Happy Affordable Care Act New Year

Happy-New-Year-2016-Images-5

Ir’s not exactly hats and horns for the 2016 Affordable Care Act (ACA) New Year, but there are a few reasons to celebrate regarding compliance matters.

Filing Extensions

The 2016 ACA reporting deadlines that apply to all subject employers (those with an average workforce of 50 or more full-time employees plus full-time equivalents, or “FTEs”) have recently been extended. The new due dates are:

  • For employee reporting (2015 IRS Forms 1095-B and 1095-C), the deadline is postponed from February 1, 2016 to March 31, 2016;
  • For IRS filings (2015 Forms 1094-B, 1094-C, 1095-B and 1095-C), the deadlines are postponed from February 29, 2016 to May 31, 2016 (paper filers) and from March 31, 2016 to June 30, 2016 (electronic filers).

In addition, Congress acted in mid-December to postpone from 2018 to 2020 the “Cadillac Tax” on high-cost employer health plans that is likely to impact one in four sponsoring employers. It also made this excise tax deductible for subject employers. The postponement comes with Congressional direction to study adjustments to the excise tax threshold that triggers the tax which could afford tax relief to some employers.

Helpful Housekeeping Details

There are also a few helpful housekeeping details buried in the ACA 2015 regulatory barrage:

First, the coverage affordability threshold of 9.5 percent of “household income” has been adjusted for the cost of living, so that percentage increases to 9.56 percent for 2015 and 9.66 percent for 2016.

Second, the annual penalty amounts ($2,000.00 and $3,000.00 per employee for employer “shared responsibility” payments) have been similarly adjusted to $2,080.00 and $3,120.00 for 2015, and $2,160.00 and $3,240.00 for 2016. The regulators have now established penalty amounts that (except for $2,080.00) are divisible by 12! This will, at long last, facilitate their computation on a monthly basis as required by the ACA.

Third, payments to employees on account of non-working time (such as vacation, paid holidays, sickness, lay off, jury duty, military duty and leaves of absence) normally count in measuring “hours of service” to determine full-time employee status and to compute the number of FTEs. Recent clarification provides that workers compensation and employer-funded disability payments to former employees can be excluded from hours of service for this purpose. Fewer hours of service means fewer FTEs, which could be good news for some employers.

Recommendations

  1. The extension of reporting deadlines is good news especially for Applicable Large Employers (ALEs) with fewer than 100 full-time employees plus FTEs. Remember to use 2014 employee information for this purpose, and for 2014 only, employers can select any period of six consecutive months to determine this average number of full-time employees and FTEs.
  2. But get started on compiling the necessary historical information because payroll services will not be able to provide all of the data required to complete IRS Forms 1094-C and 1095-C (1094-B and 1095-B for self-insured plans).

About the Author

Andrew S. Williams has practiced in the employee benefits and ERISA arena since ERISA was passed in 1974. He has been recognized by his peers through a survey conducted by Leading Lawyers Network as among the top 5 percent of Illinois lawyers in Small, Closely and Privately Held Business Law and Employee Benefit Law. He maintains a website, Benefits Law Group of Chicago, with additional updates, commentary and analysis on benefits and employment topics.

Disclaimer: The above material is intended for general information purposes and should not be relied on or construed as professional advice. Under the applicable Illinois Rules of Professional Conduct, the contents of this e-mail may be considered to be attorney advertising. The transmission of this information is not intended to create, and receipt of it does not create a lawyer-client relationship.

Enhanced health benefits for executives? That’s another Affordable Care Act issue to consider

aca keyboardA prohibition on discrimination has applied to self-insured plans for years under  Section 105(h) of the Internal Revenue Code. The Affordable Care Act (“ACA”) now extends that ban on discrimination in insured group health plans.

What does this mean? Insured health plans  can no longer favor highly compensated employees in terms of eligibility for benefits or the value of such benefits. The intent is to prohibit employers from offering enhanced or subsidized health care benefits to highly compensated management employees while at the same time not providing equivalent health benefits to all other covered employees.

Enforcement of the new ACA provisions, which contain severe financial penalties for non-compliant insured plans, was suspended until publication of new IRS regulations. The IRS apparently has come to grips with some of the difficult issues presented, including the thorny issue of whether an employer violates the ACA non-discrimination rules if it offers the same coverage to all employees and rank and file employees choose to obtain coverage elsewhere, such as through a government sponsored health insurance exchange. Those regulations are now expected to be issued by the IRS sometime during 2016.

Employers with either self-insured or fully insured plans should avoid taking action that is likely to violate the current rules or the expected ACA regulations. Such inadvisable conduct would include:

  • Offering executives free, subsidized or enhanced health coverage
  • Providing health coverage only to management employees (that also is likely to be a problem under the ACA’s “employer mandate”)
  • Providing benefits to dependents of highly paid executives that are not available on equivalent terms to dependents of other covered employees
  • Offering continued group health coverage (other than as required by COBRA) to departing executives as part of a severance package. This practice not only violates the ACA non-discrimination rules that the IRS is likely to finalize but also ignores the terms of the applicable group health insurance contract, which typically extend coverage only to employees who satisfy an active employment requirement.

Recommendations

At this point, we cannot count on any protection from a grandfather provision in the forthcoming ACA regulations. Until we know more about those regulations, employers should minimize their exposure by not entering into any of the arrangements outlined above. See your benefits professional with questions about the new rules and how they may apply to your group health plan.

About the Author

Andrew S. Williams has practiced in the employee benefits and ERISA arena since ERISA was passed in 1974. He has been recognized by his peers through a survey conducted by Leading Lawyers Network as among the top 5 percent of Illinois lawyers in Small, Closely and Privately Held Business Law and Employee Benefit Law. He maintains a website, Benefits Law Group of Chicago with additional updates, commentary and analysis on benefits and employment topics.

Disclaimer: The above material is intended for general information purposes and should not be relied on or construed as professional advice. Under the applicable Illinois Rules of Professional Conduct, the contents of this e-mail may be considered to be attorney advertising. The transmission of this information is not intended to create, and receipt of it does not create a lawyer-client relationship.

Welfare Benefit Plans: More than just the Affordable Care Act

iceberg NOAA

Many employers sponsoring welfare benefit plans are understandably now totally focused on what they can see in front of them. Namely, the Affordable Care Act.

But lurking just below the surface is ERISA and a host of other laws through which employers have to navigate.

Let’s start with ERISA. Most welfare benefit plans are subject to Title I of ERISA. And as an ERISA plan, the Department of Labor’s Employee Benefits Security Administration (“EBSA”)  has primary jurisdiction over welfare benefit plans but not exclusively as you’ll see later.

ERISA Requirements

But in pure ERISA terms, this means that:

  • There must be a governing plan document(s) which complies with ERISA.
  • Participants must be provided with a Summary Plan Description (“SPD”). Keep in mind that an insurance contract is by itself neither a plan document nor SPD. (Note to Self: Write a blog post on how a “Wrap Plan” can be used to meet SPD and Form 5500 reporting requirements).
  • There must be a Named Fiduciary, the individual or entity named in the plan document who has the authority and responsibility to control and manage the operation of the plan. Does EBSA have the same concerns about the timely deposit of employee premiums as they do about 401(k) contributions? Darn right.
  • The plan must provide a reasonable claims and appeals procedure. The purpose of which is to ensure “full and fair review” to participants whose claims for benefits have been denied. (Another Note to Self: Write a blog post about the Department of Labor’s recent proposed amendments to the claims procedure for plans providing disability benefits.
  • Every fiduciary and every person who handles funds or other property of such a plan must be bonded to protect against fraud and dishonesty unless the plan is funded solely by general assets of the plan sponsor. For example, using a 501(c)(9) trust as the funding vehicle through which contributions are made and benefits paid.

Mandated Benefits

ERISA generally allows the plan sponsor to decide whether to offer a plan and allows flexibility in the plan’s benefit design. But if an employer does decide to sponsor a plan, there are mandated benefits. Here is the  list of those mandated benefits complete with initials and acronyms.

  • Consolidated Omnibus Budget Reconciliation Act (COBRA) which gives workers and their families who lose their health benefits the right to choose to continue group health benefits provided by their group health plan for limited periods of time under certain circumstances such as voluntary or involuntary job loss, reduction in the hours worked, transition between jobs, death, divorce, and other life events. COBRA generally requires that group health plans sponsored by employers with 20 or more employees in the prior year.
  • Health Insurance Portability and Accountability Act (HIPAA) which 1) provides for continuation coverage for workers and their families when they change or lose their jobs; 2) mandates industry-wide standards for health care information on electronic billing and other processes; and 3) requires the protection and confidential handling of protected health information.
  • Mental Health Parity Act (MHPA) which generally prevents group health plans and health insurance issuers that provide mental health or substance use disorder (MH/SUD) benefits from imposing less favorable benefit limitations on those benefits than on medical/surgical benefits.
  • Newborns’ and Mothers’ Health Protection Act (Newborns’ Act) which requires plans that offer maternity coverage to pay for at least a 48-hour hospital stay following childbirth (96-hour stay in the case of a cesarean section).
  • Women’s Health and Cancer Rights Act (WHCRA) which provides protections for individuals who elect breast reconstruction after a mastectomy. Under WHCRA, group health plans offering mastectomy coverage must provide coverage for certain services relating to the mastectomy, in a manner determined in consultation with the attending physician and the patient.
  • Genetic Information Nondiscrimination Act (GINA) which protects individuals from genetic discrimination in health insurance and employment. Genetic discrimination is the misuse of genetic information.
  • Mental Health Parity and Addiction Equity Act (MHPAEA) which generally prevents group health plans and health insurance issuers that provide mental health or substance use disorder (MH/SUD) benefits from imposing less favorable benefit limitations on those benefits than on medical/surgical benefits.
  • Children’s Health Insurance Program Reauthorization Act (CHIPRA) under which group health plans and group health insurance issuers must offer new special enrollment opportunities.
  • Michelle’s Law which requires employer-provided health plans to continue coverage for an employee’s dependent child who is a college student when they take a “certified medically necessary leave of absence.” The extension of eligibility is to protect group health coverage of a sick or injured dependent child up to one year.

Additional Jurisdiction

As mentioned above. the DOL is not the only ones with jurisdiction over welfare benefit plans. The others include:

  • Department of Treasury: Internal Revenue Code
  • Department of Health and Human Services: Public Health Service Act
  • State Insurance Commissions: State insurance laws
  • Participants and Beneficiaries: Private litigation

The Takeaway

What’s the takeaway from this lengthy explanation? Simply this. The DOL has an active and extensive enforcement program for welfare benefit plan ERISA compliance. Employers should be ready. Details to follow.

Image: An iceberg captured on camera during a 30-day mission in 2012 to map areas of the Arctic aboard the  National Oceanic and Atmospheric Administration (NOAA) Ship Fairweather. (Original source: National Ocean Service Image Gallery)

This article expands upon one previously published in Employee Benefit Advisor for which the author is on the Editorial Advisory Board.

Progress Through Business launches social enterprise platform: Progress Daily

cropped-PTBLogoThere’s ESPN for sports. There’s CNN for news. Now there’s Progress Daily, an online platform for social enterprise developments.

That may seem overly ambitious, but the idea of business leadership tackling social problems was the reason I recently joined the Advisory Board of Progress Through Business (logo shown here), the non-profit 501(c)(3) organization that created Progress Daily.

Progress – as we call the organization – has come a long way since it was founded in 1995 by a small group of dedicated individuals with the mission of

Sustaining and enhancing under-served communities through initiatives, research, networking and strategic business partnerships to empower people and improve the social and economic conditions of the communities we serve.

Progress has helped start dozens of small businesses in low-income communities in the United States and India, grown a successful financial literacy organization, assisted thousands of low-income people with free tax preparation services and promoted initiatives across the world designed to raise the socio-economic status of the poor.

Progress Daily, our  newest initiative, lets readers take immediate action in support of causes and projects they find meaningful by the “Act Now” button, which is on many articles. Clicking on that button provides information about how to get involved. Why don’t you join in.

ERISA Employee Benefit Claims: Legislative Goals vs. Litigation Reality

mock-courtroom-580

Every Summary Plan Description has to include one, a claims procedure that set forth the requirements for processing benefit claims and appeals.

The underlying ERISA statute was written in a paternalistic manner with explicit provisions intended to offer protection to “the interests of participants in employee benefit plans and their beneficiaries…by providing for appropriate remedies, sanctions, and ready access to the Federal courts.”

The Litigation Reality

However, despite ERISA’s lofty goals, the last 40-plus years of litigation have shown just the opposite as the courts have strongly favored employee benefit plan administrators and their insurers in disputes over entitlement to benefits claimed. Here’s our ways how that happened.

First, the courts have systematically stripped ERISA benefits claimants of rights they would otherwise retain in ordinary civil litigation such as the right to a trial by jury and the right to conduct depositions and to utilize other typical pre-trial investigative procedures.

Second, the courts have also barred claimants from collecting damages – both compensatory and punitive – regardless of the consequences of the benefit denial and irrespective of culpability.

Third, time limitations within which to bring suit are often shortened from what would ordinarily be the case if state statutes of limitations applied. And without any regulatory oversight, plans have been drafted to limit benefits and expand the circumstances under which benefit eligibility is curtailed or which would allow recoupment of benefits previously paid.

The fourth and final factor has been the one most damaging to benefit claimants: the inclusion of terms that trigger a standard of court review that almost always leads to a judicial outcome that upholds the denial of benefits.

The Firestone Supreme Court Decision and Judicial Review

In 1989, the Supreme Court decided Firestone Tire & Rubber Co. v. Bruch. Ostensibly a ruling in favor of benefit plan participants, Firestone was actually a huge victory for plan administrators and insurers that provide benefits such as health, life and disability insurance.

The Supreme Court held that a standard of judicial review that would afford no deference to either party in a dispute over entitlement to benefits was the norm and would be the default method of reviewing benefit claims.

However, the Court granted benefit plans carte blanche to incorporate plan terms that would reserve “discretion” to decide claims or even to interpret plan terms in a self-serving manner.

The consequence of the inclusion of such provisions in an employee plan means that a court hearing a benefit dispute case must defer to the benefit determination and uphold it, even if the decision was erroneous, so long as it was reasonable.

That standard of judicial review, known as the “arbitrary and capricious” or “abuse of discretion” standard has governed most litigation of employee benefit disputes until recently.

The change that has occurred has to do with insured plans. While the ERISA law normally trumps or preempts the application of state law to a dispute over benefits, a significant exception is that laws regulating insurance are saved from preemption.

In 2004, the National Association of Insurance Commissioners decided that consumers needed added protection against arbitrary claim denials and issued a model law that prohibited the inclusion of discretion-granting clauses in insurance policies, including policies that were subject to ERISA.

Since then, approximately half the states have issued statutes, regulations, or rulings that have incorporated some form of the model law. Recently, the Illinois Insurance Regulation prohibiting discretionary clauses adopted in 2005 was upheld following a court challenge.

The Fontaine Case as a Victory for Claimants

In Fontaine v. Metropolitan Life Insurance Company, a case brought by our firm, the U.S. Court of Appeals for the Seventh Federal Circuit rejected several arguments raised by MetLife, including an assertion that if the discretionary language is incorporated in a plan document other than an insurance policy or certificate, it would not be subject to the regulation.

The court cited a prior Supreme Court ruling that found such efforts to evade state insurance laws were ineffective so long as the plan was insured. Fontaine will undoubtedly even the playing field in future employee benefits litigation by removing the thumb on the scale in favor of plan administrators that a discretionary clause permits.

But not completely. The Fontaine ruling is applicable only to insured plans; and self-funded benefit plans and most retirement plans are exempt from that ruling.

About the Author

Mark D. DeBofsky is an attorney and the Principal of DeBofsky & Associates, P.C. His firm represents individuals in Chicago and nationwide in claims and litigation involving disability benefits, life and health insurance, pension or retirement, and long-term care insurance. Many of his cases have resulted in precedent setting decisions issued by the United States Court of Appeals for the Third, Seventh, Eighth, and Ninth Circuits. He is also an adjunct professor of law at John Marshall Law School, and a prolific author and speaker.

Disclaimer: The above material is intended for general information purposes and should not be relied on or construed as professional advice. Under the applicable Illinois Rules of Professional Conduct, the contents of this article may be considered to be attorney advertising. The transmission of this information is not intended to create, and receipt of it does not create a lawyer-client relationship.

Image courtesy of AmicusLink who provides litigation support and communication consulting to the legal profession.

The Affordable Care Act: What You Need to Do Now

To Do NotebookOK, so you sponsor an insured group health plan and employ at least 50 full-time employees including full-time equivalents, or “FTEs” (that’s ACA jargon for 30 hours of work each week performed by more than one employee so that, for example, two employees working 15 hours per week equals one “FTE”).

You have made this determination based on your average employee count during 2014 (if you’re still working on this calculation, bear in mind that you can use any consecutive six-month period during 2014, but that’s for 2014 only). So, you’ve nailed down that number – what is the next step?

You’ll need to file data with the IRS showing participation (or non-participation) of your employees in your insured group health plan on a month-by-month basis during 2015 – and notify your employees of their information. This reporting is required even if you do not provide any group health coverage for your employees. Self-insured plans, even those covering fewer than 50 full-time employees plus FTEs, have a separate filing requirement.

Take a look at IRS Form 1094-C for an idea of what is required and remember that the information returns must be provided to employees by February 1, 2016 (the IRS filing for hard copy filers is due February 29, 2016).

Some of the required information may be compiled by your payroll service. But your payroll service probably will not track the following:

  • The date when coverage (as opposed to premium payments) begins and ends
  • Evidence of your offer of group health coverage to eligible employees
  • Any employee waivers of coverage
  • The out-of-pocket employee cost of the lowest cost employee-only coverage

Can your plan play catch up and handle all this later on? Maybe – but it’s going to be your responsibility to come up with required historic data and undertake a “good faith” effort to comply in order to avoid IRS fines for submitting incomplete or inaccurate data.

Is there any good news? Well, if you have fewer than 100 full-time employees (including FTEs), you may be exempt from the penalties for failing to provide ACA-compliant coverage for 2015 (there are a few other conditions that apply). Those are the $2,000-$3,000 annual per employee non-deductible penalties – and they definitely will apply after 2015.

Today’s Takeaway: Don’t procrastinate in understanding and meeting your  compliance requirements.

About the Author

Andrew S. Williams has practiced in the employee benefits and ERISA arena since ERISA was passed in 1974. He has been recognized by his peers through a survey conducted by Leading Lawyers Network as among the top 5 percent of Illinois lawyers in Small, Closely and Privately Held Business Law and Employee Benefit Law. He maintains a website, Benefits Law Group of Chicago with additional updates, commentary and analysis on benefits and employment topics.

Disclaimer: The above material is intended for general information purposes and should not be relied on or construed as professional advice. Under the applicable Illinois Rules of Professional Conduct, the contents of this e-mail may be considered to be attorney advertising. The transmission of this information is not intended to create, and receipt of it does not create a lawyer-client relationship.

IRS Announces 2016 Retirement Plan Limits: Most Remain Unchanged

2016-1The IRS recently announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2016. For the third time in six years, most of the limitations were unchanged because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustment:

  • 401k Elective Deferrals: $18,000
  • Annual Defined Contribution Limit: $53,000
  • Annual Compensation Limit: $265,000
  • Catch-Up Contribution Limit: $6,000
  • Highly Compensated Employees: $120,000
  • Annual Defined Benefit Limit: $210,000
  • 403(b)/457 Elective Deferrals: $18,000
  • SIMPLE Employee Deferrals: $12,500
  • SIMPLE Catch-Up Deferral: $3,000
  • SEP Minimum Compensation: $600
  • SEP Annual Compensation Limit: $265,000
  • Social Security Wage Base: $118,500

However, other limitations will change because the increase in the index did meet the statutory thresholds. All of which are indicated on the 2016 Plan Limits Chart.

Sorry, MacGyverisms can’t solve 403(b) problems, but there are ways to fix them

MG1Back in the 1980s, I thought MacGyver could fix anything. Using everyday items, he invented ways to fix critical problems.

These inventions became synonymous with the character and became known as “MacGyverisms”. Just a little more than halfway through Season 1, for example, he had

  • Disarmed a missile with a paper clip
  • Raised a fallen I-beam with knotted fire hose filled with water
  • Used a knife on a string to hook a towel
  • Used a map and duct tape to patch hole in a hot air balloon
  • Tied a hand held electric mixer in front of a cart wheel with rubber band around the wheel and a mixing bar to “motorize” the cart

Unfortunately, some three decades later there are no MacGyverisms to fix 403(b) plan problems. But the IRS has something even better. It’s called EPCRS which stands for the Employee Plans Compliance Resolution System, which is a correction program to fix mistakes and avoid the consequences of plan disqualification. EPCRS has  three components:

  1. Self-Correction Program (SCP). The plan sponsor can correct certain plan failures with without contacting the IRS or paying any fee.
  2. Voluntary Correction Program (VCP). The plan sponsor can at any time before audit pay a fee and receive IRS approval for correction of plan failures.
  3. Audit Closing Agreement Program (Audit CAP). The plan sponsor pays a sanction and corrects a plan failure while the plan is under audit.

The takeaway from all of this is simply:

Don’t wait to get that letter from the IRS that they’ll be auditing your 403(b) plan. Take advantage of the IRS’ 403(b) Fix-It Guide which describes common mistakes, how to find them, how to fix them, and how to avoid them.

Internal controls, that’s the ticket.

Pop Culture Note: The legend of Angus MacGyver lives on in the form of streaming videos, DVDs, books, music, fan gear, and Mac-Gear including, yes, duct tape.

Who pays 401(k) fees? Us or them?

us or them2

 

 

 

 

That’s the question employers ask regarding who pays 401(k) fees. The “us” being, of course, the employer, and the “them” being the plan participants.

The number of “thems” has been increasing. According to Deloitte’s 2015 Annual Defined Contribution Benchmarking Survey, the number of employers completely covering the cost of fees declined again in 2015 to 36% compared to 40% in 2013-14 and 50% in 2012.

Whether you are an employer whose employees are already paying some or all of the plan costs, or are considering doing so, here are some important considerations to keep in mind.

The ERISA Basics

Plan assets can be used for two purposes: to pay benefits and pay the “reasonable” expenses of plan administration.

The decision to pay fees from the plan is a fiduciary decision subject to ERISA’s fiduciary rules. That is, the plan must be established and maintained by the employer for the “exclusive benefit” of the employees and beneficiaries.

That means that the plan cannot pay for expenses that are considered to be the responsibility of the employer. These are called “settlor” expenses and may include:

  • Legal or consulting services in connection with the formation of the plan
  • Plan design studies and cost projections to determine the financial impact of a plan change
  • Legal and consulting expenses incurred in connection with the decision to terminate a plan

On the other hand, expenses that relate to the fiduciary’s administration of the plan can be paid out of plan assets. These are called operational expenses and may include:

  • Drafting required plan amendments to maintain the tax-qualified status of the plan, e.g., Pension Protection Act restatement
  • Discrimination testing
  • Implementing a plan termination

It’s more complicated than this, of course. The Department of Labor (“DOL”) has published Guidance on Settlor vs. Plan Expenses that provides a set of six hypothetical fact patterns in which various plan expense issues are both presented and addressed.

Allocation of Expenses

What about those plan expenses that are not being charged to a specific participant’s account such as transaction fees? Those operational fees can be allocated to all plan participants on either a “pro rata”, done proportionately based on account balances; or “per capita”, each participant pays the same amount.

Here’s a example of how a fee of $1,000 would be allocated either pro rata or per capita:

fee chart4

 

 

 

As you can see the participant with the largest account balance would pay the most fees under the pro rata method and the participant with the smallest account balance would pay the same fee as the others under the per capita method.

Which method is best? Once again, it’s based on fact and circumstances as to what is reasonable. The DOL has stated that it could be reasonable to treat terminated employees differently than active employees when it comes to the allocation of plan expenses.

Using Forfeitures to Pay Expenses

Forfeitures, those amounts arising from participants terminating whose accounts are not fully vested, can be used to pay expenses or reduce employer contributions. In the case of the latter, however, the type of employer contribution should be taken into account. For example, forfeitures from matching contribution should be used to reduce  matching contributions and forfeitures from employer contributions should be used to reduce profit sharing contributions.

Proper Documentation

As with all things ERISA, there has to be proper documentation. Best practices would be to specifically state in the plan document that the plan may pay reasonable operating expenses, reflect that in the Summary Plan Description or Material Modification thereof, and have a written Expense Policy.

As you know, ERISA compliance matters are based on individual facts and circumstance, and especially when paying expenses from plan assets. So use caution when doing so including discussing it with your legal advisor.

Tempus fugit: October 1 deadline to set up new 401(k) plan fast approaching

tempus fuget uk 1As the sign under the clock pictured above says, tempus fugit, or ‘time flies’ translated from the Latin.

This being The Retirement Plan Blog there’s an ERISA connection, of course.  Much of  ERISA involves meeting deadlines. This one is about establishing a new retirement plan.

Before 401(k) plans were invented, an employer with a calendar year end could wait until year end to set up a new plan. The only requirements were a signed plan document and an initial contribution to set up a trust account. The plan could be effective retroactive to January 1, and a tax deduction could be taken as long as the contribution was made before the tax return was due.

Except if that new plan was a Safe Harbor plan in which case, it had to be established by October 1. (The same 3-month deadline also applies to adding a Safe Harbor provision to an existing profit sharing plan).

Meeting the deadline allows owners and other Highly Compensated Employees (HCEs) to maximize their contributions regardless of how much the Non-HCEs contribute. Under 2015 tax rules, the maximum is $18,000 plus an additional $6,000 for those over age 50, for a total of $24,000.

In return for which, the Safe Harbor rules require that an employer make one of two types of contributions:

  • 3% of compensation for all eligible employees, or
  • Matching contribution of 100% of the first 3% of an employee’s contribution, and 50% of the next 2% of an employee’s contribution. Thus, if an employee contributes the full 5%, it will cost the employer 4%.

These Safe Harbor contributions can be allocated to owners and HCEs, as well.

One more possible tax benefit: an employer adopting a new 401(k) plan may qualify for the retirement plan tax credit as discussed in our FAQs.

October 1 is fast approaching.

Image, via Flickr, The Bear Tavern, Bearwood, Birmingham City, England, Tim Ellis

 

 

 

 

 

 

 

LexBlog