Hybrid Plan Rules Allow Sponsors to Choose Risk Level

September 24, 2014 (PLANSPONSOR.com) – Sponsors of hybrid retirement plans for employees now have clarity about how to credit interest to these plans.

The Internal Revenue Service (IRS) has issued final regulations for hybrid retirement plans. According to Jim McHale, a principal in PwC’s retirement practice, based in New York City, the regulations clarify the lump-sum based formula concept and define what kinds of plans are subject to the regulations—cash balance plans, variable annuity plans and pension equity plans. Richard C. Shea, chair of the Employee Benefits & Executive Compensation practice at Covington & Burling LLP, adds that there’s a provision in the statute which says the Treasury can treat plans with similar formulas to cash balance and pension equity plans as hybrid plans. “This may be important to people trying to market different plan designs,” he tells PLANSPONSOR.

But, the main thing the final regulations do is clarify what is meant by “market rate of return” in the hybrid plan statute, which says interest credits for any plan year may not exceed a market rate of return. According to Shea, the simplest thing plan sponsors can do is a fixed interest credit of up to 6%. This was increased from the 5% stated in regulations issued in 2010.

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The next simplest thing is to use one of the crediting rates that was listed in IRS Notice 96-8, which offered a list of government bond yields, such as the rate on 30-year Treasuries, and allowed the addition of a certain number of basis points—what the Treasury calls government bonds with margins. Notice 96-8 also allowed the use of rates published by the Pension Benefit Guaranty Corporation (PBGC) for calculating minimum funding requirements for defined benefit plans, as well as consumer price index (CPI)-based rates for certain periods defined in the plan. The final regulations keep this list mostly the same, Shea says.

However, according to a PwC insights article, plan sponsors can use each of the three segment rates used for the minimum funding requirements for defined benefit plans as a permissible interest crediting rate, or the rates adjusted by the MAP-21 and HATFA legislation, which modify the segment rates to fall within a range of the average rates over a 25-year period.

Where the regulations get more complicated, Shea says, is in allowing the use of registered investment companies’ mutual funds or exchange-traded funds (ETFs), such as an S&P 500 or balanced fund. The rules say plan sponsors cannot use industry or sector funds or funds that have leverage in them, and the mutual fund or ETF has to be reasonably expected not to be more volatile than a broad U.S. equity, or similar international equity, market.

Also, just as in the 2010 regulations, hybrid plan sponsors are allowed to credit interest based on the actual return on plan assets. But, while in 2010 the interest rate was required to be based on aggregate plan assets, the final regulations allow plans to credit interest based on the return on a subset of plan assets. Shea explains that if the return on aggregate plan assets was used and the plan invested aggressively, it could be bad for older employees; if the plan invested conservatively, it could be bad for younger employees. Plan sponsors told the Treasury they should be able to segregate and have different asset pools for different participant demographics. The final regulations allow that, but Treasury avoided specifically saying plan sponsors could segregate by age—to avoid anything age discriminatory, Shea speculates. The final regulations mention segregating asset pools by years of service and a couple of other factors.

McHale tells PLANSPONSOR that if plan assets have negative returns, the plans have capital preservation protection, so negative returns cannot be applied to the point that a participant’s balance falls below the aggregate amount of credits to the account. In addition, all DB plans are subject to backloading rules which are designed to keep employers from favoring longer service employees by having accruals go back to the beginning of their career. In a hybrid plan, when plan sponsors test for backloading, they have to do a projection and conversion of the benefit to an annuity. The final regulations allow the use of a 0% return in testing for backloading when the prior year’s return was negative.

“The most interesting part of the regulations to me is [registered investment company funds and return on plan assets] are the only two actual market rates of return in this definition of ‘market rate of return,’” Shea notes. “You can’t go out into the market and get the government bond rates listed” in the final regulations.

“In my view these rules allow employers to dial up or down the risk they want to take in offering employees a pension plan and avoid or reduce some of the risk they would have with traditional defined benefit plans without putting all the risk on employees,” McHale says. “Plan sponsors can now design a plan where liabilities and assets move in tandem. They can completely guarantee returns or have minimums, while participants have the safety net of a capital preservation guarantee and the ability to take an annuity at retirement.” He adds that plan sponsors can decide what is the best of both worlds to them on a continuum of choices.

Shea agrees, and explains, “If I offer a conventional cash balance plan with a fixed interest rate or government bond yield, those behave like traditional plans; the employer is on the hook for funding that, and it takes on the risk of making sure the assets are constantly appreciating. But using rates of return on plan assets or a subset plan assets, or using a mutual fund or ETF, results in less risk for the plan sponsor. Risk is shared with employees.” He adds that there are also situations in which plan sponsors put a floor on returns or subsidize with disability benefits when returns go down, so there’s a range of risk that sponsors can take on. “This is important because a lot of employers are very nervous about offering DB plans because of market and interest rate volatility. Now they have workable rules for dampening that volatility.”

The final regulations go into effect in 2016, so sponsors of existing plans should look to see if they are in compliance with the new interest crediting regulations, McHale says. Plans with an interest crediting rate that is not allowed have until 2016 to be modified. He adds that the regulations allow plans to move to a new formula without having to change past, and without violating anti-cutback rules.

More information about hybrid plans and the final regulations are in PwC’s Insights article.

SECOND OPINIONS: Forms and Instructions for ACA Health Coverage Information

September 24, 2014 (PLANSPONSOR.com) - Code section 6056, as enacted by the Affordable Care Act (ACA), requires “applicable large employer members” subject to the employer “shared responsibility” mandate Internal Revenue Code section 4980H to report to the Internal Revenue Service (IRS) information about their compliance with the mandate and any health care coverage offered to employees.

Section 6056 also requires applicable large employer members to furnish related statements to employees so that the employees may use the statements to help determine eligibility for the ACA premium tax credit. A similar reporting requirement in Code section 6055 requires health insurance issuers, employers that sponsor self-insured plans and other providers of minimum essential coverage to report and provide statements on minimum essential coverage offered under their plans.

On August 28, 2014, the IRS released draft instructions for use by applicable large employer members to satisfy the Code section 6056 reporting requirements. (Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Return and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.) Also on August 28, 2014, the IRS released a revised form, and draft instructions, for use by sponsors of minimum essential coverage to report such coverage to the IRS and to covered individuals under the Code section 6055 requirements. (Draft Instructions to Form 1094-B, Transmittal of Health Coverage Information Returns and Form 1095-B, Health Coverage, released along with a revised draft Form 1095-B.) The IRS previously issued draft Forms 1094-B, 1095-B, 1094-C, and 1095-C on July 24, 2014.    

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In this column, we answer some of the frequently asked questions we have received on these draft forms and instructions.

Are employers that are subject to the employer mandate and that sponsor a self-insured health plan for their employees required to file Form 1095-B?   

No, employers that are subject to the employer mandate and that sponsor a self-insured group health plan will report information about the coverage provided to employees in Part III of Form 1095-C instead of on Form 1095-B. Note, employers that sponsor self-insured health coverage for their employees but are not subject to the employer mandate are not required to file Forms 1094-C and 1095-C and will report details of the coverage on Form 1095-B (and file a Form 1094-B transmittal).

If an applicable large employer member is providing health coverage to employees through an insured health plan or in some other manner (e.g., through a multiemployer health plan), the issuer of the insurance or the sponsor of the multiemployer or other plan providing the coverage will provide the information about the health coverage to any enrolled employees on Form 1095-B (and file a Form 1094-B transmittal). The employer in these cases would not file a Form 1095-B or complete Part III of Form 1095-C for those employees.

What is the deadline for providing the IRS returns and employee statements? 

The forms generally must be filed with the IRS annually no later than February 28 (March 31 if filed electronically) of the year immediately following the calendar year to which the return relates. Each employee statement generally must be furnished to a full-time employee on or before January 31 of the year succeeding the calendar year to which the return relates. 

Under transition relief provided in 2013 (IRS Notice 2013-45), the first returns and statements for the 2015 calendar year will be due in early 2016. 

Do employers with 50 to 99 employees that qualify for the 2015 transition relief from the employer mandate penalties have to file Forms 1094-C and 1095-C for 2015?   

Yes. The instructions to Forms 1094-C and 1095-C specify that such an employer remains subject to the Forms 1094-C and 1095-C reporting requirements for 2015 because the IRS needs the information to determine the employee’s potential eligibility for the premium tax credit.  

Must a Form 1094-C transmittal form be filed each time an employer files Forms 1095-C? 

Yes, a Form 1094-C must be attached to any Forms 1095-C filed by an employer. The instructions state that an employer may submit multiple Forms 1094-C, each accompanied by Forms 1095-C for some of its employees, provided that, in combination, Forms 1095-C are filed for each employee for whom the employer is required to file. In addition, an employer must file a single Form 1094-C reporting aggregate employer-level data for all full-time employees of the employer and identify the form, on line 19 of Part II, as the employer’s Authoritative Transmittal.

 

Got a health-care reform question?  You can ask YOUR health-care reform legislation question online at http://www.surveymonkey.com/s/second_opinions.   

You can find a handy list of Key Provisions of the Patient Protection and Affordable Care Act and their effective dates at http://www.groom.com/HCR-Chart.html.     

Contributors:   

Christy Tinnes is a Principal in the Health & Welfare Group of Groom Law Group in Washington, D.C. She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare. She represents employers designing health plans as well as insurers designing new products. Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.   

Brigen Winters is a Principal at Groom Law Group, Chartered, where he co-chairs the firm's Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.   

PLEASE NOTE: This feature is intended to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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