IRS Outlines FY 2020 Compliance Strategies and Priorities
On October 17, 2019, the IRS issued a Program Letter outlining its compliance strategies and priorities for fiscal year 2020. Employee benefits-related issues they will focus on include:
- Determining whether fringe benefits are properly taxed for FICA and income tax withholding
- Contacting employer plan sponsors who fail to file a Form 5500
- Examining 403(b) and 457 plans for compliance related to universal availability, excessive contributions, catch-up contributions under IRC Section 414(v) (for 403(b) plans), and the proper use of the special three-year catch-up contribution rule (for 457 plans)
- Continuing to pursue referrals received from internal and external sources that allege possible noncompliance by a retirement plan
While it may be helpful for employers to see the areas where the IRS will focus their enforcement efforts in fiscal year 2020, compliance in all areas related to employer-sponsored plans should always be a priority.
DOL Proposes New Electronic Disclosure Safe Harbor
On October 23, 2019, the DOL proposed a new rule to expand the options available to retirement plan sponsors for electronic delivery of required disclosures. The proposal followed Executive Order 13847, which instructed the DOL to determine whether regulatory actions could be taken to improve the effectiveness of participant disclosures and reduce their cost to employers. After review and consultation with other regulatory agencies, the DOL set forth a new "notice and access" safe harbor under which ERISA retirement plan disclosures could be made available on a website following specified notice.
As background, in 2002, the DOL issued a safe harbor that permitted electronic delivery of disclosures provided that the method was reasonably calculated to ensure actual receipt, notice and content requirements were satisfied, and participants maintained the right to request paper copies. Under this prior safe harbor, employees with "integral access" to the employer’s computer system at work could be defaulted to electronic delivery; all others were required to affirmatively consent to the electronic method. In recognition of technological advances and increased participant internet access, the notice and access option is offered as a new alternative to (rather than a replacement of) the existing 2002 safe harbor.
The proposed alternative permits required disclosures for retirement plans (including multi-employer plans) to be posted online following notice to covered individuals, who can then access the documents continuously using an internet connected device. Covered individuals are participants, beneficiaries, and any other individuals entitled to documents, who have provided the plan administrator (or designee) with an electronic address, such as email address or smartphone number. Alternatively, if an electronic address is assigned by an employer for this purpose, the employee is treated as if they provided the electronic address. Covered documents include all disclosures required under Title 1 of ERISA, with the exception of documents that must be furnished upon request (such as the plan document).
The new safe harbor requires plan administrators to send a notice of internet availability to each covered individual’s electronic address whenever a covered document is made available on the website. Administrators are permitted to combine certain annual disclosures, for which the notice of availability would be considered timely if furnished not later than 14 months following the date of the prior plan year’s notice.
The new safe harbor lays out specific content that must be included in the notice. The referenced website address must be "sufficiently specific" to provide ready access to the covered document, either by leading the covered individual directly to the covered document or to a login page that provides a prominent link to the covered document. Generally, the notice must not contain additional information or be accompanied by other documents and it must be written in a manner calculated to be understood by the average plan participant.
The proposed rule includes two significant protections for individuals who prefer to receive paper versions of covered documents. First, any covered individual has the right to request and receive a paper copy free of charge. Second, a covered individual who prefers to receive all covered documents in paper may opt out of receiving covered documents electronically. If a plan administrator becomes aware of an invalid address (for example, if an email is returned as undeliverable), the individual must be treated as if they opted out of electronic delivery.
Plan administrators who choose to use the new safe harbor must send an initial paper notification to apprise covered individuals of the new electronic delivery method and the opportunity to opt out.
The DOL has requested public comments and information regarding the proposed alternative electronic delivery method on or before November 22, 2019. The new safe harbor option will be effective 60 days following publication of a final rule. In response to the executive order's directive, the DOL is also seeking information and ideas regarding measures (in addition to the notice and access framework) that would enhance the effectiveness of ERISA disclosures for participants and beneficiaries. This second request focuses upon the design and content of the disclosures and includes specific questions upon which feedback is sought.
Employers who are seeking an alternative electronic delivery method for retirement plan disclosures may want to review the proposed rule. It is important to note that the proposed notice and access delivery method does not currently incorporate welfare benefit plan disclosures. (The DOL declined to extend the proposal to welfare benefit plans, pending review and consultation with other regulatory authorities.)
Please stay tuned to Compliance Corner for further updates on these initiatives.
IRS Provides Recurring Remedial Amendment Periods for 403(b) Plans
On September 30, 2019, the IRS released Revenue Procedure 2019-39, which sets up recurring remedial amendment periods for 403(b) plans. As background, remedial amendment periods allow plan sponsors to retroactively correct form defects in their plan document. This guidance comes after the IRS established a pre-approved plan program for 403(b) back in 2013. The last day of the remedial amendment period established under that previous guidance is March 31, 2020.
Rev. Proc. 2019-39 establishes recurring remedial amendment periods for form defects occurring after March 31, 2020. It also gives plan sponsors deadlines by which they must adopt 403(b) plan documents or plan amendments.
403(b) plan sponsors should work with their advisers to correct any form defects. The IRS indicated that they will provide additional guidance at a later date. We will continue to report on any developments in Compliance Corner .
Can I offer my employees a cash payment if they waive coverage under the medical plan?
Yes, an employer may provide a cashable waiver to employees who decline medical coverage. However, they have to be very careful with its design, particularly applicable large employers that are subject to the employer mandate.
Section 125 is the exclusive means by which an employer can provide employees with a choice between taxable cash and nontaxable benefits. Thus, any cashable waiver must be included in the written Section 125 Plan Document as a qualified benefit.
An employee can waive coverage under Section 125 for any reason — even if they have no other coverage. However, if the employer is subject to the employer mandate, then they should likely only allow employees to opt-out and take the cash if they certify that they have other MEC. This is called a conditional waiver. If any waived employee is provided with the cash-out regardless of whether they have other MEC, this is called an unconditional waiver and it can negatively impact a large employer’s affordability calculation.
Let’s look at an example. ABC company offers employees the opportunity to enroll in self-only coverage for $150 per month. If the employee waives coverage, they would receive $75 as a cash-out amount. The $75 is taxable income. Under a conditional waiver, the employee must certify that they have other MEC to receive the $75 per month. The cost of coverage for affordability and Section 6056 reporting purpose is $150 per month. Under an unconditional waiver, any employee waiving coverage receives $75 per month. The cost of coverage for affordability and reporting purposes in this case would be $225 ($150 plus $75), and the $225 is the amount the employer would have to use to determine affordability.
MEC includes Medicare, TRICARE, Medicaid, and other group coverage. It does not include individual coverage. It can sometimes be difficult to distinguish individual coverage from group coverage by simply looking at a health plan identification card. This is why it is best to simply have the employee self-certify whether they have other MEC.
Lastly, please note that this issue only applies to employers who implement a cashable waiver design on or after December 16, 2015. If the employer’s design was adopted before that date, they are not required to treat the opt-out payment as increasing the employee’s required contribution.
FSA Notice Requirement
On August 30, 2019, Gov. Newsome signed AB 1554 into law. The new law is effective January 1, 2020 and requires employers to provide notice to health FSA, dependent care FSA, and adoption assistance account participants if the deadline to submit claims is earlier than the end of the plan year.
The notice is not required to be distributed to all participants — only those whose coverage terminates mid-plan year and who have to submit their claims before the end of the plan year. In other words, they have an accelerated run-out period. For example, let’s say that under an employer’s plan design, participants who terminate employment mid-year have 90 days from termination to submit claims. That employer would need to send the notice to those participants. Alternatively, if the FSA permits mid-year terminated employees to submit claims all the way through the end of the plan year the notice would not apply to them.
The law itself is only three sentences. As of now, there is no model notice or language. The only requirement is for employers to notify the affected participants of the appropriate deadline to submit claims. Best practice would be to add the plan name, contact information for questions, and instructions for submitting claims to the notice.
Importantly, employers are required to provide the notice in two different forms. One may be electronic (email), but the second must be telephonic, by text message, through postal mail, or in person.
Lastly, there is some question as to whether the law would be preempted by federal law since a health FSA is governed by ERISA. However, this is not clear and employers should plan on complying in 2020 until further guidance is provided.
Georgia Telehealth Act
On May 6, 2019, Gov. Kemp signed SB 118 into law, creating the Georgia Telehealth Act. The bill expands upon existing law in an effort to increase the availability of telemedicine for a broader array of services, and to ensure pay equity for telemedicine providers.
Specifically, the law prohibits insurers from excluding a service from coverage solely because it is provided through telemedicine rather than in-person consultation. The insurer must also reimburse the provider for the diagnosis, consultation, or treatment of an insured delivered through telemedicine on the same basis and at least the rate for the same service provided through in-person contact.
Additionally, the carrier cannot impose 1) any annual or lifetime limits on telemedicine coverage other than those that apply in the aggregate to all items and services covered under the policy or 2) any copayment, coinsurance, or deductible that is not equally imposed upon all terms and services covered under the policy. An insured cannot be required to use telemedicine services in lieu of in-person consultation.
The law goes into effect on January 1, 2020. Although the measures are primarily directed towards insurers, employers with health benefit policies issued in Georgia should be aware of the new coverage requirements.
State Law Amended to Provide Certain ACA Protections
On May 15, 2019, Gov. Sisolak signed Assembly Bill 170 into law. The bill requires insurers to offer health benefit plans to Nevada residents regardless of their health status, and provides a mechanism for the state to oversee insurers in the state and to help residents obtain such health benefit plans. The state passed this law in order to make sure that residents of the state with pre-existing conditions would not lose coverage in the event that the Affordable Care Act is struck down in the courts.
Nevada is one of several states that are passing state-level solutions in the event the ACA is struck down in the courts, in order to make sure that their residents are covered. Employers should keep an eye on these efforts in their own states, and be prepared to make any adjustments in the way they provide health coverage to their employees in light of any state-level changes.
Bernalillo County Paid Time-Off Ordinance
On October 15, 2019, Bernalillo County, New Mexico’s Board of County Commissioners approved a paid-leave ordinance that will become effective January 1, 2020. Under the ordinance, all employees can accrue or use up to 28 hours of paid leave a year starting on July 1, 2020. All employees of employers with at least 11 employees can accrue or use up to 44 hours of paid leave a year starting on July 1, 2021, and all employees of employers with at least 35 employees can accrue or use up to 56 hours of paid leave a year starting on July 1, 2022.
This is a good example of how local jurisdictions are mandating paid leave through local ordinances. Employers in Bernalillo County should consult with their employment law advisors to comply with this law.
State Law Amended to Provide Certain ACA Protections
On April 4, 2019, Gov. Lujan Grisham signed HB0436 into law. The law aligns provisions relating to accessibility of health care coverage to federal law, including protections for persons with pre-existing conditions and a requirement that health care plans provide essential health benefits such as emergency services, hospitalization, prescription drugs, and maternity and newborn care. The state passed this law in order to make sure that residents of the state would not lose coverage in the event that the Affordable Care Act is struck down in the courts.
New Mexico is one of several states that are passing state-level solutions in the event the ACA is struck down in the courts, in order to make sure that their residents are covered. Employers should keep an eye on these efforts in their own states, and be prepared to make any adjustments in the way they provide health coverage to their employees in light of any state-level changes.
Newborn Nurse Visiting Services Required
On July 15, 2019, Gov. Brown signed SB 526 into law. Effective September 29, 2019, the law requires health benefit policies issued in Oregon to reimburse the cost of newborn nurse visiting services. The coverage must be provided without any cost-sharing, coinsurance, or deductibles to families with newborns up to six months old.
Although insurers must offer these nurse services in health benefit plans, an eligible enrollee is not required to receive the services as a condition of coverage. Additionally, the carrier is responsible for notifying an enrollee about the services whenever an enrollee adds a newborn to coverage. Carriers may use in-network providers or may contract with local public health authorities to provide such services.
The measures are primarily directed towards insurers. However, Oregon employers should be aware of the new coverage requirements, particularly if planning to offer an HDHP option with an HSA program. An HDHP cannot provide for cost sharing, with the exception of preventive care, before the deductible is satisfied. Accordingly, it may be advisable for employers to talk to counsel about the impact of the new state mandate on HDHP/HSA arrangements
San Antonio Paid Sick Leave Ordinance Effective December 1, 2019
On December 1, 2019, San Antonio’s paid sick leave ordinance goes into effect. The ordinance is being challenged in court, and, although Austin’s paid sick leave ordinance was struck down on appeal, San Antonio’s ordinance may be different enough from Austin’s ordinance to avoid that fate.
The San Antonio ordinance covers employees who work within the city limits and those who work more than 240 hours within the city limits in a year. The size of the employer does not matter. Those covered employees accrue one hour of sick leave for every 30 hours worked, up to a maximum of 56 hours a year. Employers can restrict use of the paid sick leave for the first 90 days of employment, although the accrual begins on the first day. Employers can also use reasonable verification procedures in the ordinance for employees who use paid sick leave for more than three consecutive days of work. The ordinance does not require employers to reinstate any paid out sick leave if employers rehire an employee within six months of separation. Employees have one year to file complaints with San Antonio regarding violations of the ordinance.
Since the ordinance is the subject of a lawsuit, it may be overturned at the district level or on appeal. However, employers with employees subject to the new ordinance may wish to review their leave policies in order to make sure they comply.
Paid Sick Leave Law Survives Court Challenge
On October 11, 2019, the U.S. District Court for the Western District of Washington decided a lawsuit in favor of Washington’s paid sick leave law. The law applies to workers based in the state, including airline workers. It guarantees that those workers earn paid sick leave, and prohibits employers from requesting medical verification of illness, disciplining workers when they take sick leave, or preventing employees from using leave in one-hour increments.
The Plaintiff in the case was an organization representing several airlines, Airlines for America, which argued that the Washington law was preempted by the Airline Deregulation Act and violates the Constitution’s Dormant Commerce Clause, as well as the Fourteenth Amendment’s Due Process Clause, because the law conflicts with sick leave laws in other states, creating additional burdens on the airlines and causing consumer prices to rise. In addition, they argued that the Washington law will increase flight crew absences and create flight delays, cancellations, and additional costs.
The court noted that many provisions of the law can be found in collective bargaining agreements that the airlines have already agreed to, and that the airlines failed to show that following the law created additional administrative or financial burdens, such as increased flight delays. Accordingly, the court ruled that the benefits provided under the Washington law outweighed any impact to interstate commerce, that the law applied only to workers with strong ties to the state, and that the law did not significantly impact airline services or prices.
This case provides an example to employers that state paid sick leave law can survive constitutional challenges and should be considered when drafting sick leave policies.
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Can I offer my employees a cash payment if they waive coverage under the medical plan?