More than five years after the initial adopting legislation was passed into law, the Departments of Treasury, Labor and Health and Human Services jointly issued final regulations implementing the Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA), as amended by ACA. MHPAEA amends certain provisions of the Public Health Service Act (PHSA), ERISA and the Internal Revenue Code in a manner designed to provide increased parity between mental health and substance use disorder benefits and medical/surgical benefits.
Earlier this month, the Pension Benefit Guaranty Corporation (“PBGC”) announced the flat and variable premium rates that defined benefit pension plans must pay in 2014.
- Single-employer plans. The flat rate premium for 2014 is $49 per participant. This is a $7 per participant increase from 2013. The variable premium rate will increase in 2014 to $14 per every $1,000 in unfunded vested benefits, with a cap of $412 per participant, which is an increase in the variable premium rate of $9 in 2013. Note that smaller plans may be subject to a lower per participant cap on the variable premium rate.
- Multiemployer plans. The flat rate premium rate for these plans is $12 a participant in 2014, which remains unchanged from 2013. Multiemployer plans do not pay a variable rate premium.
With these premium increases on the horizon for single-employer plans, this may be a good time to crunch the numbers to determine if cashing out deferred vested participants makes sense. For example, does the potential reduction in PBGC premiums based on a lower participant count support offering a lump sum cash out for deferred vested participants with a lump sum amount less than a certain threshold (i.e., $10,000 or $20,000)? If interest rates continue to rise, the case may be more compelling to reduce the number of deferred vested participants in the plan since a rise in interest rates correlates to lower present value calculations. Spousal consent rules, requirements as to actuarial assumptions used to determine present value amounts, and nondiscrimination rules must be followed if this type of strategy is implemented. Also, lump sum payments may be restricted if the AFTAP for the plan is below 80%. Even with the compliance efforts involved to implement this type of plan change, taking steps to reduce the plan’s PBGC premium liability may be a financially-sound endeavor.
After having some time to consider the recent IRS guidance on the $500 carryover (sometimes called the “rollover”) for FSAs that we previously wrote about, additional issues keep coming to light. Here’s a quick list of just some of the issues that we have encountered that remain unanswered:
- As noted in our previous post, additional guidance is needed on the effect of this carryover on the status of a health FSA as an excepted benefit.
- How does the addition of the carryover impact the limited FSA COBRA obligation? Ordinarily, if a health FSA meets the conditions of being an excepted benefit as described in our earlier post, it is also eligible for a limited COBRA obligation. If a participant has an underspent account in such an FSA, then he or she only needs to be offered COBRA through the end of the year of the qualifying event (plus any grace period). If an employer provides additional contributions to the FSA with a carryover feature, can it qualify for this limited COBRA obligation?
- Even assuming it does, does the $500 carryover feature mean that the COBRA obligation has to extend through the end of the year after the qualifying event (if that is shorter than the otherwise maximum COBRA period)?
- Does the availability of the carryover feature make participants ineligible to make Health Savings Account contributions during the year of the carryover? Current IRS guidance would suggest that it does. For that reason, employers with high deductible health plans should think hard before implementing such a feature.
- Can an employer allow employees to make health FSA contributions by causing the carryover to be “limited purpose” (e.g., vision and dental expenses only), similar to the rules that currently apply to the grace period? If so, does the carryover have to be limited purpose for all participants, as the grace period does now?
These unanswered questions require some additional answers and plan sponsors should think hard about them before adopting this carryover feature.
On the first of this month, the D.C. Court of Appeals issued, sua sponte, an order granting the owners of two secular, for-profit corporations temporary reprieve to challenge the validity of the PPACA provision which requires coverage of preventive care – including FDA-approved contraceptive drugs, devices and related services – with no cost sharing (Gilardi v. HHS, D.C. Cir., No. 13-5069, 11/1/13). The owners of the two closely-held companies in Gilardi adhere to the Catholic faith and, based on their religious beliefs, oppose contraception, sterilization, and abortion.
Given PPACA’s apparent requirement to provide coverage in contravention to their religious beliefs or, in the alternative, pay potentially significant penalties for failing to provide compliant coverage as required under PPACA, the owners and their two companies filed suit in district court. Their suit alleged the mandated coverage of contraceptive drugs, devices and services violated their rights under the Religious Freedom Restoration Act (RFRA), the Free Exercise Clause and the Free Speech Clause of the U.S. Constitution, and the Administrative Procedure Act.
The plaintiffs moved for a preliminary injunction, but the district court denied their motion finding that (1) the companies could not “exercise” religion and, thus, the plaintiff corporations could not demonstrate a substantial burden on religious exercise under RFRA; and (2) the burden on the owner’ religious beliefs was indirect. The plaintiffs timely filed an interlocutory appeal and moved for an injunction pending appeal. After having initially denied their motion, the D.C. Court of Appeals revisited this issue and modified its earlier ruling.
In a detailed opinion rejecting the reasoning of the Tenth Circuit Court of Appeals, as announced in Hobby Lobby v. Sebelius (which held that a for-profit secular corporation may assert that the mandate violates its religious rights), the D.C. Court of Appeals found that current case law did not provide a basis upon which it could conclude that a secular organization is a “person” that can exercise religion or that a corporation could vindicate the rights of its owners. Therefore, the D.C Court of Appeals found that the plaintiff corporations had no basis for bringing a RFRA claim. However, the court stated that it did “understand the impulse” for an argument that a closely-held corporation could vindicate the rights of its owners, leaving open the potential for the court to find differently under a different set of facts.
The Court then considered the rights of the owners – existing independently of any right of their secular companies. The governing opinion found that the two owners were likely to succeed on the merits of their claim that the contraceptive mandate places a substantial burden on their own free exercise rights and, therefore, remanded the plaintiffs’ claim to the district court to have the court consider the other factors relevant in assessing whether the parties were entitled to a preliminary injunction. In reaching this decision, the Court recognized that the contraceptive mandate demands that owners of closely-held organizations, like the plaintiffs, “meaningfully approve and endorse the inclusion of contraceptive coverage in their companies’ employer provided plans, over whatever objections they may have… [which] is a cognizable burden on free exercise. And the burden becomes substantial because the government commands compliance by giving” the owner’s a choice between disregarding their beliefs or paying large penalties.
Given the growing Circuit Court split on these issues facing secular organizations with religious objections to the contraceptive mandate, the issue appears to be ripe for Supreme Court review.
Qualified plans frequently provide that participation commences on an entry date that coincides with or immediately follows completion of a year of service. While there seems to be no issue with the concept that the calendar year begins on January 1 and ends on December 31, making that same determination with respect to periods that do not begin on the first day, or end on the last day, of a month sometimes seems to present difficulties.
During a question and answer session at the recent 2013 American Society of Pension Professionals & Actuaries’ Annual Conference, IRS officials were asked whether an employee who is hired on January 2, 2012 would become a participant on January 1 or April 1, 2013 in a plan providing for entry on the first day of the calendar quarter coinciding with or immediately following completion of one year of service. This does not appear to be an isolated issue, as summary plan descriptions using an example such as this to illustrate the plan’s participation requirements have been known to indicate that the year of service would be completed on January 2, 2013, with entry on April 1, 2013. However, in those circumstances, an IRS senior tax law specialist in employee plans technical compliance in effect indicated that the year of service would end on January 1, 2013 by stating that the employee would become eligible to participate on that date. This answer assumes that the service requirement is satisfied on January 1, 2013. Since that date coincides with an entry date, that is the date the employee should be eligible to participate. The IRS official indicated that, in his view, the eligibility date would be different if the plan provided for entry on the first day of the calendar quarter next following completion of one year of service, as opposed to coinciding with or following satisfaction of that requirement.
While this answer was unofficial, and does not constitute a formal position of the IRS, it emphasizes the importance of applying plan provisions—and, in this case, determining when a year ends—literally. Specifically, in a plan that provides for participation to commence on a monthly, quarterly or semi-annual entry date coinciding with or immediately following a year of service, failure to properly do so could result in the improper exclusion of some eligible employees for part of a plan year. While that is not likely to affect a large number of employees, for those employees who are affected it could require corrective action, at the expense of the plan sponsor, and possibly the payment of a fee or penalty to the IRS in order to avoid disqualification of the plan.
While “stock-drop” cases (i.e. cases based on the decline in value of company stock offered as an investment option in a retirement plan) are not new these days, a recent Ninth Circuit case added a new spin that retirement plan fiduciaries should be aware of. In Harris v. Amgen, the court found that statements made in SEC filings and expressly incorporated into a plan’s SPD are fiduciary activities that can form the basis of liability under ERISA.
Background: In June, the Ninth Circuit reversed a district court’s decision dismissing an ERISA lawsuit alleging breach of fiduciary duty when the company’s stock value declined, including stock held in two employee stock-ownership plans. Employees claimed that plan fiduciaries violated their duty of care “by continuing to provide Amgen common stock as an investment alternative when they knew, or should have known, that the stock was being sold at an artificially inflated price.” The court agreed. Last month, in an amended opinion, the court clarified its decision with respect to statements in SEC filings incorporated into SPDs.
Analysis: First, the court determined the decision to invest in company stock was not protected by the presumption of prudence (articulated in 1995 in the Moench case) because plan terms did not require or encourage investment in employer stock. Next, without the presumption in place, the court found the fiduciaries violated the normal prudent man standard by permitting continued investments in company stock when they knew, according to SEC filings, the stock price was inflated. While the fiduciaries contended that their omissions and misrepresentations were not made in their fiduciary capacity, the court noted that they did more than merely file and distribute the SEC filings (a corporate action), and instead, they incorporated them by reference into the plan’s SPD (a fiduciary action). Thus, the distribution of the SPDs, including the incorporation of the misleading statements, were acts performed in a fiduciary capacity.
Take-Away: Plan fiduciaries should be cautious about blurring the lines between SEC filings and plan documents (including incorporating SEC filings into SPDs), since this may increase ERISA liability exposure. Consideration should be given to creating an SPD for the plan which is separate from the prospectus, offering circular, and offering circular supplements covering employer stock when it is an available investment under the plan.
Just before rushing out the door to hand out candy to trick-or-treaters, the IRS gave the benefits world a treat and released Notice 2013-71 which modified the use-it-or-lose-it rule for health FSAs. The notice generally provides that a cafeteria plan may be amended to provide a carryover of up to $500 of unused amounts into a subsequent plan year. The $500 amounts may come from employer or employee contributions. The carryover may only be applied in the immediately following plan year, so if it is not used then, it will be forfeited.
Any remaining amounts at the end of the plan year can still be reduced during the plan’s run-out period before the carryover is applied. For example, if a plan has a run-out period ending March 31 and a participant submits an expense incurred in the prior year before March 31, that would reduce the prior year’s amount (just as it does now), which would reduce the carryover. Plans can (and should) provide that amounts used in that following plan year will first be applied against the carried over funds before applied against current year contributions.
A health FSA can have this carryover feature, or a grace period, but not both. The plan must be amended before the end of the year to implement the carryover feature. The carryover feature does not apply to other kinds of FSAs.
One issue not addressed in the guidance is whether a health FSA with a carryover feature of $500 that also has employer contributions can continue to qualify as an excepted benefit under HIPAA (and thus also remain exempt from health reform). Under applicable regulations, a health FSA is exempt from HIPAA portability rules and health reform if the maximum amount that can be reimbursed under the health FSA is the greater of (1) two times the participant’s salary reduction or (2) the participant’s salary reduction plus $500 and other major medical coverage is available. So assume a participant elects $200 of salary reductions and receives a $500 carryover and a $100 nonelective contribution from the employer. Does this make the health FSA subject to HIPAA portability and health reform? The Notice does not address this issue, so additional guidance would be welcome. Pending further guidance, plan sponsors should consult with counsel before adopting a carryover feature if they (the sponsors, not counsel) also provide nonelective contributions.
Is the IRS bending the statute by issuing this guidance? Section 125(d)(2) provides “The term ‘cafeteria plan’ does not include any plan which provides for deferred compensation.” There are exceptions for specific items, like 401(k) and HSA contributions. The IRS used these exceptions to say that “a § 125 cafeteria plan generally does not include any plan that provides for deferred compensation.” (emphasis supplied to the additional word supplied by the IRS). In doing so, the IRS’s “trick” was to use the statutory exceptions to create another exception which does not seem to be expressly permitted under the statute. No one is likely to challenge this new exception, much like no one challenged the grace period; however, the grace period had some basis in other areas of tax law that provide amounts are not deferred compensation if paid or received within 2 1/2 months after the end of the tax year. Here, the IRS doesn’t seem to have any other tax principle on which to hang its hat.
But legal niceties aside, it remains to be seen how useful this carryover feature really is. Since it cannot coexist with the grace period in the same plan, plan sponsors will have to decide which feature is more beneficial to their participants. For example, if most participants elect around $500 for the FSA, the carryover feature may be more beneficial than the grace period.
In keeping with the trend of issuing significant guidance around holidays, on October 31st, 2013, the IRS published its annual cost-of-living adjustments to the dollar limitations on benefits and contributions under qualified retirement plans for 2014 (IR-2013-86). Although some limitations, such as those governing 401(k) plans and IRAs, remained unchanged for 2014, a number of other limitations were adjusted upward. Effective January 1, 2014, the following adjusted limitations will apply to qualified retirement plans:
- The limitation on the annual benefit under a defined benefit plan under IRC 415(b)(1)(A) will be $210,000 (increased from $205,000 in 2013);
- The limitation for defined contribution plans under IRC 415(c)(1)(A) will be $52,000 (increased from $51,000 in 2013);
- The annual compensation limit under for qualified trusts under IRC 401(a)(17) will be $260,000 (increased from $255,000 in 2013);
- The dollar limitation for key employee in a top-heavy plan under IRC 416(i)(1)(A)(i) will be $170,000 (increased from $165,000 in 2013);
- The deduction for taxpayers making contributions to a traditional IRA is phased out:
- For single individuals and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes, between $60,000 and $70,000 (increased from $59,000 and $69,000 in 2013);
- For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, between $96,000 to $116,000 (increased from $95,000 to $115,000 in 2013); and
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, if the couple’s income is between $181,000 and $191,000 (increased from $178,000 and $188,000 in 2013);
- The adjusted gross income phase-out range for taxpayers making contributions to a Roth IRA is:
- For married couple filing jointly, $181,000 to $191,000 (increased from $178,000 to $188,000 in 2013); and
- For single individuals and heads of household, $114,000 to $129,000 (increased from $112,000 to $127,000);
- The adjusted gross income limit for the “saver’s credit” (or the “retirement savings contribution credit”) for low- and moderate-income workers is:
- For married couples filing jointly, $60,000 (increased from $59,000 in 2013);
- For heads of household, $45,000 (increased from $44,250 in 2013); and
- For married individuals filing separately, $30,000 (increased from $29,500 in 2013).
For a summary of other qualified retirement plan limitations, unchanged from this year, see our 2013 limitations summary here.