erisa roundup · the secure act is landmark legislation that affects the rules for creating and...

ERISA ROUNDUP A quarterly recap of recent publications from BDO’s ERISA Center of Excellence.

Q1 2020

IN THIS ISSUE

Immediate Actions Needed by Retirement Plans to Comply with SECURE Act of 2019 ...................1

New Opportunities for Workplace Retirement Plans Under the SECURE Act ........................................ 4

Health Savings Accounts: Tools for Creating a Healthy Retirement ...................................14

Cybersecurity Considerations for the DOL’s New Electronic Disclosure Rule ..................................16

SECURE Act: Educating Employees About What It Means for Them ..............................................18

Reducing the Risk of Fraud in Benefit Plans ................ 20

Employers Can Immediately Provide Tax-Free Qualified Disaster Payments To Employees In Connection With COVID-19 ................. 22

Federal Aid Package Helps Individuals Affected by COVID-19................................................ 24

How To Determine If An Employer Has “Fewer Than 500 Employees” ForCOVID-19 Federal Paid Sick And Family Leave Mandates ................................ 28

IRS Outlines Procedures for Payroll Tax Credits and Rapid Refunds for Employers Making Federally-Mandated COVID-19 Leave Payments ....... 32

Act Now to Take Advantage of SBA Loans and Payroll Tax Incentives .......................................... 34

Individuals: What You Need to Know About the CARES Act ..................................................37

BDO’s ERISA Center of Excellence is your source for insights on emerging regulations, industry trends, current topics, and more. Visit us at www.bdo.com/erisa or follow along on Twitter: @BDO_USA and #BDOERISA.

A NOTE FROM BDO’S NATIONAL ERISA PRACTICE LEADER

In unprecedented times, we find value in relationships. When change overwhelms, we have the opportunity to join together to share education, resources, and compassion. At the heart of our partnerships are good people doing their best to further the goals of their organizations and the team members within them.

Our own priorities have shifted along with those of the nation. Our goal over the next few months is to enable you to understand complex regulations and stay ahead of changing deadlines. Beyond the financial aspects of your day-to-day, you’re likely already facing tough decisions involving the health and welfare of your workforce. We’re here to help.

Amidst the typical articles you’ve come to expect in our quarterly ERISA Roundup, you’ll find a plethora of information around the CARES Act. As our worldview evolves, we’ll continue to share insights to keep your business operational and profitable during this crisis and beyond.

Together we can recover stronger. Please feel free to reach out to any of our dedicated team members for support.

Sincerely,

BETH GARNER National Practice Leader, ERISA

www.bdo.com/erisa

http://www.bdo.com/erisa

ERISA ROUNDUP / Q1 2020 / 1

Immediate Actions Needed by Retirement Plans to Comply with SECURE Act of 2019

On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) became law, as part of the Further Consolidated Appropriations Act, 2020 (H.R. 1865), which was primarily a budget and spending law. The SECURE Act is landmark legislation that affects the rules for creating and maintaining workplace retirement plans for all employers (including for-profit and tax-exempt employers of all sizes). Whether you currently offer your employees a retirement plan (or are planning to do so), you should consider how these new rules may affect your current retirement plan (or your decision to create a new one).

CHANGES EFFECTIVE IMMEDIATELYSome of the SECURE Act provisions are required to be (or can be) operationally implemented immediately by employers who sponsor and maintain tax-qualified retirement plans, such as 401(k) plans, cash balance plans or traditional defined benefit (DB) pension plans, and 403(b) plans. This tax alert focuses attention on those provisions. A separate tax alert will summarize other changes in the law that, while important, are not immediately effective.

Credit Card Loans Prohibited

Effective December 20, 2019, making new plan loans through any credit card or similar arrangement is prohibited. Any such loans will be treated as taxable distributions.

INCREASED AGE FOR REQUIRED MINIMUM DISTRIBUTIONS (RMDS)Under prior law, RMDs from tax-qualified retirement plans, 403(b) and 457(b) plans generally had to start no later than April 1 of the calendar year following the later of (i) the year in which an employee attains age 70 ½ or the calendar year in which the employee retires (but 5-percent owners could not use this retirement rule). SECURE changed age 70 ½ to age 72 for RMDs for individuals who attain age 70 ½ after December 31, 2019.

“Stretch” Beneficiaries Eliminated for Defined Contribution (DC) Plans

Under prior law, if payments to a non-spouse designated beneficiary under a DC plan (including 403(b) plans) began within one year after the participant’s death, such payments could be made ratably over the beneficiary’s life expectancy (i.e., potentially stretched out over decades), but if the payments did not begin by that time, they had to be paid out in full within five years after the participant’s death.

BDO INSIGHTS The new law does not appear to impact any credit card plan loans made before December 20, 2019. So it appears that repayment of such loans could continue in accordance with their terms. Some plans had allowed such loans as an “on-demand” line of credit that could be used for routine or small purchases. By prohibiting this practice, the SECURE Act confirms that retirement plans are intended to provide retirement (not “rainy day”) savings.

BDO INSIGHTS If an individual attained age 70 ½ in 2019 and if they have terminated employment or are a 5-percent owner, RMDs must still begin by April 1, 2020, (and continue annually thereafter) in accordance with prior law.

Similar changes apply to traditional IRAs (without regard to employment status).

Employers should confirm that their plan administrator will immediately update all retirement plan distribution paperwork describing the RMD rules to reflect the new law.

Employees who were expecting to begin RMDs when they reached age 70 ½ in 2020 or later may want to reconsider their options.

2 / ERISA ROUNDUP / Q1 2020

Under the new law, for participant deaths that occur after December 31, 2019, all distributions generally must be paid within 10 years from the date of death. But the new 10-year payout rule does not apply to payments made to the participant’s surviving spouse, a child who has not reached the age of majority, a disabled or chronically ill individual (or trusts for the benefit of such individuals), or any individual who is not more than 10 years younger than the deceased participant, so long as the payments begin within one year after the participant’s death (but for surviving spouses, the payments are not required to begin until the deceased participant would have attained age 72). In addition, if such “eligible designated beneficiary” dies before receiving all payments owed to them,the remaining amount must be paid out within 10 years after the eligible designated beneficiary’s death.

Fiduciary Safe Harbor

Effective December 20, 2019, DC plan fiduciaries can use a new ERISA fiduciary safe harbor to reduce uncertainties when offering an annuity to plan participants. If plan fiduciaries satisfy the safe harbor, they are deemed to have met ERISA’s prudence standard for selecting an insurance carrier for the DC plan’s annuity option and will not be liable for losses if the insurer cannot satisfy its obligations under the annuity contract.

Nondiscrimination Testing Relief for Closed DB Plans

The SECURE Act included long-awaited nondiscrimination testing relief for DB plans that are closed to new participants. The relief applies to plans that were closed as of April 5, 2017, or that have been in operation but have not made any increases to the coverage or value of benefits for the closed class for five years before the freeze can now meet nondiscrimination, minimum coverage, and minimum participation rules by cross-testing the benefits with the employer’s DC plans.

BDO INSIGHTS Similar rules apply to IRAs.

Eliminating this “stretch” feature paid for most of the changes in the law made by the SECURE Act.

Since the distributions cannot be stretched over multiple generations, participants might want to change beneficiary designation in many cases.

Plans may not be required to permit all delayed payments that the new law would allow. Rather, SECURE establishes the outer limits of what is permissible with respect to participants who die after December 31, 2019 (with later dates for certain collectively bargained and governmental plans).

The new rules may impact amounts payable to beneficiaries of a participant who has already begun to receive payments but who dies after 2019. The new law may also affect survivor benefit features, including annuity forms and certain installment payments.

IRS guidance is needed to clarify how these new rules work.

BDO INSIGHTS When an employer selects an annuity provider for its retirement plan, the employer is an ERISA fiduciary, which means that the employer must act solely in the best interests of plan participants and beneficiaries when making its decision.

For DC plans, the new safe harbor clarifies that employers are not required to select the lowest cost contract. Rather, the employer can consider the value, features and benefits of the contract and attributes of the insurer (such as its financial strength) in considering the cost of the annuity contract.

The safe harbor also clarifies that employers are not required to review the appropriateness of the annuity after the contract has been purchased.

The new safe harbor does not apply to cash balance or other DB plans.

BDO INSIGHTS Although the changes are generally effective upon enactment, plan sponsors may elect to apply them to plan years beginning after December 31, 2013. IRS had been extending temporary relief on a year-by-year basis since 2014.

Many DB plans that were closed to new hires have been forced to freeze completely because grandfathered employees who were still accruing benefits became too small or consisted mostly of highly paid employees. The relief is intended to prevent such complete freezes.


Retirement Plan Disaster Relief

Congress finally provided special retirement plan disaster relief for the 2018 California wildfires and other major disasters that occurred between January 1, 2018, and February 18, 2020. This relief is similar to relief provided for 2016 and 2017 hurricanes and California wildfires, but is not an extension of (or additional relief) for those earlier disasters.

Effective December 20, 2019, retirement plans can make “qualified disaster distributions,” which are special in-service distributions of up to $100,000 (even if amounts are not otherwise distributable from the plan) that are not subject to the 10-percent early withdrawal penalty or 20-percent withholding. Participants can include the distributions in income over a three-year period and can recontribute the full distribution amount to the plan or IRA within three years.“Qualified disaster distributions” are conditioned upon an individual taking a distribution on or after the first day of the disaster and before June 17, 2020 (i.e., 180 days after SECURE was enacted); having a principal place of abode in a presidentially-declared disaster area during the relevant disaster; and sustaining an economic loss by reason of the disaster.

SECURE also permits individuals to recontribute distributions from a retirement plan or IRA, if such distributions were to be used to purchase or construct a principal residence in a disaster area and that principal residence was not purchased or constructed on account of the disaster. These repayments must be made by June 17, 2020.

SECURE also allows plans to offer loan relief to participants whose principal place of abode during any of the covered disasters was located in a disaster area and who sustained an economic loss by reason of the disaster. The maximum loan amount is increased to the lesser of: (1) $100,000; or (2) the greater of $10,000 or 100% of the present value of the participant’s vested accrued benefit. This increased loan amount is available for loans made from December 20, 2019, through June 17, 2020. SECURE also extends for one year (or, if later, until June 17, 2020) the due date of any qualified individual’s loan repayment that would otherwise be due during the period beginning on the date of the disaster and ending 180 days after the last day of the disaster.

In welcome news for individuals and employers affected by disasters, SECURE provides a 60-day automatic extension of the deadline to file returns and pay taxes, as well as for making contributions to qualified plans and IRAs, withdrawing excess IRA contributions, and completing rollovers.

WHEN ARE PLAN AMENDMENTS NEEDED?Generally, it appears that the plan amendment deadline for adopting retirement-related disaster relief provisions would be the last day of the first plan year beginning on or after January 1, 2020 (2022 for governmental plans).

Other than those disaster relief provisions, conforming plan amendments (retroactive to the first day as of which the new rules apply) generally will not be required any earlier than the last day of the first plan year beginning in 2022 (or later for certain collectively bargained and governmental plans). Additional guidance from the IRS is expected on plan amendment deadlines.

BDO INSIGHTS Recontributed qualified disaster distributions are treated as a tax-free rollovers.

Employers are permitted (but not required) to make these disaster relief provisions available.

The SECURE Act clarifies that the $100,000 limit is applied separately if an individual is affected by more than one relevant disaster.

The delayed loan repayment rules are available for loan repayments that were due as early as January 1, 2018.


New Opportunities for Workplace Retirement Plans Under the SECURE ActBy now, most employers know that the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) became law on December 20, 2019, as part of a federal budget and spending bill (H.R. 1865). The SECURE Act is landmark legislation that affects the rules for creating and maintaining workplace retirement plans for all employers — including for-profit and tax exempt employers of all sizes. In a nutshell, the SECURE Act eases employers’ administrative burdens for operating workplace retirement plans and encourages plan participation. Some of the SECURE Act changes in the law are most beneficial to smaller employers, while other provisions address changing workforce demographics, such as longer life expectancies and long-term part-time employees in what is often called the “gig” economy.

Whether you currently offer your employees a retirement plan (or are planning to do so), you should consider how these new rules may affect your workplace retirement savings program (or your decision to create a new one). This tax alert summarizes some of the planning opportunities under the SECURE Act for employer-sponsored retirement plans with broad applicability.

DIFFERENT EFFECTIVE DATES FOR PLAN DOCUMENTS VS. PLAN OPERATIONSThe SECURE Act makes 30 changes to retirement plan law, affecting tax-qualified defined benefit (DB) plans (such as cash balance plans and traditional pension plans) and defined contribution (DC) plans (such as 401(k) plans, employee stock ownership plans (ESOPs), 403(b) plans and 457(b) plans) and individual retirement accounts (IRAs). Some of these changes are effective immediately, while others are effective in plan or tax years beginning on or after January 1, 2020, 2021, 2022, or later. Generally, amendments to written plan documents are not required until the last day of the 2022 plan year (2024 for governmental plans). However, plan administration must be updated to reflect the SECURE Act’s provisions by the applicable effective date of each change, even if the plan amendment deadline is later.

Employers can expect to hear from their retirement plans’ third-party administrators (TPAs), recordkeepers and other service providers about how SECURE compliance changes to their systems will impact their services, as well as whether any new documents need to be executed to implement SECURE Act changes.

WHAT SHOULD EMPLOYERS BE DOING RIGHT NOW?The SECURE Act requires employers to take action with respect to certain plan administrative changes, employee notices and plan amendments. Right now, employers should educate themselves about the SECURE Act provisions, prioritize those which have an immediate impact (See our earlier tax alert discussing immediate actions needed by retirement plans to comply with the SECURE Act), evaluate the new features and consider plan design changes.


OPPORTUNITIES TO EXPAND WORKPLACE SAVINGSThe SECURE Act encourages workplace retirement plan access and participation in several new ways, which are discussed below.

Increasing QACA Auto Enrollment Safe Harbor Cap

An annual nondiscrimination test called the actual deferral percentage (ADP) test applies to elective deferrals under a 401(k) plan. The ADP test is deemed to be satisfied if a 401(k) plan includes certain minimum matching or qualified non-elective contributions (QNEC) safe harbors. Automatic enrollment can be part of a safe harbor plan design called a “qualified automatic contribution arrangement” (QACA). For plan years beginning after December 31, 2019, the SECURE Act increases the maximum default contribution rate under a QACA from 10 percent to 15 percent for years after the participant’s first deemed election year.

Covering Long-term Part-time Employees in 401(k) Plans

Generally, tax-qualified retirement plans must cover all employees who work at least 1,000 hours per year unless they are not yet age 21. Starting for plan years beginning after December 31, 2023, the SECURE Act will require 401(k) plans (other than collectively bargained plans) to also cover employees who have worked at least 500 hours for three consecutive years (measured for plan years starting after December 31, 2020) – which seems to include seasonal employees. No employer contributions (not even top-heavy minimum contributions) are required until the employee satisfies the plan’s normal eligibility requirements. A special vesting rule that also applies to these individuals seems to provide vesting credit at 500 hours of service (but guidance is needed on how this provision works).BDO INSIGHT

For the participant’s first deemed election year in an automatic enrollment plan, the cap on the default rate remains 10 percent.

X Employers that use the QACA safe harbor may (but are not required to) increase the cap on automatic enrollment deferrals under their plans.

X Employers should work closely with their TPA and recordkeeper to ensure changes needed to plan operations and systems are implemented in a timely manner to reflect the increased cap on the QACA default percentage.

X Retirement professionals generally recommend an annual retirement savings rate of 15 percent for individuals, so increasing the automatic enrollment safe harbor cap from 10 percent to 15 percent reflects this industry trend.

X This provision (along with other SECURE Act changes) is designed to increase retirement readiness by closing the gap between actual and recommended retirement savings. Evidence indicates many employees continue the QACA without reducing their savings rate.

BDO INSIGHT

X Employers can also continue to impose an age 21 requirement.

X Employees will not need to be permitted to defer under this new rule before 2024. But as a practical matter, starting January 1, 2021, employers will need to begin tracking hours worked that are less than 1,000 to determine the future eligibility of such employees to join the 401(k) plan.

X This change would not apply to 403(b) plans.

X Since studies show that women are more likely than men to work part-time, the new rule may be especially helpful to women in preparing for their retirement.


Delay of Required Minimum Distributions (RMDs)

Before the SECURE Act, RMDs generally had to start by April 1 of the calendar year following the calendar year in which an employee reached age 70 ½. The SECURE Act increases the age at which RMDs must begin from age 70 ½ to age 72. This change applies to individuals who attain age 70 ½ after December 31, 2019. The exception that allows active employees who are not 5-percent owners to delay RMDs until separation of employment is unchanged.

BDO INSIGHT

X This change is designed to match RMDs with trends in delayed retirement and increased life expectancies. However, its prospective nature does not help individuals already in RMD pay status. Participants who attained age 70 ½ before January 1, 2020, will continue to receive RMDs on their current schedule.

X Accordingly, 5-percent owners and other participants who are no longer active employees and who have attained age 70 ½ during 2019 will still need to receive the 2019 RMD payments by April 1, 2020, and the 2020 RMD by December 31, 2020, notwithstanding the fact that they might not yet be age 72 on December 31, 2020.

X An individual who attains age 70 ½ in 2020 will not be required to take an RMD from a tax-qualified retirement plan for the 2020 calendar year. Any distribution that such an individual does receive before age 72 will be subject to the regular income tax and withholding rules (including rollover rules) that generally apply to retirement plan distributions.

X Delaying RMDs is not mandatory and the plan sponsor can choose to retain its plan feature that provides distributions at age 70 ½.

X Action Plan: Plan sponsors will need to evaluate the new RMD rules to determine if they want to delay RMDs as allowed. If elected, procedures need to be changed immediately and the plan documents amended before the remedial amendment period.

X Plans will need to coordinate with TPAs and record keepers to update policies and procedures for notifying participants of an upcoming RMD trigger date and update any routine notices sent to participants regarding RMDs. For example, distribution reporting will probably need to be updated beginning January 1, 2020, for participants who turn 70 ½ in 2020 to ensure that distributions between age 70 ½ and 72 are treated as being eligible for tax-free rollover and the mandatory 20-percent withholding is deducted (if not rolled over).


Elimination of Extended Payouts to Young Beneficiaries

For distributions made with respect to DC plan participants who die after December 31, 2019 (December 31, 2021 for collectively bargained and governmental plans), the SECURE Act changes the RMD rules to generally require that all distributions (except for payments to certain beneficiaries) must be made by the end of the 10th calendar year following the year the participant died. “Eligible designated beneficiaries” are not subject to the new 10-year rule. Eligible designated beneficiaries include the surviving spouse, minor children, certain chronically ill or disabled beneficiaries, and individual beneficiaries who are not more than 10 years younger than the deceased participant. Eligible designated beneficiaries may continue to receive RMDs over their life expectancy, provided however, that the account balance must be distributed within 10 years after the death of the eligible designated beneficiary or, in the case of an eligible beneficiary who was a minor child, within 10 years after such child reaches the age of majority (determined under applicable state law).

This change in the law eliminates what is often referred to as a “stretch payment.” Such payments typically were structured so that, upon the participant’s death, RMDs would be paid over the life expectancy of a much younger designated beneficiary (such as the participant’s grandchild). Smaller annual RMDs resulted, which allowed for continued tax deferral on the retirement account assets while they continue to appreciate.

Employers Can Adopt a Retirement Plan up Until Their Tax Return Due Date, Plus Extensions

One of the most welcome SECURE Act changes for employers is that, for tax years beginning in 2020, employers can retroactively adopt a new qualified retirement plan as late as the employer’s extended federal income tax filing deadline. Except for salary deferral plans (because salary deferrals can only be made prospectively), the new plan can be retroactively effective as of the beginning of the tax year for which the tax return is being filed.

BDO INSIGHT

X This change eliminates the tax benefit of naming grandchildren or any beneficiary more than 10 years junior as the beneficiary for retirement funds unless the beneficiary meets the exception.

X The new post-death DC plan distribution rule does not apply to DB plans.

X Action Plan: Plan language regarding beneficiary designations and RMD should be reviewed in light of the SECURE Act.

X Participants should rethink beneficiary designations in light of the lost benefits of stretching distributions over generations.

BDO INSIGHT

X This gives employers an alternative to adopting a Simplified Employee Pension (SEP). For example, calendar-year unincorporated business owners could establish a DB or DC plan for the 2020 tax year anytime up until October 15, 2021, if they extended the due date of their federal income tax filing. For a calendar year partnership, S-corporation or limited liability company (LLC), the deadline to adopt DB or DC plan and make a prior year contribution would be September 15, 2021. But due to DB plan funding rules, calendar year C corporations would need to adopt a DB plan by September 15, 2021 (even though they technically have until October 15, 2021 to file their extended tax return), if they want the employer’s contribution to the plan to count as a deduction for the prior year (since those contributions must be made by September 15, 2021). Calendar year C corporations could adopt and fund a DC plan by October 15, 2021, effective for the 2020 tax year.

X One other consideration is that if an employer retroactively adopts a plan, the plan would still need to file a Form 5500 for its initial plan year in a timely manner. Depending on when the employer adopts the plan, it may be too late to file a Form 5558 to extend the due date of the Form 5500, which means that the due date for the initial Form 5500 would be the due date of the employer’s federal income tax return. Depending on facts and circumstances, the employer may not have much time to prepare and file the Form 5500.

X Even though this change in the law allows retroactive effective dates and income tax deductions, complex retirement plan rules nevertheless apply for both plan documents and operation. Hasty decisions to implement without proper lead-time often results in funding and compliance problems.


Increased Tax Credits for Having a Retirement Plan

Effective for tax years beginning after December 31, 2019, small employers (i.e., employers with 100 or fewer employees) may be entitled to a new non- tax credit of up to $500 per year for the first three years that they put in place an automatic enrollment feature in a DC plan (like a 401(k) plan or SIMPLE IRA). Automatic enrollment has been shown to increase employee participation and result in higher retirement savings.

The automatic enrollment tax credit is in addition to an existing tax credit for small employers that start a retirement plan, such as a tax-qualified retirement plan, Simplified Employee Pension (SEP) or SIMPLE. Effective for tax years beginning after December 31, 2019, the SECURE Act increases the small employer tax credit to encourage small businesses to set up retirement plans. Starting in 2020, the credit is increased by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500, or (2) the lesser of: (a) $250 multiplied by the number of non-highly compensated employees (NHCEs) who are eligible to participate in the plan, or (b) $5,000. The credit applies for up to three years.A third option, called a buy-in, is seeing a resurgence in popularity. This is a form of Liability Driven Investing (LDI), where the plan sponsor purchases a group annuity contract, just like a buy-out. With a buy-in, however, the plan sponsor remains in control of the assets, but is reimbursed by the insurance company for monthly payments. The insurance company assumes the risk for the benefits it insures. Plan sponsors looking to have more control in timing of a future buyout may want to consider this method.

BDO INSIGHT

X Employers who already have a retirement plan can claim the credit if they add an automatic enrollment feature to an existing plan.

X The automatic enrollment credit is in addition to the tax credit for employers that start retirement plans. Tax credits are generally better than tax deductions because they reduce the amount of tax owed on a dollar-by-dollar basis.

X These tax credits are non-refundable, so they can only be used to reduce tax owed.

X These tax credits are intended to help small employers cope with the financial costs of starting or maintaining a workplace retirement savings plan as a way of increasing access to (and participation in) such programs. Studies show that payroll deduction workplace retirement savings plans are the most effective way to save for retirement.

X It appears that employers who put a new plan in place in 2019 (or earlier) can increase their credit for 2020 (and later) years, so long as they are still within the three-year start-up period to which the credit applies.

X BDO can help employers decide which plans may be the best fit for their workforce and assist in implementing the program, including advising on how to make the most out of these new tax credits.


Lifetime Income (Annuity) Options in DC Plans

As workplace retirement benefits have shifted over the years from being mostly provided by traditional DB plans to being primarily offered through DC plans, and as the workforce lives and works longer, the retirement industry has emphasized the need to educate DC plan participants about the importance of lifetime distribution options, so they do not outlive their retirement savings. The SECURE Act made three changes in the law to address lifetime income issues.

X The SECURE Act encourages DC plan sponsors to offer lifetime income during retirement by creating a new ERISA fiduciary safe harbor for employers that include such options in their plans. The new safe harbor became effective on December 20, 2019. For more on the new fiduciary safe harbor, please see our previous tax alert on immediate actions for plan sponsors under the SECURE Act.

X The SECURE Act allows DC plan participants to make in-service, direct trustee-to-trustee transfers of lifetime income investments (or annuity transfers) to an IRA or other retirement plan or to receive a distribution of that investment option if the plan discontinues offering that particular investment option. The transfer or distribution must be made within 90 days after the date when the lifetime income product is no longer authorized to be held as an investment option under the plan. This change is effective for plan years beginning after December 31, 2019; before this change in the law, with certain exceptions, participants generally could not make in-service transfers or take a distribution of just one investment option.

BDO INSIGHT

X This change in the law allowing for portability of lifetime income investment options gives DC plans flexibility to try out a lifetime income investment without having to worry about being stuck with it forever.

X It also enables participants to potentially avoid surrender charges and other fees or penalties that would otherwise apply upon liquidation of the investment if the plan sponsor eliminates the investment option from the investment lineup (assuming the participant can find an IRA or other retirement plan that is willing to accept a direct trustee-to-trustee transfer of the investment or is willing to take a distribution of the investment option).

X Plans that intend to offer lifetime income investment options will likely need an amendment to permit these types of in-service and in-kind distributions.

X Employers may also want to consider whether their DC plan should be amended to accept in-kind transfers of lifetime income investments (such as a rollover from an employee’s prior employer’s plan).

X Employers should also be alert that lifetime income investment options may be acquired through mergers or acquisitions (if a legacy plan was terminated or if a plan merger is undertaken).


X The SECURE Act requires DC plans to eventually provide participants with an annual benefit statement showing hypothetical lifetime income disclosures illustrating the monthly amount a participant would receive if his or her DC plan account provided a lifetime annuity benefit. The required disclosure will estimate the monthly annuity income payments that the participant would receive if the participant’s account balance was used to purchase a qualified joint and survivor annuity (with a spouse the same age) and a single life annuity (even if the plan doesn’t actually offer those forms of benefit). But the new disclosures won’t be required until at least 12 months after the later of when the Department of Labor (DOL) issues either (1) an interim final rule regarding these disclosures or (2) model disclosures and assumptions for converting account balances into lifetime annuity streams (note that SECURE directs the DOL to issue these by December 31, 2021). The SECURE Act also relieves plan fiduciaries, plan sponsors or anyone else who provides lifetime income disclosures from ERISA fiduciary liability based on the DOL’s model disclosures and assumptions.

Increased IRS Retirement Plan Penalties

To pay for some of the SECURE Act provisions, some of the more common potential IRS maximum penalties related to retirement plans have increased significantly (i.e., by 10 times). These changes are generally effective for returns, statements and notices required to be filed or provided beginning after December 31, 2019, for the following failures:

X The IRS penalty for failure to timely file a Form 5500 or a Form 5310-A (to report certain transfers, mergers or spin-offs) has increased from $25 per day (capped at $15,000 per year) to $250 per day (capped at $150,000).

X The IRS penalty for failure to file a Form 8955-SSA has increased from $1 per participant multiplied by the number of days the failure occurred (up to a maximum of $5,000) to $10 per participant multiplied the number of days the failure occurred (up to a maximum of $50,000).

X The IRS penalty for failure to file a required notification of changes in a plan’s Form 8955-SSA has increased from $1 per day to $10 per day (up to $10,000).

X The IRS penalty for failure to provide participants with a required notice regarding withholding on periodic and nonperiodic pension plan payments has increased from $10 to $100 per failure.

X The IRS penalty for failure to file a Form 8822-B (to register a change in plan name or plan administrator name/address) will increase from $1 per day (up to $1,000) to $10 per day (up to $10,000).

X The IRS penalty for failure to timely file and pay the prohibited transaction excise tax reported on Form 5330 (used to report and pay the prohibited transaction excise tax related to employee benefit plans) was increased from the lesser of $330 or 100 percent of the amount due to $400 or 100 percent of the amount due.

BDO INSIGHT

These increases affect IRS penalties only and have no effect on the much higher DOL penalties. For example, the maximum DOL penalty for failure to timely file a Form 5500 is currently $2,233 (with no maximum). The IRS and DOL have amnesty programs that can reduce late filing penalties significantly. BDO can help employers obtain relief through those programs and with mitigating potential penalty risks. Because correction through an amnesty program generally cannot be started once the employer has been notified of an examination, submitting a filing under those programs is advisable as soon as possible if errors occurred.


Penalty-Free (Not Tax Free) Withdrawals for Child Birth or Adoption

Usually, in-service withdrawals from a DC plan before age 59 ½ are subject to a 10-percent early withdrawal penalty, unless an exception applies. Withdrawals that are “eligible rollover distributions” are also subject to mandatory 20-percent federal income tax withholding. But for distributions made after December 31, 2019, the SECURE Act creates a new exception to the early withdrawal penalty and mandatory withholding rule for participants who take withdrawals from DC plans of up to $5,000 within one year after the birth of the participant’s child (or after the adoption is finalized) that is used for expenses related to the birth or adoption. Plans may allow such distributions to be repaid with after-tax dollars at any time — essentially allowing retirement plan participants to restore the full amount of the distribution to their plan accounts. So, if a participant withdrew $5,000 as a qualified birth or adoption expense, he or she could recontribute the full $5,000 back into the plan (even years later), even though the participant paid income tax on the distribution. For more on these rules, please see our previous tax alert on SECURE Act issues for individuals.

Retirement Plan Disaster Relief

Congress finally provided special retirement plan disaster relief for the 2018 California wildfires and other major disasters that occurred between January 1, 2018, and February 18, 2020. This relief is similar to relief provided for 2016 and 2017 hurricanes and California wildfires, but is not an extension of (or additional relief) for those earlier disasters. For more on the these rules, please see our previous tax alert on immediate actions for plan sponsors under the SECURE Act.

Pooled Employer DC Plans

For plan years after December 31, 2020, the SECURE Act provides new rules that will allow unrelated employers with no common interest to participate in a “pooled employer plan” (PEP). PEPs would be limited to DC plans that satisfy certain ERISA fiduciary and registration requirements. A PEP must be sponsored by a “pooled plan provider” (PPP), like a financial services company, TPA, insurance company, record keeper, or similar entity (and PPPs will be subject to a $1 million bond). The PPP must serve as the plan’s ERISA plan administrator and named fiduciary and will have other duties, such as ensuring that all parties are properly licensed and bonded (beyond just “handling funds,” which is required for ERISA bonds). The SECURE Act clarifies that an employer who adopts a PEP will be acting as an ERISA fiduciary in deciding to join the PEP and will be remain responsible for monitoring the PPP and other plan fiduciaries. The adopting employer will remain the PEP’s investment fiduciary unless the PEP delegates investment management duties to someone else.

PEPs will be treated as a single ERISA plan, which means the plans will have a single plan document, one Form 5500 filing and a single independent plan audit. However, PEPs are not required to be audited until they either cover 1,000 participants or any adopting employer has more than 100 participants. SECURE continues the multiple employer plan (MEP) requirement that the Form 5500 must include a list of adopting employers and show the percentage of current year contributions and plan accounts for adopting employer’s participants.

A MEP is a plan (that is not a collectively bargained plan) maintained by two or more unrelated employers. Historically, DOL rules permitted only “closed” MEPs, where the participating employers shared a common interest. In 2019, the DOL expanded that rule to allow “association retirement plans” (ARPs), allowing looser affiliations to satisfy the common interest requirement. But ARPs were not true “open” MEPs. Similarly, the IRS recently proposed regulations that would provide some relief from the “one bad apple” rule. Under that rule, if just one participating employer failed to satisfy any of the many tax-qualified plan rules, the entire MEP could be disqualified. The SECURE Act goes further than both the DOL and IRS relief, since it will allow unrelated small employers with no common interest to participate in PEPs and will not disqualify the entire PEP if one participating employer fails a qualification requirement.

BDO INSIGHT

The $5,000 limit is per individual. So, a married couple may each separately receive a $5,000 qualified birth or adoption distribution from an eligible retirement plan.

Employers should consider whether to offer these special distributions. Plan amendments and updates to forms and communications may be needed if the distributions are allowed.

https://www.bdo.com/insights/tax/private-client-services/setting-every-community-up-for-retirement-enhancem


Combined Form 5500s for DC Plans

Effective for plan years beginning after December 31, 2021, DC plans can file a consolidated Form 5500 if all the plans have the same trustee, named fiduciary, plan administrator, plan year and investment options.

Nondiscrimination Testing Relief for Closed DB Plans

The SECURE Act included long-awaited, permanent nondiscrimination testing relief for DB plans that are closed to new participants. The relief applies to plans that were closed as of April 5, 2017, or that have been in operation but have not made any increases to the coverage or value of benefits for the closed class for five years before the freeze can now meet nondiscrimination, minimum coverage, and minimum participation rules by cross-testing the benefits with the employer’s DC plans. For more on the these rules, please see our previous tax alert on immediate actions for plan sponsors under the SECURE Act.

BDO INSIGHT

X Small to mid-size employers who either do not have a workplace retirement plan or who currently maintain their own DC plan but who are frustrated by the burden of running the plan may want to keep an eye on how PEPs develop, since PEPs may provide the same (or similar) benefits, rights and features at reduced cost and also reduce the employer’s potential ERISA liability exposure. It is likely that many PEP offerings are being prepared to launch effective January 1, 2021, and beyond. The SECURE Act directs the IRS to issue model PEP documents.

X Employers who currently participate in a state-run automatic IRA program (such as CalSavers, OregonSaves, Illinois Secure Choice, etc.) may want to consider whether joining a PEP may increase retirement savings.

X PEPs will clearly allocate responsibility between the pooled plan provider and the adopting employers, which the employer community and retirement plan industry have been requesting for many years.

X The SECURE Act creates a new form of plan — PEPs, which do not apply to ARPs or “open” or “closed” MEPs, including professional employer organization (PEO) MEPs. Existing MEPs will not be considered PEPs unless they have a PPP, elect to be a PEP and satisfy all other requirements. Guidance on whether (and how) an existing MEP could be converted into a PEP would be helpful.

X The SECURE Act allows PEPs to use electronic disclosures to participating employers and participants, which will simplify plan administration and reduce costs.

BDO INSIGHT

Small employers should watch this development, which may streamline their Form 5500 filing requirements. An employer does not need to participate in a PEP to be able to file a single Form 5500 for multiple plans. But the DOL and IRS will need to issue guidance and a consolidated Form 5500 no later than January 1, 2022, since the SECURE Act merely says that members of a “group of plans” can file a consolidated Form 5500. It appears that the consolidated reporting is not meant to apply only to controlled groups or affiliated service groups. Rather, it appears intended to cover unrelated employers or even PEOs, as a form of MEP/PEP (for reporting purposes only, not for plan document or operation purposes).


403(b) Plan Terminations

The SECURE Act directs the IRS to issue guidance by June 20, 2020 (within six months after enactment), providing that individual 403(b) custodial accounts may be distributed in-kind to a participant or beneficiary when the 403(b) plan terminates. The guidance will be retroactively effective for tax years beginning after December 31, 2008.

CONCLUSIONMany of the SECURE Act retirement plan changes in the law apply to both large and small employers, including for-profit and non-profit employers. Some of the changes are especially helpful to small employers. Almost all tax-qualified retirement plans will need to be reviewed for possible amendments and operational changes to reflect the SECURE Act. While further guidance on many of the SECURE Act provisions is needed, employers should review their plan documents and systems in the meantime to determine what, if any, amendments will need to be made, what operations need to be changed, and what systems or processes should be updated. Employers may want to consult with BDO on how to address the SECURE Act to take advantage of new opportunities and minimize the impact of unfavorable changes.

Lower In-Service Withdrawal Ages for Certain Plans

The SECURE Act provides that defined benefit plans (including hybrids like cash balance plans) and 457(b) plans can now allow in-service withdrawals at age 59 ½.

Changes for Individuals

Self-employed individuals may want to review our other SECURE Act tax alert, which provides an overview of the most significant changes for individuals.

BDO INSIGHT

X Although lowering the age for in-service distributions seems contrary to the trend of keeping retirement savings in the retirement system, it was enacted to enable so-called “phased retirement” where full-time employees switch to part-time or make other arrangements with their employer to continue working as an independent contractor.

X The Pension Protection Act of 2006 lowered in-service distributions from DB plans to age 62. The SECURE Act takes that one step further and reduces the in-service distribution age even lower to age 59 ½.

X Lowering the age for in-service distributions is an optional (not mandatory) plan design change that will likely require a plan amendment.

BDO INSIGHT

X This change in the law means that terminated 403(b) custodial accounts will be treated the same as terminated 403(b) annuities (in other words, a 403(b) plan is allowed to distribute individual custodial accounts to participants and those accounts can continue to be tax-free until amounts are withdrawn from those accounts).

X In Revenue Ruling 2011-17, the IRS clarified that a terminating 403(b) plan may consider an annuity contract to be distributed (in-kind) upon the establishment of a fully paid individual annuity contract to the plan participant. Such individual annuity contracts would hold the benefit until properly distributed. But the Revenue Ruling did not afford the same treatment to 403(b)(7) custodial accounts, so the SECURE Act addresses that issue.

X The retroactive effective date syncs up with other important IRS 403(b) plan guidance, including final regulations that require a written plan document effective for tax years beginning after December 31, 2008.


Health Savings Accounts: Tools for Creating a Healthy RetirementWhen employees hear that their company offers a Health Savings Account (HSA), many fail to make the connection to how these tax-advantaged accounts for qualified medical expenses can help them prepare for a successful retirement. But with healthcare being one of the biggest expenses people face in retirement, HSAs can play an important role in creating a healthy retirement plan.

A couple retiring in 2019 is expected to spend $285,000 in health and medical expenses throughout retirement, according to Fidelity Investments. For most Americans, it will take years of planning and investing to reach that savings goal. Fortunately, HSAs can significantly accelerate those efforts by offering myriad tax advantages.

There is a great deal of confusion among employees about how HSAs work, which creates a powerful opportunity for employers to educate employees about how these vehicles can augment their 401(k), IRA and other retirement savings accounts. Doing so effectively can result in more engaged employees and better retention of top talent.

ADDRESSING CONFUSION ABOUT HSAsOften, employees confuse the HSA with the Flexible Savings Account (FSA), another type of healthcare savings vehicle. While employers can offer both accounts, the FSA can be paired with any health plan. Employers own and contribute to the FSA on behalf of the employee, and funds can only be used for eligible medical expenses. In addition, most FSAs have a “use-it-or-lose-it” rule, which means the unused balance in each account is forfeited by the employee at the end of the plan year (or its grace period).

HSAs, on the other hand, are owned by the employee, don’t have an annual “use-it-or-lose it” rule and must be paired with a high deductible health plan (HDHP). For 2020, the IRS defines a HDHP as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. HSA contributions go in tax-free, grow tax-free, and are withdrawn tax-free when used for qualified medical expenses.


In addition to this triple-tax benefit, other attractive aspects of HSAs include:

X Most HSAs can be invested (after a certain threshold is met), just like a 401(k)

X HSA contribution limits for 2020 are $3,550 for people with individual coverage and $7,100 for people with family coverage; people age 55 and older can make $1,000 annual catch-up contributions

X HSAs are portable after an employee leaves a job

X Employees can make contributions to HSAs for a given year until April 15 of the following year

X HSA dollars can be used to pay for qualified medical expenses not covered by insurance

X Account holders who are 65 and older can use HSA dollars to pay for any kind of expense, not just healthcare, without penalty; non-healthcare withdrawals for seniors, however, are taxed at the user’s marginal rate, just like a traditional 401(k)

X Users can pay out-of-pocket for healthcare expenses, hold onto the receipts and then cash them in for a tax-free payout; there is no time limit for these transactions

It is important to note that employers may choose to contribute to employees’ HSAs. Just like a 401(k), employer contributions to HSAs are tax-deductible. The average employer contribution is $648 according to the latest data from the Devenir HSA Research Report.

BDO INSIGHT: OPPORTUNITY FOR EMPLOYER EDUCATION

Employees with HDHPs typically open HSAs during open enrollment, but about 15 percent of these new accounts remain unfunded well into the following year, according to the Devenir report. Meanwhile, only 22 percent of all HSA assets are invested, and the average employee contribution is $1,121—much lower than the contribution limit.

These statistics suggest that a significant percentage of employees aren’t taking full advantage of these powerful savings tools. This means that employers have an opportunity to educate employees about the high costs of healthcare in retirement and how HSAs can be a savvy way to prepare for this major expense.

Employers can show how 401(k)s and HSAs can work together to improve a participant’s financial health. HSA and 401(k) communication strategies can be paired side-by-side to help participants see them as working together for a common goal. By helping their employees to feel more confident and prepared for health spending in retirement, employers improve their chances of retaining their best team members and keeping them more engaged.

If you would like to review the rules related to HSAs and how they can be used as a valuable part of your overall benefits strategy, your BDO representative is able to help.

https://www.devenir.com/wp-content/uploads/2019-Midyear-Devenir-HSA-Research-Report-Executive-Summary.pdf

https://www.devenir.com/wp-content/uploads/2019-Midyear-Devenir-HSA-Research-Report-Executive-Summary.pdf


Cybersecurity Considerations for the DOL’s New Electronic Disclosure Rule

The U.S. Department of Labor (DOL) announced a proposed new rule in October 2019 that would allow retirement plan sponsors to post plan disclosures online, rather than having to deliver this information via physical mail. While the DOL has emphasized that the proposed rule should result in increased convenience and reduced printing and mail expenses for companies, plan sponsors should very seriously consider the cybersecurity issues that accompany the electronic disclosure of sensitive plan and participant information. In fact, it is their fiduciary responsibility to do so.

BACKGROUND ON THE ELECTRONIC DISCLOSURE RULEThe proposed Retirement Plans Electronic Disclosure Safe Harbor Rule offers plan sponsors more options to fulfill their obligation to provide required documents and disclosures to participants and beneficiaries. The DOL expects that the rule, when finalized, will save about $2.4 billion on printing and mailing costs over the next 10 years. The rule applies to most plans covered by the 1974 Employee Retirement Income Security Act (ERISA), but it doesn’t cover employee welfare plans.

The proposed rule includes a safe harbor option allowing plan sponsors to put certain notices on a website, instead of sending paper announcements via physical mail. Before the transition to electronic disclosures, participants will be notified of the coming change and will be provided the opportunity to opt out of the new procedure and continue receiving printed information via mail.

ELECTRONIC DISCLOSURE HEIGHTENS CYBERSECURITY RISKSWhile transitioning to a modern communication format to increase convenience and lower costs sounds very attractive, plan sponsors have a fiduciary responsibility to ensure that participants’ data are protected. The proposed rule remains vague regarding data protection requirements, simply stating that plan administrators must take reasonable measures to ensure confidential information is safeguarded.

Benefit plan documents carry a multitude of sensitive information, such as Social Security numbers, account balances, and home addresses. BDO research into Cybersecurity Guidelines for C-Suite Executives shows that intellectual property, personally identifiable information, protected health information, and payment and card information are highly valuable data points targeted by hackers. Even if this information is stored by service providers, plan sponsors are still obligated by law to ensure the information is protected.

HOW PLAN SPONSORS CAN PREPARE FOR ELECTRONIC DISCLOSUREThe good news is that plan sponsors have time to address potential cybersecurity issues as well as review and update current processes before the proposed rule goes into effect. Once the electronic disclosure rule is finalized, it will become effective 60 days after it is published in the Federal Register. The rule will not apply to plans until January 1 of the year following the final rule, so the soonest the rule will be in effect is January 1, 2021.

In the interim, plan sponsors should take a close look at the cybersecurity controls needed to protect sensitive data and other information. BDO recommends a threat-based cybersecurity approach to prevent cyber-attacks and limit the costs associated with a potential breach. This approach analyses a company’s unique threat profile, identifies at-risk areas, and creates a range of proactive steps to safeguard sensitive information.

https://www.federalregister.gov/documents/2019/10/23/2019-22901/default-electronic-disclosure-by-employee-pension-benefit-plans-under-erisa

https://www.federalregister.gov/documents/2019/10/23/2019-22901/default-electronic-disclosure-by-employee-pension-benefit-plans-under-erisa

https://www.bdo.com/getattachment/c97be460-0786-4e79-817b-68b994afa0dc/attachment.aspx?ADV_2020-Cybersecurity-Guidelines-for-C-Suite-Executives.pdf


Some guidelines to a threat-based cybersecurity approach include:

X Hiring an independent firm to evaluate specific areas, including vulnerabilities with email, networks, endpoints, spear-phishing, and other security assessments

X Using advanced software encryption, including two-factor authentication, above and beyond password identification

X Offering effective cybersecurity education and training for the entire workforce

X Developing a solid governance plan to map, track, and secure all data

X Reviewing and testing the organization’s Incident Response Plan (IRP)

X Verifying compliance of the organization’s cybersecurity plan among service providers

BDO INSIGHT: DON’T LET CONVENIENCE TRUMP SECURITY

Information is valuable. Sensitive information is even more so. In fact, U.S.-based organizations paid an average $8.2 million to fix data breaches in 2019, according to a recent analysis by the Ponemon Institute and IBM Security.

The DOL’s proposed rule to allow electronic disclosure of retirement plan information should lead to greater convenience and better transparency for plan participants. But before celebrating the convenience and efficiencies that should accompany electronic disclosure, plan sponsors must take a serious look at their controls to protect against cybersecurity threats. Plan sponsors who rush to modernize communication strategies may wind up spending much more addressing cyber breaches than the amount they save on printing and mailing costs.

Convenience and efficiency are important, but they shouldn’t trump security. Your BDO representative can help you adopt an approach to cybersecurity and electronic disclosure that allows you to provide your participants convenient access to their information while fulfilling your fiduciary responsibility to keep that information safe.


SECURE Act: Educating Employees About What It Means for Them

The recently passed Setting Every Community Up for Retirement Enhancement (SECURE) Act includes many changes designed to help strengthen employees’ retirement security. For the law to achieve its intended goal of helping workers prepare for retirement, employees need to understand how the wide-ranging changes affect them. Plan sponsors can play an important role by developing a communications strategy for educating employees about what the SECURE Act means for their retirement planning.

BACKGROUND ON THE SECURE ACT

The SECURE Act became law in December 2019 as part of a broader $1.4 trillion spending bill. The SECURE Act, which is the first significant retirement legislation since the 2006 Pension Protection Act, contains many wide-ranging provisions that amend the Internal Revenue Code (IRC) and Employee Retirement Income Security Act (ERISA). BDO’s National Tax Office issued an alert detailing the actions that plan sponsors need to take immediately to comply with the SECURE Act.

In addition to learning about these immediate compliance steps, plan sponsors should be thinking about the longer-term effects of the law. BDO’s National Tax Office issued an alert detailing planning opportunities for plan sponsors. Communicating what the law means to employees should be a central part of that planning. Although employers generally do not give employees personal tax advice, they often educate employees about the importance of retirement savings.

DEVELOPING AN EFFECTIVE COMMUNICATION STRATEGY

An effective communication strategy will take time and effort given the breadth of changes brought about by the SECURE Act. Below, we highlight several of the provisions that most directly affect employees’ retirement planning and provide ideas for how plan sponsors can develop a successful communication plan to educate participants about these changes.

X Part-time Work Benefits: In general, long-term part-time workers now will be eligible to participate in company 401(k) plans. Qualifying employees will have the right to contribute to the plan if they are at least 21 years of age and worked at least 1,000 hours in one year or have worked at least 500 hours each year for three consecutive years. Employers can help part-time workers understand the new benefit and how it may apply to their personal situation. Employers should also examine their payroll and time-tracking systems to ensure they have an effective and efficient way to track employees’ eligibility for such benefits.

X Increased Age for Required Minimum Distributions: Employees who turn 70 ½ after December 31, 2019 will now be able to delay taking required minimum distributions (RMDs) from their employer-sponsored retirement plans or individual retirement accounts (IRAs) until they reach age 72. This change, which reflects the fact that Americans generally are working and living longer, can provide a significant addition to employees’ retirement savings. Once an RMD is initiated, it cannot be suspended, so it is important that employees are aware of this rule change. Employees who were expecting to begin RMDs when they reached age 70 ½ in 2020 or later may want to rethink their options.


X Penalty-Free Distributions for Birth or Adoption Expenses: The law allows penalty-free retirement plan withdrawals of up to $5,000 within a year of the birth or adoption of a child to pay for eligible expenses. While the distribution would be penalty-free, it would be subject to income tax. Plan sponsors should make sure their employees, especially younger ones, are aware of this new opportunity, as well as the tax consequences. A unique feature of these special distributions is that the participant can repay the full amount to the plan at any time in the future (if the plan so allows).

X IRA Contributions after 70 ½: IRA owners now can continue to contribute to their IRAs after age 70 ½, as long as they are still working. While IRAs are typically outside of the company 401(k) plan, employers may want to educate participants about this new rule, which now aligns with 401(k) provisions.

X Mandatory Lifetime Income Disclosure: The SECURE Act requires employers to give participants a snapshot of the monthly income they might expect from an annuity, based on their current account balance. The snapshot will be included annually on participants’ benefits statements. It should be noted that employers aren’t required to provide an annuity option, only to educate employees regarding the size of an annuity that corresponds to their account balance. While the Department of Labor (DOL) needs to develop a model for this disclosure before it becomes effective, employers should start thinking about how they want to communicate this information to participants.

X Elimination of “Stretch” Beneficiary Distributions: Previously, people who inherited an IRA or 401(k) could receive—or “stretch”—distributions from the account over their entire lifetimes. Now, non-spouses and other specific beneficiaries who inherit these accounts must take all of the money out within a 10-year window. This new provision could affect the estate planning strategies of some employees, particularly those who have established trusts for younger generations. Employers have an opportunity to alert employees about this change and encourage them to talk with their financial advisors about how it might affect the employees’ estate planning.

BDO INSIGHT: COMMUNICATE TO SHOW YOU CARE

Employers can show their commitment to helping employees achieve their retirement goals by providing the information necessary to understand the SECURE Act’s changes. By showing that they care about helping employees prepare for retirement, employers can improve employee engagement and enhance their ability to recruit and retain the best talent.

Even though many of the SECURE Act’s provisions won’t go into effect for several months, plan sponsors should be proactive in developing communications strategies. This will help participants prepare to take advantage of the new benefits, as well as feel empowered and cared for along the way. Your BDO representative is ready to help create a communications strategy that works for your organization.


Reducing the Risk of Fraud in Benefit Plans

Benefits leaders spend a lot of time understanding the complex rules that govern plans, and often less time making sure controls are in place to protect against fraud. Unfortunately, thieves who understand how benefit plans operate can work undetected—sometimes for a long period of time—and cause massive disruption to organizations and plan participants.

The Department of Labor (DOL) has been hard at work to protect employee benefit plans from fraudulent transactions. Last year, the DOL restored more than $2.5 billion to plans, participants and beneficiaries, with $2 billion coming from enforcement investigations. Many of these cases could have been prevented with stronger internal controls, beginning with better segregation of duties.

Developing a thorough approach to fraud prevention may seem like a daunting challenge for benefits managers who find themselves juggling multiple responsibilities. Fortunately, these professionals can improve their ability to prevent fraud by educating themselves on common schemes as well as best practices in oversight of benefit plans.

WHAT DOES FRAUD LOOK LIKE?Staying informed on recent examples of benefit plan fraud can help benefits managers identify gaps in their control processes. As highlighted in the examples below, fraud can hit a benefit plan from a number of potential directions. For example, it can be committed by a payroll benefits manager, a company officer, or a service provider.

Examples of fraud cases affecting benefit plans from the DOL and American Institute of CPAs (AICPA) include:

X An operator of a company that provided investment advice and administrative services to pension plans was sentenced to 41 months in prison and ordered to pay $1.6 million in restitution for forging documents, writing phony checks and cheating beneficiaries of a Florida-based rehabilitation center of their defined benefit plan assets.

X The CEO and other fiduciaries of an Ohio-based industrial company were required to pay back and restore nearly $29,000 to the company 401(k) plan after federal enforcement officials found that they failed to forward employee contributions to their retirement accounts.

X A director of a plan administrator’s defined benefit plan embezzled approximately $3 million from the plan over a period of 4-6 years by paying bogus expenses, recorded as miscellaneous plan expenses, to fictitious companies he created. The scheme, which was eventually caught by the DOL, went undetected for several years because the amount taken was under the auditor’s materiality level for the $1 billion plan.

X An outside investment manager for a defined benefit plan reported investments and investment gains that did not exist. The fraud went undetected for a period of six months before being discovered.

X A payroll supervisor requested distribution checks for former employees who had been laid off and requested that the checks be sent to her to distribute through final payroll checks to the employees. The supervisor then deposited these funds in her own savings account. $250,000 was later restored to the plan.

X An employee of a defined contribution severance plan created fictitious participants in the system and cut benefit checks. The scheme was caught at the check cashing facility.

X A plan administrator used forfeitures to pay personal credit card balances.

X An HR employee figured out how to process loans against participants’ accounts and manually prepared annual participant statements to hide the loans. The plan used a small service organization that sent the participant statements to the sponsor for mailing. Proper controls weren’t in place to ensure the statements were private and to approve the loans.

X An individual was offered a position but never actually started the job. The plan sponsor entered the individual as an employee in the HR system, enrolled the person in the benefit plan, and then started issuing paychecks with deductions for contributions to the plan. This scheme went on for three years and was eventually uncovered when the employee running the scam requested a distribution.


Spotting these crimes might seem easy in retrospect, but how can you improve your chances of discovering fraud that is occurring right under your nose? Some potential warning signs include:

X Participants reporting inaccuracies or anomalies, such as late plan statements and errors in account balances, contribution amounts or distribution checks

X Changes in the investment lineup without proper notification

X Late transfers to participant accounts

X One-time transactions or unusual payments to vendors

X Unusual, lavish lifestyle or sudden changes in behavior of a plan administrator

IMPROVING INTERNAL CONTROLS AND SEGREGATING DUTIESYour internal controls should be customized to fit your organization’s benefits lineup. Internal controls can be simplified so they become a regularly scheduled part of managing benefits offerings. Some examples of internal controls best practices include regularly monitoring outside service providers, reconciling recordkeeping and custodial records, periodically reviewing distribution reports and matching up third-party reports with payroll records. The goal of internal controls should be to help prevent mistakes, reduce the risk of fraud and reassure plan sponsors that benefits are compliant with the law.

Segregation of duties is paramount in helping to prevent fraud and detect it once it occurs. Employees who have access to both plan assets and records already have opportunity to commit fraud; now they just need the incentive and a way to rationalize their behavior. At a minimum, custody of assets and related authorizations should be separated from recording functions. It is important to review the oversight and executional roles involved in administering your benefit plan and ensure that your plan has separated duties appropriately.

Benefits leaders should also encourage plan participants to help prevent fraud. Providing participants with examples of fraud patterns, encouraging strong passwords, discouraging users from sharing information (even with loved ones) and creating a process to report potential fraud can help bring awareness to this growing problem. Studies have shown that fraudulent activity is most often reported by someone internally; a fraud hotline or similar whistleblowing channel is a powerful tool in limiting potential fraud.

BDO INSIGHT: REVISIT INTERNAL CONTROLS AND SEGREGATING DUTIES

It is human to think bad things won’t happen in our lives. Unfortunately, this is an unrealistic and dangerous assumption when it comes to managing benefit plans.

Some plan sponsors may believe that their annual plan audit should catch any fraud that occurs in their benefit plans. While audits can sometimes be helpful in identifying irregularities, they aren’t specifically designed to detect fraud. An audit performed in accordance with auditing standards generally accepted in the United States doesn’t provide absolute assurance or any guarantee of the accuracy of the financial statements; as such, an audit is subject to inherent risk that fraud, if it exists, may not be detected. Many fraud schemes are designed to avoid detection by operating at dollar amounts that are less than the audit’s level of materiality. It is the responsibility of plan management to implement internal controls that ensure oversight of the many types of transactions that happen within their plans on a regular basis.

Your BDO representative is ready to help evaluate the needs of your benefits lineup to help you design or test controls and discuss best practices to prevent fraud from happening to your organization.


Employers Can Immediately Provide Tax-Free Qualified Disaster Payments to Employees in Connection with COVID-19

Employers are scrambling to find ways to help their employees who are impacted by the novel coronavirus (COVID-19). Help is available. Now that the COVID-19 has been declared a national emergency,[1] Internal Revenue Code Section 139 can be used to allow employers to make tax-free payments or reimbursements to employees as “qualified disaster payments.” Below are some frequently asked questions about how employers can use Section 139 immediately to help employees cope with COVID-19.

Q1: What is a “qualified disaster payment”?

A1: Qualified disaster payments are payments that are not otherwise reimbursed by insurance made by an employer to an employee that are reasonably expected by the employer to:

X Reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster; and

X Reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.

The payments should not include non-essential, luxury, or decorative items or services.

Q2: What expenses might be considered to be eligible as a qualified disaster payment with respect to COVID-19?

A2: With respect to COVID-19 circumstances, it appears that employers can pay for, reimburse, or provide in-kind benefits reasonably believed by the employer to result from the COVID-19 national emergency that are not covered by insurance. For example, it appears that employers could pay for, reimburse or provide employees with tax-free payments for over-the-counter medications, hand sanitizers, home disinfectant supplies, child care or tutoring due to school closings, work-from-home expenses (like setting up a home office, increased utilities expense, higher internet costs, printer, cell phone, etc.), increased costs from unreimbursed health-related expenses and increased transportation costs due to work relocation (such as taking a taxi or ride-sharing service from home instead of using public mass transit).

BDO INSIGHT

Wage replacement (such as paid sick or other leave) would not be covered by Section 139, so such payments would still be taxable wages and would remain subject to income and payroll tax withholding and reporting.


Q3: What is the federal tax treatment of qualified disaster payments?

A3: Qualified disaster payments are federal tax-free to employees and are fully deductible to the employer. Such payments are not considered “gifts.” There is no federal reporting or disclosure, so such payments are not reported on Form W-2 or 1099 and are not subject to federal income or payroll tax withholding.

Q4: What is the state tax treatment of qualified disaster payments?

A4: Generally, state treatment for income tax withholding purposes will mirror the federal treatment of qualified disaster relief payments. That is, states generally exclude qualified disaster relief payments from the definition of wages for state income tax withholding purposes, either expressly or by applying the federal definition of “wages” for state income tax withholding purposes. However, qualified disaster relief payments may still be considered “wages” for purposes of state unemployment insurance tax. Employers should determine on a state-by-state basis whether certain income tax withholding and/or unemployment insurance tax contribution obligations may arise in connection with such payments.

Q5: Is there a cap on how much an employer can provide to an employee as a qualified disaster payment?

A5: No. Section 139 does not impose any limit on the amount or frequency of qualified disaster payments that an employer can make to any individual employee or to all employees in the aggregate.

Q6: Must employers have a written plan to make qualified disaster payments to employees?

A6: No. Employers are not required to have a written program for qualified disaster payments. But having such a program is recommended, so employers can inform employees about the parameters of the employer’s program in the COVID-19 context. Such a program might include a description of who is eligible, what expenses will be reimbursed (perhaps up to a “per employee” maximum), how and when payments will be made, etc.

Q7: Are employees required to substantiate their expenses to prove that they are eligible for qualified disaster payment treatment?

A7: No. Employees are not required to provide receipts or other proof supporting their expenses. However, employers could require such proof as part of its written program, perhaps using rules similar to the long-standing IRS “accountable plan” rules.


Federal Aid Package Helps Individuals Affected by COVID-19

The Families First Coronavirus Response Act (H.R. 6201), became law on March 18, 2020. The Act guarantees free testing for the novel coronavirus (COVID-19), establishes emergency paid sick leave, expands family and medical leave, enhances unemployment insurance, expands food security initiatives, and increases federal Medicaid funding.

The Act includes up to 80 hours of emergency paid sick leave for workers who are unable to work while they are sick or complying with COVID-19 restrictions or caring for school age children due to the closure of schools or child care facilities, as well as paid family and medical leave that employees will be able to use to care for family members (not for personal illness) for up to 12 weeks. The first 10 days of emergency family and medical leave may be unpaid, unless employees opt to use accrued paid time off for those days.

The mandatory paid leave provisions apply to employers with fewer than 500 employees and government employers, with exceptions for health care providers and emergency responders. Self-employed individuals would be eligible for the new benefits provided under the Act. It is not clear if individuals who have self-employment income from their partnership or limited liability company would be eligible for the new self-employed benefits, as the Act does not specifically address those situations. Employers with 500 or more employees would not be subject to those rules. Employers who are required to provide paid time off would need to initially bear the costs of paying their employees, but the federal government would provide payroll tax credits to help cover those costs.

BACKGROUNDCurrently, the federal Family Medical Leave Act of 1993 (FMLA) provides eligible employees up to 12 work weeks of unpaid leave a year and requires group health benefits to be maintained during the leave as if employees continued to work instead of taking leave. Employees are also entitled to return to their same or an equivalent job at the end of their FMLA leave. Special rules apply to military personnel.

To be eligible for FMLA, an employee is required to have been employed by their employer for a year, worked for 1,250 hours, and worked in a location where there are 50 other employees within a 75-mile radius. The FMLA applies to all private sector employers who employ 50 or more employees for at least 20 workweeks in the current or preceding calendar year (including joint employers and successors of covered employers). Many states have enacted laws that are similar to federal FMLA, which apply to smaller employers who may be exempt from federal FMLA. The FMLA also applies to federal, state and local employers. These current provisions remain available for qualifying employees.

EMPLOYER MANDATES

Emergency Paid Sick Leave

Through December 31, 2020, the Act requires employers with fewer than 500 employees and government employers to provide all employees (including union employees and regardless of how long the individual worked for the employer, but excluding health care providers and emergency responders) with 80 hours (e.g, 10 business days) of emergency paid sick leave for full-time workers (pro-rated for part-time employees or employees with varying work schedules) for employees who are unable to work or telework because the employee:

X Is subject to a federal, state, or local COVID-19 quarantine or isolation order;

X Has been advised by a health care provider to self-quarantine because of COVID-19;

X Is experiencing COVID-19 symptoms and is seeking a medical diagnosis;

X Is caring for an individual subject to or advised to quarantine or isolation;

X Is caring for a son or daughter whose school or place of care is closed, or child care provider is unavailable, due to COVID-19 precautions; or

X Is experiencing substantially similar conditions as specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.


Generally, employers would pay employees at their regular rate of pay for emergency sick leave, capped at $511 per day ($5,110 in the aggregate) if the leave is taken for an employee’s own illness or quarantine (i.e., for the first three bullets above). Employers would pay employees two-thirds of their regular rate of pay for emergency sick leave, capped at $200 per day ($2,000 in the aggregate) if the leave is taken to care for others or due to school closures (i.e., for the last three bullets above).

An employer cannot require an employee to use other paid leave before using this paid leave. Employers would not be able to require employees to find replacement workers to cover their shifts if employees use emergency paid sick leave. The federal government is supposed to provide a model notice within seven days after enactment, which employers would be required to post at their workplace, informing employees of their right to emergency paid sick leave. The U.S. Department of Labor is directed, within 15 days after enactment, to issue guidelines on how to calculate the amount of emergency paid sick leave. The Department of Labor also has the authority to issue regulations to exempt small businesses with fewer than 50 employees from having to provide emergency paid sick leave to employees who need to care for a son or daughter whose school or place of care is closed, or child care provider is unavailable, due to COVID-19 precautions if the imposition of such requirements would jeopardize the viability of the business as a going concern.

Employers would face penalties for failing to comply with the new emergency paid sick leave rules and are prohibited from discriminating against employees who take emergency paid sick leave. Eligible employees could use emergency paid sick leave before using new, emergency paid family and medical leave created by the Act.

FMLA Amendments

The Act would add provisions to the FMLA to provide employees (including union employees) who have been employed for at least 30 days by employers with fewer than 500 employees or government employers, with the right take up to 12 weeks of job-protected leave through December 31, 2020, if the employee is unable to work or telework due to having to care for a child under age 18 if the child’s school or place of child care has been closed (or the child care provider is unavailable), due to the COVID-19 public health emergency. Employers may elect to exclude health care providers and emergency responders from taking this public health emergency FMLA.

The first 10 days of FMLA under these new provisions may be unpaid. Employees can use other paid time off such as vacation, sick days, sabbatical, or emergency paid sick leave to cover that gap, but employers cannot require employees to use their accrued paid time off before using these 12 weeks of extended FMLA leave. Employers would pay employees two-thirds of their regular rate of pay for this emergency FMLA leave, capped at $200 per day ($10,000 in the aggregate per employee). Adjustments would be made to the amount of paid time off for employees with varying schedules.

The Act gives the U.S. Department of Labor authority to issue regulations that would exclude certain health care providers and emergency responders from being able to take emergency family and medical leave. The Department of Labor also has the authority to issue regulations to exempt small businesses with fewer than 50 employees from the emergency family and medical leave requirements if the imposition of such requirements would jeopardize the viability of the business as a going concern. The Act would also exempt employers with fewer than 50 employees in a 75-mile radius from civil damages in an FMLA lawsuit.

Under the Act, covered employers (those with less than 500 employees) are required to hold an employee’s job open for them until the end of the leave period. However, an exception applies to employers with fewer than 25 employees if the employee’s position no longer exists due to economic conditions or other changes in the employer’s operations that affect employment and are caused by the COVID-19 crisis, and the employer made reasonable efforts to restore the employee’s job. And, if those efforts failed, the employer agrees to reinstate the employee if an equivalent position becomes available within a year.

The Act creates new, refundable payroll tax credits for employers to help cover the costs of this new paid sick and family leave.


PAYROLL TAX CREDITSTo assist employers who are required to provide emergency paid sick leave or FMLA leave under the programs described above, the Act provides for a refundable tax credit applicable against the employer’s portion of Social Security or Railroad Retirement Tax Act (RRTA) tax for amounts paid under those programs. The IRS recently expanded the sources that employers can draw upon to obtain their refundable tax credit for providing the mandated paid sick and child care leave.

Source of Tax Credit Refunds

The IRS recently said that employers can deduct the cost of providing such leave from their total federal tax deposit amount from all employees (not just from those who take the federally mandated leave). Specifically, employers can deduct the cost of providing such leave from: (1) federal income taxes withheld from all employees pay; (2) the employees’ share of Social Security and Medicare taxes; and (3) the employer’s share of Social Security and Medicare taxes.

Self-Employed

Equivalent tax credits are available to self-employed individuals for federally mandated paid sick and child care leave. But self-employed individuals will deduct their tax credits from their estimated tax payments or can claim a refund on their federal income tax return (i.e., their 2020 Form 1040).

As a result, employers (including self-employed individuals) will have more cash in-hand (by not remitting taxes that are otherwise due) to cover the cost of providing the federal paid sick and child care leave.

Rapid Refunds

IR 2020-57 also says that if the payroll tax off-set is not sufficient to cover 100% of those costs, employers can request a refund of their tax credit for any remaining amount. The IRS expects to process such refunds within two weeks.

How much is the credit?

The credit is equal to 100% of the compensation paid in each calendar quarter to employees who are not working for the reasons enumerated above, subject to the following limitations:

For payments to an employee who needs time off for self-isolation, diagnosis, or care of a COVID-19 diagnosis, or compliance with a health care provider’s recommendation or order, the credit is capped at $511 of eligible wages per employee per day. For payments to an employee who needs time off to care for a family member who has been exposed to or diagnosed with the COVID-19, or a child under age 18 whose school or place of care has been closed, the credit is capped at $200 of eligible wages per employee per day. The credit for emergency paid sick leave wages is only available for a maximum of 10 days per employee over the duration of the program. For expanded FMLA, the credit is capped at $200 of eligible wages per employee per day and $10,000 for all calendar quarters.

Both of the credits are increased by any amounts paid or incurred by the employer to maintain a group health plan, to the extent those expenses are (1) excluded from the employee’s gross income under the tax code and (2) “properly allocable” to the respective qualified sick or FMLA wages required to be paid under the Act. The exact method of allocation will be provided by regulation at a later date, but the Act provides that the allocation will be treated as properly made if done “on the basis of being pro rata among covered employees and pro rata on the basis of periods of coverage.”

If the credit exceeds the employer’s total liability for Social Security or RRTA tax for all employees for any calendar quarter, the excess is refundable to the employer. The employer may choose not to apply the credit. Further, to prevent a double benefit, the employer cannot obtain a deduction for the amount of the credit. In addition, employers may not receive the credit in connection with wages for which a credit is allowed under Section 45S (credit for paid family and medical leave).


Similar rules apply to a self-employed individual that allow a refundable tax credit against the individual’s self-employment tax. The credit is capped at the lesser of the amounts that apply to eligible wages per employee or the individual’s lost self-employment income. The House-passed version of the Act provides guidance on how to determine the individual’s lost income due to the corona virus.

No Employer FICA Tax on Emergency Sick and Child Care Leave

Notably, required payments for emergency paid sick leave or FMLA under the Act will not be considered wages for purposes of calculating the employer’s portion of the Social Security or RRTA tax. In addition, the tax credits available to an employer are increased by the amount of the employer’s liability for Medicare tax on wages paid under the Act, effectively exempting the emergency sick leave and FMLA payments from that tax as well. In this way, the Act provides employers with two tax benefits: (1) refundable credits against the employer’s portion of Social Security or RRTA tax; and (2) an exemption from, or credit against, the employer’s portion of Social Security or RRTA and Medicare taxes on the wages required to be paid under the Act.

However, the law does not exempt these payments from the definition of wages for the purpose of other taxes (including the employee’s portion of Social Security, RRTA and Medicare taxes).

The Act ensures there is no negative impact to the Social Security program caused by the tax credit or the exemption of sick pay and family leave pay from Social Security tax by authorizing a transfer of funds from the General Fund to the Social Security and disability insurance trust funds to replace the lost employer contributions. The tax provisions discussed herein will apply beginning on a date to be determined by the Secretary of the Treasury after the enactment of the Act and ending on December 31, 2020.


How to Determine if an Employer Has “Fewer than 500 Employees” for COVID-19 Federal Paid Sick and Family Leave Mandates

The Families First Coronavirus Response Act (H.R. 6201) became law on March 18, 2020. Among other things, the Act requires employers with “fewer than 500 employees” to provide two new benefits: (1) federal emergency paid sick leave and (2) federal emergency paid family and medical leave (FMLA). As a result, employers need to know immediately how to determine if they have “fewer than 500 employees.”

Questions remain about how to calculate whether an employer has “fewer than 500 employees” and which measurement period or date should be used. These questions are particularly important, as many employers are currently making difficult decisions, which could lead to dramatic cuts to their employee headcount due to the COVID-19 pandemic.

Because these new mandates are grounded in two different federal laws, it seems that there are two different sets of rules for counting “fewer than 500 employees.” Specifically, as described below, one method must be used for federal emergency paid sick leave while another method must be used for the federal emergency paid FMLA leave.

COUNTING EMPLOYEES FOR FEDERAL PAID SICK LEAVE

No Controlled Group Concept

The Fair Labor Standards Act (FLSA) definition of “employer” applies for federal emergency paid sick leave. FLSA does not seem to have a controlled group concept. Likewise, the new legislation simply says “employer” and does not include references to any sections of the Internal Revenue Code that would require all entities under common control be treated as if they were a single employer. Often (but not always), the Code requires related employers to be treated as if they were a single employer (for example, see Sections 1563 and 414(b), (c), (m), etc.). Also, the Code often (but not always) imposes ownership attribution rules (for example, under Sections 267(b) or 318). Congress certainly knew about the controlled group and ownership attribution concepts, which were used most recently in the SECURE Act and the Tax Cuts and Jobs Act, as well as many other laws. By not specifically including cross-references to any of those existing Code sections, it seems Congress did not intend for controlled group or ownership attribution concepts to apply when determining whether an employer has “fewer than 500 employees” for purposes of the new federal paid sick leave mandate. We have submitted this question to the IRS as needing priority guidance.

As of what date should the headcount be made?

Since H.R. 6201 does not specify the date for the employee count and the FLSA applies to almost all employers all the time, guidance is needed to determine as of which date employers would be treated as having “fewer than 500 employees” for purposes of the new federal emergency sick leave benefit.

BDO INSIGHT

Some employers may want their headcount to be fewer than 500 so that they can obtain assistance from the government to provide their employees with paid leave benefits. Those employers will benefit from a methodology that does not require employees of related companies or consolidated group members to be counted. Many small employers would like to assist their employees but cannot afford paid leave without federal assistance.

In contrast, other employers may prefer to avoid the mandatory paid leave requirements and would benefit from a more inclusive employee count.


COUNTING EMPLOYEES FOR FEDERAL PAID FMLA LEAVE

Integrated Employers

The FMLA definition of “employer” applies for federal emergency paid FMLA leave. That definition includes an “integrated employer” concept, which is similar to (but not the same as) the Code’s “controlled group” concept. Employers would apply the following four factors to determine if common law employers are required to be aggregated for FMLA purposes:

X Common management

X Interrelation between operations

X Centralized control of labor relations and

X Degree of common ownership/financial control

FMLA regulations say that no single factor is determinative. Rather, the entire relationship must be reviewed in its totality. In other words, do the two entities work “hand in glove” so to speak? Do they share the same leadership? Ownership? The more intertwined, the more likely they are “integrated employers” for purposes of the new federal paid FMLA mandate.

For purposes of determining employer coverage under the FMLA, the employees of all entities making up the integrated employer must be counted.

There is no “one size fits all” answer, since there is no bright-line, numerical ownership percentage test (like tax professionals are used to analyzing). It seems that FMLA may treat entities as employers, even if they are disregarded entities for tax purposes (such as partnerships or limited liability companies taxed as partnerships).

BDO INSIGHT

Employers who use professional employer organizations, or PEOs, need to take special care to determine how FMLA applies. FMLA includes a “joint employer” concept, so each employer may have a separate duty to provide the FMLA benefits. FMLA rules also include a “successor employer” concept.


Who counts as an employee?

Employees who must be counted include:

X Any employee who works in the United States, or any territory or possession of the United States

X Any employee whose name appears on payroll records, whether or not any compensation is received for the workweek

X Any employee on paid or unpaid leave (including FMLA leave, leaves of absences, disciplinary suspension, etc.), as long as there is a reasonable expectation the employee will return to active employment

X Employees of foreign firms operating in the United States

X Part-time, temporary, seasonal, and full-time employees

Do not count:

X Employees with whom the employment relationship has ended, such as employees who have been laid off

X Unpaid volunteers who do not appear on the payroll and do not meet the definition of an employee

X Employees of United States firms stationed at worksites outside the United States, its territories, or possessions

X Employees of foreign firms working outside the United States

As of what date should the headcount be made?

Generally, a private sector employer is subject to FMLA if it employs 50 or more employees for each working day during each of 20 or more calendar workweeks in the current or preceding calendar year. Although it is not clear, the same measurement period could be used to determine if an employer has “fewer than 500 employees” for purposes of the federal emergency paid FMLA leave. Guidance from the U.S. Department of Labor would be helpful in this regard, which hopefully would be more lenient, to take into account the rapid reduction in workforce that came without much warning for many employers, due to COVID-19.


BDO INSIGHT

Because the FMLA rules have been in existence for years, employers may want to ask their human resources department or employment legal counsel to determine how the employer has historically complied with these rules. Such past practice could be applied to interpreting the new federal FMLA mandate with respect to determining if the entities must be aggregated for the “fewer than 500 employees” rule.

Since enactment of the new law, in our discussions with clients, we are finding that the very low FMLA threshold of 50 employees often did not require much analysis of “integrated employer” concept. For example, if there are 5 entities that have some of the characteristics of being “integrated” with each of them having at least 50 employees, they never had to make the determination about being integrated because the answer would not change. Look for any entity that had fewer than 49 employees to see if it extended FMLA to its employees. Now that the threshold is 500, this could be the first time that the “integrated employer” concept becomes relevant.


IRS Outlines Procedures for Payroll Tax Credits and Rapid Refunds for Employers Making Federally-Mandated COVID-19 Leave Payments

The federal government is trying to get much-needed cash into the hands of employers and employees affected by COVID-19 as quickly as possible. To do so, it is utilizing employers’ existing payroll systems to minimize the employers’ cash flow hardship that might otherwise have occurred from having to pay new, mandatory federal paid sick and child care leave to certain employees. Specifically, the IRS has just clarified that employers can subtract the cost of the new mandated paid leave (plus the cost of keeping affected employees’ health care coverage in place during that leave) from any payroll taxes that are otherwise due to the IRS.

IRS Information Release (IR) 2020-57 (March 20, 2020) outlines the system that will promptly reimburse employers for the benefits required under the Act. IR 2020-57 also states that eligible employers are entitled to an additional tax credit based on costs to maintain health insurance coverage for the eligible employee during the mandated federal paid sick and child care leave period.

BACKGROUNDBusinesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick and child care leave through December 31, 2020, under the Families First Coronavirus Response Act (Act) (H.R. 6201), can claim a refundable federal tax credit to recover 100% of those payments. Equivalent credits are available to self-employed individuals based on similar circumstances. See BDO tax alert “Federal Aid Package Helps Individuals Affected by COVID-19” for a summary of requirements the Act.

MECHANICS OF TAX CREDIT REFUNDSGenerally, employers are required to withhold federal income, Social Security and Medicare taxes from their employees’ paychecks. Normally, employers must timely remit to the IRS the withheld taxes, along with the employer’s share of Social Security and Medicare taxes. But the IRS will release guidance the week of March 23 allowing employers who pay mandated federal paid sick or child care leave to decrease their federal payroll tax deposit by the cost incurred. The IRS also said that the cost of providing such leave can include the cost of continuing health care coverage during the federally mandated sick and child care leave period.

Source of Tax Credit Refunds

Employers can deduct the cost of providing such leave from their total federal tax deposit amount from all employees (not just from those who take the federally mandated leave). Specifically, employers can deduct the cost of providing such leave from: (1) federal income taxes withheld from all employees’ pay; (2) the employees’ share of Social Security and Medicare taxes; and (3) the employer’s share of Social Security and Medicare taxes.

Self-Employed

Equivalent tax credits are available to self-employed individuals for federally mandated paid sick and child care leave. But self-employed individuals will deduct their tax credits from their estimated tax payments or can claim a refund on their federal income tax return (i.e., their 2020 Form 1040).

As a result, employers (including self-employed individuals) will have more cash in-hand (by not remitting taxes that are otherwise due) to cover the cost of providing the federal paid sick and child care leave.


Rapid Refunds

IR 2020-57 also said that if the payroll tax off-set is not sufficient to cover 100% of those costs, employers can request a refund of their tax credit for any remaining amount. The IRS expects to process such refunds within two weeks.

Examples. Here are two examples from IR 2020-57:

X Example 1: If an eligible employer paid $5,000 in federally mandated paid sick or child care leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes that it was otherwise going to deposit to make the qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.

X Example 2: If an eligible employer paid $10,000 in federally mandated paid sick or child care leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes that it was otherwise going to deposit to make qualified leave payments and could file a request for an accelerated refund for the remaining $2,000.

NEW SMALL BUSINESS EXEMPTIONAccording to IR 2020-57, small businesses with fewer than 50 employees will be eligible for an exemption from the federally mandated child care leave if complying with those requirements would jeopardize the ability of the business to continue as a going concern. The exemption will be available on the basis of simple and clear criteria, which the U.S. Department of Labor will provide in emergency guidance.

NON-ENFORCEMENT PERIODIR 2020-57 says that the U.S. Department of Labor will issue a temporary non-enforcement policy that provides a period of time for employers to come into compliance with the Act. For at least the initial 30 days (i.e., through April 20), the Labor Department will not bring any enforcement action against any employer for violating the Act, so long as the employer acted reasonably and in good faith to comply with the Act.


Act Now to Take Advantage of SBA Loans and Payroll Tax Incentives

BACKGROUNDIn light of the novel coronavirus (COVID-19) global pandemic, many small and midsize businesses are struggling to manage revenue losses amid prolonged economic uncertainty.

To offset the pandemic’s financial impacts, Congress has passed several stimulus bills, including the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes provisions that can provide for increased cashflow as well as tax savings.

Businesses should quickly consider how these provisions could help their companies during this uncertain time to ensure they are maximizing available benefits.

SBA PAYCHECK PROTECTION PROGRAMThis $350 billion forgivable loan program, included in the CARES Act, significantly expands which organizations are eligible for Small Business Administration (SBA) loans. For organizations facing financial strain as a result of COVID-19, these loans can help offset a variety of costs.

What can the loan be used for?

The loan can cover costs including payroll, continuation of health care benefits, employee compensation (excludes compensation in excess of $100,000 on an annual basis), mortgage interest obligations, rent or lease payments, utilities, and interest on debt incurred before the covered period.

Who is eligible for the program?

To qualify for the program, businesses must have either fewer than 500 employees (including full time, part time and “other” employees), meet the SBA’s size standards, or have less than $15 million of tangible net worth and less than $5 million of average net income in the last 2 years. There are some special eligibility rules for businesses in the hospitality and dining industries.

How much can a business borrow?

The maximum amount for these loans is 2.5 times the average total monthly payroll costs, or up to $10 million. The interest rate may not exceed 4%. Business can also defer payment of the principal, interest and fees for six months to one year.

Is there loan forgiveness?

Yes, provided your business meets certain conditions. Your business will be eligible to apply for loan forgiveness equal to the amount you spent during an eight-week period after the loan closing date on:

X Payroll costs

X Interest on mortgages

X Payments of rent

X Utility payments

Principal payments of mortgage payments will not be eligible for forgiveness.


How do you apply?

Applications and underwriting are handled by SBA-approved banks. While documentation requirements will vary between institutions, we would expect them to include the following:

X Current personal financial statement

X Latest available personal tax return

X Latest available business tax return

X Latest available internal 2019 YE financials

X YTD internal 2020 financials

X Spreadsheet detailing the following:

• List of all full-time employees with eight weeks salary + payroll taxes

• Cost of two months of rent with copies of leases

• Cost of two months of mortgage interest with copy of loan payments

• Cost of two months of utility costs with copy of utility payments

What is required to be eligible?

Borrowers will need to include a Good-Faith Certification that:

X The loan is needed to continue operations during the COVID-19 emergency.

X Funds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments.

X The applicant does not have any other application pending under this program for the same purpose.

X From February 15, 2020, until December 31, 2020, the applicant has not received duplicative amounts under this program.

Are there any other considerations to be aware of?

X Given these very limited requirements for borrowers, we may see additional guidance from the SBA on how banks should be underwriting these loans.

X Additionally, the CARES Act does not appear to have overridden the SBA’s “affiliation” rules. Entities are considered “affiliates” when they are controlled by or under common control of another entity. This classification generally includes private equity owners. Business cannot exceed the size thresholds for either the primary industry of the business alone, or the industry of the business and its affiliates, whichever is greater. For groups of affiliates that operate in different industries—a typical case for private equity portfolio companies—industry code is based on the primary income producing entity. However, there is some ambiguity in the text of the CARES Act, so additional guidance may be forthcoming.

EMPLOYEE RETENTION CREDITThe CARES Act provides eligible employers with a refundable credit against payroll tax liability.

How much does the credit cover?

The credit is equal to 50% of the first $10,000 in wages per employee (including value of health plan benefits).

Who is eligible for the credit?

X Eligible employers must have carried on a trade or business during 2020 and satisfy one of two tests:

X Business operations are fully or partially suspended due to orders from a governmental entity limiting commerce, travel, or group meetings.

X A year-over-year (comparing calendar quarters) reduction in gross receipts of at least 50% – until gross receipts exceed 80% year-over-year.

For employers of more than 100 employees, only wages for employees who are not currently providing services for the employer due to COVID-19 causes are eligible for the credit. For employers of 100 or fewer employees, qualified wages include those for any, regardless of if the employee is providing services.

Employers receiving a loan under the SBA Paycheck Protection Program are not eligible for this credit.

DELAY OF EMPLOYER PAYROLL TAXESThe CARES Act postpones the due date for employers and self-employed individuals for payment of the employer share of taxes related to Social Security.

When are the deferred payments due?

The deferred amounts are payable over the next two years – half due December 31, 2021, and half due December 31, 2022.

Who is eligible for the deferral?

All businesses and self-employed individuals are eligible. However, employers who receive a loan under the SBA Paycheck Protection Program and whose indebtedness is forgiven are not eligible for the payroll tax deferral.


BDO INSIGHT: HOW BDO CAN HELP

Small and midsize businesses have many potential avenues—including the SBA loan program and payroll tax incentives—to help offset costs during this uncertain time. However, navigating the complex loan application process is a daunting task. The payroll tax provisions in the CARES Act interact with the SBA loan provisions, adding to the complexity.

In the immediate term, BDO can assist in analyzing which approach will be the most beneficial for your employees and your company. Those seeking SBA loans will need to move quickly to get their loans approved and funded. We can help you navigate the required paperwork and help organize the necessary information in an expedited manner—so you can boost your cashflow ASAP.

In addition to maximizing these available options, there are also beneficial income tax provisions to claim on income tax returns, including 2019 returns. BDO can assist companies in determining possible cash tax refunds through net operating loss (NOL) carrybacks and quick refunds of 2019 taxes already paid.

Individuals: What You Need to Know About the CARES Act

On March 6, 2020, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020 was enacted, becoming the first of three Congressional relief and stimulus acts passed in March and setting off a firestorm of administrative relief by several federal agencies including the IRS and Department of Labor.

Since then, BDO has established a dedicated web page providing up-to-date insights and webinars on all novel coronavirus (COVID-19) issues impacting our clients. You can access that landing page by clicking here. This alert attempts to provide the information of most interest to BDO’s Private Clients.

BACKGROUNDThis alert briefly summarizes the following relief provisions enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted on March 27, 2020.

X Temporary waiver of required minimum distribution (RMD) rules for certain retirement plans and accounts

X Temporary waiver of early distribution penalty from tax-qualified plans and special rules related to plan loans

X Changes to charitable contribution deduction limitations

X Net operating loss (NOL) carrybacks for losses generated after December 31, 2017

X Postponement of excess business loss limitation and relief for limitations incurred in 2018 and 2019

X Recovery rebates for individuals

TEMPORARY WAIVER OF RMD RULES FOR CERTAIN RETIREMENT PLANS AND ACCOUNTSGenerally, required minimum distributions must begin at age 72 for individuals born on or after July 1, 1949, or at age 70 ½ for individuals born before July 1, 1949.

The CARES Act waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This applies even for taxpayers who turned 70 ½ in 2019 but deferred their first RMD to April 1, 2020.

RMDs that have already been taken in 2020 may be rolled over within 60 days of the distribution.


BDO INSIGHT

Waived RMDs do not need to be taken in subsequent years. However, any forgone RMD in 2020 will affect the account balance used to calculate the RMD in 2021 and future years. It is not known whether additional relief will be offered for individuals who took their RMD early in 2020 and are already outside the 60-day rollover window. RMDs were last waived in 2009. At that time, the IRS issued a notice stating that the 60-day rollover deadline would be satisfied if completed by a given date that year. It is possible that similar guidance will be issued this year.

https://www.bdo.com/insights/business-financial-advisory/insurance-risk-recovery/covid-19

SPECIAL RULES FOR USE OF RETIREMENT FUNDSEligible individuals can withdraw up to $100,000 for coronavirus-related purposes from tax-qualified retirement plans during 2020 without incurring the usual 10% early distribution penalty.

Taxable distributions should generally be included in gross income ratably over a three-year period.

Taxpayers may recontribute the withdrawn amounts in one or more re-contribution payments to the qualified plan at any time within three years of the distribution. These repayments will be treated as a tax-free rollover and not subject to that year’s cap on contributions.

The CARES Act also makes it easier to borrow money from 401(k) plans, raising the borrowing limit from $50,000 to $100,000 for the first 180 days after enactment, and by delaying the payment dates for any loans due the rest of 2020 for one year. (The CARES Act was enacted March 27, 2020; the 180-day window closes September 23, 2020.)

Coronavirus-related distributions are made to an individual (i) diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention; (ii) whose spouse or dependent is diagnosed with COVID-19 by such a test; or (iii) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.

Notably, however, a “dependent” here is defined more broadly than a “qualifying child” for purposes of the recovery rebates. Here, “dependent” includes children under the age of 19 or full-time students under the age of 24 as of December 31, 2020. In addition, individuals who are permanently and totally disabled may also be considered dependents, as can certain other qualifying relatives such as parents and in-laws.

ALLOWANCE OF PARTIAL ABOVE-THE-LINE DEDUCTION FOR CHARITABLE CONTRIBUTIONSIndividuals who do not elect to itemize their deductions in 2020 may take a qualified charitable contribution deduction of up to $300 against their adjusted gross income in 2020. A qualified charitable contribution is a charitable contribution (i) made in cash, (ii) for which a charitable contribution deduction is otherwise allowed, and (iii) which is made to certain publicly supported charities.


BDO INSIGHT

Given that COVID-19 tests are in short supply, it’s likely that most individuals will look to the last catch-all category for relief under this provision.

What’s unclear in the CARES Act is the timing of these two three-year periods and whether they run concurrently, or whether the three-year gross income inclusion period is subsequent to the three-year payback period.

California has its own early distribution penalty and while California’s statue generally conforms to the federal Internal Revenue Code, California likely needs to enact its own legislation to offer similar relief.

BDO INSIGHT

This above-the-line charitable deduction may not be taken for contributions to a non-operating private foundation or a donor advised fund.

MODIFICATION OF LIMITATIONS ON CHARITABLE CONTRIBUTIONS DURING 2020Currently, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Any contributions in excess of the 60% AGI limitation may be carried forward as a charitable contribution in each of the succeeding five years.

The CARES Act suspends the AGI limitation for qualifying cash contributions and instead permits individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020 to the extent such contributions do not exceed the taxpayer’s AGI.

Any excess is still carried forward as a charitable contribution in each of the succeeding five years.

NET OPERATING LOSSESPreviously, NOLs generated beginning in 2018 were limited to 80% of taxable income computed without regard to any NOL deduction. Any unused NOL was not able to be carried back but could be carried forward indefinitely.

The CARES Act permits individuals with NOLs generated in taxable years beginning after December 31, 2017, and before January 1, 2021, to carry back such NOLs five taxable years. Such NOLs not carried back may continue to be carried forward indefinitely. The CARES Act also eliminates the 80% taxable income limitation imposed by the TCJA for taxable years beginning before January 1, 2021.

EXCESS BUSINESS LOSS LIMITATIONSBeginning in 2018, net business losses in excess of $500,000 for joint filers ($250,000 for all other taxpayers) were not allowed as a current deduction against other income. These threshold amounts were indexed for inflation and, in 2020, were scheduled to be $518,000 for joint filers ($259,000 for all other taxpayers). The disallowed business losses became a net operating loss applied to subsequent taxable years.

The CARES Act suspends the application of this excess business loss rule for 2020, and retroactively suspends the excess business loss limitation rule for 2018 and 2019. Thus, taxpayers will be allowed to offset their business losses against other income for 2020.


BDO INSIGHT

This provision benefits taxpayers who elect to itemize their deductions in 2020 and make cash contributions to certain public charities. Contributions to non-operating private foundations or donor advised funds are not eligible for the 100% AGI limitation.

BDO INSIGHT

Taxpayers with NOLs generated in 2018 and 2019 may find it advantageous to amend returns prior to those years to carryback NOLs to years with taxable income subject to a 39.6% tax rate.

BDO INSIGHT

Taxpayers will need to address with their tax advisors the impact of the retroactive removal of the excess business loss limitation rule for 2018 and 2019. Many taxpayers have not yet filed for 2019 and the removal of the loss limitation rule should be considered in the preparation of the 2019 return. If a taxpayer was subject to the excess business loss rule in his or her 2018 tax return, the taxpayer should amend his or her 2018 return to take advantage of the elimination of the rule for 2018. Taxpayers may have a refund opportunity for 2018 if their net business losses were limited and may also find their 2019 tax liabilities either increased or decreased, depending on whether their business losses were being carried forward to 2019 or were sustained in 2019 but were limited.

RECOVERY REBATES FOR INDIVIDUALS Eligible individuals will receive a refundable tax credit against their 2020 taxable income equal to $1,200 ($2,400 for joint filers) plus $500 per qualifying child. The refund is determined based on the taxpayer’s 2020 income tax return but is advanced to taxpayers based on their most recent income tax filing – the 2018 or 2019 tax return, as appropriate.

The credit begins to phase out if the individual’s AGI exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers), and is reduced by an amount equal to 5% of the amount in which the taxpayer’s AGI exceeds these thresholds. As a result, individuals with no qualifying children completely phase out of the credit if their AGI exceeds $99,000 ($198,000 for joint filers). Individuals with two qualifying children completely phase out of the credit if their AGI exceeds $119,000 ($218,000 for joint filers).

If an eligible individual’s 2020 income is higher than the 2018 or 2019 income used to determine the rebate payment, the eligible individual will not be required to pay back any excess rebate. However, if the eligible individual’s 2020 income is lower than the 2018 or 2019 income used to determine the rebate payment such that the individual should have received a larger rebate, the eligible individual will be able to claim an additional credit generally equal to the difference of what was refunded and any additional eligible amount when they file their 2020 income tax return.

Individuals who have not filed a tax return in 2018 or 2019 may still receive an automatic advance based on their social security benefit statements (Form SSA-1099) or social security equivalent benefit statement (Form RRB-1099). Individuals who are otherwise not required to file and are not receiving social security benefits are still eligible for the rebate but will be required to file a tax return to claim the benefit.

The CARES Act provides that the IRS will make automatic payments to individuals who have previously electronically filed their income tax returns using direct deposit banking information provided on a return any time after January 1, 2018.

Eligible individuals do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates, and trusts.

A qualifying child (i) is a child, stepchild, eligible foster child, brother, sister, stepbrother, or stepsister, or a descendent of any of them, (ii) under age 17, (iii) who has not provided more than half of their own support, (iv) has lived with the taxpayer for more than half of the year and (v) who has not filed a joint return (other than only for a claim for refund) with the individual’s spouse for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins.


BDO INSIGHT

Individuals between the ages of 17 and 24 are ineligible to be claimed as a qualifying child and may be unable to claim their own independent rebate if they are eligible dependents on their parents’ tax return. Eligible dependents include children under the age of 19 or full-time students under the age of 24 who do not provide more than half of their own support and who live with the taxpayer for more than half the year.

CONTACT:

BETH LEE GARNER Assurance Partner, National Practice Leader Employee Benefit Plan Audits 404-979-7143 / [email protected]

KIMBERLY FLETT Managing Director, National Practice Leader ERISA, STS Compensation and Benefits 234-466-4068 / [email protected]

MICHAEL BELONIO Assurance Director, Northeast Region Practice Leader 212-404-5516 / [email protected]

MARY ESPINOSA Assurance Director, West Region Practice Leader 714-668-7365 / [email protected]

JODY HILLENBRAND Assurance Director, Southwest Region Practice Leader 210-424-7524 / [email protected]

LUANNE MACNICOL Assurance Partner, Central Region Practice Leader 616-802-3364 / [email protected]

JOANNE SZUPKA Assurance Director, Atlantic Region Practice Leader 215-636-5591 / [email protected]

JAM YAP Assurance Director, Southeast Region Practice Leader 404-979-7205 / [email protected]

WENDY SCHMITZ Assurance Director 704-887-4254 / [email protected]

DARLENE BAYARDO National Assurance Director 714-913-2619 / [email protected]

CHELSEA SMITH BRANTLEY National Assurance Senior Manager 404-979-7162 / [email protected]

ELLYN BESS STS GES Partner, Compensation and Benefits 757-640-7226 / [email protected]

GREGG GARRETT Head of US and International Cybersecurity 703-770-1019 / [email protected]

ANDY GIBSON Tax Regional Managing Partner 404-979-7106 / [email protected]

ALEX LIFSON STS Practice Leader, Compensation and Benefits 617-239-7009 / [email protected]

NORMA SHARARA STS GES Managing Director, Compensation and Benefits 703-770-6371 / [email protected]

JOAN VINES STS GES Managing Director, Compensation and Benefits 703-770-4444 / [email protected]

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