Industry & Regulatory News

The House of Representatives has passed the Securing a Strong Retirement Act of 2022 (which lawmakers are coining SECURE 2.0) by a 414-5 vote. H.R. 2954 was first introduced by House Ways and Means Committee Chairman Richard Neal (D-MA) and Ranking Member Kevin Brady (R-TX) in October 2020, and subsequently amended by the Ways and Means Committee last year. The bill now includes provisions from the Retirement Improvement and Savings Enhancement (RISE) Act that came out of the House Education and Labor Committee last November.

Several key provisions are highlighted below.

• Requires automatic enrollment of eligible employees in 401(k) and 403(b) plans with certain exceptions and grandfathering provisions
• Enhances the three-year small retirement plan start-up credit, with a maximum credit of 100 percent (vs. the current 50 percent) for employers with no more than 50 employees, and phasing out for employers that have between 51 and 100 employees
• Provides a new credit for employer contributions to defined contribution plans of up to $1,000 per employee
• Enhances the saver’s credit by replacing the three-tier formula with a single 50 percent credit percentage on contributions up to $2,000, with phase outs beginning at certain AGI thresholds
• Increases the age for required minimum distributions (RMDs) from age 72 to age 73 in 2023, then age 74 in 2030, and finally age 75 in 2033
• Increases the catch-up contribution limit for plan participants who have attained ages 62-64 to $10,000 ($5,000 for SIMPLE plans)
• Clarifies pooled employer plan (PEP) trustee duties by indicating that any fiduciary of a pooled employer plan may be responsible for collecting contributions
• Permits 403(b) plans to participate in multiple employer plan (MEP) arrangements, including PEPs
• Reduces from three years to two years the period of service requirement for long-term, part-time workers, and disregards pre-2021 service for vesting purposes
• Reduces excise tax from 50 percent to 25 percent for failures to take RMDs, and further reduces tax to 10 percent if an RMD from an IRA is corrected within a certain time frame
• Establishes a national online “lost and found” database to connect individuals with unclaimed retirement account benefits
• Increases the cash-out limit from $5,000 to $7,000
• Requires defined contribution plan sponsors to provide paper benefit statements at least once annually, unless a participant elects otherwise
• Allows employers to permit employees to elect Roth treatment of both employee and employer contributions to SIMPLE and SEP plans
• Requires catch-up contributions made to a 401(k), 403(b), or 457(b) plan to be made on a Roth basis
• Permits defined contribution plan sponsors to provide participants with the option of receiving match contributions on a Roth basis

Additional proposals include the following.

• Requires the IRS to promote the saver’s credit
• Permits 403(b) plans to invest in collective investment trusts
• Provides for indexing of IRA catch-up contributions
• Permits certain student loan repayments to qualify for employer retirement plan matching contributions
• Allows a small employer joining a MEP or PEP arrangement to potentially claim a small plan start-up credit during the first three years of the MEP/PEP arrangement’s existence
• Provides a new small employer tax credit for enhanced plan eligibility for military spouses
• Permits immediate de minimis financial incentives, in addition to a matching contribution, to individuals for contributing to a retirement plan
• Enhances options for correcting employee salary deferral errors
• Defers tax for certain sales of employer stock to an employee stock ownership plan sponsored by an S Corporation
• Expands securities treated as publicly traded in the case of employee stock ownership plans
• Removes RMD barriers for life annuities by updating applicable actuarial test
• Reforms qualifying longevity annuity contract rules by repealing 25 percent limit for premiums and addressing spousal survivor rights after a divorce
• Directs agencies to review reporting and disclosure requirements and report to Congress
• Exempts defined contribution plans from sending otherwise required notices to certain individuals who are eligible but do not participate in the plan
• Expands failures eligible for self-correction under the Employee Plans Compliance Resolution System
• Eliminates “first day of the month” deferral election requirement for governmental 457(b) plans
• Expands types of distributions that can be considered IRA qualified charitable distributions and excluded from income
• Adds private sector firefighters to those qualified public safety employees eligible for distribution penalty exception at age 50
• Excludes certain disability-related first responder retirement payments from income after retirement age
• Clarifies the statute of limitations for taxes on prohibited transactions with regard to IRAs to include the date such return would have been due
• Allows otherwise excludable employees from a defined contribution plan to be excluded from determination of whether top-heavy requirements are met
• Limits repayment of qualified birth or adoption distributions to three years
• Permits participants to self-certify that deemed hardship distribution conditions are met in certain circumstances
• Permits participants who self-certify that they have experienced domestic abuse to withdraw the lesser of $10,000 or 50 percent of their account without being subject to the 10 percent early distribution penalty tax. The funds could be repaid to the plan over three years.
• Makes changes to stock attribution rules under family attribution for coverage and nondiscrimination testing
• Permits discretionary amendments that increase benefits to participants to be adopted by the due date of the employer’s tax return
• Permits new 401(k) plans established after the end of the taxable year but before the employer’s tax filing date to receive elective deferrals up to the due date of the employee’s tax return for the initial year when they are sponsored by sole proprietors and single-member LLCs
• Limits only the portion of an IRA used in a prohibited transaction to be treated as distributed, as opposed to current rules disqualifying and treating the entire IRA as distributed
• Directs the DOL to review pension risk transfer interpretive bulletin relative to conditions for discharging defined benefit plan liabilities

The legislation also includes minor technical corrections to the SECURE Act. One such correction clarifies that defined benefit plan participants other than 5 percent owners who retire after the year they turn 70½ are entitled to actuarial adjustment for the period in which they do not receive distributions. Plan amendments would be required by the last day of the first plan year beginning on or after January 1, 2024 (2026 for governmental and collectively bargained plans), and would extend these new deadlines to the SECURE Act, CARES Act, and the Taxpayer Certainty and Disaster Tax Relief Act.

The bill will now head to the Senate for consideration. Senator Patty Murray (D-WA) who chairs the Senate HELP committee indicated that she and ranking member Senator Burr intend to advance companion legislation later in the spring.

Group health plans and health insurance issuers must provide benefits for certain items and services related to testing for the detection and diagnosis of COVID-19, including over-the-counter (OTC) COVID-19 tests. Effective January 15, 2022, the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act require that these services be provided without imposing cost-sharing requirements, prior authorization, or other medical management requirements.

While the guidance significantly expands access to low-cost or no-cost COVID-19 at-home tests, the various range of solutions and implementation creates a communication challenge to employers. Sponsors of group health plans must review and carefully guide participants through the coverage details such as “direct coverage” or “reimbursement” options. Clear communication is especially important if the employer offers plans from multiple carriers.

On February 4, 2022, the Departments of Labor (DOL), Health and Human Services (HHS), and the Treasury (collectively, the Departments) issued Frequently Asked Questions (FAQs). These FAQs provide additional guidance on the requirement to provide coverage for OTC COVID-19 tests without a prescription or individualized clinical assessment from a health care provider.

Prior to the expansion of the health plan free testing mandate to include OTC COVID tests, the IRS issued a reminder that at-home testing expenses are eligible expenses under a health FSA, HRA, or HSA. The guidance confirmed that COVID testing is an eligible expense because the cost to diagnose COVID is a Section 213(d) medical expense.

Worth noting however, the IRS imposes a blanket rule prohibiting individuals from “double dipping” with account-based plans that prevents using the account for expenses reimbursed by the health plan. The prohibition also includes tax deductions. Now that OTC COVID tests are generally covered by the health plan, employees will need to carefully consider the best way to be reimbursed for OTC tests, considering that health plans will pay in full and leaving health FSA, HRA, or HSA dollars for other expenses. Employers are responsible to communicate all necessary facts to aid in the decision.

Notable guidance within the FAQs include:

Limits on Coverage: Plans or issuers may limit reimbursement to the lesser of the actual price of the test, or $12 per test. Each covered participant, beneficiary, or enrollee may be reimbursed for at least eight tests per 30-day period (or per calendar month). The plan or issuer must calculate the reimbursement based on the number of tests in a package.

Direct-to-Consumer Coverage: Plans or issuers that provide direct coverage of OTC COVID-19 tests through both a pharmacy network and a direct-to-consumer program, and otherwise limits reimbursement for OTC COVID-19 tests from nonpreferred pharmacies or other retailers to the lesser of the actual price of the test, or $12 per test, will not be subject to enforcement action. To provide adequate access, the plan or issuer must make OTC COVID-19 tests available through at least one direct-to-consumer shipping mechanism and at least one in-person mechanism. The direct-to-consumer mechanism may include online or telephone ordering, but the plan or issuer must cover the cost of shipping.

FSA/HRA/HSA: The cost of OTC COVID-19 tests purchased after January 15, 2022, are eligible for reimbursement from a group health plan or issuer. Individuals may not seek reimbursement more than once for the same medical expense. When notifying individuals about any direct coverage or reimbursement, the plan or issuer must include a reminder stating that the same medical expense may not be submitted to a health flexible spending account (FSA), health reimbursement arrangement (HRA), or health savings account (HSA).

Impact of Supply Shortage: Plans or issuers will not be out of compliance if they temporarily cannot provide adequate access because of a supply shortage.

Fraud or Abuse: Plans or issuers may take reasonable steps to prevent, detect, and address fraud and abuse. For example, a plan or issuer can require tests to be purchased from an established retailer, substantiate the purchase by carefully reviewing receipts and documentation, and require the individual to attest that the product will not be resold.

Self-Collected Sample with Lab Processing: OTC COVID-19 tests must be self-administered and self-read without the involvement of a health care provider. The OTC COVID-19 coverage rules do not apply when an individual sends the specimen to be processed in a laboratory. These tests must be ordered by a healthcare provider.

On March 15, 2022, President Biden signed the $1.5 trillion omnibus spending package known as the Consolidated Appropriations Act, 2022 (CAA 2022). Included in the bill is a provision that temporarily reinstates health savings account (HSA) relief, which allows high deductible health plans (HDHPs) to waive the deductible for telehealth and other remote care services, regardless of the plan year and without causing plan participants to lose HSA eligibility. The provision allows the deductible to be disregarded for the period April 1, 2022, through December 31, 2022.

Previously, the Coronavirus Aid, Relief, and Economic Security (CARES) Act amended the same provision to temporarily cover telehealth and remote care services without meeting the deductible for the period after January 1, 2020, for plan years beginning on or before December 31, 2021.

While the provision in CAA 2022 allows additional temporary flexibility for HSA owners to cover telehealth expenses from their accounts before meeting deductibles, due to the timing of the expiration of the CARES Act relief and the extension provided in the legislation, telehealth services for the period January 1, 2022, through March 31, 2022, are subject to the HDHP deductible requirements before they would be considered a qualified medical expense for HSA purposes.

Some key points about the extension:

• Telehealth services do not need to be preventative or related to COVID-19 to qualify for the relief;
• An employer is not required to offer these restored CARES Act exceptions;
• Under CAA 2022, the relief applies “in the case of months beginning after March 31, 2022, and before January 1, 2023”; and
• This relief applies on a monthly basis as opposed to a plan year basis. Consequently, for non-calendar year plans, the HDHP will need to make a midyear change on or after January 1, 2023 to make applicable telehealth visits subject to the Code’s minimum deductible requirements.

If offering the temporary flexibility, employers will be required to:

• Determine whether their plans can and should apply the minimum deductible to telehealth and other remote care services on a retroactive basis during the gap period;
• Clearly communicate all changes to their employees as the relief provided can be confusing (e.g., for some plans, including calendar year plans, the relief will not apply for the months of January through March, and non-calendar year plans will not be able to offer this relief for months after December 31, 2022);
• Update plan documents to explain adopted changes;
• Confirm for fully insured plans whether their insurer will be permitting this relief; and
• Work with their third-party administrator for self-funded plans to see if their systems are able to accommodate these changes.

As the United States anticipates the illusive end of the COVID-19 pandemic, there is cause to be continually mindful of ongoing regulatory guidance and changes. Although legislative activity including new laws and regulations is not near the level seen in the early months of the pandemic, it is important to understand what is temporary, what is renewed, and what is the new standard. Following are a couple of key developments. 

Continuing Extensions

On February 18, 2022, President Biden once again extended the National Emergency until February 28, 2023. The extended National Emergency provides relief to health and welfare plans related to the following:

• COBRA notices (i.e., employer and employee), payment, and election
• HIPAA special enrollment requests
• Claims and appeals request and claims perfection

EBSA Notice 2020-01 defined a new term “Outbreak Period” to signify disregarded periods of time for critical deadlines related to items listed above. Until the end of the pandemic is announced, employees continue to have an additional year to meet certain deadlines.

Specifically, periods are disregarded until the earlier of one year from the date they were first eligible for relief, or 60 days after the announced end of the National Emergency (the end of the Outbreak Period). As clarified in Notice 2021-01, the Department of Labor, the Internal Revenue Service, and the Department of Treasury explained the disregarded period applies on a person-by-person basis and cannot exceed one year.

Potential Expiration

When the President declared a National Emergency due to the COVID-19 outbreak in March 2020, effective March 1, 2020, there was no expectation of the Outbreak Period end. The Outbreak Period had been set to expire on February 28, 2022. As that deadline drew near, it was extended to February 28, 2023. Note that on March 3, 2022, the U.S. Senate passed a bill to end the National Emergency. This bill has yet to make it through Congress.

As your partner in employee benefits administration, we are here to assist you in reviewing and executing employee benefit regulations to ensure your compliance and help prevent any adverse consequences. Please do not hesitate to reach out with any questions to

MasonComplianceGroup@ascensus.com. 

Michelle Fowler
Compliance Manager

Health Savings Account (HSA) owners can choose to name their spouse, adult children, other individuals, or a trust as their beneficiary. If no beneficiary is named, the HSA will be distributed to the estate.

Careful consideration should be made when choosing a beneficiary as there are different tax implications depending on who is listed, or not listed, as the beneficiary of the HSA. It is also important to note that some states require spousal consent if the accountholder wishes to name someone other than their spouse.

When the employee’s spouse is named as the beneficiary, the account can remain a an HSA and the spouse can continue to take advantage of all that the HSA offers. They may make contributions to the account (if they are otherwise eligible to do so), earn interest tax-free and use the account for their own healthcare expenses without any tax consequences. If they choose to use the account for expenses that are not health-related, they will be required to pay income tax on those amounts and an additional 20% penalty if they are under age 65.

When an individual or group other than the employee’s spouse is named as the HSA beneficiary, the funds must be distributed and taxed at the fair market value of the account on the date of the employee’s death. Each beneficiary will pay taxes at their own income tax rate. If the money is invested, the account can make gains between the time of the account holder’s death and the closing of the account. These gains would be taxed like any other capital gains.

When a trust (revocable or irrevocable) is named as the HSA beneficiary, the fair market value of the account will be included on the employee’s final tax return. This may be the best option if your chosen beneficiary is a minor. We recommend seeking professional tax advice due to the complexity of trust accounts.

When no beneficiary is named, the HSA ends on the date of the accountholder’s death. The fair market value of the account will be included on the employee’s final income tax return and the HSA will be distributed to the estate (even if there is a surviving spouse). Another downside to this is that when requesting distribution of the HSA, the estate will need to provide additional documentation confirming the identity of the executor of the estate in the form of a small estate affidavit, a letter from an attorney, or a document from the court.

In any of these cases, the funds may be used for the health expenses that were incurred by the deceased accountholder for up to one year following their death.

There are many advantages to bringing back former employees, but applicable large employers need to follow the Affordable Care Act (ACA) rules when determining when to offer benefits. The key to this is determining whether the employee should be treated as a “new hire” or a “continuing employee.” This determination will tell the employer whether to offer benefits right away or if the designated waiting period applies.

There are three possible scenarios:

• Employee returns after 13 weeks or more (26 weeks for educational entities): This employee can be treated as a “new hire” and, if the employee is a variable hourly worker or part-time, employers can wait until the end of the designated measurement period to begin offering coverage. If the employee is hired full-time, then the same rules for other newly hired full-time employees would apply.

• Employee returns after less than 13 weeks (26 weeks for educational entities): This individual is treated as a “continuing employee” and must be offered coverage immediately on the first date of reemployment.
• The exception to this rule is the ACA’s Rule of Parity. It says that if the returning employee’s employment gap was longer than the period they worked before leaving, they should be treated as a new hire.
• If the returning employee was eligible before the break in service, but opted not to receive coverage, then the employer may not have an obligation to offer new coverage upon rehire, according to Cafeteria Plan regulations.
  
  
• Employee was in a stability period when they left. If the returning employee was in a stability period when they left, then they should be placed back into the ongoing eligible stability period and offered benefits upon reemployment.

Employers are allowed to be more generous than the ACA employer mandate rules require. The above rules and the employer’s policies should be spelled out in plan documents or other plan communications and should be applied consistently.

During this time when unprecedented numbers of employees are changing jobs, employers need creative ways to enhance their benefits programs to increase employee satisfaction and attract new talent. Lowering the employee’s medical deductible by offering a post-deductible health reimbursement arrangement (HRA) is one way to do that.

A post-deductible HRA is a specific type of HRA plan that is designed to be integrated with a qualified high deductible health insurance plan (HDHP) and a health savings account (HSA). To do this, the HRA must require the employee to meet the IRS mandated minimum deductible. In 2022, the minimum is $1,400 for individual coverage and $2,800 for family coverage.

HRAs are very flexible and even in this specific situation, the employer has options for customizing the plan to meet their needs, including choosing the amount that they want to offer and deciding whether any remaining funds are rolled over for use in future plan years or retained by the employer.

Employers can use a post-deductible HRA to help employees by:

• Lowering their deductible. If the medical plan deductible is $3,000 for single coverage and $6,000 for family coverage, the employer can add an HRA so that the employee is only responsible for the first half of the deductible and the employer covers the second half, if needed. This way the “new” deductible is only $1,500 for single and $3,000 for a family. This meets the minimum deductible requirement for an HSA qualifying plan but decreases the amount the employee is responsible for paying. The employer will benefit from lower insurance premiums as well.
• Easing the transition to a higher deductible. Since the employer decides how much they want to offer or potentially be responsible for paying, they can use a stepped approach to reduce “sticker shock.” Perhaps the qualifying HDHP that they have chosen has a deductible of $4,000 for single coverage and $8,000 for family coverage. The first year the employer could choose to make the HRA deductible $1,500 for single coverage and $3,000 for family coverage; then the next year they could increase the employee’s portion of the deductible to $1,700 for single coverage and $3,400 for family coverage. This gives the employer the flexibility to adjust each year based on budgetary constraints as well.
  
  
• Providing time to build up their HSA balance. The post-deductible HRA does not affect the amount allowed to be contributed to the employee’s HSA by the employee or the employer. The employer can still contribute to the employee’s HSA in addition to offering the post-deductible HRA, if desired.
• Pairing with a limited purpose FSA. A limited purpose FSA is also compatible with the post-deductible HRA and HSA combination. Employees can use the limited purpose FSA to help them reduce the costs of dental and vision expenses and avoid using money in their HSA.

As with a traditional HRA, the post-deductible HRA can be beneficial to employers as well, giving them the flexibility to design the plan around their current needs and goals.

In late December 2021, the IRS issued Notice 2022-04, providing the updated rate for Patient-Centered Outcomes Research Institute (“PCORI”) fees for plan years that end on or after October 1, 2021, and before October 1, 2022.

The Affordable Care Act (ACA) imposes a fee on issuers of specified health insurance policies and plan sponsors of applicable self-insured health plans to help fund the PCORI fee.

The fee is calculated using the average number of lives covered under the policy or plan and the applicable dollar amount for that policy year or plan year. IRS Notice 2020-84 provided that the adjusted applicable dollar amount for policy years and plan years that ended on or after October 1, 2020, and before October 1, 2021, is $2.66.

Notice 2022-04 provides that the adjusted applicable dollar amount for policy years and plan years that end on or after October 1, 2021, and before October 1, 2022, is $2.79.

The PCORI fee is filed using the Quarterly Federal Excise Tax Return (IRS Form 720). Although Form 720 is a quarterly return, PCORI Form 720 is filed annually only, by July 31. Plan sponsors should apply the applicable PCORI fees and file Form 720 corresponding to policy or plan years ending from January 1, 2021, to December 31, 2021, by July 31, 2022.

For more information regarding PCORI fees in general, please refer to IRS Code Sections Internal Revenue Code Sections 4375 and 4376.

The IRS has released a new proposed rule providing for an exception, if certain requirements are met, to the application of the “unified plan rule” for multiple employer plans (MEPs) when there is a failure by one or more participating employers to take actions necessary to satisfy requirements of the Internal Revenue Code. The unified plan rule (also referred to as “one bad apple rule”) specifies that the failure by one participating employer to satisfy an applicable qualification requirement would result in the disqualification of the MEP for all employers maintaining the plan. The release also withdraws prior proposed regulations that were published in the Federal Register on July 3, 2019.

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) created a statutory exception to the unified plan rule for certain types of MEPs and directed the Secretary to issue guidance to carry out that provision. The exception applies to defined contribution plans maintained by employers that have a “common interest” or have a “pooled plan provider” and failed to take action required to meet qualification requirements, subject to the following conditions.

• The plan assets attributable to employees of the employer that failed to take action will be transferred to a plan maintained only by that employer
• The employer (and not the plan or any other employer in the plan) will generally be responsible for liabilities with respect to the plan attributable to employees of that employer
• The pooled plan provider performs substantially all of the administrative duties for which it is responsible for any plan year

The proposed regulations provide that the terms of the MEP document must include language describing the procedures that will be followed to address a participating employer failure, including a description of the notices that the plan administrator will send and when such notices will be sent. The plan terms must also describe the actions that the plan administrator will take if by the end of the 60-day period following the date the final notice is provided, the unresponsive participating employer does not take appropriate action with respect to the failure or initiate a spinoff to a separate plan maintained by the employer. The IRS intends to publish model language for this purpose in connection with a final rule.

Under the proposal, a MEP plan administrator may be required to provide up to three notices to an unresponsive participating employer regarding a failure—with the final notice also being provided to affected participants and the Department of Labor. The unresponsive participating employer can either take appropriate remedial action or initiate a spinoff. The proposal delineates notice requirements for both “a failure to provide information” and a “failure to take action”, and in situations where a failure by a participating employer is initially a failure to provide information, but becomes a failure to take action, more than three notices may be necessary.

If an unresponsive participating employer neither takes appropriate action or initiates a spinoff within 60 days after the final notice is provided, the MEP plan administrator must 1) stop accepting contributions from the unresponsive participating employer and participants, 2) provide notice to affected participants of the unresponsive participating employer, and 3) provide participants with an election regarding treatment of their accounts.

Comments may be submitted within 60 days of publication in the Federal Register. A public hearing on the proposed rule has been scheduled for Wednesday, June 22.

Representative Ann Wagner (R-MO) has introduced the Long-Term Care Affordability Act to allow distributions from retirement accounts for the payment of long-term care insurance coverage. The bill is the House companion to S.2415 introduced in the Senate by Senator Patrick Toomey (R-PA) last year.

The proposal would permit tax-free retirement saving distributions of up to $2,500 per year—indexed for inflation—that are used to purchase long-term care insurance. The arrangements to which the legislation applies would include qualified retirement plans, 403(a) and 403(b) plans, governmental 457(b) plans, and IRAs. These distributions would also be exempt from the 10 percent early distribution penalty tax. The bill would also create new distribution triggers for employee deferral amounts that have been contributed to 401(k), 403(b), and governmental 457(b) plans.