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.

Summertime Blues for Your 401(k) Plan, P.2: Eligibility Failures

This is the second installment of several posts covering the most common 401(k) plan operational issues that arise during Form 5500 prep season for calendar year plans, which happens to be summertime: the season of outdoors fun and enjoyment for folks outside the ERISA bubble. This time around we will focus on a few selected errors related to eligibility under the plan – who gets to participate in the plan, and when. (More information on fixing eligibility errors in a 401(k) plan, courtesy of the IRS, is found here.) Note that the following discussion relates to plans in which participants must affirmatively enroll; a separate post will cover operational errors arising from auto-enrollment features.

Error No. 2: Eligibility Failures

Eligibility speaks to who gets to participate in a 401(k) plan, and entry dates signal when their participation must begin. These related areas can result in a host of plan errors.

The two main criteria of plan eligibility are age and service, and a minimum age of 21 and one Year of Service (defined below) are common eligibility criteria, especially for receiving employer contributions. The minimum service requirements to make salary deferrals are commonly reduced to, say, three months of service or even a shorter period. Also, commonly, plans exclude employees covered by a collective bargaining agreement, and employees earning no U.S.-source income. These criteria are all fairly straightforward, but complications sometimes arise when plans exclude employees based on schedule or job category, such as part-time employees, temporary employees, and per diem employees. Applicable law requires that employees in these categories be allowed to participate once they have worked 1,000 hours in a 12-consecutive month period (“Year of Service”). This requirement is part of preapproved plan documentation (adoption agreement), but plan sponsors not infrequently fail to adhere to it in actual fact. So, it is not uncommon to find that a plan has been excluding employees classified as per diem, or part-time, even after they have attained 1,000 hours in a given plan year.

The correction for this error is generally to put the improperly excluded participant in the position they would have been in had the error not occurred, by making qualified nonelective contributions (QNECs), plus earnings, to replace the salary deferrals and matching contributions that they failed to receive while improperly excluded from the plan. Generally plan sponsors only need to replace 50% of the missed elective deferrals (lost opportunity cost), but in some cases when the error is caught and corrected quickly and a disclosure is made to affected participants, the lost opportunity cost is reduced to 25% of the missed elective deferral (period of failure exceeds three months, but is less than two years), or even 0% (period of failure is less than three months). 100% of the missed matching contribution or nonelective contribution needs to be replace, plus earnings.

Note that under the SECURE Act, Section 401(k) plans (other than collectively bargained plans) must cover “long-term, part-time employees” who work at least 500 but less than 999 hours in each of the last three consecutive years. Employers must start counting hours of service towards this standard in 2021, such that the first coverage of long-term, part-time employees will occur in 2024. Proposed legislation would reduce the three year measurement period to two years. A plan sponsor can be more generous than the minimum requirement and allow entry into their plan sooner than the SECURE Act deadline.

Entry dates add another area of potential error. Entry dates may be semi-annual (e.g., January 1 and July 1, for a calendar year plan) or more frequent, such as quarterly (January 1, April 1, July 1, October 1), or even monthly. Errors often occur when plans are amended to adopt a more frequent entry date schedule, but plan operation lags behind and continues to follow the old entry date schedule. Errors also arise because of the time period for counting the 1,000 hours (the initial eligibility computation period) is often misunderstood and thus misapplied. In most plans, but not always – check your Adoption Agreement! – the 1,000 hours are counted from the date of hire to the first anniversary of hire, and then the counting period switches to the plan year (in these examples, the calendar year). Sometimes plan sponsors keep using the anniversary date cycle and therefore don’t catch the correct point at which 1,000 hours is attained, and thus miss the correct entry date.

Other eligibility errors arise from permitting employees to participate before they have met eligibility criteria. Sometimes these errors can be corrected with a retroactive amendment permitting early participation by the otherwise eligible employee. However this might not be the correct approach if, for instance, most of the affected participants are highly compensated employees. In that scenario, return of contributions plus earnings may be appropriate.

Correction of eligibility errors is relatively straightforward, as noted. The real goal, however, is to avoid these operational errors in the first place. I’ll come back to my favorite recommendation to avoid unneeded plan interpretation mishaps – design your plan as simply as possible. Of course, “simplicity” will depend upon the sector your business is in and the rate of employee turnover you experience. Immediate eligibility may be simple to administer for a small shop of engineering professionals, but a six-month or longer eligibility period may make sense for a restaurant or other business that experiences high turnover. If immediate eligibility works for your business, keep in mind that there are other ways to incentivize employees to stay with you long term, for instance by way of a vesting schedule imposed on employer contributions.

In addition to a simple plan design, I also recommend the all-hands meeting among human resource and payroll personnel, whether in-house or outsourced, at which every attendee has a copy of the plan adoption agreement, and a description of employment categories such as full-time, part-time, temporary, per diem, etc. It may also be helpful to have a representative of the plan recordkeeper at the meeting. At this meeting, the key sections of the plan document are those on eligibility, hours of service, and entry dates. The attendees should review the age and service criteria for eligibility, the method of crediting hours of service (whether actual hours or elapsed time.), any exclusion categories, whether any exclusion categories are subject to the 1,000 hour exception, and how the eligibility computation period works. Walking through hypothetical new hires and whether and when they enter the plan is one way to make sure everyone is on the same page and to reduce the chances for misinterpretation of the plan documents. After the meeting, drinks with umbrellas in them may be in order!

Photo credit: A.J. Garcia, 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.

Fast Facts About the COBRA Subsidy

The recently enacted American Rescue Plan Act of 2021 (ARPA) contains a number of financial aid measures to help Americans coping with the economic fallout of the COVID-19 pandemic, including a 100% subsidy of COBRA continuation coverage premiums for a period of up to six months.  The subsidy provisions are set forth at Title IX, Subsection F of ARPA, Section 9501, titled “Preserving health benefits for workers.”  The following fast facts on the COBRA subsidy will help employers and benefit advisors prepare for more detailed guidance and model notices that are soon to follow from the Department of Labor. 

Subsidy Period

  • The subsidy is first available April 1, 2021 and ends, unless terminated earlier as described below, on September 30, 2021 (the “subsidy period,” as used herein).  The subsidy covers 100% of COBRA premiums, including the 2% administrative fee, for medical, dental and vision coverage during that time.  It does not apply to continuation coverage under a health flexible spending account.

Assistance Eligible Individuals

  • The subsidy applies to “assistance eligible individuals.”  This means someone who is eligible for continuation coverage during some or all of the subsidy period, by reason of an involuntary termination of employment or a reduction of hours.  The subsidy would also appear to apply to that person’s dependents.  
  • The subsidy is not available to those who resign or voluntarily quit employment.  
  • The change in employment status need not be directly related to COVID-19.  The usual exception for termination due to gross misconduct applies, but remember that that exception is applied sparingly.

Extended Election Period

  • Under a special extended election period, the subsidy is available not only to assistance eligible individuals who newly become COBRA eligible as of April 1, 2021, but also to persons who earlier declined COBRA, or elected COBRA but let it expire.  For instance, this group may include assistance eligible individuals who first became COBRA on or after November 1, 2019 (April 2021 would be the 18th month of COBRA coverage).  
  • The subsidized continuation coverage would apply prospectively only, in such instance.
  • A notice of the extended election period must be provided, triggering a 60-day period to elect to re-instate COBRA .  The Department of Labor is required to provide a model notice within 30 days of the March 11 ARPA enactment date.  

Option to Change Coverage

  • Assistance eligible individuals may receive the subsidy for the same coverage they were enrolled in at the time of their qualifying event, or they may elect a different coverage option so long the applicable premium does not exceed the premium for the coverage they had at the time of the qualifying event.  This is an optional feature of the subsidy provisions and an employer may choose not to extend the option to change coverage.

Termination of Subsidy Period

  • The subsidy period will end prior to September 30, 2021 in the event the assistance eligible individual’s maximum COBRA period ends (for instance, with regard to someone who made a special extended COBRA election).
  • Alternatively, it will end when an assistance eligible individual becomes eligible for coverage under another group health plan, or becomes eligible for Medicare.  
  • Eligibility under other group coverage or Medicare triggers a duty to notify the group health plan providing the COBRA subsidy.  The Department of Labor will further define the form and timing of the notice.  
  • A $250 penalty applies to each failure to provide the notice, and a higher penalty, equal to 110% of the applicable COBRA premium, may apply to an intentional failure to notify.  An exception to the penalty applies in the case the failure to notify was due to reasonable cause and not willful neglect.

Notification Duties

  • ARPA requires an update to COBRA notices sent to assistance eligible individuals who first became eligible for COBRA before the subsidy period, describing the premium assistance and the option to enroll in different coverage, if that latter option is extended by the employer, as well as the duty to provide notice of eligibility for other group coverage or Medicare.   The deadline to provide the new information is 60 days from April 1, 2021.  
  • This information must also be added to new COBRA qualifying event notices for assistance eligible individuals.  The new information may either be provided as part of amended qualifying event notices or in a separate document provided with the qualifying event notice.
  • As mentioned above, a special notice about the extended election period must be provided, and triggers a 60-day election period.  If the option to choose different coverage of an equal or lower premium is extended, an additional 30-day election period, for a total of 90 days, applies.
  • Advance notice of the expiration of the subsidy period is also required to be provided.  The Secretary of Labor will provide a model notice no later than 45 days from the March 11 enactment date.  

Subsidy is Not Taxable Income

  • The dollar value of the COBRA subsidy is excluded from the gross income of assistance eligible individuals.

Payment for Subsidy:  Credit Against Medicare Taxes

  • The person to whom COBRA premiums are payable will be entitled to reimbursement for the subsidy, in the form of a credit against the Medicare component of Social Security taxes.  
  • The employer is the person to whom premiums are payable, and who may claim the credit, in the case of a self-insured plan or an insured plan subject to federal COBRA  It is the plan itself in the case of a multiemployer plan.  
  • If the credit exceeds taxes payable the excess is treated as a refundable overpayment.   

DOL Outreach

  • ARPA allots $10 million to the Department of Labor to help implement the COBRA subsidy, enabling it to provide outreach in the form of public education and enrollment assistance to employers, group health plan administrators, and other stakeholders.

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:  Marten Bjork, 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

Benefits Provisions of the Tax Relief Act of 2010

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Tax Relief Act” or “Act”). The Act was the result of painful compromise between fiscally conservative and liberal factions in Washington, D.C. Basically the Obama administration agreed to a two-year continuation of certain income and other tax cuts dating back to 2001, in exchange for an additional 13 months of continued unemployment benefits.

You can read the 74-page text of the Act here, and the 177-page Congressional explanation of the Act here.

The Act significantly changes the estate planning landscape through 2012. For more information on the specific opportunities that exist during this brief window of time, contact an attorney in Mullen & Henzell LLP’s Estate Planning Group.

The Act also makes a 2% reduction in employees’ share of FICA taxes for 2011 (the Old Age, Survivors and Disability component, not the Medicare component), from 6.2% down to 4.2%. The employer’s portion is unchanged, at 6.2%. A comparable change is made to self-employment taxes. Even before the Act became law, the IRS issued new income tax withholding tables reflecting the 2% reduction.

The Act also affects a number of employer-provided, tax-qualified benefits, as listed below, by lifting the December 31, 2010 expiration date that otherwise would have applied under 2001 and subsequent tax laws. Unless otherwise stated all changes expire on December 31, 2012:

• Educational assistance plans under Internal Revenue Code (“Code”) Section 127 are given another two-year lease on life. The maximum dollar amount that employers can provide (whether as direct payment for education or in the form of an employee reimbursement) remains $5,250 per calendar year. Unlike education reimbursements provided as “working condition fringe benefits” under Code Section 132(d), benefits provided under Section 127 may cover study that is not necessarily limited to improving the employee’s existing skill set.
• The Act extends certain adoption benefits through 2012. The maximum adoption tax credit, and the maximum tax-exempt employer reimbursement for adoption expenses under Code Section 137, will remain at indexed rates (subject to phase-out for adjusted gross income starting at $182,500). The 2010 dollar limit was $13,170. For 2011, the maximum dollar amount of the credit or exclusion from income will be $13,360 however this will drop to $12,170 in 2012 because the Act did not extend a $1,000 increase in the limit made under the health care reform bill. For this same reason, the adoption tax credit is not refundable after 2011.
• Qualified transportation benefits under Code Section 132(f) are also continued at current levels, through December 31, 2011. Employees may exclude up to $230 from income each month in employer-provided mass transit and/or vanpool benefits; this combined dollar limit was linked to the separate $230 dollar limit that applies to employer-provided parking benefits under the 2009 recovery act. Thus, up to $460 is available per employee, per month for transportation and parking expenses. The $230 dollar limit that applies to mass transit and vanpool benefits only (not parking) was slated to drop to $120 per month on January 1, 2011.
• Tax-free IRA distributions to charitable organizations are extended through 2011. Although the Act permits 2010 IRA distributions to be made to a charitable organization through January 31, 2011, the IRS recently announced that there is no “re-do” available for individuals who took 2010 distributions prior to passage of the Act on December 17, 2010. The Wall Street Journal discusses the IRS announcement, and predicament to taxpayers, here.