Updated Form 5500s Released for 2017

The U.S. Department of Labor’s Employee Benefits Security Administration, the IRS, and the Pension Benefit Guaranty Corporation (PBGC) have releasedadvance informational copies of the 2017 Form 5500 annual return/report and related instructions. The “Changes to Note” section of the 2017 instructions highlight important modifications to the Form 5500 and Form 5500-SF and their schedules and instructions.

Modifications are as follows:

  • IRS-Only Questions. IRS-only questions that filers were not required to complete on the 2016 Form 5500 have been removed from the Form 5500, Form 5500-SF and Schedules, including preparer information, trust information, Schedules H and I, lines 4o, and Schedule R, Part VII, regarding the IRS Compliance questions (Part IX of the 2016 Form 5500-SF).
  • Authorized Service Provider Signatures. The instructions for authorized service provider signatures have been updated to reflect the ability for service providers to sign electronic filings on the plan sponsor and Direct Filing Entity (DFE) lines, where applicable, in addition to signing on behalf of plan administrators.
  • Administrative Penalties. The instructions have been updated to reflect an increase in the maximum civil penalty amount under ERISA Section 502(c)(2), as required by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. Department regulations published on Jan. 18, 2017, increased the maximum penalty to $2,097 a day for a plan administrator who fails or refuses to file a complete or accurate Form 5500 report. The increased penalty under section 502(c)(2) is applicable for civil penalties assessed after Jan. 13, 2017, whose associated violation(s) occurred after Nov. 2, 2015 – the date of enactment of the 2015 Inflation Adjustment Act.
  • Form 5500/5500-SF-Plan Name Change. Line 4 of the Form 5500 and Form 5500-SF have been changed to provide a field for filers to indicate the name of the plan has changed. The instructions for line 4 have been updated to reflect the change. The instructions for line 1a have also been updated to advise filers that if the plan changed its name from the prior year filing(s), complete line 4 to indicate that the plan was previously identified by a different name.
  • Schedule MB. The instructions for line 6c have been updated to add mortality codes for several variants of the RP-2014 mortality table and to add a description of the mortality projection technique and scale to the Schedule MB, line 6 – Statement of Actuarial Assumptions/Methods.
    Form 5500-SF-Line 6c. Line 6c has been modified to add a new question for defined benefit plans that answer “Yes” to the existing question about whether the plan is covered under the PBGC insurance program. The new question asks PBGC-covered plans to enter the confirmation number – generated in the “My Plan Administration Account system” – for the PBGC premium filing for the plan year to which the 5500-SF applies. For example, the confirmation number for the 2017 premium filing is reported on the 2017 Form 5500-SF.

Information copies of the forms, schedules and instructions are available online

Proposed Tax Reform: Ignore The Noise

While I usually do not post about proposed legislation, because it is so speculative, I am going to make an exception in the case of the House Republicans’ proposed Tax Cuts and Jobs Act for several reasons.

The first reason is that, the much-hyped potential reduction to $2,400 in pre-tax deferral limits to 401(k) and 403(b) Plans is not in the actual proposed legislation. In any event, given the popularity of 401(k) Plans, I would rate the chances of this particular proposal ever making it into law at about as close to zero as one could get. My advice is: don’t spend any time worrying about how to deal with it.

The second reason is that there has been virtually no press coverage of the proposed evisceration of non-qualified deferred compensation plans and other employee benefits changes, which are part of the proposed legislation. More on that below, if you are interested.

The third, and bigger point, is that it is way too early to start spending your precious time figuring out how to deal with this this proposed legislation. Recent history tells us that, even with Republican control of all three branches of government, major legislation is very difficult to pass. I can count this year’s major legislative accomplishments on no hands. And even if tax reform legislation does pass, it will likely look quite different from the initial House proposal once it has gone through the House, the Senate and a joint committee. So again, my advice is: don’t spend any time worrying about how to deal with the potential changes in the tax code. You have better things to do with your precious time.

If you are still interested in more details on these proposals you can read the proposed legislation, the House Committee on Ways and Means section-by-section summary, or the short summary below.

Summary of employee benefits tax proposals

The most significant proposal, in my view, is to eliminate the ability to defer taxation of compensation earned and vested in one year into a subsequent year, which is generally governed by Code Sections 409A and 457(b). If enacted, this would essentially eliminate future non-qualified deferred compensation arrangements.

In addition, proposed changes to qualified plans would repeal the special rule permitting recharacterization of Roth IRA contributions as traditional IRA contributions, expand the source accounts from which hardship distributions could be taken, and repeal the six month prohibition on making deferrals after taking a hardship distribution.

Other proposed benefits changes would repeal income exclusions for employee achievement awards, dependent care assistance programs, qualified moving expense re-imbursement, and adoption assistance programs.

IRS Notice 2017-67 Provides Guidance On Qualified Small Employer Health Reimbursement Arrangements

IRS Notice 2017-67 provides guidance on the requirements for providing qualified small employer health reimbursement arrangement (QSEHRA) under section 9831(d) of the Internal Revenue Code (Code), the tax consequences of the arrangement, and the requirements for providing written notice of the arrangement to eligible employees.

The guidance in Notice 2017-67 includes sections on the following topics:
A. Eligible employer
B. Eligible employee
C. Same terms requirement
D. Statutory dollar limits
E. Written notice requirement
F. MEC requirement
G. Proof of MEC requirement
H. Substantiation requirement
I. Reimbursement of medical expenses
J. Reporting requirement
K. Coordination with PTC
L. Failure to satisfy the requirements to be a QSEHRA
M. Interaction with HSA requirements
N. Effective date

In addition, Executive Order 13813 (82 Fed. Reg. 48385, Oct. 17, 2017), directed the Secretaries of the Treasury, Labor, and Health and Human Services to consider revising guidance, to the extent permitted by law and supported by sound policy, to increase the usability of health reimbursement arrangements (HRAs), expand employers’ ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with non-group coverage. The guidance provided in Notice 2017-67 addresses each of those objectives. The Treasury Department and IRS are expected to issue additional guidance in the future in response to Executive Order 13813.

Background on QSEHRAs

The 21st Century Cures Act (Cures Act), P.L. 114-255, 130 Stat. 1033, was enacted on December 13, 2016. Section 18001 of the Cures Act amends the Code, the Employee Retirement Income Security Act of 1974 (ERISA), and the Public Health Service Act (PHS Act), to permit an eligible employer to provide a QSEHRA to its eligible employees.

Pursuant to section 9831(d)(1), a QSEHRA is not a group health plan, and as a result, is not subject to the group health plan requirements that apply under the Code and ERISA. Generally, payments from a QSEHRA to reimburse an eligible employee’s medical expenses are not includible in the employee’s gross income if the employee has coverage that provides minimum essential coverage (MEC) as defined in Code section 5000A(f). For this purpose, “medical expenses” means expenses for medical care, as defined in section 213(d) (which includes premiums for other health coverage, such as individual health insurance policies).

The Cures Act provides that a QSEHRA is an arrangement that meets the following criteria:

(a) The arrangement is funded solely by an eligible employer, and no salary reduction contributions may be made under the arrangement;

(b) The arrangement provides, after the eligible employee provides proof of coverage, for the payment or reimbursement of the medical expenses incurred by the employee or the employee’s family members (in accordance with the terms of the arrangement);

(c) The amount of payments and reimbursements for any year does not exceed $4,950 ($10,000 for an arrangement that also provides for payments or reimbursements of medical expenses of the eligible employee’s family members (family coverage)); and

(d) The arrangement is generally provided on the same terms (the “same terms requirement”) to all eligible employees of the eligible employer.

To be an eligible employer that may provide a QSEHRA, the employer must not be an applicable large employer (ALE), as defined in Code section 4980H(c)(2) and the regulations thereunder (and, thus, may not be an employer that, generally, employed at least 50 full-time employees, including full-time equivalent employees, in the prior calendar year), and must not offer a group health plan (as defined in section 5000(b)) to any of its employees. Pursuant to Code section 4980H(c)(2), an employer whose workforce increases to 50 or more full-time employees during a calendar year will not become an ALE before the first day of the following calendar year.

EEOC Wellness Regulations Sent to EEOC For Review (AARP v US EEOC)

The United States District Court for the District of DC has concluded in the case of AARP v. United States Equal Employment Opportunity Commission, that the EEOC’s final wellness regulations are arbitrary and capricious, and has therefore sent them back to the EEOC for review. The regulations address the impact of the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA) on employer-sponsored wellness programs.

The Plaintiff in the case, the AARP, argued that permitting incentives of up to 30% of the cost of coverage is an unreasonable interpretation of the term “voluntary” because the incentive is too high to give employees a meaningful choice whether to participate in programs requiring disclosure of ADA-protected information. It further argued that the EEOC’s reversal of its prior position on the meaning of “voluntary”, which precluded incentives, was unsupported, inadequately explained, and thus, arbitrary and capricious.

The court ruled that the EEOC has not justified its conclusion that the 30% incentive level is a reasonable interpretation of voluntariness. Rejecting the EEOC’s argument that 30% is appropriate because it harmonizes the EEOC regulations with HIPAA as amended by the ACA, the court explained that HIPAA’s 30% incentive cap is not intended to serve as an interpretation of the term “voluntary” since voluntariness of participation is not an issue under HIPAA. Moreover, the court pointed out, the EEOC regulations are inconsistent with the HIPAA regulations in other respects. For instance, the EEOC regulations extend the 30% cap to participatory wellness programs to which the HIPAA cap does not apply. While holding that the EEOC made its decision arbitrarily, the court did not vacate the regulations, noting that they have been applicable for eight months. Instead, the court remanded the regulations to the EEOC for reconsideration. For now, the EEOC’s final wellness regulations will remain in effect, pending the EEOC’s review of the regulations.

Background

Wellness programs are regulated in part by the Health Insurance Portability and Accountability Act (HIPAA), as amended by the Affordable Care Act (ACA), as well as by HIPAA’s implementing regulations.

HIPAA prevents health plans and insurers from discriminating on the basis of “any health status related factor,” but allows covered entities to offer “premium discounts or rebates” on a plan participant’s copayments or deductibles in return for that individual’s compliance with a wellness program. A “reward” or incentive may include a discount on insurance costs or a penalty that increases the plan participant’s costs because of non-participation in the wellness program. See 26 C.F.R. § 54.9802-1(f)(1)(i).

The ACA’s amendments to HIPAA, and the accompanying implementing regulations, allow plans and insurers to offer incentives of up to 30% of the cost of coverage in exchange for an employee’s participation in a health-contingent wellness program, a kind of wellness program in which the reward is based on an insured individual’s satisfaction of a particular health-related factor. See Incentives for Nondiscriminatory Wellness Programs in Group Health Plans (“the 2013 HIPAA regulations” or “2013 HIPAA rule”), 78 Fed. Reg. 33,158, 33,180. Neither the ACA nor the 2013 HIPAA regulations impose a cap on incentives that may be offered in connection with participatory wellness programs, which are programs that do not condition receipt of the incentive on satisfaction of a health factor. Id. at 33,167.

However, because employer-sponsored wellness programs often involve the collection of sensitive medical information from employees, including information about disabilities or genetic information, these programs often implicate the ADA and GINA as well. As both the ADA and GINA are administered by EEOC, this brings wellness programs within EEOC’s purview.

The ADA prohibits employers from requiring medical examinations or inquiring whether an individual has a disability unless the inquiry is both job-related and “consistent with business necessity.” 42 U.S.C. § 12112(d)(4)(A). But the ADA makes some allowances for wellness programs: it provides that an employer may conduct medical examinations and collect employee medical history as part of an “employee health program,” as long as the employee’s participation in the program is “voluntary”. Id. § 12112(d)(4)(B). The term “voluntary” is not defined in the statute.

Similarly, GINA prohibits employers from requesting, requiring, or purchasing “genetic information” from employees or their family members. The definition of genetic information includes an individual’s genetic tests, the genetic tests of family members such as children and spouses, and the manifestation of a disease or disorder of a family member. Like the ADA, GINA contains an exception that permits employers to collect this information as part of a wellness program, as long as the employee’s provision of the information is voluntary. Again, the meaning of “voluntary” is not defined in the statute.

Thus, while HIPAA and its implementing regulations expressly permit the use of incentives in wellness programs, uncertainty existed as to whether the “voluntary” provisions of the ADA and GINA permit the use of incentives in those wellness programs that implicate ADA- or GINA-protected information.

The EEOC previously took the position that in order for a wellness program to be “voluntary,” employers could not condition the receipt of incentives on the employee’s disclosure of ADA- or GINA-protected information. However, in 2016 the EEOC promulgated new rules reversing this position. Those are the rules at issue in this case. The new ADA rule provides that the use of a penalty or incentive of up to 30% of the cost of self-only coverage will not render “involuntary” a wellness program that seeks the disclosure of ADA-protected information. See ADA Rule, 81 Fed. Reg. at 31,133–34. Likewise, the new GINA rule permits employers to offer incentives of up to 30% of the cost of self-only coverage for disclosure of information, pursuant to a wellness program, about a spouses’s manifestation of disease or disorder, which, as noted above, falls within the definition of the employee’s “genetic information” under GINA.2 See GINA Rule, 81 Fed. Reg. at 31,144.

Unlike the 2013 HIPAA regulations, which place caps on incentives only in health-contingent wellness programs, the incentive limits in the new GINA and ADA rules apply both to participatory and health-contingent wellness programs.

Attorney Erwin Kratz Named to the Best Lawyers in America© 2018

ERISA Benefits Law attorney Erwin Kratz was recently selected by his peers for inclusion in The Best Lawyers in America© 2018 in the practice area of Employee Benefits (ERISA) Law. Mr. Kratz has been continuously listed on The Best Lawyers in America list since 2010.

Since it was first published in 1983, Best Lawyers® has become universally regarded as the definitive guide to legal excellence. Best Lawyers lists are compiled based on an exhaustive peer-review evaluation. Lawyers are not required or allowed to pay a fee to be listed; therefore inclusion in Best Lawyers is considered a singular honor. Corporate Counsel magazine has called Best Lawyers “the most respected referral list of attorneys in practice.”