Legislative Perspectives

California Assembly Bill 5 (also known as CA AB 5), which went into effect January 1, 2020, will apply to all workers’ compensation policies as of July 1, 2020. It implements a new test to determine whether a worker qualifies as an employee or an independent contractor under the California Labor Code. The law applies to all workers in California, regardless of where the employer is based. It does not apply to workers outside of the state who work for a California-based employer. It is important that employers review the new standards to determine if any workers should be reclassified as an “employee,” which would have a corresponding impact under the employer’s workers’ compensation policy.

After passage, the CA Labor & Workforce Development Agency created the “ABC Test” to help employers work through the process of identifying “employees.” Under the ABC Test, a worker is defaulted to employee status, unless the hiring entity demonstrates that all three of the following conditions are satisfied:

1. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact
   (e.g., paid by the job vs. by the hour; provides own tools and equipment; works for a brief time; distinct occupation).
2. The person performs work that is outside the usual course of the hiring entity’s business (e.g., car dealership hires a plumber for a plumbing leak).
3. The person is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed (e.g., separate office location; employs assistants; carries own liability insurance; possesses own business licenses).

All three prongs of the ABC test must be satisfied for workers to be classified as independent contractors. Some occupations are exempt from the new classification (see the labor.ca.gov AB5 FAQs #4). Those industries exempt from the ABC Test will continue to use the existing Borello test for determining whether or not the worker must be included under their workers’ compensation policy.

The new legislation applies to all employers with workers’ compensation policies in-force on or after July 1, 2020. This means that a worker could be classified as an independent contractor before July 1, 2020, and as an employee after July 1, 2020. It also means that effective July 1, 2020, all payments to workers reclassified from independent contractor to employee are considered payroll and are included in your workers’ compensation premium. To avoid a possible civil penalty of up to $25,000 per violation and to avoid unexpected premiums adjustments following a final audit, employers must act immediately to bring themselves into compliance with CA AB 5.

The ABC test is also applicable for minimum wage, overtime pay, breaks, paid sick days, family leave, business expense reimbursement, state disability, unemployment and other wage-related matters.

What about employee benefits?

Employee benefit eligibility is governed by different tests than the ABC test for CA AB5 compliance. For example, a test emanating from a U.S. Supreme Court case, Nationwide Mutual Insurance Co. v. Darden (commonly referred to as the Darden test), is relevant for ERISA matters. Both employer group health plans and 401(k)s are governed by ERISA and thus courts would turn to the Darden Test to determine an individual’s classification. A similar test, the IRS “right to control” test, is relevant for those matters under their purview, such as cafeteria plans. Both tests are less rigid than the ABC test in that there is no presumption the worker is an employee and no one factor must be met to determine employee status. While some employers may wish to use one test for administration simplification, there are possible implications for covering individuals under a group health plan or 401(k) who do not qualify as an employee under the Darden test. In fact, the employer may unwittingly create a MEWA by including such independent contractors in the employer’s group health plan. Because worker classification creates complex and significant legal issues, we recommend working with your legal counsel to properly classify any California worker.

For questions related to your workers’ compensation policy, please reach out to your NFP advisor.

Amidst wide-spread criticism of the Paycheck Protection Program (PPP), Congress has enacted the Paycheck Protection Program Flexibility Act of 2020 on June 5, 2020 to address some concerns surrounding the original PPP — specifically those around loan forgiveness.

The Flexibility Act’s amendments to the PPP are effective retroactively back to the start of the program, which was itself first established through the Coronavirus Aid, Relief, and Economic Security (CARES) Act in early April to aid small businesses with certain business costs during the pandemic. The PPP was operationalized through the SBA’s 7(a) small business lending program, providing loans up to $10 million per eligible borrower to be used for payroll, mortgage interest, rent and utilities. A total of $349 billion in funding was exhausted in less than two weeks and was thusly followed by Congress providing an additional $310 billion in funding in late April.

Reacting to Feedback
The Flexibility Act is welcome news to the numerous small businesses seeking financial relief who felt restricted by the PPP’s original rules, such as limits on how the funds could be used and the time period in which the expenses must be incurred, with primary complaints of the PPP surrounding the “forgiveness period,” an eight-week period beginning on the day funds are disbursed and during which certain expenses must be incurred to qualify for loan forgiveness (many businesses are unable to become fully operational during the eight-week period due to government shutdowns or other pandemic-related issues). The Flexibility Act addresses this concern by extending the forgiveness period from eight weeks to 24 weeks, or December 31, 2020, with the option for pre-Act recipients to retain the original eight-week period if that fit their business needs.

Also related to loan forgiveness was a concern that 75% of the forgivable expenses be used for payroll costs during the forgiveness period. Businesses complained that their fixed costs did not decline during the pandemic, such as lease payments, while their payroll costs diminished as employees were laid off or furloughed due to a reduction in revenue. To help businesses with these other operating costs, the Flexibility Act decreased the amount of forgivable expenses tied to payroll costs to 60% from 75%.

The original PPP required borrowers to retain their full-time employee equivalent (FTE) count in order to receive the full loan forgiveness to incent employers to retain or rehire laid-off employees. Businesses found their efforts to rehire employees thwarted by the high unemployment benefits many former employees received under the CARES Act and the local shelter-in-place orders that impact restoration of operations to pre-pandemic levels. The original PPP reduced the forgiveness amount proportionally if the full FTE count was not restored by June 30, 2020. The Flexibility Act extends the time for borrowers to restore their FTE count to December 31, 2020 to enable borrowers an opportunity to obtain full loan forgiveness.

Navigating New Nuances
The Flexibility Act also added two new exceptions to the FTE count requirement. The first exception applies to situations in which an employer cannot find qualified employees though rehire efforts have been made. The second exception applies to situations in which the business cannot restore its operations to pre-pandemic levels due to government rules or guidance that impact operations. For example, a local order may limit the number of customers who can be seated in a restaurant, thus the required employee count will also be limited. Both exceptions are broadly written to allow employers to meet the FTE requirements for loan forgiveness.

Finally, the Flexibility Act altered the maturity date, deferment period and limits on employer payroll tax deferment. The maturity date for any loan is now a minimum of five years instead of two, and the deferment period is extended from six months to the date on which the borrower’s loan forgiveness amount is determined. The Flexibility Act also makes changes to the borrowers’ ability to take advantage of existing payroll tax deferrals under the CARES Act, which were unavailable to them previously. 50% of the employer’s share of payroll taxes may be deferred until 2021 with the remaining 50% deferred until 2022.

As SBA is issuing new rules and guidance on a rolling basis, borrowers may rely on the rules and guidance in place at the time of application and do not need to take any further action based on subsequent SBA releases. Borrowers whose applications have not yet been processed may, however, amend those applications based on new rules and guidance.

Putting it All Together
While the flexibility afforded by the Act is welcome news for PPP borrowers that struggled with the loan forgiveness requirements, there are still unanswered questions and clarifications that we would like addressed. We have updated our PPP FAQs to reflect the new legislation and will continue to provide updated information and guidance as it is released.

For months – years even – you've been hearing about New York's Best Interest and Suitability Reg 187, but now it's finally happening. Starting February 1, 2020, Reg 187 will be effective for all new life insurance sales issued or delivered in New York and will apply to all carriers operating in New York.

So now what do you need to do? To help you get started, NFP has developed an FAQ that outlines the key parts of Reg 187 and the all pieces that producers licensed to do business in New York State, or servicing clients with NY issued life insurance policies need to know.

One of the most important components is that Reg 187 requires training of all individuals holding NY licenses (producers, staff, and anyone else involved in making a "recommendation" to a client). This training can be found at RegEd, Kaplan, or LIMRA. Most carriers are indicating that they prefer RegEd, but license holders who received training from Kaplan or LIMRA can submit a certificate of completion from Kaplan or LIMRA. In addition to the universal training offered by RegEd, Kaplan, and/or LIMRA, each carrier will require product-specific training that can be found on the new business websites of the various carriers.

The other important change is that Reg 187 requires that each client's specific "suitability information" be gathered, documented, submitted, and retained for all "recommendations." Reg 187 has specific requirements for what constitutes "suitability information" and each carrier has created their own suitability form. To help simplify the process for our producers, NFP has created universal suitability forms – both for new recommendations and annual reviews – that can be submitted to the carriers with new business.

As you can imagine, the full impact of Reg 187 has yet to be felt and there are a lot of outstanding questions that the Reg has raised, but not yet answered. Given this, NFP will continue to provide information as we get additional clarity from the New York State Department of Financial Services or from those carriers doing business in New York.

On December 20, 2019, President Trump is expected to sign the Further Consolidated Appropriations Act of 2020 (HR 1865) into law. The main purpose of this legislation is to continue funding certain government operations. However, the bill also includes a number of employee benefits-related provisions. Specifically, the bill repeals the tax on high cost health coverage (aka the Cadillac tax), the health insurance tax (HIT), and the medical device tax. The bill also adopts the Setting Every Community Up for Retirement Enhancement (SECURE) Act relating to retirement plans.

ACA Tax Repeals

Cadillac Tax: The Cadillac tax was introduced by the ACA and would have imposed a 40% excise tax on employer-sponsored coverage that exceeded a certain threshold. The tax was originally set to become effective in 2018, but had been delayed through 2022. HR 1865 completely repeals the tax, meaning it will never be imposed on any employer plan.

HIT:The Health Insurance Providers Fee, also known as the HIT, is a tax imposed on insurers that was meant to help fund the cost of ACA implementation and the exchanges. Although the tax applied to insurers, insurers were allowed to push those costs through to group health plans through increased premium rates. HR 1865 repeals the tax effective January 1, 2021. However, the tax will still be due for the 2020 plan year.

Medical Device Tax: The medical device tax was a 2.3% excise tax on manufacturers and importers of certain medical devices. The tax was originally set to become effective in 2013, but has been delayed multiple times. HR 1865 repeals the tax entirely.

The repeal of these taxes is welcome news to the health and welfare industry and employers, as the taxes have been widely opposed since the adoption of the ACA.

SECURE Act

HR 1865 adopts the SECURE Act, which is the most comprehensive retirement legislation passed since the Pension Protection Act of 2006. The law includes sweeping changes that will affect how retirement plans are offered.

Some of the highlights of the legislation are as follows:

• Traditional IRA contributions can continue past age 70.5
• Open multiple employer plans can be offered, allowing employers with no connection to join together to offer retirement benefits to their collective employees
• Relaxed 401(k) safe harbor rules
• Increased credits for small businesses that start a retirement plan
• Eligibility for long-term part-time employees
• Penalty-free distributions for birth or adoption
• Increase in age for minimum required distribution (from 70.5 to 72)
• Portability of annuity investments
• Fiduciary safe harbor for employers that select a lifetime income provider
• Lifetime income disclosure requirements
• Elimination of the stretch IRA strategy, requiring non-spouse IRA beneficiaries to deplete inherited IRAs within 10 years

The SECURE Act enjoys widespread bipartisan support, as many in Congress and in the retirement plan industry believe that it will make retirement plans more accessible to those who don’t have them. The life insurance and annuity industries are also looking forward to the opportunities presented given the ability to fund 401(k) plans with annuities and the option to use life insurance as an inherited stretch IRA alternative. As the law is enacted and regulations formulated, we’ll continue to keep you updated.

We will provide more detail about the spending bill in our January 7 edition of Compliance Corner.

For months – years even – you've been hearing about New York's Best Interest and Suitability Reg 187, but now it's finally happening. Starting February 1, 2020, Reg 187 will be effective for all new life insurance sales issued or delivered in New York and will apply to all carriers operating in New York.

So now what do you need to do? To help you get started, NFP has developed an FAQ that outlines the key parts of Reg 187 and the all pieces that producers licensed to do business in New York State, or servicing clients with NY issued life insurance policies need to know.

One of the most important components is that Reg 187 requires training of all individuals holding NY licenses (producers, staff, and anyone else involved in making a "recommendation" to a client). This training can be found at RegEd, Kaplan, or LIMRA. Most carriers are indicating that they prefer RegEd, but license holders who received training from Kaplan or LIMRA can submit a certificate of completion from Kaplan or LIMRA. In addition to the universal training offered by RegEd, Kaplan, and/or LIMRA, each carrier will require product-specific training that can be found on the new business websites of the various carriers.

The other important change is that Reg 187 requires that each client's specific "suitability information" be gathered, documented, submitted, and retained for all "recommendations." Reg 187 has specific requirements for what constitutes "suitability information" and each carrier has created their own suitability form. To help simplify the process for our producers, NFP has created universal suitability forms – both for new recommendations and annual reviews – that can be submitted to the carriers with new business.

As you can imagine, the full impact of Reg 187 has yet to be felt and there are a lot of outstanding questions that the Reg has raised, but not yet answered. Given this, NFP will continue to provide information as we get additional clarity from the New York State Department of Financial Services or from those carriers doing business in New York.

On December 20, 2019, President Trump is expected to sign the Further Consolidated Appropriations Act of 2020 (HR 1865) into law. The main purpose of this legislation is to continue funding certain government operations. However, the bill also includes a number of employee benefits-related provisions. Specifically, the bill repeals the tax on high cost health coverage (aka the Cadillac tax), the health insurance tax (HIT), and the medical device tax. The bill also adopts the Setting Every Community Up for Retirement Enhancement (SECURE) Act relating to retirement plans.

ACA Tax Repeals

Cadillac Tax: The Cadillac tax was introduced by the ACA and would have imposed a 40% excise tax on employer-sponsored coverage that exceeded a certain threshold. The tax was originally set to become effective in 2018, but had been delayed through 2022. HR 1865 completely repeals the tax, meaning it will never be imposed on any employer plan.

HIT:The Health Insurance Providers Fee, also known as the HIT, is a tax imposed on insurers that was meant to help fund the cost of ACA implementation and the exchanges. Although the tax applied to insurers, insurers were allowed to push those costs through to group health plans through increased premium rates. HR 1865 repeals the tax effective January 1, 2021. However, the tax will still be due for the 2020 plan year.

Medical Device Tax: The medical device tax was a 2.3% excise tax on manufacturers and importers of certain medical devices. The tax was originally set to become effective in 2013, but has been delayed multiple times. HR 1865 repeals the tax entirely.

The repeal of these taxes is welcome news to the health and welfare industry and employers, as the taxes have been widely opposed since the adoption of the ACA.

SECURE Act

HR 1865 adopts the SECURE Act, which is the most comprehensive retirement legislation passed since the Pension Protection Act of 2006. The law includes sweeping changes that will affect how retirement plans are offered.

Some of the highlights of the legislation are as follows:

• Traditional IRA contributions can continue past age 70.5
• Open multiple employer plans can be offered, allowing employers with no connection to join together to offer retirement benefits to their collective employees
• Relaxed 401(k) safe harbor rules
• Increased credits for small businesses that start a retirement plan
• Eligibility for long-term part-time employees
• Penalty-free distributions for birth or adoption
• Increase in age for minimum required distribution (from 70.5 to 72)
• Portability of annuity investments
• Fiduciary safe harbor for employers that select a lifetime income provider
• Lifetime income disclosure requirements
• Elimination of the stretch IRA strategy, requiring non-spouse IRA beneficiaries to deplete inherited IRAs within 10 years

The SECURE Act enjoys widespread bipartisan support, as many in Congress and in the retirement plan industry believe that it will make retirement plans more accessible to those who don’t have them. The life insurance and annuity industries are also looking forward to the opportunities presented given the ability to fund 401(k) plans with annuities and the option to use life insurance as an inherited stretch IRA alternative. As the law is enacted and regulations formulated, we’ll continue to keep you updated.

We will provide more detail about the spending bill in our January 7 edition of Compliance Corner.

On December 18, 2019, a three-judge panel of the US Court of Appeals for the Fifth Circuit ruled that the minimum essential coverage (MEC) provision (otherwise known as the "individual mandate") of the Affordable Care Act (ACA) is unconstitutional. However, the appeals court declined to rule on whether the individual mandate rendered the entire ACA unconstitutional or if it can be severed from the ACA. The appeals court remanded that matter back to the district court to make the determination. As a reminder, the matter came before the appeals court after US District Judge Reed O’Connor of the Northern District of Texas ruled that the individual mandate was unconstitutional and so integral to the ACA that the entire law must be overturned.

The question of whether the individual mandate is unconstitutional or not hinges upon the tax penalty imposed upon taxpayers who fail to obtain health insurance that provides MEC. A previous ruling by the US Supreme Court, back in 2012, determined that Congress had the authority to create an individual mandate in the ACA through its power to tax. Thus, as long as the law imposed a tax, the mandate was constitutional. In late 2017, Congress reduced the tax to $0, and in response 20 states and two individuals challenged the ACA on the basis that Congress waived its authority to impose the individual mandate when it declined to impose a tax. Both the district court and the appeals court accepted this argument.

The appeals court remanded back to the district court the issue regarding whether the individual mandate causes the whole ACA to fail. The appellate court asks the district court to determine two things: 1) which provisions in the ACA are so intertwined with the individual mandate that they must also be severed from the ACA; and 2) whether the court can enjoin only those provisions of the ACA that injure the states and individuals that brought the suit or declare the ACA unconstitutional only as to those states and individuals.

The lawsuit will continue to move through the courts for some time. California, one of the states defending the ACA in this lawsuit, has already indicated that it will appeal this decision to the Supreme Court. Even if the Supreme Court declines to take up the matter at this time, the district court must now reconsider key issues, as noted above, and issue new rulings that will very likely be appealed as well. Although it is very difficult to predict the course of any lawsuit, it is not unreasonable to expect this one to take many more months to resolve.

For employers and group health plans, the Fifth Circuit decision does not change any requirements or obligations currently imposed under the ACA. Specifically, employers should continue their efforts toward timely ACA employer reporting and compliance with other coverage mandates, as the regulatory agencies will continue enforcing the ACA. We will report future developments in Compliance Corner.

On December 2, 2019, the IRS released IRS Notice 2019-63, extending the deadlines for distributing ACA reporting forms to individuals. The IRS also provided relief from penalties for good faith effort and from the requirement to distribute the Form 1095-B to individuals. As background, the ACA imposed two reporting requirements under Sections 6055 and 6056. Section 6055 requires entities that provide minimum essential coverage to report to the IRS and to covered individuals the months in which the individuals were covered. Section 6056 requires applicable large employers (under the employer mandate) to report to the IRS and full-time employees whether they offered minimum essential coverage that was affordable and minimum value. See below for a description of the deadline and relief provided through the notice.

Deadline Extension

As the IRS has done for the last four reporting years, they have extended the date by which employers must distribute Forms 1095-B or 1095-C to individuals. Those forms must now be distributed by March 2, 2020 (instead of January 31, 2020). However, as in previous years, this notice does not extend the date by which employers must file Forms 1094-B/C and 1095-B/C with the IRS. Those dates remain February 28, 2020, if filing by paper and March 31, 2020, if filing electronically.

Good Faith Effort Relief

The IRS is also reinstating relief recognizing good faith effort made by employers that file the 2019 forms. Specifically, employers that timely file and distribute their required Forms 1094-B/C and 1095-B/C will not be subject to penalties if the information is incorrect or incomplete. The relief does not extend to a complete failure to file.

Section 6055 Relief

Notably, this notice also provides penalty relief for employers which will allow them to forego distributing the Form 1095-B to individuals. This comes after the IRS accepted comments on the necessity of the Forms 1095-B now that the individual mandate penalty has been zeroed out. As long as employers post a notice on their website that the document is available upon request, and then fulfill any such request within 30 days – they don’t have to distribute them to covered individuals.

This relief is not available for Forms 1095-C, but can be applied to employees who are not full-time and only receive a Form 1095-C to meet the Form 1095-B reporting requirement. In other words, those employees who are only receiving a Form 1095-C because the employer uses Part III to comply with Section 6055 no longer have to be provided a Form 1095-C.

Employers should keep this guidance in mind as they are preparing their filings and distributions. We will continue to update you on reporting guidance from the IRS.

On October 31, 2019, the Treasury Department finalized rules detailing the requirements for reportable policy sales (RPS), which were created under the 2017 Tax Cuts and Jobs Act (TCJA) and apply to the direct and indirect transfer of life insurance contracts. Now, when there is an acquisition of an interest in a life insurance contract, in order to ensure that the death benefit retains its income tax-free treatment the acquirer must determine: 1) that there was not a RPS and 2) that an exception to the transfer for value (TFV) rule exists. For more insight as you navigate the RPS rules, we have created this in-depth piece.

These final regulations provide guidance for determining which transfers are considered to be RPS and how to report the policy sale if required. The final regulations also provide clarity for the COLI/BOLI market, which was directly impacted by 101(a)(3). We have created a decision tree to help you navigate the RPS rule and its potential impact on COLI/BOLI insurance policies. You can also review this summary of the final regulations provided by our partners at AALU. The final regulations came into effect on their release date, October 31, 2019, but may be applied to any RPS or any death benefits paid on a life insurance contract that was part of a RPS after December 31, 2017. All reporting statements for transactions occurring between December 31, 2018, and October 31, 2019, must be furnished by February 28, 2020.

Please do not hesitate to contact Kristin Bulat should you have any questions about reportable policy sales and how they may be impacting your clients' insurance transactions.

Having lived through the "will they, won't they" back and forth of the DOL's Fiduciary Rule, we were all looking forward to some quiet on the regulatory front. Sadly, with New York's finalization of the "Suitability and Best Interest in Life Insurance and Annuity Transactions" regulation (Reg 187), our brief moment of quiet is over.

New York's Department of Financial Services was also frustrated by the uncertainty over the DOL's Fiduciary Rule, so in December 2017, they began the process of creating their own Best Interest Standard for life insurance and annuities. That initial proposal went through several iterations and a comment period to reach the finalized version that took effect on August 1, 2019, for annuities and will be effective February 1, 2020, for life insurance.

Read our summary of the key provisions of Reg 187 for more insight.

In taking over where the DOL was forced to leave off, New York becomes the first state to fill what is seen as a gap in protections to its citizens engaging in financial transactions. It's expected that several states are likely to follow New York's lead, including: Massachusetts, New Jersey, Nevada, Maryland, California, and Illinois. None of those states are as far down the road to finalized regulations as New York, but it's important to know that New York is not alone in establishing a Best Interest standard.

AALU was instrumental in helping to shape the final version of Reg 187 and they will continue to work with the insurance departments of states considering their own Best Interest standards to craft regulation that protects both consumers and our industry.

Much of the criticism leveled at the DOL's Fiduciary Rule was focused on the fact that it really isn't the Department of Labor's job to provide fiduciary standards for investment recommendations. In fact, it was frequently pointed out that this was the job of the SEC and that the SEC had fiduciary standards in place. Commentators suggested that if the SEC felt that a heightened standard was required, then the SEC should provide that standard, not the DOL.

It appears that the SEC heard those commentators and chose to act. On June 5, 2019, the SEC adopted the Regulation Best Interest Rule (Reg BI), which requires broker-dealers and associated persons to act in the best interest of their retail customers when making a recommendation. Reg BI became effective August 5, and compliance is required by June 30, 2020. Read a summary of the key provisions in Reg BI for more information.

Despite the protracted compliance deadline for Reg BI, Kestra is already taking steps to meet the requirements of Reg BI and to implement the required practices and procedures. Join Kestra October 17 and 18 for two webinars discussing of Reg BI and the steps they are taking to get ready for the full implementation of the regulation.

On Dec. 22, 2018, a partial shutdown of the federal government began, after Congress and President Trump did not reach an agreement on spending measures. It is now the longest government shutdown in history. While the shutdown directly impacts federal agencies, it also indirectly affects employers with employees on federal contracts. With the federal government agency or project being shut down, many of those employees have been placed on furlough or unpaid leave.

What does this mean for the employees' eligibility under employer sponsored plans?

Unfortunately, it’s a complex issue with no single answer for all employers. There are a lot of considerations, as outlined below.

ERISA Plan Document and Any Employment Contracts
First, an employer needs to review the plan document and the plan’s eligibility terms as related to unpaid leaves of absence. An employer who has experienced a previous shutdown may have already adopted language regarding applicable provisions. If there are Service Contract Act or Davis Bacon Act contracts in place, they will want to review those as well to see if they contain any special provisions. This goes for all benefit offerings — medical, dental, vision, life, disability, etc.

If there are no special terms, then it comes down to the general terms of eligibility. Medical, dental and vision typically identify an eligible employee as one who works a certain number of hours per week or per month, or who is otherwise determined to be full-time. For a small employer (fewer than 50 full-time employees, including equivalents), an employee not working the required hours would lose eligibility under the medical plan. This practice would also apply for dental and vision coverage for all sized employers. In other words, as soon as the employee no longer meets the terms of eligibility, coverage would be terminated and COBRA or state continuation would be offered. A large employer will not only need to consider the plan document, but also the employer mandate requirements (which are discussed below).

Short- and long-term disability and life insurance policies are governed by ERISA, but are not subject to the employer mandate or COBRA requirements. Thus, these contracts will need to be reviewed carefully as eligibility provisions vary by carrier and policy.

Employer Mandate
Large employers also need to consider the employer mandate rules when determining employee eligibility for medical coverage. If they are using the monthly measurement method to determine employee eligibility, then an employee who has a change of employment status to zero hours of service would lose eligibility under the plan (unless the plan document contains a special provision for unpaid leaves of absence). Coverage would terminate at the end of the month when eligibility is lost with COBRA offered for reduction of hours.

If the large employer is using the look-back measurement method to determine employee eligibility and the employee was one who was previously determined to be full-time in a measurement period, then the employee would remain eligible through the end of the stability period regardless of the number of hours they are currently working.

Payment of Contributions
For all sized employers, if an employee continues to be eligible under the plan, how would the employer receive the employee premium contributions without a paycheck from which to make the deduction? Generally, the rules for FMLA premium payment are mirrored. The employer may require that employees pay during the furlough period by personal check or other post-tax method. The payments may be due per pay period or per month. The employees should be provided with written notice of the payment method, due date and consequences for nonpayment (termination of coverage). Alternatively, the employer could permit employees to pay upon return, but the employer should consider the consequences of that option should the shutdown continue for a long time.

Section 125 Cafeteria Plan Document and Reinstatement
All sized employers also need to consider the Section 125 cafeteria plan rules, which apply if the employees are able to pay for premiums on a pre-tax basis. Consider an employee who continues to be eligible for coverage under the terms of the plan and/or employer mandate rules, but who wants to drop coverage because of no pay. Is this allowed?

There is a qualifying event permitting employees to drop coverage based on an unpaid leave of absence if the Section 125 Cafeteria Plan Document provides that such employees lose eligibility under the cafeteria plan. If they return to work within 30 days after dropping coverage, they would be reinstated to the same coverage with no chance to change elections.

For a large employer whose employees lose eligibility under the plan, if they return to work within 30 days but before 13 weeks, they would be reinstated to eligibility and would have the right to change elections. If they return beyond 13 weeks, they could be required to meet a new waiting period or start a new measurement period.

COBRA
At the point that eligibility is lost, coverage would be terminated and COBRA would be offered for reduction of hours (also consider state continuation mandates). This would require the employer or their COBRA vendor to send out the COBRA election notice and process COBRA enrollment for any employees that elect COBRA.

Retirement Plan Considerations
Employers should also consider how the shutdown will affect employees’ contribution to and use of their 401(k) or other retirement plan. Employees that are not receiving pay likely will not be contributing to their 401(k) plans during the furlough. However, employers that provide employer contributions that are not based on a matching formula should consider how they are to handle the employer contribution under the plan terms. Additionally, employers will need to work with providers to determine how the furlough will effect eligibility where the plan imposes a minimum years of service requirement or a vesting schedule.

Employers should also be mindful of plan loans. Furloughed employees that are not actually terminated might seek to request plan loans to pay their bills. At the same time, employees that are currently repaying loans would not receive any compensation from which to pay their loans. So employers will want to work with their recordkeepers to process new loans or to possibly suspend loan payments (if the plan document allows for that). The employers should also review their plan document and IRS rules to determine if the furlough would be a reason to allow hardship distributions.

As always, we are providing this guidance to give employers an idea of the compliance issues to consider. We recommend that clients consult with their attorney for guidance on all of these issues.

EFFECTS OF THE TAX CUTS AND JOBS ACT ON EXECUTIVE COMPENSATION
Much has been written about how the 2017 Tax Cuts and Jobs Act changed the tax rate for C corporations and created a deduction for S corporations. But all this attention to corporations meant that other impactful provisions went into effect without much notice. One such unheralded provision is the "Tax on Excess Tax-Exempt Organization Executive Compensation" (the "excise tax").

WHAT IS THE EXCISE TAX?
An excise tax of 21 percent is imposed on the remuneration paid by all tax-exempt employers in the following two situations:

1. Amounts in excess of $1 million paid to a covered employee for a tax year
2. Any separation (parachute) payment paid to a highly compensated employee that is equal to or greater than three times the 5-year average annual earnings of that employee

THE EXCISE TAX’S REACH
Just in case there was any confusion, the excise tax applies to all tax-exempt entities, including political organizations and farmers’ cooperatives. Employees whose compensation will trigger the tax-exempt entity to have to pay the 21 percent excise tax, making them "covered employees" for the purposes of the excise tax, include

• The five most highly paid employees earning more than $1 million per year for the current year or any prior year, starting Dec. 31, 2016. The tax-exempt entity must determine the five most highly paid employees annually, which means that this could be an evolving roster of employees. But once an employee becomes a covered employee, they remain a covered employee.
• Any highly compensated employee (defined as receiving compensation equal to or greater than $120,000 in 2018) receiving a separation from service payment equal to or greater than three times the 5-year average final annual compensation.

Depending on the tax-exempt entity examining the excise tax, the tax-exempt employer might have a tendency to despair or to dismiss the excise tax as being not applicable. Before we do either of those things, let’s look at the few exceptions and some of the opportunities arising from the excise tax.

EXCEPTIONS
The excise tax doesn’t apply to

• Remuneration paid to licensed physicians, nurses or veterinarians, to the extent that the remuneration is for the performance of medical or veterinary services rendered by such professionals.
• Payments received from qualified retirement plans, such as 401(k), 403(b), simplified employer pension plans and 457(b) plans.
• Separation payments to highly-compensated employees if the payment is limited to 2.99 times their five-year average annual earnings.

NOT EXCEPTIONS
Many tax-exempt entities are likely to be quick to dismiss the excise tax as not applicable to their employees because of the $1 million threshold. Those employers need to be careful that they don’t also ignore the fact that any single 457(f) payment that exceeds the threshold is subject to the tax made at the time of separation from service. Any amounts paid to a highly compensated employee under a SERP or 457(f) plan could be subject to the excise tax, not just the amounts paid to the top five employees. In addition, the excise tax applies to amounts paid to covered employees from related organizations, which is determined by common control. Avoiding the excise tax isn’t as simple as creating a taxable entity to employ all covered employees.

THE GOOD NEWS
While it may seem that providing compensation to those employees who are crucial to the tax-exempt entity’s continued success is impossible without paying a hefty excise tax, that’s not necessarily the case. There are ways careful design of a compensation plan, coupled with the use of life insurance, can allow a tax-exempt entity to still provide meaningful remuneration to its employees without negative tax consequences to either the employer or the employee. The best place for a tax-exempt employer to start is by conducting a thorough review of the remuneration paid or promised to its highly compensated employees to determine the full applicability of the excise tax. Then the tax-exempt entity can start the process of revising its compensation structure to fit within the parameters of the excise tax.

The job market is starting to tighten, and would-be employees are looking for extra benefits that make the organizations they apply to stand out from the crowd. One such benefit is student loan assistance. On Aug. 17, 2018, the IRS issued private letter ruling 201833012 (the "PLR"). The PLR addressed an individual plan sponsor's desire to amend their 401(k) plan to include a program for employees that were making student loan repayments. The form of this benefit would be an employer nonelective contribution ("SLR Contribution").

HOW DOES IT WORK?
The design of the plan would result in matching contributions being made available to participants equal to 5% of compensation for every 2% of compensation deferred. Specifically, employees could receive up to 5% of compensation in the SLR Contribution for every 2% of student loan repayments they made during the year, and the appropriate SLR Contribution would be calculated at year-end.

The PLR states the program would allow a participant to both defer into the 401(k) and make a student loan repayment at the same time, but they would only receive either the match or the SLR Contribution — not both for the same pay period. If an employee enrolls in the student loan repayment program and later opts out without hitting the 2% threshold necessary for a SLR Contribution, they would be eligible for matching contributions for the period in which they opted out and made deferrals into the plan.

The PLR requested that the IRS rule that such design wouldn't violate the "contingent benefit" prohibition under the Internal Revenue Tax Code (the "Code"). As background, the Code's contingent benefit prohibition essentially states that the only benefit that can be conditioned upon an employee's elective deferrals is a matching contribution. In response to the plan sponsor's request, the IRS ruled that the proposed design doesn't violate the contingent benefit prohibition, therefore allowing SLR contributions to be made when employees pay student loans.

WHAT'S THE CATCH?
All that said, it's important to note that a PLR is directed to a specific taxpayer requesting the ruling, and it's applicable only to the specific set of facts and circumstances included in the request. That means other taxpayers – plan sponsors – cannot rely on the PLR as precedent. It is neither a regulation nor even formal guidance. However, it provides insight into how the IRS views certain arrangements. Thus, other plan sponsors that wish to replicate the design of the facts and circumstances contained in the PLR can do so with some confidence that they similarly will not run afoul of the contingent benefit prohibition.

From a practical perspective it's important to consider a few related, and impactful, concepts and qualified plan rules. First, companies are increasingly aware of the heavy student debt carried by their employees and wish to assist them in alleviating this burden. They're exploring multiple programs they can offer than can help their employees. This particular design is meant to allow employees who cannot afford to both repay their student loans and defer into the 401(k) at the same time the ability to avoid missing out on the "free money" being offered by their employer in the 401(k) plan. It works by essentially replacing the match they miss by not deferring with the SLR Contribution they receive for participating in the student loan repayment program.

It's important to understand that, while the IRS has ruled in regard to the contingent benefit prohibition, they stated definitively that all other qualification rules (such as testing and coverage) would remain operative. Plan sponsors wishing to pursue adding such provisions to their 401(k) plans must be aware of how they undertake the design. This design is very basic in that it requires deferral/student loan repayment equal to 2% for a 5% employer contribution (either match or SLR Contribution). There can be no variations from this design, as varying the employee student loan payment required to receive a SLR contribution could create separate testing populations, which would make annual testing and administration much more difficult.

THE BOTTOM LINE
If you're considering adding a student loan repayment program to your benefits package or wish to explore the potential for a qualified plan integrated program, please contact your plan advisor.

Jason E. Levine. "Private Letter Ruling 201833012." IRS Static Files Directory.

Ed O'Malley, Executive Vice President, Head of Insurance Brokerage and Consulting

The Tax Cuts and Jobs Act of 2017 (TCJA) has shifted – and in many cases eased – the tax burden on companies across the country. Organizations everywhere are finding themselves with an exciting influx of new money thanks to the new tax reductions.

There are a lot of ways businesses can choose to spend those dollars. Some may choose to build up their cash reserves, others may decide to repurchase company shares, and others still may choose to divert resources to technology, inventories or infrastructure. Smart organizations, though, may decide this is an opportune time to reinvest in their talent.

Meanwhile, net job growth remains slow and employers are reporting an alarming shortage of qualified candidates for open positions – particularly in technology – and jobs remaining unfilled.

So what can employers do as a result of the TCJA? Stay competitive and:

1. Recruit the best available talent
2. Retain that talent by giving them tangible reasons to stay, like competitive compensation and non-monetary benefits
3. Provide a prosperous path to Retirement for all employees, so they can leave the organization when the time is right

RECRUIT

To get the best talent on their team, businesses need to double down on competitive compensation and benefits. With the TCJA, some traditional incentives are disappearing and companies will need brand new ways to attract talent and show existing employees they care. 170,000 new jobs are created each month, and 3 million people are quitting their jobs each month — evidence that competition in the labor market is one of the toughest business challenges in 2018.

Some corporations are already sharing the cash increase with their employees: AT&T gave bonuses to 200,000 union-represented and non-management employees; Fifth Third Bank and others raised their minimum wage to $15 an hour and gave out bonuses; companies like Boeing are committing millions to workforce development in the form of training, education and other personnel development; and FedEx and CVS reported plans to create thousands of new jobs.

Offering perks to employees on-site, like more flexible work schedules, open telecommuting policies, paid parental leave, free on-site refreshments, mentoring programs and more, can also help create a people-centric culture that's attractive to employees, especially millennials. And using technology to find and hire the best talent can help make the process easier for prospects as well as simpler and more sophisticated for hiring managers. Don't forget the power of social media, either. Would-be employees of all ages are plugged in to Facebook, Twitter, LinkedIn, Instagram and myriad other sites. More than ever, businesses should be involved and savvy about the way they present themselves and engage with clients, employees and prospects throughout the digital world.

Good employee health benefits will always be immensely important to both incoming and existing employees. The individual mandate penalty will disappear starting in 2019, which means that individuals have no tax incentive to maintain minimum essential health coverage. However, employers of a certain size still need to offer coverage. The cash influx from tax savings could be just the thing a business needs to beef up its health plan for existing employees and to attract new employees and to keep top talent and their families happy, healthy, wealthy and at the top of their game.

To that same effect, consider enhancing death and disability benefits to protect employees' families and income when the unexpected occurs. You can always improve upon existing plans that currently cap life insurance and disability benefits. Income replacement benefits have been fairly static over the last decade or so, making this a great place to stand out when it comes to attraction policies.

Employment is a partnership, and it's important for a workplace to show their employees they care at the very beginning — from the first interview to the first day and beyond.

RETAIN

Once a business has the talent on board, they have to keep them; other companies won't be resting on their laurels in the light of that tax savings, either. Keep existing employees happy – or make them even happier – and they'll continue to deliver successes and be more excited to do it.

Employees are under incredible financial stress today. Most don't even know how much stress they're under; they just recognize it's beyond their understanding and thus their control. Employers can take steps to help rid them of this stress, which, in turn, will make their employees happier and more productive.

There are plenty of ways to ease concerns about today and tomorrow:

• Revamp Matching Contributions. Offer employees more by investing in their retirement now by increasing retirement plan contributions and match percentages.
• Offer Employee Engagement. Use the money for employeelevel education/programs. You can engage your advisor for a full financial wellness program that goes beyond the 401(k)/403(b)/457 plan needs and helps employees understand and plan for debt reduction, succession planning, insurance needs, etc.
• Invest in Employees on a Personal Level. Work with each employee to build a "living" development plan. Include their strengths, weaknesses, goals, career aspirations and potential paths forward. NFP's HR Services team can help you engage and support your employees through a variety of customized programs.
• Offer More Bang for Their Buck. Make sure you're still making the right compensation moves. Changes to different parts of the Internal Revenue Code are reducing the amount highly compensated employees can be compensated without being taxed. This means you might just offer higher base salaries and less creative compensation. Between life insurance, nonqualified retirement plans and other options, there are plenty of ways to compensate your best talent and help them keep most of their hard-earned money. Work with the NFP Executive Benefits team to find the right recipe.
• Treat Employees at All Levels Fairly. Taking care of your people and keeping a mindful eye toward the entire compensation playing field is probably the most important part of keeping your employees happy — and sometimes it's the easiest way to use your money wisely. One way to do so is to move your retirement plan to a safe harbor plan design. Due to the makeup of their workforce, some employers struggle with passing their annual nondiscrimination testing, necessitating refunds of deferrals to their highly compensated employees. Safe harbor design allows plans to be deemed to pass the nondiscrimination testing, thereby allowing the highly compensated employees to max out their deferrals. This, of course, has to be paid for through required contributions by the employer, but what better way to use those "new" dollars than to assist your employees at all levels to save effectively. It's a win for everyone.

RETIRE

Planning well for your employees' retirement is an important way to both show them you care and to make sure your workforce is always in its prime. After all, if there's incentive to retire – and retire well – that frees up space for fresh-faced young talent to come in with new ideas and less significant salary histories.

With some TCJA money burning a hole in your business's pocket, get creative with the ways you tend to your and your employees' futures:

• Implement and/or enhance automatic features. While auto features were popular before 2008, they fell out of favor thanks to the economic downturn. Now is a great time to use that extra capital to reintroduce them. Make saving easier for employees by doing it for them. This includes auto enrollment in 401(k)/403(b)/457 plans at a set percentage of income. Doing so gives participants who aren't saving now a head start toward retirement. Be sure to set the automatic enrollment at a high enough level to be impactful, perhaps with a default of 6 percent of compensation. Studies show that a 6 percent rate doesn't increase opt-outs.
• If your employees are already automatically enrolled in the plan, add or increase automatic escalation. Once participants are in the plan, march them forward on an annual basis to get them to a meaningful savings rate. Most plans start their automatic escalation at 1 percent annually, but studies show no greater opt-out rate among employees if they're escalated at 2 percent annually. Coordinating the annual escalation with annual merit increases assists in maintaining a low opt-out rate. For plans that already escalate 1 percent annually, raise it to 2 percent.
• Make an impactful matching contribution. Not only does it add to employees' savings; it incentivizes them to save for themselves. Implementing a match should be strategic. Design the matching program to encourage greater deferrals. If your goal is to provide 2 percent of compensation, design it to be $0.25 on the dollar up to 8 percent of compensation. It will drive superior savings efforts by employees.
• Add or fund a profit-sharing contribution. If your plan already provides a well-designed matching contribution that drives great participant behavior and you just want to add to their savings, add a profit-sharing contribution. To use your dollars efficiently, explore some more sophisticated contribution designs that allow you to differ among groups — within reason. Explore tiered or new comparability profit-sharing designs.
• Create a new cash balance or defined benefit plan. If you've considered adding an expensive defined benefit or cash balance plan to your retirement program, new TCJA money may be just the tipping point to help you actually do so. Though these plans are much more complicated in design than typical 401(k)/403(b)/457 plans, they offer an additional way for employers to greatly enhance the retirement horizons of their employees.

THE BOTTOM LINE

New legislation is making many businesses more cash flush, and it will be interesting to see how that new capital flows throughout the economy. These are just some of the ways many businesses can attract, keep and steward the careers of the best workers in the industry. By staying educated about the nuances of how the Tax Cuts and Jobs Act of 2017 affects each piece of the insurance brokerage and consulting industry – and how those pieces interact – decision-makers at all levels of the organization can make the best choices to protect their employees, their personal wealth and their futures.

On Nov. 28, 2018, in a piece of unexpected and good news, the IRS published Notice 2018-94. This notice extends the due date for providing Forms 1095-B and 1095-C to individuals and employees and extends the good faith effort relief from penalties for mistakes on Forms 1094-B, 1095-B, 1094-C and 1095-C.

General Timeline
On the due date extension, the notice extends the due date for providing the 2018 Forms 1095-B and 1095-C to applicable individuals from Jan. 31, 2019, to March 4, 2019. Importantly, the notice does not extend the due date for filing 2018 Forms 1094-B, 1095-B, 1094-C or 1095-C with the IRS. Thus, employers should still plan to file the appropriate forms by Feb. 28, 2019 (if filing by paper) or April 1, 2019 (if filing electronically). The notice also states that because the automatic extension of the due date to furnish is as generous as the permissive 30-day extension to provide notices to individuals/employees, the IRS will not formally respond to any request for such an extension.

Impact on Employers
On the good faith effort relief, the notice extends relief from past years to the 2018 forms. Specifically, the good faith effort relief means that employers who work in good faith to complete the forms will not be assessed penalties relating to inaccurate or missing information. For example, if an employer timely files a Form 1094-C and related Forms 1095-C and has made a good faith effort to complete the forms correctly, but makes some mistakes on employee information, social security numbers, birth dates or reporting codes (on Lines 14, 15 and 16), the IRS will not assess reporting penalties. (Employers should remember that reporting penalties are distinct from employer mandate penalties for not offering affordable coverage to full time employees.) In determining good faith efforts, the IRS will consider multiple factors, including whether the employer made appropriate efforts to gather and transmit necessary data to a vendor or agent to submit to the IRS.

Lastly, the notice states that the IRS is reviewing whether the repeal of the individual mandate tax penalty (which takes effect in 2019) will change the reporting requirements under IRC Section 6055 for self-insured employers and other coverage providers (such as an insurer of a fully insured plan) to report on all covered individuals under the plan on either Form 1095-B or 1095-C. NFP Benefits Compliance will continue to monitor any developments that might impact employer reporting obligations in future years.

Should you have questions regarding employer reporting or employer mandate obligations, please reach out to your NFP team.

IRS Notice 2018-94

On Dec. 14, 2018, a federal judge in the U.S. District Court for the Northern District of Texas held, in Texas v. U.S., that the ACA’s individual mandate is unconstitutional and, as a result, the entire ACA is invalid. The ruling is a result of a challenge to the ACA brought by a coalition of Republican-led states, including Texas. Because the current administration refused to defend the ACA, several Democratic-led states intervened to defend the law. The challenge is focused on the ACA’s individual mandate — the requirement for all U.S. citizens to purchase health insurance or pay a penalty tax. As background, in 2012, the U.S. Supreme Court held the individual mandate (and thereby the ACA) constitutional, stating that the individual mandate was actually a tax, and that imposing a tax is a valid exercise of Congress’s authority. The coalition of states in Texas v. U.S. argued that Congress erased that constitutional basis for the individual mandate when it reduced the tax penalty to $0 under the Tax Cuts and Jobs Act of 2017. The district court agreed, stating that because the penalty tax is now gone, there’s no constitutional justification for the individual mandate; and because the individual mandate is "essential to" and "inseverable from" the other provisions of the ACA, the entire ACA falls.

What’s Changing?
Importantly, the judge did not immediately enter an order to block the enforcement of the ACA, meaning the ACA remains the law of the land for now. The White House and its regulatory agencies acknowledged that the law remains in effect pending appeal. Seema Verma, the administrator for the Centers for Medicare and Medicaid Services – the federal agency that oversees implementation of the ACA – confirmed the ruling has "no impact to current coverage or coverage in a 2019 plan." The coalition of intervening states has said they will appeal the law. An appeal would likely go to the Fifth Circuit Court of Appeals. Many legal experts believe the case is headed to the U.S. Supreme Court, meaning the ACA’s future could once again be in the hands of the highest court in the land. There is also a chance Congress could revisit health care as an issue in 2019, although with Democrats taking control of the House, any legislative changes would require bipartisan support.

If the district court’s ruling is ultimately upheld, or if the judge enters an order to block the law, the ACA would be deemed invalid. That would have far-reaching consequences, as the ACA goes far beyond just the exchanges, premium tax credits and employer obligations most people are familiar with. For employers, though, while the employer mandate, reporting and other obligations would disappear, so would some of the more popular provisions. For example, plans could once again exclude adult children, impose cost-sharing for preventive services and annual exams, and exclude or impose surcharges for individuals with pre-existing conditions. While there does appear to be bipartisan congressional support for those more popular provisions of the ACA, it remains to be seen whether Congress would enact new legislation that would maintain those protections.

What Does This Mean for Employers?
As for impact on employers, because the ACA remains the law for now, employer-related requirements remain in place. This includes the employer mandate, employer reporting (Forms 1094/95-C), Summary of Benefits and Coverage, Form W-2 reporting of employer-sponsored coverage, and all insurance mandates: coverage of dependents up to age 26, coverage of preventive services without cost-sharing, and the prohibitions on annual limits for essential health benefits and pre-existing condition exclusions. In addition, the exchanges remain open for business for individuals; people who enrolled by the Dec. 15, 2018, deadline will still have their coverage effective Jan. 1, 2019. Employers should continue to monitor their compliance obligations.

Stay tuned! As always, NFP’s Benefits Compliance team will continue to track and report on future developments on this issue.

Texas v. U.S. »