As noted in our prior blog post, the Consolidated Appropriations Act, 2021 (the Act) includes several types of relief for flexible spending accounts (FSAs), impacting both health FSAs and dependent care FSAs. The FSA relief provisions in the Act address a concern raised frequently by employees and employers in 2020 — must employees forfeit their remaining 2020 FSA funds based on the rules that normally apply to FSAs under the Internal Revenue Code (the Code), given that, due to the COVID-19 pandemic, many employees’ actual 2020 health and dependent care expenses were significantly less than employees anticipated when they elected FSA coverage for 2020?
On Friday January 8, the Pension Benefit Guaranty Corporation (PBGC) published a final rule that provides multiemployer pension plans with additional methods to help calculate employer withdrawal liability. The rule includes relatively simplified approaches to calculating withdrawal liability that multiemployer plans may choose to use. The rule comes into effect on Friday, January 7, 2022, 30 days after its publication in the Federal Register. The final rule reflects changes based on several comments made to the proposed rule that was published on February 6, 2019.
The Employee Retirement Income Security Act (ERISA) charges the PBGC with oversight of multiemployer pension plans, including employer withdrawal liability. Multiemployer plans and their actuaries do not have free reign to calculate withdrawal liability as they see fit. Rather, they must follow the provisions and approved methods set forth in ERISA and as published by the PBGC. The new rule stems from amendments to the ERISA funding rules implemented by Congress in 2006 under the Pension Protection Act (“PPA”) and in 2014 under the Multiemployer Pension Reform Act (“MPRA”). The funding rules permitted financially distressed multiemployer plans to reduce adjustable benefits, suspend a portion of nonforfeitable benefits, and impose contribution increases and surcharges for underfunded plans. These funding rules clarified whether plans could take these changes into account when determining withdrawal liability and instructed the PBGC to draft simplified methods to do so.
The Consolidated Appropriations Act of 2021 (Act), enacted on December 27, 2020, contains a number of provisions that may impact the design and administration of employer-sponsored group health plans and flexible spending account (FSA) benefits. Below, we summarize the primary provisions. In the days and weeks ahead, Spotlight on Benefits will provide a series of blog posts that will address the provisions in more detail. We encourage health and FSA plan sponsors to review the blog posts and consider the preparations needed to comply with applicable changes in the law, including coordinating with insurers and third-party administrators, the various effective dates, and whether plan sponsors will have to amend their health plans or FSA plans to implement any applicable changes.
Pubic companies that sponsor nonqualified deferred compensation plans with grandfathered benefits will want to be aware of helpful payment guidance in the Internal Revenue Code Section 162(m) final regulations. The final regulations, which were published in the Federal Register on December 30, 2020, implement amendments made to Section 162(m) by the Tax Cuts and Jobs Act (TCJA). The regulations adopt the Section 162(m) proposed regulations issued on December 20, 2019, with certain modifications.
On December 22, 2020, the Internal Revenue Service (“IRS”) issued an advance version of Notice 2021-03 (the “Extension Notice”) to extend the temporary relief from the “physical presence” requirement for participant elections under retirement plans that was previously granted in Notice 2020-42 (the “Relief Notice”).
The U.S. Supreme Court handed down a decision on Thursday of last week that will impact state-level regulation of pharmacy benefit managers (PBMs) by holding that an Arkansas law regulating PBMs was not preempted by the Employee Retirement Income Security Act (ERISA). The decision capped off a busy week in litigation for PBMs as on Monday the Second Circuit held that a business transaction between a PBM and an insurer was not a fiduciary act under ERISA. Although the cases involve distinct issues, they provide some clarity for PBMs on the interplay between business decisions and litigation risks, and some expectation for future regulation at the state-level.
Public companies that sponsor nonqualified deferred compensation plans that require Internal Revenue Code Section 162(m) payment delays may want to consider whether removing the payment delay provision from a plan is warranted in light of the 2017 Tax Cuts and Jobs Act (TCJA) changes to the definition of a “covered employee.” The December 31, 2020 deadline is approaching to amend plans to remove Section 162(m) payment delays without the change being considered an impermissible acceleration of payment under Internal Revenue Code Section 409A.
Section 162(m) imposes a $1 million deduction limit on remuneration paid to a “covered employee.” The TCJA changed the Section 162(m) rules so that an individual’s status as a “covered employee” will continue after he or she terminates from employment with a public company. Prior to the TCJA change, an individual ceased to be a covered employee for purposes of Section 162(m) when he or she terminated employment. This change to the “covered employee” definition applies to tax years beginning after December 31, 2016. As a result, covered employees identified for a public company’s 2017 tax year (in accordance with the pre-TCJA rules for identifying covered employees) continue to be covered employees for the company’s 2018 tax year and thereafter.
On November 16, 2020, the Internal Revenue Service (IRS) issued Notice 2020-82 (the Notice), to further extend the deadline for required minimum contributions for single-employer defined benefit pension plans that would otherwise be due during the 2020 calendar year, from January 1, 2021, to January 4, 2021. On the same day, the PBGC issued complementary guidance, in Technical Update 20-2 (the PBGC Update), to reflect the January 4, 2021, deadline established by the IRS in the Notice when calculating variable-rate premiums.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) previously established a January 1, 2021, deadline for certain required minimum contributions that would otherwise be due during the 2020 calendar year. This pension funding holiday applies for contributions to single-employer defined benefit pension plans required under Section 430(j) of the Internal Revenue Code (the Code). Under Code Section 430(j), single-employer defined benefit pension plan sponsors are required to make certain minimum contributions that are designed to keep the plan sufficiently funded. For a given contribution to apply for a plan year, generally the contribution must be made no later than 8-1/2 months after the plan year ends. However, when a plan has a funding shortfall for the prior plan year, the plan sponsor is required to pay four quarterly installments toward the required minimum contribution for the plan year (due on April 15, July 15, and October 15 of the plan year, and January 15 of the following year, for a calendar year plan). The CARES Act gave plan sponsors additional time to make these required minimum contributions, by providing a January 1, 2021, due date for amounts otherwise due during 2021.
In the Notice, the IRS recognized the legislative intent to defer a plan sponsor’s payment obligation to calendar year 2021. The IRS acknowledged that this deferment to 2021 would not be possible with a January 1, 2021, deadline, given that January 1, 2021, is a bank holiday, and financial institutions cannot transfer funds on the January 1, 2021, due date. As a result, the Notice extends the deadline to January 4, 2021, the next business day after January 1, 2021. For amounts that are contributed on January 4, 2021, and treated as timely made pursuant to the Notice, the amount of the required minimum contribution that is considered satisfied by the contribution is determined by computing the applicable interest adjustment based on the actual contribution date.
The Notice also extends the deadline for a plan sponsor of a single-employer defined benefit pension plan to make certain elections related to the plan’s prefunding balance. These extended deadlines relate to (a) an election to add contributions made in excess of the minimum required contribution for a plan year to the plan’s refunding balance (i.e., a balance that may be used at the plan sponsor’s election to offset minimum required contributions for a later plan year) and (b) an election to use an existing prefunding balance or funding standard carryover balance to offset a required minimum contribution for a plan year. The deadline for those elections is now also January 4, 2021, for a plan year for which the extended due date for required minimum contributions applies. Note, however, that the Notice does not impact the treatment of certain missed quarterly installment contributions otherwise due on January 1, 2021, pursuant to the CARES Act. Further, the extended deadline (previously January 1, 2021, and now January 4, 2021) does not apply for a multiemployer plan, a money purchase pension plan, a “cooperate and small employer charity” (CSEC) plan, or a fully insured plan as described in Code Section 412(e)(3).
Prior to this Notice, the IRS had issued guidance on the CARES Act funding rules for single-employer defined benefit pension plans in Notice 2020-61. That notice addressed the payment of annual premiums to the Pension Benefit Guaranty Corporation (PBGC) (as well as interest adjustments for minimum required contributions, the actuarial certification of a plan’s adjusted funding target attainment percentage (AFTAP), and Form 5500 reporting for contributions made with respect to the 2019 plan year that were made after the filing deadline for the 2019 plan year).
The PBGC Update referenced above addresses the IRS guidance and its impact on the PBGC premium filings by providing that, for premium filings due on or after March 1, 2020, and before January 1, 2021, the date by which prior-year contributions must be received by the plan to be included in plan assets used to determine the variable-rate premium is extended to January 4, 2021. If such a contribution is made by January 4, 2021, a plan sponsor may amend the premium filing to revise the originally reported asset value and the applicable variable-rate premium. Note that the PBGC relief does not impact the premium due dates, and it does not allow a plan sponsor to include a contribution that has not yet been made in the premium filing.
Contact your Faegre Drinker attorney for more information on the extended deadline for required minimum contributions, the variable-rate premium contribution calculation and deadlines, and other aspects of the CARES Act relief for single-employer defined benefit pension plans.
In October 2020, the IRS issued two pieces of guidance addressing (1) the tax withholding and reporting of distributions from qualified retirement plans to state unclaimed property funds, and (2) the ability of taxpayers to roll over funds that were previously escheated to a state unclaimed property fund.
In July 2020, the Government Accountability Office (GAO) prepared a report for the Ranking Member of the Senate Committee on Health, Education, Labor and Pensions about Qualified Domestic Relations Orders (QDROs). QDROs are court-issued orders that allow a divorced spouse (or in rare cases a child) to receive a portion of a participant’s qualified retirement plan benefit. A QDRO is one of the few ways in which a participant’s qualified retirement benefit can be assigned or alienated.