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Would You Like a Latte With that 401(k) Deferral?

SECURE 2.0 Permits Small Financial Incentives to Encourage Plan Enrollment

Effective immediately under a provision of the recently-passed SECURE 2.0 retirement reform legislation, employers may offer their employees gift cards or other “de minimis financial incentives” for enrolling in a 401(k) plan.  This post sets forth some compliance points for this new incentive opportunity.

  • Under prior law, matching contributions were the only means by which employers could encourage employees to make elective deferrals. 

Expanding access to retirement plans is one of the overriding goals of SECURE 2.0 (set forth in Division T of the Consolidated Appropriations Act, 2023).  Many employers would like to be able to encourage employees to save for retirement but may not be able to afford an ongoing employer matching contribution.  Section 113 of Division T expands the list of permitted employer incentives by allowing employers to provide a small financial incentive to employees to enroll in a 401(k) plan.  The small incentive may be just enough to get the ball rolling for employees who are otherwise not inclined to take part in a 401(k) plan.

  • The small financial incentive must be paid for by the employer, not the plan itself.

Section 113 makes clear that the employer that sponsors the plan must purchase the gift cards or other small financial incentives.  Plan assets may not be used for this purpose.

  • The gift cards or other small financial incentives will constitute taxable income to employees.

Employer-provided gift cards and other items with a clear cash value are treated as cash for income and employment tax purposes.  The “de minimis fringe” exception that may apply to a water bottle or t-shirt provided to employees does not apply to items with a readily ascertainable cash value.  (See 2023 Publication 15-B, p. 9) If your 401(k) plan’s definition of compensation for contribution purposes does not exclude gift cards, the gift cards are also “compensation” for plan contribution purposes.

  • Keep the dollar amount of the incentive small. 

There is no safe harbor amount for “de minimis” value, and the determination depends upon the facts and circumstances. A gift card of up to $25 probably satisfies the standard and will buy an employee a few cups of coffee or smoothies. Consult a qualified tax advisor if you are considering a more generous incentive.

  • Coordinate with your recordkeeper and third-party administrator on rolling out this feature.

You will need to coordinate with your plan recordkeeper and your third-party administrator to coordinate the small financial incentive with plan enrollment.  Think about how and when you will communicate this benefit to employees and about when and how you will deliver the financial incentive in connection with proof of enrollment in the plan.  It might be a good idea to draft out a timeline for a hypothetical new enrollee, and walk through it with your recordkeeper and third-party administrator before you unveil it to employees.

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. © 2023 Christine P. Roberts, all rights reserved.

Photo credit: Tye Doring, Unsplash

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Is EEOC Wellness Guidance Coming Out of the Deep Freeze?

Currently, guidance on permissible incentives (whether in the form of a reward or penalty) to participate in a wellness program is in a state of flux, but some clarity may be forthcoming sometime after July 1, 2022.

That is the date on which one of the five seats on the Equal Employment Opportunity Commission (EEOC), currently held by Republican Janet Dhillon, becomes available for President Biden to fill.  The Commission’s current roster of three Republicans and two Democrats has been blamed for delays, including two consecutive failures, in the fall of 2020 and spring of 2021, to publish the Commission’s regulatory agenda. President Biden’s pick for the slot, Cohen Milstein, et al. attorney Kalpana Kotagal, failed to secure confirmation upon initially appearing before the Senate in May of this year.  However Senate Majority Leader Chuck Schumer may bring Ms. Kotagal’s nomination to a full Senate Floor vote under rules that apply when there is no majority for either party in that house of Congress.

By way of background, the EEOC issued proposed regulations in January of 2021 that would have required that, to be considered “voluntary,” incentives for “participatory” wellness programs must be “de minimis,” such as a water bottle or t-shirt.  Voluntariness is a requirement under the Americans with Disabilities Act whenever an employer performs a medical examination – which would include biometric testing under a wellness program – or makes a disability-related inquiry, which could be part of a Health Risk Assessment under a wellness program.  Both biometric testing and HRAs are examples of participatory wellness programs in that they do not require any physical activity or health outcome, and these types of wellness programs are in wide use across the country.   (For more background information on the EEOC and wellness incentives, including removal of incentive provisions under 2016 EEOC regulations, check out our earlier post.) 

The Biden Administration required the EEOC to withdraw the 2021 wellness regulations before they were published in the Federal Register, as part of a regulatory freeze pending review.  It is possible that, if Biden’s nominee to the EEOC secures confirmation, the proposed regulations containing the de minimis rule may be revived in their original or a modified form.  Below is a brief summary of existing wellness incentive rules and some thoughts on what a de minimis incentive rule might look like, if enforced. 

  • If we ignore the EEOC withdrawn proposed regulations, what are the rules on wellness incentives?

Keep in mind that withdrawal of the 2021 EEOC proposed regulations followed withdrawal of the incentive provisions of 2016 EEOC final wellness regulations, which would have capped incentives even for participatory programs at 30% of the cost of self-only coverage if the program involved a physical examination or asked disability-related questions. Many employers are still using the 30% cap even for participatory wellness programs that involve biometric testing or HRAs.

In the absence of both sets of withdrawn EEOC guidance, the rules are set forth in HIPAA regulations and are as follows:

Participatory wellness programs (require no physical activity or health outcome) do not have any limit on incentives.

Health-contingent programs (require physical activity or health outcome) have a maximum incentive that 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.

Important Note:  the cap on financial incentives is just one aspect of wellness compliance; there are also design parameters, notification duties, and other criteria that apply under HIPAA wellness regulations.  One example of a required design criteria for a health-contingent wellness program is 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.  Another is that a participatory wellness program be made available to all similarly situated individuals. 

  • If the de minimis incentive rule is revived, for participatory wellness programs that include physical exams/disability-related questions, what type of incentive might qualify as de minimis?

The withdrawn 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.  Note that these items may be taxable compensation.  Any gift card would be, but a water bottle, t-shirt or other small item may qualify as an excludible de minimis fringe benefit under Internal Revenue Code Section 132(a)(4).

Clearly, there is a good bit of daylight between the HIPAA rules for participatory programs (unlimited incentive) and the de minimum rule under withdrawn EEOC guidance.  And the voluntariness of incentives to take part in biometric testing is still being challenged in the courts, as evidenced by a recent court case from the Northern District of Illinois.  Hopefully changes in the EEOC will be followed by guidance that brings some clarity to an area that has been frustratingly confusing for employers for a number of years.

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. © 2022 Christine P. Roberts, all rights reserved.

Photo credit:  Dev Benjamin, Unsplash

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Five Fast Facts About Reproductive Health Benefits

Employers are increasingly looking to offer employees assistance in starting and adding to their families, which in a growing number of cases involves dealing with infertility treatments and other reproductive health issues.   Below are five fast facts about this trending employment benefit.

  1. Reproductive health benefits are increasingly in demand.  According to a survey by the International Foundation of Employee Benefit Plans, summarized here, 24% of employers surveyed covered the cost of in vitro fertilization benefits in 2020, up from 13% in 2016.  Similar or greater increases in coverage were seen across other categories, including fertility medications, visits with genetic counselors and surrogacy advisors, genetic testing, non-IVF fertility treatments, and egg harvesting and freezing services (coverage of which jumped from 2% in 2016 to 10% in 2020). 
  2. Only some reproductive health benefits are likely to qualify as medical expenses under a health FSA or HRA.  Such expenses must be incurred “for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body [of the employee, the employee’s spouse, or the employee’s dependent.]”  IRS Publication 502, Medical and Dental expenses, mentions only in vitro fertilization, including temporary storage of eggs or sperm, and surgery to reverse procedures to prevent conception, as qualifying medical expenses.  With regard to other reproductive health measures, such as surrogacy expenses, egg donation and the like, we have only private letter rulings or other IRS guidance that is specific to the taxpayers who seek an opinion and may not be relied upon by other tax payers.  As a consequence, a comprehensive reproductive health benefit plan may have to comprise a blend of pre-tax and after-tax benefits.
  3. State laws may apply, especially with regard to surrogacy benefits.  Some states, including New York, prohibit certain types of gestational surrogacy contracts, whereas other states permit them subject to certain conditions.  This article provides a survey of state laws as of early 2020.  Employers with operations in multiple states will want to proceed cautiously in designing their reproductive health benefits so as not to offer benefits that are prohibited or restricted under state laws.
  4. A number of vendors have cropped up in this space as a consequence of the complexity around the federal tax and state law issues.  Services they offer include integration with insurance carriers, care navigation, and coaching. Some of the leading reproductive health benefit vendors include the following:
  5. Retirement plans are getting into the game.  Effective as of last year, the SECURE Act permits 401(k) plans to offer “qualified birth or adoption distributions” of up to $5,000 person, to cover expenses incurred in childbirth or adoption, that are subject to income taxes but exempt from the 10% early distribution tax under Code Section 72(t).  More information on these distributions can be found in our earlier post on this topic.  Adding this distribution feature can help support an employer’s overall reproductive health benefit offerings.

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. © 2022 Christine P. Roberts, all rights reserved.

Photo credit:  Garret Jackson, Unsplash

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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

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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.

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.  © 2020 Christine P. Roberts, all rights reserved.

Photo Credit:  Dan Burton (Unsplash)