Category Archives: ERISA

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

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

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

Few Changes Are Made to 2016 Benefit Plan Limits

On October 21, 2015 the IRS announced 2016 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.   There are few changes to be noted, as the increase in the cost-of-living index stayed below many thresholds necessary to trigger adjustments. Citations below are to the Internal Revenue Code.

Limits That Remain the Same for 2016 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 limit, currently $6,000, also remains the same. For 2016 as in this year, the maximum plan deferral an individual age 50 or older may make is $24,000.

–Maximum total annual contributions to a 401(k) or other “defined contribution” plans under 415(c) remains at $53,000 ($59,000 for employees aged 50 and older).

–The maximum annual benefit under a defined benefit plan remained at $210,000.

–Maximum amount of compensation on which contributions may be based under 401(a)(17) remains at $265,000.

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

–The compensation dollar limit used to determine key employees in a top-heavy plan remains unchanged at $170,000.

–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.

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

–The Social Security Taxable Wage Base for 2016 remains at this year’s level, $118,500.

Limits That Changed for 2016 Are As Follows:

  • The deductibility of IRA contributions made by someone who is not covered by an employer’s retirement plan but is married to someone who is, phases out if their joint income is between $184,000 and $194,000, up from $183,000 and $193,000.
  • The deductibility of contributions to a Roth IRA phases out over the following adjusted gross income ranges:
    • $184,000 to $194,000 for married couples filing jointly, also up from $183,000 and $193,000;
    • $117,000 to $132,000 for singles and heads of households, up from $116,000 to $131,000.
  • The retirement savings contribution tax credit (saver’s credit) for low and moderate-income workers is limited to those whose adjusted gross income does not exceed:
    • $61,500 for married couples filing jointly, up from $61,000;
    • $46,125 for heads of households, up from $45,750; and
    • $30,750 for married filing separately and for singles, up from $30,500.

 

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Filed under 401(k) Plans, 403(b) Plans, COLA Increases, ERISA, IRA Issues, Nondiscrimination Rules for Insured Health Plans, Profit Sharing Plan

Summary Chart of Disallowed Pay or Play Tactics

With the January 1, 2015 employer shared responsibility deadline fast approaching, the three government agencies charged with ACA compliance (IRS, DOL and HHS) have provided recent guidance on several strategies or tactics that have been marketed to applicable large employers as legitimate ways to reduce their coverage costs and exposure to shared responsibility penalty taxes (assessable payments).   Employer reimbursement of individual health insurance premiums is a common but not universal feature of these arrangements.  The Internal Revenue Service ruled out pre-tax reimbursement of individual health premiums in Notice 2013-54, but more recent guidance in ACA FAQ XXII and in IRS Notice 2014-69 expands the prohibition to include after-tax individual premium reimbursements, as well as other shared responsibility cost reduction strategies.  The chart attached below summarizes:

  • the disallowed strategies;
  • the reasons why they were disallowed;
  • the penalties that may apply to applicable large employers that persist in pursuing these strategies; and
  • other relevant facts and concerns.

Disallowed Tactic Chart

As with all content provided on this blog, the chart is meant to serve as a general summary of legal developments and the information it contains should not be applied to any particular factual situation without first consulting experienced tax or benefits counsel.

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Filed under Affordable Care Act, Benefit Plan Design, Cafeteria Plans, Employer Shared Responsibility, ERISA, Flex Plans, Health Care Reform, HIPAA and HITECH, PPACA

IRS Announces Increased 2015 Retirement Plan Contribution Limits

On October 23, 2014 the IRS announced 2015 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.   A 1.7% rise in the September CPI-U over 2013 triggered $500 increases to the annual maximum salary deferral limit for 401(k) plans, and the catch-up limit for individuals age 50 or older. Citations below are to the Internal Revenue Code.

Limits That Increase for 2015 Are As Follows:

–The annual Salary Deferral Limit for 401(k), 403(b), and most 457 plans, currently $17,500, increases $500 to $18,000.

–The age 50 and up catch-up limit also increases $500, to $6,000 total. This means that the maximum plan deferral an individual age 50 or older in 2015 may make is $24,000.

–Maximum total annual contributions to a 401(k) or other “defined contribution” plans under 415(c) increased from $52,000 to $53,000 ($59,000 for employees aged 50 and older).

–Maximum amount of compensation on which contributions may be based under 401(a)(17) increased from $260,000 to $265,000.

–The compensation threshold for determining a “highly compensated employee” increased from $115,000 to $120,000.

–The compensation threshold for SEP participation increased from $550 to $600.

–The SIMPLE 401(k) and IRA contribution limit increased $500 to $12,500.

–The Social Security Taxable Wage Base for 2015 increased from $117,000 to $118,500.

Limits That Stayed The Same for 2015 Are As Follows:

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

–The compensation dollar limit used to determine key employees in a top-heavy plan remains unchanged at $170,000.

–The maximum annual benefit under a defined benefit plan remained at $210,000.

 

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Unpacking the 1-Year Pay or Play Delay for Limited Workforce Employers

Most readers of this blog are aware that that the Internal Revenue Service and Treasury Department postponed the compliance deadline under the ACA’s employer shared responsibility rules from January 1, 2014 to January 1, 2015, via IRS Notice 2013-45. This was an across-the-board, 1-year extension under which no penalties under Internal Revenue Code (“Code”) Sections 4980H(a) or (b) would be imposed during 2014 on applicable large employers (“ALEs”) who failed to offer affordable, minimum value or higher group health coverage to its full-time employees, meaning those working 30 or more hours per week.

Many of you are also aware that the final employer shared responsibility regulations published in February of this year included an additional one-year extension – to 2016 – for ALEs with between 50 and 99 full-time employees, including full-time equivalents (referred to herein as the “limited workforce” extension). The limited workforce extension is also described in Questions 34 through 37 of a recently-posted IRS FAQ on employer shared responsibility provisions.

This second 1-year extension is not “across the board” like the earlier one; the limited workforce requirement is just one of several distinct requirements that ALEs must satisfy, before they can qualify for the transition relief. This post breaks down the requirements into their component parts:

Limited Workforce Size
To be eligible for the 1-year extension for 2015 an ALE must employ on average, on business days during the 2014 measurement period, at least 50 full-time employees, but fewer than 100 full-time employees, including, in either instance, full-time equivalents. This headcount must take into account full-time employees and full-time equivalent employees of separate businesses related by ownership to the ALE (controlled group rules). However, the ALE may make use of the seasonal worker exception in the headcount process, such that the additional 1-year extension would apply if the ALE employs more than 99 full-time employees, including full-time equivalents, for 120 days or fewer during a calendar year, and the employees over the 99 employee headcount are seasonal workers. Note that the seasonal worker exception is only available if employee hours are averaged over all 12 months of a calendar year. For simply determining employees’ full-time status for the 2015 plan year, transition relief in the final regulations permit the 2014 measurement period to be the entire calendar year, or a period of no less than six consecutive months in 2014, starting no later than July 1, 2014 and ending no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2015. Like the seasonal worker exception, the shortened measurement period may be used in connection with the 1-year extension for limited workforce employers.

Maintenance of Workforce and Aggregate Hours of Service
For the period beginning on February 9, 2014 through December 31, 2014, the ALE must not reduce the size of its workforce, or reduce the overall hours of service of its employees, in order to satisfy the limited workforce criterion. Reductions in workforce or schedules that are for “bona fide business reasons” are permitted, however. Examples given in the preamble to the final regulations include reduction in workforce size or aggregate hours because of business activity such as the sale of a division, changes in the economic marketplace in which the employer operates, terminations of employment for poor performance, or other similar changes unrelated to the extension criteria.

Maintenance of Previously Offered Health Coverage
The third requirement for the extension is that, during the applicable “coverage maintenance period” the ALE does not eliminate or materially reduce group health coverage that was in place as of February 9, 2014, which is the day before the final regulations were released to the public. The restrictions here are similar to those that apply to plans that are grandfathered under the ACA and generally apply to employee-only coverage. Specifically, the ALE must not reduce the dollar amount of the employer contribution towards employee-only coverage by more than 5% , it must maintain or increase the employer percentage towards such coverage in place as of February 9, 2014, it must not allow benefits to drop below “minimum value” or “bronze” level, and it may not narrow or reduce the class or classes of employees (or employees’ dependents) who were offered coverage as of February 9, 2014. The coverage maintenance period or “CMP” over which the ALE must continue to meet these conditions is, for plans following a calendar year cycle, the period from February 9, 2014, through December 31, 2015. For non-calendar year plans, the CMP is the period from February 9, 2014 through the last day of the plan year that begins in 2015.

Certification by Applicable Large Employer
ALEs that qualify for the limited workforce exception do not have pay or play duties in 2015 but must nonetheless comply with ALE reporting duties under Code Section 6056 that go into effect for 2015, with initial reporting due in early 2016. For this initial reporting year ALEs must certify that they met the requirements for the additional 1-year delay. Certification will be made on IRS Form 1094-C (not yet released by the IRS).

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Filed under Affordable Care Act, Employer Shared Responsibility, ERISA, Health Care Reform, Plan Reporting and Disclosure Duties, PPACA