November 25, 2014
- Final MEC, Individual Mandate Regulations Address Flex Credits, Wellness Programs
- Defined Benefit Plan Measures May Arise in End-of-Year Legislation
- Council Comments to PBGC on Proposed Revisions to the 2015 Premium Filing Procedures
- Council Urges Flexibility in Swap Rules as Member of Global Pension Coalition
Final MEC, Individual Mandate Regulations Address Flex Credits, Wellness Programs
In final regulations released on November 21, the Internal Revenue Service (IRS) provided guidance on determining the affordability of coverage under the individual mandate provisions of the Patient Protection and Affordable Care Act (PPACA), including how employer contributions under a Section 125 cafeteria plan should be taken into account.
Under Internal Revenue Code Section 5000A, as added by PPACA, nonexempt individuals must maintain “minimum essential coverage” (MEC) for themselves and any dependents (including coverage under an “eligible employer-sponsored plan”) or make a “shared responsibility payment” on their federal income tax return. Final regulations issued under Section 5000A in August 2013 provided implementation guidance regarding the maintenance of MEC and liability for the shared responsibility payment.
Proposed regulations issued by the IRS in January (simultaneously with Notice 2014-10) specifically requested comment on the treatment of employer contributions under a Section 125 cafeteria plan for purposes of the individual mandate to the extent employees may not opt to receive the employer contributions as a taxable benefit, such as cash. The Council provided written comments on April 28, recommending the IRS adopt final regulations stating that any contributions made to a cafeteria plan by an employer on behalf of a cafeteria plan participant be taken into account in determining the affordability of the minimum essential coverage, as long as the cafeteria plan participant has the choice to use such contributions toward the purchase of MEC.
The preamble to the final regulations states that “If an employee may use nontaxable employer contributions to a cafeteria plan to pay for minimum essential coverage and only to pay for medical expenses, then that represents a real reduction in the cost to the employee of purchasing minimum essential coverage. In such a case, it is appropriate to treat the amounts as a reduction in the employee’s required contribution.” The preamble further states, however, that “if an employee’s use of nontaxable employer contributions to a cafeteria plan is not limited to medical expenses, then it cannot be assumed that the employee will use the contribution for purchasing minimum essential coverage” and therefore cannot be taken into account in determining whether the employee’s offer of coverage is affordable.
The final regulations also address the treatment of wellness program incentives for purposes of determining an individual’s required contribution for coverage under an employer-sponsored plan. While the proposed regulations stated that only incentives related to tobacco use will be treated as “earned” for these purposes, the Council recommended that final regulations allow plans to take into account all potential wellness program rewards in determining minimum value and affordability, not just rewards that are related to cessation of tobacco use. The final regulations retain the rules in the proposed regulations that wellness incentives unrelated to tobacco use are treated as unearned and wellness incentives related to tobacco use are treated as earned in determining affordability. According to the preamble to the final regulations, “These rules are consistent with the policies related to tobacco use reflected in the Affordable Care Act, such as allowing issuers to charge higher premiums based on tobacco use.”
Additional guidance with respect to hardship exemptions that may be claimed by individuals for purpose of the minimum essential coverage requirement is also included in the final regulations.
For more information, contact Kathryn Wilber, senior counsel, health policy, at (202) 289-6700.
Defined Benefit Plan Measures May Arise in End-of-Year Legislation
With very little time left in the legislative session, lawmakers in the U.S. Senate and House of Representatives are currently prioritizing the items that must be considered before the 113th Congress adjourns.
The current continuing resolution – which funds government operations – expires on December 11 and must be renewed to avoid a possible (but unlikely) government shutdown. Congress is also negotiating a deal to extend certain expiring or expired tax provisions (so-called “tax extenders”) and discussing a long-term fix of the Sustainable Growth Rate (SGR) affecting payments to Medicare providers (commonly referred to as the “doc fix”).
Additionally, a proposal to address the position of multiemployer pension plans – most likely a one-year extension of the expiring multiemployer plan funding provisions of the Pension Protection Act of 2006 – will likely be discussed in the next few weeks. The Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act, which includes an extension of the multiemployer funding provisions, among other expiring tax provisions, was approved by the Senate Finance Committee on April 2.
Among the items that could be considered for inclusion on the congressional agenda, whether as part of the measures noted above or as a separate package, are legislative clarifications of pension plan “shutdown” procedures under ERISA Section 4062(e).
Section 4062(e) Issues
Under current law, if an employer with a pension plan shuts down operations at a facility – and, as a result of that shutdown, more than 20 percent of the workers who were plan participants are separated from employment – the employer is required to provide the Pension Benefit Guaranty Corporation (PBGC) with short-term financial guarantees in the form of a bond or escrow amount based on the plan's unfunded termination liability.
Aggressive PBGC enforcement of this provision has given rise to significant compliance challenges and large unexpected liabilities for many companies that engage in normal business transactions, although in July the agency announced a moratorium on enforcement through the end of 2014.
On September 16, the Senate approved S. 2511, a bill to address the problem by:
- Ensuring that there is no 4062(e) event unless there is a substantial shutdown of operations at a facility relative to the size of the entire employer.
- Ensuring (subject to certain exceptions) that there is no 4062(e) event unless employees lose their jobs, as opposed to going to work for another employer.
- Significantly reducing the scope of an employer’s liability if there is a 4062(e) event.
A brief summary and talking points document is available on the Council website.
Normally, the Senate measure would proceed to the full House for consideration. However, House rulemakers have identified a procedural problem with the Senate bill, noting that under the Constitution tax legislation must originate in the House rather than the Senate. Therefore, the House must pass its own version of the bill, then send it back to the Senate for its approval.
It remains to be seen whether lawmakers will be able to push the measure through before the end of the year. Also, it is possible that other proposals could be attached to the House bill, which could jeopardize its support in the Senate.
If legislation is not passed before the end of the congressional session, the process will start over and a new bill will need to be reintroduced in 2015. The Council has been in close contact with House leadership and key committee members to urge action before the end of the year. On October 10, the Council sent letters to key members of Congress in support of S. 2511.
Frozen Plan Nondiscrimination Issues
The Council also continues to advocate for legislation to address the inadvertent effects of ERISA’s nondiscrimination rules on frozen defined benefit plans. The increasingly necessary practice of defined benefit plan sponsors “soft freezing” their plans (closing them to new entrants), and the use of various approaches to assist older employees with the transition to the new system, have created challenges for these employers. Over time, some of these transition approaches can become technically inconsistent with current regulations prohibiting discrimination in favor of highly compensated employees.
In December 2013, the Internal Revenue Service (IRS) provided temporary relief for 2014 and 2015 from the imposition of certain nondiscrimination rules on defined benefit pension plans that have been closed to new hires (See the December 13, 2013, Benefits Byte for more details). The notice also proposes a number of alternatives for a permanent solution to the problem as well as other possible modifications to the nondiscrimination requirements.
The Council, after conferring with plan sponsor members, has determined that the permanent alternatives suggested by IRS are insufficient to fix the problem and continues to advocate for legislation to address the matter, though the Treasury Department has expressed concerns about more comprehensive relief.
Senators Benjamin Cardin (D-MD) and Rob Portman (R-OH) of the U.S. Senate Finance Committee, and Representatives Pat Tiberi (R-OH) and Richard Neal (D-MA) of the U.S. House of Representatives Ways and Means Subcommittee on Select Revenue Measures, have introduced legislation (the Retirement Security Preservation Act (S. 2855)/H.R. 5381) that would affirm that a defined benefit plan does not fail the nondiscrimination rules, or the minimum participation requirement, provided the composition of the closed class of participants in the plan meets certain requirements (See the October 7 Benefits Byte story). The Council has prepared a set of talking points on the issue, and wrote letters to Portman and Cardin and Tiberi and Neal expressing strong support for the legislation.
Despite bicameral, bipartisan legislation addressing the problem, it will be very difficult for supporters to succeed in enacting legislation this year given the few days left in the session, the competing priorities and concerns about the legislation’s comprehensive approach as raised by the Treasury Department. Once again, if Congress fails to act on these measures before the end of the congressional session, both bills will need to be reintroduced in 2015.
To have a real chance of success, it will be critical for pension plan sponsors and other concerned employers to continue to weigh in with lawmakers to underscore the importance of legislation addressing these issues. To assist with the Council’s effort or for more information, contact Lynn Dudley, senior vice president, global retirement & compensation, or Diann Howland, vice president, legislative affairs, at (202) 289-6700.
Council Comments to PBGC on Proposed Revisions to the 2015 Premium Filing Procedures
The PBGC’s proposed revision to the 2015 premium filing procedures and instructions would require “reporting of certain undertakings to cash out or annuitize benefits for a specified group of former employees,” commonly referred to as “de-risking.” A growing number of companies have engaged in de-risking strategies, such as transferring all or a portion of their pension plan's assets and liabilities to an insurance company through an annuity buyout or directly to plan participants through a voluntary lump-sum distribution.
The Council testified on de-risking issues before the U.S. Department of Labor ERISA Advisory Council in June 2013, describing the key motivations behind de-risking activity. The testimony emphasized that the legislative and regulatory environment for pension plans has made sponsorship increasingly difficult over the past few decades by increasing cost, uncertainty and risk.
The Council letter generally supports the revision, while recommending that PBGC:
- Require reporting of all transactions that closed at least 120 days prior to the premium filing, rather than 30 days, to allow sufficient time to collect, review, and confirm the data.
- Keep company-specific data, such as the number of participants electing a lump sum, strictly confidential, as the purpose of data collection should be to identify important trends in the aggregate, not to publicize or otherwise disclose company-specific data.
- Provide clarification on the types of transactions that must be reported, specifically that plan terminations are not covered, clarity regarding the nature of transactions covered, clarify the terminology used regarding lump sum distributions and clarify that with respect to annuity purchases, the reporting is only being sought for purchase of annuities that are to be used to satisfy a plan’s obligations to participants, not, for example, annuities that are to be held by the plan as a plan asset.
Council Urges Flexibility in Swap Rules as Member of Global Pension Coalition
The Council continues to pursue regulatory flexibility at the federal and international level with regard to the treatment of “swap” derivative trades, which are commonly used by defined benefit pension plans to hedge or mitigate risks endemic to plan liabilities and investments. Without the use of swaps, defined benefit pension funding obligations would become more volatile and force employers to find other less efficient ways to manage that risk — including setting aside large sums of cash to cover potential funding obligations.
As a member of the Global Pension Coalition – an alliance of associations committed to raising awareness of international pension issues – the Council sent a letter to federal regulators urging them to consider the unintended consequences that recently proposed rules would have for employer-sponsored pension plans.
An April 2011 proposed rule and an October 3 proposed regulation and advance notice of proposed rulemaking, issued by a team of federal regulators including the Commodity Futures Trading Commission, the Federal Housing Finance Agency, the Farm Credit Administration, the Office of the Comptroller of the Currency, the Federal Reserve System and the Federal Deposit Insurance Corporation, would establish minimum margin and capital requirements with respect to uncleared swaps for registered swap dealers, major swap participants, security-based swap dealers and major security-based swap participants pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection (“Dodd-Frank”) Act of 2010. These proposed rules affect retirement plans because, among other reasons, the rules require swap dealers and the other covered entities to impose margin requirements on their counterparties, including retirement plans.
The coalition’s letter asserts that “pension plans should not be subject to initial margin requirements for uncleared swaps,” arguing that “pension plans provide a crucial source of stable, risk-reducing liquidity to the derivatives markets because they are highly creditworthy and liquid counterparties, with practically little to no leverage.”
The letter emphasizes three specific points:
- Inclusion of “affiliates” in a pension’s material swaps exposure calculation should be limited to entities to whom covered swap entities have recourse for relevant pension trades.
- The inclusion of additional entities as pension affiliates, other than those to whom covered swap entity counterparties have recourse for relevant pension trades, would be unworkable.
- The multi-jurisdiction enforceability requirement for third-party custodian agreements is legally impractical.
For more information, contact Lynn Dudley, senior vice president, global retirement & compensation policy, at (202) 289-6700.