IRS Releases Publication 5164, Test Package for 2019 Electronic ACA Filers
The IRS recently released an updated version of Publication 5164, entitled “Test Package for Electronic Filers of Affordable Care Act (ACA) Information Returns (AIR),” for tax year 2019 (processing year 2020). The publication describes the testing procedures that must be completed by those filing electronic ACA returns with the IRS, specifically Forms 1094-B, 1095-B, 1094-C, and 1095-C. As a reminder, those who are filing 250 or more forms are required to file electronically with the IRS.
Importantly, the testing procedures apply to the entity that will be transmitting the electronic files to the IRS. Thus, only employers who are filing electronically with the IRS on their own would need to complete the testing. If an employer has contracted with a software vendor who’s filing on behalf of the employer, then the testing and this publication would not apply to the employer, but would apply to the software vendor instead.
Similar to prior years, the IRS provides two options (see pages 12-13) for submitting test scenarios for reporting year 2019: predefined scenarios and criteria-based scenarios. Predefined scenarios provide specific test data within the submission narrative for each form line that needs to be completed. Criteria-based scenarios give more flexibility to test and create data that may be unique to their organization when completing the necessary test scenarios. Correction scenarios are also provided (see page 17), but those are not required in order to pass testing.
As a reminder, electronic filing of 2019 returns will be due March 31, 2020. Most large employers that are required to file the forms work with third-party vendors in performing electronic filing, so the testing outlined in Publication 5164 wouldn’t apply to the employer. But if the employer is filing on their own, they’ll want to review the updated testing requirements in Publication 5164. Large employers that are required to file electronically, and would like information on a third-party vendor who can assist, can contact PPI for more information.
IRS Finalizes Hardship Distribution Rules
On September 23, 2019, the IRS published the final rule changing the requirements that must be met for a participant to take a hardship distribution. As background, the IRS proposed new rules for hardship distributions back in November 2018 (as discussed in our November 29, 2018, Retirement Update for Compliance Corner ).
The final rules are very similar to the proposed rules. As such, participants will be able to take a hardship distribution even if they have not exhausted all plan loans. They will also be allowed to continue contributing to their 401(k) after they take a hardship distribution. Likewise, the proposed rule would allow participants to draw hardship distributions from qualified matching contributions and qualified nonelective contributions (if their employer plan sponsor chooses to allow it).
There were a few clarifying changes to note:
- The safe harbor for expenses incurred due to federally declared disasters has been updated to make it clear that employees can only receive a hardship distribution for their own losses, and not for the losses of their relatives or dependents. It also clarifies that there is no deadline for requesting a distribution and that there is no extended deadline for employers that want to adopt disaster-related hardship provisions.
- The funds that are available for hardship distributions can include safe harbor contributions.
- Participants can apply for a hardship distribution as long as the distribution is necessary to satisfy the participant’s financial need. They can do so even if they have access to funds that will be needed for another purpose soon. They can certify this need by telephone.
With some exceptions, the final regulations apply to distributions made after January 1, 2020. However, parts of the rule have been in effect since January 1, 2018.
Employers offering hardship distributions should determine how this rule will affect their plan and discuss these final rules with their advisor.
Justice Department Contends CalSavers Is Preempted by ERISA
On September 13, 2019, the U.S. Department of Justice (DOJ) filed a Statement of Interest in Jarvis Taxpayers Association et al. v. CA Secure Choice Retirement Savings Program, asserting that California’s mandatory payroll deduction retirement program (CalSavers) is preempted by ERISA. The submission follows a DOJ request to the California district court to delay ruling on a pending dismissal motion. According to the DOJ, the purpose of the filing was to advance a correct and consistent interpretation of the scope of ERISA preemption and to promote the voluntary establishment of employer-sponsored retirement plans.
As background, Congress enacted ERISA in 1974 to ensure that employees would receive the benefits to which they were entitled under employer-sponsored plans. Significantly, ERISA did not require that employers establish benefit plans, but instead provided incentives for employers to do so. ERISA also established a uniform set of plan administrative rules and procedures, so employers operating in more than one state did not have to navigate various state laws. As federal law, ERISA was designed to supersede or “preempt” any conflicting state laws.
The Secure Choice Act was enacted by the California legislature and applies to California employers that have five or more employees and do not already sponsor an ERISA retirement savings plan. These employers are required to automatically enroll employees in individual retirement accounts (IRAs) managed by a state board, and to fulfill ongoing responsibilities with respect to their employees covered by the CalSavers program. The DOJ indicated that it had a heightened interest in a preemption ruling in this case because the Secure Choice Act was the first amongst similar state auto-IRA laws to be challenged.
In the brief, the DOJ asserts that the California law is preempted by ERISA because ERISA plans are vital to its framework: an employer is compelled to either establish an ERISA plan or participate in the California equivalent. So, an employer who elects not to sponsor an ERISA plan must now enroll employees in CalSavers and follow the state’s administrative structure. Accordingly, the Secure Choice Act obstructs ERISA’s voluntary plan sponsorship and uniform national administrative scheme.
Additionally, the DOJ emphasizes that CalSavers is a plan as defined by ERISA and Ninth Circuit precedent because the benefits, beneficiaries, funding source, and procedures for receiving benefits can be reasonably ascertained from the Secure Choice Act’s terms. The state law also requires an employer to determine and monitor eligibility, payroll deductions, and contribution rates for employees, thus assuming obligations analogous to those of maintaining an ERISA plan. As a result, the Department alternatively argues, the CalSavers program as maintained by an employer is actually an ERISA plan.
The brief further notes that the existing 1975 IRA Safe Harbor, which provides an exception from ERISA coverage for payroll deduction IRAs, is not applicable to CalSavers because the program is not “completely voluntary.” Past precedents have established that “completely voluntary” for purposes of the exception requires an employee’s affirmative election to participate (as opposed to automatic enrollment and the opportunity to opt out, as is the case under the CalSavers regime).
The DOJ’s filing is significant because it reinforces the federal government’s role as primary regulator of employer sponsored retirement plans. The core issue is one of federal preemption and the scope of ERISA’s application. Clearly, the DOJ views the obligations imposed by the CalSavers program as conflicting with and preempted by ERISA.
It is not yet known to what extent the DOJ’s opinion will influence the district court’s ruling on the pending dismissal motion. However, employers in California to which the CalSavers program applies will likely want to follow this litigation. Although not directly affected by the immediate ruling, employers in other states with similar IRA programs may also wish to monitor this development.
IRS Releases Draft Version of 2019 Form 5500-EZ
On September 23, 2019, the IRS published a draft version of the 2019 Form 5500-EZ return/report. As background, IRS Form 5500-EZ is an annual filing requirement for retirement plans that are either a one-participant plan or a foreign plan. This draft is only for informational purposes and may not be used for 2019 Form 5500-EZ filings, but employers should familiarize themselves with the form in preparation for 2019 plan year filings.
The IRS does not appear to have made any changes to this year’s form. While many employers outsource the preparation and filing of this form, employers should also familiarize themselves with the form’s requirements and work closely with outside vendors to collect the applicable information.
IRS Releases Draft Instructions for 2019 Form 8955-SSA
On September 13, 2019, the IRS published a draft version of the instructions for 2019 Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits. As background, Form 8955-SSA is used to report information about participants who separated from service during the plan year and are entitled to deferred vested benefits under the retirement plan. This draft of the instructions is only for informational purposes and may not be used for 2019 Form 8955-SSA filings, but employers should familiarize themselves with the instructions in preparation for 2019 plan year filings.
The IRS does not appear to have made any changes to this year’s instructions. While many employers outsource the preparation and filing of this form, employers should also familiarize themselves with the form’s requirements and work closely with outside vendors to collect the applicable information.
Reminder: Medicare Part D Notice to Employees Deadline Is Oct. 14, 2019
Employers must notify individuals who are eligible to participate in their medical plan of whether the plan’s prescription drug coverage is "creditable" or "non-creditable" as compared to Medicare Part D coverage.
As a reminder, the Medicare Part D notice of creditable coverage should be distributed to employees by October 14, 2019. This notice serves to inform Medicare-eligible individuals of whether or not their employer group coverage is creditable. That information is necessary to help such individuals avoid paying higher premiums (also known as late enrollment penalties) for Medicare Part D coverage.
Employers should consult with their service providers to determine whether their coverage is creditable using either the simplified determination method or an actuarial analysis. Also keep in mind that CMS provides a model notice for employers.
What are the timing rules for employer and employee HSA contributions? What should be done if HSA contributions are submitted late?
There are some general rules pertaining to timeliness of HSA account contributions. While employer contributions to an HSA don't have a particular “due date,” the employer should sufficiently follow the plan terms. So if an employer communicates to employees that employer contributions will be contributed at a specific interval (such as per pay period), the employer should contribute based on that timetable. As an outside compliance limit, the IRS generally allows employers to contribute to employees' HSAs through the tax filing deadline for the year in which the HSA contributions were due.
On the other hand, participant contributions withheld from employee paychecks, including employee-deferred HSA contributions, are subject to the DOL's plan asset regulations governing welfare and pension benefits. Specifically, participant contributions become plan assets "as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets, but in no event later than 90 days after the payroll deduction is made." This generally means the outside limit for submitting contributions is 90 days, but this is not to be considered a safe harbor because contributions should nearly always be segregated in a matter of days rather than weeks.
This deadline applies to participant contributions coming into an employer's possession under the welfare benefit plan, including personal checks used to pay COBRA contributions, premiums during FMLA leave, retiree premiums, salary reductions under a cafeteria plan, and HSA contributions. As such, employers should contribute employee-deferred HSA contributions to their accounts as soon as the funds can be separated from the employer’s general account. In this way, the deadline for forwarding HSA contributions is similar to the deadline for forwarding employee 401(k) deferrals.
Keep in mind, though, that there is a safe harbor for small employers for this purpose. Employers with fewer than 100 participants can utilize a DOL "safe harbor" that gives them up to seven business days to deposit plan assets (including HSA contributions) to an employee's account.
When an employer has failed to forward participant contributions on a timely basis, there are procedures available to correct both the fiduciary breach and the prohibited transaction that has occurred. There is a DOL correction program available to employers that commit this failure. The Voluntary Fiduciary Correction Program (VFCP) allows employers to correct failures (such as failure to forward HSA contributions on a timely basis) by submitting an application for the program and filing a Form 5330, acknowledging the prohibited transaction. However, as with any compliance failure, an employer that fails to timely forward contributions should consult with legal counsel.
CA Passes Law to Avoid Misclassification of Employees
On September 18, 2019, Gov. Newsome signed AB 5 into law. The new law codifies the decision of the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal.5th 903 (April 30, 2018). Prior to the ruling, the determination of whether an individual was an independent contractor or employee was based on a totality of facts analyzed through a multiple-factor standard. The Superior Court established a new three prong test, commonly known as the ABC test. Effective, January 1, 2020, AB 5 codifies these provisions into California law. (See our May 16, 2018 article in Compliance Corner for more information.)
California workers are presumed to be common law employees. They can only be classified as independent contractors if they satisfy all three of the following conditions:
- The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in facts
- The worker performs work that is outside the usual course of the hiring entity's business
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
The law provides many exemptions from the requirement, including the following:
- California licensed insurance agents
- Physicians, surgeons, dentists, podiatrists, psychologists, or veterinarians performing professional or medical services
- Lawyers, architects, engineers, private investigators, or accountants who have an active California license
- Securities broker-dealers or investment advisers or their agents and representatives that are registered with the Securities and Exchange Commission or the Financial Industry Regulatory Authority or licensed by the State of California
- Direct salespeople
- Commercial fishermen working on American vessels
The previous multi-factor test will still apply to certain professional services contracts where the worker meets the following conditions. Professional services includes marketing, human resources, graphic design, travel agency, grant writer, photographer, freelance writer, and licensed manicurist. The worker must:
- Maintain a business location separate from the hiring entity’s location, which may be the worker’s residence
- Have a business license, in addition to any required professional licenses (effective July 1, 2020)
- Have the ability to set or negotiate their own rates
- Have the ability to set their own hours
- Have contracts with other hiring entities or hold themselves out to other potential customers
- Customarily and regularly exercise discretion and independent judgment in performance of services
The stated purpose of the law is to reduce the harm caused to misclassified workers who miss out on payment of payroll taxes, workers compensation coverage, Social Security contributions, unemployment insurance, and state mandated disability insurance. Thus, the law doesn’t directly change eligibility for group health plan coverage under ERISA or the ACA’s employer mandate. However, an employer will need to carefully consider the classification of a worker as an independent contractor or a common law employee.
The employer mandate requires large employers (those with 50 or more full-time employees, including equivalents) to offer minimum value, affordable coverage to common law employees working 30 hours or more per week. If an independent contractor will be reclassified as a common law employee, the large employer will likely need to offer them coverage if the employee is working full-time hours. Otherwise, the employer could be at risk for a penalty under the employer mandate. Depending on the percentage of affected workers, the employer could be at risk for the more costly Penalty A for failure to offer coverage to substantially all full-time employees (95%).
An employer who wishes to review their employee classifications should contact outside counsel. If workers are found to be misclassified, there may be previous tax liability and filings to be addressed as well as future benefit offerings and labor law protections.
Maximum Benefit for Behavioral Therapy for Autism Spectrum Disorder Increased
On September 13, 2019, the Department of Insurance issued Bulletin Number 2019-9, which relates to the maximum benefit for coverage of behavioral therapy for autism spectrum disorder. The purpose of the bulletin is to announce that the annual adjustment of the maximum benefit coverage of behavioral therapy for autism spectrum disorder is increased from $57,300 to $58,300 for the calendar year beginning January 1, 2020. Although the bulletin is directed towards insurers, South Carolina employers should be aware of the new maximum benefit for behavioral therapy.
Diagnostic Mammography Coverage Required
On June 15, 2019, Gov. Abbott signed HB 170 into law. This law requires plans that provide coverage for a screening mammogram to provide coverage for a diagnostic mammogram that is no less favorable than the coverage for a screening mammogram. The bill defines “diagnostic mammogram” as an imaging examination designed to evaluate a subjective or objective abnormality detected by a physician in a breast, an abnormality seen by a physician on a screening mammogram, an abnormality previously identified by a physician as probably benign in a breast for which follow-up imaging is recommended by a physician, or an individual with a personal history of breast cancer.
This law takes effect on September 1, 2019, and will apply to any health benefit plan that is delivered, issued for delivery, or renewed on or after January 1, 2020.
This material was created by PPI Benefit Solutions to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The service of an appropriate professional should be sought regarding your individual situation. PPI does not offer tax or legal advice. "PPI®" is a service mark of Professional Pensions, Inc., a subsidiary of NFP Corp. (NFP). All rights reserved.
Industry news topics covered in the Compliance Corner are chosen based on general interest to most employers and may include articles about services not available through PPI.
What are the timing rules for employer and employee HSA contributions? What should be done if HSA contributions are submitted late?