Monthly Benefits Update - December 2013
The following are the most significant employee benefits-related legal developments that occurred in December of 2013. At the beginning of 2013, after considering feedback from our clients and contacts who work in the employee benefits area, we decided to change the format and timing of our periodic employee benefits alerts. During 2013, we sent one comprehensive alert at the end of each month that briefly highlighted the most important employee benefits legal developments for that month. We will continue this format in 2014. Based on client feedback, our “Monthly Benefits Updates” have been a very helpful resource for busy benefits and HR professionals. As always, our updates focus on the clients we serve—namely, employers and benefit plans. We will continue to include only those items that our clients would generally consider to be important and that clearly impact our clients’ responsibilities with regard to their benefit arrangements. We continue to welcome your feedback and hope you find our alerts to be helpful in keeping up with the ever-changing employee benefits landscape.
Health & Welfare Plans
IRS Issues Guidance on the Application of the Windsor/DOMA Decision to Cafeteria Plans, FSAs, and HSAs
The IRS issued Notice 2014-1 which provides guidance on the impact of the U.S. Supreme Court’s recent decision in United States v. Windsor to cafeteria plans, flexible spending arrangements (FSAs), and health savings accounts (HSAs). In Windsor, the Supreme Court struck down the provision of the Defense of Marriage Act (DOMA) which provided that, for purposes of federal law, a marriage could only be between a man and a woman. The Windsor decision effectively resulted in the recognition of same-sex marriage for purposes of federal law. Following Windsor, a number of short but important pieces of guidance have come out from the IRS (with regard to the decision’s general impact under the Internal Revenue Code) and the DOL (with regard to the decision’s general impact under ERISA). We have described those pieces of guidance in previous alerts here and here.
Notice 2014-1 provides some helpful guidance for employers who provide welfare benefits under a cafeteria plan (and that sponsor FSAs and HSAs). Below are the key items from the Notice:
Mid-Year Election Changes. Participants who were in a same-sex marriage as of the date of the Windsor decision (June 26, 2013) can be treated as having a mid-year change in marital status, such that the participant is eligible to make certain mid-year election changes in the employer’s cafeteria plan. The plan may only accept a mid-year election change due to the Windsor decision if the election is filed during the plan year that includes June 26, 2013 or the plan year that includes December 16, 2013 (for calendar year plans, this means the 2013 plan year).
Pre-Tax Contributions for Health Coverage. The Notice provides some helpful clarification to employers on the issue of when to start treating employee contributions for health insurance coverage for a same-sex spouse on a pre-tax basis under a cafeteria plan. The Notice generally provides that participants who are paying the employee cost of health insurance coverage for a same-sex spouse on an after-tax basis must notify the employer that the participant is legally married to the individual receiving spousal coverage. If the employer receives this notice from the employee before the end of the plan year that includes December 16, 2013, the employer must begin treating the contribution as pre-tax no later than the date that a change in marital status would be required for income-tax withholding purposes or a reasonable period of time after December 16, 2013, whichever is later. A revised Form W-4 would, for example, suffice as notice to the employer of the coverage being for a same-sex spouse.
FSA Benefits. The Notice provides that flexible spending arrangements (whether a health FSA, dependent care FSA, or adoption assistance FSA) can reimburse a participant for the covered expenses of the participant’s same-sex spouse or same-sex spouse’s dependent, as long as the expenses were incurred during a time period that begins no earlier than the beginning of the plan year that includes June 26, 2013 or the date of the marriage, whichever is later. And even if the participant had only elected coverage under a self-only FSA for that period, the spouse may be treated as covered by the FSA.
Dependent Care FSA Limits. The joint $5,000 annual limit that applies to a married couple’s contributions to a dependent care FSA also applies to same-sex couples who are treated as married for federal tax purposes in a particular taxable year (i.e., same-sex couples who remain married as of the last day of the taxable year).
HSA Contribution Limits. The joint limit for contributions to an HSA (which is $6,550 for 2014) also applies to same-sex married couples.
Plan Amendments. The Notice clarifies that, unless a cafeteria plan does not permit mid-year election changes for changes in marital status, the plan document does not need to be amended to permit mid-year election changes as a result of the Windsor decision. If a plan sponsor wishes to add mid-year election changes that were not previously allowed under the plan, the plan will need to be amended before the last day of the first plan year that begins on or after December 16, 2013 (i.e., December 31, 2014 for a calendar year plan year).
We expect further guidance from the IRS with respect to the Windsor/DOMA decision’s impact on benefit plans (and retirement plans in particular). In the meantime, in addition to the issues in Notice 2014-1, there are a number of things plan sponsors should be considering with regard to their benefit plans in response to the Windsor decision. These items should be at the top of every plan sponsor’s list in 2014. You may want to consider attending our Annual Employment Law Conference in February where we will discuss all of the relevant Windsor-related employee benefits issues that employers and plan sponsors need to consider.
IRS Issues Guidance Aimed at Helping Frozen DB Plans Pass Nondiscrimination Testing
The IRS issued Notice 2014-5 which provides temporary relief to frozen defined benefit plans with regard to the required annual nondiscrimination and coverage tests under the Internal Revenue Code. The Notice provides temporary guidance that allows the sponsor of a frozen defined benefit plan to satisfy the annual nondiscrimination testing requirements under Code Section 401(a)(4) by providing equivalent benefits under a separate defined contribution plan to employees who are not eligible to participate in the defined benefit plan, even if the plan is not permitted under current testing rules to test on this basis.
To provide some background, when a defined benefit plan is “frozen” (i.e., existing participants continue to accrue benefits, but new employees are no longer eligible to participate), the plan may eventually have difficulty passing certain required annual nondiscrimination and coverage tests. This happens because the plan’s existing participants typically become more highly compensated over time as compared to newer employees who are not accruing any benefits in the plan. Eventually, this disparity can make it difficult or impossible for the plan to satisfy the nondiscrimination and coverage tests in the Internal Revenue Code. Sponsors of defined benefit plans have in recent years asked Congress and the IRS to help alleviate this problem, to help plan sponsors avoid the need to stop all benefit accruals under their defined benefit plans.
Although Congress has so far failed to take any meaningful action in response to this issue, the IRS, in Notice 2014-5, has provided some limited temporary relief to frozen plans with regard to the nondiscrimination test under Code Section 401(a)(4). Under this temporary guidance, a defined benefit plan that is aggregated with a defined contribution plan for nondiscrimination and coverage testing purposes can satisfy the nondiscrimination test on the basis of equivalent benefits provided to participants in the defined contribution plan, even if the two plans do not otherwise meet the normal requirements to test on the basis of equivalent benefits. For many frozen defined benefit plans, testing on the basis of equivalent benefits is not currently an option, so Notice 2014-5 will help many frozen plans comply.
Importantly, this new testing option is generally only available for defined benefit plans that, for the plan year beginning in 2013, satisfied the nondiscrimination and coverage tests under the existing rules. Finally, the testing option is only available for defined benefit plans that were frozen before December 13, 2013, and it can only be used for plan years beginning before January 1, 2016. Between now and 2016, the IRS has said that it expects to engage in a formal rulemaking process to provide a more permanent solution for frozen plans.
IRS Issues Guidance on In-Plan Roth Rollovers
The IRS issued Notice 2013-74 which provides further guidance on in-plan rollovers of non-Roth amounts to Roth accounts. These types of in-plan Roth rollovers first became available to 401(k), 403(b), and governmental 457(b) plans under the Small Business Jobs Act of 2010. Initially, if a plan wished to offer this option, participants could choose to roll over non-Roth amounts to a Roth account in the same plan only if the participant was otherwise eligible to receive a distribution of the non-Roth amount (e.g., because the participant had terminated employment, reached age 59 ½, etc.).
This most recent guidance expands the types of non-Roth amounts that can be rolled over to a Roth account in the same plan. The IRS has made it clear that the following types of non-Roth amounts can be rolled over (converted, effectively) to a Roth account, even if the amounts are not otherwise eligible for distribution to the participant: (1) elective deferrals in a 401(k) or 403(b) plan, (2) employer matching and nonelective contributions that are vested, and (3) annual deferral amounts in a governmental 457(b) plan. The guidance also makes it clear that amounts rolled over to a Roth account in the same plan must remain subject to the same distribution restrictions that applied under the plan before the rollover.
Finally, it is worth mentioning that participants may only elect an in-plan Roth rollover if the plan itself allows for it. Plan sponsors should therefore consider whether they wish to offer this newly expanded option to participants. If a plan sponsor decides to offer this option to participants, the Notice provides that the plan must be amended by the end of the plan year in which the rollover option is first offered, or December 31, 2014 if later.
New U.S. Budget Bill Increases PBGC Premiums
For the second time in two years, PBGC premiums have been increased. The Bipartisan Budget Act of 2013 which was signed into law in late December, increases both flat and variable rate PBGC premiums for single-employer plans (not multiemployer plans) beginning in 2015. The previous increase came in the Moving Ahead for Progress in the 21st Century (MAP-21) Act of 2012.
The flat rate premium will go from $49 to $57 per participant in 2015, to $64 per participant in 2016, and will be indexed for wage inflation in 2017 and after. The variable rate premium will go from $14 (per $1000 of underfunding) to at least $24 in 2015, to at least $29 in 2016 (with a $500 per-participant cap), and will be indexed for wage inflation in 2017 and after (with the $500 per-participant cap indexed for wage inflation). For underfunded single-employer plans in particular, these increases will be quite significant.
U.S. Supreme Court Upholds Plan’s Internal Statute of Limitations
The U.S. Supreme Court, in a unanimous 9-0 opinion in Heimeshoff v. Hartford Life & Accident Ins. Co., upheld an ERISA plan’s contractual three-year statute of limitations against a plan participant who filed a lawsuit to recover benefits more than three years after the participant provided proof of loss to the plan. The statute of limitations was included in the plan document and therefore applied by contract. The court held that a contractual limitations period in an ERISA plan is enforceable as long as the length of the limitations period is reasonable and there is no controlling statute to the contrary. The Heimeshoff decision is an important one for plan sponsors and plan drafters because it validates the long-standing and increasingly common practice of including in plan documents reasonable limitations periods for benefit claims.