Understanding Employee Benefits and key developments in the employee benefits field and items of interest to our clients. MORE

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (“ARPA”) into law. Under ARPA, certain employees and their dependents who lost group health coverage during the COVID-19 pandemic due to the employee’s involuntary termination (other than for gross misconduct) or reduction of hours are allowed to temporarily receive fully-subsidized COBRA coverage between April 1, 2021 and September 30, 2021. The COBRA subsidy is designed for individuals (i) who are currently enrolled in COBRA, (ii) who enrolled in COBRA previously and later dropped COBRA continuation coverage, or (iii) who previously declined COBRA continuation coverage.  ARPA offers the last two groups a second chance to obtain COBRA coverage, even if their deadline for electing coverage or paying premiums has passed.  Coverage must be provided to subsidy-eligible individuals (“Assistance Eligible Individuals” or “AEIs”) without the requirement to pay the COBRA premium, with the employer, insurer, or multiemployer plan providing the subsidy offsetting the cost by claiming a new federal tax credit.

AEIs must be notified of their right to the subsidy and when the subsidy is about to end, and ARPA required the Department of Labor (“DOL”) to draft model notices (“Model Notices”) for these purposes.  On April 7, 2021, the DOL issued guidance related to COBRA subsidies, consisting of Frequently Asked Questions (“FAQs”), and Model Notices and election forms.

The Notices and FAQs provides some clues as to the work ahead for plan sponsors, administrators, insurers, and other service providers, but additional guidance is needed on such critical issues as who will qualify as an AEI – for example, the circumstances in which an employee will be considered to have had an involuntary termination and the process for making that determination.   Absent clear guidance, employers, multiemployer plans, and insurers could find themselves responsible for the subsidy without being eligible for a tax credit when they make a good faith determination that an individual is an AEI, or, alternatively, subject to excise taxes (or more) for not providing notice when they make a good faith determination that an individual is not an AEI.  The IRS has promised guidance, which presumably will address this issue, along with others.

FAQs

While the DOL’s FAQs are largely geared toward individuals, focusing on how to obtain the COBRA subsidy and how the COBRA subsidy interacts with other types of health coverage that may be available, they do confirm a few points that will impact COBRA administration. The FAQs clarify that:

  • An AEI may make the election for subsidized COBRA if the election is made within 60 days of receiving the required Notice. The coverage may begin (1) April 1, 2021 or later (or prospectively from the date of a qualifying event if the qualifying event occurred after April 1, 2021), or (2) upon an earlier qualifying event if the individual is eligible to make the election (with the subsidy beginning no earlier than Apri1, 2021).
  • While an individual is not an AEI if eligible for other group health coverage (generally, a new employer’s plan, a spouse’s plan, or Medicare), individuals currently receiving coverage through Medicaid or the Marketplace may be AEIs. The FAQs also confirm that the COBRA subsidy also covers certain excepted benefits (dental and vision, but not health FSAs).
  • Individuals who lose coverage due to a reduction in hours (and remain employed), whether the reduction is voluntary or involuntary, can be AEIs.
  • Dependents of an employee terminated for gross misconduct cannot be AEIs.
  • The extension of COBRA deadlines under EBSA Disaster Relief Notice 2021-01 does not apply to the notice and election periods related to the ARPA COBRA subsidy. (Failure to send required COBRA notices can result in an excise tax of up to $100 per qualified beneficiary, not exceeding $200 per family, per day.)
  • COBRA subsidies apply to any continuation coverage required under state mini-COBRA laws; however, ARPA does not otherwise change the terms under which the coverage is available under state law.

Model Notices

The DOL also issued the Model Notices that Congress required as a part of ARPA.  Employers are not required to use the Model Notices; however, the DOL considers the appropriate use of the Model Notice to be good faith compliance with the notice requirements. The appropriate use of the Model Notice means that all of the specific information pertinent to the individual is included in the Model Notice (i.e., the correct dates, qualified beneficiaries, and group plan information). In addition to the Model Notices, the DOL also issued a Summary of COBRA Premium Assistance Provisions under the American Rescue Plan Act of 2021, which contains information on the subsidy and forms for individuals to attest to meeting the conditions for eligibility for the COBRA subsidy and request treatment as AEI (i.e., receive the subsidy); this document must be sent with the General, Alternative, and Extended Election Notices to satisfy ARPA’s notice requirements.  Below is a summary of the pertinent information related to the Model Notices.

  • General Notice and Alternative Notice – The general notice is used for any qualified beneficiary who loses coverage due to a reduction in hours or an involuntary termination between April 1, 2021 and September 30, 2021. An alternative notice is used for plans subject to state continuation coverage.
  • Extended Election Notice – The extended election notice should be sent to all assistance eligible individuals who are still in the 18-month window. Employers must send the extended election notice before May 31, 2021 if the individual is currently enrolled in COBRA, enrolled in COBRA previously and later dropped COBRA continuation coverage, or previously declined COBRA continuation coverage.
  • Notice of Expiration of Period of Premium Assistance – The notice of expiration informs AEIs that the COBRA subsidy will soon be expiring and that the individual may be eligible for Medicaid, coverage through the Marketplace, or unsubsidized COBRA continuation coverage. The notice of expiration must be sent 15 to 45 days before the COBRA subsidy expires.

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (the “ARPA”) into law.  Many of the provisions in this sweeping legislation bring changes to the employee benefits world of which employers should take note and which are summarized below.

Subsidized COBRA

The ARPA contains several new rules which impact COBRA benefits. These changes will allow workers and their dependents who lost group health coverage during the COVID-19 pandemic to temporarily receive fully subsidized COBRA coverage. The ARPA also allows the employer, insurer, or multiemployer plan sponsor who subsided the premiums to offset the cost by claiming a new federal tax credit. Below is a summary of the ARPA’s COBRA subsidy provisions.

Individuals Eligible to Receive Subsidy

The following individuals are eligible to receive the COBRA premium subsidy and are considered “Eligible Individuals”:

  • Individuals who have lost medical coverage under a group health plan because the individual (or the individual’s family member) has been involuntarily terminated for reasons other than gross misconduct or a reduction of hours that would result in COBRA coverage between April 1, 2021 and September 30, 2021; and
  • The individual is a qualifying individual and already enrolled in COBRA coverage on April 1, 2021, or enrolls in COBRA coverage during the “special enrollment period” described below.

Plans Subject to the ARPA Rules

All group health plans that provide major medical benefits subject to federal COBRA rules are subject to the ARPA COBRA rules.  This includes self-funded and fully-insured plans, multi-employer plans, and governmental employer plans. Health care flexible spending accounts are not subject to the ARPA provisions.

Amount and Length of Subsidy

Eligible Individuals are entitled to receive a subsidy equal to 100% of the cost of COBRA premiums, and such subsidy is available from April 1, 2021 through September 30, 2021, if they are enrolled in COBRA coverage during that time. This also includes individuals who enroll during the “special enrollment period” as described below.  The subsidy is tax-free to the individual receiving the subsidy. The subsidy expires prior to the September 30, 2021 deadline, if, before the date, the Eligible Individual’s maximum COBRA coverage period ends or if the Eligible Individual becomes eligible for coverage under another employer’s group insurance plan or Medicare.

Special Enrollment Period

Eligible Individuals who are not enrolled in COBRA as of April 1, 2021, including those who have made an election and later dropped COBRA and those who never made a COBRA election, are allowed a second window of time to enroll in coverage and obtain the subsidy.  This window runs for 60 days after the Eligible Individual receives the appropriate notice.

While not required, the employer is also permitted under the ARPA to allow Eligible Individuals 90 days from the date of the notice to enroll in a different type of medical coverage option.

Notice Requirements

The ARPA imposes new notice requirements on group health plans so that Eligible Individuals are provided the information needed to enroll in the subsidized coverage.  The ARPA requires that the following notices be sent (1) notice of availability of the subsidy, (2) notice of the extended election period for COBRA coverage; and (3) notice of the expiration of the subsidy.  The federal government is required to issue a model notice within 30 days for the first two notices, and within 45 days for the notice of expiration of the subsidy. It is recommended that notices are not updated until the model notices are issued.

Tax Credit

While employers (for self-insured plans and multi-employer plans) or insurance carriers (for fully insured plans) are responsible for the COBRA subsidy, the paying entity is entitled to take a federal tax credit against payroll taxes.  The credit is fully deductible and, in anticipation of the credit, the credit may also be advanced, according to forms and instructions provided by federal agencies, through the end of the most recent payroll period in the quarter.  The credits are provided each quarter in an amount equal to premiums not paid by the Eligible Individuals.

Temporarily Increased Dollar Limits for Contributions to Dependent Care FSAs

The ARPA increases the cap on dependent care assistance benefits. For the 2021 tax year, employers are permitted to increase the annual limit on contributions to Dependent Care FSAs from $5,000 to $10,500 (from $2,500 to $5,250 for married participants filing separate tax returns). Employers can adopt the increased limits through a retroactive plan amendment so long as the amendment is adopted before the end of the plan year in which it is effective (December 31, 2021 for calendar year plans).

Single Employer Pension Plan Provisions

The ARPA contains two funding relief items that benefit single employer pension plans. First, for plan years beginning in 2022, the amortization period for underfunded plans is extended to 15 years, rather than seven as previous allowed. Plan sponsors can make a retroactive election to amortize over the extended period for plan years beginning after December 31, 2018, 2019, and 2020. Amortization bases and shortfall amortization installments are also reduced to zero, allowing a “fresh start” for plans. These changes will result in a lower annual required contribution for plan sponsors.

Second, the ARPA extends the funding stabilization percentages that were scheduled to begin phasing out in 2021. Under the ARPA, the 10% interest rate corridor is reduced to 5% for plan years beginning in 2020 through 2025, the 5% per year expansion will be delayed to the 2026 plan year (and, accordingly, the 30% corridor is reached in the 2030 plan year), and a permanent 5% interest floor is established for the twenty-five year averages. The effect of these changes is that plans will be able to calculate the present value of benefits using a higher interest rate, and thereby improving its funding status. Plan sponsors may elect to defer the changes until 2022.

Multiemployer Plan Provisions

Arguably the most significant provision of the ARPA from an employee benefits perspective is the creation of the financial assistance program under the PBGC for troubled multiemployer pension plans. Eligible plans that apply for assistance will receive a lump sum payment sufficient to cover all benefits due through December 31, 2051, with no repayment obligation. Plans that receive the funds would be required to restore any previously cut or suspended benefits. There is no cap on the amount of financial assistance available. The PBGC is authorized to impose additional conditions on plans that receive the financial assistance, such as conditions on future accrual rates and retroactive benefit improvements.

In order to qualify for the financial assistance, the multiemployer plan must meet any of the following criteria:

  • The plan is certified to be in critical and declining status in any plan year beginning in 2020 through 2022.
  • The plan has previously been approved for a suspension of benefits under the MPRA.
  • The plan is certified to be in critical status in any plan year beginning in 2020 through 2022, has a modified funding percentage of less than 40%, and the ratio of active to inactive participants is less than 2:3.
  • The plan has become insolvent after December 16, 2014 and has not been terminated as of the enactment of the ARPA.

At this point, it is unclear what impact the financial assistance will have on a participating employer’s withdrawal liability. The bill originally included a provision stating that any participating employer that withdraws within 15 calendar years from the date the plan receives the financial assistance would not have any reduction in their withdrawal liability as a result of the financial assistance. This provision was removed from the final bill. There is a concern among practitioners that absent such a provision, there could be a race to the door from the struggling pension funds. It is expected that the PBGC will issue additional guidance this summer that will address withdrawal liability.

The financial assistance program will be funded out of the Department of Treasury’s general assets. In addition, the ARPA increases the PBGC premiums from $31 per participant in 2021 to $52 per participant beginning in plan years starting after December 31, 2030. The PBGC premium will be adjusted annually for inflation.

In addition to the creation of the financial assistance program, the ARPA also offers the following temporary funding relief for multiemployer plans without regard to whether the plan is eligible for the financial assistance:

  • The plan may elect to retain the same funding zone status for plan years 2020 or 2021 that applied for the previous year. The plans are also not required to update their funding improvement or rehabilitation plan until the year following the designated year.
  • If the plan is already in endangered or critical status, the plan may extend its funding improvement or rehabilitation plan for five additional years.
  • The plan is allowed to amortize the investment and COVID-related losses for the first two plan years ending after February 29, 2020 over a 30-year period.

Changes to Code Section 162(m)

Just four years after making significant changes to Code Section 162(m) as part of the 2017 Tax Cuts and Jobs Act (the “TCJA”), Congress has again modified this provision of the Internal Revenue Code again in the ARPA.  While the amendments to Code Section 162(m) in the ARPA are not nearly as extensive as those made by the TCJA, the changes are still significant for those companies subject to Code Section 162(m).

Code Section 162(m), as amended by the TCJA, generally bars public companies from deducting compensation in excess of $1 million paid to “covered employees” in a year.  Currently, only a company’s chief executive officer, chief financial officer, and the next three most highly compensated employees are “covered employees” for a given year.  In addition, once an individual becomes a covered employee, that individual remains a covered employee for all future years.  Consequently, at least five employees of a company subject to Code Section 162(m) are covered employees each year.

The ARPA expands the definition of “covered employee” under Code Section 162(m) such that for tax years beginning after December 31, 2026, the next five mostly highly compensated employees of a company (after the CEO, CFO, and top three mostly highly compensated employees besides the CEO and CFO) will also be “covered employees.”  As a result, beginning in 2027 for calendar year companies, at least ten employees will be covered employees for purposes of Code Section 162(m) each year.  However, unlike individuals who become “covered employees” because they are a company’s CEO, CFO, or other top three mostly highly compensated employees, individuals who are “covered employees” because they are in the next five most highly compensated employees will only be “covered employees” for that year (i.e., who is a “covered employee” as a result of being in the next five most highly compensated employees will be re-determined with respect to each year and these “covered employees” do not retain their status from one year to tax year).

When the ARPA changes to Code Section 162(m) become effective, companies will have to be ready to separately track those individuals who become “covered employees” and remain “covered employees” in perpetuity and those individuals whose status can change from year to year.  This may require companies subject to Code Section 162(m) to retool the mechanisms they use to identify and track “covered employees.”

Payroll Tax Credits

Voluntary Paid Leave Tax Credits

The ARPA extends tax credits available to employers who voluntarily provide paid sick and family leave to emloyees unable to work due to certain COVID-19 related reasons from March 31, 2021 to September 31, 2021. Please see Stinson’s previous Alert, The American Rescue Plan: Update for Employers Providing FFCRA Leave in 2021 for more information.

Employee Retention Credit

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) created the employee retention credit to help eligible employers keep employees on their payroll by providing a refundable credit against qualified wages and certain health plan expenses. The ARPA extends the employee retention credit until December 31, 2021. The credit cap rate remains at 70% of qualified wages up to $10,000, allowing employers to claim up to $7,000 in credits per employee per quarter.  The ARPA also expands eligibility for the credit to recovery startup businesses, which are business that began operation after February 15, 2020 with annual gross receipts of less than $1 million. Recovery startup businesses are eligible to receive a maximum credit of $50,000 per quarter.

 

 

On February 18, 2021, the IRS issued Notice 2021-15, clarifying temporary special rules for cafeteria plans, health flexible spending accounts (“FSAs”), and dependent care assistance programs (“DCAPs”) that were included in the Consolidated Appropriations Act (“CAA”), enacted on December 27, 2020.  The Notice also adds temporary opportunities to make changes in health plan coverage under a cafeteria plan.  The Notice provides lots of flexibility to employers wishing to implement these special rules.

Flexibility for Carryovers and Grace Periods

The CAA allows plans that include health flexible spending arrangements or dependent care assistance programs to carry over all unused contributions from 2020 and 2021 to the immediately following plan year.  Without the CAA relief, the carryover amount is limited to $550 for health FSA amounts unused in 2020; carryovers are not normally permitted for DCAPs.  Similarly, plans may extend the claims period up to 12 months after the end of the plan year for unused contributions remaining in a heath FSA or DCAP at the end of the 2020 and 2021 plan year.  Without the CAA relief, the post-plan year period for incurring claims (the “grace period”) is limited to 2 months and 15 days.

Employers may adopt either the CAA carryover or grace period relief, even if they currently provide either a carryover or grace period, or if they previously did not provide either feature.  Employers adopting the CAA carryover may limit the carryover amount and limit the time period for incurring claims.  Employers adopting the CAA grace period may limit the period to less than 12 months.  Any limits on accounts apply to the year in which the amount is contributed, not to any amounts available due to the carryover or grace period.

The unused contributions available for use in the following year include all amounts remaining in the employee’s account at the end of the plan year, except those amounts remaining solely because of the coronavirus outbreak-related extension of a grace period ending in 2020.

Post-Termination Reimbursements from Health FSAs

The CAA permits plans that provide grace periods for health FSAs (similar to the rules applicable to DCAPs) to allow employees who cease participation during 2020 or 2021 to continue to receive reimbursements from unused contributions for expenses incurred through the end of the year in which participation ceased, including any grace period or extended grace period with respect to that year.  For plans that provide carryovers, reimbursements may only be made through for expenses incurred through the end of the year in which participation terminated.

The guidance clarifies that employers may limit the unused amount available in a health FSA to the amount of contributions the employee has actually made up to the date the employee ceased to be a participant rather than the full amount elected by the employee for the year.  This applies to employees who cease to be participants due to termination, a change in employment status, or a new election during 2020 or 2021.

Interaction with COBRA

Under certain circumstances, qualified beneficiaries who lose coverage under a group health plan, including health FSA, may elect continuation health coverage under COBRA.

The guidance clarifies that a limited extension of coverage under a health FSA does not prevent an otherwise qualified beneficiary from having a loss of coverage resulting from a qualifying event (such as termination of employment).  The employer will be required to provide the individual with notice of the right to elect COBRA coverage.  For example, if an employee elected to contribute $2,400 to a health FSA and terminated employment on January 31 after making $200 in salary reduction contributions, the employer may allow the employee to request reimbursement up to $200, or the employee may elect COBRA continuation coverage to have access to $2,400 by paying the applicable COBRA premiums of $200 per month.

In addition, if an employer adopts the CAA carryover or grace period, the maximum amount that a health FSA may require to be paid as the applicable COBRA premium does not include unused amounts carried over or available during the extension period.

Regardless of the employee’s COBRA election, if the employer amended the plan to allow post-termination reimbursements from health FSAs, the employee could be reimbursed for expenses incurred through the end of the plan year and through any grace period provided under the plan.

Impact of CAA Health FSA Carryovers and Grace Periods on HSA Eligibility

Eligibility to contribute to an HSA is determined on monthly basis.  Generally, an individual is eligible in any month if the individual (i) is covered by a high deductible health plan (HDHP) as of the first day of the month, and (ii) is not covered under any other health plan (with certain exceptions), such as a general purpose health FSA.  General purpose health FSA CAA carryovers or grace periods for an employee who moves from a non-HDHP to an HDHP the following year would make the employee ineligible for HSA contributions.  This would also apply to terminated employees who may still incur expenses reimbursable from their general purpose health FSA.

To avoid this result, employers may amend their plans to allow employees, on an employee-by-employee basis, to opt-out of the CAA carryover or grace period to preserve HSA eligibility, or to make a mid-year change to be covered under an HSA-compatible FSA for part of the year.

If an employee makes a mid-year election change in coverage from a general purpose health FSA to an HSA-compatible FSA or vice versa, the employee’s permissible HSA contribution is based on the number of months the individual was covered under the HSA-compatible FSA and an HDHP.

Special Age Limit Relief Applicable to Carryovers for DCAPs

The CAA temporarily increases the age at which a child is no longer eligible for DCAP reimbursement from 13 to 14.  This special age limit rule applies to employees who are enrolled in a DCAP for the last plan year for which the end of open enrollment was on or before January 31, 2020 (the “2020 plan year”) and has one or more dependents who attain age 13 either (i) in the 2020 plan year, or (ii) in the case of an employee who has unused DCAP amounts for the 2020 plan year, in the 2021 plan year.

The guidance clarifies that this special age rule is separate from the CAA carryover and grace period.  Employers are not required to adopt the CAA carryover or grace period to adopt the age limit relief.  If an employer adopts this special rule, then all amounts from the 2020 plan year may be applied to dependent care expense for a dependent who attained age 13 during that plan year.  In addition, employers may allow employees to carry over all unused amounts from the 2020 plan year to reimburse dependent care expenses in the 2021 plan year for dependents until they reach the age of 14.  The special age limit rule does not permit employers to reimburse expenses for dependents who are 14 years or older.

Mid-Year Election Changes to Health FSAs and DCAPs

Generally, elections under cafeteria plans must be irrevocable and made prior to the first day of the plan year.  The CAA allows plans to permit employees to make prospective mid-year changes to health FSAs and DCAP elections in plan years ending in 2021, regardless of any change in an employee’s status.

The Notice clarifies that an employer may adopt an amendment allowing employees to revoke an election, make one or more elections, and increase or decrease an existing election.  An employee, who initially declined to enroll, may also elect to enroll in a health FSA or DCAP for the year.

Employers have a lot of flexibility in implementing mid-year elections.  An employer may limit the number of elections an employee may make and determine the extent to which election changes are permitted, provided any election change is applied on a prospective basis.  For example, employers may allow amounts contributed prior to a mid-year election change to cease contributions to be used to reimburse expenses incurred through the entire plan year, or may limit reimbursements to expenses incurred prior to the mid-year change.  Similarly, amounts contributed after a mid-year election to commence contributions may be used to reimburse expenses incurred at any time during the year, even prior to the election, or the employer could choose to limit reimbursements to expenses incurred after contributions began.  In addition, employers may require that any changes not reduce the annual election to less than the amount already reimbursed, and may limit elections to certain types of changes (such as decreases only) or to certain time periods.  Any rules must apply uniformly to participants.

Mid-Year Changes in Health Plan Coverage and HSAs

The Notice allows additional flexibility for plans to allow changes in health coverage, where these changes would otherwise be impermissible under cafeteria plan rules.  A plan may be amended to allow an employee who initially declined coverage to add it, to change from one type of coverage offered by the employer to another, or to drop coverage if the employee attests in writing that they are enrolled, or immediately will enroll, in other comprehensive coverage.  The Notice provides sample language for the attestation and provides that an employer can rely on the attestation unless the employer has actual knowledge to the contrary.

Employees who change comprehensive health plan coverage may also want to make changes in their health FSAs.  An employer may amend its plan to allow employees to make mid-year elections to be covered by a general purpose heath FSA for part of the year and an HSA-compatible FSA for part of the year.  Employers may offer employees a choice between an HSA-compatible FSA and general purpose FSA, on an employee-by-employee basis.  In addition, an employer may automatically enroll employees who elect HDHP coverage into HSA-compatible FSAs.

Plan Amendments

Plans must adopt an amendment implementing relief under the CAA by the end of the calendar year following the plan year in which the amendment is effective.  For example, a calendar year plan that is amended to carry over the entire unused amount remaining in health FSAs on December 31, 2020, must adopt an amendment by December 31, 2021.  The plan must operate in accordance with the amendment from the effective date of the amendment to the date the amendment is adopted.  Employers should consider the timing of participant communications and notices to ensure employees can utilize the flexibility provided by any amendments.

On October 26, 2020, the Internal Revenue Service (IRS) released Notice 2020-79, which sets forth the 2021 cost-of-living adjustments affecting dollar limits on benefits and contributions for qualified retirement plans. The IRS also announced the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements in Revenue Procedure 2020-45. The health savings account (HSA) and high deductible health plan (HDHP) annual deductible and out-of-pocket expense adjustments were announced earlier this year in Revenue Procedure 2020-32. The Social Security Administration announced its cost-of-living adjustments for 2021 on October 13, 2020, which includes a change to the taxable wage base.

The following chart summarizes the 2021 limits for benefit plans. The 2020 limits are provided for reference.

  2020 2021
Elective Deferral Limit 401(k), 403(b), 457(b)  $19,500 $19,500    (no change)
Catch-up Limit (age 50+) $6,500

 

$6,500      (no change)

 

Defined Benefit Limit $230,000 $230,000  (no change)
Defined Contribution Limit $57,000

 

$58,000
Dollar Limit – Highly Compensated Employees $130,000 $130,000  (no change)
Officer – Key Employee $185,000 $185,000  (no change)
Annual Compensation Limit $285,000 $290,000
SEP Eligibility Compensation Limit $600 $650
SIMPLE Deferral Limit $13,500 $13,500  (no change)
SIMPLE Catch-up Limit (age 50+) $3,000 $3,000  (no change)
Social Security Taxable Wage Base $137,700 $142,800
ESOP 5 Year Distribution Extension Account Minimum $1,150,000 $1,165,000
Additional Amount for 1-Year Extension $230,000 $230,000       (no change)
HSA (Self/Family) Maximum Annual Contribution $3,550/$7,100 $3,600/$7,200
HDHP Minimum Deductible Limits $1,400/$2,800 $1,400/$2,800   (no change)
Out-of-pocket Expense Annual Maximum $6,900/$13,800 $7,00/$14,000
Medical FSA $2,750 $2,750                   (no change)

For more information on the 2021 cost-of-living adjustments, please contact Nick Bertron, Jeff Cairns or the Stinson LLP contact with whom you regularly work.

 

On Friday, June 19, 2020, the IRS released Notice 2020-50 which provides additional guidance regarding the coronavirus-related distributions (“CRDs”) and coronavirus-related loans and loan repayment delays (“CR Loan Relief”) made available to certain retirement plan participants affected by COVID-19 under the CARES Act. The notice expands, and in some cases modifies, previous guidance issued by the IRS regarding CRDs and CRD Loan Relief discussed in our recent blog. Discussion of the material information contained in the notice is provided below.

Expanded Definition of “Qualified Individual” Eligible for CRDs and CR Loan Relief

Notice 2020-50 expands the definition of “qualified individual” (an individual eligible for CRDs or CR Loan Relief) to take into account additional factors such as reductions in pay, rescissions of job offers, and delayed start dates with respect to an individual, as well as adverse financial consequences to an individual arising from the impact of COVID-19 on the individual’s spouse or household member[1].

Under the expanded definition provided under Notice 2020-50, “qualified individual” is now defined as an individual who:

  • is diagnosed, or whose spouse or dependent is diagnosed with COVID-19 by certain approved tests; or
  • experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household (that is, someone who shares the individual’s principal residence):
    • being quarantined, furloughed or laid off, or having work hours reduced due to COVID-19;
    • being unable to work due to lack of childcare due to COVID-19;
    • closing or reducing hours of a business that they own or operate due to COVID-19;
    • having pay or self-employment income reduced due to COVID-19; or
    • having a job offer rescinded or start date for a job delayed due to COVID-19.

The notice clarifies that plan administrators can rely on an individual’s certification that the individual is a qualified individual (unless the plan administrator has actual knowledge to the contrary), but also notes that an individual must actually be a qualified individual in order to obtain favorable tax treatment with respect to a CRD. The notice provides a sample certification that may be used by an individual to certify that they satisfy the conditions to be a qualified individual.

Distributions that may be treated as CRDs

 In Notice 2020-50, the IRS confirms that, in general, a qualified individual is permitted to designate a distribution satisfying the applicable CARES Act requirements as a CRD without regard to whether the plan treats the distribution as a CRD.  Notice 2020-50 further clarifies that the amount of a CRD is not limited to amounts withdrawn solely to meet a need arising from COVID-19. Thus, an individual who is a qualified individual is permitted to take CRDs up to the $100,000 limit regardless of the individual’s need for the funds.

Direct Rollover, Notice and Withholding Requirements Not Applicable to CRDs

The notice and prior guidance provide that a plan is not required to treat a plan distribution meeting the applicable requirements as a CRD. The notice clarifies that if a plan elects to treat a distribution as a CRD, the rules for eligible rollover distributions do not apply and the plan is not required to offer the individual a direct rollover with respect to the distribution and the plan administrator is not required to provide the individual with a 402(f) notice. In addition, the CRD is not subject to the 20% withholding requirement normally applicable, but the voluntary withholding requirements continue to apply.

Safe Harbor for Suspension of Loan Repayments

Under the CARES Act, a plan may permit a delay in certain loan repayments (generally, loan repayments with a due date between March 27, 2020 and December 31, 2020) without causing the loans to be treated as a deemed distribution under Code § 72(p). For plans providing qualified individuals with this repayment relief, the notice provides a safe harbor to satisfy the CARES Act requirements and avoid a deemed distribution.

Under the safe harbor, a qualified individual will not be treated as having a deemed distribution if:

  • the obligation to repay a plan loan is suspended under the plan for any period beginning not earlier than March 27, 2020, and ending not later than December 31, 2020 (the “Suspension Period”);
  • loan repayments resume after the end of the Suspension Period and the term of the loan may be extended by up to 1 year from the date the loan was originally due to be repaid;
  • interest accruing during the Suspension Period is added to the remaining principal on the loan; and
  • the loan is reamortized and repaid in substantially level installments over the remaining period of the loan.

Use of the safe harbor is not required, and the IRS has acknowledged that there may be additional reasonable methods for administering the suspension of loan repayments.

Plans Accepting Recontribution of CRDs

Under the CARES Act, a qualified individual who receives a CRD that is eligible for tax-free rollover treatment is generally permitted to recontribute, at any time within the 3-year period beginning on the day after the date on which the distribution is received, any portion of the CRD (but not an amount in excess of the amount of the distribution), to an eligible retirement plan that accepts eligible rollover contributions. A plan administrator may rely on an individual’s certification that they are a qualified individual in determining whether the recontributed amount was a CRD, unless the administrator has actual knowledge to the contrary.

Tax Reporting of CRDs by Eligible Retirement Plans

Notice 2020-50 details the reporting procedures for eligible retirement plans that issue CRDs. If an eligible retirement plan makes a CRD, the plan must report the distribution on Form 1099-R even if the individual recontributes the CRD to the same plan in the same year. If no other appropriate code applies to the distribution, the plan is permitted to use distribution code 2 (early distribution, exception applies) or distribution code 1 (early distribution, no known exception) in box 7 of Form 1099-R.

Tax Reporting of CRDs by Qualified Individuals

Notice 2020-50 provides a detailed discussion of the reporting requirements and tax consequences applicable to qualified individuals that receive CRDs. In general, a qualified individual is permitted to designate any distribution satisfying the applicable requirements as a CRD (without regard to whether the plan treated the distribution as a CRD) by reporting the distribution on the individual’s federal income tax return and on Form 8915-E (Qualified 2020 Disaster Retirement Plan Distributions and Repayments).

Qualified individuals designating amounts as CRDs have two options for including the taxable portion of the CRD in his or her income: (1) include the taxable portion of the distribution in income ratably over a 3-year period; or (2) elect out of the 3-year ratable income inclusion and include the entire amount of the taxable portion of the CRD in the year of distribution. An election cannot be made or changed after the timely filing of the individual’s federal income tax return (including extensions) for the year of distribution, and all CRDs received in a taxable year must be treated consistently (either all distributions must be including in income over a 3-year period or all distributions must be included in income in the current year).

If a qualified individual elects to recontribute any portion of the CRD during the 3-year period beginning on the day after the date the CRD is received, the reporting requirements and applicable tax consequences vary depending on whether the individual uses the 1-year or 3-year inclusion method with respect to the CRD and whether the recontribution is made before or after the individual files his or her federal income tax return for the applicable tax-year.  Special rules also apply for qualified individuals who use the 3-year income inclusion method with respect to a CRD if the individual dies before the full taxable amount of the CRD has been included in the individual’s gross income.

For more information on the new IRS guidance or the CARES Act, please contact Jeff Cairns, Audrey Fenske or Nick Bertron or the Stinson LLP contact with whom you regularly work.

[1] As we noted in a recent blog, under previous IRS guidance, a “qualified individual” did not include an individual that experienced adverse financial consequences attributable to a spouse’s loss of income due to coronavirus-related quarantine, furlough, layoff, reduced hours, inability to work due to lack of child care, or closing of a spouse’s business or reduced hours of a spouse’s business. The definition of qualified individual, as expanded by Notice 2020-50, now includes these individuals.

In a new information letter, the U.S. Department of Labor (DOL) concludes offering professionally managed asset allocation funds, which include a private equity component as an investment option in an individual account plan (e.g., a 401(k) plan), is not a per se violation of ERISA. Plan fiduciaries commonly invest defined benefit pension plan assets in private equity in order to take advantage of the increased diversification and enhanced returns offered by private equity investments relative to publicly traded securities. In contrast, due to questions surrounding the ERISA fiduciary liabilities associated with having private equity investment exposure in an individual account plan, such plans have not offered participants investment options that include private equity exposure. As a result of the DOL’s position in the information letter, this dichotomy may change soon. However, before plan fiduciaries jump to offer private equity investment exposure to plan participants, fiduciaries must consider that the information letter outlines a robust process to follow when determining whether to offer a professionally managed asset allocation fund with a private equity component in the plan’s investment line-up.

The Scope of DOL’s Conclusion

In the June 3, 2020 information letter, the DOL concludes that a “plan fiduciary would not, in the view of the Department, violate the fiduciary’s duties under section 403 and 404 [ERISA’s fiduciary duty provisions] of ERISA solely because the fiduciary offers a professionally managed asset allocation fund with a private equity component as a designated investment alternative for an ERISA covered individual account plan.” This conclusion does not, however, open the door to a plan fiduciary allowing plan participants to invest in any type of private equity arrangement.

First, the DOL only considered the type of investment vehicle proposed by the private equity investment group requesting the letter, and therefore, the scope of the letter is limited to such investment vehicles. The proposed professionally managed asset allocation funds with a private equity component would be structured as a custom target date, target risk, or balanced fund, permitting only a certain portion of the fund’s assets to be exposed to private equity. The remainder of the fund’s assets would be invested in publicly traded securities or other liquid investments with established market values.

Second, the information letter’s conclusion only applies to private equity investments that are components of larger, diversified multi-asset investment vehicles. The information letter does not address situations in which individual account plan participants are able to invest directly in private equity.

Factors the Plan Fiduciary Must Consider

In addition to concluding the inclusion of asset allocation funds with private equity components in a plan’s investment line-up is not a per se violation of a plan fiduciary’s duties under ERISA, the information letter describes the factors that a plan fiduciary must consider before deciding to include such an investment vehicle in the plan’s investment line-up. The plan fiduciary must determine if it has the skills, knowledge, and experience necessary to understand the private equity component of the investment vehicle and to make the required determinations. If the plan fiduciary lacks these traits, it must engage a qualified investment adviser or professional to help it determine whether including an asset allocation fund with a private equity component in the plan’s investment line-up is appropriate and, if so, assist in selecting a suitable asset allocation fund.

With respect to selecting a particular asset allocation fund with a private equity component, the plan fiduciary must follow a thorough, objective and analytical process that considers all relevant facts and compare the asset allocation fund with appropriate alternatives that do not include a private equity component. According to the DOL, during such a process a plan fiduciary must consider the following:

  • Whether the fund’s characteristics match the characteristics of the plan and the needs of its participants and beneficiaries (e.g., in light of the participants’ ages, contribution and withdrawal patterns, employment turnover, etc., if the nature and duration of the fund’s liquidity restrictions are appropriate)
  • Whether the addition of the fund would allow participants to diversify investment risk while still earning an appropriate return (net of fees) over a multiple year period
  • Whether the party controlling the fund has the requisite capabilities, experience, and stability to manage an investment with a private equity component, given the complexity of private equity activity
  • Whether the private equity component of the fund has been appropriately limited in size (e.g., no more than 15% of the fund’s assets are held in the private equity component)
  • Whether the fund has features to ensure it maintains sufficient liquidity to allow participants to receive benefit distributions and change their plan investment options as permitted by the plan’s term
  • How the fund will value the private equity investments
  • Whether plan participants will be given sufficient and adequate information regarding the fund to understand the risks associated with investing in a fund that includes a private equity component

Should a plan fiduciary decide to include an asset allocation fund with a private equity component in a plan’s investment line-up, the DOL stresses that the plan fiduciary must continuously monitor such a fund to ensure that keeping it in the plan’s investment line-up remains prudent.

The Department of Labor has issued final regulations that will enable employers to electronically provide required information and documents to more plan participants.  Although employers have been able to electronically provide some documents and information to some participants under existing rules, use of electronic delivery was limited because of an affirmative consent requirement that applied to many participants.  In contrast, the new rules provide a “safe harbor” for plans to default to electronic disclosure, if participants are allowed to opt out, and the plan meets certain notice and access requirements.

The availability of this new safe harbor is expected to save approximately $3.2 billion in costs for ERISA retirement plans.  The regulations are in response to the President’s August 31, 2019 Executive Order, which directed the DOL and the Treasury Department to review ways to make retirement plan disclosures required under ERISA and the Internal Revenue Code more understandable and useful to participants, including exploring the potential for broader use of electronic delivery as a way to improve effectiveness and reduce costs.  The DOL worked with Treasury throughout the regulatory process, and Treasury and the IRS intend to issue additional guidance regarding the electronic delivery of participant notices required under the Internal Revenue Code.

These new rules are applicable to retirement plans only, and not to welfare benefit plans.  Below are Q&As that address some of the key features of the new safe harbor.

What kinds of electronic addresses may be used?

The regulations make it easier for plans to facilitate electronic disclosure by allowing a plan to use an electronic address (e.g., email or smartphone number) already used by the employer for general employment-related purposes.  To ensure email will be accessed regularly enough to be effective, the email address must either be (i) assigned by the employer (but not by the plan administrator or recordkeeper or otherwise specifically assigned for plan use) or (ii) provided by the plan participant, beneficiary, or anyone else entitled to documents.  An employer cannot assign an electronic address to anyone except participants.  When a participant terminates employment, the plan must have reasonable procedures in place to obtain a new electronic address from the departing employee, if the email address in use is one assigned by the employer.

Who is covered under the safe harbor?

To be covered by the new safe harbor, a participant must receive an initial paper notice that electronic delivery will be used.  The notice must identify the electronic address that will be used, describe how to access documents, and caution the participant that documents may only be available for a limited period of time.  The notice must also describe the participant’s rights to opt out of electronic delivery and to request a paper copy of any document free of charge and how to exercise those rights.  This notice requirement applies to both new and existing employees, some who may already receive electronic disclosures under an existing safe harbor.  Although it may be possible to fall within the existing regulatory safe harbor based on required regular work-related email access or affirmative consent for some participants while using the new safe harbor for other participants, the requirements for document delivery would differ for the two groups of participants, making plan administration complex.

How must documents and information be delivered?

Documents and information may be provided electronically in two ways:  (i) they may be attached in electronic form to an email, or (ii) they may be made available on a website.

If a document is available on the internet, participants must receive a “notice of internet availability” or “NOIA.”  The NOIA must include a link to the document or a website address specific to the document.  If the link/website requires the participant to login first, the document link must be prominently displayed following login.  The regulations include requirements for how long a document or information must be maintained on the website.  Whether the documents are on a website or in an attachment to an email, the plan administrator must take steps reasonably calculated to protect the confidentiality of personal information of participants and beneficiaries.

Are there content restrictions or requirements for an email of NOIA?

Yes.  Both the NOIA and an email that delivers a document or information in an attachment must also include information on the participant’s rights similar to the initial notice and a telephone number of the plan administrator or representative.  The rules also require specific statements to be included in the NOIA or email.  The content of the NOIA must otherwise be limited to a brief, simple description of the documents or information.  Whether attached to the email or included on a website, the documents or information must be in a format that is easily readable on-line, easily printed, and searchable.

Can an NOIA or email cover multiple plans or multiple documents/disclosures?

No.  Emails or NOIAs may not include information about more than one plan and generally may not include more than one document/information disclosure.  However, summary plan descriptions, annual disclosures, and any other documents/disclosures designated by the Secretary of Labor or the Secretary of Treasury may be included in a single annual NOIA (“Annual NOIA”).

When must documents and information be delivered?

Documents and information must be available on a website or delivered to participants at the same time as they are otherwise required to be furnished to participants under ERISA.  The safe harbor does not change these requirements.

If the document or information is provided in an electronic attachment to an email, the email would need to be sent by the date it is required to be furnished to the participant under ERISA.

Although documents and information that are made available on a website must be available and an NOIA generally provided by the date required under ERISA, the Annual NOIA must only be provided annually and no later than 14 months after the most recent NOIA.

When will the safe harbor be available?

Although the rules are not effective until sixty days after they are published in the Federal Register, in response to comments and due to the difficulties of plan administration associated with the COVID-19 pandemic, the DOL will not take action against a plan administrator that relies on them before the effective date.

Will the existing safe harbors still be available?

The existing safe harbor for electronic delivery (based on either affirmative consent or required regular work-related access to email) remains available.  Other existing safe harbors based on DOL interpretations in Field Advisory Bulletin 2006-03 (covering pension benefit statements) and 2008-03 (addressing QDIA notices) and in Technical Release 2011-03R (fee disclosures) may only be relied on for a period of eighteen months following the effective date of the new regulations.

On May 4, 2020, the IRS provided guidance on coronavirus-related distributions (“CRDs”) and coronavirus-related loans and loan payment delays (“CR Loan Provisions”) in the form of FAQs.  In those FAQs, the IRS answered a few of the questions that many practitioners, administrators, and employers have been asking:

  • Does a spouse’s loss of income trigger eligibility for CRDs or CR Loan Provisions? For now, an individual is not considered a “qualified individual” (an individual eligible for CRDs or CR Loan Provisions) due to adverse financial consequences that are attributable to a spouse’s loss of income due to coronavirus-related quarantine, furlough, layoff, reduced hours, inability to work due to lack of child care, or closing of a spouse’s business or reduced hours of a spouse’s business. (Q&A-3.)  The FAQ also notes that Treasury and the IRS may expand the list of factors considered in determining whether an individual is a “qualified individual” in future guidance.
  • Are CRDs and CR Loan Provisions optional? Both CRDs and CR Loan Provisions are optional, meaning that a plan need not provide for CRDs, higher loan limits, or delayed loan payments.  (Q&A-9.)
  • If a plan does not offer CRDs, will participants lose out on favorable CRD treatment? If a participant is otherwise able to take a distribution from a plan, but the plan does not provide for CRDs, the participant is still able to claim beneficial CRD treatment (no 10% additional tax, three-year inclusion in income, and ability to repay) if the participant is a “qualified individual.”  (Q&A-9.)  Similarly, the CARES Act does not add any distribution events for a defined benefit pension plan, but if the participant is a qualified individual, the beneficial CRD treatment may be available for an otherwise available distribution.  (Q&A-9 and Q&A-10.)
  • Is a plan required to accept repayments of CRDs? Repayments of CRDs are treated as rollovers, and no plan is required to accept rollovers.  (Q&A-12.)  Presumably, if a plan accepts all rollovers, it must accept repayments of CRDs.
  • Can a plan administrator rely in all cases on a participant’s certification that they are eligible for CRDs or CR Loan Provisions? Although the CARES Act provides that an administrator may rely on an employee’s certification that the requirements to be a qualified individual are met, this reliance is only available if the administrator does not have actual knowledge to the contrary.  (Q&A-11.)

The FAQs also mention that the Treasury and IRS will substantially follow the principles in IRS Notice 2005-92 (Katrina-related guidance on similar provisions) in the forthcoming final guidance where the Katrina-related provisions are similar to those of the CARES Act. (Q&A-2.) This should helpful in anticipating tax and information reporting requirements with respect to CRDs and coronavirus-related loans.

Guidance under the CARES Act related to CRDs and CR Loan Provisions is evolving. For the most up-to-date information, please contact Audrey Fenske, Mark Wilkins, Sam Butler, or any member of the Stinson employee benefits group with any questions.

Since the coronavirus (COVID-19) first emerged as a serious health emergency, Congress has moved quickly to pass three major pieces of legislation designed to address the public economic and health crises caused by the pandemic. According to reports, House Democrats have prioritized multiemployer pension reform in previous negotiations regarding coronavirus relief legislation, and are likely to continue to do so as lawmakers consider a potential “phase 4” COVID-19 relief bill.

Since the beginning of 2018, lawmakers from both sides of the aisle have introduced three major proposals attempting to address the ongoing multiemployer pension plan crisis. The proposals, each of which are summarized below, will likely provide the framework for any pension reform discussions that may take place in the context of future COVID-19 relief legislation. At this point a timeline for any further legislative action is uncertain as both the House and Senate are out of session until April 20, but reports indicate that a fourth relief bill could be passed between late April and mid-May.

Links to the summaries below:

For more information on the federal multiemployer pension reform proposals, please contact Tom Dowling, Nick Bertron, Joel Abrahamson, Dominic Cecere, Nicole Faulkner, Rick Pins, James Sticha, Johnny Wang or the Stinson LLP contact with whom you regularly work.

RELATED RESOURCES

Stinson’s Coronavirus Task Force

Coronavirus Resources & Employment FAQs

Previously Published Coronavirus Alerts

RELATED PRACTICE AREAS

Labor, Employment & Benefits

Employee Benefits

 

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which addresses the public economic and health crisis related to the 2019 novel coronavirus (COVID-19). The CARES Act includes a temporary provision that allows employers to make tax-free student loan payments on behalf of employees pursuant to a qualifying educational assistance program maintained by the employer under Internal Revenue Code (Code) Section 127.

To qualify for tax-free treatment, the student loan payment must satisfy the following conditions:

  • The payment must be made after March 27, 2020 and before January 1, 2021.
  • The amount of the payment may not exceed $5,250. The $5,250 limit is reduced by any other educational assistance provided to the employee under the employer’s educational assistance program during the year (such as reimbursement of current tuition).
  • The payment must be issued to pay principal or interest on a qualified education loan (as defined in Code Section 221(d)(1)) incurred by the employee for his or her education. In general, a qualified education loan is any indebtedness incurred by the employee to pay qualified higher education expenses which are attributable to education furnished during a period in which the employee was an eligible student (at least half-time at an eligible educational institution).

The payments must also be provided under a program that meets the general requirements of Code Section 127, which include, among other things, that the program be in writing, that the payment not discriminate in favor of highly compensated employees, and that its terms and availability be adequately communicated to employees.

Employers electing to provide this benefit may issue payment directly to the lender or make payment to the employee. Employees who receive student loan assistance may not deduct the interest portion of that excludible student loan payment under Code Section 221.

As indicated above, employers who wish to take advantage of the new employee student loan assistance available under the CARES Act must provide the benefit through an education assistance program that meets the requirements of Code Section 127. Those employers with existing programs who wish to provide the new benefit will also likely need to amend their programs to include student loan repayments as an available benefit.