Blogs April 2018

This applies to all employers offering medical plans with a Health Savings Account (HSA).

Overview

On Thursday, April 26, the IRS announced via Revenue Procedure 2018-27 that it's granting relief to taxpayers who have family coverage under a high deductible health plan and who contribute to a health savings account (HSA).

On May 4, 2017, the maximum for family coverage was issued as $6,900. On March 2, 2018, the limit was reduced to $6,850 for taxpayers with family coverage under HDHPs pursuant to Tax Reform legislation that changed the calculation for 2018 and future years. Under this new guidance, it allows taxpayers to continue to treat the 2018 limit as $6,900.

The new guidance also clarifies how taxpayers who already received a distribution from an HSA of an excess contribution based on the $6,850 deduction limit may treat the distribution as a mistake and repay the HSA without any tax or reporting consequences. In addition, it clarifies how to treat a distribution of an excess contribution (and earnings) based on the $6,850 deduction limit.

Vita Clients: If you are a Vita Client, your dedicated Account Representative will be reaching out soon with a plan of action.

On April 9, 2018, in Rizo v. Yovino, the Ninth Circuit Court of Appeals held that under the federal Equal Pay Act an employer cannot justify a wage differential between male and female employees by relying on prior salary. The EPA prohibits sex-based wage discrimination between men and women, in the same establishment, who perform jobs that require substantially equal skill, effort, and responsibility under similar working conditions.

According to the court’s opinion, “[w]e now hold that prior salary alone or in combination with other factors cannot justify a wage differential. To hold otherwise – to allow employers to capitalize on the persistence of the wage gap and perpetuate that gap [endlessly] – would be contrary to the text and history of the EPA and would vitiate the very purpose for which the act stands.”

What Happened in Rizo

In this case, after Rizo was hired she learned that male colleagues in the same job were being hired at a higher salary than her. However, the only rationale the employer offered for this wage disparity was that Rizo’s salary was lower at a prior job. The court held, “[that] this scenario provides a textbook violation of the “equal pay for equal work” mantra of the EPA . . . because [p]rior salary level created the only differential between Rizo and her male colleagues. Thus, requiring that the “any-other-factor-other-than-sex” defense must be limited to legitimate, job-related factors.”

Through this decision, the Ninth Circuit (covering employers in Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington) joins the Second, Sixth, Tenth, and Eleventh Circuits that have likewise interpreted the “any-factor-other-than-sex” defense is limited in its application.

What Now?

The impact of the Rizo decision reinforces federal and state equal pay rights and highlights National Equal Pay Day because the decision was filed April 9, 2018, the day before 2018’s Equal Pay Day. Equal Pay Day was originated by the National Committee on Pay Equity (NCPE) as a public awareness event illustrating the gap between men’s and women’s wages and is commemorated around the nation and the world. When created, the NCPE decided to select a Tuesday in April as Equal Pay Day. A Tuesday was selected to represent how far into the next work week women must work to earn what men earned the previous week.

As the fight for equal pay continues, Rizo may be reviewed by the Supreme Court, although there are no current indications the employer is pursuing review. So, what now? Employers should take steps to review their policies and eliminate any hiring policy that relies on a job applicant’s prior salary in determining their starting pay. Additionally, employers should review applicable state laws related to hiring practices and prior salaries to ensure compliance and avoid liability.

However, according to the NCPE, because on average women earn less than men, they must work significantly longer for the same amount of pay. So . . . maybe the better answer to “What now?” is that employers do not just review their policies, but take the steps necessary to ensure that their employees are paid equally, regardless of gender, and work toward ending the perpetual cycle of pay inequality.

401(k) News
Fifth Circuit Knocks Down Fiduciary Rule
After much delay and numerous challenges, the Department of Labor (“DOL”) appears to have lost its six-year effort to advance a Final Rule on Conflicted Advice. The Fifth Circuit Court of Appeals’ decision on March 15, 2018 to “vacate the Fiduciary Rule in toto” would appear to be the death knell to the DOL’s efforts.

By “vacating” the DOL’s Fiduciary Rule, the Court emphasized that the DOL did not have the authority to change the definition of fiduciary advice as it relates to 401(k) plan participants nor enforce the package of exemptions that came with it. The DOL has until May 7, 2018 to ask for a rehearing by the Fifth Circuit or request an appeal to the Supreme Court. Most commentators and analysts do not expect the DOL to appeal this ruling. Instead, we may see the Securities and Exchange Commission (“SEC”), which has authority over financial advice, or individual states propose their own rules to protect 401(k) plan participants from predatory financial advice.

New Rules for Disability Claims Procedures
Earlier this year, the DOL announced that the Final Rule on Disability Claims would take effect on April 1, 2018. According to the DOL, this new rule is intended to “give America’s workers new procedural protections when dealing with plan fiduciaries and insurance providers who deny their claims for disability benefits.” Most 401(k) plans will continue to rely on the disability determination made by the Social Security Administration (“SSA”), therefore the new rules should have little impact on retirement plans.

A participant with a long-term disability is able to withdraw their 401(k) savings without the 10% premature-withdrawal penalty. In general, retirement plans are less rigid than disability insurance providers in ascertaining the validity of a disability claim. A 401(k) disability withdrawal is limited to the value of the assets of accrued savings – prior to retirement or termination – whereas a disability insurance claim can have an unlimited pay-out value. Hence, 401(k) plans tend to rely on the determination of a relevant authority, such as the Social Security Administration, even in cases where the review by a physician could be stipulated.

The new DOL rule may necessitate that recordkeepers amend their prototype plan documents, and we will keep you updated of any changes in this regard.

Administration
Large Retirement Plans: Start Scheduling your Independent Audit
Now that census data has been submitted and testing completed for calendar year retirement plans, steps should be taken toward completion of the annual independent audit. The independent audit report must be included with the Form 5500 filing.

The independent audit requirement applies to employers who sponsor “large” plans – those with over 100 participants. Special attention should be paid to the IRS definition of “participant,” as it does include all employees who are eligible to participate in the Plan, not just those who are actively contributing. The definition also includes former employees who still have balances in the Plan.

There are special rules that allow for growing plan sponsor companies to first exceed 120 participants before becoming subject to the audit requirement, and thereafter continue being subject to the requirement while staying above the 100 participant threshold. Please contact Vita Planning Group if you have questions about whether the independent audit requirement applies to your Plan.

View our online Compliance Calendar to see other important administrative tasks. 

Market Update
Volatility is back. The effect of the rise of volatility in Q1 2018 was a decline in both equity and fixed income prices: the S+P 500 ending the quarter down 0.1% and the BarCap Aggregate US Bond Index down 1.46%. The three factors that were most often cited by market analysts to explain the rise in market volatility were the return of inflation, the rise of interest rates, and, of course, the much anticipated end to the current bull market in US equities. The rise in inflation and interest rates are neither new nor extreme. Even if over-valued at the beginning of the year, US equity valuations improved significantly over the course of the quarter due to the sell-off in the equity markets and the strong US corporate earnings in Q4 2017. Perhaps what weighs most heavily on markets, though, is the uncertainty whether the US will follow through on threats to raise import tariffs leading to a trade war.

First, a few words to put the volatility in Q1 into perspective. To begin, it is important to recognize that volatility is the norm. Normally, there is an average of four 5% declines in the S+P 500 per year, and one 10% decline; an average of sixty 1% moves in either direction; and only 5 consecutive days the Chicago Board of Trade’s Volatility Index, the “VIX”, is below 10 (which is an annual +/- 10% range). By any of these measures, 2017 was the exception. In 2017 there were no 5% or 10% down moves all year; there were only eight 1% moves in either direction; the VIX was below 10 for 50 consecutive days.

Second, volatility is cyclical. With the abnormally low volatility in 2017, it is not so surprising that the pendulum has swung far in the opposite direction in 2018. Q1 has already seen one 10% decline in the S+P 500, four 5% declines and twenty-two 1% moves either way. There have only been 7 days, at the beginning of January, when the VIX was below 10. If 2017 was abnormally subdued, 2018 has already been abnormally volatile.

Finally, VIX has been unfairly called the “fear index.” Yet, higher volatility does not necessarily equate to a bear market. Unfortunately, the last time we saw a period of abnormally low volatility followed by a spike in the VIX was…you guessed it, 2007-2008. While the re-emergence of volatility may cause some market participants to see a repeat of the last recession and market crash, it is too simplistic to see 2017-2018 as a repeat of the global financial crisis of 10 years ago.

The fundamentals underpinning economic growth continue to be very strong. US GDP growth in Q1 2018 is expected to come in at 2.9% year-on-year (“YOY”), after recorded 2.6% YOY growth in Q4 2017. Economists expect the positive impact of tax cuts and fiscal stimulus to result in US economic growth at or around 3% for 2018 and continuing into the first half of 2019. Unemployment was at 4.1% in March 2018, and with the GDP growth predicted above, it should decline to around 3.5% by the end of 2018. This leads analysts to predict a rise in US corporate in 2018 of 25% YOY, which would bring the S+P 500 to $42 of earnings per share by Q4 2018.

Yes, oil prices have been rising and the US dollar falling, both of which are inflationary. But wage growth continues to be moderate at a 2.7% YOY in March 2018. With the focus on margins, companies are deciding not to expand rather than pay more for a smaller pool of available workers. The net effect should be an inflation rate of at 2% for 2018, which is exactly the Fed’s target rate. And speaking of the Fed, it seems that markets have finally listened and now believe that the Fed will continue to raise interest rates in 2018 and 2019. Even with the six rate hikes that the Fed is now committed to, the 10 year Treasury is only expected to rise to between 3.25 to 3.5% by the end of 2019, still well below its long-term average.

Still, despite the apparent strength of economic fundamentals and historically low rates of inflation and interest rates, all major asset classes – stocks, bonds, commodities, REITS - finished lower at the end of the first quarter. Interestingly, only Emerging Market equities rose, up 1.5% in Q1 2018, which speaks volumes to the opportunities that may still exist in overseas markets. But that is not to say that the 10 year rally in US equities does not still have legs. It would certainly seem so as the effects of tax cuts, fiscal spending, a lower US dollar, and rising oil prices have yet to work through the economy. Conditions are supportive of corporate earnings in 2018, even as interest rates continue to rise. But no matter how strong a case can be made for generally constructive economic conditions, there may be no place to hide as markets continue to gyrate between positive and negative views of the near future, as well as threats of a global trade war. For long term investors, there may be no other option but to hold tight and prepare for a bumpy ride.

The Medicare secondary payer rules determine when your group health plan must pay primary and when it can pay secondary to Medicare (a.k.a. Coordination of Benefits). Unfortunately, these rules are lengthy and complex. Payment order depends on employer size and reason for Medicare entitlement. We've outlined the ways in which an individual becomes entitled to Medicare, when Medicare is the primary payer, and when it is the secondary payer.

Reasons for Medicare Entitlement
There are three ways in which an individual becomes entitled to Medicare:

• Age: Once an individual reaches age 65, that person is entitled to Medicare and eligible to enroll as of the first of the month in which they turn age 65.
• Disability: While this requires approval by the Social Security Administration, individuals who are deemed disabled become entitled to Medicare on the 30^th month of disability.
• End Stage Renal Disease (ESRD, a.k.a. kidney failure): The date individuals become entitled to Medicare varies based on treatment situations. For more information, visit the CMS website.

The chart below illustrates when Medicare is the primary payer and the group health plan is the secondary payer, and vice versa.  Generally, the group health plan is the primary payer for enrolled employees and their dependents. However, small employers have a special exception. There are two categories of small employers, which are defined by the reason for Medicare entitlement.

Employers with Fewer Than 20 Employees
When the reason for Medicare entitlement is age-related and the employer has fewer than 20 employees for each working day in at least 20 weeks in either the current or the preceding calendar year, Medicare is the primary payer and the group health plan is secondary.

Employers with Fewer Than 100 Employees
When the reason for Medicare entitlement is due to disability and the employer has fewer than 100 employees on at least 50% of its regular business days during the previous calendar year, Medicare is the primary payer and the group health plan is secondary.

End Stage Renal Disease (ESRD)
When the reason for Medicare entitlement is due to ESRD, the group health plan is the primary payer for the first 30 months and Medicare becomes the primary payer thereafter.  There is no exception to this rule.

COBRA Coverage
Medicare will become the primary payer when beneficiaries lose their jobs and lose coverage by virtue of current employment status.  If a Medicare beneficiary chooses COBRA, Medicare pays primary and the COBRA coverage through the group health plan pays secondary.  If the reason for Medicare entitlement is due to ESRD, the ESRD rules above apply under COBRA.  As such, electing COBRA can be an expensive endeavor for coverage that is not primary.  Be sure to direct Medicare eligible individuals to the Medicare website if they are considering COBRA.

Employer Prohibited Actions
Under the Medicare secondary payer rules, employers cannot offer Medicare entitled participants a financial or any other incentive to opt out of the employer sponsored group health plan and take Medicare instead. The plan must offer current employees or current employees’ spouses age 65 or older the same benefits, under the same conditions and terms available to employees or spouses under age 65.