PPI in the News Compliance Corner - January 11, 2018 Archive
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On Dec. 22, 2017, the IRS released Notice 2018-06, which delays the date by which informational statements must be provided to individuals and provides transitional good faith relief for reasonable mistakes made in reporting Sections 6055 and 6056 information about 2017.

Specifically, the due date for providing individuals with Form 1095-B (by a carrier or self-insured employer) and Form 1095-C (by an applicable large employer) has been extended by 30 days, to March 2, 2018 (changed from Jan. 31, 2018). The deadline for filing these forms with the IRS hasn't changed. That date remains April 2, 2018, if filing electronically, or Feb. 28, 2018, if not filing electronically. If an employer doesn't comply with the deadlines, the employer could be subject to penalties.

Despite the extended due date, employers and other coverage providers are encouraged to furnish 2017 statements as soon as they're able. But if individuals haven't received these forms by the time they file their individual tax returns, they may rely upon other information received from employers or coverage providers to attest that they had minimum essential coverage as required by the individual mandate. Individuals need not amend their returns once they receive the forms, but they should keep them with their tax records.

In addition, Notice 2018-06 extends good faith effort relief to employers for incorrect or incomplete returns filed in 2018 (as to 2017 information). The IRS previously provided relief for penalties stemming from 2017 reporting failures (as to 2016 data), and the relief appears to be outlined in the 2017 Instructions for Forms 1094-C and 1095-C. Accordingly, for 2017 and prior filings, relief is available to entities that could show that they made good faith efforts to comply with the information reporting requirements, even if they reported incorrect or incomplete information. In determining what constitutes a good faith effort, the IRS will take into account whether an employer or other coverage provider made reasonable efforts to prepare for reporting, such as gathering and transmitting the necessary data to a reporting service provider or testing its ability to use the AIR electronic submission process. This relief doesn't apply to a failure to timely furnish or file a statement or return, and doesn't extend to employer mandate penalties (for large employers that didn't offer affordable coverage to full-time employees pursuant to the ACA's employer mandate).

IRS Notice 2018-06 »

On Dec. 28, 2017, CMS finalized the 2019 actuarial value (AV) calculator methodology, which only contained small changes from the draft calculator reported on in the Nov. 14, 2017, Compliance Corner . The AV calculator is designed by HHS and CMS to help estimate the AV for a given plan design in the individual and small group markets, which is used to categorize such plans into the metal levels of coverage (bronze, silver, gold and platinum). The proposed rules describe the calculator's methodology and operation, and can be quite technical and complex. The rules primarily provide technical guidance to insurers, but contain general information regarding medical trends.

The calculator is largely unchanged from previous years, which means that individual and small group insurance plan options may stay largely the same in plan design and metal level status. However, one interesting change was that the annual projection factor for medical costs used in 2018 was 3.25 percent, but HHS increased that factor to 5.4 percent for 2019. The projection factor for prescription drugs remains at the higher level of 11.5 percent to account for the expectation that the cost of prescription drugs is to increase at a substantially higher rate than medical costs. For the 2019 AV calculator, the maximum out-of-pocket limit and related functions have been set at $8,000 to account for an estimated 2019 annual limitation on cost sharing. The 2019 annual limitation on cost sharing will be specified in the final 2019 payment notice.

Employers don't need to take any action in relation to the AV calculator. Large groups aren't categorized into one of the metal tier categories. The AV of fully insured and small group policies will be determined by the insurer. However, the cost of medical and prescription services is expected to increase significantly over the next two years for all sized plans.

2019 Actuarial Value Calculator Methodology »

On Dec. 22, 2017, Pres. Trump signed H.R. 1, the Tax Cuts and Jobs Act, creating Public Law No. 115-97. The Tax Cuts and Jobs Act (2017 Tax Reform Law) made significant changes to the IRC, with its primary impact on corporate and individual tax rates and other non-benefits areas. This article is meant to summarize the changes that impact employers with respect to employee benefit offerings.

ACA Individual Mandate Penalty Repealed
First, beginning in 2019, the 2017 Tax Reform Law repeals the tax penalty under the ACA's individual mandate — the requirement for all U.S. citizens to purchase health insurance or pay a tax penalty. While the exact impact of the mandate's repeal is unknown, many people forecast this will lead to an increase in health insurance premiums (particularly in the individual market) and in the number of uninsured, which could further destabilize the health insurance marketplace. Others believe the current instability of the marketplace is evidence that the individual mandate hasn't supported competition and growth, and therefore the repeal of it will have minimal impact. Regardless, with the penalty for failure to carry health insurance gone, employers may see a decline in their group health plan participation rates for employees that choose to forego coverage altogether.

Note that the 2017 Tax Reform Law doesn't impact the ACA's employer mandate. That means employers must still identify and offer affordable health insurance coverage to all full-time employees and their dependents. Similarly, the employer reporting obligations under IRC Sections 6055 and 6056 remain in place, meaning employers still must complete and file appropriate forms (Forms 1094/95-B or 1094/95-C) with the IRS each year and distribute a copy of Form 1095-C (or a substitute statement) to employees.

Changes to Commuter Benefits
Beginning in 2018, the 2017 Tax Reform Law repeals the employer business deduction for qualified mass transit and parking benefits (with an exception for certain situations involving the safety of the employee). Specifically, employers may no longer deduct the cost of providing qualified transit passes, parking expenses, commuter highway and bicycle commuter reimbursement costs. The 2017 Tax Reform Law also repeals the exclusion for gross income and wages for qualified bicycle commuting costs and reimbursements (beginning in 2018 and running through the end of 2025). This means employees must recognize as income any employer payment or reimbursement for bicycle commuter costs.

Because IRC Section 132 was not changed, though, employees may still exclude from gross income the value of commuter benefits purchased with pretax salary reduction contributions (through a Section 125 plan). Thus, employees may continue to make pretax contributions for parking and transportation costs, but not for bicycling costs.

Employers that previously subsidized mass transit and parking might consider switching to exclusive employee pretax contribution designs. Importantly, employers in cities that require employers to maintain employee pretax contributions (such as Washington D.C., New York and San Francisco) should review local ordinances before coming to any conclusions on their transportation fringe benefit programs.

Employer Tax Credit for Providing Paid Family Leave
Interestingly, the 2017 Tax Reform Law provides for a new tax credit for wages paid by employers in 2018 and 2019 to employees that are on an FMLA-protected leave. While FMLA currently provides job and benefits protection for those out on an FMLA-protected leave, FMLA doesn't require that the leave be paid. Employers that provide "qualifying employees" at least two weeks of annual paid family and medical leave that provides at least 50 percent wage replacement would be eligible for the tax credit. A "qualifying employee" is one who has been employed for at least one year and who didn't have compensation (for the preceding year) in excess of 60 percent of the compensation threshold for highly compensated employees (for 2018, 60 percent of $120,000, which would be $72,000).

In addition, the employer must outline their policy in writing. The tax credit itself depends on how much replacement wages the employer provides, but it generally ranges from 12.5 percent (for employers paying up to 50 percent of wages) to 25 percent (for employers paying more than 50 percent of wages) of the cost of each hour of paid leave. Importantly, personal leave (such as PTO or vacation pay) or pay mandated by a state or local government may not be taken into account for purposes of the new tax credit.

We anticipate that the federal government will provide additional guidance on the new tax credit which will hopefully flesh out more of the details. In the meantime, because the new tax credit implicates leave policies (an area outside benefits compliance generally), employers should work with outside counsel or an HR professional in developing their leave policies in a way that allows them to take advantage of the new tax credit.

Retirement Plans
The 2017 Tax Reform Law will have minimal impact on most retirement plans. But there are some minor changes to consider. First, under prior law, if a qualified retirement plan (including 401(k) plans) account balance is reduced to repay a plan loan, and the amount of that offset is considered an eligible rollover distribution, the offset amount may be rolled over into an eligible retirement plan (so long as the rollover occurs within 60 days). Under the 2017 Tax Reform Law, the 60-day deadline is extended until the due date for the participant's individual federal income tax return (including extensions) for the year in which the amount is treated as a distribution. Thus, an employee who terminated employment with an outstanding loan could avoid having adverse tax consequences relating to that loan if the employee rolls over the loan amount to an IRA or eligible retirement plan before they file their federal income tax return for that year. This provision applies to employees whose plan terminates or who separate from employment after Dec. 31, 2017.

The new law also allows retirement plans (including 401(k) plans) to help victims of federally declared major disasters occurring in 2016 through a special distribution event (i.e., one that avoids the normal 10 percent early withdrawal penalty for distributions received before age 59 1/2). Specifically, the new law provides relief from the early withdrawal penalty for up to $100,000 for qualified 2016 disaster distributions (those taken from a retirement plan between Jan. 1, 2016, and Jan. 1, 2018) to an individual whose principal place of abode at any time during 2016 was located in a 2016 area impacted by a federally declared major disaster (as declared by the President). Qualified disaster distributions are taxed ratable over three years (rather than all in one year) and the distribution amount may be recontributed to an eligible retirement plan within three years. Employers may amend their retirement plans retroactively to take advantage of the new distribution rules.

Employers with questions regarding retirement plan changes should work with their retirement plan advisor or outside counsel.

Dependent Care and Adoption Assistance Left Untouched
Although prior versions of 2017 Tax Reform Law made changes to the exclusion for dependent care flexible spending arrangements (known as a dependent care FSA or dependent care assistance program, DCAP), that exclusion remains untouched in the law as passed. Similarly, the adoption tax credit and exclusions for educational assistance programs and qualified tuition reductions remain in place.

Other Changes
The 2017 Tax Reform Law generally disallows employer deductions for entertainment, amusement, recreation, meals and other food expenses. There are also changes to the tax treatment of employee achievement awards, on-site athletic facilities and employee moving expenses. Because those tax provisions are generally outside the scope of health and welfare benefits, employers should consult with a tax advisor for questions relating to these changes.

Overall, the 2017 Tax Reform Law doesn't have a major impact on employee benefit offerings. While the repeal of the ACA's individual mandate penalty may impact the health insurance market generally, it doesn't directly affect employers' requirements to comply with all the other ACA provisions.

Tax Cuts and Jobs Act »

Two federal district courts have enjoined the Trump Administration's expansion of the moral and religious exemptions to the PPACA's contraceptive mandate. As background, back in October 2017, the HHS, Treasury Department and DOL (the Departments) jointly issued interim final rules that broadened those exemptions. Specifically, the Departments' interim final rules basically allowed any employer to claim a religious or moral objection to offering certain contraceptives, including non-closely held companies and even publicly traded companies.

After those rules were issued, many entities sued the Trump administration, claiming that the expansion of the exemption was unlawful for various reasons. Among those litigants are the state of Pennsylvania and a group of states including California, Delaware, Maryland, New York and Virginia.

On Dec. 15, 2017, the U.S. District Court for the Eastern District of Pennsylvania issued a preliminary injunction in favor of Pennsylvania in Pennsylvania v. Trump . The injunction blocks the Departments from enforcing the final regulations issued in October 2017 (discussed above).

The court in that case ruled that Pennsylvania was likely to succeed in showing that the agencies didn't follow proper federal procedure when issuing the regulations. They also ruled that Pennsylvania had adequately shown that their citizens would suffer irreparable harm should the injunction not be granted. So although the court didn't decide the case on its merits, it did decide to put a halt to the interim final rules during the course of the litigation.

Similarly, on Dec. 21, 2017, the U.S. District Court for the Northern District of California issued a preliminary injunction in favor of the State of California and the other plaintiffs in State of California v. HHS . The court in this case also reasoned that the Departments had failed to follow proper procedure and that the citizens of the different plaintiff states would suffer irreparable harm if the Departments' interim final rules were allowed to remain for the duration of the proceedings.

Ultimately, this issue is far from over. It seems quite likely that the Trump Administration will appeal these rulings, and the states who sued will also continue to litigate their positions. As these (and other) challenges work their way through the courts, employers who are looking to avail themselves of these exemptions should work with legal counsel to ensure that they remain abreast of all the developments in this situation.

Pennsylvania v. Trump »
State of California v. HHS »

On Jan. 5, 2018, the EBSA published proposed regulations related to the creation and maintenance of association health plans (AHPs) under ERISA. The rules are in direct response to Pres. Trump's Executive Order dated Oct. 12, 2017, in which he ordered the DOL to propose regulations to expand access to AHPs and allow health coverage sales across state lines.

As background, ERISA currently governs single employer plans and multiple employer welfare plans (MEWAs). There are two types of MEWAs depending upon whether the participating employers meet the commonality-of-interest test. In general, parties to the MEWA must have sufficiently close economic or representational connection.

ERISA would apply to the MEWA on the plan level, instead of on the individual employer level, if all of the following criteria apply:

• The association is a bona fide organization with business/organization functions and purposes unrelated to providing benefits
• The participating employers share some commonality of interest and relationship outside of benefits
• The employers directly or indirectly exercise control over the program

If an employer meets these criteria, it's considered a bona fide association, the group is rated collectively for insurance premium purposes, the plan is considered to be maintained at the plan level and there's a single Summary Plan Description (SPD) and Form 5500 filed (if applicable). Alternatively, if the group doesn't satisfy the criteria, then the insurer may issue rates based on each separate employer member, the plan is considered to be maintained at the employer level and each employer would be responsible for a separate SPD and Form 5500 (if applicable).

Essentially, the proposed regulations would eliminate the requirement for the association to exist outside of the purpose of providing benefits. Instead, under the proposed rules, a group of employers may join together solely for the purpose of purchasing or providing health benefits to employees. The group would still need to be maintained as a legal entity with by-laws and a governing board.

Additionally, under the proposed rules, employers must exercise control over the program. For example, a representation of employers may serve on the board and make decisions related to coverage offered, plan design, etc. Importantly, the employers must either:

• Be in the same industry, trade, line of business or profession.
• Have a principal place of business within the same state or metropolitan area. The metropolitan area may include more than one state. EBSA provides specific examples of such areas: Greater New York City Area/Tri-State Region covering portions of New York, New Jersey and Connecticut; the Washington Metropolitan Area of the District of Columbia and portions of Maryland and Virginia; and the Kansas City Metropolitan Area covering portions of Missouri and Kansas.

Currently, ERISA doesn't apply to an arrangement consisting only of a self-employed individual with no common law employees. Participants must be employees, former employees or family members of such. However, the proposed rules would permit sole proprietors and other self-employed individuals with no common law employees to join an AHP as a member employer. The individual must just earn income from the trade or business for providing personal services. Specifically, the individual must provide on average at least 30 hours of personal services per week (or 120 hours per month) or have earned income that at least equals the cost of coverage under the AHP. Further, the individual must not be eligible for other subsidized group health plan coverage by another employer.

The proposed rules also include health nondiscrimination provisions. The association must not restrict membership based on a health factor such as claims utilization, health status or disability. The AHP must comply with the HIPAA nondiscrimination rules that prohibit discrimination in terms of eligibility or cost based on a health factor.

While any size employer may join an AHP, AHPs may only be attractive to small employers that would avoid the current member-level billing, modified community rating, essential health benefit package and limited plan choice. The rules apply generally to both fully insured and self-insured plans. This means that employers may join together to provide a self-insured plan, but the EBSA notes that such plans would still be subject to state law. Concerned with issues of plan solvency, many states restrict such designs and place many requirements on these plans, which may include licensure as an insurer.

Importantly, these plans would still be considered MEWAs and, therefore, would still have initial and annual M-1 filing requirements.

Comments on the proposed regulations are due within 60 days following Friday's publication. We'll continue to keep you updated on any future developments.

EBSA Proposed AHP Rules »

On Jan. 2, 2018, the DOL published a final rule adjusting for inflation civil monetary penalties under ERISA. As background, federal law requires agencies to adjust their civil monetary penalties for inflation on an annual basis. The DOL last adjusted certain penalties under ERISA in January 2017 (as discussed in the Jan. 24, 2017, edition of Compliance Corner ).

Among other changes, the DOL is increasing the following penalties that may be levied against sponsors of ERISA-covered plans:

• The penalty for a failure to file Form 5500 will increase from a maximum of $2,097 per day to a maximum of $2,140 per day.
• The penalty for a failure to furnish information requested by the DOL will increase from a maximum of $149 per day to a maximum of $152 per day.
• The penalty for a failure to provide CHIP notices will increase from a maximum of $112 per day to a maximum of $114 per day.
• The penalty for a failure to comply with GINA will increase from $112 per day to $114 per day.
• The penalty for a failure to furnish SBCs will increase from a maximum of $1,105 per failure to a maximum of $1,128 per failure.
• The penalty for a failure to file Form M-1 (for MEWAs) will increase from $1,527 to $1,558.

The regulations also increased penalties resulting from other reporting and disclosure failures.

These new amounts will go into effect for penalties assessed after Jan. 2, 2018, for violations that occurred after Nov. 2, 2015. The DOL will continue to adjust the penalties no later than Jan. 15 of each year and will post any changes to penalties on their website.

For more information on the new penalties, including the complete listing of changed penalties, please consult the final rule below. Additionally, see your retirement plan advisor if you have questions about the imposition of these penalties.

Final Rule »

On Dec. 20, 2017, the U.S. District Court for the District of Columbia vacated the EEOC wellness regulations effective 2019. The decision is in response to the AARP's lawsuit challenging the EEOC's employer wellness program regulations. Specifically, the EEOC claims that the 30 percent wellness reward allowable under the regulations is too high and leads to discrimination of older Americans. Their argument is that a wellness program is no longer considered voluntary considering the high cost of health plans.

In August 2017, the court had ordered the EEOC to reconsider their regulations, citing "serious concerns about the agency's reasoning regarding the GINA and ADA rules." In September 2017, the EEOC stated that it would issue proposed regulations by August 2018 and final regulations by October 2019, with an estimated effective date of January 2021.

In the most recent ruling, the court essentially rejected the EEOC's timeline by stating "an agency process that will not generate applicable rules until 2021 is unacceptable. Therefore, the EEOC is strongly encouraged to move up its deadline for issuing the notice of proposed rulemaking, and to engage in any other measures necessary to ensure that its new rules can be applied well before the current estimate of sometime in 2021."

For now, the EEOC's rules remain in place. Employer wellness programs involving a disability-related inquiry (e.g., a health risk assessment) or a medical examination (e.g., a biometric screening) are limited to a 30 percent wellness reward. A financial incentive may be provided to individuals who voluntarily provide genetic information as long as certain requirements are met. A notice must be provided to participants prior to the inquiry or examination. If the EEOC doesn't finalize regulations in 2018, those rules would be vacated effective 2019.

Importantly, the HIPAA rules related to wellness programs (including a limitation on reward amounts, requirement to provide a reasonable alternative standard and an additional notice requirement) aren't impacted by this court decision and remain applicable to employer-sponsored wellness programs.

Memorandum »

In the December 2017 issue of Employee Plans News , the IRS addressed several topics related to 401(k) plans.

First, the IRS now has a webpage that summarizes recent national disaster legislation, making it easier for plan participants to access retirement plan funds to recover from Hurricanes Harvey, Irma and Maria. The webpage describes relief available for early distributions, plan loan and repayment options, and retroactive plan term amendments.

Second, IRS Form 5300 underwent major revisions that became effective back on Jan. 1, 2017. Form 5300 is used to request a determination letter for an individually designed plan, which includes a 401(k) plan. The IRS warns that any applications submitted after Dec. 31, 2017 will be returned if the previous version of the form is used. Further, plan sponsors are reminded that requests for partial termination determinations may be submitted without regard to their ability to request a determination letter on plan documents.

Third, the IRS has updated the listing of required modifications (LRMs) for cash or deferred arrangements (CODAs) and defined contribution plans. The LRM is a collection of information that helps plan sponsors draft plans that comply with applicable laws and regulations. The updated defined contribution LRM makes adjustments in plan qualification requirements, regulations and guidance provided in the 2017 Cumulative List of Changes.

Lastly, other items in the newsletter include the release of advanced copies of Form 5500 for 2017, instructions for field agents regarding missing participants and beneficiaries, and updated instructions for electronically filing Form 8955-SSA (Publication 4810).

Plan sponsors of retirement plans should familiarize themselves with the information contained in the IRS newsletter (especially the various types of disaster-related relief affecting employee benefit plans) and make any necessary changes.

IRS Newsletter »

On Dec. 22, 2017, the Pension Benefit Guaranty Corporation (PBGC) issued final regulations that expand its Missing Participants Program (the Program) to defined contribution plans (such as 401(k) and other plans). As background, ERISA requires plan sponsors to distribute plan assets to participants upon termination. The problem with completing that process is often that the employer cannot find certain prior employees. The Program allowed defined benefit plan sponsors who had undertaken a diligent search for these missing employees to transfer the missing employees' account balances to PBGC. PBGC would then provide those benefits to employees when they were found.

This new regulation broadens the Program to offer it to defined contribution plans, multiemployer plans, professional service plans with 25 or fewer participants, and other defined benefit plans that weren't previously covered. So, beginning on Jan. 1, 2018, defined contribution plan sponsors that are terminating their plans have the option of transferring missing participants' benefits to PBGC. PBGC will then provide a centralized benefits directory through which the missing participants can determine if benefits are being held for them.

The new regulations also streamline the program by changing the way that employers determine the amount of money that should be sent to PBGC, increasing protection of participants' benefits and easing the transfer of benefits to PBGC.

Any employers considering whether they would like to access the PBGC Program should familiarize themselves with the Program to determine if doing so is appropriate.

Final Regulations »