Webinar: Dept. of Labor 401(k) Audits – How Not to Get Selected (and How to Survive if You Do)

 Y01VDYAX63Please join Christine Roberts and former DOL investigator David Kahn for a free, one-hour webinar on Wednesday, Aug 24, 2016 at 10:00 AM PDT which will provide tips on how to reduce the risk of audit, and how to survive an audit if one occurs. We will cover investigation triggers and issues that the DOL targets once an audit is underway. This no-charge webinar qualifies for continuing education credits for California CPAs and ASPPA. Join us for a webinar. Register now! https://lnkd.in/b-58niA

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Filed under 401(k) Plans, DOL Audit, Fiduciary and Fee Issues, Fiduciary Issues, Plan Reporting and Disclosure Duties, Profit Sharing Plan

Section 457(f) Gets Its Groove Back

In June of this year the IRS issued proposed regulations under Section 457 of the Internal Revenue Code (“Code”) that primarily affect “ineligible” plans under Code § 457(f).  These are plans for employees of governmental entities and tax-exempt employers, limited in the latter instance to a select group of management or highly compensated employees (the “top-hat” group), that permit deferral of compensation in excess of the limits that apply under Code § 457(b).  Our prior post looked at some exceptions to these rules; this post focuses on when deferred amounts are subject to a substantial risk of forfeiture or “SROF.”

Amounts set aside under Section 457(f) plans must be included in the executive’s taxable compensation once the amounts are no longer subject to a “substantial risk of forfeiture,” for instance upon completion of a vesting schedule. Due to the requirement that income inclusion/taxation occur when the risk of forfeiture lapses, Section 457(f) plans generally work best when retirement is in the fairly near future (e.g., 2 to 7 years out), and where vesting occurs on or near the anticipated retirement date.

Traditionally it was not uncommon under Section 457(f) plans for organizations to push back a previously established vesting date, to allow the executive to work additional years for the organization without triggering taxation of their plan accounts. This practice of “rolling vesting” was popular for the planning flexibility it allowed.  Another popular practice under Section 457(f) plans was to use a covenant not to compete to prolong the substantial risk of forfeiture (and hence postpone taxation) for several years after an executive’s departure.

Both of these practices – “rolling” vesting, and use of covenants not to compete, came under a cloud, however, when the Congress passed legislation in 2005 that included a comprehensive set of rules governing nonqualified compensation plans. The rules, codified at Section 409A of the Code, were passed due to perceived and actual abuses of deferred compensation plans (for instance, the Enron executives triggered acceleration clauses under their plans when they foresaw the company’s demise).  Section 409A disallowed acceleration clauses and imposed a plethora of other design restrictions on nonqualified deferred compensation.  Section 409A was expressly made applicable to Section 457(f) plans, but final regulations issued in 2007 did not fully explain the intersection of Sections 409A and 457(f).  Separate guidance, in the form of Notice 2007-62, suggested that when formal guidance did issue, it would not recognize rolling vesting as a legitimate tax deferral measures.  Final Section 409A regulations expressly disallowed covenants not to compete as means of creating a substantial risk of forfeiture.  Therefore, for nine years, risk-averse sponsors of Section 457(f) plans have avoided rolling vesting and covenants not to compete, and have accustomed themselves to the stricter, post-Enron plan design rules.

As explained in the chart below, the proposed 457 regulations have resurrected rolling vesting, and also permit a covenant not to compete to create a substantial risk of forfeiture, subject in both instances to some tricky prerequisites.  This added design flexibility for 457(f) plans is good news for non-profit organizations, which increasingly must compete for talent with for-profit organizations.

457(f) SROF Chart

Also welcome is an updated definition of “substantial risk of forfeiture” which harmonizes with the Section 409A definition. Specifically, compensation is subject to a substantial risk of forfeiture under 457(f) when entitlement to it is conditioned upon:

  • the performance of substantial services (generally at least 2 years, unless earlier terminated by death, disability, or involuntary termination, including for “good reason”), or
  • the occurrence of a condition that is related to the purpose of the compensation, (such as a performance goal for the employee, or to the employer’s tax-exempt or governmental activities (such as completion of a funding campaign).

As under 409A, there is no SROF if the facts and circumstances suggest that the employer is unlikely to enforce the forfeiture condition.   Relevant facts and circumstances include the employer’s past practices in enforcing (or not enforcing) forfeitures, the level of the benefitted executive’s control of or influence over the organization, and the likelihood that the conditions would be enforceable under applicable law.

The proposed 457 regulations may be relied upon until the effective date (the “applicability date”) of the final regulations, which will follow their publication in the Federal Register. Transition relief applies only to certain union and governmental plans, such that risk-averse plan sponsors should consider taking steps to voluntarily comply with the proposed regulations in advance of the applicability date.

Finally, compensation for the non-profit executive must meet reasonableness standards or it will potentially trigger excise taxes under Code Section 4958.  This standard applies to deferred compensation amounts, and increases in those amounts, including, arguably, the minimum increase necessary under the new rolling risk of forfeiture rules.

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Filed under Benefit Plan Design, Nonqualified Deferred Compensation, Section 409A, Section 457(b) Plans, Section 457(f) Plans

Chart of Section 457(f) Carve-Outs Under New Proposed Regulations

The IRS recently announced proposed regulations under Internal Revenue Code (“Code”) Section 457 that update prior, final regulations issued in 2003 and other subsequent guidance from IRS.  Section 457 governs deferred compensation rules for government employees, and for executives of private, tax-exempt organizations it permits deferrals from compensation over and above limits set forth in Code § 403(b).  The proposed Section 457 regulations impact “ineligible” deferred compensation plans under Code § 457(f) more substantially than “eligible” deferred compensation plans under Code § 457(b) which were more comprehensively covered in the 2003 final regulations.

By contrast to eligible Section 457(b) plans, which limit annual contributions to $18,000, as adjusted for inflation (and without the age 50 catch-up for private non-profit executives), there is no dollar limit on annual contributions to a Section 457(f) plan (although as explained below other laws do set reasonableness limits upon nonprofit executive compensation in general).   However, amounts set aside under Section 457(f) plans must be included in the executive’s taxable compensation once the amounts are no longer subject to a substantial risk of forfeiture, for instance upon completion of a vesting schedule, even if amounts are not physically paid out from the plan.  Due to the requirement that income inclusion/taxation occur when the substantial risk of forfeiture lapses, Section 457(f) plans generally work best when retirement is in the fairly near future (e.g., 5 to 7 years out), and where vesting occurs on or near the anticipated retirement date.

As summarized in the chart, below, the proposed regulations clarify how certain pay arrangements are carved out from Section 457(f) compliance, either because the arrangement is not deemed to provide for a deferral of compensation, or because it defers compensation but not in a manner that does not fall under Code § 457(f). Where no deferral of compensation occurs, the pay arrangement generally is also exempt from the “Enron rules” applicable to for-profit deferred compensation plans under Code § 409A, and related regulations.  (Final regulations under Code § 409A were published in 2007; the second of two sets of proposed regulations were published the same day as the proposed Section 457 regulations).  The proposed Section 457 regulations clarify that Section 457(f) arrangements generally are also subject to Code § 409A, although there are some important distinctions between the two sets of rules which I will address in a future post.

457(f) Chart

 

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Filed under 403(b) Plans, COLA Increases, Fringe Benefits, Nonqualified Deferred Compensation, Section 409A, Section 457(b) Plans, Section 457(f) Plans

Benefits Compliance: Where You Get It; What You Need (Poll)

Y01VDYAX63Changes in the law and continued advances in technology have made benefits compliance a constantly shifting landscape.  As one of many potential sources for your own path towards benefits compliance, E for ERISA would very much appreciate your participation in the following poll, which asks a few simple questions about where you currently get your benefits compliance services and what you may still need in that regard.  Thank you in advance for (anonymously) sharing your thoughts and experiences.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Filed under 401(k) Plans, 403(b) Plans, Affordable Care Act, Applicable Large Employer Reporting, Benefit Plan Design, Employer Shared Responsibility, ERISA, Federally Facilitated Exchange, Fiduciary and Fee Issues, Fiduciary Issues, Fringe Benefits, Health Care Reform, HIPAA and HITECH, Payroll Issues, Plan Reporting and Disclosure Duties, PPACA, Profit Sharing Plan, Uncategorized

Exchange Subsidy Notices: Prelude to ACA Tax Assessments

After a one-year delay, the federally-facilitated exchange (www.healthcare.gov) has begun mailing Applicable Large Employers (ALEs) notices listing employees who qualified for and received advance payment of premium tax credits or cost sharing reductions (collectively, “exchange subsidies”) for one or more months to date in 2016.  There is a model federal subsidy notice; state-facilitated health exchanges may use their own subsidy notices. In 2016, the notices will go to mailing addresses that employees supplied while enrolling on an exchange and hence may include worksite addresses rather than an employer’s administrative headquarters.  For that reason, ALEs should track all work locations for receipt of the exchange notices.

Each notice will identify one or more employees who received subsidies in 2016, and if the names include those of full-time employees who were offered affordable, minimum value or higher coverage (or enrolled in coverage, even if unaffordable) for the period involved, an appeal is appropriate and must be made within 90 days of the date on the exchange subsidy notice. This Employer Appeal Request Form may be used for http://www.healthcare.gov as well as the following state-based exchanges:  California, Colorado, D.C., Kentucky, Maryland, Massachusetts, New York and Vermont.  The appeals process is carried out via mail or fax this year but will eventually convert to a digital format.

Remember, these exchange subsidy notices are not themselves assessments of ACA penalty taxes which is a separate process carried out by IRS. And the IRS will assess ACA penalty taxes for 2015 without benefit of subsidy notices for that year.   However the subsidy notices now being released do provide a “heads up” regard to potential 2016 tax liability, and by filing an appeal an ALE can build the file it will need in the event of a later penalty tax assessment. Not only will a timely appeal document the fact that no ACA penalty tax should apply, it may also prevent the employee in question from later having to refund subsidy amounts to IRS, either through a reduced tax refund or with out-of-pocket funds.

In this regard, ALEs should keep in mind that coverage that is unaffordable for exchange purposes (i.e. entitles an individual to exchange subsidies) may be affordable for employer safe harbor/penalty assessment purposes (i.e., prevents assessment of an ACA employer penalty tax). They both use the same affordability percentage – 9.66% in 2016 – but apply it to different base amounts.  The exchanges look at the employee’s modified adjusted gross income (MAGI), which may be higher than the employer’s safe harbor definition (for instance when the employee’s household includes other wage earners), or may be smaller than the employer’s safe harbor definition (for instance, when the employee has large student loan interest expenses and/or alimony payments, both of which are excluded from MAGI).  Thus there will be instances in which an employer bears no ACA penalty liability with regard to coverage that is unaffordable for exchange purposes. The appeals process will make available to an employer information as to whether an employee’s household income exceeded the affordability threshold for exchange subsidies, along with other data used to establish eligibility for exchange subsidies.  A flowchart of the exchange subsidy notice and appeals process follows:Flowchart for Handling Exchange Subsidy Notices

We do not yet have details on how the IRS will go about assessing ACA penalties on ALEs for 2015 and subsequent years, other than that employers will have an opportunity to contest a tax assessment. All the more reason to engage in the appeal process, where appropriate, with regard to subsidy notices.

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Filed under Affordable Care Act, Covered California, Employer Shared Responsibility, Federally Facilitated Exchange, Health Care Reform, Health Insurance Marketplace, Premium Tax Credits, State Exchange

Final Rules on Wellness Program Design: A Chart and FAQs

Recent months have seen a flurry of new guidance related to wellness programs:

  • On May 17, 2016 the EEOC published final regulations and interpretive guidance on wellness programs that include disability-related questions (such as a Health Risk Assessment or HRA) and/or medical examinations (such as biometric testing). The new rules and guidance fall under Title I of the Americans with Disabilities Act (ADA), which permits collection of medical information under an employer’s “voluntary” wellness program. They replace proposed rules and guidance which were published in April 2015. We addressed the proposed rules in an earlier post.
  • In addition, EEOC published in the same issue of the Federal Register final regulations on wellness program participation by employees’ spouses, under Title II of the Genetic Information Nondisclosure Act (GINA). For GINA purposes, health status or health history about a family member, including a spouse, constitutes genetic of the employee. The rule replaces proposed regulations issued in October 2015.
  • In connection with the final rules the EEOC also published a model confidentiality notice to be provided to wellness program participants.
  • Finally, the Internal Revenue Service issued guidance regarding taxation of cash rewards to participate in wellness programs, and reimbursement of premiums paid through cafeteria plan deductions.

Overview. The new ADA and GINA regulations supplement, and in some instances contradict, existing wellness regulations under HIPAA, as modified by the ACA. Most notably, the HIPAA/ACA rules do not impose any incentive limitation on wellness programs that are “participation only,” whereas the ADA and GINA rules do impose a maximum incentive limit if the “participation only” program includes an HRA or biometric testing. The ADA and GINA regulations apply to employers with 15 or more employees, and to wellness programs that are “self-standing” as well as those offered in connection with a group health plan. HIPAA/ACA rules apply only to wellness programs that themselves comprise a group health plan, or that are offered with group health plans.

Effective Dates. The ADA and GINA incentive limits and ADA notice requirement discussed below go into effect for plan years beginning on or after January 1, 2017 (in most cases this will be the year of the health plan to which the wellness program relates). Employers may choose to voluntarily comply with these rules prior to that time. The balance of the new guidance goes into effect immediately, as the EEOC has characterized it as clarification of existing law.

Compliance Chart. Below is a chart summarizing permissible dollar or in-kind incentives for wellness program participation, along with some other requirements under the new ADA and GINA regulations, followed by some frequently asked questions on the new wellness program guidance.

Capturechart

* If multiple health plans are offered, the 30% limit applies to the lowest cost major medical plan. If no plans are offered, the reference point is the premium paid for a 40 year old non-smoker enrolled in the second-lowest silver plan on the health exchange in the employer’s region.

Q.1:     What are reasonable design criteria for wellness programs under ADA regulations? 

A.1:      A wellness program is “reasonably designed to promote health or prevent disease” if it is (a) not highly suspect in the method chosen to promote health or prevent disease; (b) does not require an overly burdensome period of time to participate, involve unreasonably intrusive procedures or significant costs; (c) is not a subterfuge for violating the ADA or other legal requirements or a means to simply shift costs from employer to employees; and, (d) if medical information is collected, the program provides feedback or advice to participants about risk factors or uses aggregate medical data to design programs or treat specific conditions.

Q.2: How do these requirements differ from the requirements for wellness programs under HIPAA/ACA?

A.2: In addition to the differences in incentive limits noted in the chart above, the HIPAA/ACA test applies a reasonable design criteria only to health-contingent wellness programs, while the ADA rules apply to participation-only wellness programs that include HRAs and/or biometric testing.  In addition, the HIPAA/ACA rules require that participants have a chance to qualify for the full incentive at least annually, and must offer to waive incentive criteria, or offer a reasonable alternative standard, to permit equal participation by all similarly situated participants.  This is somewhat similar, but not identical, to the ADA reasonable accommodation requirement.  HIPAA/ACA also requires that notice of the waiver/reasonable alternative standard be provided.

Q.3: Do GINA wellness program regulations add any requirements?

A.3: Yes, if a spouse is requested to complete an HRA or undergo biometric testing, a separate incentive limit equal to 30% of the total cost of self-only coverage applies, and the spouse must sign a written, knowing and voluntary authorization to take part in the HRA or biometric testing.  The authorization must describe the genetic information being obtained (e.g. health history information in an HRA), how it will be used, and any restrictions on its disclosure.  Additionally, employers may not deny access to coverage or otherwise retaliate in the event a spouse refuses to provide HRA/biometric testing.

Q.4: What are the criteria of a “voluntary” wellness program under ADA regulations?

A.4: A wellness program is voluntary for ADA purposes if employees are not required to participate in the program, are not punished for not participating (e.g., not granted access to all health benefits or plan options), and are not subjected to adverse employment action, retaliation, coercion or other prohibited conduct in order to get them to participate, or to reach certain health goals. In addition, incentives are capped at the percentages shown in the chart, and participants are provided with a written notice re: collection and use of medical information.  The EEOC has provided a form of model notice.

Q.5: What does the model EEOC notice state, and is it mandatory or can we use our own version?

A.5: The notice, which should be provided prior to participation in an HRA or biometric exam, may be modified but must be written in language that recipients can understand, and must describe what medical information is collected, what measures will be used to protect its privacy and security, and must state that the information will not be sold, exchanged, transferred, or otherwise disclosed except as necessary and permitted under law in order to implement the wellness program.  Some of the provisions may repeat provisions of an existing HIPAA privacy notice.

Q.6: Can we email the ADA wellness program notice or must we distribute by hand?

A.6: You can email it so long as you are certain the email will reach the intended employees, e.g. through use of a current work email address, and so long as proper attention is brought to the nature of the notice (for instance, do not attach it to an email already containing a number of other, unrelated human resource forms or disclosures). You may also distribute in hard copy.  Your distribution method should take into account employee disabilities such as visual impairment, or learning disabilities.

Q.6: What confidentiality requirements apply under ADA regulations?

A.6: The employer must receive wellness data in aggregate form only, and may not require an employee to agree to the sale, exchange, sharing, transfer or other disclosure of medical information, or to waive ADA confidentiality protections, as a condition for participation.  Note that ADA confidentiality rules would apply to a wellness program not linked to a group health plan, and for a wellness program that is a health plan or is linked to one, HIPAA/ACA privacy, security and breach notification measures must also be followed.  These rules independently would prohibit the employer from viewing individualized health data.

Q.7: What is the impact of “de minimis” wellness incentives such as tee-shirts and water bottles?

A.7: The ADA regulations do not recognize a “de minimis” rule, thus the approximate dollar value of all “in-kind” incentives should be counted towards the 30% incentive limit.  By contrast, for federal income tax purposes, the IRS allows small items such as tee-shirts and water bottles to be excluded from participants’ taxable income as de minimis fringe benefits under Internal Revenue Code (“Code”) Section 132(e).  See IRS Memo 2016-22031, discussed below.

Q.8: How does the IRS treat cash incentives to participate in a wellness program treated under the Internal Revenue Code?

A.8: In IRS Memo 2016-22031 the IRS concluded that cash incentives to take part in a wellness program, or amounts paid or reimbursed for more than de minimis items that do not qualify as Code Section 213(d) medical expenses (such as gym memberships) are included in employees’ taxable income.  The same is true when an employer uses a wellness program to reimburse employees for premium or other coverage amounts withheld from their salary under a Section 125 cafeteria plan.

Q.9: What is the ADA’s  “insurance safe harbor” or “bona fide benefit plan” safe harbor, and can employers use it to justify a wellness program that does not meet the new ADA wellness program criteria?

A.9: The insurance safe harbor or “bona fide benefit plan” safe harbor permits the gathering of health data from employees so long as it is for underwriting or risk classification purposes, e.g., in order to determine insurability or establish premiums and other costs of coverage.   The safe harbor typically would apply to an insurance carrier but also could apply to a self-insured health plan.  In the past several years, a few employers have successfully used the safe harbor to prevail over EEOC federal court challenges to wellness programs that conditioned very high financial incentives on completion of an HRA or biometric testing; see, e.g., Seff v. Broward County, 691 F.3d 1221 (11th Cir. 2012); EEOC v. Flambeau, Inc., 131 F. Supp. 3d 849 (W.D.Wis. 2015).  The ADA regulations expressly make the insurance safe harbor unavailable to employers sponsoring wellness programs, but this does not resolve how the issue will be determined in federal courts.

Q.10: Are there other GINA regulations that impact wellness programs?

A.10: Yes, Title I of GINA applies to health insurance issuers and group health plans (including self-insured health plans), and prohibits requiring an individual to provide genetic information (including through answering a family history question on an HRA) prior to or in connection with plan enrollment, or at any time in connection with “underwriting purposes,” which broadly refers to any provision of a reward or incentive.  As a result of GINA Title I, a plan may use an HRA that requests family medical history only if it is requested to be completed after plan enrollment and is unrelated to enrollment, and if there is no premium reduction or any other reward offered.

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Filed under Affordable Care Act, Americans with Disabilities Act, Benefit Plan Design, Cafeteria Plans, Flex Plans, Fringe Benefits, GINA/Genetic Privacy, Health Care Reform, HIPAA and HITECH, PPACA, Wellness Programs

A Conversation About the DOL Fiduciary Rule (Audio File)

The Department of Labor recently published a final regulation defining a “fiduciary” for purposes of investment advice rendered for a fee with regard to “retirement accounts.” The final regulation marks the first change in the regulatory definition of this type of fiduciary since the regulation originally was published in 1975. Retirement accounts under the new rule include those held under qualified plans (e.g., 401(k), pension plans), which have always been subject to ERISA, and now for the first time with regard to IRAs, which formerly were subject only to Internal Revenue Code rules governing self-dealing and other forms of prohibited transactions that the Internal Revenue Service enforced through audits.  The new rule – together with new and amended prohibited transaction exemptions related to the rule – becomes applicable on April 10, 2017, with full implementation required on and after January 1, 2018.

Recently I was interviewed about the new definition of an investment advice fiduciary for an episode of Money Talk that KZSB (1290 AM) will broadcast a 2:00 p.m. PDT on June 20, 2016.  The interview provides a broad overview of the rule and how it will likely impact IRA investors, employers, and the investment industry.  Joining me were program hosts Dianne Duva, Partner at Arlington Financial Advisors, and Neil Kriesel, who worked in finance for many years, has taught at SBCC as an adjunct faculty member and serves on the SBCC Foundation Board and various other non-profit organizations.  Click below to listen.

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Filed under 401(k) Plans, Fiduciary and Fee Issues, Fiduciary Issues, IRA Issues, Uncategorized