Category: Benefit Plan Audits

Posted on Jan 17, 2017

Given the role that deferred compensation plans play in attracting and retaining executives and key employees, it’s important that the non-qualified plans operate according to applicable law and are designed in a way that maximizes value to participants. Unfortunately, because these plans can be complex, compliance errors, as well as administration and communication mistakes, can easily occur, negating the advantages that companies intended to provide.

Typical Non-Qualified Plans

Non-qualified deferred compensation (NQDC) plans typically fall into four categories, according to the IRS:

1. Salary Reduction Arrangements simply defer the receipt of otherwise currently includible compensation by allowing the participant to defer receipt of a portion of his or her salary.

2. Bonus Deferral Plans resemble salary reduction arrangements, except they enable participants to defer receipt of bonuses.

3. Top-Hat Plans (also known as Supplemental Executive Retirement Plans or SERPs) are NQDC plans maintained primarily for a select group of management or highly compensated employees.

4. Excess Benefit Plans are NQDC plans that provide benefits solely to employees whose benefits under the employer’s qualified plan are limited by tax code section 415.

Note: Despite their name, phantom stock plans are NQDC arrangements, not stock arrangements.

The Legal Requirements

Although non-qualified deferred compensation plans are not qualified, they must follow the guidelines of Internal Revenue Code Section 409A. This tax code section covers the timing of non-qualified plan elections, funding, distributions and documentary compliance requirements.

Regulations under Section 409A are lengthy and complex. Failure to follow them can wipe out the intended tax breaks of income deferral under a non-qualified arrangement. Noncompliance can also subject amounts to a 20 percent tax penalty and interest.

Choosing the right investment vehicles for a non-qualified deferred compensation plan is critical because mistakes can result in trouble with the IRS, as well as the possibility of underperformance. If the plan is set up to mirror the company’s 401(k) plan, with administration by the plan vendor, tax problems can occur when participants reallocate their investments.

Regardless of who administers the plan, investment choices should reflect the diversification that is usually desired by top earning executives, with attention paid to avoiding investment vehicles that may appear attractive but may have unintended tax consequences. The services of an investment professional knowledgeable in non-qualified deferred compensation plans can be invaluable in avoiding pitfalls in this area.

Because non-qualified deferred compensation plan participants are high-level employees, a company sometimes assumes that they readily understand the plan. Therefore, the company may not make the same communication efforts that are generally undertaken with plans for rank-and-file employees.

Don’t underestimate the importance of clear, thorough and up-to-date communications. Participation can be hampered if eligible executives don’t understand the plan benefits. Even if executives do participate, poor communications can result in misunderstandings and, sometimes, lawsuits.

Participants should know what they have coming to them and any risks associated with participation, such as the status of their non-qualified benefits if the company becomes insolvent or what if their employment terminates before retirement.

In addition to educating executives about the plan, the sponsoring company must ensure that it realizes the full extent of the obligations the plan is creating down the road. If not managed properly, promises made to today’s executives can become burdensome to tomorrow’s shareholders, drain future corporate coffers and put a strain on the ability of the company to remain competitive in its industry.

Non-qualified deferred compensation plans can certainly enhance a company’s executive pay package and thus be an excellent executive recruitment and retention tool. However, common and easily made mistakes can turn what should be an advantage into a quagmire of unintended consequences.

Careful strategic planning, regular reviews and the assistance of qualified tax and legal counsel can help to avoid errors in compliance, administration and communications. Contact your CJ Benefit Plan Advisor with any questions.

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Posted on Dec 23, 2016

Choosing a retirement plan for your business can be complicated, particularly when one type of account may have several variations. But it’s the differences that help you decide which makes the best fit for your company.

Take Individual Retirement Accounts (IRAs) for example. A major advantage of IRAs is the ability to save for retirement while deferring taxes until the money is actually withdrawn. However, the plans carry a lot of restrictions, including stiff penalties if you withdraw funds before the age of 59 1/2 years.

Each type of IRA has its own tax implications and eligibility requirements. This article will deal with three of the possibilities: the SIMPLE-IRA, the Simplified Employee Pension (SEP) plan and the Payroll Deduction IRA (see right-hand box).

A No-Cost Benefit

No matter how big or small your business is, your employees can participate in a Payroll Deduction IRA, at virtually no cost to you. Here’s how it works: Employees who want to participate set up a traditional or Roth IRA with their banks and authorize you, the employer, to make payroll deductions. You forward the deductions to the banks. Your only other responsibility is to make the plan available to all employees. You have no contribution or filing requirements. Participants cannot borrow from the plan or use assets as collateral. They also must pay income tax and a 10 percent penalty for withdrawals made before they turn 59 1/2 years of age. If your business eventually decides to set up a retirement plan that includes employer contributions, your benefits adviser can help you discontinue the Payroll Deduction IRA and make the switch.

SIMPLE-IRA: The Fundamentals

If your business has no more than 100 employees, you can set up a SIMPLE-IRA. Self-employed individuals and one-employee corporations also often use these pension plans. Earnings on the account balance accumulate tax-free until withdrawals start. There is no limit on how much can be accumulated.

Contributions are generally broken down into two elements: elective deferrals made by the self-employed individual or company employee and matching contributions by the employer.

For 2017, the maximum employee contribution is the smaller of:

  • 100% of your self-employment income or 100% of the salary from your corporation.
  • $12,500 (unchanged from 2016).

Employees can start making “catch-up” contributions in the year they reach age 50. For 2017, they can contribute an extra $3,000  a year (same as 2016).

Employers generally must make a matching contribution that is the smaller of:

  • Three percent of salary or self-employment income, or
  • 100 percent of the elective deferral.

If you run your business as a sole proprietorship or a single-member LLC treated as a proprietorship for federal tax purposes, you are considered self-employed. So you make the elective deferral and the matching contribution, claiming deductions for both.

If you are employed by your own S or C corporation, the company makes the matching contribution and withholds the elective deferral contribution from your salary. The business gets a deduction for the contribution and your taxable salary is reduced by your contribution.

Simplified Employee Pensions: Stripped-Down Plans

SEPs are intended primarily for self-employed individuals, including sole proprietors, partners and LLC members, as well as small corporations.

If you’re self-employed, you can make an annual deductible contribution of up to 20% of self-employment income. Self-employment income generally equals the net profit shown on your Schedule C, E or F, minus the deduction for 50% of self-employment tax from page one of Form 1040.

If you’re employed by an S or C corporation, the company must set up the SEP. The business can then make a deductible contribution of as much as 25% of your salary. The maximum possible contribution is $54,000 for 2017 (up from $53,000 in 2016).

So how do these two plans compare? They are each simple to set up and identical in several ways, such as:

  • Requiring no annual filings with the federal government;
  • Allowing minimal or no contributions when cash is tight; and
  • Prohibiting borrowing.

In other ways, however, they stack up a little differently:

Employee Contributions

A SIMPLE-IRA can permit much larger annual deductible contributions if your business produces a modest  income. But contribution limits can become a disadvantage as income grows. A SEP allows you to make more generous annual deductible contributions, an advantage if you have a large amount of self-employment income or salary. But, depending on your age and income, you might be allowed to make larger annual deductible contributions to other types of personal retirement accounts, such as a 401(k) or a defined benefit pension plan.

SIMPLE-IRAs allow you to make “catch-up” contributions; SEPs do not.

Employer Contributions

SIMPLE-IRA plans may require you to make matching contributions if your business has other employees. Matching contributions are 100 percent vested immediately. Your company must allow all employees to participate in a SIMPLE plan if they earned $5,000 or more in any two previous years (consecutive or not), and are reasonably expected to earn at least $5,000 in the current year.

With a SEP, if your business has employees, you would have to make deductible contributions for those who have worked for you during at least three of the past five years. Also, since all contributions to the accounts vest immediately, an employee can quit at any time without losing SEP money. That’s great for the employee. But if your business employs more than just a few trusted staff members, you may want to consider a different option.

Set-Up Dates

You must establish a SIMPLE-IRA by no later than October 1 of the year for which you want to make your initial contribution.

You can establish a SEP as late as the extended due date of the federal income tax return for the year when you make the initial contribution. Later contributions can be extended in the same way.

Conclusion: When your business generates a modest amount of self-employment income or salary and there are no other employees who must be covered, the SIMPLE-IRA is often the best choice. It doesn’t matter if you have additional income from other sources. This is especially true if you are 50 or older, because you can make additional “catch-up” contributions that further sweeten the deal.

On the other hand, if you want maximum simplicity, a SEP may be the best choice, assuming you don’t mind covering your employees. A SEP is your only choice if you want to make a deductible contribution for the preceding year when no plan actually existed at the end of that year.

With the vast array of retirement plans available, contact your benefits adviser to learn more about SIMPLE-IRAs, SEPs or alternatives.

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Posted on Oct 3, 2016

Dependent Eligibility Audits Emerge as Cost Cutting Tool

As employers search for ways to contain employee benefit plan costs, many are undertaking dependent eligibility audits. The logic and the potential cost savings are compelling. Why pay for something — in this case, coverage for someone not entitled to it under the terms of a benefit plan — if you don’t have to?

Get Employees on Board With Audits

Many employers that choose to conduct dependent eligibility audits fail to communicate to employees the reasons behind the move — that is, the potential savings for the company and the staff.

Employers should use all available media, and stress that removing individuals who are not eligible for coverage will benefit not only the company, but all employees who are paying to have themselves,and family members covered by the plan. In some cases a successful audit might mean the difference between continued coverage and the decision to eliminate a health plan altogether.

Although the cost savings can be compelling, they’re not the only reason to conduct a dependent eligibility audit. ERISA mandates that benefit plans be maintained for the “exclusive benefit” of employees and employers as plan fiduciaries are required to operate plans accordingly. Arguably, covering ineligible individuals, which can create additional plan costs for all employees, runs afoul of these requirements.According to the results gleaned from one group of these audits, the percentage of ineligible dependents detected ranged between seven percent and 19 percent. With the cost of each employee dependent covered under a health plan averaging about $3,400 annually, the potential savings can be dramatic, even for a small business. The return on investment from dependent eligibility audits can be as high as 40 to 1. Savings should be significant, when you consider that each removed ineligible dependent represents dollars saved year after year.

The purpose of a dependent eligibility audit is to verify that individuals listed by employees as eligible for coverage — primarily spouses and dependent children — indeed meet the plan eligibility requirements. A simple employee certification or affidavit of dependent eligibility does not provide proof and, therefore, an audit requires employees to submit documents that substantiate eligibility.

An audit is a significant undertaking. Assume that you will need to:

  • Review health plan documents (and documents for any other plans for which the audit is being conducted) to determine the definitions for all possible eligible dependents.
  • Determine the documentation required for substantiating eligibility. For example, in the case of a spouse, this may be not only a marriage license or certificate, but also a recently filed joint income tax return to show that the marriage continues to the present day.
  • Establish a time line for informing employees about the audit and a deadline for submitting the required documentation. Develop communications materials accordingly.
  • Determine the process by which employees can submit their documentation and set up a mechanism to receive materials.
  • Review submitted documents to determine whether they meet the requirements for establishing eligibility. Establish a notification and grace period process for employees who fail to submit materials properly and/or on time. Inform employees of the audit results.
  • Since these audits generate a large amount of paper, arrange for secure storage and/or disposal of the materials employees have submitted.
  • Chances are the audit will generate questions from employees. That’s why a knowledgeable person or persons must be assigned to field employee inquiries.

Some companies choose to outsource dependent eligibility audits instead of conducting them in-house. Audit service providers cite the potential cost savings that can be achieved and the amount of work involved in a thorough, well-designed audit to argue that contracting for such services delivers a good return on investment. Ask your accountant for guidance.

What Other Design Factors Should You Consider?

The workload associated with a dependent eligibility audit can be substantial. In order to make the process more manageable, some companies audit only a particular dependent group, or a single company division or location at a time, instead of requiring all pertinent employees to submit documentation.

You also need to decide whether to conduct your audit retrospectively (and try to recover claims that shouldn’t have been paid) or on a forward-looking basis only. Many employers choose to precede the audit with an amnesty period during which employees can voluntarily remove dependents from the plan with no penalty.

Since most companies have traditionally run on an honor system when covering dependents — basically taking an employee’s word for it that those dependents enrolled for coverage indeed meet a definition of an eligible dependent — advance communications to alert employees of the audit, and the reasons for it, are critical to employee cooperation and, ultimately, the success of the audit.

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Posted on Sep 29, 2016

ERISA Basics for Employers

If you’re a U.S. employer and you offer any kind of pension benefit to your employees, it’s critical that you have an understanding of the Employee Retirement Income Security Act of 1974 (ERISA). The failure to know and fulfill your obligations and responsibilities under the landmark law may lead to significant liability.

Background and Origin

ERISA established a set of standards and rules that regulated the pension industry and how employers provide retirement benefits to their workforces. The law allows favorable tax treatment for money contributed to pension plans, but it also sets forward a series of requirements as well. Specifically, to qualify for favorable status under ERISA, a plan can’t discriminate entirely in favor of executives and management, and it must extend such benefits to rank-and-file employees.

Pensions

ERISA doesn’t require employers to provide pension benefits at all. But if a pension is offered, for it to qualify for ERISA protection, it must meet a number of demands. Among them:

  • Employees’ pensions must vest to their benefit within a certain number of years.
  • Employers must keep defined benefit pensions sufficiently funded to meet expected benefits, based on the actuarial assumptions in the plan.
  • Income benefits for married couples must be calculated on the joint life expectancy of the couple, not just on the life expectancy of the employee — unless both spouses waive the requirement in writing.

ERISA also created the Pension Benefit Guaranty Corporation (PBGC). This is a quasi-government entity that acts as a backstop for pensions that run into financial trouble and serves to provide workers some security against the possibility of the failure of a pension plan.

All qualified pensions in the country must pay an insurance premium to the PBGC. If a covered pension plan becomes insolvent, the PBGC steps in, takes over the assets and ensures that workers in the plan receive promised benefits, up to certain monthly limits.

Requirements

Employers who provide ERISA-qualified pension plans must file a form 5500 with the Department of Labor. This includes both defined benefit (traditional) pension plans and defined contribution pension plans like the popular 401(k).

You must also provide every employee beneficiary or participant with a plan summary on request. This includes calculations of vested benefits and accrued balances and income benefits.

The Fiduciary Standard

ERISA established a fiduciary standard for plan sponsors, trustees and administrators. This means that those sponsoring or in charge of a plan or its assets are held to the highest standards of conduct, fair dealing and utmost good faith recognized in U.S. law. This is critical, because if plan sponsors fail to understand and abide by their responsibilities as plan fiduciaries, it could lead to significant civil liability and federal fines.

As a fiduciary, your responsibilities include:

  • Acting solely in the best interests of plan participants and their beneficiaries
  • Exercising prudence in carrying out your responsibilities
  • Avoiding any unreasonable plan expenses
  • Making investment and administrative decisions in accordance with plan documents
  • Diversifying investments

Health plans

ERISA also affects the administration of employer health plans. Specifically, to qualify for a full deduction of premiums paid on behalf of employees, the employer must extend benefits and eligibility not just to executives but also to all full-time employees.

A later amendment to ERISA, the Consolidated Omnibus Budget Reconciliation Act (commonly known as COBRA), requires employers to provide limited continuation health insurance coverage to all employees who leave service.

For more information about your obligations and responsibilities under ERISA, contact your employee benefits specialist at Cornwell Jackson.

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Posted on Sep 14, 2016

ACA word on tablet screen with medical equipment on background

When it comes to Affordable Care Act compliance reporting of eligible employee health coverage for the 2016 tax year, the difference between a small employer and an applicable large employer (ALE) isn’t so clear-cut.

ALEs are defined as organizations with 50 or more employees in the previous year, including full-time equivalent employees. However, the IRS considers subsidiaries or related entities with fewer than 50 employees to be part of the parent company when defining an ALE. Bottom line: the parent and its related entities are all subject to ACA reporting.

WP Download - ACA ReportingThen there are self-insured employers, which are basically regarded as insurance companies by the IRS. These employers are required to submit Form 1095 regardless of the number of people they employ or provide with health care insurance.

In addition to proper reporting, self-insured employers are subject to two fees as part of the ACA that are adjusted annually and have different deadlines for payment. The Transitional Reinsurance fee is paid into a federal fund that could provide reimbursements for insurance carriers that experience financial losses when participating in federal- or state-sponsored health care exchanges. The Patient-Centered Outcomes Research Institute Fee (PCORI) goes toward research of care outcomes and practices at various health care organizations; the goal is to create a central federal database to help patients make the best choices for health care. Although the Transitional Reinsurance fee is expected to go away after 2016, the PCORI fee will continue in 2016 with an expected sunset for plan or policy years ending on or after October 1, 2019.

Plan ahead to avoid penalties later.

Especially for small entities of large employers, Form 1095 can be confusing when listing the proper legal entity that employs each eligible employee. Listing the parent company or the name most people recognize as the company name can trigger a filing rejection. The same goes for the choice of address and a corresponding employer identification number (EIN), a number assigned by the IRS to identify employer tax accounts. Entities that don’t have an EIN have to request one from the IRS in order to complete Form 1095 properly.

In addition, revised Department of Labor overtime rules that go into effect December 1, 2016, could hinder proper reporting as the number of employees eligible for health care coverage shifts. Employers that choose to bump up salaries for key employees may end up increasing the number of eligible employees.  Alternatively, maintaining a larger number of part-time or non-exempt employees could lead to higher levels of overtime pay.

Employers that choose payroll outsourcing and knowledgeable benefit brokers can get support to plan ahead for ACA reporting. They can confirm whether or not the employer (or any affiliated entities) is subject to ACA reporting. Then, their advisors can help improve payroll administration and coordinate a schedule for collecting and reporting data by the January 31, 2017, filing deadline. Employers can face penalties for noncompliance with ACA requirements as well as for missing tax forms — risks that can be mitigated when benefits brokers, CPAs and payroll administration cooperate early in the year.

What if you don’t have to comply with ACA for 2016?

Small employers that are not yet required to either provide affordable health care coverage or report on coverage under ACA can eventually fall under requirements if employment hits 50 employees (or fte) or if they merge or are acquired. Working closely with an ACA compliant payroll provider, benefits broker and your CPA can help your company prepare to respond to those changes in the future.

Cornwell Jackson’s payroll team can help. Partnering with Brinson Benefits, we manage ACA-compliant payroll administration. We can guide employers to the right resources and answer questions about reporting deadlines and other payroll and tax compliance issues. For example, we advise on hourly and salaried employee compliance and new overtime rules, which tie into employee eligibility for benefits and any required ACA reporting. Read our whitepaper on outsourced payroll. Send us your questions and we’ll point you to the experts.

 

SB HeadshotScott Bates, CPA, is a partner in the audit practice and leads Cornwell Jackson’s Business Services Department, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, retail and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.comor 972-202-8000.

 

Sharon Alt headshotSharon Alt is Director of Compliance with Brinson Benefits in the Dallas/Fort Worth area. With a focus on Affordable Care Act regulations, she is responsible for ensuring that Brinson and their employee benefit clients meet all regulatory compliance standards in regards to healthcare benefits administration, particularly with regard to healthcare reform and the Affordable Care Act. She regularly guides clients through the ACA 6055/6056 reporting requirements. 

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Posted on Sep 12, 2016

employee-performance

Replacing nonperforming employees is costly and traumatic, both for employers and employees. But allowing a bad situation to fester is worse; it can cause the problem to spread by undermining morale or by creating the impression that management doesn’t care. Performance improvement plans (PIPs), when executed properly, can help you avoid all that.

The American National Standards Institute (ANSI), which oversees the creation, promulgation and use of thousands of norms and guidelines that directly impact businesses in nearly every sector, has guidelines for creating these plans within its broader performance management standard. The ANSI standard describes a performance improvement plan as “a process used to resolve persistent performance problems in accordance with a documented procedure.” It also states that a PIP “provides a vehicle for open dialog and consistent feedback,” and features both conversation and documentation.

Questioning Assumptions

Assumptions you may have made about the sources of nonperformance can be put to the test through the PIP process. For example, a problem you assume is due to a simple lack of effort on the employee’s part might in fact be due to inadequate training, poorly communicated expectations, or health or personal problems that require accommodation.

The PIP process involves a series of formal steps that will help you uncover the source of the problem and then effectively address it.

You will need to create (or borrow and customize) a document that lays out the whole process. According to the ANSI standard, the first step is to document the performance issues. That document should include the following elements:

  • Employee information,
  • Relevant dates,
  • Description of the performance discrepancy or gap,
  • Description of expected performance,
  • Description of actual performance,
  • Description of consequences,
  • Plan of action,
  • Signatures of the manager and the employee, and an
  • Evaluation of the plan of action and overall performance plan.

Suppose the issue is spotty attendance and tardiness. The documentation would include details of when these infractions occurred, a summary of the attendance policy, the employee’s paid time off allotment, and any formal warnings the employee has already received.

Action Plan

Before sitting down with the employee to present the documentation, you need to have developed a provisional plan of action to address the problem. The plan is provisional because you might learn something in the course of the meeting that would suggest an alternative path.

Your goal in the meeting isn’t simply to point out the problem, but to seek understanding and to encourage the employee to own the issue, according to a primer put out by the Society for Human Resource Management (SHRM).

The action plan should also feature specific measurable goals to turn the situation around. For a straightforward issue like attendance, the goal could be as simple as having a perfect attendance record until a scheduled follow-up meeting, perhaps three months in the future. (This assumes there’s no underlying health or similar issue that needs to be taken into account.)

When setting goals for more complicated performance issues, such as problems with the quality of the employee’s work, you’ll need to determine whether the employee needs additional resources in order to improve. You’ll also need to be clear about the specific quality issues so that improvement can be measured.

Finally, the plan should spell out specific consequences for a failure to meet the goals. For example, says SHRM, if termination may result from certain actions, this should be clearly communicated in writing.

For quality control purposes, it’s good to share the performance plan with a colleague who might spot problems or have ideas on how to improve it. If you have an internal HR team, of course, you should work closely with them.

When the plan is ready, it’s time to meet with the employee. Remember, the goal is two-way communication; employees need to understand it’s their responsibility as much as it’s yours to make this a dialog. The ANSI standard states that “effective feedback should be timely, constructive, specific and balanced, and should include both positive and development information based on what the employee did or did not do.”

Focus on Behaviors

The ANSI standard also stresses the importance of not critiquing “personal characteristics,” but focusing instead on behaviors and how those behaviors “are linked to effective versus ineffective performance.” (The same advice is applicable to any time you’re providing employee feedback, of course.)

As noted, you might learn from your conversation with the employee subject to the PIP that you didn’t fully understand the issues at hand, and therefore need to fine-tune the performance plan. When you have presented the final version, both you and the employee should sign it.

The plan should lay out the schedule for follow-up meetings at which employee progress — or lack thereof — toward achieving enumerated goals is discussed. Ideally, goals will have been achieved, or at least significant movement in that direction, will have occurred. That provides an opportunity for positive, motivational feedback.

In the other scenario — no or limited progress — you will be guided by the action plan that you established at the outset. The outcome might be to give the employee a final chance (with a date set for the next meeting) to achieve goals. Alternatively, you might conclude that the employee is better suited to another job within your organization or that termination is the best course of action.

Whatever happens, by using the PIP process, you may be able to:

  • Ensure that employees with performance issues are treated consistently,
  • Construct a straightforward roadmap of how to handle the situation,
  • Maximize the possibility of retaining an employee who might otherwise have been terminated, and
  • Prevent an employee who ultimately does have to be terminated from feeling like the victim of a capricious or discriminatory act, therefore minimizing the likelihood of litigation.

Of course a PIP isn’t always the appropriate course of action. But when it’s used successfully, you may salvage an otherwise good employee who simply needs redirection. In the end, improving your existing resources is likely to be far more cost effective than starting over with a new employee.

Members of SHRM.org can find a great deal of information there about how to flesh out a performance improvement plan.

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Posted on Sep 8, 2016

Today’s employers are offering a growing array of voluntary benefits to their staff members. It’s easy to see why these plans are well received by employees and employers. They expand the menu of benefit choices at discounted rates to employees (compared to what they would pay on the individual market) and at little or no cost to the company.

ERISA does not require any employer to establish a pension plan. It only requires that those who establish plans must meet certain minimum standards. The law generally does not specify how much money a participant must be paid as a benefit.

— The U.S. Dept. of Labor

ERISA broadly defines an “employee welfare benefit plan” as any plan, fund or program established or maintained by an employer for the purpose of providing participants and their beneficiaries with certain types of benefits, through insurance or otherwise. DOL regulations exclude from this definition certain types of workplace programs and practices.One issue that is frequently overlooked when bringing a voluntary benefit program into the workplace is ERISA compliance with ERISA (theEmployee Retirement Income Security Act). Many employers assume that any voluntary benefit plan for which employees shoulder the entire premium cost is outside of ERISA’s reach. Not so. Department of Labor (DOL) regulations and legal precedent determine what does and does not constitute an ERISA-governed “employee welfare benefit plan.”

Exclusions from ERISA

Employee welfare benefit plans do not include a group-type insurance program under which:

1. No contributions are made by the employer.

2. Participation in the program is completely voluntary for employees.

3. The employer’s sole functions with regard to the program are — without endorsing the program — to permit the insurer to publicize the program to employees, to collect premiums through payroll deduction and to remit these premium payments to the insurer.

4. The employer 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.

Information or Endorsement?

A voluntary benefit program that meets all four of these requirements will not be considered an ERISA plan. But what these requirements mean is not always clear, especially when applied to a particular situation. For example:

  • What actions can an employer take to inform employees about a new voluntary benefit program “without endorsing the program?”
  • If employee communications about the program have an employer logo on them, has the employer endorsed the program?
  • What if the employer includes information about the program in a booklet with information on its health plan and pension plan, which are — and are intended to be — employer-sponsored, ERISA-governed plans?
  • What message is the employer sending and what message are employees getting about the employer’s role in the program?

Plans that fall under ERISA trigger various reporting, disclosure and fiduciary responsibilities for an employer. If an employer mistakenly believes that a particular program is not subject to ERISA, and consequently fails to do what is necessary to comply with the law, it can run into lawsuits and penalties down the road.

Thus, from the moment an employer begins to consider bringing a voluntary benefit into its workplace, you should understand exactly what your company can and cannot do with regard to that benefit program if you want to avoid making the program subject to ERISA. Employers certainly can have more than a minimal level of involvement in a voluntary benefit program, but they must realize that these programs most likely will be subject to ERISA and, accordingly, take steps to comply with the requirements of that law.

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Posted on Aug 30, 2016

ACA word on tablet screen with medical equipment on backgroundUnder the Affordable Care Act, individuals without health care coverage will pay tax penalties for their lack of coverage. However, if they are eligible to receive ACA-compliant affordable health insurance coverage through an employer, they must choose to take that coverage or actively waive that coverage. The employers must document when employees were informed of eligibility in accordance with health care plan guidelines. They must also document if and when an employee waived coverage. If the employee accepts coverage, an employer must document the start and end dates of coverage (including data on dependents and their coverage dates for self-insured plans), within the given tax year.

If the employer meets the definition of an ALE or if it is self-insured, this health care coverage information must be reported to the IRS on Form 1095 for purposes of comparing employer data with employee tax data.

WP Download - ACA ReportingNow here is the wrinkle for eligible employees who waive eligible employer coverage. Let’s say one of these employees decides to get health insurance coverage through a state- or federal-sponsored health care exchange, even though the employer offered “affordable” coverage. And let’s say that same employee receives a federal government subsidy to pay for health coverage through the exchange. If the IRS determines that the employee had affordable health coverage through the employer, the employee could be required to pay back the subsidy — and faces additional penalties which could be hundreds or thousands of dollars over a year. This is a primary reason for such scrutiny of ACA compliance — rooting out misuse or abuse of federal health care insurance subsidies among taxpayers who could receive compliant coverage through an employer.

For the purposes of this article, we won’t delve into the question of what is really affordable health care insurance through employers, particularly for family coverage. The fact remains that the IRS requires accurate reporting of the status of all eligible employee health care coverage, and is far less likely to make exceptions for employer good faith efforts in 2016.

Improve administration and payroll systems for ACA reporting

One of the biggest challenges when complying with Affordable Care Act tax reporting for 2015 was that payroll and administration systems weren’t compatible with the data requested.

Employers struggled with missing data or hard-to-interpret data. For example, coverage start dates were difficult to interpret because many were listed as generic “termination” dates. An employer would list the previous plan as terminated on a certain date, then reenact the plan the next day when adding an eligible spouse or dependent.

Employers that tried to handle ACA reporting in-house were challenged not only with reporting requirements, but also the hassle of form rejections. Payroll outsourcing companies and benefits specialists spent countless hours organizing, untangling and resubmitting forms. The best specialists have been preparing since the last tax season filing to improve their processes and collect data earlier.

Continue Reading: ACA and the Small Employer vs. Large Employer Challenge


Cornwell Jackson’s payroll team can help. Partnering with Brinson Benefits, we manage ACA-compliant payroll administration. We can guide employers to the right resources and answer questions about reporting deadlines and other payroll and tax compliance issues. For example, we advise on hourly and salaried employee compliance and new overtime rules, which tie into employee eligibility for benefits and any required ACA reporting. Read our whitepaper on outsourced payroll. Send us your questions and we’ll point you to the experts.

 

SB HeadshotScott Bates, CPA, is a partner in the audit practice and leads Cornwell Jackson’s Business Services Department, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, retail and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

 

Sharon Alt headshotSharon Alt is Director of Compliance with Brinson Benefits in the Dallas/Fort Worth area. With a focus on Affordable Care Act regulations, she is responsible for ensuring that Brinson and their employee benefit clients meet all regulatory compliance standards in regards to healthcare benefits administration, particularly with regard to healthcare reform and the Affordable Care Act. She regularly guides clients through the ACA 6055/6056 reporting requirements. 

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Posted on Aug 22, 2016

The intent to discriminate might not have been a factor. But an East Coast chemical manufacturer will still have to pay $175,000 in back pay and interest to 660 African-American job applicants, who were rejected for entry-level jobs at one of their locations over a one-year period.

The problem was a failure to satisfy the federal Uniform Guidelines on Employee Selection Procedures. In particular, the company’s pre-employment test was deemed to disproportionately screen out a protected group based on criteria that weren’t sufficiently linked to the skills required for the jobs the company was filling.

The original guidelines (updated over the years) were issued by the Equal Employment Opportunity Commission (EEOC) back in 1978, six years after the enactment of the Equal Employment Opportunity Act. While the basic rules aren’t new, they’re subject to constant interpretation in each employment scenario, and in the case of the chemical manufacturer, the employer’s interpretation didn’t hold up. The rules seek to eliminate aspects of hiring systems that could be discriminatory by race, gender, religion or national origin.

“All Selection Procedures”

The EEOC guidance doesn’t apply to pre-employment tests, but “all selection procedures used to make employment decisions, including interviews, review of experience or education from application forms, work samples, physical requirements, and evaluations of performance,” according to the EEOC.

A key principle is the importance of using “validated” testing systems (more on that below). Technically, you’re not required to use tests that have been prevalidated as nondiscriminatory. However, if you’re accused of discriminating and can’t prove the validity of your testing methods at that time, you’ll generally lose the case.

Hiring results that raise red flags are those that lead to a “substantially different rate of selection.” The same applies to the processes of promotion, retention or any other positive employment action. The EEOC defines that as when the selection rate for any race, sex or ethnic group is less than 80% of that for the group with the highest selection rate.

So, for example, if 50% of men pass a pre-employment test and are hired, but only 30% of women pass the test and are hired, the alarm bells sound. In this case, the hiring rate for women was only 30% divided by 50%, which equals 60% of the hiring rate for men. The women’s pass rate would have to be at least 40% to be within the range acceptable to the EEOC.

Note: You don’t need to analyze testing results for every protected group. An exception is made for groups that represent less than 2% of the local work force. That low threshold might be applicable to the “national origin” category, if a relatively obscure country is involved.

Failing the “substantially different rate of selection” test isn’t, on its own, proof of illegal discrimination, however. The EEOC describes it as “a numerical basis for drawing an initial inference and for requiring additional information.” This is where test validation comes in — basically showing that the test gives an accurate measurement of a job candidate’s ability to be successful in the position sought.

Validating Hiring Tests

The Uniform Guidelines draw upon the American Psychological Association’s list of “validity strategies:”

    • Criterion-related validity: A statistical demonstration of a relationship between scores on a selection procedure, and job performance of a sample of workers,
    • Content validity: A demonstration that the content of a selection procedure is representative of important aspects of the job, and
  • Construct validity: A demonstration that a selection procedure measures a human trait (for example, creativity), and that the trait is essential for successful job performance.

If you’re accused of discriminatory hiring practices and the EEOC decides to investigate, these are the two steps the investigator typically will take to assess the situation. The examiner will:

  1. Measure the extent to which each element of your selection process has an adverse impact on members of protected groups, and
  2. Ask you for evidence of the validity of any selection mechanism that has been shown to have an adverse impact.

Unfortunately, you can’t give a trial run to validate evidence to the EEOC in advance to gain assurance whether it will pass muster if you face an accusation of discrimination. During an examination, “validity evidence will not be reviewed without evidence of how the selection procedure is used and what impact its use has on various race, sex and ethnic groups,” according to the EEOC.

“Rational” Doesn’t Suffice

Also, it’s not enough to demonstrate a “rational relationship between a selection procedure and the job sufficient to meet the validation requirements of the guidelines,” the EEOC warns. Nor can you present written or oral assertions of validity from any expert. It all comes down to a validity study that the EEOC will “judge on its own merits.”

One of the pre-employment tests used by the chemical manufacturer measured reading, math, listening, the ability to locate information and teamwork. In spite of assertions by the employer that the test accurately predicts a job applicant’s future performance for the job at hand, the EEOC wasn’t convinced.

The bottom line: Before choosing, let alone trying to validate an employment test, determine what knowledge, skills and abilities are essential for the job, to avoid inappropriately screening out applicants. Also, be sure you maintain records of the demographic features of your job applicants to make it possible for you (and perhaps the EEOC) to determine whether your hiring practices are having a disproportionate negative impact on protected groups.

Industrial psychologists and other job experts specialize in these issues, and can help you to avoid falling into any employment discrimination traps.

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Posted on Aug 19, 2016

ACA word on tablet screen with medical equipment on backgroundThe challenges of Affordable Care Act reporting for the 2015 tax year will likely follow companies and organizations into 2016 — and the honeymoon period with the IRS is over. It will take more than careful administration to ensure proper reporting and avoid kicked back forms or penalties for missing or inaccurate data. Benefits brokers that specialize in ACA reporting recommend a combination of careful administration along with support from payroll outsourcing companies. This planning includes a CPA team that can advise on tax and payroll administration.

The IRS late “Christmas miracle” last tax season gave employers extra time to report compliance with ACA affordable health insurance coverage mandates and the status of employee health care coverage. It is not expected to be repeated for 2016.

WP Download - ACA ReportingIn fact, company administrators and their CPA or payroll advisors should be gathering data now to be ready to fill out and file relevant parts of Form 1095 by January 31, 2017.

Applicable large employers (ALEs), those that have 50 or more employees (or full time equivalent), must show compliance with the ACA employer mandate to provide affordable health care coverage to eligible employees. Both ALEs and employers that are self-insured are required to report which employees were eligible for coverage and when. They also have to report which employees waived coverage and which were in fact covered in any month during 2016.

Starting and ending dates of coverage as well as starting and ending dates of dependent coverage (including birth dates and SSNs) are crucial for accurate reporting. Even eligible employees who left the employer sometime during the year must be accounted for.

Experiences from last year illustrate the complexity and financial costs at stake for employers navigating ACA reporting. Well-intentioned employers can get hung up at various stages of employee and payroll administration, data gathering and IRS reporting. They may also not understand if they fall under the definition of ALE if they are a subsidiary with fewer than 50 employees. However, the IRS views all subsidiaries or entities of large companies as falling under the same employer for the ACA reporting obligation.

Penalties can involve hundreds of dollars for each missing form with no limit on the total penalty per employer.

Last year, approximately 9 percent of all Form 1095 forms were rejected.

Some of the most common errors involved the following:

  • Improper use of EIN numbers
  • Employee and dependent names and SSNs that didn’t match tax forms (e.g. name changes due to marriage were kicked back)
  • Discrepancies with employee and dependent start dates and termination dates

When processing through the new Affordable Care Act Information Return System (AIR), some forms were rejected due to the use of apostrophes in last names or an extra space prior to an employer’s name. The IRS is working to improve AIR for 2016 filing, but employers and their advisors should be aware of IRS tips to avoid common errors and expedite processing.

Continue Reading: Why is the IRS Cracking Down on ACA Reporting?


Cornwell Jackson’s payroll team can help. Partnering with Brinson Benefits, we manage ACA-compliant payroll administration. We can guide employers to the right resources and answer questions about reporting deadlines and other payroll and tax compliance issues. For example, we advise on hourly and salaried employee compliance and new overtime rules, which tie into employee eligibility for benefits and any required ACA reporting. Read our whitepaper on outsourced payroll. Send us your questions and we’ll point you to the experts.

 

SB HeadshotScott Bates, CPA, is a partner in the audit practice and leads Cornwell Jackson’s Business Services Department, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, retail and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

 

Sharon Alt headshotSharon Alt is Director of Compliance with Brinson Benefits in the Dallas/Fort Worth area. With a focus on Affordable Care Act regulations, she is responsible for ensuring that Brinson and their employee benefit clients meet all regulatory compliance standards in regards to healthcare benefits administration, particularly with regard to healthcare reform and the Affordable Care Act. She regularly guides clients through the ACA 6055/6056 reporting requirements. 

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