New FSA rules from the IRS: Some Considerations

This past week, the IRS has provided two notices (IRS Notice 2020-29 and IRS Notice 2020-33) related to health flexible spending accounts and dependent care flexible spending account plans, commonly referred to as health FSAs and DCAP plans. Many employers and employees have been hoping for, or even expecting this type of guidance, which was a relaxation of strict IRS rules related to health FSA and DCAP plans.  

Given the current COVID-19 public health emergency, childcare facilities have been shut down for a period of time nationwide. Elective surgeries have been deferred and for some people, may not be rescheduled this year. This means that money employees have set aside in DCAP or health FSA accounts may not be needed this year. Unlike other employee healthcare-related accounts, such as health savings accounts (HSAs), funds deferred into health FSAs and DCAPs have limited rollover capabilities. This new guidance from the IRS is a welcome effort to offer flexibility to these programs and it certainly makes sense in this unprecedented time.

A summary of specific changes can be found here.

However, as an employer, there are a couple of things you should keep in mind.

New FSA rules from the IRS

Communication Plan

If you have a DCAP and/or a Health FSA, and you choose to implement these flexible options for 2020 you will want to take some action to notify your employees. Because these changes can have a significant financial impact on your employees during this unusual time, you may want to consider putting some extra efforts toward educating your employees as to their specific new options. You should also expect to work with your FSA and DCAP administrator(s), if applicable, to coordinate upcoming changes and necessary file feeds.  This may be as simple as an email and you may be able to rely on your vendors or broker/consultant to draft communications.

Depending on the needs of your employees, you may feel a more robust communication plan is required. If that is the case, please reach out to the contact below or your Findley consultant and they can help.

Effects on Non-discrimination testing

In general, employers who sponsor DCAP and Healthcare FSA plans are subject to Cafeteria plan non-discrimination testing under IRS Code section 125.  DCAPs are additionally subject to DCAP plan testing under IRS Code section 129. Employers should know that the IRS notices do not suspend non-discrimination testing for the 2020 plan year and employers should be mindful that they still must pass applicable non-discrimination tests in order to maintain tax-qualified benefit plans. If you have already reviewed your current plan year and have passed testing related to IRS codes section 125 and 129, you may need to revisit those tests with updated information.

Particularly for DCAP testing under IRS code section 129, passing the average benefits test can be an annual source of anxiety for some employers. Adding deferral flexibility may change a plan from passing or failing this test in a given year, depending on changes your employees elect.

If you have questions regarding the impact of additional deferral changes on your ability to pass non-discrimination testing, you should reach out to whoever handles your testing annually. This may be your FSA or DCAP administrator or a consultant.

Here at Findley, we offer this type of expertise to our clients. If you should have any questions, please reach out to the Findley consultant you normally work with or Dave Tighe at Dave.Tighe@findley.com or 419.327.4194

For the actual IRS notices click here

Published May 21, 2020

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Copyright © 2020 by Findley, Inc. All rights reserved.

Treasury Will Now Allow an Employer Tax Credit for Insured Furloughed Workers

Employers that are partly or completely prohibited from operating during the shutdowns caused by the coronavirus pandemic but who continue to fund employee health care coverage, may be able to take up to a $10,000 tax credit for each employee, regardless of whether they are paying wages to those employees.

As part of The Coronavirus Aid, Relief and Economic Security (CARES) Act, the IRS created an Employee Retention Tax Credit (ERTC) of up to $10,000 it pays in “qualified wages.”  Under the CARES Act, “qualified wages” included (a) cash compensation paid between March 13, 2020 and December 31, 2020, and (b) “qualified health plan expenses.”  The original position within the CARES Act allowed Employers to claim the ERTC who continued to provide health coverage AND continued paying other wages.  This was negatively received by many lawmakers as it seemed prohibitive. The new position allows Employers to claim the ERTC regardless of whether the employee is paid qualified wages.

Treasury Will Now Allow an Employer Tax Credit for Insured Furloughed Workers

Who is eligible?

Businesses of all sizes, including non-profits, can receive the ERTC in two circumstances:

  • If the business operations were fully or partially suspended as a result of government-mandated COVID-19 shut-down order, or
  • If the business experiences a decline in gross receipts by more than 50% in a quarter compared to the same quarter in 2019.

For the second qualifier, the employer eligibility ends if gross receipts in a quarter exceed 80% compared to the same quarter in 2019.

Who is NOT eligible?

  • Importantly, any employer who receives a Paycheck Protection Program (PPP) loan will not be eligible for the ERTC, unless it is fully paid back by 5/14/2020.

This PPP caveat protects from double dipping, but regardless, this will likely be welcome news and will encourage employers to continue to pay for health expenses.

While this article focuses on the highlights, a full list of Q and A regarding tax credits for insured furloughed workers can be found here on the IRS website.

For more information or questions regarding how this could impact your organization, contact Dave Barchet at Dave.Barchet@findley.com or 216.875.1914

Published May 13, 2020

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GE pension changes: should my company be looking to do the same?

On October 7, General Electric (GE) announced a series of decisions around their salaried pension plan:

  • For participants continuing to accrue benefits, further accruals will be stopped at the end of 2020. (New employees hired after 2011 were not eligible for the pension plan.)
  • A lump sum buy-out proposal to 100,000 terminated but not yet retired participants will be offered.
  • Benefits in a supplemental plan for certain executives will also freeze.

Inevitably, whenever one of the largest pension plans in the country makes an announcement like this, it can cause executives at other companies to question if a similar decision makes sense for their plan.  The action item here most germane to other plan sponsors, and the focus of the remainder of this article, will be to focus on the middle bullet point.  Offering lump sums to non-retired, terminated participants has become a popular strategy among pension plan sponsors the last couple years as a way to reduce headcount without paying a premium to an insurance company to off-load the obligations.

Lump Sum Cashouts Defined

A Lump Sum Cashout program occurs when a defined benefit pension plan amends its plan to allow terminated vested participants to take a lump sum payment of their benefit and be cashed out of the plan entirely. The program is typically offered as a one-time window.  Plans generally may offer this type of program only if their IRS funded percentage is at least 80% both before and after the program is implemented.

Many pension plans have offered, or at least considered, Lump Sum Cashout programs over the last several years to minimize their financial risk. Plan sponsors that have implemented these programs have been rewarded with significant cash savings as well as risk reduction.

Advantages of Implementing Lump Sum Cashout Today

1. Improved Funded Status

An advantage of the current interest rate environment is that lump sums will be less than most other liability measurements related to the plan. Employers will be paying benefits to participants using a value less than the balance sheet entries being carried for those benefits in most cases. These lower lump sum payments will then help employers improve the funded status of the plan in addition to de-risking or reducing the future risk.

2. PBGC Premium Savings

The most significant benefit of offering a Lump Sum Cashout Program is the Pension Benefit Guaranty Corporation (PBGC) premium savings. The PBGC continues to increase the annual premiums that pension plans are required to pay to protect the benefits of their participants in the pension plan. The per participant portion of the premium (flat-rate) is now up to an $80 payment per participant in 2019. This is more than a 200% increase since 2012. The variable rate portion of the premium is up to $43 per $1,000 underfunded which is an increase of almost 500% since 2012.

These rates are expected to continue to grow with inflation each year. Therefore it is ideal for pension plan sponsors to reduce their participant count sooner rather than later so they can save on these future premiums. In total, some pension plan sponsors could see annual PBGC premium savings of over $600 for each participant who takes a lump sum distribution.

Other Considerations When Planning for a Lump Sum Cashout

There are some concerns that pension plan sponsors will also want to consider such as:

  • Potential increases to contribution requirements;
  • One-time accounting charges that could be triggered;
  • Potential increase to annuity purchase pricing upon pension plan termination. Note that a permanent lump sum feature may increase pension plan termination annuity pricing and cause some insurers to decline to bid.

The pension plan’s actuary should be consulted so they can properly evaluate the impact of offering such a program.

Some pension plan sponsors use lump sum cashouts as part of their pension plan termination preparation strategy. This Findley article provides tips to map your route to pension plan termination readiness. Already have a frozen plan and been considering a termination in the near future? For a complete A-Z walkthrough, check out our guide below.

Questions? Contact the Findley consultant you normally work with, or contact Amy Gentile at amy.gentile@findley.com, 216.875.1933 or Matt Klein at matt.klein@findley.com 216-875-1938.

Published on October 8, 2019

© 2019 Findley. All Rights Reserved.

AI Technology Transforming the Next Generation of HR

The right mix of technology, artificial intelligence and the human element is a differentiator.

With the coming of Artificial Intelligence (AI) and broader uses of technology, HR professionals will be challenged to manage and humanize HR systems to achieve their objectives. AI is the ability of a computer program or a machine to think and learn. Call it what you will, HR Technology (HRIS, HRMS, HCM) are here to stay.

Steven Hawking once said that “Unless we learn how to prepare for, and avoid, the potential risks, AI could be the worst event in the history of our civilization.”

HR is Already Using Artificial Intelligence and Leveraging Technology

Many experts predict that AI will replace jobs involving repetitive or basic problem-solving tasks, and even go beyond current human ability. AI systems will make HR decisions instead of professionals in industrial settings, customer service and other interactive roles. 

Likewise, Human Resources technology and AI are used increasingly in every facet of the organization’s employment lifecycle as listed below.

  • Employers use social media to brand their companies and attract candidates
  • Applicant Tracking Systems technology improves HR professional’s recruiting and hiring efficiency and productivity
  • Screening technologies, such as video interviews, assessments or automated scheduling/screening help to vet candidates
  • Technologies have automated several HR-related tasks such as employee onboard processing, employee benefit elections and processing retirements
  • Performance management systems track individual performance and link that performance to company results
  • Employee engagement surveys, and 360 feedback systems capture the employee perspective
  • Training modules are distributed to employees and their utilization tracked via learning management technology systems
  • Compensation data surveys and cloud-based technology tools are available to compensation professionals that subscribe to them

Today many employee or prospective employee interactions are not with a human being. Instead, leveraging AI in HR, candidates apply for a job to an automated HR system, have an initial online screening, interview via video and through conversational job matching, are assessed to determine if they are talent worthy of further consideration. The assumption is that these HR software solutions are faster, more accurate and cost-effective at selecting the best talent.

How has the Human Resources Professional’s Role Changed?

Businesses that are late adopters of technology will be left behind. In today’s competitive market your speed to attract, hire, manage, develop and reward your talent is a key success factor. As we have seen in the marketplace, organizations that are lacking in this space have higher employee turnover and lower productivity. They are not meeting the needs of today’s generation which require immediate capability to engage and transact certain activities. Organizations using traditional HR approaches and software solutions struggle to land and keep top talent.

Human Resources professionals will need to significantly adapt and add new skills beyond being people experts. HR teams will need to develop a stronger understanding of systems, process and data analytics). We see this movement in the world of professional sports where data analytics augments identifying top talent. Businesses are slowly following this AI trend and are beginning to reap the benefits.  

Building Your Next Generation HR Team

One of the best innovators in hiring today is a company called Catalyte. In fact, Catalyte’s mission states: “Catalyte advances human potential for the digital economy. We use artificial intelligence to identify individuals, regardless of background, who have the innate potential and cognitive ability to be great software developers.”

Catalyte uses AI to review candidates for pure ability – not experience – and then builds skills through a strong apprentice and training program. The organization looks for raw talent and molds that talent to develop the computer programming skills they need to succeed.

Is your HR team combining innovative technology with raw human skill to build your workforce for the future? What kind of HR talent do you need to create and lead this kind of approach?

In larger organizations, where resources may be more plentiful, the focus of systems, process and data analytics may be assigned to specific departments. In smaller organizations everyone shares the burden of addressing these AI areas. Irrespective of the size of the organization or the specific role, HR professionals will need to build their technical acumen and become the conduit to building a workforce for the future.

After all, even AI uses algorithms built off of desired outcomes, as identified and input by human experts. Therefore, HR teams today require a mix of both art and science.

Questions regarding how to develop an innovative HR strategy or assess your current HR function or talent, contact the Findley consultant you normally work with, or Dan Simovic at dan.simovic@findley.com, 216.875.1917.

Published August 14, 2019

© 2019 Findley. All Rights Reserved.

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More Pension Lump Sum Cashout De-risking Activity Expected in 2019

Pension plan sponsors looking for significant cash savings and de-risking opportunities have another favorable environment to pull the participants’ lump sum cashout lever this year. But that lever includes several options and considerations. In 2019, the interest rate environment is favorable which gives pension plan sponsors an opportunity to provide lump sum payments to participants while improving the funded status of the plan. So why wait to offer this cashout opportunity when you have this significant benefit staring you right in the face?

Lump Sum Cashout Opportunity in 2019

Lump Sum Cashouts Defined

A Lump Sum Cashout program occurs when a defined benefit pension plan amends its plan to allow terminated vested participants to take a lump sum payment of their benefit and be cashed out of the plan entirely. The program is typically offered as a one-time window but can also be made a permanent feature of the plan with potentially significant financial impact. Plans generally may offer this type of program only if their IRS funded percentage is at least 80% both before and after the program is implemented.

Many pension plans have offered, or at least considered, Lump Sum Cashout programs over the last several years to minimize their financial risk. Plan sponsors that have implemented these programs have been rewarded with significant cash savings as well as risk reduction

Advantages of Implementing Lump Sum Cashout Today

1. Favorable Lump Sum Interest Rate Environment

In 2019, the lump sum interest rate environment is favorable for most employers thanks to a significant interest rate increase during 2018 when lump sum interest rates are locked in for 2019 calendar year plans. These higher rates will result in smaller lump sum payments when compared to 2018 (15-20% decrease).

2. Improved Funded Status

Another advantage of the current interest rate environment is that lump sums will be less than most other liability measurements related to the plan. In other words, interest rates used for 2019 calendar year plans to determine accounting liabilities are lower than lump sum rates. Therefore employers will be paying benefits to participants using a value less than the balance sheet entries being carried for those benefits. These lower lump sum payments will then help employers improve the funded status of the plan in addition to de-risking or reducing the future risk. This interest rate arbitrage is not expected to exist in 2020 since defined benefit lump sum interest rates have continued to decrease since the beginning of 2019.

3. PBGC Premium Savings

The most significant benefit of offering a Lump Sum Cashout Program is the Pension Benefit Guaranty Corporation (PBGC) premium savings. The PBGC continues to increase the annual premiums that pension plans are required to pay to protect the benefits of their participants in the pension plan. The per participant portion of the premium (flat rate) is now up to an $80 payment per participant in 2019. This is more than a 200% increase since 2012. The variable rate portion of the premium is up to $43 per $1,000 underfunded which is an increase of almost 500% since 2012.

HOW TO CALCULATE THE PBGC PREMIUM
Flat Rate (per participant) + Variable Rate = PBGC Premium

These rates are expected to continue to grow with inflation each year. Therefore it is ideal for pension plan sponsors to reduce their participant count sooner rather than later so they can save on these future premiums. In total, some defined benefit plan sponsors could see annual PBGC premium savings of over $600 for each participant who takes a lump sum distribution.

Can You Offer a Lump Sum Cashout More than Once?

Employers that have previously offered a lump sum cashout to participants should be aware that this doesn’t exclude them from pursuing a de-risking program again. In general, as long as plan sponsors wait 3-4 years between similar programs, they can offer the same program to plan participants again. This gives participants who have terminated since the original program an opportunity to take their pension payment. A second round offering also gives participants from the first program a second chance to take a cashout while de-risking the plan for the plan sponsor.

Other Considerations When Planning for a Lump Sum Cashout

There are some concerns that plan sponsors will also want to consider such as:

  • Potential increases to contribution requirements;
  • One-time accounting charges that could be triggered;
  • Potential increase to annuity purchase pricing upon plan termination. Note that a permanent lump sum feature may increase pension plan termination annuity pricing and cause some insurers to decline to bid.

In summary, 2019 is an ideal year given the lump sum interest rates. The current interest rate arbitrage provides pension plan sponsors a low cost opportunity to de-risk the pension plan and save significantly on future PBGC premiums. As with any de-risking opportunity, there are several considerations that should also be discussed. The defined benefit plan’s actuary should be consulted so they can properly evaluate the impact of offering such a program.

Some plan sponsors use lump sum cashouts as part of their pension plan termination preparation strategy. This Findley white paper provides tips to map your route to pension plan termination readiness.

Questions? Contact the Findley consultant you normally work with, or contact Amy Gentile at amy.gentile@findley.com, 216.875.1933.

Published on June 7, 2019

© 2019 Findley. All Rights Reserved.

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