Top 10 Questions re: Management Carve Outs in Group Health Plans

            Employers value flexibility in designing their group health benefits so as best to attract and retain qualified personnel. One issue that remains perpetually murky, in this regard, is the legality of management carve-outs, whereby an employer offers certain group health insurance options or classes of coverage only to management or other highly paid groups.   The following true or false discusses some of the rules that come into play.

  1. The ACA contains a rule that restricts employers’ ability to offer different insured group health benefits to highly compensated employees, than to other employees.

             TRUE:  Under Section 2716 of the Public Health Service Act, which was incorporated into the Affordable Care Act (ACA), non-grandfathered, insured group health plans generally must satisfy nondiscrimination rules similar to those that apply to self-insured group health plans under Section 105(h) of the Internal Revenue Code (“Code”). These rules generally require some measure of parity between higher-paid employees, and non-highly paid employees.  Limited scope dental or vision plans provided under policies separate from group medical coverage are excepted.

  1. However, the IRS is not currently enforcing the ACA nondiscrimination rules for insured group health plans.

             TRUE:  In 2011 the IRS postponed enforcement of these rules, pending publication of regulations that will guide employers as to how to comply. As we approach the ACA’s eighth anniversary in March 2018, regulations have yet to issue.  When regulations do issue they will apply on a prospective (going forward) basis.

  1. Therefore employers have free reign to offer different benefits to management employees or other highly-compensated groups of employees.

             FALSE:   Although there are some circumstances in which employers may offer different and/or better group health insurance to management or other highly-paid employee groupings, the Section 125 cafeteria plan rules do impose some design restrictions.  These rules will apply to employers that have any type of Section 125 cafeteria plan arrangement, including premium-only plans (e.g., employees’ share of premiums are paid on a pre-tax basis, with no other cafeteria plan features) and to employers with other cafeteria plan features such as a health flexible spending account or dependent care flexible spending account.  The rules are explained in the questions that follow.

  1. All management employees are “highly-compensated employees” for cafeteria plan testing purposes.

             FALSE: First, the technical term is “highly-compensated individuals,” and it includes the following groups, which will not necessarily overlap 100% with an employer’s management group population:

  • Officers during the prior plan year
  • Greater than 5% shareholders (in either the preceding or current plan year)
  • Highly compensated employees (those earning more than $120,000 in 2017 are highly compensated employees in 2018)
  • Spouses or dependents of any of the above.
  1. If I maintain just a premium-only plan and all employees can participate and elect the same salary reductions for the same benefits, the premium only plan is nondiscriminatory.

             TRUE.  Proposed cafeteria plan regulations that issued in 2007 provide this safe harbor rule. Employers may rely on the proposed rules.

  1. If I maintain just a premium-only plan and don’t meet the requirements of the safe harbor, the POP is automatically discriminatory.

            FALSE.  Under these circumstances your premium-only plan will not satisfy the safe harbor mentioned above, but it could still pass other applicable nondiscrimination tests.  There is some uncertainty, under the 2007 proposed regulations, as to whether the only applicable test applies to eligibility, or whether there is a benefits component of the test.  It may be best to consult a seasoned third party administrator, or benefits attorney, if you have questions.

  1. If my cafeteria plan fails all types of nondiscrimination testing, all is lost.

             FALSE. The 2007 proposed regulations permit “disaggregation” – breaking up one plan into separate component plans – one benefitting participants who have completed up to three years of employment, and another benefitting those with three or more years of employment.  Each component plan must separately pass cafeteria nondiscrimination rules applicable to eligibility, and contributions and benefits.  Plans that fail nondiscrimination testing as a whole may pass testing after permissive disaggregation.  The proposed regulations did not discuss whether plans may be disaggregated based on factors other than length of employment, and further guidance on this point would be welcome.

  1. The IRS does not audit cafeteria plans so it doesn’t matter anyway.

FALSE. Although audits specific to a cafeteria plan are seldom seen, the IRS could expand a payroll audit or other business or benefit plan audit to encompass operation of a cafeteria plan, even a premium-only plan.  Therefore it is important to comply with the cafeteria plan nondiscrimination rules.

  1. Our company pays 100% of health premiums for highly compensated individuals directly to the carrier (or the employees pay themselves on an after-tax basis), so there is no cafeteria plan nondiscrimination issue.

             TRUE.  However, any insured group health plan design that provides better treatment for higher paid employees may fall afoul of the ACA nondiscrimination regulations mentioned in questions 1 and 2, when they issue; although the regulations will apply prospectively, neither employers nor their highly compensation staff should assume that preferential health plan designs are more than temporary.

  1. A “Simple” Cafeteria Plan is exempt from Section 125 nondiscrimination rules.

             TRUE.  A nondiscrimination safe harbor applies to “simple” cafeteria plans under Code Section 125(j), however those plans are subject to other design restrictions that may prove unworkable for many employers, including mandated employer matching or non-elective contributions. They are also limited to employers with 100 or fewer employees on business days during either of the two preceding years.

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Filed under Affordable Care Act, Benefit Plan Design, Cafeteria Plans, Health Care Reform, Nondiscrimination Rules for Insured Health Plans, PPACA, Premium Only Plans

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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New Year Brings New, (Sometimes) Lower VCP User Fees

Effective January 2, 2018, the IRS has materially lowered the user fees required to be paid in order to participate in the Voluntary Compliance Program (VCP) under the Employee Plans Compliance Resolution System or EPCRS.  VCP is a way for sponsors of qualified retirement plans to get IRS approval of voluntary correction of operational errors and other plan errors that jeopardize the plan’s tax-qualified status.  Under old user fees, which were based on the number of plan participants as of the last day of a plan year, most applicants fell within the 100 – 1,000 participant range, which in 2017 carried a fee of $5,000.  The new fees, set forth in Appendix A to IRS Revenue Procedure 2018-1, are based on plan assets as of the last day of the plan year and are as follows:

User Fee               Plan Assets

$1,500                   $500,000 or less

$3,000                   Over $500,000 to $10,000,000

$3,500                   Over $10,000,000

As many if not most plan sponsors will fall in the over $500,000 to $10,000,000 range, this will result in a $2,000 reduction in the applicable user fee.

Lowering the price barrier to participation in VCP is a positive for plan sponsors.  Obtaining a compliance statement from IRS through the program is the equivalent of insurance against penalties and interest that would be assessed if the plan problems were discovered on audit.  The VCP compliance statement is also crucial in the event the plan sponsor sells its business or merges with another entity, as plan problems must be disclosed in the pre-deal due diligence stage, and unresolved plan problems can slow down or even derail a sale or merger transaction.  Speaking of insurance, some fiduciary liability insurance carriers will cover, and provide reimbursement for, the VCP user fee and professional services used in preparing the application (although generally amounts that are owed to the plan are not covered).

There is a downside to this new fee schedule, namely in the loss of reduced fees (as low as $300) for submissions that were limited to participant loan errors, failures to make required minimum distributions, and SEP and SIMPLE plan submissions.

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Filed under 401(k) Plans, 403(b) Plans, EPCRS, ERISA, Profit Sharing Plan, VCP

IRS Gifts Large Employers an ACA Reporting Extension

Under the ACA, Applicable Large Employers (ALEs) must comply with annual reporting and disclosure duties under Section 6056 of the Internal Revenue Code (“Code”). These include filing, with the IRS, a Form 1094-C transmittal form, together with copies of Form 1095-C individual statements that must also be furnished to full-time employees (and to part-time employees who enroll in self-insured group health plans).

In a holiday-time gift to ALEs, the IRS just extended the deadline to furnish Form 1095-Cs to employees by 30 days, from January 31, 2018, to March 2, 2018. ALEs must still file Form 1095-C employee statements with the IRS by the normal deadline of February 28, 2018 (paper) or April 2, 2018 (e-file). However, due to the across-the-board extension to March 2, 2018, the IRS will not be granting any permissive 30-day extensions to furnish Form 1095-C to employees. And, while granting the extension, the IRS still encourages ALEs to furnish the 2017 employee statements as soon as they are able, and also to file or furnish late rather than not file or furnish at all, where applicable. ALEs may still obtain an automatic extension on the filing deadlines by filing Form 8809, and may obtain an additional, permissive 30-day filing extension upon a showing of good cause. In summary, the deadlines for 2017 ACA reporting are as follows:

File 2017 Form 1094-C with IRS:           February 28, 2018 (paper); April 2, 2018, (e-file)

File 2017 Form 1095-Cs w/IRS:               February 28, 2018 (paper); April 2, 2018 (e-file)

Furnish 2017 Form 1095-Cs to Employees:       March 2, 2018

Additionally, the IRS extended, for another year, the transition relief that has been in place since ACA reporting duties first arose in 2015. Under the transition relief, the IRS will not impose penalties on employers who file Forms 1094-C or 1095-C for 2017 that have missing or inaccurate information (such as SSNs and dates of birth), so long as the employer can show that it made a good faith effort to fulfill information reporting duties. There is no relief granted for ALEs who fail to meet the deadlines (as extended) for filing or furnishing the ACA forms, or who fail to report altogether.

This news is be welcome given that all U.S. employers will be grappling with new income tax withholding tables early in 2018 given the passage of the Tax Cuts and Jobs Act of 2017, which President Trump signed in to law on December 22, 2018. We’ll be providing more information on the Act’s impact on employment benefits after the Christmas holiday.

 

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Filed under Affordable Care Act, Applicable Large Employer Reporting, Health Care Reform, Minimum Essential Coverage Reporting, Payroll Issues, Post-Election ACA, PPACA, Tax Cuts and Jobs Act

IRS Rolls Out Collection Process for ACA Large Employer Penalty Tax

The IRS is rolling out enforcement of the large employer “pay or play” penalty tax for 2015, with preliminary penalty calculation letters anticipated to begin to be issued between now and the end of 2017.   This will potentially impact employers who, over 2014, averaged 100 or more full-time employees, plus full-time equivalents, and who in 2015 either did not offer group health coverage to at least 70% of its full-time employees, or offered coverage that was “unaffordable,” as defined under the ACA, and for whom at least one full-time employee qualified for premium tax credits on a health exchange.

The sample penalty summary table the IRS has just circulated leaves space for a six-figure annual penalty amount, so substantial amounts of business revenue could be at stake in the collection process. Below is a timeline beginning with receipt of a notice from the IRS of a preliminary penalty calculation (Letter 226J), which includes the penalty summary table; the timeline is based on recently-updated IRS FAQs on the penalty collection process.   Employers must respond by the date set forth in the Letter 226J, which generally will be 30 days from the date of the letter. However due to habitually slow IRS internal processing, employers may have less than two weeks from date of actual receipt, to prepare a response.  ACA reporting vendors may not be equipped to assist with responses to preliminary penalty assessments, so employers who receive a Letter 226J identifying a preliminary penalty amount should look to ERISA or other tax counsel, or an accountant with knowledge of the ACA, in order to best protect their interests.  Not all IRS communication forms referenced below had been released as of the date of this post but it will be updated as the forms become available.

  1. The start point is an employer who is an ALE for 2015 (based on 2014 headcount) and who has one or more FT employees who obtain premium tax credits for at least one month in 2015, as reflected in ACA reporting (and an affordability safe harbor or other relief was not available).
  2. The ALE receives Letter 226J with enclosures, including the penalty summary table, Form 14764 Employer Shared Responsibility Payment (ESRP) Response, and Form 14765 Premium Tax Credit (PTC) List, identifying employees who potentially trigger ACA penalties.
  3. The ALE has until the response date set forth on Letter 226J to submit Form 14764 ESRP Response and backup documentation. The deadline will generally be no more than 30 days from date of Letter 226J but internal IRS processing may cut in to that time budget.
  4. The IRS will acknowledge the ALE’s response, via one of five different versions of Letter 227.
  5. The ALE either takes the action outlined in Letter 227 (e.g., makes original or revised ESRP payment), or
  6. the ALE requests a pre-assessment conference with IRS Office of Appeals, in writing, within 30 days from the date of Letter 227, following instructions set forth in Letter 227 and in IRS Publication 5, Your Appeal Rights.
  7. If ALE fails to respond to Letter 226J or Letter 227, the IRS will assess the proposed ESRP payment amount and issue Notice CP 220J, notice and demand for payment.
  8. Notice CP 220J will include a summary of the ESR payment amount and reflect payments made, credits applied, and balance due, if any; it will instruct ALE how to make payment. Installment agreements may be reached per IRS Publication 594.

 

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Filed under Affordable Care Act, Applicable Large Employer Reporting, Health Care Reform, Minimum Essential Coverage Reporting, Post-Election ACA, PPACA, Premium Tax Credits

Proposed Tax Reform Targets Executive Deferred Compensation

Buried deep within the 429 pages of the tax reform proposal, titled the “Tax Cuts and Jobs Act,” is a provision that would significantly change the landscape for executive deferred compensation plans. Specifically, Section 3801 of the Act, titled “Nonqualified Deferred Compensation,” would move the point of taxation of most forms of deferred compensation from the time of actual payout to the executive, which is generally the case under the current rules, to the point at which the executive need no longer perform substantial services in order to receive the compensation; e.g., the point at which the funds “vest.”  Other changes are proposed, but this single timing issue would remove much of the appeal of deferred compensation plans. The changes, if they become law, would affect not just deferrals of cash compensation, but also equity forms of compensation such as stock options and stock appreciation rights.

The Act would also repeal the current compliance regime for nonqualified deferred compensation, known as the “Enron rules” (because they were inspired by manipulation of deferred compensation by certain Enron executives), and codified at Code Section 409A, which have been in place since 2005.  The new rules, if passed into law, will be set forth under Section 409B of the Code.

This is not the first time that Congress has proposed these changes to deferred compensation; a version of them appeared in the Tax Reform Act of 2014, also under Section 3801 of that bill.  An excellent and detailed overview of the those earlier proposed changes appeared in the Summer 2014 issue of the Benefits Law Journal.  The article deserves re-reading now that deferred compensation reform is back on the table under the Tax Cut and Jobs Act.

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Filed under Deferred Compensation, Section 409A, Section 409B, Tax Cuts and Jobs Act, Top-Hat Exemption

IRS Announces New Benefit Limits for 2018

olga-delawrence-386839On October 19, 2017 the IRS announced 2018 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 increased $500 to $18,500, but other dollar limits remained unchanged, including the compensation threshold for highly compensated employee status. Specifically, an employee will be a highly compensated employee (HCE) in 2018 on the basis of compensation if he or she earned more than $120,000 in 2017.  Citations below are to the Internal Revenue Code.

In a separate announcement, the Social Security Taxable Wage Base for 2018 increased to $128,400 from $127,200.

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