Published in NH Bar News (Febuary 2019), NH Society of CPA's Connections Newsletter (3/21/2019) and TerraLex Connections (7/17/2019)
While tax practitioners were spending the bulk of 2018 attempting to understand the intricacies of the Tax Cuts and Jobs Act of 2017 (the Act), there were still significant developments impacting employee benefit plans. This article highlights a few of the significant 2018 developments impacting employee benefit programs. A common theme seen in these developments is the federal government’s attempt to enhance access to retirement and health benefits.
Let’s All Come Together, Association Health and Retirement Plans
Following the issuance of a 2017 Executive Order intending to promote healthcare choice and competition, the United States Department of Labor (DOL) began working on guidance to facilitate the purchase of health insurance across State lines. On June 21, 2018, the DOL issued a final regulation under Title I of the Employee Retirement Income Security Act (ERISA) that established criteria for determining when employers may join together in a group or association of employers that will be treated as the sole “employer” sponsor of a single multiple-employer employee welfare benefit plan and group health plan.
The final regulation sets forth the criteria under which groups or associations may establish an ERISA-covered multiple employer group health plan. Most significantly, under the so-called “commonality of interest” test, any employer can join with other employers in a self-funded or insured association health plan if (i) the employers are in the same trade, industry, line of business, or profession, or (ii) each employer has a principal place of business in the same region that does not exceed the boundaries of a single state or metropolitan area (even if the metropolitan area includes more than one state).
In addition, the group or association also must have at least one substantial business purpose unrelated to offering and providing health coverage or other employee benefits. The final regulation significantly expands the groups of employers that can be treated as a single large employer group for claims experience and all other federal law purposes. However, the regulation does not change Section 514 of ERISA which permits states to regulate association plans which could limit their applicability in states wishing to maintain the current rules.
Later in 2018, the DOL turned its attention to expanding access to association retirement plans following a similar Executive Order directing expansion of retirement plan coverage. On October 23, 2018, the DOL issued a proposed regulation designed to clarify the circumstances under which an employer group or association or a professional employer organization may sponsor a workplace retirement plan. These plans are referred to as “MEPs,” or multiple employer plans.
The proposed regulation adopts criteria very similar to that of the final association health plan regulation with respect to the required connections between participating employers. The MEP regulation is only proposed and could have significant changes in the final version including further lessening of the required links between employers.
Other Significant Developments
The Internal Revenue Service ("IRS”) issued a Private Letter Ruling on May 22, 2018, that approved an employer’s request to take into account employees’ student loan repayments for purposes of qualifying for an employer contribution to the employer’s retirement plan. Under the ruling, if an employee made a student loan repayment during a pay period equal to at least 2 percent of the employee’s eligible compensation, the employer would contribution 5 percent of the employee’s compensation to the retirement plan.
Although a Private Letter Ruling is authoritative and binding only for the taxpayer requesting it, it provides clear guidance of what the IRS thinks about an issue. In light of considerable student loan debt faced by many employees, the ruling has gathered considerable interest among employers who want to assist younger employees save for retirement.
The Bipartisan Budget Act of 2018 (the Act) liberalized the rules applicable to Section 401(k) and 403(b) Plan hardship distributions. Hardship withdrawals permit active employees to receive their elective deferrals prior to reaching age 59-1/2. The IRS issued proposed regulations on November 9, 2018 to clarify certain hardship distribution issues, conform existing regulations to the new rules, and incorporate prior changes and guidance.
Among other changes, the Act and proposed regulations (i) eliminate the prior prohibition on elective deferrals for six months following a hardship withdrawal, (ii) make optional the requirement for participants to take plan loans before hardship withdrawals, (iii) permit (but do not require) an employer to allow hardship withdrawals from additional accounts, and (iv) permit hardship distributions on account of a federally declared disaster by the Federal Emergency Management Agency.
On October 23, 2018, several government agencies issued proposed regulations intended to expand the usability of health reimbursement arrangements (HRAs). HRAs are employer-funded accounts that employees can use to pay for qualified medical expenses not covered by their health plans. The proposed regulations would expand the usability of HRAs by eliminating the current prohibition on integrating HRAs with individual health insurance coverage thereby permitting employers to offer HRAs to employees enrolled in individual health insurance coverage.
Lastly, although most advisors are aware that the 2010 Affordable Care Act (ACA) imposes penalties on large employers if coverage is not offered to full-time employees (30 hours per week or more) and their dependents, many advisors may not be aware that reducing employees’ work hours to reduce health insurance costs could result in a violation of Section 510 of ERISA. Section 510 prohibits an employer from discriminating against an employee or interfering with an employee’s attainment of a right under a benefit plan.
A series of lawsuits have moved through the federal courts where employees have challenged employers’ decisions to reduce employees’ hours to under the ACA 30 hour per week eligibility threshold and thus cause the employees to lose health coverage. In one such case, Marin v. Dave & Busters, on December 7, 2018, the federal court gave preliminary approval for a $7.4 million settlement which also barred Dave & Buster’s management from taking adverse employment actions against employees for the purpose of denying them health coverage.
Although historically the ACA and ERISA have not been interpreted to require employers to offer health insurance or provide full-time employment to all employees, the ERISA 510 cases like Marin v. Dave & Busters should be a warning to employers to be cautious about both reducing hours if the result is that employees are subsequently ineligible for health insurance coverage.
John E. Rich, Jr. chairs the Tax Department at McLane Middleton, Professional Association. He specializes in employee benefits, pension, ERISA and tax-related matters. He can be reached at [email protected] or (603) 628-1438.