Benefits Monthly Minute
If You Like Your (Grandfathered) Plan, You Can Keep It – For Even Longer
For those few-and-far-between plans that managed to maintain grandfathered health plan status, this month the Departments issued Final Rules that provide greater flexibility for some grandfathered group health plans to make changes to certain types of cost-sharing requirements without causing a loss of grandfather status under the ACA. Specifically, certain grandfathered plans may increase fixed-amount cost-sharing provisions (e.g., copayments, deductibles, and out-of-pocket maximums) provided that certain thresholds are not exceeded. The Final Rules also include a special rule for certain grandfathered HDHPs, generally permitting increases to fixed-amount cost-sharing to the extent that such increases are necessary to maintain HDHP status under the Code. The final regulations apply to grandfathered group health plans and grandfathered group health insurance coverage beginning on June 15, 2021, and the new rules do not apply to grandfathered individual health insurance coverage.
KMK Comment: while some industry experts view the Final Rules solely as a means for employers to continue offering plans that do not provide comprehensive benefits, others consider them to be a win for employers that need to make certain cost-sharing increases while staying consistent with the Obama-era refrain, “If you like your plan, you can keep it.” In either case, it is essential to consult with your benefits advisor before making any changes to a grandfathered health plan to ensure consistency with the Final Rules and avoid an inadvertent loss of grandfathered status.
SECURE Act Q&As on Safe Harbor Automatic Enrollment and Nonelective Plan Requirements
The IRS recently released new SECURE Act guidance in the form of thirteen Q&As in IRS Notice 2020 -86. As reported in the February, 2020 Legal Alert, Section 102 of the SECURE Act addresses increases in the 10% cap for automatic enrollment safe harbor plans under Section 401(k)(13) to 15%, and Section 103 eliminates certain safe harbor notice requirements for plans with safe harbor nonelective contributions and adds new provisions for the retroactive adoption of safe harbor status for those plans. Of note, the Notice clarifies that:
- QACAs are not required to increase maximum automatic deferrals to 15%.
- Section 103 did not eliminate the safe harbor notice requirements of Section 401(m)(11)(A) for a traditional safe harbor 401(m) plan that satisfies the safe harbor nonelective contribution requirements.
- The 90-day withdrawal right notice requirement (under Section 414(w) of the Code) still applies.
- If a plan is no longer required to provide a safe harbor notice under Section 103, but the employer provides a notice that includes a statement that the plan may be amended mid-year to reduce or suspend safe harbor nonelective contributions, the plan will satisfy the condition that the statement regarding the possible mid-year reduction or suspension be included in a safe harbor notice as long as the notice otherwise satisfies safe harbor notice requirements.
- New retroactive amendment requirements for plans adopting a safe harbor design with 4% nonelective contributions are also described.
KMK Comment: while this last round of IRS guidance offers some welcomed clarification, we expect additional explanations addressing implementation of SECURE Act changes will be forthcoming as the IRS formulates SECURE Act regulations.
Final Rules on Rollovers of Qualified Plan Loan Offsets
The IRS issued a Final Rule on December 7, 2020, that provides guidance on the extended rollover period for a qualified plan loan offset (“QPLO”) that is very similar to the proposed rule from August, 2020. Prior to this rule change, if a 401(k) plan participant had an outstanding loan at the time of termination of employment, the amount of the loan must be rolled over to another qualified plan or IRA within 60 days to avoid it being treated as a taxable plan distribution. This tax on an unpaid loan can also occur when a plan is terminated. The Tax Cuts and Jobs Act of 2017 provided an extended rollover period for a QPLO.
A participant may roll over the QPLO amount to another qualified plan or IRA by the deadline (including extensions) for the participant’s income tax return for the year the offset is treated as distributed from the 401(k) plan. It is not required to be rolled over within the standard 60-day period.
The Final Rule defines a plan loan offset amount as the amount by which the participant’s distribution is reduced to repay the loan. However, a QPLO is a plan loan offset amount that also is treated as distributed solely because the participant fails to meet the loan repayment terms because he or she terminated employment and the loan offset happens within one year following the date the participant terminated employment from the plan sponsor or the employer terminated the plan. The plan loan being offset must also meet the IRS Code requirements for a loan not to be treated as a taxable distribution immediately prior to the participant’s termination of employment or the plan termination. There are a number of helpful examples in the Final Rule.
These rules are effective for plan loan offset amounts that are distributed on or after January 1, 2021. However, there is an option to treat amounts distributed on or after August 20, 2020, in this manner under the Final Rule.
KMK Comment: plan administrators and recordkeepers will want to establish procedures for tracking the applicable dates of severance and the one year anniversary. Note that no reporting under this rule is required until the 2021 Form 1099-R that is furnished in 2022.
The KMK Law Employee Benefits & Executive Compensation Group is available to assist with these and other issues.
KMK Employee Benefits and Executive Compensation email updates are intended to bring attention to benefits and executive compensation issues and developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.