Washington Pulse

Washington Pulse: The DOL’s New Proposal to Regulate Investment Advice

Few aspects of retirement plan governance have been as controversial as regulating investment advice. Exactly what obligation—if any—does an investment professional have to provide impartial, conflict-free advice to savers and retirees?  When do financial professionals step over the boundary that can make them a fiduciary, with the ethical and legal obligations that come with this duty?

The answers have been inconsistent, stretching over many years. Department of Labor (DOL) fiduciary investment advice regulations date back to the 1970s. Those regulations needed revision in order to better align with today’s investment products and participant-directed retirement plans. Changes were proposed in 2010, withdrawn in response to public comments, revised again in 2015, and made final in 2016.

The DOL delayed implementing the 2016 final investment fiduciary regulations and accompanying guidance. These regulations were ultimately struck down in 2018 as “regulatory overreach” by the United States Court of Appeals for the Fifth Circuit.

The DOL later issued Field Assistance Bulletin (FAB) 2018-02, which states that the DOL will not pursue prohibited transaction claims against fiduciaries who make good-faith efforts to comply with the Impartial Conduct Standards (discussed later). FAB 2018-02 remains in effect.

The DOL has again issued investment advice guidance, this time to replace the guidance struck down by the appellate court. This latest guidance package includes a proposed prohibited transaction class exemption entitled Improving Investment Advice for Workers and Retirees, and a technical amendment to DOL Regulations (Regs.) 2509 and 2510 that implements the appellate court’s order by

  • reinstating the original version of DOL. Reg. 2510.3-21 (including the five-part test);
  • removing prohibited transaction exemptions (PTEs) 2016-01 (the Best Interest Contract Exemption) and 2016-02 (the Class Exemption for Principal Transactions);
  • returning PTEs 75-1, 77-4, 80-83, 83-1, 84-24, and 86-128 to their original form; and
  • reinstating Interpretive Bulletin (IB) 96-1, which is intended to help investment providers, financial institutions, and retirement investors determine the difference between investment education and investment advice. Investment providers and financial institutions may rely on the safe harbors in IB-96-1 in order to avoid providing information that could be construed as investment advice.

The technical amendment became effective on July 7, 2020.

 

What is the five-part test?

The original version of DOL Reg. 2510.3-21 (which the technical amendment reinstates) contains a five-part test that is used to determine fiduciary status for investment advice purposes. Under the test, an investment provider or a financial institution that receives a fee or other compensation is considered a fiduciary if it meets all of the following standards (i.e., prongs) of the test.

  • The provider or institution gives advice on investing in, purchasing, or selling securities, or other property.
  • The provider or institution gives investment advice to the retirement investor on a regular basis.
  • Investment advice is given pursuant to a mutual agreement or understanding with a retirement plan or its fiduciaries.
  • The retirement investor uses the advice as a primary basis for investment decisions.
  • The provider or institution provides individualized advice, taking into account the plan’s demographics, needs, goals, etc.

 

Has the DOL’s opinion changed on rollover recommendations?

In the preamble of the proposed PTE, the DOL clarified that it no longer agrees with the guidance originally provided in Advisory Opinion 2005-23A (better known as the Deseret Letter). In the Deseret Letter, the DOL indicated that a recommendation to distribute and roll over retirement plan assets would not generally constitute investment advice because it would not meet the first prong of the five-part test. But because it is common for the investments, fees, and services to change when the decision to roll over assets is made, the DOL now believes that a recommendation to distribute assets from an IRA or an ERISA-covered plan would be considered investment advice with respect to the first prong of the five-part test.

The DOL acknowledges that advice encouraging an individual to roll over retirement plan assets may be an isolated and independent transaction that would fail to meet the second “regular basis” prong. But determining whether advice to roll over assets meets the “regular basis” prong depends on the facts and circumstances.  So the DOL could view a rollover recommendation that begins an ongoing advisory relationship as meeting the “regular basis” prong.

As discussed above, the proposed PTE would allow investment professionals to receive compensation for advising a retirement investor to take a distribution from a retirement plan or to roll over the assets to an IRA. The investment professional could also receive compensation for providing advice on other similar transactions, such as conducting rollovers between different retirement plans, between different IRAs, or between different types of accounts (e.g., from a commission-based account to a fee-based account).

Under the proposed PTE, financial institutions would need to document why the rollover advice was in the retirement investor’s best interest. Documentation would need to

  • explain whether there were other alternatives available (e.g., to leave the assets in the plan or IRA and select different investment options);
  • describe any applicable fees and expenses;
  • indicate whether the employer paid for some or all of the plan’s administrative expenses; and
  • show the different levels of services and investments available.

In addition, investment providers or financial institutions that recommend rolling over assets from another IRA or changing account types should consider and document the services that would be provided under the new arrangement.

 

Who is covered under the proposed PTE?

The proposed PTE would apply to registered investment advisers, broker-dealers, banks, and insurance companies (financial institutions), and their employees, agents, and representatives (investment professionals) that provide fiduciary investment advice to retirement investors. The proposed PTE would also apply to any affiliates or related entitites.

“Retirement investors” include

  • IRA and plan fiduciaries (regardless of plan size),
  • IRA owners or beneficiaries, and
  • plan participants or beneficiaries with authority to direct their accounts or take distributions.

The proposed PTE defines a “plan” as including 401(a) plans (e.g., 401(k) plans), 403(a) plans, 403(b) plans, defined benefit plans, owner-only plans, simplified employee pension (SEP) plans, and savings incentive match plan for employees of small employers (SIMPLE) plans. The proposed PTE would also apply to employee welfare benefit plans that have established a trust (e.g., VEBAs).

The proposed PTE, defines an “IRA” as an individual retirement account, an individual retirement annuity, a health savings account (HSA), an Archer medical savings account (MSA), and a Coverdell education savings account (ESA).

 

What protection does the proposed PTE offer?

The Internal Revenue Code and ERISA generally prohibit fiduciaries from receiving compensation from third parties and compensation that varies based on investment advice provided to retirement plans and IRAs. Fiduciaries are also prohibited from selling or purchasing their own products to retirement plans and IRAs (known as principal transactions).

Under the proposed PTE, financial institutions and investment professionals providing fiduciary investment advice could receive payments (e.g., commissions, 12b-1 fees, and revenue sharing payments) that would otherwise violate the prohibited transaction rules mentioned above. For example, the exemption would provide relief from prohibited transactions that could occur if a financial institution or investment professional

  • advises a client to take a distribution or roll over assets to an IRA or retirement plan;
  • provides recommendations to acquire, hold, dispose of, or exchange securities or other investments; or
  • recommends using a particular investment manager or investment advice provider.

In addition, the proposed PTE would cover riskless principal transactions  (e.g., when a broker-dealer purchases a security for their own account knowing that it will be sold to a retirement investor at a certain price) as well as principal transactions involving certain specific types of investments (e.g., municipal bonds).

The following transactions would not be covered by the PTE.

  • Transactions where advice is provided solely through a computer model without any personal interaction (i.e., robo-advice arrangements).
  • Transactions in which the investment professional is acting in a fiduciary capacity other than as an investment advice fiduciary under the five-part test, as described below (e.g., a 3(38) investment manager with authority to make discretionary investment decisions).
  • Transactions involving investment providers, financial institutions, and their affiliates if they are the employer of employees covered by the plan; or are a named fiduciary, plan administrator, or affiliate who was chosen to provide advice by a fiduciary who is not independent of the investment professional, financial institution, or their affiliates.

Certain individuals and institutions (and all members within the institution’s controlled group) would be ineligible to rely on the exemption—including those who have been convicted of a crime associated with providing investment advice to a retirement investor, or those who have a history of failing to comply with the exemption. The period of ineligibility would generally be 10 years, but a financial institution with a conviction may petition the DOL for continued reliance on the exemption.

 

What does the proposed PTE require?

To take advantage of the relief provided under the proposed PTE, investment professionals and financial institutions must provide advice in accordance with the Impartial Conduct Standards. The Impartial Conduct Standards contain three components—a reasonable compensation standard, a best interest standard, and a requirement that prohibits investment providers or financial institutions from giving misleading statements about investment transactions or other related matters.  The Impartial Conduct Standards also requires financial professionals and financial institutions to provide the best execution possible when completing security transactions (e.g., completing the transaction timely).

Under the best interest standard, investment professionals and financial institutions are not required to identify the best investment for the retirement investor, but any investment advice given must put the retirement investor’s interests ahead of the interests of the investment professional, financial institution, or their affiliates. This is consistent with the SEC’s Regulation Best Interest.

Investment providers and financial institutions cannot waive or disclaim compliance with any of the proposed PTE’s conditions. Likewise, retirement investors cannot agree to waive any of the conditions. In addition, the proposed PTE would require a financial institution to

  • provide the retirement investor—before the transaction takes place—with an acknowledgment of the institution’s fiduciary status in writing, and a written description of the service to be provided and any material conflicts of interest;
  • adopt and enforce policies and procedures designed to discourage incentives that are not in the retirement investor’s best interests and to ensure compliance with the Impartial Conduct Standards;
  • maintain records that prove compliance with the PTE for six years; and
  • conduct a review at least annually to determine whether the institution complied with the Impartial Conduct Standards and the policies and procedures created to ensure compliance with the exemption. Although an independent party does not need to conduct the review, the financial institution’s chief executive officer (or the most senior executive) must certify the review.

Note that the proposed PTE would not give retirement investors new legal claims (e.g., through contract or warranty provisions) but rather would affect the DOL’s enforcement approach.

 

Next Steps

Many investment advisers, broker-dealers, banks, and insurance companies that will be affected by the proposed PTE currently operate under similar standards found in various state laws and in the SEC’s Regulation Best Interest.  The DOL’s temporary enforcement policy discussed in FAB 2018-02 also remains in effect, as do other more narrowly tailored PTEs.

Each type of investment provider and financial institution is likely affected differently, whether in steps to comply or costs involved. Financial institutions and investment providers may want to review the proposed PTE and start taking steps to comply with it. This may involve creating and maintaining any policies and procedures they don’t already have in place as a result of state law or the Regulation Best Interest.

In the meantime, a 30-day comment period for the proposed PTE starts on July 7, 2020. Comments may be submitted at www.regulations.gov. The Docket ID number is EBSA-2020-0003.

 

 

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Washington Pulse: More Options for Delivering Retirement Plan Disclosures

Nearly seven months after releasing proposed regulations, the Department of Labor (DOL) has released final regulations on default electronic delivery of retirement plan disclosures. These final regulations provide an additional safe harbor that may make it easier for plan administrators and their service providers to electronically deliver (either through email or by posting online) certain required disclosures to participants and beneficiaries in ERISA-covered plans. In addition to these final regulations, the DOL also released an accompanying News Release and Fact Sheet.

 

Overview

The new safe harbor created by the final regulations is simply meant to provide employers an additional option for delivering DOL-required disclosures. Employers are not required to follow the new regulations.

The final regulations apply only to disclosures (i.e., “covered documents”) under Title I of ERISA that pension benefit plan administrators must provide to covered individuals; they do not apply to IRS disclosures or to welfare benefit plan disclosures at this time. A covered document does not include a document provided only upon the participant’s written request (e.g., a request for a copy of the plan’s trust agreement). Examples of covered documents include

  • a summary plan description,
  • a summary of material modifications,
  • a summary annual report, or
  • an annual funding notice.

A covered individual is defined as a participant, beneficiary, or another individual (e.g., alternate payee) entitled to covered documents. A covered individual must either provide an electronic address (e.g., an email address or smartphone number) or, in the case of a covered individual who is an employee, have one assigned to them by the employer. The electronic address assigned by an employer must be for employment-related purposes that include, but are not limited to, the delivery of covered documents under the new safe harbor.

 

What Has Changed From the Proposed Regulations?

The final regulations contain some welcome changes from the proposed regulations (see our previous Washington Pulse for more information on the proposed regulations.) The major changes contained in the final regulations are summarized below.

New Initial Notice Requirements

Plan administrators must provide an initial paper notice to participants who are defaulted into receiving covered documents electronically under the new safe harbor. In addition to the requirements in the proposed regulations, the final regulations require the notice to identify the specific electronic address that will be used to provide the covered documents to a covered individual. While this new requirement may make it more difficult for plan administrators to create the initial notice, it should enhance the long-term prospect of individuals receiving required disclosures.

New Email Delivery Option

In addition to posting covered documents on a website, plan administrators may now send covered documents directly to the email addresses of covered individuals, with the covered documents included either in the body of the email or as an attachment to the email. Whether using email or posting documents online, employers must ensure that the delivery method protects the confidentiality of personal information relating to any covered individual.

More Generalized Requirements for “Opt Out” Election

The proposed regulations allowed participants to opt out of receiving some documents electronically. Under the final regulations, a right to globally opt out must be provided free of charge. Plan administrators may also decide to offer recipients a “pick and choose” option (also free of charge) to receive some documents in paper form and some electronically. Similarly, a plan administrator that uses electronic means to deliver some covered documents need not use electronic means for all.

The final regulations also clarify that plan administrators need only provide one copy of any specific covered document free of charge.

New Website Requirements

  • Flexibility in definition of “website” The final regulations acknowledge the importance of including new and developing technologies in applying the guidance, as long as the safe harbor requirements can be met. For example, mobile applications now qualify as a website.
  • Reasonable procedures for website maintenance: These final regulations add “technical maintenance” of websites as a reason why disclosure documents may be unavailable for a reasonable amount of time.
  • Clarification on availability of web-posted documents: A covered document posted to a website must remain available on the website until it is superseded by a subsequent version, if applicable, but in no event less than one year after the date it is posted to the website. The annual Notice of Internet Availability (NOIA) must inform participants that the covered document may not be available past this time frame.
  • Plan administrators are not required to monitor website use: Plan administrators that choose to post covered documents on a website are not required to monitor whether covered individuals visit the website and view the information. The DOL also noted a recent court case that addressed whether a recipient has read, understood, and has “actual knowledge” of the information posted. The DOL did not, however, provide any further guidance on this issue.

New NOIA Requirements

  • Combined notices of online postings: Certain notices of online postings can be combined in a single annual NOIA, including the following.
  • Summary plan description (SPD)
  • Documents or information that must be provided annually (e.g., summary annual report (SAR))
  • Other documents authorized by the Secretary of Labor
  • Notices required by the IRS if authorized by the Secretary of the Treasury (e.g., automatic contribution arrangement (ACA) notice)

Unlike the proposed regulations, the final regulations clarify that plan administrators may not include a summary of material modifications or quarterly benefit statements in a combined NOIA. These covered documents must have their own NOIAs.

The NOIA, if applicable, must be sent to the covered individual’s electronic address. If the address is a phone number, it must be capable of receiving written text messages, and plan administrators must confirm this. Delivery of a NOIA by voice message does not meet this requirement.

  • NOIAs may contain an “invitation to take action” statement: A NOIA may contain a statement explaining that 1) the covered individual is invited or required to take action in response to the covered document and how to take such action, or 2) no action is required, provided that such statement is not inaccurate or misleading. For example, a NOIA may include a statement that a benefits claim denial delivered to a covered individual is an invitation to take action and requires action within a specific time frame or else the covered individual may forfeit a right to a benefit. In this example, it would be misleading for a plan administrator to suggest on a NOIA that no action is invited or required.
  • Document description accompanying a NOIA: Under the final regulations, a NOIA must include a brief description of a covered document if a covered document’s name does not reasonably convey the nature of the covered document. For example, a NOIA for a quarterly benefit statement ordinarily would not need a brief description, but a NOIA for a blackout notice would.

More Flexible Readability Requirements

Detailed guidelines for readability in the proposed regulations (using the Flesch reading ease score) were removed, and are not included in the final regulations. The final regulations simply require that communications under this guidance be “written in a manner calculated to be understood by the average plan participant.”

Special Rule for Severance from Employment

Procedures must be in place to ensure that a plan administrator will continue to have a valid electronic address to which notices can be provided after a covered individual’s severance from employment. The DOL revised this provision in the final regulations so that it applies only when an electronic address assigned by an employer is used to furnish covered documents. These particular procedures are not required when a personal email address is used to furnish covered documents.

 

Previous Guidance Still Applies

In 2002, the DOL created a safe harbor for electronically delivering any plan disclosures required by ERISA. Although the 2002 safe harbor is not the only permissible way that an employer may use electronic media, those using it may treat the notice or other document sent by email or other electronic means as having been properly delivered.

In March 2020, the DOL, Treasury Department, and the Department of Health and Human Services released EBSA Disaster Relief Notice 2020-01. This guidance extends deadlines for providing notices, disclosures, and documents that are due to plan participants and beneficiaries between March 1, 2020, and the end of a 60-day period following the close of the COVID-19 National Emergency (known as the Outbreak Period), which has yet to be announced.

Under this notice, plan fiduciaries will not violate ERISA as long as they act in good faith and provide required information as soon as practicable. Acting in good faith includes sending the information electronically when the plan fiduciary reasonably believes that the intended recipient has effective access to the information.

Although the DOL has yet to comment, it does not appear that plans have to rely on either one of the safe harbors in order to take advantage of Disaster Relief Notice 2020-01.

 

Transition Relief Granted

For an 18-month period following the effective date of these final regulations, plan administrators can also rely on prior guidance for the delivery of certain covered disclosures. This guidance includes FAB 2006-003, FAB 2008-003 (Q&A 7), and Technical Release 2011-03R. Thereafter, the relevant portions of the prior guidance are superseded by the final regulations.

Plan administrators may also rely on previously obtained electronic addresses—in existence on the effective date of the final rule—provided that they reasonably, in good faith, comply with the requirements of the safe harbor.

 

Effective Date

This guidance officially becomes effective on July 27, 2020. Plan administrators may, however, rely on these regulations immediately because the DOL will not take any enforcement action against those relying on the safe harbor before its effective date because of the COVID-19 pandemic. This approach, it is hoped, will help support the government’s overall response to the pandemic.

 

 

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Washington Pulse: New COVID-19 Relief for Employee Welfare Benefit Plans

During the last few months, the Department of Labor (DOL), Treasury Department, and Department of Health and Human Services (DHHS) have jointly issued multiple pieces of guidance intended to provide much needed relief to those suffering economic hardships from the coronavirus (COVID-19) pandemic. In this article, we’ll explain how the most recent relief affects employee welfare benefit plans.

 

Overview of New Relief

To help overcome the financial hardships facing millions of Americans, the DOL and the Treasury Department published a final rule on May 4, 2020. The final rule extends and suspends various employee welfare benefit plan and COBRA deadlines that fall between March 1, 2020, and the end of a 60-day period following the close of the COVID-19 National Emergency (known as the Outbreak Period), which has yet to be announced.

The DOL and Treasury Department also worked with the DHHS to create EBSA Disaster Relief Notice 2020-01. This guidance extends deadlines for providing notices, disclosures, and documents that are due to plan participants and beneficiaries between March 1, 2020, and the end of the Outbreak Period. The relief applies to plan fiduciaries that act in good faith to provide this information as soon as administratively practicable. The EBSA notice also confirms that Form 5500 filing deadlines that occur between April 1, 2020, and July 14, 2020, must now be filed by July 15, 2020 (calendar-year plans are not affected).

On May 12, 2020, the IRS issued Notice 2020-29 and Notice 2020-33. Notice 2020-29 allows employees to make election changes relating to employer-sponsored group health coverage, health flexible savings accounts (FSAs), and dependent care FSAs mid-year with no special enrollment events. The notice also allows for health FSA and dependent care FSA participants to submit new claims for reimbursement up to December 31, 2020, from amounts that remained in accounts as of a plan year end or the end of the grace period that occurred at any time in 2020.

Notice 2020-33 increases the maximum $500 health FSA carryover amount to an amount that is equal to 20 percent of the maximum salary reduction contribution for the plan year. The increase takes effect immediately, making the maximum amount that can be carried forward for the 2020 plan year $550 (20 percent of $2,750).

 

How the Final Rule Affects Employee Welfare Benefit Plans

The most significant impact of the final rule involves providing certain individuals extended deadlines for performing certain acts. When calculating the new extended deadlines, the final rule disregards the Outbreak Period.

  • Filing a benefit claim: The final rule extends the deadline for filing claims for benefits under welfare benefit plans. Importantly, this relief will also include calendar-year health FSAs and health reimbursement accounts (HRAs) that had a runout period ending on March 1, 2020 or later. Although this provision will help individuals with existing claims, it does not allow them to incur new claims applicable to an old plan year.
    • Example: An employee terminated employment and lost health coverage on May 1, 2020. Because the plan has a 90 day-runout period for terminated participants, the employee would normally have until July 30, 2020, to submit claims for reimbursement of eligible expenses incurred before the employee terminated employment. The period between the date of termination and the end of the Outbreak Period is now disregarded. If March 2, 2021 is the end of the Outbreak Period, the 90-day runout period will start on March 3, 2021, and end on May 31, 2021.
  • Filing an appeal and requesting a review: The final rule extends the period to file an appeal of an adverse benefit determination. This period must be at least 60 days (for welfare benefit plans) or 180 days (for group health plans) following notification of the adverse benefit determination. The final rule also extends the four-month period for filing a request for external or internal review.
  • Special Enrollment Periods: Employees and their eligible dependents now have more time to enroll in a group health plan following a special enrollment event. Usually individuals must elect coverage during a 30-day period (or a 60-day period, depending on plan provisions) following a special enrollment event.
    • Example: An employee had a child on March 20, 2020. The employee would normally have 30 days to elect coverage for the child. The period between the birth and the end of the Outbreak Period is now disregarded. If October 10, 2020, is the end of the Outbreak Period, the 30-day period would start on October 11, 2020, and end on November 9, 2020.

 

How Notice 2020-29 Affects Employee Welfare Benefit Plans

IRS Notice 2020-29 gives plans additional deadline flexibility and eases restrictions associated with various plan requirements found in the Internal Revenue Code and associated Treasury Regulations. The extensions provided by the Notice are described below.

  • Modified rules on irrevocable elections: Notice 2020-29 eliminates certain restrictions that limit the ability of participants to revoke and make new plan elections after the start of the plan year. During the 2020 plan year, elections pertaining to employer health coverage, health FSAs, and dependent care FSAs can now be made at any time on a prospective basis. This relief is not automatic. An employer will be required to amend its plan to allow participants to take advantage of this relief.
    • Example: A participant elected to defer $1,200 into an FSA during open enrollment for a plan year that began on January 1, 2020. The participant is now permitted to change her election at any time and defer a different amount (e.g., $2,200) if she so chooses.
  • Extended the deadline for incurring claims: Plan participants in health FSAs and dependent care FSAs may now incur and submit new claims for reimbursement up to December 31, 2020, based on amounts that remained in their FSA as of the end of a plan year or the end of a grace period that occurred at any time in 2020. This relief is not automatic. An employer will be required to amend its plan to allow participants to take advantage of this relief.
    • Example:  An employee was a participant in a 2019 calendar year FSA with a grace period that ended on March 15, 2020. He had $1,200 remaining in his account as of that date. He had not incurred any claims that he could submit for reimbursement through March 15, 2020. On June 29, 2020, the participant received medical services in excess of $1,200. He can submit his claim and be reimbursed for that amount.

 

How the Final Rule Affects COBRA Coverage

The Consolidated Omnibus Budget Reconciliation Act (COBRA) helps employees going through a qualifying event (such as termination of employment) maintain health coverage, often at a lower cost than they might find in the marketplace. To assist those who have lost health insurance coverage because of the pandemic, the final rule extends several COBRA-related deadlines. When calculating the new extended deadlines, the final rule disregards the Outbreak Period.

Delayed COBRA Election Deadline

To assist those who have lost health insurance coverage through termination of employment or a reduction of hours, the final rule extends the deadline to elect COBRA coverage. Normally, the election period ends 60 days following the later of 1) the qualifying event or 2) the date the plan provides the COBRA election notice to the qualified beneficiary.

  • Example: An employee is terminated on April 10, 2020, and loses coverage on April 30, 2020. If the terminated employee receives the COBRA election notice on May 5, 2020, he would normally have until July 4, 2020, which is 60 days, to elect COBRA coverage. But the Outbreak Period is now disregarded. If November 14, 2020, is the end of the Outbreak Period, the 60-day election period would start on November 15, 2020, and end on January 13, 2021.

This provision also gives employees flexibility in determining whether to spend money to continue coverage based on the type of medical issues they have during the extended deadline. Some people may choose to not enroll in COBRA coverage unless some type of expensive medical event makes it necessary. Normally, they would have a shorter window to determine the necessity of enrollment.

While the extended deadline helps individuals, it also creates risk for insurers and employers who may see employees taking advantage of the deadlines to enroll only if they incur significant costs. Healthy employees who would normally elect coverage, pay the premiums, and incur limited costs, will not have incentive to enroll during the window and will not be able to help offset costs as they normally would.

Delayed COBRA Payments

The final rule extends the amount of time that a qualified beneficiary has to submit a COBRA premium payment before coverage under the plan will cease. To be considered timely, the payment deadline is normally 30 days after the due date (or 45 days for the initial payment). While it is possible for qualified beneficiaries to take advantage of this relief in order to minimize expenses and avoid paying their premiums during the Outbreak Period, it is important to note that once the Outbreak Period is over, qualified beneficiaries must fully pay all prior months’ premiums in order to retain coverage. This could be a substantial financial burden. But if a qualified beneficiary has a major medical event, it could be cheaper to make up the costs of numerous months of premiums than to pay for the medical expenses.

Delayed COBRA Notices

  • Extended qualified event notification deadline: The final rule extends the date by which a covered employee or qualified beneficiary must notify the plan administrator of the following qualifying events: divorce (or legal separation) or a dependent child ceasing to be a dependent child. The normal deadline is 60 days after the date of the qualifying event.
  • Extended disability notification deadline: Covered employees and qualified beneficiaries have more time to notify the plan administrator of a disability determination. The normal deadline is 60 days after the date of being determined to be disabled.
  • Extended COBRA rights notification deadline: Plan administrators have more time to notify qualified beneficiaries of their COBRA rights following a qualifying event. The normal deadline is 14 days following the qualifying event (or 44 days when the employer is the plan administrator). Although plan administrators are not required to provide the COBRA election notice during the Outbreak Period, they must provide COBRA coverage if a participant elects it. Plan administrators will likely want to provide timely notices to encourage qualified beneficiaries to elect and pay for COBRA coverage.

 

Previous Relief Affecting Employee Welfare Benefit Plans

In March 2020, the IRS released Notice 2020-18, postponing the due date for all Federal income tax returns normally due on April 15, 2020, to July 15, 2020. Although not mentioned, contribution deadlines were expected to be delayed as well. A few weeks later, these expectations were met when Notice 2020-23 officially extended multiple deadlines that fell on or after April 1, 2020, and before July 15, 2020, to July 15, 2020—including deadlines for

  • making 2019 HSA contributions;
  • completing a 60-day rollover;
  • providing Form 5498-SA to HSA owners and to the IRS;
  • forfeiting unused FSA benefits;
  • receiving cash for unused vacation days; and
  • electing benefits in a noncalendar-year cafeteria plan.

 

Watch for Future Guidance

The last few months have seen a flurry of new guidance. This trend may continue for the duration of the pandemic. In fact, at the time of this writing the House of Representatives had just introduced a fourth stimulus package. Ascensus will be closely monitoring all future guidance. Visit ascensus.com for the latest updates.

 

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


Washington Pulse: New Coronavirus Law Provides Retirement Plan and Healthcare Relief

With virtually every part of the U.S. economy facing unexpected financial challenges from the coronavirus (COVID-19) pandemic, Congress has passed the largest relief package in U.S. history. Signed into law on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act is designed to assist the millions of Americans affected by the outbreak. The legislation has multiple provisions that affect retirement and health savings arrangements.

 

Retirement Savings Provisions

Most financial experts advise against using assets that have been set aside for retirement. But many individuals may have to do just that in order to supplement their income. The following provisions are intended to help individuals access their IRA and retirement plan assets and to replenish those assets later on.

  • New coronavirus-related distributions (CRDs). Individuals may withdraw up to $100,000 in aggregate from eligible retirement plans without paying the 10 percent early distribution penalty tax.
    • A CRD is defined as a distribution made on or after January 1, 2020, and before December 31, 2020, to a qualified individual, defined as
      • an individual (or the spouse or dependent of the individual) who is diagnosed with the COVID-19 disease or the SARS-CoV-2 virus in an approved test; or
      • an individual who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reduced hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Treasury Secretary.

The CARES Act clarifies that employers may rely on participants’ certification that they meet the CRD requirements.

    • An eligible retirement plan is defined as a qualified retirement plan (e.g., a 401(k) plan), 403(b) plan, governmental 457(b) plan, or an IRA.
    • CRDs will meet the retirement plan distribution requirements, as long as all distributions from one employer do not exceed $100,000.
    • Individuals may repay CRDs over three years beginning with the day following the day a CRD is made. Repayments may be made to an eligible retirement plan or IRA.
    • CRD repayments made within the three-year period will be treated as having satisfied the general 60-day rollover requirement.
    • CRDs will be taxed ratably over a three-year period, unless an individual elects otherwise.
    • Although CRDs may be rolled over, they are not considered “eligible rollover distributions” for certain purposes. Employers are not required to offer a direct rollover option. Employers are also not required to withhold 20 percent on a CRD or provide a 402(f) notice, which explains the tax and rollover options required by IRC Sec. 402(f).
  • Waiver of RMDs in—or for—2020. Financial markets have taken a hit in the wake of the coronavirus outbreak. To help savers retain more in their retirement accounts, the CARES Act waives the required minimum distribution (RMD) in 2020 for plan participants, IRA owners, and beneficiaries.
    • RMDs normally required to be taken for 2020 are waived.
    • This waiver also applies to individuals who turned 70½ in 2019 but who did not take their first RMD before January 1, 2020. In the absence of additional relief, the next RMD for those individuals must be taken by December 31, 2021.
    • For purposes of counting the five-year period for beneficiary distributions, 2020 is disregarded and one year is added to the remaining period. For example, for deaths occurring in 2019, the five-year period in which the inherited assets must be distributed will end on December 31, 2025, instead of on December 31, 2024.
    • A distribution that is taken in 2020—but that is not an RMD because of the waiver—may be rolled over to another eligible retirement plan or to an IRA within 60 days of the distribution. Though such distributions may be rolled over, they are similar to CRDs in that they are not treated by employer plans as eligible rollover distributions for purposes of the 20 percent mandatory withholding, the 402(f) notice, or the direct rollover requirements.
  • Increased maximum plan loan amount. The retirement plan loan maximum for a qualified Individual (defined as meeting the COVID-19 or SARs-CoV-2 conditions described previously) is increased to the lesser of $100,000 or 100 percent of the participant’s vested balance. This increased amount applies to loans made during the 180-day period beginning on March 27, 2020.
  • Delayed plan loan repayment date. Retirement plan loan repayment dates that occur between March 27, 2020, and December 31, 2020, can be delayed for one year, with the amortization period—including the five-year repayment deadline—adjusted accordingly.
  • Funding relief for defined benefit plans. For single-employer defined-benefit pension plans, the minimum required contributions due during 2020 can be delayed to January 1, 2021 (adjusted for interim earnings). Employers also have an option to use an alternative funding target percentage.
  • Expanded DOL authority to postpone certain deadlines. In addition to taking action in response to a disaster or terroristic threat, the DOL may now postpone certain deadlines under ERISA if a public health emergency (like the COVID-19 pandemic) occurs.
  • Amendment guidance. Plan sponsors generally must amend their retirement plans for these provisions by the last day of the 2022 plan year (government plans have an additional two years), or such other date as the Treasury Secretary may prescribe, with operational compliance during the interim period.

 

Health-Related Provisions

  • Allowable Services. Health insurance plans can pay for telehealth and remote care services without first requiring an individual to satisfy a deductible. Such payments will be deemed not to violate existing HSA requirements. This relief applies to plan years that begin on or before December 31, 2021, and promotes diagnosis and treatment while helping individuals avoid possibly risky in-person contact.
  • New qualified medical expenses. Certain medicines or products do not need to be a “prescription” to be qualified medical expenses for HSA, HRA, MSA, and health FSA purposes. The CARES Act specifically includes over-the-counter menstrual care products.

Although the CARES Act represents the largest relief package in U.S. history, there may be more to come. Government officials have stated that more relief will be available if needed. For now, the CARES Act should help many Americans get some of the financial relief that they desperately need. We are closely reviewing the CARES Act and other possible COVID-19 guidance. Visit ascensus.com for the latest information and developments.

 

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Washington Pulse: Congress and the IRS Provide Separate COVID-19 Guidance that Addresses Payment for Diagnosis and Treatment

The U.S. government has delivered two pieces of welcome relief in the midst of the coronavirus (COVID-19) pandemic. First, the President has signed legislation that requires healthcare insurance providers to cover COVID-19 testing without charging the patient. Second, the IRS has indicated that high deductible health plans (HDHPs) will retain their qualified status even if they cover the cost of COVID-19 testing and treatment before the satisfaction of the plan deductible. This will enable individuals with health savings accounts (HSAs) to continue to make tax-deductible contributions.

 

Legislative Relief for COVID-19 Testing

President Trump signed the Families First Coronavirus Response Act (the Act) on March 18, 2020, to address the many disruptions caused by the COVID-19 outbreak. One of the primary concerns addressed in this bill is the fear that those exposed to the virus might hesitate to be tested for the disease if they have to pay for such testing out of pocket. To encourage testing, the Act requires group and individual health insurance plans to provide coverage for two items.

  • Diagnostic testing products. This refers to federally approved products that detect the COVID-19 virus.
  • Items and services that are associated with the use of such a diagnostic product. Simply put, this requires health insurance plans to cover the costs of
    1. the office visit (even if virtual),
    2. any materials or services needed to determine whether testing is needed, and
    3. administering the test.

Health insurance plans must provide this coverage with no cost sharing (e.g., no deductibles, copayments, or coinsurance) and with no prior authorization. The statute gives joint enforcement authority to the Secretary of Health and Human Services, the Secretary of Labor, and the Secretary of Treasury, and each of these departments has the authority to issue guidance to implement these provisions.

 

IRS Relaxes HDHP Rules

To help facilitate the nation’s response to the COVID-19 virus, the IRS issued Notice 2020-15 on March 11. This guidance provides a green light for insurers offering HSA-compatible HDHPs to cover the cost of the COVID-19 diagnostic testing and associated treatment without application of a deductible or other cost sharing. The IRS notes that doing so will not disqualify the HDHP, so individuals covered by these plans may continue to contribute to their HSAs.

Normally, individuals can make HSA contributions only if they maintain HSA-compatible HDHPs. This means that the HDHP must meet certain requirements such as minimum deductibles and maximum out-of-pocket expenses. In general, individuals must not also be covered by a non-HDHP.

The concern that the cost of COVID-19 testing could be a barrier to seeking medical care during this outbreak led the IRS to relax current rules. The IRS states in Notice 2020-15, that

Due to the nature of this public health emergency, and to avoid administrative delays or financial disincentives that might otherwise impede testing for and treatment of COVID-19 for participants in HDHPs, this notice provides that all medical care services received and items purchased associated with testing for and treatment of COVID-19 that are provided by a health plan without a deductible, or with a deductible below the minimum annual deductible otherwise required . . . for an HDHP, will be disregarded for purposes of determining the status of the plan as an HDHP.

This easing of the existing HSA-compatible HDHP rules should be a welcome relief for many individuals who may be affected by the COVID-19 outbreak.

 

The Interaction of Legislative Relief and Notice 2020-15

IRS Notice 2020-15 states that an HDHP  that covers the cost of COVID-19 testing or treatment will still be considered an HSA-compatible HDHP—and eligible HSA owners will still be able to make tax-deductible contributions. The new federal statute, on the other hand, requires health plans to cover COVID-19 testing expenses, but not treatment expenses.

Individuals participating in HDHPs or any other type of health plan should consult the insurer regarding their costs associated with COVID-19 testing and treatment, including the potential application of any deductible or cost sharing. Watch ascensus.com Latest News for further developments regarding the effects of the COVID-19 pandemic on both health and welfare and retirement arrangements.

 

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Washington Pulse: Delivering DOL Disclosures May Get Easier

The Department of Labor (DOL) has issued proposed regulations that provide an additional safe harbor for providing electronic retirement plan disclosures to participants and beneficiaries. The regulations also incorporate the framework used in existing guidance found in FAB 2006-03.

For several years, the retirement industry has been requesting additional guidance and simplified procedures for providing disclosures electronically. Although the current rules were supposed to make it easier for employers and participants to communicate electronically, many employers still find it difficult to meet the current electronic notification requirements. The DOL hopes to remedy this with the release of the proposed regulations.

Note that the proposed regulations apply only to pension benefit plans providing disclosures required under Title I of ERISA; they do not apply to IRS disclosures or to health and welfare plan disclosures.

 

What are the current safe harbor rules?

In 2002, the DOL created safe harbor standards for electronically delivering any plan disclosures required by the Employee Retirement Income Security Act of 1974 (ERISA). Although this is not the only permissible way that an employer may use electronic media, the safe harbor treats the notice or other document sent by email or other electronic means as having been properly delivered.

The DOL later issued limited guidance for participant benefit statements (FAB 2006-03), qualified default investment alternatives (FAB 2008-03), and participant fee disclosures (Technical Release 2011-03R), but has not updated its broader e-delivery safe harbor since 2002.

The 2002 safe harbor applies to two categories of recipients.

  • The first category consists of participants who can effectively access documents provided electronically at their job site and who regularly access the employer’s electronic information system as part of their job duties.
  • The second category consists of participants, beneficiaries, and others (e.g., retirees) who do not fit into the first category but are entitled to ERISA documents.

The safe harbor assumes that individuals in the second category are using electronic information systems that are beyond the control of the plan sponsor. Accordingly, those individuals must affirmatively consent to receive documents electronically.

 

What’s different under the proposed safe harbor rules?

The proposed regulations add a second electronic notification safe harbor to the existing 2002 regulations. Similar to FAB 2006-03, the proposed safe harbor allows employers to post retirement plan disclosures online. Employers that want to use a safe harbor e-delivery method can use both options or choose between the new online option and the e-delivery options provided under the 2002 guidance.

The proposed regulations also allow employers to treat e-delivery as their default delivery method for participants who have provided or been issued an electronic address (e.g., an email address or phone number on a smart phone). Participants who want to receive free paper documents must be allowed to opt out of the e-delivery method for some or all of the covered documents. Those who opt out must receive paper documents until they opt in to receive the covered documents online again. Employers must have reasonable procedures in place to track opt outs and requests for paper copies.

Employers may post more documents online

Unlike FAB 2006-03, which allows employers to post only pension benefit statements online, the proposed regulations allow employers to post all “covered documents” online. The DOL defines a covered document as any ERISA Title I document that an employer must provide to participants and beneficiaries. A covered document does not include a document provided only upon the participant’s written request (e.g., a request for a trust agreement).

Examples of covered documents that employers may post online include

  • a summary plan description,
  • a summary of material modifications,
  • a summary annual report, or
  • an annual funding notice.

Employers must provide an initial paper notification

Employers must provide a paper notice to each individual being defaulted to the e-delivery option. The notice must specify that some or all of the documents will be provided online. The notice must also

  • explain that the participant can request a free paper copy of some or all of the documents,
  • clarify that the participant can opt out of receiving documents online at any time, and
  • describe how the participant can exercise those rights.

Employers must notify participants when documents are posted

When an employer posts a covered document online, the employer must also notify participants that the document is available. The notice, referred to as a “Notice of Internet Availability,” must meet certain form and content requirements. The employer’s system for delivering this notice must alert the employer when there is an inoperable or an invalid electronic address.

The employer generally must provide the Notice of Internet Availability for each covered document, as each document is posted. But the employer can provide one combined notice for certain covered documents that are triggered solely by the passage of time. For example, an employer can provide one combined notice if it posts the summary plan description and summary annual report at the same time. Employers providing a combined notice for multiple covered documents may provide the notice annually, but over a 14-month window for added flexibility.

Websites must meet certain standards

Employers must ensure that employees can easily access any covered documents posted online. For example, an employer could provide a web address that leads directly to the covered document or to a login page that contains a prominent link to the covered document. Employers must also

  • post documents online by their applicable due date;
  • keep documents online until the documents are superseded;
  • present documents in a printable, easy-to-read format that can be searched electronically by numbers, letters, or words;
  • permanently retain each document in an electronic format; and
  • protect each individual’s personal information.

A new rule applies to former employees

If an employee terminates employment (e.g., retires), the employer must take reasonable steps to obtain and maintain an accurate email address for the former employee. This rule is meant to give former employees who are still participating in the plan access to important plan information, while still allowing the employer to post the disclosures electronically.

 

More to come?

The DOL has asked for comments on the proposed regulations and has also issued a Request for Information (RFI). The questions in the RFI generally focus on how the DOL can improve the design and content of ERISA disclosures. Examples of questions asked include the following.

  • What current routine disclosures need improved effectiveness and efficiency?
  • Is any required disclosure obsolete?
  • Is it feasible to condense and streamline information into fewer or less voluminous disclosures?
  • Are there steps the DOL could take to better coordinate disclosures required under ERISA and notices required under the Internal Revenue Code?

Comments on both the proposed regulations and responses to the RFI are due by November 22, 2019. The new guidance is proposed to take effect 60 days after publication as final regulations in the Federal Register. Once published, the regulations will become applicable on the first day of the next calendar year.

 

Next Steps

The proposed regulations seem to represent a “middle-of-the-road” approach by the DOL. While many in the retirement industry have been hoping for this type of guidance, others believe that it will make it harder for certain participants (e.g., retirees) to access important plan information. In addition, the proposed regulations apply only to DOL retirement plan notices, which means employers must still follow separate IRS disclosure requirements when delivering IRS required notices.

Employers interested in using the proposed safe harbor may want to start reviewing the regulations now (knowing that some provisions might change) in order to determine whether to make operational changes, which could include website modifications and revisions to notifications. Those looking for additional information on the proposed regulations may refer to the DOL’s fact sheet and news release. Ascensus will continue to monitor any new developments on the proposed regulations. Visit ascensus.com for the latest information.

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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.

 

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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.