A recent post in the IRS’s Employee Plans News has two important tips for employers who sponsor 401(k) and similar plans:

  1. The plan sponsor is ultimately responsible for maintaining records that document compliance with tax-qualification requirements. Many employers rely on third-party administrators to maintain records of day-to-day transactions, such as loans, hardship withdrawals and distributions. It is important to confirm with the third-party administrators that the records are being kept and that the sponsor will have access to the records–in a usable format–including after the sponsor changes administrators.
  2. The IRS expects the administrator to collect documentation in support of any hardship withdrawal–saying “[i]t’s not sufficient for plan participants to keep their own records of hardship distributions.”

In an effort to streamline plan administration, some third-party administrators have promoted a simplified procedure that would allow employees to get hardship withdrawals without submitting documentation.
Continue Reading IRS Issues Warning on Documentation Requirements for 401(k) Plans

Two cases decided in January—one by the Sixth Circuit and another by the District Court for the District of Columbia—offer a cautionary tale to plan sponsors who rely on a statute or regulation that allows retroactive amendments to tax-qualified plans. Both cases involved a change to the interest and mortality assumptions that pension plans use to calculate the minimum amount of a lump sum distribution. The change was expressly authorized by a statute, but the Pension Benefit Guaranty Corporation said “not so fast”—leaving the plan sponsors responsible for several million dollars in additional liabilities.

The cases offer a cautionary tale for plan sponsors: practices that are permitted in one context will not necessarily be accepted in other contexts. For this reason, it is important to conduct a thorough analysis before relying on agency guidance or accepted practice.


Continue Reading Two Recent Cases Offer Cautionary Tale to Plan Sponsors Relying on IRS Guidance

Starting in 2014, most individuals must maintain minimum essential health coverage or pay a penalty.  (Please see our post here for a description of the health coverage mandates that apply to individuals and their families.)  The Internal Revenue Service recently issued a proposed regulation clarifying the minimum essential coverage rules and other aspects of the individual mandate.  Several points addressed in the proposed regulation will be of interest to employers that offer group health coverage to their employees.

Excepted Benefits Are Not Minimum Essential Coverage

Employers might wish to structure programs providing limited health benefits—such as dental and vision coverage or employee assistance—as “excepted benefits” so that these programs will avoid the group health plan requirements.  Final regulations issued last year explained that minimum essential coverage does not include “health insurance coverage” consisting only of excepted benefits.  The proposed regulation clarifies that no coverage (whether insured or self-insured) consisting solely of excepted benefits will qualify as minimum essential coverage.

This clarification confirms that coverage consisting solely of excepted benefits will not satisfy the employer’s obligation to offer minimum essential coverage to at least 95% of its full-time employees or the individual’s obligation to maintain minimum essential coverage.  Employers must offer, and individuals must maintain, other group health coverage in order to satisfy these shared-responsibility mandates.

On the positive side, however, a lower-income employee who is covered by a plan that offers only excepted benefits will not be prevented from receiving premium tax credits.  The tax credits help lower-income individuals purchase individual health coverage on an exchange.  An employee who has minimum essential coverage from an employer health plan is not eligible for premium tax credits; but employer coverage consisting solely of excepted benefits will not affect the employee’s eligibility.
Continue Reading New Guidance Clarifies Minimum Essential Coverage Rules

A recent GAO Report offers interesting insight into the Department of Labor’s thinking on electronic disclosure.

For the better part of the last ten years, many plan sponsors and service providers have been pushing for more flexibility to provide required disclosures electronically.  In particular, they have asked the Labor and Treasury Departments to replace an existing “opt in” regime with an “opt out” regime.  Instead of requiring affirmative consent to distribute communications electronically, many plan sponsors and service providers would like the default to be electronic disclosure–with an opportunity to elect to receive paper.

In 2011, the Department of Labor issued a public request for information regarding electronic disclosures.  The responses included thoughtful suggestions for moving toward an “opt out” regime while still ensuring that important communications are actually received.  The Department has not formally taken action in response to the RFI, but comments included in the GAO report offer insight into the Department’s thinking.

The GAO report summarizes the existing Labor and Treasury rules on electronic disclosure, and offers three suggestions for improvement:
Continue Reading Electronic Disclosure: Which Way Are We Going?

Misclassification of workers remains a hot button issue.  The IRS continues to scrutinize employers’ worker classification practices, and it is likely that health reform will cause the Department of Labor to review classification issues even more closely than it has in the past.  

In an effort to encourage employers to reclassify independent contractors as employees, the IRS created the Voluntary Classification Settlement Program in 2011.  The program limits the tax liabilities of employers who voluntarily reclassify independent contractors.  Recently, the IRS expanded the program to cover a wider range of situations and provided additional clarifications.
Continue Reading Worker (Mis)Classification: IRS Expands Voluntary Settlement Program

The IRS and Department of Labor recently announced additional relief for victims of Hurricane Sandy.

Loans and Hardship Distributions from Defined Contribution Plans

In Announcement 2012-44, the IRS relaxed the rules governing loans and hardship distributions from 401(k), 403(b) and state and local government 457(b) defined contribution plans.  There are several components to the relief:

  • Grounds for hardship distribution:  The IRS has stated that a plan will not fail to comply with the rules governing hardship distributions if it makes a distribution on account of a need arising from Hurricane Sandy.
  • No limit on future contributions:  The guidance also relaxes restrictions that would typically be placed on the participant’s ability to make contributions to the plan for a six-month period following a hardship distribution.
  • Relaxed procedural requirements:  Under the IRS guidance, the plan administrator will not be treated as failing to comply with the plan’s procedural requirements for approval of hardship distributions or loans, provided that it makes a good-faith diligent effort under the circumstances to comply and makes a reasonable effort to assemble any forgone documentation as soon as practicable.
  • Plan document relief:  To the extent that the plan must be amended to permit the loans or distributions pursuant to the Hurricane Sandy relief guidance, the deadline for adopting the amendment is the end of the first plan year beginning on or after January 1, 2013.


Continue Reading Additional Relief for Victims of Hurricane Sandy

On the day before Thanksgiving, the IRS announced that it is extending the deadline for adopting plan amendments for funding-related benefit restrictions under defined benefit plans.  For most calendar year plans, the new deadline is December 31, 2013.  (Our list of upcoming benefits and compensation related deadlines is available here.)

Although the amendment deadline

The IRS recently announced tax relief designed to encourage Hurricane Sandy recovery efforts.  The tax relief programs that have been announced are similar to programs offered in response to Hurricane Katrina in 2005, including non-taxable employee leave donations and tax-free relief payments to employees. 
Continue Reading IRS Announces Hurricane Sandy Relief for Employers and Employees

The Second Circuit recently held that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional.  That section prohibits recognizing same sex marriages under federal law.  The court’s decision in Windsor v. United States is the second by a U.S. Circuit Court to find that this portion of DOMA violates the Constitution’s Equal Protection Clause.  In May, the First Circuit also found DOMA to be unconstitutional in Massachusetts v. U.S. Dep’t of HHS.  The question of whether DOMA is constitutional could have a significant impact on employee benefit plans.

The two Circuit Court cases differ in one key respect:  the Second Circuit applied “intermediate scrutiny” while the First Circuit reviewed DOMA under an enhanced rational basis standard, under which the court “scrutinize[d] with care” and applied “closer than usual scrutiny.”  Notably, the Justice Department is seeking Supreme Court review of the Second Circuit’s decision.  Even before the Second Circuit ruled, the Justice Department had filed a petition for a “writ of certiorari before judgment filed.”  Following the Second Circuit’s decision, the Justice Department filed a supplemental brief urging the Court to grant its petition in that case and hold the petition in the First Circuit decision.  Earlier this week, the Supreme Court scheduled petitions for certiorari in the First Circuit and Second Circuit cases (and several other same-sex marriage cases) to be considered during a conference on November 20, 2012.
Continue Reading DOMA Held Unconstitutional by Second Circuit, Increasing Likelihood of Supreme Court Review

Beginning in 2011, the medical loss ratio (MLR) requirements of the Affordable Care Act require health insurers to spend at least 85% of premiums for large group policies on medical expenses and activities to improve health care quality.  If an insurer does not meet this requirement, it must rebate to the employer a portion of the collected premiums.  The employer, in turn, is responsible for determining whether and how to pass along the rebate to plan participants.  By August 1, 2012, insurers in the large group market were expected to return $386 million in rebates to employers.

Employers must consider both the implications under ERISA and the Internal Revenue Code in determining how to use the rebates.  Although employers are responsible for determining how to use the rebate, insurers are responsible for notifying employees (and their dependents) who participate in the plan that the employer has received the rebate.  Accordingly, employers should expect questions from both current and former employees regarding their use of the rebate.
Continue Reading How Employers Can Use Medical Loss Ratio Rebates