They’re here—the 2016 IRS plan limitations-but they’re not new. Because the change in the cost-of-living index doesn’t trigger an adjustment, the qualified plan limits identified here do not change in 2016. See the chart below to see the 2016 limits as well as a summary of the limits over the preceding three years. Note that certain other limitations do change for 2016 (e.g. certain IRA limits), but not the qualified plan limits reported here.
|Type of Limitation||2016||2015||2014||2013|
|Elective Deferrals (401(k), 403(b), 457(b)(2) and 457(c)(1))||$18,000||$18,000||$17,500||$17,500|
|Section 414(v) Catch-Up Deferrals to 401(k), 403(b), 457(b), or SARSEP Plans (457(b)(3) and 402(g) provide separate catch-up rules to be considered as appropriate)||$6,000||$6,000||$5,500||$5,500|
|SIMPLE 401(k) or regular SIMPLE plans, Catch-Up Deferrals||$3,000||$3,000||$2,500||$2,500|
|415 limit for Defined Benefit Plans||$210,000||$210,000||$210,000||$205,000|
|415 limit for Defined Contribution Plans||$53,000||$53,000||$52,000||$51,000|
|Annual Compensation Limit||$265,000||$265,000||$260,000||$255,000|
|Annual Compensation Limit for Grandfathered Participants in Governmental Plans Which Followed 401(a)(17) Limits (With Indexing) on July 1, 1993||$395,000||$395,000||$385,000||$380,000|
|Highly Compensated Employee 414(q)(1)(B)||$120,000||$120,000||$115,000||$115,000|
|Key employee in top heavy plan (officer)||$170,000||$170,000||$170,000||$165,000|
|SIMPLE Salary Deferral||$12,500||$12,500||$12,000||$12,000|
|Tax Credit ESOP Maximum balance||$1,070,000||$1,070,000||$1,050,000||$1,035,000|
|Amount for Lengthening of 5-Year ESOP Period||$210,000||$210,000||$210,000||$205,000|
|Taxable Wage Base||$118,500||$118,500||$117,000||$113,700|
|FICA Tax for employees and employers||7.65%||7.65%||7.65%||7.65%|
|Social Security Tax for employees||6.2%||6.2%||6.2%||6.2%|
|Social Security Tax for employers||6.2%||6.2%||6.2%||6.2%|
|Medicare Tax for employers and employees||1.45%||1.45%||1.45%||1.45%|
|Additional Medicare Tax*||.9% of comp
|.9% of comp > $200,000||.9% of comp > $200,000||0.9% of comp > $200,000|
*For taxable years beginning after 12/31/12, an employer must withhold Additional Medicare Tax on wages or compensation paid to an employee in excess of $200,000 in a calendar year for single/head of household filing status ($250,000 for married filing jointly).
Overview. On October 8, 2015, President Obama signed the Protecting Affordable Coverage for Employees Act (“PACE”). As originally enacted, the Affordable Care Act (“ACA”) included a provision which, beginning in 2016, would have expanded the universe of employers considered “small employers” to include those employers with 51 to 100 employees. PACE eliminates this provision and instead leaves each state with the option of defining a small employer as an employer with up to 100 employees. As a result, the existing ACA definition of “small employer”, which currently includes only groups with 50 or fewer employees, will remain in effect after 2015, except in those states that choose to expand the definition.
Staying in the large group market is significant for employers with 51-100 employees because several ACA requirements apply in the small group market that do not apply in the large group market. These small group requirements would have increased premiums and caused administrative issues for most employers with 51-100 employees. The three most significant differences between small group insured plans and large group insured plans are as follows:
- Small group insured plans must cover ten essential health benefits (e.g., pediatric dental care, mental health and substance use disorder services, behavioral health treatment).
- A small group insured plan must meet specified actuarial values, while a large group insured plan can provide any actuarial value as long as the plan meets the 60% minimum value requirement.
- As more fully described below, small group insured plans are subject to ACA’s national community rating rules.
Community Rating Laws. If left to their own devices, insurance companies would charge premiums based on the risks they are insuring. In the health insurance arena, for example, insurance companies would normally rate employers purchasing group health insurance coverage based on such factors as the age and health status of plan participants. The community rating laws are designed to level the premium costs for group health insurance among small employers such that small groups with healthy members will pay higher premiums than would otherwise be the case if the insurance companies were allowed to fully rate based on risk, while small groups with less healthy employees will pay correspondingly lower premiums. In other words, the community rating laws are designed to compel healthy groups to subsidize the insurance costs of unhealthy groups.
The various state departments of insurance impose widely different restrictions on insurance carriers’ ability to rate group health insurance coverage provided to small groups. New York, for example, imposes the most severe rating restrictions, while Virginia and Hawaii impose no rating restrictions at all, with the other 47 states falling somewhere in between.
Prior to 2014, there were no federal rating restrictions with respect to health insurance. This changed as a result of the enactment of ACA, which imposed national community rating restrictions on small groups of 50 or fewer effective January 1, 2014 (and, absent the enactment of PACE, would have imposed national community rating restrictions on groups of 100 or fewer effective January 1, 2016). The ACA community rating restrictions overlay rather than preempt the state law restrictions. In other words, insurance carriers are required to comply with state law community rating requirements to the extent more restrictive than the federal requirements.
Implications of PACE. The biggest winners are fully-insured healthy groups in the 51-100 category in states that choose to stick with the 50-employee definition, which likely would have seen significant health insurance premium increases effective in 2016 absent the passage of PACE.
Some states will need to consider whether to adjust their definitions of small employer for community rating purposes in light of PACE. Specifically, in anticipation of the ACA provision which would have expanded the small group definition to groups of 100 employees or fewer effective January 1, 2016, several states, including California, Colorado, Maryland, New York, Virginia and Vermont, had previously changed their definition of “small group” to encompass groups of 100 or fewer commencing January 1, 2016 to mirror what they thought would be the federal small group definition. Maryland reacted quickly to the President’s signing of PACE, issuing a bulletin on October 8 indicating that the definition of “small employer” for purposes of the Maryland community rating laws would remain at 50 employees in 2016 in light of the change in the federal law. It remains to be seen what other states will do in light of the passage of PACE.
As employers and other coverage providers are already aware, the Internal Revenue Service (“IRS”) will require that certain information be reported regarding the coverage employers offer or the coverage that is provided to individuals starting in early 2016. The applicable forms generally require a Social Security number or other taxpayer identification number (collectively, “TIN”). But what happens if the individual does not provide his or her TIN?
Generally, if filers submit incomplete or incorrect information reporting, penalties will be imposed. Under Code Section 6721, the IRS can impose a penalty of up to $250 per incomplete or incorrect return which is capped at $3,000,000 a year. If a filer cannot secure the individual’s TIN, IRS regulations allow the penalty to be waived if the failure is due to reasonable cause, meaning there are significant mitigating factors or impediments, and the filer acted in a responsible manner.
A significant mitigating factor could be, for example, the filer’s established history of compliance (if information has been incorrect or incomplete in the past, a consistently lessened rate of error is helpful). Impediments are events beyond the filer’s control; for instance, the failure of the individual to provide the necessary TIN.
However, to take advantage of this, employers and coverage providers must show that they acted in a responsible manner. This includes taking significant steps to mitigate the failure, requesting appropriate extensions of time to file, etc. Specifically with respect to TINs, however, if the filer claims the individual’s failure to provide his TIN is the impediment to the filer reporting the individual’s TIN, the only way a Filer may show it acted in a responsible manner is to prove compliance with the information solicitation requirements in Treasury Regulations Sec. 301.6724-1(e).
Regulation 301.6724-1(e) requires an initial solicitation at the beginning of the relationship, followed by two annual solicitations (by December 31 of the year in which the initial solicitation is made and December 31 of the following year) if the individual’s TIN still has not been secured. As an interesting additional requirement, if the annual solicitations are made by mail or telephone, the individual must be informed that he or she is subject to a $50 penalty imposed by the IRS under Code Section 6723 if he or she fails to provide his TIN. Mail solicitations also must include a Form W-9 and a self-addressed return envelope (which may or may not have postage prepaid). Telephone solicitations must be made to an adult member of the household and you must maintain a contemporaneous record of the phone call. There are also separate rules for make-up solicitations if you did not make an initial solicitation at the beginning of the relationship.
What does this mean for you? If you are a minimum coverage provider or employer required to report certain information because of the Affordable Care Act, you should be prepared to comply with the procedures outlined in Treasury Regulations Sec. 301.6724-1. This means you need to be prepared to solicit TINs initially and annually for two years and, if you solicit by mail or telephone, that you include the necessary disclosures.
A recent case from a federal court in the Northern District of Georgia provides an interesting perspective on the termination of a nonqualified retirement plan with a traditional defined benefit formula offering lifetime annuity payments. In Taylor v. NCR Corporation et. al., NCR elected to terminate such a nonqualified retirement plan. The termination decision not only precluded new entrants to the plan and the cessation of benefit accruals for active employees, but it also affected retirees in payout status receiving lifetime payments. Those retirees received lump sum payments discounted to present value in lieu of the lifetime payments then being paid to them.
At the time NCR terminated the plan, its provisions apparently provided that the plan could be terminated at any time provided that “no such action shall adversely affect any Participant’s, former Participant’s or Spouse’s accrued benefits prior to such action under the Plan. . . ” The plaintiff was a retiree receiving a lifetime joint and survivor annuity of approximately $29,000 annually. As a result of the plan’s termination, NCR calculated a lump sum benefit for the plaintiff of approximately $441,000, with the plaintiff ultimately receiving a net payment of approximately $254,000 after federal and state income tax withholdings.
The key allegations made by the plaintiff, as recited by the court, were (1) that the lump sum payment caused the plaintiff to incur a significant taxable event and (2) that the plaintiff objected to the use of a discount factor to reduce the value of the lump sum payment being made to him.
The court rejected the first claim by citing widely established precedent that tax losses do not fall within the relief available under ERISA. The court also rejected the plaintiff’s complaint about the actuarial reduction, citing an Eleventh Circuit decision, Holloman v. Mail-Well Corp., in which the Eleventh Circuit seemed to conclude that the power to accelerate a stream of benefit payments necessarily included the ability to discount the value of those future payments to a present value lump sum.
The court faulted the plaintiff’s allegations for simply complaining about the use of an actuarial reduction. The court stated that the allegation “that the present value reduction factor decreased his further monthly payments as correct, but irrelevant” as a present value decrease of future payments was “precisely the purpose of applying a present value reduction factor.” Furthermore, the court said that the allegation that “the use of the present value reduction factor was, in itself, improper because it amounted to a reduction of his future monthly payments under the plan” was “incorrect as a matter of law.”
The most interesting aspect of this case is how willing the court was to read a broad grant of authority into a very simple and concise reservation of an employer’s right to terminate a nonqualified retirement plan. The court was willing to infer that the power to terminate necessarily includes the power to commute annuity payments to lump sums and to discount the value of those annuity payments using appropriate actuarial assumptions, including discount rates. This case did not survive NCR’s motion to dismiss. The court indicated that it may have at least survived that stage of the litigation had the plaintiff alleged that the actuarial assumptions used by NCR were improper, rather than simply complaining about the mere use of such factors.
Last month, the U.S. Department of Health and Human Services (“HHS”) issued a proposed rule implementing section 1557 of the Affordable Care Act (“ACA”), which essentially prohibits discrimination on the basis of race, color, national origin, sex, age or disability in certain health programs and activities. While the rule does not apply directly to most employer-sponsored plans, it may potentially apply indirectly.
Under the proposed rule the nondiscrimination requirements would apply to:
- all health programs or activities of a covered entity if any part receives Federal financial assistance administered by HHS (including subsidies provided by the Federal government to individuals through the Marketplace for remittance to the covered entity);
- all health programs or activities administered by HHS, including the Federally-facilitated Marketplace; and
- all health programs or activities administered by any entity established until Title I of the ACA, including a state-based Marketplace.
A health program or activity includes:
- the provision or administration of health-related services or health-related insurance coverage;
- the provision of assistance in obtaining health-related services or health-related insurance coverage; and
- all of the operations of an entity principally engaged in providing or administering health services or health insurance coverage.
Impact on Employer-Sponsored Group Health Plans
Since the proposed rule would extend to all the operations of a covered entity, it appears that a health insurance issuer participating in the Marketplace would be required to comply with the nondiscrimination provisions with respect to (1) its own employer-sponsored group health plan (even if self-insured); (2) all its health plan products, including those plans offered outside the Marketplace (such as other group policies); and (3) an employer-sponsored self-insured group health plan for which serves as the third party administrator.
The proposed rule does not offer any specific guidance on how a covered health insurance issuer’s required compliance would apply to its services as a third party administrator for a self-funded group health plan. The preamble to the proposed rule merely includes a footnote stating that HHS will engage in a case-by-case inquiry where a covered entity that is acting as a third party administrator is legally separate from an issuer receiving Federal financial assistance for its insurance plans and evaluate whether such entity is appropriately subject to Section 1557. This means that insurers participating in the ACA Marketplaces that also offer coverage to employers in the group market, and those who act as TPAs for self-funded plans, may need to apply these rules to their group insurance coverages and even to the plans for which they serve as TPAs. This is a potentially very broad-sweeping rule that could change what employer plans have to cover.
New Standard for Sex Discrimination
Under the proposed rule, HHS has interpreted sex discrimination broadly to include discrimination based on sexual orientation, sexual stereotyping and gender identity. Specifically, this means individuals cannot be denied health care/ coverage based on their sex, including their gender identity and must be treated consistent with their gender identity. However, it also means that sex-specific health care cannot be denied or limited only because the individual identifies as belonging to another gender.
According to HHS, a covered entity’s explicit categorical exclusions from coverage of all health services related to gender transition would be facially discriminatory. Confusingly, however, HHS has also stated that the proposed rule does not require coverage for any particular benefit or service. HHS is specifically seeking comment on whether religious organizations should be exempt and the scope of any such exemption.
In addition to codifying existing nondiscrimination requirements, the proposed rule requires covered entities to provide language assistance services free-of-charge to individuals with limited English proficiency.
With respect to individuals with disabilities, a covered entity must also provide auxiliary aids and services, including alternative formats for written information and sign language interpreters. Under the proposed rule, a covered entity with more than 15 employees would also be required to designate an employee responsible for coordinating its nondiscrimination efforts and establish a grievance procedure.
To ensure that individuals are aware of their rights, covered entities will be required to post a notice (within 90 days of the effective date of such requirement) that includes information on all the above requirements and how to file a discrimination complaint with the Office of Civil Rights.
The notice must be translated (and include taglines) in the top 15 languages spoken by individuals with limited English proficiency nationally. A sample notice is provided in the proposed rule and HHS has indicated that it will provide sample taglines and translations in the top 15 languages.
The public comment period is open through November 9, 2015. The proposed effective date is 60 days after rule is finalized. In the absence of any transitional relief, covered entities will have a very brief window to come into compliance. For that reason, covered entities (and perhaps employers who use a third-party administrator or purchase group insurance) may want to consider reviewing their health plans now for potential problem areas and identify potential remedies.