Erwin Kratz – Page 8 – ERISA Benefits Law

IRS Provides Guidance on Calculating the Maximum Loan Amount under IRC § 72(p)(2)(A)

The IRS has issued a memorandum providing guidance to its Employee Plans (EP) Examinations staff to determine, the amount available for a loan under § 72(p)(2) of the Internal Revenue Code (IRC), where the participant has received multiple loans during the past year from a qualified plan.

Background
In general, IRC § 72(p)(1) provides that a loan from a plan is a distribution to the participant. IRC § 72(p)(2)(A) excepts a loan that does not exceed the lesser of:

(i) $50,000, reduced by any excess of

(I) the highest outstanding balance of loans during the 1-year period ending on the day before the date on which such loan was made, over

(II) the outstanding balance of loans on the date on which such loan was made; or

(ii) the greater of

(I) half of the present value of the vested accrued benefit, or

(II) $10,000.

Under IRC § 72(p)(2)(A)(i), if the initial loan is less than $50,000, the participant generally may borrow another loan within a year if the aggregate amount does not exceed $50,000. The $50,000 is reduced by the highest outstanding balance of loans during the 1-year period ending the day before the second loan, in turn reduced by the outstanding balance on the date of the second loan.

The guidance to EP examiners is best illustrated by an example: assume a participant borrowed $30,000 in February, which was fully repaid in April, and then borrowed $20,000 in May, which was fully repaid in July, before applying for a third loan in December.

In this example, the IRS instructs its examiners that the Plan can apply the limitations in one of two ways.

In the first approach, the plan may determine that no further loan would be available in December, since $30,000 + $20,000 = $50,000.

Alternatively, the plan may identify “the highest outstanding balance” as $30,000, and permit the third loan in the amount of $20,000 in December.

At this time, IRS EP examiners will accecpt the position that the law does not clearly preclude either computation of the highest outstanding loan balance in the above example.

Be Careful Before Denying COBRA to Employee Terminated for Gross Misconduct

The Ninth Circuit Court of Appeals has rendered a decision in Mayes v. WinCo Holdings that reminds employers to be very cautious about denying COBRA coverage based on the gross misconduct exception.

Facts
Defendant grocery store fired the plaintiff, who supervised employees on the night-shift freight crew, for taking a stale cake from the store bakery to share with fellow employees and telling a loss prevention investigator that management had given her permission to do so. The employer deemed these actions theft and dishonesty, and determined that the plaintiff’s behavior rose to the level of gross misconduct under the store’s personnel policies. Therefore, the employer fired the employee and did not offer COBRA coverage to her or her dependents. Plaintiff sued asserting gender discrimination claims under Title VII, a claim under COBRA, and wage claims.

The Law
Under COBRA, an employer does not have to offer COBRA coverage to an employee and their covered dependents if the employee is terminated for “gross misconduct.” Unfortunately, the COBRA statute does not define “gross misconduct,” and court decisions do not provide clear guidance on what that term means.

The Case
The trial court in this case initially ruled in favor of the employer, finding that theft and dishonesty can constitute gross misconduct under COBRA, regardless of the amount involved. The Ninth Circuit reversed, finding that there was sufficient evidence of the employer’s discrimination to allow the discrimination case to go to trial, and reasoning that if the employer fired the plaintiff for discriminatory reasons then that could not constitute termination for gross misconduct. Therefore, if the termination was discriminatory the employee and her dependents would be entitled to COBRA benefits and the employee could prevail on her COBRA claims.

Lessons for Employers
An employer terminating someone for violating company policy (such as theft), may be reluctant to offer them COBRA coverage, particularly where the employer’s plan is self-insured and, therefore, the employer sees the potential for large medical claims. However, denying COBRA coverage based on the gross misconduct exception is risky for a number of reasons.

First, if the employer is ultimately found to have denied COBRA incorrectly it is exposed to penalties for failing to offer coverage, and the employee and their dependents can get COBRA coverage retroactive all the way back to the initial termination of coverage. That scenario could happen in the Mayes case.

Second, if a terminated employee foresees having large medical claims, they will have a bigger incentive to sue to secure coverage. If they do file suit for COBRA coverage, they will invariably include other claims attacking the termination decision. Therefore, denying COBRA coverage increases the likelihood of a costly lawsuit challenging the termination decision.

Third, defending a case that includes a COBRA claim is also more difficult than a straight wrongful termination claim. It is easier for a judge to grant an employer summary judgment on a wrongful termination claim, which only affects the employee plaintiff, than it is to uphold a denial of COBRA, which directly affects the employee and her children, who are innocent bystanders. In most cases, therefore, an employer is better off defending a wrongful termination suit alone, and not also defending a claim that the employer failed to offer COBRA coverage.

For these reasons, in most cases discretion is the better part of valor and employers should not invoke the gross misconduct exception.

Some employers may be concerned that offering COBRA coverage after terminating someone for gross misconduct may undermine their defense of the termination decision (on the theory that offering COBRA means the termination must not have been for gross misconduct). This can be mitigated by including a self-serving cover letter on the COBRA offer indicating that while the reasons for termination most likely amount to gross misconduct, the employer is voluntarily choosing to offer the employee and their dependents COBRA coverage.

Arizona’s New Paid Sick Leave Law – Webinar by Abbe Goncharsky

ERISA Benefits Law was proud to host Arizona Labor and Employment lawyer Abbe M. Goncharsky of Abbe M. Goncharsky , PLLC for a webinar on March 8, 2017, where she addressed the ins and outs of Arizona’s newly-adopted Paid Sick Leave law and the requirements that will become effective July 1, 2017.

Click on the links below to view the webinar or listen to the audio as Abbe discusses what employers can do now to prepare for and comply with the law’s new requirements and considered the challenges businesses may face in implementing policies to address the new law.

Full webinar, audio and video (click forward – the presentation starts at 3:20):

Audio only:

DOL Delays Fiduciary Duty Rule for 60 Days and Invites Comments on Whether to Further Delay, Amend, or Withdraw the Rule

The U.S. Department of Labor (DOL) today announced a proposed extension of the applicability dates of the fiduciary rule and related exemptions, including the Best Interest Contract Exemption, from April 10 to June 9, 2017.

The announcement follows a presidential memorandum issued on Feb. 3, 2017, which directed the DOL to examine the fiduciary rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice. See our prior post, which explained that the President’s memorandum

..instructs the DOL to rescind or revise the rule . . . if it concludes for any other reason after appropriate review that the Fiduciary Duty Rule is inconsistent with the Administration’s stated priority “to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses, such as buying a home and paying for college, and to withstand unexpected financial emergencies”.

The DOL’s latest announcement invites comments that might help inform updates to the legal and economic analysis it conducted in originally issuing the rule (during President Obama’s term), including any issues the public believes were inadequately addressed in the prior analysis. The DOL has also invited comments on market responses to the final rule and the related Prohibited Transaction Exemptions (PTEs) to date, and on the costs and benefits attached to such responses. The comment period runs 45 days from today.

Upon completion of its examination, the DOL may decide to allow the
final rule and PTEs to become applicable, issue a further extension of the applicability date, propose to withdraw the rule, or propose amendments to the rule and/or the PTEs.

President Orders Review of Fiduciary Duty Rule

On February 3, 2017, the President issued a Presidential Memorandum on the Fiduciary Duty Rule, ordering the Department of Labor (DOL) to “examine the Fiduciary Duty Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice”.

DOL Review

The memorandum directs the DOL to “prepare an updated economic and legal analysis concerning the impact of the Fiduciary Duty Rule”, considering whether the rule:

has harmed or is likely to harm investors due to a reduction in access to certain retirement savings offerings, retirement product structures, retirement savings information, or related financial advice;
has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees; or
is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services.

Possible Revision or Rescission

The memorandum also instructs the DOL to rescind or revise the rule if it makes an affirmative determination as to any of the above considerations, or if it concludes for any other reason after appropriate review that the Fiduciary Duty Rule is inconsistent with the Administration’s stated priority “to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses, such as buying a home and paying for college, and to withstand unexpected financial emergencies”.

Possible Delay

While the Memorandum does not directly delay the rule, the acting U.S. Secretary of Labor, Ed Hugler, responded to the President’s direction through a News Release stating that “The Department of Labor will now consider its legal options to delay the applicability date as we comply with the President’s memorandum.”

While it is still unclear whether the DOL will delay the rule, it is entirely possible, likely even, that the DOL will delay the rule within the next few weeks. It is also a good bet that the DOL will ultimately make some revisions to the rule, even if they do not rescind it entirely. In the meantime, financial advisors and others subject to the Rule will need to evaluate their compliance efforts so that they remain as nimble as possible in the face of he constantly shifting regulatory sands.

Plan Sponsors and Plan Administrators should note that neither the Fiduciary Duty Rule, nor the potential impending changes to the rule, directly impact their responsibilities as plan fiduciaries, other than how the rule impacts those providing financial advice to Plan Sponsors and Administrators.

DOL Conflict of Interest Final Rule Page

IRS Proposes Amendments to Definition of QMACs and QNECs – Allowing Broader use of Forfeitures

The IRS has issued proposed regulations that would amend the definitions of qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) applicable to certain qualified retirement plans that contain cash or deferred arrangements under section 401(k) or that provide for matching contributions or employee contributions under section 401(m).

Under the proposed regulations, employer contributions to a plan would be able to qualify as QMACs or QNECs if they satisfy applicable nonforfeitability and distribution requirements at the time they are allocated to participants’ accounts, but need not meet these requirements when they were originally contributed to the plan. The effect of this is that plan sponsors could use forfeitures from matching and profit sharing contributions (which were not fully vested when originally allocated to the Plan) to fund QMACs, QNECs and safe harbor contributions. Under existing IRS guidance, forfeitures cannot be used to fund such contributions (which are fully vested when made) because the original contribution was not fully vested at the time it was made.

Proposed Regulations

IRS Issues Updated Determination Letter Revenue Procedure

The IRS has updated and restated its revenue procedures governing determination letters for various types of employee benefit plans.

Rev. Proc. 2017-4 reflects the prior elimination of the five-year remedial amendment cycles for individually designed plans and includes other changes made to the determination letter program, including:

limited-scope determination letters on partial terminations if an employer is not otherwise eligible to request a determination letter;
determination letters on leased employees only if the employer is otherwise eligible to request a determination letter;
no determination letters on affiliated service groups; and
modified procedures for requesting relief from retroactive revocations of determination letters or letter rulings.

IRS Issues 2016 “Required Amendments List”

The IRS has issued its first “Required Amendments List” for qualified plans since it eliminated the five-year remedial amendment cycle, and significantly curtailed the favorable determination letter program for individually designed plans. The IRS will issue a new List each year.

This first List, set forth in Notice 2016-80 contains amendments that are required as a result of changes in qualification requirements that become effective on or after January 1, 2016. December 31, 2018 is the plan amendment deadline for a disqualifying provision arising as a result of a change in qualification requirements that appears on the 2016 List.

The Required Amendments List is divided into two parts:

Part A lists the changes that would require an amendment to most plans or to most plans of the type affected by the particular change. Part A of the 2016 List contains no changes applicable to most plans.

Part B lists changes that the Treasury Department and IRS do not anticipate will require amendments in most plans, but might require an amendment because of an unusual plan provision in a particular plan. Part B of the 2016 List contains a single change that may apply to certain collectively bargained defined benefit plans: Restrictions on accelerated distributions from underfunded single-employer plans in employer bankruptcy under Code § 436(d)(2), which was enacted as part of the Highway and Transportation Funding Act of 2014, P.L. 113-159, § 2003. Code Section provides (amendments made by P.L. 113-159, § 2003 in italics):

A defined benefit plan which is a single-employer plan shall provide that, during any period in which the plan sponsor is a debtor in a case under title 11, United States Code, or similar Federal or State law, the plan may not pay any prohibited payment. The preceding sentence shall not apply on or after the date on which the enrolled actuary of the plan certifies that the adjusted funding target attainment percentage of such plan (determined by not taking into account any adjustment of segment rates under section 430(h)(2)(C)(iv)) is not less than 100 percent.

Section 430(h)(2)(C)(iv) sets minimum and maximum and maximum rates for actuarial calculations of the funded status of defined benefit plans.

If a defined benefit plan incorporates the limitation of Section 436(d)(2) by reference to the statute or regulations (or through the use of the sample amendment in Notice 2011-96, which incorporated the statute and regulations), then no amendment to the plan would be required to comply with the changes.

Additional Background

In Rev. Proc. 2016-37, the IRS eliminated, effective January 1, 2017, the five-year remedial amendment/determination letter cycle for individually-designed qualified plans. After January 1, 2017, individually-designed plans will only be able to apply for a determination letter upon initial qualification, upon termination, and in certain other circumstances that the IRS may announce from time to time. See Announcement 2015-19.

To provide individually designed plans with guidance on what amendments must be adopted and when, the IRS announced that it would publish annually a Required Amendments List. The Required Amendments List generally applies to changes in qualification requirements that become effective on or after January 1, 2016. The List also establishes the date that the remedial amendment period expires for changes in qualification requirements contained on the list. Generally, an item will be included on a Required Amendments List only after guidance (including any model amendment) has been issued.

Where a required amendment appears on the List, then for an individually-designed non-governmental plan, the deadline to adopt the amendment is extended to the end of the second calendar year that begins after the issuance of the Required Amendments List in which the change in qualification requirements appear (i.e. until December 31, 2018 for items on the 2016 List).

Qualified Employer Health Reimbursement Arrangements Permitted for Small Employers

The House and the Senate recently passed, and President Obama has signed, the “21st Century Cures Act”, which includes a provision exempting small employer health reimbursement arrangements (HRAs) from the Affordable Care Act’s (ACA’s) group plan rules, and from the excise tax imposed under Code Section 4980D for failure to comply with those rules. See our prior posts on the Section 4980D excise tax here, here and here.

Background

HRAs typically provide reimbursement for medical expenses (which can include premiums for insurance coverage). HRA reimbursements are exclude-able from the employee’s income, and unused amounts roll over from one year to the next. HRAs generally are considered to be group health plans for purposes of the tax Code and ERISA.

The ACA market reforms, which generally apply to group health plans, include provisions that a group health plan (including HRAs) (1) may not establish an annual limit on the dollar amount of benefits for any individual; and (2) must provide certain preventive services without imposing any cost-sharing requirements for these services. Code Section 4980D imposes an excise tax on any failure of a group health plan to meet these requirements.

The IRS has previously distinguished between employer-funded HRAs that are “integrated” with other coverage as part of a group health plan (and which therefore can meet the annual limit rules) and so called “stand-alone” HRAs. A “stand alone” HRA almost certainly does not meet the ACA group coverage mandates.

The New Law

The 21st Century Cures Act provides relief from the Section 4980D excise tax effective for tax years after December 31, 2016 for small employers that sponsor a qualified small employer HRA. In addition, previous transition relief for small employers, i.e. those that are not an Applicable Large Employer (ALE) under the ACA, is extended through December 31, 2016.

Therefore, for plan years beginning on or before December 31, 2016, HRAs maintained by small employers with fewer than 50 employees will not incur the Section. 4980D excise tax even if the plans are not qualified small employer HRAs. For tax years after December 31, 2016, small employer HRAs will need to satisfy the requirements of a qualified small employer HRA.

Qualified Small Employer HRA

A qualified small employer HRA must meet all of the following requirements:

(1) Be maintained by an employer that is not an ALE (i.e., it employs fewer than 50 employees), and does not offer a group health plan to any of its employees.

(2) Be provided on the same terms to all eligible employees. For this purpose, small employers may exclude employees who are under age 25, employees have not completed 90 days of service, part-time or seasonal employees, collective bargaining unit employees, and certain nonresident aliens.

(3) Be funded solely by an eligible employer. No employee salary reduction contributions may be made under the HRA.

(4) Provide for the payment of, or reimbursement of, an eligible employee for expenses for medical care (which can include premiums) incurred by the eligible employee or the eligible employee’s family members.

(5) The amount of payments and reimbursements do not exceed $4,950 ($10,000 if the HRA also provides for payments or reimbursements for family members of the employee). These amounts will be adjusted for cost of living increases in the future. An HRA can vary the reimbursement to a particular individual based on variations in the price of an insurance policy in the relevant individual health insurance market with respect to: (i) age or (ii) the number of family members covered by the HRA, without violating this requirement that the HRA be provided on the same terms to each eligible employee.

Coordination With Other Rules

If an employee covered by a qualified HRA does not maintain “minimum essential coverage” within the meaning of Code Section 5000A(f), they will be subject to the individual mandate tax penalty under existing law. Under the new law, their HRA reimbursements will also be taxable income to them.

In addition, for any month that an employee is provided affordable individual health insurance coverage under a qualified HRA, he is not eligible for a premium assistance tax credit under Code Section 36B.

Employer Reporting Requirements

For years beginning after December 31, 2016, an employer funding a qualified HRA must, not later than 90 days before the beginning of the year, provide a written notice to each eligible employee that includes:

(1) The amount of the employee’s permitted benefit under the HRA for the year;

(2) A statement that the eligible employee should provide the amount of the employee’s permitted benefit under the HRA to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit; and

(3) A statement that if the employee is not covered under minimum essential coverage for any month, the employee may be subject to the individual mandate tax penalty for such month, and reimbursements under the HRA may be include-able in gross income.

For calendar years that begin after December 31, 2016, employers also have to report contributions to a qualified HRA on their employees’ W-2s.

More… text of the 21st Century Cures Act.

Welfare Benefits Strategies For Small to Mid-Size Employers After The ACA

Lovitt & Touche’s Chris Helin has a great article out detailing two innovative approaches to dealing with the challenges posed to small and mid-sized businesses resulting from the continued rise in rates and coverage mandates under the Affordable Care Act (ACA).

Retention Accounting

Chris explains that “[w]hen you receive a quote from a carrier under a retention accounting contract instead of a fully insured contract, you are given the chance to share in the savings in a good claims year.” These contracts used to be available only to employers with more than 5000 people on their medical plan. They may now be an option even if you have as few as 100 employees on your plan.

Private Marketplace

The second approach is one on which Lovitt & Touche has taken a lead: the Private Marketplace. Not to be confused with the public exchanges, a private marketplace can be custom designed to deliver all of your welfare benefits, including medical, dental, vision, life, and disability. A private marketplace offers several innovations that employers may find attractive, including: (1) you can offer many more than just two or three plan designs within each insurance option; and (2) you can also use a defined contribution strategy and provide a specific dollar amount for each employee to spend.

Even if the ACA is repealed or significantly altered in 2017, these trends will likely continue, and they may be worth a look.

For more information read Chris’s article Here.