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

On December 19, 2019, the President signed the SECURE Act. SECURE includes, among other things, provisions that are intended to make retirement plans more accessible, especially to smaller employers, address changing workforce demographics, address nondiscrimination issues facing defined benefit plans, encourage guaranteed income options under defined contribution plans, and increase penalties for noncompliance with certain plan filing and notice requirements. Some provisions are effective immediately, and some may require most plan sponsors to adjust administration for 2020. The provisions most broadly applicable are discussed below.

Retirement Plan Accessibility

A number of changes make it easier or less costly for employers to adopt or maintain plans.

Credits Enhanced.   Beginning in 2020, employers with no more than 100 employees who start up a new plan can receive annual credits in the first three years of up to $250 for each non-highly compensated employee eligible to participate, capped at $5000. If the plan includes (or an existing plan adds) an auto-enrollment feature, a new $500 credit is available for the first three years in which the plan has an auto-enrollment feature.

Retroactive Plan and Safe Harbor Adoption. Beginning in 2020, an employer’s adoption of a plan (except for elective deferrals) is treated as effective on the last day of a tax year if adopted by the due date of the tax return for the tax year. Previously, qualified plans had to be signed and partially funded by the last day of the initial plan year to be in effect for that year. For plan years beginning after 2019, amendments to plans without existing matching contributions to provide for a nonelective 401(k) “safe harbor contribution” may be adopted as late as 30 days before the end of the plan year, or, if the employer is willing to make a contribution of at least 4%, as late as the end of the following plan year. SECURE also eliminates the safe harbor notice requirement for plans satisfying nondiscrimination requirements through nonelective contributions.

Auto-Escalation Nondiscrimination Safe Harbor. The 10% cap on elective deferrals that result from auto-enrollment and auto-escalation for a plan that satisfies the nondiscrimination safe harbor through an auto-enrollment and escalation design (“QACA”) has been raised to 15%. The cap on auto-enrollment for the initial year remains at 10%.

“Open MEPs.” Beginning in 2021, individual account (i.e., defined contribution) plans may be maintained by unrelated employers that use a “pooled plan provider” and will not subject to the “one bad apple” rule, under which the unresolved operational issues of one employer could disqualify the entire plan. In order to be eligible for this relief from the one bad apple rule, the plan must provide for the spin-off of the portion of the plan attributable to the employer with the unresolved disqualification issues into a separate plan; and the spin-off must occur, except in certain circumstances to be identified in future guidance. If the plan has disqualifying errors that result from the failure of the pooled plan provider to perform its duties, the entire plan may be disqualified.

The pooled plan provider must agree that it is a named fiduciary of the plan and responsible for ERISA compliance and compliance with qualification requirements, and must make sure employers take actions accordingly. It must also register with the IRS and comply with requirements regarding audits of the plan. Existing multiple employer plans will not be considered pooled employer plans unless elected and the plan and pooled plan provider meet the requirements.

The participating employers maintain responsibility for selecting and monitoring the pooled plan provider and for investments, unless the pooled plan provider delegates investment to another fiduciary. In addition, they must take any actions identified by the pooled plan provider or the DOL as necessary for the proper administration of the plan.

Special provisions make these plans easier to administer: the pooled plan provider is responsible for disclosures, which may be electronic, and only one 5500 is required.

Changing Workforce Demographics

Employees are living and working longer, and the number of employees working part-time has remained high, even after recovery from the recession.

Post-70-1/2 Contributions (IRAs). Beginning in 2020, there is no maximum age for contributions to a traditional IRA. However, any contributions after age 70-1/2 will reduce the qualified charitable distribution limit.

Age for Required Minimum Distributions (RMD) Raised. The age at which distributions must begin for terminated participants (and certain active participants) in employer-sponsored plans and IRA owners has been raised from 70-1/2 to 72. The new RMD rule applies to individuals who attain age 70-1/2 after December 31, 2019.

Part-time Employees. Effective in 2021, employees who meet the plan’s age requirements, if any, and have at least 500 hours of service in three consecutive 12-month periods must be allowed to participate and make elective deferrals into employer-sponsored 401(k) plans. However, these participants may be excluded for testing purposes, and they are not required to receive a matching contribution, and, if the plan is top heavy, the special vesting and contribution requirements would not apply to them. In determining years of vesting service for a participant who is a participant solely because of the new part-time employee rules, each 12-month period in which the employee has 500 hours of service will constitute a year of vesting service. These changes do not apply to collectively bargained employees. Hours of service must be counted for purposes of eligibility to participate beginning with the first 12-month period beginning on or after January 1, 2021.

Closed Defined Benefit Plans

Absent relief, many defined benefit plans that have been closed to new participants would have been forced to freeze benefits due to discrimination issues associated with the frozen plan becoming disproportionately composed of more highly compensated employees as the participant population ages or due to a failure to meet the minimum participation requirements due to participant attrition. Under SECURE, a plan that was closed before April 5, 2017, or existed for least five years before closing, with no substantial increase in benefits, rights, or features, benefits or coverage in those five years very generally:

—   will have relief from the benefits, rights, and features nondiscrimination requirements if the plan meets the nondiscrimination requirements for the plan year of closing and the two following plan years and any post-closing amendment does not discriminate significantly in favor of highly compensated employees;

—   will be able to take advantage of more permissive rules for aggregating the plan with defined contribution plans for purposes of testing nondiscrimination in benefits if the plan satisfies nondiscrimination in benefits and coverage for the plan year of closing and the two following plans years and any post-closing amendment of coverage or benefits provided does not discriminate significantly in favor of highly compensated employees; and

—   will be considered to satisfy the minimum participation requirements, if the plan satisfied the minimum participation requirements at the time of closing.

Providing, Communicating and Preserving Lifetime Income

Guaranteed Retirement Income Contracts. With the closure or termination of defined benefit pension plans, employees have lost access to plans that provide for guaranteed lifetime income. While employers sponsoring defined contribution plans currently can provide guaranteed lifetime options, they have been reluctant to do so due to administrative complexity and fiduciary risk.

SECURE provides a safe harbor, which, if followed, will limit the fiduciary risk associated with providing a “guaranteed retirement income contract.” The safe harbor requires receiving specific representations from the insurer and evaluating reasonableness of the costs of the annuity relative to the benefits delivered and the financial soundness of the insurer at the time the insurer is initially selected. On an ongoing basis, the fiduciary must receive and review the insurer’s representations at least annually.

Communicating Lifetime Income. SECURE will require, for retirement plan participant disclosures provided 12 months or later after final guidance is issued, disclosure of the amount of an annuity (a QJSA, assuming a spouse of equal age, and a single life annuity) that a participant’s defined contribution could provide upon retirement. This disclosure will be required annually, and the Department of Labor is directed to develop assumptions and model disclosures within one year of enactment.

Preserving Retirement Income. SECURE provides for disposition of annuity contracts, should they no longer be available under a plan. Plans may distribute the contract in kind to the participant or to an eligible retirement plan, even if there is no distribution event, so long as the distribution or rollover occurs in the 90-day period prior to the elimination of the annuity option. SECURE also seeks to protect income for retirement by eliminating plan loan treatment for loans made through a credit card or similar process; this provision is effective immediately.

Other Provisions Broadly Applicable to Plans or Employees

Limitation on Non-Spousal “Stretch IRAs.” Generally, beginning with any deaths occurring after 2019, non-spouse designated beneficiaries of participants or IRA owners will be required to take a distribution of all a participant’s defined contribution plan account or IRA within ten years of the death of the participant/owner. There is an exception for disabled or chronically ill beneficiaries and for a beneficiary who is no more than ten years younger than the participant/owner; distributions over the beneficiary’s life expectancy continue to be available to these beneficiaries, as well as the participant/owner’s spouse. In addition, the 10-year period for minor beneficiaries does not begin until the child reaches the age of majority.

Penalty-Free Withdrawal for Birth/Adoption Expenses. Beginning in 2020, participants who withdraw up to $5000 from a plan will not be subject to the 10% penalty tax on early withdrawals if the withdrawal is taken to cover birth or adoption expenses. Presumably, plans will need to be prepared to address this new exception when reporting distributions for 2020. To be exempt from the 10% penalty tax, the participant must include the name, age and TIN of the child on the participant’s tax return for the year. To avoid qualification issues, where a distribution would not otherwise be permitted under a plan, the $5000 limit must be applied to aggregated distributions from all qualified plans of the employer and members of the employer’s controlled group, and the distribution must be made within one year of the child’s birth or the date the adoption is finalized. The SECURE provision includes the ability of the participant to repay the distribution, treating it as a rollover; more guidance is needed on the tax treatment and timing of this repayment.

Reporting/Notice Noncompliance Penalties Increased.

IRS penalties for failing to file Forms 5500 and to provide certain notices to participants were increased tenfold, effective for filings and notices due after 2019.

Generally, for a tax qualified retirement plan to be adopted, the plan document must be signed and dated by the sponsoring employer and retained. However, in Val Lanes Recreation Center Corp. v. Commissioner of Internal Revenue, T.C. Memo 2018-92, the Tax Court found that the employer’s failure to produce a signed plan document did not disqualify the plan.

In Val Lanes, the Tax Court held that the IRS abused its discretion in revoking a favorable determination letter finding that Val Lanes’ Employee Stock Ownership Plan (ESOP) was qualified under Internal Revenue Code (IRC) § 401(a). The IRS issued a favorable determination letter, conditioned on Val Lanes’ timely adoption of a proposed amendment to comply with Internal Revenue Code (IRC) § 414(u).[1] Val Lanes claimed it adopted the amendment and restated the plan shortly after receiving the favorable determination letter, but it did not have a signed restated plan document. The IRS took the position that since the employer could not produce a signed plan document, the amendment was never executed and the ESOP did not meet the condition of the determination letter for qualification.

Although Val Lanes could not produce a signed plan document, the Tax Court found that it had adopted the amendments soon after receiving the favorable determination letter because of the credible explanation as to the absence of the executed copy. Val Lanes explained that flooding in the facility had caused extensive water damage, including damage to documents relating to the ESOP, and that the Department of Labor and IRS had seized documents and computers from Val Lanes’ accountant in an unrelated matter. The court also pointed to the fact that the IRS did not initially list failure to amend the plan as required by IRC § 414(u) as a basis for revocation on Form 886-A when it requested additional information during the plan audit. The court believed this suggested that evidence of adopting the amendment was provided during the audit.

On December 13, 2019 the IRS released a Chief Counsel Memorandum regarding qualified retirement plan adoption requirements and addressing “[c]oncerns . . . that taxpayers may argue that Val Lanes supports the proposition that a taxpayer may attempt to meet the taxpayer’s burden to have an executed plan document based on the production of an unsigned plan and a pattern and practice of signing documents given by an advisor.”[2] While memorandums may not be used or cited as precedent, they are released to the public and provide insight about the IRS’s positions and opinions on certain issues, including IRS audit positions.

The Memorandum outlines the IRS’s position that due to the unusual facts and circumstances in Val Lanes, the decision should be limited to those specific facts. According to the Memorandum, the general rule that a plan document must be signed for a qualified plan to be adopted remains the same. Therefore, “it is appropriate for IRS exam agents and others to pursue plan disqualification if a signed plan document cannot be produced by the taxpayer.”[3] Ultimately, the plan sponsor bears the burden of proof that it executed the plan document.[4]

As outlined in the Memorandum, plan sponsors can expect IRS agents to pursue plan disqualification for failure to produce a signed plan document during an IRS examination of a plan. Therefore, employers and plan sponsors should continue properly executing plan documents and retaining records in accordance with Treas. Reg. 1.6001-1(e). However, in light of Val Lanes, there may be relief for plan sponsors that cannot produced a signed plan document in extraordinary circumstances and where there is credible evidence that the plan document was executed and signed. Unfortunately, the Memorandum does not provide any guidance about the factors the IRS will consider in determining whether a taxpayer has met its burden that it executed a plan document. If a plan sponsors discovers that it failed to adopt a required plan amendment, retroactive permission to adopt and sign the amendment or restatement of the plan is often available under the Employee Plans Compliance Resolution System (EPCRS), voluntary correction procedures.

 

[1] IRC section 414(u) was amended in 1996 to require qualified plans to include special rules for employees with “qualified military service.”

[2] Office of Chief Counsel, IRS, Memorandum AM 2019-002, at 3 (Dec. 9, 2019), https://www.irs.gov/pub/foia/am-2019-002.pdf.

[3] Id.

[4] Id.

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.