EMPLOYEE BENEFIT PLAN LATE SUMMER CONSIDERATIONS
We hope all of our clients and friends are having a terrific Summer! As you know, we tend to keep our alerts to a minimum because we know your inboxes are regularly filled with “breaking news” and the like. However, we thought this was a good time to check in on priorities as we head towards a busy Fall and year-end.
Retirement Plan Issues – Early deadline is delayed
As many of you know, Congress passed SECURE Act 2.0 late last year. This retirement legislation was filled with “goodies” for the retirement community and greatly expanded opportunities for savings. Most of the aspects of the legislation are voluntary, so there was little need for plan sponsors to be immediately proactive on a large majority of the provisions, although there has been a lot of “building” work for recordkeepers in the background.
One important mandatory change affects “catch-up contributions.” The change is that individuals whose compensation exceeded $145,000 in the prior year are required to make catch-up contributions as Roth (after-tax) elective deferrals. As a reminder, catch-up contributions are an extra savings opportunity above and beyond the standard limit for elective deferrals—the standard limit is $22,500 and the catch-up contribution limit is an additional $7,500 in 2023—for those individuals who are 50 or older. Employees who are at least age 50 and whose compensation does not exceed the limit noted above can continue to make catch up contributions as pre-tax elective deferrals.
An issue with this new requirement is that your plan may not have Roth features as part of the plan design, and this legislation is, as a practical matter, forcing the plan to introduce Roth (assuming, as we might expect, that you still want to offer catch-up contributions). Plus, because of a peculiarity in the legislation, it would appear that retirement plans would need to have Roth contributions available if the Plan intends to continue to offer catch-up contributions for anyone in its entire population. It is not yet clear how the IRS will interpret this issue.
The bigger issue is that Plan Sponsors and recordkeepers have been struggling to timely implement these changes by the January 1, 2024 deadline under SECURE Act 2.0.
DEADLINE DELAYED: On August 25, 2023, the IRS announced a two-year “administrative transition period”, until January 1, 2026, in order to help Plan Sponsors and recordkeepers comply with this new requirement to ensure a smoother transition. The IRS guidance specifically explains that during this two-year window, any catch-up contributions for individuals making over $145,000 will be deemed to satisfy the new catch-up contribution requirement even if the contributions are not yet designated as Roth contributions, and a plan that does not yet provide for designated Roth contributions will be deemed to satisfy the new requirement during this two-year period.
The IRS acknowledged that further guidance is needed such as (1) clarifying whether this new requirement applies to individuals who do not have wages subject to FICA pursuant to Section 3121(a) of the Code, (2) whether a plan administrator and employer would be permitted to automatically treat an election by a participant for pre-tax catch-up contributions as a designated Roth contribution, and (3) whether wages are aggregated for purposes of determining the $145,000 threshold for plans that are maintained by more than one employer (including a multiemployer plan). We will continue to track these developments.
You may already have met with your recordkeeper based on the previous January 1, 2024 deadline. If you had the intention of introducing Roth features, you should continue that momentum in light of the fact that there are many SECURE 2.0 provisions that will require Roth which are available during the next two years. Plus, January 1, 2026 will be here before we know it. Regardless, you do not need to require individuals making over $145,000 to make catch-up contributions as Roth contributions for 2024 and 2025.
Finally, there are many elective changes in SECURE Acts 1.0 (2019) and 2.0 (2022), and many of you already have adopted provisions required under the CARES Act (2020). We have written about some of these items in earlier e-alerts, and advised of the delayed amendment deadline in 2025 (2027 for governmental plans). Still, plans must be administered (including notifying participants) as though the changes had been made to the plan prior to this deadline. Therefore, we recommend that you take the following actions now:
- Check your plans and consider amending your plans earlier than the deadline to ensure your plans reflect proper administration and operation.
- For the voluntary aspects of the various laws (particularly, SECURE Act 2.0), reach out to us to discuss these permitted changes this year or in early 2024 to determine what features may be appropriate for your plan.
- Confirm that you are complying with any mandatory aspects of these new laws, such as the new catch-up contributions requirements discussed above and the changes these new laws made to the “required minimum distribution” rules.
Please let us know if you want to discuss these features.
Health & Welfare Issues
Health and welfare plans, and the service providers for these plans, are still in the roll-out phases of the Consolidated Appropriations Act, 2021 (CAA), which covered a lot of areas impacting this space. Plan sponsors should be paying attention.
First, by now, most plan sponsors are likely in receipt of “fee disclosures” from your health and welfare brokers and consultants. As a reminder, ERISA requires brokers and consultants expecting $1,000 or more in direct and indirect compensation for services provided to group health plans to make detailed disclosures to the “responsible plan fiduciary” regarding their services and compensation. Some plan sponsors may be a bit overwhelmed on how to digest and evaluate such information. We have suggested some fiduciary steps in an earlier e-alert.
The same “Excessive fee” class action lawsuits against retirement plans (which continue to be brought) now are being filed against health & welfare plans. Indeed, a leading plaintiffs’ law firm responsible for the wave of ERISA retirement plan litigation has begun to post advertisements on its website for health plans of large employers, apparently to begin a wave of “excessive fee” lawsuits, and we expect “copy cats” to follow. As a natural consequence of this increase in risk exposure, insurers of plan fiduciaries (i.e., issuers of “ERISA riders” to E&O policies) are increasing premiums, reducing coverage or denying coverage altogether.
These dangers make it imperative that employers recognize that the selection, oversight, and contracting of service providers to ERISA plans as a fiduciary priority for their plans. An accepted best practice (endorsed by the DOL and practitioners) is to vet retirement and medical plan vendors every 3-5 years. In response to this climate, and because this vetting is to ensure legal compliance, S&D performs on behalf of our plan fiduciary clients both “Requests for Proposals” and “Incumbent Reviews” (a more friendly and less extensive process whereby the vendor is reviewed against the market to ensure fiduciary compliance). This process routinely achieves wonderful results for our clients, and, as a fiduciary expense, the fees for this service can generally be paid from plan assets.
Second, the CAA also prohibits the inclusion of any so-called “gag clauses” in health plans’ services agreements. Specifically, this means that a group health plan is prohibited from maintaining or entering into an agreement with a service provider or a third-party administrator that provides access to a provider network that restricts the plan from:
- Providing provider-specific cost or quality of care information or data to referring providers, the plan sponsor, participants, beneficiaries, or enrollees, or eligible individuals;
- Electronically accessing de-identified claims and encounter data for each participant, beneficiary, or enrollee; and
- Sharing such information, consistent with applicable privacy regulations.
Plans are required to submit an annual attestation to the government that the plan is not a party to an agreement that includes these restricted provisions. The first annual attestation is due by December 31, 2023 (covering the period of December 27, 2020 through the date of the attestation) with subsequent attestations due by December 31 of each year thereafter. Annual attestations are made through CMS’s Health Insurance Oversight System (HIOS). If a fully insured plan, the insurer’s submission of the attestation will suffice. If a self-funded plan, the TPA can submit the attestation on the plan sponsor’s behalf, so long as there is a written agreement with the TPA that it will do so. As a result, you should:
- Contact your TPA and any carriers to ensure there are no prohibited gag clauses in your existing service contracts. We recommend an amendment to your current contracts that, broadly speaking, “overrides” any prohibited provisions. This approach may vary by TPA or carrier.
- Confirm with each TPA or insurer that provides your plan with access to a provider network that they will be submitting the attestation. For example, if you have separate medical, behavioral health or pharmacy benefit service contracts, you will need to coordinate the required attestation with each of those TPAs.
- Enter into a written agreement with your TPAs to handle the attestation, if required.
- If your TPA will not submit the required attestation, authorize an appropriate individual to submit the attestation for the plan. Detailed instructions, a user manual, and a reporting template are available on CMS’s website.
Remember that these requirements are on the plan sponsor. Although a plan sponsor can rely upon the TPA to take some of the steps on its behalf, the plan sponsor must ensure compliance, and the plan sponsor should document compliance to governing/fiduciary committees.
Third, as highlighted in a prior e-alert, group health plans that are subject to the Mental Health Parity and Addiction Equity Act (MHPAEA) are required to complete and document a Non-Quantitative Treatment Limitation (NQTL) comparative analysis under the CAA. Although this requirement has been in effect since early 2021, many plans have delayed and/or struggled to comply. However, regulatory agencies continue to focus on access to mental health treatment as a top enforcement priority and recently reminded stakeholders of that in Proposed MHPAEA Regulations issued on July 25, 2023. If finalized, these regulations would significantly expand compliance obligations with respect to NQTL comparative analyses beginning with plan years starting in 2025.
Given the continued push for MHPAEA compliance (and in anticipation of further developments and requirements), we urge plan sponsors to ensure that a NQTL comparative analysis is performed, documented and up to date as required by the CAA.
We continue to experience an uptick in IRS and DOL field audits of both retirement and health and welfare plans, and believe this trend will continue. For example, the IRS continues to increase the number of IRS employees on the audit side, while reducing the number of IRS employees on the voluntary compliance side, and the DOL is creating task forces to review certain aspects of the CAA.
We strongly recommend that plan sponsors get legal counsel involved immediately upon receipt of a notice from the IRS or the DOL of the audit, and not rely upon vendors who are not experienced and versed in managing these regulatory actions. There are a number of areas where we continue to see clients get in trouble, including the DOL’s hyperfocus on late deposits and missing participants (retirement plans), enforcement of the Mental Health Parity and Addiction Equity Act and maximum out of pocket features (health plans), and evolving cybersecurity rules (all ERISA plans).
Many of these audits are the result of information provided in the annual Form 5500 for the plan, which increasingly require legal conclusions to complete the Form. For this reason, we recommend that you have us review your Form 5500 before it is filed.
Please call us early if you have the unfortunate experience of receiving an audit letter from the IRS or the DOL or if you would us to review the Forms 5500 for your plans before they are filed.
Please reach out to us if we can be of assistance with any of your compliance efforts, and we hope you all have a wonderful end of Summer!