Earlier Posts – E is for ERISA

September 11, 2021

IRS Prioritizes Guidance on Student Loan Repayment Contributions

On September 9, 2021 the Department of the Treasury issued its 2021-2022 Priority Guidance Plan listing guidance projects that are priorities for the Treasury Department and IRS during the twelve months ending June 30, 2022. Among the Employee Benefits topics is “[g]uidance on student loan payments and qualified retirement plans and §403(b) plans.” This post reviews the state of the law on student loan repayments through retirement plans and briefly discusses what type of guidance might be forthcoming.

Current State of the Law

The current state of guidance on using student loan repayments as a base for employer contributions to a qualified retirement plan or 403(b) plan is limited to a private letter ruling issued in 2018 to Abbott Labs. In addition, proposed measures are contained in various pieces of federal legislation including the Securing a Strong Retirement Act of 2021, commonly referred to as SECURE 2.0.

In the private letter ruling (PLR 201833012), discussed in our earlier post, the employer sought approval of an arrangement under which they made a 5% nonelective contribution on behalf of participants who contributed up to 2% of their compensation towards student loan repayments. Those participants could still make elective deferral contributions under the plan, but would not receive a matching contribution (also equal to 5% of compensation) for the same pay periods in which they participated in the student loan repayment program. Both the nonelective and matching contributions were made after the end of the plan year and only on behalf of employees who either were employed on the last day of the plan year or had terminated employment due to death or disability. The nonelective contributions based on student loan repayments also vested at the same rate as regular matching contributions did.

The PLR addressed whether the nonelective contribution made on behalf of student loan repayments violated the “contingent benefit rule.” Under that rule, a 401(k) plan is not qualified if the employer makes any other benefit (with the exception of matching contributions) contingent on whether or not an employee makes elective deferrals. The IRS concluded that the program did not violate the contingent benefit rule because employees in the program could still make elective deferrals, but simply would not receive the regular employer match on those amounts during pay periods in which they received the nonelective contribution based on student loan repayments.

Only Abbott Labs has reliance on the terms of the PLR, although the PLR may indicate the approach the IRS will take in any new guidance regarding student loan repayments as a basis for retirement plan contributions.

Proposed Legislation

Congress has noticed the impact that student loan repayment obligations has had on employees’ ability to save for retirement. As mentioned, the most significant bill that would address this issue is the Securing a Strong Retirement Act of 2021, commonly known as SECURE 2.0. Specifically, Section 109 of the Bill would treat “qualified student loan payments” equal to elective deferral contributions, for purposes of employer matching contributions under a 401(k) plan, a 403(b) plan, a governmental 457(b) plan, or a SIMPLE IRA plan, and would permit separate nondiscrimination testing of employees who receive the matching contribution based on student loan repayments. “Qualified student loan payments” would be defined to include any indebtedness incurred by the employee in order to pay their own higher education expenses. Under SECURE 2.0, total student loan repayments that are matched, plus conventional elective deferrals, would be capped at the dollar limit under Internal Revenue Code (“Code”) Section 402(g) ($19,500 in 2021).

What Future IRS Guidance Might Hold

Based on the Abbott Labs PLR and SECURE 2.0, we might hope or anticipate that any future IRS guidance on programs that condition employer retirement plan contributions on participant student loan repayments would include the following:

Guidance on how such programs may comply with the contingent benefit rule, including whether it will suffice simply that program participants may continue making elective salary deferrals (while likely foregoing regular matching contributions while student loan repayments are being matched).
Guidance on whether such a program, by nature limited to employees with student loans, is a “benefit, right or feature” that must be made available on a nondiscriminatory manner under Code Section 401(a)(4), and if so how it might satisfy applicable requirements.
Guidance on whether, and how, employers can confirm that loan repayments are being made, including whether (as SECURE 2.0 would permit), employers may rely on an employee’s certification of repayment status.
Guidance on nondiscrimination testing of contributions under a student loan repayment program, including provision for separate testing, as SECURE 2.0 would permit.

Additionally, plan sponsors would no doubt appreciate guidance on use of outside vendors for student loan repayment programs and how they might interact with conventional retirement plan record keepers and third party administrators.

Photo credit: Mohammad Shahhosseini, Unsplash

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. © 2021 Christine P. Roberts, all rights reserved.

December 3, 2020February 10, 2021

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.

Photo Credit: Top photo: Emin Baycan, Unsplash

October 18, 2020January 7, 2021

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.

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

September 29, 2020January 18, 2021

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.

Photo credit Tina Chelidze, Unsplash

September 22, 2020February 10, 2021

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.

Photo Credit: Gabriella Clare Marino, Unsplash

August 7, 2020January 7, 2021

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:

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

May 31, 2020January 18, 2021

Court Upholds Exclusion of Surrogate Pregnancy Costs, But Pitfalls Remain

In an unpublished opinion*, the 10th Circuit Court in Moon v. Tall Tree Administrators, LLC (10th Cir. May 19, 2020) upheld a self-insured group health plan’s exclusion of “pregnancy charges acting as a surrogate mother” as unambiguous and enforceable, even though that exclusion was nested within a larger exclusion of “[n]on-traditional medical services, treatments, and supplies.”

In the case, Moon, an employee of Mountain View Hospital in Utah and a participant in their self-insured group health plan, asked the third party administrator in 2011 whether surrogate maternity expenses were covered and was told that they were not. Moon underwent a surrogate pregnancy in 2013 without notifying the plan and her expenses were covered. She agreed to act as a surrogate again in 2015, but this time the plan denied coverage for her pregnancy expenses under the cited exclusion. Moon argued that her expenses were conventional prenatal and childbirth expenses and that because the exclusion for surrogacy expenses was nested within a larger exclusion of “non-traditional” services and treatment, it was not applicable. The district court disagreed, and granted summary judgement for the plan.

Because it was decided on summary judgment, the 10th Circuit reviewed the matter “de novo” – i.e., as a trial court would, rather than under the “abuse of discretion” standard of review applicable under Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989) when the plan document expressly accords discretion to the plan administrator to interpret the terms of the plan document.

The 10th Circuit affirmed enforcement of the exclusion on the grounds that “a reasonable person in the position of the participant would view ‘pregnancy charges acting as a surrogate mother’ as an example of a non-traditional medical expense” and hence as excluded care. Perhaps illustrating the legal maxim that “bad facts make bad law,” it is impossible to tell whether the court’s conclusion was tainted by the fact that the plaintiff proceeded with two separate surrogate pregnancies after confirming that that the plan did not cover this type of expense.

In an earlier case, Roibas v. EBPA, LLC, 346 F. Supp. 3d, 164 (D. Maine 2018), the exclusion simply stated “[e]xpenses for surrogacy,” and a dispute arose as to whether that referred to the cost of hiring a surrogate, or the surrogate’s own pregnancy and childbirth expenses. The plan had already covered some prenatal coverage before learning that it was a surrogate pregnancy and denying subsequent claims. Acknowledging that the exclusion was ambiguous, the Maine District Court upheld it out of deference accorded to the plan administrator’s interpretation of the ambiguous plan term (the Firestone standard of review applied), and based on the conclusion that the plan administrator’s interpretation was reasonable.

For sponsors of self-insured health plans, these cases highlight the importance of careful drafting of plan exclusions, particularly in an area like surrogate births where medical advancements and social trends are evolving fairly rapidly. They also provide an inflection point to examine some of the other legal pitfalls of excluding surrogate pregnancy costs from coverage.

First, there is a practical concern presented by not always being able to know when a participant or dependent’s pregnancy is for surrogacy purposes. The plans in both the Moon and Roibas cases unwittingly reimbursed some surrogate pregnancy expenses before terminating coverage. Because the facts of surrogacy are not always transparent, the plan sponsor may have difficulty consistently enforcing even unambiguous exclusions of surrogate pregnancy expenses. This could potentially lead to fiduciary breach charges. Plan sponsors may also be hard pressed to justify denying the costs of an intended surrogate pregnancy while covering the maternity expenses of a participant who intends to permit the child to be adopted.

As for legal concerns, there are two salient ones. First, the Pregnancy Discrimination Act, applicable to employers with 15 or more employees, mandates that a group health plan cover pregnancy in the same manner as other medical conditions, making it difficult for a plan sponsor to justify excluding coverage of a pregnancy based on the way in which the mother became pregnant or on their plans for the child, once born. Second, for non-grandfathered group health plans under the Affordable Care Act, the Act requires first-dollar coverage of preventive services including prenatal and post-natal care. The ACA does not carve out surrogate pregnancies in this regard. There are also potential tax consequences to providing surrogacy benefits, and fertility benefits, that are reviewed in some detail here.

As an alternative to a coverage exclusion, group health plan sponsors who want to limit the use of their plan benefits by individuals who may be compensated for a surrogate pregnancy may give thought to applying their plan’s right of reimbursement and subrogation to compensation that the participant receives. Subject to state insurance law, this is generally how group health insurance carriers approach the issue, covering the cost of surrogate prenatal care and delivery but seeking reimbursement, or asserting subrogation rights, thereafter.**

To take this approach essentially equates the compensation paid to a surrogate by a couple struggling with infertility, to the recovery an injured participant receives from a third party tortfeasor. Plan sponsors may have varying levels of comfort with this approach and should certainly seek ERISA counsel first, as well as counsel with expertise in surrogacy laws, as they vary significantly state to state.

*Unpublished opinions generally are not binding precedent but may be cited for persuasive value. The 10th Circuit covers the district courts of the states of six states of Oklahoma, Kansas, New Mexico, Colorado, Wyoming, and Utah, plus those portions of the Yellowstone National Park extending into Montana and Idaho.

**Effective January 1, 2020, Nevada is a notable exception to other states in this regard, banning carriers from denying coverage for surrogate pregnancies and from seeking reimbursement, subrogation, etc.

Photo Credit: Christian Bowen, Unsplash.

April 19, 2020January 7, 2021

CARES Act Student Loan Benefits Can Aid Employees of Essential Businesses

In these troubled times, not all employers are eliminating benefits and reducing staff – essential businesses such as healthcare providers, grocery and pharmacy chains, high-tech and certain nonprofit organizations such as food banks, are actually adding staff (with Amazon and Walmart being obvious examples).

Those essential businesses that are adding to payroll or are asking extraordinary efforts from their existing employees should consider making tax-advantaged payments towards employees’ student loans through a new CARES Act measure made available from March 27, 2020 (the CARES Act adoption date), through the end of this calendar year. The CARES Act provision is not in any way limited to essential employers, but by necessity these may be the only employers who are in a financial and staffing position to give the measure serious consideration at this time.

The measure is an add-on to existing Section 127 of the Internal Revenue Code which currently allows employers to provide eligible employees with tax-free educational assistance of up $5,250 per year provided certain conditions are met. Section 127 plans are sometimes referred to as qualified educational assistance programs or EAPs. Permitted types of educational assistance include tuition, fees, and books, for a broad range of educational pursuits, including graduate degrees, which need not be directly job-related. Employers can pay the amounts directly to educators or can reimburse employees after the fact.

Under Section 2206 of the CARES Act, the annual maximum benefit remains the same, but “educational assistance” is expanded to include direct payment or reimbursement of principal and interest payments to a provider of any qualified education loan as defined under 26 U.S.C. 221(d). Notably, the CARES Act does not change the maximum annual budget. In other words, employers could “spend” the $5,250 per year for a single employee three different ways:

by using the entire budget for tuition;
by using the entire budget for student loan payments; or
by making a combination of tuition payments and student loan payments, with the total not exceeding $5,250.

There are some other requirements to offer this benefit. There must be a written plan document that sets forth the following information:

the group of employees eligible to receive benefits, which must not discriminate in favor of highly compensated employees, defined as those owning more than 5% of the employer company, or earning in excess of $125,000 in 2019;
the types of benefits offered, e.g., tuition assistance, student loan repayments, or either/both, subject to the dollar limit;
the annual dollar limit (currently $5,250 is the maximum amount but an employer can choose a lower amount); and
any applicable limitations on benefits, such as the requirement to pay benefits back in the event the employee leaves employment within one year after receiving the tuition or loan repayment assistance. Some tuition assistance programs may also impose a requirement that a certain grade level be attained.

In addition:

benefits must be 100% employer-funded, and not in any way offered as an alternative to employees’ existing or additional cash compensation; and
there must be substantiation of use of the tax-qualified dollars for permitted tuition or student loan repayments. This may be automatic where the employer makes direct payments to educators or student loan vendors, but additional steps are needed if these amounts are reimbursed after employees incur them directly.

The CARES Act is drafted in a way that suggests an employer must have an EAP in place, to which this new feature is added, but employers should be able to adopt an EAP this year, and either limit it to student loan repayments, or make it a traditional educational assistance program with student loan repayments one of the forms of educational assistance, alongside qualifying types of tuition, fees, etc.

Although this measure is meant to sunset at the end of this year, if there is meaningful uptake by essential employers there is a greater chance that it could be extended, perhaps indefinitely. Especially if the annual dollar limit is adjusted upwards to track inflation (or, better yet, the more rapidly increasing inflation in education costs), tax-advantaged student loan repayments could remain a useful means of attracting and retaining qualified employees both during and after the COVID-19 pandemic.

Photo Credit: Andre Hunter, Unsplash.

March 24, 2020March 10, 2021

Layoffs, Reductions in Force, and 401(k) Plans

Many business owners, employment law counsel and benefit advisors are grappling with reductions in force/layoffs due to the unprecedented business and economic impact of COVID-19. I wanted to flag for you, briefly, a retirement plan compliance issue that these staff reductions can trigger. The rule applies to all qualified retirement plans not just 401(k) plans; special issues exist if your client has a defined benefit/pension plan, or if it has collectively bargained benefits.

The issue is this: the IRS established in Revenue Ruling 2007-43 that when employer action – including as a result of an economic downturn – results in 20% or more of the plan population being terminated from employment, then a presumption arises that everyone affected must be fully vested in their employer contributions under the plan. This is called a “partial plan termination.”

This is relevant only if the retirement plan has employer contributions, such as matching or profit sharing contributions, that are subject to a vesting schedule. Safe harbor contributions are always 100% vested as are employee salary deferrals.

The way the employer determines the 20% threshold is as follows:

Start with the number of participants on the first day of the plan year which will also be the number of participants on the last day of the prior plan year, on Form 5500. For 401(k) plans you look at who is “eligible” to make salary deferrals not just those who actually make salary deferrals or otherwise have a plan account. (IRS Q&A with ABA from May 2004, Q&A 40).
Add new participants (eligibles) added during the plan year in progress.
Take that total number, and divide by the number of participants (eligibles) experiencing employer-initiated termination of employment.
In all cases, count both vested and nonvested participants (eligibles).

If you are at 20% or more you have a presumed partial termination. Certain facts can rebut this presumption such as very high normal turnover but this message is meant to address reductions in force related to COVID-19 which are employer-initiated due to outside forces and thus the presumption would likely not be rebuttable.

If you meet or exceed 20% then all persons directly terminated by the employer during the year must be fully vested in their employer contributions. The IRS also recommends you fully vest collaterally-affected employees such as those who leave voluntarily, as often those voluntary departures are triggered by concern over the company’s future in light of the involuntary terminations. Even if the reduction in plan population is under 20%, a potential partial plan termination may have occurred depending on all of the facts and circumstances.

The period of a partial termination may exceed a single plan/calendar year in some cases but in the instance of COVID-19, with any luck, we will only be looking at 2020.

Fully vesting folks does not cost the employer money because the money is already in the plan. However if this is not done correctly it is a complicated and expensive fix “after-the-fact.”

Generally there is not a requirement to notify participants of full vesting as a result of partial termination at the employer level but it might be mentioned in distribution paperwork according to the practices of the client’s plan recordkeeper.

Partial terminations raise a number of other ERISA compliance issues – as does the COVID-19 crisis as a whole – so let me know if questions arise.

Wishing all readers safe passage through the next weeks and months.

Photo Credit: techdaily.ca.

March 13, 2020January 18, 2021

COVID-19 and Changing Dependent Care Assistance Plan Elections

Many employers are instructing employees to work from home in order to help in containing the spread of COVID-19. Other persons are simply experiencing reduced work schedules, for instance in the travel industry. Many school districts are announcing closures, and private childcare settings such as daycare, onsite child care and after-school activities are also closing in order to minimize the spread of transmission.

Needless to say, these developments are disrupting childcare arrangements that were expected to be in place when employees made salary deferral elections under their employers’ dependent care assistance plans (DCAPs) during open enrollment periods. As a general rule, elections made under a DCAP are required to remain in place for a full plan year, absent a change in status, in which case a participant may change their election on a prospective basis in a manner that is on account of, and consistent with, the change of status. Treas. Reg. Sec. 1.125-4(c)(1).

When can parents affected by these scheduling gyrations make mid-year elections under their dependent care flexible spending account, to change amounts set aside pre-tax for child care? The answer depends, of course, on the factual circumstances.

School closure itself does not squarely fit within the existing regulatory categories of changes in status. The closest analogy might be a change from one child care provider to another which results in a cost change. It is possible that subsequent guidance from the IRS will clarify that school closure that results in the need for childcare expenses, is a permissible grounds for a mid-year election change. By contrast, a reduction in child care costs due to closure of a daycare center or onsite childcare facility is a recognized basis for a participant to reduce or eliminate future deferrals.

With regard to parent working schedule changes, the guidance is is also clear in many, but not all, instances. Take the airline worker whose schedule has been reduced from full-time to part-time, so they are home several hours per week and can care for their child who would otherwise be in daycare. This is a permitted basis to change their salary deferral to reduce the amount set aside for dependent care.

What about the hospital worker whose schedule has gone from part-time to full-time as a result of the health crisis and needs more childcare as a result? That person could prospectively increase their DCAP elections on the same basis.

What about the engineer who is working full time, but from home, at the recommendation of their employer, and wants to take their child out of daycare? Technically if they are still expected to work eight hours per day, they have not had a schedule reduction and arguably don’t have grounds to make an election change. However if the engineer’s spouse was laid off as a result of the health crisis and was available to care for their children at home for free, that might be an independent reason for a reduction in salary deferrals.

Due to the national state of emergency that has been declared, it is possible that everyone will be confined to their homes in the near future and that childcare workers simply will not be available. In such a case, DCAP election changes will be the least of our worries.