It’s 2024, which means a new batch of provisions from SECURE Act 2.0 have gone into effect. One of the more significant ones is an increase in the “cashout” limit that a qualified plan can impose to kick former employees with small balances out of their plans.

The cashout limit allows a qualified plan to force a distribution of the accrued benefit of a participant whose account balance is below a certain threshold stated in the Internal Revenue Code. You don’t need the participant to make an election or otherwise consent to the distribution; you just have to give them a reasonable period to make an election as to how they want to receive the benefit. If they don’t respond, the plan ships out the benefit. If the value of the forced distribution is over $1,000 and the participant doesn’t elect how to receive the benefit, the distribution must go into an IRA established for the participant – and it isn’t hard for a plan to find a service provider who will be happy to set up those IRAs.

For a while, this limit was $3,500 and was increased to $5,000 by the Taxpayer Relief Act of 1997. The final regulations for this increase became effective October 17, 2000. SECURE Act 2.0 bumps it up to $7,000 as of January 1, 2024. Plans aren’t required to have a force-out provision, but nearly all do, and for good reason.

It’s hard to imagine a scenario where it wouldn’t be smart for a plan to take advantage of the increased limit. Here are the main reasons why:

  • The IRS and DOL have made it known to plan sponsors that it’s important for them to do their best to keep track of terminated employees so those participants can ultimately get the benefits they’ve earned. The more participants you can drop, the fewer participants you have to worry about losing.
  • Plans with 100 or more participants (generally, it’s 100; the rules are a little more complex than that) with account balances at the start of the plan year must be audited by an independent CPA firm. While I’m one of the first people who will tell you that good auditors provide value and can catch a lot of operational errors before they snowball into bigger problems, they aren’t cheap. Sponsors on the borderline of needing an audit usually want to avoid the cost if they can, so removing more account balances might get the plan under the limit.
  • For bigger plans that are more likely to be the target of a class action lawsuit, removing participants can reduce the leverage that a participant class can have, even if the claims aren’t all that strong. Once a class action is filed, it’s largely a numbers game.
  • If the plan’s third-party administrator charges a fee based on the number of participants, reducing the plan’s headcount naturally reduces that fee.
  • Distributing the balance of a participant who isn’t 100% vested allows the non-vested amounts to be moved into the plan’s forfeiture account, and those amounts can pay plan expenses, offset contributions, or be reallocated to other employees.
  • For ESOPs (sorry, I had to get in something specific to ESOPs), forcing out a participant’s balance earlier can help control the plan’s repurchase liability, assuming that the value of the stock will increase. It’s generally less expensive to buy out the stock earlier. Plus, if shares are forfeited, they can be allocated to other employees, and having enough shares to allocate to current employees can become more of a struggle as an ESOP matures.

Recent guidance extended the required amendment adoption date to December 31, 2026, for many SECURE 2.0 provisions, including this increase to the cashout threshold. Plan sponsors wanting to use the higher threshold may do so while waiting to adopt an amendment. Those inclined to increase their cashout level should discuss the change process with their third-party administrators before taking any action themselves.

The Jackson Lewis Employee Benefits Practice Group members can assist plan sponsors in understanding and putting the requirements of SECURE 2.0 into practice. Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

Unionized employers participating in an underfunded multiemployer pension plan face significant financial exposure when withdrawing (completely or partially) from the plan.  The cost (called “withdrawal liability”) is generally based on the employer’s pro rata share of the pension plan’s unfunded vested benefits and typically amounts to hundreds of thousands or millions of dollars.  This withdrawal liability must be imposed even though the employer has made all required contributions to the plan.

Accounting for the risk of withdrawal liability requires understanding the many intricacies of the law, including when a shareholder or officer may be personally liable despite the business being a corporation or limited liability company. 

Liable Employer – The Controlled Group Concept

All trades or businesses under sufficient common control or ownership to be a controlled group (as defined by IRS regulations) constitute the “employer” for withdrawal liability purposes.  Thus, if one member of a controlled group ceases contributions to a multiemployer pension plan, causing a complete withdrawal, then all related members of the group will be jointly and severally liable for payment of the liability. 

 Personal Liability

If the withdrawn employer fails to make the required withdrawal liability payments, the trustees of the multiemployer pension plan will often initiate action against current and former related entities to the signatory employer, including individuals.

Owners must pay special attention to whether any personal holding or investment entity could be considered a “trade or business” for controlled group purposes (particularly in the situation of a business closely held by a small number of individuals).  If the controlled group includes a partnership or sole proprietorship, then the liabilities of that business pass through to the owners.  For example, a shareholder in a limited liability entity that withdraws from a multiemployer plan may find that an economic side activity such as renting out a piece of property is considered to be a sole proprietorship that is a “trade or business” within the controlled group of the withdrawn employer.  By being a controlled group member, this rental business would be jointly and severally liable for withdrawal liability, and by being a sole proprietorship, the business’s liability would pass through to the owner as a matter of law even if the withdrawn employer was a corporation with limited liability for its shareholders.  

Along with the controlled group concept, pension funds may use other theories to try to impose withdrawal liability upon an individual (or related entity):

Alter ego/piercing the corporate veil: an affiliated company, shareholder, or officer may be held liable for the withdrawal liability of a corporation under its control if it acted as the “alter ego” of the corporation or otherwise met the requirements for “piercing the corporate veil.”

Individual signatories: an individual signing a CBA in an individual capacity on behalf of an employer may also agree to assume personal liability for the employer’s unpaid plan contributions and withdrawal liability.

The above theories are not the exclusive mechanisms in which multiemployer pension funds have tried to extend withdrawal liability to other parties.  The range of issues relating to withdrawal liability is significant and distinct for each employer.  Given the complexities involved, employers should evaluate specific scenarios with the assistance of counsel.  Please contact a Jackson Lewis attorney if you have any questions or need assistance.

America’s cultural wars may be opening up a new front, and group health plans may be caught in the fray. Since the US Supreme Court decision in Dobbs ended almost fifty years of constitutional protection for abortion rights and gave states the authority to regulate abortion, lawmakers (or citizens) have either enacted new prohibitions on abortions or created new legal protections for women seeking abortions. And in anticipation of the Supreme Court possibly eroding protections for transgender people, lawmakers in many states are expanding their efforts to include prohibitions against or protections for gender-affirming treatments. Some states have drafted their prohibitions so broadly that many sponsors of group health plans are concerned about criminal liability for offering reproductive and gender-affirming treatments under their health plans to employees who work in states with these broad prohibitions. But employees, advocacy groups, some courts, and the Biden administration are all working to make sure transgender people have access to gender-affirming care. 

Many employers feel caught between a rock and a hard place. 

Some employers want to continue to provide their female workers with a full array of healthcare services, including abortion services, even if they must travel to another state to access those services. However, some states have drafted their laws so that an employer who pays for travel expenses so a woman can obtain an abortion in a neighboring state might be “aiding and abetting” an illegal act. Employers may take some comfort from Supreme Court Justice Kavanaugh’s concurring opinion in Dobbs, saying that interstate travel is a constitutional right, and no state could prohibit a resident from traveling to another state for an abortion. In response, Idaho has passed an “abortion trafficking” law making it a crime to help a minor cross state lines for an abortion without her parents’ consent, although a federal court recently blocked enforcement of that law. ERISA’s preemption clause may also provide some protection for self-insured plans, although ERISA does not preempt “generally applicable criminal” state laws. Given these uncertainties, employers may feel they must either deny their female workers full healthcare benefits or face a lawsuit or even criminal charges. Further complicating the issue is the fact that more than half of the abortions in the United States are medication abortions, according to the Guttmacher Institute. Some states are acting to ban pharmacies from dispensing or mailing abortion medications to their residents, and there are two conflicting federal court rulings in Texas and Washington State on the provision of mifepristone, the primary drug used for medication abortion.

More recently, many states are banning specified gender-affirming treatment for individuals under a certain age. According to the Human Rights Campaign, twenty-two states have passed laws banning gender-affirming care for individuals up to age eighteen. For employers who believe that providing these benefits is critical to attracting and retaining a diverse workforce, this creates another dilemma. If a young person is seeking gender-affirming treatment, and the employer wants to cover the treatment and pay for travel expenses if the state where the individual lives prohibits the procedure, the employer could face a lawsuit or possibly even criminal charges. Meanwhile, on the federal level, the trend seems to be moving in the opposite direction. The Biden administration has adopted a position supportive of gender-affirming treatments, and some believe that health plans must cover gender-affirming treatments because Section 1557 of the Affordable Care Act prohibits discrimination on the basis of sex (which includes gender identity). As a result, employers that may have legitimate concerns about covering gender-affirming treatments are feeling pressured to offer them under their plans. 

With things developing so rapidly and no clear direction, employers are understandably confused about whether they may or must provide benefits to employees seeking abortions or gender-affirming treatments. We recommend keeping an eye on developments at the state and federal levels, deciding what is right for your company (including what your employees want and how much risk you are willing to take), and being ready to pivot in response to important developments. 

The Jackson Lewis Employee Benefits Practice Group members can assist if you have questions or need assistance. Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

As discussed in a previous blog, the Patient-Centered Outcomes Research Institute (PCORI) is an independent nonprofit research organization that funds comparative clinical research, among other things. PCORI is funded through annual fees — provided for in the Affordable Care Act — paid by insurers of fully insured health plans and sponsors of self-insured health plans, including health reimbursement arrangements (HRAs) that are not excepted benefits (i.e., that do not reimburse certain coverage premiums and limit contributions to no more than $1,800 annually, as indexed, among other requirements). The PCORI fee originally applied only to health plans with plan years ending after September 30, 2012, and before October 1, 2019. However, the Bipartisan Budget Act of 2019 extended PCORI fees through 2029.

Dental plans and vision plans that are excepted benefits (i.e., are offered through a stand-alone insurance policy or are not integrated with a health plan) are not subject to PCORI fees. Similarly, health flexible spending accounts that are excepted benefits (i.e., the maximum benefit payable does not exceed two times the participant’s salary reduction election or $500 plus the participant’s salary reduction election and other qualifying health plan coverage is provided to participants) are also excepted benefits not subject to PCORI fees.

For plan years ending in 2023, the PCORI fee is due July 31, 2024.

IRS Notice 2023-70 recently provided the adjusted PCORI fees. For plans with plan years that ended on or after October 1, 2023, and before October 1, 2024, the fee is $3.22 per covered life. Employers who maintain self-insured health plans and HRAs (both with the same plan year) need not pay a separate PCORI fee for HRA-covered lives. However, employers who provide coverage through a fully insured plan (the PCORI fee for which will be paid by the insurer) and an HRA must pay a PCORI fee based on the HRA, but covered lives are limited to employees.

The IRS provides helpful FAQs about PCORI fees, including information about permitted methods for counting covered lives.  Permitted methods include:

  • Actual count method. Add the total number of lives covered under the plan for each day of the plan year and divide by the total number of days in the plan year.
  • Snapshot method. Add the total lives covered on one or more days during each quarter of the plan year and divide by the number of days used.
  • Snapshot factor method. The number of lives covered on a date equals (a) the number of employees with self-only coverage and (b) the number of employees with other than self-only coverage multiplied by 2.35.
  • Form 5500 method. The method used for calculating participants for Form 5500 reporting. 

The PCORI fee is reported using IRS Form 720, Quarterly Federal Excise Tax Return.  The PCORI fee can be remitted to the IRS electronically or by mail.

If you need more information about PCORI fees, please contact the author or the Jackson Lewis attorney with whom you normally work.

The Internal Revenue Service recently announced its cost-of-living adjustments applicable to dollar limitations on benefits and contributions for retirement plans generally effective for Tax Year 2024 (see IRS Notice 2023-75). Most notably, the limitation on annual salary deferrals into a 401(k) or 403(b) plan will increase to $23,000, and the dollar threshold for highly compensated employees will increase to $155,000. The more significant dollar limits for 2024 are as follows:

LIMIT20232024
401(k)/403(b) Elective Deferral Limit (IRC § 402(g)) The annual limit on an employee’s elective deferrals to a 401(k) or 403(b) plan made through salary reduction.$22,500$23,000
Government/Tax Exempt Deferral Limit (IRC § 457(e)(15)) The annual limit on an employee’s elective deferrals concerning Section 457 deferred compensation plans of state and local governments and tax-exempt organizations.$22,500$23,000
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 over the age of 50 generally can make an additional “catch-up” contribution not to exceed this limit.
$7,500$7,500
Highly Compensated Employee (“HCEs”)  (SECURE 2.0 Sec. 603 – IRC § 414(v)(7)) Catch-up contributions for HCEs earning above this limit in FICA wages for the preceding year MUST be ROTH contributions.   Not Required for Plan Years beginning in 2024$66,000$69,000
Defined Benefit Plan Limit (IRC § 415(b)) The limitation on the annual benefits from a defined benefit plan.$265,000$275,000
Annual Compensation Limit (IRC § 401(a)(17)) The maximum amount of compensation that may be taken into account for benefit calculations and nondiscrimination testing.$330,000 ($490,000 for certain gov’t plans)$345,000 ($505,00 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.$150,000 (for 2024 HCE determination)$155,000 (for 2025 HCE determination)
Highly Compensated Employee (“HCEs”)  (SECURE 2.0 Sec. 603 – IRC § 414(v)(7))    Catch up contributions for HCEs earning above this limit in FICA wages for the preceding year MUST be ROTH contributions.   Not Required for Plan Years beginning in 2024 $145,000
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.$215,000$220,000
SEP Minimum Compensation Limit (IRC § 408(k)(2)(C)) The mandatory participation requirements for a simplified
employee pension (SEP) includes this minimum compensation threshold.
$750$750
SIMPLE Employee Contribution (IRC § 408(p)(2)(E)) The limitation on deferrals to a SIMPLE retirement account.$15,500$16,000
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.
$3,500$3,500
Social Security Taxable Wage Base See the 2024 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).$160,200$168,600

Please contact a team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

When the original SECURE Act was passed in 2019, compliance with its new long-term part-time employee rule seemed far in the future—way out to January 1, 2024. Well, that time is nearly upon us, so sponsors of 401(k) plans should be ready to let these long-term part-time employees start participating in their plans with the start of the New Year.

Under this long-term part-time employee rule, part-time employees who work at least 500 hours during three consecutive 12-month periods must be eligible to participate in the plan for purposes of elective deferrals (subject to any applicable age requirement). The 12-month periods began as of January 1, 2021, so the first time an employee could become eligible under this rule is January 1, 2024.

 Plan sponsors should have started counting and tracking part-time employee hours as of January 1, 2021. Now is the time to look at that data to determine which employees may be required to be eligible to make elective deferrals as of January 1, 2024. Don’t forget that certain employees may be excluded from this new eligibility rule (such as employees subject to a collective bargaining agreement) and that these employees can be excluded from certain nondiscrimination testing.

 While these long-term part-time employees may be newly eligible for elective deferrals, the IRS has clarified that employers generally must include all years of services with the employer to determine the employee’s vesting rights to employer contributions. To be clear, the employees becoming eligible under this new rule are only required to be eligible to make employee deferrals—they are not also required to qualify for employer contributions. Whether to expand eligibility for employer contributions to these employees is up to the plan sponsor. As with eligibility, a year of vesting services for these employees is based on a 500-hour threshold.

 To help with the administrative burden of tracking these periods of 500 hours, plan sponsors should count hours on the date the employee’s employment begins. If the employee does not complete the required hours of service during the initial 12-month period of employment, plan sponsors may then use the first day of the plan year for hours-counting purposes going forward.

 As a reminder, SECURE 2.0 created a variation to the long-term part-time rule set forth in the original SECURE Act, as we wrote about here. Plan sponsors should ensure compliance with both the original SECURE Act rule and the SECURE 2.0 rule.

 If you have questions about the rules for long-term part-time employees under either the original SECURE Act or SECURE 2.0 or if your plan does not let part-time employees save for retirement, please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

On August 9, the IRS issued a news release, IR-2023-144, warning taxpayers and advisors of “numerous compliance issues” with ESOPs, such as “valuation issues with employee stock,” “prohibited allocation of shares to disqualified persons,” “failure to follow tax law requirements for ESOP loans causing the loan to be a prohibited transaction” and “promoted arrangements using ESOPs that are potentially abusive.” Naturally, this out-of-nowhere release caused quite a bit of bad blood in the ESOP community because the tone of the release made it sound like ESOPs were in trouble. We fielded questions from several ESOP clients asking what this was about and if they should be concerned about an IRS agent arriving to audit their plans – which, if timed right, could lead to a cruel summer.

Since then, the IRS has provided more insight into what triggered the news release, and as expected, most ESOP sponsors should be able to shake it off. We’ve learned that the IRS issued the release to alert interested parties and the employee ownership community that they’ve identified what they’ve termed a “questionable transaction” sold by a small number of promoters. These generally involve small medical or dental practices in which an ESOP is set up through a management company that provides services to the practice (which, in most states, can’t have an ESOP due to ownership restrictions). The management company then charges fees to the practice for management services, but at a level that takes most or all of the profit out of the practice, resulting in the group’s income flowing into a 100% ESOP S corporation, which is exempt from income taxes. Then, the management company loans its retained earnings to the practice’s owners, giving those owners cash flow without taxes. How or when those loans ever get paid back is somewhat of a mystery. 

The good news is that the IRS has made an effort to let the ESOP world know that its concerns only involve a few promoters, and the broader community still has a good reputation. Most plan sponsors who set up ESOPs for the right reason have no need for concern about enhanced IRS enforcement activities. The release is only about those promoters who twist the law to a point where the transactions toe the line of abusiveness, which happens with nearly every other part of the tax code. It sounds like karma will ultimately catch up to those promoters.

The Jackson Lewis Employee Benefits Practice Group members can assist if you have questions or need assistance. Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

The new Illinois Transportation Benefits Program Act (HB 2068; P.A. 103-291) aims to promote the commuter benefits available to employees who use public transportation to commute to and from work.

Beginning January 1, 2024, certain employers located within designated Illinois counties and townships will be required to provide employees a “pre-tax commuter benefit.”

The pre-tax benefit means that employers must allow covered employees to use pre-tax dollars for the purchase of a transit pass through payroll deduction. A transit pass is any pass, token, care card, and the like entitling the employee to take public transit. Participating transit programs may include those offered by the Chicago Transit Authority (CTA) or the Regional Transportation Authority. More…

Under the Affordable Care Act (ACA), applicable large employers (ALEs) — i.e., those with, on average, fifty (50) or more full-time or full-time-equivalent employees in the preceding year — must offer in the following year affordable, minimum value group health plan coverage to their full-time employees and those employees’ dependents or risk imposition of ACA penalties. Affordability is determined by using the employee’s premium for the lowest-cost employee-only coverage under the employer’s plan. The coverage is affordable if the employee premium for this coverage is 9.5% (as adjusted) or less of the employee’s household income.

Recognizing that employers might have a very difficult — if not impossible — time determining full-time employee household income, the ACA employer mandate final regulations set forth three (3) safe harbor proxies for employee household income that employers can select from to make affordability determinations:  the federal poverty line, W-2 wages, or rate of pay.

In the recently issued Rev. Proc. 2023-29, the Internal Revenue Service announced the affordability percentage that will apply for plan years beginning in 2024:  8.39%. This percentage is a notable reduction from the previously applicable 9.12% for 2023 and is the lowest applicable percentage since the employer mandate’s inception.

With open enrollment for calendar year plans just around the corner, ALEs should take immediate steps to make sure their offers of coverage for 2024 will satisfy the new affordability percentage.

If you have questions concerning the affordability percentage or any other aspect of the ACA, the Jackson Lewis Employee Benefits Practice Group members are available to assist. Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.