2014 Year-End Compliance – Qualified Retirement Plans & 2015 Compliance – The Affordable Care ActDecember 2, 2014
By year-end 2014, sponsors of calendar-year retirement plans must adopt required and discretionary amendments and perform a range of administrative procedures to ensure compliance with current statutory and regulatory requirements. In addition, the Affordable Care Act (ACA) has made significant changes to group health plans. Many of these key changes became effective in 2014, which include changes in health plan design, increased wellness program incentives, and reinsurance fees. Additional reforms become effective in 2015 for certain employers sponsoring group health plans. The following is a summary of these matters.
2014 Year-End Qualified Retirement Plan Compliance
A. Deadlines Applicable to Qualified Retirement Plans
- Discretionary Plan Amendments. If discretionary, operational, or plan design changes were made in the current plan year, amendments must be formally adopted by December 31, 2014 for calendar-year plans.
- Required Amendments for the Recognition of Same-Sex Marriages. Qualified retirement plans are required to reflect the outcome of United States v. Windsor (“Windsor“), effective June 26, 2013. If a qualified plan defines a marital relationship by reference to Section 3 of the Defense of Marriage Act (DOMA) (or is otherwise inconsistent with federal law recognizing a same-sex spouse), then an amendment to that plan is required. Generally, a plan sponsor who has not yet adopted a plan amendment will have until December 31, 2014 to do so; governmental plans may have additional time if certain criteria are met.
- Cycle D Sponsors. Individually designed plans are on five-year cycles for renewing their determination letters with the IRS. For most Cycle D sponsors (i.e., those sponsors with an employer identification number ending in either 4 or 9), the five-year cycle will end on January 31, 2015. Generally, multiemployer plans are assigned to Cycle D. Individually designed plan Cycle D sponsors (and multiemployer plan sponsors) who have not already renewed their determination letter this cycle should submit their amended and restated plans to the IRS no later than January 31, 2015. February 1, 2015 will begin the cycle for Cycle E sponsors (i.e., those sponsors with an employer identification number ending in either 5 or 0).
- Pre-Approved Prototype or Volume Submitter Documents. For plan sponsors with defined contribution pre-approved or volume submitter documents, a restatement of their plan document must be completed by April 30, 2016. This same deadline applies for submission to the IRS for a favorable determination letter for pre-approved plans that have modifications.
B. Required Annual Notices
Plan sponsors should ensure that the required annual notices, if applicable, are sent to participants and beneficiaries on a timely basis.
- Section 401(k) Safe Harbor Notice. All participants in a safe harbor 401(k) plan must receive an annual notice that describes the safe harbor contribution and certain other plan features. The notice must be given by December 1 for calendar-year plans; and for non-calendar-year plans, not fewer than 30, and not more than 90, days before the first day of the plan year.
- Section 401(k) Automatic Enrollment Notice. If the plan provides that employees will be automatically enrolled, the plan administrator must give eligible employees an annual notice that describes the circumstances in which eligible employees are automatically enrolled in the plan and pay will be automatically contributed to the plan on a tax-deferred basis, and, if applicable, that contributions will be auto-escalated. The notice must be given by December 1 for calendar-year plans; and for non-calendar-year plans, not fewer than 30 days before the first day of the plan year.
- Qualified Default Investment Notice. A defined contribution plan that permits participants to direct the investment of their account balances may also provide that if the participant does not give an affirmative investment direction, the portion of the account balance for which affirmative investment direction was not given will be invested in a qualified default investment. Plan sponsors must give the annual notice by December 1 for calendar-year plans; and for non-calendar-year plans, at least 30 days prior to the beginning of the plan year.
NOTE: A safe harbor 401(k) plan may incorporate two or more of the notices described above, as applicable, in a single notice.
- Defined Benefit Plan Funding Notice. An annual notice describing the plan’s funded status for the past two years, a statement of the plan’s assets and liabilities, and certain other information relating to the plan’s funded status must be furnished to participants within 120 days after the end of the plan year. For calendar-year plans, the deadline is April 30. The deadline for small plans that cover fewer than 100 participants is the due date for the plan’s Form 5500 (i.e., for calendar-year plans, July 31, without extensions).
C. Corrective Action Items
- Plan Operational Failures. Best practice should include a yearly self-audit by plan sponsors of the operation and administration of its retirement plans. If a plan sponsor discovers that a plan failure has occurred, it should consider correcting the mistake through the IRS’s Employee Plans Compliance Resolution System (EPCRS). In many cases, EPCRS allows for self-correction of a failure, without IRS notification or sanction, if corrected in a timely manner.
- Delinquent Form 5500. In an effort to encourage plan sponsors to file overdue annual reports (commonly referred to as Form 5500), the Department of Labor’s Employee Benefits Security Administration (EBSA) provides plan sponsors with the opportunity to pay reduced civil penalties for voluntarily complying with the annual reporting requirements.
2015 Health Care Reform Compliance Checklist
A. Requirements Applicable to Self-Insured Group Health Plans
Certain mandates under the Patient Protection and Affordable Care Act, as amended (PPACA, and commonly referred to as the ACA) are about to become effective. On or beginning with the dates specified below, a group health plan (whether grandfathered or not) must comply with the following requirements:
- Calculate and Pay Transitional Reinsurance Fees. Certain self-insured group health plans offering major medical coverage, as well as health insurance issuers (“Contributing Entities”), are responsible for paying this annual fee. The deadline for Contributing Entities to submit their 2014 enrollment counts has been extended until 11:59 pm on December 5, 2014. Contributing Entities will have the option to pay (1) the entire 2014 benefit year contribution of $63.00 per covered life no later than January 15, 2015; or (2) two separate payments for the 2014 benefit year, with the first due by January 15, 2015 reflecting $52.50 per covered life, and the second due by November 15, 2015 reflecting $10.50 per covered life.
- Calculate and Pay PCORI Fee. The Patient-Centered Outcomes Research Institute Trust Fund fee (PCORI fee) is paid by issuers of certain health insurance policies and by plan sponsors of applicable self-insured health plans. The amount is equal to the average number of lives covered during the policy year or plan year, multiplied by the applicable dollar amount for the year. Although this is not a new requirement, the applicable dollar amount for policy and plan years ending after September 30, 2014 and before October 1, 2015 was recently announced as being $2.08. Payment of this third annual PCORI fee, based on the 2014 plan year, will be due July 31, 2015 and is reported using IRS Form 720, Quarterly Federal Excise Tax Return.
B. Requirements Applicable to Non-Grandfathered Group Health Plans
Group health plans that are not grandfathered for ACA purposes, including self-insured plans, must comply with the following additional requirements on or after January 1, 2015:
- Ensure Cost-Sharing Limitations Are Not above Certain Ceiling Amounts. The overall cost-sharing limits (sometimes called the “out-of-pocket maximum”) for plan years beginning in 2015 are $6,600 for self-only coverage and $13,200 for other than self-only coverage. For HSA-compatible high-deductible health plans, those 2015 limits are $6,450 and $12,900, respectively.
- The Employer Shared Responsibility Rules (Employer Mandate–Play or Pay). Beginning January 1, 2015, most employers with an average of at least 100 full-time and full-time equivalent employees during the preceding year can be subject to a penalty tax for (i) failing to offer health care coverage to 70% of their full-time employees (and their dependents); or (ii) offering minimum essential coverage that is either not affordable or under which the plan’s share of the total allowed cost of benefits is less than 60% of the actuarial value. Employers with 50 to 99 full-time and full-time equivalent employees in 2014 will not be subject to the Employer Mandate–Play or Pay until 2016, but only if they meet certain requirements. Additionally, employers that maintained non-calendar-year plans may have until the first day of their 2015 plan year to comply, but again, only if certain requirements are met.
C. Requirements Applicable to Grandfathered Group Health Plans
A grandfathered plan is a plan that was in existence on March 23, 2010 (the date of enactment of the ACA) and has elected grandfathered status. Grandfathered plans will continue to maintain their grandfathered status, provided that such a plan has not been amended significantly to cause it to lose its grandfathered status (i.e., amended to eliminate or reduce benefits, increase the percentage of cost-sharing such as co-insurance, or lower the level of employer contributions toward the cost of coverage). Best practice should include an annual review of plan provisions and amendments to determine whether the plan will maintain its grandfathered status for the upcoming plan year.
D. Requirements Applicable to Cafeteria Plans and Wellness Programs
Similar to qualified retirement plans, cafeteria plans may need to be amended to reflect the outcome of the Windsor decision if a sponsor chose to permit election changes that were not previously provided for in the written plan document. For example, if a plan permitted mid-year election changes based on a change in marital status, then no amendment is required. However, an amendment is required if a plan does not provide for such mid-year change and if following Windsor the cafeteria plan permitted changes based on marital status.
Cafeteria plans also have until December 31, 2014 to formally amend their plans to comply with the maximum health FSA contribution amount of $2,500 and to provide for the discretionary carryover of up to $500 of unused funds if such carryover was permitted in 2013.
For plan years starting on or after January 1, 2014, final regulations increased the maximum reward/penalty under a health contingent wellness program from 20% to 30% (and up to 50% for tobacco prevention). If such a change has been made to a program but without the plan’s having yet been formally amended for the increase, this must take place by year end.
E. 2016 Health Care Reform Reporting Requirements
Beginning in 2016, employers with 50 or more employees will be required to report to the IRS, and to employees, information relating to employer-sponsored health coverage. This information will be used by the IRS to verify employer-sponsored coverage and to administer the shared responsibility provisions of the ACA. This is referred to as the Section 6056 reporting requirement.
Additionally, health insurance issuers, sponsors of self-insured plans, government agencies that administer government-sponsored health insurance programs, and other entities that provide minimum essential coverage will be required beginning in 2016 to file an annual return with the IRS that contains reporting information for each individual who is provided with this coverage. This information must also be provided to the covered individuals. This is referred to as the Section 6055 reporting requirement.
The deadline to file the Section 6056 and 6055 reporting requirements with the IRS is February 28 (or March 31, if filed electronically) of the year after the calendar year to which the returns pertain. Written statements are to be provided to employees by January 31 of the year following the calendar year in which coverage was provided.
We strongly recommend that plan sponsors determine which reporting requirements they will have to comply with and start analyzing whether their HRIS systems track and appropriately code all the required information. Plan sponsors will need to begin capturing the information as of January 1, 2015.
Deferred Compensation Update
Finally, the IRS is beginning a limited-scope audit of nonqualified deferred compensation plans subject to Section 409A of the Internal Revenue Code. These audits will focus on initial elections to defer compensation (including the time and form of payment), subsequent elections to re-defer compensation, and distributions (including the six-month delay imposed on specified employees of public companies). We anticipate that these limited-scope audits will lead to greater enforcement activity, including larger-scale audits. Plan sponsors that offer deferred compensation plans should have those documents reviewed periodically to confirm compliance with 409A. There are significant penalties imposed on the taxpayer (typically the executives / top management) for non-compliance.
Our benefits team is available to assist you with bringing your plans into compliance, or identifying any potential issues with respect to your employer-sponsored employee benefit plans. If you have any questions or would like to discuss further, please do not hesitate to reach out to any member of our employee benefits team.