IRS Guidance

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

IRS Releases Guidance for Correcting Form Defects in 403(b) Plans

The IRS released Revenue Procedure (Rev. Proc.) 2019-39, which sets forth a system of recurring remedial amendment periods for correcting form defects in 403(b) plans. Rev. Proc. 2019-39 provides guidance for correcting form defects in both individually designed 403(b) and pre-approved 403(b) plans first occurring after March 31, 2020, which is the ending date for the initial remedial amendment period outlined in Rev. Procs. 2013-22 and 2013-18.

Rev. Proc. 2019-39 also provides a limited extension of the initial remedial amendment period for certain form defects, and establishes a system of 403(b) pre-approved plan cycles under which proposed pre-approved 403(b) plans may be submitted to the IRS for approval.

Additionally, this revenue procedure provides deadlines for both individually designed 403(b) plans and pre-approved 403(b) plans for the adoption of plan amendments.


Washington Pulse: Hardship Distributions Made Easier

On September 19, 2019, the IRS issued final regulations that make retirement plan assets more accessible to those experiencing financial hardship. Released approximately 10 months after the proposed regulations, the final hardship distribution regulations address changes made by the Bipartisan Budget Act of 2018 (BBA) and satisfy a BBA provision directing the IRS to update its hardship regulations in general.

Among other things, the final hardship distribution regulations allow employers to broaden the employee contribution sources (including earnings) available for hardship distributions, and to grant a hardship distribution without first requiring the participant to take a plan loan. In addition, the regulations eliminate the six-month suspension of salary deferral and employee after-tax contributions (employee contributions) following receipt of a hardship distribution.

 

Hardship Distribution Overview

Retirement plan participants generally are prohibited from taking plan distributions unless certain events occur—such as separation from service or attainment of age 59½. But employers are permitted to design plans to allow participants experiencing financial difficulties to take hardship distributions.

Before receiving a hardship distribution, a participant must meet two conditions. First, the participant must have an “immediate and heavy financial need.” Second, the distribution must be necessary to satisfy that financial need.

The final regulations do not change how employers determine whether participants have an immediate and heavy financial need. Employers may still generally choose to use safe harbor rules (some of which changed under the final regulations) or may rely on “facts and circumstances.”

The final regulations do change how employers determine if a distribution is necessary to satisfy the financial need. Instead of relying on facts and circumstances, employers must now follow a general standard when determining if a participant has met this requirement.

The IRS adopted the final regulations with minimal changes from the proposed regulations. The highlights of the final regulations are discussed next.

 

The “Immediate and Heavy Financial Need” Safe Harbor Provisions

The final regulations make the following changes to the “immediate and heavy financial need” safe harbor provisions.

Federal disaster declarations

The final regulations add a safe harbor for “expenses and losses—including loss of income—incurred by the employee” in FEMA-declared disasters. Employers may apply this safe harbor to distributions taken on or after January 1, 2018. According to the IRS, this safe harbor expense differs from its previous disaster relief in three ways.

  • The safe harbor applies only to the participant’s losses and expenses (not to the losses and expenses of the participant’s relatives or dependents.)
  • Participants do not have a specific deadline by which to take a hardship distribution. And although the IRS does not have the authority to relax certain procedural requirements, employers may be more flexible when processing hardship distributions following a disaster.
  • An employer that chooses to wait until a disaster occurs to allow disaster-related distributions must amend its plan by the end of the plan year in which the amendment first applies.

This safe harbor is meant to end any uncertainty about accessing plan assets following a major disaster. As a result, the IRS and Treasury Department do not believe that future disaster-related announcements will be needed.

Repairing damage to principal residence

The Tax Cuts and Jobs Act of 2017 (TCJA) eliminated an income tax deduction for certain personal casualty losses for tax years 2018 through 2025 unless the losses were part of a federally-declared disaster. As a result, the availability of the safe harbor for repairing damage to a principal residence was severely limited. The final regulations remove the limitation imposed by TCJA for hardship distribution purposes, restoring the broad usefulness of this safe harbor.

Primary beneficiary safe harbor

This change aligns the regulations with an earlier law change that—plan permitting—includes the hardship of an employee’s primary beneficiary for medical, educational, or funeral expenses.

 

Determining Whether a Distribution is Necessary to Satisfy a Financial Need

The final regulations create a general standard for determining whether a hardship distribution is necessary to satisfy a financial need. Under this new standard, a hardship distribution must not exceed a participant’s need (including amounts to pay penalties and taxes), and the participant must not have any other way of meeting that need. To meet the second requirement,

  • the participant must take all other available distributions from the plan and from all deferred compensation plans of the employer,
  • the participant must represent that she has insufficient funds “reasonably available” to satisfy the financial need, and
  • the plan administrator cannot have actual knowledge that the participant’s representation is false.

The final regulations clarify that a participant can represent that she has insufficient funds even if she does have cash or other assets on hand—as long as she’s planning to use those assets on other future expenses (e.g., rent). The final regulations also clarify that in addition to a written representation, a participant can make a verbal representation through a recorded phone call.

 

Employers May Add Other Conditions, but Can’t Suspend Deferrals

In addition to the general standard described above, an employer may design its plan to require participants to meet additional conditions—such as taking a plan loan—before being eligible for a hardship distribution or requiring a nondiscriminatory minimum hardship distribution amount. Beginning January 1, 2020, however, an employer cannot require participants in a qualified plan, 403(b) plan, or governmental 457(b) plan to suspend employee contributions after receiving a hardship distribution.

While these three types of plans cannot suspend deferrals, the final regulations clarify that nonqualified deferred compensation plans may continue to include a suspension feature.

 

More Contribution Sources Available For Distributions

In addition to earnings on elective deferrals, other contribution sources in a participant’s 401(k) plan account may now be distributed for hardship reasons—including qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), employer ADP safe harbor and QACA safe harbor contributions, and earnings on all of these amounts.

The new rules relating to hardship distributions also apply to 403(b) plans. However, earnings on 403(b) elective deferrals continue to be ineligible for hardship distribution and QNECs, QMACs, and other employer contributions continue to be unavailable in 403(b)(7) custodial accounts.

 

Other Issues

Using all safe harbor expenses not required

When determining if a participant has an immediate and heavy financial need, the final regulations clarify that employers may make available some but not all of the safe harbor expenses. The regulations also make clear that employers do not need to include all categories of individuals (e.g., primary beneficiaries) when determining who has a safe harbor expense.

Notice Requirements

The final regulations indicate that employers with ADP and/or ACP safe harbor plans must provide safe harbor notices that contain the hardship withdrawal provisions. If an employer’s current notice does not contain the new provisions, then the employer must provide an updated notice to eligible participants and provide participants with an opportunity to change their election.

 

Applicability Dates

The new hardship distribution rules apply to distributions taken on or after January 1, 2020, but employers may choose to apply the rules to distributions taken in plan years beginning after December 31, 2018.

The regulations allow employers to stop suspensions of contributions for hardship distributions taken in plan years after December 31, 2018. Employers may apply this rule as of the first day of the first plan year beginning after December 31, 2018, even if the hardship distribution was taken in the prior plan year (e.g., in October 2018.)

 

Amendment Deadlines

Although the amendment deadlines vary based on the type of plan document used, all amendments must apply to distributions taken no later than January 1, 2020.

At this point, the amendment deadline for pre-approved plan documents is unclear. Ascensus will provide updates as additional information becomes available.

The amendment deadline for individually designed plans (IDDs) depends on when the IRS includes the final regulations in the Required Amendments list. If the IRS includes the final regulations in the 2019 Required Amendments List, then employers must amend their IDDs by December 31, 2021.

For now, the 403(b) plan remedial amendment deadline is March 31, 2020. But the IRS and Treasury Department may issue separate guidance that provides for a later amendment deadline.

 

Next Steps…

Now that the final regulations have been released, service and document providers have begun analyzing the regulations with an eye toward updating their products and services. In the meantime, employers should become familiar with the revised hardship requirements and expect future amendments.

Ascensus will continue to monitor any new guidance as it is released. Visit ascensus.com for the latest information.

 

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

 


IRS Issues Long-Awaited Final Regulations for Retirement Plan Hardship Distributions

Scheduled to be published in Monday’s Federal Register are IRS final regulations for hardship distributions from employer-sponsored retirement plans, including 401(k) and 403(b) plans. These regulations are chiefly a response to statutory changes affecting hardship distributions that were contained in the Bipartisan Budget Act of 2018.

The hardship-related changes in that legislation included the following.

  • Elimination of the (formerly) required 6-month suspension of employee elective deferrals following receipt of a hardship distribution
  • Allowing inclusion of employer-provided qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs) and their earnings—as well as earnings on employee elective deferrals—in hardship distributions
  • Elimination of the requirement that available retirement plan loans be taken before the granting of a hardship distribution

Additional regulatory guidance on these changes—including required plan amendments—has been awaited since the legislation’s enactment and the IRS’ issuance of proposed regulations in November 2018.

Ascensus will continue to analyze these regulations. Stay tuned for additional information.


IRS Extends Nondiscrimination Relief for Certain Closed Defined Benefit Plans

The IRS has issued Notice 2019-49, guidance that extends existing nondiscrimination testing relief available to certain defined benefit (DB) pension plans that are closed to new participants. The guidance is intended to aid sponsoring employers that are maintaining a DB plan for certain current employees, but commonly offer only a defined contribution (DC) plan—such as a profit sharing-401(k) plan—to new employees. In the absence of such relief, these DB plans could fail nondiscrimination testing because of the limitations on participation. Notice 2019-49 extends the current relief to cover plan years that begin before 2021. (Permanent relief has been proposed in retirement enhancement legislation that has not yet been enacted.)


IRS Publishes Corrections to MEP “Bad Apple” Proposed Regulations

Several corrections to IRS proposed regulations on multiple employer plans (MEPs) were published in the Federal Register. Originally published on July 3, 2019, this proposed guidance would revise 1979 IRS final regulations on MEPs—arrangements under which several employers elect to participate in a common plan.

A key revision being proposed in these regulations addresses the so-called “bad apple” rule, under which an entire MEP could fail to meet qualification requirements because of a compliance failure by one employer. This is known formally as the “unified plan rule.” These regulations propose an exception to the unified plan rule and—if certain requirements are met—compliance failures by individual participating employers need not jeopardize the entire MEP.

Most of the corrections published in the Federal Register are of a grammatical or punctuation nature, or a minor omission, such as failing to precede an Internal Revenue Code citation with the word “Section.” However, one substantive change corrects an omission in the preamble (page 31788) to these proposed regulations. Added by the correction is the parenthetical reference “(and their beneficiaries”) to a proposed notification requirement.

Specifically—in the event of a compliance failure by a participating MEP employer—a notification must be sent by the MEP plan administrator to participants if that participating employer has proven unresponsive. The proposed regulation states that such notices must be provided to beneficiaries, as well. However, the preamble as published did not include a reference to beneficiaries. The correction now being made aligns the preamble with the regulation itself.