United States: Recent Developments – Employee Benefits – 01.31.17

Executive Summary: A flurry of activity in the Employee Benefits area has taken place in the past few months. This advisory summarizes the recent developments.

  1. The IRS published proposed regulations that will permit a 401(k) plan sponsor to use the plan's forfeiture account to fund QNECs and QMACs needed to pass the ADP and /or ACP nondiscrimination tests.
  2. The DOL released regulations setting forth new requirements for the ERISA claims procedures for disability-related benefits.
  3. The IRS published guidance on the taxation of "fixed indemnity health plans" provided through a cafeteria plan and of wellness plan rewards.
  4. The "21st Century Cures Act" was enacted:
    • Allowing small employers to offer health reimbursement arrangements to their employees without violating the Affordable Care Act's group plan rules. This legislation overturns prior IRS and DOL guidance issued in 2013 and 2015;
    • Clarifying the treatment of eating disorders under the Mental Health Parity and Addictions Equity Act; and
    • Directs regulators to relax HIPAA privacy restrictions for communications with caregivers of adults with serious mental illnesses.
  1. The DOL announced increased civil monetary penalties for a number of violations.

Affected Parties: This new guidance affects any employer sponsoring a plan subject to ERISA and in particular:

  • Large and small employers that provide their employees with group health benefits;
  • Any employer that is required to make a disability determination under any retirement or welfare plan; and
  • Any sponsor of a non-safe harbor 401(k) plan.

1. Proposed 401(k) Regulations Expand Permissible Uses of Forfeitures

IRS proposed regulations, published January 18, 2017, expand the permissible use of funds in a 401(k) plan's forfeiture accounts. In order to comply with the Actual Deferral Percentage (ADP) Test and the Actual Contribution Percentage (ACP) Test, some non-safe harbor 401(k) and 401(m) plans make Qualified Nonelective Contributions (QNECs) or Qualified Matching Contributions (QMACs) in order to pass the ADP and ACP Tests, rather than distribute or forfeit the excess contributions. Prior to the proposed regulations, forfeitures could not be used to fund these QNEC or QMAC contributions.

This change allows employers additional flexibility in funding QNEC and QMAC contributions with the plan's forfeiture account. Previously QNEC and QMAC contributions could only be funded with new employer contributions, which could impact employer budgets and cash flow needs.

The proposed regulation revises the definition of a QNEC or QMAC to require that it be vested when allocated to participant accounts, rather than when the funds were contributed to the plan. This simple change frees up forfeiture funds to be used as QNECs or QMACs to help pass the ADP or ACP Tests. Other requirements for QNECs and QMACs continue to apply (i.e., they may not be distributable prior to the earliest of death, disability, severance from employment or age 59-1/2 and generally not included in hardship distributions). Note that, although not explicitly addressed in the preamble to the new rule, the new requirements should also free up forfeitures for use to correct other failures for which a QNEC is the correction method prescribed under the IRS's Voluntary Compliance Program.

The proposed regulations may be relied upon before they are finalized and any changes in the final regulations that may be more restrictive will apply on a prospective basis only. Before acting on this change, employers should review their plan documents to confirm (a) whether forfeitures may be used to reduce employer contributions, (b) there is no language restricting the use of forfeitures from funding QNECs or QMACs, and (c) the plan does not require that corrective contributions be vested at the time contributed, rather than when allocated. If any of these provisions are contained in the plan, the employer may need to work with counsel to amend the plan before relying on this new guidance.

2. Disability Claims Procedures - Expanded Basic Disclosure and Other Notice Requirements

New DOL regulations set forth additional requirements for disability claims and other benefits that require a determination of the existence of a disability. Any retirement plan or group health or welfare plan that offers benefits based on a determination of disability may be subject to the new regulations and need to be amended to comply with them. These new regulations affect short-term and long-term disability benefit plans, as well as plans that provide benefits based on the existence of a disability. For example, a pension plan would be affected by this new regulation if it provides for early commencement of benefits or an enhanced payment upon a disability.

Employers will need to review and update their plan documents (including summary plan descriptions, claim procedures, claims forms, denial notices, and other internal administration procedures) for the affected plans. These regulations are effective for disability claims and appeals filed on or after January 1, 2018.

The additional requirements are similar to changes made by the ACA for the denial of certain medical claims.

Specifically, the new procedures require that:

  • Benefit denial notices must contain a more complete description of why the claim was denied and the standard used in making the determination, including a discussion of the basis for disagreeing with the views of a health care or vocational professional obtained in connection with the plan's determination or a disability determination made by the Social Security Administration.
  • Before a final denial, the claimant has the right to review and comment on any new or additional information or rationale not included in the initial denial.
  • The appeal process must be carried out in a manner designed to insure independence and impartiality of the decision makers. For example, a claims adjudicator or medical or vocational expert cannot be retained, promoted, terminated, or compensated based on the likelihood of the person denying benefit claims (i.e., a decision maker's history of denying claims cannot be rewarded).
  • Borrowing the ACA standard for group health plans, the final rule requires denial notices be provided in a culturally and linguistically appropriate manner (where applicable) to accommodate non-English languages.

It is unclear how the regulation will ultimately be treated by the Trump administration. The regulation was published in the Federal Register on December 19, 2016, and will be impacted by the January 20, 2017, Presidential Memorandum which postponed regulations that are published but not yet effective for 60 days of additional review. Such 60-day review may be subject to further postponement by agency and department heads.

3. IRS Guidance on Taxation of Fixed Indemnity Health Plans and Wellness Rewards

On December 12, 2016, the IRS Office of Chief Counsel issued a Memorandum addressing the tax treatment of fixed indemnity plans and wellness program incentives. A fixed indemnity plan is a health plan that provides a flat payment per event, such as doctor visit, hospital stay, or specific medical expense. Wellness incentives may include a fixed payment for participating in a prescribed activity such as completing a health risk assessment or screening.

The Memorandum stated that, with respect to a fixed indemnity plan, to the extent that the payment for the cost of the coverage is paid either by the employer or by the employee on a pre-tax basis through a cafeteria plan, the benefit paid by the plan upon the occurrence of the event, must be included in taxable income. This tax treatment is similar to the treatment of short- and long-term disability benefits. If the coverage is paid for on a pre-tax basis, any benefit paid will be taxable. Whereas if the coverage is paid for on an after-tax basis, any benefit paid will be tax-free. Like disability benefits, the employee may be better off in the long run paying for the indemnity plan coverage on an after-tax basis.

The Memorandum also stated that, with respect to wellness incentives, any reward or incentive payments that is not a payment for or reimbursement of medical care is included in the employee's taxable income for federal income tax purposes and wages for employment tax purposes, unless the payment is otherwise excluded as a de minimis fringe benefit under Code Section 132. Therefore, if an employee receives a payment for completing a health risk assessment, the payment will be taxable and the employer will responsible for insuring the amount is properly reported to tax authorities, including inclusion on the Form W-2.

Employers that allow fixed indemnity plan to be purchased as voluntary benefits through a cafeteria plan may wish to rethink this practice or at least revise communications with employees about the effect of the election to pay on a pre-tax basis. In addition, employers should ensure they have a proper process in place to ensure any taxable benefits are properly reported and employment taxes properly paid.

4. 21st Century Cures Act

The "21st Century Cures Act" (the "Cures Act") primarily focused on funding new medical research and accelerating the approval process for new drugs and medical devices. However, it also addressed several other issues that affect employers that sponsor group health plans.

Small Employer HRAs

For "small employers" (i.e., employers with less than 50 full-time employees in the prior year and not subject to "the employer mandate under the Affordable Care Act") that do not offer a group health plan to any employees, the Cures Act provides an exception to the application of the IRS's position that an "employer payment plan" or HRA violated the ACA's market reforms. Violation of the ACA 's market reforms rules can result in a $100 per affected employee per day penalty (whether or not the employer is a large or small employer). This exception generally goes into effect for tax years beginning after December 31, 2016.

Under an "employer payment plan," the employer pays or reimburses an employee for some or all of the premiums for an individual health insurance policy. HRAs are a form of employee health benefit funded by employers that enable employees to take tax-free reimbursements for medical expenses for a year up to a certain amount, with unused amounts available to roll over for use in future years. Both employer payment plans and HRAs are considered group health plans.

To qualify for this exemption, an HRA or employer payment plan must supplement an employee's existing health coverage. More specifically, the Cures Act requires that a qualified small employer HRA or employer payment plan must:

  1. Be maintained by an employer that employs fewer than 50 employees and does not offer a group health plan to any of its employees;
  2. Be funded solely by an eligible employer, and there can be no employee salary reduction contributions (e.g., salary deferrals) made under the arrangement;
  3. Be provided on the same terms to all eligible employees;
  4. Provide for the payment or reimbursement of expenses for medical care incurred by an eligible employee or the eligible employee's family members; and
  5. Impose annual caps on maximum reimbursements at $4,950 for individuals and $10,000 for plans provided for family members.

Additionally, eligible employees that participate in a qualified small employer HRA may apply for a premium tax credit; however, the value of any credit will be reduced (dollar-for-dollar) by the monthly HRA amount. Further, employees participating in a qualified small employer HRA are required to have "minimum essential coverage" to receive tax-free HRA reimbursements.

The Cures Act requires any small employer funding a qualified HRA to provide written notice to each eligible employee at least 90 days before the beginning of the year that includes the following information:

  • the amount of the employee's permitted benefit under the arrangement for the year;
  • a statement that the eligible employee should notify any health insurance exchange of the permitted benefit if applying for an advance payment of the premium tax credit; and
  • a statement that the employee may be subject to tax for any month that the employee is not covered under minimum essential coverage, and reimbursements under the arrangement may be includible in gross income.

Clarifying Treatment of Eating Disorders under the MHPAEA

The Cures Act contains what it called a clarifying amendment to the Mental Health Parity and Addictions Equity Act (MHPAEA). The Cures Act makes it clear that if a group health plan subject to the MHPAEA provides coverage for eating disorders, including residential treatment, such benefits must be provided in a manner consistent with the MHPAEA. Thus, eating disorders are treated the same as other mental health or substance abuse disorders.

MHPAEA requires that benefit limits on mental health and substance abuse disorders be no more restrictive than the "predominant" requirements or limitations applied to "substantially all" medical/surgical benefits. Accordingly, a plan that does not impose an annual or lifetime dollar limit on medical/surgical benefits may not impose such a dollar limit on either mental health or substance abuse disorder benefits offered under the plan. Similarly, a plan cannot impose stricter benefit limits (office visit limits) and higher patient cost requirements (co-pays and deductibles) for both mental health or substance abuse disorders than those that apply to general medical or surgical benefits. The MHPAEA provisions apply to plans offering mental health, substance abuse disorder, or eating disorder benefits, but do not require plans to include coverage for such benefits.

Relaxing HIPAA Privacy Rules Applicable to Caregivers of Certain Adults

The Cures Act directs the Department of Health and Human Services to issue guidance no later than December 31, 2017, to relax the requirements for communications with caregivers of adults with serious mental illness in order to facilitate treatment. Group health plans will need to watch for this guidance to determine what changes will be needed to their HIPAA policies and procedures and Notices of Privacy Practices.

5. DOL Increases Civil Monetary Penalties

The DOL announced increased civil monetary penalties to account for inflation for a number of ERISA violations including the following:

The increased amounts apply to penalties assessed after January 13, 2017, for violations that occurred after November 2, 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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