Washington Pulse

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.

 

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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.

 

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


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.


Washington Pulse: Final Regulations Expand MEP Options

In 2018, roughly 38 million private-sector employees did not have access to a retirement plan*. This troubling statistic led the Trump Administration to issue an Executive Order, directing the Department of Labor (DOL) and the Treasury Department to issue guidance that would help increase participation levels in employer-sponsored retirement plans.

On July 31, 2019, the DOL fulfilled this directive by releasing final regulations on association retirement plans (ARPs)—also known as multiple employer plans, or MEPs. A MEP typically allows multiple employers to participate in a single retirement plan, which may—among other things—help reduce plan administrative and fiduciary responsibilities for participating employers. The final regulations are substantially similar to the proposed regulations, which were covered in detail in a previous Washington Pulse.

 

Why the Final Regulations are Important

One of the most important outcomes of the final regulations is the expanded interpretation of the term “employer.” The current definition of “employer” under ERISA Section 3(5) is unclear because the term “group or association of employers” is not defined. As a result, many in the retirement industry have relied on various DOL advisory opinions that seemed unnecessarily narrow.

The final regulations clarify that a “bona fide group or association of employers,” and a “bona fide professional employer organization” that satisfy certain criteria are deemed to be able to act in the interest of an employer for MEP purposes. Although the final regulations expand the term “employer,” the guidance does not create “open MEPs,” under which multiple participating employers share no common characteristic, affiliation, or purpose (as has been proposed in pending legislation).

 

Commonality of Interest Requirement Remains

To qualify as a “bona fide group or association of employers,” the group or association of employers must meet seven requirements—one of which is the “commonality of interest” requirement. To meet this requirement, the employers within the group or association must

  • be in the same industry, trade, line-of-business, or profession; or
  • have a business in the same region.

The DOL is taking a “middle-of-the-road” approach toward expanding or restricting the commonality requirement. Responding to the proposed regulations, some commenters asked the DOL to impose a less restrictive test by eliminating the commonality of interest requirement. The elimination of this requirement would essentially allow groups or associations of employers to form open MEPs. The DOL, however, decided to keep the commonality of interest requirement. Although this provision is not required by statute, the DOL believes that keeping this requirement is important for several reasons—one of which is that it aligns the final ARP regulations with the final association health plan (AHP) regulations.

In the preamble to the final ARP regulations, the DOL stated that it would “construe[ ] broadly” what constitutes an industry, trade, line-of-business, or profession. The DOL believes that this broad interpretation will help expand access to MEPs. The DOL also indicated that, in general, it will not challenge

  • any “reasonable and good faith” industry classification or categorization of employers, or
  • the inclusion of businesses that share an economic or representational interest with other members of the group or association.

 

Special Rules for Owner-Employees

The 2018 Executive Order directed the DOL to consider how working owners (e.g., sole proprietors without employees) might be included in MEP arrangements. The final regulations clarify that working owners without common law employees may consider themselves to be both an employer and an employee, and therefore eligible to participate in a MEP. To qualify for MEP participation, an owner-employee must 1) have an ownership interest in the trade or business, 2) have income from providing personal services to the trade or business, and 3) meet minimum work hours or earnings tests.

 

New PEO Requirements
Under the final regulations, a professional employer organization (PEO) must meet four requirements in order to qualify as a “bona fide PEO.” A bona fide PEO may act as an “employer” for purposes of sponsoring a MEP that covers the employees of its client employers. To qualify as a bona fide PEO, a PEO must

  • perform substantial employment functions for its client employers;
  • have substantial control over the MEP’s functions and activities and continue to have employee-benefit-plan obligations to MEP participants after the contract between the PEO and its client employers ends;
  • ensure that each client employer has at least one participant covered under the MEP; and
  • limit MEP participation only to current and former employees of the PEO and the PEO’s client employers, to former client employers, and to beneficiaries.

Whether a PEO performs “substantial employment functions” on behalf of its client employers is generally based on the facts and circumstances. But PEOs needing more regulatory certainty can take advantage of a new safe harbor, which is separate from the facts-and-circumstances test. (The proposed regulations contained a complicated regimen of safe harbors; the final regulations contain a single, simplified safe harbor with four conditions that PEOs must meet.)

 

Miscellaneous Provisions

 

Severability Provision Provides Safety Net
The final ARP regulations include a severability clause. Under this clause, if any provisions are found to be unenforceable, or stayed by court action, the remaining provisions of the regulations would remain operative and enforceable. (The regulations include examples of how this severability provision would be applied.)

The severability clause is similar to the one found in the final AHP regulations, which were released in June 2018. Since then, the final AHP regulations have encountered legal obstacles—including having certain provisions vacated by the U.S. District Court for the District of Columbia. Whether the ARP guidance generates similar concerns remains to be seen.

 

States Can Still Establish MEPs

The DOL received numerous comments questioning how the final regulations would affect other guidance—including DOL Interpretive Bulletin 2015-02, which gives states the authority to establish state-facilitated MEPs. The DOL clarified that, although the final regulations do supersede other preexisting DOL guidance, the regulations do not supersede this interpretive bulletin.

 

Open MEPs Still a Possibility

Although the final regulations don’t allow for open MEPs, the DOL has not ruled out future rulemaking that may permit them. Following the release of the proposed regulations, the DOL received approximately 60 comments; more than half of those comments addressed this issue, and the majority supported the creation of open MEPs or pooled employer plans.

Because of the comments received, the DOL has issued a request for information (RFI) that asks for responses on several questions addressing such issues as 1) the cost and complexity of open MEPs, 2) whether the DOL should allow financial institutions to sponsor open MEPs for unrelated employers, and 3) whether the DOL should expand its regulatory definition of employer to include “corporate MEPs” and affiliated service groups.

Although not officially defined, a corporate MEP typically consists of a plan that covers a group of employers related by some level of common ownership—but not enough ownership to constitute a controlled group or affiliated service group. There were three reasons the DOL included corporate MEP questions in the RFI.

  • To obtain information on the level of common ownership that would indicate enough genuine interests to permit members to act in the interests of other group members for purposes of sponsoring a MEP.
  • To determine whether the DOL should consider other facts and circumstances in addition to the level of common ownership between employers.
  • To determine what criteria two or more tax-exempt organizations or a tax-exempt organization and another organization must meet to be considered an employer under ERISA Section 3(5).

 

No Additional Reporting Requirements

The proposed regulations solicited comments on whether it should modify the current reporting and disclosure requirements. Because of the comments received, the DOL decided not to modify the current reporting and disclosure requirements. It also clarified that the MEP plan administrator is responsible for meeting these requirements.

 

The Pros and Cons of Joining a MEP

Some employers may benefit from joining a MEP—especially smaller employers that may not have the time or money to offer their own retirement plan. For example, participating employers may benefit by delegating plan duties to the MEP plan sponsor, incurring less fiduciary liability and sharing reporting responsibilities. But MEPs may not provide a substantial benefit to all who join. For example, proponents claim that participating employers could file one Form 5500 information return collectively. While this is true, many small employers don’t have to file this form, so this benefit could be minimal at best. Cost savings is another commonly perceived benefit. But because plan administration fees and investment fees have lessened in recent years, employers may not incur substantial cost savings after joining a MEP.

 

More to Come . . .

This year has seen a substantial increase in MEP-related activity. In addition to the DOL’s final regulations, the IRS released proposed regulations eliminating the “one bad apple rule,” which would provide an important improvement for MEPs. And earlier this year the U.S. House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. If enacted, this proposed legislation would eliminate the current commonality requirement—resulting in open MEPs.

While the final ARP regulations may not go as far as some in the industry would like, the regulations do give employers participating in MEPs more certainty about their status under ERISA. And based on the information contained in the RFI, it appears that the DOL is at least preparing for the possibility of open MEPs sometime in the future.

The final ARP regulations are effective September 30, 2019. Those looking for additional information may refer to the DOL’s fact sheet. And, as always, visit ascensus.com for any new developments.

* “National Compensation Survey: Employee Benefits in the United States”, The U.S. Department of Labor’s Employee Benefits Security Administration, March 2018

 

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


Washington Pulse: Proposed Treasury Regulations on MEPs a Good Start

The U.S. Treasury Department has released proposed regulations that relax the “unified plan rule” for multiple employer plans (MEPs). Published on July 3, 2019, this guidance was prompted by a 2018 Executive Order that directed the Treasury Department to consider proposing guidance that would expand workplace retirement plans for American workers. This Order specifically noted that providing greater access to MEPs would help achieve this goal. The new rules would provide relief for defined contribution MEPs that include a participating employer that jeopardizes the plan through failure to comply with certain qualified plan rules. Under the existing rules, one noncompliant employer within a MEP can disqualify the entire plan, creating significant problems for the other participating employers. If these proposed regulations become final, they will remove an important compliance hurdle for employers considering—or already in—a MEP.

 

Why are MEPs Important?

Multiple employer plans generally allow two or more employers to participate in a single retirement plan, which may result in simpler plan administration and reduced costs. These businesses may, for example, have some common ownership that allows—but does not require—the companies to share a single plan. Recognizing the potential benefits of MEPs, the Department of Labor (DOL) and federal legislators have also proposed expanding access to these plans.

The MEP concept is simple: some employers may benefit from combining their retirement resources into one plan. Instead of each employer establishing, maintaining, and paying for a separate qualified plan, many employers can participate in a single plan. This means that each participating employer could save time and money by avoiding individual annual plan audits, IRS Form 5500 returns, and ERISA bonds. Additionally, MEP participants may be able to enjoy some savings on plan investments once the plan reaches a certain size. Each participating employer still owes certain fiduciary duties to plan participants, but MEPs typically streamline administration by using a single plan administrator, who assumes overall responsibility for plan compliance and for day-to-day operations.

 

How Would the Proposed Regulations Help Employers with MEPs?

For the past 40 years, Treasury Regulations have dictated that “the failure by one employer maintaining the plan (or by the plan itself) to satisfy an applicable qualification requirement will result in the disqualification of the MEP for all employers maintaining the plan.” This unified plan rule, sometimes called the “one bad apple rule,” may well have discouraged individual employers from participating in a MEP. The proposed regulations provide an important exception to the unified plan rule. But this relief, if made final, will require the MEP plan administrator to follow a rigorous notification process and extensive follow-up.

 

Requirements for the Unified Plan Rule Exception

The proposed regulations cite four conditions that the MEP must satisfy in order to avoid plan disqualification on account of a participating employer’s failure. These conditions, listed below, will be described in more detail throughout this Washington Pulse.

  • The MEP must satisfy the general eligibility requirements:
  • The MEP plan administrator must have processes and procedures that are designed to promote overall plan compliance.
  • The MEP plan document must describe the steps that the MEP plan administrator would take to address a participating employer’s compliance failure.
  • The MEP must not be “under examination” by the IRS.
  • The MEP plan administrator must provide detailed notices to the “unresponsive participating employer”—and if no action is taken, to plan participants (and their beneficiaries) and to the DOL’s Employee Benefits Security Administration (Office of Enforcement)—describing the failure and possible remedies.
  • If the participating employer does not remedy the failure or spin off the assets held on behalf of its participants to a single employer plan, then the MEP plan administrator must spin off of those assets into a single employer plan and terminate such plan.
  • The MEP plan administrator must comply with any IRS information request in connection with the spun-off plan assets.

 

Important MEP Compliance Provisions

The Treasury Department crafted these regulations to promote compliance and to increase coverage of employees by workplace retirement plans. To do so, it has proposed an exception to the unified plan rule, as discussed above, to ensure overall qualification of a MEP plan in spite of the action or inaction of one or more individual participating employers. To achieve its objective, Treasury’s proposed regulations—created in cooperation with the DOL—include many detailed requirements.

 

The MEP plan administrator must create a compliance process—and must include procedures in plan documents. The proposed regulations state that the MEP plan administrator must establish procedures that are designed to promote compliance with federal rules. The proposed regulations also require that the MEP defined contribution plan document itself contain the procedures that the MEP plan administrator will use to address participating employer failures, including failures to take appropriate remedial action. Fortunately, once final regulations are issued, the IRS intends to release a model plan amendment, which will provide clear direction about exactly how much procedural detail must be placed in the plan document.

 

The MEP plan administrator must provide certain notices. A participating employer becomes an “unresponsive participating employer” when it fails to comply with reasonable MEP plan administrator requests for compliance information—or when it fails to correct a compliance deficiency. At this point, the MEP plan administrator must provide a first notice to this employer, describing

  • the participating employer failure;
  • the remedial actions needed to fix the failure;
  • the employer’s option to initiate a spinoff of the assets and account balances of its participants; and
  • the consequences of failing to remedy the failure, including an involuntary spinoff of the assets and account balances of the employer’s participants, followed by a termination of that spun-off plan.

The MEP plan administrator must provide a second notice if the unresponsive participating employer fails to take remedial action within 90 days of the first notice. This second notice must be provided within 30 days after the first 90-day period ends. The second notice must include all of the information contained in the first notice. But it must also specify that the employer must remedy the failure (or spin off the assets) within 90 days, or the MEP plan administrator will send a notice to the DOL and to the unresponsive participating employer’s plan participants (and their beneficiaries), telling them of the participating employer’s failure and of the consequences of not correcting that failure.

The proposed regulations require a third notice if the employer takes no remedial action within 90 days of the second notice. The MEP plan administrator must provide this notice within 30 days after the second 90-day period ends. The MEP plan administrator must, however, also provide the notice to the unresponsive participating employer’s plan participants (and their beneficiaries) and to the DOL. This notice must include the information required to be in the first notice, plus

  • the deadline for employer action,
  • an explanation of any adverse consequences that a spinoff/termination could create for participants, and
  • a statement that the MEP plan administrator is sending the notice to the unresponsive employer’s participants (and beneficiaries) and to the DOL.

 

Additional requirements.

  • Spin off and termination. If the unresponsive participating employer doesn’t fix the compliance failure or spin off its participants’ assets, the MEP plan administrator must
  • notify the affected participants (and their beneficiaries) about the spin off-termination details,
  • notify the IRS (further guidance is expected),
  • stop accepting contributions,
  • implement a spinoff of the affected participants’ assets to a separate single-employer plan, and
  • terminate the spun-off plan.
  • Qualification of spun-off plan. The unified plan rule exception in the proposed regulations does not protect the unresponsive participating employer’s plan. Even though the MEP plan may have remained qualified at the time of the spinoff, the spun-off plan’s failure while still part of the MEP will be considered a qualification failure once it has been spun off. Further, the IRS may pursue adverse action against the owner of the participating employer or against any other responsible parties.
  • Favorable tax treatment of participants’ assets upon termination. Generally, assets that are distributed because of the participating employer’s failure will still be treated as eligible rollover distributions.

 

The Treasury Department is Seeking Comments

With these proposed regulations, the Treasury Department has tried to balance the need for efficient plan administration with the ultimate aim of protecting plan participants and their beneficiaries. Accordingly, it is seeking comments from the public until October 1, 2019, particularly on whether

  • the exception to the unified plan rule should be extended to defined benefit plans,
  • the regulations should include additional requirements for MEPs to be eligible for the exception,
  • the notice requirements should be simplified or the notice period shortened, and
  • there are steps that the DOL should take to help implement the regulations.

 

The Proposed Regulations and Future MEP Developments

As written today, the proposed regulations provide an important improvement for MEPs. They will protect other participating employers from plan disqualification arising from one “bad apple.” But they cannot be relied on until they are made final. In addition, the regulations do not broaden the base of employers that are eligible to adopt a multiple employer plan.

Pending legislation and proposed DOL guidance could soon alter the MEP landscape. The final DOL “Association Retirement Plan” regulations are expected to be released soon. Like the proposed regulations, the final regulations are expected to provide much needed clarity and would allow a somewhat broader segment of employers to adopt MEPs. The U.S. House of Representative’s Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019—which enjoys bipartisan support—would eliminate the current commonality requirement, thereby creating “open MEPs.” If it becomes law, employers may find it easier to become part of a MEP. So while the Treasury’s proposed regulations may not significantly increase MEP usage on their own, as part of a larger movement toward greater MEP accessibility, they certainly could prove helpful to employers.

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