IRS Guidance

IRS Updates Determination Letter and VCP Submission Information

The IRS has issued Revenue Procedure (Rev. Proc.) 2020-4, which updates 2019 guidance on determination letter and Voluntary Correction Program (VCP) submission procedures. Changes from the prior year Rev. Proc. 2019-4 include the following.

Section 3.04 is revised to state that a determination letter issued regarding the qualified status of a retirement plan will include a determination on the exempt status of any related trust or custodial accounts (does not include an adopting employer of a pre-approved plan).

Section 3.06(2) is revised to change an “Appeals Office” reference in Rev. Proc. 2019-4 to now read “Internal Revenue Service Office of Appeals (Independent Office of Appeals),” with corresponding changes made throughout Rev. Proc. 2020-4.

Section 6.02 is revised to provide a list of applicable documents that should be submitted to enable the Service to more efficiently process determination letter requests.

Section 8.02 notes that determination letter requests for certain hybrid (defined contribution and defined benefit) plans will be accepted through August 31, 2020, and certain individually designed merged plans on an ongoing basis.

Section 9.07 removes a former cautionary statement that a favorable determination for a plan executing a de-risking of its pension obligations by lump sum distribution does not constitute a determination of federal tax consequences.

Sections 30.07 and 31.03 are revised to note that user fees under VCP must be paid electronically using www.pay.gov, and that the Service no longer accepts paper VCP submissions.

Section 31 is revised to update mailing addresses.


IRS Proposes No Change for 2020 Retirement Plan Periodic Payment Withholding

The IRS has issued Notice 2020-3, guidance in which the Service is proposing no change for 2020 in a procedure for determining tax withholding on periodic distributions from pensions, annuities, and “certain other deferred income.”

Withholding on nonperiodic or on-demand distributions is generally applied at a 10 percent rate (other than retirement plan-eligible rollover distributions subject to mandatory 20 percent withholding), and can also be waived. Periodic—generally annuitized—payments have withholding applied according to IRS wage withholding tables, with recipients electing the number of withholding allowances or waiving withholding. However, when a withholding election is not made (on IRS Form W-4P), the current default assumption for the 2019 tax year is for the payor to apply withholding as if the recipient is married and has claimed three (3) withholding allowances.

The IRS is proposing in this guidance to retain this assumption for the 2020 tax year for those who make no withholding election for such periodic distributions, but is receiving public comments on this proposal through February 17, 2020.


IRS Extends Final Hardship Regulations Amending Deadline for Pre-Approved Plans

The IRS has issued Revenue Procedure 2020-09, guidance that extends the deadline for pre-approved retirement plans to amend for final IRS hardship regulations published in September 2019. The amending deadline for these plans is extended to December 31, 2021.

Significant changes to hardship distribution requirements were enacted in the Bipartisan Budget Act of 2018 (BBA). Changes contained in the legislation and reflected in the final regulations—applying to 401(k) and 403) plans—included the following.

  • Eliminates the six-month suspension of deferrals and employee after-tax contributions following a hardship distribution.
  • Eliminates the need for available plan loans to be taken before receiving a hardship distribution.
  • Broadens available plan sources from which hardship distributions may be taken, to include (in addition to elective deferrals) earnings on elective deferrals, as well as qualified non-elective contributions (QNECs), qualified matching contributions (QMACs), ADP and QACA safe harbor contributions—and the earnings thereon (certain restrictions on hardship-available sources apply to 403(b) plans).
  • A general standard may be used to determine if a hardship distribution is needed to satisfy a financial need.
  • Other provisions apply to casualty losses and to certain federally declared disasters.

BBA and final regulations provisions must be effective for hardship distributions on or after January 1, 2020, although certain changes could be applied for 2018 and 2019 plan years.


IRS Releases 2019 Required Amendments List for Individually-Designed Qualified and 403(b) Plans

The IRS has issued Notice 2019-64, the 2019 Required Amendments List for drafting individually designed retirement plan documents for plans intended to be qualified under Internal Revenue Code Sections 401(a) (“qualified plans”) and 403(b).

In general, a Required Amendments List includes statutory and administrative changes in requirements that are first effective during the plan year in which the list is published, but does not include guidance that is issued or legislation that is enacted after the list has been prepared.

 

The list is divided into two parts. Part A covers changes in requirements that generally would require an amendment to most plans; or, to most plans of a type that would be affected by the change. Part B includes changes in requirements that the Treasury Department and the IRS anticipate will not require amendments to most plans, but might require an amendment because of an unusual provision in a particular plan.


IRS Grants Filing Extension for Certain Affordable Care Act Reporting

The IRS has issued Notice 2019-63, granting a 30-day extension to file information returns (forms) that report required information on compliance with certain requirements of the Affordable Care Act (ACA). The IRS makes clear that the 30-day extension applies to the deadline for providing the forms to taxpayers; the to-IRS deadlines remain unchanged.

Under Internal Revenue Code Section (IRC Sec.) 6056, certain “applicable large employers” (generally, those with 50 or more full-time-equivalent employees) are required to file with the IRS and distribute to employees information on offers of coverage under—and enrollment in—the employer’s health insurance plan(s). Under IRC Sec. 6055, providers of health coverage are required to report to the IRS and to employees the months that the employee was covered under ACA-defined minimum essential coverage. The information returns used to report this information include Forms 1094-B, 1094-C, 1095-B, and 1095-C.

The deadline for providing these forms to employees and covered individuals is extended from January 31, 2020, to March 2, 2020. The February 28, 2020, paper-copy IRS deadline and March 31, 2020, electronic submission IRS deadlines are not extended.

This notice also extends relief from penalties to reporting entities that report incorrect or incomplete information on the return or statement when these entities can show that they made good-faith efforts to comply with the information-reporting requirements. This relief applies to missing and inaccurate taxpayer identification numbers and dates of birth, as well as other information required on the return or statement.

The Treasury Department and the IRS have requested comments as to whether an extension of the due date for furnishing statements to individuals and the good-faith reporting relief will be necessary for future years and, if so, why.


IRS and DOL Identify Fall Regulatory Guidance Priorities

The IRS and the Department of Labor (DOL) Employee Benefit Security Administration (EBSA) have identified priority regulatory topics on their fall guidance agendas. These postings are not assurance that all items listed will be completed and issued within hoped-for timeframes, but serve as a general reference to the guidance these agencies are working to complete.

 

IRS

Proposed Rules

  • Guidance on Rules Applicable to IRAs Under Sections 408 and 408A
  • Spousal IRAs, SEPs, and IRA Technical Changes
  • Deferred Compensation Plans of State and Local Governments and Tax-Exempt Entities
  • Additional Rules Regarding Pension Plan Funding and Benefit Restrictions
  • Reporting and Notice Requirements for Deferred Vested Benefits Under Section 6057
  • Requirements for Employee Stock Ownership Plans
  • Application of Nondiscrimination Requirements, Backloading Limitations, Certain Plan Termination Rules, Benefit Limitations, and Top Heavy Rules to Statutory Hybrid Plans
  • Minimum Vesting Standards
  • Excise Tax on High Cost Employer-Sponsored Health Coverage
  • Health Reimbursement Arrangements and Other Account-Based Group Health Plans

Final Rules

  • Reporting and Notice Requirements for Deferred Vested Benefits Under Section 6057
  • Additional Rules Regarding Information Reporting of Minimum Essential Coverage (health plans)
  • Withholding on Certain Retirement Plan Distributions Under Section 3405(a) and (b)

 

DOL/EBSA

Proposed Rules

  • Fiduciary Rule and Prohibited Transaction Exemptions
  • Grandfathered Group Health Plans and Grandfathered Group Health Insurance Coverage

Final Rules

  • Adoption of Amended and Restated Voluntary Fiduciary Correction Program (VFCP).

 

 

 


IRS Proposes Updated Life Expectancy Tables for Retirement Arrangement Required Distributions

The IRS has issued a notice of proposed rulemaking and a notice of public hearing for updated life expectancy and distribution tables. The updated tables would be used in determining required minimum distributions (RMDs) from IRAs and employer-sponsored retirement plans. RMDs generally must begin when an individual reaches age 70½, or—in the case of some employer-sponsored retirement plans—when an individual retires and separates from service with the sponsoring employer. Beneficiaries may also take required payments based on the life expectancy tables after the death of an IRA owner or retirement plan participant.

The proposed guidance is a response to an August 2018, Executive Order by President Donald Trump directing the Treasury Department and IRS to revise existing guidance on such distributions, taking into account increased life expectancies in the population since final RMD regulations were last issued in 2002. A public hearing has been scheduled for January 23, 2020. Written or electronically-submitted comments must be received by a date 60 days from publication in the Federal Register (currently scheduled for tomorrow, November 8, 2019).

The notice of proposed rulemaking and public hearing can be found here.


2020 Cost-of-Living Adjustments for Flexible Spending Arrangements and Fringe Benefits

The IRS has issued Revenue Procedure 2019- 44, which contains cost-of-living-adjusted (COLA) amounts for 2020 for flexible spending arrangements (FSAs) and certain other fringe benefits, as described below.

 

Cafeteria Plans

For taxable years beginning in 2020, the dollar limitation under Internal Revenue Code Section (IRC Sec.) 125(i) on voluntary employee salary reductions for contributions to health FSAs is $2,750.

 

Qualified Transportation Fringe Benefits

For taxable years beginning in 2020, the monthly limitation under IRC Sec. 132(f)(2)(A) regarding the aggregate fringe benefit exclusion for transportation in a commuter highway vehicle and any transit pass is $270. The monthly limitation under IRC Sec. 132(f)(2)(B) regarding the fringe benefit exclusion amount for qualified parking is $270.

 

Adoption Assistance Programs

For taxable years beginning in 2020, under IRC Sec. 137(a)(2), the amount that can be excluded from an employee’s gross income for the adoption of a child with special needs is $14,300. For taxable years beginning in 2020, the maximum amount that can be excluded from an employee’s gross income under IRC Sec. 137(b)(1) for the amounts paid or expenses incurred by an employer for qualified adoption expenses furnished pursuant to an adoption assistance program for other adoptions by the employee is $14,300. The amount excludable from an employee’s gross income begins to phase out under IRC Sec. 137(b)(2)(A) for taxpayers with modified adjusted gross income in excess of $214,520 and is completely phased out for taxpayers with modified adjusted gross income of $254,520 or more. (Section 3.04 of Revenue Procedure 2019-44 contains additional information on the adoption credit.)

 

Qualified Small Employer Health Reimbursement Arrangements

For taxable years beginning in 2020, in order to be considered a qualified small employer health reimbursement arrangement under IRC Sec. 9831(d), the arrangement must provide that the total amount of payments and reimbursements for any year cannot exceed $5,250 ($10,600 for family coverage).

 


Washington Pulse: New Guidance Simplifies Affordability Determination for ICHRAs

The IRS has issued proposed regulations that provide additional guidance to employers intending to offer an Individual Coverage HRA (ICHRA) for 2020 and beyond. The guidance confirms and clarifies the safe harbor provisions that were initially outlined in IRS Notice 2018-88. The proposed regulations are meant to 1) help employers determine whether their ICHRA is affordable, and 2) clarify the ICHRA nondiscrimination testing requirements.

 

Affordability

There are several reasons why an ICHRA may appeal to employers. For example, an ICHRA allows an employer to contribute a set amount to employees while reducing the employer’s risk of incurring unknown costs that may arise with traditional group health insurance plans.

A unique feature of the ICHRA is that it is flexible: there are no minimum or maximum contribution limits, so an employer can contribute any amount it chooses. But there are some restrictions. For example, an applicable large employer (ALE) that offers ICHRAs to its full-time employees must ensure that it is offering an “affordable” ICHRA. If the ICHRA is not affordable, then the employer must make a shared responsibility payment under Internal Revenue Code Section (IRC Sec.) 4980H(b). The payment is determined on a month-by-month basis. The monthly penalty amount is 1/12 of $3,860 for each full-time employee who receives a premium tax credit (PTC).

An ALE is defined as an employer who had an average of 50 or more full-time employees (including full-time equivalent employees) during the preceding calendar year. If an ALE offers an ICHRA to part-time employees only, the ALE will not be subject to the IRC Sec. 4980H(b) penalty if the ICHRA is not affordable. (The ALE must still offer affordable health coverage to its full-time employees or it could owe a penalty under IRC Sec. 4980H(a) or (b).) If the employer is not classified as an ALE, it will not be subject to the IRC Sec. 4980H(b) penalty, regardless of whether the ICHRA is considered affordable for employees.

An ICHRA is considered affordable for full-time employees if the monthly premium for single coverage under the lowest-cost silver plan offered on the Exchange in their rating area (where the employee lives) minus the monthly allowance is less than 9.78 percent of their household income. (On average, silver plans pay 70 percent of the costs for benefits that the plan covers.)

Determining affordability on this basis is difficult for employers: they may not know an employee’s household income and may not know where the employee currently lives. As a result, the IRS has provided safe harbors to ease the calculation for employers.

 

Safe Harbors

Instead of using individual employee calculations, employers may use the safe harbors when determining ICHRA affordability. Employers are not required to use all of the safe harbors when determining affordability. For example, employers could use the look-back month safe harbor and the affordability safe harbor, but disregard the location safe harbor when calculating affordability. Employers may also use the safe harbors when calculating affordability for all employees, or just when calculating affordability for a reasonable category of employees (as specified in the ICHRA final regulations). Employers must, however, always apply the safe harbors on a uniform and consistent basis for all the employees in a category.

Look-back month safe harbor

Although the ICHRA may appeal to some employers, there are a few drawbacks—including not knowing how much to contribute to an ICHRA. The Exchange generally does not determine premium costs until shortly before open enrollment begins on November 1 of each year. Employers must usually make benefit decisions well before this date. To help employers determine how much they will have to contribute before the beginning of the plan year, the IRS has developed the look-back safe harbor.

To determine the ICHRA’s affordability for the current year, this safe harbor allows a calendar-year ICHRA to use the cost of the lowest-cost silver plan offered on the Exchange in the employee’s rating area during January of the prior year (known as the look-back month). Employers maintaining noncalendar-year ICHRAs may also use this safe harbor, but the look-back month will be January of the current year.

Affordability safe harbor

When determining ICHRA affordability, employers must also take into account the employee’s household income. Prior guidance on affordability calculations has recognized that employers will not have this information—and have permitted an employer to use either a safe harbor based on the employee’s Form W-2 income, the employee’s rate of pay, or the federal poverty line.

When looking at the affordability safe harbors, remember that ICHRAs are funded solely by employer contributions. The term “HRA employee contributions” refers to what employees must pay for their insurance premiums in addition to what the employer must provide as an ICHRA contribution.

Form W-2 wages safe harbor: Under the Form W-2 wages safe harbor, the ICHRA is deemed affordable if the required HRA contribution for the employee does not exceed 9.78 percent (subject to cost-of-living adjustments) of that employee’s W-2 wages for the calendar year. This safe harbor allows an employer to use the employee’s wages entered in Box 1 of Form W-2.

The proposed regulations state that employers should not add back any W-2 reductions under IRC Sec. 36B (e.g., 401(k) or IRC Sec. 125 cafeteria plan contributions). When determining affordability, employers may not use Form W-2 wages from a prior year. They must use the current calendar year Form W-2 wages when determining affordability. This will require the employer to project the W-2 wages for each employee at the beginning of the current calendar year. If this proves to be to administratively difficult for the employer, the employer can use either the rate-of-pay or the poverty-line safe harbor described below.

Rate-of-Pay safe harbor: Under the rate-of-pay safe harbor, the ICHRA is deemed affordable for a calendar month if the required HRA contribution for the employee does not exceed 9.78 percent (subject to cost-of-living adjustments) of an amount equal to 130 hours multiplied by the lesser of 1) the employee’s hourly rate of pay as of the first day of the coverage period (generally the first day of the plan year), or 2) the employee’s lowest hourly rate of pay during the calendar month.

Example: If an employee earns $15 per hour, the employer should perform the following calculation.

$15 x 130 hours = $1,950

$1,950 x .0978 = $190.71

In this example, for the ICHRA to be deemed affordable, the required HRA contribution for the employee must be less than $190.71.

If the employee is paid on a salary basis, the ICHRA is still deemed affordable if the employee’s required HRA contribution for the calendar month does not exceed 9.78 percent of the employee’s monthly salary.

Federal poverty-line safe harbor: Under the federal poverty-line safe harbor, an applicable large employer member’s offer of ICHRA coverage to an employee is treated as affordable if the employee’s required ICHRA contribution for the calendar month does not exceed 9.78 percent of a monthly amount. This amount equals 1/12 of the federal poverty line for a single individual for the applicable calendar year.

Location safe harbor

When determining an ICHRA’s affordability, an employer must use the lowest-cost silver plan in the employee’s rating area. This requires the employer to know where the individual lives.

The IRS initially proposed a location-based safe harbor in Notice 2018-88, which allowed employers to use the employee’s primary work location for the area of residence. The IRS received numerous suggestions on how to simplify the calculation for employers while ensuring that employees would not be disadvantaged if premium costs varied widely in a small geographical area that was composed of different rating areas.

The proposed regulations conclude that the employer may generally use the primary site of employment where the employee will be reasonably expected to perform services on the first day of the plan year. The proposed regulations also address issues related to employees that change worksites midyear, who regularly work from home or in other remote locations, or who work only remotely.

 

Nondiscrimination Testing

The proposed regulations also provide more information on nondiscrimination testing.

The guidance found under IRC Sec. 105(h) prohibits discrimination in relation to benefits, in both plan design and plan operation.  To be nondiscriminatory in design, employers must provide uniform contributions to all participants, and amounts cannot vary based on age or length of service. If the plan fails this nondiscrimination requirement, the excess reimbursements become taxable to the highly compensated individuals (HCIs).

The ICHRA rules, however, provide certain exceptions to this nondiscrimination requirement. Contributions may increase based on the number of dependents covered and based on the participant’s age—as long as the oldest participants do not receive an amount greater than three times what the youngest participants receive. An ICHRA that follows these exceptions within each class of employees (as specified in the ICHRA final regulations) will not fail to meet the requirement to provide nondiscriminatory benefits as a matter of plan design.

Even if an ICHRA follows these exceptions, it may still be considered discriminatory in operation. If an ICHRA is discriminatory in operation and too many HCIs use the maximum ICHRA benefit, the excess reimbursements will become taxable to the HCIs.

Employers that have a large number of older employees who are HCIs may be concerned about failing nondiscrimination testing in relation to plan operations. Limiting ICHRA reimbursements may be a practical solution to testing concerns. This is because HRAs that reimburse only for premium costs (and are not permitted to reimburse for other 213(d) medical expenses) are excluded from the testing requirements of IRC Sec. 105(h).

 

The Take Away

The proposed regulations are consistent with the President’s goal of expanding HRAs in order to give employers and employees more options when purchasing health insurance. This guidance should simplify determining an ICHRA’s affordability and help employers avoid the shared responsibility payment. In light of the new proposed regulations, it is clear that the IRS is expecting employers of all sizes—including ALEs—to use the new ICHRA.

Ascensus will closely monitor any new developments regarding this guidance. Visit ascensus.com for future updates.

 

Click here for a printable version of this edition of the Washington Pulse.


Student Loan and Retirement Plan Guidance on IRS Priority List

The IRS has released its fiscal year 2019-2020 Priority Guidance Plan (PGP). Employee benefit-related items on the list include “Guidance on student loan payments and qualified retirement plans and 403(b) plans.”

Both employers and federal lawmakers have made student loans a high-profile issue, due in part to debt burdens that are said to be limiting employees’ ability to participate fully in their employers’ retirement plans, and in the U.S. economy.

Employers have individually requested IRS approval of benefit arrangements that link student loan repayment and retirement plans. There have been calls for the IRS to issue guidance that other employers could avail themselves of without seeking IRS guidance or approval individually.

Similarly, many bills that have a student loan dimension have been introduced. Some address such elements as disclosure, financing options, and debt forgiveness, but several have linked student loan payments with employer-sponsored retirement plans. For example, the Retirement Parity for Student Loans Act, introduced in December 2018 by Sens. Rob Portman (R-OH) and Ben Cardin (D-MD), would allow employer retirement plan contributions on behalf of employees that are based on their higher education student loan payments.

Other retirement benefit-related items on the 2019-2020 PGP are either new or carryovers from prior years’ lists, including the following.

  • Revisions to the IRS Employee Plans Compliance Resolution System program for correcting retirement arrangement defects
  • Revised life expectancy tables used to calculate required minimum distributions, taking into account longer life expectancies
  • Broad updated guidance on Traditional and Roth IRAs
  • Guidance on retirement plans of affiliated service groups
  • Guidance on church retirement plans