The Proposed Tax Cuts and Jobs Act Would Make Sweeping Changes to Executive Compensation and Employee Benefits

On November 2, 2017, the U.S. House of Representatives unveiled the Tax Cuts and Jobs Act (H.R. 1) (the “Bill”) as part of proposed tax reform legislation. The Bill is sweeping in scope and provides for significant changes to the U.S. Internal Revenue Code (the “Code”), including in the area of executive compensation and employee benefits.

Executive Compensation

The Bill makes far-reaching changes in the executive compensation arena, which would curtail employees’ ability to defer taxation of compensation and incentive awards (other than under a tax-qualified retirement plan) and employers’ ability to provide fully tax-deductible compensation to their executives. If enacted in its current form, it will require fundamental rethinking and restructuring of many present-day incentive compensation packages.  Some highlights of the Bill are as follows:

  1. The Bill requires that nonqualified deferred compensation (which under the Bill includes stock options and stock appreciation rights which are generally excluded from such definition under current guidance) attributable to services performed after 2017 be subject to income tax when it is no longer subject to a substantial risk of forfeiture (i.e., when it vests, rather than when it is subsequently paid, as is currently permitted under Code Section 409A). For this purpose, only a condition requiring the future performance of substantial services will generally constitute a substantial risk of forfeiture. The Bill “grandfathers” existing nonqualified deferred compensation arrangements until 2025, at which time they will also become subject to the foregoing rules. Note that an amendment to the Bill released by the House Ways and Means Chairman Kevin Brady includes a watering-down of some of these requirements as it provides that certain employees of non-public companies who receive stock options or restricted stock units as compensation for the performance of services may elect to defer recognition of income for up to 5 years.
  2. The Bill greatly expands the reach of Code Section 162(m) (which denies a corporate deduction for compensation in excess of $1 million paid to certain top executives of publicly traded companies) by eliminating current exceptions from this rule for performance-based compensation and broadening its application in various other respects.
  3. The Bill also imposes an excise tax on compensation in excess of $1 million paid by tax-exempt employers to their five highest paid employees, as well as on certain payments contingent on separation from employment paid to such employees.

Employee Benefits

Though relatively less sweeping, the Bill also makes various changes to the current tax rules governing various employee benefit arrangements (and a number of these changes are beneficial to employees):

  1. The Bill removes taxpayers’ ability to change the tax characterization (Roth or traditional) of their contributions to individual retirement accounts (IRAs).
  2. The Bill reduces the age at which in-service distributions are permitted under defined benefit plans (as well as certain state and local government plans) from age 62 to age 59 ½.
  3. The Bill makes various changes to the rules governing participant hardship distributions under retirement plans, which would likely have the effect of facilitating larger and more frequent hardship distributions.
  4. The Bill extends the deadline for individuals who leave employment, or whose plan terminates while they are employed, to roll over their outstanding plan loan balances to an IRA in order to avoid adverse tax treatment.
  5. The Bill grants relief from nondiscrimination testing and certain other qualification requirements for some defined benefit retirement plans.
  6. The Bill limits the deductibility or exclusion of certain employer-provided fringe benefits.
  7. The Bill eliminates dependent care assistance programs, although a recent amendment to the Bill would continue the exclusion for up to $5,000 of employer-provided dependent-care assistance through Dec. 31, 2022.

If the Bill were to be passed in current form, the foregoing changes would generally apply to taxpayers beginning in 2018. However, as the Bill progresses through Congress, we expect that these provisions will undergo further revision and evolution.  Although it is too early to speculate about the final form of the Bill, it could ultimately require employers to perform a comprehensive review and restructuring of their executive compensation practices and benefit plans.

We will provide further updates as this legislation develops.

No Standing!

This is the most recent article in our series which focuses on the impact on employers of the downward spiral and death knell of the multi-employer defined benefit plan.

The Eleventh Circuit has dealt another blow to employers who contribute to multi-employer defined benefit funds.

In Westrock RKT Company v. Pace Industry Union-Management Pension Fund No. 16-16443, the Eleventh Circuit affirmed a ruling from the Northern District of Georgia.  The gist of the ruling is that the employer involved in the case was found to lack standing under ERISA to challenge an action by the board of a pension fund.  In particular, Westrock RKT Company (“Westrock”) was found to lack standing to challenge the Board of Trustees (“Board”) of the Pace Industry Union-Management Pension Fund (the “Fund”) under two sections of ERISA.

The facts are not unique for multi-employer pension funds.  Based on requirements imposed by the Pension Protection Act of 2006 (“PPA ’06”), the Fund found itself in critical status.  As a result, it complied with its requirement under PPA ’06 to adopt a Rehabilitation Plan.  A Rehabilitation Plan typically consists of action items such as reduction in plan expenditures, reductions in future benefit accruals and increases in contribution rates.  All of these were designed to improve the Fund’s financial outlook.

The Fund had adopted a Rehabilitation Plan in 2010.  In 2012, the Fund amended the Rehabilitation Plan to include a provision stating that an employer withdrawing from the Fund was required to pay a portion of the Fund’s accumulated funding deficiency in addition to the statutorily mandated withdrawal liability.  Withdrawal can occur for a number of specified reasons, including actions over which an employer has absolutely no control such as de-certification by the bargaining unit or disclaimer by the Union.

Westrock sought relief from that amendment by filing a declaratory action seeking a declaration that the amendment violated ERISA.  The district court never addressed the merits of the action but rather dismissed the complaint under Federal Rule of Civil Procedure 12(b)(6) stating that Westrock lacked standing.

The Eleventh Circuit, acknowledging that this was a case of first impression which turned on statutory interpretation, affirmed the district court.  In doing so, it opined that civil actions under ERISA were limited only to those parties and actions which Congress specifically enumerated.

The plaintiff had asserted that it had a valid cause of action under either 29 U.S.C.  Section 1132(a)(1) or Section 1451(a).  As to Section 1132(a)(1), the Circuit Court recognized that section as initially drafted did not authorize contributing employers to bring any kind of civil suit at all but that in its passage of PPA ’06 Congress had provided employers with a limited cause of action.  The Court then addressed whether new Section 1132(a)(10) provided the plaintiff with standing to bring its cause of action.  The Court rejected that concept stating that Section 1132(a)(10) did not provide an employer with the right to challenge a provision in a rehabilitation plan.  The cause of action was limited to procedural issues rather than the substance of a Rehabilitation Plan.  As such, the plaintiff as an employer did not have a role to play when a plan sponsor enacted reasonable measures.  Moreover, the Circuit Court found that there was no portion of ERISA which prohibited a fund from putting into place a system for charging withdrawing employers for their share of the accumulated funding deficiency.

WestRock had also asserted a cause action under 29 U.S.C. Sec. 1451(a).   Section 1451 appears to be a catch-all provision which authorizes an employer to bring an action when it is “…adversely affected by the act or omission of any party under this subtitle with respect to a multi-employer plan…”  The Circuit Court found that the “subtitle” noted was Subtitle E which is entitled “Special Provisions for Multiemployer Plans.”  Because Subtitle E dealt with unfunded vested benefits and the amendment addressed accumulated funding deficiency, the plaintiff lacked standing under Section 1451 because the amendment had nothing to do with Subtitle E.

In a chilling statement for employers, the Eleventh Circuit concluded with the following about ERISA:

There is nothing in the text that indicates Congress intended for ‘withdrawal liability’ to be the only payments a withdrawing employer would ever face, and because of the comprehensive nature of ERISA, we read the absence of such language as intentional.

            It is feared by this commentator that the decision may embolden funds to adopt this type of penalty in future rehabilitation plans.  It is further evidence of the need for employers to move pro-actively in dealing with multi-employer pension funds.

 

On-Site Clinics: What Effect on HDHPs and HSAs?

As of October 2017, Health Care Still Uncertain.

We already know the state of health care in the United States continues to whipsaw, as an October 25th ruling demonstrates: a federal district court confirmed that the Trump Administration need not fund the Affordable Care Act (“ACA”) subsidies that offset insurance copays and deductibles for some ACA shoppers. This outcome came over the entreaties of 19 state attorney generals who brought the request for an emergency injunction to compel the Trump Administration to reverse its position of choosing not to pay the October and future monthly cost-sharing reductions.

Health Care Costs Still on the Rise.

What remains certain is that premiums for general health insurance and ACA marketplace plans continue to rise. Accordingly, in order to help control health care costs and encourage wellness, employers might find it appealing to offer on-site health clinics for their employees.

On-Site Clinic Considerations.

Before an employer actually commits to an on-site clinic, however, several interrelated legal and operational issues should be evaluated:

• Whether the on-site clinic will be a group health plan covered under the Employee Retirement Income Security Act (“ERISA”) and thus will be subject to:

a. written disclosure requirements;

b. the Health Insurance Portability and Accountability Act’s (“HIPAA’s”) privacy and security regulations;

i. if HIPAA does not apply, consider state law privacy and security requirements;

c. non-discrimination issues under the Internal Revenue Code (where benefits that impermissibly favor highly-compensated individuals trigger adverse income tax consequences for those individuals and more burdensome tax reporting requirements); and

d. health plan continuation coverage rights for employees under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”).

• Whether the employer sponsoring the on-site clinic can properly navigate issues if it also wants to offer employees high deductible health plans (“HDHPs”) paired with health savings accounts (“HSAs”).

Tax Benefits of HSAs.

For an employee, HSA benefits include pre-tax paycheck deductions, tax-free earnings on money in the HSA, and tax-free withdrawals for qualifying health expenses (and, after age 65, the employee can withdraw from an HSA for any purpose). According to the Internal Revenue Service guidance in Notice 2008-59 (the “IRS Notice”), however, having access to an on-site health clinic that provides significant medical benefits for free or at a reduced cost may prevent an employee from making HSA contributions. Indeed, such contributions – if improper – would be subject to income and excise taxes.

Permissible Benefits an On-Site Health Clinic Can Offer, if the Employer Offers HSAs.

An on-site health clinic may offer the following permissible medical benefits at no cost, without affecting HSA eligibility: “permitted” coverage (such as vision and dental care), “preventive care” (such as shots and screenings), and “insignificant” medical benefits (collectively, permissible benefits). The IRS Notice explains in an example that “insignificant” medical benefits include:

• physicals and immunizations;

• injecting antigens provided by employees (e.g., performing allergy injections);

• a variety of aspirin and other nonprescription pain relievers; and

• treatment of injuries caused by accidents at an employer’s location.

The IRS Notice concludes that an on-site clinic providing the above limited services would not interfere with employees’ HSA eligibility because the clinic would not be providing “significant benefits in the nature of medical care” other than the permitted coverage and preventive care.

“Significant Medical Benefits” Provided at Free or Reduced Cost will Affect HSA Eligibility.

If an on-site clinic provides “significant benefits” for free or at reduced-cost (i.e., below fair market value (“FMV”)), an employee may lose eligibility for an HSA. Indeed, the IRS Notice indicated that an employee who has mere access to (rather than one who actually uses) such an on-site clinic will not be an HSA-eligible individual. The IRS Notice concluded that an employer who permits its employees to receive care at its on-site facilities for all of their medical needs, provides medical care at no charge to uninsured employees, and waives all deductibles and co-payments for employees who have health insurance would be providing “significant benefits in the nature of medical service.”

As already stated, because of the rules for HSAs, an on-site clinic can provide only permissible benefits at no cost. Although there is no IRS guidance on whether an otherwise HSA-eligible employee may simply pay FMV, the IRS Notice suggests by negative implication that an employee might be able to preserve HSA eligibility by paying for the significant benefits that the on-site clinic provides.

TRICARE/Medicare/Medicaid Prevent HSA-Eligibility.

For reasons not relevant here, employees who receive TRICARE (the health benefits for active/retired members of the uniformed services) or Medicare/Medicaid (government-provided medical assistance for the aged and low income) cannot fund an HSA. Thus, an employer offering a paired HDHP with an HSA feature must be sure to flag TRICARE/Medicare/Medicaid employees as ineligible at the point of enrollment into the HSA. TRICARE/Medicare/Medicaid employees cannot have HSAs; it seems they may have HDHPs, however, if they are willing to bear costs out-of-pocket, rather than from an HSA. It is likely these employees will have to have health plan alternatives other than HDHPs.

Success in Having Both an On-Site Health Clinic and HSAs?

In order to successfully offer an on-site health clinic, with a HDHP/HSA in place, an employer will need to be able to:

• drill down on all of the medical benefits provided by the on-site clinic;

• delineate the clinic’s permissible benefits;

• delineate the clinic’s significant medical benefits;

• identify the procedure for calculating FMV of a significant benefit, if there are any;

• vet out which employees need to pay for any significant benefits;

• identify what the deductible is per employee;

• keep track of the employee payments towards annual deductible limits; and

• vet out TRICARE/Medicare/Medicaid employees.

2018 Cost of Living Adjustments for Retirement Plans

The Internal Revenue Service recently announced its cost-of-living adjustments applicable to dollar limitations for retirement plans and Social Security generally effective for Tax Year 2018 (see IRS Notice 2017-64). Most notably, the limitation on annual salary deferrals into a 401(k) plan will increase from $18,000 to $18,500. The dollar limits are as follows:

LIMIT 2017 2018
401(k)/403(b) Elective Deferral Limit (IRC § 402(g))

The annual limit on an employee’s elective deferrals to a Section 401(k) or 403(b) plan made through salary reduction.

$18,000 $18,500
Governmental/Tax Exempt Deferral Limit (IRC § 457(e)(15))

The annual limit on an employee’s elective deferrals to Section 457 deferred compensation plans of state and local governments and tax-exempt organizations.

$18,000 $18,500
401(k)/403(b)/457 Catch-up Limit (IRC § 414(v)(2)(B)(i))

In addition to the regular limit on elective deferrals described above, employees age 50 or over generally can make an additional “catch-up” contribution not to exceed this limit.

$6,000 $6,000
Defined Contribution Plan Limit (IRC § 415(c))

The limitation for annual contributions to a defined contribution plan (such as a 401(k) plan or profit sharing plan).

$54,000 $55,000
Defined Benefit Plan Limit (IRC § 415(b))

The limitation on the annual benefits from a defined benefit plan.

$215,000 $220,000
Annual Compensation Limit (IRC § 401(a)(17))

The maximum amount of compensation that may be taken into account for benefit calculations and nondiscrimination testing.

$270,000

($400,000 for certain gov’t plans)

$275,000

($405,000 for certain gov’t plans)

Highly Compensated Employee Threshold (IRC § 414(q))

The definition of an HCE includes a compensation threshold for the prior year. A retirement plan’s discrimination testing is based on coverage and benefits for HCEs.

$120,000

(for 2017 HCE determination)

$120,000

(for 2017 HCE determination)

Key Employee Compensation Threshold (IRC § 416)

The definition of a key employee includes a compensation threshold. Key employees must be determined for purposes of applying the top-heavy rules. Generally, a plan is top-heavy if the plan benefits of key employees exceed 60% of the aggregate plan benefits of all employees.

$175,000 $175,000
SEP Minimum Compensation Limit (IRC § 408(k)(2)(C))

The mandatory participation requirements for a simplified employee pension (SEP) includes this minimum compensation threshold.

$600 $600
SIMPLE Employee Contribution Limit (IRC § 408(p)(2)(E))

The limitation on deferrals to a SIMPLE retirement account.

$12,500 $12,500
SIMPLE Catch-up Limit (IRC § 414(v)(2)(B)(ii)))

The maximum amount of catch-up contributions that individuals age 50 or over may make to a SIMPLE retirement account or SIMPLE 401(k) plan.

$3,000 $3,000
Social Security Taxable Wage Base

See the 2018 SS Changes Fact Sheet.

This threshold is the maximum amount of earned income on which Social Security taxes may be imposed (6.20% paid by the employee and 6.20% paid by the employer).

$127,200 $128,700

Exemption to ACA Contraceptive Mandate Extended to For-Profit Entities and Individuals

Exemption to ACA Contraceptive Mandate Extended to For-Profit Entities and Individuals

Under the ACA, employers must provide plans that cover birth control and other preventative health services with no out-of-pocket costs. Certain religious employers with religious objections to providing contraceptive services have been exempt from the requirement. (Accommodations have also been provided to non-profit religious organizations objecting to the rule and expanded to closely held for-profit entities objecting to the mandate on religious grounds, see http://www.benefitslawadvisor.com/2014/07/articles/employee-health-welfare-plans/1007/).

The new rules, issued through the IRS, DOL, and HHS, broaden the exemption in scope and in application to for-profit entities that object to providing or covering identified contraceptive services due to sincerely held religious beliefs or moral convictions.

Exemptions for Plan Sponsors

For employers, the temporary and proposed regulations issued by the administration extend use of the religious exemption to for-profit, non-governmental plan sponsors of group health plans, including closely-held and publicly held for-profit entities, non-religious non-profit organizations, and institutions of higher education in their arrangements of student health insurance coverage.

The regulations also provide an exemption based upon sincerely held moral convictions to non-Federal governmental plan sponsors, including non-profit organizations, for-profit entities with no publicly traded ownership interests, and institutions of higher education in the arrangement of student health insurance coverage.

Exemptions for Health Insurance Issuers

Health insurance issuers offering group or individual insurance coverage (“issuers”) that object to providing coverage for certain contraceptive services are provided an exemption from offering coverage of mandated contraceptive services to the extent the exemption is based upon the issuer’s sincerely held religious beliefs or moral convictions.

An issuer is also exempt from providing coverage where the exemption is provided to a plan sponsor due to the sponsor’s religious or moral objection (regardless of whether the issuer has its own objection).

The issuer exemption does not exempt a group health plan from providing mandated contraceptive services under the ACA. Therefore, unless the plan sponsor itself is exempt under the regulations, issuers that hold religious or moral objections should notify plan sponsors of any contraceptive services not covered due to the issuer’s exemption.  The issuer should also inform the plan sponsor that the group health plan remains obligated to provide mandated contraceptive services.

Exemptions for Individuals

Individuals who object to coverage or payment of certain contraceptive services by a sponsoring employer are exempt to the degree that the plan sponsor and health insurance issuer agree to offer separate benefit package option, policy, or insurance certificate or contract omitting contraceptive coverage to the objecting individual. The individual exemption cannot be used to require a plan sponsor or insurance issuer to omit contraceptive coverage if the plan sponsor or issuer has no objection to providing such coverage, nor can it be used to prevent application of laws requiring contraceptive coverage under State law.

The individual exemption may be recognized by private and governmental employers. A non-exempt governmental employer may choose to offer an individual participant coverage omitting contraceptive services that honors the individual’s objections.  Note, however, this exemption is limited to the ACA mandate for contraceptive services and is not applicable to state laws requiring contraceptive coverage.

Exemption Notification Requirements for Employers

Plan sponsors are not required under the new rules to file an exemption notice or comply with a self-certification process to claim a religious or moral exemption from the ACA’s contraceptive mandate. Nevertheless, employer-provided group health plans remain subject to ERISA and its disclosure requirements.  Employers objecting to the provision of certain contraceptive services must make sure that any coverage exclusions are clearly identified in the plan document.   Any contraceptive services subsequently omitted from plan coverage must be adequately communicated to participants and beneficiaries through all applicable ERISA disclosures. 

Rules are available at: https://www.federalregister.gov/documents/2017/10/13/2017-21851/religious-exemptions-and-accommodations-for-coverage-of-certain-preventive-services-under-the

and

https://www.federalregister.gov/documents/2017/10/13/2017-21852/moral-exemptions-and-accommodations-for-coverage-of-certain-preventive-services-under-the-affordable

Although the interim final rule is effective immediately, HHS is requesting public comments on the rule (see http://www.regulations.gov). Written comments must be received by December 5, 2017.

To Audit or Not to Audit? A Good Question for Self-Funded Group Health Plans

The rise in insurance premiums for group health plans has prompted many employers to reexamine the decision whether to fund participant health benefits with insurance or self-fund benefits and limit their claims risk by purchasing stop-loss insurance. The increasing number of self-funded health plans in workplaces across the country has caused some confusion among employers and their advisors as to the requirements for Form 5500 reporting and fiduciary audits for these plans. The last time the Department of Labor (“DOL”) weighed in on these issues was in 1992 (see EBSA Technical Release 92-01), so it is easy for advisors to look upon the rules associated with group health plan reporting as “old news.” Surprisingly, however, many advisors assume that, so long as self-funded health plan benefits are paid out of an employer’s general assets, and not a trust or VEBA , no reporting or fiduciary audit obligations exist. In reality, with respect to most self-funded health plans existing in workplaces today, this assumption is dead wrong.

In Technical Release 92-01, the DOL addressed the question whether the use of cafeteria plans to collect and process employee contributions to group health plans violated the rule that employee contributions must be segregated from employer assets and held in trust. The DOL’s technical guidance and regulations established the rule that, for fully insured plans, employee contributions could be collected through a cafeteria plan, and remitted to the insurance carrier within a short time period, without violating ERISA trust requirements. Such plans would be excused from the Form 5500 filing requirement if there were fewer than 100 participants at the beginning of the plan year. Plans with more than 100 participants at the beginning of the plan year would be required to file a Form 5500, but were exempted from the requirement to submit a fiduciary audit report or Schedule H. For fully insured plans it was simple.

However, Technical Release 92-01 left the situation with self-funded health plans caught up in a complex compliance environment caused by the fact that virtually 100% of such plans are, first, funded in part through participant contributions for themselves, their spouses, or their dependents, and second, that participant contributions are paid on a pre-tax basis through cafeteria plans. Under these circumstances, the question whether a Form 5500 with a Schedule H must be filed, and a fiduciary audit report included, depends upon the following: (i) whether the plan document language causes participants to infer that the money deducted from their wages is segregated (either placed in trust or sent to a special account) to be used to pay plan benefits; (ii) whether COBRA premium payments are remitted directly to a TPA or held in a separate plan account segregated from the employer’s general assets; (iii) whether the participant contributions, employer contributions and COBRA premium payments are placed in a TPA “zero balance account” and used to pay plan benefits without accumulation or carry-over of any account balances from one month to the next, or one year to the next; and (iv) whether the TPA’s account comingles assets from more than one employer.

In the current environment of group health plans, the customary arrangement with TPAs often results in the employer wiring employee contributions through the cafeteria plan, COBRA premiums, and any required employer contributions, to the TPA to be held in an account (which may or may not be the employer’s segregated account) from which the TPA writes checks for allowed claims. Often, the TPA maintains one account for many of its employer plans, but accounts for each employer’s plan assets and claims separately. Some TPA’s take the “float” or earnings from these accounts as compensation. Also often, the accounts attributable to any individual employer’s plan are not completely depleted or “zeroed out” at any time. Participant contributions taken from payroll at the end of the calendar year (and corresponding plan year) are used to pay claims submitted in the subsequent year. Plan documents describe the health plan’s funding as “from participant and employer contributions,” without any reference to whether these accumulated amounts are available to the employer’s creditors, as well as the plan’s creditors.

Under these common, self-funded health plan scenarios, non-enforcement promises in Technical Release 92-01, and exemptions from reporting and disclosure requirements, do not apply. All self-funded health plans must file a Form 5500. Employers with small group health plans, i.e., those with less than 100 participants, must file a Form 5500 and include Schedule I. Employers with large group health plans must file Form 5500, include a Schedule H, and submit an independent auditor’s (accountant’s) report. In circumstances where the TPA comingles funds from unrelated employers, a Form M-1 (MEWA report) may need to be filed.

Thus, under the most common of administrative scenarios relied upon today, employers that are sponsors and plan administrators of self-funded health plans have reporting and fiduciary audit obligations. The employers are not relieved of these obligations merely because they fund plan benefits out of their general assets, rather than a trust or VEBA. It is prudent, therefore, for all employers who sponsor and administer self-funded health plans to review their plan document language, their own and their TPA’s asset collection and benefit payment processes (including the administration of COBRA premiums and benefits) and determine whether their current reporting and disclosure practices comply with ERISA’s requirements. In sum, for self-funded health plans today, answers to old questions, may be entirely new.

Employer Health Plan Premiums Rose in 2016, But Just Barely

Premiums for Affordable Care Act (ACA) marketplace coverage continue to sky rocket, with the average cost of a benchmark plan in the individual market place rising 20% this year. There is very different news for employer-sponsored plans. According to the nonprofit Kaiser Family Foundation, in 2016 annual family premiums rose on average a modest 3% to $18,142 per year, of which workers paid on average $5,277, just barely outpacing the average increase in workers’ wages (2.5%) and inflation (1.1%).

Based on its 2016 annual survey of employers, the Kaiser Family Foundation reported that the low increase is part of an ongoing trend: family premiums have increased less than 5% in each of the last six years, for a total increase of 20% since 2011. In contrast, family premiums increased by 31% between 2006 and 2011 and by 63% between 2001 and 2006.

So why the historically low rates? Higher employee deductibles may be part of the answer. Covered employees continue to move into high deductible plans with Health Savings Account (HSAs) or linked to Health Reimbursement Arrangements (HRAs), which have lower average premiums that traditional group health plans. In 2016, 29% of covered employees where enrolled in high deductible plans compared with 20% in 2014. Preferred provider organization plans (PPOs), which have higher than average premiums, saw the opposite trend: 48% of covered workers were enrolled in such plans, down from 58% in 2014.

The survey also looked at the impact of the ACA on employer coverage. This year, ACA shared responsibility provisions took full effect, with the result that applicable large employers (ALEs) — employers with 50 or more full-time employees (including full-time equivalents) — must offer group health plan coverage that meets the ACA’s value and affordability standards to their full-time employees (and dependents) in order to avoid penalties. The survey found that 93% of ALEs offered health benefits to at least some of their employees and that the great majority of those ALEs offered coverage that met the ACA’s value and affordability requirements.

Other topics in the survey include:

• Trends in spousal coverage. A growing percentage of firms are using limitations and incentives to require or encourage spouses to enroll in other employer coverage available to them.
• Single coverage premiums. Premiums for single coverage averaged $6,435 annually, with employees bearing on average $1,129 of that cost.
• Health risk assessments. 59% of large employers that offer health benefits also offer employee health risk assessments, which ask employees questions about lifestyle, health status and medical history. 54% of the large employers that use health risk assessments provide financial incentives to encourage employee participation — including reduced premiums or cost sharing, contributions to an HSA, or cash.
• Biometric screenings. 53% of large firms offer biometric screenings, which are physical exams that measure health indicators such as weight, blood pressure and cholesterol. 59% of these firms offer financial incentives to employees who participate in the screening. A smaller percentage (14%) tie incentives to attaining specific health outcomes, such as weight loss or reduced cholesterol levels.

Employers who want more information concerning trends in employer-sponsor health coverage can access the survey at http://www.kff.org/ehbs.

Crossing the Threshold – Small Business to “ALE”

While many of us have been crossing our fingers behind our backs, hoping that the Affordable Care Act’s employer reporting and shared responsibility penalties would be repealed, many small businesses have crossed the threshold to applicable large employer (ALE) status as a result of hiring or business ownership changes. A business that averaged 50 or more full-time employees (including full-time equivalent employees) in 2016 is an ALE for reporting and penalty purposes in 2017.

Determining whether your business is an ALE is a simple five-step process: First, for each month in 2016, count the number of employees who were employed to work on average at least thirty hours per week. Count all full-time common law employees (including seasonal employees) who work for all entities treated as part of the same controlled group or affiliated service group. Second, for each month of 2016, add the total number of hours for all other employees not counted in step one and divide each monthly sum by 120 – the result is the number of full-time equivalents for each month. Third, add the results of steps one and two to obtain twelve sums – one for each month of 2016. Fourth, determine the average of the sums obtained in step three by adding them up and dividing by twelve (do not round up). If the result is less than fifty, you’re not an ALE. If the result is fifty or more, there’s another step: you still might not be an ALE if you had more than fifty employees for no more than four months during 2016 and you exceeded fifty in those months because you had seasonal employees.

If your business has crossed the threshold to ALE status, consider your vulnerability to the (nondeductible) employer penalties: If you didn’t offer group health coverage to at least 95% of your full-time employees (and their children) and a full-time employee obtains subsidized “Marketplace” coverage for a given month, the business will be subject to a penalty equal to $188.33 per full-time employee in excess of 30 for that month (Penalty A). Alternatively, if you did offer group health coverage to at least 95% of your full-time employees (and dependents) but a full-time employee declined your coverage and instead obtained subsidized Marketplace coverage for a given month, the business will be subject to a penalty for that month equal to the lesser of the Penalty A amount or $282.50 for each full-time employee who had subsidized Marketplace coverage (Penalty B). An employee can obtain subsidized Marketplace coverage and trigger the employer penalty for a given month if you didn’t offer group health coverage that meets the minimum value and affordability tests.

An ALE that escapes the penalty still is subject to the ACA’s employer reporting requirements. The IRS has devoted a webpage to reporting resources for employers.

New Guidance on Taxation of Contributions and Benefits Under New York State’s Paid Family Leave Program

The New York State Department of Taxation and Finance (the “Department”) recently provided guidance regarding the taxation of contributions made under, and benefits paid under, New York State’s new paid family leave program (“Program”).  After reviewing applicable law and other guidance, and after consulting with the Internal Revenue Service regarding the appropriate tax treatment of Program contributions and benefits, the Department provided the following guidance:

CONTRIBUTIONS

  • Premiums paid by employees through wage deductions are to be deducted from employees’ after-tax wages; and
  • Employers should report employee contributions on IRS Form W-2 using Box 14 – State disability insurance taxes withheld.

 BENEFIT PAYMENTS

  • Benefits paid to employees are taxable non-wage income that must be included in federal gross income;
  • Taxes are not to be automatically withheld from benefit payments, but employees may request voluntary tax withholding; and
  • Benefits are generally required to be reported by payers on IRS Form 1099-MISC.

The Department’s guidance is welcome clarification.

 

FORFEITURE FREEDOM

Some of our employer client sponsors of pre-approved 401(k) plans have contacted us regarding plan amendment notices received recently from their prototype or volume submitter plan document sponsors relating to the expanded use of forfeitures in their plans. An employer is informed either that an amendment has already been made for all employers that have adopted the plan form or requests or suggests that they adopt the amendment for their particular plan. The amendment specifically allows amounts in forfeiture accounts to now be used to fund qualified nonelective contributions (“QNECs”) and qualified matching contributions (“QMACs”) and, for safe harbor plans, to fund safe harbor plan contributions. Bottom line: the news is all good, and the amendment should be welcome and/or adopted for virtually all plans.

This mass amendment of plans stems from Proposed Treasury Regulations issued by the IRS in January of this year which reverse a multi-year position taken by the IRS to the effect that QNECs and QMACs had to be fully vested when first contributed to the plan, rather than when allocated to the accounts of participants.  QNECs and QMACs are primarily used by non-safe harbor 401(k) plans to meet the ADP and ACP nondiscrimination tests for plans that do not use distributions of excess contributions to remedy a failed test.  After much lobbying by benefits lawyers, actuaries and accountants, the IRS has finally accepted the view that the better reading of the Internal Revenue Code and the Treasury Regulations is that nonforfeitability conferred by the plan sponsor when such contributions are allocated to accounts is what matters.  The new right to use forfeitures for QNECs and QMACs also extends to 401(k) safe harbor matching or nonelective contributions, which must also be fully vested when allocated.  Taxpayers may rely on the regulations for periods preceding the date the regulations eventually become final. If the Final Regulations are more restrictive than the Proposed Regulations the Final Regulations will not be applied retroactively to create a noncompliance problem for any plan amended in reliance on the Proposed Regulations.  Lingering remaining questions, however, are whether forfeitures could be used for safe harbor 401(k) contributions made for the 2016 year or even whether forfeitures arising in 2016 could be used in 2017.  We are not aware that the IRS has yet clarified with any formal or informal comments.

Such an amendment is a discretionary plan amendment, meaning if the employer wants to reallocate forfeitures under the new regulations at a time in 2017 prior to making the amendmentthen it must adopt the amendment before the 2017 plan year end.

Finally, if you are an adopter of an individually-designed 401(k) plan, you will very likely wish to make this amendment to your plan.  Feel free to contact Jackson Lewis so we may help you with an amendment suited to your plan.

LexBlog