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

On November 6, 2019, the Internal Revenue Service (IRS) released Notice 2019-59, which sets forth the 2020 cost-of-living adjustments affecting dollar limits on benefits and contributions for qualified retirement plans. The IRS also announced the health savings account (HSA) and high deductible health plan (HDHP) annual deductible and out-of-pocket expense adjustments earlier this year in Revenue Procedure 2019-25. The Social Security Administration announced its cost-of-living adjustments for 2020 in October 2019, which includes a change to the taxable wage base.

The following chart summarizes the 2020 limits for benefit plans. The 2019 limits are provided for reference.

  2019 2020
Elective Deferral Limit 401(k), 403(b), 457(b) $19,000 $19,500
Catch-up Limit (age 50+) $6,000 $6,500
Defined Benefit Limit $225,000 $230,000
Defined Contribution Limit $56,000 $57,000
Dollar Limit – Highly Compensated Employees $125,000 $130,000
Officer – Key Employee $180,000 $185,000
Annual Compensation Limit $280,000 $285,000
SEP Eligibility Compensation Limit $600 $600
SIMPLE Deferral Limit $13,000 $13,500
SIMPLE Catch-up Limit (age 50+) $3,000 $3,000
Social Security Taxable Wage Base $132,900 $137,700
ESOP 5 Year Distribution Extension Account Minimum $1,130,000 $1,150,000
Additional Amount for 1-Year Extension $225,000 $230,000
HSA (Self/Family) Maximum Annual Contribution $3,500/$7,000 $3,550/$7,100
HDHP Minimum Deductible Limits $1,350/$2,700 $1,400/$2,800
Out-of-pocket Expense Annual Maximum $6,750/$13,500 $6,900/$13,800
Medical FSA $2,700 *

*Waiting for final 2020 number from IRS but expected to be $2,750

For more information on the 2020 cost-of-living adjustments, please contact Lisa Rippey, Jeff Cairns or the Stinson LLP contact with whom you regularly work.

On September 23, 2019 the Internal Revenue Service (“IRS”) issued final regulations amending the rules for hardship distributions from 401(k) and 403(b) plans (the “Final Regulations”). The Final Regulations modify the hardship requirements to reflect statutory changes and directives introduced by the Bipartisan Budget Act of 2018, the Tax Cuts and Jobs Act of 2017 and the Pension Protection Act of 2006. The Final Regulations are substantially similar to the proposed hardship regulations issued by the IRS on November 14, 2018.

The Final Regulations, which generally make it easier for plan participants to obtain hardship distributions, include the following changes:

Distributions “Necessary” to Satisfy Financial Need:

The Final Regulations make substantial changes to the analysis applied in determining whether a requested hardship distribution is “necessary” to satisfy an immediate and heavy financial need of an employee. Specifically, the Final Regulations: (1) eliminate the safe harbor that required suspension of employee contributions and exhausting available plan loans; and (2) eliminate the facts and circumstances standard. The Final Regulations replace these two standards with one “general standard” for determining whether a distribution is necessary, which retains parts of the prior standards.

Elimination of Six-Month Suspension/Plan Loan Safe Harbor

The prior hardship regulations provided a safe harbor whereby a distribution would be deemed “necessary” to satisfy an immediate and heavy financial need of an employee if: (1) elective contributions to the 401(k) plan and any other employer plan were suspended for at least six months after a hardship distribution; and (2) currently available, non-hardship distributions (including dividends from an ESOP) and non-taxable loans from the plan or any other plan maintained by the employer were taken before a hardship distribution.

Under the Final Regulations, for hardship distributions on or after January 1, 2020, plan sponsors are prohibited from suspending employee contributions to a 401(k) plan as a condition for obtaining a hardship distribution. Beginning in plan years beginning on or after January 1, 2019, requiring a loan prior to a hardship distribution and suspending employee contributions under nonqualified plans is still permitted, but not required.

New “General Standard” for Determining Whether Hardship Distribution is Necessary

The Final Regulations adopt a new single standard for determining whether a distribution satisfies an immediate and heavy financial need of the employee. Under the new standard, a hardship distribution must meet the following requirements:

  • The distribution may not exceed the amount of the employee’s need (including any taxes and penalties reasonably anticipated as a result of the distribution);
  • The employee must obtain non-hardship distributions available under the employer’s plans (this includes ESOP dividends); and
  • The employee must provide a representation that they have insufficient cash or other liquid assets available to satisfy the financial need. This representation may be made in writing, by an electronic medium (including website, e-mail and, as the Final Regulations clarify, a recorded telephone conversation) and other forms prescribed by the IRS commissioner. The plan administrator may rely on this representation unless it has actual knowledge that is contrary to the employee’s representation.

Additional Sources for Hardship Distributions:

The Final Regulations expand available sources for hardship distributions to include Qualified Non-Elective Contributions (QNECs) and related earnings, Qualified Matching Contributions (QMACs) and related earnings, and earnings on elective contributions, regardless of when these amounts were contributed or earned. Note that the rules for 403(b) plans are different, because the legislation left in place some existing rules for these plans: QNECs and QMACs in a custodial account, and earnings on elective deferrals to a 403(b) plan are not eligible for hardship distribution.

Modifications to Safe Harbor List of Expenses Deemed to Satisfy Financial Need

The Final Regulations modify the existing list of safe harbor expenses for which distributions are deemed to be made on account of an immediate and heavy financial need to:

  • Include losses incurred by an employee on account of a disaster declared by the Federal Emergency Management Agency;
  • Clarify that expenses for damage to a participant’s principal residence can satisfy the safe harbor requirements even if the residence is not located in a federally-declared disaster area; and
  • Add the participant’s primary plan beneficiary to the list of individuals for whom medical, educational, and funeral expenses may qualify under the safe harbor.

Plan Amendment Deadlines

While the Final Regulations generally apply to hardship distributions made on or after January 1, 2020, the deadline for amending a plan’s hardship distribution provisions will vary depending on whether the plan is an individually designed plan, a pre-approved plan, or a 403(b) plan.

Employers with questions about the new hardship distribution rules or who need assistance in amending their plans’ hardship distribution provisions can contact the author or any member of the Stinson LLP Employee Benefits Group.

Participants and beneficiaries are sometimes slow to cash qualified retirement plan distribution checks, especially when the checks are relatively small.  This may result in the check being cashed in a year after the year the check was received.  Sometimes it is not cashed at all.

In this situation, a common question from plan administrators is whether this changes the year of distribution for purposes of the Form 1099-R or the plan’s requirement to withhold from the distribution, or means that the participant or beneficiary is not required to include the distribution in taxable income for the year the check was received. This question may arise because the recipient of the distribution is arguing for alternate treatment – for example, that the payment should be taxed in the year the check is cashed.  The recipient may have cashed the check after filing the tax return for the year, didn’t consider that payment or the 1099-R in completing the return, and is trying to avoid an amended tax return.  Plan administrators tell participants and beneficiaries that there is nothing they can do, because their lawyers or tax advisors say that the tax treatment is fixed.

In Revenue Ruling 2019-19, the IRS has concisely addressed these questions, confirming the bad news that tax advisors and lawyers have regularly delivered.  No matter what the participant or beneficiary does with the check, once received,

  • the distribution is included in the individual’s taxable income;
  • the distribution is reported on a Form 1099-R; and
  • withholding on the distribution, if required, applies.

Although the IRS clearly concluded that when or whether the recipient cashes the check is not relevant in answering these questions, it did not address some of the tricky questions that arise when distribution checks are issued close to or at year-end.

For more information on taxation of retirement plan distributions, please contact Audrey Fenske or Jeffrey Cairns, or the Stinson LLP contact with whom you regularly work.

The Department of Labor’s Veterans Employment and Training Services (“VETS”) issued a new fact sheet (“Fact Sheet”) to help employers better manage their pension obligations under the Uniform Services Employment and Reemployment Rights Act (“USERRA”). USERRA creates certain rights and protections for uniformed service members. For example, under USERRA, service members who were reemployed after a uniformed-services-related absence are treated as though they did not have a break in civilian employment for purposes of participation, vesting, and accrual of pension benefits.

The Fact Sheet addresses how USERRA applies to employers that pay pension benefits as a percentage of an employee’s total earnings. Specifically, the Fact Sheet explains that:

  • the service member’s entire period of absence from employment “due to or necessitated by” military service must be treated as continuous employment, which includes the time spent preparing for military service and the post-service time that the individual spent applying for reemployment or recovering from an illness incurred or aggravated by military service;
  • if a pension plan is contributory, the employer must make contributions that are contingent on the service member’s contributions only to the extent that the service member makes the contributions to the plan;
  • to determine the service member’s pension entitlement in plans that pay pension benefits as a percentage of an employee’s total earnings, an employer must determine the rate or rates of compensation the service member would have received but for the military-related absence;
  • to determine the rate of compensation mentioned above, the employer must determine how many hours of service the member would have likely worked and how much the service member would have earned based on the service member’s previous work history; and
  • if the rate of compensation cannot be determined with reasonable certainty, the employer must look at the average rate of compensation the service member received during the preceding twelve months (the “12-month look-back”).

For more information regarding an employer’s obligations under USERRA, please contact Jeffrey Cairns, Thomas Dowling, Phil McKnight, Lisa Rippey or the Stinson LLP contact with whom you regularly work.

Companies that contribute to multiemployer pension plans are often rightfully worried that corporate restructurings may inadvertently trigger either a complete or a partial withdrawal from the plan. A recent case out of the Third Circuit provides a helpful illustration of the partial withdrawal rules in practice. Caesar’s Entertainment Corp. v. International Union of Operating Engineers Local 68 Pension Fund, Case No. 18-2465, 2019 WL 3484247 (3d Cir. Aug. 1, 2019).

Caesar’s Entertainment Corporation (“Caesars”) operated four casinos in Atlantic City, NJ under which each casino was a party to a collective bargaining agreement (”CBA”) that required contributions to the IUOE Local 68 Pension Fund (the “Fund”) for certain engineering work performed by union employees. Because of the common ownership, these casinos were treated as a single employer for purposes of withdrawal liability. In 2014, one of the casinos shut down, and Caesars stopped making contributions to the Fund for the engineering work performed there while continuing contributions for the engineering work performed at the other three casinos. The Fund wagered that the shutdown of the casino constituted a partial withdrawal.

Under ERISA Section 4205, a partial withdrawal occurs in one of three scenarios:

  • There is a 70% contribution decline.
  • The employer ceases to have an obligation to contribute to a plan under one or more but fewer than all collective bargaining agreements, but continues to perform work in the jurisdiction of the type for which contributions were previously required (the “bargaining out” provision).
  • The employer ceases to have an obligation to contribute under a plan for work performed at one or more but fewer than all facilities, but continues to perform work at the facility of the type for which the obligation to contribution ceased (the “facility take-out” provision).

The cessation of work performed at the casino was not sufficient to trigger the 70% contribution decline. Instead, the Fund argued that the “bargaining out provision” applied because (a) when the casino shut down Caesars ceased to have an obligation under one or more but fewer than all of the CBAs, and (b) the shutdown was parlayed with work continued to be performed at the other three casinos in the same jurisdiction. The Fund argued that it was not relevant that Caesars was required to contribute to the Fund for that work.

The Third Circuit, relying on the plain language of the statute as well as guidance from the PBGC, disagreed. It held that for the bargaining-out provision to apply, the work that continues to be performed must not be work that results in contributions to the Fund. The Third Circuit thus joined all other circuits that have examined the issue in holding that no partial withdrawal liability is imposed when an employer closes an operation and shifts work to other operations that are covered by other CBAs under which contributions are required to be made to the multiemployer plan.

This is a welcome decision for companies that are looking to restructure their operations but are worried about withdrawal liability. It also highlights that as the pension funding crisis worsens, these funds are going to be more willing to go “all in” and look for ways to stretch the reading of the statutes to impose withdrawal liability.

 

Employers sponsoring 403(b) plans should be aware that we are nearing the deadline for adopting a pre-approved 403(b) plan that provides relief for any documentary noncompliance back to January 1, 2010 (or, if later, the effective date of the plan). As a reminder, adopting a pre-approved plan is the only way a plan sponsor may now be assured that its plan document meets all IRS requirements. A pre-approved plan can take different forms, but essentially it is a document with some options that the employer selects, and additional standard terms that apply universally. The options and the standard terms are submitted to the IRS for approval, so that any employer that timely adopts the documents can rely on the IRS opinion issued to the sponsor of the pre-approved document that it meets all IRS requirements.

In Revenue Procedure 2017-18, the IRS announced a deadline of March 31, 2020 for adopting pre-approved 403(b) plans in order to receive retroactive relief for any noncompliant plan provisions. Shortly thereafter, it began issuing opinions on plans submitted by sponsors of volume submitter and prototype 403(b) plan documents.

All 403(b) plan sponsors were first required to have a plan document in place by the end of 2009, effective January 1, 2009. Prior to that time, plan documents were only required for 403(b) plans that were subject to ERISA.

Stinson sponsors ERISA and non-ERISA pre-approved plan documents. Please contact any member of the Stinson Employee Benefits Group about updating your 403(b) plan document. Contacts for the Minneapolis, Minnesota, and Kansas City, Missouri offices are:

Audrey Fenske, Jeff Cairns, Phil McKnight, Tom Dowling, and Elizabeth Delagardelle

 

On June 13, 2019 the Department of Health and Human Services, Department of Labor and Department of the Treasury released final regulations that create new healthcare coverage options for employers and employees. https://www.federalregister.gov/documents/2019/06/20/2019-12571/health-reimbursement-arrangements-and-other-account-based-group-health-plans

The new coverage options come in the form of two new types of health reimbursement arrangements (“HRAs”), one which allows employers to reimburse employees for medical expenses including expenses for health insurance purchased on the individual market (an “Individual Coverage HRA”) and another that allows employers offering a traditional group health plan to reimburse employees for medical expenses even if the employee does not enroll in the traditional group health plan offered by the employer (an “Excepted Benefit HRA”). These types of HRAs were previously unavailable because they were deemed to violate the “market reform” provisions of the Affordable Care Act (“ACA”) including the prohibition on annual and lifetime dollar limits on essential health benefits and the first dollar coverage requirements for preventive care services.

Individual Coverage HRAs

Individual Coverage HRAs provide an additional option to employers seeking an alternative to offering traditional group health coverage to employees: coverage under an Individual Coverage HRA which employees can use to purchase (and receive reimbursement for) health coverage on an individual market. If certain conditions are met, payments to employees from the HRA will receive the same tax-favored treatment as contributions to a traditional group health plan.

Individual Coverage HRAs are available to employers of all sizes, including Applicable Large Employers, who can avoid penalties under the employer mandate provisions of the ACA so long as they contribute a sufficient amount to the HRA for the offer of the HRA to be considered “Affordable” under ACA rules[1].

In the event the amount contributed to the Individual Coverage HRA by the employer is insufficient to cover 100% of the cost of an employee’s health insurance coverage purchased on the individual market, the employee can use pre-tax dollars to cover the difference so long as: (1) the employer offers a salary reduction arrangement under a cafeteria plan to cover the difference; and (2) the individual health insurance coverage is not purchased on an Exchange.

Individual Coverage HRAs must satisfy all of the following conditions:

  • The Individual Coverage HRA must require that the employee and any covered dependents enroll in individual health insurance coverage and must substantiate their enrollment in such coverage.
  • If the employer offers an Individual Coverage HRA to a particular class of employees, the employer may not also offer a traditional group health plan to the same class of employees (subject to an exception for new hires).
  • If the employer offers an Individual Coverage HRA to a particular class of employees, the HRA must be offered on the same terms to all participants within the class (subject to certain exceptions related to carryovers, family size, employee age, former employees and new hires).
  • The Individual Coverage HRA must allow an employee to opt out of coverage at least once with respect to each plan year; and
  • The employer must provide a written notice to each employee that includes a description of the HRA, notice of the right of the employee to opt out of coverage and a description of the availability of the premium tax credit if the participant opts out and the HRA is not considered affordable under the ACA rules.

[1] The Internal Revenue Service has stated that it will provide more information about how the employer mandate applies to Individual Coverage HRAs in the near future.

Excepted Benefit HRAs

Excepted Benefit HRAs allow employers to supplement an existing traditional group health plan with an HRA to help cover the cost of copays, deductibles and other non-covered expenses. Unlike other HRAs, an Excepted Benefit HRA may be used to reimburse an employee’s medical expenses even if the employee declines to enroll in the traditional group health plan offered by the employer (or in any other coverage). In addition, an employer may also use an Excepted Benefit HRA to reimburse an employee for certain qualified medical expenses, including premiums for vision, dental and short term limited duration insurance. An Excepted Benefit HRA must satisfy certain conditions, including the following:

  • The annual HRA contribution is limited to $1,800 per year (indexed for inflation beginning in 2021);
  • The HRA must be offered in conjunction with a traditional group health plan (although the employee is not required to enroll in the traditional plan);
  • The HRA cannot be used to reimburse individual health insurance premiums, group health insurance premiums (other than COBRA), or Medicare Premiums; and
  • The HRA must be uniformly available to all similarly situated individuals (as defined under the Health Insurance Portability and Accountability Act, which generally permits bona fide employment-based distinctions unrelated to health status).

Employers can begin offering Individual Coverage HRAs and Excepted Benefit HRAs beginning January 1, 2020. Employers interested in offering an Individual Coverage HRA or an Excepted Benefit HRA should ensure that the HRAs comply with the applicable conditions set forth in the regulations. Employers with questions about the new coverage options available under the final HRA regulations can contact the author or any member of the Stinson LLP Employee Benefits Group.

The IRS has issued guidance (Rev. Proc. 2019-20) expanding the determination letter program for certain individually designed plans.  The IRS had previously announced in 2017 that the determination letter program for individually designed plans would be limited to initial plan qualification and qualification on plan termination.  Since that time, the IRS received many comments asking for an expansion of the determination letter program.  The new guidance provides that beginning September 1, 2019, merged plans previously maintained by unrelated employers may request a determination on an ongoing basis.  In addition, hybrid plans (cash balance and certain other similar plans) will have a limited period (September 1, 2019 through August 31, 2020) to apply for a determination.

The ongoing program for merged plans will be helpful to large employers, which are more likely to have individually designed plans and to be involved in acquisitions regularly.  The program is available if the plan merger occurs by the end of the plan year following the plan year in which the related business transaction occurred, and the application is filed by the end of the plan year that follows the plan year of the plan merger. For example, if the transaction occurs in 2019, the plan merger (assuming a calendar year plan) must occur in 2020 and the determination letter application must be filed by December 31, 2021.

The window for hybrid plans provides an opportunity for plan sponsors of these plans to obtain a review of all provisions related to the final hybrid plan regulations, which were not fully addressed in the most recent remedial amendment cycle.

Note that the scope of the IRS review of a merged plan will not be limited to the merger-related amendment, and the review of a hybrid plan will not be limited to review of the plan provisions impacted by the final hybrid plan regulations.  The merged plan program will take into account the Required Amendments List from the second calendar year preceding the year of the application, and all prior Requirement Amendments and Cumulative Lists.  The hybrid plan program will take into account the 2017 Required Amendments List and all prior Required Amendments and Cumulative Lists.

If, in reviewing a plan submitted for a determination letter, the IRS identifies a disqualifying amendment or failure to amend that does not fall within the remedial amendment period, and the IRS determines that amendment was timely adopted in good faith or the failure to amend was based on a good faith belief that no amendment was required, a special sanction structure will apply that is more favorable than the sanctions generally applicable in that situation under the IRS Employee Plans Voluntary Compliance Resolution System (EPCRS).  This special sanction is limited to the EPCRS user fee applicable when the plan sponsor identifies the disqualifying provision.

One of the clear trends in employee benefits involves companies offering assistance with their workforce’s student loan repayments. The reasons are obvious. Student loan debt is now the largest source of consumer debt after housing and that will likely be the case for the foreseeable future. This financial insecurity has a clear link to workplace productivity. In addition, companies are using student debt repayment incentives as recruitment tools for millennial workers. However, because these benefits were historically not offered on a tax-favored basis, the appeal was limited.

The IRS in a recent private letter ruling opened the door to a potential new incentive – the ability to offer a 401(k) “match” tied to an employee’s student loan repayments. Private letter rulings are not binding on anyone but the taxpayer seeking the ruling, so the private letter ruling cannot be relied on by other taxpayers looking to offer a similar program. This is especially true for this particular ruling given how narrow the scope of the ruling is and the number of outstanding questions it raises. Nonetheless, the private letter ruling has generated a lot of discussion on retirement plan design.

The private letter ruling was requested by an employer that maintains a traditional 401(k) plan with a regular matching contribution equal to 5% of the participant’s compensation per pay period if the participant made an elective contribution to the 401(k) plan of at least 2% of his or her compensation. The employer desired to amend its plan to add a new student loan repayment benefit program (the “Program”). The key terms of the Program are as follows:

— The employer would make a non-elective contribution on behalf of participants in the Program who made student loan repayments. If a participant made a student loan repayment of 2% of compensation, then the employer would make a non-elective contribution to the 401(k) plan equal to 5% of the employee’s compensation.

— Participants in the Program would not be eligible to receive the regular matching contribution for any elective deferrals to the 401(k) plan while participating in the Program.

— The employer would also have a “true-up” matching contribution at the end of the year if the participant did not make a student loan repayment during a pay period but did make elective contributions to the 401(k) plan.

— The non-elective contribution and “true-up” matching contribution would be subject to the same vesting schedule as the regular matching contribution.

The employer requested a ruling that the Program would not violate the “contingent benefit” rule under Code Section 401(k)(4)(A). The contingent benefit rule prohibits a 401(k) plan from conditioning any benefits (other than matching contributions) on the participant making an elective contribution. The IRS granted the ruling agreeing that the Program would not violate the contingent benefit rule because the Program was conditioned on the participant making a student loan repayment, not an elective contribution.

While this ruling is welcome for employers seeking creative 401(k) plan designs, it leaves open a number of practical questions an employer will need to consider before implementing a similar student loan repayment program. Some of the issues to consider are:

— How will coverage and nondiscrimination testing apply to such programs? Depending on the industry, the employees who would likely participate in a student loan repayment program include a mix of both highly compensated employees and non-highly compensated employees.

— Is such a program available to a safe harbor 401(k) plan?

— How would the employer substantiate that the student loan repayments were made? The easiest mechanism to substantiate would be if the employer directly paid the student loan provider through a payroll system, but this approach can be burdensome operationally.

Given these outstanding issues, companies that are interested in offering a similar program should work closely with benefits counsel to make sure the program is right for the company and administratively feasible. Tom Dowling and Mark Wilkins have been working closely with clients on possible solutions.  To discuss potential options, please contact Tom or Mark or the employee benefits attorney with whom you normally work.

On August 31, 2018, President Trump signed an executive order outlining the administration’s priorities for American retirement plans. Emphasizing that as many as 34 percent of workers do not have access to a workplace retirement plan, the order outlines the administration’s plan for increasing workplace retirement plan availability.

The first section of the order outlines policy points, noting that employers with more than 500 employees are more likely to offer retirement plans than are employers with fewer than 100 employees. The current “[r]egulatory burdens and complexity” of offering a retirement plan may be cost prohibitive for small employers who might otherwise offer retirement benefits. The order calls on federal agencies to “revise or eliminate” rules that impose “unnecessary costs and burdens” which may be preventing small businesses from establishing retirement plans. The administration’s goal of increasing access to multiple employer plans (MEPs), which would allow small employers to band together to participate in a single retirement plan, echoes the recent expansion of access to association health plans. The order also prioritizes both the reduction/simplification of employee benefit plan notice requirements and the revamping of current required minimum distribution rules to prevent retirees from running out of money during their later retirement years.

The second section of the order directs the Secretaries of Labor and Treasury to “examine policies” to increase access to MEPs. Within 180 days of the signing of the order, the Secretary of Labor is to consider whether a notice of proposed rulemaking, other guidance, or both should be issued regarding what groups or employer associations may be an ERISA section 3(5) “employer.” The Secretary of Treasury is specifically directed to consider providing guidance to MEPs navigating the tax qualification process. The second section of the order also directs the Secretaries to overhaul current retirement plan disclosure notices within the next year. The goal is to make notices both user-friendly for participants and less burdensome for employers and other plan fiduciaries to produce. Lastly, the Secretary of Treasury is also directed to review within 180 days the life expectancy and distribution period tables applicable to required minimum distributions to determine whether updates are needed.

While the order does not immediately affect workplace retirement plans, the order provides valuable insight on the administration’s workplace retirement policy. If you have questions about how this may affect your business, or if you are considering implementing a qualified retirement plan, please contact us or the Stinson Leonard Street attorney with whom you regularly work.