Compensation and benefits regulations from the IRS, DOL and HHS

Here are digests of proposed compensation and benefits regulations and related guidance issued by the IRS, the Department of Labor and the Department of Health and Human Services.

401(k) regs. Proposed regs implement portions of the 2018 Budget Act and the Tax Cuts and Jobs Act. Unless otherwise noted, these regs won’t become effective until final regs are issued.

The regs cover the provision of the 2018 Budget Act that eliminates the rule prohibiting employees who take hardship distributions from making pretax contributions for six months. This portion of the regs is effective with the 2019 plan year, but you can delay implementation to distributions made on or after Jan. 1, 2020. On the other hand, the IRS says it’s OK to implement this provision sooner than the 2020 plan year, if you can.

Also in compliance with the Budget Act, the regs expand the pot of money from which hardship distributions can be made, to include employers’ contributions and earnings on those amounts, but plans may specify the types of contributions from which hardship distributions may be made. Finally, employees are no longer required to take out plan loans before applying for hardship distributions.

The Tax Cuts and Jobs Act suspends the deduction for personal casualty losses, which is also one of the safe harbors for hardship distributions. The regs provide that regardless of this suspension, employees may still take hardship distributions for personal casualty losses. (83 F.R. 56763, 11-14-18)

Separately, the DOL proposed regs that would allow small employers to join together in association retirement plans. The association, and not individual employers, would be the plan administrator that would be responsible for ERISA compliance. These regs won’t become effective until final regs are issued. (83 F.R. 53534, 10-23-18)

HRA regs. The IRS, DOL and HHS have proposed regulations that would allow health reimbursement accounts to be integrated with individual coverage, without those HRAs being considered an ERISA plan. The regs are proposed to become effective with the 2020 plan year. The Affordable Care Act currently prohibits HRAs to be integrated this way.

Employees enrolled in individual coverage HRAs wouldn’t be eligible for a premium tax credit, and employers wouldn’t be liable for a free-rider penalty. HRAs could be integrated with individual plans if the following criteria are met:

  • Individual coverage HRAs must be offered to a class of employees on the same terms.
  • Employees and their families must enroll in individual health insurance coverage.
  • Employees who are offered individual coverage HRAs can’t also be offered traditional group health plans.
  • Employees must be permitted to waive future reimbursements at least annually; and upon their termination, either the remaining amounts in their HRAs are forfeited or they can permanently waive future reimbursements.
  • HRAs must implement reasonable procedures to ensure that individuals whose medical expenses are reimbursable are enrolled in individual health coverage for a plan year.
  • HRAs must provide a written notice to employees at least 90 days before the beginning of each plan year. (83 F.R. 54420, 10-29-18)

In conjunction with the proposed regs, the IRS has proposed new safe harbors that would absolve employers from free-rider penalties for employees who opted for individual coverage HRAs. (Notice 2018-88, IRB 2018-49)