The Employee Benefits practice is pleased to present the Benefits Developments Newsletter for the month of September 2018. Click through the links below for more information on each specific development or case.
IRS Approves Student Loan Benefit Feature for 401(k) Plan
We do not regularly report on private letter rulings, but the IRS recently issued a notable private letter ruling (PLR) that apparently opens the door for companies that might want to offer a new type of student loan benefit under their 401(k) plans. The benefit structure that was approved in the PLR involves a nonelective company contribution for employees who need to make student loan repayments and may not be able to defer as much as they would like to their 401(k) plan and potentially lose out on company matching contributions.
Normally, under the 401(k) plan addressed in the PLR, if an eligible employee makes an elective contribution during a payroll period equal to at least 2% of his or her eligible compensation during the pay period (the minimum permitted elective contribution under the Plan), the company makes a matching contribution (“regular matching contribution”) on behalf of the employee equal to 5% of the employee’s eligible compensation during the pay period. Under the new student loan benefit feature approved by the PLR, if an employee who enrolls in the student loan feature of the plan instead makes a student loan repayment (rather than an elective deferral) during a pay period equal to at least 2% of the employee’s eligible compensation for the pay period, the company will make an “SLR nonelective contribution” (in lieu of a regular matching contribution) as soon as practicable after the end of the year equal to 5% of the employee’s eligible compensation for that pay period.
The SLR nonelective contribution is made without regard to whether the employee makes any elective contribution throughout the year. If the employee does not make a student loan repayment for a pay period equal to at least 2% of the employee’s eligible compensation, but does make an elective contribution during that pay period equal to at least 2% of the employee’s eligible compensation for that pay period, then the company will make a matching contribution as soon as practicable after the end of the plan year equal to 5% of the employee’s eligible compensation for that pay period (“true-up matching contribution”). To receive either the SLR nonelective contribution or the true-up matching contribution, the employee would need to be employed by the company on the last day of the plan year (except in the case of termination of employment due to death or disability). Both SLR nonelective contributions and true-up matching contributions will be subject to the same vesting schedule as regular matching contributions.
The SLR nonelective contribution will not be treated as a matching contribution for purposes of any testing under or requirement of section 401(m). The true-up matching contribution, on the other hand, will be included as a matching contribution for purposes of any testing under or requirement of section 401(m). The SLR nonelective contribution will be subject to relevant plan qualification requirements, including the eligibility, vesting and distribution rules, contribution limits, and coverage and nondiscrimination testing.
The program is voluntary. An enrolled employee may opt out of enrollment on a prospective basis. An enrolled employee would still be eligible to make elective contributions to the plan but would not be eligible to receive regular matching contributions with respect to those elective contributions while the employee participates in the program. All employees eligible to participate in the Plan will be eligible to participate in the program. If an enrolled employee later opts out of enrollment, the employee will resume eligibility for regular matching contributions.
The legal issue addressed in the PLR is whether the proposed student loan benefit violates the “contingent benefit” prohibition under Code Section 401(k) and related Treasury regulations. Generally speaking, the “contingent benefit” prohibition makes it impermissible for a qualified cash or deferred arrangement under a 401(k) plan to condition (directly or indirectly) any other benefit (with limited exceptions such as matching contributions) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash. In the PLR, the IRS ruled that the new plan feature under which SLR nonelective contributions are to be paid would not be conditioned (directly or indirectly) on the employee making elective 401(k) contributions and would not violate the “contingent benefit” prohibition because the SLR nonelective contributions would be conditioned solely on whether an employee makes a student loan repayment during a pay period, and because an employee who enrolls student loan benefit feature of the plan would still be permitted to make elective contributions.
PLRs, it should be remembered, are directed only to the requesting taxpayer and may not be cited as precedent. Nonetheless, the PLR identifies helpful parameters for employers that may be interested in designing a similar student loan benefit for inclusion in a 401(k) plan. Note that not all such student loan benefits would need to be identical in design -- the design of the 401(k) plan’s present elective deferral and matching contribution features, however, would need to be considered in deciding whether and how such a student loan benefit could be integrated into an existing plan. And appropriate compliance testing may be needed to ensure that the feature does not inadvertently violate qualified plan standards such as the nondiscrimination rules. (Private Letter Ruling 201833012).
President Trump Issues Executive Order Proposing Changes to Retirement Plans
President Trump issued an Executive Order directing that the Department of Labor and the Treasury Department take potential actions in order to make it easier for employers to offer retirement plans and therefore increase retirement benefits for employees. The Executive Order directs the Department of Labor to clarify and expand the situations in which primarily small- and mid-size employers may sponsor or adopt a multiple employer plan. Multiple employer plans (MEP) are plans offered by one or more employers who are not in a controlled group situation. The Department of Labor is directed to clarify when a group or association of employers or other organizations could be an “employer” within the meaning of ERISA. In connection with this, the Secretary of Treasury was directed to consider proposing amendments under which a MEP may continue to satisfy the tax qualification requirements even if one or more employees that sponsor or adopt the MEP fail to take necessary action to meet the qualification requirements.
The Executive Order also directs the Secretary of Labor and Secretary of Treasury to review whether it is possible to make retirement plan disclosures under ERISA and the Internal Revenue Code be more understandable and useful for participants and also to examine whether there are ways of reducing the costs and burdens imposed on employers for the production and distributions of these notices. The Order specifically directs examination of potential broader use of electronic delivery methods as a way of reducing costs and burdens.
Finally, the Secretary of Treasury is directed to review whether it is appropriate to examine the life expectancy and distribution tables required under the minimum distribution rules to determine whether they should be updated to reflect the longer period of time people are currently living and whether such updates should be taken on a more periodic basis. Executive Order on Strengthening Retirement Security in America, August 31, 2018 https://www.whitehouse.gov/presidential-actions/executive-order-strengthening-retirement-security-america/
Federal Agencies Issue Compliance Guidance Regarding Association Health Plans
In June, the U.S. Department of Labor issued final regulations expanding opportunities for small employers and working owners to band together to form association health plans (“AHPs”). See our June, 2018 newsletter article. The DOL and IRS have separately issued guidance addressing key legal compliance topics for sponsors of AHPs.
The IRS updated its Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act to clarify that an employer that is not an applicable large employer (has fewer than 50 full time employees) does not become an ALE subject to the employer mandate solely because the employer participates in an AHP. Multiple employers are not aggregated to determine ALE status, unless the entities are in a controlled group or under common control.
The DOL issued a Compliance Assistance Publication describing various compliance rules that apply to AHPs as group health plans, including multiple legal requirements under ERISA, federal consumer health protection statutes, and concurrent regulation by states of multiple employer welfare arrangements. Key features of the guidance include:
Disclosure Rules – The DOL highlights the three most important disclosures required to be provided to participants automatically and upon request: the summary plan description; the summary of material modification, and the summary of benefits and coverage.
Reporting Rules – The DOL guidance describes the Form 5500 annual reporting requirement, and the requirement to file Form M-1 to register the AHP as a multiple employer welfare arrangement.
Claims Administration – The DOL reminds the AHPs are subject to the detailed claims procedure rules under ERISA, which establish minimum timing and content standards for claims adjudications, notifications, and appeals.
COBRA Continuation Coverage – Continuation of group health plan coverage under AHPs will be available to covered employees, spouses and dependents when coverage is lost due to the occurrence of a qualifying event. AHP coverage on a self-pay basis will be available for 18-36 months under ERISA, and may continue longer under state mini-COBRA laws. The DOL anticipates issuing future guidance about how it intends to enforce the COBRA rules respecting member employers with fewer than 20 employees, the applicable number to trigger federal COBRA obligations.
Consumer Health Protections – Group health plans must comply with numerous consumer protection provisions, including the Health Insurance Portability and Accountability Act, the Affordable Care Act, the Mental Health Parity and Addiction Equity Act, the Newborns’ and Mothers’ Health Protection Act, the Women’s Health and Cancer Rights Act, and the Genetic Information Nondiscrimination Act.
Fiduciary Rules – ERISA establishes standards governing the conduct of AHP fiduciaries, individuals controlling and administering the AHP. AHP member employers have a fiduciary obligation to monitor AHP fiduciaries by obtaining periodic reports on the AHP fiduciary’s management and administration of the AHP.
Prohibited Transactions and Applicable Exemptions – ERISA prohibits parties involved in administering AHPs from engaging in certain conduct that amounts to self-dealing or misconduct. Exemptions from the prohibited transaction rules permit AHPs to engage in transactions necessary for administering the AHP, such as playing AHP service providers reasonable and necessary fees.
Availability of Voluntary Correction Programs – The DOL explains the availability of its Voluntary Fiduciary Correction Program, and the Delinquent Filer Voluntary Correction Program to correct legal compliance errors by AHPs.
Concurrent State Enforcement of MEWAs – The DOL describes the joint enforcement authority of the DOL and state insurance regulators over AHPs in their capacity as Multiple Employer Welfare Arrangements.
Regarding concurrent state regulation, the New York State Department of Financial Services recently issued guidance indicating its position that the DOL’s rules regarding the liberalization of the requirements for AHPs do not preempt contrary New York law requiring associations to be formed for a “principal” purpose other than the provision of benefits, and allowing the state to continue to rate policies issued to AHPs based on member employer size and not the size of the association as a whole. It is unclear whether this apparent conflict may result in partial preemption of these contrary New York standards, or contrary standards of other states.
Despite the uncertain application of state law to AHPs, the IRS and DOL guidance is welcome compliance assistance for employers navigating the patchwork of federal laws governing AHPs.
The guidance can be found at DOL Compliance Assistance Publication for Association Health Plans, August 20, 1018: https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/compliance-assistance-publication-ahp.pdf; the IRS guidance is located at Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, Q/A No. 18: https://www.irs.gov/affordable-care-act/employers/questions-and-answers-on-employer-shared-responsibility-provisions-under-the-affordable-care-act; and the New York State Department of Financial Services, Insurance Circular Letter No. 10, dated July 27, 2018 can be found at https://www.dfs.ny.gov/insurance/circltr/2018/cl2018_10.pdf
Court Upholds Validity of Health Plan’s Anti-Assignment Clause
A Third Circuit district court recently held that a group health plan’s anti-assignment provision was enforceable, despite the fact that the plan made direct payments to the provider and engaged the provider during the claims review process. In this case, a health care provider filed a claim alleging that it had been underpaid by a participant’s group health plan. Under ERISA, a participant or beneficiary may bring a civil action to recover benefits under the terms of a benefit plan. Courts have found that a health care provider may bring a cause of action only by acquiring derivative standing through an assignment of rights from a plan participant or beneficiary. The health plan in this case contained an anti-assignment provision that would prohibit a third-party, such as a health care provider from acquiring derivative standing. The court rejected the health care provider’s argument that the plan waived its anti-assignment provision by making direct payments to the provider and engaging the provider during the claims review process. This case is one of several recent cases that have recognized the validity (and value) of including an anti-assignment provision in a group health plan. Employers should review their group health plans to confirm they include this important clause. (N.J. Spine & Orthopedics, LLC v. Schwan Cosmetics USA, Inc. (D.N.J. 2018).