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On the same day as the introduction of the new Retirement Security and Savings Act, the Senate Finance Committee heard from retirement industry witnesses about the need to pass numerous federal retirement reforms.

U.S. Senators Rob Portman, R-Ohio, and Ben Cardin, D-Maryland, have introduced the Retirement Security & Savings Act, which they describe as a broad set of reforms designed to strengthen Americans’ retirement security.

The bill includes more than 50 provisions designed to improve the existing U.S. retirement system. According to the Senators, these include allowing people who have saved too little to set more aside for their retirement; helping small businesses offer 401(k)s and other retirement plans; expanding access to retirement savings plans for low-income Americans without coverage; and providing more certainty and flexibility during Americans’ retirement years.

As discussed during a Senate Finance Committee hearing, the Retirement Security and Savings Act is just the latest piece of sweeping legislation aimed at improving the private-sector retirement system. Notably, the Retirement Enhancement and Savings Act, known as “RESA,” has been repeatedly introduced and debated over the last two Congresses. Senate Finance Committee Chairman Chuck Grassley said during the hearing that passage of RESA remains a top priority for himself and Finance Committee Ranking Member Ron Wyden, D-Oregon.

Grassley and Wyden called the Finance Committee hearing to generate additional feedback from retirement industry experts about the need for the passage of RESA and other proposals. Senator Wyden also discussed the challenges faced by union-sponsored multiemployer pensions, and the challenges faced by the Pension Benefit Guaranty Corporation (PBGC) and Social Security. In addition, Senator Wyden said action is needed to allow employers to offer tax-advantaged retirement plan matching contributions against younger employees’ student debt payments. He also urged lawmakers to change rules applying to individual retirement accounts (IRAs), which prevent people from saving more in their IRA because they passed a certain age limit.

The first witness called by the committee was Joni Tibbetts, vice president of product management, retirement and income solutions, Principal Financial Group. Tibbetts testified to the effect that online and digital enrollment solutions created by the defined contribution (DC) retirement plan industry have driven improved outcomes for participants. In part due to automatic enrollment and in part due to better educational resources, newly eligible employees are deferring more than ever before, Tibbetts said.

“The average contribution of those using our website is 50% higher than those who do not engage with us digitally,” Tibbetts noted. “Digital and automatic solutions work, but we also know that it has been 15 years since the Pension Protection Act was passed. We need a system that keeps up with the changes in consumer needs and in the broader workforce, and RESA would help create that system.”

Beyond RESA, Tibbetts said Principal supports the broader removal of barriers to the greater use of automatic plan design and administrative features. The company also supports the expanding of the open multiple employer plan (MEP) opportunity to the 403(b) plan marketplace.

“Principal has lot of experience in the small and mid-sized plan space,” Tibbetts said. “What these clients talk about most is the burden of setting up multiple employer plans today, and the fact that many small employers wear multiple hats. For open MEPs to be successful, the administrative burden must be low for employers and employees. It should be easy to join a plan and to maintain compliance.”

Testimony next came from Tobias Read, Treasurer of the State of Oregon and a former member of the Oregon state legislature. Notably, Read was among the sponsors of the legislation that created the OregonSaves auto-IRA program, and in his role as Treasurer, he is now helping to operate the growing program. He noted that more than $2 million is being invested in OregonSaves each month, and much of this money is coming from new savers. Given the rapid growth and the fact that 82% of voters in the state support OregonSaves, Read said, other states should seriously consider creating their own automatic savings programs for workers whose employers do not offer tax-advantaged savings opportunities. He said the creation of more state-based systems would be a great complement to the progress that RESA would bring about, helping to alleviate Americans’ reliance on Social Security.

In testimony from Joan Ruff, board chair of the AARP, particular attention was given to the declining role of private pensions, and how this fact makes passage of RESA and other pro-DC plan legislation that much more pressing. Ruff said a clear priority for lawmakers in the Senate should be providing coverage for the tens of millions of Americans who totally lack coverage today. She provided stats suggesting workers are 15-times more likely to save for retirement when a savings program is offered by their employer.

“Payroll deduction is a very powerful tool, and we believe that state and federal programs working together will most effectively solve our challenges,” Ruff said. “States should be allowed to continue to enact and expand savings opportunities for private-sector workers. We also want to emphasize that federal policy should also address part-time workers who lack coverage, two-thirds of whom are women.”

Other topics addressed by Ruff include improving the savers tax credit and pushing the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) to make progress on conflict of interest reforms in the advisory and brokerage industries.

“When it comes to the union multiemployer pension crisis, there is so much concern from our members voiced over the funding situation,” Ruff added. “We beg Congress to come up with a working solution, and soon. Benefit cuts have already happened and those who are already retired do not have any easy way to make up for a loss in anticipated income.”

During her questioning of the experts, Michigan’s Democratic Senator Debbie Stabenow echoed these points and urged the committee to find some real urgency on the multiemployer union pension crisis. Senator Mike Enzi, R-Wyoming, agreed, noting that 150 such plans could become insolvent within a matter of years.

“We need a hair on fire moment about the union pension issue,” Stabenow said. Anyone who has listened in on the various public meetings held on this topic throughout 2018 will have noticed the dire testimony given time and again by various stakeholders in the multiemployer pension space. In previous testimony on this matter, witnesses have suggested that fewer than 1% of multiemployer plans are 100% funded when using reasonable actuarial assumptions.

The next testimony came from Lynn Dudley, senior vice president, global retirement and compensation policy, American Benefits Council.

“The passage of RESA would send a very positive message about the employer-sponsored retirement system,” Dudley said. In her assessment of RESA, two provisions stand out. First is the proposal to provide nondiscrimination testing reform to help older, longer-service participants in pension plans, when the plan has been modified for future participants.

“This is a big issue,” Dudley said. “The second top priority is to expand open MEPs, which RESA does by eliminating the nexus rule and the one-bad-apple rule. This is a tremendous change to improve access for many, including gig workers. Also, we need to address student debt and how this can be linked to retirement matching dollars against student loan payments.”

By way of context for the hearing, the Senate Finance Committee, among other committees, has been pretty active so far in 2019 with respect to the national retirement system. However, the wealth of hearings and proposals has not yet delivered significant legislation, and conventional political wisdom says passing such sweeping legislation as RESA or the SECURE Act gets harder as a Presidential election approaches.

In February, the Senate Special Committee on Aging held a hearing about “Financial Security in Retirement: Innovations and Best Practices to Promote Savings.” Hearing witnesses discussed conducting a comprehensive review of the American retirement system, allowing for open MEPs, and changing certain defined contribution plan rules to facilitate greater savings, among other things.

In early April, the bipartisan leadership of the Senate Finance Committee introduced a 2019 version of the Retirement Enhancement and Savings Act, known as “RESA.” As seen during the hearing, retirement reform advocates have called the legislation the most comprehensive retirement security measure proposed at the federal level since the Pension Protection Act of 2006.

Finally, just this month, the full Senate confirmed Gordon Hartogensis as the 16th director of the Pension Benefit Guaranty Corporation (PBGC) by a vote of 72 to 27, with one abstention. He replaced Thomas Reeder, who was director from 2015 to 2018.

If you are an employer and sponsor a group health plan, you have many obligations that our benefits team can help clarify for you. Here are a few to review for 2019.

1. Evaluate Grandfathered Status of Group Health Plan

A grandfathered plan is one in existence as of March 23, 2010 that has covered at least one person continuously from that day forward. Grandfathered plans do not have to comply with certain ACA rules. Determine whether any changes to the plan that reduce benefits or increase costs to employees and dependents enrolled in coverage result in a loss of grandfathered status. If the plan loses grandfathered status, confirm that the plan design and benefits offered reflect all ACA requirements that previously did not apply because the plan was exempt (such as coverage of preventive services without cost-sharing). If the plan remains grandfathered, provide a Notice of Grandfathered Status whenever a summary of plan benefits is provided to participants and beneficiaries. Continue to maintain records documenting the terms of the plan that were in effect on March 23, 2010, and any other documents necessary to verify grandfathered status.

2. Review Plan Documents for Required Changes to Plan Benefits

Certain requirements apply to particular plan designs, as noted below.    All Group Health Plans:Ensure that any waiting period—the time that must pass before coverage can become effective for an employee or dependent that is otherwise eligible to enroll in the plan—does not exceed 90 days. (Other conditions for eligibility that are not based solely on the lapse of a time period are generally permissible.) If the plan requires completion of an employment-based orientation period as a condition for eligibility, ensure the orientation period does not exceed one month and the maximum 90-day waiting period begins on the first day after the orientation period. (Note: Employers subject to “pay or play” may not be able to impose the full one-month orientation period and the full 90-day waiting period without potentially becoming subject to a penalty.) Confirm that no annual dollar limits apply to coverage of “essential health benefits” (EHBs), a comprehensive package of items and services. If the plan limits the number of visits to health providers or days of treatment, verify that the visit or day limit does not amount to a dollar limit.Verify that no preexisting condition exclusions are imposed on any individual, regardless of age.Ensure that an employer payment plan is not in place (an arrangement under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy, or uses its funds to directly pay the premium for an individual policy–with the exception of qualified small employer HRAs[QSEHRAs]). Non-Grandfathered Group Health Plans Only: For small group plans, confirm the plan covers EHBs. (This requirement does not apply to self-insured plans or plans offered in the large group market.) Ensure that annual out-of-pocket costs for coverage of all EHBs provided in-network do not exceed $7,900 for self-only coverage or $15,800 for family coverage ($8,150 and $16,300, respectively, for the 2020 benefit year). Note: The self-only maximum annual limitation on cost-sharing applies to each individual, regardless of whether the individual is enrolled in self-only coverage or family coverage under a group health plan. Plans with more than one service provider may structure a benefit design using separate out-of-pocket limits across multiple categories of benefits (rather than reconcile claims across multiple service providers), provided the combined amount of any separate out-of-pocket limits applicable to all EHBs under the plan does not exceed the annual limit. A plan that includes a network of providers may, but is not required to, count out-of-pocket spending for out-of-network and non-covered items and services towards the plan’s annual maximum out-of-pocket limit. Note: Certain small businesses may be allowed to renew existing group coverage that does not comply with the requirements to cover EHBs and limit annual cost-sharing under the plan, through policy years beginning on or before October 1, 2020, so long as the coverage comes into compliance by January 1, 2021. Not all states and insurers will permit coverage to renew. Businesses that are eligible to continue existing coverage will receive a notice from their insurance company.

3. Analyze Tax-Favored Arrangements 

Employers who maintain HRAs, health FSAs, and cafeteria plans should confirm that these arrangements comply with ACA requirements.  Health Reimbursement Arrangements (HRAs)Confirm that the HRA (other than a QSEHRA, a retiree-only HRA, or an HRA consisting solely of excepted benefits) is properly “integrated” with group health plan coverage in order to satisfy the preventive services requirements and the annual dollar limit prohibition. To be “integrated,” an HRA must meet specific requirements under either of two methods described in agency guidance, as clarified by FAQs.If the HRA does not constitute a QSEHRA, confirm that the HRA is not being used to reimburse an employee’s individual insurance policy premiums. Such an arrangement may be subject to a $100 per day excise tax per applicable employee (which is $36,500 per year, per employee). Health Flexible Spending Arrangements (FSAs)Confirm that the health FSA qualifies as excepted benefits to comply with the preventive services requirements. Health FSAs are considered to provide only excepted benefits if the employer also makes available group health plan coverage that is not limited to excepted benefits and the health FSA is structured so that the maximum benefit payable to any participant cannot exceed two times the participant’s salary reduction election for the health FSA for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election). Confirm that the health FSA is offered through a cafeteria plan (a plan which meets specific requirements to allow employees to receive certain benefits on a pre-tax basis) in order to comply with the annual dollar limit prohibition.  Ensure plan documents are amended to reflect that employee salary reduction contributions to health FSAs are limited to $2,700 annually.    The amendment to the written cafeteria plan may be expressed as a maximum dollar amount, a maximum percentage of compensation, or by another method of determining the maximum salary reduction contribution. Determine whether you will allow employees to carry over up to $500 of unused health FSA amounts to use in the following plan year, and adopt appropriate plan amendments. (A plan incorporating the carryover provision may not also provide for a grace period in the plan year to which unused amounts may be carried over.) Cafeteria Plans Generally Determine whether you will allow employees to make additional mid-year changes in salary reduction elections in the event of an employee’s enrollment in Health Insurance Marketplace coverage and/or a reduction in an employee’s hours of service, as permitted in agency guidance, and adopt appropriate plan amendments.  Confirm that section 125 plan documents were amended to comply with the prohibition on providing a qualified health plan offered through the individual Health Insurance Marketplace as a benefit under an employer-sponsored cafeteria plan.

4. Provide Required Notices to Employees and Dependents

Please contact your carrier or an employment law attorney if you have questions regarding these notices. Health Insurance Exchange NoticeProvide a written notice with information about the Health Insurance Marketplace to each new employee at the time of hiring, within 14 days of the employee’s start date. Employers are not required to provide a separate notice to dependents.  Summary of Benefits & Coverage (SBC)* and Notice of Plan Changes Confirm contractual arrangements with the carrier (insured group health plans) or third party administrator (self-insured plans) to prepare and provide the SBC. If the carrier or TPA does not assume responsibility, the employer should provide this notice (without charge) to employees and beneficiaries at specified times during the enrollment process and upon request. Note: Employers that enter into a binding contract with another party to provide the SBC must satisfy additional obligations, including monitoring compliance. Ensure that enrollees are provided with notice of any material modification that would affect the content of the SBC (and that occurs other than in connection with coverage renewal or reissuance) no later than 60 days prior to the effective date of the change.

5. Comply With “Pay or Play” Responsibilities

Applicable large employers—generally, those with 50 or more full-time employees, including full-time equivalents—are subject to the ACA employer shared responsibility (“pay or play”) requirements. Due to the complexity of the law in this area, employers are strongly advised to work with knowledgeable employment law counsel to ensure full compliance. Determine “applicable large employer” (ALE) status for the upcoming calendar year by calculating the average number of full-time employees and full-time equivalents (FTEs) across the months in the current year. (Special counting rules apply for seasonal workers.) Employer Aggregation Rules: Small employers that individually do not employ 50 or more full-time employees or FTEs may still be subject to the requirements if they meet the threshold when combined with other companies under common ownership or that are otherwise related. (The rules for combining related employers do not apply for purposes of determining whether a particular company owes a penalty or the amount of any penalty. That is determined separately for each related company).Determine whether group health plan coverage will be offered to full-time employees (and their dependents), using the measurement methods and rules for calculating hours of service described in the “pay or play” final regulations. An employee is full-time for a calendar month if he or she averages at least 30 hours of service per week (or 130 hours for the month). The final regulations describe approaches that can be used for various circumstances, such as for employees who work variable hour schedules, seasonal employees, and employees of educational organizations. For ALEs offering coverage, review the cost of your group health plan coverage to determine whether it is affordable.In general, coverage is affordable in 2019 if an employee’s required contribution for self-only coverage does not exceed 9.86% of his or her household income for the taxable year. ALEs may use a number of safe harbors to determine affordability, including reliance on Form W-2 wages. The IRS has stated that until final regulations on opt-out arrangements are applicable, employers can rely on the opt-out arrangement guidance provided in IRS Notice 2015-87 and a subsequent proposed rule. That guidance generally provides that, for purposes of “pay or play” and the corresponding information reporting provisions, employers are only required to increase an employee’s required contribution by the amount of an unconditional opt-out arrangement adopted after December 16, 2015. An unconditional opt-out arrangement provides payments conditioned solely on an employee declining employer-sponsored coverage and not on an employee satisfying any other meaningful requirement related to the provision of health care to employees, such as a requirement to provide proof of other coverage.For ALEs offering coverage, determine whether your group health plan coverage provides minimum value.A plan generally provides minimum value if it pays for at least 60% of covered health care expenses and provides substantial coverage of inpatient and physician services. Federal agencies have produced a minimum value calculator to determine if a plan with standard features provides minimum value. However, results of the calculator—or any other method chosen—should be carefully reviewed with benefits counsel. Determine if a penalty may apply. An ALE subject to “pay or play” may be liable for a penalty if it does not offer affordable health insurance that provides minimum value to its full-time employees (and their dependents), and any full-time employee receives a premium tax credit for purchasing individual coverage on the Health Insurance Marketplace. (Note: In determining if a penalty applies, ALEs should be aware of limited non-penalty periods provided for in the “pay or play” final regulations, during which an ALE generally will not be subject to a penalty.) Determine whether to appeal a Marketplace decision from a prior year, if applicable. The Health Insurance Marketplaces sends letters to notify certain employers that one or more of their employees was determined eligible for advance premium tax credits and cost-sharing reductions and had enrolled in a Marketplace plan. Because these events may trigger employer “pay or play” penalties, employers must file an appeal within 90 days of the date stated on the Marketplace notice. Review and respond to IRS Letter 226J, if applicable. The IRS issues Letter 226J to an ALE if it determines that, for at least one month in the year, one or more of the ALE’s full-time employees was enrolled in a qualified health plan for which a premium tax credit was allowed (and the ALE did not qualify for an affordability safe harbor or other relief for the employee). Pay assessed “pay or play” penalties, if applicable. The IRS will assess “pay or play” penalties for prior years and issue a notice and demand for payment via Notice CP 220J. That notice will instruct the ALE on how to make a payment. ALEs will not be required to include the payment on any tax return.

6. Satisfy Information Reporting Requirements (Forms 1094 & 1095)

Information reporting is used to determine compliance with the ACA individual responsibility and “pay or play” provisions. Reporting entities are required to report in early 2019 for coverage offered (or not offered) in calendar year 2018.    Determine if you are a reporting entity (and what type) to understand applicable reporting requirements:“Section 6055” Reporting Entities.  Self-insuring employers that are not ALEs that provide minimum essential health coverage are required to report information on this coverage to the IRS and to covered individuals under section 6055 of the Internal Revenue Code.“Section 6056” Reporting Entities. ALEs with 50 or more full-time employees (including FTEs) are required to report information to the IRS and to their employees about their compliance with “pay or play” under Internal Revenue Code section 6056. Compile the required information for section 6055 reporting and/or the required information for section 6056 reporting.Review the IRS Forms and Instructions:Forms 1094-B and 1095-B (along with Instructions) are available for section 6055 reporting entities. Forms 1094-C and 1095-C (along with Instructions) are available for section 6056 reporting entities (or employers that are subject to both reporting provisions).Determine whether to hire a third party to fulfill reporting responsibilities (reporting entities will still be liable for the failure to report information and furnish statements). For section 6056 reporting entities, determine whether you will use the general method of reporting or a simplified alternative method to satisfy the reporting requirements.If the reporting entity plans to furnish statements electronically for the first time, or if prior consents only applied to the statements required to be furnished in prior reporting years, ensure that affirmative consent is obtained from employees prior to furnishing (section 6056 reporting entities must also ensure that certain notice, hardware, and software requirements are met). Remember to comply with the information reporting deadlines:Section 6055 Deadlines (Forms 1094-B and 1095-B):Forms 1094-B and 1095-B must generally be filed with the IRS annually, no later than February 28 (or April 1, if filing electronically). Forms 1095-B must generally be furnished to responsible individuals (may be the primary insured, employee, former employee, or other related person named on the application) by March 4. Section 6056 Deadlines (Forms 1094-C and 1095-C):Forms 1094-C and 1095-C must generally be filed with the IRS annually, no later than February 28 (or April 1, if filing electronically). Forms 1095-C must generally be furnished to all full-time employees by March 4.

7. Other Action Items

The following outlines actions required for continued ACA compliance, as well as additional items that may be of significance for certain employers and group health plans. Additional Medicare Tax for High Earners. Remember to withhold Additional Medicare Tax (0.9%) on wages or compensation paid to an employee in excess of $200,000 in a calendar year. Coverage of Preventive Services. Continue to monitor guidelines for preventive services, which are regularly updated to reflect new scientific and medical advances. As new services are approved, non-grandfathered group health plans will be required to cover them with no cost-sharing for plan years beginning one year later. Medical Loss Ratio (MLR) Rebates. Distribute rebates received from insurance companies to eligible plan enrollees as appropriate. Rebates are due to employer-policyholders by September 30, 2019. These rules do not apply to employers who operate self-insured plans. PCORI Fees. Employers sponsoring certain self-insured health plans (including HRAs not treated as excepted benefits) are responsible for fees to fund the Patient-Centered Outcomes Research Institute (PCORI). To report and pay the fees, IRS Form 720 must be filed by July 31, 2019.Form W-2 Reporting of Employer-Provided Health Coverage.  Continue to report the cost of health coverage provided to each employee annually on Form W-2, which must be furnished to employees by January 31. (This requirement does not apply to employers required to file fewer than 250 Forms W-2 for the preceding calendar year.Section 1557 Nondiscrimination Requirements (If Applicable).  Entities administering any health program or activity that receives federal financial assistance (such as hospitals that accept Medicare or doctors who accept Medicaid) must confirm compliance with the final rule implementing section 1557 of the ACA, which prohibits discrimination on the basis of race, color, national origin, sex, age, or disability. In addition, certain notice and tagline requirements must be met. For more on this notice requirement, click here (see “Procedural Requirements”).

The federal Consolidated Omnibus Budget Reconciliation Act (COBRA) generally requires group health plans sponsored by employers with 20 or more employees in the prior year to offer employees and their families the option to continue benefits for limited periods of time when coverage under the plan would otherwise end due to certain qualifying events. These events include voluntary or involuntary job loss, reduction in hours worked, death, divorce, and other life events.

COBRA sets rules for how and when continuation coverage must be offered, how employees and their families may elect COBRA, and what circumstances justify terminating coverage. The length of time for which continuation coverage must be made available depends on the type of qualifying event. For termination of employment or a reduction in hours, the maximum period of COBRA is generally 18 months. Up to 36 months of coverage may be available due to other qualifying events, or if a second qualifying event occurs during the initial period of COBRA coverage.

Please review our COBRA Steps to Success to understand the key areas involved in implementing COBRA for your company. Most states (including Arizona) also have laws (commonly referred to as “mini-COBRA” laws) which require that group health plans provide COBRA-like continuation of benefits for certain employees and their families.

An analysis from Morningstar suggests monitoring defined contribution (DC) plan fund menus can have a positive impact on performance, and investment management providers weigh in on how to determine when a fund change is needed.

A Morningstar report, “Change Is a Great Thing,” finds that monitoring defined contribution (DC) plan fund menus can improve performance, although more research on why this effect occurs is warranted.

The report cites previous research which found that institutional investment managers hired to replace terminated underperforming managers perform much better before they are hired, but this outperformance disappears after they are selected.

Morningstar researchers used a large data set of plan holdings from three different recordkeepers between January 2010 and November 2018, to investigate the monitoring value provided by plan sponsors. For each plan, a list of available funds is available at some interval, typically quarterly. They employ a matching criterion to determine when a fund is replaced within the same investment factor style based on its Morningstar Category over time. The analysis results in a sample of 3,478 replacements across 678 DC plans. They find that on average replacement funds had better historical performance and lower expense ratios, along with more-favorable comprehensive metrics such as the Morningstar

Rating for funds (the “star rating”) and the Morningstar Quantitative Rating for funds, than the funds they replaced. The largest performance difference in the replacement and replaced funds is the five-year historical returns, suggesting this historical reference period is the one that carries the most weight among plan sponsors.

They also found that the future performance of the replacement fund is better than the fund being replaced at both the future one-year and three-year time periods, and that these differences are statistically significant. The outperformance persists even after controlling for expense ratios, momentum, style exposures, and other metrics commonly used by plan sponsors to evaluate funds such as the star rating and quantitative rating.

“Our findings suggest that monitoring plan menus can have a positive impact on performance,” the researchers conclude.

Jim Licato, vice president of product management at Morningstar in Chicago, and co-author of the report, tells PLANSPONSOR, “We have found, and believe it is very important, for someone to be keeping an eye on retirement plan investments—whether an investment committee or investment adviser—and make necessary changes. We found not doing so is a disservice to participants.”

He says that the prior studies did not include as robust a data set as the Morningstar analysis and that may be the reason it found different results than prior research. However, he adds, “We still have not dug through the detail about why exactly replacement funds are overperforming. It will require further research as it remains elusive as to why.

“What we can say,” Licato continues, “is that prior to replacement, plan sponsors were looking at a number of areas—past performance, expense ratios, Morningstar ratings, etc.—and all improved with the replacement fund.”

Considerations for fund replacement

Other than declining returns, Mike Goss, EVP and co-founder, Fiduciary Investment Advisors in Windsor, Connecticut, says one big factor in considering a fund for replacement for his firm is a fund manager change—whether a lead portfolio manager or a key member of that team. When this happens a fund may be put on watch because generally the manager is ultimately responsible for the funds track record and which securities to own. A fund manager change could change the fund’s track record or style, he explains.

Other factors in considering a fund for placement on a watch list or for considering a fund change is the change in ownership of the investment firm. “It’s a potential change that could lead to poor results,” Goss says. Those tasked with monitoring a DC plan’s investment menu also want to watch out for a fund style change or drift—for example, from value to growth—and for a strange in strategy or fund turnover—for example, some funds own stocks for a long time and some trade frequently. “Both can be good strategies, but if a fund changes strategy it should cause a plan fiduciary to ask why,” he says. “Plan sponsors select funds based on a certain process, style or philosophy. Any change would be a red flag.”

According to Licato, fund expenses should also be monitored to make sure they are in line with what similar funds are charging.

He says when a fund is put on a watch list, it can remain on the watch list for one quarter or a few quarters. Those monitoring the DC plan fund menu will look to see whether what triggered putting the fund on the watch list has been improved or gotten worse. If it’s gotten worse, the fund should be replaced. “There is no set number of funds that need to be replaced or put on watch. It’s more about fund monitoring and staying on top of things,” he adds.

According to Goss, his firm’s rule is that a fund cannot be on watch more than year. “There’s no law or necessary best practice, but we think a year is enough time to make a quality assessment to either maintain the fund in the DC plan investment menu or change it,” he says.

Goss warns that DC plan fiduciaries should never try to time the market. “That’s no reason to add or delete a fund. Hopefully, if they’re doing very good due diligence when they select a fund to include on the investment menu, they should not have a significant turnover of funds. We very rarely turn funds over,” he says. Goss adds that one of the things fiduciaries can outsource through a 3(38) investment manager is the ability to have the manager select, monitor and replace funds.

Licato points out that fund turnover can be disruptive for recordkeepers and participants—the paperwork and moving of assets is never a good thing from an administrative standpoint. However, he says, if a plan fiduciary is contemplating not removing a fund because it will be disruptive, it is not looking at the best interest of participants. “If it will benefit participants, do it.”He adds that the main lesson from Morningstar’s analysis is, “Don’t’ set the investment menu on cruise control and not look at it for years. During that time there could be many red flags.”

February 15, 2018

A new breed of robo-retirement startups have positioned themselves to take on incumbents and the $27.3T of assets held in retirement accounts.

The wealth management industry is under siege by a new crop of “robo-retirement” fintech startups disrupting retirement savings. At stake is roughly $27.25T held in US retirement assets as of September 2017 (including IRAs, 401(k)s, pensions, etc).

Though 401(k)s only account for $5.28T of assets (nearly 20% of total retirement savings in 2017), they have grown dramatically, up from 2% of total retirement savings in 2007.

That said, these retirement vehicles are still vastly underutilized by employees due to high fees, poor user experience, and lack of education. Now, startups have zeroed in on the opportunity to create retirement offerings that cut down on fees and deliver a better user experience, following the playbook fintechs used with robo-advisors.

While 4 out of 5 workers are employed by companies that offer a 401(k) plan, only 41% of workers actually contribute. A number of factors can contribute to this — lack of education on the benefits of contributing, difficulty accessing and navigating 401(k) plans, or an income that just covers expenses, thus making it difficult to save.

In addition to the challenge of getting more employees to invest in 401(k)s when they’re available, smaller companies also struggle to provide these plans to their workers. This can be the result of high costs and administrative challenges.

Recognizing this gap, startups — including Forusall, Blooom, Vault, Human Interest, FeeX, and Guideline — are raising private market funding to scale cheaper and easier-to-use retirement savings products.

These “robo-retirement” platforms streamline access for employers, lower the costs to administer plans, and provide transparent pricing. Meanwhile, incumbent wealth managers’ suite of products and services remain static – and vulnerable to disruptors.

Sound familiar?

The same trends that are helping robo-retirement companies gain traction are the same ones that enabled the rise of the first robo-advisors nearly a decade ago. If incumbents want stay relevant as these startups gain traction, they will need to be proactive to address products gaps, or suffer a similar fate.

Using the CB Insights platform and SEC filings, we analyzed how these startups stack up, and highlighted a few operating metrics like assets under management (AUM), client accounts, and financing.

We define this group of fintech startups as “robo-retirement.” Our robo-retirement category includes automated wealth management platforms that specifically target retirement savings accounts including 401(k), 403(b), and pensions. Our robo-retirement category is tracked as part of the broader wealth tech collection on the CB Insights platform.

Investors see new opportunities in retirement savings startups

Retirement savings startups have already seen 2 deals in 2018, despite the broader pullback in early-stage fintech in the US that occurred last year.

Following a $21M Series B investment in ForUsAll, Nick Shalek, General Partner at Ribbit Capital noted there are 2 brokers for every 1 fund they manage, creating an opportunity for software to increase broker efficiency. This is in part why Ribbit Capital, among other investors, are jumping in early.

 “The (retirement) industry is in desperate need of improvement. Around 300,000 brokers manage 650,000 small and mid-sized business 401(k)s. Since the average broker only handles two 401(k)s, they simply do not have the ability to invest deeply in delivering modern, personalized investment solutions to companies and their employees.

Just as the travel agent market was uprooted by technology, we believe ForUsAll is disrupting the 401(k) broker market by using technology to deliver a smarter, more effective, and less expensive solution.”

-Nick Shalek, General Partner at Ribbit Capital

Human Interest is the latest to raise, completing a $11M investment from Wing Venture Capital that also included angel investor Adam Nash. Adam Nash is experienced in scaling and advising robo-advisor startups. He is a current board member at Acorns, and the former CEO and president of Wealthfront.

A few of the other private startups focused on retirement include Blooom, Guideline, and FeeX. Many of these startups are using a range of strategies that vary by distribution channel and perceived addressable gap, which we analyze below. The majority are leveraging a B2B strategy targeting small- and medium-sized employers because they are largely underserved.

Robo-Retirement fintechs are already growing aum, client accounts

Blooom has grown the fastest in terms of assets under management (AUM) and client accounts. As of January 2018, Blooom has quietly collected approximately $2B in AUM across 17,746 client accounts.

Blooom is a B2C and select B2B portfolio management software provider for Employer-Sponsored Retirement Accounts (ESRA). B2B partners include Fidelity, the startup’s custodian, which holds nearly half of the startup’s reported AUM in separately managed accounts.

Forusall is the second largest with a reported $500M of AUM for an undisclosed amount of accounts as of a press release in January 2018. AUM is up nearly 5x in less than a year. In March 2017, Forusall reported the company managed $104M of AUM across 5,685 client accounts.

Guideline came in third with a reported $158M in AUM across 2,000 client accounts as of October 2017.

Also pictured are Human Interest and  Vault. Though these companies manage less money, Human Interest is still keeping up with Guideline and Forusall in the race for client accounts. Portland-based Vault, a 401(k) provider for SMBs, was acquired by micro-investing startup Acorns in Q4’17. The firm has grown assets to $1.1M across 507 client accounts.

While AUM is modest compared to top robo-advisors like Betterment (which leads with $11.8B in AUM) and Wealthfront ($10B in AUM; both as of January 2018), both of which have 401(k) services, they’ve been building their market for a decade and faced little competition from incumbents in their early years.

Similarly, this cohort of robo-retirement startups were able to grow largely unchallenged by incumbents in the early days. To stay ahead of challengers in 2018, these startups will need to focus on customer acquisition and scaling.

these are the investors placing robo-retirement bets

We used the CB Insights Business Social Graph to highlight the investors that are diversifying their bets in fintech with retirement savings startups.

Please click to enlarge. Each green line indicates one investment.

• Collectively, this group has raised $97M and are all in the early- to mid-stages. The most well-funded is Forusall, mentioned above.
• Forward-thinking strategic investors are early backers of robo-retirement startups. Insurance companies Allianz Life Ventures and Nationwide Ventures both co-invested in Blooom. While Blooom is currently focused on retirement savings, extending into insurance could be on the product roadmap and a partnership with insurers would not be surprising.
• Investors are spreading out their bets. Horizons Ventures has made 2 investments in this space, investing in Feex, a B2C subscription service that reduces 401(k) management fees, as well as Forusall. SV Angel on the other hand invested in Human Interest and Guideline.
• Looking at investors’ portfolios, we can see a few notable overlapping portfolios with some of the largest robo-advisors. Great Oak Ventures is an investor in Human Interest and in micro-investing platform Acorns. Ribbit Ventures is an investor in Forusall and in Wealthfront.
• Retirement savings startups have already seen 1 acquisition. Vault, mentioned above, was acquired by Acorns in Q4’17. Acorns will leverage Vault to launch a retirement product called Acorns Later in 2018. We dug into Acorn’s acquisition strategy as part of strategy teardown on Acorns.

Closing thoughts

Employer-sponsored retirement programs are still a largely untapped and growing portion of the retirement savings market. Early movers have a head start but can’t compete with incumbent’s resources. Timing in this market is essential and startups are well positioned to grow if they focus on acquiring customers while the economy remains strong (despite a potential correction).

What will be interesting to watch, however, is when (and how) incumbents will respond to this new wave of insurgents. Looking to get ahead, incumbents with a “buy” strategy might look to get into the retirement savings market. When the first robo-advisors entered the market, many incumbent firms seemed unfazed (while others funded a few). Today, every initial skeptic has a robo-advisor strategy.

If history repeats itself, by the time incumbents take notice, it could be too late to stop them.

The United States tax code allows for many unusual but legitimate tax deductions and tax credits. Below are some of the noteworthy tax breaks that have been successfully claimed. Some of these might apply to you.

• Pet Moving Expenses: If you lost your job and you are relocating to start a new job, these moving expenses are tax deductible if you are an active duty military member or if you are an employee who has reimbursed expenses dated before January 1, 2018 and did not claim them on a prior tax return. You might not know that the expense of moving your cat, dog, bird, or other pet you have from your current or old home to your new home is treated the same as moving your other personal properties.
• Clarinet Lessons: A parent was able to deduct the expenses for clarinet lessons for her child because she claimed it corrected her child’s overbite. This was based on a 1962 case where an orthodontist argued that playing the clarinet helps correct a child’s overbite.
• Babysitter Expenses: Another claimed her babysitter expenses as a deduction because she was performing charitable deeds while she was away from her child. This would mean that you pay somebody to look after your child while you work for no pay for a charity. In this case the tax court rejected and overruled an IRS revenue ruling when, despite not having the money go directly to a charity, a parent used the baby sitter expense as a charitable contribution while volunteering for a charity.
• Private Airplane Expenses: A couple owned and rented out a condo that was a 7 hour drive away from their primary residence. To save time and money, they bought a private airplane and were able to deduct airplane expenses, like fuel and depreciation for business use, for the property management trips to their condo. However, it turned out that the expenses increased the overall loss on the rental condo.
• Cat Food Expenses: Under certain conditions, the cost cat food might be considered a legitimate deductible expense. A junkyard owner bought cat food to attract local stray cats in order to drive away mice and rats. He claimed it as a business expense and it was approved by the IRS. The average house cat will likely not qualify because the cat would need to perform some task associated with the upkeep of a business.
• Swimming Pool Costs: If you have a medical condition that would improve with a swimming pool exercise regimen, your swimming pool expenses might qualify as a deductible medical expense. That’s what happened in the case of an arthritis patient who was prescribed to swim frequently in order to treat his condition. He installed a swimming pool on his property and deducted the expenses from his taxes. After some investigation, the IRS approved the deduction, but if the pool were used for recreational purposes, it wouldn’t have been approved.
• Sex-Change Operation Expenses: A man who was diagnosed with gender-identity disorder (he felt he was a woman trapped in a male body) wanted to deduct almost $22,000 in out-of-pocket medical expenses for various surgeries, including hormone therapy, sexual-reassignment surgeries, and breast augmentation, in order to become a woman. Here is what the tax court decided: the hormone therapy and the sex-change operation in the amount of $14,500 was a qualified medical tax deduction. However, the expenses for the breast augmentation was not; it was deemed nondeductible cosmetic surgery by the court.
• Medical Expenses to Quit Smoking: You might qualify to deduct expenses for smoking cessation programs, nicotine patches, stop-smoking aides, etc.
• Costs for Getting in Shape: Weight-loss expenses may be deductible if doctor signs off on it and tells you that your life might be in danger if you don’t start exercising and lose weight. The cost for remedies that help you drop a few pounds, improve your heart rate, or reduce your cholesterol might all be deductible.
• Business Trips: Any business trip viewed as “ordinary and necessary” to the course of doing business by the IRS is eligible for a travel expense deduction. In one case, the owner of a dairy took a trip to Africa to conduct research on wild animals, and successfully claimed it as a business expense because it was relevant to his business.
• Lawn Care Expenses: These expenses might be deductible, but your house will have to be your workplace and the state of your lawn would have to have some relevance to the performance of your business. A sole proprietor successfully deducted lawn care expenses as business expenses because he met his clients in his home office.
• Cost of Body Oil: For one bodybuilder, it worked. He claimed a deduction for the cost of body oil that he used in competitions. The IRS didn’t seem to have any problem with this, as it was a business expense.
• Whaling Boat Repairs: Whaling boats need repairs and, since 2004, captains of whaling boats can deduct up to $10,000 for repairs, equipment purchases, and other expenses associated with the business. However, starting a whaling business to claim a deduction will not work for most people, since whaling is banned by the United States government and only Native American tribes are allowed to engage in it.
• Cost of Breast Implants: In 1994, one stripper’s attempt to get more tips led her to undergo breast augmentation surgery. She then proceeded to deduct the expense from her taxes. A tax court judge ruled in favor of the stripper, stating that the implants were a stage prop, and thus a legitimate work expense that can be deducted.

Strange Tax Breaks from the U.S. and Around the World

• In Wisconsin, cloth diapers are not subject to sales tax, but disposable diapers are.
• In Texas, cowboy boots are exempt from the sales tax, but hiking boots are not.
• In Ohio, a corpse in a mortuary gets makeup applied on it without getting taxed, but a living person is taxed for the makeup that gets applied in a beauty salon.
• In South Carolina, one can get a $50 deduction if they donate a dead deer to the poor.
• In Maryland, oyster farmers get a tax break, but those who farm other types of shellfish don’t.
• Hawaii gives a $3,000 tax deduction to those who grow state-approved trees.
• People who were persecuted by the Ottoman Empire between 1915 and 1923 were exempt from taxes in California (learn more about the history of taxes in United States).
• A business owner bought a racehorse and claimed it as a business expense. No, he was not in the horse-racing business; he claimed that he needed to entertain his clients and that a racehorse would do just that. The economic stimulus package allowed for a tax deduction as large as $25,000 to be claimed for buying a racehorse, but the deal expired without creating many new purchases.
• In one case, the use of a yacht was deducted as a business expense because the business owner tried to impress his customers and encourage them to do business. Maintenance and cleaning of the yacht, however, was not allowed to be deducted because the IRS code prohibits it.
• An ostrich farmer in Louisiana’s St. Tammany Parish depreciated his ostrich, which is allowed as long as the birds are used for breeding purposes.
• One man who owned several properties hired his girlfriend to manage them. She looked for furniture for the houses, made sure the proper repairs were made, and managed his home. He was able to deduct $2,500 of the $9,000 he paid her as a business expense.
• A dentist submitted fraudulent insurance claims. When the fraud was discovered, she was ordered to pay the money back as well as serve some time in jail. However, she was able to deduct her repayment to the insurance company as a business expense. That is because the repayment was done to compensate for a loss sustained by the insurance company and was not considered a fine.
• A man was arrested for drunk driving after he waited to sober up–but not for long enough–and wrecked his car. His insurance company refused to compensate him for the wrecked car because he broke the law. The driver, however, was able to deduct the cost of his car as a casualty loss because he acted reasonably. If he hadn’t waited to sober up, then it would have been gross negligence and thus nondeductible.
• In 1981, a drug dealer from the Minneapolis area was caught with possession of large amounts of cocaine, amphetamines, and marijuana. He was arrested and later audited. The audit found that he owed $17,000 in taxes. The drug dealer argued that he should be able to deduct a significant amount of the back taxes as business costs incurred by running his business from his home. He managed to get a deduction, but still went to jail for drug possession.
• A man working for a graphic design agency bought a pair of skis from Yamaha Snowmobiles, a company for which he was making a catalog. He used the company discount and then successfully deducted the skis as a business research expense.
• A hair stylist successfully deducted the entire cost of her wardrobe that she wore while working with her clients as a business expense.
• In Germany, one can deduct bribes. While the deduction is seldom used, it does exist as part of the tax code. All one has to do to report it is disclose their name and the name of the official that they bribed.
• The United Kingdom gives tax breaks to video game companies that create “culturally British” games. The criteria for being culturally British is not very clear; the game must score 16 or more of 31 points on a test that was designed to measure the cultural content and contribution of the game.
• In the Netherlands, those who study and practice witchcraft can claim a tax break given out by the government. It has existed for quite some time, but in 2005 it gained the attention of the public after a judge upheld the tax break in court.
• During the 2010 FIFA World Cup in South Africa, stadiums and the areas surrounding them were exempt from the value added tax as well as the income tax from profits. This allowed FIFA to keep more of the money to itself. Critics didn’t like this measure because it deprived the government of South Africa from tax revenue associated with the World Cup matches.
• In Italy, almost a third of all men over 30 still live at home. To encourage them to move out, the government issued a 1,000 euro tax break to those who rent their homes. However, the problem is considered to be tied to the difficult job market in Italy that prevents young men from obtaining jobs that will support their independent lifestyles, so critics say it’s unlikely that the tax break will encourage many young Italian men to move out.

In March of 2019, the Social Security Administration began mailing notifications to employers identified as having at least one name and Social Security Number (SSN) combination submitted on wage and tax statement (Form W-2) that do not match their records. The purpose of the letter is to advise employers that corrections are needed in order for them to properly post its employee’s earnings to the correct record. There are a number of reasons why reported names and SSNs may not agree with their records, such as typographical errors, unreported name changes, and inaccurate or incomplete employer records.

On this page are resources and free online tools to assist with accurate wage reporting, including how to register for Business Services Online (BSO) and how to view and correct name and SSN errors.

Here is a link to the sample notices

Principal Financial Group is paying $1.2 billion for the bank’s retirement business, which serves 7.5 million U.S. customers.

Michael Thrasher | Apr 09, 2019

Principal Financial Group is acquiring Wells Fargo & Company’s Institutional Retirement & Trust business, a unit that serves 7.5 million customers and oversees $827 billion in assets, for $1.2 billion, the two companies announced Tuesday.

The deal is expected to close in the third quarter of this year, pending regulatory approval. Principal is financing the $1.2 billion purchase with cash and senior debt financing. Wells Fargo can also earn an additional $150 million contingent on better-than-expected revenue retention and payable two years after the deal closes. No other specific terms were disclosed.

The acquisition doubles the size of Principal’s record-keeping assets, making a juggernaut in the retirement space even larger, while diversifying its client base. More than two-thirds of Wells Fargo’s institutional retirement assets are in midsize employers’ plans ranging from $10 million to $1 billion, according to Principal.

“Retirement is at the heart of our business and core to our future,” Dan Houston, the chairman, president and CEO of Principal, said. “This will be a powerful combination for customers, employees and shareholders as we solidify our place as a top-three leader in the U.S. retirement market.”

Shedding the Institutional Retirement & Trust unit, which includes defined contribution, defined benefit, executive deferred compensation, employee stock ownership plans, institutional trust, and custody and institutional asset advisory businesses, is a stark change relative to at least one other wealth manager. Morgan Stanley just reorganized its wealth management business to fold in the recent acquisition Solium Capital Inc., a stock-plan administration company the bank acquired in February for $900 million. It also has been vocal about seeking to make other acquisitions and adding to its wealth management business to help serve the employees of the more than 1,000 companies it provides retirement accounts and stock options to, as plan sponsors seek ways to help improve their employees’ overall financial health.Advertising, Mouse Over For Audio

Rob Foregger, co-founder of NextCapital, a company that provides enterprise digital advice solutions to Transamerica and other financial services firms, said he expects there will be more consolidation amongst recordkeepers. But a well-executed strategy like Morgan Stanley’s can make a retirement business especially valuable. Much of Fidelity Investments’ asset management growth has stemmed from its retirement business, said Foregger, who spent nearly two years as the president and led Fidelity’s retail banking services.

A Wells Fargo spokesperson said the sale of the retirement business to Principal reflects Wells Fargo’s strategy to focus our resources on areas where we can grow and maximize opportunities within wealth, brokerage and asset management.”

Lazard and Debevoise & Plimpton advised Principal on the transaction.

Published Tue, Apr 2 2019 • 12:06 PM EDT | Updated Tue, Apr 2 2019 • 3:40 PM EDTYlan Mui@ylanmui

Key Points

• A key House committee passes the Secure Act, a bill intended to increase the flexibility of 401(k) plans and improve access to the accounts, particularly for small businesses and their employees.
• The bill includes a host of provisions aimed at encouraging small businesses to provide private retirement benefits to their workers.
• The bill is one of the few proposals with a significant chance of becoming law amid a bitterly divided Congress.

The most comprehensive changes to private retirement plans in more than a decade are gaining momentum in Congress.

A key House committee on Tuesday unanimously passed a bill intended to increase the flexibility of 401(k) plans and improve access to the accounts, particularly for small businesses and their employees.

The proposal, known as the Secure Act, was backed by the top Democrat and Republican on the tax-writing Ways and Means committee.

The bill includes:

• A host of provisions aimed at encouraging small businesses to provide private retirement benefits to their workers.
• It allows them to band together to offer 401(k)s and creates a new tax credit of up to $500 for companies that set up plans with automatic enrollment.
• Businesses with long-term, part-time workers must also allow them to become eligible for retirement benefits.

Several measures that would affect other types of savings are included in the bill.

• It repeals the maximum age for IRA contributions and raises the age for required mandatory distributions from 70½ to 72.
• It also expands the use of 529 plans, from only college-related expenses to include home schools and student loans.

“Americans currently face a retirement income crisis, with too many people in danger of not having enough in retirement to maintain their standard of living and avoid sliding into poverty,” committee Chairman Richard Neal, D-Mass., said Tuesday.

The bill is one of the few proposals with a significant chance of becoming law amid a bitterly divided Congress. Elements of the bill have been debated among members for years and enjoy wide support among both industry groups and advocacy organizations. On Tuesday, Neal called the legislation “a major bipartisan accomplishment.”

“The Ways and Means committee is where we find solutions and get things done for the American people,” he said.

The last time Congress passed major retirement legislation was in 2006. The Pension Protection Act focused on underfunded accounts and reforms to that system. Since then, lawmakers have debated proposals to address the popularity of 401(k)s and individual savings accounts.

But those efforts have stalled on their own, said Paul Richman, chief government officer at the Insured Retirement Institute, a trade group. He said the Secure Act aims to “modernize” the system.

“It’s packaging them all into a comprehensive piece of legislation that would address many of these little issues that have cropped up over the years,” he said. “We think that it’s a good chance for Congress to take some positive, bipartisan action and advance this bill.”

The Senate Finance committee introduced a companion bill late Monday. It is expected to pass with backing from both sides of the aisle.

“There’s a lot of pent-up momentum for this, and that’s why it’s so bipartisan in nature,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center, a think tank. “They’re now getting to the point where there’s momentum to get it across the finish line in both the House and the Senate.”

In the House, Neal said he is also working on a second retirement bill with ranking Republican Rep. Kevin Brady of Texas. He said he hopes the committee will consider that legislation before Congress goes on recess in August.

This checklist is designed to help employers who sponsor group health plans review their compliance with key provisions of the Affordable Care Act (ACA) for 2019. If you have any questions regarding your responsibilities, please contact a knowledgeable employment law attorney, benefits advisor, or your carrier.

Please Note: This list is for general reference purposes only and is not all-inclusive. The information is subject to change based on new requirements or amendments to the law. Additionally, your company or group health plan may be exempt from certain requirements and/or subject to more stringent rules under your state’s laws.

1. Evaluate Grandfathered Status of Group Health Plan

A grandfathered plan is one in existence as of March 23, 2010 that has covered at least one person continuously from that day forward. Grandfathered plans do not have to comply with certain ACA rules.Determine whether any changes to the plan that reduce benefits or increase costs to employees and dependents enrolled in coverage result in a loss of grandfathered status.If the plan loses grandfathered status, confirm that the plan design and benefits offered reflect all ACA requirements that previously did not apply because the plan was exempt (such as coverage of preventive services without cost-sharing).If the plan remains grandfathered, provide a Notice of Grandfathered Status whenever a summary of plan benefits is provided to participants and beneficiaries. Continue to maintain records documenting the terms of the plan that were in effect on March 23, 2010, and any other documents necessary to verify grandfathered status.

2. Review Plan Documents for Required Changes to Plan Benefits

Certain requirements apply to particular plan designs, as noted below.   All Group Health Plans:Ensure that any waiting period—the time that must pass before coverage can become effective for an employee or dependent that is otherwise eligible to enroll in the plan—does not exceed 90 days. (Other conditions for eligibility that are not based solely on the lapse of a time period are generally permissible.)If the plan requires completion of an employment-based orientation period as a condition for eligibility, ensure the orientation period does not exceed one month and the maximum 90-day waiting period begins on the first day after the orientation period. (Note: Employers subject to “pay or play” may not be able to impose the full one-month orientation period and the full 90-day waiting period without potentially becoming subject to a penalty.)Confirm that no annual dollar limits apply to coverage of “essential health benefits” (EHBs), a comprehensive package of items and services. If the plan limits the number of visits to health providers or days of treatment, verify that the visit or day limit does not amount to a dollar limit.Verify that no preexisting condition exclusions are imposed on any individual, regardless of age.Ensure that an employer payment plan is not in place (an arrangement under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy, or uses its funds to directly pay the premium for an individual policy–with the exception of qualified small employer HRAs[QSEHRAs]).Non-Grandfathered Group Health Plans Only:For small group plans, confirm the plan covers EHBs. (This requirement does not apply to self-insured plans or plans offered in the large group market.)Ensure that annual out-of-pocket costs for coverage of all EHBs provided in-network do not exceed $7,900 for self-only coverage or $15,800 for family coverage.Note: The self-only maximum annual limitation on cost-sharing applies to each individual, regardless of whether the individual is enrolled in self-only coverage or family coverage under a group health plan.Plans with more than one service provider may structure a benefit design using separate out-of-pocket limits across multiple categories of benefits (rather than reconcile claims across multiple service providers), provided the combined amount of any separate out-of-pocket limits applicable to all EHBs under the plan does not exceed the annual limit.A plan that includes a network of providers may, but is not required to, count out-of-pocket spending for out-of-network and non-covered items and services towards the plan’s annual maximum out-of-pocket limit.Note: Certain small businesses may be allowed to renew existing group coverage that does not comply with the requirements to cover EHBs and limit annual cost-sharing under the plan, through policy years beginning on or before October 1, 2019, so long as the policy ends by December 31, 2019. Not all states and insurers will permit coverage to renew. Businesses that are eligible to continue existing coverage will receive a notice from their insurance company.

3. Analyze Tax-Favored Arrangements 

Employers who maintain HRAs, health FSAs, and cafeteria plans should confirm that these arrangements comply with ACA requirements. Health Reimbursement Arrangements (HRAs)Confirm that the HRA (other than a QSEHRA, a retiree-only HRA, or an HRA consisting solely of excepted benefits) is properly “integrated” with group health plan coverage in order to satisfy the preventive services requirements and the annual dollar limit prohibition.To be “integrated,” an HRA must meet specific requirements under either of two methods described in agency guidance, as clarified by FAQs.If the HRA does not constitute a QSEHRA, confirm that the HRA is not being used to reimburse an employee’s individual insurance policy premiums. Such an arrangement may be subject to a $100 per day excise tax per applicable employee (which is $36,500 per year, per employee).Health Flexible Spending Arrangements (FSAs)Confirm that the health FSA qualifies as excepted benefits to comply with the preventive services requirements.Health FSAs are considered to provide only excepted benefits if the employer also makes available group health plan coverage that is not limited to excepted benefits and the health FSA is structured so that the maximum benefit payable to any participant cannot exceed two times the participant’s salary reduction election for the health FSA for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election).Confirm that the health FSA is offered through a cafeteria plan (a plan which meets specific requirements to allow employees to receive certain benefits on a pre-tax basis) in order to comply with the annual dollar limit prohibition. Ensure plan documents are amended to reflect that employee salary reduction contributions to health FSAs are limited to $2,700 annually.    The amendment to the written cafeteria plan may be expressed as a maximum dollar amount, a maximum percentage of compensation, or by another method of determining the maximum salary reduction contribution.Determine whether you will allow employees to carry over up to $500 of unused health FSA amounts to use in the following plan year, and adopt appropriate plan amendments. (A plan incorporating the carryover provision may not also provide for a grace period in the plan year to which unused amounts may be carried over.)Cafeteria Plans GenerallyDetermine whether you will allow employees to make additional mid-year changes in salary reduction elections in the event of an employee’s enrollment in Health Insurance Marketplace coverage and/or a reduction in an employee’s hours of service, as permitted in agency guidance, and adopt appropriate plan amendments. Confirm that section 125 plan documents were amended to comply with the prohibition on providing a qualified health plan offered through the individual Health Insurance Marketplace as a benefit under an employer-sponsored cafeteria plan.

4. Provide Required Notices to Employees and Dependents

Please contact your carrier or an employment law attorney if you have questions regarding these notices.Health Insurance Exchange NoticeProvide a written notice with information about the Health Insurance Marketplace to each new employee at the time of hiring, within 14 days of the employee’s start date. Employers are not required to provide a separate notice to dependents. Summary of Benefits & Coverage (SBC)* and Notice of Plan ChangesConfirm contractual arrangements with the carrier (insured group health plans) or third party administrator (self-insured plans) to prepare and provide the SBC. If the carrier or TPA does not assume responsibility, the employer should provide this notice (without charge) to employees and beneficiaries at specified times during the enrollment process and upon request.Note: Employers that enter into a binding contract with another party to provide the SBC must satisfy additional obligations, including monitoring compliance.Ensure that enrollees are provided with notice of any material modification that would affect the content of the SBC (and that occurs other than in connection with coverage renewal or reissuance) no later than 60 days prior to the effective date of the change.

5. Comply With “Pay or Play” Responsibilities

Applicable large employers—generally, those with 50 or more full-time employees, including full-time equivalents—are subject to the ACA employer shared responsibility (“pay or play”) requirements. Due to the complexity of the law in this area, employers are strongly advised to work with knowledgeable employment law counsel to ensure full compliance.Determine “applicable large employer” (ALE) status for the upcoming calendar year by calculating the average number of full-time employees and full-time equivalents (FTEs) across the months in the current year. (Special counting rules apply for seasonal workers.)Employer Aggregation Rules: Small employers that individually do not employ 50 or more full-time employees or FTEs may still be subject to the requirements if they meet the threshold when combined with other companies under common ownership or that are otherwise related. (The rules for combining related employers do not apply for purposes of determining whether a particular company owes a penalty or the amount of any penalty. That is determined separately for each related company).Determine whether group health plan coverage will be offered to full-time employees (and their dependents), using the measurement methods and rules for calculating hours of service described in the “pay or play” final regulations.An employee is full-time for a calendar month if he or she averages at least 30 hours of service per week (or 130 hours for the month). The final regulations describe approaches that can be used for various circumstances, such as for employees who work variable hour schedules, seasonal employees, and employees of educational organizations.For ALEs offering coverage, review the cost of your group health plan coverage to determine whether it is affordable.In general, coverage is affordable in 2019 if an employee’s required contribution for self-only coverage does not exceed 9.86% of his or her household income for the taxable year. ALEs may use a number of safe harbors to determine affordability, including reliance on Form W-2 wages.The IRS has stated that until final regulations on opt-out arrangements are applicable, employers can rely on the opt-out arrangement guidance provided in IRS Notice 2015-87 and a subsequent proposed rule. That guidance generally provides that, for purposes of “pay or play” and the corresponding information reporting provisions, employers are only required to increase an employee’s required contribution by the amount of an unconditional opt-out arrangement adopted after December 16, 2015. An unconditional opt-out arrangement provides payments conditioned solely on an employee declining employer-sponsored coverage and not on an employee satisfying any other meaningful requirement related to the provision of health care to employees, such as a requirement to provide proof of other coverage.For ALEs offering coverage, determine whether your group health plan coverage provides minimum value.A plan generally provides minimum value if it pays for at least 60% of covered health care expenses and provides substantial coverage of inpatient and physician services. Federal agencies have produced a minimum value calculator to determine if a plan with standard features provides minimum value. However, results of the calculator—or any other method chosen—should be carefully reviewed with benefits counsel.Determine if a penalty may apply. An ALE subject to “pay or play” may be liable for a penalty if it does not offer affordable health insurance that provides minimum value to its full-time employees (and their dependents), and any full-time employee receives a premium tax credit for purchasing individual coverage on the Health Insurance Marketplace. (Note: In determining if a penalty applies, ALEs should be aware of limited non-penalty periods provided for in the “pay or play” final regulations, during which an ALE generally will not be subject to a penalty.)Determine whether to appeal a Marketplace decision from a prior year, if applicable. The Health Insurance Marketplaces sends letters to notify certain employers that one or more of their employees was determined eligible for advance premium tax credits and cost-sharing reductions and had enrolled in a Marketplace plan. Because these events may trigger employer “pay or play” penalties, employers must file an appeal within 90 days of the date stated on the Marketplace notice.Review and respond to IRS Letter 226J, if applicable. The IRS issues Letter 226J to an ALE if it determines that, for at least one month in the year, one or more of the ALE’s full-time employees was enrolled in a qualified health plan for which a premium tax credit was allowed (and the ALE did not qualify for an affordability safe harbor or other relief for the employee).Pay assessed “pay or play” penalties, if applicable. The IRS will assess “pay or play” penalties for prior years and issue a notice and demand for payment via Notice CP 220J. That notice will instruct the ALE on how to make a payment. ALEs will not be required to include the payment on any tax return.

6. Satisfy Information Reporting Requirements (Forms 1094 & 1095)

Information reporting is used to determine compliance with the ACA individual responsibility and “pay or play” provisions. Reporting entities are required to report in early 2019 for coverage offered (or not offered) in calendar year 2018.   Determine if you are a reporting entity (and what type) to understand applicable reporting requirements:“Section 6055” Reporting Entities. Self-insuring employers that are not ALEs that provide minimum essential health coverage are required to report information on this coverage to the IRS and to covered individuals under section 6055 of the Internal Revenue Code.“Section 6056” Reporting Entities. ALEs with 50 or more full-time employees (including FTEs) are required to report information to the IRS and to their employees about their compliance with “pay or play” under Internal Revenue Code section 6056.Compile the required information for section 6055 reporting and/or the required information for section 6056 reporting.Review the IRS Forms and Instructions:Forms 1094-B and 1095-B (along with Instructions) are available for section 6055 reporting entities.Forms 1094-C and 1095-C (along with Instructions) are available for section 6056 reporting entities (or employers that are subject to both reporting provisions).Determine whether to hire a third party to fulfill reporting responsibilities (reporting entities will still be liable for the failure to report information and furnish statements).For section 6056 reporting entities, determine whether you will use the general method of reporting or a simplified alternative method to satisfy the reporting requirements.If the reporting entity plans to furnish statements electronically for the first time, or if prior consents only applied to the statements required to be furnished in prior reporting years, ensure that affirmative consent is obtained from employees prior to furnishing (section 6056 reporting entities must also ensure that certain notice, hardware, and software requirements are met).Remember to comply with the information reporting deadlines:Section 6055 Deadlines (Forms 1094-B and 1095-B):Forms 1094-B and 1095-B must generally be filed with the IRS annually, no later than February 28 (or April 1, if filing electronically).Forms 1095-B must generally be furnished to responsible individuals (may be the primary insured, employee, former employee, or other related person named on the application) by March 4. Section 6056 Deadlines (Forms 1094-C and 1095-C):Forms 1094-C and 1095-C must generally be filed with the IRS annually, no later than February 28 (or April 1, if filing electronically).Forms 1095-C must generally be furnished to all full-time employees by March 4.

7. Other Action Items

The following outlines actions required for continued ACA compliance, as well as additional items that may be of significance for certain employers and group health plans.Additional Medicare Tax for High Earners. Remember to withhold Additional Medicare Tax (0.9%) on wages or compensation paid to an employee in excess of $200,000 in a calendar year.Coverage of Preventive Services. Continue to monitor guidelines for preventive services, which are regularly updated to reflect new scientific and medical advances. As new services are approved, non-grandfathered group health plans will be required to cover them with no cost-sharing for plan years beginning one year later.Medical Loss Ratio (MLR) Rebates. Distribute rebates received from insurance companies to eligible plan enrollees as appropriate. Rebates are due to employer-policyholders by September 30, 2019. These rules do not apply to employers who operate self-insured plans.PCORI Fees. Employers sponsoring certain self-insured health plans (including HRAs not treated as excepted benefits) are responsible for fees to fund the Patient-Centered Outcomes Research Institute (PCORI). To report and pay the fees, IRS Form 720 must be filed by July 31, 2019.Form W-2 Reporting of Employer-Provided Health Coverage. Continue to report the cost of health coverageprovided to each employee annually on Form W-2, which must be furnished to employees by January 31. (This requirement does not apply to employers required to file fewer than 250 Forms W-2 for the preceding calendar year.Section 1557 Nondiscrimination Requirements (If Applicable). Entities administering any health program or activity that receives federal financial assistance (such as hospitals that accept Medicare or doctors who accept Medicaid) must confirm compliance with the final rule implementing section 1557 of the ACA, which prohibits discrimination on the basis of race, color, national origin, sex, age, or disability. In addition, certain notice and tagline requirements must be met. For more on this notice requirement, click here (see “Procedural Requirements”).