On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act or the CARES Act was enacted into law. The CARES Act is a $2 trillion stimulus package designed to help bolster the economy overall by providing aid to workers and businesses impacted by COVID-19 and to provide further support to the country’s health systems. Several provisions of the CARES Act impact compensation and benefits provided by employers to employees. See our post on Mayer Brown’s COVID-19 blog for a high level summary of some of the key provisions of the CARES Act that may impact employers.
In Notice 2020-18 (PDF), the US Treasury Department and the Internal Revenue Service (IRS) announced special Federal income tax return filing and payment relief in response to the ongoing Coronavirus Disease 2019 (COVID-19) emergency. The IRS has now published Frequently Asked Questions providing additional information on the relief, some of which is relevant to employer-sponsored retirement plans, Individual Retirement Accounts (IRAs) and Health Savings Accounts (HSAs). See our post on Mayer Brown’s COVID-19 blog for details on the guidance provided by the IRS.
US employers are considering many alternatives to address the significant economic hardships caused by the COVID-19 pandemic. One such alternative is putting one or more groups of employees on furlough—a low paid or unpaid leave of absence. However, now more than ever, employers must carefully address health plan coverage during a furlough. See our Legal Update for issues that US employers will need to consider when considering a furlough.
The Families First Coronavirus Response Act, signed into law on March 18, 2020, is a significant piece of federal legislation addressing the 2019 Novel Coronavirus (COVID-19) pandemic. Among its many provisions is a broad requirement that group health plans and health insurance issuers provide coverage for COVID-19 testing without any cost sharing, prior authorization, or other medical management requirements. The mandate applies to both the individual and group markets, and to all grandfathered health plans. Notably, the requirement applies only to testing – not treatment – but includes telemedicine and in-person visits. It also includes items and services furnished to an individual during health care visits to the extent the items or services relate to evaluating the need for, furnishing or administering COVID-19 testing.
The new requirement took effect immediately. Note that, under IRS Notice 2020-15, compliance with this new requirement (that is, coverage of COVID-19 testing) will not cause a high deductible health plan to fail to qualify as a high deductible health plan. For more information on the impact of Notice 2020-15 on high deductible health plans, see our prior blog entry.
For an update on the Families First Coronavirus Response Act, which requires coverage of testing without cost sharing effective March 18, 2020, see our blog entry.
In an effort to remove barriers to testing for and treatment of the 2019 Novel Coronavirus (COVID-19), the Internal Revenue Service today issued Notice 2020-15. The Notice permits qualifying high deductible health plans (HDHPs) to provide testing and treatment for COVID-19 prior to the application of any deductible, or with a lower deductible than would otherwise apply under the plan, without jeopardizing the status of the HDHP under the Code. The IRS confirmed that individuals with HDHPs providing this coverage may continue making tax-favored contributions to their health savings accounts. The guidance will apply indefinitely, until future guidance is issued by the IRS. The Notice also included a reminder that vaccinations continue to be considered preventive care that can be paid for by a HDHP (and, as a result, may be covered prior to applying a deductible).
The IRS Notice follows similar moves by many major U.S. health insurers over the past week. Actions announced by insurers include waivers of cost-sharing and deductibles for testing, waivers of pre-approval requirements, expanded access to telemedicine and nurse hotlines, greater flexibility regarding medication refill limits, and increased mental health support.
Background: On August 20, 2019, a Ninth Circuit panel in Dorman v. Schwab, No. 18-15281, reversed the district court’s denial of Schwab’s motion
to compel arbitration and held that Schwab could force the plaintiff to individually arbitrate his fiduciary duty claims challenging the administration of Schwab’s 401(k) plan. In 2017, plaintiff Michael Dorman filed a putative class action in federal court alleging that Schwab had breached its fiduciary duties under ERISA by adding allegedly poorly performing in-house investment funds to its 401(k) plan investment lineup. In 2015 – two years before the lawsuit was filed – Schwab had amended its 401(k) plan document to include an arbitration clause stating that “[a]ny claim, dispute, or breach arising out of or in any way related to the Plan” had to be resolved by individual, rather than class or collective, arbitration. Based on this 2015 plan amendment, Schwab filed a motion in the district court to compel individual arbitration. The district court denied the motion because it concluded that the plan’s arbitration provision was unenforceable with respect to the plaintiff’s fiduciary duty claims.
The Affordable Care Act contains a provision–the so-called “Cadillac tax”–providing for a 40% excise tax on high cost employer-sponsored health coverage. The bar for “high cost” is fairly low, and the Cadillac tax is ultimately expected to apply to a significant number of employer-sponsored health plans.
Since the passage of the Affordable Care Act, many employers and insurers (who would be responsible for paying the tax) have actively opposed the implementation of the Cadillac tax provisions, with moderate success. The Cadillac tax was originally slated to take effect in 2018, but its implementation has been delayed twice–most recently until 2022.
Each new year brings new limitations, and the Internal Revenue Service has released its annual cost-of-living adjustments applicable to employee benefit plans. A year-to-year comparison of limitations applicable to plan sponsors can be found here: 2019 Annual Limitations Chart.
Reflecting a slight increase in inflation over the past year, several benefit plan limitations will increase for 2019. The IRS continued its trend from the prior year by increasing the elective deferral limitation for defined contribution plans from $18,500 to $19,000. Additionally, the limit on compensation taken into account under qualified plans will rise from $275,000 to $280,000.
Health and welfare plan participants will also benefit from various increases. The amounts participants are allowed to contribute to health care flexible spending accounts and health savings accounts will increase, while dependent care assistance will remain stagnant for another year. Small employers taking advantage of the opportunity to provide Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) to eligible employees in 2019 can provide increased reimbursements of up to $10,450, from $10,250, for family coverage. (QSEHRA maximums for self-only coverage will increase from $5,050 to $5,150.) Plan participants will also have the opportunity to increase their contributions for qualified transportation expenses from $260 to $265 per month.
The Social Security Tax wage base will increase significantly as compared to prior years, from $128,400 to $132,900. However, FICA tax and Social Security tax percentages will remain the same.
Long-awaited guidance on Section 162(m) of the Internal Revenue Code (the “Code”), has finally arrived. On August 21, 2018, the IRS issued Notice 2018-68, which provides guidance on certain changes made to Section 162(m) by the Tax Cuts and Jobs Act (the “Act”). The guidance is limited to (a) the identification of covered employees and (b) the so-called “Grandfather Rule.” The Notice does not address all of the issues raised by the Act’s changes to Section 162(m) and it makes clear that the Grandfather Rule will be narrowly interpreted. The guidance is effective for tax years ending on or after September 10, 2018 and will be incorporated into future regulations. The material provisions of the guidance are summarized below.
In a case of first impression, a federal district court in the Southern District of Texas has ruled that a former parent company’s stock was not an “employer security” under section 407(d)(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). As a result, the ERISA exemption from the duty to diversify and the duty of prudence (to the extent the latter requires diversification) were not available where a plan held former parent company stock in a legacy single-stock fund. Although in this case plaintiff participants’ claims were ultimately dismissed, the decision should be on the radar of fiduciaries of plans holding significant amounts of former employer securities.
As background, in 2012, Phillips 66 Company, Inc. (“Phillips 66”) spun off from ConocoPhillips Corporation (“ConocoPhillips”) and sponsored a new defined contribution plan with an employee stock ownership plan (“ESOP”) component, as had ConocoPhillips. In addition to newly issued Phillips 66 stock, however, Phillips 66’s new plan also held more than 25% of its assets in a frozen ConocoPhillips stock fund that was transferred from the old plan in connection with the Phillips 66 spinoff.
When the value of ConocoPhillips stock held by the Phillips 66 plan dropped, participants sued the plan’s investment committee and its members, along with the plan’s financial administrator, alleging imprudence and failure to diversify plan assets in violation of ERISA. In reply, defendants argued that ConocoPhillips stock was not subject to the duty to diversify, as those shares were “employer securities” when issued; ConocoPhillips was previously the employer of the participants. Therefore, defendants argued, ConocoPhillips stock remained exempt from the duty to diversify despite Phillips 66’s spin-off from the ConocoPhillips controlled group.
The court rejected this aspect of defendants’ argument, holding that stock does not indefinitely retain its character as “employer securities” for purposes of ERISA’s diversification and prudence requirements. Ultimately ruling in favor of defendants, the court held that ERISA’s diversification and prudence requirements were not violated because the plan’s investment lineup overall was diversified, public information on the risks of ConocoPhillips stock was reflected in its market price, and because the claims about procedural imprudence lacked factual support in the complaint’s allegations. The Schweitzer court also emphasized that participants were free to shift their ConocoPhillips holdings to other investment options under the plan.