Category Archives: Uncategorized

It’s (Summer) Time for Wellness Plan Re-Design

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Now that summer is here, there are only a few more months until benefit plan open enrollment for 2019 gets underway. Employers who maintain a wellness program that includes biometric testing, health risk assessments (HRAs), or medical questionnaires need to think now about how they will design their plan in the new year, as changes to the rules governing these wellness features go into effect.  This post outlines the changes and discusses the new design landscape for 2019.

What are the Changes?

During 2017 and 2018, final regulations under the Americans with Disabilities Act (ADA) limit the financial incentive employers may offer in exchange for participating in biometric testing, HRAs or medical questionnaires, to an amount equal to 30% of the cost of individual coverage (both the employee and employer portions.) The same limit applies to surcharges or penalties for not taking part.  Companion regulations under Title II of the Genetic Information Nondiscrimination Act (GINA) apply the same cap to completion of an HRA or medical questionnaire by an employee’s spouse, because manifestation of a disease or disorder in a family member comprises genetic information on the employee.  The ADA regulations also disallow the 20% additional incentive tied to tobacco use, if the wellness program includes a blood test for nicotine or cotinine.  The ADA and Title II of GINA apply to employers with 15 or more employees.   We discussed the ADA and GINA rules in a prior post.

The American Association of Retired Persons (AARP) challenged the 30% incentive limit in court on the grounds that the Equal Employment Opportunity Commission (EEOC) failed to prove that this cap was necessary in order for participation in the biometric testing or health risk assessment (HRA) to be “voluntary” and not coercive, which is an ADA requirement.

A federal court agreed with the AARP, and vacated the 30% incentive cap effective January 1, 2019.  (Other provisions of the ADA regulations, including notification and confidentiality rules, remain in effect.)  The court also lifted a requirement that the EEOC publish new proposed regulations on the voluntary standard by August 31, 2018.   The EEOC may issue regulations in the future (and could appeal the court decision), but wellness program design for 2019 must get underway in the absence of clear guidance on the voluntariness standard.

2019 Design Landscape

The chart below illustrates the wellness rule landscape effective January 1, 2019 for employers that are subject to the ADA. Wellness regulations under HIPAA and the ACA will continue to apply, but they do not impose any limit on incentives (or penalties) for biometric testing or HRAs that are “participation only” i.e., that do not require physical activity, or specific health outcomes.

Despite the vacated EEOC standard, employers should exercise caution in setting financial incentives for biometric testing, HRAs or medical questionnaires.  Even prior to issuing regulations, the EEOC had challenged wellness programs in several court actions, ranging from a program that conditioned biometric testing and completion of an HRA on a $20 per paycheck surcharge, to one that conditioned 100% of the premium cost on taking part in an HRA. Although the cases generally were resolved in favor of the employer, they make clear that EEOC may view even modest incentives as failing the voluntary standard.

Employers should also make sure that their wellness program follows up after gathering health data through biometric testing, HRAs or medical questionnaires, with information, advice, or programs targeted at health risks.  A wellness program that fails to do so would not qualify as an employee health program under the ADA and the voluntary wellness program exceptions would not be available.

So what are some options for 2019? There are several design “safe harbors” that do not trigger the ADA voluntariness standard:

1) Eliminating biometric testing/HRAs/medical questionnaires altogether.

2) Keeping biometric testing/HRAs/medical questionnaires, but removing any financial incentive or penalty that applied to them.

3) Offering smoking cessation programs that request self-disclosure as a tobacco user (no blood test for nicotine, cotinine).

Limiting financial incentives/penalties for biometric testing/HRAs/medical questionnaires to an amount that does not exceed 10 – 15% of the individual premium is another option. This range is just high enough to encourage participation, but it is under 20%.  In AARP v. EEOC, the court’s August 2017 ruling on summary judgment cited a RAND study noting that “high powered” incentives of 20% or more may place a disproportionate burden on lower-paid employees.

What about different incentive levels for different groups of employees? First, this may be administratively impractical, and second, it might run afoul of the HIPAA/ACA requirement that the full wellness incentive or reward be made available to all “similarly situated” individuals.  Groupings of employees for this purpose must be based on bona fide, employment-based classifications that are consistent with the employer’s usual business practice, such as between full-time and part-time employees, hourly and salaried, different lengths of employment, or different geographic locations.   For many employers, these criteria may not always neatly overlap with different compensation levels.

In sum, employers who do not wish to eliminate biometric testing and HRAs/medical questionnaires from their wellness programs should anticipate living with some uncertainty about whether their financial incentives meet ADA standards.   Engaging in careful planning in the coming weeks, together with benefit advisors and legal counsel, can help keep the risk to a minimum.

 

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Filed under Affordable Care Act, Americans with Disabilities Act, Benefit Plan Design, GINA/Genetic Privacy, HIPAA and HITECH, PPACA, Uncategorized, Wellness Programs

Disaster Area Tax Relief Does Not Extend to ACA Reporting

benjamin-kerensa-363991 (1)The IRS has announced tax deadline extensions to individuals and businesses affected by the Thomas fire and subsequent flooding, mud and debris flow in Santa Barbara and Ventura counties.  The same relief is extended to individuals and businesses in San Diego and Los Angeles counties affected by wildfires and related natural disasters occurring since December 4, 2017, and is triggered by President Trump’s disaster declaration for these areas.  Significantly for “Applicable Large Employers” as defined by the ACA, the relief does not extend to Forms 1094-C and 1095-C, which are due in the early months of 2018, as discussed in our earlier post.  Certain other benefit-related filing guidance is discussed below.

Who is Eligible for the Relief?

The relief extends to “Affected Taxpayers,” meaning:

  • Individuals who reside in the affected counties.
  • Businesses – including nonprofits – with a principal place of business in the affected counties.
  • Taxpayers located outside the affected counties who stored records in the affected counties that are necessary to fulfill filing deadlines.
  • Governmental or charitable aid workers who assisted in the disaster areas.
  • Any visitor to the disaster areas who was killed or injured as a result of the disaster.

What Relief is Available?

Affected Taxpayers may claim the following relief:

  • An extension, to April 30, 2018, to file most tax returns with an original or extended due date falling between December 4, 2017 and April 30, 2018 (hereafter, the “affected period”), including:
    • Individual, corporate, estate and trust income tax returns;
    • Partnership returns, S corporation returns, trust returns;
    • Estate, gift, and generation-skipping transfer tax returns;
    • Employment and certain excise tax returns;
    • Annual information returns of tax exempt organizations (Form 990s);
    • Certain excise tax returns.
  • With respect to annual return/reports for retirement and certain health and welfare plans (Form 5500 series), the April 30, 2018 extended deadline is available only to Affected Taxpayers who are unable to obtain from a bank, insurance company, or any other service provider, on a timely basis, information necessary for completing the forms, because the service provider’s operations are located in a covered disaster area. In these limited circumstances, both the Department of Labor and the PBGC will recognize the same deadline extension.

In a separate announcement, the PBGC is extending certain deadlines and waiving penalties for plan administrators affected by the California wildfires and ensuing natural disasters.

What is NOT Eligible for the Relief?

The relief does not extend to:

  • Deadlines to file and furnish Forms W-2;
  • Deadlines applicable to ACA Forms 1094-C (Transmittal Form) and 1095-C (Employee Statements) for 2017, required to be filed and furnished by Applicable Large Employers. Those deadlines remain as follows: File Form 1095-Cs w/IRS by    February 28, 2018 (paper); April 2, 2018 (e-file);  Furnish Form 1095-Cs to Employees by March 2, 2018.
  • Deadlines for forms in the 1099 series, including Forms 1099-R related to retirement plan and IRA distributions;
  • Deadlines for employment and excise tax deposits (although penalties may be abated in certain instances); and
  • Other acts not specifically listed in Revenue Procedure 2007-56.

Other exclusions are referenced in the IRS announcement.  Detailed related information affecting benefit plans is found in Section 17 of Revenue Procedure 2007-56.

How do You Claim Relief?

If you qualify for relief and receive a late filing or late payment penalty notice from the IRS, you are advised to call the phone number on the notice to request that the IRS abate the penalty due to the disaster relief.   The IRS announcement states that the Service will automatically identify, and apply filing and penalty relief to, taxpayers located in the affected counties.  However taxpayers located outside the disaster area (for instance those whose tax records are stored in the damaged areas) will need to call the IRS disaster hotline at 866-562-5227 to request relief.

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Offer Opt-Out Payments? Don’t Get Snared in Overtime Liability

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If you are an employer within the jurisdiction of the Ninth Circuit Court of Appeals and offer cash payments to employees who opt out of group health coverage (“opt-out payments”), what you don’t know about the court’s 2016 opinion in Flores v. City of San Gabriel may hurt you.

Specifically, the Ninth Circuit court held that opt-out payments had to be included in the regular rate of pay used to calculate overtime payments under the federal Fair Labor Standards Act (FLSA). In May 2017 the U.S. Supreme Court declined to review the opinion, making it controlling law within the Ninth Circuit, and hence in the states of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington.

The Flores case arose when a group of active and former police officers in the City of San Gabriel sought overtime compensation based on opt-out payments they received between 2009 and 2012 under a flexible benefits plan maintained by the City.  The plan required eligible employees to purchase dental and vision benefits with pre-tax dollars; they could also use the plan to purchase group health insurance.  Employees could elect to forgo medical benefits upon proof of alternative coverage; in exchange they received the unused portion of their benefits allotment as a cash payment added to their regular paycheck.  The opt-out payments were not insubstantial, ranging from $12,441 annually in 2009 to $15,659.40 in 2012.  The City’s total expenditure on opt-out payments exceeded $1.1 million dollars in 2009 and averaged about 45% of total contributions to the flexible benefits plan over the three years at issue.

The court held that the City had not properly excluded the opt-out payments from the regular rate of pay for overtime purposes under the FLSA, as they were items of compensation even though not tied directly to specific hours of work, and further that the “bona fide” benefit plan exception did not apply, because, inter alia, the cash opt-out payments received under the flex plan comprised far more than an “incidental” portion of the benefits received.

Despite the significant potential impact of getting this classification wrong, the City appears not to have sought a legal opinion on whether it could permissibly exclude the opt-out payments under the FLSA. Instead, a City employee testified that it followed its normal process of classifying the item of pay through joint decision by the payroll and human resources departments, without any further review of the classification or other due-diligence.  For this oversight, the court awarded liquidated damages against the City for failure to demonstrate that it acted in good faith and on the basis of “reasonable grounds” to believe it had correctly classified the opt-out payments under the FLSA.  Further, the court approved a three-year statute of limitations for a “willful” violation of the FLSA, rather than the normal two year period, on the grounds that the City was on notice of its FLSA requirements, yet took “’no affirmative action to ensure compliance with them.’”

Although Flores involved a benefit plan maintained by a public entity, there is nothing in the Ninth Circuit’s opinion that limits its scope to public entity employers.

Therefore employers within the Ninth Circuit who offer opt-out payments should review their payroll treatment of these amounts and seek legal counsel in the event there if potential overtime liability under the FLSA. They should also confirm that cash opt-out payments remain an “incidental” percentage of total flex benefits, which the Department of Labor has defined in a 2003 opinion letter as no more than 20% of total plan benefits.  In Flores the Ninth Circuit found the 20% threshold to be arbitrary, but suggested that it was likely lower than 40% of total benefits.  Finally, employers offering opt-out payments should also revisit the other legal compliance hurdles that these payments present under the ACA, which after its recent reprieve from repeal/replace legislation, remains, for now, the law of the land.

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Filed under Benefit Plan Design, Cafeteria Plans, FLSA, Fringe Benefits, Health Care Reform, Overtime, Post-Election ACA, PPACA, Uncategorized

Using Forfeitures for Corrective Contributions: Look Before You Leap

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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