FAQ on New 401(k) Coverage Rules for Long-Term, Part-Time Workers

With a stated goal of encouraging retirement savings, the Setting Every Community Up for Retirement Enhancement Act expands eligibility to make salary deferrals under a 401(k) plan to “long-term, part-time workers.” The new rules under the SECURE Act, which became law on December 20, 2019, ramp up between 2021 and 2024. However, some employer action is already required, as explained below. The following Frequently Asked Questions walks you through the new rules, including those contained in IRS Notice 2020-68, published on September 3, 2020.

Q.1: What are the current rules for excluding part-time, seasonal, and temporary employees under 401(k) and other retirement plans?

A.1: Even of you exclude these categories by name, you must still track their hours of service and include them in the plan on the entry date coinciding with or following their completion of 1,000 or more hours of service within a 12-month period (or, if later, upon also attaining a minimum age not exceeding 21). This is required under Section 401(a) of the Internal Revenue Code. Different rules applicable under Section 403(b) plans are outside the scope of this FAQ.

Q.2: Over what period do you count the 1,000 hours of service?

A.2: You count them over an “eligibility computation period.” The first eligibility computation generally starts upon the date of hire and ends on the first anniversary of that date. The plan may then continue to use the anniversary of hire, or switch to a plan year cycle.

Example – Switch to Plan Year Cycle: Kyle is hired on June 15, 2021 under a plan that follows a calendar year cycle and uses quarterly entry dates. Kyle works 700 hours between June 15, 2021 and June 14, 2022, the first anniversary of hire. Kyle does not enter the plan on July 1, 2022. Kyle completes 1,000 hours between January 1, 2022 and August 15, 2022 and enters the plan on October 1, 2022.

Q.3: What is a “long-term, part-time worker”?

A.3: Section 112 of the SECURE Act defines a long-term, part-time worker as an employee who has worked 500 or more hours in each of 3 consecutive 12-month periods, and who has attained a minimum age, not to exceed 21, as of the end of that 36-month period. The 12-month eligibility computation periods may be based on the anniversary of hire or may switch to the plan year cycle as described above.

Q.4: What eligibility rules apply to long-term, part-time workers?

A.4: An employee who qualifies as a long-term, part-time worker must be allowed to make employee salary deferrals under a Section 401(k) plan as of the first applicable entry date following completion of the 36-month period. A plan is allowed to use 6-month entry dates for long-term, part-time workers (e.g., January 1 and July for a calendar year plan) or may use regular quarterly, monthly, or other entry dates for this group.

Q.5: When do you begin tracking hours of service for long-term, part-time workers?

A.5: You begin tracking on January 1, 2021. That means the first point at which an employee will qualify for participation in a 401(k) plan as a long-term, part-time worker is January 1, 2024.

Q.6: Must long-term, part-time workers receive matching contributions or other employer contributions?

A.6: No, only eligibility to make salary deferral contributions is required. However, an employer may voluntarily make long-term, part-time workers eligible for matching and other employer contributions.

Q.7: If we choose not to, does that mean we don’t have to track hours of service towards vesting, for long-term, part-time workers?

A.7: No, you must track hours of service towards vesting, even if you don’t make employer contributions for this group. That is because, if a long-term, part-time worker later meets the plan’s conventional eligibility requirements, the worker joins the plan as a “regular” participant as of the first subsequent plan year, and may become eligible for matching and other employer contributions at that point. All of the worker’s hours of service must be counted towards vesting at that point. If these are hourly workers, you may be tracking their hours of service automatically, as it is.

Q.8: Do special rules apply to tracking vesting service for long-term, part-time workers?

A.8: Yes. Notice 2020-68 provides that you count each year in which an employee has at worked least 500 hours of service as a year of service counted towards vesting. Further, you count all years of service with the company in which they reach that threshold, not just years of service worked from January 1, 2021 and onward (as you do for eligibility purposes). If the plan language allows, you may disregard only years worked before attaining age 18, years worked before the plan was adopted, or years that may be disregarded under specially modified break in service rules.

Q.9: Are the break in service rules modified for long-term, part-time employees?

A.9: Yes. Normally, a break in service is defined as a year in which an employee has not completed more than 500 hours of service. For long-term, part-time workers, it is defined as a year in which the employee did not complete at least 500 hours of service.

Q.10: Can a plan still exclude employees based on job function or job location, such as “employees at Location B,” without violating the long-term, part-time worker coverage rules?

A.10: Presumably, reasonable, job-based exclusion criteria that pass minimum coverage testing are still permissible and are not preempted by the long-term, part-time worker coverage rules, but more guidance from the IRS would be appreciated. Employers with specific questions should consult benefit counsel for individualized guidance.

Q.11: Are long-term, part-time workers counted towards nondiscrimination testing, including ADP/ACP, and minimum coverage testing?

A.11: No, you are not required to count them under these tests.

Q.12: Are you required to make minimum top-heavy contributions on behalf of long-term, part-time workers?

A.12: No, you are not required to do so.

Q.13: Do the long-term, part-time worker coverage rules apply to employees subject to a collective bargaining agreement?

A.13: No, they do not apply to collectively bargained employees.

Q.14: Instead of tracking new hires over 3 years, should I just allow all employees who complete 500 hours of service to participate in the salary deferral portion of my 401(k) plan as of the next entry date?

A.14: That is certainly a simplified alternative to the minimum requirements, and presumably the exceptions from nondiscrimination testing and top-heavy contributions would continue to apply to employees meeting these reduced eligibility criteria. However this route could bring its own complications, by increasing your plan participant headcount over the 100 participant threshold sooner than is required. See Q&A 17.

Q.15: How will the long-term, part-time worker rules apply to plans with automatic enrollment?

A.15: The SECURE Act currently only refers to the minimum semi-annual entry dates for long-term, part-time workers, so it would appear that the automatic enrollment provisions would not apply to them. More guidance would on this topic would be appreciated, however.

Q.16: What if my plan doesn’t use actual hours to track service, but instead uses the equivalency method (e.g., 45 hours credited per week, if any service is performed in the week)?

A.16: It would appear that you can continue to use this method of tracking service for employees who meet conventional eligibility criteria, and use actual hours to track eligibility of long-term, part-time workers. Nothing in the SECURE Act prohibits use of the equivalency method for tracking service of long-term, part-time workers.

Q.17: Should we just create a new, separate 401(k) plan for long-term, part-time workers?

A.17: That depends. As it stands, it appears that employees who meet the criteria of long-term, part-time workers – whether or not they actively defer under the plan – will be included in the plan participant headcount on the first day of a plan year. This headcount is used to determine whether or not the plan has 100 or more participants and must include an independent qualified auditor’s report with its 5500 for a given year. If inclusion of your long-term, part-time workers will push your existing plan over the 100 participant threshold, you might give thought to separating them out in a separate plan, such that both of your plans will be under the audit threshold. Both plans would still have to file a Form 5500-SF each year, of course.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. (c) 2020 Christine P. Roberts, all rights reserved.

Photo Credit: Gabriella Clare Marino, Unsplash

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Not “Wired at Work”? New DOL E-Disclosure Rule is Here to Help

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Note:  This article was originally published by The Bureau of National Affairs, Inc. (Bloomberg Industry Group) (“INDG”) on August 7, 2020 at www.bloombergindustry.com.  Reproduced with permission from © 2020 The Bureau of National Affairs, Inc. (800-372-1033).

On May 21, 2020, the DOL announced final regulations that describe new “safe harbor” procedures for electronic delivery of required ERISA retirement plan disclosures (e-disclosure) such as Summary Plan Descriptions, quarterly or annual account statements, and other items. The new safe harbor procedures are an addition to the DOL e-disclosure rules that date back to 2002, and represent an improvement on the 2002 rules for employees who are not “wired at work,” as defined in those regulations.

The safe harbor procedures took effect July 27, 2020. A plan administrator that relied on the safe harbor before that date wouldn’t be subject to an enforcement action, the DOL vowed.

What is “Wired at Work”?

As defined in the 2002 DOL e-disclosure rules, a plan participant is “wired at work” if they meet both of the following requirements:

• They have the ability to effectively access electronic documents at any location where they reasonably could be expected to perform their employment duties.

• Their access to the electronic information system is an integral part of those employment duties.

This generally will mean someone with a desk that has a computer on it who needs the computer in order to do his or her job. “Computer” for these purposes means a laptop, notebook/tablet, or desk console computer that has an email account. Access to a computer connected to a medical or other electronic device, or a “kiosk,” does not suffice to make someone “wired at work.”

The “not wired at work” category would include active employees who work away from a desk, for instance in the agricultural, hospitality, healthcare, or retail sectors, and it would also include former employees who retain a plan account, beneficiaries of deceased plan participants, and alternate payees under a qualified domestic relations order.

The typical plan sponsor will have a mix of wired at work, and not wired at work, plan participants. For instance a hospital will have administrators who work in front of a desktop computer and who are wired at work. It will also have nurses and medical techs who primarily see patients and who may interact with electronic medical devices, and periodically use a computer at a nursing station, but who are not considered “wired at work” for purposes of the 2002 safe harbor.

How does a plan sponsor determine wired at work status for employees working remotely, whether due to COVID-19 or otherwise? Remote work was fairly rare when the 2002 regulations were published and they are silent on the topic. Common sense would suggest that an employee who met the wired at work criteria in an office setting remains wired at work when performing the same tasks at home, but circumstances may vary. Both the 2002 and 2020 e-disclosure regulations require that confidential information be safeguarded, and remote work arrangements will likely require extra data security efforts to ensure this requirement is met.

2002 Safe Harbor E-Disclosure for Not Wired at Work Populations

The 2002 safe harbor e-disclosure rules consist of, including tracking message receipt, and offering hard copy disclosures, and then separate procedures for wired at work and non-wired at work groups. Individuals who are not wired at work are required, under the 2002 safe harbor, to affirmatively consent to receive electronic delivery of ERISA disclosures. The consent may be delivered electronically provided the plan sponsor obtains a working email address for individuals in this group. Consent is only valid following provision of a statement in which you:

• Identify the documents or types of documents to which the consent applies (e.g., Summary Plan Descriptions, Summaries of Material Modification).

• Specify that the individual may withdraw consent at any time and describe how they may update electronic contact information or withdraw electronic consent (e.g., by email to a human resources manager with “Consent Withdrawn for Electronic Disclosure” in the subject line).

• Explain the individual’s right to request a paper copy (without charge, in the case of an SPD).

• Describe the electronic disclosure system and what software and hardware are needed to use it.

If the plan administrator later changes its hardware or software related to electronic disclosure, or otherwise makes changes that impact access to the system, it must provide notice of the changes and obtain a renewed consent to electronic disclosure from individuals in this group.

By contrast, e-disclosure to individuals who are wired at work need only meet the core disclosure rules. The plan sponsor may attach an electronic SPD or other ERISA disclosure to an email to these employees, or may email them the link to the disclosure document stored on a secure online location. The email in which the sponsor provides the attachment or the weblink can set forth the “Notice re: Electronic Disclosure” that is required for each instance of e-disclosure. There is no need to get their express consent to electronic disclosure.

2020 Safe Harbor Rules E-Delivery Rules for All Populations

The 2020 safe harbor uses a “notice and access” format for all intended recipients, and does not distinguish between wired at work, and not wired at work status. Everyone first must receive an initial hard copy notice about the new e-disclosure system that informs them of the right to globally opt-out of e-disclosure. They in turn must supply an electronic address, consisting of either an email address or a smartphone phone number. An employer-assigned electronic address suffices so long as it is provided for a job purpose other than receiving electronic ERISA disclosures. In essence, under the new safe harbor method everyone establishes themselves as “wired” irrespective of work, by supplying the electronic address.

Then, each time an ERISA disclosure is provided electronically, a Notice of Internet Availability or “NOIA” is sent to the electronic addresses. Note, certain disclosures may be bundled together. In the proposed regulations for the new safe harbor, the NOIA only notified of an online posting, but the final 2020 regulations allow disclosures to be made in the body of, or via attachment to, an email that sets forth the contents of the NOIA. The new e-disclosure rules also sanction the use of an app for electronic delivery of ERISA disclosures.

For participant populations who are not wired at work, the advantages of the notice and access format over the 2002 safe harbor method are clear. There is no longer a need to obtain consent to electronic disclosure, just a requirement to collect an electronic address (and to make sure it remains accurate when an individual separates from service). Cumbersome updates about software or system changes are eliminated. Nor is there the need to monitor the not-wired at work group for opt-outs from electronic disclosure, as the opt-out occurs at the initial paper notice stage. Note, individuals can reverse the opt-out by supplying an electronic address to the plan administrator at any time.

Choosing Which Safe Harbor Rule(s) to Use

Each plan sponsor will need to evaluate its plan participant sub-populations before choosing which e-disclosure safe harbor method or methods to use for retirement plan disclosures going forward.

For instance, an engineering firm whose entire population of active employees is wired at work may be content with the 2002 safe harbor e-disclosure method and may not want to switch to the 2020 safe harbor method, which would require an initial paper notice to all plan account holders notifying them of the new e-disclosure procedures. However, the same employer may want to switch to the 2020 safe harbor method for former employees who retain account balances, and for beneficiaries and alternate payees. Of course, only the 2002 safe harbor e-disclosure methods are permitted, at this juncture, for health and welfare disclosures.

By contrast, a grocery store chain with wired at work administrative and management staff, and not wired at work checkers and other employees working in the stores, may want to either switch entirely to the 2020 safe harbor e-disclosure method, or roll it out only for the not wired at work active employees, and for former employees with plan accounts, beneficiaries, and alternate payees. Many plan sponsors may end up with a patchwork resembling the following, at least until updated e-disclosure rules for health and welfare plan disclosures are announced:

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The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. 

Photo credit: Tyler Nix, Unsplash.com

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Filed under 401(k) Plans, 403(b) Plans, E-Disclosure, ERISA, Plan Reporting and Disclosure Duties

Court Upholds Exclusion of Surrogate Pregnancy Costs, But Pitfalls Remain

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In an unpublished opinion*, the 10th Circuit Court in Moon v. Tall Tree Administrators, LLC (10th Cir. May 19, 2020) upheld a self-insured group health plan’s exclusion of “pregnancy charges acting as a surrogate mother” as unambiguous and enforceable, even though that exclusion was nested within a larger exclusion of “[n]on-traditional medical services, treatments, and supplies.”

In the case, Moon, an employee of Mountain View Hospital in Utah and a participant in their self-insured group health plan, asked the third party administrator in 2011 whether surrogate maternity expenses were covered and was told that they were not.  Moon underwent a surrogate pregnancy in 2013 without notifying the plan and her expenses were covered.  She agreed to act as a surrogate again in 2015, but this time the plan denied coverage for her pregnancy expenses under the cited exclusion.  Moon argued that her expenses were conventional prenatal and childbirth expenses and that because the exclusion for surrogacy expenses was nested within a larger exclusion of “non-traditional” services and treatment, it was not applicable.  The district court disagreed, and granted summary judgement for the plan.

Because it was decided on summary judgment, the 10th Circuit reviewed the matter “de novo” – i.e., as a trial court would, rather than under the “abuse of discretion” standard of review applicable under Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989) when the plan document expressly accords discretion to the plan administrator to interpret the terms of the plan document.

The 10th Circuit affirmed enforcement of the exclusion on the grounds that “a reasonable person in the position of the participant would view ‘pregnancy charges acting as a surrogate mother’ as an example of a non-traditional medical expense” and hence as excluded care.  Perhaps illustrating the legal maxim that “bad facts make bad law,” it is impossible to tell whether the court’s conclusion was tainted by the fact that the plaintiff proceeded with two separate surrogate pregnancies after confirming that that the plan did not cover this type of expense.

In an earlier case, Roibas v. EBPA, LLC, 346 F. Supp. 3d, 164 (D. Maine 2018), the exclusion simply stated “[e]xpenses for surrogacy,” and a dispute arose as to whether that referred to the cost of hiring a surrogate, or the surrogate’s own pregnancy and childbirth expenses.  The plan had already covered some prenatal coverage before learning that it was a surrogate pregnancy and denying subsequent claims.  Acknowledging that the exclusion was ambiguous, the Maine District Court upheld it out of deference accorded to the plan administrator’s interpretation of the ambiguous plan term (the Firestone standard of review applied), and based on the conclusion that the plan administrator’s interpretation was reasonable.

For sponsors of self-insured health plans, these cases highlight the importance of careful drafting of plan exclusions, particularly in an area like surrogate births where medical advancements and social trends are evolving fairly rapidly.  They also provide an inflection point to examine some of the other legal pitfalls of excluding surrogate pregnancy costs from coverage.

First, there is a practical concern presented by not always being able to know when a participant or dependent’s pregnancy is for surrogacy purposes.  The plans in both the Moon and Roibas cases unwittingly reimbursed some surrogate pregnancy expenses before terminating coverage.  Because the facts of surrogacy are not always transparent, the plan sponsor may have difficulty consistently enforcing even unambiguous exclusions of surrogate pregnancy expenses.   This could potentially lead to fiduciary breach charges.  Plan sponsors may also be hard pressed to justify denying the costs of an intended surrogate pregnancy while covering the maternity expenses of a participant who intends to permit the child to be adopted.

As for legal concerns, there are two salient ones.  First, the Pregnancy Discrimination Act, applicable to employers with 15 or more employees, mandates that a group health plan cover pregnancy in the same manner as other medical conditions, making it difficult for a plan sponsor to justify excluding coverage of a pregnancy based on the way in which the mother became pregnant or on their plans for the child, once born.  Second, for non-grandfathered group health plans under the Affordable Care Act, the Act requires first-dollar coverage of preventive services including prenatal and post-natal care.  The ACA does not carve out surrogate pregnancies in this regard.  There are also potential tax consequences to providing surrogacy benefits, and fertility benefits, that are reviewed in some detail here.

As an alternative to a coverage exclusion, group health plan sponsors who want to limit the use of their plan benefits by individuals who may be compensated for a surrogate pregnancy may give thought to applying their plan’s right of reimbursement and subrogation to compensation that the participant receives.  Subject to state insurance law, this is generally how group health insurance carriers approach the issue, covering the cost of surrogate prenatal care and delivery but seeking reimbursement, or asserting subrogation rights, thereafter.**

To take this approach essentially equates the compensation paid to a surrogate by a couple struggling with infertility, to the recovery an injured participant receives from a third party tortfeasor.  Plan sponsors may have varying levels of comfort with this approach and should certainly seek ERISA counsel first, as well as counsel with expertise in surrogacy laws, as they vary significantly state to state.

*Unpublished opinions generally are not binding precedent but may be cited for persuasive value. The 10th Circuit covers the district courts of the states of six states of Oklahoma, Kansas, New Mexico, Colorado, Wyoming, and Utah, plus those portions of the Yellowstone National Park extending into Montana and Idaho.

**Effective January 1, 2020, Nevada is a notable exception to other states in this regard, banning carriers from denying coverage for surrogate pregnancies and from seeking reimbursement, subrogation, etc.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2020 Christine P. Roberts, all rights reserved.

Photo Credit: Christian Bowen, Unsplash.

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Filed under Affordable Care Act, ERISA, Fiduciary Issues, Health Care Reform, PPACA, Preventive Care, Self-Insured Health Plans, Surrogacy Expenses, Uncategorized

CARES Act Student Loan Benefits Can Aid Employees of Essential Businesses

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In these troubled times, not all employers are eliminating benefits and reducing staff – essential businesses such as healthcare providers, grocery and pharmacy chains, high-tech and certain nonprofit organizations such as food banks, are actually adding staff (with Amazon and Walmart being obvious examples).

Those essential businesses that are adding to payroll or are asking extraordinary efforts from their existing employees should consider making tax-advantaged payments towards employees’ student loans through a new CARES Act measure made available from March 27, 2020 (the CARES Act adoption date), through the end of this calendar year. The CARES Act provision is not in any way limited to essential employers, but by necessity these may be the only employers who are in a financial and staffing position to give the measure serious consideration at this time.

The measure is an add-on to existing Section 127 of the Internal Revenue Code which currently allows employers to provide eligible employees with tax-free educational assistance of up $5,250 per year provided certain conditions are met.  Section 127 plans are sometimes referred to as qualified educational assistance programs or EAPs.  Permitted types of educational assistance include tuition, fees, and books, for a broad range of educational pursuits, including graduate degrees, which need not be directly job-related.  Employers can pay the amounts directly to educators or can reimburse employees after the fact.

Under Section 2206 of the CARES Act, the annual maximum benefit remains the same, but “educational assistance” is expanded to include direct payment or reimbursement of principal and interest payments to a provider of any qualified education loan as defined under 26 U.S.C. 221(d).  Notably, the CARES Act does not change the maximum annual budget.  In other words, employers could “spend” the $5,250 per year for a single employee three different ways:

  • by using the entire budget for tuition;
  • by using the entire budget for student loan payments; or
  • by making a combination of tuition payments and student loan payments, with the total not exceeding $5,250.

There are some other requirements to offer this benefit. There must be a written plan document that sets forth the following information:

  • the group of employees eligible to receive benefits, which must not discriminate in favor of highly compensated employees, defined as those owning more than 5% of the employer company, or earning in excess of $125,000 in 2019;
  • the types of benefits offered, e.g., tuition assistance, student loan repayments, or either/both, subject to the dollar limit;
  • the annual dollar limit (currently $5,250 is the maximum amount but an employer can choose a lower amount); and
  • any applicable limitations on benefits, such as the requirement to pay benefits back in the event the employee leaves employment within one year after receiving the tuition or loan repayment assistance. Some tuition assistance programs may also impose a requirement that a certain grade level be attained.

In addition:

  • benefits must be 100% employer-funded, and not in any way offered as an alternative to employees’ existing or additional cash compensation; and
  • there must be substantiation of use of the tax-qualified dollars for permitted tuition or student loan repayments.  This may be automatic where the employer makes direct payments to educators or student loan vendors, but additional steps are needed if these amounts are reimbursed after employees incur them directly.

The CARES Act is drafted in a way that suggests an employer must have an EAP in place, to which this new feature is added, but employers should be able to adopt an EAP this year, and either limit it to student loan repayments, or make it a traditional educational assistance program with student loan repayments one of the forms of educational assistance, alongside qualifying types of tuition, fees, etc.

Although this measure is meant to sunset at the end of this year, if there is meaningful uptake by essential employers there is a greater chance that it could be extended, perhaps indefinitely. Especially if the annual dollar limit is adjusted upwards to track inflation (or, better yet, the more rapidly increasing inflation in education costs), tax-advantaged student loan repayments could remain a useful means of attracting and retaining qualified employees both during and after the COVID-19 pandemic.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2020 Christine P. Roberts, all rights reserved.

Photo Credit: Andre Hunter, Unsplash.

 

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Layoffs, Reductions in Force, and 401(k) Plans

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Many business owners, employment law counsel and benefit advisors are grappling with reductions in force/layoffs due to the unprecedented business and economic impact of COVID-19. I wanted to flag for you, briefly, a retirement plan compliance issue that these staff reductions can trigger. The rule applies to all qualified retirement plans not just 401(k) plans; special issues exist if your client has a defined benefit/pension plan, or if it has collectively bargained benefits.

The issue is this: the IRS established in Revenue Ruling 2007-43 that when employer action – including as a result of an economic downturn – results in 20% or more of the plan population being terminated from employment, then a presumption arises that everyone affected must be fully vested in their employer contributions under the plan. This is called a “partial plan termination.”

This is relevant only if the retirement plan has employer contributions, such as matching or profit sharing contributions, that are subject to a vesting schedule. Safe harbor contributions are always 100% vested as are employee salary deferrals.

The way the employer determines the 20% threshold is as follows:

  • Start with the number of participants on the first day of the plan year which will also be the number of participants on the last day of the prior plan year, on Form 5500. For 401(k) plans you look at who is “eligible” to make salary deferrals not just those who actually make salary deferrals or otherwise have a plan account.  (IRS Q&A with ABA from May 2004, Q&A 40).
  • Add new participants (eligibles) added during the plan year in progress.
  • Take that total number, and divide by the number of participants (eligibles) experiencing employer-initiated termination of employment.
  • In all cases, count both vested and nonvested participants (eligibles).

If you are at 20% or more you have a presumed partial termination. Certain facts can rebut this presumption such as very high normal turnover but this message is meant to address reductions in force related to COVID-19 which are employer-initiated due to outside forces and thus the presumption would likely not be rebuttable.

If you meet or exceed 20% then all persons directly terminated by the employer during the year must be fully vested in their employer contributions. The IRS also recommends you fully vest collaterally-affected employees such as those who leave voluntarily, as often those voluntary departures are triggered by concern over the company’s future in light of the involuntary terminations. Even if the reduction in plan population is under 20%, a potential partial plan termination may have occurred depending on all of the facts and circumstances.

The period of a partial termination may exceed a single plan/calendar year in some cases but in the instance of COVID-19, with any luck, we will only be looking at 2020.

Fully vesting folks does not cost the employer money because the money is already in the plan. However if this is not done correctly it is a complicated and expensive fix “after-the-fact.”

Generally there is not a requirement to notify participants of full vesting as a result of partial termination at the employer level but it might be mentioned in distribution paperwork according to the practices of the client’s plan recordkeeper.

Partial terminations raise a number of other ERISA compliance issues – as does the COVID-19 crisis as a whole – so let me know if questions arise.

Wishing all readers safe passage through the next weeks and months.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2020 Christine P. Roberts, all rights reserved.

Photo Credit: Markus Spiske, Unsplash.

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Filed under 401(k) Plans, COVID-19 Benefits Issues, ERISA, Profit Sharing Plan

COVID-19 and Changing Dependent Care Assistance Plan Elections

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Many employers are instructing employees to work from home in order to help in containing the spread of COVID-19.  Other persons are simply experiencing reduced work schedules, for instance in the travel industry.  Many school districts are announcing closures, and private childcare settings such as daycare, onsite child care and after-school activities are also closing in order to minimize the spread of transmission.

Needless to say, these developments are disrupting childcare arrangements that were expected to be in place when employees made salary deferral elections under their employers’ dependent care assistance plans (DCAPs) during open enrollment periods.  As a general rule, elections made under a DCAP are required to remain in place for a full plan year, absent a change in status, in which case a participant may change their election on a prospective basis in a manner that is on account of, and consistent with, the change of status.  Treas. Reg. Sec. 1.125-4(c)(1).

When can parents affected by these scheduling gyrations make mid-year elections under their dependent care flexible spending account, to change amounts set aside pre-tax for child care?  The answer depends, of course, on the factual circumstances.

School closure itself does not squarely fit within the existing regulatory categories of changes in status.  The closest analogy might be a change from one child care provider to another which results in a cost change.  It is possible that subsequent guidance from the IRS will clarify that school closure that results in the need for childcare expenses, is a permissible grounds for a mid-year election change.   By contrast, a reduction in child care costs due to closure of a daycare center or onsite childcare facility is a recognized basis for a participant to reduce or eliminate future deferrals.

With regard to parent working schedule changes, the guidance is is also clear in many, but not all, instances.  Take the airline worker whose schedule has been reduced from full-time to part-time, so they are home several hours per week and can care for their child who would otherwise be in daycare.  This is a permitted basis to change their salary deferral to reduce the amount set aside for dependent care.   

What about the hospital worker whose schedule has gone from part-time to full-time as a result of the health crisis and needs more childcare as a result?  That person could prospectively increase their DCAP elections on the same basis.  

What about the engineer who is working full time, but from home, at the recommendation of their employer, and wants to take their child out of daycare?  Technically if they are still expected to work eight hours per day, they have not had a schedule reduction and arguably don’t have grounds to make an election change.  However if the engineer’s spouse was laid off as a result of the health crisis and was available to care for their children at home for free, that might be an independent reason for a reduction in salary deferrals.

Due to the national state of emergency that has been declared, it is possible that everyone will be confined to their homes in the near future and that childcare workers simply will not be available.   In such a case, DCAP election changes will be the least of our worries.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader.  Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  © 2020 Christine P. Roberts, all rights reserved.

Photo Credit:  Dan Burton (Unsplash)

 

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Filed under Cafeteria Plans, COVID-19 Benefit Issues, DCAP, Dependent Care, Flex Plans

2020 Benefits Update

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This PowerPoint deck covers:

  • SECURE Act mandatory and optional changes for employers that currently sponsor 401(k) or other defined contribution plans,
  • Proposed Department of Labor Regulations creating a safe harbor for posting certain retirement plan disclosures online, and
  • A quick update on the statuses of ACA repeal and the CalSavers program, respectively.

It was originally presented on March 4, 2020 as part of my firm’s 24th annual Employment Law Conference, held at the Four Seasons Biltmore, Santa Barbara, California.  As with all information posted here, it is provided general informational purposes only and does not create an attorney-client relationship between the author and the reader.  Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  © 2020 Christine P. Roberts, all rights reserved.

Photo by Lora Ohanessian on Unsplash

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Filed under 401(k) Plans, 403(b) Plans, ADP and ACP Testing, Affordable Care Act, Benefit Plan Design, California Insurance Laws, California Secure Choice Retirement Savings Program, CalSavers Program, ERISA, Health Care Reform, Profit Sharing Plan, Qualified Birth or Adoption Distribution, SECURE Act, State Auto-IRA Programs

Rust Never Sleeps: ACA Large Employer Tax Liability is Forever

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Ordinarily under the Internal Revenue Code (Code), when a taxpayer files a return reporting tax liability (or absence thereof), the filing of the return triggers a period of time during which the IRS can challenge the reported tax liability.  This period is referred to as a “statute of limitations” and the customary period under Section 6501(a) of the Code expires three years after the “return” is filed.  As is explained below, a form must meet certain criteria to be considered a “return” that, once filed, starts the statute of limitations running.

The IRS Office of Chief Counsel has stated, in a memorandum dated December 26, 2019, that because there is no actual return filed reporting ACA taxes owed by Applicable Large Employers (ALEs) under Code Section 4980H, the statute of limitations on the IRS’s ability to collect the taxes never begins to run, even though ALEs annually file Form 1094-C transmittal forms with IRS each year, along with copies of Form 1095-C statements furnished to full-time employees (and part-time employees covered under self-insured group health plans).  Therefore, ALEs remain potentially liable for Code Section 4980H excise taxes for an indefinite period.  The IRS has been actively collecting ACA taxes from Applicable Large Employers owed for calendar years since 2015 and presumably will continue to do so.  This significant amount of potential tax liability will only grow, not wear away, under the IRS stated policy.

Below we spell out how the IRS concluded that it has an open-ended ability to assess ACA penalties.

By way of background, the IRS uses the term “Employer Shared Responsibility Payments” or “ESRP” to refer to the excise tax imposed on Applicable Large Employers under Code § 4980H if they don’t meet their ACA duties to offer affordable, minimum value or higher coverage to full-time employees.

There are two different taxes:

  • The 4980H(a) tax which applies if at least one full-time employee qualifies for premium tax credits on an exchange, and the employer fails to offer minimum essential coverage to at least 95% of its full time employees (or all but 5 of its full-time employees, if 5 is greater than 5%). This tax, currently set at $2,570 annually, is calculated by multiplying that amount times all full-time employees, minus the first 30.  (The tax was $2,500 for 2019).  Depending on the number of full-time employees, this tax can mount quickly.
  • The 4980H(b) tax applies if the employer fails to offer affordable, minimum value or higher coverage to that employee. This tax, currently set at $3,860 annually, is calculated by multiplying that amount times only the number of those full-time employees who qualify for premium tax credits on the exchange.  (The tax was $3,750 for 2019).  This tax can never exceed in amount what the ALE would owe under the (a) tax if it did not offer minimum essential coverage.

It is important to note that Applicable Large Employers do not calculate or report ESRP amounts on corporate or other business tax returns or on any other type of “penalty” return, even though other types of excise taxes are reported on dedicated IRS forms (e.g., Form 5330, Return of Excise Taxes Related to Employee Benefit Plans).

Instead, ALEs annually file with the IRS Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, together with copies of the individual Form 1095-C Employer-Provided Offer and Coverage statements furnished to full-time employees.  Using this information, the IRS determines which full-time employees might have triggered an ESRP each month in a given year based on the reported offer of coverage (or lack thereof), their employment status for the month, and, among other factors, the cost of coverage offered for the month.  The IRS also receives reports from the exchanges (Form 1094-A Health Insurance Marketplace Statement) on advance payment of premium tax credits to individuals.  By checking the employees’ Form 1040 returns, the IRS then determines, based on household income, which of those full-time employees were entitled to retain some or all of the premium tax credits advanced to them by the exchanges.  Full-time employees’ retention of premium tax credits, teamed with the information reported on Forms 1094-C and 1095-C, triggers imposition of the ESRP on the Applicable Large Employer.  The IRS notifies the ALE of its intention to assess ACA penalties via Letter 226-J, related forms, and subsequent correspondence.

Applicable Large Employers have advocated that Form 1094-C and attached employee statements are returns that, when filed, trigger the three-year statute of limitations under Code Section 6501.  In its memorandum, the Office of Chief Counsel concludes that this is not the case, because the data disclosed on Forms 1094-C and 1095-C is insufficient to calculate tax liability – it only provides part of the information the IRS needs to calculate the tax, the rest of which is obtained from the exchanges, and from full-time employees’ tax returns.  Disclosure of information that is sufficient to calculate tax liability is one of four criteria used to determine when a tax form, when filed, is sufficient to trigger the running of the statute of limitations, as set forth in Beard v. Commissioner, 82 Tax Court 766, 777 (1984), aff’d. 793 F.2d 139 (6th Cir. 1986).[1]

Because the ACA forms do disclose sufficient information to calculate tax liability and thus do not trigger the “filed return” statute of limitations, any other applicable statute of limitations would have to be set forth by Congress in Section 4980H itself.  Citing numerous federal cases holding that no statute of limitations may be imposed absent Congressional intent, and noting that Section 4980H contains no statute of limitations, the memorandum concludes that the Service is not subject to any limitations period for assessing Section 4980H payment.

What this means to Applicable Large Employers is that they now have an added incentive, in the form of minimizing open ended potential tax liability, to ensure that they are offering affordable, minimum value or higher coverage to their full-time employees for so long as the ACA’s ESRP provisions remain in place.  They must also continue to timely and accurately file and furnish Forms 1094-C and 1095-C, respectively, as failing to do so triggers its own tax penalties, which were recently increased.  However, because these Forms do not trigger running of any statute of limitations on collection of the underlying Section 4980H excise tax, there is no “value add” in ongoing ACA reporting compliance.

[1]  The other criteria are that the document must purport to be a return, there must be an honest and reasonable attempt to satisfy the requirements of the tax law, and the taxpayer must execute the return under penalties of perjury.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader.  Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  © 2020 Christine P. Roberts, all rights reserved.

Photo credit:  Annie Spratt (Unsplash)

 

 

 

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Filed under Affordable Care Act, Applicable Large Employer Reporting, Covered California, Employer Shared Responsibility, Federally Facilitated Exchange, Health Care Reform, Health Insurance Marketplace

As Out-of-Pocket Childbirth Costs Soar, SECURE Act Offers Relief

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Effective January 1, 2020, the SECURE Act exempts new parents from the 10% penalty tax that ordinarily would apply to retirement plan or IRA withdrawals before age 59.5, for distributions of up to $5,000 on account of a “qualified” birth or adoption.  This new optional plan feature is called a “Qualified Birth or Adoption Distribution” or QBAD.

The timing could not be more apt.  The out-of-pocket costs of childbirth for women with health insurance have been reported to have increased 50% between 2008 and 2015 (citing Health Affairs study; subscription required.)  The same sources report that, with employee health insurance, the average out-of-pocket cost for hospital-assisted childbirth is approaching $5,000.  The costs of a domestic, private adoption can be much higher, approaching $40,000, although parents who adopt may qualify for an adoption tax credit of up to $14,300 per child in 2020, or tax-qualified employer provided adoption benefits under Internal Revenue Code Section 137.

How will the new QBAD work?

  • As mentioned, the distribution cannot exceed $5,000 per child
  • Children must not have attained age 18 (or, if older, be physically or mentally incapable of self-support) and must not be the child of the taxpayer’s spouse
  • The dollar limit applies per parent, so a couple could each qualify for the dollar limit unless an employer plan provides otherwise
  • The distribution must be taken after the date of birth or date on which adoption is finalized and within one year of the birth or adoption event.
  • Distributions can be repaid back to the qualified plan or IRA notwithstanding normal contribution dollar limits; the repayment will be treated as the equivalent of a rollover contribution for these purposes
  • Future regulations may specify timing rules for the repayment process
  • The parent must include the name, age, and taxpayer ID (SSN) of the child on his or her tax return.

Plans and IRA custodian/trustees will likely allow the distributions to occur in 2020 but ultimately a plan amendment – or amendment to an IRA custodial account or trust agreement – is required for this option to be available.  For qualified plans, the amendment deadline will generally be the last day of the first plan year beginning on or after January 1, 2022 and the amendment must be effective retroactively to January 1, 2020, or a later date on which the date the QBAD is first implemented.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader.  Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  © 2020 Christine P. Roberts, all rights reserved.

Photo credit:  Randy Rooibaatjie (Unsplash)

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Filed under 401(k) Plans, 403(b) Plans, Benefit Plan Design, ERISA, Fringe Benefits, IRA Issues, QBAD, Qualified Birth or Adoption Distribution, SECURE Act

2020 COLA Adjustments Announced

rodney-the-architect-Fqn4hiQ-Rnk-unsplash.jpgOn November 5, 2019, the IRS announced 2020 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.  The maximum limit on salary deferral contributions to 401(k) and 403(b) plans increased $500 to $19,500 and a number of other dollar limits increased.  Citations below are to the Internal Revenue Code.

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In a separate announcement, the Social Security Taxable Wage Base for 2020 increased to $137,700 from $132,900 in 2019.

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