The pros? 

For the most part, an employer who wants to have an IRS pre-approved 403(b) plan document will be able to spare itself of having to adopt and create its own plan document language to conform to IRS rules and be relieved of the expense of having to continue to revise that language for such ever-changing IRS rules.  These plans will be available once retirement plan vendors and service providers submit and obtain IRS approval for what are called "prototype" and "volume submitter" plans (these would be the boilerplate documents).  These retirement plan vendors and service providers will generally be those who sponsor similar IRS pre-approved 401(k) documents.  Typically, there will be a base plan document and a check-the-box-for-your-specific-design adoption agreement.  These eligible plan sponsors can then meet the "written plan document requirement" (mandated in 2009) and thus have a document that complies, in form, with Internal Revenue Code requirements for Section 403(b).

The cons?

It will be about a year or so before these pre-approved plans will be available to employers who can sponsor 403(b) plans -- so, there's a bit of a wait.  Perhaps more importantly, employers who use these boilerplate plans will not have as much flexibility for specific designs, so if an employer wants to be creative in its own 403(b) plan design, it cannot rely on boilerplate language (and thus must have its own individually-designed plan, which is more onerous with plan document compliance issues that an employer takes on). 

Learn how to avoid the $2000/$3000 per employee penalty. . . or determine why paying the penalty might be cheaper than even offering a group health care plan.

If you are close to any of these locations, come hear our own Brian Magargle speak at one of the below seminars about  how to tackle the your Health Care issues now; be sure to contact Constangy or Brian to register.

Health Care Reform Update

S.C. Manufacturers Alliance Manufacturing Managers Meeting

Isle of Palms, SC

April 30, 2013

The $64,000 Question:  Employee Benefits -- What Requires Your Attention Now?

The Employers' Association (of North Carolina)

Charlotte, NC 

May 10, 2013

Health Care Reform and Impact on Employers 

South Carolina Bar Employment and Labor Law Section 

Columbia, SC 

May 17, 2013

Health Care Reform: No Calm Before the Storm   

South Carolina Manufacturers Alliance Human Resources Division Meeting

Charleston, SC

October 18, 2013

• The proposed regulations provide that the employer penalty provisions require coverage for both full-time employees and their dependents.  The proposed regulations define “dependents” for purposes of employer shared responsibility rules as the employee’s children up to age 26 (their 26^th birthday), and as not including spouses.  The proposed regulations provide that, for large employers that do not now offer dependent coverage to full-time employees, no penalty will be imposed for failing to offer dependent coverage during their 2014 plan year, provided that the employer takes steps during the plan year toward satisfying the requirement. 
• The proposed regulations clarified that penalties do not apply if an employer offers “minimum essential coverage” to at least 95% of full-time employees and their “dependents.”

Based on these proposed regulations, employers may have additional issues to consider when it comes to their employee benefit plans.  It should be noted that the government is accepting comments regarding the proposed regulation.  Comments on the proposed rule must be received by March 18, 2013. Comments may be submitted electronically through the federal eRulemaking portal or sent by mail to: CC:PA:LPD:PR (REG-138006-12), Internal Revenue Service, room 5203, POB 7604, Ben Franklin Station, Washington, DC 20044.

In addition, the IRS intends to hold a public hearing on the proposed rule on April 23, 2013 at 10:00 a.m. in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Suggested topics the IRS should address at this hearing must be submitted by April 3, 2013.

New HIPAA regulations are effective this March 2013

The final regulations contain numerous important changes which covered entities and business associates must begin reviewing to meet the September 23 deadline.  The most significant of these changes include: 

• Analyzing Breaches of Protected Health Information (PHI).  Under current regulations, a covered entity is not required to find a breach of PHI has occurred unless there is a “significant risk of harm” to the individual whose PHI has been disclosed.  The final regulations adopt a much less rigid standard, which presumes a breach has occurred “unless the covered entity or business associate, as applicable, demonstrates that there is a low probability that the protected health information has been compromised.”  The likely effect of this change is that an unauthorized disclosure of PHI will be more likely to constitute an actual breach, triggering notice obligations to the individual, and in large cases, to HHS and even the media.  Thorough investigations of any unauthorized disclosures will be even more important in light of this lower standard. 
• HIPAA Penalties Apply Directly to Business Associates.  The final regulations state that potential penalties for failure to comply with the Privacy Rule and the Security Rule can apply directly to business associates who mishandle PHI.  In addition, business associates are now defined to include subcontractors, such as vendors which assist with electronic transmission services or who otherwise have access to PHI.  Also, if the business associate is deemed an “agent” of the covered entity, the covered entity may also be subject to penalties, even if it has not mishandled PHI itself. 
• Patient Access to Electronic Records.  Patients now have the right to obtain electronic copies of their medical records in substantially the same form in which they are maintained by the covered entity.   
• Some Disclosures to Health Plans Restricted.  The final regulations also state that a group health plan does not have the right to receive PHI on treatment an individual has paid for in cash or on a completely out-of-pocket basis. 
• Sale of PHI.  A covered entity or business associate may not sell or otherwise receive any benefit from providing PHI to another entity, unless the covered entity or business associate has previously obtained an authorization from each affected individual.
• Marketing Rules.  Prior authorization from each affected individual is now required for all treatment and healthcare operations communications where the covered entity is compensated by a third party whose service or products is being marketed. 
• Notice of Privacy Practices.  Covered entities are required to revise certain aspects of these forms and redistribute them to existing patients.   
• Genetic Information.  The final regulations incorporate requirements of the Genetic Information Nondiscrimination Act (GINA) which generally prohibit health plans from using or disclosing genetic information for underwriting purposes.  
• Penalties for Willful Neglect.  Enhanced penalties now apply to noncompliance issues which arise from the willful neglect of the covered entity. 

Action Plan Items

Covered entities and business associates should start planning now to implement these changes over the next six months, especially in light of the increasing number of random HIPAA audits and increased scrutiny of complaints about PHI from individuals.  We recommend, at a minimum, that you review and update your business associate agreements, Notices of Privacy Practices, individual authorization forms, and internal policies on privacy, security, and breach notifications to incorporate these new requirements.  We also suggest additional training for personnel who handle or otherwise have access to PHI, especially on issues related to possible unauthorized disclosures and resulting breaches of the Privacy and/or Security Rules.

Although the new regulations do not contain sweeping changes, there are two important aspects of wellness programs which are affected.

Reward Percentages Increased

Current regulations set the maximum permissible reward for a program that requires meeting a certain health-related goal (e.g., lowering cholesterol, controlling diabetes) at 20% of the cost individual or family coverage under the group health plan.  For plan years beginning on or after January 1, 2014, however, the maximum permissible reward can be as much as 30%.  Also, the reward for programs designed to prevent tobacco use can be as much as 50%, which will be a significant incentive for employees and dependents to stop using tobacco products.  Keep in mind that these percentages apply to the total of all rewards offered under a wellness program and not to each individual part aimed at a specific health issue.

“Reasonable Alternative Standard” Clarified

 The new regulations also provide additional information about the “reasonable alternative standard” required for all wellness programs which require meeting a certain health-related goal.  A “reasonable alternative standard” is another way for an employee or dependent to receive the wellness program reward(s) if the employee or dependent cannot meet the health-related goal for medical reasons.  The new regulations provide:

• Simpler and more clear model language describing the reasonable alternative standard in health plan and wellness program materials distributed to employees and dependents.
• An option for the health plan to waive the standard altogether for individuals unable to meet the health-related goal for medical reasons.
• An option for the health plan to determine a reasonable alternative standard on a case-by-case basis, depending on the specific situation of the individual.
• If the completion of an educational program is required, the employer must provide or locate the program and pay for it.
• If the alternative standard requires participation in a diet or weight-loss program, the employer must pay any program or membership fees.  However, the employee is not required to pay for the cost of food.
• If the alternative standard requires compliance with the recommendations of a medical professional hired or employed by the employer, then the employer must provide another alternative if the individual’s own physician disagrees with the recommendations.  
• The employer can still request a statement from the individual’s physician that he or she cannot meet the alternative standard for medical reasons, but only if such a request is “reasonable under the circumstances.”
• If an individual is denied a program reward for failure to meet an alternative standard, then such denial is eligible for external review under the health plan’s claims and appeals procedures

Employer Action

Although these new [health care] regulations are not effective until 2014, we encourage you to start planning now to determine what changes you may want to make to the reward percentages available to wellness program participants.

Although these new regulations are not effective until 2014, we encourage you to start planning now to determine what changes you may want to make to the reward percentages available to wellness program participants.  Also, most of the changes to the reasonable alternative standard aspect of the program are mandatory and not optional, so revisions to your health plan documents and wellness program materials will be necessary.  Finally, now that the U.S. Supreme Court has upheld the Affordable Care Act and President Obama has been reelected, you can expect more and more regulations changing your health care plan in the coming months.

Last month, the Sixth Circuit affirmed a Michigan Bankruptcy Court and District Court order approving a corporate taxpayer's request for refund of FICA (Federal Insurance Contribution Act) taxes on severance payments to terminating employees.  In re Quality Stores, Inc., 693 F.3d 605 (6th Cir. 2012).  As part of a company-wide reduction in force, Quality Stores paid severance to terminating employees and subsequently collected and remitted the total FICA tax to the IRS, largely in an abundance of caution.  Quality Stores, however, disagreed with having to withhold and remit FICA taxes on these severance amounts; it thus filed an IRS refund claim, seeking to recover $1 million in FICA tax paid (for itself and over 1,800 former employees). 

In its refund claim, Quality Stores asserted that the severance payments were not “wages” for FICA purposes, but instead, it had 26 U.S.C. § 3402 supplemental unemployment compensation benefits ("SUB pay"), and that such pay was not taxable under FICA.  Quality Stores, 693 F.3d  at 610.  The IRS rejected Quality Stores' refund request and contended that the SUB pay must be conditioned upon the employees' receipt of other unemployment benefits in order to be exempt from FICA taxes. The IRS further contended that the SUBs must be paid in installments, rather than in a lump sum, as was the case with Quality Stores.

Ultimately agreeing with Quality Stores, the Sixth Circuit rejected the IRS's argument as an imposition of additional limitations that neither law nor regulation required. The court found that the company made SUB payments to assure workers of unemployment security and to reward employees for tenure, rather than deferred compensation for services rendered.  Consequently, the court determined that the SUB payments were not "wages" for purposes of FICA, even though the payments were "wages" for federal income tax withholding. The Sixth Circuit’s decision creates a split, as the Federal Circuit has approved the IRS's position that a taxpayer that pays SUB pay is subject to FICA tax.  CSX Corp. v. United States, 518 F.3d 1328 ( Fed. Cir. 2008).

Potential Tax Refund (or Savings) for Corporate Taxpayers with a Presence in Michigan, Ohio, Tennessee, and Kentucky.

Sixth Circuit Offers Savings or Refund Potential.

For now, corporate taxpayers should still comply with FICA on SUB pay until the courts (likely the United States Supreme Court) or Congress settles this matter. However, any such corporate taxpayer who downsized and paid severance (and FICA) should consider protecting its rights by filing a protective refund claim with the IRS before the 3-year period of limitation expires if the Quality Storesdecision continues to stand (but see below regarding the Department of Justice).  The right to file a refund claim for the 2009 tax year expires April 15, 2013, for employers who timely filed their quarterly Forms 941.  Though the Sixth Circuit's opinion applies principally to employers in Michigan, Ohio, Tennessee, and Kentucky, it could have further reaching implications for those corporate taxpayers with headquarters or mere operations in those states (where employees from those operations are terminated, with severance).  This might create a venue or forum opportunity taxpayers in similar severance situations to challenge an IRS rejection.   A purportedly SUB payment, with an ability to have a case appealable to the Sixth Circuit (where there is now taxpayer-favored precedent), could be the difference in millions of dollars in potential savings for employers and employees.  

DOJ Involvement and/or Supreme Court Review.

On October 18, the Justice Department filed a petition for rehearing en banc in the Sixth Circuit regarding Quality Stores.  Such a rehearing, exceedingly uncommon under normal circumstances, asks the entire Court of Appeals (rather than the three sitting judges for any one argument) to reconsider.  The Justice Department (acting on behalf of the IRS in this instance) filed the motion for two strategic purposes: first, if the Sixth Circuit agrees to rehear, there is a chance the court will reverse itself and favor the government’s position, treating the severance as “wages” for FICA purposes; and second, even if the court declines to rehear or affirms its earlier decision, this accords the government time to file a petition for certiorari to the Supreme Court.    

$104 Million. . . Just for Blowing the Whistle on a Tax Evader. . .

Under the IRS Whistleblower Program, the federal agency will reward people (and certainly current and former employees are a great source for) solid information about a non-compliant taxpayer.  In fact, it just awarded $104 million to a former UBS employee who alerted the IRS to his company's tax evasion scheme with respect to its clients.  This six figure award, even when that former UBS employee had served time in prison for the very role he had played in that tax evasion!  Read this for a brief description of the convict who netted the $104 million.

It can't be taken lightly.  Employees will by-pass their own management to complain directly to the IRS about tax issues they suspect, particularly if the prospect of an award so far exceeds any holiday bonus they may get or any class action of which they think they should take part.

How would several 10-15 hour per week employees be defined?

For purposes of determining large employer status, an employer would aggregate part-time employee and then divide by 30 to determine the number of full-time equivalents.  Part-time employee hours are used to determine the full-time equivalent for purposes of determining of an employer is "large," but the employer does not have to pay a penalty for part-time employees.  

Once an employer drops a plan and pays the penalty, are employers able to reinstate a plan in future years, or are plans no longer an option once the employer has paid the penalty?  

The employer would be able to start a new plan.  Once the employer offers qualifying health coverage, the penalties would cease. 

When is the non-discrimination clause effective?

Health Care Reform initially required compliance with the nondiscrimination rules for insured plans for plan years beginning on or after September 23, 2010.   However, IRS Notice 2011-1  provides that employers can postpone compliance until the agencies have issued regulations or other guidance regarding the rules.

Will the employees need to enroll their dependents to avoid the penalty when they file their taxes?

Dependents will be required to have coverage, although the coverage does not have to be through the employer’s plan.

Imagine the following situation: A business that sponsors a 401(k) plan is unable to attract enough employees to the plan for two years running, and fails the average deferral percentage (ADP) discrimination test.  As a result, highly compensated employees (HCEs) must take back contributions, losing out on an opportunity to contribute the maximum into retirement. 

In such a case, some advisors may rush in with an almost knee-jerk recommendation—“Put in automatic enrollment”— not anticipating how this choice, if wrongly implemented, could prove to be a costly one. 

With the 1996 Small Business Job Protection Act and, later, the 2006 Pension Protection Act, Congress endorsed an employer’s ability to mandate savings by its employees by simply taking a small percentage of each paycheck and depositing it into the retirement plan. “Auto” enrollment generally sidesteps annual discrimination tests and HCEs may maximize their retirement contribution annually. 

On its face, auto enrollment can seem like a great solution. . .

. . .  That is, unless the employer “forgets” to withhold from employee paychecks, for example, after failing to tell its payroll company to make deductions from employee gross pay. . .  or the employer acquires another company, and although the plan document requires that new employees contribute 3% of their paycheck automatically, the employer neglects to enroll them in the plan.  

The legal/audit/TPA compliance cost of such missteps is exorbitant.  What once would have been employee payroll money deposited into the plan is now money that company itself  has to contribute, with any match, plus interest.  This mandatory correction is how the IRS and Department of Labor punish this type of forgetfulness and, over a period of years, the cost of these mistakes can add up.  Advisors who fail to provide adequate education on the impact of auto enrollment on daily operations are likely to find themselves with disgruntled clients.

The moral of the story: When proposing auto enrollment, be sure to follow through with implementation details or your client — and your relationship — may suffer the consequences.