Qualified Small Employer HRAs Face Steep Compliance Path

Co-authored by
Christine P. Roberts, Mullen & Henzell L.L.P and
Amy Evans of Colibri Insurance Services, Inc.

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Passed in December 2016, the 21st Century Cures Act backtracked in part on an abiding ACA principle – namely, that employers could not reimburse employees for their individual health insurance premiums through a “standalone” health reimbursement account (HRA) or employer payment plan (EPP).  Specifically, the Cures Act carves “Qualified Small Employer Health Reimbursement Arrangements” or QSE HRAs — out from the ACA definition of group health plan subject to coverage mandates, permitting their adoption by eligible small employers, subject to a number of conditions.  The provisions are effective for plan years beginning after December 31, 2016.

The compliance path for QSE HRAs is steep enough that they may not be adopted by a significant number of eligible employers. Below we list the top five compliance hurdles that small employers will face:

1.   Requirement that no group health plan be maintained.

In order to be eligible to maintain a QSE HRA an employer must not have more than 50 full-time employees, including full-time equivalents (measured over the preceding calendar year), and in addition it must not maintain any group health plan for employees.  Small businesses are more likely than not to offer some health coverage to employees, although eligibility may be limited as in a “management carve-out” arrangement.  Business owners may be reluctant to part with group coverage, such that QSE HRAs may have most appeal to small employers that never offered coverage at all.

2.  Confusion over impact on premium tax credits.

A significant amount of confusion exists as to whether QSE HRA benefits impact an employee’s eligibility for premium tax credits on a health exchange.  The confusion is natural as the applicable rules are quite confusing.  Fundamentally, if a QSE HRA benefit constitutes “affordable” coverage to an employee (which requires a fairly complicated calculation), then the employee will be disqualified from receiving premium tax credits.  If a QSE HRA is not affordable (that calculation again), then the QSE HRA benefit will reduce, dollar for dollar, the premium tax credit amount for which the employee qualified.  We have only statutory text at this point and regulations will no doubt provide more clarity, but small employers may still struggle to understand the interplay of these rules and may be even less equipped to assist employees with related questions.

3.  Annual notice requirement.

A small employer maintaining a QSE HRA must provide a written notice to each eligible employee 90 days before the beginning of the year that:

  • Sets forth the amount of permitted benefit, not to exceed annual dollar limits that are adjusted for inflation (currently $4,950 for individual and $10,000 for family coverage);
  • Instructs the employee to disclose the amount of their QSE HRA benefit when applying for premium tax credits on a health insurance exchange; and
  • Reminds the employee that, if he or she is not covered under minimum essential coverage (MEC) for any month a federal tax penalty may apply, and in addition contributions under the QSE HRA may be included in their taxable income. (The QSE HRA is not itself MEC.)

If compliance with the annual notice requirements under SEP and SIMPLE plans is any guide, small employers may find it difficult to consistently provide the required written notice. The Cures Act imposes a $50 per employee, per incident penalty for notice failures, up to $2,500 per person.  Penalty relief is available if the failure is demonstrated to have been due to reasonable cause and not willful neglect.

4.  Annual tax reporting duties.

Small employers must report the QSE HRA benefit amount on employees’ Forms W-2 as non-taxable income.   ACA tax reporting for providers of “minimum essential coverage” (MEC), namely, providing Form 1095-B to each eligible employee and transmitting  copies of all employee statements to the IRS under transmittal Form 1094-B  –would not appear to be required for sponsors of QSE HRAs, as MEC reporting will be done by the individual insurance carriers.  Clarity on this point would be welcome.

5.  Lack of financial incentive for benefit advisers.

Small employers will (reasonably) look to health insurance brokers for guidance and clarification on these complex issues. They will also need assistance with QSEHRA set-up, including shopping TPAs to compare services and fees, educating employees on enrollment and use, handling service issues during the year, and satisfying the annual notice requirement and annual tax reporting duties. Unfortunately, the benefit broker and adviser community has little financial incentive to recommend QSEHRAs, because commissions are based on a relatively low annual administrative fee and do not provide reasonable compensation for this work.  This in turn could result in low uptake by small employers.

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Filed under Affordable Care Act, Benefit Plan Design, Health Reimbursement Accounts, Health Reimbursement Arrangements, Plan Reporting and Disclosure Duties, PPACA, Premium Tax Credits, Qualified Small Employer HRAs

Using Forfeitures for Corrective Contributions: Look Before You Leap

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When a 401(k) plan fails nondiscrimination testing that applies to employee salary deferrals, one way to correct the failure is for the plan sponsor to make qualified nonelective contributions (QNECs) on behalf of non-highly compensated employees. The same approach may apply to matching contribution failures, but in that instance the corrective contributions are called qualified matching contributions or QMACs.   QNECs and QMACs must satisfy the same vesting and distribution restrictions that apply to employee salary deferrals – they must always be 100% vested and must not be allowed to be distributed prior to death, disability, severance from employment, attainment of age 59.5, or plan termination (i.e., they may not be used for hardship distributions).

Existing Treasury Regulations provide that QNEC and QMAC contributions must be 100% vested at when they are contributed to the plan, not just when they are allocated to an account.

Forfeitures are unvested employer contributions when originally contributed to the plan, and for this reason the IRS has taken the position that a plan sponsor may not use forfeitures to fund QNECs or QMACs. And in fact, the prohibition on using forfeitures to make QNECs or QMACs is reflected in the Internal Revenue Manual, and the IRS Employee Plans Compliance Resolution System (EPCRS) which outlines voluntary correction methods for plan sponsors.

On January 18, 2017, the IRS changed course by publishing a proposed regulation requiring that QNECs and QMACs be 100% vested only when they are allocated to an account, and need not be 100% vested when originally contributed to a plan. This means that forfeitures may be used to make QNECs and QMACs if the underlying plan document permits.  It would logically follow that other employer contributions that are not fully vested when made may be re-designated as QNECs to satisfy ADP testing for a plan year.

The proposed regulation is applicable for plan years beginning on or after January 18, 2017 (January 1, 2018 for calendar year plans) but may be relied upon prior to that date.

Caution is advised, however, for plan sponsors wanting to make immediate use of forfeiture accounts for QNECs and QMACs. First, they must confirm that their plan document does not prohibit use of forfeitures for this purpose.  In the author’s experience, master and prototype and volume submitter basic plan documents may expressly prohibit use of forfeitures for QNECs and QMACs.  The language below was taken from a master and prototype basic plan document:

7) Limitation on forfeiture uses. Effective for plan years beginning after the adoption of the 2010 Cumulative List (Notice 2010-90) restatement, forfeitures cannot be used as QNECs, QMACs, Elective Deferrals, or Safe Harbor Contributions (Code §401(k)(12)) other than QACA Safe Harbor Contributions (Code §401(k)(13)). However, forfeitures can be used to reduce Fixed Additional Matching Contributions which satisfy the ACP test safe harbor or as Discretionary Additional Matching Contributions.

Plan sponsors that locate a similar prohibition in their plan document should contact the prototype plan sponsor to determine whether they will be amending their plan document to permit use of forfeitures for QNECs and QMACs and when such an amendment will take effect.

In instances where there is no express plan prohibition, plan sponsors that are making use of EPCRS to correct plan failures should try to ascertain from the IRS whether or not they may use forfeitures to fund QNECs or QMACs as part of a self-correction or VCP application, as the most recently updated EPCRS Revenue Procedure (Revenue Procedure 2016-51, 2016-41 I.R.B. 465), expressly disallows this at Section §6.02(4)(c) and Appendix A §.03. Hopefully, the IRS will issue some guidance on this point without too much delay.

 

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Filed under 401(k) Plans, ADP and ACP Testing, Benefit Plan Design, Nondiscrimination Testing for Qualified Retirement Plans, Uncategorized

State Auto-IRA Programs: What Employers Need to Know

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California and four other states (Connecticut, Illinois, Maryland and Oregon) have passed legislation requiring employers that do not sponsor employee retirement plans to automatically withhold funds from employees’ pay, and forward them to IRAs maintained under state-run investment programs. Provided that these auto-IRA programs meet safe harbor requirements recently defined by the Department of Labor in final regulations, the programs will be exempt from ERISA and employers cannot be held liable for investment selection or outcome.  The DOL has also finalized regulations that would permit large cities and other political subdivisions to sponsor such programs where no statewide mandate exists; New York City has proposed its own such program, tentatively dubbed the New York City Nest Egg Plan.

In light of this growing trend, what do employers need to know about auto-IRA programs?   Some key points are listed below:

  1. Some Lead Time Exists. Even for state auto-IRA programs that become effective January 1, 2017 (e.g., in California and Oregon), actual implementation of employee contributions is pushed out to July 1, 2017 (in Oregon) and, in California, enrollment must wait until regulations governing the program are adopted. The California program, titled the California Secure Choice Retirement Savings Program, also phases in participation based on employer size. Employers with 100 or more employees must participate within 12 months after the program opens for enrollment, those with 50 or more within 24 months, and employers with fewer than 50 employees must participate within 36 months. These deadlines may be extended, but at present the earliest round of enrollment is anticipated to occur in 2019.
  2. Employer Involvement is Strictly Limited. The DOL safe harbor prohibits employer contributions to auto-IRAs and requires that employers fulfill only the following “ministerial” (clerical) tasks:
    • forwarding employee salary deferrals to the program
    • providing notice of the program to the employees and maintaining contribution records
    • providing information to the state as required, and
    • distributing state program information to employees.  Note that in California, the Employment Development Department will develop enrollment materials for employers to distribute, and in addition a state-selected third party administrator will collect and invest contributions, effectively limiting the employer role to forwarding salary deferrals.
  3. Employers Always Have the Option of Maintaining their Own Plan. Generally the state auto-IRA programs established to date exempt employers that maintain or establish any retirement plan (401(k), pension, SEP, or SIMPLE), even plans with no auto-enrollment feature or employer match used to encourage employee salary deferrals. Therefore employers need not be significantly out of pocket (other than for administrative fees) to avoid a state auto-IRA mandate. Employers should bear in mind that an employer-sponsored retirement program, even if only a SEP or SIMPLE IRA, helps to attract and retain valued staff, and should consider establishing their own plan in advance of auto-IRA program effective dates for that reason.
  4. Penalties May Apply. California’s auto-IRA program imposes a financial penalty on employers that fail to participate.   The penalty is equal to $250 per eligible employee if employer failure to comply lasts 90 or more days after receipt of a compliance notice; this increases to $500 per employee if noncompliance extends 180 or more days after notification. The Illinois auto-IRA program imposes a similar penalty.
  5. Voluntary Participation in Auto-IRA Program May Create an ERISA Plan. One of the requirements of the DOL safe harbor is that employer participation in auto-IRA programs (referred to as “State payroll deduction savings programs” be compulsory under state law. If participation is voluntary, an employer will be deemed to have established an ERISA plan. In theory, this rule could be triggered when an employer that was mandated to participate later drops below the number of employees needed to trigger the applicable state mandate (for instance, a California employer that drops below 5 employees), but continues to participate. The DOL leaves it to the states to determine whether participation remains compulsory for employers despite reductions in the number of employees.   The DOL also notes that, under an earlier safe harbor regulation from 1975, an employer that is not subject to state mandated auto-IRA programs can forward employees’ salary deferrals to IRAs on their behalf without triggering ERISA, provided that the employee salary deferrals are voluntary and not automatic.   The DOL final regulations can be read to suggest that a payroll-to-IRA forwarding arrangement that is voluntary and that meets the other requirements of the 1975 safe harbor will constitute a pre-existing workplace savings arrangement for purposes of exempting an employer from a state-mandated auto-IRA program.
  6. The Trump Administration Will Likely Support Auto-IRA Programs. Early and necessarily tentative conclusions are that the Trump Administration will continue to support the DOL’s safe harbor regulation exempting auto-IRA programs from ERISA, as well as other state-based efforts to address the significant savings gap now known to confront much of the country’s workforce.   One unknown variable is the degree to which the Trump Administration will be influenced by opposition to the programs mounted by the financial industry. Until the direction of the Trump Administration becomes clearer, employers that do not currently maintain a retirement plan should track auto-IRA legislation in their state or city and otherwise prepare to comply with a state or more local program in the near future, ideally by adopting their own retirement plan for employees.

 

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Filed under 401(k) Plans, 403(b) Plans, California Secure Choice Retirement Savings Program, ERISA, Fiduciary Issues, Payroll Issues, State Auto-IRA Programs

Post-Election ACA Prognosis

roadsignChange is the order of the day and that extends to the Affordable Care Act, arguably the signature legislative mark made by the Obama Administration.  In short, the ACA as we know it has a limited lifespan.  President-Elect Trump has pledged to repeal it and replace it with something better.  Even if we knew what that something better was, which we don’t, from a practical standpoint, a wholesale repeal of the law is unlikely as it would be subject to filibuster.  As an alternative, the law could be dismantled through the revenue reconciliation process, which is filibuster proof.  That process, however, is limited to provisions in the law that are revenue related such as the individual and employer mandates, premium tax credits, the insurer tax, and other measures meant to pay for the costs of the law, which include the insurance market reforms.  Those reforms, including most notably the prohibition on pre-existing condition exclusions, are not revenue-related but they are expensive for carriers to maintain.  So the Trump Administration and Congress will need to work together to find alternatives to the coverage mandates so that the popular market reforms remain financially viable for carriers.  In short, the legislative process of fixing and/or replacing the ACA will resemble a game of Jenga and like Jenga it will require time and patience.  In the short term, those subject to the law should be keeping their heads down and following the provisions of the law currently in place, including planning for ACA reporting for applicable large employers, due early in 2017.

Employers and the brokers and other benefit advisers who serve them will need more help in this environment than they would if the ACA just continued to unfold in its current form.  This blog remains committed to helping its audience weather the coming changes.

In the meantime, you can find more detailed information on the legislative measures described above, here and here.

 

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Filed under Applicable Large Employer Reporting, Employer Shared Responsibility, Individual Shared Responsibility, Post-Election ACA, PPACA, Pre-Existing Condition Exclusion, Premium Tax Credits

IRS Announces New Benefit Limits for 2017

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On October 28, 2017 the IRS announced 2017 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.   Salary deferral limits to 401(k) and 403(b) plans remained unchanged for the second year in a row, but other dollar limit adjustments were made. Citations below are to the Internal Revenue Code.

Limits That Remain the Same for 2017 Are As Follows:

–The annual Salary Deferral Limit for 401(k), 403(b), and most 457 plans, currently $18,000, stays the same.

–The age 50 and up catch-up deferral limit, currently $6,000, also remains the same. For 2017 as in this year, the maximum salary deferral an individual age 50 or older may make is $24,000.

–The compensation threshold for determining a “highly compensated employee” remains unchanged at $120,000.

–Traditional and Roth IRA contributions and catch-up amounts remain unchanged at $5,500 and $1,000, respectively.

–The compensation threshold for SEP participation remained the same at $600.

–The SIMPLE 401(k) and IRA contribution limit remained the same at $12,500.

Limits That Changed for 2017 Are As Follows:

–The maximum total annual contribution to a 401(k) or other “defined contribution” plan under 415(c) increased from $53,000 ($59,000 for employees aged 50 and older) to $54,000 ($60,000 for employees aged 50 and olded).

–The maximum annual benefit under a defined benefit plan increased from $210,000 to $215,000.

–The maximum amount of compensation on which contributions may be based under 401(a)(17) increased from $265,000 to $270,000.

-The compensation dollar limit used to determine key employees in a top-heavy plan increased from $170,000 to $175,000.

In a separate announcement, the Social Security Taxable Wage Base for 2017 increased from $118,500 to $127,200.  

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Filed under 401(k) Plans, 403(b) Plans, Benefit Plan Design, COLA Increases, ERISA, IRA Issues, Profit Sharing Plan, Section 457(b) Plans

Update on ACA Reporting Duties – Revised for IRS Notice 2016-70

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ACA reporting deadlines for applicable large employers arrive early in 2017 and, through Notice 2016-70,  the IRS has now offered a 30-day extension on the January 31, 2017 deadline to furnish employee statements – Forms 1095-C.  The new deadline is March 2, 2017 and it is a hard deadline, no 30-day extension may be obtained.  There is no extension on the deadline to file Forms 1095-C with the IRS under cover of transmittal Form 1094-C.  The deadline for paper filing is February 28, 2017 and the electronic filing deadline is March 31, 2017.  (Electronic filing is required for applicable large employers filing 250 or more employee statements.)

Also in Notice 2016-70, the IRS extended its good faith compliance policy for timely furnished and filed 2016 Forms 1095-C and 1094-C that may contain inaccurate or incomplete information.  This relief is only available for timely filed, but inaccurate or incomplete returns.  Relief for failure to furnish/file altogether is available only on a showing of reasonable cause, and this is a narrow standard (e.g., fire, flood, major illness).

In addition to covering the new transition relief, this-brief-powerpoint-presentation summarizes some changes in the final 2016 Forms 1094-C and 1095-c, from last year’s versions, and includes some helpful hints for accurate and timely reporting.

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Filed under Affordable Care Act, Applicable Large Employer Reporting, Employer Shared Responsibility, Minimum Essential Coverage Reporting, PPACA, Uncategorized

Untangling ACA Opt-Out Payment Rules

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As group health coverage premiums soar ever higher, it has become increasingly popular for employers to offer employees cash in exchange for their opting out of group coverage. When the cash opt-out payments are provided outside of a Section 125 cafeteria plan, they may have the unintended consequence of reducing the affordability of employer group health coverage, because the IRS views the cash opt-out payment as compensation that the employee effectively forfeits by enrolling in coverage.[1]  Unaffordable coverage may entitle the employee to premium tax credits under IRC § 36, and may also exempt the employee from individual mandate duties under IRC § 5000A.  This post focuses on the impact of opt-out payments on “applicable large employers” subject to employer shared responsibility duties under the ACA.  For such employers, reduced affordability of coverage will impact how offers of coverage are reported under ACA reporting rules (IRC § 6056) and could trigger excise tax payments under IRC § 4980H(b).

By way of background, the IRS addressed opt-out payments last year in the form of Notice 2015-87, concluding that a “conditional” opt-out payment – one that requires that the employee meet a criterion in addition to declining employer group coverage, such as showing proof of other group coverage – would not affect affordability. The Notice also offered transition relief for unconditional offers (paid simply for declining employer coverage) that were in place as of December 16, 2015, the date the Notice was published.  Unconditional opt-out arrangements adopted after December 16, 2015 do impact affordability.

Subsequently, in July 2016, the IRS addressed the affordability issue in proposed regulations under IRC § 36, governing individuals’ eligibility for premium tax credits. The proposed regulations refer to “eligible” opt-out arrangements rather than conditional ones.  An eligible opt-out payment  is one under which an employee’s right to receive payment is conditioned on the employee providing reasonable evidence that the employee and all his or her dependents (the employee’s “expected tax family”) have or will have minimum essential coverage other than individual coverage (whether purchased on or off the health exchange/Marketplace).  Reasonable evidence may include the employee’s attestation to the fact of other coverage, or provision of proof of coverage, but in any event the opt-out payment cannot be made if employer knows or has reason to know that the employee/dependents does not have or will not have alternative coverage.  Evidence of the alternative coverage must be provided no less frequently than every plan year, and no earlier than the open enrollment period for the plan year involved.

The proposed regulations are expected to be finalized this year and thus the “eligible opt-out arrangement” rules likely will apply to plan years beginning on or after January 1, 2017.   In the meantime, the following provides guidance to applicable large employers on conditional and unconditional opt-out payments for purposes of 2016 ACA compliance, and ACA reporting due to be furnished to employees and filed with the IRS early in 2017:

Unconditional opt-out arrangement: opt-out payments increase employee contributions for purposes of the “affordability” safe harbor, and should be added to line 15 of Form 1095-C, unless the arrangement was already in effect on December 16, 2015.  “In effect” for these purposes means that (i) the employer offered the arrangement (or a substantially similar arrangement) for a plan year that includes December 16, 2015; (ii) the employer’s board of directors or authorized officer specifically adopted the arrangement before December 16, 2015; or (iii) the employer communicated to employees in writing, on or before December 16, 2015, that it would offer the arrangement to employees at some time in the future.

Conditional opt-out arrangement: opt-out payments do not increase employee contributions whether or not the condition is met.  Do not include the opt-out payment in line 15 of Form 1095-C.

Opt-out arrangement under a collective bargaining agreement (CBA): if the CBA was in effect before December 16, 2015, treat as a conditional opt-out arrangement, as above, and do not include in line 15 of Form 1095-C.

Medicare Secondary Payer Act/TRICARE Implications: An applicable large employer for ACA purposes will also be subject to provisions of the Medicare Secondary Payer Act (MSPA) that prohibit offering financial incentives to Medicare-eligible employees (and persons married to Medicare-eligible employees) in exchange for dropping or declining private group health coverage[2]. In the official Medicare Secondary Payer (MSP) Manual, the Centers for Medicare and Medicaid Services (CMS) takes the position that a financial incentive is prohibited even if it is offered to all individuals who are eligible for coverage under a private group health plan, not just those who are Medicare-eligible. Traditionally the CMS has not actively enforced this rule, and has focused on incentives directed at Medicare-eligible populations. However, there are reports that the CMS may be retreating from its unofficial non-enforcement position with respect to opt-out payments. At stake is a potential civil monetary penalty of up to $5,000 for each violation. As a consequence, MSPA-covered employers with Medicare-eligible employees, or employees who are married to Medicare-eligible persons, should not put an opt-out arrangement in place, or continue an existing one, without first checking with their benefits attorney. Finally, please note that there are similar prohibitions on financial incentives to drop military coverage under TRICARE. TRICARE is administered by the Department of Defense, but along the same principles as apply to MSPA.

Note:   This post was published on October 6, 2016 by Employee Benefit Adviser.

[1] Note: employer flex contributions to a cafeteria plan reduce affordability unless they are “health flex contributions,” meaning that (i) the employee cannot elect to receive the contribution in cash; and (ii) the employee may use the amount only to pay for health-related expenses, whether premiums for minimum essential coverage or for medical expense reimbursements permitted under Code § 213, and not for dependent care expenses or other non-health cafeteria plan options. See IRS Notice 2015-87, Q&A 8.

 

[2] An employer is covered by the MSPA if it employs 20 or more employees for each working day in at least 20 weeks in either the current or the preceding calendar year.

 

 

 

 

 

 

 

 

 

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Filed under Affordable Care Act, Applicable Large Employer Reporting, Benefit Plan Design, Cafeteria Plans, Employer Shared Responsibility, Flex Plans, Health Care Reform, PPACA