Employee Benefits Articles

401(k) Basics

November 5, 2015

in Employee Benefits

A retirement plan shows that you are invested in the futures of your employees and gives employees the opportunity to plan ahead and care for their financial futures. The 401(k) is a type of retirement account, aptly named after its section description in the IRS tax code (26 U.S. Code § 401(k)). This code section allows you to provide employees with an option to receive their earnings in cash or in a deferred compensation structure.

Plan Options
There are two main ways that employees can contribute to a 401(k) plan: they can do so on a pretax basis, meaning that their deferrals will come out of their checks prior to any applicable taxes being taken out, or they can do so on a post-tax basis, meaning that all applicable taxes will be taken out of their pay prior to making the contribution to their retirement account.

Traditional 401(k)
The pretax option, also known as the traditional 401(k), was written into the tax code back in 1978. The traditional 401(k) allows employees the option of setting aside a portion of their compensation towards their retirement, in which they will not pay taxes on their contributions to the plan or their earnings until they reach retirement age and take the money out.

Roth 401(k)
The post-tax option, also known as the Roth 401(k), was written into the tax code in 2006. This option requires that employees pay taxes on their contributions at the time at which they are made, but when they take a distribution at retirement, they no longer need to pay taxes on that money since they have already done so. Employers are slowly adding this option to their plan documents, as it gives their lower earning employees the opportunity to contribute post tax while they are low income earners, given that they are likely predicting their tax rate to be higher at retirement than at the time of their contribution.

*NOTE there is another option, called a SIMPLE 401(k) that is an option for some small employers. As the rules for the SIMPLE 401(k) are vastly different from the other retirement plan options listed above, we will primarily focus on the rules around the other types of 401(k) plans here.

Employer Contributions
Employer Matching
You have the option of matching your employee contributions to the plan. Most employers who contribute do so based on providing a certain percentage up to a specific contribution limit (e.g., 50% of the first 6% of employee contributions). The added benefit of employer matching encourages employees to save for their retirement by offering an incentive to do so. This is not a requirement, but many employers tend to offer this whenever possible.

Nonelective contributions
Some employers choose to make a contribution on behalf of their employees that is not tied to the employee contribution. This is called a nonelective contribution, and the contribution will be made to all employees regardless of whether or not they choose to contribute to the 401(k) plan.

Contribution Limits
As with many benefits allowed by the IRS, there are limits to how much employees can contribute to the plan. These limits are set on an annual basis.

For 2016, the following yearly limits apply:

  •  Traditional or Roth 401(k) employee contribution limit: $18,000
  •  Traditional or Roth 401(k) employee catch-up contribution limit (for employees age 50 and over): $6,000
  •  SIMPLE 401(k) contribution limit: $12,500
  •  Employee catch-up contribution limit (for employees age 50 and over): $3,000
  •  Total limit for employer plus employee contributions: $53,000—or $59,000 including catch-up contributions.

Investment Options
Typically employees will have the options of choosing between several different mutual fund options, bonds, stocks, cash, and a variety of other investment options. Some plans offer employees the option of choosing a time managed portfolio, which allows the 401(k) administrator the option of selecting a mix of investment options for the employee based on their predicted retirement age.

Vesting
Many employers have chosen to incentivize employees to stay within the organization for a certain timeframe in order to reap the benefits of the company match. This is typically done through a vesting schedule. In most cases, employee contributions are vested at 100%. This means that the employee is entitled to 100% of their contributions when they leave the company. When it comes to the company match, however, the vesting schedule may vary significantly from company to company.

Plan Testing
Plan sponsors must test traditional 401(k) plans each year to ensure that the contributions made for rank-and-file employees – those considered non-highly compensated – are proportional to those made for owners and managers. These non-discrimination tests are called Actual Deferral Percentage and Actual Contribution Percentage tests.

Distribution Rules
There are specific requirements regarding when and how employees can access their retirement funds. There are some unique requirements, but generally distributions of elected deferrals cannot be made outside of the following events:

  •  The employee dies, becomes disabled, or otherwise has a severance from employment.
  •  The plan terminates and no successor defined contribution plan is established or maintained by the employer.
  •  The employee reaches age 59½ or incurs a financial hardship.

Distribution rules can be difficult to maneuver, but typically it is the responsibility of the employee to understand the limits imposed on 401(k) plan distributions. A third party administrator is one of the best resources to help employees in this regard.

Conclusion
The 401(k) is widely popular benefit—many employees even expect employers to provide it. If you’re able to offer a retirement plan, the 401(k) is a good investment—for your employees and for you!

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Employers that sponsor self-insured group health plans, including health reimbursement arrangements (HRAs) should keep in mind the upcoming July 31, 2015 deadline for paying fees that fund the Patient-Centered Outcomes Research Institute (“PCORI”). As background, PCORI was established as part of health care reform to conduct research to evaluate the effectiveness of medical treatments, procedures and strategies that treat, manage, diagnose or prevent illness or injury. PCORI fees were first due by sponsors of self-insured group health plans and insurers last July for plan and policy years that ended on or after October 1, 2012. Under health care reform, most employer sponsors and insurers will be required to pay PCORI fees until 2019.

Determining the Amount of your PCORI Fees

The amount of PCORI fees due by employer sponsors and insurers is based upon the number of covered lives under each “applicable self-insured health plan” and “specified health insurance policy” (as defined by regulations) and the applicable plan or policy year.

  • For plan years that ended between January 1, 2014 and September 30, 2014, the fee is $2.00 per covered life and is due by July 31, 2015.
  • For plan years that ended between October 1, 2014 and December 31, 2014, the fee is $2.08 per covered life and is due by July 31, 2015.
  • The fee will be paid by July 31, 2016 for any plan years ending in 2015.

NOTE: The insurance carrier is responsible for paying the PCORI fee on behalf of a fully insured plan. The employer is responsible for paying the fee on behalf of a self-insured plan, including an HRA.

Historical information for prior years:

  • For plan years that ended between October 1, 2012 and December 31, 2012, the fee was $1 per covered life and was due by July 31, 2013.
  • For plan years that ended between January 1, 2013 and September 30, 2013, the fee was $1 per covered life and was due by July 31, 2014.
  • For plan years that ended between October 1, 2013 and December 31, 2013, the fee was $2 per covered life and was due by July 31, 2014.

The fee-amount per covered life generally increases each year based upon health expenditure data released by the Department of Health and Human Services annually. Employers that sponsor self-insured group health plans should report and pay PCORI fees using IRS Form 720, Quarterly Federal Excise Tax Return.

Final regulations issued by the Internal Revenue Service contain special rules regarding the types of plans and policies for which fees are due and also include several different methods that may be used by employers to determine the number of covered lives under each plan. There are additional rules for counting the number of covered lives under an HRA (in general, the fee applies on a per-covered employee basis for HRAs). Employers that sponsor self-insured plans should review these rules closely to ensure that the correct PCORI fees are paid.

Note that because the PCORI fee is assessed on the plan sponsor of a self-insured plan, it should not be included in the premium equivalent rate that is developed for self-insured plans if the plan includes employee contributions. However, an employer’s payment of PCORI fees should be tax deductible as an ordinary and necessary business expense.

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On June 16 the Internal Revenue Service, the U.S. Department of Labor, and Health and Human Services (the “Agencies”) will release final regulations (“Regulations”) for the Affordable Care Act’s (“ACA’s”) Summary of Benefits and Coverage (“SBC”) requirements. HHS also released a “Fact Sheet” to accompany the release of the Regulations. The Regulations largely follow and consolidate prior SBC guidance and break very little new ground.

This summary is based on a pre-June 16 advance publication of the Regulations. The Regulations are to be released in the Federal Register on June 16.

Background

The ACA requires health insurance issuers and plan sponsors (e.g., employers) to provide participants and beneficiaries with an SBC that accurately describes the benefits available. Since the passage of the ACA, the Agencies have released guidance outlining the rules for SBC content and delivery and related matters. Proposed regulations were released in August 2011. On February 14, 2012 those proposed regulations were finalized and released along with templates for SBCs. Subsequent to those final regulations, the Agencies released explanations, further guidance and “safe harbors” through a series of seven FAQs (VII, VIII, IX, X, XIV and XIX). On December 30, 2014 the Agencies released a proposed regulation which was followed by FAQ XXIV released on March 30, 2015.

These Regulations finalize the proposed regulations and consolidate some of the prior sub-regulatory guidance released in the form of FAQs. Importantly, the Regulations do not include new sample language for the SBCs. The December 2014 proposed rules included proposed revisions to the SBC template, instruction guides, uniform glossary, and other supporting materials. However, in the Regulations the Agencies reiterate the statement from the FAQ issued on March 30, 2015 that they anticipate the new SBC templates and associated documents will be finalized by January 2016 and will apply to plan years beginning on or after January 1, 2017 (including open enrollment periods that occur in the Fall of 2016 for coverage beginning on or after January 1, 2017).

The Final Regulations

As noted above, not much new ground is broken in these Regulations. Key provisions include:

  • Online Access to Individual Underlying Policy or Group Certificate. The Regulations clarify that all insurance issuers must include an Internet web address where a copy of the actual policy or group certificate of coverage can be reviewed and obtained before someone signs up for coverage. For fully insured employer-sponsored plans, because the actual “certificate of coverage” is not available until after the plan sponsor has negotiated the terms of coverage with the insurer, the insurer may post a sample group certificate of coverage for each applicable product. After the actual certificate of coverage is executed, it must then be posted and made available to the plan sponsor, participants and beneficiaries on the Internet.
  • Safe Harbor for Sponsors That Use Vendors. The Agencies confirmed that a prior proposed safe harbor for plan sponsors that contract with others to deliver the SBCs will still be available if:
        1. The plan sponsor monitors performance by the vendor under the contract;
        2. If the plan sponsor has knowledge that the SBC is not being provided in a manner that satisfies the requirements and the plan sponsor has all information necessary to correct the noncompliance, the plan sponsor corrects the noncompliance as soon as practicable; and
        3. If the plan sponsor has knowledge the SBC is not being provided in a satisfactory manner and the plan sponsor does not have all information necessary to correct noncompliance, the plan sponsor communicates with the affected participants and beneficiaries regarding the noncompliance and begins taking steps as soon as practicable to avoid future violations.
      • Timing and Delivery of SBCs Remains the Same. The Agencies continue to attempt to take a common sense approach to the timing and the delivery of SBCs, including:
      1. Not requiring a new SBC be provided to participants who were provided an SBC prior to the start of a plan year but before the insurance contract is finalized (as long as there have been no changes to the required information);
      2. Allowing participants whose coverage is automatically renewed to be provided with an SBC for that coverage option by the start of the plan year (although they may request and must receive SBCs for other coverage options within seven days of the request); and
      3. Permitting electronic posting of SBCs for those enrolling online.

What Employers Should Do

The Regulations apply to plan years commencing on or after September 1, 2015. Employers and other plan sponsors should review the complete SBC guidance with their ERISA counsel and broker and other vendors to ensure compliance. The penalty for noncompliance with the SBC rules is $1,000 per person per day-so compliance is extremely important.


Peter Marathas Employee Benefits Compliance DirectorPeter J. Marathas, Esq.
Legal & Compliance Director, Benefit Advisors Network

Originally posted by Benefit Advisors NetworkAgencies Issue Final SBC Rules” in conjunction with the law firm of Marathas, Barrow & Weatherhead LLP

This post is a service to clients and friends of Shirazi Benefits, a member of the Benefit Advisors Network (BAN). It is designed only to give general information on the developments actually covered. It is not intended to be a comprehensive summary of recent developments in the law, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.   Benefit Advisors Network and their smart partners are not attorneys and are not responsible for any legal advice. To fully understand how this or any legal or compliance information affects your unique situation, you should check with a qualified attorney.

The author, Peter Marathas, Jr., Esq., is a partner at Marathas, Barrow & Weatherhead LLP, speaks and writes frequently on the requirements of the Affordable Care Act, provides counsel and assists Shirazi Benefits, a members of the Benefit Advisors Network (BAN), with compliance support. 

Other Affordable Care Act (ACA) & Compliance Posts:

Preventive Care & Birth Control Required to be Covered by ACA

Final Forms and Instructions for ACA Reporting from IRS

New Definition of “Spouse” for Family and Medical Leave Act (FMLA)

New HHS Regulations: Health Plans Covering Families to Have “Embedded” Individual Cost-Sharing Limits

Premium Reimbursement Arrangements – IRS Clarification

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Many employers are devoting most (if not all) of their compliance time focused on the requirements of the Affordable Care Act (ACA). Employers and other plan sponsors should, of course, work diligently to ensure that they are meeting (or getting ready to meet) the complex ACA requirements, but they should be ever diligent and mindful of all of the rules generally applicable under the Employee Retirement Income Security Act of 1974 (ERISA).

A case in the U.S. District Court for the Eastern District of New York – Raymond Thomas v. CIGNA Group Insurance, et al. (No 09-CV-5029)-provides an instructive reminder that those who rely on electronic delivery of plan-related documents must follow fairly specific rules.

The Raymond Thomas Case

The facts in Raymond Thomas are fairly straightforward: Judith Thomas participated in Countrywide Financial Group’s benefit plans, including a buy-up voluntary life insurance plan. The buy-up plan required premium payments by employees. When Judith went out on disability, she could have filed a waiver-of-premium form that would have kept the insurance in place without requiring premium payments while she was out on disability. Judith did not timely file the waiver after going out on disability.

When Judith’s brother, Raymond, the beneficiary on the life insurance, made a claim for benefits after Judith’s death, his claim for the life insurance proceeds was denied based of Judith’s failure to timely file the waiver; that is, the employer and the insurer claimed the policy lapsed because of non-payment of premium and the failure to timely request a waiver.

The central question of the case: was Judith adequately provided with information so that she knew about the waiver requirements, including the timing requirements? The plan argued that the life insurance plan documents, including its summary plan description (SPD), were furnished to all employees via a posting on the company’s intranet for all to see. The court, however, disagreed that merely furnishing the SPD and other documents was sufficient under ERISA. Not surprisingly-because the regulations are pretty clear-the court ruled that because ERISA’s rigid requirements for electronic delivery were not followed, the plan sponsor and the insurer could not prove that the SPD that included the waiver requirements were provided to Judith Thomas. Accordingly, the court held for Raymond Thomas.

Electronic Delivery under ERISA-Briefly

The Raymond Thomas case may be surprising to some employers, other plan sponsors and their consultants and advisors who believe that simply posting plan information (including SPDs, notices and other required documents) is sufficient to meet ERISA’s electronic delivery requirements. Raymond Thomas serves a reminder to all that ERISA’s electronic delivery rules are complex; simply posting documents and notices to an intranet system will not satisfy these requirements.

ERISA’s basic requirements for electronic delivery include:

  1. When an electronic document is furnished, a notice must be provided to each recipient describing the significance of the document-in other words, simply posting is not enough: participants must know that there are documents to be reviewed.
  2. The steps taken for furnishing the documents must be reasonably calculated to result in the actual receipt of the documents; plan sponsors should consider using return-receipt or notice of undelivered e-mail features and/or should conduct periodic reviews or surveys to confirm actual receipt by participants.
  3. Reasonable and appropriate confidentiality safeguards should be used to protect the privacy of personal information related to an individual’s accounts and benefits.
  4. The electronically delivered documents must be prepared and furnished in a manner that is consistent with the style, format and content requirements applicable to the particular document.
  5. A paper version of the electronic document must be readily available

Once the foregoing basic requirements are met, ERISA documents may be furnished to two classes of potential recipients:

  1. Actively employed participants whose access to the employer’s electronic information system is an integral part of their job and who have the ability to access documents through the electronic information system that is located where they are expected to perform their duties.

Caution:  There is a common misconception that this requirement can be met for employees who do not have computers at their desks or other work stations by the use of a centrally located computer, such as a kiosk.  Using kiosks or placing computers in break rooms, locker rooms or other worksite locations does not meet this requirement.

  1. Terminated or retired participants, beneficiaries and others as long as they (i) affirmatively consent to receive the documents electronically, (ii) provide an electronic address and (iii) reasonably demonstrate their ability to access documents in electronic form.

If documents and notices are sent via e-mail attachment (including by providing a link that recipients can click to obtain copies), employers and other plan sponsors can ensure the three consent requirement are met if the e-mail requires recipients to affirmatively consent via email from the email address at which they agree to receive the information.

Before consent is obtained the plan sponsor must provide a statement that includes the following specific information:

  • the types of documents that will be provided electronically;
  • that the individual receiving the documents or notices has the ability to withdraw consent to electronic delivery along with the procedure for withdrawing consent and updating information;
  • that a paper version of all documents and notices is available upon request and whether a charge applies (no charge applies in the case of SPDs); and
  • what electronic delivery system will be used and the hardware and software needed to use it.

These electronic delivery rules apply to all documents and notices required to be provided under ERISA. These include: open enrollment materials, SPDs, Summaries of Material Modifications (SMMs), Summary Annual Reports (SARs), QMCSO notices, COBRA notices, and retirement plan and 401(k) plan notices such as “blackout period” notices, 404(c) notices, and information on participant loans.

The new Summary of Benefits and Coverage (SBC) under the ACA may be distributed electronically in accordance with the rules set out above. However, the DOL expanded electronic distribution of SBCs to individuals without work-related access to make the requirements easier to meet (http://www.dol.gov/ebsa/faqs/faq-aca9.html). Under these rules, an employer or plan sponsor may distribute the SBC without the prior consent of an individual who does not have work-related computer access when:

  • the individual enrolls online or renews their coverage online; or
  • the individual requests an SBC online.

In either case, the individual must always have the option to receive a paper copy upon request.


Peter Marathas Employee Benefits Compliance DirectorPeter J. Marathas, Esq.
Legal & Compliance Director, Benefit Advisors Network

Originally posted by Benefit Advisors NetworkERISA Electronic Delivery: A Friendly Reminder” in conjunction with the law firm of Marathas, Barrow & Weatherhead LLP

This post is a service to clients and friends of Shirazi Benefits, a member of the Benefit Advisors Network (BAN). It is designed only to give general information on the developments actually covered. It is not intended to be a comprehensive summary of recent developments in the law, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.   Benefit Advisors Network and their smart partners are not attorneys and are not responsible for any legal advice. To fully understand how this or any legal or compliance information affects your unique situation, you should check with a qualified attorney.

The author, Peter Marathas, Jr., Esq., is a partner at Marathas, Barrow & Weatherhead LLP, speaks and writes frequently on the requirements of the Affordable Care Act, provides counsel and assists Shirazi Benefits, a members of the Benefit Advisors Network (BAN), with compliance support. 

Other Affordable Care Act (ACA) & Compliance Posts:

ACA Update: Agencies Issue Final SBC Rules

Preventive Care & Birth Control Required to be Covered by ACA

Final Forms and Instructions for ACA Reporting from IRS

New HHS Regulations: Health Plans Covering Families to Have “Embedded” Individual Cost-Sharing Limits

Premium Reimbursement Arrangements – IRS Clarification

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On May 26, 2015, the Departments of Health and Human Services, Labor, and Treasury, jointly released the twenty-seventh set of FAQs on Affordable Care Act implementation issues. The FAQs clarify the application of the ACA’s out-of-pocket limit rules for plan years beginning in 2016.

Under the ACA, all non-grandfathered group health plans must ensure that annual out-of-pocket cost sharing (e.g., deductibles, coinsurance and copayments) for in-network essential health benefits does not exceed certain limits, as shown below:

Out-of-Pocket Guide

Plan Years beginning in 2015 Beginning in 2016
Individual $6,600 $6,850
Family $13,200 $13,700

In February, HHS “clarified” that the ACA’s out-of-pocket limits apply to each individual, even those enrolled in family coverage. For example, suppose an employee and spouse enroll in family coverage with an annual out-of-pocket limit of $13,000, and during the 2016 plan year, the spouse has $10,000 of out-of-pocket expenses and the employee has $3,000. Under the new rule, the spouse’s out-of-pocket expenses are capped at the individual limit of $6,850 (with the remaining $3,150 being covered by the plan). The employee is still subject to cost sharing, however, until the $13,000 plan limit is reached.

The FAQs confirm that HHS’ clarification applies to all non-grandfathered group health plans, including large group and self-insured plans. Meaning, starting with 2016 plan years, all non-grandfathered plans must contain an embedded individual out-of-pocket limit for family coverage. For these purposes, family coverage includes any tier of coverage other than employee-only.

The FAQs also confirm that these rules apply to high-deductible health plans (HDHPs). The embedded out-of-pocket limit rules do not impact HSA-qualified HDHPs, as a family HDHP will not be required to start paying medical claims under the ACA out-of-pocket rule until the minimum annual deductible for family HDHP coverage is satisfied. In other words, by the time the embedded individual out-of-pocket limit is reached, the employee will have satisfied the minimum annual deductible for HDHP coverage. Contribution and out-of-pocket limits for HSAs and HDHPs are shown in the table below.

Clarifying Out of Pocket Limit Rules

Minimum Annual Deductible for HDHP 2015-2016 Maximum Annual HSA COntribution 2015/2016 Maximum Annual Out-of-pocket 2015/2016
Individual $1,300 / $1,300 $3,350 / $3,350 $6,450 / $6,550
Family $2,600 / $2,600 $6,650 / $6,750 $12,900 / $13,100


Peter Marathas Employee Benefits Compliance DirectorPeter J. Marathas, Esq.
Legal & Compliance Director, Benefit Advisors Network

Originally posted by Benefit Advisors NetworkDepartments Clarify Out-of-Pocket Limit Rules for 2016” in conjunction with the law firm of Marathas, Barrow & Weatherhead LLP

This post is a service to clients and friends of Shirazi Benefits, a member of the Benefit Advisors Network (BAN). It is designed only to give general information on the developments actually covered. It is not intended to be a comprehensive summary of recent developments in the law, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.   Benefit Advisors Network and their smart partners are not attorneys and are not responsible for any legal advice. To fully understand how this or any legal or compliance information affects your unique situation, you should check with a qualified attorney.

The author, Peter Marathas, Jr., Esq., is a partner at Marathas, Barrow & Weatherhead LLP, speaks and writes frequently on the requirements of the Affordable Care Act, provides counsel and assists Shirazi Benefits, a members of the Benefit Advisors Network (BAN), with compliance support. 

Other Affordable Care Act (ACA) & Compliance Posts:

Preventive Care & Birth Control Required to be Covered by ACA

Final Forms and Instructions for ACA Reporting from IRS

New HHS Regulations: Health Plans Covering Families to Have “Embedded” Individual Cost-Sharing Limits

Premium Reimbursement Arrangements – IRS Clarification

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