Monthly Benefits Update - September 2014
October 6, 2014
By Hrishi Shah
Health & Welfare Plans
IRS Issues Guidance on How to Deal With a Change to an Employee’s Measurement Period Under ACA Employer Mandate
The Internal Revenue Service (IRS) issued Notice 2014-49, which proposes an approach for dealing with changes to an employee’s look-back measurement method in determining the employee’s full-time status under the Affordable Care Act’s (ACA) “employer mandate.” The new guidance would apply to situations where an employee’s measurement period changes due to the employee’s transfer to a different position or due to the employer’s decision to modify the measurement period for that employee’s classification.
As we have written before, employers with 50 or more full-time employees may face penalties under the ACA’s employer mandate if they do not offer affordable, minimum value health coverage to substantially all of their full-time employees. The ACA defines full-time employees as those employees who work on average 30 hours per week or 130 hours per month. The final regulations provide two general methods to determine whether employees are considered full-time: a month-to-month method and a “look-back measurement period” method. Under the month-to-month measurement method, an employee’s hours are counted on a monthly basis to determine whether the employee is considered full-time (i.e., works an average of 30 hours per week or 130 hours per month). Under the look-back measurement period method, the employee’s average hours are determined over a measurement period (the duration of the measurement period is set by the employer, within certain parameters). The employee’s hours during the measurement period determine the employee’s full-time status for a subsequent stability period (with an optional administrative period between the measurement period and the stability period). Employers may choose to apply different measurement methods for different classifications of employees (e.g., collectively and non-collectively bargained employees, employees covered by different collective bargaining agreements, salaried and hourly employees, and employees who work in different states) as long as the measurement method is applied consistently within employee classifications.
Applying the look-back measurement period method can be a challenge when an employee transfers to a position where a different measurement method applies or when the employer wishes to modify the measurement method that applies to a classification of employees. In Notice 2014-49, the IRS proposed the following approaches in these situations:
Transferred Employees Who Are In an Administrative or Stability Period
When an employee transfers to a position where a different measurement method applies, if the employee is already in an administrative period or stability period applicable to the previous position, the employee’s full-time status determination for the previous position remains in effect until the end of that stability period. After the end of that stability period, the employee’s full-time status is determined based on the measurement method that applies under the new position. If the employee’s full-time status cannot be determined after the end of the stability period (for example, because the employee has not been employed over the full initial measurement period for the new position), then the rule described below for transferred employees who are not in an administrative or stability period applies.
Transferred Employees Who Are Not In an Administrative or Stability Period
If the transferred employee is not in an administrative period or stability period at the time of the transfer, the employee’s full-time status is determined solely under the measurement method that applies to the second position, and includes all service performed in the first position during that measurement period.
Employer Changes Applicable Measurement Method
The IRS pointed out that changes to the measurement method (including changes from the look-back measurement period method to the month-to-month method, or vice versa) have already been addressed in the final regulations at 26 C.F.R. § 54.4980H-3(f). But if the employer changes the duration of the look-back measurement period for an employee, the employee’s full-time status is determined under the rules described above for transferred employees, as if the employee had transferred from a position to which the original measurement method applies to a position to which the revised measurement method applies as of the effective date of the change.
The employer mandate will take effect as of January 1, 2015 for employers with 100 or more full-time employees. Employers with between 50 and 99 full-time employees will not be subject to the mandate until January 1, 2016, provided they meet certain requirements.
Agencies Issue Final Rules Amending Definitions of Excepted Benefits
The IRS, Department of Labor (DOL) and Department of Health and Human Services (HHS) (collectively the “Agencies”) finalized regulations expanding the criteria for certain health and welfare coverage to qualify as “excepted benefits.” Excepted benefits are generally exempt from the ACA’s market reform requirements, as well as the requirements of the Public Health Service Act, the Internal Revenue Code (the “Code”), and the Health Insurance Portability and Accountability Act (HIPAA). The final regulations are largely unchanged from the proposed regulations issued in December of 2013.
Most importantly, the regulations provide that stand-alone vision or dental coverage qualifies as an excepted benefit if the coverage is either:
- provided under a separate policy, certificate, or contract of insurance; or
- not an integral part of the health plan—this simply requires the plan to offer participants the ability to opt out of receiving dental or vision coverage without dropping their major medical coverage.
The first criterion is only available for fully insured coverage, while the second is available to both fully insured and self-insured coverage. Similar to the 2013 proposed regulations, the final regulations no longer require participants to pay an additional premium for stand-alone dental and vision coverage in order for such coverage to qualify as an excepted benefit.
IRS Issues Guidance Permitting Additional Mid-Year Election Changes Under a Cafeteria Plan
The IRS issued Notice 2014-55, which permits cafeteria plans to allow participants to make mid-year election changes in two additional situations where a participant wishes to cease employer-sponsored coverage and purchase ACA marketplace-based coverage. Based on the new guidance, cafeteria plans may permit participants to prospectively revoke elections of employer-sponsored health coverage in these two situations, provided that the plan is not a health flexible spending account (FSA).
In the first situation, an employee whose hours are reduced from an average of at least 30 hours per week to less than 30 hours per week may prospectively revoke a coverage election in order to enroll in ACA marketplace-based coverage, even if the reduction in hours does not result in the employee losing eligibility under the employer’s group health plan. The second situation involves an employee who is eligible for and wishes to enroll in marketplace-based coverage. Such an employee is permitted to revoke his employer-sponsored coverage election as long as it does not result in duplicate coverage.
Notice 2014-55 was effective as of September 18, 2014. The IRS intends to amend the applicable regulations under Code Section 125 to reflect the guidance in the Notice.
IRS Sets PCORI Fee Rate for Plan Years Ending After October 2014
The IRS has issued guidance setting the Patient-Centered Outcomes Research Institute (PCORI) fee rate for plan years that end on or after October 1, 2014 and before October 1, 2015. Under the ACA, insurers and sponsors of self-insured health plans that provide accident and health coverage are responsible for paying the fee.
The PCORI fee for plan years ending between October 1, 2014 and October 1, 2015 is $2.08 multiplied by the average number of covered lives under the insurance policy or plan. The fee multiplier increased to $2.08 from $2.00, which was in effect for plan years ending before October 1, 2014, and $1.00 for plan years ending before October 1, 2013.
IRS Issues Final Cash Balance Plan Regulations
The IRS finalized regulations pertaining to cash balance and other hybrid pension plans, which it had proposed in 2010. The final regulations also include proposed transitional relief for plans that do not currently comply with the final regulations.
The most important change in the final regulations is an expansion of the interest crediting rate options that are available to cash balance and hybrid plans. For example, under the final regulations, the maximum interest crediting rate was increased from 5% to 6%. The final regulations take effect for plan years beginning on or after January 1, 2016. The proposed transitional relief provides protection to plans that currently use non-compliant interest crediting rates. The relief includes guidance on reconciling conflicts between the final regulations and the anti-cutback rules of Code § 411(d)(6), in the event that a plan is required to adopt a lower crediting rate in order to comply with the final regulations.
Any amendments to bring plans into compliance with the final regulations must be adopted by January 1, 2016.
PIMCO and Bill Gross Part Ways
Bill Gross, the co-founder and longtime chief investment officer of Pacific Investment Management Co. (PIMCO) recently announced his departure from the firm. Gross is widely recognized as having been instrumental in the success of PIMCO and the strength of its bond funds. Because PIMCO’s bond funds (in particular, the Total Return Fund) are a key component of many retirement plan investment platforms, plan fiduciaries should consider what effect, if any, Gross’s departure might have on PIMCO and whether his departure impacts the prudence of retaining PIMCO’s funds in their plans.
IRS Issues Guidance Permitting Rollovers of After-Tax Contributions to Roth IRAs
The IRS issued proposed regulations and accompanying Notice 2014-54 permitting rollovers of after-tax contributions in retirement plans to Roth IRAs. The Notice also provides guidance and examples of how to handle simultaneous disbursements of pre-tax and after-tax amounts to different destinations. The Notice states that a transaction involving multiple disbursements should be treated as a single distribution, but each disbursement must be reported on a separate Form 1099-R.
The guidance applies to distributions made on or after January 1, 2015, but plan administrators may rely on the guidance for distributions that are made on or after September 18, 2014.
DOL Proposes Rule Requiring Electronic Filing of Top-Hat Plan Election, Apprenticeship and Training Fund Filings
The DOL issued a proposed rule that would revise filing procedures for top-hat plan elections and apprenticeship and training fund notices. Such filings are currently made in paper form through regular mail or personal delivery, which the DOL then converts into electronic form and posts online. Because the DOL receives approximately 2,000 paper filings of top-hat plan elections and 120 paper filings of apprenticeship and training fund notices each year, it has determined that regular mail or personal delivery is no longer the most efficient or cost-effective filing method. This proposed rule would not change the current content requirements in the exemption under 29 C.F.R. § 2520.104-22 for apprenticeship and training funds or the alternative method of compliance with the reporting and disclosure requirements applicable to top-hat plans.
Illinois Circuit Judge Bars State from Requiring State Retirees to Pay Health Premiums
A Sangamon County Circuit Court judge issued a preliminary injunction preventing the State of Illinois from requiring retirees to pay a portion of their retiree health premiums. This circuit court ruling is an extension of the Illinois Supreme Court’s ruling in Kanerva v. Weems that was issued in July. As covered in more detail in our separate alert, the Kanerva ruling held that retiree health benefits are a protected benefit under the pension protection clause of the Illinois Constitution.
In 2012, Illinois passed the State Employee Group Insurance Act of 2012 (Public Act 97-695), which required current state retirees to begin making contributions towards the cost of their health premiums. The Supreme Court held in Kanerva that retiree medical benefits are constitutionally protected, and remanded the case back to the lower court to determine whether the benefit reductions effected by Public Act 97-695 violated the pension protection clause of the Illinois Constitution. On remand, Circuit Judge Steven Nardulli has now issued a preliminary injunction against the enforcement of Public Act 97-695, halting state efforts to collect health premiums from current retirees.
As explained in our prior alert, it is still unclear what impact these decisions will have on the impending legal challenge to Senate Bill 1, passed in December of 2013, which made various benefit reductions to public pensions, including for current pensioners.