Retirement Plans

Major Revisions to Qualified Plan Determination Letter Process Announced

Effective January 1, 2017, the staggered five-year determination letter remedial amendment cycles for individually designed plans will be eliminated, the IRS announced in Announcement 2015-19. Additionally, according to the announcement, the scope of the determination letter program will be limited to initial plan qualification and qualification upon plan termination. Effective July 21, 2015, the IRS has stopped accepting off-cycle determination letter applications, with the exception of applications for new plans. 

By way of background, the remedial amendment periods that are being eliminated allowed plan sponsors to retroactively adopt required amendments to their plan documents, in essence extending the deadlines for such amendments. Additionally, the determination letter program allowed plan sponsors to be periodically assured by the IRS that the plan document was in compliance with the Internal Revenue Code. With the announced changes, plan sponsors will no longer receive such periodic assurances.

The announcement indicates that the Treasury Department and the IRS are considering how to make it easier for plan sponsors to comply with the qualified plan document requirements in light of the elimination of the remedial amendment cycles. One such option would be for the IRS to timely issue model amendments for plan sponsors to use in reflecting required amendments.

Many plan sponsors with individually designed plans have relied on the determination letter program to ensure their plan documents remain compliant with changes in law. Sponsors should now consider making changes to their administrative procedures to ensure that plan amendments are timely adopted. Such changes may include implementing periodic internal audits of the plan document or, if the plan sponsor currently relies solely on a third-party administrator for amendments, engaging outside ERISA counsel to ensure the plan document is amended on a timely basis.

DOL to Provide Guidance Regarding State-Based Retirement Programs

In recent years, several states, including Illinois, have passed laws that would require employers who do not offer retirement plans to automatically enroll employees into IRAs. However, there has been concern regarding whether these state laws would be preempted by ERISA. For instance, the Illinois legislation (discussed in this prior alert) that would require all employers with 25 or more Illinois-based employees that do not sponsor a retirement plan to enroll their employees in a Roth-style IRA program, specifically states that the program should not be implemented if it fails to receive an opinion from the Department of Labor (DOL) that exempts the program from ERISA. Consequently, the DOL intends to provide guidance to help reduce the risk of litigation regarding ERISA preemption for state-based retirement programs by the end of the year, as discussed in this DOL blog post. This guidance is expected to pave the way for more state-based employer retirement plan initiatives like the one in Illinois.

Updated Static Mortality Tables Issued for Defined Benefit Pension Plans

In Notice 2015-53, the IRS provided updated static mortality tables for use by defined benefit pension plans under Section 430(h)(3)(A) of the Internal Revenue Code. The new tables apply for purposes of calculating the funding target and other items for valuation dates that occur during the 2016 calendar year. Base mortality rates, projection factors, and weighting factors set forth in Treasury Regulation Section 1.430(h)(3)-1(d) were used to develop the new mortality rates in the tables as were blending techniques described in the preambles to those regulations. The notice also includes a modified unisex version of the mortality tables to be used in determining minimum present value for distributions with annuity starting dates that occur during periods beginning in the 2016 calendar year. The unisex tables were developed following procedures set forth in Revenue Ruling 2007-67.

The Treasury Department and the IRS expect to issue proposed regulations revising the base mortality rates and projection factors in Treasury Regulation Section 1.430(h)(3)-1, but such new regulations will not apply until 2017, following a notice and comment period.

IRS to Prohibit Lump-Sum Cashout Windows for Pension Plan Retirees

As described in a prior alert, the IRS issued Notice 2015-49, which abruptly announces the IRS’s intention to prohibit lump-sum cashout windows for pension plan retirees already in pay status. The IRS intends to prohibit lump-sum windows for retirees by proposing amendments to the “required minimum distribution” regulations under Section 401(a)(9) of the Internal Revenue Code. These proposed regulations would entirely prohibit lump-sum windows for retirees in pay status, unless the plan sponsor took certain concrete steps to offer a lump-sum window by July 9, 2015.

There are several other common pension de-risking strategies that are still available to plan sponsors, including offering lump-sum windows to deferred vested participants and beneficiaries who have not yet begun receiving benefits.

PBGC Proposes Changes to Plan Reporting Requirements

Section 4010 of ERISA requires reporting to the Pension Benefit Guaranty Corporation (PBGC) of actuarial and financial information by plan sponsors of certain underfunded single-employer defined benefit pension plans. The PBGC develops regulations implementing the 4010 reporting requirements and has announced proposed changes to its regulations to reflect the provisions of the Moving Ahead for Progress in the 21st Century Act and the Highway Transportation and Funding Act of 2014.

The PBGC also proposes to modify Section 4010.11(a) of the current regulations, which allows reporting waivers if the aggregate underfunding of pension plans in a controlled group does not exceed $15 million. The proposed rule would revise this waiver to limit it to controlled groups with fewer than 500 participants. The proposed rule also adds a waiver to the extent reporting is required solely on the basis of either a statutory lien resulting from missed contributions over $1 million or outstanding minimum funding waivers exceeding the same amount, provided that the missed contributions resulting in the lien or minimum funding waivers were reported to the PBGC under the Reportable Events regulation by the deadline for the 4010 filing.

DOL Provides Guidance Regarding Monitoring Annuity Providers

The DOL issued Field Assistance Bulletin No. 2015-02,which provides clarity regarding selection and monitoring of annuity providers for fiduciaries of defined contribution retirement plans. There is a safe harbor regulation that the DOL previously promulgated which specifies the steps a fiduciary should take in selecting an annuity provider and contract and also specifies that fiduciaries should periodically review annuity providers and contracts. There was some confusion amongst fiduciaries about the frequency of the periodic evaluations and, in particular, whether a fiduciary is required to review the provider each time a participant or beneficiary elects an annuity. The DOL has clarified in this field assistance bulletin that the frequency of review depends on facts and circumstances and is not required to occur every time a participant or beneficiary elects an annuity. The bulletin also clarifies that a fiduciary’s obligation to monitor an annuity provider ends when the plan ceases to offer annuities from that provider as a distribution option.

New Highway Legislation Includes Extension of Provisions Allowing Pension Asset Transfers

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 was signed into law on July 31, 2015. As a result of the new law, Section 420(b) of the Internal Revenue Code, which previously allowed pension plan sponsors to transfer excess plan assets to retiree health plans and group-term life insurance accounts so long as the transfer was made by December 31, 2021, has been revised to extend the deadline for such transfers to December 31, 2025. Proponents of the extension argue that it could save retiree life insurance benefits for many employers while others worry that it could lead to pension plan underfunding.

Health and Welfare Plans

IRS Issues Second Notice on Cadillac Tax

On July 30, the IRS issued Notice 2015-52, which provides guidance regarding the “Cadillac Tax” provision of the Affordable Care Act (ACA). Earlier this year, the IRS issued Notice 2015-16, which represented the first guidance issued by a regulatory agency regarding the Cadillac Tax and which we discussed in a prior alert. Notice 2015-52 supplements Notice 2015-16 and addresses additional issues relating to the tax.

In particular, the new notice proposes alternatives for clarification regarding who is liable for the tax. Under Section 4980I of the Internal Revenue Code (which codifies the Cadillac Tax), the health insurance issuer is deemed liable for any applicable excise tax in the case of an insured plan and the employer is liable for coverage under an HSA or Archer MSA, but for other coverage, the person liable is “the person that administers the plan benefits.” The Department of the Treasury and the IRS, according to Notice 2015-52, are considering how to define “the person that administers the plan benefits” for purposes of the tax liability. The notice proposes two alternatives: (1) the person responsible for performing day-to-day functions that constitute administration, which would often be a third-party administrator for self-insured plans or (2) the person that has ultimate authority or responsibility with respect to administration.

The notice also invites comments regarding the application of the controlled group rules under Section 414 of the Internal Revenue Code to the Cadillac Tax provisions. Under Section 4980I(f)(9) of the Internal Revenue Code, employers that are treated as a single employer under the controlled group rules of Section 414 of the Internal Revenue Code are aggregated for purposes of the Cadillac Tax. The IRS is inviting comments on the practical difficulties of such application.

The notice also provides guidance regarding the cost of applicable coverage for Cadillac Tax purposes. Based on the mechanics of the statute, employers will need to be able to determine the cost of applicable coverage provided during a taxable year soon after the end of that year to enable payment of any applicable excise tax on a timely basis. The notice invites comments regarding issues with calculating the tax under that timeline. The IRS also seeks comments regarding the mechanics of taxation for coverage providers who pass the tax on to employers. Because the excise tax is not deductible, if a coverage provider is reimbursed for the excise tax by the employer, that coverage provider will be taxed on the amount of the reimbursement and will consequently pass along the increased income tax to employers. While the statute indicates that the excise tax reimbursement itself would not be included in the cost of applicable coverage, it is not clear whether the portion of the reimbursement relating to the increased income tax of the coverage provider would be included in the cost of applicable coverage. 

Additionally, the notice provides guidance regarding the age and gender adjustments that may apply to the dollar limits for coverage. The Department of Treasury and the IRS anticipate that adjustment tables will be developed to simplify the calculation of the age and gender adjustments, but the notice invites comments regarding the adjustments.

Comments on Notice 2015-52 and additional comments on Notice 2015-16 are due by October 1, 2015.

IRS Provides Updated Guidance on Electronic Filing of ACA Information Returns 

As 2016 approaches, the IRS is issuing more detailed guidance on how employers will need to comply with the upcoming ACA information reporting requirements. As a reminder, the ACA information reporting rules require employers to report certain information about their employer-sponsored group health coverage both to participants and the IRS starting in early 2016. Any employer who is preparing 250 or more information returns must file those returns electronically with the IRS using its new ACA Information Returns system, also referred to as the “AIR” system, by March 31, 2016. The IRS recently updated its AIR Submission Composition and Reference Guide, which gives details on the IT requirements that employers will need to be aware of as they begin this process.

The AIR system requirements are complicated and permit employers to use a third party vendor to file these statements electronically with the IRS on the employer’s behalf. The end of the year is approaching quickly, and it is important for employers to begin to consider whether their own IT professionals will file information returns electronically with the IRS or rely on their payroll provider or other outside vendor to do this on their behalf. Any entity that plans on filing ACA information returns without assistance from an outside vendor will need designate a responsible official and additional contacts at their organization (typically IT professionals) and take steps to register with IRS e-services. This process can take up to a month so it is important that this registration occur in advance of January 2016. Now is also a good time for employers to consider how and whether they will work with third party vendors to meet their ACA information reporting obligations.

Final Rule Regarding Preventive Services Under ACA

The Department of the Treasury, DOL, and Department of Health and Human Services (HHS) issued final rulesregarding coverage of certain preventive services required to be provided under ACA without cost sharing by non-grandfathered group health plans. The final rules combine provisions from three sets of rulemaking actions: two interim final regulations and one proposed regulation. Amongst other things, the final rules allow eligible employers that have a religious objection to providing contraceptive coverage to receive an accommodation by either filing EBSA Form 700 or notifying HHS in writing of the objection. An eligible employer for this purpose is an organization that (1) opposes providing coverage for contraceptive items or services on account of religious objections, (2) is organized as a nonprofit entity holding itself out as a religious organization or is a closely held for-profit entity that has adopted a resolution establishing its objections on account of the owner’s sincerely held religious beliefs, and (3) self-certifies that it is eligible for an accommodation. The DOL and HHS will notify insurers and third party administrators of an organization’s objection and participants in the plans can receive separate payments for contraceptive services, with no additional cost to the participant or employer organization. The written notice to HHS must include the name of the organization and the basis on which it qualifies for an accommodation. These final regulations are effective September 14, 2015.

IRS Provides Q&As on PCORI Fee

The IRS has provided Q&As regarding the Patient-Centered Outcomes Research Institute (PCORI) fee. The fee applies to issuers of specified health insurance policies as well as plan sponsors of applicable self-insured health plans. The amount of the PCORI fee equals the average number of lives covered during the plan year multiplied by the applicable dollar amount ($2.08 for plan years ending between September 30, 2014 and October 1, 2015).

The Q&As provide a high-level overview of the PCORI fee requirements, but direct readers to the PCORI fee final regulations published in 2012 for more detailed information. 

Some of the highlights of the Q&As include: 

  • Issuers and plan sponsors can determine the average number of lives covered by the plan by using one of four alternative methods described in the final regulations. The alternatives are the actual count method, the snapshot method, the member months method, or the state form method.
  • Issuers and plan sponsors will file Forms 720 annually to report and pay the PCORI fee. Form 720 is due on July 31 of the year following the last day of the plan year. If only the PCORI fee is reportable on a Form 720, then the filer is only required to file it once a year. If other liabilities are reportable on a Form 720, then the filer must file quarterly and should use their second quarter form to report and pay the PCORI fee.
  • Tax-exempt organizations are typically subject to the PCORI fee for self-insured health plans that they sponsor, unless they are an exempt governmental program.
  • Issuers and plan sponsors can correct previously filed Forms 720 by filing a Form 720X.

General Benefits

Department of Treasury Issues 2015-2016 Priority Planning Guide

The Department of the Treasury issued its 2015-2016 Priority Guidance Plan detailing projects that it intends on dedicating resources to in the coming year. There are numerous employee benefits-related items in the plan. Amongst the employee benefits-related highlights are:

  • Regulations updating ESOP rules.
  • Guidance regarding mid-year changes to safe harbor 401(k) plans.
  • Amendments to the Employee Plans Compliance Resolution System (EPCRS) as well as guidance regarding the Voluntary Closing Program for failures not included in EPCRS.
  • Regulations regarding the Cadillac Tax.
  • Final regulations on income inclusion under Section 409A of the Internal Revenue Code.

Hopefully most of the items on this priority list will come to fruition and the IRS will provide much-needed guidance in certain employee benefits areas.