2013 Year End Benefit Plan Compliance Update and Reminders for Employers
As 2013 draws to a close and we look ahead to 2014, there is no shortage of benefit plan administrative challenges with which employers must contend. While the Patient Protection and Affordable Care Act of 2010 ("ACA") remains very much at the forefront of these challenges, retirement plan and deferred compensation plan administration continue to require attention. With that in mind, we offer the following non-exhaustive summary of key legal compliance matters to keep in mind while closing out this year and planning for next year.
Health Care Reform Update
Despite the waves of political and judicial attacks that are not expected to let up – and the missteps that marred the roll out of HealthCare.gov – the ACA continues to be the law of the land. The implementation of some important components of the ACA has been delayed, however, and some elements of the law have been modified. Beyond well-publicized notice and other requirements that took effect earlier this year, employers should take note of the following:
- Delayed implementation of the employer mandate.The reporting requirements for large employers under Section 6055 (regarding individuals offered health coverage) and Section 6056 (regarding the terms and conditions of the health coverage offered) have been delayed until 2015, though the IRS has encouraged voluntary reporting for 2014. Perhaps more importantly, this delay prompted a delay in the implementation of the employer shared responsibility component of the ACA, until 2015. This means that applicable large employers will not be subject to penalties for failing to offer compliant health insurance coverage to full-time employees and their dependents in 2014.
- Repeal of the Massachusetts Section 125 Plan Rule.Starting with the first plan year beginning on or after January 1, 2014, Massachusetts employers may no longer allow non-benefits eligible employees to purchase individual health insurance using pre-tax dollars through a Code Section 125 plan. This is because the Massachusetts law requiring employers with 11 or more full-time equivalent employees to offer Section 125 plans to any employee wishing to purchase individual health insurance (956 CMR 4.07(3)) is incompatible with the ACA. See IRS Tech. Rel. 2013-03 and IRS Notice 2013-54. In order to comply with the ACA, calendar year Section 125 plans will have to discontinue the affected benefits on December 31, 2013. Fiscal year plans may continue through the end of the plan year that expires in 2014, but employees will not be permitted to obtain an ACA tax credit for any month in 2014 in which they used pre-tax dollars to purchase an individual policy.
- Elimination of excessive waiting periods.For plan years beginning on or after January 1, 2014, group health plans must eliminate waiting periods in excess of 90 days, annual limits on essential health benefits (as defined by law), and pre-existing condition exclusions for all individuals. Although regulations have not yet been finalized, the federal agencies responsible for ACA implementation have proposed eliminating the requirement to provide certificates of creditable coverage as of December 31, 2014.
Non-ACA Welfare Plan Changes
- Change to health FSA "use it or lose it" rule.Under IRS Notice 2013-71, employers have the option of allowing participants in health flexible spending accounts ("FSAs") to carry over up to $500 in unused health FSA funds to the following plan year. An employer wishing to adopt the carryover feature must amend its health FSA plan to provide for the carryover and must eliminate any grace period the plan may have, though the plan may maintain a claims run-out period. (A grace period is a period of up to two and one-half months following the end of a plan year during which a participant may use amounts remaining from the prior year to cover expenses incurred during the current plan year, while a claims run-out period provides participants with a period of time following the end of a plan year to submit claims for expenses incurred during that prior plan year.) Generally an employer must adopt the carryover amendment on or before the last day of the plan year from which amounts may be carried over, but an employer wishing to allow carryovers from the 2013 plan year has until the end of the 2014 plan year to amend its plan.
- Final rule under HIPAA.The privacy and security standards of the Health Insurance Portability and Accountability Act ("HIPAA") were modified by the Final Omnibus Rule (the "Final Rule") published in January 2013. The Final Rule made important changes to HIPAA's privacy breach notification requirements, required covered entities (including self-funded group health plans) to distribute a new Notice of Privacy Practices, and required most covered entities to enter into new business associate agreements to incorporate the Final Rule changes. Although the general compliance deadline was September 23, 2013, covered entities with HIPAA-compliant business associate agreements in place prior to January 25, 2013 have until September 22, 2014 to execute revised agreements if certain requirements are met.
- Massachusetts wellness program tax credit. In April 2013 the Public Health Council of Massachusetts established a program to provide employers with 200 or fewer employees a tax credit of up to 25% of the cost of implementing a certified employee wellness program. The program is authorized through the 2017 tax year and employers must apply for the credit annually. The deadline for completing the online application for the 2013 tax year is December 31, 2013.
Post-DOMA Agency Guidance
Following the U.S. Supreme Court decision in United States v. Windsor, both the Internal Revenue Service and the Department of Labor adopted a "place of celebration" rule, under which legally married same-sex couples are recognized under federal law regardless of the state in which they reside. (In other words, a spouse is a spouse for purposes of applying federal law.) Though the IRS began to apply this rule as of September 16, 2013, additional guidance is expected regarding retroactivity and general application to benefit plans. In the meantime employers should note the following benefit plan implications and consider whether plan amendments are necessary in order to ensure proper plan administration:
- Welfare Plans:
- The value of welfare benefits provided to the same-sex spouse of a married employee should not be treated as income for federal tax purposes if the employee and his or her spouse are legally married in any state. Employers operating in states that do not recognize same-sex marriage may, however, need to impute income at the state level.
- Same-sex spouses of covered employees must be allowed to participate in health FSA, health reimbursement arrangement, and health savings account reimbursement benefits.
- COBRA rights must be extended to the same-sex spouse of a covered employee.
- Employers that have adopted 401(k) plans with safe harbor contributions designed to automatically satisfy applicable nondiscrimination requirements must provide an annual notice explaining the safe harbor design at least 30 days before the beginning of each plan year.
Retirement Plan Changes and Reminders
With respect to retirement plan administration, employers should note the following:
- Cycle C determination letter applications due by January 31, 2014.The deadline for cycle C employers (those with tax identification numbers ending in 3 or 8 and governmental employers) to file determination letter applications is January 31, 2014. Governmental employers may wait until cycle E (February 1, 2015 to January 31, 2016) to file.
- Expiration of reduced fees for 403(b) plan non-adopters under EPCRS.The IRS Employee Plans Compliance Resolution System ("EPCRS") allows employers to correct the failure to have adopted a written 403(b) plan document prior to the December 31, 2009 deadline. Voluntary corrections submitted by December 31, 2013 and made for the sole purpose of correcting the failure to adopt a written plan document receive a 50% reduction in the filing fee. Applications submitted after that date will require the full filing fee.
- Deadline to incorporate Code Section 436 funding-based benefit restrictions.Employers have until the last day of the first plan year beginning in 2013 to amend their defined benefit retirement plans to incorporate the funding-based limits on benefit distributions and benefit accruals set forth under Code Section 436. Accordingly, for calendar year plans the amendment deadline is December 31, 2013. The IRS has provided sample Code Section 436 amendment language in Notice 2011-96.
- Preservation of spousal beneficiary designation. Individually designed plans should be amended to eliminate language that automatically revokes a participant's spousal beneficiary designation upon legal separation.
- Key year end notices relating to retirement plans. Employers should have already provided the following notices with respect to their tax-qualified retirement plans:
- QDIA Notice. Employers that utilize a qualified default investment alternative ("QDIA") to direct the retirement investments of participants who fail to make timely investment elections must provide an annual notice describing the QDIA and the rights of participants at least 30 days prior to the beginning of each plan year.
- Automatic Enrollment Notice. Employers with automatic enrollment features for their 401(k) plans must provide an annual notice explaining automatic enrollment and the right to opt out at least 30 days before the beginning of each plan year.
- Safe Harbor Notice. Employers that have adopted 401(k) plans with safe harbor contributions designed to automatically satisfy applicable nondiscrimination requirements must provide an annual notice explaining the safe harbor design at least 30 days before the beginning of each plan year.
Coming fast on the heels of open enrollment, the end of the year can be a hectic time for benefit plan administrative professionals. The beginning of a new year, however, is a perfect time to take review administrative and other practices that are critical to the sound and prudent operation of benefit plans. Fiduciary governance practices should be at the top of the list of items for review. Employers who have not taken the formal steps necessary to establish an administrative committee to oversee their ERISA plans, or at least their tax-qualified retirement plans, should seriously consider doing so. Fiduciary committees should make sure that their meeting minutes and other records for the previous year are in good shape. Plan investment fiduciaries should review their investment policy statements and schedule meetings with investment advisors, consultants, or managers so that the performance of investments over the previous plan year can be evaluated.
Employment practices that affect the administration of benefit plans should also be reviewed. Chief among these practices is the classification of workers as employees or independent contractors. In this regard, we note that both the IRS and DOL intend to focus on worker classification issues in the coming year. This enforcement activity could affect both welfare plans and retirement plans, so employers should put this issue at the top of their compliance work plans for 2014.
Finally, employers should use 2014 to complete their compliance preparations and refine administrative practices in anticipation of full implementation of the ACA employer mandate in 2015.