December 2019 Client Advisory

This Client Advisory, originally distributed in December 2019, highlights important developments in the law governing employee benefit plans and executive compensation over the past year. It offers insight into what these developments mean for employers and plan sponsors and previews developments we expect to see in 2020. The following topics are covered:

• DOL Proposes New Electronic Distribution Rule
• Errors in ACA Penalty Assessments Require Prompt Employer Action
• New Health Care Design Opportunity for Large Employers: Individual HRAs
• Newly Proposed Health Insurance Cost and Coverage Transparency Requirements
• Remedial Amendment Period Closing Soon for Self-Correcting 403(b) Plans
• IRS Opens Determination Letter Window to Cash Balance and Other Hybrid Plans
• Final Regulations on 401(k) Hardship Withdrawals
• Massachusetts Among Several States Implementing Paid Leave Programs
• Legislative Update
  • Paid Leave Tax Credit
  • SECURE Act
• Litigation Round-up
  • Cross-Plan Offsetting
  • Pension Plan Mortality Table Litigation
  • 403(b) Plan Fee Litigation
  • 2020 Supreme Court Preview

DOL Proposes New Electronic Distribution Rule

In October, the Department of Labor (DOL) announced a proposal to update the rules for electronic distribution of retirement plan disclosures. When finalized and adopted, the new safe harbor rules will update outmoded guidance that has been in place since 2002.

The new rules do not apply to disclosures regarding health and welfare benefit plans, which the DOL believes to be a more challenging matter that requires further study. Nevertheless, the new rules come as welcome news to employers and plan administrators who have been waiting for an electronic disclosure regime that reflects the modern workplace.

The new rules will apply to any disclosure document that a plan administrator is required to distribute broadly to retirement plan participants and beneficiaries under ERISA. In addition to summary plan descriptions, the new rules will cover documents that must be furnished because of the passage of time (such as benefit statements and summary annual reports), as well as documents that must be furnished because of a specific triggering event (such as a summary of material modifications or blackout notice). The new rules will not cover documents that must be furnished in response to a specific request made by a participant or beneficiary under Section 104(b) of ERISA.

The new rules will permit a plan administrator to distribute a disclosure document by posting it to a website and sending an email to participants and beneficiaries alerting them that the document is available with a link to the document. Each participant and beneficiary who will receive documents under the new electronic disclosure regime must be notified in writing (i.e., on paper) that the new system will be used and they must be allowed to opt out of electronic distribution at any time.

The new rules do not replace traditional paper distribution methods, which still remain valid. So employers may continue to distribute disclosure materials the “old fashioned way” if they choose to do so.

The proposed rules provide detailed guidance regarding the content of email cover messages and specifications for websites hosting the documents that are required to be distributed. Plan administrators will need to comply with these technical requirements, some of which may change as the rules evolve toward finalization, in order to take full advantage of the new rules.

Plan administrators may not rely on the new rules until they are finalized, likely in 2020

Errors in ACA Penalty Assessments Require Prompt Employer Action

While the individual mandate penalty under the Affordable Care Act (ACA) was reduced to $0 this year, the employer shared responsibility mandate and ACA reporting requirements remain intact, and employers continue to face potential assessments for failing to offer affordable, minimum value coverage to at least 95% of their full-time employees.

The IRS sends letters – known as “Letter 226-J” – informing employers that they owe a penalty based on information the employer provided on Forms 1094 and 1095-C, information employees provided on individual income tax returns, and information the insurance exchanges provide regarding eligibility for subsidies. An employer may receive Letter 226-J if any of its full-time employees enroll in exchange coverage for at least one month and receive a subsidy.

As we have worked with employers to respond to these letters, it has become clear that errors in reporting and factual inaccuracies are common. Typically, fixing these errors is all that is necessary to reduce or eliminate the penalty, but it is important to take prompt action.

Employers must respond to Letter 226-J within 30 days from the date of the letter. An extension may be requested, but our understanding is that IRS internal policy is to grant just one 30-day extension per letter. Do not ignore the letter, as the IRS will next issue a Notice and Demand for payment, which can be subject to lien and levy enforcement actions.

Reach out to your Verrill attorney before you respond to Letter 226-J. We can help you review your filings, prepare a response, and navigate the process.

New Health Care Design Opportunity for Large Employers: Individual HRAs

In June, the Departments of Treasury, Labor, and Health and Human Services jointly finalized regulations that dramatically liberalize the rules for health reimbursement arrangements (HRAs). Prior to the issuance of these rules, large employers (those with 50 or more employees) were prohibited from offering HRAs that would reimburse employees for the cost of individual health insurance policies.

The final regulations create two new types of HRAs:

• individual health insurance coverage HRAs, or “ICHRAs”; and
• excepted benefit HRAs, or “EBHRAs.”

EBHRAs allow employees to seek reimbursement of up to $1,800 (indexed for inflation after 2020) for a full range of benefits and are considered an “excepted benefit” under HIPAA if certain conditions are satisfied. The final regulations for EBHRAs closely track the proposed regulations.

ICHRAs are a significant development in health benefit planning. ICHRAs allow employers to reimburse expenses for health insurance premiums for Medicare coverage, as well as coverage purchased through the individual market and ACA Exchanges. Unlike EBHRAs, ICHRAs may constitute “minimum essential coverage” under the ACA. Accordingly, large employers may satisfy the ACA employer mandate to offer coverage to at least 95% of full-time employees by offering only an ICHRA, or offering an ICHRA for certain employees and traditional group health plan coverage to others.

An ICHRA must satisfy five requirements:

1. Enrollment – Eligible employees must enroll in individual health insurance coverage (that provides more than excepted benefits such as limited dental and vision coverage).
2. Class – The employer does not offer a major medical plan to the same “class” of employees who are eligible for the ICHRA reimbursement. All employees within a class of employees eligible for the ICHRA must be offered reimbursement coverage on the same terms with limited exceptions that allow differentiation based on age, number of dependents, and status as a former employee.
3. Opt-out – Employees must be permitted to opt out of ICHRA coverage.
4. Substantiation – The employer must have reasonable procedures in place for verifying and substantiating enrollment in individual health insurance coverage.
5. Notice – Notices must be provided to employees at least 90 days before the beginning of each plan year that describe the ICHRA and its effect on any premium tax credit that might be available for the purchase of ACA Exchange coverage. (A model notice was released simultaneously with the final regulations.)

The most significant change to ICHRAs contained in the final rules is the addition of new “classes” of employees and endorsement of the ability to combine classes when identifying which groups of employees may receive ICHRA reimbursements versus an offer of traditional group health plan coverage. Specifically, the final rules provide employers with the flexibility to distinguish between hourly and salaried employees in addition to the previously identified classes of full-time, part-time, collectively bargained employees, seasonal employees, employees who work in a specific insurance rating area, foreign employees working abroad, and employees subject to a 90-day waiting period for traditional group health plan coverage.

The ability to combine classes provides employers with great flexibility and the opportunity to tailor health benefits for specific groups of employees. For example, an employer may offer ICHRA reimbursements rather than traditional group health plan coverage to just the part-time workers paid hourly working in a specific insurance rating area.

The final rules do not explain how an offer of an ICHRA can satisfy the ACA employer mandate requirement that coverage must be “affordable.” Fortunately, the Department of Treasury recently proposed regulations that provide guidance regarding how to calculate whether an ICHRA provides “affordable” coverage. This guidance closely tracks IRS Notice 2018-88 and provides that an ICHRA offers “affordable” coverage if the difference between the amount of the reimbursement available through the ICHRA and the cost of self-only coverage for the lowest cost silver plan available to the employee on the ACA Exchange (in other words, an employee’s out-of-pocket cost for coverage on the ACA Exchange after reimbursement from the ICHRA, if the employee purchases the lowest cost silver plan) does not exceed 1/12 of the employee’s household income for the taxable year multiplied by the “required contribution percentage” for the year (9.78% in 2020).

Acknowledging that employers are not always aware of an employee’s “household income,” the proposed regulations adopt the W-2, rate of pay, and federal poverty line safe harbors that apply when measuring the affordability of traditional group health plan coverage and allow two simplifying safe harbors that permit employers to look back to the lowest cost silver plan from a prior year and consider the lowest cost silver plan in the area where an employee’s primary site of employment is located.

The ICHRA final rules are effective January 1, 2020, but employers wishing to use an ICHRA to satisfy the ACA employer mandate may want to wait until the affordability rules are finalized prior to adopting a full-scale ICHRA program.

Newly Proposed Health Insurance Cost and Coverage Transparency Requirements

Acting on an executive order regarding health care transparency, the Departments of Treasury, Labor, and Health and Human Services have jointly proposed regulations that would require employer sponsored group health plans to disclose price and cost-sharing information to participants, beneficiaries, and enrollees. The proposed rule accompanies the recent final hospital price transparency rule requiring hospitals to provide a list of charges, including the charges negotiated with insurance companies, for the items and services they provide.

The proposed rule requires that plans and insurers disclose both rate information (information regarding the negotiated rate for in-network provider services and historical maximum reimbursement amounts for out-of-network providers) and personalized cost-sharing information (an estimate of the amount a covered individual would be required to pay for a covered item or service based on cost-sharing information (e.g., deductible, co-pay, out-of-pocket maximum)). The rate information must not only be disclosed to participants but also made available to the public.

Importantly, the proposed rule explains that an employer plan may satisfy the disclosure obligations by delegating the responsibility to the carrier or third-party administrator (TPA) for the plan.

The proposed rule may have significant implications for the relationship between plans and their service providers, as well as on the health care market as a result of the public disclosure requirement. However, several hospitals and health care industry groups recently filed suit to block the final hospital price transparency rule, and it is likely the proposed rate and cost-sharing transparency rule will face similar challenges.

The proposed rule will not be effective until one year after finalization. Comments are due January 14, 2020.

Remedial Amendment Period Closing Soon for Self-Correcting 403(b) Plans

Tax exempt and governmental employers should be mindful that the IRS remedial amendment period to correct qualification defects in 403(b) plan documents will expire on March 31, 2020.

The IRS periodically issues guidance and lists of required amendments for 403(b) plans. Plan documents that are not updated for these required modifications may become defective. Under Rev. Proc. 2017-18, plan sponsors may self-correct plan document defects and some operational defects, provided they do so by March 31, 2020. This correction period is known as the “remedial amendment period” and is open to sponsors of both pre-approved and individually designed plans.

A plan sponsor may self-correct a defective 403(b) plan provision by:

• adopting a pre-approved 403(b) plan by March 31, 2020, that has a 2017 opinion or advisory letter; or
• amending an individually designed plan by March 31, 2020.

The correction may involve adding required plan provisions or modifying existing defective provisions. As a general rule, the correction must be retroactive to the later of January 1, 2010, or the effective date of the plan or disqualifying amendment. If the plan was administered based on the defective provision, any resulting operational defect must be corrected as well.

In order to take advantage of the relief provided under Rev. Proc. 2017-18, a plan sponsor must have adopted a written plan document by December 31, 2009 (or the effective date of the plan, if later). If a plan sponsor did not have a written plan document in place by the required date, the sponsor may not self-correct plan qualification defects during the remedial amendment period. Instead, the plan sponsor must correct qualification defects under the IRS’s Employee Plans Compliance Resolution System (EPCRS).

A plan sponsor’s ability to retroactively correct operational defects is limited. An operational defect generally may not be corrected under Rev. Proc. 2017-18 unless:

• there is a plan document defect; and
• an operational defect results from the administration of the defective plan provision.

Other plan operational defects may be corrected under the procedures outlined in EPCRS.

Two examples of the types of plan defects and operational defects that may be corrected during the remedial amendment period are as follows.

Example 1 – Plan Document Failure. Plan A, which was adopted January 1, 2009, does not contain required language limiting contributions and other annual additions under Section 415 of the Code. No participant has exceeded the Section 415 limit since January 1, 2009, so there is no operational defect. The Plan may be amended retroactive to January 1, 2010, to include the required Section 415 limits (prior to 2010 403(b) plans were not required to have a plan document, so there is no plan document failure for 2009).

Example 2 – Plan Failure and Operational Failure. Plan B, which was adopted January 1, 2011, excludes union employees from plan participation in violation of the universal availability rule for elective deferrals. Union employees were impermissibly excluded from plan participation since 2011. The plan must be amended retroactive to January 1, 2011, to cover union employees under the plan, and the plan sponsor must correct missing contributions and earnings based on principles in EPCRS. Note: if the union employees were excluded because they were covered under another 403(b) plan maintained by the plan sponsor (a permissible exclusion under the universal availability rule), the 403(b) plan could be amended retroactive to January 1, 2011, to exclude union employees covered under the other 403(b) plan, and there would be no operational failure to correct.

The remedial amendment period under Rev. Proc. 2017-18 provides employers with a unique opportunity to review their 403(b) plans and correct defects retroactively without having to obtain IRS approval. We urge all employers sponsoring 403(b) plans to review their plan documents before the remedial amendment period expires on March 31, 2020.

IRS Opens Determination Letter Window to Cash Balance and Other Hybrid Plans

The IRS is now accepting determination letter applications from cash balance plans and other hybrid pension plans. During a one-year period from September 1, 2019, to August 31, 2020, the IRS will review individually designed hybrid plans to determine whether the plan document is compliant with all applicable rules through the 2017 required amendments list. The 2017 list includes the final hybrid plan regulations.

This marks an expansion of the determination letter program, after the IRS restricted the program in 2017 to focus on volume submitter plans and new individually designed plans.

This one-year window provides a valuable opportunity for plan sponsors to confirm that their plan is compliant with the final hybrid plan regulations, including the market-rate-of-interest rules. A plan’s most recent determination letter likely did not consider these rules, because the IRS restricted the determination letter program before the final regulations became effective.

In addition to providing assurance that a plan is compliant in form, a current determination letter can be particularly useful during audits and investigations, and in the context of mergers and acquisitions.

Final Regulations on 401(k) Hardship Withdrawals

In September 2019, the Treasury Department issued final regulations governing hardship withdrawals from 401(k) plans. The final regulations update the existing 2004 regulations to reflect recent statutory changes made to the hardship withdrawal rules under Section 401(k) of the Internal Revenue Code, including:

• permitting the withdrawal of earnings on elective deferrals in the event of a hardship;
• permitting the withdrawal of QNECs, QMACs, and earnings on such contributions in the event of a hardship; and
• providing that a distribution will not be treated as failing to be made upon a participant’s hardship solely because the participant does not take any available loan under the plan.

In addition, the final regulations eliminate the requirement under the existing regulatory safe harbor to suspend a participant from making elective deferrals or employee contributions for a period of six months following receipt of a hardship withdrawal.

The final regulations also update the list of deemed “immediate and heaving financial needs” by:

• adding a participant’s “primary beneficiary” as an individual for whom qualifying medical, educational, and funeral expenses may be incurred;
• removing an unintended restriction on qualifying expenses for the repair of damage to a participant’s principal residence; and
• adding a new expense to the list – expenses and losses (including loss of income) incurred by a participant as a result of a federally-declared disaster, provided the participant’s principal residence or principal place of employment was located in an area designated by FEMA for individual assistance with respect to the disaster.

The final regulations are substantially similar to the proposed regulations issued last year, and 401(k) plans that complied with the proposed regulations will satisfy the final regulations. However, plan sponsors who made changes in response to the proposed regulations should review any prior plan amendments and administrative procedures to ensure that the plan complies with the final regulations in both form (i.e., the plan document) and in operation. For example, plan sponsors who amended their plans for the proposed regulations may wish to further amend their plans for the less strict standard in the final regulations regarding the employee representation requirement described below.

The final regulations also modify the rules for determining whether a distribution is necessary to satisfy an immediate and heavy financial need by eliminating the existing regulatory safe harbor and providing one general standard for determining whether the distribution is necessary. The new general standard has three components:

1. A hardship withdrawal may not exceed the amount of the employee’s need (including any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution).
2. The employee must have obtained all other currently available distributions (including distributions of ESOP dividends) under the plan and all other plans of deferred compensation, whether qualified or nonqualified, maintained by the employer.
3. The employee must represent, in writing (including by using an electronic medium), that the employee has insufficient cash or other liquid assets reasonably available to satisfy the financial need.

Importantly, in response to a comment the Treasury Department received on the proposed regulations, the words “reasonably available” were added to the employee representation requirement in the final regulations. By adding these two words, the Department explained that an employee could make the representation that he or she meets this requirement even if the employee has cash or other liquid assets on hand, provided that cash or other assets is earmarked for payment of another obligation in the near future (for example, rent). The employee representation requirement applies for distributions made on or after January 1, 2020, and a plan administrator may rely on the participant’s representation unless the plan administrator has actual knowledge to the contrary.

The final regulations provide that a 401(k) plan generally may provide for additional conditions to demonstrate that a withdrawal is necessary to satisfy an immediate and heavy financial need. For example, a plan may require a participant to first obtain all nontaxable loans available under the plan before a hardship withdrawal may be made or impose a nondiscriminatory minimum dollar withdrawal amount. However, the final regulations no longer permit a plan to provide for a suspension of elective deferrals or employee contributions as a condition of obtaining a hardship withdrawal. This prohibition applies only for hardship withdrawals made on or after January 1, 2020, but plan sponsors may choose an earlier implementation date, as explained below.

Applicability Dates. The final regulations apply to hardship withdrawals made on or after January 1, 2020. However, plan sponsors have the option to apply them sooner – they may be applied to hardship withdrawals made in plan years beginning after December 31, 2018, and the prohibition on suspending elective deferrals and employee contributions may be applied as early as the first day of the first plan year beginning after December 31, 2018, even if the distribution was made in the prior plan year. This means a calendar year plan providing for hardship withdrawals under the pre-2019 safe harbor standards may either:

• be amended to provide that a participant who received a hardship withdrawal in the second half of 2018 is suspended from making contributions only until January 1, 2019; or
• continue to provide that contributions are suspended for the originally scheduled six months.

In addition, the revision to qualifying expenses for the repair of damage to a participant’s principal residence may be applied to withdrawals made on or after a date that is as early as January 1, 2018.

If a plan sponsor chooses early application of the final regulations, the new rules requiring an employee representation and prohibiting suspension of elective deferrals and employee contributions may be disregarded with respect to hardship withdrawals made before January 1, 2020.

Plan Amendments. The Treasury Department and IRS expect that plan sponsors will need to amend the hardship withdrawal provisions in their 401(k) plans to reflect the final regulations.

As a rule, individually designed plans have until December 31, 2021, to be amended for the final regulations. Pre-approved 401(k) plans (e.g., volume submitter and prototype plans), as well as individually designed and pre-approved 403(b) plans, may have an earlier amendment deadline.

Note for 403(b) Plan Sponsors. The final regulations generally apply to 403(b) plans too. However, earnings attributable to Section 403(b) elective deferrals remain ineligible for distribution on account of hardship, and QNECs and QMACs in a Section 403(b) plan that are in a custodial account continue to be ineligible for hardship withdrawals. QNECs and QMACs in a Section 403(b) plan that are not in a custodial account may be withdrawn in the event of hardship.

Massachusetts Among Several States Implementing Paid Leave Programs

This year, Massachusetts rolled out the first stages of its paid family and medical leave program. The program requires employers and employees to make contributions, and the Commonwealth provides income replacement for new parents, individuals dealing with a serious medical condition, and individuals caring for a family member with a serious medical condition.

Although benefits under Massachusetts’s program are not available until January 1, 2021, employers were required to begin collecting contributions on October 1, 2019, with the first payment to the Commonwealth due on January 31, 2020.

Recent years have seen a proliferation of paid leave laws and they have taken a variety of forms. Dozens of states and municipalities require employers to provide paid sick leave. Maine now requires paid time off that can be used for any reason. And along with Massachusetts, California, Connecticut, New Jersey, New York, Rhode Island, Washington State, and Washington D.C. have adopted state-run paid leave programs.

Massachusetts’s program is representative of the basic structure of these state-run programs. The program is funded by a payroll tax, which employers are required to collect and remit on a quarterly basis. When an employee goes on leave, the employee applies to the newly formed Massachusetts Department of Family and Medical Leave for benefits, and the Commonwealth makes payments directly to the employee.

The program provides:

• 20 weeks of paid medical leave for an employee’s own serious health condition;
• 12 weeks of paid family leave following birth, adoption, or foster care;
• 12 weeks of paid family leave for a family member’s serious health condition; and
• 26 weeks of paid family leave to care for a family member who is a member of the armed services.

An employee may take up to a total of 26 weeks of family and medical leave in any 52-week period. Leave may be taken intermittently. While on leave, the employee receives a percentage of their average weekly wages prior to going on leave, up to a maximum of $850 per week. All employers are required to provide certain information about their employee population to the Department of Family and Medical Leave on a quarterly basis.

Every employee in Massachusetts is eligible for benefits and is required to make contributions to the program. All employers who employ at least 25 individuals in Massachusetts are required to make employer contributions, unless the employer maintains a qualifying private plan and applies to the Department of Family and Medical Leave for an exemption. If an employer receives an exemption, its employees are not required to make contributions and are not eligible for benefits under the Commonwealth’s program.

Exemptions are available to employers that maintain a paid family and medical leave program that provides benefits at