Blogs January 2018

This article has been published in partnership with ThinkHR.

Question: We would like to include the following statement in our job postings: “We are interested in every qualified candidate who is eligible to work in the United States. However, we are not able to sponsor visas.”  Would this be considered a discriminatory practice?

Answer: The anti-discrimination provisions of the Immigration and Nationality Act (INA) do not bar employers from limiting employment to individuals with the legal right to work in the United States and stating in recruitment materials that immigration or work visa sponsorship will not be provided as long as the no-sponsorship policy is applied in a nondiscriminatory fashion regardless of race, gender, ethnic origin, or any other classification protected by law. 

This legal right to work status applies to U.S. citizens, U.S. nationals, recent lawful permanent residents, refugees and asylees. Other types of nonimmigrants may lawfully be excluded from the recruitment process if the exclusion practices do not involve discrimination based on protected class status or other prohibited conduct, such as document abuse in the I-9 verification process. 

In the event that an applicant overlooks the no-sponsorship statement in the recruitment materials, the Department of Justice has indicated employers may lawfully ask:

1. Are you legally authorized to work in the United States on a full-time basis?
2. Will you now or in the future require sponsorship for employment visa status?

Consequently, employers may lawfully reject applicants for advertised positions who are not U.S. citizens, U.S. nationals, recent lawful permanent residents, asylees, or refugees. If an applicant’s immigration status is unclear during the recruitment and selection process, consult with legal counsel.

This article has been published in partnership with ThinkHR.

One of the inconvenient truths about HR is that, even in this modern age, there is a lot of paperwork, and a lot of rules about how long employers need to retain said paperwork. Let’s break down some of the most common records, and how long you need to keep them, based on federal rules for most employers. Be sure to check the records retention requirements for your type of business and state rules too. 

Another truth about active employee personnel files is that many HR practitioners keep active files with all of the records throughout the individual’s employment, in case there is an employment dispute later. Here’s why:

You need to keep your files for a longer period of time if there is a charge of discrimination filed under Title VII of the Civil Rights Act, the Americans with Disabilities Act (ADA), the Age Discrimination in Employment Act (ADEA), or the Genetic Information Nondiscrimination Act (GINA). In the event of a civil action brought by the Equal Employment Opportunity Commission (EEOC) or the Attorney General, you must retain all records related to the charge or action until “final disposition” as defined by the EEOC. The date of final disposition means the expiration date of the statutory period within which the employee may bring an action in a U.S. District Court or, where such an action has been brought, the date on which such litigation is terminated.

One Year/52 Weeks/365 Days

Selection and Hiring 

However you want to mark time, records related to employee selection and hiring need to be retained for one year after a hire/no hire decision or the creation of the document (whichever is later). So even if you determined a candidate was not a fit for your company, you need to hang on to the resume, application, interview notes, and anything else related to the hiring process. Do you use pre-employment screening tests? Keep those for a year. Post a job ad? Keep it for a year. The one-year clock starts ticking when the final hiring decision is made or the job requisition is cancelled, so if you have had a long interview process, the retention time will be longer than one year. Qualified federal contractors should retain records for three years. If you are subject to the Department of Transportation requirements for pre-employment drug screening, keep those records for five years.

Promotion, Demotion, Transfers and More

Once you bring an employee onboard, you’ll begin to generate paperwork as part of the normal lifecycle. The federal requirements say you must keep files for one year that are related to:

• Promotion 
• Demotion 
• Employment Termination 
• Transfers 
• Performance Evaluations 
• Training

Involuntary Employment Terminations 

If an employee is involuntarily terminated, their personnel records must be kept for at least one year from the date of employment termination. 

Involuntary Employment Terminations 

Finally, keep requests for reasonable accommodation from employees and applicants and your responses for a full year from the record date or action, whichever is later. (Public employers should retain for two years.) 

Two Years/104 Weeks/730 Days

Some Compensation Records 

If you pay different wages to employees of the opposite sex in the same workplace, retain all records that explain the rationale for the different wages, including wage rates, performance evaluations, collective bargaining agreements, and merit or seniority system documentation, for a minimum of two years in case of a wage-hour audit or employment complaint.

Three Years/156 Weeks/1,092 Days

Payroll Records and Timesheets 

Keep basic employee data such as name, address, Social Security number, and so on for a minimum of three years. Compensation records, like amounts and dates of payments, total hours worked each day and workweek, annuity and pension payments, and fringe benefits payments should be retained for a minimum of three years. In addition, employment law experts recommend that employers retain these records for the entire length of employment plus an additional five years regardless of termination reason based on recent lawsuits challenging unequal pay practices. You may want to begin shopping for more filing cabinets.

Form I-9 

Hang on to Forms I-9 and copies of all documentation for three years after the date of hire or one year after the date of termination, whichever is longer. 

Family and Medical Leave Act (FMLA) Records  

If you have FMLA-eligible employees, keep basic payroll and identifying employee data, dates FMLA leave is taken, copies of employee notices of leave, documents describing employee benefits or employer policies and practices regarding taking paid and unpaid leave, hours used with intermittent leaves, premium payments, dispute records and medical certifications or recertifications for a minimum of three years. Retain all FMLA requests for this time period, even requests that were denied. 

Polygraph Test Records 

Hold on to the statement concerning the activity or incident under investigation and the basis for testing a particular employee, all of the documents furnished by the examiner, and a copy of the written notice to the examiner identifying the employee for three years from the date of the exam or from the exam request date if no exam is conducted.

Four Years/208 Weeks/1,456 Days

Income Tax Withholding 

A pessimist once said that the only two certainties in life are death and taxes. Optimistically, you need to keep records relating to FICA and FUTA income tax withholding for four years from the date the tax is due or paid.

Five to 30 Years/At least 260 Weeks/1,820+ Days

OSHA Records 

OSHA wants you to keep a variety of forms for the present year plus the five preceding calendar years. These forms include: 

• Form 101, Supplementary Record of Occupational Injuries and Illnesses (Form 301 replaced this) 
• Form 200, Log and Summary for Occupational Injuries and Illnesses (Forms 300 and 300A replaced this) 
• Form 300, Log of Work-Related Injuries and Illnesses 
• Form 300A, Summary of Work-Related Injuries and Illnesses 
• Form 301, Injury and Illness Incident Report 

There are some OSHA records that should be retained for 30 years, or 30 years plus the duration of employment. These records pertain to employees exposed to harmful toxic substances or harmful physical agents.

Indefinitely

Employee Benefit Records 

Records concerning employee benefits and beneficiaries (for example, 401(k) plan records and health and welfare plans subject to the Employee Retirement Income Security Act (ERISA)), Summary Plan Descriptions and other documents that describe your benefits offerings, and COBRA records should be kept for a minimum of six years or indefinitely. The key is to keep them for as long as they may be relevant to a determination of benefit entitlements. While there are no specific records retention rules for COBRA events, benefits experts suggest that the ERISA rules may apply. If you are challenged to prove that an employee should have received certain benefits years later, you need to have proof to support the benefits you provided.

Military Leave Records

All records related to military leave of absence and reemployment and employee benefits during or upon return from military leave should take up permanent residence in your file cabinet. 

This is not intended to be an exhaustive accounting of all types of records employers must keep but a representation of the most common employee-related documentation employers are required to retain under federal law for a variety of purposes. Given the volume of documentation associated with the employee lifecycle and doing business, many employers are moving to electronic file storage. In next month’s issue, we’ll dive into electronic recordkeeping best practices, including security and audit preparation. 

Whenever you are in doubt about retaining a document, hang on to it or seek legal advice before you destroy it.

Comments:

This article has been published in partnership with ThinkHR.

A new chapter has begun in the years-long saga of rules, regulations, and court challenges affecting workplace wellness programs. At issue is the meaning of “voluntary” and whether programs that offer financial incentives to employees to participate in medical screenings or inquiries truly are voluntary. While earning an incentive is a reward, not earning one clearly is a penalty — and the penalties may be up to 30 percent of the group health plan’s premium under current Equal Employment Opportunity Commission (EEOC) regulations. In a lawsuit challenging programs with large incentive amounts, the court agreed that the EEOC had not justified its definition of voluntary.

In the latest twist, a federal district court has ruled that the EEOC’s current rules will cease to apply on January 1, 2019. The court also attempted to order the EEOC to issue new proposed rules by August 31 of this year, but later removed the deadline. That is, the current rules expire at the end of 2018. How and when the EEOC will propose new rules for 2019 is not yet clear.

Background

The EEOC regulates and enforces provisions of the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA) that affect workplace wellness programs. Employers with 15 or more workers generally are prohibited from requiring employees to undergo medical exams or answer disability-related questions (unless needed for certain job-related health/safety exams). An exception is allowed for wellness programs that are voluntary, but the meaning of voluntary has always been debated.

For many years, the EEOC failed to issue regulations defining voluntary while at the same time unofficially asserting that programs were not voluntary if the employee was required to provide private health information to earn a reward or avoid a penalty. In 2015, the EEOC finally proposed rules on the matter, which were finalized in 2016 and took effect January 1, 2017. Somewhat surprisingly, the EEOC rules allowed employers to offer wellness program incentives of up to 30 percent of the health plan’s cost. The AARP, on behalf of its membership, sued in federal court alleging that the 30 percent threshold was too high to be considered a voluntary program.

Note that the Health Insurance Portability and Accountability Act (HIPAA), a separate federal law primarily regulated by the Department of Labor (DOL), not the EEOC, permits group health plans, including wellness programs, to offer incentives of up to 30 percent of plan cost. AARP did not challenge the HIPAA rules. HIPAA’s incentive cap applies only to health-contingent programs, however, while the EEOC’s ADA and GINA rules are broader and include both participatory-only and health-contingent wellness programs.

Last summer, the U.S. District Court for the District of Columbia ruled in AARP v EEOC. The court found that the EEOC had failed to justify its new definition of a voluntary program and the incentive provisions were arbitrary and capricious. The court ordered the EEOC to review its regulations. Further, the EEOC was ordered to report back to the court with a proposed schedule for revised rules. When the EEOC submitted its proposed schedule, however, it was clear it planned to issue revised rules that likely would not take effect until 2021. It seems that was the last step in exhausting the court’s patience.

In late December 2017, the judge in the AARP case, Judge John D. Bates, vacated the EEOC’s current rules for wellness programs under the ADA and GINA, effective January 1, 2019. He also ordered the EEOC to propose revised rules no later than August 31, 2018, but that portion of his order was subsequently removed. The court will be watching; however, the EEOC must file a status report on its rulemaking progress by the end of March.

Next Steps for Employers

The court could have vacated (nullified) the EEOC’s current rules immediately, but chose not to do so since employers had relied on those rules to design their 2017 and 2018 wellness programs. That is, the current rules remain in force and employers may continue using them as guidance this year. Note, however, that employers whose wellness programs offer large incentives for providing individual health information need to consider whether their program may be challenged through private litigation. The EEOC is expected to propose revised rules to take effect January 1, 2019. Once released, employers should work with their benefit advisors and legal counsel to review any changes promptly to ensure their wellness programs continue to comply with the ADA and GINA, and with existing rules under HIPAA.

On Monday, January 22, Congress passed and President Trump subsequently signed bill H.R. 195 to fund the government through February 8, 2018. As part of the bill, the implementation of the Cadillac Tax on high-value health insurance plans will be delayed for two years, from 2020 to 2022. The bill also implemented a one-year moratorium of the Health Insurance Tax (HIT), effective for 2019 only. It's important to note that the HIT is in effect for 2018. 

In addition, funding for the Children's Health Insurance Program (CHIP) was renewed for six years and a two-year delay (2018-2019) of the Medical Device Tax was also implemented. 

This article has been published in partnership with ThinkHR.

The fall of Harvey Weinstein and other influential executives from Hollywood’s graces due to allegations of sexual harassment and sexual assault opened the door for many women to speak openly about sexual harassment and other improprieties in the movie industry. The open dialogue didn’t stop in Hollywood. Instead, the movement prompted a large social media campaign where individuals who have been victims of sexual harassment or sexual assault identified themselves by posting “Me Too” on their social media status. 

Sexual harassment is generally divided into two categories. The first is unwelcome sexual conduct that is either an explicit or implicit term or condition of employment, such as offering an employee a promotion or pay increase for agreeing to sexual demands or terminating an employee who refuses a sexual advance. This is known as quid pro quo sexual harassment. In Harvey Weinstein’s case, he is accused of textbook quid pro quo sexual harassment by requesting sexual acts or favors from actresses and others in the entertainment industry in exchange for favorable treatment or roles. 

The second form of sexual harassment is unwelcome sexual conduct that unreasonably interferes (on purpose or in effect) with an individual’s work performance or creates an intimidating, hostile, or offensive working environment. This is known as hostile or offensive work environment sexual harassment. 

Harassing behavior can include sexual advances, requests for sexual favors, other verbal or physical conduct of a sexual nature, or offensive remarks about a person’s sex. While the recent reports out of Hollywood appear to primarily focus on sexual harassment directed at women, both men and women may be sexually harassed, and harassment can occur between members of the same sex. 

As more individuals feel empowered to speak out against sexual harassment, employers may find this an appropriate time to re-evaluate their current sexual harassment policies and procedures and provide additional training for employees, managers, and supervisors. The following are best practices employers can implement to ensure compliance with sexual harassment laws and protect their workplace environment.

Update Employer Policies and Procedures

The EEOC recommends that sexual harassment policies and procedures include the following:

• An unequivocal statement that sexual harassment (or other harassment based on any protected characteristic) will not be tolerated. 
• A clear, simple, and easy-to-understand description of what constitutes harassing behavior or conduct, including examples of the types of behaviors that are considered harassing. 
• A description of the employer’s established reporting system, including all avenues for reporting (for example, to a direct supervisor, to a department head, or to human resources) and who can report incidents of harassment (such as the victim and any employees who observe harassing behavior).
• A statement that allegations will be investigated promptly and thoroughly through an impartial process and that individuals involved in the investigation (victim, witnesses, and/or the target of the complaint) as well as information gathered during the investigation will be kept confidential by the investigator(s) to the extent possible. You can send an employee home to change or groom. If an employee arrives at work dressed inappropriately or poorly groomed (employees with body odor issues could be a bigger problem in the hot summer months), be sure to discuss your concerns with the employee privately. Refer to your written policy and explain without judgment why the choice of dress or lack of grooming violates the policy. Allow the employee the option to return home or, if the employee does not live near the workplace, to leave work and shop for more appropriate attire. Follow the Fair Labor Standards Act (FLSA) rules for payment of time off that includes pay for exempt employees who worked any part of the workweek. If the employee is non-exempt, the FLSA does not require you to pay him or her for this time away from work. 
• Assurances that the employer will take immediate and proportionate corrective action if the investigation reveals sexual harassment has occurred.
• A statement that any individual who reports an incident of sexual harassment, either as a target or a witness, will be protected against retaliation from coworkers and supervisors or managers. If the individual does experience retaliation, the coworker, supervisor, or manager who retaliates will be disciplined appropriately.You can be flexible. If instituting casual Fridays or occasional breaks from your dress code would improve morale, consider doing so. Some employers offer the option of more casual dress on Fridays during the summer months. You can—and should—set standards for what is and is not appropriate on casual days and ask that employees consider their schedule when choosing their dress. Employees with an important client meeting, for example, may want to refrain from dressing too casually. 

Train, Train, Train

In the wake of the “Me Too” movement, employers may choose to provide employee and management training on updated policies and procedures or remedial training on current policies and procedures. The EEOC recommends using an interactive training program that is repeated and reinforced regularly and supported at the highest levels of the organization.

Sexual harassment training for employees should include the following:

• A description of illegal harassment and conduct, including examples tailored to the workplace.
• Information about employees’ rights, responsibilities, and the process for reporting harassment that is experienced or observed.
• An outline of the consequences of engaging in harassing conduct.

Management and supervisor training should include all elements of employee training as well as methods for dealing with harassment, reporting harassment claims, assessing the employees they supervise for risk factors for harassment and the consequences for failing to address and report harassment.

All training should be specific to the employer’s written policies and procedures and encompass state training requirements or recommendations, if any. While only three states (California, Connecticut and Maine) require harassment training for supervisory personnel for private employers, other states mandate training for public sector employees and recommend harassment training for all employers. 

Ensure an Effective Reporting and Investigation Process

It is incumbent upon employers to take any allegations of sexual harassment seriously and follow all policies and procedures for investigating the claims. 

Another important element is to have an employee reporting process that is managed and staffed by representatives who are properly trained, take all reports seriously, and promptly and thoroughly respond to any reports of harassment. Employees should feel the environment is supportive and that they will be safe in making a report.

Having well trained, neutral, and objective investigators and a timely, well-documented investigation process is also critical. To the extent possible, the investigation should remain confidential, and involvement limited to those individuals needed to conduct a thorough investigation to gather all of the facts. Additionally, employers should implement mechanisms to ensure individuals who file reports of sexual harassment or provide information during the investigative process are not retaliated against and that individuals alleged to have engaged in harassment are not adversely treated while the investigation is pending.

Finally, employers should receive a final report of the investigation and have a communication strategy to deliver the determination to the parties that includes any potential sanctions imposed.

In conclusion, compliant sexual harassment policies and procedures, training, reporting, and investigative processes foster a safe and productive workplace and limit an employer’s exposure to sexual harassment allegations like those that are rocking Hollywood. Employers are encouraged to work with experienced advisors or counsel to ensure their policies, procedures, and training programs are compliant and to ensure investigations meet EEOC confidentiality and privacy requirements while not interfering with protected activities under the National Labor Relations Act.

This article has been published in partnership with ThinkHR.

In the Human Resource world, Leaves of Absence (LOA) can be very complex. There are many questions to take into account when an employee walks into your office and inquires about a leave:

• Is the employee entitled to a leave, and if so which one?
• Does this situation call for personal leave, federal leave or state leave?
• Is this a paid leave or an unpaid leave?
• Is this a job protected (unpaid) leave?
• Is there an income replacement leave available to this employee?

To tackle these questions, let’s look at LOA in bite-sized chunks. We’ll explore the difference between a job protected leave vs. an income replacement leave, focusing specifically on California. Please note that the information below is not all-inclusive, and you should always consult legal counsel if you are unsure of the type of leave an employee may be eligible for.

Job Protected Leaves

There are three major mandatory job protected leaves in California. These leave types do not provide income replacement:

• FMLA (Family and Medical Leave Act) – This is a Federal leave for employers with 50 or more employees within 75 miles of the worksite. An employee must have worked for you for 12 months and 1,250 hours in the prior 12 month period. Employees may take up to 12 weeks off in a 12 month period for:
  • Birth of a child/care for a newborn, adoption or foster child care (up to the age of one, or within a year of placement)
  • Care for self, spouse, child or parent with a serious health condition
• CFRA (California Family Rights Act) – This is a state-mandated leave and has the same requirements and qualifications as FMLA. The eligibility rules for this leave are the same as above, with a few differences. The list below is not all-inclusive.
  • CFRA covers registered domestic partners, where the FMLA does not recognize them
  • CFRA does not cover leave due to pregnancy/childbirth or military service members’ needs, where the FMLA does
• PDL (California Pregnancy Disability Leave) – This is a state-mandated leave for employers with five or more employees. There is no minimum hours worked requirement for employees to be eligible. Employees with a pregnancy disability may take up to four months of PDL per pregnancy. An employee’s health care provider will determine whether the employee has a disability due to pregnancy that prevents the employee from preforming the essential duties of their job.

There are numerous other job protection leaves, of which some provide income replacement (in bold):

• Alcohol and drug rehabilitation leave
• ADA (Americans with Disability Act)
• California paid sick leave
• California workers’ compensation
• Employer leave of absence policies
• Kin Care
• Organ donor/bone marrow donor leave
  
• Victims of domestic violence leave
  

Income Replacement Leaves

There are two major paid leaves that coordinate most often with the job protection leaves:

• PFL (Paid Family Leave) – State-mandated program to provide income replacement for employees who need time to bond with a new child or to care for a seriously ill family member.
• SDI (State Disability Insurance) – State-mandated program to provide partial income replacement for employees who are unable to work. This program is for all eligible California workers who are unable to work due to disability (as certified by their physician), for reasons other than pregnancy or a work related illness/injury

Job protected leaves and income replacement leaves coordinate and work together, which can cause confusion and frustration when coordinating LOAs for employees. Below are links that provide additional information on each of the major leaves. The information provided by these resources is general in nature and not all-inclusive. 

As a reminder, any time you are unsure what to do, your best bet is to seek legal guidance to ensure compliance.

Additional Information/Resources:

• FMLA: https://www.dol.gov/agencies/whd/fmla
• CFRA: https://www.dfeh.ca.gov/resources/frequently-asked-questions/employment-faqs/pregnancy-disability-leave-faqs/pdl-cfra-fmla-guide/
• PDL - https://www.dfeh.ca.gov/resources/frequently-asked-questions/employment-faqs/pregnancy-disability-leave-faqs/
• PFL - http://www.edd.ca.gov/Disability/Paid_Family_Leave.htm
• SDI - http://www.edd.ca.gov/Disability/About_DI.htm

Regardless of your health plan design – whether it’s a High Deductible Health Plan (HDHP) or a traditional PPO medical plan – the best way to manage your out-of-pocket expenses when seeking care is to behave like a consumer. When you use your consumer skills, you will be more successful in choosing care that fits both your personal and financial needs.

Below is an illustration of the various medical care delivery models and the typical cost associated with each model, expressed in dollar signs. On the left side of the spectrum are your non-urgent or low level health care needs, and on the right side of the spectrum are your higher-level, life threatening health care needs.

Virtual Visits
These are most appropriate for non-urgent or low level health care needs where a hands-on physical examination is not necessary. With a virtual visit, you do not have to waste time driving to and waiting in your doctor’s office, and you save gas money! Appointments are on demand and physicians are able to prescribe medications.

Convenience Care Clinic
These are health clinics found in retail outlets such as, CVS, Target or Rite Aid, and typically staffed by a Nurse Practitioner or M.D. While not predominant in California, this type of health clinic is popular in the rest of the country, especially in more rural areas. Access to care is easy, as extended hours are common and an appointment is not required.

Office Visit
This is the most popular way to seek care for non-emergency situations that require a hands-on examination. Visits are typically covered with a copayment and require an appointment within the doctor’s normal business hours.

Urgent Care
These are more popular in California than Convenience Care Clinics and often associated with medical groups and staffed by M.D.s. These clinics provide a higher level of care for injuries and illnesses that require a hands-on examination, and offer extended office hours. They are typically covered at a higher copayment than an office visit.

Emergency Room
Visit the emergency room when immediate, highly skilled care is needed for the alleviation of acute pain, or for life threatening situations. Available 24 hours a day, this is the most expensive health care delivery option.

By better understanding the various delivery models above, you can take charge of your health care and choose the delivery method that best fits your needs.  Now you are a consumer!

Comments:

The Tax Cuts and Jobs Act includes a new federal tax credit for employers that provide paid family and medical leave (FML) to their employees.

To be clear, the Act does not require employers to provide paid leave. However, eligible employers are allowed a tax credit based on wages paid to employees on FML. If the employer provides paid leave as vacation leave, personal leave, or medical or sick leave, then that leave will not be considered FML for purposes of the tax credit.

The tax credit would apply to employers who have a written policy that provides:

• Qualifying full-time employees with at least two weeks of annual paid FML;
• Qualifying part-time employees with an annual paid FML amount that is at least proportionate to the full-time employees' annual paid FML amount; and
• A rate of pay not less than 50 percent of the wages normally paid to employees for services performed.

The tax credit would apply to an employer's qualifying employees who are:

• Employees as defined under Section 3(e) of the Fair Labor Standards Act of 1938, as amended;
• Employed by the employer for one year or more; and
• Not compensated in excess of 60 percent of the amount for highly compensated employees for the preceding year (for example, in 2018, employers may only apply the credit toward employees who earn less than $72,000).
  

For employers who meet the above criteria and who pay 50 percent of wages, they may claim a tax credit of 12.5 percent of wages paid for up to 12 weeks of FML annually. For each percentage point increase above 50 percent of wages paid, the employer may increase the tax credit by a 0.25 percentage point (not to exceed 25 percent).

The tax credit would apply to wages paid to employees on FML in taxable years beginning after December 31, 2017, and before January 1, 2020.

 

Administration Update
2017 Year-End Census Information Due Now! 
It’s that time again! Perhaps one of the most pressing compliance matters is the submission of census data to begin compliance testing. Sponsors of calendar-year 401(k) plans subject to the Average Deferral Percentage (“ADP”) or Average Contribution Percentage (“ACP”) Tests (i.e. all Non-Safe Harbor Plans) must submit their 2017 census data now to ensure timely results and processing of any potential refunds. 

Be sure to submit your annual census data and compliance questionnaires to your record-keeper by their specific deadline (generally January 31st) to ensure delivery of testing results before March 15th.  Any ADP refunds made after March 15th will be subject to a 10% employer excise tax. Please contact Vita Planning Group if you have questions regarding your record-keeper’s requirements. 

For other important dates on the horizon, please check out our online Compliance Calendar. 

401(k) News
Tax Reform 
The Tax Cuts and Jobs Act signed into law by President Trump on December 22, 2017 included two main provisions related to 401(k) plans: the maintenance of the tax deferred status of participant contributions and the extension of a 401(k) loan default to the date a participant is required to file their taxes.

There was a significant debate during the negotiation of the provisions of the tax bill whether to eliminate the tax-deferred status of participant salary contributions in order to help make up for revenue that would be lost as a result of individual and corporate tax cuts. The tax treatment of 401(k) salary contributions was not changed: contributions are still deducted from gross income and remain untaxed until funds are withdrawn during retirement.

Under current rules for 401(k) plans, if a participant’s account balance is reduced to repay a plan loan and the amount of that offset is considered an eligible rollover distribution, the offset amount can be rolled over into an eligible retirement plan - however, the rollover has to occur within 60 days. The tax act extends the 60-day deadline to the latest date on which the participant can file his or her tax return for the year of the loan default.

On another note, there are provisions in the tax law related to “pass through” income for sole proprietorships, LLCs, partnerships and S corporations that could make individual decisions regarding the efficacy of 401(k) contributions more difficult. These provisions are complex and quite subjective depending on individual circumstances, especially due to the phase-out limits for “professional services” (lawyers, doctors, consultants, etc.) for business owners, making over certain levels of income. We recommend those individuals for whom “pass through” income is applicable take professional tax advice before making any decision regarding their use of 401(k) or other qualified retirement savings plan.

Market Update
2017 ended as it began: rising domestic and international equity prices with interest rates steady despite central bank tightening and rising commodity prices. The biggest factor affecting markets at the beginning of 2018 is the impact of the US tax reform bill signed into law in December 2017. Generally, both the enacted tax reform and the federal budget, currently being debated in the US Congress, are seen as supportive of economic growth and equity markets in the US. Overseas economies also continue to show improving economic growth and attractive valuations, which argues for continued strong equity markets in both developed and emerging markets. Longer term, supply side constraints in the US and rising interest rates globally may start to take some of the luster off current bull markets as we enter 2019.

In the short-term, the lowering of US corporate tax rates and the financial stimulus currently proposed in this year’s federal budget is expected to help US GDP growth. US GDP growth is forecast to rise from the 2.3% year-over-year (“YOY”) registered in Q3 2017 to 3.5% in the first half of 2018, with estimates for the full-year 2018 coming in at or around 3%. This is expected to translate into continued strong corporate earnings in 2018. Full-year 2017 S+P 500 earnings per share (“EPS”) are estimated at $1.25; full-year 2018 EPS is already estimated at $1.45. The weakening of the US dollar and the rise in energy prices that we are seeing as we begin 2018 are also supportive of improved S+P 500 corporate earnings.

Over the longer-term, it is likely that supply side factors, most notably the lack of US workers, will impinge on US economic growth. US unemployment stood at 4.1% in December 2017, a 0.6% decline during 2017. With the GDP expectations outlined above for 2018, it would not be surprising to see a similar rate of decline in unemployment, resulting in a possible 3.5% rate at the end of 2018. That would be the lowest rate of unemployment since the early 1950s. In addition, the lack of capital spending during this current economic expansion is resulting in falling productivity growth in the US. Both of these factors point to diminished US GDP growth, possibly as early as 2019.

Overseas economies are expected to continue their strong performance in 2018. The Global Purchasing Managers’ Index for Manufacturing shows the Euro Zone at 60.6% and Emerging Markets at 52%, the highest figures since February 2011 (a reading over 50 for either of these numbers indicates expansion and is typically viewed as a positive indicator by economists and investors). Eurozone GDP growth is approaching 3% YOY for 2017 and unemployment was down to 8.8% in November; aggregate emerging market GDP growth is approaching 5% with China leading the way at 6.8% YOY growth in Q3 2017. Improved economic figures and equity valuations at or below 25 year averages should result in continued buoyant equity markets in both developed and emerging countries.

2018 dawned with the S+P closing above 2,700 for the first time ever, following an 18.7% rise in 2017. Still, this result was dwarfed by emerging market equities returning 37.8% (MSCI EM) in 2017 and developed markets, 25.6% (MSCI EAFE). More perplexing was the record of fixed income markets. In both word and deed, the FED has sought to impress upon markets its intent to raise interest rates and decrease its assets. In fact, there were no interest rate cuts among any of the 10 top developed market central banks in 2017. Yet the 10-year US Treasury started 2017 at 2.45% and ended the year at 2.40% and spreads relative to high yield and corporate bonds narrowed and remained well below historical averages. Is this the year that longer term interest rates back up? If US tax reform results in the hoped-for repatriation of overseas corporate income and if foreign central bank tightening continues to lag the US, then it could still be some time before the US yield curve begins to steepen. In the meantime, 2018 looks likely to see a continuation of the now 9-year bull market in US equities, as well as strong overseas equity markets.


Comments:

The Internal Revenue Service (IRS) has started the process of levying penalties on employers under the Affordable Care Act (ACA) employer shared responsibility provision. Often called the employer mandate or play or pay, the ACA provides for the IRS to assess penalties on employers that do not offer adequate health coverage to their full-time employees. Although the mandate took effect in 2015, the IRS is just now starting to send penalty notices. This article explains the IRS process and the steps you can take if you receive a penalty notice. 

Looking Back to 2015

The first round of penalty notices pertains to calendar year 2015. Employers that receive a notice will only have 30 days to respond, so it is advisable for all employers to prepare in advance by reviewing what their situation was in 2015. 

Applicable Large Employer (ALE):

For 2015, the play or pay rules applied only to employers that had an average of 50 or more full-time employees, including full-time equivalents, in 2014. Related employers in a controlled group, such as parent-subsidiary groups and entities under common ownership, were counted together to determine whether they were ALEs. Non-ALEs were exempt from the mandate. 

Employer Mandate:

Penalties were triggered only if a full-time employee received a government subsidy to buy individual health insurance through a Marketplace. In that case, penalties for 2015 were based on a two-prong test: 

• Penalty A if the ALE failed to offer minimum essential coverage to at least 70% of its full-time employees; or
• Penalty B if the ALE failed to offer affordable minimum value coverage to its full-time employees.

If triggered, Penalty A is $2,080 times the total number of full-time employees minus the first 80 employees. Penalty B is $3,120 times the number of full-time employees who actually received a Marketplace subsidy due to employer’s failure to offer that employee affordable minimum value coverage. Amounts are pro-rated by month. To calculate the monthly amount, divide $2,080 and $3,120 by 12. Also, if Penalty A applies, then Penalty B is disregarded.

ACA Reporting Forms (1094-C/1095-C):

ALEs were required to prepare and distribute Form 1095-C to persons who were full-time employees for any month in 2015 and to file copies with transmittal Form 1094-C to the IRS. The forms reported whether each full-time employee was offered health coverage and, if so, whether the coverage was affordable.

Transition Relief:

Several transition relief provisions were available for 2015.

For example:

• ALEs that had an average of 50-99 full-time-equivalent employees in 2014, and did not materially reduce their workforce or health coverage through 2015, were exempt from penalties.
• ALEs with non-calendar year health plans generally were exempt from penalties for the months preceding their 2015 plan year start date.

To take advantage of a transition relief provision, the ALE’s completed 2015 Form 1094-C must indicate the specific provision.

IRS Penalty Process 

The IRS is using information from 2015 Forms 1095-C and 1094-C, and information about employees who received a Marketplace subsidy for any month in 2015, to determine which ALEs it believes are liable for penalties. It appears that a Form 1095-C on which line 16 is blank is one of the triggers the IRS is using to identify ALEs for penalty notices. The penalty process consists of the steps below.

1. The IRS sends Letter 226J (notice and instructions) along with Form 14765 (list of employees who received a Marketplace subsidy) and Form 14764 (employer response form). ALEs are instructed to review the information and respond within 30 days.

2. The ALE responds by completing and returning Form 14764. The ALE will check a box to indicate whether it agrees with the proposed penalty or disagrees with part or all of the proposed penalty. The form also requires the ALE’s contact information for additional follow-up.

3. If the ALE responds by agreeing with the proposed penalty, the ALE will complete the payment option section of the form.

4. If the ALE responds by disagreeing in whole or part with the proposed penalty, the IRS sends Letter 227 (not yet available). The follow-up letter will instruct the ALE on how to present supporting information for its case. The ALE also will have the option of requesting a pre-assessment conference with the IRS.

5. If the ALE fails to respond to Letter 226J or Letter 227 in a timely manner, the IRS will issue Notice CP 220J as a demand for payment.

Action Steps

Employers are advised to gather information now so they are prepared to respond quickly if they receive an IRS penalty notice. Again, the first notice will be Letter 226J and the employer will only have 30 days to respond. To prepare:

1. Alert all departments and staff to keep an eye out for any material from the U.S. Treasury or IRS. If part of a controlled group, confirm that subsidiaries or affiliated companies will notify each other if they receive any material.

2. Ensure that copies of all 2015 Forms 1095-C and 1094-C are readily available. Many ALEs used third-party vendors to prepare their forms, so it may be necessary to contact the vendor.

3. Identify staff and establish an audit process for comparing the IRS notice against employee data and benefits records.

4. Upon receipt of Letter 226J, refer to legal counsel for assistance in preparing a timely response. Lastly, note that the majority of employers will not receive an IRS notice, either because the employer was too small to meet the ALE definition or because the employer’s Forms 1095-C and 1094-C did not trigger any IRS action. In any case, an employer will not be on the IRS radar unless at least one of its employees received a Marketplace subsidy.

The IRS provides information about the penalty process in question-and-answer format on its Understanding your Letter 226-J webpage. Employers and their advisors should check the webpage periodically for updated information.

Questions about the Affordable Care Act (ACA) employer shared responsibility provision and associated penalties? Contact Vita at info@vitamail.com or (650) 968-8811.