Employee Benefits & Executive Compensation Blog

The View from Proskauer on Developments in the World of Employee Benefits, Executive Compensation & ERISA Litigation

Digging into the New HRA Regulations, Part 2 – ERISA Implications

New regulations issued by the Departments of Labor, Treasury, and Health and Human Services have expanded the use of health reimbursement accounts (“HRAs”) by allowing reimbursements for individual market insurance premiums. As noted in the final regulations, Individual Coverage HRAs and Excepted Benefit HRAs are group health plans subject to ERISA. However, individual health insurance coverage purchased through an Individual Coverage HRA will not be deemed to be an ERISA-covered group health plan or part of a group health plan, provided that the safe harbor described below is satisfied. If the safe harbor is not satisfied, the individual policies could become subject to ERISA’s regulatory framework, which includes coverage continuation requirements under COBRA, fiduciary responsibility, and various reporting and disclosure requirements.

Accordingly, to clarify these issues, the final regulations include a safe harbor that excludes individual insurance coverage that is reimbursed by an HRA from being deemed to be part of an ERISA-covered group health plan. The safe harbor generally tracks criteria recognized under similar safe harbor rules for voluntary employee benefit plans (i.e., common employee-paid voluntary insurance for things such as critical illness or accidents). In order to qualify for the safe harbor for individual insurance coverage, all of the following conditions must be satisfied:

  1. The purchase of any individual health insurance coverage is completely voluntary for employees. An employee participating in an Individual Coverage HRA must be enrolled in individual insurance coverage. However, the fact that a plan sponsor requires an employee to purchase insurance coverage as a condition of participating in the Individual Coverage HRA does not make the purchase “involuntary” for the purpose of the safe harbor.
  2. The employer, employee organization, or other plan sponsor does not select or endorse any particular issuer or insurance coverage. Plan sponsors may provide general assistance to employees in shopping for health insurance coverage, but the assistance must be unbiased and cannot steer employees towards a particular health insurer or type of coverage. Although plan sponsors may accommodate requests from insurance brokers to speak with employees or distribute informational materials at worksites, plan sponsors must accommodate such requests on a uniform basis and without preference for brokers that represent particular firms or have relationships with certain health insurance carriers. Maintaining an online platform that displays information about all coverage options in a state is permitted—but in order to be eligible for the safe harbor, the platform must present the coverage options in a way that is “entirely neutral” and plan sponsors could not recommend or “star” insurance coverage options on the platform.
  3. Reimbursement for non-group health insurance premiums is limited solely to individual health insurance coverage. In order to comply with the safe harbor, only premiums for individual health insurance coverage as defined in DOL Reg. §2590.701-2 may be reimbursed; individual health insurance coverage that consists solely of excepted benefits does not satisfy the safe harbor. That said, the HRA may reimburse Medicare premiums for Medicare beneficiaries, as permitted under DOL Reg. § 2590.702-2, without falling outside the safe harbor. Reimbursement is defined broadly to include employee-initiated payments made through financial instruments such as pre-paid debit cards, as well as direct payments (individual or in the aggregate) made by the plan sponsor directly to the health insurance issuer. Employers cannot apply reimbursement procedures in a way that limits or endorses one insurer over another (for example, by making direct payments to certain health insurers and refusing to make direct payments to others). This would run afoul of the “endorsement” requirement discussed above.
  4. The employer, employee organization, or other plan sponsor receives no consideration in the form of cash or otherwise in connection with the employee’s selection or renewal of any individual health insurance coverage. The preamble to the final regulations emphasizes that plan sponsors may not receive consideration or “kick-backs” from any insurance issuer or affiliated person in connection with any employee’s purchase or renewal of individual insurance coverage that is reimbursed by the HRA. Accordingly, compensation from third parties (such as individual insurers) to cover the cost of operating the HRA would be prohibited payments and not permissible under the safe harbor. This requirement does not affect the rules that apply to determining whether ERISA-covered plans (including HRAs) may reimburse plan sponsors for certain expenses associated with plan administration—so, to the extent that plan assets are used to reimburse a plan sponsor for administration expenses, such reimbursements would need to be permissible under ERISA section 408(b)(2) and DOL Reg. § 2550.408b-2(e).
  5. Each plan participant is notified annually that the individual health insurance coverage is not subject to ERISA. For Individual Coverage HRAs, the annual notice must meet the notice requirements set forth in the Individual Coverage HRA integration rules at DOL Reg. § 2590.702-2(c)(6). For qualified small business health reimbursement arrangements or HRAs that are not subject to those notice requirements, the regulations provide sample notice language that may be used to satisfy the safe harbor.

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The safe harbor in the final regulations provides some, but not complete, relief for plan sponsors. For those plan sponsors that allow employees to purchase any individual market coverage, the safe harbor should be easy to satisfy. However, some plan sponsors may wish to establish a private individual health coverage exchange through which employees can purchase selected health insurance policies. In that case, plan sponsors will need to be cognizant of the “no endorsement” requirement when designing the scope of the private exchange.

Foreign Nationals Don’t Have ERISA Claims

A federal district court in Pennsylvania held that it did not have subject matter jurisdiction to hear a claim for disability benefits under an ERISA plan brought by foreign nationals working in the Republic of Kosovo.  The court explained that absent an “affirmative intention” of Congress that is “clearly expressed” to give a statute extraterritorial reach—which there was not under ERISA—it must presume that ERISA is primarily concerned with “domestic conditions.”  Accordingly, the court determined that it was precluded from hearing plaintiffs’ claims for lack of subject matter jurisdiction.  The case is In re Reliance Standard Life Ins. Co., No. 19-331 (E.D. Pa. June 24, 2019).


Ninth Circuit Concludes Domestic Partner Entitled To Benefits

The Ninth Circuit concluded that a plan fiduciary abused its discretion in denying survival benefits to a pension plan participant’s domestic partner.  In so ruling, the Court explained that the plan’s choice of law provisions provided that the plan would be governed by California law in a manner consistent with the requirements of the Code and ERISA and, at the time the participant retired, California law afforded domestic partners the same rights and benefits as those granted to spouses.  Accordingly, the Court reversed the district court’s decision that domestic partners were not included within the definition of spouse under the plan and remanded with instructions to determine the benefits due to the domestic partner-beneficiary.  The case is Reed v. KRON/IBEW Local 45 Pension Plan, No. 4:16-cv-04471-JSW (9th Cir. May 16, 2019).

Digging into the New HRA Regulations Part 1 – Individual Coverage HRAs

As discussed in our June 18th blog entry, the Departments of Labor, Health and Human Services, and Treasury (collectively, the “Departments”) recently released final regulations expanding the use of health reimbursement arrangements (“HRAs”). Among the more important aspects of the final regulations was the reversal of long-standing Affordable Care Act (“ACA”) policy that HRAs or premium payment plans could not be used to reimburse premiums paid for individual market coverage. Through “Individual Coverage HRAs,” employers may now create HRAs to allow some or all of their employees to purchase insurance on the individual market. This blog entry summarizes the key characteristics and design considerations for Individual Coverage HRAs.

Integration with Individual Coverage

In general, HRAs cannot comply with the ACA’s market reforms (particularly the preventive care coverage requirement and the prohibition on annual and lifetime dollar limits) on a stand-alone basis. In order to comply with the ACA, HRAs must integrate with ACA-compliant coverage. Prior to the new regulations, HRAs could only integrate with group health plans and, in limited situations, Medicare. The new Individual Coverage HRAs can integrate with:

  • individual insurance coverage purchased on the ACA marketplace;
  • individual insurance coverage purchased outside of the ACA marketplace (including on a private exchange);
  • student health insurance coverage;
  • individual insurance coverage obtained in states that have received a waiver (called a Section 1332 waiver) of certain ACA requirements from the Departments;
  • individual catastrophic coverage;
  • “grandmothered” coverage (i.e., non-grandfathered coverage that is not compliant with ACA but that the Department of Health and Human Services has announced it will not take enforcement action on); and
  • coverage under Medicare Parts A, B, C, or D and Medigap.

Individual Coverage HRAs may not, however, be integrated with short-term limited duration insurance or excepted benefit coverage. A second type of HRA created by the final rule, the “Excepted Benefit HRA” can be integrated with such coverage and will be discussed in greater detail in a later part of this series.

Employees are not required to prove that the integrated individual insurance coverage complies with the ACA. Instead, the regulations include a “proxy” rule that deems all eligible individual health insurance coverage as complying with ACA restrictions on lifetime and annual dollar limits and first dollar coverage of preventive care services.

Individual Coverage HRA Design and Eligibility

The final regulations establish several requirements for Individual Coverage HRAs. These include:

  • Employers can specify the maximum annual HRA allocation and define which expenses can be reimbursed through the HRA.
  • To be eligible, employees cannot also be eligible for a traditional group health plan sponsored by their employers.
  • Employees must be enrolled in individual health insurance coverage and be able to substantiate enrollment both annually and with every request for reimbursement. If an individual covered by the HRA fails to have individual health insurance coverage for any month, the HRA would not comply with the ACA for that month, and the participant could not seek reimbursement under the HRA for claims incurred after the individual coverage ceases. Further, if an entire family covered by the HRA no longer has individual coverage, the HRA will be forfeited. If the HRA is forfeited in this manner, the loss of coverage under the HRA is not a COBRA qualifying event that would allow the individual(s) to continue reimbursements.
  • Employers must offer Individual Coverage HRAs on the same terms to all members of a permissible class (as identified in the regulations), except that the amounts offered may be increased for older workers (maximum ratio of 3:1) and for workers with more dependents within a class. Permissible classes include full-time employees, part-time employees, classes based on geographic areas, seasonal employees, employees covered by a collective bargaining agreement, salaried workers, non-salaried workers, temporary employees, alien employees, etc. Each employer can choose to which classes of employees it wishes to offer Individual Coverage HRAs.
  • If an employer makes Individual Coverage HRAs available to some classes of employees and a traditional group health plan to other employee classes, a “minimum class size requirement” will apply. The minimum number of employees for each class varies depending on the employee population. For example, the minimum class size is ten employees, for an employer with fewer than 100 employees; ten percent of the total number of employees, for employers with between 100 and 200 employees; and 20 employees, for employers with more than 200 employees. If the minimum class size requirement is violated, the classes chosen by the employer will be disregarded such that all of the employees will be treated as a single class of employees with varying terms within that class; therefore, the Individual Coverage HRA will not satisfy ACA requirements.
  • Employees must be given the opportunity to opt-out of Individual Coverage HRAs on an annual basis and waive future reimbursements.

Eligible Reimbursements

In general, Individual Coverage HRAs can reimburse eligible employees for individual market insurance premiums and other eligible medical expenses. The IRS’s Publication 502 defines which medical expenses may be reimbursed under an HRA. Employers are not required to permit reimbursement for all medical expenses. When designing Individual Coverage HRAs, employers can limit reimbursements to insurance premiums. Alternatively, reimbursements could be limited to insurance premiums and point-of-sale out-of-pocket costs (such as copayments, deductibles, or coinsurance).

Notice of Independent Coverage HRA Availability

The final rule requires that employers offering Individual Coverage HRAs provide written notice at least 90 days before the beginning of each plan year to participants. Participants who do not receive the notice because they were not eligible when the notice was sent should receive the notice no later than the date the HRAs become effective for them.

The regulations require that the annual notice contain the following:

  • an explanation of the HRA terms and conditions;
  • the maximum annual allocation;
  • a statement and explanation regarding the different kinds of HRAs;
  • a statement that the HRA cannot integrate with short-term limited-duration insurance;
  • a statement as to whether the HRA is subject to ERISA;
  • a statement regarding the impact the HRA will have on premium tax credit availability;
  • information as to how participants can enroll in individual coverage on the ACA marketplace and elsewhere; and
  • information related to the participants’ coverage substantiation obligation.

To help employers comply with the notice requirement, the Departments have issued a model notice which contains language addressing certain elements of the required notice. The notice must be tailored to the specific terms of the HRA. Employers do not have to use the model notice, but if the model notice is tailored to the HRA and provided timely, they will be considered to be in good faith compliance with the notice requirement. The model notice can be found at the end of Frequently Asked Questions published by the Departments.

Substantiation Requirement & Model Notices

As noted above, Individual Coverage HRA participants must substantiate their enrollment in individual coverage both annually and on an ongoing basis. In that regard, the Departments have issued a model attestation form for Individual Coverage HRAs. The model annual substantiation form identifies who in an employee’s is covered by the individual insurance, the name of the insurance company, and when coverage began. With respect to the ongoing substantiation requirement, the Departments issued a model attestation form similar to the annual one. However, the final regulations state that the ongoing attestation could be simply part imbedded in the reimbursement request form.

Other Considerations

Individual Coverage HRAs will impact compliance with the ACA’s employer shared responsibility mandate and how individual interact with the ACA marketplace (i.e., availability of premium tax credits and special enrollment). Additionally, these HRAs give rise to ERISA, COBRA, and Medicare implications. These issues will be addressed in upcoming blog entries. Stay tuned.

Departments Publish Final Regulations Expanding the Availability of HRAs

On June 13, 2019, the Department of Labor, together with the Department of Health and Human Services and the Department of the Treasury (collectively, the “Departments”), published final regulations designed to expand the use of health reimbursement arrangements (“HRAs”). The final regulations provide, in general, that HRAs may be used to (1) reimburse premiums for individual insurance market coverage, and (2) reimburse non-premium (other than COBRA premium) medical expenses even if the participant is not enrolled in health coverage. These new HRAs are likely to be a welcome development for employers who seek to expand health coverage opportunities for employees while controlling benefit program costs.


Before the passage of the Patient Protection and Affordable Care Act (“PPACA”), many employers offered HRAs that paid or reimbursed employees for the cost of individual insurance premiums and other eligible health expenses. However, as described in our November 2014 blog entry, guidance released under PPACA made clear that HRAs were considered “group health plans” and subject to PPACA’s market reforms, including first dollar coverage of preventive services and the prohibition of annual and lifetime dollar limits. The nature of HRAs (e.g., that they have an annual dollar limit) meant they could not comply with PPACA, except where the HRA was provided in conjunction with (or was “integrated”) with a group health plan that satisfied PPACA requirements. As discussed in our 2015 blog entries here and here, subsequent guidance further clarified that HRAs could not integrate with individual market insurance, and therefore could not be used to reimburse employees for the cost of individual insurance coverage (whether on a pre-tax or post-tax basis).

On October 12, 2017, the President signed The Executive Order Promoting Healthcare Choice and Competition, which directed federal agencies to create or modify the treatment of certain alternatives to traditional group medical insurance under PPACA, including HRAs. Proposed regulations regarding the expansion of HRAs were released in October 2018. The final regulations issued last week create two types of HRAs—Individual Coverage HRAs and Excepted Benefit HRAs.

New HRAs

The final regulations contain significantly more detail than we can summarize in a single blog entry, so the summary that follows presents a high-level overview of the changes. Over the next week or so, we will post subsequent blog entries digging into the new HRAs and the legal and administrative implications of each.

  • Individual Coverage HRAs. The most significant aspect of the final regulations is the creation of the “Individual Coverage HRA,” which allows employers to create HRAs through which employee can purchase health coverage on the individual market. These HRAs are subject to numerous requirements, including uniform access among employment classifications (subject to minimum class sizes), employee notification requirements, and employee attestations. These requirements and the implications on ERISA and PPACA’s employer mandate and premium tax credit will be described in detail in the forthcoming blogs.
  • Excepted Benefit HRAs. The final regulations also create “Excepted Benefit HRAs,” which permit employers to credit up to $1,800 per year (indexed for inflation after 2020) to HRAs from which employees can get reimbursed for certain medical expenses. Unlike Individual Coverage HRAs, Excepted Benefit HRAs must be offered in connection with a traditional group health plan, though employees need not participate in the group health plan to take advantage of the Excepted Benefit HRA. Excepted Benefit HRAs are considered “excepted benefits” that are exempt from many requirements under ERISA and the PPACA.

The final regulations are effective for plan years beginning after December 31, 2019, and, with respect to the premium tax credit, tax years beginning after December 31, 2019. Employers that might be interested in offering either of the new HRAs should consider planning now so that appropriate adjustments are made for the upcoming open enrollment period.

HHS Proposes to Narrow Scope of Nondiscrimination Regulations under Affordable Care Act

The U.S. Department of Health and Human Services (HHS) recently proposed regulations that scale back nondiscrimination protections under Section 1557 of the Affordable Care Act (ACA). The new regulations, proposed on May 24, 2019, represent a marked shift in HHS’s policy by loosening the nondiscrimination requirements imposed on health plans and other entities and substantially narrowing the universe of entities covered by Section 1557.


Section 1557 of the ACA generally prohibits certain health programs and activities from discriminating on the basis of race, color, national origin, age, disability or sex, or protected groups under civil rights statutes. Final regulations issued in 2016 adopted a broad application of the statute’s nondiscrimination requirement. As finalized, the regulations apply, in part, to all operations of “covered entities,” which include entities that operate health programs or activities, any part of which receives Federal financial assistance (such as Medicare subsidies). In general, a group health plan could be a covered entity if (i) it was a fully-insured plan and the insurance carrier received Federal financial assistance, (ii) it was a self-insured plan sponsored by an entity engaged in a health-related business, or (iii) it was a self-insured plan sponsored by an entity that received Federal financial assistance.

In addition, under the 2016 final regulations, HHS expanded the definition of discrimination on the basis of sex to include discrimination based on gender identity and the termination of pregnancy. However, once the regulations were put into effect, there was significant pushback against HHS’s interpretation of sex discrimination. In particular, one action challenged HHS’s inclusion of gender identity and termination of pregnancy as protected groups. Franciscan All. Inc. v. Burwell, 227 F. Supp. 3d 660 (N.D. Tex. 2016). In this case, the court not only found that the plaintiffs had standing to maintain the action, but also issued a nationwide preliminary injunction, preventing the enforcement of the department’s rule regarding gender identity and termination of pregnancy.

The 2016 regulations also contain several provisions aimed at informing participants of the nondiscrimination requirements and encouraging access for individuals with limited English proficiency. First, the regulations mandate that a covered entity take both initial and continuing steps to inform beneficiaries, enrollees, applicants and members of the public of the entity’s compliance with Section 1557. Also contained in these notices are general statements that the entity provides auxiliary aids and language assistance services to help individuals with disabilities or limited English and does not discriminate on the basis of race, color, national origin, sex, age, or disability. Second, all notices and large significant plan communications (e.g., summary plan descriptions) must contain “taglines,” or short two-sentence statements translated in the top 15 languages spoken in the relevant state(s). However, if the communication is small in size, such as a post-card or brochure, taglines in only 2 languages are required. For many plan sponsors and insurers, these notice and tagline requirements can prove quite burdensome—not only in terms of added costs to send and post such notices but also in terms of identifying which languages to use for the taglines.

Proposed Regulations

On May 24, 2019, HHS issued proposed regulations which, if finalized, would roll-back many of the requirements from the 2016 regulations. Among the proposed changes are the following:

  • Re-focus on existing civil rights laws. Perhaps the most notable change is that the new proposal encourages a return to existing civil rights laws. In summarizing this change, HHS stated that the previous regulations exceeded the agency’s regulatory authority by defining discrimination on the basis of sex to include discrimination based on gender identity or termination of pregnancy. The proposal’s preamble explains that those definitions were inconsistent with Title VI and Title IX of the Civil Rights Act of 1964 and other federal nondiscrimination rules. By returning to existing civil rights laws, HHS addressed the concerns raised in Franciscan and further narrows the scope of Section 1557.
  • Repeal and replace the covered entities definition. As proposed, the rules would apply, in part, to (i) all operations of an entity principally engaged in the business of health care that receive federal financial assistance, or (ii) an operation of an entity not principally engaged in the business of health care for which it receives federal financial assistance. The rules continue to provide that an entity principally engaged in providing health insurance would not automatically be considered an entity principally engaged in the business of providing health care. Overall, this change would narrow the scope of the regulations significantly—no longer would all operations of an non-health care entity be covered, but instead only the individual activities funded by HHS. As a result, the proposed rules would be inapplicable to most self-insured plans.
  • Repeal the mandatory notice and tagline requirements. In the preamble to the proposed regulation, HHS noted that it underestimated the costs to plans to comply with these requirements. After discussions with trade associations and large insurers, HHS now estimates that the annual burden of these requirements, which was originally estimated at $7.2 million in one-time costs, is now somewhere in the range of $147 million to $1.34 billion. As such, HHS proposes repealing in their entirety the provisions requiring taglines and nondiscrimination notices.

The new proposed regulations appear to be less burdensome than the 2016 final regulations and would apply to a smaller scope of entities. Currently, the proposed regulations are in a public comment period. If finalized in their current form, many health plans will be relieved of the burdensome disclosure requirements, including those on notices and taglines. For now, however, the 2016 final regulations still govern to the extent their enforcement is not enjoined by Franciscan.

U.S. Supreme Court Agrees to Hear IBM’s Challenge to Second Circuit Ruling in ERISA Stock-Drop Suit

In December 2018, we reported here that the Second Circuit became the first court at any level to allow an ERISA stock-drop claim to survive a motion to dismiss since the Supreme Court revamped the pleading standard for such claims several years ago.  The Second Circuit reinstated a claim for breach of fiduciary duty under ERISA brought by participants in IBM’s 401(k) plan who suffered losses from their investment in IBM stock.  Jander v. Retirement Plans Committee of IBM, et al., 2018 WL 6441116 (2d Cir. Dec. 10, 2018).  Since then, IBM petitioned the U.S. Supreme Court for review of the Second Circuit’s decision on multiple grounds, including that the decision stood in direct conflict with decisions from the Fifth and Sixth Circuits.  IBM’s petition was supported by an amici brief written by Proskauer on behalf of the U.S. Chamber of Commerce, American Benefits Council, and ERISA Industry Committee.

On June 3, 2019, the Supreme Court granted IBM’s petition for certiorari.  It is, of course, impossible to predict how the Supreme Court will ultimately rule in this case, but we are hopeful that the Court’s decision to grant certiorari is a signal that it disagrees with the approach the Second Circuit has taken in the case against IBM.

Stay tuned for further developments.  The case is Retirement Plans Comm. of IBM v. Jander, No. 18-1165 (2019).

Third Circuit Upholds Health Plan’s Anti-Assignment Clause

The Third Circuit recently held that anti-assignment clauses in ERISA-governed healthcare plans are enforceable as long as they are unambiguous.  The Court concluded that the anti-assignment clause clearly stated that participants could not assign their rights under the plan; and the plan’s statement that payments made directly to a provider did not transfer to that provider any legal or equitable rights under the plan did not render the clause any less clear or imply that payment and an assignment of rights should be treated as synonymous.  In so ruling, the Court rejected the provider’s argument that the anti-assignment clause was invalid because it did not explicitly state that an assignment is void or that the purported assignee acquires no rights in the event of a non-conforming assignment.  Accordingly, the Court concluded that the provider lacked statutory standing to assert a claim for benefits under ERISA. The case is University Spine Center v. Aetna, Inc., No. 18-2842, 2019 WL 2149590 (3d Cir. May 16, 2019).


SECURE Act: Key Changes for Plan Sponsors and Employers

Last week, the U.S. House of Representatives passed the Setting Every Community Up for Retirement Enhancements (SECURE) Act of 2019. To become law, the bill still needs to be passed by the Senate and signed by the President. Because there appears to be bipartisan support, there is a chance that some form of the SECURE Act could be signed into law.

The SECURE Act contains several provisions that would significantly change qualified retirement plan design and operation. Below is a summary of some of the key changes that will affect plan sponsors. Many of the details would be left to interpretation by the IRS and Department of Labor.

  • Expansion of part-time employee eligibility: Under existing law, a section 401(k) plan may exclude part-time employees from participation if they do not complete at least 1,000 hours of service in a year. The bill would reduce the threshold to 500 hours for any employee who completes at least 500 hours per year in three consecutive years (“long-term part-time employees”); and any employee who completes 1,000 hours in a plan year would have the same rights as under existing law. This rule would not apply to collectively-bargained plans and it would not limit the ability to exclude employees for other reasons (subject to passing the nondiscrimination “coverage” test), such as position or job title. Also, this rule does not affect the ability to impose up to a two-year waiting period for employer contributions or to limit participation to employees age 21 and older. Effective date: Plan years beginning after December 31, 2020, except that for purposes of the new eligibility criteria, 12-month periods beginning before January 1, 2021 will not be taken into account.
  • Changes to section 401(k) safe harbor plans: The bill includes two significant changes to section 401(k) safe harbor plans:
    • Nonelective 401(k) safe harbor plans: Under current law, if an employer sponsors a section 401(k) safe harbor plan, eligible employees must be provided with notices describing the safe harbor provisions. The bill eliminates the notice requirement for nonelective safe harbor 401(k) plans—that is, safe harbor plans under which the employer provides a nonelective contribution of no less than 3% of the employee’s compensation, rather than matching contributions. The bill would also allow a retroactive election to convert to nonelective safe harbor status; if the nonelective contribution is at least 4% of compensation, the election could be made as late as the end of the next following plan year. Effective date: Plan years beginning after December 31, 2019.
    • Increase to cap on default rate for automatic enrollment 401(k) safe harbor plans: The bill increases the cap on the default rate for contributions under a qualified automatic contribution arrangement (“QACA”) from 10 percent (current law) of compensation to 15 percent for years after the default contributions have started. Effective date: Plan years beginning after December 31, 2019.
  • Addition of “qualified birth or adoption distributions”: The bill would allow in-service withdrawals from elective deferral contribution accounts of up to $5,000 (per spouse) within one year after birth or adoption of a qualifying child. Participants would be permitted to “repay” qualified birth or adoption distributions to certain qualified plans. Effective date: Applies to distributions made after December 31, 2019.
  • Prohibition on using credit card arrangements for plan loans: Some qualified plans permit participants to access plan loans through credit cards or similar mechanisms. The bill would prohibit plan loans through the use of a credit or debit card. Effective date: Applies to loans made after the date of enactment.
  • New lifetime income disclosure requirement: The bill would require that defined contribution plan participants receive annual “lifetime income disclosures.” This disclosure would have to show an amount of monthly income the participant could receive if his or her plan account were paid as an annuity. This requirement would apply even if the underlying plan does not offer annuities as a distribution option, and even though the actual annuity available would depend on investment performance and premium rates available from insurers. The bill includes relief from fiduciary liability if the disclosure uses safe harbor actuarial assumptions and includes model language to be prepared by the Department of Labor. Effective date: Applies to benefit statements provided more than 12 months after the Department of Labor issues (1) interim final rules, (2) the model disclosure, and (3) prescribed assumptions.
  • New portability for lifetime income investment options: Some plans offer investment options with lifetime income features. If these investment options are removed from a plan’s investment lineup, participants would be permitted to take a distribution of the investment option without regard to restrictions on in-service distributions – either by a direct rollover to an IRA or retirement plan or through a direct distribution to the individual. Effective date: Plan years beginning after December 31, 2019.
  • Nondiscrimination testing relief for closed defined benefit plans: The bill extends nondiscrimination testing relief to certain closed defined benefit plans. Among other items, the bill expands the availability of cross-testing (aggregating defined benefit plans with defined contribution plans and testing on the basis of equivalent annuities), including to allow cross-testing with certain matching contributions. To be eligible for this relief, the closed defined benefit plan must have either (1) been closed before April 5, 2017, or (2) been in effect for at least five years without a substantial increase in coverage or the value of benefits in the last five years. Effective date: Date of enactment, or, at the election of a plan sponsor, plan years beginning after December 31, 2013.
  • Changes to minimum required distributions: The bill delays the “required beginning date” from age 70½ to age 72 for distributions from retirement plans and IRAs. For death benefits, the bill would require defined contribution accounts to be distributed within 10 years after the participant’s death, except where the beneficiary is not more than 10 years younger than the participant or the beneficiary is a surviving spouse or disabled individual; a special rule would apply for minor children. The bill also repeals the current prohibition on individuals over age 70½ making non-rollover contributions to traditional IRAs, aligning with the rules for contributions to employer-sponsored retirement plans and Roth IRAs. Effective dates: Effective for distributions required to be made after December 31, 2019, with respect to individuals who attain age 70½ after such date, and distributions for employees who die after December 31, 2019. Effective for contributions made to traditional IRAs for taxable years beginning after December 31, 2019. A transition rule applies for certain collective bargaining agreements.
  • New statutory safe harbor for annuity provider selection: The bill includes a new fiduciary safe harbor for the selection of a lifetime income provider. Under the safe harbor, the prudent person requirement will be deemed met if: (1) the fiduciary engages in an objective, thorough and analytical search for providers; (2) the fiduciary considers the financial capability of a provider to satisfy obligations under the contract and considers the contract cost in relation to the benefits and services to be provided thereunder; and (3) on the basis of the foregoing, concludes that, at the time of the selection, the provider is financially capable of satisfying its obligations under the contract and that the contract cost in relation to the benefits and services to be provided under the contract is reasonable. Further, a fiduciary will be deemed to have met the requirement to have considered the financial capability of the provider and to have concluded that the provider is financially capable of satisfying its obligations if the fiduciary obtains certain written representations from the provider and meets other requirements. Effective date: Effective upon enactment.
  • More changes: In addition to the items summarized above, the bill contains changes intended to boost retirement savings and security, including provisions that: (1) increase the availability of open multiple employer plans; (2) increase tax credits for small employers starting retirement plans and add tax credits for small employers that include automatic enrollment features in a retirement plan; (3) increase penalties relating to the failure to file Form 5500 and other notices (annual registration, notification of change of status, and withholding notices); (4) require the Treasury to issue certain guidance regarding the termination of 403(b) custodial accounts within six months of enactment; and (5) direct the IRS and Department of Labor to develop a consolidated Form 5500 for defined contribution plans with the same trustee, named fiduciary, administrator, plan year, and investment lineup.

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Check back for updates as we continue to monitor and report on the progress of the SECURE Act.