IRS Penalty Waivers for Certain Form 8955-SSA Delinquencies

On October 1, 2014, the IRS announced that due to changes to the DOL’s electronic filing system, filings under DFVC no longer include all information required by the IRS. The Form 8955-SSA, Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits, which replaced the Schedule SSA (Form 5500), must be filed directly with the IRS (see Question 65 for details).

The IRS has therefore modified the requirements for qualifying for IRS penalty relief. The IRS is now waiving its late filing penalties only for filers who:

1.    satisfy the Department of Labor’s DFVC requirements for:

• ·       Forms 5500, Annual Return/Report of Employee Benefit Plan, or Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan;

2.    file a paper Form 8955-SSA with the IRS for the same delinquent tax year filings; and

3.    meet the requirements of Notice 2014-35 (see below).

Plans Eligible for Relief

Retirement plans governed by Title I of ERISA that:

•    must file a Form 5500-series return (but not Forms 5500-EZ or 5500-SF for plans without employees); and

•    are eligible for DOL’s Delinquent Filer Voluntary Compliance Program.

Note: The IRS has a separate Form 5500-EZ Late Filer Program for relief from late filing penalties for non-ERISA plans that must file Forms 5500-EZ or 5500-SF because they cover only the owner, partner and spouses.

Who is eligible to participate in the DFVCP?

The DOL has stated that:

Plan administrators are eligible to pay reduced civil penalties under the program if the required filings under the DFVCP are made prior to the date on which the administrator is notified in writing by the department of a failure to file a timely annual report under Title I of the Employee Retirement Security Act of 1974 (ERISA). DFVCP is not available to plans that are not covered by Title I of ERISA. DFVCP relief is available only if the plan is required to file an annual report under Title I of ERISA. If a Form 5500-EZ is filed late, the plan administrator may request relief from the IRS for any applicable tax code penalties.

The relief under the DFVCP is available only to the extent that a Form 5500 is required to be filed under Title 1 of ERISA and for certain one-participant and foreign retirement plans under the pilot program issued in 2014 (subject to the reporting requirements of IRC §§ 6047(e), 6058, and 6059).

 The IRS has made this pilot program permanent for plan years 2015 and beyond

What is the Delinquent Filer Voluntary Compliance Program (DFVCP or DFVC Program)?

The Delinquent Filer Voluntary Compliance Program (DFVCP, DFVC Program) was adopted by the Department of Labor’s Employee Benefits Security Administration (formerly the Pension and Welfare Benefits Administration) in an effort to encourage delinquent filers to voluntarily comply with the annual reporting requirements under Title I of ERISA. As adopted, the DFVCP permitted eligible plan administrators the opportunity to avoid the assessment of civil penalties otherwise applicable to administrators who failed to file timely annual reports (commonly referred to as the Form 5500) by voluntarily complying with the filing requirements under Title I of ERISA and paying reduced civil penalties specified in the DFVCP.

In early 2013, the DOL updated the DFVCP to reflect the mandatory electronic filing requirement for the Form 5500 under EFAST 2. The updated DFVCP replaces the program adopted on April 27, 1995, and updated on March 28, 2002, and became effective on January 29, 2013. The updated program maintains the penalty structure that was announced in the 2002 update.

In an effort to further encourage and facilitate voluntary compliance by plan administrators with the annual reporting requirements of Title I of ERISA, the DOL updated the DFVCP by simplifying the procedures governing participation and lowering the civil penalty assessments thereunder.

According to DOL guidance, the penalty structure under the DFVCP is as follows:

•    Reduced per-day penalty: The basic penalty under the program was reduced from $50 to $10 per day for delinquent filings.

•    Reduced per-filing cap: The maximum penalty for a single late annual report was reduced from $2,000 to $750 for a small plan (generally a plan with fewer than 100 participants at the beginning of the plan year) and from $5,000 to $2,000 for a large plan.

•    “Per plan” cap: The DFVCP’s “per plan” cap is designed to encourage reporting compliance by plan administrators who have failed to file an annual report for a plan for multiple years. The “per plan” cap limits the penalty to $1,500 for a small plan and $4,000 for a large plan regardless of the number of late annual reports filed for the plan at the same time. There is no “per administrator” or “per sponsor” cap. If the same person is the administrator or sponsor of several plans required to file annual reports under Title I of ERISA, the maximum applicable penalty amounts would apply for each plan.

•    Small plans sponsored by certain tax-exempt organizations: A special “per plan” cap of $750 applies to a small plan sponsored by an organization that is tax-exempt under Internal Revenue Code Section 501(c)(3). The $750 limitation applies regardless of the number of late annual reports filed for the plan at the same time. It is not available, however, if as of the date the plan files under the DFVCP, there is a delinquent annual report for a plan year during which the plan was a large plan.

•    Top hat plans and apprenticeship and training plans: The penalty amount for “top hat” plans and apprenticeship and training plans was reduced to $750.

Questions about the DFVCP should be directed to EBSA by calling (202) 693.8360 or accessing its Web site at http://www.dol.gov/ebsa.

What are the minimum funding standards under ERISA?

A plan shall be treated as satisfying the minimum funding standard for a plan year if:

1.    In the case of a defined benefit plan that is not a multiemployer plan, the employer makes contributions to or under the plan for the plan year that, in the aggregate, are not less than the minimum required contribution determined under IRC Section 430 for the plan for the plan year;

2.    In the case of a money purchase plan that is not a multiemployer plan, the employer makes contributions to or under the plan for the plan year that are required under the terms of the plan;

3.    In the case of a multiemployer plan, the employers make contributions to or under the plan for any plan year that, in the aggregate, are sufficient to ensure that the plan does not have an accumulated funding deficiency under IRC Section 431 as of the end of the plan year.

What are the basic requirements for vesting under ERISA?

ERISA Section 203 establishes the minimum vesting standards for an ERISA-covered pension plan. Under that section, each pension plan must provide that an employee’s right to his normal retirement benefit is nonforfeitable upon the attainment of normal retirement age. ERISA Section 203(a)(1) states that an employee’s accrued benefit derived from the employee’s own contributions must, at all times, be conforfeitable.

Section 904 of the Pension Protection Act of 2006, has altered the mandatory vesting requirements for qualified benefit plans by eliminating ERISA Section 203(a)(4) and IRC Section 411(a)(12). The PPA also amended ERISA Section 203(a)(4) and IRC Section 411(a)(2) by providing that for plan years beginning after 2006, employer non-elective contributions must vest at least as rapidly as the mandated vesting schedules for employer matching contributions—that is, either a three-year cliff vesting schedule or a schedule of 20 percent after two years, 40 percent after three years, 60 percent after four years, 80 percent after five years, and 100 percent after six years. 

IRS Notice 2007-7 has clarified that employer discretionary contributions remitted to a plan trust prior to 2007 may remain under the pre-PPA vesting provisions of either a five-year cliff vesting schedule or a 3/20 schedule graduating at 20 percent per year after three years and culminating in 100 percent vesting after seven years. 

Most qualified retirement plans provide for a graduated vesting schedule on a “2/20” basis. That is a vesting schedule that provides for 2 percent vesting after two years of credited service and then increases the vesting percentage by 20 percent for each additional year of credited service until the participant becomes 100 percent vested. However, employer-matching contributions (as defined under IRC Section 401(m)(4)(A)) must be vested on a three-year cliff or six-year graded vesting schedule.

For defined contribution plans, the “accrued benefit” is the balance of assets allocated to the participant’s individual account. For purposes of a defined benefit plan, “accrued benefit” is defined as the employee’s accrued benefit as determined under the plan and expressed in the form of an annual benefit commencing at normal retirement age.

Both ERISA and the Internal Revenue Code generally prohibit any plan amendment that has the effect of decreasing accrued benefits under a plan. This would include any amendment increasing the vesting schedule. The IRS takes this provision very seriously and has disqualified plans for violations of this prohibition. Such violations are often referred to as the “death penalty” for qualified plans.

Does ERISA expressly exclude 403(b) tax sheltered annuities from ERISA coverage?

For purposes of ERISA, a program for the purchase of an annuity contract or the establishment of a custodial account as described under IRC Section 403(b), pursuant to salary reduction agreements or agreements to forgo an increase in salary and which satisfies the requirements of treasury regulations under Section 403(b), will not be considered “established or maintained by an employer” as that term is used in the definition of the terms “employee pension benefit plan” and “pension plan” if:  

1.    Participation is completely voluntary for employees; 

2.    All rights under the annuity contract or custodial account are enforceable solely by the employee, by a beneficiary of such employee, or any authorized representative of such employee or beneficiary;  

3.    The sole involvement of the employer is limited to any of the following:  

a.    permitting annuity contractors to publicize their products to employees,  

b.    requesting information concerning proposed funding media, products, or annuity contractors, 

 c.    summarizing or otherwise compiling the information provided with respect to the proposed funding media or products that are made available, or the annuity contractors whose services are provided, in order to facilitate review and analysis by the employees,  

d.    collecting annuity or custodial account considerations as required by salary reduction agreements or by agreements to forgo salary increases, remitting such considerations to annuity contractors, and maintaining records of such considerations,  

e.    holding in the employer’s name one or more group annuity contracts covering its employees, and 

f.    limiting the funding media or products available to employees, or the annuity contractors who may approach employees, to a number and selection that is designed to afford employees a reasonable choice in light of all relevant circumstances; and  

4.    The employer receives no direct or indirect consideration or compensation in cash or otherwise other than reasonable compensation to cover expenses properly and actually incurred by the employer

What type of group or group-type insurance programs are expressly excluded from ERISA coverage?

For purposes of ERISA coverage, the term “employee welfare benefit plan” does not include a group or group-type employee pay-all insurance program offered by an insurer to employees or members of an employee organization, under which:  

1.    No contributions are made by the employer or employee organization;  

2.    Participation in the program is completely voluntary for employees or members;  

3.    The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs, and to remit them to the insurer; and  

4.    The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.  

A U.S. District Court in Florida ruled that a disability plan originally maintained by an employer remains subject to the provisions of ERISA even after it becomes an employee pay-all welfare benefit arrangement.  

Such employers who pay all of an insurance program may, unintentionally, find themselves subject to ERISA where the employer or employee organization that has offered the program inadvertently endorses it (e.g., advising employees that the program offers a “valuable” extension of existing insurance coverage, or the marketing pamphlets for the program contain the employer or employee organization’s logos). 

What welfare benefit plans are not subject to ERISA?

The following welfare benefit arrangements are not subject to the general fiduciary provisions of ERISA:  

1.    Payroll practices that are established by an employer and that provide for payment by an employer to employees on account of overtime pay, shift premiums, holiday premiums or weekend premiums, sick pay, vacation pay, jury duty pay, and pay while on leave for military service;  

2.    The maintenance of on-premises facilities such as recreation, dining, or medical/first aid for the treatment of work-related injuries or illness occurring during normal work hours, or other facilities (excluding day care centers) for use by employees;

3.    Programs for the provision of holiday gifts such as turkeys or hams;

4.    Sales to employees of articles or commodities (whether or not they are offered at below-market prices) of the kind the employer offers for sale in the regular course of business;

5.    Hiring halls maintained by one or more employers, employee organizations, or both;

6.    Remembrance funds under which contributions are made to provide remembrances such as flowers, small gifts, or obituary notices on occasion of the illness, hospitalization, or death of an employee;

7.    Strike funds maintained by an employee organization to provide payment to its members during strikes and for related purposes;

8.    Industry advancement programs that have no employee participants and do not provide benefits, regardless of whether the program serves as a conduit through which funds or other assets are channeled to employee benefit plans subject to ERISA; and  

9.    Unfunded scholarship programs, including tuition and education reimbursement programs, under which payments are made solely from the general assets of an employer or employee organization

Which employee benefit plans does ERISA expressly exclude from coverage?

ERISA Section 4(b) establishes that the provisions of ERISA do not apply to any employee benefit plan if:  

1.    The plan is a governmental plan (as defined under ERISA Section 3(32));  

2.    It is a church plan (as defined in ERISA Section 3(33)) that has not made an IRC Section 410(d) election to have participation, funding, and vesting provisions apply;  

3.    It is maintained solely for the purpose of complying with applicable workers’ compensation laws or unemployment compensation laws or disability insurance laws;  

4.    It is maintained outside the United States primarily for the benefit of persons substantially all of whom are nonresident aliens; or  

5.    The plan is an unfunded excess benefit plan (as described under ERISA Section 3(36), which provides benefits for certain employees in excess of the limitations on contributions and benefits imposed by IRC Section 415). 

Behavioral Healthcare Benefit Plans

Typical Plan Features

According to the Substance Abuse Mental Health Services Administration (SAMHSA), the vast majority of employer-sponsored plans cover inpatient and outpatient mental health treatment services. Roughly half of all employers cover intermediate mental health treatment services such as residential treatment and partial (or day) hospitalization. Approximately 60 percent cover intensive outpatient services, which can include psychosocial rehabilitation, case management, and wraparound services for children (developing treatment plans for children that involve their families). Many plans also include a parity benefit—often called a "severe mental illness" benefit—that specifies which disorders are covered under their state parity law. A well-designed benefit package should cover a wide range of clinically effective services and treatments while incorporating financial incentives to substitute lower cost alternatives for higher cost alternatives when it is clinically appropriate to do so.

Benefit Plan Variables

As previously discussed, mental health and substance abuse coverage has long been characterized by limits that do not apply to healthcare coverage in general. The typical employee healthcare benefit plan offers 30 annual inpatient mental health treatment days and 20 annual outpatient mental health visits. Industry studies show that approximately 80 percent of employees have less generous limits, copayments, and coinsurance deductibles for inpatient mental health treatment than for medical treatment. Although nearly 20 percent of all employer-sponsored health plans have no day or visit limits on inpatient and outpatient health care, more than 50 percent of the plans covered just 20 outpatient mental health treatment visits, and nearly 60 percent covered just 30 or fewer inpatient days. While approximately 80 percent of all covered employees have copayments for medical treatment of less than $20 per visit, only 40 percent have copayments of less than $20 for outpatient mental health treatment visits.

ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) regulates the majority of private pension and welfare group benefit plans in the United States. The provisions of ERISA prevent states from regulating multistate employers on the provisions of their health benefits. Most notably, this affects the 9.5 million federal employees enrolled in the Federal Employee Health Benefit Plan (FEHBP). It also affects many large, self-insured employers and union trust groups.

HIPAA

HIPAA applies to all health insurance plans, including MBHOs. HIPAA allows employees to continue their health insurance coverage from one group to another. HIPAA's nondiscrimination provisions prohibit a group health plan or insurance company from denying an individual eligibility for benefits or from charging an individual a higher premium based on a health factor, including health status, medical condition (both physical and mental illnesses), claims experience, receipt of health care, medical history, genetic information, evidence of insurability, and disability. HIPAA also may serve to reduce health care fraud and abuse and protect privacy and is projected to significantly reduce the 29 cents of every health care dollar spent today on administration. The HIPAA Administration Simplification component consists of three areas:

• Data Standards. Enforce standards for the electronic transmission of health care information.
• Security. Protects confidential and private information through sound and uniform security practices.
• Privacy. Maintains confidentiality of member information.

Because behavioral stigma still prevails, HIPAA plays a particularly important part in protecting sensitive patient information gathered during behavioral treatment.

Legislation 1980–2004 | ERISA

During the years since ERISA, there have been a series of legislative measures with common themes enacted into law. The laws include the:

§  Economic Recovery Tax Act of 1981 (ERTA).

§  Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).

§  Retirement Equity Act of 1984 (REA).

§  Deficit Reduction Act of 1984 (DEFRA).

§  Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA).

§  Tax Reform Act of 1986 (TRA '86).

§  Omnibus Budget Reconciliation Act of 1987 (OBRA '87).

§  Omnibus Budget Reconciliation Act of 1989 (OBRA '89).

§  Budget Act of 1990.

§  Omnibus Budget Reconciliation Act of 1993 (OBRA '93).

§  Family and Medical Leave Act of 1993 (FMLA).

§  Uniformed Services Employment and Reemployment Rights Act of 1993 (USERRA).

§  Pension Annuitants Protection Act of 1993.

§  Uruguay Round Agreements Act (Retirement Protection Act) of 1994.

§  Bankruptcy Reform Act of 1994.

§  Deduction for Health Insurance Costs of Self-Employed Individuals (1995).

§  Small Business Job Protection Act of 1996 (SBJA).

§  Health Insurance Portability and Accountability Act of 1996 (HIPAA).

§  Taxpayer Relief Act of 1997 (TRA '97).

§  Savings Are Vital to Everyone's Retirement Act of 1997.

§  Transportation Equity Act for the 21st Century of 1998.

§  Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1998.

§  Ticket to Work and Work Incentives Improvement Act of 1999.

§  Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999.

§  Mental Health Parity Act of 2001 (MHPA).

§  Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

§  Sarbanes Oxley Act of 2002.

§  Economic Security and Worker Assistance Act of 2002.

§  Jobs and Growth Tax Relief Reconciliation Act of 2003.

§  Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

COBRA established rules to ensure that individuals and their dependents would have access to continued group health insurance upon job termination and certain other qualifying events, and Congress can be expected to expand this concept to one of assured access for all Americans.

OBRA '87 significantly tightened funding standards for defined benefit plans, further restricted plan terminations, and moved the PBGC to a much higher and variable premium. Legislation consistent with these themes will continue to be considered and enacted, with emphasis on the larger theme that employers should be responsible for keeping promises once made regardless of the financial implications for the business.

In 1989, Congress again consolidated employee benefits changes into the budget, restricting tax incentives for employee stock ownership plans (ESOPs), reforming the method of physician payment in the Medicare program, expanding COBRA protections, and repealing the 1988 Medicare Catastrophic Coverage Act and Section 89 (nondiscrimination tests for welfare plans) of TRA '86.

The year 1990 saw the enactment of childcare legislation, expansion of Medicaid, further restrictions on asset reversions, allowance for some pension asset transfers for retiree medical expenses, Age Discrimination in Employment Act (ADEA) amendments to expand protections in early retirement programs, and passage of the Americans with Disabilities Act.

In 1991, Congress limited the employee deduction of employer-provided parking benefits, increased the tax-exempt employer-provided transit benefit, passed the Civil Rights Act of 1991, eliminated pass-through coverage for benefit responsive bank investment contracts (BICs), and limited federal deposit insurance.

In 1992, Congress imposed a 20 percent withholding tax on lump-sum distributions that are not rolled over into qualified retirement accounts and required pension plan sponsors to transfer eligible distributions directly to an eligible plan at the participant's request.

Congress modified ERISA in 1993 as it relates to group health plan coverage of pediatric vaccines, compliance with medical child-support orders, and coverage of adoptive children as dependents. In addition, Congress reduced the compensation limit for qualified pension plans and placed a cap on the deduction of executive compensation not tied to performance. The legislation also included a veterans' rights bill guaranteeing veterans' rights to pension benefits that would have accrued during military service and clarifying the right for military personnel to continue receiving employer-sponsored health insurance for up to 18 months if they are absent due to military service. Finally, it provided, through the Family and Medical Leave Act, that firms with more than 50 workers provide up to 12 weeks of unpaid leave with continued health coverage to employees for the birth or adoption of a child or for serious illness of the employee or the employee's child, parent, or spouse.

In 1994, Congress passed a trade bill that included pension provisions that required greater contributions to underfunded plans, limited the range of interest rate and mortality assumptions used to establish funding targets, phased out the variable rate premium cap, modified certain rules relating to participant protection, and required private companies with underfunded pension plans to notify the PBGC before engaging in large corporate transactions. The law also slowed pension cost-of-living adjustments and extended a provision to allow excess pension assets in certain pension plans to be transferred into a retiree health benefits account. Congress also passed legislation to give the PBGC and state and local government pension plans seats on creditors' committees in corporate bankruptcies. The Social Security Administration also became an independent federal agency in 1995, with the passage of Social Security Administration Reform legislation in 1994.

In 1995, Congress made no permanent legislative changes for benefits. However, in 1996, Congress made changes to COBRA, established a tax exclusion for adoption assistance, and repealed the $5,000 death benefit exclusion. Congress also simplified many pension rules, restricted the ability of states to tax nonresidents' pension incomes earned while working in another state, added length-of-stay requirements for health plans, added mental health parity provisions, established new requirements for health plans and insurers and HMOs (including limiting preexisting-condition exclusions), established limited medical savings accounts, and provided favorable tax treatment for long-term care insurance.

In 1997, Congress was very active. TRA '97 included numerous simplification provisions while increasing the full funding limit, repealing the 15 percent tax on excess distributions, expanded deductible individual retirement accounts (IRAs), created non-deductible "Roth" IRAs, enacted the SAVER Act which led to the 1998 National Summit on Retirement Savings, and enacted a budget that included many Medicare and health coverage expansion provisions.

In 1998, Congress added new tax incentives for transportation benefits, restructured the IRS, and enacted a number of mandatory coverage provisions for health plans.

In 1999 and 2000, Congress enacted changes for Medicare and Medicaid, but passed no ERISA benefits provisions that were signed into law.

In 2001, Congress enacted Mental Health Parity Legislation and a major tax change program in the Economic Growth and Tax Relief Reconciliation Act. EGTRRA allowed new types of plans, larger contributions to plans, and special catch-up contributions for those over the age of 50.

In 2002, Congress enacted the Economic Security and Worker Assistance Act of 2002 in response to the 2001 terrorism, containing provisions related to reserve military and employee benefit plans, and other provisions. Also, following accounting scandals, Congress enacted the Sarbanes Oxley Act of 2002 which contains extensive provisions on corporate governance and plan fiduciary behavior.

In 2003, Congress enacted the Medicare Prescription Drug, Improvement, and Modernization Act, and the Jobs and Growth Tax Relief Reconciliation Act. The major expansion of Medicare included provisions intended to encourage employers to continue the provision of retiree medical benefits.