Request a Proposal
The beginning of a great business relationship is just a click away.Learn More
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.
Date: Thursday, October 17
Date: Friday, October 18
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.
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.
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:
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
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.
The excise tax doesn’t apply to
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.This material was created by NFP (NFP), its subsidiaries or affiliates for distribution by their registered representatives, investment advisor representatives, and/or agents.
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:
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.
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:
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:
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.This material was created by NFP Corp. (NFP), its subsidiaries or affiliates for distribution by their agents, registered representatives or investment advisor representatives. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. Neither NFP, its subsidiaries or affiliates offer legal or tax advice. The services of an appropriate professional should be sought regarding your individual situation. Insurance services provided through licensed subsidiaries or affiliates of NFP. To locate an NFP office, please go to nfp.com
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.
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.
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.
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.