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  • November 2020

Blogs November 2020

  1. Are Virtual Day Camps and Daycare Eligible Under a Dependent Care FSA?

    System Administrator – Fri, 20 Nov 2020 00:13:38 GMT – 0

    In the era of COVID, many parents find themselves working from home with children afoot because schools and daycare providers are closed. Many, if not most, schools are operating remotely in a virtual-learning environment. While virtual learning is less optimal than in-person learning, it does provide important structure for students. Importantly, virtual learning often also provides needed structure for parents who are balancing some measure of homeschooling while simultaneously needing to meet the demands of full-time work.

    Enter a host of new virtual daycare opportunities and virtual camp experiences for children. This typically comes into play for elementary school age children whose parents engage virtual daycare or day camps for their children so that they can focus on work. With the advent of virtual daycare, camps, and classes, there has been an onslaught of claims for these services under Dependent Care FSA plans. With that, the issue of eligibility must be addressed.

    IRS Requirements

    Dependent care expenses must meet specific criteria in order to be considered eligible. Care must be provided for a qualifying individual (generally a child under the age of 13) and it must be incurred such that the employee (and the employee’s spouse) can be gainfully employed. These underlying requirements are clear and are not at issue in this discussion. There are three additional criteria which relate to the nature of the care provided that are relevant here:

    1. Primarily Custodial in Nature: This requirement clarifies the ineligibility of any expenses which are primarily educational in nature. This exclusion of directly educational expenses as well as those which may have an element of care, but which remain primarily educational (such as tutoring or music lessons) has been a long-standing and clear requirement in the IRS regulations.

    2. Ensure “Well-Being and Protection": The IRS guidance is clear that the primary function of the care must be to ensure well-being and protection of the child. In the context of virtual care, it is important to understand the primary vs. secondary nature of the purpose of the care.

    3. Other Benefits Must be Incidental to and Inseparably Part of Care: The IRS recognizes that in the regular provision of dependent care, some other benefits may inure to the child or the family. For example, a babysitter may provide some educational function by reading to a child. A daycare program may provide lunch for a child. Or an afterschool program may provide some instructional services. However, each of these “extra” benefits are considered incidental to and not the primary purpose of the care.

    An Example of Reality

    Let’s take the example of a parent working at home and who has enrolled their elementary age child in a virtual day camp experience. It is clear that the existence of the virtual day camp experience will allow the parent to better focus on working. It can also be assumed that someone else is watching over the child’s immediate activities and, presumably, would alert the parent if there are any problems.

    The Argument FOR Virtual Daycare Eligibility

    It could be argued that this scenario meets the criteria set out for dependent care eligibility and that the primary purpose could be deemed as ensuring the child’s well-being and protection. Proponents of this viewpoint argue that the vigilance provided by an in-person provider is not significantly different than when such a service is provided via a video connection with two-way audio and visual functionality. The basic argument here is that the nature of the oversight of the child is not changed by the virtual nature of the interaction.

    The Argument AGAINST Virtual Daycare Eligibility

    The more conservative argument would acknowledge that a virtual care could not ever be considered primarily custodial in nature nor for the primary purpose of the well-being and protection of the child since the very nature of custody and protection implies physical presence. Virtual providers might be able to keep the child engaged and occupied for the convenience of the parent, but it is difficult to make the argument that they would be able to protect and ensure the well-being of the child beyond maintaining web-based vigilance. While a virtual provider might be able to alert a parent if the child is in danger, it is still the parent who must act to protect the child. This calls into play the third test of the inseparability of “other benefits” (in this case the benefit of keeping the child otherwise engaged). In effect, the parent is still the primary provider of well-being and protection, and the parent retains the responsibility of primary custody of the child.

    What are FSA Administrators Doing?

    To say there is a lack of consistency on how FSA administrators are addressing these claims is an understatement. Many administrators are taking the more lax interpretation given the unusual circumstances of COVID. Most proffer an admittedly weak argument for eligibility with a strong argument for reason in the face of COVID realities for parents. In further support of this opinion, these administrators are relying on participants “attesting” that the expense meets all of the IRS criteria for eligibility. To this, we would suggest that it is the administrator’s job to affirm eligibility of reimbursements and to keep the plan compliant.

    We Agree, It Should be Eligible

    We agree that, in the face of COVID realities, virtual daycare expenses SHOULD be considered eligible under dependent care FSA plans. It is reasonable. It is logical. These services really do help parents focus on work. The fact is that current IRS guidance does not properly contemplate the realities faced by parents working from home while schools are closed with elementary age children needing to log on to the internet for class. The regulations were written at time when Zoom didn’t exist and when virtual services of all kinds (daycare and otherwise) would have been seen as a Jetson’s era reality. In short, the regulations we have simply don’t recognize the reality we are living in.

    But It’s Not

    That said, the fact is that according to the IRS guidelines that we currently have, virtual dependent care expenses simply don’t meet the standards that are outlined for eligibility. Wishing it otherwise, doesn’t change the fact. While we can hope that the IRS will offer some updated guidance on this issue, they have yet to do so. As unpopular as it is, without explicit guidance from the IRS, we believe it is better to err on the side of caution and consider virtual daycare and virtual day camps as ineligible expenses.

    • Pre-Tax
  2. New California Pay Day Reporting Requirement

    System Administrator – Thu, 19 Nov 2020 23:37:23 GMT – 0

    On September 30, 2020, California Governor Gavin Newsom signed SB 973, also known as the California Gender, Race Pay-Gap Law. This law, going into effect January 1, 2021, creates new pay data reporting obligations, requiring employers to detail pay data for specified employee job categories, broken down by race, gender and ethnicity.

    Who is Subject?

    Private California employers with 100 or more employees that are required to file an annual, federal Employer Information Report (EEO-1) are subject to this new law. Employers with fewer than 100 employees and governmental employers are not subject to this law.

    Deadline

    Covered employers must submit pay data reporting to the California Department of Fair Employment and Housing (DFEH), by March 31, 2021. Thereafter, employers must submit pay data reporting annually to reflect pay data from the prior calendar year.

    Broad Job Categories Included

    The following job categories are included in the pay data reporting requirements:

    • Executive or senior level officials and managers
    • First or mid-level officials and managers
    • Professionals
    • Technicians
    • Sales workers
    • Administrative support workers
    • Craft workers
    • Operatives
    • Laborers and helpers
    • Service workers

    Reporting Requirements

    The pay data report must include the following elements:

    • Number of employees by race, ethnicity and sex whose annual earnings fall within each of the pay bands that are used in the U.S. Bureau of Labor Statistics Occupational Employment Statistics survey
    • Total number of hours worked by each employee counted in each pay band during the reporting year
    • Employer’s North American Industry Classification System (NAICS) code

    Data must be provided in a format that allows the DFEH to search and sort the information using readily available software.

    Employers with multiple establishments must submit a report for each establishment and a consolidated report that includes all employees.

    • Compliance
  3. 401(k) Update: Q4 2020

    System Administrator – Thu, 19 Nov 2020 01:40:37 GMT – 0

    Year-End Participant Notifications

    As we wrap up 2020, we would like to remind you of some important annual notices that may need to be delivered to Plan participants, depending on the provisions of your Plan. Below is an outline of these notices, along with the corresponding due dates, based on a calendar-year Plan:

    Qualified Default Investment Alternative Notice

    • Applicable Plans: Plans with an assigned QDIA
    • Distribution Date: December 1, 2020


    2021 Safe Harbor Notice

    • Applicable Plans: Plans with a Safe Harbor provision
    • Distribution Due Date: December 1, 2020


    Automatic Enrollment Notice

    • Applicable Plans: Plans with an automatic contribution arrangement (automatic enrollment) feature
    • Distribution Due Date: December 1, 2020


    2019 Summary Annual Report

    • Applicable Plans: ALL retirement plans (note: this is the extended due date for plans that filed a Form 5558)
    • Distribution Due Date: December 15, 2020

    Download our Compliance Calendar to see what other important dates may be approaching.

     

     

    Market Update1

    Markets in the third quarter of 2020 maintained and extended the sharp rebound experienced in the second quarter. The S&P 500 rose another 10% in Q3, taking the index up 8.9% year-to-date (“YTD”). US bond markets held onto the gains from the beginning of the year with the BarCap US Aggregate Bond Index up another 0.6% in Q3, resulting in a YTD rise of 6.79%. Overseas, the MSCI All Country World ex US index clawed back another 6.25% in Q3, leaving the index down 5.44% YTD. Progress from here will be much harder to come by. Q2 market movements will need to be validated by positive economic figures to continue these gains in Q4 2020.

     

    The rally in equity markets seems to have been driven largely by a slowdown in COVID cases and the continued monetary and fiscal support provided both in the US and abroad. The number of cases and the rate of fatality are diminishing, though we will most probably continue to bounce back and forth between social easing and restriction for some time. The passage of an extension of the CARES Act seems to have been delayed by the elections in the US. However, most commentators still expect passage of an extension of economic support in the lame duck session of Congress, no matter which party wins. The bond market rally is supported largely by the expectation that the Fed will keep rates low through 2021. Fed Chairman Powell has given no indication otherwise.

     

    At some point, economic fundamentals will need to catch up with market valuations if we are to maintain YTD market gains. The US GDP registered a 31.4% decline in Q2 and estimates are for a rebound of as much as 35% in Q3 and another small (2-5%) rise in Q4. Early expectations for full-year 2020 GDP growth are coming in at around a decline of 10%, which would make this the second most severe recession since the Great Depression. Most economists are predicting positive and sustained year-on-year economic growth in the US from Q1 or Q2 of 2021. About half of jobs lost in Q1 and Q2 of 2020 have come back, and unemployment rate has come off its peak of 14.7% in April to 7.9% at the end of September. While these trends support the hope for a short-lived recession, we are unlikely to see a sustained rebound in GDP or jobs growth until a vaccine and a cure for COVID-19 is found and deployed.

    These difficult economic conditions have naturally had an adverse impact on corporate earnings. Corporate earnings in 2020 are expected to be down as much as 43% from last year, though these will be spread unevenly among sectors. Certain sectors –technology, communications, and consumer staples – may see positive earnings growth this year, but earnings for the economy as a whole are not forecast to rebound until 2021 at the earliest. S&P 500 forward Price/Earnings ratio rose to 21.4x at the end of September, more than one standard deviation above its 25-year average of 16.46x. While this is on a par with valuations seen during the “Tech Wreck” of the early 2000’s, lower interest rates today should make these levels somewhat more sustainable.    

     

    The market rebound in Q2 and Q3 2020 has been heartening. However, the possibility of an uptick in COVID-19 cases, politicking around the extension of economic support, and the rhetoric of a presidential election campaign means we are likely to see continued market volatility for the rest of 2020.

            

     

    This commentary is provided for informational purposes only and does not pertain to any security product or service and is not an offer or solicitation of an offer to buy or sell any product or service. Nothing in this commentary constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to your individual circumstances.

     

    1Source data: JPMorgan Asset Management, Guide to the Markets – U.S. Economic and Market Update, 4Q 2020 September 30, 2020.

    • Retirement
  4. Supreme Court to Determine Fate of the ACA - A Peek Into the Crystal Ball

    System Administrator – Thu, 12 Nov 2020 06:58:54 GMT – 0

    Just as the nation is facing the COVID-19 global pandemic, the Affordable Care Act (ACA) is once again in the limelight. On November 10, the U.S. Supreme Court will take up California v. Texas and hear arguments on whether the ACA is constitutional, in whole or in part. The case will address two things:

    1. Penalty-Less Individual Mandate: The constitutionality of the individual mandate now that the penalty for not having coverage has been zeroed out.
    2. Severability: Whether the individual mandate is so central to the rest of the ACA that it cannot be severed from the rest of the law (if it is considered unconstitutional) or whether the entirety of the statute would be invalidated in the absence of the individual mandate.

    Case History

    The Supreme Court already addressed the constitutionality of the ACA back in 2012. At that time, the court upheld the constitutionality of the ACA's penalty on individuals who do not comply with the mandate to have health coverage (the so-called individual coverage mandate) as a justifiable exercise of Congress' power to tax. The key issue here was that the law expressed the fine for not carrying health insurance as a “penalty” and not expressly as a “tax.” The ruling at that time was that the penalty was sufficiently “tax-like” to fall under Congress’ power to levy taxes. Thus, the individual mandate was upheld on the grounds that the fine for not carrying health insurance was, in fact, a tax.

    Why Does This Matter?

    Had the fine not been deemed a tax, then the law would have to be interpreted as Congress mandating behavior (to purchase health insurance). However, Congress’ power is limited to “expressed powers” and not general powers, and there is no expressed power to compel or mandate certain behaviors. Levy taxes, yes. Mandate behavior, no. Thus, the determination that the Individual Mandate was deemed constitutional hangs on the fact that the fine is considered a tax.

    Enter the Zero Tax

    In December 2017, President Trump signed into law the Tax Cuts and Jobs Act which eliminated the ACA's penalty on individuals who lack health coverage. At this stroke of a pen, the thread by which the Individual Mandate’s constitutionality hung was eliminated.

    Crystal Ball Option #1: ACA Falls

    So, what are the likely or potential outcomes? Without question, the case is complex. That said, several important facts are relevant to consider:

    1. The constitutionality of the individual mandate was upheld based on the penalty being a tax. The federal court which most recently invalidated the individual mandate portion of the ACA concluded that, “the individual mandate, unmoored from a tax, is unconstitutional.”
    2. There is no longer a tax.
    3. The argument brought forth by the challengers is that if the constitutionality of the individual mandate was upheld based on the tax, and there is no longer a tax, then it stands to reason that the change in the tax would render the individual mandate unconstitutional.

    What about Severability?

    If the individual mandate were found to be unconstitutional, the question becomes whether the individual mandate can be “severed” from the rest of the law or whether it is so central to the foundation of the law that the entire law would be invalidated by the demise of that one provision. Writing for the majority in the 2012 opinion, Chief Justice Roberts addressed the issue of severability in a detailed analysis, reaching the conclusion that the individual mandate was, in fact, not severable from the rest of the law. Importantly, none of the other justices offered dissenting opinions addressing this issue. This lays a foundation of uniform thought on the bench regarding the severability issue.

    What Happens if the ACA is Invalidated?

    If the individual mandate were found to be unconstitutional and not severable from the rest of the ACA, the entirety of the law would be invalidated. This would include many popular provisions of the law including:

    • Protections for people with pre-existing conditions
    • Funding for premium subsidies
    • Funding for Medicaid expansion.
    • Small group reforms
    • Coverage mandates (free preventive care, no lifetime limits, caps on out-of-pocket cost sharing, dependent coverage to age 26, etc.)

    If the law were invalidated, Congress could pass legislation to restore key provisions of the law. Such action would render moot any Supreme Court determination to the contrary. This, of course, assumes Congress is aligned on the provisions to restore and has the votes to push such legislation through.

    Crystal Ball Option #2: ACA is Upheld

    Oral arguments were heard by the Supreme Court on November 10, 2020. While there has been speculation that they newly-conservative-leaning Supreme Court would lean toward invalidating the law, feedback from the oral arguments was less definitive than some had expected. Early feedback from Chief Justice Roberts and Justice Kavanaugh indicate that they see a possible path to invalidate the individual mandate but consider it severable from the law, thus enabling the remainder of the law to stand. This argument would suggest that since 2017 the ACA has actually been operating without the individual mandate (because the penalty has been zeroed out) and it has not imploded. Therefore, it has effectively proven that it is severable. Justice Alito offered the analogy of an airplane:

    “At the time of the first case, there was strong reason to believe that the individual mandate was like a part in an airplane that was essential to keep the plane flying, so that if that part was taken out the plane would crash. But now the part has been taken out and the plane has not crashed . . . So, how would we explain why the individual mandate in its present form is essential to the operation of the act?"

    There is also a possibility that the Supreme Court will determine that Texas and the other GOP-led states that brought the challenge don’t, in fact, have standing to sue in the first place. There was some discussion on this issue in the hearing as well.

    Ultimate Fate

    The ACA’s fate is now in the hands of the Supreme Court. The court is expected to rule on this case before the end of the term in June 2021. In the meantime, the ACA remains fully in effect, and all employer provisions and reporting requirements remain enforceable.

    • Employee Benefits
  5. California Minimum Essential Coverage Information Reporting

    System Administrator – Mon, 09 Nov 2020 23:37:54 GMT – 0

    In parallel to the now-being-challenged federal individual mandate to carry health insurance, California has passed a Health Care Mandate. The tax penalty that California residents face for not carrying health insurance is $695 per adult and $347.50 per child or 2.5% of gross income above the filing threshold, whichever is higher.

    California Minimum Essential Coverage Information Reporting (MEC IR) essentially means that copies of the federal 1095-B/C and 1094-B/C forms must be submitted to the State of California (as well as to the IRS) so that the state is able to confirm health coverage for individuals.

    What are the Filing Requirements?

    Insurance providers are required to report health coverage information to the California Franchise Tax Board (FTB) annually. Employers are similarly required to report health insurance information, but only if their insurance providers do not report to FTB. The deadline for both insurance carrier and employer filings is March 31st.

    What is the Penalty?

    The penalty for not reporting is $50 per individual who was provided health coverage.

    When are Carriers Responsible?

    Carriers are responsible for health coverage information reporting when a plan is fully insured. This means if coverage is fully insured, there is no direct action to take for employers relative to reporting for the California Mandate.

    Self-Funded Employers Must File

    Employers are responsible for health coverage information reporting when a plan is self-funded. This means for self-funded plans (and for level-funded plans) employers are required to take steps to complete the required reporting.

    Timeline

    • FTB starts accepting MEC IR registration/enrollment: October 5, 2020
    • FTB starts accepting test files: October 5, 2020
    • FTB starts accepting production files: January 4, 2021
    • Deadline for MEC IR submission: March 31, 2021

    How to File Electronically

    Employers who need to file can submit information either electronically or by paper. The FTB has created an easy-to-follow Getting Started wizard. There are three steps to the process:

    1. Register Online: A Responsible Official completes the registration on behalf of the organization.
    2. Enroll in the MEC IR Program: After logging into the MEC FX Portal, submit a MEC IR enrollment form online.
    3. Submit MEC Information: This step includes a test cycle and the ability to manage enrollment, transmit data, and get acknowledgements.

    How to File by Mail

    You can send MEC IRs directly to the FTB by mail. The FTB has provided resources and instructions for direct mail filing. Although currently in draft form, the instructions are outlined in the MEC IR Publications page of the FTB website.

    Helpful Resource

    The FTB has a very helpful and detailed Registration and Enrollment Guide. It offers a step-by-step guide for filing as well as helpful comparisons between the federal and state processes.

    • Compliance
  6. New York Sick/Safe Leave Law

    System Administrator – Fri, 06 Nov 2020 23:54:03 GMT – 0

    As of September 30, 2020, all New York State employers must provide their employees with sick leave. For most employers, it must be paid leave. Some cities (including NYC) and counties had existing local laws that required sick leave. However, these laws have largely been amended to align with the new state law.

    Leave Type and Duration Varies by Employer Size

    The amount of sick leave that must be provided (and whether such leave is paid or not) varies based on employer size and income as follows:

    • Employers with 100+ employees: Seven days (56 hours) of paid sick leave per calendar year.
    • Employers with 5 to 99 employees: Five days (40 hours) of paid sick leave per calendar year.
    • Employers with 1 to 4 employees (>$1 million*): Five days (40 hours) of paid sick leave per calendar year
    • Employers with 1 to 4 employees ($1 million or less*): Five days (40 hours) of unpaid sick leave per calendar year

    * Employer net income in previous tax year.

     

    Uses of Leave

    The statute establishes specific categories of leave for New York-based employees. The leave duration may be spread across any of the categories, but only one allocation of leave time is available for each employee per calendar year. The leave categories are as follows:

    Sick Leave:

    • A mental or physical illness, injury or health condition of an employee or the employee’s family member, regardless of whether such illness, injury or health condition has been diagnosed or requires medical care at the time the employee requests leave
    • The diagnosis, care or treatment of an existing health condition of, or preventive care for, an employee or an employee’s family member.

    Safe Leave:

    • An employee or an employee’s family member who is a victim of domestic violence, a sexual offense, stalking or human trafficking in order to avail themselves of services or assistance.
    • Compliance
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