Employee Benefits Law Report

New health reimbursement account rules provide alternative path to Affordable Care Act compliance

Seemingly unfazed by the recent setbacks with the Association Health Plan regulations, the Departments of Treasury, Labor and Health and Human Services have released new health reimbursement (HRA) regulations that could reshape the group health plan landscape by providing employers with potentially cheaper options than traditional group health plan coverage for satisfying Affordable Care Act (ACA) requirements.

While we are still digesting the regulations (they come in at a whopping 497 pages), the guidance provides for two new types of health reimbursement accounts (HRAs); Individual Coverage HRAs and Excepted Benefit HRAs.

Individual Coverage HRAs

From our perspective, this is the bigger development. Currently large employers (those with 50 or more employees) must offer full-time employees ACA-compliant group health plan coverage or face potential penalties. Merely offering an HRA without an accompanying offer of traditional group health plan coverage would not satisfy this employer coverage mandate.

That would change under these regulations. Starting in 2020, these Individual Coverage HRAs could be offered as an alternative to traditional group health coverage. An employer could offer the Individual Coverage HRA to all of its employees, particular groups of employees, or new employees only. If the HRA/offer is structured appropriately—is offered on the same terms/conditions to all within a defined class, is offered only to those who are not also eligible for traditional group health plan coverage, is affordable, and meets other requirements—that offer would be treated as an offer of coverage for ACA employer coverage mandate purposes.

Functionally, the Individual Coverage HRA would be similar to any other HRA—it would be used to reimburse medical expenses up to a maximum amount per year (as determined by the employer). The primary difference between current HRAs and Individual Coverage HRAs is that the latter could be used to reimburse premiums for individual health insurance coverage, on or off an exchange.

Because this provides a potentially much cheaper option for satisfying the ACA employer coverage mandate, this may be a very attractive option for employers in 2020 and beyond (when this is available). This may also provide a nice option for small or mid-size employers who, while not subject to the ACA employer coverage mandate, want to provide some medical plan assistance to their employees, short of offering a traditional group health plan.

Excepted Benefit HRAs

While the Individual Coverage HRA has the most potential to shake up the group health plan landscape, the second new HRA—the Excepted Benefit HRA—is also an interesting new option.

Currently, HRAs are considered group health plans, which means they are subject to the full scope of the ACA rules. This effectively means that employers cannot offer standalone HRAs—an employer can only offer an HRA if it is integrated with a group health plan that meets the various ACA rules.

This new Excepted Benefit HRA would change those rules. An employer could offer this new arrangement alongside a traditional group health plan, and would be available even to those that opt out of the traditional plan. In other words, it allows for limited standalone HRAs that are exempt from the ACA requirements, provided the employee was actually offered the traditional group coverage.

Looking forward

Critics of the Association Health Plan rules—including the U.S. District Court for the District of Columbia, which ultimately struck those rules down—argued that those rules were a not-so-veiled attempt at an end-around on the ACA. We expect that these new HRA rules will be challenged on the same grounds. But, if these new HRA rules survive those challenges, they have a very real chance of changing the group health plan landscape going forward by providing a potentially simpler, more cost-effective option for employers to meet their ACA obligations.

Please check back with us, as we intend to issue future updates that provide you with a closer look that at these new rules. In the meantime, the Departments have issued additional guidance that elaborates on these options, including a News Release, FAQs, and model notices to be used in connection with these new arrangements (here and here).

IRS issues guidance on excise tax on executive compensation of tax-exempt entities

The IRS recently issued Notice 2019-09 (Notice), which provides guidance with respect to the 21 percent excise tax on remuneration in excess of $1 million and excess parachute payments by “applicable tax exempt organizations” (ATEOs) applies under Code Section 4960. In general Code Section 4960 and the Notice apply concepts from Code Sections 162(m) (which denies a deduction to publicly traded corporations with respect to payments of compensation in excess of $1 million to certain covered employees) and 280G (which, along with Code Section 4999, imposes an excise tax and disallows a deduction with respect to excess parachute payments). Code 4960 was added to the Internal Revenue Code as part of the tax reform legislation enacted in December 2017. While the IRS and Treasury Department intend to issue more detailed guidance in future proposed regulations, the Notice shows that Code Section 4960 will have a significant impact on compensation practices – particularly with respect to severance and deferred compensation – that ATEOs pay to key employers.  Continue Reading

IRS publishes transition relief regarding part-time employees and 403(b) plans

The IRS recently issued Notice 2018-95 (the Notice), which clarifies the circumstances under which part-time employees must be given the opportunity to make deferral elections under their employers’ 403(b) plans. In particular, the Notice provides transition relief from the once-in-always-in (OIAI) condition for excluding part-time employees. Tax-exempt and governmental employers who sponsor 403(b) plans will want to confirm that they are including and excluding part-time employees correctly under this latest guidance. Continue Reading

IRS letter ruling generates interest in employer student loan benefit plans, but be aware of testing and other issues

The Internal Revenue Service (IRS) recently issued a private letter ruling, PLR 201833012 (PLR) that has generated interest among employers about student loan benefit programs. An IRS official at a recent conference, however, cautioned practitioners to read the PLR because the scope of the PLR is more narrow than what some headlines may have led people to believe. In particular, the PLR did not allow employers to authorize distributions from 401(k) plans to allow employees to repay their student loans. Instead, the PLR allowed an employer to make nonelective contributions to the company’s 401(k) plan on behalf of employees who were paying off student loan debt. To receive that benefit, the employees were required to opt out of receiving the normal matching contribution. In other words, the plan that was the subject of the PLR was quite unique. While it is encouraging to see the IRS support innovative plan designs that provide a benefit that employees value, it is important to understand what the PLR addressed and what it did not address before employers create their own plans. Specifically, the PLR held only that this benefit did not violate the contingent benefit rule. The PLR did not address other practical questions that employers will need to resolve before implementing their own similar program. We describe these items below. Continue Reading

Recent IRS guidance affects corporate tax deductibility of public company executive compensation arrangements and related proxy statement disclosures

We previously blogged about how the Tax Cuts and Jobs Act (the Act) amended Internal Revenue Code Section 162(m). In general, the amended Code Section 162(m) restricts the ability of publicly traded companies to recognize a tax deduction for amounts paid to “covered employees” in excess of $1 million. It does this primarily by expanding the groups of individuals who are classified as covered employees and restricting the scope of the arrangements that are exempt from the $1 million deduction limit. The Act left many questions unanswered, and the IRS recently answered some of those questions by publishing transition guidance in Notice 2018-68 (the Notice). The most notable takeaway from the Notice is that the ability of arrangements to be grandfathered under prior Code Section 162(m) is more limited than many practitioners had hoped for.

The guidance from the Notice will require public companies to evaluate both the design and administration of their executive compensation plans. Doing so is important both to preserve the tax deductibility of grandfathered amounts and to consider the best way to align executive compensation with increasing shareholder value in the new tax environment. Companies also will need to be able to explain these issues as part of their compensation discussion and analysis in their proxy statements. To manage these issues, public companies should consider taking the following actions with respect to their executive compensation plans: Continue Reading

Fifth Circuit issues mandate that vacates the ERISA fiduciary rule: What plan sponsors should do next

After years of revising regulations and even more years of legal battles, the Department of Labor’s (DOL) 2016 ERISA fiduciary regulations (the regulations) essentially end up right where they started. That is because the U.S. Court of Appeals for the 5th Circuit issued its mandate officially vacating in toto the regulations, including the Best Interest Contract or “BIC” Exemption, and the DOL’s other related prohibited transaction exemptions. Because the deadline to appeal the decision lapsed on June 13, 2018, the legal battle is finally over. Yet, ERISA plan sponsors still have plenty of reasons to monitor their relationships with their service providers and make sure they are complying with their fiduciary duties under the previous (and once again current) regulations.

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Final association health plan regulations provide opportunity for small employers…maybe

In February, we reported that the Department of Labor (DOL) issued a proposed rule that could make it easier for small businesses to join together to purchase health insurance. That proposed rule sparked considerable debate on the general merits of association health plans (AHPs), as well as on the nuances of the proposed rule. Some commentators and experts remained skeptical of such arrangements, citing to the history of AHPs being used as a vehicle for fraud. Others were clearly in favor of any rule that might provide small employers with a new avenue to provide health coverage to their employees. And still others were cautiously optimistic, reserving judgment until some of the open issues in the regulations were resolved.

Well, the debate can now begin in earnest, as the DOL has issued the final regulations. Continue Reading

Tie goes to the plan administrator: Sixth Circuit clarifies importance of Firestone language for ERISA plan interpretation

In baseball, there is a common saying that a “tie goes to the runner.” Under this maxim, if a base runner and the baseball arrive at the base at the same time, the runner is safe. Stated another way, the baseball must arrive at the base before the runner in order for the runner to be out. The rule, essentially, construes close calls against the defense. Yet, many Major League Baseball umpires interpret the rule in the exact opposite manner, claiming that the runner must touch the base before the ball arrives in order to be safe. In other words, these umpires construe close calls against the offense.

If you were a baseball team worried about how close calls would get resolved, what would you do? One option would be to hope that the calls work out in your favor. Hope is not a plan, however, and so the better option would be to clarify how the rule will be interpreted before the game starts. That way, you know whether the umpire will show deference either to the offense or defense. Continue Reading

IRS provides guidance to 403(b) plan sponsors who can’t locate participants required to receive distributions (but be mindful of DOL rules too)

The IRS’s Tax Exempt and Government Entities Division recently issued a memorandum (the memo) to its auditors that directed them not to challenge a 403(b) plan as failing to satisfy the required minimum distribution (RMD) standards under circumstances set out in the memo. This guidance is helpful to 403(b) plan sponsors and consistent with missing participant procedures that the IRS set forth for qualified plan sponsors last year. For those 403(b) plans that are governed by ERISA, however, we note that the Department of Labor (DOL) requires plan sponsors to follow additional standards. We describe these issues below.

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Association health plans: Proposed DOL rules create potential opportunity for associations and small employers

On Jan. 5, 2018, the Department of Labor (DOL) issued a proposed rule that would make it easier for small businesses to join together to purchase health insurance.

This is not a completely new concept. Unrelated small employers can join together to purchase health insurance today. Under current guidance, however, these types of plans are generally not considered a single ERISA plan. The result is that each participating employer in one of these plans is typically treated as maintaining its own ERISA plan. That means that each employer is separately responsible for complying with the myriad requirements applicable to group health plans, such as HIPAA, COBRA and the Affordable Care Act. Moreover, participating employers with fifty or fewer employees are typically subject to additional insurance-based requirements under the Affordable Care Act, including the requirement to offer certain “essential health benefits” and the requirement to comply with restrictive community rating rules when determining premiums. The combination of additional administrative complexity and increased costs currently makes fully-insured association health plans a non-starter for most small employers.

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