Compliance Corner Archives

On Dec. 2, 2016, the U.S. Supreme Court granted certiorari to three cases involving church affiliated hospitals and whether ERISA preemption applies. In December 2015, the United States Court of Appeals for the Third Circuit (Third Circuit) (ruled in St. Peter’s Healthcare v. Kaplan (2015 WL 9487719(3d Cir. 2015)), that the employee pension plan maintained by the church affiliated hospital was subject to ERISA and did not fall under ERISA’s exception for church plans. Similar decisions were issued by the Seventh Circuit in March 2016 in Advocate Health Care v. Stapleton (2016 WL 1055784(7th Cir. 2016)); and the Ninth Circuit in July 2016 in Dignity Health v. Rollins (2016 WL 3997259(9th Cir. 2016)).

Employee retirement and health plans established and maintained by churches are generally exempt from ERISA. At issue is ERISA § 3 (33)(C)(i), which defines a church plan as follows:

“A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches.”

The circuit courts ruled that in order for a church affiliated plan to be exempt from ERISA, the plan must initially be established by the church. In other words, according to the recent rulings, the employee benefit plan would need to be established by the church with which the entity is affiliated. The plan could not be established by the church affiliated entity.

The rulings acknowledged that the IRS and DOL have interpreted ERISA for many years to include an exemption for employee plans established by church affiliated entities. The agencies have issued letters to many such employers with a determination that their plan was not subject to ERISA. In fact, two of the entities involved here (Advocate Health Care and St. Peter’s Healthcare) had previously received an IRS determination letter.

The U.S. Supreme Court’s decision to grant review to the cases is an important one for church affiliated employers relying upon the ERISA exemption. If the Court ultimately rules that some church affiliated plans are indeed subject to ERISA, that decision will bring additional compliance requirements to those employers such as funding, vesting, Form 5500 filing, and the distribution of Summary Annual Reports and Summary Plan Descriptions.

The cases will be heard in consolidation with oral arguments likely around April and a decision should be published around June. NFP Benefits Compliance will report any developments on this issue in future editions of Compliance Corner.

• St. Peter’s Healthcare v. Kaplan »
• Advocate Health Care v. Stapleton »
• Dignity Health v. Rollins »

On Nov. 11, 2016, CMS announced the 2017 premiums and deductibles for the Medicare inpatient hospital (Part A) and physician and outpatient hospital services (Part B) programs.

CMS explained that about 99 percent of Medicare Part A beneficiaries will pay no premium since they have 40 or more quarters of Medicare-covered employment. Those beneficiaries who will have a Medicare Part A premium in 2017 will either have a premium of $227 a month (if they have 30 quarters of coverage) or $413 a month (if they are uninsured, have certain disabilities, or have less than 30 quarters of coverage). The Medicare Part A deductible will be $1,316 in 2017, compared to $1,288 in 2016.

CMS also explained that the Medicare Part B premium is related to the Social Security cost-of-living adjustment (COLA). Since this year’s COLA will only be .3 percent, the Part B premiums will increase very little for about 70 percent of beneficiaries. Those beneficiaries will have a 2017 monthly premium of about $109, compared to $104.90 for the last four years. The standard monthly premium for the other 30 percent of beneficiaries will be $134 per month, up from the 2016 premium of $121.80. The Medicare Part B deductible will be $183 in 2017, compared to $166 in 2016.

Although these premiums and deductibles are of little consequence to employers, the information would be helpful to employees who are eligible for Medicare.

CMS News Release »

On July 31, 2016, the DOL revised the Employer CHIP Model Notice which employers with group health plans use to inform eligible employees about premium assistance offered through their state Medicaid or Children’s Health Insurance Program (CHIP). Originally, the notice was set to expire on Oct. 31, 2016, but the effective date has now been extended through Nov. 30, 2016.

Employers who provide coverage in states with premium assistance available through Medicaid or CHIP are required to notify employees of possible assistance opportunities in acquiring health coverage. Providing the model notice annually before the beginning of the plan year and free of charge will satisfy the requirement. However, employers using their own notices, rather than using the DOL model notice, should confirm the most recent information is included.

Employer CHIP Notice (Previously linked website content is no longer available.)

On Nov. 1, 2016, the DOL published advance information copies of the 2016 Form 5500 return/report, which includes Form 5500-SF and corresponding instructions. These advance copies are only for informational purposes and may not be used for 2016 Form 5500 or 5500-SF filings, but employers should familiarize themselves with the changes in preparation for 2016 plan year filings. Important modifications to the Form 5500 and Form 5500-SF instructions and schedules are summarized below.

First, for the 2016 plan year only, the IRS previously instructed filers to omit the “Preparer’s Information” on Form 5500, questions on lines 4o, 6a through 6d of Schedules H and I, and the “Part VII – IRS compliance Questions” of Schedule R. Similarly, filers using Form 5500-SF should skip the “Preparer’s Information” section, “Part VIII – Trust Information,” and “Part IX – IRS Compliance Questions.” See the announcement related to the IRS list of compliance questions to omit on Form 5500-series returns in the Oct. 18, 2016, edition of Compliance Corner.

Second, administrative civil penalties assessable under ERISA have increased to a maximum of $2,063 per day for a plan administrator’s failure or refusal to file a complete and/or accurate Form 5500 report.

Third, for Schedules H and I, the revised Line 5c asks filers who answer “Yes” to enter the My PAA-generated confirmation number for the Pension Benefit Guaranty Corporation (PBGC) plan year premium filing. Schedule SB, Line 27, Code 1, now reflects guidance on specific topics regarding application of the Cooperative and Small Employer Charity Pension Flexibility Act.

While many employers outsource the preparation and filing of these forms, employers should also familiarize themselves with the new requirements and work closely with outside vendors to collect the applicable information.

• DOL News Release »
• 2016 Form 5500, Schedules and Instructions »

On Oct. 31, 2016, the DOL launched the Medical and Disability Related Leave Advisor (Advisor) to help workers and employers understand medical and disability related leave.

The Advisor asks a few questions and then uses answers to those questions to determine which federal employment laws apply. Questions asked include the type of business or organization, workforce size and if the entity receives federal financial assistance. Two examples of identifiable federal laws that may apply include FMLA and ADA.

Please note that the Advisor addresses these federal employment laws in the context of medical and disability related leave only. It does not provide comprehensive information about employee and employer rights and responsibilities under those leaves. Federal workers’ compensation laws, state workers’ compensation laws or state disability nondiscrimination laws that provide for leave related to an injury, medical condition or chronic illness are outside the scope of the Advisor.

This new Advisor is added to the collection of elaws Advisors provided by the DOL to assist employers and employees in understanding their rights and responsibilities under various employment laws.

Medical and Disability Related Leave Advisor »

On Oct. 27, 2016, the Mental Health and Substance Use Disorder Parity Task Force (the Task Force) released its final report. This task force was created by President Obama in March 2016 to increase awareness of the protections mental health and substance use parity (parity) provides, to improve understanding of the requirements of parity and to increase the transparency of the compliance process.

After listing key milestones in parity, the report provides background on key developments in parity, explains what MHPAEA and PPACA require, discusses the impact of recent parity policy changes, and offers an overview of parity enforcement activities. Notably, the report also discusses the types of mental health and substance use disorder violations that were found during DOL enforcement actions from 2010-2015.

Finally, the report includes recommendations from the Task Force that are based on input and feedback received from diverse stakeholders. Those recommendations include suggestions on supporting consumers, improving parity implementation, and enhancing parity compliance and enforcement.

Final Report »

On Oct. 27, 2016, the Employee Benefits Security Administration of the DOL released compliance guidance (which includes limited relief) and participant FAQs addressing Hurricane Matthew issues. The DOL recognizes that many parties may encounter compliance-related issues in the coming months related to their ERISA-covered plans. Specifically, the compliance guidance is meant to help employee benefit plans, plan sponsors, employers and employees that are located in counties identified as a covered disaster area due to Hurricane Matthew’s devastation. The guidance is as follows:

• Since relief from certain verification procedures related to retirement plan participant loans has been provided through IRS announcement 2016-39 (addressed in the Nov. 1, 2016, edition of Compliance Corner), the DOL indicated that they will not find any person to be violating Title I of ERISA by complying with the announcement.
• Neither will the DOL seek to enforce plan asset timing rules provided the failure is attributable to Hurricane Matthew. (Note that participant contributions and loan repayments must be forwarded to the plan as soon as possible, but no later than the 15th business day of the month following the month they were transferred to the employer.)
• Normally, an administrator of an individual account plan is required to provide 30 days advance notice to participants whose rights will be temporarily suspended or limited by a period of at least three business days when they cannot direct investments, obtain loans or other distributions. Natural disasters, like Hurricane Matthew, are beyond the control of a plan administrator. Therefore, if the lack of notice is attributable to Hurricane Matthew, then it would not be an ERISA violation.
• The DOL recognizes that plan participants may encounter difficulties meeting deadlines for filing benefit claims and COBRA elections due to Hurricane Matthew. Plan sponsors are to act reasonably, prudently and in the interest of the workers and their families. Reasonable accommodations should be made to minimize loss of benefits because of timing failures.
• Finally, the DOL understands that timely compliance by group health plans may not be possible. Therefore, the DOL’s enforcement emphasis will be on compliance assistance and will include grace periods and other appropriate relief.

The DOL also provided FAQs for participants and beneficiaries related to health and retirement plans. It addresses issues participants may face (e.g., having an employer close, being unable to contact the plan administrator, or wanting to withdraw retirement funds without penalty due to the hurricane).

• Hurricane Matthew DOL News Release »
• Hurricane Matthew Participant FAQs »

On Oct. 27, 2016, the DOL published a set of FAQs on the Conflict of Interest rule. As background, the Conflict of Interest rule amends ERISA’s definition of ‘fiduciary’ by considering more communications to be investment advice that renders the person providing that advice a fiduciary. Additionally, the DOL introduced new prohibited transaction exemptions (PTEs) and amended others in order to permit common compensation structures and to cover certain types of transactions. These FAQs answer questions concerning those PTEs – some highlights of which we will discuss below.

Although the rule is effective on April 10, 2017, the rule allows for a transition period until Jan. 1, 2018, during which fiduciaries have fewer requirements to meet. However, FAQs 1 and 2 clarify that fiduciaries must still act impartially, provide notice of their fiduciary status and designate someone to handle compliance during that transitional period.

The Best Interest Contract (BIC) exemption is the subject of FAQs 3-8 and 10. The BIC exemption is the main exemption that will cover investment advice to individuals, and it applies to rollover advice and recommendations made by investment advisers. The BIC exemption is not available for transactions where the fiduciary has discretionary authority or control over the decision to proceed with a transaction, and it is not necessary when the fiduciary receives no fee or compensation for advice.

FAQs 9 and 12 address different types of adviser compensation with the goal of steering financial institutions away from providing advisors with incentives that are not reasonable compensation or in the investor’s best interests.

FAQs 13-19 discuss the streamlined level-fee option as allowed through the BIC exemption.

FAQs 21-23, 32, and 33 explain that the BIC exemption applies to insurance companies offering annuity investments. Notably, PTE 84-24 can be relied upon for rollovers into annuities.

FAQs 24-27 discuss the contracts and disclosure required by the BIC exemption. They specifically allow for a model contract to be posted to advisers’ website as long as the adviser follows that contract. Also, investors that request information on the fees and costs associated with transactions should be provided that information as of the date of the recommendation.

Although the DOL did not extend the effective dates of the rule, FAQ 34 indicates that the DOL’s initial enforcement approach will be to work with advisers and plans to come into compliance. The DOL also confirmed that they would be issuing additional guidance in the coming months.

Plan sponsors should familiarize themselves with these FAQs to understand the requirements the regulations impose on their financial advisers and investment managers. We will continue to report on additional guidance as the DOL provides it.

FAQs about Conflict of Interest Rules and Exemptions Part I »

On Sept. 30, 2016, the IRS publicly released Information Letter 2016-0043, dated May 25, 2016. This letter is a response to a taxpayer’s correspondence concerning COBRA continuation coverage, which is generally 18 months. Specifically, this taxpayer asked about the COBRA disability extension, which provides a 29-month maximum coverage period.

In this case, the taxpayer requested a disability extension but was denied the extension by the plan. The taxpayer received a disability notice from the Social Security Administration but did not meet the plan’s requirements (consistent with the regulations) to provide the plan with notice of the disability award within 60 days of the date of the reward. The IRS explained that it has no procedure for requiring plans to provide longer periods for elections than required by the IRC and regulations.

Additionally, in its response, the IRS points out that in order to qualify for the disability extension, the qualified beneficiary must provide notice to the plan of the disability determination on a date that is both: within 60 days after the date the determination is issued and before the end of the original 18-month maximum coverage period that applies to the qualifying event.

As background, all of the following conditions must be met for a beneficiary to qualify for the COBRA disability extension:

• The qualifying event must be caused by the employee’s reduction in hours or employment termination.
• The qualified beneficiary must be determined under the Social Security Act to have been disabled during the first 60 days of COBRA coverage, even if the determination itself occurred after the 60 days.
• The Plan Administrator must be notified of the determination within 60 days after the latest of the following dates:
  • Date of the determination;
  • Date of the qualifying event (i.e., employment termination or reduction of hours);
  • Date qualified beneficiary lost coverage as a result of the qualifying event; or
  • Date qualified beneficiary is informed of the responsibility to provide the determination and the plan’s procedures for providing the notice to the employer.
• Qualified beneficiary must also let the administrator know of the determination before the end of the original 18-month maximum coverage period.

To clarify, the “first 60 days of COBRA coverage” is generally measured from the date of termination of employment or reduction of hours, not necessarily from the date of disability. The rule does not impose any direct condition on when the determination itself must be issued, so the determination can occur before or after the qualifying event. This would also apply to any other qualified beneficiaries connected with the original qualifying event (such as all family members who were enrolled).

In addition, the plan may charge the disabled beneficiary 150 percent of the applicable COBRA premium, instead of 102 percent of the premium, after the original 18-month maximum coverage period. If they decide to charge 150 percent, the plan should inform the beneficiary of the increase effective after the original coverage period.

Information letters are not legal advice and cannot be relied upon for guidance. Taxpayers needing binding legal advice from the IRS must request a private letter ruling. However, this letter does provide general information which may be helpful to employers with questions on this particular topic.

IRS Information Letter 2016-0043 »

On Oct. 21, 2016, the IRS published Announcement 2016-39, which provides retirement plan distribution relief for those who have been adversely affected by Hurricane Matthew. According to the announcement, employer sponsors of certain retirement plans, including 401(k), 403(b) and 457(b) plans, can make loans and hardship distributions to victims of Hurricane Matthew and members of their families who live or work in disaster area localities (and designated for individual assistance by the Federal Emergency Management Agency (FEMA)). This includes parts of North Carolina, South Carolina, Georgia and Florida.

To help streamline the process of requesting and receiving a loan or hardship distribution, the announcement relaxes procedural and administrative rules that would generally apply to retirement loans and distributions. The announcement also states that the plan itself can ignore the reasons that normally apply to hardship distributions (meaning the affected individual can use the distribution for reasons such as food and shelter). Also, the normal six-month ban on 401(k) and 403(b) contributions that comes into play following a hardship distribution will not apply.

Importantly, the announcement states that plans may make loans or hardship distributions before the plan is formally amended to provide for them and may relax normal substantiation or documentation requirements relating to distributions. However, it’s important to note that loans and distributions made as a result of the announcement are still subject to federal taxation as are other loans and distributions (loan proceeds are generally tax-free if repaid within a certain period of time; hardship distributions are generally taxable and may be subject to a 10 percent early-withdrawal penalty).

Thus, if the retirement plan allows it, 401(k), 403(b) or 457(b) plan participants may be eligible to take advantage of streamlined loan procedures and more liberal hardship distribution rules. Employers that may have affected individuals should work with their retirement plan advisors (and potentially outside counsel) in determining the IRS announcement’s impact on their plan design.

• Announcement 2016-39 »
• IR-2016-138> »
• IRS Tax Relief in Disaster Situations »

On Oct. 27, 2017, the IRS issued News Releases IR-2016-141 and Notice 2016-62, which relate to certain cost-of-living adjustments for a wide variety of tax-related items, including pension plans and other limitations for tax year 2017.

For 2017, the elective deferral limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remained unchanged at $18,000. Additionally, the catch-up contribution limit for employees age 50 and over who participate in any of those plans remains at $6,000. The annual limit for Savings Incentive Match Plan for Employees (SIMPLE) retirement accounts remains at $12,500.

The annual limit for defined contribution plans under Section 415(c)(1)(A) increases to $54,000 (from $53,000), and the annual limit on compensation that can be taken into account for contributions and deductions increased from $265,000 to $270,000. The threshold for determining who is a “highly compensated employee” (HCE) remains the same at $120,000.

The annual benefit for a defined benefit plan under Section 415(b)(1)(A) increased from $210,000 to $215,000, and the dollar limitation concerning the definition of key employee in a top-heavy plan and the limitation on IRA contributions increased from $170,000 to $175,000.

Cost-of-living adjustments are effective Jan. 1, 2017. Sponsors and administrators of benefits with limits that are changing will need to determine whether their plans automatically apply the latest limits or must be amended (if desired) to recognize the changes. Any changes in limits should also be communicated to employees.

• IR-2016-141 »
• Notice 2016-62 »

On Oct. 25, 2016, the IRS issued Revenue Procedure 2016-55, which relates to certain cost-of-living adjustments for a wide variety of tax-related items, including transportation benefits, qualified parking benefits, health FSAs and other limitations for tax year 2017.

According to the revenue procedure, the annual limit on employee contributions to a health FSA will be $2,600 for plan years beginning in 2017 (up $50 from 2016).

Some changes impact the small business health care tax credit, since the maximum credit is phased out based on the employer’s number of full-time equivalent employees in excess of 10. For 2017, the average annual wage level at which the credit phases out for small employers is $26,200 (up $300 from 2016). The maximum average annual wages to qualify for the credit as an “eligible small employer” for 2017 will be $52,400 (a $600 increase from the 2016 amount).

Another change is that the maximum amount an employee may exclude from his or her gross income under an employer-provided adoption assistance program for the adoption of a child will be $13,570 for 2017 (a $110 increase from the 2016 maximum of $13,460).

Regarding qualified transportation fringe benefits, the monthly limit on the amount that may be excluded from an employee’s income for qualified parking benefits in 2017 remains at $255. The combined monthly limit for transit passes and vanpooling expenses for 2017 also remains at $255.

Sponsors and administrators of benefits with limits that are changing (i.e., adoption assistance plans) will need to determine whether their plans automatically apply the latest limits or must be amended (if desired) to recognize the changes. Any changes in limits should also be communicated to employees.

NFP has a white paper that is being updated with the 2017 annual employee benefit limits. When the white paper has been updated, it will be announced in Compliance Corner.

• IR-2016-139 »
• Rev. Proc. 2016-55 »

The IRS has released the draft instructions for the 2016 Form 5500-EZ. This follows the release of the draft 2016 Form 5500-EZ in August 2016. As a reminder, the Form 5500-EZ is used by a one-participant retirement plan or foreign retirement plan that does not file electronically on Form 5500-SF.

For 2016, the IRS has proposed in the draft instructions that plan sponsors will not be required to enter the preparer’s information at the bottom of the second page of Form 5500-EZ and plan sponsors should skip these questions when completing the form.

Also, plan sponsors may skip questions 4a through 4d (trust information), 13a (confirmation that the plan has been timely amended), 13b (date of last plan amendment), 14 (confirmation that required minimum distributions to five percent owners who have attained age 70 ½) and 15 (unrelated business taxable income information).

• Draft 2016 Form 5500-EZ Instructions »
• Draft 2016 Form 5500-EZ »

On Sep. 29, 2016, the IRS issued Rev. Proc. 2016-51, a consolidated statement of the correction programs under the IRS’s Employee Plans Compliance Resolution System (EPCRS), which modifies and supersedes Revenue Procedure 2013-12.

As background, EPCRS allows plan sponsors of qualified retirement plans to correct plan errors that raise qualification issues and avoid the risk of having the IRS disqualify their plans for these errors. Rev. Proc. 2013-12, although current due to modifications via subsequent guidance, was due for an update to ensure that all the changes were contained in one document.

Among the changes incorporated by Rev. Proc. 2016-51 are:

• Those introduced by Rev. Proc. 2015-27, clarifying the correction of overpayments and permitting plans to not demand repayment from participants and beneficiaries in all instances;
• Those introduced by Rev. Proc. 2015-28, addressing failures with respect to automatic contribution features and encouraging the early correction of employee elective deferral failures; and
• Those introduced by Rev. Proc. 2016-37, incorporating changes to the determination letter application program that were announced in Rev. Proc. 2016-37 (as reported in the July 12, 2016, edition of Compliance Corner).

Rev. Proc. 2016-51 is effective Jan. 1, 2017, and does not significantly change EPCRS’s substantive provisions, but makes a few clarifying updates and consolidates all EPCRS guidance. Plan sponsors may not elect to apply provisions before Jan. 1, 2017. Rev. Proc. 2013-12, as modified by Rev. Proc. 2015-27 and Rev. Proc. 2015-28, are in effect for 2016.

Rev. Proc. 2016-51 »

On Oct. 5, 2016, the IRS published a list of compliance questions filers should omit for the 2015 and 2016 plan years when completing Forms 5500, 5500-SF, 5500-EZ and Schedules H, I and R. The final forms released on Feb. 25, 2016, included new IRS compliance questions that plan sponsors were required to answer. However, the IRS is instructing plan sponsors not to answer the questions until after the 2015 and 2016 plan years due to misreporting concerns.

The following questions should be skipped for 2015 and 2016 plan years:

• Form 5500 (Previously linked website content is no longer available.)
  Preparer Information (page 1 bottom)
• Schedule H (Previously linked website content is no longer available.)
  • 2015 plan year: Lines 4o-p, 6a-d
  • 2016 plan year: Lines 4o, 6a-d
• Schedule I (Previously linked website content is no longer available.)
  • 2015 plan year: Lines 4o-p, 6a-d
  • 2016 plan year: Lines 4o, 6a-d
• Schedule R (Previously linked website content is no longer available.)
  • 2015 plan year: New Part VII (Lines 20a-c, 21a-b, 22a-d, and 23)
  • 2016 plan year: Part VII (Lines 20a-b, 21a-b, and 22a-b)
• Form 5500-SF (Previously linked website content is no longer available.)
  • 2015 plan year: Preparer Information (page 1 bottom), Lines 10j, 14a-d, and New Part IX (Lines 15a-c, 16a-b, 17a-d, 18, 19, and 20)
  • 2016 plan year: Preparer Information (page 1 bottom), Lines 14a-d, and Part IX
    (Lines 15a-b, 16a-b, 17a-b, 18, and 19)
• Form 5500-EZ
  • 2015 plan year: Preparer Information (page 2 bottom), Lines 4a-d, 13a-d, 14, 15, and 16
  • 2016 plan year: Preparer Information (page 2 bottom), Lines 4a-d, 13a-b, 14, and 15

Currently, plan sponsors can use these compliance questions as a checklist to ensure any potential compliance issues are identified and addressed. When plan sponsors are required to respond to these compliance questions, their responses could highlight compliance issues for the IRS.

Form 5500-Series Questions to Omit (Previously linked website content is no longer available.)

HHS has provided guidance in the form of frequently asked questions regarding cloud computing and HIPAA Privacy and Security requirements. The guidance is specifically targeted at cloud service providers (CSPs), as opposed to covered entities or business associates utilizing their services. CSPs generally provide online access to shared computing resources, such as networks, servers, storage and applications.

If a covered entity or business associate engages a CSP to create, receive, maintain or transmit electronic protected health information (PHI) on its behalf, the CSP is a business associate under HIPAA. A business associate agreement should be in place between the parties. The CSP would be contractually required to appropriately safeguard the ePHI and generally comply with HIPAA Privacy and Security requirements. Entering into a relationship with a CSP without a business associate agreement is considered a violation of the HIPAA rules.

Further, the covered entity or business associate should understand the cloud computing environment and conduct its own risk analysis accordingly. A Service Level Agreement may be used to address specific practices such as: system availability and reliability; back-up and data recovery; manner in which data will be returned to customer after termination of relationship; security responsibility and use, retention and disclosure limitations.

In response to a request to provide a listing of CSPs offering HIPAA-compliant cloud services, HHS responded that the Office of Civil Rights does not endorse, certify or recommend specific technology or products.

Guidance »

On Sept. 30, 2016, the DOL published final regulations relating to paid sick leave for federal contractors. The rules finalize proposed regulations that were published earlier this year (covered in the July 26, 2016, edition of Compliance Corner), and do so without significant changes.

As background, in 2015 Pres. Obama signed Executive Order 13706, Establishing Paid Sick Leave for Federal Contractors. To be clear, the executive order and final regulations are not a federally-mandated paid sick leave law for all employers. Rather, the order and regulations apply to employers that contract with the federal government where the contract is covered by the Davis-Bacon Act, the Service Contract Act or that is in connection with federal property or lands and related to offering services for federal employees. There are a few exceptions, including one for contracts and agreements with Native American tribes.

Under the final regulations, federal contractor employees must accrue paid sick leave of one hour for every 30 hours worked, and the employee must be able to accrue at least 56 hours (or seven work days) per year. The final regulations are merely a minimum, and contractors may still need to provide more paid sick leave to comply with local or state laws (and contracts may also offer more generous leave under their own policies). Employees must be allowed to carry over unused sick leave from year to year. Importantly, if an employee is rehired by the same contractor within 12 months, the rehired employee’s leave must be reinstated. That said, contractors are not required to pay an employee for unused sick leave upon termination.

The final regulations narrow the definition of “hours worked” when it comes to accrual. While the proposed regulations defined that term to include all time for which an employee should be paid (e.g., time spent on paid leave), the final regulations define that term to include only hours actually worked. In addition, the final regulations continue to allow contractors flexibility with respect to actual provision of the leave—contractors can either provide 56 hours of leave up front at the beginning of the year or provide leave as it accrues (although that requires the additional burden of tracking). Paid sick leave must be provided to part-time employees and to both exempt and non-exempt employees (although contracts may assume a 40 hour work week with respect to exempt employees).

As under the proposed regulations, the final regulations allow an employee to use accrued paid sick leave for the following reasons:

• To care for an employee’s own physical or mental illness, injury or condition (including visits to the doctor or other health care provider for diagnosis, care or preventive care);
• To care for a family member (child, parent, spouse partner or any other blood-related individual (or someone whose relationship is the equivalent of a family relationship); or
• To care for an employee’s own situation (or a covered family member) relating to domestic violence, sexual assault or stalking.

Also similar to the proposed regulations, employees may request paid sick leave either orally or in writing. Generally speaking, where the leave is foreseeable, an employee’s request must be made at least seven calendar days in advance. Where leave is unforeseeable, the leave request must be made as soon as practical. Employers are expected to explain any leave request denial (and may not base that denial on their business needs or on the notion that they have found a replacement for that employee). Contractors may request medical provider certification where the employee’s absence is three or more consecutive days.

The final regulations apply to all covered contracts solicited and awarded on or after Jan. 1, 2017. To help with questions, the DOL published a press release and a set of FAQs on its web page. Employers that contract with the federal government should review the rules, press release and FAQs to ensure that their leave policies are consistent with the final regulations. Outside counsel’s assistance is recommended, particularly since leave policies and paid sick leave may impact areas of legal liability outside the benefits compliance sphere (such as labor and employment laws, wage payment, etc.).

• Final Regulations »
• DOL Press Release »
• DOL FAQs »

On Sept. 2, 2016, the IRS published final regulations relating to same-sex marriage and the federal tax consequences relating to, among other issues, employer-provided health benefit coverage of a same-sex spouse. The final regulations formally establish that a marriage of two individuals, whether of the same or opposite sex, will be recognized for federal tax purposes if that marriage is recognized by the state, possession or territory of the United States in which the marriage is entered into, regardless of the married couple’s place of domicile. Further, a marriage performed in a foreign jurisdiction is recognized for federal tax purposes if that marriage would also be recognized in at least one state, possession or territory of the United States, regardless of place of domicile or whether the couple ever resides in the United States. The final regulations also interpret the terms “spouse,” “husband” and “wife” to include same-sex spouses as well as opposite-sex spouses, and the terms “husband” and “wife” may be applied without regard to gender.

As background, in 2013, the U.S. Supreme Court, in U.S. v. Windsor, ruled Section 3 of the Defense of Marriage Act (DOMA) unconstitutional. For all purposes under federal law, including ERISA and the IRC, Windsor required employers and plans to recognize a legally married same-sex spouse as a spouse under federal law, at least in states that allowed same-sex marriage. Then, in 2015, the Supreme Court, in Obergefell v. Hodges, went one step further in finding that the Fourteenth Amendment of the U.S. Constitution requires a state to license and to recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out of state. Thus, a state that did not recognize same-sex marriage was forced to recognize a same-sex marriage performed in a different state (one where same-sex marriage was recognized). Later in 2015, the IRS published proposed regulations (outlined in the Nov. 3, 2015, edition of Compliance Corner) that were aimed at establishing federal tax treatment of same-sex marriages following the Obergefell decision. After considering comments related to the proposed regulations, the IRS published these final regulations.

The final regulations will apply to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit. For employers and their benefit plans, this means a same-sex spouse is considered a tax dependent of the employee, and therefore employer benefit plan coverage and benefits can be provided to a same-sex spouse on a tax-advantaged basis (the same as an opposite-sex spouse).

Additionally, the final regulations are consistent with our understanding following the 2015 proposed regulations and Windsor and Obergefell. They do not change the federal tax treatment of domestic partnerships or civil unions. Specifically, the final regulations still would not treat registered domestic partnerships, civil unions or similar relationships not denominated as marriage under state law as marriage for federal tax purposes. This is to distinguish between individuals who have specifically chosen to enter into a state law registered domestic partnership, civil union or similar relationship rather than a marriage in order to retain their status as single for federal tax purposes. The final regulations are effective as of Sept. 2, 2016.

• Proposed Regulation »
• Final Regulation »
• U.S. Treasury Department Press Release »

On June 21, 2016, CMS introduced a new tool to assist entities in determining whether they are a covered entity for purposes of HIPAA’s administrative simplicity provisions. Those provisions include HIPAA’s electronic interchange (EDI) rules and HIPAA’s rules related to the privacy and security of health data (including breach notifications). “HIPAA-covered entities” generally include health care providers that conduct certain transactions in electronic form, health care clearinghouses and health plans.

The interactive tool allows health care clearinghouses, health care providers that conduct certain transactions in electronic form, and health plans to determine whether they are a covered entity by answering a series of questions. The tool uses a number of defined terms, which are found in the endnotes. Employers, particularly those that are self-insured, should review their group health plan arrangements to see if they could be considered a HIPAA covered entity in their capacity as plan sponsor or administrator. While the interactive tool can assist in that determination, outside counsel should weigh in on any specific questions relating to HIPAA’s application and requirements.

HIPPAA Covered Entity Interactive Tool »

On Aug. 30, 2016, the DOL published final regulations related to state run IRA programs. Many states are currently working toward such programs or have passed legislation to establish one. The general concept is that states would create a program in which employees could contribute on a pre-tax basis to an IRA. Most of those state programs require participation from private employers and involve automatic enrollment for employees.

There had been uncertainty as to whether ERISA would apply to these programs. ERISA defines an employee pension plan as a plan, program, or fund established by an employer that provides retirement income to employees or results in a deferral of income by employees for periods extending to the termination of covered employment or beyond. Creating additional confusion were the 1975 IRA Payroll Deduction Safe Harbor rules. Under those rules, employers may facilitate payroll deductions for employees to fund IRAs. In order to meet the safe harbor and for the arrangement to be exempt from ERISA, employees must initiate participation. If an employer auto-enrolled the employees, the plan would fall out of the safe harbor, even if the employees were given an opportunity to opt-out.

Since the recent state run IRA programs involved auto-enrollment, the thought was that the programs would generally be subject to ERISA. The new rules provide “a safe harbor from ERISA coverage to reduce risk of ERISA preemption of the relevant state laws.” In other words, if a state program is designed to meet the safe harbor criteria, a private employer would not be required to meet the ERISA obligations for the plan including plan documents and reporting.

The safe harbor conditions include the following:

• The program must be established and administered by the state pursuant to state law.
• Employer participation must be required. The DOL considers an employer option to participate as a possible factor in establishing an ERISA plan. In other words, if a state establishes an IRA program for private employers who do not already sponsor an employee retirement plan, the state must mandate participation of such employers. A state could limit the application to employers of a certain size.
• Employee participation must be voluntary. The state program or an employer may implement auto-enrollment, but employees must be provided with an opportunity to opt-out and provided notice on how to do so.
• The state or state agency is responsible for the investment of the contributions or offering investment options to the participating employees.
• The state or state agency is responsible for the security of employee contributions.
• Employers may not contribute to the IRA program. Their involvement must be limited to administrative duties (called ministerial activities) such as coordinating payroll deductions, forwarding employee contributions, recordkeeping, reporting and employee communications.
• The state must adopt measures to ensure employees are notified of their rights under the program.

Further, state programs are permitted to implement certain withdrawal restrictions. For example, a program may limit the circumstances under which an employee may withdraw their contributions, such as acquiring a certain age.

Finally, states may reimburse employers’ direct cost by offering tax credits or incentives to the employers.

The rules are effective 60 days following the Aug. 30, 2016, publication.

In addition to the final rules applicable to state run IRA programs for private employers, the DOL also issued proposed rules that would permit states to establish similar programs for political subdivisions of a state. The DOL proposes to limit the option to states who have not established a state wide program for private employers and to political subdivisions with a population equal to or greater than the least populous state (which is currently Wyoming with approximately 600,000). The DOL will accept comments for 30 days following the Aug. 30, 2016, publication.

While these rules are directed to states wishing to establish such programs, the rules are important for employers to understand. If a state establishes such a program, the state may require certain private employers (and in the future governmental employers) to participate in the program by auto-enrolling employees, facilitating employee payroll deductions and distributing employee communications.

• News Release »
• Final Rules (Previously linked website content is no longer available.)
• Proposed Rules (Previously linked website content is no longer available.)

On July 31, 2016, the DOL updated its Employer CHIP Model Notice that employers with group health plans may use to notify eligible employees about premium assistance available through their state Medicaid or Children's Health Insurance Program (CHIP). Since its initial release in 2010, the DOL has been updating the notice twice annually, on or around January 31 and July 31 of each year. The updates reflect changes to contact information for the list of states offering premium assistance programs. In this newest update, Arkansas has been added to the list of states offering a program.

Employers creating their own notices, rather than the DOL’s model notice, should pay special attention to ensure the most recent information is used. Employees residing in one of the states identified on the notice must receive this information automatically, before the start of the plan year and free of charge.

Employer CHIP Notice (Previously linked website content is no longer available.)

The EEOC recently released an information letter dated July 1, 2016. The letter provides clarification for a particular provision of the final regulations issued in May 2016. If an employer sponsored wellness program seeks health information from participants either through a medical examination or a disability inquiry, then the maximum incentive that the program may provide participants, as governed by the ADA, is 30 percent of the total self-only premium cost. The letter clarifies how to calculate that limit when the employer offers multiple plan options.

If the wellness program incentive is available to employees enrolled in any of the employer’s plan options, then the incentive must be limited to 30 percent of the total premium of the lowest cost self-only coverage option. Alternatively, if the wellness program incentive is only available to employees enrolled in a particular plan option, then the incentive limit is based on 30 percent of the self-only cost under that particular coverage option.

Information Letter (Previously linked website content is no longer available.)

On Aug. 14, 2016, the IRS issued Revenue Procedure 2016-17, introducing a self-certification procedure aimed to help recipients of retirement plan distributions who have mistakenly missed the 60-day time limit to roll amounts into another retirement plan. The IRS also released a set of frequently asked questions addressing when the 60-day rollover requirement may be waived.

As background, individuals have 60 days from the date they receive a distribution from a retirement plan or IRA to roll it over into another plan or IRA (the 60-day requirement is one of many requirements to make a valid rollover contribution). If the rollover requirements are not met, then the distribution may be taxable, unless the IRS waives the requirement. Previously, the IRS has provided for only two types of waivers: Automatic waivers for certain errors made by financial institutions and waivers granted in IRS private letter rulings (which cost $10,000). Waivers are important because financial institutions that serve as IRA trustees or custodians have not regularly accepted late rollovers unless given an IRS ruling waiving the timing requirement. These institutions may now rely on an individual’s self-certification to accept late rollover contributions, as long as they don’t know of information contrary to the certification.

Individuals qualify by certifying that they have not previously been denied a waiver by the IRS for the same distribution, the deadline was missed for one of the 11 enumerated reasons, and the contribution is made as soon as practicable after the circumstance that caused the missed deadline. The 11 allowed reasons for a late contribution are below.

• An error was committed by the financial institution making the distribution or receiving the contribution.
• The distribution was in the form of a check and the check was misplaced and never cashed.
• The distribution was deposited into and remained in an account that the individual mistakenly thought was a retirement plan or IRA.
• The individual’s principal residence was severely damaged.
• One of the individual’s family members died.
• The individual or one of the individual’s family members was seriously ill.
• The individual was incarcerated.
• Restrictions were imposed by a foreign country.
• A postal error occurred.
• The distribution was made on account of an IRS levy and the proceeds of the levy have been returned to the individual.
• The party making the distribution delayed providing information that the receiving plan or IRA required to complete the rollover despite the individual’s reasonable efforts to obtain the information.

Also included in the Revenue Procedure is a model letter that individuals can use to self-certify.

• Revenue Procedure 2016-47 »
• FAQs »

On Aug. 15, 2016, the U.S. Treasury Department (Treasury) and IRS released its initial 2016-2017 Priority Guidance Plan. As background, the IRS uses the plan each year to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices and other published administrative guidance. The plan lists the 281 regulatory projects that the agency "intends to work on actively" during the 12-month period from July 2016 through June 2017. While the IRS is not bound by its plan, it does provide insight regarding the administration's goals and the amount of activity expected. The guidance plan does not place any deadline on completion of projects and is typically updated throughout the year.

In addition to items addressing retirement benefits, executive compensation, health care and other benefits, the priority guidance plan also includes items related to consolidated returns; corporations and their shareholders; excise taxes; exempt organizations; financial institutions and products; gifts, estates and trusts; insurance companies and products; international issues; partnerships; subchapter S corporations; tax accounting; tax administration; tax-exempt bonds and other general tax issues.

Of particular interest are the following:

• Guidance on issues under Code Section 4980H, which governs the employer mandate under PPACA;
• Regulations under Internal Revenue Section 4980I regarding the excise tax on high-cost employer-provided health coverage, also known as the Cadillac tax;
• Additional guidance on the determination letter program, including changes to the pre-approved plan program; and
• Guidance regarding substantiation of hardship distributions.

Priority Guidance Plan (Previously linked website content is no longer available.)

The IRS updated its Form 14568 series in relation to its Voluntary Correction Program (VCP). Under the VCP, retirement plans that aren’t currently being audited by the IRS may apply to correct errors in the plan document or its operations, reducing their penalty exposure. The IRS and the plan sponsor agree upon a plan of correction that must take place within an agreed upon timeframe, which is generally 150 days. The IRS clarified that if the plan sponsor cannot make the corrections within that timeframe, they must request an extension.

The series includes a “compliance statement” that a sponsor uses to describe its VCP submission. The model compliance statement is used to explain the failure, how it will be corrected, and what steps will be taken to make certain the error will not occur again. This was updated to include a statement that no opinion is offered as to the plan’s qualification status and a new request-for-relief provision allows certain loan failure corrections to avoid Form 1099-R reporting. There were additional revisions to the applicable schedules. The revised forms are available in a fillable format on the IRS website.

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• Model VCP Compliance Statement »
• IRS Instructions for Correcting Plan Errors »
• Voluntary Correction Program - General Description »

As we shared with you in the July 26, 2016, edition of Compliance Corner, Phase II of HHS’s Office of Civil Rights (OCR) HIPAA Audit Program is underway. Together with Phase I (launched back in 2011), the audit program is meant to help HHS assess compliance with the HIPAA privacy, security and breach notification rules. In addition, the program’s audits serve as a compliance tool that supplements OCR’s other enforcement tools, such as complaint investigations and compliance reviews.

As OCR implements Phase II of the program, OCR is developing enhanced protocols (sets of instructions) to be used in this round of audits and is also pursuing a new strategy to test the efficacy of desk audits, instead of onsite audits, in evaluating the compliance efforts of the HIPAA regulated industry.

On its HIPAA audit web page, OCR has created a new section for guidance on 2016 desk audits. Included in that section is a link to guidance on selected protocol elements, which contains instructions on associated document submission requests and related Q&As; access to presentation slides from an OCR information webinar on the desk audit process held on July 13, 2016; and a link to a list of comprehensive FAQs from the webinar that covered entities had regarding the desk audit process. Some of those FAQs included who will be audited, on what basis the audits will be selected and what happens after an audit.

As a reminder, group health plans are generally considered “covered entities” under HIPAA. Thus, employers that sponsor a self-insured group health plan should review the OCR web page, FAQs and other recent guidance, so that they are familiar with the program and process.

• HIPAA Audit Program Home Page »
• Selected Protocol Elements (Previously linked website content is no longer available.)
• Webinar Slides »
• Webinar Q&A's (Previously linked website content is no longer available.)

On July 29, 2016, the IRS released a clarification about the reporting on Form 5500 (and Form 5500-SF) of required minimum distributions (RMDs) not made due to the recipients not being able to be found. As background, RMDs are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. However, if the account owner is a five percent owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½, regardless of whether he or she is retired.

Form 5500 asks whether the plan has failed to provide any benefit when due under the plan. When this question was added to the Form 5500 for the 2009 plan year, the instructions did not include examples of what constituted a reportable failure. In connection with the 2015 Forms, the IRS clarified the instructions to explain that a reportable failure included unpaid RMDs to 5 percent owners who have attained the age of 70 ½ and non-five percent owners who have attained the age of 70 ½ and have separated from service or retired. This current instruction clarifies that filers do not need to report unpaid RMD amounts for participants who have separated from service or retired, or their beneficiaries, who cannot be located after reasonable efforts are made.

IRS Clarification (Previously linked website content is no longer available.)

On July 21, 2016, the DOL proposed changes to Form 5500 Filings. Specifically, they published a Notice of Proposed Forms Revisions to the Form 5500 Annual Return/Report Series and also published a Proposed Rule that implements those form revisions. As background, sponsors of ERISA-covered plans are generally required to file an annual Form 5500 which reports on the financial condition and operations of the plan.

In proposing changes to the Form 5500 filings, the DOL is seeking to improve reporting in five ways. The proposed changes seek to:

• Modernize financial reporting. The DOL notes that the financial information collected on the Form 5500 has remained unchanged although there have been many changes in plan structures, investment practices, and financial markets.
• Provide greater information regarding group health plans. Most notably, the DOL seeks to eliminate the current exemption from filing for small insured and self-insured welfare benefit plans. They believe this would allow the DOL to oversee a larger sector of group health plans.
• Enhance Data Mineability. These changes would allow the DOL to more easily search the data in the Forms 5500 and would allow private sector data users to develop better tools for employers.
• Improve Service Provider Fee Information. This is the DOL’s attempt to better reconcile the Form 5500 Schedule C reporting with the requirements of the ERISA 408(b)(2) regulations and the notices that are provided to plan fiduciaries.
• Enhance Compliance with ERISA and the IRC. The DOL seeks to add additional questions to the Form 5500 that will compel fiduciaries to better evaluate plan compliance.

In addition to the changes that would be made on the Form 5500, the DOL’s proposed rules would also give the DOL more authority to review the audits of Independent Qualified Public Accountants (IQPAs).

The current target for implementing the proposed form revisions is the 2019 Plan Year.

The DOL is also requesting public comments on these changes. The comments are due no later than Oct. 4, 2016, and may be submitted electronically or by paper.

• Notice of Proposed Form Revision »
• Proposed Rule »
• Fact Sheet (Previously linked website content is no longer available.)

Phase II of HHS’s Office of Civil Rights (OCR) HIPAA Audit Program is underway. Together with Phase I (launched back in 2011), the audit program is meant to help HHS assess compliance with the HIPAA privacy, security and breach notification rules. In addition, the program’s audits serve as a compliance tool that supplements OCR’s other enforcement tools, such as complaint investigations and compliance reviews. In Phase II, OCR is reviewing the policies and procedures adopted and employed by covered entities and their business associates to meet certain standards and implementation specifications of the HIPAA rules.

The Phase II process has begun with verification of a covered entity’s and business associate’s contact information. Selected covered entities received notification letters via email from OCR on Monday, July 11, 2016, requesting that contact information. A sample notification letter is now included on the OCR web page. Business associate audits will commence in the fall of 2016. After the verification process is complete, OCR will then transmit a pre-audit questionnaire to gather additional information relating to the size, type and operations of the covered entity. OCR will then use that information to form a pool of candidates that could be selected for an audit or compliance review.

On its web page, OCR has a list of FAQs that covered entities might have regarding the audit program. Some of those FAQs include who will be audited, on what basis the audits will be selected and what happens after an audit. As a reminder, group health plans are covered entities. Thus, employers that sponsor a self-insured group health plan should review the announcement, web page FAQs and sample notification letter, so that they are familiar with the program and process.

• HHS Announcement »
• HIPAA Audit Program Home Page »
• Sample Notification Letter »

HHS recently published a fact sheet on ransomware attack prevention and recovery from a health care perspective, including the role that HIPAA has in assisting HIPAA-covered entities (and their business associates) to prevent and recover from ransomware attacks.

As background, ransomware is a type of malware (malicious software) that is used to attack computer systems in an attempt to gain access to information. Ransomware is distinct from other malware in that its defining characteristic is that it attempts to deny access to a user’s data until a ransom is paid (the ransom itself is usually requested to be paid in some type of encrypted currency, such as Bitcoin, which is a digital asset and payment system). Ransomware usually encrypts the data with a key known only to the hacker who deployed the malware, and the hacker promises to send a decryption key only once the ransom has been paid. Hackers may also use ransomware to destroy or steal data.

As a reminder, HIPAA’s security rules require covered entities (and their business associates) to implement security measures with respect to protected health information (PHI) that is stored electronically. Some of those security measures include implementing a security management process, which includes conducting a risk analysis to identify threats and vulnerabilities to electronically-stored PHI and implementing procedures to guard against and detect malicious software, such as ransomware. The measures also require the covered entity to train users on malicious software protection so they are able to assist in detecting malicious software (and reporting on any such detection).

The fact sheet describes ransomware in more detail and includes facts about the number of ransomware attacks that occur daily. The fact sheet is written in a question and answer format with eight questions, and addresses issues such as whether (and how) HIPAA compliance can assist covered entities in detecting, preventing and recovering from malware and ransomware infections. The fact sheet also addresses the factors to consider in determining whether a ransomware infection might constitute a HIPAA breach, and whether the breach is significant enough to trigger the breach notification requirement.

The fact sheet contains no new employer obligations, but can serve as a great resource for employers and their business associates when it comes to HIPAA security rule compliance. Employers should work with outside counsel in developing HIPAA security practices and procedures, and should incorporate the fact sheet with respect to specific practices relating to ransomware.

Fact Sheet: Ransomware and HIPAA »

In September 2015, President Obama issued Executive Order 13706, Establishing Paid Sick Leave for Federal Contractors. The DOL subsequently issued regulations that are proposed to apply to certain new contracts effective on or after Jan. 1, 2017. The categories of covered contracts are identical to those covered by Executive Order 13658, Establishing a Minimum Wage for Contractors.

Covered contracts include:

• A procurement contract for construction covered by the Davis-Bacon Act;
• A contract for services covered by the Service Contract Act;
• A contract for concessions, including any concessions contract excluded from coverage under the SCA by Department of Labor regulations at 29 CFR 4.133(b); or
• A contract in connection with Federal property or lands and related to offering services for Federal employees, their dependents, or the general public.

The regulations will not apply to contracts for the manufacturing or furnishing of materials, supplies, articles, or equipment to the Federal Government that are subject to the Walsh-Healey Public Contracts Act.

The paid sick leave requirement applies to employees performing work on or in connection with the covered contract. Examples include laborers and mechanics engaged in the construction of a public building or public work on the site of the work; a security guard patrolling or monitoring a construction worksite where DBA-covered work is being performed; and a clerk who processes the payroll for SCA contracts.

Eligible employees would accrue not less than one hour of paid sick leave for every 30 hours worked on or in connection with the contract up to a maximum accrual of 56 hours per year. An employer may provide the accrual in a lump sum at the beginning of the year or on a per-workweek basis. Unused sick leave may be carried over to a subsequent year, but is still subject to the maximum accrual limits. Employers are not required to pay out unused balances upon termination.

An employee may use the leave time in connection with absences related to their own illness; to care for a child, parent, spouse, domestic partner, or any other individual related by blood or in a relationship equivalent to a family relationship; and domestic violence, sexual assault or stalking.

The proposed regulations would require a contractor to inform an employee, in writing, of the amount of paid sick leave that the employee has accrued but not used (1) no less than monthly, (2) at any time when the employee makes a request to use paid sick leave, (3) upon the employee’s request for such information, but no more often than once a week, (4) upon a separation from employment, and (5) upon reinstatement of paid sick leave.

A contractor’s existing procedure for informing employees of their available paid time off, such as notification accompanying each paycheck or an online system an employee can check at any time, can be used to satisfy or partially satisfy these requirements provided it is written (including electronically) and clearly indicates the amount of paid sick leave an employee has accrued separately from indicating amounts of other types of paid time off available.

Employers with covered contracts should familiarize themselves with the requirements. Again, if finalized, the rules would be effective for new contracts effective on or after Jan. 1, 2017.

Executive Order 13706, Additional Information, Wage and Hour Division (Previously linked website content is no longer available.)

On June 30, 2016, the DOL published an interim final rule adjusting for inflation civil monetary penalties under ERISA. As background, federal law requires agencies to adjust their civil monetary penalties for inflation, and the DOL had done this in 1997 and 2003. However, Congress recently passed the 2015 Inflation Adjustment Act, which requires agencies to conduct these adjustments on an annual basis, beginning with a ‘catch-up’ adjustment that was to be completed by July 1, 2016, and effective on Aug. 1, 2016.

As such, the DOL published this rule, designating the adjusted civil monetary penalties for certain violations of ERISA. Among other changes, the DOL is increasing the following penalties that may be levied against sponsors of ERISA-covered plans:

• The penalty for a failure to file Form 5500 will increase from up to $1,100 per day to up to $2,063 per day.
• The penalty for a failure to furnish information requested by the DOL will increase from up to $110 per day to up to $147 per day.
• The penalty for a failure to provide CHIP notices will increase from up to $100 per day to up to $110 per day.
• The penalty for a failure to comply with GINA will increase from $100 per day to $110 per day.
• The penalty for a failure to furnish SBCs will increase from up to $1,000 per failure to up to $1,087 per failure.

These new amounts will go into effect for penalties assessed after Aug. 1, 2016, for violations that occurred after Nov. 2, 2015. Beginning in 2017, the DOL will adjust the penalties no later than January 15 of each year, and will post any changes to penalties on their website.

For more information on the new penalties, including the complete listing of changed penalties, please consult the documents below. Additionally, see your advisor if you have questions about the imposition of these penalties.

Interim Final Rule »

On July 1, 2016, the U.S. Court of Appeals for the Sixth Circuit affirmed their earlier ruling in Self-Insured Institute of America, Inc. v. Snyder, 761 F.3d 631 (6th Cir. 2014), that a self-insured plan is subject to Michigan’s claims tax. Under the Michigan claims tax, health insurers and plans are subject to a one percent tax on health claims incurred in the state by state residents. The tax is calculated, paid and reported on quarterly returns.

ERISA generally preempts (meaning that it takes precedent over) state laws that ‘relate to’ employee benefit plans. However, ERISA does not generally preempt state laws that regulate the business of insurance. The topic of ERISA preemption has been at the center of many court cases, and the boundaries of the issue are not always clear.

In March 2016, the U.S. Supreme Court ruled in Gobeille v. Liberty Mutual Ins. Co., 136 S.Ct. 936 (March 1, 2016), that self-insured plans are not subject to a Vermont law requiring health insurers and plans to report claims to the state. The court ruled that the state requirement was preempted by ERISA. It further stated that ERISA preemption was necessary in order to prevent states from imposing inconsistent and burdensome reporting requirements on plans.

In light of the Gobeille decision, in March 2016, the Supreme Court vacated the Sixth Circuit’s decision in the Michigan claims tax case and returned the case to the court for further consideration. The Sixth Circuit concluded again that ERISA does not preempt the state’s tax requirement. The court considered the Supreme Court’s Gobeille decision along with other ERISA preemption rulings. They made a distinction between state laws that regulate integral aspects of ERISA plan administration such as reporting and laws that require incidental reporting and recordkeeping in order to enforce a greater provision. The court ruled that the primary purpose of Michigan’s law is to collect taxes and generate Medicaid funds. The reporting and recordkeeping, which are ERISA plan administration functions, are incidental. Thus, the court ruled that self-insured plans continue to be subject to the state claims tax and related reporting obligations.

Self-Insured Institute of America, Inc. v. Snyder »

On July 1, 2016, the D.C. Court of Appeals affirmed a district court’s decision in Central United Life v. Burwell, enjoining HHS from enforcing a 2014 regulatory prohibition of the sale of fixed indemnity plans to individuals who do not have other coverage that qualifies as minimum essential coverage (MEC) under PPACA.

Fixed indemnity plans pay a fixed amount upon the occurrence of an event (e.g., hospitalization) with the coverage amount not tied to the cost of services provided. For example, a fixed indemnity policy may pay $500 per day of hospitalization. Prior to the PPACA, HIPAA established standards for exempting fixed indemnity plans and other “excepted benefits” from requirements found under the Public Health Service Act. In 2014, HHS released regulations requiring additional standards for the sale of fixed indemnity products in the individual health insurance market. In part, the new regulation stipulated that a fixed indemnity plan would only qualify as an excepted benefit (and be exempt from the PPACA) if it was sold to individuals who attested in their insurance application that they had other minimum essential coverage.

Central United Life, an insurer that sells fixed indemnity policies, sued the HHS challenging their authority to enforce the new standard. The court held the original statute permits fixed indemnity coverage if it “(1) is provided under a separate policy, contract, etc. and (2) offers independent non-coordinated benefits.” The court held, “[n]othing suggests … Congress left any leeway for HHS to tack on additional criteria.” The court then stated that because HHS lacked authority to demand more of fixed indemnity providers than Congress required, the district court’s permanent injunction would stand. As a result, fixed indemnity policies must not coordinate with other coverage and an individual cannot be required to have MEC in order to purchase. HHS has 90 days to petition the U.S. Supreme Court to review the matter. However, the time period for requesting review by the Court could be extended if HHS requests en banc review by the entire D.C. Circuit Court of Appeals.

Employers are reminded that as an excepted benefit, a fixed indemnity policy does not qualify as MEC. If the only coverage an applicable large employer provides is a fixed indemnity product, this would not satisfy the employer mandate. Similarly, it would not satisfy the individual mandate either.

Central United Life v. Burwell »

On June 29, 2016, the IRS issued Rev. Proc. 2016-37, changing the determination letter program for individually designed retirement plans (which are those that are not administered through a pre-approved master and prototype or volume submitter plan document). Specifically, individually designed retirement plans will now only be required to seek determination letters upon plan creation/qualification and plan termination (instead of at certain intervals, as in the past).

The Revenue Procedure also lays out certain actions that the IRS will take in modifying the determination letter program. Specifically, the IRS indicates that they will:

• Annually consider whether determination letter applications will be accepted for individually designed plans in circumstances other than qualification and termination.
• Annually provide a required amendments list and allow employers two years to complete those amendments.
• Annually provide an operational compliance list, which would instruct employers on how they should operate their plans when they have not yet been amended.

They also specified that they will consider opening up this amended determination letter program to plans that are not individual retirement plans, such as complex defined benefit plans or multiemployer plans. Further, the IRS will consider providing model amendments for plans that must make changes to comply with IRS requirements.

These changes become effective on Jan. 1, 2017.

Employers sponsoring individually designed retirement plans should make themselves familiar with this revenue procedure and contact their advisors with any questions.

Rev. Proc. 2016-37 »

On July 11, 2016, as we were preparing to publish this communication, the DOL issued proposed regulations that would revise Form 5500 filing procedures. The regulations are proposed and would not impact the 2015 plan year filing currently in process. We will review and provide a detailed summary of the regulations in the next edition of Compliance Corner on July 26, 2016.

• Proposed Regulations, Revision of Annual Information Return/Reports »
• Proposed Regulations, Annual Reporting and Disclosure »
• DOL Fact Sheet (Previously linked website content is no longer available.)
• DOL News Release (Previously linked website content is no longer available.)

On May 17, 2016, the EEOC published final regulations related to employer sponsored wellness programs (see May 17, 2016, edition of Compliance Corner). Those regulations require wellness programs which include a disability related inquiry or medical examination to provide a notice to employees. That notice must explain what medical information will be obtained, who will receive the medical information, how the medical information will be used, the restrictions on its disclosure and the methods the covered entity will employ to prevent improper disclosure of the medical information. On June 16, 2016, the EEOC released a sample notice that employers may use to meet this requirement.

The notice requirement applies to employer sponsored wellness programs that request disability related information from employees or involve a medical examination, regardless of whether the program is related to a group health plan. Examples include a requirement to complete a health risk assessment, biometric screening, doctor’s exam or blood test in order to obtain some sort of reward, such as cash, gift card, HRA or HSA contribution or premium differential. It is effective for plan years on or after Jan. 1, 2017.

In conjunction with the release of the sample notice, the EEOC also provided a set of questions and answers that address specific questions about the notice, including the content, timing and format of the notice. The notice must be distributed to employees prior to them providing any health information. In other words, providing the notice after an employee has completed a health risk assessment or exam would be too late and prohibited. The notice may be delivered by hand, mail, or email with a subject line that clearly identifies what is being communicated (“Notice Concerning Employee Wellness Program”). The EEOC advises that the notice should not be provided with a lot of information unrelated to the wellness program as this may cause employees to misunderstand the notice. Thus, a stand-alone communication is recommended.

• EEOC Wellness Program Sample Notice »
• EEOC Questions and Answers »

On May 27, 2016, the IRS publically released the Office of Chief Counsel Advice 201622031 (CCA), which is dated Apr. 14, 2016. In the informal guidance, the IRS establishes that reimbursed premiums (whether originally paid through a cafeteria plan or not) that were paid to participate in a wellness program aren’t excludable from an employee’s gross income. Similarly, cash rewards for wellness program participation cannot be excluded from an employee’s gross income. The CCA is consistent with our prior understanding of these types of programs.

In the CCA, the IRS lays out three wellness designs through which it outlines the parameters of these principles. The fact patterns include situations where a no-cost wellness program provides cash rewards (or other benefits that are not excludable, like gym fees) for completion of certain tasks, a similar situation that includes employee-paid premiums, and a third situation implicating a reimbursement scheme of pre-tax wellness premiums. Cash payments and premium reimbursements cannot be excluded from the taxable income of an employee. These amounts would be considered wages and would be subject to payroll taxes and income tax withholding.

Generally speaking, CCA consists of memoranda written in response to various internal requests for guidance from IRS agents, officers and attorneys. The advice is not substantial authority and cannot be relied upon by an employer, but it provides insight into the IRS’ standing on certain issues, and it outlines important tax principles for employers that may encounter a similar situation in the future.

Office of Chief Counsel Advice »

On June 1, 2016, the DOL released an informal guide entitled “Warning Signs- Plan or Policy Non-Quantitative Treatment Limitations (NQTLs) that Require Additional Analysis to Determine Mental Health Parity Compliance.” As background, the MHPAEA requires group health plans and health insurance issuers to ensure that financial requirements and treatment limitations applied to mental health or substance use disorder (MH/SUD) benefits are no more restrictive than the predominant requirements or limitations applied to substantially all medical/surgical benefits.

NQTLs are non-numerical limits on the scope or duration of benefits for treatment (such as preauthorization). In essence, NQTLs on MH/SUD benefits must be comparable to, and applied no more stringently than, the processes, strategies, evidentiary standards or other factors used in applying the limitation with respect to medical/surgical benefits.

Since NQTLs are not as easy to identify as quantitative limitations, there have been many questions surrounding how to apply them. As such, this publication focuses on NQTLs and how to identify provisions that will require inquiry beyond the plan/policy terms in order to determine compliance with MHPAEA. Specifically, the publication provides example NQTL provisions that should be further investigated to determine if they are also applied to medical/surgical benefits.

Those example provisions are broken into sections including Preauthorization & Pre-service Notification Requirements, Fail-First Protocols, Probability of Improvement, Written Treatment Plan Required and Other. If any of these example provisions are applied to MH/SUD benefits, then the plan sponsor will need to ensure that such provisions are applied to medical/surgical benefits as well.

Employers above 50 should work with their insurer or ASO provider (if self-insured) to make sure that any NQTLs in their plans are compliant with MHPAEA.

Warning Signs Guide (Previously linked website content is no longer available.)

On May 17, 2016, the IRS issued final regulations modifying the Roth account distribution rules. As background, in September 2014, the IRS published Notice 2014-54 (and a corresponding proposed rule), which provided new guidance on pre-tax and after-tax distributions from qualified retirement accounts, in that it allowed for simultaneous distributions to multiple destinations to be treated as a single distribution for allocation purposes.

Specifically, beginning on Jan. 1, 2015, participants were allowed to select how the pre-tax amount was allocated among the distribution destinations. So if the pre-tax amount was less than the total amount distributed for a type of rollover, the participant could direct the allocation of the pre-tax funds (for example, to a rollover IRA) before the distribution was made. This allowed the participant to minimize the tax liability that resulted from the distribution.

These final regulations finalize the proposed rules that were issued along with Notice 2014-54, and essentially require employers and participants to follow the notice’s rules on allocating pre-tax and after-tax funds (as explained above).

These final regulations apply to Roth account distributions that take place on or after Jan. 1, 2016. Please see your advisor for information on how this notice will affect future pre-tax and after-tax distributions.

Final Regulations »

On March 3, 2016, the IRS issued Information Letter 2016-0007. The letter relates to transportation benefits, and addresses the situation where the transit provider refuses to accept an employer-provided debit card as payment for transportation. Generally speaking, IRC Section 132 allows employers to provide employees with certain transportation benefits, including transit passes for commuters, on a tax-advantaged basis. Under those rules, though, if a voucher (or similar item that can only be exchanged for a transit pass) is “readily available” for distribution to employees, the employer cannot give an employee a cash reimbursement. In other words, employers cannot reimburse transit expenses with cash if vouchers are available instead. The words “readily available” have created questions, since it’s not always clear what that actually means in practice.

The new IRS letter describes a situation where an employer made a debit card available for employees’ transit expenses. As a result, it did not provide cash reimbursement for bus tickets. One particular bus company, though, accepts only cash or checks, and not debit cards. An employee who had used that bus company to commute inquired about cash reimbursement for his bus fares. In response, the letter reiterates the ‘readily available’ test, and that this particular bus company’s unwillingness to accept debit cards does not in and of itself cause the bus tickets to not be readily available to the employer for direct distribution to the employee. As an example, the letter suggests that the employer could have purchased ticket books from the bus company for direct distribution for employees.

As a takeaway, although IRS information letters are not formal or binding guidance, employers should understand that cash reimbursement for commuter benefits is not an option unless there are substantial restrictions on the employer’s ability to reimburse employees through other means, such as vouchers, debit cards and the like. According to the letter, a transit provider’s requirement that payment be in the form of check or cash is not sufficient to make vouchers unavailable and allow cash reimbursements. Employers may need to identify (and communicate to employees) which transit providers are covered under the transportation plan.

Information Letter 2016-0007 »

On May 26, 2016, the IRS published checklists for retirement plan documents that are categorized into subject matter and are used by IRS agents when they review retirement plan documents. The IRS suggests that retirement plan sponsors use these checklists to review their plans before submitting determination letter applications. Each subject matter package contains an explanation of the law, alert guidelines and plan deficiency paragraphs that have been bundled into one document for convenience.

There are 17 different packages provided and the topics include many different issues that will be of assistance to employers who sponsor defined contribution retirement plans. Employers should familiarize themselves with these packages to ensure that their plan documents are in compliance.

Checklists »

On May 9, 2016, the EEOC published guidance relating to unpaid leave as a reasonable accommodation under the ADA. The guidance consolidates prior guidance and focuses on the ADA, employer leave policies, reasonable accommodation, undue hardship, requests for indefinite leave and return to work issues.

According to the guidance, employers should treat employees with disabilities the same as other similarly situated employees when it comes to leaves of absence. For example, if an employer offers five paid sick leave days each year to all employees with no attached conditions, the employer should not require an employee with a disability to provide a doctor’s recommendation to use the paid sick leave.

The guidance also highlights that because the ADA’s reasonable accommodation rules require an employer to adjust the customary employment practices to enable a disabled employee to work, an employer should consider unpaid leave as a possible reasonable accommodation. This would be true even where the employer does not offer leave as a benefit, the employee is not eligible for leave under the employer’s particular leave policy or the employee has exhausted FMLA (or other similar state law) protections. The protection is limited to unpaid leave, meaning the employer does not have to provide paid leave beyond what is allowed in its leave policy. With respect to indefinite leave requests, the guidance reiterates that although employers are not required to provide indefinite leave (since that generally constitutes an undue hardship on the employer), employers should carefully consider state and local laws before rejecting an indefinite leave request.

Employers should consider this guidance as they develop their leave policies, and should do so in conjunction with outside counsel (particularly since leave of absence situations implicate other non-benefits areas of law, including employment and labor law issues).

Guidance »

On March 25, 2016, the Treasury Department’s Office of Chief Counsel, Health and Welfare Branch, issued two nearly identical Information Letters. Both letters, Numbers 2016-0008 and 2016-0012, are related to the taxation of employer sponsored coverage provided to domestic partners. The letters do not reflect a change to previous guidance on the issue. However, they affirm current understanding and practice that coverage provided to a non-tax dependent domestic partner results in imputed income for the employee. The letters are notable because the IRS and Treasury Department rarely comment on issues related to domestic partnerships, since such partnerships are not federally recognized.

Tax-advantaged benefits may only be provided to an employee, legal spouse, children to age 27 or tax dependents. Domestic partners do not qualify as a spouse for federal taxation purposes. Thus, in order for an employee to receive tax free benefits for a domestic partner, the partner must be a tax dependent of the employee. The two recently issued letters state that to qualify as a dependent of the employee, the partner must meet four conditions:

• He or she is not a qualifying child of the taxpayer
• He or she is a citizen, national or legal resident of the U.S. or a resident of a contiguous country
• He or she is a member of the employee’s household for the full tax year
• He or she receives more than half of his or her support from the employee

If the partner does not meet these conditions, the employee must be taxed on the fair market value of the coverage provided to the partner. Generally speaking, fair market value is based on the premium cost of the coverage, not the actual benefits or claims reimbursement provided.

Please note that IRS Information Letters do not serve as official guidance. They are only intended for the specific individual who requested information. However, they do serve as an indication of how the IRS might rule on a particular issue. Also, this information is only applicable to federal taxation. States have their own rules regarding recognition of domestic partnerships and taxation.

If your plan provides coverage for domestic partners and you need additional information on this issue, please contact your advisor.

• IRS Information Letter 2016-0008 »
• IRS Information Letter 2016-0012 »

On May 17, 2016, the EEOC published final regulations related to employer sponsored wellness programs. The regulations were issued in two parts: Under the ADA and GINA. Both are applicable for plan years beginning on or after Jan. 1, 2017.

ADA

After receiving and reviewing comments, the EEOC finalized regulations under the ADA which were mostly similar to those that were proposed in April 2015, although making a few key changes. The ADA generally prohibits an employer (with 15 or more employees) from making a disability-related inquiry or requesting that an employee undergo a medical examination unless it is job related. There is an exception for employer sponsored wellness programs in which participation is voluntary. The final rules for such programs are summarized below.

First, it is important to note that bona fide benefit plans meeting the ADA’s safe harbor conditions are not subject to the ADA’s restrictions. In recent years, two district courts ruled that an employer’s wellness program was exempt from the ADA’s rules and EEOC enforcement because the program met the safe harbor conditions. (Seff v. Broward County, 778 F. Supp. 2d 1370 (S.D. Fla. 2011), aff'd, 691 F.3d 1221 (11th Cir. 2012); EEOC v. Flambeau, Inc., 2015 WL 9593632 (W.D. Wis. 2015).) In the preamble to these final regulations, the EEOC states that it believes those two cases were wrongly decided.

The EEOC states that the safe harbor is only available to health plans for the purpose of underwriting, classifying and administering risk. The safe harbor does not apply to an employer’s wellness program that includes a disability related inquiry or medical exam when the purpose of the program is to offer rewards or impose penalties. An employee cannot be discriminated against in terms of cost based solely on the fact that a disability exists. The difference in cost has to be justified by increased risk and based on sound actuarial data and not speculation.

The final rules only apply to programs that request information related to a disability or request a medical examination. A program that simply promotes general health or provides education to employees, such as a weight loss program or onsite fitness facility, is not subject to these rules. However, the ADA would still apply to such a program in that a reasonable accommodation must be provided for an employee with a disability who wishes to participate in the program. For example, if the program involves a nutritional class, the employer may need to provide a sign language interpreter for an employee with a hearing impairment.

If the program involves a disability related inquiry or medical examination, it must be considered voluntary. Examples include requesting the completion of a health risk assessment and biometric screening. To be considered voluntary, the employer:

• Cannot require participation in the wellness program
• Cannot deny coverage for any group health plan or benefit packages within the plan or limit the extent of such coverage for those not participating in the wellness program
• Cannot take adverse employment action, retaliate against, intimidate, coerce or threaten employees in relation to program participation

Additionally, a program must be reasonably designed to improve health or prevent disease in participants, which means the program:

• Must not be overly burdensome
• Must not be a subterfuge for violating the ADA or other laws
• Must have a reasonable chance of improving the health of or preventing disease in participants
• Must use aggregate data to design a program to improve health of participants; or individual participants must receive results, follow-up information or advice designed to improve health
• Must not be highly suspect in the method chosen to promote health or prevent disease

A wellness program is not reasonably designed if its primary purpose is to shift cost from the employer to employees based on the employee’s health or to estimate future costs to a group health plan.

It’s important to understand that the provisions outlined above apply regardless of whether an incentive is provided or if the program is related to the group health plan.

Further, wellness programs that include a disability related inquiry or medical examination must provide a notice to employees which explains what medical information will be obtained, who will receive the medical information, how the medical information will be used, the restrictions on its disclosure and the methods the covered entity will employ to prevent improper disclosure of the medical information. The final regulations apply this notice requirement to all such programs, whereas the proposed regulations were only going to apply the notice requirement to programs tied to a group health plan.

The wellness programs are restricted in the amount of the incentive to be provided to participants. The total value of all incentives cannot exceed 30 percent of the total cost of employee only coverage under the health plan. This would include incentives provided by both participatory and health contingent wellness programs, as defined by HIPAA. This is a change from current requirements where HIPAA applies the 30 percent limitation only to health contingent plans. Previously, there was no limit on the amount of incentive a participatory program could provide. Now, if the program involves a disability related inquiry or medical examination, the incentive is limited to 30 percent of the employee only cost of coverage.

Importantly, the limitation on the amount of the incentive includes both rewards and penalties, depending on how the employer has structured its program. It also includes all incentives, both financial and non-financial. An example of a non-financial incentive (also called in-kind) would be leave time, a parking space or a relaxing of an employer dress code. Although this may seem challenging, employers have flexibility in determining value of non-financial incentives.

As some may recall, HIPAA increases the incentive amount to 50 percent of the cost of coverage if the program is related to tobacco. Under the new rules, an employer could use the 50 percent only if the program does not make a disability related inquiry or request a medical examination. For example, if the program simply asks employees to self-certify whether they use tobacco, the employer may implement an incentive up to 50 percent of cost. Alternatively, if the program uses a blood test to determine the presence of nicotine, this would be considered a medical examination and the incentive would be limited to 30 percent of cost.

The EEOC had previously requested comments as to whether affordability should factor into the maximum allowable incentive for a wellness program related to a health plan. If the wellness program’s incentive makes the cost of coverage unaffordable (as defined under PPACA), the EEOC had considered that this practice would render the wellness program as involuntary. This provision was not part of the final rules. Rules under PPACA already require employers to disregard incentives when determining affordability. In other words, if the program is non-tobacco related, the employer must use the higher employer contribution amount as if no employee participates in the wellness program.

GINA

In October 2015, the EEOC issued proposed regulations related to employer sponsored wellness programs and GINA. After receiving and reviewing comments, they have issued final regulations which address the extent to which an employer may offer an inducement (incentive) to an employee for a spouse to provide information through a health risk assessment in conjunction with an employer sponsored wellness program.

GINA generally restricts an employer’s acquisition and disclosure of genetic information and prohibits an employer from using genetic information in making employment decisions. One limited reason that an employer may request, require or purchase genetic information is related to an employer who sponsors a voluntary wellness program that is reasonably designed. The terms ‘voluntary’ and ‘reasonably designed’ are defined in the same manner as under the ADA regulations, outlined above. Such programs cannot condition the inducement on the provision of genetic information. Importantly, medical information pertaining to a spouse or child is considered genetic information of the employee.

The final regulations maintain that a spouse’s manifestation of a disease or disorder is not genetic information. Thus, an employer may provide an inducement for this information. In other words, an employer may provide a reward for an employee and spouse’s completion of an assessment even if the assessment requests information on the spouse’s current or past health status. Alternatively, an inducement cannot be provided for information related to an employee’s child since that is more closely related to the employee’s genetic information.

Both sets of regulations require that medical information acquired through the wellness program be treated as confidential medical records and kept separate from personnel records. Employers should adopt and communicate strong privacy policies and train those employees who handle confidential information.

Employers with wellness programs may be overwhelmed by these new regulations and how they interact with the existing HIPAA/PPACA guidelines. Please consult your advisor with any questions. NFP Benefits Compliance is developing new resources and tools to assist with your design and compliance.

• ADA Regulations »
• Fact Sheet: Employer Wellness Programs and the ADA »
• EEOC FAQs: Employer Wellness Programs and the ADA »
• GINA Regulations »
• Fact Sheet: Employer Wellness Programs and GINA »
• EEOC FAQs: Employer Wellness Programs and GINA »

This week, the DOL announced a new general FMLA notice (which employers post in the workplace) and simultaneously released a new 76-page guide to help employers administer FMLA. The new general FMLA notice doesn’t contain new information, but is organized in a more reader-friendly manner. There is no immediate need to change currently-posted FMLA posters. Employers may continue to use the former general notice or may post the newly released notice.

The new FMLA guide, intended for employers, does not contain new employer requirements. Instead, it is meant to provide a user-friendly explanation of FMLA, answering a number of commonly asked questions. It also provides a walkthrough of a typical leave scenario and highlight’s the law’s entitlements and obligations. At a high level, the guide:

• Contains easy to follow flowcharts of the typical FMLA process
• Includes “Did You Know?” sections to highlight lesser-known provisions
• Provides charts and an explanation of the medical certification process
• Instructs regarding military family leave, an oft-misunderstood aspect of FMLA

• Poster »
• Guide »

The IRS has released a Voluntary Correction Program (VCP) submission kit defined contribution plan sponsors can use if they failed to adopt new plan documents by the April 30, 2016 deadline. The sponsor may seek to correct that failure by adopting a pre-approved plan document that includes provisions required by the Pension Protection Act (PPA) and submitting a VCP compliance statement to the IRS. This will protect the plan’s tax-favored status.

The IRS cautions employers to check with the service provider who generally provides their plan document to determine if that law firm, bank, broker or TPA will make a special request for a closing agreement on behalf of all the adopters who they represent who missed the deadline. If that is the case, the individual plan sponsor does not also need to complete a VCP submission.

The VCP submission kit includes information on items that must be submitted with the submission, instructions on completing the necessary forms, information on calculating the VCP user fee and addresses to which to send the VCP submission.

VCP Submission Kit »

On April 29, 2016, the IRS published Rev. Proc. 2016-28, which provides the 2017 inflation-adjusted amounts for HSAs and HSA-qualifying HDHPs. According to the revenue procedure, the 2017 annual HSA contribution limit will increase to $3,400 (up $50 from 2016) for individuals with self-only HDHP coverage, but stays the same at $6,750 (no change from 2016) for individuals with family HDHP coverage.

For HSA-qualifying HDHPs, the 2017 minimum statutory deductibles are the same as those for 2016: $1,300 for self-only coverage and $2,600 for family coverage. The 2017 maximum out-of-pocket expenses are also the same as those for 2016: $6,550 for self-only HDHP coverage and $13,100 for family HDHP coverage. Out-of-pocket expenses include deductibles, copayments and coinsurance, but not premiums.

The 2017 limits may impact employer benefit strategies, particularly for employers coupling HSAs with HDHPs. Employers should ensure that employer HSA contributions and employer sponsored qualified HDHPs are designed to comply with the 2017 limits.

Rev. Proc. 2016-28 »

On April 6, 2016, the DOL released the final Conflict of Interest Rule, which amends ERISA’s definition of “fiduciary.” As we’ve reported in the past, the new rule broadens the definition of fiduciary under ERISA by considering more communications to be investment advice that renders the person providing that advice a fiduciary.

As background, the DOL released a proposed rule in 2010, but withdrew that version after opposition from the industry and Congress. The DOL later released another proposed rule in April 2015, and received hundreds of comments from the business community, consumer advocates and state and federal legislators. The DOL also held hearings on the rule in August of 2015.

After sending the rule to the Office of Management and Budget (OMB), the final rule was released. In addition to releasing the final rule, the DOL released a regulatory package of materials that accompany the rule, including:

• The final version of the Best Interest Contract Exemption (“BIC Exemption”)
• The Principal Transactions Exemption
• Amendments to previous Prohibited Transaction Exemptions (“PTEs”), including PTEs 75-1, 77-4, 80-83, 83-1, 84-24, and 86-128.
• Regulatory impact analysis
• Chart Illustrating Changes from DOL’s 2015 Conflict of Interest Proposal to Final
• FAQs
• Fact Sheet: Middle Class Economics: Strengthening Retirement Security by Cracking Down on Conflicts of Interest in Retirement Savings
• Fact Sheet: DOL Finalizes Rule to Address Conflicts of Interest in Retirement Advice, Saving Middle-Class Families Billions of Dollars Every Year

Although the final rule adopts much of the proposed rule’s substance and structure, the DOL also made a number of changes to the rule. Some of the most significant changes to the final rule are as follows:

• The rule clarifies the meaning of “recommendation” to be communication that is more tailored to the particular recipient. This aligns the definition of recommendation with FINRA guidance.
• The rule clarifies that an advisor that markets himself or his firm’s services without making investment recommendations is not giving fiduciary investment advice.
• Appraisals are completely removed from the rule, as the DOL intends to include them in a separate rulemaking project.
• Participant education can include asset allocation models and interactive materials identifying specific investment products or alternatives without being considered fiduciary investment advice. However, this is not the case for IRAs.
• The rule expands the seller’s exception for recommendations to independent fiduciaries of plans or IRAs with financial expertise and plan fiduciaries with at least $50 million in assets under management.

The DOL also made several adjustments to the BIC Exemption, including:

• Allowing all asset types to be covered by the BIC Exemption.
• Allowing advice provided to sponsors of small 401(k) plans to be covered under the BIC Exemption.
• Eliminating the requirement for a separate contract between ERISA plans and participants and the advisor.
• Not requiring contract execution prior to advisers’ recommendations.
• Allowing for the contract terms to be incorporated into account-opening documents.
• Providing a negative consent process for existing clients to avoid having to get new signatures from them.
• Simplifying execution of the contract by only requiring the financial institution to execute the contract and not each individual adviser.
• Providing a streamlined “level fee” provision, that allows advisers and financial institutions that receive only a level fee in connection with the advice they provide to rely on the exemption without entering into a contract as long as the other aspects of the BIC Exemption are met.
• Eliminating most of the proposed data collection requirements and some of the more detailed proposed disclosure requirements and providing a mechanism to correct good faith violations of the disclosure requirements.

The DOL also clarified that the rule does not include advice given with respect to welfare plans, such as health, disability, or life insurance. However, the DOL did not exclude HSAs from the scope of the rule.

The final rule is effective on June 7, 2016. However, the final rule and several conditions of the BIC Exemption (e.g., the acknowledgement of fiduciary status, adhering to the best interest standard, and certain conflict of interest disclosures) have a delayed applicability date of April 10, 2017. Other requirements of the BIC Exemption (e.g., the contract requirement and certain representations and warranties regarding firm conflicts) will not go into full effect until Jan. 1, 2018. In the period between publication and Jan. 1, 2018, an interim rule that mirrors the conditions of the existing regulation will be in effect.

In the coming months, we expect the DOL to provide additional regulatory guidance on the rule. We will notify you of any developments as we become aware of them.

• Final Rule (Previously linked website content is no longer available.)
• BIC Exemption (Previously linked website content is no longer available.)
• Entire Regulatory Package (Previously linked website content is no longer available.)

On April 4, 2016, the IRS published Employee Plans News Issue No. 2016-5, which includes the following items: a reminder of the upcoming deadline for employers with preapproved retirement plan documents; a new correction method for missed plan deadlines; a request for 2016-2017 Priority Guidance Plan recommendations; guidance on plan designs using short service; and links to two updated webpages and recorded webinars.

Concerning the reminder, the IRS explained that employers with preapproved retirement plan documents must restate the plan by April 30, 2016, to keep the plan qualified and updated with changes in the law. Generally, these plans are required to be updated and restated on a six year cycle. In addition, if an employer wants to receive IRS approval of their restated plan, the application filing must be made with the IRS on or before April 30, 2016. However, most employers don’t need a separate IRS determination letter for a preapproved plan and the IRS limits applications to employers who changed their volume submitter plan. An employer who adopts a master & prototype plan (standardized or non-standardized) may not apply for its own determination letter and should rely on the approval letter issued to the plan sponsor (typically a financial institution, advisor, or similar provider).

The reminder also includes a one year extension to Jan. 31, 2017, for any preapproved plan adopted on or after Jan. 1, 2016 (“new adopter”). This would not include a plan that is adopted as a modification and restatement of a pre-approved plan that had been maintained by the employer prior to Jan. 1, 2016. This extension is to facilitate a plan sponsor’s ability to convert an existing individually designed plan into a current pre-approved plan. The plan sponsor would need to restate the plan and file it with the IRS by Jan. 31, 2017.

Additionally, the IRS introduced a new method for plan document providers to request correction of employers’ failure to timely adopt preapproved plans. Previously, the only way an employer could correct not signing a preapproved retirement plan by the deadline was to adopt a restated plan document and complete a submission under the Voluntary Correction Program (VCP) with the IRS. If approved, the IRS treats the plan as entitled to tax-favored status.

This new option allows the financial institution or service provider that offers the plan document to request a closing agreement on behalf of all adopters who missed the deadline. The goal is to reduce employers’ burden of submitting VCP applications. Employers may continue to make VCP submissions for correcting a failure to restate their plans by the deadline, but the IRS encourages financial institutions or other service providers to submit proposals for umbrella closing agreements to correct the same failure on a larger scale by addressing employers affected by the failure as a group.

This edition also includes an invite for public comment on recommendations for items that should be included in the 2016-2017 Priority Guidance Plan. As background, the IRS uses the Priority Guidance Plan each year to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance. Comments must be submitted by May 16, 2016.

Next, the IRS issued a cautionary note on discriminatory plan designs using short service. As quick background, qualified retirement plans must ensure the contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees (those earning more than $120,000 a year). A plan that meets statutory or regulatory checklists, but primarily or exclusively benefits highly compensated employees (HCEs) with little to no benefits for non-highly compensated employees (NHCEs), may still discriminate and violate the IRC.

The IRS has recently found discriminatory plan designs that provide significant benefits to the HCEs and a specified group of NHCEs, who work very few hours or receive very little compensation, and exclude other NHCEs from plan participation. The allocation to NHCEs is designed so that the group receives the minimum to satisfy the mathematical portion of the nondiscrimination requirements found in IRC Section 401(a)(4).

Although these designs may allow the plan to satisfy the vesting or numeric general tests for nondiscrimination and the associated regulations, they don’t satisfy Treas. Reg. Section 1.401(a)(4)-1(c)(2), which requires that the provisions of Sections 401(a)(4)-1 through 401(a)(4)-13 be reasonably interpreted to prevent discrimination in favor of HCEs.

Further, the IRS included links to updated webpages on 457(b) plans for state or local governments and for non-governmental tax-exempt entities. Note that the IRS has provided two updated comparison charts on these webpages. One compares governmental 457(b) plans and 401(k) plans, and the other compares a tax-exempt 457(b) plan and a governmental 457(b) plan.

Finally, there are two recorded webinars as follows: On Feb. 18, 2016, the IRS hosted a webinar entitled “Highlights of the 2015 Cumulative List of Changes for Retirement Plans”. On Dec. 8, 2015, the IRS hosted the “Employee Plans - Examinations Update - Fall 2015” webinar.

Employee Plans News Issue No. 2016-5 »

On March 17, 2016, the U.S. Court of Appeals for the Seventh Circuit, in Stapleton v. Advocate Health Care Network, 2016 WL 1055784 (7th Cir. 2016), ruled that a pension plan established by Illinois-based Advocate Health Care Network (“Advocate”) does not qualify as a “church plan” exempt from ERISA. This decision affirms the lower court’s ruling and holds that a plan established by a church-affiliated organization is not exempt from ERISA under the church plan exception.

As background, church plans are generally exempt from ERISA. A church plan is defined as a plan that is established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches that is exempt under IRC Section 501. A church plan found exempt from ERISA can escape responsibilities such as the Form 5500 filing, Summary Annual Report, and SPD.

The opinion affirmed that Advocate is not a church, nor was its predecessor. Advocate formed in 1995 as a 501(c)(3) non-profit corporation from a merger between two health systems. While Advocate is still affiliated with two associations of churches, it is not owned or financially supported by either. The Seventh Circuit reasoned that a plan established and maintained by a church is a church plan, and a church plan established by a church and maintained by a church-affiliated organization is a church plan. However, a plan that is both established and maintained by a church-affiliated organization is not a church plan.

To qualify for the church plan exception under ERISA, there are establishment and maintenance requirements. Only the maintenance requirement includes a church-affiliated organization.

Late last year in a similar case, the Third Circuit, in Kaplan v. Saint Peter’s Healthcare System, held that the IRS’ granting of an exemption to the plan was of no consequence. Even though the IRS has taken the position that church-affiliated organizations can establish and maintain church plans, the court held that this position is at odds with ERISA’s statutory text.

These recent cases in the Third and Seventh Circuits are of concern for church-affiliated organizations that rely on the church plan exemption. They show that there is some argument that the courts might require these organizations to comply with ERISA’s requirements, even if the IRS has made a determination that the organization is sponsoring a church plan.

If you sponsor a plan that has relied on the church plan exemption and your organization is an affiliated organization instead of an actual church, you may want to consider speaking with outside counsel about the implications of this case. We will continue to monitor this case and report on any developments.

Stapleton v. Advocate Health Care Network »

HHS’s Office of Civil Rights (OCR) recently announced that it has launched Phase II of its HIPAA Audit Program. Together with Phase I (launched back in 2011), the audit program is meant to help HHS assess compliance with the HIPAA privacy, security and breach notification rules. In addition, the program’s audits serve as a compliance tool that supplements OCR’s other enforcement tools, such as complaint investigations and compliance reviews. In Phase II, OCR says it will review the policies and procedures adopted and employed by covered entities and their business associates to meet certain standards and implementation specifications of the HIPAA rules.

The Phase II process begins with verification of a covered entity’s address and contact information. Those entities that are selected will receive an email from OCR requesting that contact information. OCR will then transmit a pre-audit questionnaire to gather additional information relating to the size, type and operations of the covered entity. OCR will then use that information to form a pool of candidates that could be selected for an audit or compliance review.

On its web page, OCR has a list of FAQs that covered entities might have regarding the audit program. Those FAQs include who will be audited, on what basis the audits will be selected, whether audits will I process. As a reminder, group health plans are covered entities. Thus, employers that sponsor a self-insured group health plan should review the announcement and web page FAQs, so that they are familiar with the program and process.

• HHS Announcement »
• HIPAA Audit Program Home Page »

On March 11, 2016, the IRS Employee Plans Compliance Unit (EPCU) announced the opening of three new projects (compliance checks) relating to data errors on Form 5500 Series and Form 5330. As background, in an effort to focus its resources, the EPCU uses information from its projects to gather general information on retirement plan compliance. Once opened, the EPCU may contact retirement plan sponsors for information relating to the plan, including information on Form 5500 filing as well as Form 5330. While these compliance checks are not an official audit, failure to respond to an EPCU inquiry may result in an audit. An important distinction between an audit and a compliance check is that a plan does not lose access to certain IRS correction programs due to a compliance check.

Beyond responding to an EPCU inquiry, plan sponsors may be interested in the projects generally, since they describe issues that might raise red flags and potentially trigger an audit. The three recently-opened projects all relate to Form 5500 and Form 5330 reporting, and indicate that these failures may trigger an audit.

The first relates to missing, inconsistent or incomplete pensions feature codes from Forms 5500, 5500-SF, and 5500-EZ. The EPCU is sending letters to the sponsors of the identified plans (along with a list of the pension feature codes) asking the sponsors to identify which codes apply to their plans. Also included will be instructions on how the sponsors are to amend filings to correct the codes and any other inaccuracies.

The second relates to Final Form 5500 Series filings showing year-end assets. Form 5500 filings marked as final cannot show any assets at the end of the plan year. Plan sponsors receiving letters of this nature will be asked to clarify why the “Final Return” checkbox was selected.

The last relates to 401(k) plans reporting an IRC Section 4971 excise tax on Form 5330. The Section 4971 excise tax doesn’t apply to 401(k) plans; only those plans subject to the minimum funding requirements. Plan sponsors receiving letters of this nature will be asked to confirm their type of plan, plan number, plan name and type of contributions. This information will be used to determine if an amended Form 5330 should be filed and whether a different excise tax is due.

• New EPCU Project: Sole Proprietor Participation Project (Previously linked website content is no longer available.)
• New EPCU Project: Favorable Letter/Non-Filer Project (Previously linked website content is no longer available.)
• New EPCU Project: Non-Governmental 457(b) Plans Excess Deferrals Project (Previously linked website content is no longer available.)

The IRS recently released Publication 3998, which is a short 6-page document aiming to help small employers choose the best retirement plan solution for their business. Much of the publication includes definitions and terms, but pages 2 and 3 include a side-by-side comparison chart. The chart illustrates the differences between IRS-based plans (such as a SEP or SIMPLE IRA), defined contribution plans (such as a Profit Sharing, Safe Harbor 401(k) or Traditional 401(k)) and defined benefit plans. Contact your advisor if you are a small employer who wishes to offer a retirement plan to employees.

IRS Publication 3998 »

On March 1, 2016, the U.S. Supreme Court, in Gobeille v. Liberty Mutual Ins. Co., No. 14-181 (March 1, 2016), held that ERISA preempts a Vermont law that requires employers and insurers to report claims to the state. As background, Vermont previously enacted a law requiring health insurers and other entities, including self-insured plans and their TPAs, to periodically (as often as monthly) report data relating to the plan’s health care claims, enrollment, cost, cost comparisons, pricing, quality and utilization requirements to a Vermont state agency. The law was meant to help create a resource, known as an ‘all-payer claims database,’ for the state, insurers, employers and providers to examine and review health care utilization, expenditures and performance in Vermont. Penalties for non-compliance could be up to $2,000 per day and/or the loss of state licensure. In an attempt to address the issue with respect to many of its self-insured TPAs, as well as its own information privacy concerns, Liberty Mutual challenged the Vermont law, claiming that the law was preempted by ERISA.

As a short background on ERISA, ERISA generally preempts (meaning that it takes precedent over) state laws that ‘relate to’ employee benefit plans. However, ERISA does not generally preempt state laws that regulate the business of insurance. The topic of ERISA preemption has been at the center of many court cases, and the boundaries of the issue are not always clear.

The Supreme Court held that ERISA does preempt the Vermont law. The Court reasoned that ERISA generally preempts two broad categories of state laws. The first category relates to those state laws that refer to and directly regulate ERISA plans. The second relates to those that are connected to a central matter of plan administration or that would interfere with ERISA’s goal of establishing a nationally uniform plan administration. The Court stated that Vermont’s law fell into that second broad category by disrupting a key aspect of plan administration via its interference with ERISA’s uniform disclosure and plan administration system. The Court reasoned that ERISA preemption is necessary in order to prevent states from imposing inconsistent and burdensome reporting requirements on plans.

The Court’s ruling means that plan sponsors and insurers in Vermont do not have comply with the Vermont reporting law. It is not entirely clear what the ruling means for other state’s reporting or other laws that might apply to a group health plan—NFP Benefits Compliance will continue to monitor any developments on the issue of ERISA preemption.

Gobeille v. Liberty Mutual Ins. Co. (Previously linked website content is no longer available.)

On Feb. 25, 2016, the IRS and DOL released instructions related to the Form 5500 series for 2015 (which are filed seven months after the plan year end date). For plans ending Dec. 31, 2015, that is Aug. 1, 2016. The final forms included new IRS compliance questions that plan sponsors are to answer. There were FAQs released explaining how to answer the questions. However, because the questions were not approved by the Office of Management and Budget before the final forms were issued, the IRS is instructing plan sponsors not to answer the questions and the IRS has removed the FAQs. The webpage linked below lists each affected form and schedule, noting the items that should not be completed. Please note that these 2015 Instructions have been revised to reflect this change (although the Forms have not).

• Form 5500 Instructions (Previously linked website content is no longer available.)
• Form 5500-SF Instructions (Previously linked website content is no longer available.)
• Form 5500-EZ Instructions »
• Webpage (Previously linked website content is no longer available.)

On Feb. 29, 2016, the IRS published Employee Plans News Issue No. 2016-3. In this edition, the IRS provided additional guidance on completion of the new Forms 5500, discussed the newest guidance on mid-year amendments to safe harbor 401(k) plans, announced the 2015 reference list, and highlighted Publication 721 – Tax Guide to U.S. Civil Service Retirement Benefits.

Specifically, the IRS mentioned that they will not require plan sponsors to complete new questions on the most recently published Forms 5500/5500-SF for the 2015 year. In fact, they encouraged plan sponsors to skip the following questions when completing the form:

• Form 5500 - Preparer Information (page 1 bottom); (Previously linked website content is no longer available.)
• Schedule H - Lines 4o-p, 6a-d; (Previously linked website content is no longer available.)
• Schedule I - Lines 4o-p, 6a-d; (Previously linked website content is no longer available.)
• Schedule R - New Part VII (Lines 20a-c, 21a-b, 22a-d, and 23); and (Previously linked website content is no longer available.)
• Form 5500-SF - Preparer Information (page 1 bottom), Lines 10j, 14a-d, and New Part IX (Lines 15a-c, 16a-b, 17a-d, 18, 19, and 20). (Previously linked website content is no longer available.)

Additionally, the IRS addressed Notice 2016-16, which clarifies how plan sponsors may comply with the safe harbor 401(k) plan rules when making mid-year plan changes. The new guidance provides that a mid-year change to a safe harbor plan or to a plan’s safe harbor notice doesn’t violate the safe harbor rules merely because it’s a mid-year change if:

• The plan satisfies the notice and election opportunity conditions, if applicable; and
• The change is not a prohibited mid-year change listed in Notice 2016-16.

The IRS also announced the 2015 version of their Reference List, which lists the changes in retirement plan qualification requirements that were announced in that year, in an effort to help plan sponsors incorporate updated provisions in their plan documents.

Finally, the IRS provided the 2015 version of Publication 721, which is a tax guide for civil service retirement benefits. This publication explains how the federal income tax rules apply to civil service retirement benefits received by federal employees and their beneficiaries.

Employers sponsoring plans that could be affected by these provisions should review this guidance to ensure compliance.

Employee Plan News Issue No. 2016-3 »

The IRS recently issued the 2015 version of Form M-1. As background, Form M-1 must be filed by MEWAs and certain entities claiming exception (ECEs). The Form M-1 allows those entities to report that they complied with the ERISA’s group health plan mandates.

Although the newest version of Form M-1 does not include any substantive changes, MEWA and ECE sponsors will benefit from reviewing the updated Form and its instructions. Additionally, the Form includes the DOL’s self-compliance tool that will assist plan sponsors (even those who do not sponsor a MEWA) in reviewing their group health plans for compliance with the various requirements under ERISA.

2015 Form M-1 (Previously linked website content is no longer available.)

On Dec. 31, 2015, the IRS released a private letter ruling (PLR) relating to a collectively bargained arrangement (CBA) that allows employees to contribute the value of unused vacation time to their employer’s retiree HRA or 401(k) plan. The ruling, PLR 201601012, affirms that such contributions are eligible for favorable tax treatment. As background on the arrangement, the employer’s vacation benefits are earned by employees annually and cannot carry over from year to year. As reconciliation, at the end of each year, the employee forfeits the value of unused vacation up to 21 days, and the employer pays out as regular wages the value of any additional unused days. Under the CBA, the employer proposed an amendment to its HRA and 401(k) plan that would allow employees to elect (irrevocably at the beginning of the plan year) to contribute the forfeited value to either the HRA or the 401(k) plan (or a combination of the two). In addition, if the employee did not make an election, the entire forfeited amount would go to the 401(k) plan (although amounts exceeding the 401(k) maximum contribution limits would go into the HRA).

In the PLR, the IRS stated that because the amounts will not be paid in cash or applied toward a taxable benefit, the elections will not create a cash or deferred arrangement, and therefore are allowed under the 401(k) rules. Importantly, because the arrangement is provided for under a CBA, there are exceptions to certain nondiscrimination rules that might otherwise restrict the arrangement. With respect to the HRA contributions, because the contributions are employer paid and are going to an otherwise valid HRA (meant to reimburse eligible medical expenses during retirement), the HRA contributions would be excludable from gross income.

Importantly, PLRs may be relied on only by the entity requesting the determination. While it is helpful insight into how the IRS may view another such plan design, employers that have or are contemplating a plan design that involves donation of unused vacation time should review the PLR and work with outside counsel in appropriately structuring the arrangement.

PLR 201601012 »

On Feb. 8, 2016, the IRS released Rev. Proc. 2016-14, which makes inflation required adjustments as a result of the Protecting Americans from Tax Hikes (PATH) Act of 2015. While the revenue procedure addresses a variety of items ranging from educator expenses to certain depreciable assets, of interest to employers sponsoring qualified transportation benefits is the increase in the fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass to $255 per month. This new amount was effective Jan. 1, 2016. While this limit was previously announced (as reported in the Dec. 22, 2015, edition of Compliance Corner), the revenue procedure serves as a helpful (and official) reminder to employers and employees taking advantage of the increased limitation.

Rev. Proc. 2016-14 »

On Feb. 10, 2016, the U.S. Court of Appeals for the Fifth Circuit decided the case of Health Care Serv. Corp. v. Methodist Hosps. of Dallas, 2016 WL 530680 (5th Cir. 2016). As background, a Texas state law, found in the Insurance Code, the “Texas Prompt Payment Act,” generally requires issuers to face penalties if claims are not paid within 30 days for electronic claims, or 45 days for non-electronic claims. In the case, the plaintiff filed a suit seeking a declaratory judgement that the law does not apply to the plaintiff as the administrator of a self-insured plan and is preempted by ERISA. The suit was filed in anticipation that the defendant would assert a counterclaim in excess of $31 million attributable to alleged late payment of approved claims, penalties, interest and attorney’s fees, which did in fact occur.

Previously, the federal district court ruled the Texas prompt-pay law does not apply to third-party administrators of self-insured plans. The Fifth Circuit upheld that determination, basing its decision off the plain language of the statute (a de novo review) stating that a TPA is not an “insurer” when acting in its capacity as a plan administrator for a self-insured plan. Finally, the Fifth Circuit acknowledged that agreements in place between a TPA and self-insured client are not a “health insurance policy” subject to Texas Prompt Payment Act because the benefits are provided by the plan itself- not the TPA.

This case is important for employers sponsoring self-insured plans, as it reinforces the ERISA fiduciary duty plan sponsors have, rather than a TPA selected to administer the plan. Further, it clarifies that state insurance law does not extend its application to regulating self-insured plans.

Health Care Serv. Corp. v. Methodist Hosps. of Dallas »

On Feb. 10, 2016, HHS published a consumer fact sheet related to mental health and substance use disorder parity of benefits. The fact sheet summarizes the federal law requiring group health plans to provide mental health and substance use disorder benefits under the same terms and conditions as the plan provides for other medical benefits. Non-grandfathered small group health plans and retiree-only health plans are not subject to the law. While not addressed in the fact sheet, please note that self-insured non-federal governmental plans may also opt-out of the parity requirements. Additionally, a non-grandfathered fully insured small group plan may be subject to similar state insurance mandates.

As described in the fact sheet, group health plans subject to the parity law cannot impose financial requirements or treatment limitations on mental health or substance use services that are not imposed on medical services. For example, the services must have similar co-payments, annual limits, prior authorization requirements and medical necessity standards.

On Feb. 8, 2016, the DOL’s EBSA submitted a report to Congress entitled “Improving Health Coverage for Mental Health and Substance Use Disorder Patients Including Compliance with the Federal Mental Health and Substance Use Disorder Parity Provisions.”

The DOL states in the report that EBSA currently has 460 investigators who review all types of ERISA plan inquiries, including Mental Health Parity and Addiction Equity Act (MHPAEA). In 2015, EBSA created a new position called Senior Advisory- Health Investigations in each of its ten regional offices to investigate large self-insured single employer plans and large-format service providers. In fiscal years 2010 through 2015, EBSA received approximately 1.5 million inquiries related to ERISA covered employee benefit plans. Of those, 1,079 were related to MHPAEA. During that same time frame, EBSA has conducted 1,515 investigations related to MHPAEA and cited 171 violations. Corrective actions included the amending of insurer products, reprocessing of claims resulting in the payment of previously denied benefits, plan document amendments.

The most common MHPAEA violations identified include:

• Not offering out-of-network providers or inpatient benefits to treat mental health or substance use disorders even though these benefits are available for medical benefits;
• Charging higher co-payments for mental health providers compared to medical providers;
• Imposing visit limits on mental health benefits that are more restrictive than those applied to medical visits;
• Imposing broad preauthorization requirements on all mental health and substance use disorder treatments and only requiring preauthorization on a select few medical treatments; and/or
• Imposing lower annual dollar limits to treat autism spectrum disorder when such limitations are not imposed on medical benefits.

The fact sheet and report serve as a reminder that federal regulatory agencies consider compliance with MHPAEA a priority. Employer plan sponsors should review their plan design and documents to ensure their own plan’s compliance. If you have additional questions or need assistance on this issue, please contact your advisor.

• Fact Sheet (Previously linked website content is no longer available.)
• Report (Previously linked website content is no longer available.)

Many plans have in place a provision related to subrogation and reimbursement. If a participant incurs expenses and those expenses are subsequently paid or reimbursed by a third party, the plan reserves the right to recover any amount that the plan previously paid for those expenses. An example would be a participant who is injured in a car accident and the participant later receives reimbursement of medical expenses through an auto insurance policy or legal settlement. The plan may have reserved the right within the plan document for the plan to recover the amount it previously paid for the participant’s accident related expenses.

In Montanile vs. Board of Trustees of the National Elevator Industry Health Benefit Plan, No. 14-723 (Jan. 20, 2016), the U.S. Supreme Court reviewed a case in which a participant (Montanile) was injured in a car accident caused by a drunk driver. The plan paid $121,044 in expenses related to Montanile’s injuries. Montanile later received a $500,000 settlement against the driver. Several months after the settlement was received, the plan took action against Montanile to recover the paid benefits. By this time, Montanile had spent much of the settlement funds on things such as medical and living expenses.

The Supreme Court ruled that because Montanile no longer had the funds and the funds were spent on untraceable items, the plan could not place a lien on the participant’s general assets. Alternatively, it would seem that if the participant was still in possession of some or all of the funds or if the participant had used the funds on a traceable item (such as a car), the plan could have a right to place a lien against the participant to recover the amount the plan had spent on claims.

The decision could impact plan policy regarding subrogation and reimbursement. Specifically, plans may find it important to request reimbursement more quickly following third party payment. This is particularly important for self-insured plan sponsors who are more directly at risk for plan expenses. Ultimately, plan sponsors should work with outside counsel with respect to subrogation and reimbursement issues under the plan.

Montanile vs. Board of Trustees of the National Elevator Industry Health Benefit Plan (Previously linked website content is no longer available.)

On Jan. 28, 2016, the CMS Center for Consumer Information and Insurance Oversight (CCIIO) released the January 2016 list, known as "Culturally and Linguistically Appropriate Services County" (CLAS) data, of counties that meet or exceed the 10 percent threshold of people who are literate only in the same non-English language.

This list is important for two separate PPACA requirements:

1. Internal and external appeals notifications provided by non-grandfathered group health plans.

A non-grandfathered plan sending an internal or external appeals notification to an address found within one of the counties listed (that meets the 10 percent threshold for the population being literate only in the same non-English language) must be aware that the claimant is entitled to certain accommodations. These include a one-sentence statement in the English version of the notice in their non-English language indicating how to access the language services provided by the plan, asking questions and receiving answers orally (such as through telephone assistance) and receiving assistance with filing claims and appeals in their non-English language, and upon request receiving the entire notice in the applicable non-English language. On the model notices applicable to the internal and external appeals notifications, there is a one-sentence statement available in four languages: Spanish, Chinese, Tagalog and Navajo. Links to the model notices are included below.

2. Summary of Benefits and Coverage (SBC), regardless of grandfathered status.

PPACA requires the SBC to be presented in a "culturally and linguistically appropriate manner." The regulations require plans or insurers, regardless of grandfather status, to follow the analogous rules for providing appeals notices in a culturally and linguistically appropriate manner described above (requiring the English versions of SBCs sent to individuals residing in specified counties to include a one-sentence statement clearly indicating how to access the language services provided by the plan or insurer).

The counties in which this must be done are those in which at least 10 percent of the population residing in the county is literate only in the same non-English language. The 2016 CLAS data is the list of all such U.S. counties. This determination is based on U.S. Census data and includes four languages: Spanish, Chinese, Tagalog and Navajo.

Written translations of the SBC must be provided upon request in the applicable non-English languages. To assist with compliance with this language requirement, HHS provides written translations of the SBC template, sample language and uniform glossary in the four applicable languages (Spanish, Tagalog, Chinese and Navajo) and may also make these materials available in other languages.

• 2016 CLAS Data »
• Model Notice of Adverse Benefit Determination (Previously linked website content is no longer available.)
• Model Notice of Final Internal Adverse Benefit Determination (Previously linked website content is no longer available.)
• Model Notice of Final External Review Decision (Previously linked website content is no longer available.)
• Chinese SBC (Previously linked website content is no longer available.)
• Navajo SBC (Previously linked website content is no longer available.)
• Spanish SBC (Previously linked website content is no longer available.)
• Tagalog SBC (Previously linked website content is no longer available.)
• Additional SBC Resources (such as Uniform Glossary and Word format) for non-English language SBCs »

On Jan. 20, 2016, the DOL published a variety of resources directed towards joint employers, including an administrator’s interpretation, FAQs, graphical representations of the joint employment relationship and Fact Sheets #35 and #28N.

The interpretation and subsequent guidance identifies common scenarios in which two or more employers jointly employ an employee and are thus jointly liable for compliance. The interpretation pulls together all of the relevant authorities, including statutory provisions, regulations and case law, to provide comprehensive guidance on joint employment under the FLSA and Migrant and Seasonal Agricultural Worker Protection Act, so that employers can properly analyze a joint employment scenario.

Specifically of interest to employers for employee benefits purposes, Fact Sheet #28N discusses the impact of a joint employer relationship for application of federal FMLA. Generally, the FMLA requires that where a joint employment relationship exists, an employee will have coverage and eligibility protection under the FMLA from both employers. Fact Sheet #28N includes a chart comparing the joint employer responsibilities under the FMLA.

While not directly mentioned, employers should also consider the potential impact of such guidance on application of the employer mandate when considering whether an employee is a “full-time employee” and needs to be offered affordable, minimum value coverage for purposes of the mandate.

• DOL Blog (Previously linked website content is no longer available.)
• Administrator’s Interpretation No. 2016-1 (Previously linked website content is no longer available.)
• FAQs (Previously linked website content is no longer available.)
• Graphical illustration of vertical joint employment (Previously linked website content is no longer available.)
• Graphical illustration of horizontal joint employment (Previously linked website content is no longer available.)
• Fact Sheet #35 (Previously linked website content is no longer available.)
• Fact Sheet #28N »

On Jan. 27, 2016, the IRS published an updated version of Guide to Retirement Plan Reporting and Disclosure Requirements. This publication lists the basic documents that a retirement plan sponsor may use to report to the IRS or disclose plan information to employees. In table format, the IRS shares the required documents, the type of information each document provides, the parties with whom each document must be shared, and the date by which each document must be filed or distributed.

Although the document is not exhaustive, it is a good primer on the basic reporting and disclosure responsibilities that a retirement sponsor should be aware of. Please see your advisor if you have any questions about any of the listed documents.

Guide to Retirement Plan Reporting and Disclosure Requirements (Previously linked website content is no longer available.)

On Jan. 29, 2016, the IRS published Notice 2016-16, which offers the opportunity for mid-year changes to safe harbor retirement plans. As background, 401(k) plans generally must be tested to ensure that contributions do not discriminate in favor of highly compensated employees. Specifically, employee deferrals and employer contributions are tested using the actual deferral percentage (ADP) test and the actual contribution percentage (ACP) test, respectively. If employers sponsor retirement plans that meet certain safe harbor plan designs, their plan is treated as though it satisfied those tests.

One such requirement under the safe harbor is that safe harbor provisions must remain in place for a 12-month plan year. However, this notice changes that. In fact, aside from a delineated list of certain prohibited mid-year changes, it seems that most changes could be made to a safe harbor plan at mid-year.

If a change affects the plan’s safe harbor provisions or any of the information required to be included in the safe harbor notice, then the employer must provide participants with an updated safe harbor notice and an opportunity to modify their deferral elections. This notice must describe the mid-year change and identify its effective date. Further, the employer must distribute this notice to participants at least 30 days, but no more than 90 days, before the change takes place. Once the notice is distributed, participants must be given a reasonable opportunity before the effective date of the change to modify their cash or deferred elections.

Although most mid-year changes are now allowed, the mid-year changes that are prohibited are as follows:

• Changes that violate the anti-cutback, anti-abuse, or nondiscrimination rules.
• Changes to increase the number of years of vesting service required for Qualified Automatic Contribution Arrangement (QACA) safe harbor contributions.
• Changes to reduce the number or otherwise narrow the group of employees eligible for safe harbor contributions.
• Changes to the type of safe harbor, such as moving from a traditional to a QACA safe harbor, or vice versa.

Now that the IRS has issued guidance on the possibility for mid-year changes to safe harbor plans, employers can better consider the possible advantage of a mid-year change. However, the IRS is also looking for feedback on whether additional guidance is needed on these mid-year changes, including the implications of these changes in the context of mergers and acquisitions and eligible automatic contribution arrangements. Comments are due to the IRS by April 28, 2016.

Notice 2016-16 »

On Jan. 11, 2016, the IRS released Notice 2016-6, explaining the procedure for tax reporting in relation to the retroactive increase in 2015 qualified transportation benefits. The procedure is similar to that offered in 2015 (described in the Jan. 13, 2015 edition of Compliance Corner). This guidance only affects employers that provided 2015 transit benefits in excess of the old limit of $130.

As background, on Dec. 18, 2015, the President signed the Consolidated Appropriations Act, which, among other things, created retroactive transit parity for 2015 (reported in the Dec. 22, 2015 edition of Compliance Corner). This law retroactively increased the 2015 combined limit for transit and vanpooling benefits provided under a qualified transportation plan. Previously the 2015 combined limit for transit pass and vanpooling benefits was $130 per month, far less than the 2015 limit of $250 per month for qualified parking. The limits are now equal for 2015, and this will be the case going forward as well. For 2016, the monthly exclusion is $255 per month for transit benefits and $255 per month for qualified parking.

Consistent with previous years, employers are not required to make changes to their transportation plans in response to this transit parity. However, the law permits plans to allow higher qualified limits for transit passes and vanpooling retroactively for 2015 as well as for future years.

The notice clarifies that employees cannot retroactively increase their 2015 compensation reduction elections nor can they take additional compensation deductions in 2016 to pay for 2015 transit expenses. For employers that treated transit benefits in excess of the previous limit as wages and have not filed Form 941 for the fourth quarter of 2015, there is a special procedure available to account for tax corrections without filing a Form 941-X. If the employer either repays or reimburses employees for overcollected FICA taxes for all four quarters before filing the fourth quarter Form 941, the employer may reduce the fourth quarter amounts by the refunded amounts that transit parity made excludable. Employers that have already filed their fourth quarter Form 941 for 2015 will need to make any corrections by filing a Form 941-X.

If Forms W-2 have not yet been provided to employees, the forms must be adjusted to correctly note the increased exclusion and any related overcollected FICA taxes that were reimbursed. If Forms W-2 have already been filed with the Social Security Administration, corrections will need to be made using Form W-2c.

IRS Notice 2016-6 »

On Jan. 14, 2016, the IRS released the 2015 version of Retirement Plans for Small Business. This publication discusses retirement plans that small business owners can set up for themselves and their employees. The publication specifically addresses Simplified Employee Pensions (SEPs), SIMPLE Plans, and Qualified Plans and the Code’s requirements for each.

This edition of the publication has been updated to reflect limits for 2015 and 2016, including the compensation limits, the elective deferral limit, the defined contribution limit, the SIMPLE plan salary reduction contribution limit and the catch-up contribution limit.

The publication also includes deduction worksheets for the self-employed and information on how small businesses can obtain tax help.

IRS Publication 560 »

The IRS recently released Publication 969 for use in preparing 2015 individual federal income tax returns. While there are no major changes to the 2015 version (as compared to the 2014 version), the publication provides a general overview of HSAs, HRAs and health FSAs, including brief descriptions of benefits, eligibility requirements, contribution limits and distribution issues. Minor changes include the updated 2015 limits for HSA contributions ($3,350 for single-only coverage and $6,650 for family coverage) and the updated annual deductible and out-of-pocket maximums for HSA-qualifying HDHPs. The deductible limit is $1,300 for single-only coverage and $2,600 for family coverage while the out-of-pocket maximum limit is $6,450 for single-only coverage and $12,900 for family coverage. The publication also reminds employers that for 2015, salary reduction contributions to a health FSA cannot be more than $2,550 per year. The publication serves as a helpful guide for employers with these types of consumer reimbursement arrangements.

IRS Publication 969 »

On Dec. 29, 2015, in Kaplan v. Saint Peter’s Healthcare System, 2015 WL 9487719 (3d Cir. 2015), the Court of Appeals for the Third Circuit ruled that a church-affiliated hospital’s retirement plan was ineligible for ERISA’s church plan exemption. As background, ERISA does not apply to plans that are “established and maintained” by a church for the benefit of its employees.

Saint Peter’s Healthcare System (St. Peter’s) is a nonprofit healthcare system with ties to the Roman Catholic Church. They began sponsoring the retirement plan at issue in 1974 and operated the plan as an ERISA-covered plan for about three decades. In 2006, St. Peter’s considered the idea that the plan could be exempt from ERISA under the church plan exemption. To verify this, St. Peter’s applied to the IRS for a church exemption. The IRS determined that the plan was a church plan pursuant to ERISA. Sometime after that determination, St. Peters stopped operating the plan in compliance with ERISA requirements.

Kaplan filed this case in May 2013, alleging that St. Peter’s was violating ERISA by failing to comply with certain reporting and disclosure requirements and because the plan was grossly underfunded by ERISA’ standards. St. Peter’s sought to dismiss the suit, claiming that they were sponsoring a church plan, which was exempt from ERISA’s requirements. The District Court disagreed, holding that St. Peter’s could not be sponsoring a church plan because it is not a church. St. Peter’s appealed to the Third Circuit.

Agreeing with the District Court, the Third Circuit argued that the plain meaning of the text of ERISA shows that only a church can establish a plan that qualifies for the church plan exemption. In essence, because no church established St. Peter’s’ retirement plan, the plan is ineligible for a church plan exemption. As such, the case would not be dismissed.

Notably, the Third Circuit also held that the IRS’ exemption of this plan was of no consequence. Even though the IRS has taken the position that church-affiliated organizations can establish and maintain church plans, the court held that this position is at odds with ERISA’s statutory text.

This case is the first Circuit Court decision on this matter, and although this decision does not set precedent outside of the Third Circuit, it raises concerns for church-affiliated organizations that rely on the church plan exemption. This case shows that there is some argument that the courts might require these organizations to comply with ERISA’s requirements, even if the IRS has made a determination that the organization is sponsoring a church plan.

If you sponsor a plan that has relied on the church plan exemption and your organization is an affiliated organization instead of an actual church, you may want to consider speaking with outside counsel about the implications of this case. We will continue to monitor this case and report on any developments.

Kaplan v. Saint Peter’s Healthcare System »

On Dec. 1, 2015, the IRS published 2015 instructions related to 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. The information in this form is given to the Social Security Administration (SSA), and the SSA provides that information to separated participants when they file for social security benefits.

On Dec 22, 2015, the IRS posted a revised Draft Form 5500-EZ, Annual Return of One Participant (Owners and Their Spouses) Retirement Plan. As background, Form 5500-EZ is used by one-participant plans and foreign plans that are not subject to section 104(a) of ERISA and that do not choose to file Form 5500-SF.

Keep in mind that this draft is informational only, and employers will need to file using the final version once it is published by the IRS. In the meantime, plan sponsors should review the draft form and ensure the final form is filed by the employer or another service provider.

• 2015 Instructions for Form 8955-SSA »
• Draft of 2015 Form 5500-EZ »

The IRS recently issued the 2016 version of Publication 15-B, Employer’s Tax Guide to Fringe Benefits. Publication 15-B contains information for employers on the tax treatment of certain fringe benefits, including accident and health coverage, adoption assistance, dependent care assistance, educational assistance, discount programs, group term life insurance, moving expense reimbursements, HSAs and transportation benefits. The 2016 version is substantially similar to the 2015 version, but includes the 2016 dollar amounts for various benefit limits and definitions, including the monthly limits for qualified transportation plans, the maximum out-of-pocket expense limits for high-deductible health plans and the maximum contributions allowed toward an HSA. Specifically, the publication states that—as a result of the Consolidated Appropriations Act of 2016—the monthly transit benefit exclusion increased from $130 to $250 per participating employee for the period of Jan. 1, 2015, through Dec. 31, 2015. The publication states that employers will be provided instructions on how to correct the social security and Medicare taxes on the excess transit benefits in future guidance. In addition, the publication states that for 2016, the monthly exclusion for qualified parking is $255, the monthly exclusion for commuter highway vehicle transportation and transit passes is $255 and salary reduction contributions for a health FSA are limited to $2,550 for plan years beginning in 2016. Finally, the publication states that the business mileage rate for 2016 is 54 cents per mile.

Publication 15-B is a useful resource for employers on the tax treatment of fringe benefits. Employers should familiarize themselves with the publication, as well as other IRS publications referenced in Publication 15-B which further describe and define certain aspects of those benefits.

2016 Publication 15-B, Employer’s Tax Guide to Fringe Benefits »