On February 3, 2017, President Trump directed the DOL to re-examine the final rule’s impact. As a result, on March 2, 2017, the DOL opened a 15-day comment period (which ended last Friday) on a proposed 60-day delay of the rule’s effective date, from April 10, 2017 to June 9, 2017.
Simultaneously, the DOL opened a 45-day comment period on the substance of the actual rule. This second comment period affords the DOL with an opportunity to review comments before June 9, 2017 (the proposed delayed effective date). At such point, the DOL could allow the final rule to take effect, propose an additional extension in order make amendments to the rule based on the comments received or withdraw the rule.
With the final rule’s current effective date quickly approaching and no indication on whether a delay would occur, there was growing uncertainty among members of the retirement services industry about how to proceed. For example, if the DOL doesn’t announce its decision to delay implementation of the rule until after April 10, 2017, a “gap” would exist between April 10, 2017 and the date the DOL actually issues the final rule delaying the implementation. The other issue is that with entities ceasing their compliance efforts in anticipation of a delay it is highly unlikely such entities will be able to comply with the rule by April 10, 2017, if the delay does not occur.
The DOL issued Field Assistance Bulletin 2017-01 to assuage the above concerns. Pursuant to the Bulletin, the DOL will not take enforcement action against an adviser or financial institution during the “gap” period. In addition, in the absence of a delay in the final rule’s effective date, the DOL will refrain from initiating enforcement actions provided the adviser or financial institution complies with the final rule, including sending out required disclosures to retirement investors, within “a reasonable period” after the publication of a decision not to delay the effective date.
So breathe easy for the moment, but recognize this development relates to a delay, and not repeal, of the final rule.
For additional insight and perspective, read this client alert from our broker-dealer practice.
In today’s virtual world, we suspect most plan sponsors rely upon the self-certification process to document and process 401(k) distributions made on account of financial hardship. The IRS has recently issued examination guidelines for its field agents for their use in determining whether a self-certification process has an adequate documentation procedure. While these examination guidelines do not establish a rule that plan sponsors must follow, we believe most plan sponsors will want to ensure that their self-certification processes are consistent with these guidelines to minimize the potential for any dispute over the acceptability of its practices in the event of an IRS audit.
The examination guidelines describe three required components for the self-certification process:
(1) the plan sponsor or TPA must provide a notice to participants containing certain required information;
(2) the participant must provide a certification statement containing certain general information and more specific information tailored to the nature of the particular financial hardship; and
(3) the TPA must provide the plan sponsor with a summary report or other access to data regarding all hardship distributions made during each plan year.
The notice provided to participants by the plan sponsor or TPA must include the following:
(i) a warning that the hardship distribution is taxable and additional taxes could apply;
(ii) a statement that the amount of the distribution cannot exceed the immediate and heavy financial need;
(iii) a statement that the hardship distributions cannot be made from earnings; and
(iv) an acknowledgement by the participant that he or she will preserve source documents and make them available upon request to the plan sponsor or plan administrator at any time.
The participant certification statement for financial hardship distributions must contain the following information:
(i) the participant’s name;
(ii) the total cost of the hardship event;
(iii) the amount of the distribution requested;
(iv) a certification provided by the participant that the information provided is true and accurate; and
(v) more specific information with regard to the applicable category of financial hardship, as outlined in the examination guidelines that can be found at the following website link: https://www.irs.gov/pub/foia/ig/spder/tege-04-0217-0008.pdf.
In cases where any participant has received more than two financial hardship distributions in a single plan year, the guidelines advise agents to request source documents supporting those distributions if a credible explanation for the multiple distributions cannot be provided. Given the instructions being given to agents in this regard, plan sponsors may wish to consider limitations on the number of financial hardship distributions that a participant may take or to apply a more stringent process for approving requests for financial hardship distributions where more than two requests are made in any plan year.
Plan sponsors should be aware that this IRS memorandum only addresses substantiation of “safe-harbor” distributions and that if a plan permits hardship distributions for reasons other than the “safe-harbor” reasons listed in the regulations, the IRS may take the position that self-certification regarding the nature of those hardships is not sufficient.
The good news with these guidelines is that if a self-certification process with respect to “safe-harbor” hardship distributions adheres to these guidelines, plan sponsors should have less concern over using the self-certification process and there should be fewer, if any, disputes with IRS field agents over the need for plan sponsors to maintain or provide access to source documents.
Late on Monday, House Republicans revealed, in two parts (here and here, with summaries here and here) the American Health Care Act (“AHCA”) that is designed to meet the Republicans’ promise to “repeal and replace” the ACA. In many respects, the AHCA is less “repeal and replace” and more “retool and repurpose,” but there are some significant changes that could affect employers, if this bill becomes law as-is. Below is a brief summary of the most important points:
- Employer Mandate, We Hardly Knew You. The ACA employer play or pay mandate is repealed retroactive to January 1, 2016, so if you didn’t offer coverage to your full-time employees, then this is the equivalent of the Monopoly “Get out of Jail Free” card.
- OTC Reimbursements Allowed from HSAs and FSAs, Without a Prescription. This goes back to the old rules that allowed these reimbursements. This would begin in 2018.
- Reduction in HSA Penalty. One of the pay-fors for the ACA was an increase in the penalty for non-health expense distributions from HSAs from 10% to 20%. The AHCA takes it back to 10% starting in 2018.
- Unlimited FSAs Are (or Would Be) Here Again. AHCA repeals the $2,500 (as adjusted) limit on health FSA contributions starting in 2018.
- Medicare Part D Subsidy Expenses Would Be Deductible Again. The ACA still allowed Medicare Part D subsidies to be excluded from a company’s income, but denied the deduction, for tax purposes, for any expenses that were subsidized. This reinstates the prior law that allowed a “double tax benefit” of both the exclusion of the subsidy from income and the deduction for the costs funded by the subsidy starting in 2018.
- A New COBRA Subsidy. The AHCA does away with ACA’s income-based subsidies in favor of age-based subsidies from $2,000 to $4,000 per individual (with a max of $14,000 for a family) with a phaseout for incomes over $75,000 per year ($150,000 for married filing jointly). However, unlike the ACA subsidies (which could only be used for individual market insurance), the new subsidies would also be available for unsubsidized COBRA coverage. This would not kick in until 2020. The subsidies are adjusted based on the CPI+1, which means they are probably unlikely to keep pace with medical inflation. Additionally, any excess subsidy (which seems unlikely) would be put into an HSA for the individual’s benefit.
- Trading in The Cadillac Tax for a Newer Model Year. Hearing the outcry of employers who did not want their health benefits taxed, the bill instead kicks the Cadillac Tax down the road. Instead of applying in 2020, it now applies in 2025. There is no adjustment to the thresholds in this bill, so it will still pick up coverage that is not all that “Cadillac” (despite its name). Despite being highly unpopular, the Cadillac Tax has basically survived.
- HSA Enhancements. The HSA contribution limits would be increased effective in 2018 so that they are the same as the out of pocket maximums that apply to HSAs (currently $6,550 for self-only coverage and $13,100 for family coverage). Additionally, expenses incurred up to 60 days before the account is established could be reimbursed from the account.
- Continuous Coverage Requirement. In lieu of the individual mandate, the law would require individuals to maintain continuous coverage (with no more than a 63-day break). If they did not, then insurance companies could assess a 30% enrollment surcharge above their regular premium for twelve months. This is designed to encourage individuals to stay in the insurance market, even if they don’t need coverage. Employers will recognize the 63-day break rule from the old HIPAA creditable coverage rules. This is basically the same concept, only applied across both employer plans and the individual market (the HIPAA rules did not apply to the individual market). And unlike the HIPAA rules, the penalty here is a 30% premium increase, whereas under the HIPAA rules, pre-existing conditions could be excluded for a period of time if the individual did not maintain creditable coverage. For employers, this probably mostly would mean a return to having to issue creditable coverage certificates.
The proposed AHCA makes many other changes that are beyond the scope of this post, but these are the ones that are most likely to have an impact on employer plans. Of course, at this point, this is just proposed legislation and there’s no telling how much (if any) of this will survive the legislative process. At least now, however, some legislators have something specific with which to work (and others have something specific to criticize).
In a prior post, we covered President Trump’s order directing the Department of Labor to review the new regulation and, as it deems appropriate, to take steps to revise or rescind it. The Employee Benefits Security Administration (“EBSA”) has taken the first step in response to that order by proposing a 60 day delay in the applicability date. The final rule had an applicability date of April 10, 2017. Likewise, the prohibited transaction exemptions (“PTEs”) included in the final rule, such as the Best Interest Contract Exemption, had an applicability date of April 10, 2017.
In light of the President’s prior order, EBSA has released the text of a proposed rule, to be published on March 2, 2017, delaying the applicability date of the final rule and the PTEs by 60 days. EBSA noted that there were only 45 days until the rule and the PTEs became effective and said that it felt it needed more time to perform the analysis required by the President’s order.
EBSA is inviting comments on the proposal to extend the applicability date of the final rule and PTEs. Comments must be submitted quickly; the comment period will end 15 days after publication.