Happy 10th Birthday, EforERISA

December 16, 2020 marks the 10th anniversary of our first post on this blog and this week EforERISA is debuting a fresh new look and redesign courtesy of Ashli Smith and her team at Spotted Monkey Marketing. We are always looking for ways to make this site better and more impactful so your constructive criticism and comments on the redesign are welcome. We also welcome suggestions on topics to cover in our future posts.

2021 promises to be a busy year on the benefits front, with a new administration in gear and light at the end of the tunnel for our economy as vaccination becomes more widespread. We look forward to keeping you posted on the benefits news you need to have, whether you are an employer sponsoring benefit plans for your employees, or a benefits broker or consultant for whom compliance is your stock in trade.

Photo Credit: Robert Anderson, Unsplash

In Rehire Mode? Keep March 31, 2021 in Mind for Your 401(k) Plan

If your business is one of the many that reduced employees in the early days of the COVID-19 pandemic, you need to keep March 31, 2021 marked on your calendar, particularly if you are fortunate enough to be ramping up activity and adding workers back to your payroll.

As explained in our earlier post, when employer action, including as the result of an economic downturn, results in 20% or more of the population of an employee retirement plan being terminated from employment, a presumption arises that a “partial plan termination” has occurred, with the result that everyone affected by the partial termination must be fully vested in their plan accounts.

The partial termination rule is therefore relevant to plans that include employer contributions that are subject to a vesting schedule.

March 31, 2021 comes into play because it is the date set under Division EE, Section 1, Title II, Section 209 of the Consolidated Appropriations Act, 2021 as the snapshot date on which a partial plan termination may be avoided through rehires that restore earlier plan participation levels.  Specifically, a plan will not be treated as having experienced a partial plan termination if on March 31, 2021, the number of active plan participants is at least 80 percent of the number covered by the plan on March 13, 2020 (the beginning of pandemic-related stay at home orders).  For purposes of this rule, “active” status relates to the plan, not payroll, meaning that the individual maintains a plan account but may or may not be actively employed.  Clearly, however, adding new hires who establish accounts under the plan will result in increased plan participant numbers as the March 31, 2021 date approaches.

The partial plan termination relief applies during any plan year which includes March 13, 2020 to March 31, 2021 period.  If you have questions about application of this new rule to your 401(k) or other benefit plan, don’t hesitate to contact us. 

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2021 Christine P. Roberts, all rights reserved.

Photo credit: Booke Lark, Unsplash

Honey, I Shrunk the Incentive: EEOC Proposes Wellness Regulations

EEOC regulations proposed in the final days of the Trump Administration would, if finalized, reduce the permissible incentive for participatory wellness programs to a de minimis amount – such as a water bottle or T-shirt.  The current incentive cap is equal to 30% of an individual group health premium, which works out to around $180 per month.  The Biden Administration has withdrawn the proposed regulations from publication in the Federal Register under a regulatory freeze pending review.  Although they may not be finalized in their current form, the proposed regulations reflect the thinking of the EEOC on how small an incentive must remain (answer:  very small) in order to preserve the voluntariness of a participatory wellness program.  As such, employers cannot afford to ignore them.  Below are some key questions and answers about the proposed measures.  

Q. 1:  What wellness programs are subject to the de minimis incentive limit?

A. 1: “Participatory” wellness programs would be subject to the de minimis limit, if it is published in final form.  A participatory wellness program requires no physical activity or health outcome in order to receive the incentive.  For instance, completion of a Health Risk Assessment (HRA) or undergoing biometric testing, with no requirement to improve the results, are examples of participatory wellness activities.  

Q. 2:  What types of incentives qualify as de minimis?

A. 2:   The proposed regulations give the example of a water bottle or gift card of modest value, and indicate that premium surcharges of $50 per month ($600 per year), an annual gym membership, or airline tickets would be more than de minimis.  If a water bottle suffices, presumably other low-cost items  such as a t-shirt, towel, or stress ball would also work.  “Modest value” gift cards probably mean $10 or $15 or less.  See Q&A 7 below, re tax treatment of de minimis incentives.

Q. 3:  What is the safe harbor exception to the de minimis incentive limit?

A. 3:   An incentive may be more than de minimis under a health-contingent wellness program that is part of, or that qualifies as a group health plan.  Let’s break that down.  “Health-contingent” means that the program conditions the reward either on a physical activity (such as completing a walking program), or on satisfying a standard related to a health factor, such as reducing blood pressure or cholesterol levels.   As for “comprising part of, or qualifying as a group health plan,” the proposed regulations list four factors that, if present, may indicate when this is the case:  (1) the wellness program is offered only to employees who are enrolled in an employer-sponsored health plan; (2) the wellness incentive is tied to cost-sharing or premium reductions (or increases) under the employer’s group health plan; (3) the wellness program is offered by a vendor that has contracted with the employer group health plan (or, in the case of an insured plan, with the insurance carrier); and (4) the wellness program is a “term of coverage” under the group health plan.  It is not very clear what is meant by the last criteria.  It may mean that the terms of the wellness program are set forth in the group health plan documentation, for instance.  More clarification from EEOC would be welcome.

Q. 4:  What is an example of a wellness program that can continue to use a higher incentive under the safe harbor?  

A. 4:  An example of a wellness program that might qualify for the safe harbor exception, and be able to offer a more than de minimis incentive, would be a biometric testing program that awards a premium reduction to participants who successfully lower their blood pressure and cholesterol readings, that is administered by a vendor of the health insurer that provides the coverage, and under which participation is limited to employees who participate in the group health plan.  Another example would be a program of walking or exercise, that also meets the other criteria listed.  Note also that the de minimis rule, and EEOC regulations in general, do not apply to wellness programs that do not include disability-related questions or medical examinations, so would not apply to wellness programs that provide general health and educational information, such as classes on nutrition or smoking cessation.  Note also that both HIPAA and EEOC regulations require that an alternative means of earning a wellness incentive be made available to persons who are prevented from meeting (or attempting to meet) the original criteria due to medical conditions or issues.

Q. 5:  What is the maximum incentive under the safe harbor exception?

A .5:  Under EEOC regulations, the maximum incentive that may be offered under a health-contingent wellness program is an amount equal to 30% of the individual premium under the most affordable group health plan option, or 50% if the program is designed to reduce or stop tobacco use.   This is consistent with HIPAA regulations; note however that HIPAA regulations would not impose any maximum cap on incentives to take part in participatory wellness programs.

Q. 6:  I want to offer employees a PTO day if they get a COVID-19 vaccination.  Am I subject to the de minimis incentive limit?

A. 6:  Probably not.  Vaccination programs are participatory programs for purposes of the proposed EEOC regulations.  And a day’s wages, even at minimum wage, is more than a de minimis amount.  However, if you are offering a PTO day to employees who seek out their own COVID-19 vaccine from a third party, you are not administering a medical exam (i.e., the vaccine) for purposes of the EEOC voluntariness requirement and arguably the de minimis exception would not apply.   Conversely, if the vaccinations are offered through a clinic your company sponsors, then arguably the de minimis rule applies.   This a fact-intensive inquiry, however, so get individualized legal advice regarding the specific facts of your situation.

Q. 7:  Must I treat de minimis incentives as taxable income to my employees?  

A. 7:  That depends upon whether the item qualifies as a de minimis fringe benefit under Internal Revenue Code Section 132(a)(4).  This may be the case for a water bottle, t-shirt, and similar small items.  With regard to gift cards, however, note that he IRS has taken the position that gift cards that are redeemable for general merchandise, even if of nominal value, are treated as a cash equivalent and are taxable.  

Q. 8:  Do the EEOC’s proposed wellness regulations make any other changes?

A. 8:  They suggest potential changes to notice requirements.  The 2016 EEOC wellness regulations require issuance of a written notice that describes the types of medical information that the wellness program will collect and the purposes for which it will be used.  In the proposed regulations the EEOC opines that the notice no longer is necessary under the de minimis incentive standard, but requests public comment on whether the notice should be required nonetheless.  

Q. 9:  What do the proposed GINA rules require?

A. 9:  Proposed regulations under the Genetic Information Nondisclosure Act accompanied the wellness regulations. The proposed regulations under GINA would limit, to a de minimis amount, wellness incentives offered for information about manifestation of a disease or disorder in all family members – not just spouses, as was the case in 2016 GINA regulations.  The regulations continue prior prohibitions, under GINA, of questioning an employee about the employee’s family medical history or other genetic information.

Q. 10.  Is there a backstory to the EEOC’s de minimis incentive limit? 

A. 10:  How much time to do you have?   It all starts with the Americans with Disabilities Act, which permits employers to make disability-related inquiries (such as are set forth in an HRA) or require medical examinations (such as biometric testing) as part of employee health programs, so long as employees’ participation is “voluntary.”  42 U.S.C. § 12112(d)(4)(A).  Initially the EEOC simply stated that “voluntary” meant that participation was neither required, nor penalized.  A number of years went by. In 2014, the EEOC sued several employers, including Honeywell, on the grounds that their participatory wellness programs were not voluntary because the incentives were too large (one program conditioned payment of 100% of the monthly premium amount on participation in biometric testing and completion of the HRA).  These suits largely failed, and in final regulations published in 2016, the EEOC defined “voluntary” according to the 30% and 50% limits described above.  The AARP sued the EEOC over the regulations, arguing in relevant part that the 30% limit was arbitrary and too high.  As a result of the litigation, the EEOC ended up withdrawing the incentive portion of the regulations, and since that time (December 2018), the question of what constituted a “voluntary” wellness incentive under the ADA has remained open.  As mentioned the proposed regulations may be modified by the Biden Administration; certainly guidance that lessens the now considerable permissible incentive gap between de minimis, on the one hand, and approximately $200 per month, on the other, would be welcome.

Note: The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation.

(c) 2021 Christine P. Roberts, all rights reserved.

Photo Credit: Hello I’m Nik, Unsplash

COVID-19 Vaccines: Employer Mandate & Incentive Issues UPDATED

Regular readers of this blog know that I limit my practice to ERISA and employee benefit issues. However, my partner Paul Wilcox has stepped in as a guest co-author to address the employment law issues around COVID-19 vaccines and your workforce (Q&A 1 – 4, below). I follow up below with a few questions on using wellness incentives to encourage employees to get vaccinated. This updated post reflects EEOC guidance on COVID-19 vaccinations that was issued on December 16, 2020.

Q.1: Now that COVID-19 vaccines are coming, can I require employees be vaccinated as a condition of employment?
A.1: The Equal Employment Opportunity Commission (EEOC) has recently issued guidance indicating that requiring vaccination of employees is generally permissible. However, the EEOC also says that employer must consider accommodation of disabilities and sincerely held religious beliefs that are inconsistent with vaccination.  Additionally, some commentators have questioned whether the fact that the current COVID-19 vaccine was approved by the FDA on an Emergency Use Authorization (EUA) might limit the employer’s authority to mandate vaccination.  Whether there is any merit to that argument has yet to be resolved, but the EEOC guidance indicating the mandating vaccination is generally permissible mentions the EUA status of the current vaccine but says nothing that directly indicates that EUA authorization by the FDA limits the right of employers to require vaccination.  This is an open question.

Q.2: Do we have to treat all employee objections to vaccination equally or do some types of objections trigger legal duties of accommodation, etc.?
Q.2: The law requires employers to consider reasonable accommodations for persons with disabilities who may be particularly impacted by vaccination and for people with religious beliefs that are inconsistent with vaccination. Whether an accommodation of a disability or religious belief is required depends on the circumstances, but the employer generally must consider the issue even if the ultimate answer is that the requested accommodation will not be granted. In its recent guidance on mandatory vaccinations, the EEOC noted that, however, accommodations which would result in a direct risk of harm to other persons are not required.

Q.3: Will I get in trouble if I only require some employees, such as customer-facing workers, get vaccinated but not other employee groups?
A.3: No, not necessarily. Making distinctions between employees based on job duties is generally permissible.

Q.4: Will my company face potential liability if an employee has a bad reaction to the vaccination? Does it matter that the current vaccine was approved by the FDA on an EUA?
A.4: The law also does not provide a clear answer to this question, although the general answer is that employer liability for work-related injuries is confined to the workers’ compensation system, so any liability might be covered by workers’ compensation insurance. Workers’ compensation is a “no fault” system, meaning that whether the injury was caused by negligence or in the absence of negligence is not a relevant issue.

Q.5: Can I offer wellness program incentives to encourage employees to get a COVID-19 vaccine?
A.5: Yes. The incentive could take the form of a cash reward or gift card, for instance. Note that cash and cash equivalent rewards are taxable to employees and are generally compensation counted under 401(k) and other retirement plans.

Q:6: Is there a dollar limit on the incentive I could offer?
A.6: Not a flat dollar amount or percentage, but the incentive must be reasonable in amount. As Paul noted above, vaccinations are characterized as medical examinations and therefore you must abide by ADA regulations governing wellness plans. Those regulations are aimed at insuring, among other things, that employee participation in work-related wellness programs that include medical examinations, such as health risk assessments, is voluntary on the part of the employee. In past years the EEOC has sued employers whose wellness rewards it deemed to be excessive. On January 7, 2021, the EEOC issued proposed regulations that would permit only de minimis incentives for participatory wellness programs such as a vaccination program. Examples of de minimis incentives include a water bottle or small gift card. The regulations will be reviewed by the Biden Administration and may not be finalized as currently drafted, but employers whose wellness programs include COVID-19 vaccinations should consult with counsel as to whether or not they should limit incentives to de minimis amounts or items. Employers that are offering an incentive to employees to obtain COVID-19 vaccinations from public agencies or third party vendors who are not part of the employer’s wellness program or group health plan may not be subject to the de minimis incentive limitation, but should confirm with independent legal advice.

Q.7: If employees have a disability that makes the vaccination inappropriate for them, do we still need to offer a way for them to earn the vaccination incentive?
A.7: Yes. Reasonable accommodation provisions in the ADA wellness regulations remain in effect, such that you must modify or adjust your wellness program for persons with disabilities that make the COVID-19 vaccine medically inadvisable. Examples might be virtual/remote attendance at a class on COVI9-19 mitigation measures such as mask wearing, hand washing, and social distancing.

Q.8: Do I have to notify employees about the special incentive offered for getting a COVID-19 vaccine?
Q.8: That is not clear at the present time. Notification duties under ADA wellness regulations form 2016 would have required a notice be provided when employees’ medical information is gathered, such as in a vaccination process. The 2016 regulations required that the notice be written in a language reasonably likely to be understood by the participating employees, describe the type of information that will be gathered, and describe the confidentiality measures that are in place to protect this information. In its proposed 2021 wellness regulations the EEOC waives the notice requirement as unnecessary when the de minimis incentive applies. Employers with participatory wellness programs that would be subject to the de minimis incentive limit, if enforced, should consult counsel as to whether or not to comply with the notice requirements from the 2016 EEOC wellness regulations.

Note: The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation.

(c) 2021 Christine P. Roberts and Paul K. Wilcox, all rights reserved.

Photo Credit: Top photo: Emin Baycan, Unsplash

The Song Remains the Same: Few 2021 COLA Adjustments for Retirement Plans

On October 26, 2020, the IRS announced 2021 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.  The maximum annual limit on salary deferral contributions to 401(k), 403(b), and 457 plans remained the same for 2021 as it was in 2020, at $19,500, and the catch-up contribution limit for employees age 50 and older also stayed the same at $6,500.  The SIMPLE employee contribution limit of $13,500 was also unchanged, as were the annual deductible IRA contribution and age 50 catch-up limits ($6,000 and $1,000, respectively).  The Section 415(c) dollar limit for annual additions to a retirement account was increased to $58,000 from $57,000 and the maximum limit on annual compensation under Section 401(a)(17) increased from $285,000 to $290,000.  Below we list the changed and unchanged dollar limits for 2021. Citations below are to the Internal Revenue Code. (Click on the chart for a larger image.)

In a separate announcement, the Social Security Taxable Wage Base for 2021 increased to $142,800 from the prior limit of 137,700 in 2020.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. (c) 2020 Christine P. Roberts, all rights reserved.

Photo Credit: Jude Beck, Unsplash

No Signature, No Shoes, No Service

As an ERISA attorney my heart sinks when I receive benefit plan documents from a client that are not properly signed and dated.  This happens not infrequently, although less often as time passes, due to the prevalence of electronic signatures.  Electronic signatures that comply with the federal ESIGN statute and comparable state statues are valid for ERISA documents, unless the plan document specifically requires manual signatures.

Signing an ERISA plan document or amendment is not a mere formality.  Rather, the tax-qualified status of the plan is contingent on properly executed plan documentation and could be revoked were the unsigned document revealed in an IRS audit.  This was made clear in a recent IRS Chief Counsel Memorandum that contradicts the holding in an earlier Tax Court Memorandum, Val Lanes Recreation Center Corporation v. Commissioner (T.C. Memo 2018-92 (2018)).  Each is summarized below, followed by some practical compliance steps.

The Val Lanes Case

In this case, the IRS revoked the tax-qualified status of an ESOP that had been set up by a business that operated a bowling alley in West Des Moines, Iowa.  The IRS selected the ESOP for audit in 2005.  It questioned several items, including the independence of the appraiser, who was the same CPA who set up the ESOP for Val Lanes.  But what the IRS finally tagged Val Lanes on was that it could not produce a signed copy of a USERRA plan amendment required under Section 414(u) of the Internal Revenue Code.  The Service requested the amendment during review of the ESOP’s request for a favorable determination letter, and conditioned the favorable letter upon timely adoption of the amendment.  The accountant prepared the amendment and sent it to Val Lanes’ principal, Mr. Essy, for signature.  He retained an unsigned copy, but neither he nor Mr. Essy could locate a copy of the signed amendment, and the Service revoked the qualified status of the ESOP.

In a declaratory judgment proceeding challenging disqualification, Mr. Essy testified that he always signed amendments and other plan documents that the accountant sent to him.  He also testified that the roof of the bowling alley failed in bad weather, resulting in extensive water damage to company records including those related to the ESOP.  The accountant testified to the best of his recollection that his client signed the necessary amendment.  Also relevant was that, in an unrelated matter, the IRS had seized computers and documents from the accountant’s home and offices and that the missing amendment might have been among the seized items.

The Tax Court found that the 414(u) amendment had been timely adopted despite absence of physical proof, pointing to the fact that Mr. Essy had signed a restated plan document, and to what it deemed to be a “credible explanation” as to why the signed copy was missing.  Thus, Val Lanes appears to create a “pattern and practice” doctrine that a plan sponsor could use as an alternative to producing a signed plan document or amendment. 

IRS Chief Counsel Memorandum

The Val Lanes decision raised concern among IRS benefits counsel and in 2019, the Office of Chief Counsel issued a Memorandum that basically limited the Val Lanes holding to the unusual facts of the case (flooding, seizure of accountant’s computers), and stated that it remains appropriate for IRS exam agents and others to pursue plan disqualification if an employer cannot produce a signed plan document.  (IRS Chief Counsel Memorandum AM 2019-002 (December 9, 2019)).  The Memorandum also clarified that the employer bears the burden of proof as to whether it executed a plan document as required, when it is unable to produce an executed plan or amendment. 

Practical Compliance Steps

The Memorandum is intended primarily for IRS internal use, however employers are wise to heed its message:  the “pattern and practice” argument that succeeded in the Val Lanes case simply is not available to employers in the ordinary course of events.  Rather, they must put in place, and consistently follow, procedures to ensure that plan documentation (including original plan documents, amendments and restatements) are timely signed and dated and must retain and be able to access electronic or other copies of the signed and dated originals.   Other compliance steps might include the following:

  • Take stock of all of your current benefit plans and make sure that you can locate signed and dated versions of all iterations of the plan document and all amendments.
  • If executed signature pages are missing, follow up with the plan recordkeeper, third party administrator, or other third party who prepared the document or amendment, to see if they have copies.
  • If copies cannot be located, determine whether it might be due to extraordinary events such as those in Val Lanes (i.e., fire, flood, other natural disaster, office burglary, major illness or death of key personnel).  If so, document the relevant facts, and document normal procedures for signing plan documents and amendments, and otherwise prepare to bear the burden of proof as to whether the document or amendment was signed.
  • For new plan documentation and amendments, establish internal procedures for handling – identify who will be the signing party or parties and outline what steps will they take to ensure they retain and store a copy of the signed and dated document.
  • Ask existing and new recordkeepers, third party administrators and other third parties who prepare plan documents these questions:
    • What is their format for storing signed documents,
    • how long they retain them, and
    • how you may access them during and after the length of your company’s relationship with them. 
  • As to the second bullet point, notwithstanding required periods for retaining tax documents, and other document retention guidelines, we recommend saving copies of signed and dated benefit plan documents and amendments indefinitely
  • Don’t rely on the third party to retain your documents, make sure that you safely store each document you sign and date before you send it back to the third party.  Follow up with the third party to obtain their official, final signed and dated document or amendment as stored in their records, and save that.  However keep your provisional signed and dated copy in the meantime in case the follow up process breaks down.

Take these steps not just for retirement plan documents but for health and welfare documents as well.  The tax-qualified status of your plan may hang in the balance. 

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. (c) 2020 Christine P. Roberts, all rights reserved.

Photo Credit: Top photo: Cytonn Photography; Val Lanes: MapQuest.

September 30, 2020 is CalSavers Deadline for Large Employers

If your business has over 100 California employees, September 30, 2020 is the deadline to either register with (or certify as exempt from), the CalSavers Retirement Savings Program (CalSavers). You may have already received a notice about registering in CalSavers, or proving your exemption, with an access code and a notice that may be forwarded to employees.  To register with CalSavers or prove your exemption you will need your federal tax ID number and your California payroll tax number, as well as the access code provided in the CalSavers notice. The link to the CalSavers website to register or to claim exemption is https://employer.calsavers.com.

The following bullet points cover some last-minute questions that may still remain.

  • To count employees for purposes of the over 100 threshold, take the average number of employees that your business reported to EDD for the quarter ending December 31 and the previous three quarters, counting full- and part-time employees.   So, for example, if you reported over 100 employees to EDD for the quarter ending December 31, 2019 and the previous three quarters, combined, you would need to register your business with CalSavers on September 30, 2020.
  • If you use staffing agencies or a payroll company, or a professional employer organization, see my prior post on how this impacts your employee headcount.
  • If your business is part of a controlled group of corporations, a group of trades or businesses under common control, or an affiliated service group, and none of the member businesses maintains a retirement plan, then each component business must separately determine whether it is required to enroll by September 30 based on its employee headcount. If a retirement plan is maintained by the controlled group, the employer that sponsors the plan and any other members of the controlled group, etc. are exempt.

If You Are Exempt from CalSavers

  • If you have a retirement plan in place, including a 401(k) plan, SEP or SIMPLE-IRA, you should register as exempt, even if your retirement plan does not cover all of your employees.
  • If you are exempt you cannot auto-enroll employees who are not covered by your retirement plan. However, you may voluntarily notify employees that, if they enroll in CalSavers individually, your business will forward contributions to CalSavers for them.
  • In order for individual employees to enroll in CalSavers they must:
    • Be at least age 18
    • Have a bank account
    • Have either a Social Security Number or Individual Taxpayer Identification Number; and
    • Provide a residential address, and date of birth.
  • Once employees enroll individually in CalSavers they would need to notify your business of how much they want sent from their payroll to CalSavers and your business can forward those amounts manually or through a payroll provider.

If You Must Enroll in CalSavers

  • If you are subject to CalSavers, once you register, you must update your account on an ongoing basis by adding new employees who are eligible for CalSavers (aged 18 or above and receiving a Form W-2 from you) and by removing former employees who are no longer employed.  
  • You do not have to enroll employees in CalSavers yourself.  Once you register with CalSavers, enrollment is automatic.  Employees have 30 days after their hire/eligibility date to opt out.  
  • You can delegate CalSavers duties to your payroll provider, if the payroll provider is equipped to do so and agrees to do so.
  • CalSaver contributions are automatic (unless an employee opts out) and are equal to 5% of compensation.  They increase by 1% per year, up to 8% of compensation unless the employee makes a different election.
  • Contributions come out of employee pay.  There are no employer contributions required or permitted.
  • The funds are invested after-tax in Roth IRAs.  Investment of the Roth IRAs is managed by CalSavers and investment advisors who contracted with the state.  
  • Your business cannot be held liable over CalSavers investment losses.

Messaging, Penalties, Etc.

  • Your business must remain neutral about the CalSavers program and may not encourage employees to participate, or discourage them from doing so. You should refer employees with questions about CalSavers to the CalSavers website or to Client Services at 855-650-6918 or clientservices@calsavers.com.
  • There are penalties for noncompliance with CalSavers.  The penalty is $250 per eligible employee for failure to comply after 90 days of receiving the CalSavers notification, and $500 per eligible employee if noncompliance extends to 180 days or more after the notice.
  • A legal challenge to the CalSavers program as preempted by ERISA is still ongoing but it has not stopped the September rollout for large employers. Employers with more than 50 employees will need to register or prove exemption by June 30, 2021, and employers with 5 or more employees, by June 30, 2022.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. (c) 2020 Christine P. Roberts, all rights reserved.

Photo credit Tina Chelidze, Unsplash

FAQ on New 401(k) Coverage Rules for Long-Term, Part-Time Workers

With a stated goal of encouraging retirement savings, the Setting Every Community Up for Retirement Enhancement Act expands eligibility to make salary deferrals under a 401(k) plan to “long-term, part-time workers.” The new rules under the SECURE Act, which became law on December 20, 2019, ramp up between 2021 and 2024. However, some employer action is already required, as explained below. The following Frequently Asked Questions walks you through the new rules, including those contained in IRS Notice 2020-68, published on September 3, 2020.

Q.1: What are the current rules for excluding part-time, seasonal, and temporary employees under 401(k) and other retirement plans?

A.1: Even of you exclude these categories by name, you must still track their hours of service and include them in the plan on the entry date coinciding with or following their completion of 1,000 or more hours of service within a 12-month period (or, if later, upon also attaining a minimum age not exceeding 21). This is required under Section 401(a) of the Internal Revenue Code. Different rules applicable under Section 403(b) plans are outside the scope of this FAQ.

Q.2: Over what period do you count the 1,000 hours of service?

A.2: You count them over an “eligibility computation period.” The first eligibility computation generally starts upon the date of hire and ends on the first anniversary of that date. The plan may then continue to use the anniversary of hire, or switch to a plan year cycle.

Example – Switch to Plan Year Cycle: Kyle is hired on June 15, 2021 under a plan that follows a calendar year cycle and uses quarterly entry dates. Kyle works 700 hours between June 15, 2021 and June 14, 2022, the first anniversary of hire. Kyle does not enter the plan on July 1, 2022. Kyle completes 1,000 hours between January 1, 2022 and August 15, 2022 and enters the plan on October 1, 2022.

Q.3: What is a “long-term, part-time worker”?

A.3: Section 112 of the SECURE Act defines a long-term, part-time worker as an employee who has worked 500 or more hours in each of 3 consecutive 12-month periods, and who has attained a minimum age, not to exceed 21, as of the end of that 36-month period. The 12-month eligibility computation periods may be based on the anniversary of hire or may switch to the plan year cycle as described above.

Q.4: What eligibility rules apply to long-term, part-time workers?

A.4: An employee who qualifies as a long-term, part-time worker must be allowed to make employee salary deferrals under a Section 401(k) plan as of the first applicable entry date following completion of the 36-month period. A plan is allowed to use 6-month entry dates for long-term, part-time workers (e.g., January 1 and July for a calendar year plan) or may use regular quarterly, monthly, or other entry dates for this group.

Q.5: When do you begin tracking hours of service for long-term, part-time workers?

A.5: You begin tracking on January 1, 2021. That means the first point at which an employee will qualify for participation in a 401(k) plan as a long-term, part-time worker is January 1, 2024.

Q.6: Must long-term, part-time workers receive matching contributions or other employer contributions?

A.6: No, only eligibility to make salary deferral contributions is required. However, an employer may voluntarily make long-term, part-time workers eligible for matching and other employer contributions.

Q.7: If we choose not to, does that mean we don’t have to track hours of service towards vesting, for long-term, part-time workers?

A.7: No, you must track hours of service towards vesting, even if you don’t make employer contributions for this group. That is because, if a long-term, part-time worker later meets the plan’s conventional eligibility requirements, the worker joins the plan as a “regular” participant as of the first subsequent plan year, and may become eligible for matching and other employer contributions at that point. All of the worker’s hours of service must be counted towards vesting at that point. If these are hourly workers, you may be tracking their hours of service automatically, as it is.

Q.8: Do special rules apply to tracking vesting service for long-term, part-time workers?

A.8: Yes. Notice 2020-68 provides that you count each year in which an employee has at worked least 500 hours of service as a year of service counted towards vesting. Further, you count all years of service with the company in which they reach that threshold, not just years of service worked from January 1, 2021 and onward (as you do for eligibility purposes). If the plan language allows, you may disregard only years worked before attaining age 18, years worked before the plan was adopted, or years that may be disregarded under specially modified break in service rules.

Q.9: Are the break in service rules modified for long-term, part-time employees?

A.9: Yes. Normally, a break in service is defined as a year in which an employee has not completed more than 500 hours of service. For long-term, part-time workers, it is defined as a year in which the employee did not complete at least 500 hours of service.

Q.10: Can a plan still exclude employees based on job function or job location, such as “employees at Location B,” without violating the long-term, part-time worker coverage rules?

A.10: Presumably, reasonable, job-based exclusion criteria that pass minimum coverage testing are still permissible and are not preempted by the long-term, part-time worker coverage rules, but more guidance from the IRS would be appreciated. Employers with specific questions should consult benefit counsel for individualized guidance.

Q.11: Are long-term, part-time workers counted towards nondiscrimination testing, including ADP/ACP, and minimum coverage testing?

A.11: No, you are not required to count them under these tests.

Q.12: Are you required to make minimum top-heavy contributions on behalf of long-term, part-time workers?

A.12: No, you are not required to do so.

Q.13: Do the long-term, part-time worker coverage rules apply to employees subject to a collective bargaining agreement?

A.13: No, they do not apply to collectively bargained employees.

Q.14: Instead of tracking new hires over 3 years, should I just allow all employees who complete 500 hours of service to participate in the salary deferral portion of my 401(k) plan as of the next entry date?

A.14: That is certainly a simplified alternative to the minimum requirements, and presumably the exceptions from nondiscrimination testing and top-heavy contributions would continue to apply to employees meeting these reduced eligibility criteria. However this route could bring its own complications, by increasing your plan participant headcount over the 100 participant threshold sooner than is required. See Q&A 17.

Q.15: How will the long-term, part-time worker rules apply to plans with automatic enrollment?

A.15: The SECURE Act currently only refers to the minimum semi-annual entry dates for long-term, part-time workers, so it would appear that the automatic enrollment provisions would not apply to them. More guidance would on this topic would be appreciated, however.

Q.16: What if my plan doesn’t use actual hours to track service, but instead uses the equivalency method (e.g., 45 hours credited per week, if any service is performed in the week)?

A.16: It would appear that you can continue to use this method of tracking service for employees who meet conventional eligibility criteria, and use actual hours to track eligibility of long-term, part-time workers. Nothing in the SECURE Act prohibits use of the equivalency method for tracking service of long-term, part-time workers.

Q.17: Should we just create a new, separate 401(k) plan for long-term, part-time workers?

A.17: That depends. As it stands, it appears that employees who meet the criteria of long-term, part-time workers – whether or not they actively defer under the plan – will be included in the plan participant headcount on the first day of a plan year. This headcount is used to determine whether or not the plan has 100 or more participants and must include an independent qualified auditor’s report with its 5500 for a given year. If inclusion of your long-term, part-time workers will push your existing plan over the 100 participant threshold, you might give thought to separating them out in a separate plan, such that both of your plans will be under the audit threshold. Both plans would still have to file a Form 5500-SF each year, of course.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. (c) 2020 Christine P. Roberts, all rights reserved.

Photo Credit: Gabriella Clare Marino, Unsplash

Not “Wired at Work”? New DOL E-Disclosure Rule is Here to Help

 

Note:  This article was originally published by The Bureau of National Affairs, Inc. (Bloomberg Industry Group) (“INDG”) on August 7, 2020 at www.bloombergindustry.com.  Reproduced with permission from © 2020 The Bureau of National Affairs, Inc. (800-372-1033).

On May 21, 2020, the DOL announced final regulations that describe new “safe harbor” procedures for electronic delivery of required ERISA retirement plan disclosures (e-disclosure) such as Summary Plan Descriptions, quarterly or annual account statements, and other items. The new safe harbor procedures are an addition to the DOL e-disclosure rules that date back to 2002, and represent an improvement on the 2002 rules for employees who are not “wired at work,” as defined in those regulations.

The safe harbor procedures took effect July 27, 2020. A plan administrator that relied on the safe harbor before that date wouldn’t be subject to an enforcement action, the DOL vowed.

What is “Wired at Work”?

As defined in the 2002 DOL e-disclosure rules, a plan participant is “wired at work” if they meet both of the following requirements:

• They have the ability to effectively access electronic documents at any location where they reasonably could be expected to perform their employment duties.

• Their access to the electronic information system is an integral part of those employment duties.

This generally will mean someone with a desk that has a computer on it who needs the computer in order to do his or her job. “Computer” for these purposes means a laptop, notebook/tablet, or desk console computer that has an email account. Access to a computer connected to a medical or other electronic device, or a “kiosk,” does not suffice to make someone “wired at work.”

The “not wired at work” category would include active employees who work away from a desk, for instance in the agricultural, hospitality, healthcare, or retail sectors, and it would also include former employees who retain a plan account, beneficiaries of deceased plan participants, and alternate payees under a qualified domestic relations order.

The typical plan sponsor will have a mix of wired at work, and not wired at work, plan participants. For instance a hospital will have administrators who work in front of a desktop computer and who are wired at work. It will also have nurses and medical techs who primarily see patients and who may interact with electronic medical devices, and periodically use a computer at a nursing station, but who are not considered “wired at work” for purposes of the 2002 safe harbor.

How does a plan sponsor determine wired at work status for employees working remotely, whether due to COVID-19 or otherwise? Remote work was fairly rare when the 2002 regulations were published and they are silent on the topic. Common sense would suggest that an employee who met the wired at work criteria in an office setting remains wired at work when performing the same tasks at home, but circumstances may vary. Both the 2002 and 2020 e-disclosure regulations require that confidential information be safeguarded, and remote work arrangements will likely require extra data security efforts to ensure this requirement is met.

2002 Safe Harbor E-Disclosure for Not Wired at Work Populations

The 2002 safe harbor e-disclosure rules consist of, including tracking message receipt, and offering hard copy disclosures, and then separate procedures for wired at work and non-wired at work groups. Individuals who are not wired at work are required, under the 2002 safe harbor, to affirmatively consent to receive electronic delivery of ERISA disclosures. The consent may be delivered electronically provided the plan sponsor obtains a working email address for individuals in this group. Consent is only valid following provision of a statement in which you:

• Identify the documents or types of documents to which the consent applies (e.g., Summary Plan Descriptions, Summaries of Material Modification).

• Specify that the individual may withdraw consent at any time and describe how they may update electronic contact information or withdraw electronic consent (e.g., by email to a human resources manager with “Consent Withdrawn for Electronic Disclosure” in the subject line).

• Explain the individual’s right to request a paper copy (without charge, in the case of an SPD).

• Describe the electronic disclosure system and what software and hardware are needed to use it.

If the plan administrator later changes its hardware or software related to electronic disclosure, or otherwise makes changes that impact access to the system, it must provide notice of the changes and obtain a renewed consent to electronic disclosure from individuals in this group.

By contrast, e-disclosure to individuals who are wired at work need only meet the core disclosure rules. The plan sponsor may attach an electronic SPD or other ERISA disclosure to an email to these employees, or may email them the link to the disclosure document stored on a secure online location. The email in which the sponsor provides the attachment or the weblink can set forth the “Notice re: Electronic Disclosure” that is required for each instance of e-disclosure. There is no need to get their express consent to electronic disclosure.

2020 Safe Harbor Rules E-Delivery Rules for All Populations

The 2020 safe harbor uses a “notice and access” format for all intended recipients, and does not distinguish between wired at work, and not wired at work status. Everyone first must receive an initial hard copy notice about the new e-disclosure system that informs them of the right to globally opt-out of e-disclosure. They in turn must supply an electronic address, consisting of either an email address or a smartphone phone number. An employer-assigned electronic address suffices so long as it is provided for a job purpose other than receiving electronic ERISA disclosures. In essence, under the new safe harbor method everyone establishes themselves as “wired” irrespective of work, by supplying the electronic address.

Then, each time an ERISA disclosure is provided electronically, a Notice of Internet Availability or “NOIA” is sent to the electronic addresses. Note, certain disclosures may be bundled together. In the proposed regulations for the new safe harbor, the NOIA only notified of an online posting, but the final 2020 regulations allow disclosures to be made in the body of, or via attachment to, an email that sets forth the contents of the NOIA. The new e-disclosure rules also sanction the use of an app for electronic delivery of ERISA disclosures.

For participant populations who are not wired at work, the advantages of the notice and access format over the 2002 safe harbor method are clear. There is no longer a need to obtain consent to electronic disclosure, just a requirement to collect an electronic address (and to make sure it remains accurate when an individual separates from service). Cumbersome updates about software or system changes are eliminated. Nor is there the need to monitor the not-wired at work group for opt-outs from electronic disclosure, as the opt-out occurs at the initial paper notice stage. Note, individuals can reverse the opt-out by supplying an electronic address to the plan administrator at any time.

Choosing Which Safe Harbor Rule(s) to Use

Each plan sponsor will need to evaluate its plan participant sub-populations before choosing which e-disclosure safe harbor method or methods to use for retirement plan disclosures going forward.

For instance, an engineering firm whose entire population of active employees is wired at work may be content with the 2002 safe harbor e-disclosure method and may not want to switch to the 2020 safe harbor method, which would require an initial paper notice to all plan account holders notifying them of the new e-disclosure procedures. However, the same employer may want to switch to the 2020 safe harbor method for former employees who retain account balances, and for beneficiaries and alternate payees. Of course, only the 2002 safe harbor e-disclosure methods are permitted, at this juncture, for health and welfare disclosures.

By contrast, a grocery store chain with wired at work administrative and management staff, and not wired at work checkers and other employees working in the stores, may want to either switch entirely to the 2020 safe harbor e-disclosure method, or roll it out only for the not wired at work active employees, and for former employees with plan accounts, beneficiaries, and alternate payees. Many plan sponsors may end up with a patchwork resembling the following, at least until updated e-disclosure rules for health and welfare plan disclosures are announced:

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The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. 

Photo credit: Tyler Nix, Unsplash.com