Finally! An Answer to Local Taxation of Non-Qualified SERP Benefits in Ohio

Qualified retirement plan benefits paid by pension or 401k plans have always been exempt from local taxes in Ohio.  Non-qualified retirement plans (often referred to as “Supplemental Executive Retirement Plans” or “SERPs”) are often designed to enhance retirement benefits for executives over and above the benefits provided through the qualified plans offered by the employer.  Over the last several years there has been disagreement between cities in Ohio and SERP eligible executives over whether benefits paid by SERPs are retirement plan benefits, exempt from local taxes, or deferred compensation benefits, subject to local taxes when such benefits become vested using FICA and Medicare (“FICA”) taxation rules.

SERP participants have alleged that SERPs are retirement benefits which should be exempt from local taxes just like qualified retirement plan benefits. Cities have argued that non-qualified SERPs are taxable compensation to the executive. The disagreement rose into the public eye in 2015 in the case of MacDonald vs. Shaker Heights when the Ohio Supreme Court ruled in favor of MacDonald. The local tax ordinance in that case did not exclude SERPs and further, did not specifically define “pension benefits” which were exempt from local taxation. After this ruling, many cities amended their tax ordinance to define pensions as benefits paid only by a qualified retirement plan. Many taxpayers have argued these Ohio cities should not be able to tax retirement benefits….whether paid by a qualified or non-qualified plan. But there has been little or no guidance from Ohio on the issue…..until recently.

local taxation and non-qualified SERP benefits

What’s New in 2020?

Ohio House Bill 166 amended ORC 718 and clarifies the definitions of “pension” and “retirement benefit plan”. This prevents cities from defining such terms in their tax ordinances to require taxation of non-qualified pensions and retirement benefits.  All pensions and benefits paid out of a retirement benefit plan are exempt from local taxes if the benefits meet the following criteria:

  • The benefits are provided by the Employer and not through a deferral of wages by the employee;
  • The benefit payments must be due after or at termination of employment; and
  • The plan is designed to deliver the benefits because of retirement or disability

HB166 does not define “retirement”; therefore, it will be up to plan documents to define what constitutes a retirement. Retirement definitions vary from plan to plan, but it is typically defined by age and/or years of service. Wage continuation, severance payments, and payments of accrued vacation are specifically not included in retirement plan benefits.

Thus, whether paid by a qualified or non-qualified plan, if these criteria are met, the benefits are retirement plan benefits exempt from local taxes in Ohio. Eligibility for the exemption in SERPs is going to be a facts and circumstances analysis comparing the plan design to the criteria above and intent of the plan. The new rules were made effective January 1, 2020. SERP benefits taxed by municipalities prior to 2020 are not refundable. However, eligible SERP benefits which become vested on or after January 1, 2020, even if they have accrued over a long career, are exempt from local taxes.

Taxation Timing

SERPs are subject to FICA taxes under special rules….the present value of the benefit is generally taxed when the benefit becomes vested, even if this is prior to payment.  There is an exception for non-account balance plans which benefits cannot be determined until retirement.  Ohio local taxes follow the FICA rules for tax timing. HB166 did not change these tax timing rules. However, if the benefits qualify as “pension” and “retirement benefit plans” under HB 166, the benefits are exempt from local tax if vested on or after January 1, 2020. Starting in 2020, collection and remittance of city income taxes for an eligible SERP is no longer necessary, assuming it meets the facts and circumstances analysis.

Ineligible Benefits

Examples of executive benefits that would be ineligible for the local income tax exclusion:

  • Benefits provided through elective deferrals on the part of the employee
  • Any payment of benefits prior to termination of service, retirement or disability
  • Benefits delivered through long term incentive plans, such as phantom stock plans, which do not promise benefits because of retirement or disability
  • Benefits under a plan which provides a participant with an election to be paid prior to retirement or disability, even if the participant did not make the election
  • Severance payments, payments made for accrued personal or vacation time, and wage continuation payments.

Outcomes

As a result of HB 166, the taxation of SERPs by Ohio municipalities has been resolved. Properly designed SERP benefits will be exempt from income tax by Ohio municipalities, just like qualified retirement plan benefits.

Many employers currently have a SERP; those plans should be evaluated to determine if it meets the exemption criteria. Employers should stop reporting and withholding local wages and taxes starting in 2020 if they deem the plan(s) to be a “retirement benefit plan”.

Some school districts within Ohio have their own income tax.  There are no changes to the taxation of school district income tax as a result of HB166. School District Income taxes follow Ohio taxing guidelines rather than FICA, so participants would be taxed when benefits are paid.

For questions regarding the impact of this legislation on your organization’s Non-Qualified SERP Benefits or how to navigate these changes, please contact the Findley consultant you normally work with, or Brad Smith below.

Published May 28, 2020

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Copyright © 2020 by Findley, Inc. All rights reserved

Taking Public Sector Retiree Medical To The Next Level

Faced with the sobering reality of more than $1 trillion in unfunded retiree healthcare liabilities, public sector employers across the country are seeking a sustainable retiree health benefit solution. Their shift to relying on retiree health insurance exchanges will not be without challenges or concerns. One solution that is just starting to be used is to work with state legislatures and make benefit changes that allow public sector employees to convert unused sick leave into retiree health insurance credits.

Numerous plan sponsors for public sector organizations may already be using – or contemplating the use of — retiree healthcare insurance exchanges to facilitate purchase of pre-65 individual policies or Medicare supplemental benefits. As public sector employers review this option, they should consider issues that may arise if future cuts are made to retiree medical stipends. What will be the exchange-based solution?

Earlier this year, the Ohio Public Employees Retirement System (OPERS) announced that serious financial pressure will result in significant reductions in stipends for retiree health benefits. The cuts for pre-65 retirees may be as much as $400 per month and will affect retirees including police and fire department pensioners. Although the mandatory retirement age for a public safety officer may be 65, many police officers and firefighters retire well ahead of Medicare entitlement, because of health status and long service.

According to a January 16, 2020 cleveland.com article, the changes will reduce OPERS unfunded healthcare liabilities from $6.2 billion to $27 million. Officials from OPERS said the $11 billion healthcare fund was set to run out of money in 11 years, but with the changes that will be implemented beginning in 2022, the fund will be solvent for 18 years.

In addition to cutting premium subsidies for retirees in 2022, healthcare coverage will no longer be provided through OPERS. Retirees will receive an OPERS subsidy to be used toward the purchase of healthcare coverage through the healthcare marketplace.

public sector employers across the country are seeking a sustainable retiree health benefit solution

Look beyond HSAs

It is evident that there is an acute need for public sector employers to accumulate funds for retiree medical benefits while the plan participant is actively employed. While Health Savings Accounts (HSAs) provide an opportunity for employees to create a nest egg, implementing a qualified high deductible health plan for collectively bargained public sector groups remains a challenge. In addition, these high deductible plans are not immune to problematic healthcare trends, including how high cost specialty drugs can ravage an employer’s (and employee’s) health benefits budget.

An alternative to an HSA, Health Reimbursement Accounts (HRAs) do not need to be paired with a high deductible plan, but the employer contributions are typically modest and easily consumed by out-of-pocket medical, prescription drug, dental and vision expenses. For instance, according to Mercer’s 2018 National Survey of Employer Sponsored Health Plans, the median HRA annual contribution for those with single coverage was just $625.

A better mechanism is needed to establish funds for public sector retiree medical benefits – and the states of New York and Wisconsin may be on the right track. New York’s policy allows eligible state employees to cover some retiree health insurance costs with unused sick leave, while in Wisconsin, the Accumulated Sick Leave Credit Conversion Program allows state employees covered by the State Group Health Insurance Program to convert unused sick leave into credits to pay for health insurance when they retire. The credits cannot earn interest or be used to pay for insurance that is not part of the State Group Health Insurance Program.

Since most employers, public sector and private, are interested in reducing health care liabilities and not subsidizing retirees under their active employee health benefits plan, the Wisconsin approach – with some important tweaks — is an intriguing solution that should be considered in other states.

Retiree medical’s future: Sick leave conversion, HRAs and marketplace options?

First, the decision to convert unused sick leave into health insurance credits should be left to each retiring employee without triggering a taxable event. In 2005, the Internal Revenue Service (IRS) issued Revenue Ruling 2005-24 that allowed employers to use sick leave and vacation conversion programs to fund an HRA, as long as the employees did not have the option to take these converted amounts in cash. Then, in 2007, the IRS issued a Private Letter Ruling (PLR 200708006) indicating the sick leave and vacation conversion arrangement did not result in taxable income if the employer mandates what unused amounts would be converted to cash, contributed to the HRA, or used to pay other benefits.

In other words, the employee has no say in any of these important decisions.

Second, the retiree should not be forced into remaining in their former employer’s group health plan. They should have the ability to shop the insurance marketplace for a plan and medical provider network that meets their needs.

Third, the retiree should be able to decide how to spend the HRA funds. Even the new Excepted Benefit HRA unveiled last year by the Trump administration (where up to $1,800/year may be contributed by the employer) does not allow the HRA to be used to pay premiums for Medicare Parts B or D; individual health insurance (except for short-term limited duration insurance); group insurance coverage (except COBRA); or Medicare supplements or Advantage plans.

Although a traditional HRA or Retirement HRA may allow payment of premiums for Medicare or long-term care insurance; and if using a trust, accept employee/retiree after-tax contributions and accrue interest tax-free, there is still the issue that conversions of unused sick leave must be made on a mandatory basis by the employer. The employee cannot make such an election before retirement.

As state legislatures consider strategies to deal with the ever growing costs of providing retiree healthcare, the option of new legislation that would permit state and local governments to create sick leave conversion programs that would enable their retirees to use those funds to help pay for health insurance purchases on or off an insurance exchange. To give employees more control over the conversion to credits, there would have to be some changes to the employer’s  IRC 125 cafeteria plan.  The approach could provide a more sustainable bridge to Medicare for those public sector employees who retire before age 65.

We are interested in your thoughts about this topic. Please contact Bruce Davis with your comments and questions at Bruce.Davis@findley.com or 419.327.4133

Published March 24, 2020

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© 2020 Findley. All Rights Reserved.

2020 Health and Group Benefits Plan Compliance Calendar

Calendar Plan Year & Calendar Employer Tax Year*

2020 Health and Group Benefits Plan Compliance Calendar January through June
2020 Health and Group Benefits Plan Compliance Calendar July through December

January 2020

31   Last day to report on Form W-2 to employees the cost of applicable employer-sponsored coverage under a group health plan

February 2020

28   Paper Filing – Last day for applicable large employer member to file one or more Forms 1094-C and to file Form 1095-C for each employee who was a full-time employee for any month of the calendar year 2019

28   Paper Filing – Last day for person that provides minimum essential health coverage to an individual during calendar year 2019 to file an information return with the IRS reporting the coverage. Filers will use Form 1094-B, Transmittal of Health Coverage Information Returns, to submit Forms 1095-B, Health Coverage, to IRS.

28   Notice of Breach of Unsecured Protected Health Information – breaches affecting fewer than 500 individuals. Last day for covered entities to notify HHS of a breach affecting fewer than 500 individuals. (Covered entities must notify affected individuals of such a breach without unreasonable delay and in no case later than 60 days following the discovery of a breach.)

March 2020

02   Last day to file electronically with DOL Form M-1 annual report for MEWAs (and certain entities claiming exception) for 2019 (without extension)

02   Last day for filers of IRS For 1095-B, Health Coverage, to furnish a copy of Form 1095-B to the person identified as the “responsible individual” on the form for coverage in 2018

02   Last day for an applicable large employer member to furnish a Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, to each of its full-time employees

31   Electronic Filing – Last day for an applicable large employer member to file one or more Forms 1094-C and to file a Form 1095-C for each employee who was a full-time employee for any month of the calendar year 2019 bb

31  Electronic Filing – Last day for person that provides minimum essential coverage to an individual during calendar-year 2018 to file an information return with the IRS reporting the coverage. Filers will use Form 1094-B, Transmittal of Health Insurance Offer and Coverage Information Returns, to submit Forms 1095-B, Health Coverage, to IRS

May 2020

15   Last day (unextended deadline) to file Form 990 series for a 2019 VEBA. An automatic filing extension of 6 months may be requested by filing Form 8868 by the due date of the Form 990

July 2020

28   Last day to furnish Summary of Material Modifications (SMM) to participants and beneficiaries receiving benefits

31   Last day to file Form 5500 for 2019 without extension

31   Last day (unextended deadline) to file Form 5330 and pay excise tax on disqualified benefits underfunded welfare plans

31   Last day (unextended deadline) to file Form 5330 and pay excise tax on certain excess fringe benefits

September 2020

30   Last day to furnish Summary Annual Report (SAR) for 2019 plan year to participants and beneficiaries if an extension to file Form 5500 was not obtained

October 2020

Prior to Oct. 15, 2020 – Medicare Part D Creditable Coverage Notice – Employers offering prescription drug coverage to Medicare Part D eligible individuals must notify those individuals whether the offered prescription drug coverage is creditable coverage. Notice must be provided prior to Oct. 15, 2020.

15   Last day to file Form 5500 with extension

December 2020

15   Last day (with extension) to furnish Summary Annual Report (SAR) for 2019 plan year to participants and beneficiaries

*This calendar is designed to provide a general overview of certain key compliance dates and is not meant to indicate all possible compliance dates that may affect your plan.

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

To access other selected requirements with no specific deadline plus a detailed description of each compliance item, click below.

View 2020 Detailed Health and Welfare Plan Compliance Calendar/Checklist and other selected requirements with no specific deadline

Interested in other compliance calendars?

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Defined Contribution

Medicare Part D Notice – 2019 Update for Employers

It’s that time of year again, Medicare Part D compliance. Employers must send employer-sponsored, health plan Medicare-eligible members a Medicare Part D Notice (Notice) notifying them whether their prescription drug (Rx) benefits qualify for coverage.

The Notice is due before October 14, 2019. There have been no changes in the Model Part D Coverage Notice since last year—thus you can use your 2018 Notice (although you will need to update your 2018 notice with corresponding 2019 dates).

The Notice is intended for individuals who are covered (or seeking to be covered) for employer-sponsored Rx coverage, including active employees, retirees, and COBRA continuants (and their dependents) who are eligible for Medicare as the result of age or disability. The only exception to providing the Notice is for those employers who provide Rx coverage through a qualified Employer Group Waiver Plan (EGWP).

Rather than try to identify Medicare-eligible individuals for targeted distribution, many employers simply provide the Notice to all their plan participants. If you need a copy of the Model Notice, you can use this link: https://www.cms.gov/Medicare/Prescription-Drug-Coverage/CreditableCoverage/Model-Notice-Letters.html

You will recall that in addition to distributing the Notice, there is also a requirement to notify the Centers for Medicare & Medicaid Services (CMS), by March 1, 2020, (for calendar year plans) of whether your coverage is creditable or non-creditable.

Questions? Please contact the Findley consultant you regularly work with or Bruce Davis at Bruce.Davis@findley.com or 419.327.4133.

© 2019 Findley. All Rights Reserved.

Posted September 19, 2018

2019 Health and Welfare Plans Compliance Calendar/Checklist

Significant Due Dates – Calendar Plan Year & Calendar Employer Tax Year*

2019 Health and Group Benefits Compliance Calendar

January 2019

31   Last day to report on Form W-2 to employees the cost of applicable employer sponsored coverage under a group health plan

February 2019

28   Paper Filing – Last day for applicable large employer member to file one or more Forms 1094-C and to file Form 1095-C for each employee who was a full time employee for any month of the calendar year 2018

28   Paper Filing – Last day for person that provides minimum essential health coverage to an individual during calendar year 2018 to file an information return with the IRS reporting the coverage. Filers will use Form 1094-B, Transmittal of Health Coverage Information Returns, to submit Forms 1095-B, Health Coverage, to IRS.

28   Notice of Breach of Unsecured Protected Health Information – breaches affecting fewer than 500 individuals. Last day for covered entities to notify HHS of a breach affecting fewer than 500 individuals. (Covered entities must notify affected individuals of such a breach without unreasonable delay and in no case later than 60 days following the discovery of a breach.)

March 2019

01   Medicare Part D Creditable Coverage Disclosure to CMS – Last day for employers offering prescription drug coverage to Medicare Part D eligible individuals to disclose to CMS whether coverage is creditable prescription drug coverage by submitting a completed online Creditable Coverage Disclosure to CMS Form

01   Last day to file electronically with DOL Form M-1 annual report for MEWAs (and certain entities claiming exception) for 2018 (without extension)

04   Last day for filers of IRS For 1095-B, Health Coverage, to furnish a copy of Form 1095-B to the person identified as the “responsible individual” on the form for coverage in 2018

04   Last day for an applicable large employer member to furnish a Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, to each of its full-time employees

31   Electronic Filing – Last day for an applicable large employer member to file one or more Forms 1094-C and to file a Form 1095-C for each employee who was a full time employee for any month of the calendar year 2018. [IRS 2018 Instructions for Forms 1094-C and 1095-C provide that, while generally the Forms must be filed by March 31 when filing electronically, for calendar year 2018 the Forms are required to be filed by April 1, 2019 when filing electronically.]

31  Electronic Filing – Last day for person that provides minimum essential coverage to an individual during calendar-year 2018 to file an information return with the IRS reporting the coverage. Filers will use Form 1094-B, Transmittal of Health Insurance Offer and Coverage Information Returns, to submit Forms 1095-B, Health Coverage, to IRS. [The IRS 2018 Instructions for Forms 1094-B and 1095-B provide that, while generally the Forms must be filed by March 31 (when filing electronically) of the year following the calendar year of coverage, for Forms filed in 2019 reporting coverage provided in calendar year 2018 the Forms are required to be filed by April 1, 2019 when filing electronically.]

May 2019

15   Last day (unextended deadline) to file Form 990 series for a 2018 VEBA. An automatic filing extension of 6 months may be requested by filing Form 8868 by the due date of the Form 990

July 2019

29   Last day to furnish Summary of Material Modifications (SMM) to participants and beneficiaries receiving benefits

31   Last day to file Form 5500 for 2018 without extension

31   Last day (unextended deadline) to file Form 5330 and pay excise tax on disqualified benefits under funded welfare plans

31   Last day (unextended deadline) to file Form 5330 and pay excise tax on certain excess fringe benefits

31   Last day for plan sponsor of a self-insured plan to file Form 720 and pay the PCORI fee for 2018 plan year

September 2019

30   Last day to furnish Summary Annual Report (SAR) for 2018 plan year to participants and beneficiaries if an extension to file Form 5500 was not obtained

October 2019

14   Prior to Oct. 15, 2019 – Medicare Part D Creditable Coverage Notice – Employers offering prescription drug coverage to Medicare Part D eligible individuals must notify those individuals whether the offered prescription drug coverage is creditable coverage. Notice must be provided prior to Oct. 15, 2019.

15   Last day to file Form 5500 with extension

December 2019

15   Last day (with extension) to furnish Summary Annual Report (SAR) for 2018 plan year to participants and beneficiaries

*This calendar is designed to provide a general overview of certain key compliance dates and is not meant to indicate all possible compliance dates that may affect your plan.

Copyright © 2019 by Findley, Inc. All rights reserved.

To access other selected requirements with no specific deadline plus a detailed description of each compliance item, click below.

View 2019 Detailed Health and Welfare Plan Compliance Calendar/Checklist and other selected requirements with no specific deadline

Interested in other compliance calendars?

Defined Benefit

Defined Contribution

Employer Sponsors of Health Benefits Part 1: Possibilities to Sustain Healthcare Costs

Featured

It’s little comfort to an employer sponsoring employee health benefits to be told annual healthcare trend rates are moderating. Even at a 4 – 5% trend, healthcare costs continue to grow faster than wages and salaries. Although employers have passed some of this increase on to their employees via higher contributions and out-of-pocket expenses, a tight labor market makes this more difficult to do. With the Affordable Care Act (ACA) Employer Responsibility requirements still in place, and the average employer’s share of healthcare costs now more than half the cost of an entry-level employee, some employers will continue to scrutinize work schedules to avoid full-time employee thresholds.

Employers know healthcare will be at the crux of the 2020 Presidential election. With uncertainty as a foundation, employers:

  • Are now hearing about proposals to eliminate employer-sponsored health plans in favor of a “Medicare for All” program.
  • Want to know if the “Medicare for All” proposal is economically feasible; would it, indeed, “level the playing field” in terms of attracting talent.
  • Question if the increase in their taxes needed to support this program would be more or less than what they spend now on healthcare benefits.

Between now and the 2020 election, employers are striving to sustain competitive, affordable health benefits. They have tried and exhausted many tactics to contain healthcare costs, and are looking for other alternatives—beyond putting their health plan out to bid to optimize network discounts and/or reduce fixed costs, such as Administrative Services Only (ASO) fees and stop loss premiums. The following diagram shows a range of possibilities an employer can consider for 1/1/2020. It presupposes the employer has:

  • Completed a claims analysis to identify cost trends and drivers.
  • Examined demographics for health status and special needs to address well-being.
  • Considered proposed regulations liberalizing the use of Health Reimbursement Arrangements (HRAs), by employers of any size, to pay individual health insurance premiums are finalized for 2020.

This diagram does not speak to interactive modeling tools, like Findley’s BenScan® modeler, to value the impact of these potential changes on their gross and net costs.

Possibilities to Sustain Healthcare Costs

However, many employer concerns involve questions about future legislative, regulatory, and litigation activity that could affect employee health benefits. As a result, we have developed a three-part series to delve into the current situation in Washington, DC and the results of the 2020 election and how it may impact the future direction of employer-sponsored health benefits.

Your thoughts are appreciated too. Share your input here or voice your opinion on what the future hold for employer-sponsored health benefits.

Read more about the current situation in Washington, DC in our next article in this series: Employer-Sponsors of Health Benefits: Part 2: More Gridlock Ahead.

Questions? Contact the Findley consultant you normally work with, or Bruce Davis at 419.327.4133, Bruce.Davis@findley.com.

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Posted March 4, 2019

Medicare Part D Notice Action Items for Employers

It’s that time of year again, Medicare Part D compliance. Employers must send employer-sponsored, health plan Medicare-eligible members a Medicare Part D Notice (Notice) notifying them whether their prescription drug (Rx) benefits qualify for coverage.

The Notice is due before October 15, 2018. There have been no changes in the Model Part D Coverage Notice since last year—thus you can use your 2017 Notice (although you will need to update your 2017 notice with corresponding 2018 dates).

The Notice is intended for individuals who are covered (or seeking to be covered) for employer-sponsored Rx coverage, including active employees, retirees, and COBRA continuants (and their dependents) who are eligible for Medicare as the result of age or disability. The only exception to providing the Notice is for those employers who provide Rx coverage through a qualified Employer Group Waiver Plan (EGWP).

Rather than try to identify Medicare-eligible individuals for targeted distribution, many employers simply provide the Notice to all their plan participants. If you need a copy of the Model Notice, you can use this link: https://www.cms.gov/Medicare/Prescription-Drug-Coverage/CreditableCoverage/Model-Notice-Letters.html

You will recall that in addition to distributing the Notice, there is also a requirement to notify the Centers for Medicare & Medicaid Services (CMS), by March 1, 2019, (for calendar year plans) of whether your coverage is creditable or non-creditable.

Questions? Please contact the Findley consultant you regularly work with or Blake Babcock at Blake.Babcock@findley.com or 216.875.1904.

Posted September 19, 2018

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