December 2018 Client Advisory

This Client Advisory, originally distributed in December 2018, 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 2019. The following topics are covered:

• Don’t Panic if the IRS Says You Owe Penalties Under the ACA
• Proposed HRA Rules Provide New Flexibility for Employers of All Sizes
• HIPAA Reasonable Alternative Requirements Still Apply to Wellness Programs
• Reminder: Amendment Deadline for Disability Claims Procedures
• 401(k) Plan Employer Contributions Tied to Student Loan Repayments
• Proposed Regulations on 401(k) Hardship Withdrawals
• Forfeitures May Now be Used to Fund Safe Harbor Contributions
• New IRS Model Rollover Distribution Notices
• Online Filing Will Soon be Required for Retirement Plan Correction Applications
• PBGC’s Missing Participant Program Now Available to Defined Contribution Plans
• Guidance for Plan Fiduciaries about Socially Responsible Investing
• NYU Fee Case Provides Reminder of Importance of Sound Fiduciary Practices
• First Circuit Endorses Burden Shifting Rule in Breach of Fiduciary Duty Cases

Don’t Panic if the IRS Says You Owe Penalties Under the ACA

In November, the IRS began to send the latest wave of letters notifying employers that they may be liable for an Employer Shared Responsibility Payment (ESRP) under the Affordable Care Act (ACA). The amounts described in the letter can be alarming to recipients.

Letter 226-J is the initial letter issued to employers with 50 or more full-time employees, known as Applicable Large Employers (ALEs). The determination of whether an ALE may be liable for an ESRP and the amount of the proposed ESRP in Letter 226-J is based on information from IRS forms filed by the ALE and the individual income tax returns filed by the ALE’s employees.

There are two different penalties that could apply to an ALE, but only one will apply for any particular tax year. First, if the ALE fails to offer minimum essential coverage to at least 95% of its full-time employees and their dependent children and at least one of its full-time employees enrolls in individual coverage through a public exchange and qualifies for a premium tax credit, the so-called “subsection (a) penalty” applies. The subsection (a) penalty for 2018 is $193.33/month multiplied by the total number of full-time employees (minus 30 full-time employees).

Second, if the ALE makes an offer of minimum essential coverage to at least 95% of its full-time employees, but at least one of the ALE’s full-time employees enrolls in individual coverage through a public exchange and qualifies for a premium tax credit (because the coverage was unaffordable, didn’t provide minimum value, or the employee didn’t receive an offer of coverage), the so-called “subsection (b) penalty” applies. The subsection (b) penalty for 2018 is $290/month for each full-time employee who received a premium tax credit.

If you receive a letter, do not panic. Letter 226-J is not a bill. We have found that many proposed assessments are the result of mistakes in reporting, rather than an actual violation. And most ALEs are able to get the proposed assessments waived or significantly reduced by providing corrected reporting information. Reach out to employee benefits legal counsel before responding to Letter 226-J to make sure you get the best outcome possible.

Proposed HRA Rules Provide New Flexibility for Employers of All Sizes

The Departments of Treasury, Labor, and Health and Human Services jointly announced proposed regulations that dramatically liberalize the rules for health reimbursement arrangements (HRAs).

The proposed rules are a departure from existing guidance that requires HRAs to be “integrated” with another major medical plan to satisfy Affordable Care Act (ACA) prohibitions against annual dollar limits and the requirement that health plans provide certain preventative services at no cost. Prior guidance limited the use of “stand-alone” HRAs to retiree-only plans and qualified small employer health reimbursement arrangements (QSEHRAs) that allow employers with less than 50 full-time employees to reimburse employee health expenses.

The proposed rules create two new types of HRAs: (1) HRAs that are integrated with individual coverage or “ICHRAs”; and (2) excepted benefit HRAs or “EBHRAs.”

ICHRAs

Under the proposed regulations, an ICHRA may reimburse an employee for the cost of individual health insurance coverage if all of the following requirements are met:

• The employee enrolls in individual health insurance coverage (that provides more than excepted benefits, such as dental and vision).
• 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 are offered reimbursement coverage on the same terms. (According to the proposed regulations, employers may differentiate coverage among permitted “classes” including full-time, part-time, collectively bargained employees, seasonal employees, and employees who are under age 25 at the beginning of the plan year. The proposed regulations also allow differences in coverage based on the employee’s age and the number of dependents.)
• Employees must be permitted to opt out of ICHRA coverage.
• The employer must have reasonable procedures in place for verifying and substantiating enrollment in individual health insurance.
• 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 exchange coverage.

Because ICHRAs may qualify as minimum essential coverage under the ACA, the proposed regulations will allow large employers the option of satisfying the ACA employer mandate to offer coverage to at least 95% of full-time employees without maintaining a group health plan. In addition, smaller employers may benefit from the ability to reimburse premium costs without regard to the annual reimbursement limits that apply to QSEHRAs.

EBHRAs

The proposed regulations allow employers to offer a standalone, general purpose HRA as an “excepted benefit” that is not required to be “integrated” with either group health plan coverage or individual coverage. EBHRAs allow employers to reimburse up to $1,800 in medical expenses per year (indexed for inflation) if:

• The EBHRA is offered solely to employees who are eligible to participate in the employer’s major medical plan (even if the employee does not ultimately enroll);
• The EBHRA does not reimburse premiums for individual health insurance coverage or Medicare coverage; and
• The EBHRA is available on the same terms to all similarly situated employees.

The ability to provide EBHRAs is an excellent add-on for employers looking to offset the increasing share of medical costs passed on to employees by both group and individual health plans. In addition, the EBHRA’s status as an excepted benefit means that employees who receive EBHRA reimbursements may still be eligible to receive premium tax credits for individual policies purchased through the health care exchange.

Finally, the proposed regulations allow employees to pay for any portion of an individual health insurance premium on a pre-tax basis through a cafeteria plan even if the premium is reimbursed in part by an ICHRA or QSEHRA reimbursement arrangement. The ability to pay premiums on a pre-tax basis is only available for individual coverage that is not purchased from the exchange because existing cafeteria plan rules prohibit the use of a cafeteria plan to purchase exchange coverage.

Although the proposed rules are in their early stages, they promise to provide welcome flexibility to employers looking to help their employees respond to the increasing costs of healthcare. The proposed rules are scheduled to take effect for plan years beginning on or after January 1, 2020, with additional guidance promised. (Subsequent guidance, IRS Notice 2018-88, requests comments regarding the use of ICHRAs to satisfy the employer mandate and the “affordability” and minimum value safe harbors described in the proposed rules.) Employers would be well served by thinking about whether the addition of an ICHRA or EBHRA would be appropriate for their employee population and staying tuned for additional guidance regarding the proposed regulations.

HIPAA Reasonable Alternative Requirements Still Apply to Wellness Programs

Much has been written about the elimination of financial incentive limits for wellness programs beginning on January 1, 2019. Employers should not forget, however, that the HIPAA reasonable alternative requirements continue to apply.

A federal judge struck down the incentive limit of 30 percent of the cost of self-only coverage under the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA), effective January 1, 2019. Because the EEOC recently announced that the release of new proposed rules will be delayed until at least June 2019, there will be a period of at least several months without any guidance as to permitted incentives. As explained in our blog post on this issue, however, most employers should stay the course, stay tuned, and hope for clearer agency guidance in the future.

Accordingly, the most important news for 2019 is the resurgence of EEOC enforcement of the other set of wellness regulations: the nondiscrimination regulations under HIPAA. The HIPAA regulations, which apply only to wellness programs that are part of a group health plan (or themselves constitute a group health plan), establish several requirements for “health contingent” wellness programs that require participants to complete an activity related to a health factor or attain a specific health outcome to receive an incentive. Chief among these requirements is the obligation to provide a “reasonable alternative” for obtaining the reward and to notify participants that a reasonable alternative is available.

Recent litigation brought against employers by the EEOC seeks to enforce the reasonable alternative standard, particularly with respect to programs that aggressively target tobacco use.

In August 2017, the EEOC filed suit against Macy’s alleging, among other things, that the tobacco surcharge in its wellness program violated the requirement to provide a reasonable alternative standard to individuals who fail to satisfy the initial tobacco testing standard. The EEOC filed a similar action against Dorel Juvenile Group, Inc. in September 2018, alleging that its tobacco surcharge program also violated the requirement to provide a reasonable alternative standard. In October 2018, the EEOC filed yet another lawsuit (against ChemStation International, Inc.) alleging that the employer charged higher insurance premiums to participants who were either not enrolled in the wellness program or who did not achieve certain health outcomes, without providing a reasonable alternative. ChemStation immediately settled its case, offering to pay nearly $60,000 to plan participants who were forced to pay higher health insurance premiums.

Bottom line: if you have a wellness program that penalizes tobacco users or offers premium discounts based on health outcomes, make sure you offer participants a reasonable alternative for obtaining the same rewards and discounts available to those who achieve the desired health outcomes. Failing to do so may invite enforcement action by the EEOC under the HIPAA rules, regardless of the amount of the reward offered.

Reminder: Amendment Deadline for Disability Claims Procedures

The deadline for amending employee benefit plans – including retirement plans and nonqualified deferred compensation plans – to comply with the Department of Labor’s final rule regarding disability benefit claims procedures (the “Final Rule”) is fast approaching. Employers have until December 31, 2018 (for calendar year plans) to adopt the formal modifications necessary to comply with the Final Rule, which took effect on April 2, 2018.

The Final Rule is designed to harmonize the rules that apply to the processing of disability claims under ERISA with the claims administration requirements of the Affordable Care Act. In order to accomplish this, the Final Rule prescribes a number of new requirements for determinations of disability under an ERISA plan. These new requirements include: (1) mandatory independent claims review; (2) an additional opportunity for claimants to review and respond to new information or rationales applied by a claims administrator to deny a claim; and (3) new content requirements for benefit denial notices.

If a covered plan fails to follow these new procedures, a participant whose disability-related claim has been denied will generally be deemed to have exhausted her administrative remedies and may immediately file a lawsuit to recover benefits.

It goes without saying that short-term and long-term disability plans subject to ERISA must comply with these new rules because all claims for benefits under such plans turn on a determination of a participant’s disability. However, the Final Rule also applies to 401(k) plans, 403(b) plans, and other retirement plans, as well as many deferred compensation plans, that include disability-related vesting, benefit calculation, or benefit payment terms. These plans must comply with the Final Rule either by eliminating administrative discretion in disability determinations or by following the new claims procedures.

For retirement plans and deferred compensation plans whose definition of “disability” gives the plan administrator discretion to make the disability determination, there are two ways to comply with the Final Rule. First, the plan’s definition of “disability” may be amended to require determinations of disability to be made by reference to an impartial objective standard (under which the plan administrator cannot exercise any discretion). Under this approach, the definition of “disability” could be amended to provide that a participant is disabled only if she has been determined to be disabled under the plan sponsor’s long-term disability plan or by the Social Security Administration. Alternatively, the plan’s definition of disability could remain as is, provided the plan is amended to incorporate the disability claims procedures prescribed by the Final Rule.

Contact your Verrill Dana employee benefits attorney if you have any questions about how the Final Rule may affect your retirement plan or deferred compensation plan.

401(k) Plan Employer Contributions Tied to Student Loan Repayments

In May 2018, the IRS issued a private letter ruling (PLR) approving an employer’s proposal to make 401(k) plan contributions for employees based on their student loan repayments. The ruling is likely to garner attention as employers seek to find ways to improve participation in retirement plans among younger employees and provide benefits that help employees pay down student loan debt.

The scope of the ruling is limited to compliance with a particular technical rule governing 401(k) plans (the contingent benefit rule). And, like all PLRs, the ruling applies only to the employer who sought the ruling. But it opens the possibility that such a design may become more viable, and attractive to employers, in the future.

Under the program described in the PLR, the employer makes a contribution of 5 percent of an employee’s compensation if the employee makes student loan payments equal to at least 2 percent of the employee’s compensation. The employee is eligible to receive the employer contribution whether or not the employee makes any elective deferrals to the plan.

If an employee elects to participate in the program, the employee is still eligible to make elective deferrals, but is not eligible to receive employer matching contributions on those deferrals.

The IRS concluded that because an employee receiving the contributions based on student loan repayments is still permitted to make elective deferrals, but is not required to make elective deferrals to receive the employer contribution, the program does not violate the contingent benefit rule.

Although the PLR provides insight in the IRS’s views, employers may wish to wait for further guidance before attempting to implement their own version of this program. Congress has considered legislation that would permit employers to treat student loan payments as elective deferrals for purposes of matching contributions to 401(k) plans. This legislation has received some support, but there is no indication of whether or when it is likely to become law.

Proposed Regulations on 401(k) Hardship Withdrawals

On November 14, the Treasury Department issued highly anticipated proposed regulations governing hardship withdrawals from 401(k) plans. The proposed regulations address recent statutory changes made to the hardship withdrawal rules under Code Section 401(k), 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 proposed regulations eliminate the requirement under the existing regulatory safe harbor to suspend the elective deferrals of the affected participant for a period of six months following receipt of a hardship withdrawal. The proposed regulations also update the list of deemed “immediate and heaving financial needs” by: (1) adding a participant’s “primary beneficiary under the plan” as an individual for whom qualifying medical, educational, and funeral expenses may be incurred; (2) removing an unintended restriction on qualifying expenses for the repair of damage to a participant’s principal residence; and (3) 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 proposed regulations 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. First, a hardship withdrawal may not exceed the amount of the participant’s need (including any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution). Second, the participant 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. Third, the participant must represent that he or she has insufficient cash or other liquid assets to satisfy the financial need. A plan administrator may rely on the participant’s representation unless the plan administrator has actual knowledge to the contrary. Given the timing of the publication of the proposed regulations, the requirement to obtain this representation would apply only for distributions made on or after January 1, 2020.

The proposed regulations provide that a 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. However, the proposed 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. In light of the timing of the publication of the proposed regulations, this prohibition would apply only for hardship withdrawals made on or after January 1, 2020 (but plan sponsors may choose an earlier implementation date).

Click here for a complete summary of the new hardship withdrawal rules, including effective dates, plan amendments, and a special note for sponsors of 403(b) plans.

Forfeitures May Now be Used to Fund Safe Harbor Contributions

Plan sponsors may now use forfeitures to fund QNECs, QMACs, and safe harbor matching contributions, thanks to new Treasury regulations finalized this year.

Previously, the IRS took the position that money in forfeiture accounts could not be used to fund QNECs, QMACs, and safe harbor matching contributions. Such contributions must be fully vested when first contributed to the plan, not when the money used to fund the contribution is designated as a QNEC, QMAC, or safe harbor matching contribution and allocated to a participant’s account. By contrast, money held in a forfeiture account was, of course, subject to forfeiture when it was first contributed to the plan. The new regulations, released in 2017 and finalized in July 2018, reverse the old IRS position.

The new regulations are effective for plan years beginning on or after July 20, 2018, but may be applied to contributions made prior to that date, as well. One effect of the regulatory change is that contributions made to correct a failed nondiscrimination test or matching contribution failure, which must be made with QNECs or QMACs, respectively, may now be made from forfeitures if permitted by the plan document.

Before using forfeitures to fund QNECs, QMACs, or safe harbor matching contributions, plan sponsors should review their plan documents to ensure that the plan permits forfeitures to be used for these contributions.

New IRS Model Rollover Distribution Notices

The IRS has issued new model notices for recipients of eligible rollover distributions from retirement plans. The updated notices reflect changes from the 2017 Tax Cuts and Jobs Act, as well as regulatory changes enacted since previous versions of the notices were published.

The model notices provide a safe harbor for complying with the requirement to provide certain information to participants before they receive an eligible rollover distribution. Plan administrators must provide the notice to participants in 401(k) and other qualified plans, 403(b) plans, and governmental 457(b) plans when the participant may elect a lump sum distribution or installments payable over less than 10 years. The notice is not given for required minimum distributions, hardship distributions, or when the only distribution options are a series of substantially equal installments paid over at least 10 years or the life of the participant and/or beneficiary. The notices include information about rollover options, tax implications, and deadlines.

All employers sponsoring covered retirement plans should begin using the new model notices (or update their existing notices) as soon as possible. The model notices are found in IRS Notice 2018-74, which also includes a sentence-by-sentence guide to updating notices based on previous models, for plan administrators that don’t wish to use the new models.

Online Filing Will Soon be Required for Retirement Plan Correction Applications

Beginning in April 2019, retirement plan sponsors must file all Voluntary Correction Program (VCP) applications electronically. VCP applications are a method of correcting errors in administering retirement plans.

Rev. Proc. 2018-52, published on October 15, 2018, contains new guidance regarding the EPCRS program, and along with requiring online VCP applications, it updates the program to adapt the application methodology to the new filing system. Beginning April 1, 2019, plan sponsors must file VCP submissions using the pay.gov website rather than submitting a paper filing with an attached check. During a transition period from January 1, 2019, through March 31, 2019, plan sponsors may submit applications by either paper filing or using the online system.

Authorized representatives (such as attorneys and tax professionals) will still be permitted to file VCP submissions on behalf of a plan sponsor but must also do so using the online system.

Rev. Proc. 2018-52 contains additional changes to EPCRS, but they are minor and largely consist of updates to language to address the switch to online filing.

PBGC’s Missing Participant Program Now Available to Defined Contribution Plans

The PBGC’s Missing Participants Program, which permits the sponsor of a terminating retirement plan to distribute a missing participant’s benefits, is now available to sponsors of defined contribution plans, such as 401(k) plans.

The PBGC is a federal agency tasked with insuring defined benefit pension plans. Under the PBGC’s Missing Participants Program, plan sponsors may transfer plan assets to the PBGC to cover benefits owed to missing participants. This allows the plan to fully distribute all assets and terminate, with the PBGC responsible for paying benefits to the missing participants if they are located.

As of January 1, 2018, the program is generally available to defined contribution plans with a termination date on or after January 1, 2018. More information about the program and how to participate is available on the PBGC’s website.

Guidance for Plan Fiduciaries about Socially Responsible Investing

In the wake of mass shootings, environmental disasters, industrial accidents, and other tragedies, retirement plan investors are paying more attention to selecting or rejecting investments based on perceived public policy benefits or detriments. For example, investors may be focused on the larger implications of a mutual fund’s holdings in companies with a diverse Board of Directors or in arms manufacturers and diamond mine operators.

Retirement plan fiduciaries increasingly find themselves in the difficult position of having to respond to these concerns when raised by plan participants, while fulfilling their fiduciary duties under ERISA. In fact, ERISA plan fiduciaries and the Department of Labor have been wrestling with the concept of socially responsible investing for many years. (More on the history and evolution of the DOL’s guidance on social responsible investing is available in our blog post on this topic.)

In April 2018, the DOL released Field Assistance Bulletin 2018-01, the latest in a series of pronouncements that includes opinion letters and prohibited transaction exemptions in the 1980s, and ERISA Interpretive Bulletins in 1994, 2008, and 2015. Consistent with the purpose of a Field Assistance Bulletin, FAB 2018-01 purports to interpret rather than replace prior guidance. Nonetheless, it may have a chilling effect on plan fiduciaries who have relied on the 2015 guidance to consider one or more socially responsible investments for retirement plans.

Socially responsible investing generally means the act of choosing investment vehicles with an eye to their collateral benefits, as well as their expected risks and returns. Socially responsible investments go by several names. “ETI” (economically-targeted investment) and “ESG” (environmental, social, and governance) are acronyms commonly applied to this type of investing.

ERISA requires plan fiduciaries to manage plan investments for the exclusive benefit of participants and beneficiaries, and with the care, skill, prudence, and diligence of a prudent expert. And the DOL has consistently said that ERISA fiduciaries may not use plan assets to promote public policy causes at the expense of participants’ and beneficiaries’ financial interests or retirement security. The unsettled issue always has been whether and how fiduciaries may satisfy ERISA if they take account of ESG factors in their investment decisions.

Harkening back to guidance issued in 2008 (Interpretive Bulletin 2008-1), FAB 2018-01 acknowledges that ESG factors can involve business risks or opportunities that &quo