The Vita Blog December 2019

In July 2019, Governor Newsom signed SB 30 which expands the definition of domestic partnerships in California. This change in the law does potentially impact employee benefit plans and how eligibility is defined and administered.

The Past

Under prior California law, Registered Domestic Partners (RDP) are deemed to have the same rights and responsibilities as legally married spouses. Existing law defines domestic partners as two adults who have chosen to share one another’s lives in an intimate and committed relationship of mutual caring. A domestic partnership is formed when persons file a Declaration of Domestic Partnership with the Secretary of State and, at the time of filing:

• Neither person was married or in a domestic partnership with someone else;
• The persons are not related by blood;
• Both are at least 18 years of age (with exceptions);
• Both are capable of consenting to the domestic partnership;
• Both are members of the same sex or one or both is eligible for social security benefits and over the age of 62.

It is this last bullet point in the list of requirements that has been changed in the new law. 

New Law

In July 2019, Governor Newsom signed SB 30 which eliminates the requirement that persons be of the same sex or of the opposite sex and over 62 years of age. Effectively, the law simply did a strikethrough on the last bullet point:

• Both are members of the same sex or one or both is eligible for social security benefits and over the age of 62.

The new law is effective January 1, 2020. The registration process consists of completing a Declaration of Domestic Partnership Form, having the form notarized, and mailing the form (along with a small processing fee) to the Secretary of State.

Impact on Employers

Employers should evaluate how this change in RDP definition may impact the eligibility provisions of their benefit plans. Specifically, they should determine whether they wish to make any changes to welfare plan eligibility requirements for unregistered domestic partners in the absence of the prior law’s restrictions. 

A Reminder about RDP/DP Documentation

Employers must treat Registered Domestic Partners exactly as they do spouses. In practice, this means that Domestic Partnership Registration documentation may not be requested unless marriage documentation is also required for married individuals. On the other hand, validating documentation (such as an Affidavit of Domestic Partnership) may still be required for unregistered domestic partners covered on benefit plans. Importantly, Vita highly recommends the use of an Affidavit of Domestic Partner for all unregistered domestic partners on group sponsored benefit plans.

Don’t Forget about Imputed Income

As a reminder, the value of health benefits coverage provided to domestic partners must be imputed to the employee’s income. The following chart outlines the federal and state taxation consequences for health benefits provided under employer health benefit plans. It is important to make sure that correct benefits taxation protocols are coordinated with payroll. 

Questions

Please reach out to your Vita Account Team with any questions about this change, to discuss your current documentation procedures, to understand the value of using DP Affidavits for unregistered domestic partners, or to confirm imputed income taxation on processes. 

PCORI Fee Extension

The Patient-Centered Outcomes Research Institute (PCORI) fee is extended to 2029. The PCORI fee was initially applied from 2012 to 2019. The fee started at $1.00 per covered life in the first year that the fee was in effect and increased based on a COLA factor since. Most recently, for plan years that ended on or after October 1, 2018, and before October 1, 2019, the indexed fee was $2.45. 

New PCORI Fee not Released

The IRS has not released the indexed fee for plan years that end on or after October 1, 2019, and before October 1, 2020, or for subsequent plan years. Stay tuned for details on the specific PCORI fee. 

The week of December 16, 2019, Congress passed two year-end spending agreements to fund the federal government until Sept. 30, 2020 (H.R. 1158 and H.R. 1865) and President Trump signed them into law.  One of the agreements, H.R. 1865 (the Further Consolidated Appropriations Act of 2020), included a full repeal of three taxes originally imposed by the ACA:

1. Cadillac Tax
2. Health Insurance Industry Fee (aka. Health Insurer Tax)
3. Medical Device Tax

Cadillac Tax

The Cadillac Tax would have imposed a 40% excise tax on coverage on high-cost employer-sponsored health insurance. When originally enacted in the ACA, the thresholds were $10,200 for self-only and $27,500 for family coverage with a 2018 effective date.

In early December, more than 1,000 employers, insurers, unions and other organizations urged Senate leaders to scrap the Cadillac tax, which was set to go into effect in 2022.

The Cadillac Tax was delayed multiple times since passage of the ACA, and is now fully repealed, meaning it no longer exists and will never take effect.

Health Insurer Tax

H.R. 1865 also fully repeals the Health Insurer Tax, beginning in 2021. The $8 billion fee was implemented in 2014 and continued to increase each year. The fee only applied to insured plans (not self-funded plans) and was based on each insurer’s share of the taxable health insurance premium base.

Due to the adverse impact on health insurance premiums, the fee was suspended in 2017 and 2019. It is important to note that the fee will be in effect for 2020 as no suspension was granted for that year.  Then, it will be fully repealed effective 2021.

Medical Device Tax

The Medical Device Tax imposed a 2.3% excise tax on U.S. medical device revenues. The tax was in effect from 2013 through 2015.  It was then suspended from 2016 through 2019. H.R. 1865 fully repeals the tax, effective Dec. 31, 2019.

Things Left Out

Compromise legislation to address surprise medical bills and a major drug-pricing package were left out of the year-end package. Lawmakers delayed long-term action on funding expiration for several healthcare priorities until May 22, which provides another potential vehicle for those larger packages.

Comprehensive Retirement Plan Reform Law

It has been more than a decade since we have seen comprehensive pension plan reform, but such legislation has just been passed by Congress.  It is expected to be signed into law by President Trump today as part of the budget bill funding the federal government for the remainder of the fiscal year. The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE) was added as Division O to the Further Consolidated Appropriations Act, 2020 (H.R. 1865). Of critical importance to plan sponsors: The effective dates in the original bill were left unchanged. As a result, many of the new law’s provisions will become effective on January 1, 2020.

SECURE enjoyed bipartisan support, having passed the House of Representatives earlier this year on a vote of 417–3. It was expected that the Senate would quickly approve the bill through an expedited process that would have required the unanimous consent of all senators. Several objected, and the bill languished until now. Adding it to the budget bill, which was considered “must-pass” legislation, was likely the last chance it had to be enacted in this Congress.

New Rules for 401(k) Plans

SECURE makes a number of changes to the 401(k) plan rules, effective for plan years beginning after December 31, 2019. They include:

• No Safe Harbor Notice. The annual safe harbor notice would no longer be required for plans using the non-elective contribution approach.
• Mid-Year Amendments for Non-Elective Contributions. Traditional 401(k) plans can now be amended mid-year to become a non-elective contribution type safe harbor plan. (This option is not available for matching contribution safe harbor plans.) If the mid-year amendment is adopted fewer than 31 days before the end of the plan year, the non-elective safe harbor contribution must equal at least 4% of compensation and the actual amendment must be adopted no later than the end of the next plan year.
• Cap on Auto Contributions Increased. The cap on automatic enrollment contributions is increased from 10% to 15% of compensation for qualified automatic contribution arrangement safe harbor plans.

Pooled Employer Plans

A good portion of the SECURE Act is intended to increase coverage of American workers in employer-sponsored savings arrangements. SECURE provides for a new type of multiple employer plan called a Pooled Employer Plan (PEP). PEPs have been promoted as a way smaller employers can pool together to participate in a single plan and save on administrative costs. A PEP has a single plan document, a single Form 5500 filing and a single independent plan audit. A PEP should also have a larger pool of assets, allowing for institutional mutual fund share classes which have lower expense ratios.

The PEP must be sponsored by a Pooled Plan Provider (PPP), which is likely to be a financial services company, third-party administrator, insurance company, recordkeeper, or similar entity. The PPP must serve as the ERISA section 3(16) plan administrator, as well as the named fiduciary for the plan. It is expected that many PEPs will retain an ERISA section 3(38) investment advisor who would be responsible for selecting and monitoring the plan’s investment menu. Consequently, the participating employers would only have fiduciary responsibility for prudently selecting and monitoring the PPP. This is expected to be very appealing to smaller employers who are concerned about the potential for fiduciary responsibility and liability. The PEP provisions are delayed a year and will be effective for plan years beginning after December 31, 2020. The IRS and DOL are expected to provide guidance in the coming year.

Part-time Employees

An important change in the bill intended to increase coverage is a new mandate to cover long-term part-time employees. Under SECURE, if an employer maintains a 401(k) plan, then any part-time employee who has not otherwise satisfied the plan’s eligibility conditions must be permitted to participate and make elective contributions if the employee has completed 3 consecutive 12-month periods of employment and was credited with at least 500 hours of service in each of those periods. No employer contribution (including top-heavy minimum contributions) would be required until the employee has satisfied the plan’s normal eligibility requirements. This new mandate is effective for plan years beginning after December 31, 2020. Twelve-month periods of service before January 1, 2021, however, need not be counted, which will further delay the date by which a part-timer might first enter a plan under this new mandate.

Tax Credit for New Plans

Another change in the law, intended to increase the number of workplace retirement plans, is a significant increase in the tax credit given to small employers who set up a new plan. Under SECURE, the tax credit for the first 3 years after adopting a new plan will equal 50% of the plan’s startup costs up to the greater of $500 or $250, multiplied by the number of NHCEs eligible to participate up to a maximum of $5,000. This is a substantial increase from the current limit of 50% of the startup costs up to a maximum credit of $500 per year for the first 3 plan years. An additional small employer tax credit equal to $500 per year for up to 3 years is available if the plan sponsor adds auto enrollment to an existing plan or if it is included in a new plan. A “small” employer for purposes of the credit is defined as one who, in the preceding tax year, had no more than 100 employees receiving at least $5,000 in compensation. These changes are effective for taxable years beginning after December 31, 2019.

Stretch IRAs Restricted

The new law also eliminates the so-called stretch IRA (which also applies to qualified plans and 403(b) plans). Under current law, after the death of a plan participant or IRA owner, a non-spouse beneficiary is permitted to stretch the required minimum distributions over the beneficiary’s life based on his or her life expectancy. Under the new law, all amounts held by the plan or IRA must be distributed within 10 years of the plan participant’s or IRA owner’s death. An exception to the 10-year distribution rule is provided for an “eligible beneficiary,” which includes a surviving spouse, minor child, disabled or chronically ill individual, or any other beneficiary who is no more than 10 years younger than the participant or IRA owner. An exception is also provided for certain binding annuities in effect on the date of enactment. These new distribution rules will generally apply with respect to participants or IRA owners who die after December 31, 2019. However, government plans will apply the new rules to employees dying after December 31, 2021, and collectively bargained plans will apply them to employees dying in calendar years beginning after the expiration of the current collective bargaining agreement or December 31, 2021, if earlier.

Additional SECURE Provisions

• Minimum Distribution Age Increased to 72. Increase the age at which minimum distributions must begin to 72. This is effective with respect to individuals who attain age 70½ after December 31, 2019.
• Modify the nondiscrimination rules for older long-service employees in defined benefit plans which are frozen or which have closed classes of participants (effective on the date of enactment).
• No Max Age on IRA Contributions. The maximum age limit for making IRA contributions was repealed.  Effective for tax years beginning after December 31, 2019.
• New Plan Adoption Timing. New plans are permitted to be treated as effective for the prior tax year if adopted no later than the due date of the prior year’s tax return.  Effective for tax years beginning after December 31, 2019.
• Penalty Free Withdrawals for Birth or Adoption. Penalty-free withdrawals from retirement plans are allowed for expenses related to the birth of a child or for expenses related to an adoption.  Effective for distributions made after December 31, 2019.
• No Credit Card Loans. Prohibit plans from making qualified plan loans available through a credit card.  Effective on the date of enactment. 
• Required Illustrations. Require a lifetime income illustration on participant benefit statements for defined contribution plans.  Effective for benefit statements issued 12 months after the release of DOL guidance.
• Expanded Fiduciary Safe Harbor. Provide a more robust safe harbor to plan fiduciaries with regard to selecting an insurance company to provide participant annuities.  Effective on the date of enactment. 
• Increase Late Filing Penalties. Increase the late filing penalties for Form 5500 to $250 per day, not to exceed $150,000, and for Form 8955-SSA to $10 per participant per day, not to exceed $50,000. Applies to forms required to be filed after December 31, 2019.  
• Portability for Annuities. Provide for portability of annuity or lifetime income options if a lifetime income investment is no longer authorized to be held as an investment option under the plan.  Effective for plan years beginning after December 31, 2019. 

Plan Amendment Timing

When SECURE was added to the budget bill, a special amendment period was included in the bill. This will allow plans to operate in accordance with the new law without having to immediately amend the plan document. Most plans will have until the end of the 2022 plan year to adopt conforming amendments.

Appeals Court: Individual Mandate Unconstitutional

On December 18, 2019, the U.S. Court of Appeals for the Fifth Circuit (Appeals Court) held that the ACA's individual mandate is unconstitutional.

The Appeals Court is remanding the case to the U.S. District for the Northern District of Texas (District Court) for additional analysis on whether the individual mandate can be severed from the ACA. The Appeals Court is also directing the District Court to consider the government's new arguments regarding the relief that should be provided to the plaintiff states and the two individual plaintiffs in the case.

To be clear, the Appeals Court decision does not impact employers' group health plans at this time.

Background

In 2018, 20 states filed a lawsuit asking the District Court to strike down the ACA entirely. The lawsuit came after the U.S. Congress passed the Tax Cuts and Jobs Act of 2017 that reduced the individual mandate penalty to $0, starting in 2019.

The plaintiffs argued that, without the penalty, the individual mandate is unconstitutional because it can no longer be considered a tax. The plaintiffs also argued that the individual mandate is not severable from the rest of the ACA so if the individual mandate is unconstitutional, then the rest of the ACA is unconstitutional.

The U.S. Department of Justice (DOJ) responded that the individual mandate is unconstitutional without the penalty.

DOJ Expanded Issues Being Addressed

The DOJ also argued that because the guaranteed issue and community rating provisions are inseverable from the individual mandate, the guaranteed issue and community rating provisions are also unconstitutional.

The individual mandate requires most people to have a certain level of health insurance coverage or pay a penalty (for 2018, the penalty was $695 per adult and $347.50 per child, or 2.5 percent of household income, whichever was greater). Guaranteed issue prohibits insurers from basing coverage eligibility on an individual's medical history and from excluding preexisting conditions on new plans. In the individual and small group markets, adjusted community rating means that premiums cannot be based on medical history and can only vary based on age, tobacco use, and geographic area.

Although the DOJ asked the District Court to declare the individual mandate, guaranteed issue, and community rating provisions to be unconstitutional as of January 1, 2019, the District Court went further than the DOJ's request.

So Then What Happened?

On December 14, 2018, the District Court issued a declaratory order that the individual mandate is unconstitutional. The District Court found that the individual mandate is unconstitutional without the penalty and that the individual mandate is inseverable from the rest of the ACA. Because of its findings, the District Court declared that the individual mandate and the entire ACA – including its guaranteed issue and community rating provisions – are unconstitutional.

The District Court did not grant the plaintiffs' request for a nationwide injunction to prohibit the ACA's continued implementation and enforcement. The District Court's declaratory judgment simply defines the parties' legal relationship and rights under the case (for example, that the individual mandate is unconstitutional as applied to the individual plaintiffs).

On December 30, 2018, the District Court issued two orders. The first order grants a stay of its December 14 order. This means that the District Court's order regarding the ACA's unconstitutionality will not take effect while it is being appealed. The second order enters the December 14 order as a final judgment so the parties may immediately appeal the order.

On December 31, 2018, the District Court issued an order that stays the remainder of the case. This means that the District Court will not be proceeding with the remaining claims in the case while its December 14 order is being appealed. After the appeal process is complete, the parties are to alert the District Court and submit additional court documents if they want to continue with any remaining claims in the case.

Fast Forward One Year . . .

On December 18, 2019, the Appeals Court held that the ACA's individual mandate is unconstitutional. The Appeals Court explained that the ACA's individual mandate was based on Congress' taxing power. According to the Appeals Court, because the individual mandate can no longer be construed as a tax after the TCJA reduced the individual mandate penalty to $0, there is no other constitutional provision that allows Congress to impose the individual mandate.

The Appeals Court is sending the case back to the District Court for additional analysis:

• to explain precisely which parts of post-2017 ACA are inseverable from the individual mandate, and
• to consider whether to prohibit enforcement of only those ACA provisions that injure the plaintiffs or to declare the ACA unconstitutional only as to the plaintiff states and the two individual plaintiffs.

Although the Appeals Court decision declares the individual mandate to be unconstitutional, its majority decision does not address whether the entire ACA is unconstitutional.

What Does This Mean for Employers?

The Appeals Court decision does not impact employers' group health plans at this time. However, employers should stay informed for the final decision in this case.

Under the Affordable Care Act (ACA), applicable large employers (ALEs) are required to offer health benefits to their full-time employees and individuals are required to have health insurance. There are penalties for ALEs that do not provide the required coverage, however, Executive Action changed the penalty for individuals to $0 for failing to have minimum essential coverage starting in 2019.

Reporting on health coverage that is offered is required by insurers, employers with 50 or more full-time (or full-time equivalent), and sponsors of self-funded health plans.  This is necessary so the Internal Revenue Service (IRS) may verify that:

1. Individuals have minimum essential coverage,
2. Individuals who request premium tax credits are entitled to them, and
3. ALEs are meeting their shared responsibility (play or pay) obligations.

2019 Draft Forms and Instructions

The IRS recently released draft forms and instructions for the 1094-C and 1095-C forms. There are no substantive changes in the forms or instructions between 2018 and 2019.

In past years, the IRS provided relief to employers who made a good faith effort to comply with the information reporting requirements and determined that they would not be subject to penalties for failure to correctly or completely file. This relief did not apply to employers that failed to timely file or furnish a statement.

In December 2019, the IRS released Notice 2019-63 to extend such relief for 2019. As in prior years, the relief is applied only to incorrect or incomplete information reported on the statement or return in good faith. The relief does not apply to a failure to timely furnish or file a statement or return. 

When? Which Employers?

Reporting for coverage in 2019 will be due early in 2020.

For calendar year 2019, Forms 1094-C and 1095-C must be filed with the IRS by February 28, 2020, or March 31, 2020, if filing electronically. Employers may file Form 8809 to receive an automatic 30-day extension of this due date for forms due to the IRS.

Under Notice 2019-63, the IRS extended the due date for furnishing statements to individuals from January 31, 2020, to March 2, 2020. The permissive 30-day extension that the IRS may grant to an employer for good cause will not apply to this extended due date for furnishing statements to individuals.

All reporting will be for the 2019 calendar year, even for non-calendar year plans.

Major Reporting Summary

Fully Insured

Self-Funded

< 50 FTEs

50+ FTEs

< 50 FTEs

50+ FTEs

Penalties for Failure to File

• The penalty for failure to file a correct information return is $270 for each return for which the failure occurs, with the total penalty for a calendar year not to exceed $3,339,000.
• The penalty for failure to provide a correct payee statement is $270 for each statement for which the failure occurs, with the total penalty for a calendar year not to exceed $3,339,000.

Special rules apply that increase the per-statement and total penalties if there is intentional disregard of the requirement to file the returns and furnish the required statements.

Detailed Reporting Requirements for Forms 1094-C and 1095-C

IRS Form 1095-C is used primarily to meet the reporting requirement relating to the employer shared responsibility / play or pay requirement. Information from Form 1095-C is also used to determine whether an individual is eligible for a premium tax credit.

Employers with 50 or more full-time or full-time equivalent employees must complete Parts I and II of Form 1095-C to report on coverage that was offered to the employee and eligible dependents.

Large employers that sponsor self-funded plans may also complete Part III (to avoid filing both the employer and the insurer forms).  Employers with 50 or more full-time or full-time equivalent employees with fully insured plans skip Part III, and their insurance carrier will complete a separate 1095-B series form to report detailed information on coverage for each family member.

Employers with 50 or more full-time or full-time equivalent employees must provide Form 1095-C to virtually all employees who were full-time (averaged 30 hours per week) during any month during the year, even if coverage was not offered to the employee or the employee declined coverage. (If the full-time employee never became eligible during the year, most likely because the employee is a variable-hours employee in an initial measurement period, the form does not need to be provided).

Vita’s Takeaway

While the deadline extension and good faith relief will help an employer avoid penalties, employers should continue to focus on making sure reporting is accurate and timely. The Vita team will continue to monitor the ACA reporting developments and keep you apprised as the law evolves.