Do you know everything you need to know about your 401(k)? Check out this great article from Employee Benefit News about the top 10 misconceptions people have about their 401(k)s by Robert C. Lawton.
Unfortunately for plan sponsors, 401(k) plan participants have some big misconceptions about their retirement plan.
Having worked as a 401(k) plan consultant for more than 30 years with some of the most prestigious companies in the world — including Apple, AT&T, IBM, John Deere, Northern Trust, Northwestern Mutual — I’m always surprised by the simple but significant 401(k) plan misconceptions many plan participants have. Following are the most common and noteworthy —all of which employers need to help employees address.
1. I only need to contribute up to the maximum company match
Many participants believe that their company is sending them a message on how much they should contribute. As a result, they only contribute up to the maximum matched contribution percentage. In most plans, that works out to be only 6% in employee contributions. Many studies have indicated that participants need to average at least 15% in contributions each year. To dispel this misperception, and motivate participants to contribute something closer to what they should, plan sponsors should consider stretching their matching contribution.
2. It’s OK to take a participant loan
I have had many participants tell me, “If this were a bad thing why would the company let me do it?” Account leakage via defaulted loans is one of the reasons why some participants never save enough for retirement. In addition, taking a participant loan is a horribleinvestment strategy. Plan participants should first explore taking a home equity loan, where the interest is tax deductible. Plan sponsors should consider curtailing or eliminating their loan provisions.
3. Rolling a 401(k) account into an IRA is a good idea
There are many investment advisers working hard to convince participants this is a good thing to do. However, higher fees, lack of free investment advice, use of higher-cost investment options, lack of availability of stable value and guaranteed fund investment options and many other factors make this a bad idea for most participants.
4. My 401(k) account is a good way to save for college, a first home, etc.
When 401(k) plans were first rolled out to employees decades ago, human resources staff helped persuade skeptical employees to contribute by saying the plans could be used for saving for many different things. They shouldn’t be. It is a bad idea to use a 401(k) plan to save for an initial down payment on a home or to finance a home. Similarly, a 401(k) plan is not the best place to save for a child’s education — 529 plans work much better. Try to eliminate the language in your communication materials that promotes your 401(k) plan as a place to do anything other than save for retirement.
5. I should stop making 401(k) contributions when the stock market crashes
This is a more prevalent feeling among plan participants than you might think. I have had many participants say to me, “Bob, why should I invest my money in the stock market when it is going down. I’m just going to lose money!” These are the same individuals who will be rushing into the stock market at market tops. This logic is important to unravel with participants and something plan sponsors should emphasize in their employee education sessions.
6. Actively trading my 401(k) account will help me maximize my account balance
Trying to time the market, or following newsletters or a trader’s advice, is rarely a winning strategy. Consistently adhering to an asset allocation strategy that is appropriate to a participant’s age and ability to bear risk is the best approach for most plan participants.
7. Indexing is always superior to active management
Although index investing ensures a low-cost portfolio, it doesn’t guarantee superior performance or proper diversification. Access to commodity, real estate and international funds is often sacrificed by many pure indexing strategies. A blend of active and passive investments often proves to be the best investment strategy for plan participants.
8. Target date funds are not good investments
Most experts who say that target date funds are not good investments are not comparing them to a participant’s allocations prior to investing in target date funds. Target date funds offer proper age-based diversification. Many participants, before investing in target date funds, may have invested in only one fund or a few funds that were inappropriate risk-wise for their age.
9. Money market funds are good investments
These funds have been guaranteed money losers for a number of years because they have not kept pace with inflation. Unless a participant is five years or less away from retirement or has difficulty taking on even a small amount of risk, these funds are below-average investments. As a result of the new money market fund rules, plan sponsors should offer guaranteed or stable value investment options instead.
10. I can contribute less because I will make my investments will work harder
Many participants have said to me, “Bob, I don’t have to contribute as much as others because I am going to make my investments do more of the work.” Most participants feel that the majority of their final account balance will come from earnings in their 401(k) account. However, studies have shown that the major determinant of how much participants end up with at retirement is the amount of contributions they make, not the amount of earnings. This is another misconception that plan sponsors should work hard to unwind in their employee education sessions.
Make sure you address all of these misconceptions in your next employee education sessions.
See the original article Here.
Lawton R. (2017 April 4). The 10 biggest 401(k) plan misconceptions[Web blog post]. Retrieved from address https://www.benefitnews.com/opinion/the-10-biggest-401-k-plan-misperceptions?brief=00000152-14a5-d1cc-a5fa-7cff48fe0001
Do you need help boosting your savings for your retirement? Check out these great tips from Benefits Pro on how to increasing your retirement savings by Marlene Y. Satter
Americans are struggling to save enough money for retirement.
Now that pensions are going the way of the dodo and workers are relying primarily on Social Security and 401(k) plans—the latter if they’re lucky—it’s a struggle to find extra money to set aside against the day they leave the workplace.
In fact, many workers never plan to retire.
Considering how many workers don’t even have access to a retirement plan at work, trying to stretch dollars even a little bit further to set aside money for retirement can be a real challenge.
That’s pretty clear from the zero-to-minimum savings held by many Americans.
In fact, with 40 million working-age households lacking any retirement savings at all, and the average balance of retirement accounts a pitiful $2,500 across all households, it’s obvious that something needs to be done. But how much can people do on low incomes, fighting against the gender wage gap and shrinking benefits packages?
Perhaps it’s only baby steps they can take, but even those baby steps can pay off over the span of a career. So here are some suggestions that workers could definitely benefit from on how they might be able to squeeze just a little more out of that paycheck.
Depending on a worker’s age, some of these strategies will be more helpful for some than for others—but all can make a difference in the end result: stashing away enough money to pay for retirement.
Courtesy of a range of sources, including Schwab Retirement Plan Services, Forbes, Fidelity and others, here are 10 strategies to help workers boost their retirement savings.
If you’re lucky enough to work at a company that provides a 401(k) plan, Schwab suggests that you make sure your contribution level is high enough to take full advantage of the employer matching contribution.
Not saving enough to get the full employer match is leaving free money on the table. Look for economies elsewhere (fewer trips to the barista, brown-bag lunches) to increase your contribution till you get the full benefit of whatever your employer is willing to give.
Some people up their retirement contributions every time they get a raise; others do it when they hit some other significant milestone, such as an anniversary with the company.
Schwab, again, suggests that whether it’s a performance review, a birthday or some other occasion, you keep raising your retirement contribution even if it’s only by one percent at a time. It will all add up by the time you’re ready to retire.
While you’re busy increasing those contributions, automate them.
Set up an automatic increase that will add to your savings at regular intervals, even if you forget.
That way, whether you’re the type that actually remembers those special occasions on which you plan to boost contributions or you forget them, you can set it and forget it—and your retirement plan will do the rest.
If you’re 50 years old or older, remember that you’re allowed to put an extra $6,000 into your retirement account to catch up to where you ought to be.
That can help a lot as you approach retirement, particularly if you haven’t saved the maximum allowable in years past.
This one doesn’t actually require you to find additional money to save. What it does require is that you review the investments in your retirement accounts and see how much the fees add up to.
If there are cheaper investments available in your plan—exchange-traded funds, for example, or target-date funds that offer lower fees—make sure they’re suitable for your particular needs and risk tolerance and then, if they’re appropriate, make the switch. Cutting down on the fees you pay will keep your balance growing.
Particularly if you haven’t saved all that much for retirement and the Big Day is drawing near, see if you can adjust to a budget that reflects lower spending levels—something you might have to do in retirement anyway, if money is tight.
Whether or not you can sustain living on that budget, while you’re experimenting, take any money that you save from your usual outlay and put it into your retirement account. Better yet, open a Roth if you’re eligible. You’ll have already paid taxes on the money, if it’s coming out of your regular pay, and when you take it out of a Roth however much it’s grown to will be tax free. That will save you money both now and then.
If your benefits plan at work includes an HSA, check it out as a potential investment vehicle. While most people just put money in it to pay approved medical expenses, many don’t know that they can actually invest the money in an HSA and just let it grow; it’s not a use-it-or-lose-it account.
If it grows into retirement, you can then use the money to pay approved medical expenses tax free, which will stretch your other retirement savings further. (You can also use it for nonapproved expenses, but you’ll have to pay tax on the money upon withdrawal if you do that.)
Don’t just stick your money into a savings account and wait for retirement. Check out the potential of and differences among different types of accounts—savings, HSAs, Roths, traditional IRAs, 401(k)s—and put your money where you’ll get the most bang for the buck.
Contribute the maximum to your 401(k) to get full matching funds at work, and then look into opening a traditional or a Roth IRA. As previously mentioned, if you’ve already paid taxes on money contributed to a Roth, when you withdraw it in retirement it will be tax free (so it will go further).
Your income and income tax filing status determine whether you’re eligible for this one, aimed at low- to moderate-income households, but it’s a goodie—and if you’re married and filing jointly, both of you might be able to claim it.
The program, the official name of which is the Retirement Savings Contributions Credit, can give you $1,000 for contributing to a qualifying retirement account. Whether your retirement plan is an IRA, a 401(k), 403(b), 457(b) or even a SEP or SIMPLE IRA, you contribute the allowable amount, assuming your income level makes you eligible, and the government credits you 10 percent, 20 percent, or 50 percent of the first $2,000 you contribute to retirement savings for the year.
Yes, by following the instructions in earlier steps and boosting your retirement contribution at work, you could lower your tax bracket—and that could have you losing less of your take-home pay to increase that contribution than you thought.
Depending on your withholding rate, an increased retirement contribution might hurt less than you think—and that can encourage you to do even more. You can check with human resources or the payroll department to find out just how much the hit will save you. And who knows? It might lower your adjusted gross income enough to let you qualify for the Saver’s Credit—a real win-win situation.
Satter M. (2017 March 07). 10 tips to boost retirement savings [Web blog post]. Retrieved from address http://www.benefitspro.com/2017/03/07/10-tips-to-boost-retirement-savings?ref=mostpopular&page_all=1
Are you properly investing in your health saving account? Take a look at the this article from Benefits Pro about the importance of saving money for your healthcare by Reese Feuerman
For all ages, it’s imperative to balance near-term and long-term savings goals, but the makeup of those savings goals has changed dramatically over the past 10 years.
With the continued rise in health care costs, and increased cost sharing between employers and employees, more employees and employers have been migrating to consumer-driven health care (CDH) to provide lower-cost alternatives.
With the increased adoption in these plans for employee cost savings purposes, employers have likewise realized similar cost savings to their bottom line. But what role does CDH play in the long term?
Republicans trying to find a way to repeal the ACA are turning to health savings accounts — new ones, called…
The Greatest Generation was able to rely on their pensions, Social Security, Medicaid, and the like as a means to support them in retirement for both medical and living expenses. However, as the Baby Boomers continue their journey towards retirement, reliance upon future proof retirement funds are fading into the sunset for coming generations. According to a 2015 study from the Government Accountability Office (GAO), 29% of American’s 55 and older do not have money set aside in a pension plan or alternative retirement plan.
To make matters worse, some experts are forecasting Social Security funding will be depleted by 2034, leaving even more retirees potentially without a plan. As such, Generation X and beyond must look for more creatives measures for savings to make up the difference.
In 1978, 401(k) plans were introduced to provide the workforce with a secondary means for retirement savings while also providing significant tax benefits. However, even when actively funded, with rising health care costs and a depleted Social Security system—the solution this workforce has paid into for their entire career—will not be enough.
According to Healthview Services, the average retiree couple will spend $288,000 for just health care expenses during retirement. This sum could easily consume one-third of total retiree savings. This is a contributing factor to the rise and rapid adoption of tax-advantage health accounts to supplement retirement savings. Introduced to the market in 2003, Health Savings Accounts (HSA) have provided employees with an option to set aside pre-tax funds to either cover current year health care expenses, like the familiar Flexible Spending Account (FSA), or carry over the funds year-over-year to pay for medical expenses later or during retirement. The pretax money employees are able to set aside in these accounts to cover health care expenses, will over time, be on par with retirement savings contributions, such as a 401(k) and 403(b), because of increasing costs and triple-tax savings.
It is important for consumers to understand these retirement options and how they could be leveraged for greater financial wealth. As a result, the Health Care Stack, an analysis authored by ConnectYourCare, acts as a life savings model and illustrates the amount of pretax money consumers can contribute for both their lifestyle and health expenses in retirement.
For illustrative purposes, according to current IRS guidelines, the average American under the age of 50 could set aside up to $24,750 each year pre-tax for retirement to cover their health care and living expenses. In this example, if a worker in his or her 30s starts to set aside the maximum contributions (based on IRS guidelines) for HSA contributions, assuming a rate of return of 3%, they would have $330,000 saved in their HSA to cover health care expenses once they reach the retirement age of 65. This number could be even greater if President Trump’s administration passes any number of proposed bills to increase the HSA contribution limits to match the maximum out-of-pocket expenses included in high deductible health plans. This allocation would not only cover average medical expenses, but also provide a triple-tax advantage for consumers from now through retirement.
In addition to the long-term retirement goals, the yearly pre-tax savings may be even greater if notional accounts are factored in, with approved IRS limits of a $2,600 per year maximum for Flexible Spending Accounts, $5,000 per year maximum for Dependent Care FSA, and $6,120 per year maximum for commuter plans. This equals $38,470 (or $44,820 if HSA contributions increase) of pre-tax contributions that consumers could save by offsetting the tax burden and could invest towards retirement.
For those consumers over the age of 50, the savings potential is even greater as they can contribute to a post retirement catch-up for their 401K plans equaling a total of $24,000, plus they may take advantage of the $6,750 HSA savings, as well as the additional $1,000 catch up. If certain proposed bills are passed, the increase could be $38,100 a year that they could set aside, in pre-tax assets, for retirement.
Not only will an individual’s expenses be covered, but there are other benefits brought forth by proper planning, including the potential to reach ones retirement savings goals early. Let’s say that after meeting with a licensed financial investor it was determined that an individual needed $1.8 million in order to retire, and according to national averages, close to $288,000 to cover health care costs.
Given the proper investment strategy around contributions to both retirement and HSA plans, an individual could – theoretically -save enough to meet their retirement investment needs by the age of 60 for both lifestyle and health care expense coverage, if they started making careful investments in their 20s (assuming the worker is making $50,000 per year with a 3% annual increase).
In comparison, under current proposals, which include the increased HSA limits, retirement savings could be achieved even earlier with the coverage threshold being at 57 for the average worker. This is a tremendous opportunity to transform retirement investment programs for all American workers who would otherwise be left on their own. Talk about the American dream!
While there is not a one-size fits all strategy, it is important for everyone to understand their options and see how these pretax accounts outlined in the Health Care Stack play an important consideration in ones future retirement planning.
Taking the time now to fully understand tax-favored benefit accounts will provide him or her with the appropriate coverage to enjoy life well into their golden years. Retirement is just around the corner, are you ready?
Feuerman (2017 March 02). How are your retirement health care savings stacking up?[Web blog post]. Retrieved from address http://www.benefitspro.com/2017/03/02/how-are-your-retirement-health-care-savings-stacki?ref=hp-in-depth
IRS may play a big part in your company’s ACA tax filing. Checkout this article from Benefits Pro about what the IRS will be looking for in companies ACA filings this year by Allison Bell
An official who serves as a voice for taxpayers at the Internal Revenue Service says the IRS may be poorly prepared to handle the wave of employer health coverage offer reports now flooding in.
The Affordable Care Act requires “applicable large employers” to use Form 1095-C to tell their workers, former workers and the IRS what, if any, major medical coverage the workers and former workers received. Most employers started filing the forms in early 2016, for the 2015 coverage year.
This year, the IRS is supposed to start imposing penalties on some employers who failed to offer what the government classifies as solid coverage to enough workers.
If Donald Trump’s promise holds true, the Affordable Care Act could be on its way out. Along with it may…
Nina Olson, the national taxpayer advocate, says the IRS was not equipped to test the accuracy of ACA health coverage information reporting data before the 2016 filing season, for the 2015 coverage year. The IRS expected to receive just 77 million 1095-C forms for 2015, but it has actually received 104 million 1095-C’s, and it has rejected 5.4 percent of the forms, Olson reports.
“Reasons for rejected returns include faulty transmission validation, missing (or multiple) attachments, error reading the file, or duplicate files,” Olson says.
Meanwhile, the IRS has had to develop a training program for the IRS employees working on employer-related ACA issues on the fly, and it was hoping in November to provide the training this month, Olson says.
“The training materials are currently under development,” Olson says. She says her office did not have a chance to see how complete the training materials are, or how well they protect taxpayer reports.
Olson discusses those concerns about IRS efforts to administer ACA tax provisions and many other tax administration concerns in a new report on IRS performance. The Taxpayer Advocate Service prepares the reports every year, to tell Congress how the IRS is doing at meeting taxpayers’ needs.
In the same report, Olson talks about other ACA-related problems, such as headaches for ACA exchange plan premium tax credit subsidy users who are also Social Security Disability Insurance program users, and she gives general ACA tax provision administration data.
The ACA premium tax credit subsidy program helps low-income and moderate-income exchange plan users pay for their coverage.
Exchange plan buyers who qualify can get the tax credit the ordinary way, by applying for it when they file their income tax returns for the previous year. But about 94 percent of tax credit users receive the subsidy in the form of an “advanced premium tax credit.”
When an exchange plan user gets an APTC subsidy, the IRS sends the subsidy money to the health coverage issuer while the coverage year is still under way, to help cut how much cash the user actually has to pay for coverage.
When an APTC user files a tax return for a coverage year, in the spring after the end of the coverage year, the user is supposed to figure out whether the IRS provided too little or too much APTC help. The IRS is supposed to send cash to consumers who got too little help. If an APTC user got too much help, the IRS can take some or all of the extra help out of the user’s tax refund.
Another ACA provision, the “individual shared responsibility” provision, or individual coverage mandate provision, requires many people to obtain what the government classifies as solid major medical coverage or else pay a penalty.
Individual taxpayers first began filing ACA-related tax forms in early 2015, for the 2014 coverage year. Early last year, individual taxpayers filed ACA-related forms for the second time, for the 2015 coverage year.
Only 6.1 million taxpayers told the IRS they owed individual mandate penalty payments for 2015, down from 7.6 million who owed the penalty for 2014.
But, in part because the ACA designed the mandate penalty to get bigger each year for the first few years, the average penalty payment owed increased to $452 for 2015, from $204 for 2014.
The number of households claiming some kind of exemption from the penalty program increased to 8.6 million, from 8.4 million.
The number of filers who said they had received APTC help increased to 5.3 million for 2015, up from 3.1 million for 2014. And the amount of APTC help reported increased to $18.9 billion for 2015, from $11.3 billion in APTC subsidy help for 2014.
That means the 2015 recipients were averaging about $3,566 in reported subsidy help in 2015, down from $3,645 in reported help for 2014.
Olson says her office helped 10,910 taxpayers with ACA premium tax credit issues in the 12-month period ending Sept. 30, 2016, up from 3,318 in the previous 12-month period.
One of her concerns is how the Social Security Disability Insurance program, which is supposed to serve people with severe disabilities, interacts with the ACA provision that requires people who guess wrong about their income during the coverage year to pay back excess APTC subsidy help.
Some Social Security Disability Insurance recipients have to fight with the Social Security Administration for years to qualify for benefits. Once the SSDI recipients win their fights to get benefits, the SSA may pay them all of the back benefits owed in one big lump sum.
The big, lump-sum disability benefits payments may increase the SSDI recipients’ income for a previous year so much they end up earning too much for that year to qualify for ACA premium tax credit help, Olson says in the new report.
The SSDI recipients may then have to pay all of the ACA premium tax credit help they received back to the IRS, Olson says.
So far, IRS lawyers have not figured out any law they can use to protect the SSDI recipients from having to pay large amounts of premium tax credit help back to the government, Olson says.
For now, she says, her office is just trying to work on a project to warn consumers about how accepting any lump-sum payment, including an SSDI lump-sum benefits payment, might lead to premium tax credit headaches.
Bell A. (2017 January 16). IRS may have big ACA employer tax woes, advocate says [Web blog post]. Retrieved from address http://www.benefitspro.com/2017/01/16/irs-may-have-big-aca-employer-tax-woes-advocate-sa?page_all=1
Are you worried that your company’s retirement plan is not up to government standards? If so take a look at this article from HR Morning about what the DOL and IRS are looking for in retirement plans by Jared Bilski
Two of the most-feared government agencies for employers — the DOL and IRS — have decided there’s a real problem with the way retirement plans are being run, and they’re ramping up their audits to find out why that is.
In response to the many mistakes the agencies are seeing from retirement plan sponsors, the IRS and DOL will be increasing the frequency of their audits.
What does that mean for you? According to experts, plan sponsors can expect the feds to dig deep into the minute operations of plans. That means the unfortunate employers who find themselves in the midst of an audit can expect to be asked for heaps of plan info.
Linda Canafax, a senior retirement consultant with Willis Towers Watson, put it like this:
“The DOL and IRS are truly diving deep into the operations of the plans. We have seen a deeper dive into the operations of plans, particularly with data. Plans may be asked for a full census file on the transactions for each participant. Expect the DOL and IRS to do a lot of data mining.”
Ultimately, it’s impossible to completely prevent an audit. But employers can — and should — do certain things to safeguard themselves in the event the feds come knocking.
First, a self-audit is always a good idea. It’s always better for you to discover any problems before the feds do. Next, you’ll want to be on the lookout for the types of errors that can lead the feds to your workplace in the first place.
The most common errors the IRS and the DOL are looking for:
Bilski J. (2017 January 6). DOL and IRS want a closer look at your retirement plan[Web blog post]. Retrieved from address http://www.hrmorning.com/dol-and-irs-want-to-take-a-closer-look-at-your-retirement-plan/
The National Association of Health Underwriters has tried to show Affordable Care Act program managers that it can take a practical, apolitical approach to thinking about ACA issues.
Some of the Washington-based agent group’s members strongly supported passage of the Patient Protection and Affordable Care Act of 2010 and its sister, the Health Care and Education Reconciliation Act of 2010. Many loathe the ACA package.
But NAHU itself has tried to focus mainly on efforts to improve how the ACA, ACA regulations and ACA programs work for consumers, employer plan sponsors and agents. In Washington, for example, NAHU has helped the District of Columbia reach out to local agents. NAHU also offers an exchange agent certification course for HealthCare.gov agents.
Now NAHU is investing some of the credit it has earned for ACA fairness in an effort to shape draft eligibility screening regulations proposed this summer by the Internal Revenue Service, an arm of the U.S. Treasury Department.
Janet Stokes Trautwein, NAHU’s executive vice president and chief executive officer, says she and colleagues at NAHU talked to many agents and brokers about the draft regulations.
For a look at just a little of what she wrote in her comment letter, read on:
The IRS included many ideas in the draft regulations about ways to keep consumers honest when they apply for Affordable Care Act exchange premium tax credit subsidies.
ACA drafters wanted people to be able to use the subsidies to reduce out-of-pocket coverage costs as the year went on, to reduce those costs to about what the employee’s share of the payments for solid group health coverage might be.
To do that, the drafters and implementers at the U.S. Department of Health and Human Services and the IRS came up with a system that requires consumers to predict in advance what their incoming will be in the coming year.
Consumers who predict their income will be too low and get too much tax credit money are supposed to true up with the IRS when the file their taxes the following spring. The IRS has an easy time getting the money when consumers are supposed to get refunds. It can then deduct the payments from the refunds. When consumers are not getting refunds, or simply fail to file tax returns, the IRS has no easy way to get the cash back.
The exchanges and the IRS also face the problem that some people earn too little to qualify for tax credits but too much to qualify for Medicaid. Those people have an incentive to lie and say their income will be higher than it is likely to be.
Trautwein writes in her letter that the ACA exchange system could help by doing more to educate consumers when the consumers are applying for exchange coverage.
“The health insurance exchange marketplaces [should] be required to clearly notify consumers of the consequences of potential income-based eligibility fraud at the time of application, in order to help discourage it from ever happening,” Trautwein writes.
Trautwein notes in her letter that the ACA exchange system has an exchange eligibility determination process, and that the IRS has another set of standards for determining, based on a consumer’s access, or lack of access, to employer-sponsored health coverage, who is eligible for premium tax credit subsidies.
NAHU is worried about the possibility that a lack of coordination between the IRS and the HHS could lead to incorrect decisions about whether exchange applicants have access to the kind of affordable employer-sponsored coverage with a minimum value required by the ACA laws and regulations, Trautwein writes.
“We believe that it is fairly easy for consumers to mistakenly apply for and then receive advanced payments of a premium tax credit for which they are not eligible” based on wrong ideas about affordability, she says.
Consumers could easily end up owing thousands of dollars in credit repayments because of those kinds of errors, she says.
In the long run, employers should be reporting on the coverage they expect to offer in the coming year, rather than trying to figure out what kind of coverage they offered in the past year, Trautwein says.
In the meantime, the IRS and HHS have to work together to improve the employer verification process, she says.
Trautwein says NAHU members also worry about exchange efforts to depend on information from workers to verify what kind of coverage the workers had.
“Based on our membership’s extensive work with employee participants in employer-sponsored group benefit plans, we can say with confidence that the vast majority of employees do not readily understand the various ACA-related labeling nuances of their employer-sponsored health insurance coverage offerings,” she says.
“Terms that are now commonplace to health policy professionals, like minimum essential coverage and excepted benefits, are meaningless to mainstream consumers,” she says.
NAHU does not see how an exchange will know what kind of coverage a worker really had access to until after employer reporting is reconciled with information from the exchanges and from individual tax returns, which might not happen until more than a year after the consumer received the tax credit subsidies, Trautwein says.
“This weakness on the part of the exchanges could leave consumers potentially liable for thousands of dollars of tax credit repayments, all because of confusing terms and requirements and inadequate eligibility verification mechanisms,” she says.
See the Original Article Here.
Bell, A. (2016, September 30). 3 things NAHA told the IRS about ACA premium tax credits [Web log post]. Retreived from http://www.lifehealthpro.com/2016/09/30/3-things-nahu-told-the-irs-about-aca-premium-tax-c?page_all=1
Great feature from The National Law Review by Damian A. Myers,
Since our last ACA Reporting Update, the extended deadlines to distribute Forms 1095-B and 1095-C to covered individuals and employees and to file the forms with the IRS have passed. The IRS has stated, however, that late forms can still be submitted via electronic filing and the forms that received an error message should be corrected. By many accounts, the first ACA reporting season presented numerous challenges. From collecting large amounts of data to compiling the forms, to working with service providers that faced their own unique challenges, to facing form rejections and error notifications from an inadequate IRS electronic filing system, employers and coverage providers faced obstacles nearly every step of the way. Nevertheless, most employers and coverage providers were able to get the forms filed and put the 2015 ACA reporting season behind them.
But, alas, there is no rest for the weary. In late-July, the IRS released new draft 2016 Forms 1094-B and 1095-B (the “B-Series” Forms) and Forms 1094-C and 1095-C (the “C-Series” Forms). Additionally, on August 1, the IRS released draft instructions to the C-Series Forms (as of the date of this blog, draft instructions for the B-Series Forms have not been released). For the most part, the 2016 ACA reporting requirements are similar to the 2015 requirements, subject to various revisions described below.
Various changes have been made to the forms and instructions to reflect that certain forms of transition relief are no longer applicable. For example, the non-calendar year transition relief (for plan years starting in 2014) that applied in 2015 does not apply in 2016. Similarly, changes have been made to reflect that the “Section 4980H Transition Relief” is still relevant only for non-calendar year plans though the end of the plan year ending in 2016. The Section 4980H Transition Relief exempts applicable large employers (“ALEs”) with 50-99 full-time employees from penalties under Section 4980H of the Internal Revenue Code (the “Code”) and reduces the 95% threshold to 70% for other ALEs. The relief also exempts ALEs from having to offer coverage to dependents if certain requirements are met. For calendar year plans, the threshold is at 95% throughout 2016 and dependent coverage must be offered during each month of the year.
The draft instructions to the C-Series Forms provide more detail and examples on how ALEs should prepare the forms. Instead of referring to “employers” throughout the instructions, the IRS has replaced that term in most cases with “ALE Member.” The reason for this change is to highlight the fact that each separate ALE Member must file its own forms. Examples related to completing the authoritative Form 1094-C highlight that each separate entity (determined based on employer identification number) is required to file its own authoritative Form 1094-C.
As promised by the IRS last year, there are two new indicator codes for Line 14 of Form 1095-C. These new codes ask employers to indicate whether a conditional offer was made to a spouse. An offer of coverage to a spouse is conditional if it is subject to one or more reasonable, objective conditions. For example, if a spouse must certify that he or she is not eligible for group health coverage through his or her employer, or is not eligible for Medicare, in order to receive an offer of coverage, the offer is considered conditional.
The draft instructions to the C-Series Forms reflect that the good faith compliance standard applicable to 2015 forms (under which filers could avoid reporting penalties upon a showing of good faith) no longer applies for 2016 ACA reporting. Going forward, reporting penalties may be waived only upon the standard showing of reasonable cause.
The draft instructions to the C-Series Forms include new information related to coding for COBRA continuation coverage. There has been some uncertainty regarding how to treat offers of COBRA continuation coverage since the IRS removed relevant guidance from its Frequently Asked Questions website in February 2016. Similar to the 2015 instructions, the draft 2016 instructions provide that offers of COBRA coverage after termination from employment should be coded with 1H (Line 14) and 2A (Line 16) whether or not the COBRA coverage is elected. The new instructions now state that this coding sequence also applies for other, non-COBRA post-employment coverage, such as retiree coverage, when the former employee was a full-time employee for at least one month of the year.
In the case of an offer of COBRA coverage following a reduction in hours, the basic coding requirement is the same as in 2015 – the offer of COBRA coverage is treated as an offer of coverage on Line 14 of the Form 1095-C. The draft instructions expand on this basic requirement to explain how to code Lines 14 and 16 when the offer of COBRA coverage is not made to a spouse or dependent. In general, for purposes of Code Section 4980H, an offer of coverage made once per year to an employee and his or her spouse and dependents is treated as an offer for each month of the year even if the coverage is declined for the employee, spouse, and/or dependents. Under general COBRA rules, only those individuals enrolled in coverage immediately prior to the qualifying event receive an offer of COBRA coverage.
So how does this play out when an employee with a spouse and dependents elects self-only coverage during open enrollment and later loses that coverage due to a reduction in hours? The draft instructions treat the initial offer of coverage at open enrollment and the offer of COBRA coverage as two separate offers of coverage. To determine the proper coding, the employer must look at who had the opportunity to enroll at each offer. During open enrollment, the employee, spouse and dependent had the opportunity to enroll. Thus, until the reduction in hours and loss of coverage, the coding should be 1E (offer to employee, spouse and dependent) in Line 14 and 2C (enrolled in coverage) in Line 15.
In contrast, the offer of COBRA coverage was only available to the employee and, therefore, after the reduction in hours, the coding should be 1B (offer to employee only) in Line 14. If the employee does not elect the COBRA coverage, code 2B (part-time employee) could be inserted in Line 16. If, however, the employee does elect COBRA coverage, it appears that code 2C (enrolled in coverage) should still be inserted in Line 16. Although this latter coding sequence is likely intended to protect the spouse and dependents from being “firewalled” from a premium credit, there appears to be nothing to indicate that the employer should not be assessed a penalty for failing to make an offer to the employee’s dependents.
The draft instructions for the C-Series Forms provide additional insight into how to calculate the number of full-time employees for purposes of column (b) in Part III of the Form 1094-C. The draft instructions clarify that the determination of full-time employee status is based on rules under Code Section 4980H and related regulations and not on other criteria established by an employer. Note that, currently, the draft instructions state that the monthly measurement period must be used for this purpose, but it appears that this is a mistake and that it should reference both the monthly measurement and look-back measurement methods. The IRS may clarify this in the final instructions.
One important non-change in the draft instructions is that the specialized coding for employees subject to the multiemployer plan interim guidance remains in effect for 2016 reporting. The interim guidance provides that an employee is treated as having received an offer of coverage if his or her employer is obligated pursuant to a collective bargaining agreement to contribute to a multiemployer plan on the employee’s behalf, provided that the multiemployer plan coverage is affordable and has minimum value and the plan offers dependent coverage to the eligible employee. The coding for such as employee is 1H (no offer of coverage) for Line 14 and 2E (multiemployer plan interim guidance) for Line 16.
There will undoubtedly be tweaks to the draft instructions to the C-Series forms, but significant changes appear unlikely. Given that only five months remain in 2016, employers should start planning now for 2016 ACA reporting based on the draft instructions and make alterations as necessary when final instructions and other guidance is released.
Myers, D. A. (2016 August 4). 2016 draft forms & instructions released: affordable care act reporting update. [Web blog post]. Retrieved from address http://www.natlawreview.com/article/2016-draft-forms-instructions-released-affordable-care-act-reporting-update
Ryan Moulder gives a little clarity on the new TIN regulations in the article below.
On Aug. 2, 2016 the IRS published in the Federal Register proposed regulations which among other things attempt to clarify the confusion regarding Taxpayer Identification Number solicitations. This is the government’s third attempt to clarify the TIN issue since the creation of IRC section 6055. The first attempt was made in the preamble to the final regulations for section 6055. In an attempt to bring greater clarity and to gather further comments on the issue, the government issued Notice 2015-68. Notice 2015-68 states an employer will not be subject to the penalties for the failure to report a TIN if the entity follows the regulations set forth at section 301.6724-1(e) with the additional modifications:
The Notice is not a model for clarity and this issue has only been exasperated by the number of AIRTN500 error messages employers received when submitting the Form 1095-C. With that as a backdrop, the government is once again trying to clarify an employer’s solicitation obligation through proposed regulations. The proposed regulations only apply to the Form 1095-B and to Part III of the Form 1095-C (the Part that is used for employers that sponsor a self-insured plan). The proposed regulations do not affect Parts I or II of the Form 1095-C. This article focuses on the proposed regulations as they relate to Part III of the Form 1095-C. However, most of the concerns discussed in this article could be applied to the Form 1095-B.
As a refresher to what we have written about in previous publications, an employer submitting a Form 1095-C is subject to the penalty provisions of section 6721 and section 6722 for failure to timely file a correct information return or failure to timely furnish a correct statement to the individual. The penalties under both section 6721 and section 6722 may be waived if the failure to timely file (or furnish) a correct information return (or statement) was due to reasonable cause and not due to willful neglect. An employer may meet this standard by showing it acted in a responsible manner and that the failure was the result of events beyond the employer’s control or there were mitigating factors. An employer in danger of violating section 6721 and section 6722 as the result of a missing TIN or an incorrect TIN can follow the procedures laid out in specific sections of the regulations to fulfill the standard discussed in the preceding sentences.
The proposed regulations did a good job distinguishing between missing TINs (discussed at section 301.6724-1(e)) and incorrect TINs (discussed at section 301.6724-1(f)). Treasury and the IRS agreed with commenters that some modifications needed to be made to the solicitation process for missing TINs. However, the proposed regulations leave unchanged the regulations set out for incorrect TINs.
One of the problems commenters complained about with regard to missing TINs is it did not adequately define the term “opened” which was relevant to determine when the initial solicitation needed to be made to satisfy the regulations. An initial solicitation for a missing TIN must be made at the time an account is “opened.” Prior to the existence of the Form 1095-C, missing TIN solicitations were typically performed for financial accounts. These accounts are generally considered “opened” on the first day the account is available for use by the owner. However, this understanding of the term “opened” does not translate well to health coverage.
To rectify this problem, the proposed regulations provide that for the purposes of the Form 1095-C an account is considered “opened” on the date the filer receives a substantially complete application for new coverage or to add an individual to existing coverage. The proposed regulations indicate the initial solicitation for a missing TIN can be satisfied by requesting the enrolling individual’s TIN as part of the application process.
If the initial solicitation for a missing TIN does not produce a TIN, the first annual solicitation under the proposed regulations must be made no later than 75 days after the date on which the account was “opened” or, if the coverage is retroactive, no later than 75 days after the determination of retroactive coverage is made. The second annual solicitation for a missing TIN remains unchanged from the current regulations and must be made by December 31 of the year following the year the account is opened. It is important to note an employer may continue to rely on the rules discussed in Notice 2015-68 or may follow the proposed regulations until the final regulations are published.
Additional relief is provided by the proposed regulations for a missing TIN. For any individual enrolled in coverage on any day before July 29, 2016, the account will considered to be opened on July 29, 2016. An employer will have satisfied its initial solicitation obligation with respect to an individual who is already enrolled so long as the employer requested the enrolled individual’s TIN as part of the application process for coverage or in any other appropriate fashion before July 29, 2016.
Consistent with Notice 2015-68, the first annual solicitation would need to be made within a reasonable time after July 29, 2016 if the initial solicitation did not produce a TIN. An employer who performs the first annual solicitation within 75 days (before Oct. 11, 2016) will be treated as having made the first annual solicitation within a reasonable time. In this situation, if the first two solicitations (the initial solicitation and the first annual solicitation) do not produce a TIN, the second annual solicitation would need to be made by December 31, 2017.
The proposed regulations do not change the solicitation process for incorrect TINs. Therefore, for an incorrect TIN, the first annual solicitation must be made on or before December 31 of the year in which the employer was notified of the incorrect TIN unless the employer was notified of the incorrect TIN in December in which case the employer’s solicitation must be made by January 31 of the following year (see section 301.6724-1(f)(1)(ii)). Similarly, the rules for the second annual solicitation for an incorrect TIN remain unchanged. Therefore, if the employer is notified in any following year after the first annual solicitation that an employee’s (or other dependents’) TIN is incorrect, a second annual solicitation must be made on or before December 31 of the year in which the employer was notified of the incorrect TIN unless the employer was notified of the incorrect TIN in December in which case the employer’s solicitation must be made by January 31 of the following year (see section 301.6724-1(f)(1)(iii)).
The current regulations state that an employer may be notified of an incorrect TIN by the IRS or by a penalty notice issued by the IRS under section 6721 (see section 301.6724-1(f)(1)(ii)). Employers are being notified of an incorrect TIN on Part III of the Form 1095-C with an AIRTN500 error message. We were under the assumption that this would trigger the TIN solicitation obligation. However, footnote 2 of the proposed regulations appears to call this into question. Footnote 2 states:
A filer of the information return required under section 1.6055-1 may receive an error message from the IRS indicating that a TIN and name provided on the return do not match IRS records. An error message is neither a Notice 972CG, Notice of Proposed Civil Penalty, nor a requirement that the filer must solicit a TIN in response to the error message.
This footnote could be interpreted several ways. One possible reading would result in an employer having no solicitation obligation despite the fact an employee’s Form 1095-C triggered an AIRTN500 error message. Alternatively, this footnote could be read to mean an employer who received an AIRTN500 error message would not in all cases be required to make a solicitation. This would be the case if the employer had already fulfilled an initial solicitation as well as two additional annual solicitations at a prior time
However, we think the instructions to the Form 1095-C require an employer receiving an AIRTN500 error message to make some sort of effort to identify a correct TIN for a covered individual. Among other items, an employer is responsible for filing a corrected Form 1095-C if there was an error in the TIN in Part I or Part III related to covered individuals. The source of the error identification may be an IRS error message when submitting the Form 1095-C. The AIRTN500 error message is telling an employer there is an error in a TIN in either Part I or Part III of the Form 1095-C.
However, and to murky the water even further, the instructions for the Form 1094-C/1095-C state “Regulations section 301.6724-1 (relating to information return penalties) does not require you to file corrected returns for missing or incorrect TINs if you meet the reasonable cause criteria.” The confusion with this statement begins with the statement appearing to be at odds with the Form 1094-C/1095-C instructions requirement that a corrected return be filed for an incorrect TIN in Part I or Part III. However, this could conceivably be reconciled with the current regulations. The current regulations require an employer to include the updated TIN with any information return that has an original due date which is after the date that the employer receives the updated TIN (see section 301.6724-1(f)(1)(iv)). Therefore, these statements could be reconciled by viewing the current regulations standard of only updating forms after the correct TIN has been received (as stated in section 301.6724-1(f)(1)(iv)) as trumping the Form 1094-C/1095-C instructions need to correct a return for an incorrect TIN in Part I or Part III.
What is more difficult to reconcile is footnote 2 and the statement in the Form 1094-C/1095-C instructions. As discussed above, footnote 2 could be read to mean no solicitation effort is needed in the event of an AINTN500 error message. Seemingly to the contrary, the Form 1094-C/1095-C instructions state an employer does not need to file a corrected return for a missing or incorrect TIN if the employer meets the reasonable cause criteria of section 301.6724-1. This is inconsistent because, to meet the reasonable cause criteria of section 301.6724-1, an employer must follow the solicitation procedures for missing and incorrect TINs discussed in section 301.6724-1(e) and section 301.6724-1(f) respectively.
One possible reading of all of these statements would give employers two potential paths. If the footnote 2 path is followed, no formal solicitation would need to be made. However, if the footnote 2 path is followed and an informal solicitation produces a correct TIN, the employer would need to file a corrected Form 1095-C and typically would need to furnish the employee a corrected statement. This path is unsatisfying to a conservative legal mind. Alternatively, the second path would not require a corrected return but the formal solicitation procedures discussed in section 301.6724-1 would need to be followed. The uncomfortable aspect of this option is no corrected return would be filed after the employer is made aware that either a TIN in Part I or Part III of the Form 1095-C is incorrect. Again, this path is unsatisfying to a conservative legal mind.
Given the uncertainty created by footnote 2 and the statement in the Form 1094-C/1095-C instructions, we still view the formal solicitation as the best practice if an informal inquiry does not solve the TIN issue. Additionally, we view filing a corrected return as the safest practice. It is important to note that correcting errors is a requirement to use the good faith efforts standard to file accurate and complete information returns in 2015. Therefore, an employer must at least make some sort of effort to figure out what is causing the AIRTN500 error message.
Ideally, the IRS would release a simple overriding statement. The statement would begin “In the event one of your Form 1095-Cs triggers an AIRTN500 error message…” This would be followed by a simple statement or two as to what type of solicitation needs to be performed and whether a corrected Form 1095-C needs to be completed. We urge the IRS to take such action as the AIRTN500 error message was received for millions, if not tens of millions, of Form 1095-Cs.
We understand that the AIRTN500 error message has been the source of immense frustration for many employers. The proposed regulations appear to be another small step in the right direction towards an amicable solution. However, footnote 2 and the Form 1094-C/1095-C instructions cast uncertainty as to when the formal solicitation procedures need to be followed. Employers need to continue to monitor the government’s guidance on this important issue. And, until we get official word from the IRS, we view the formal solicitation procedures along with a corrected return when the solicitation is successful as the safest way to ensure compliance.
See the original article posted on EmployeeBenefitAdvisor.com on August 11, 2016 Here.
Moulder, R. (2016, August 11). Proposed regulations clarify TIN responsibilities, create new questions. Retrieved from http://www.employeebenefitadviser.com/opinion/proposed-regulations-clarify-tin-responsibilities-create-new-questions
Did you get the Wellness Program notice from the IRS? Jared Bilski outlines how the new memorandum may impact your wellness benefits in the article below.
Original Post from HRMorning.com on June 10, 2016
Most HR pros are focused on ensuring their wellness rewards meet the strict requirements of the ACA and the ADA. But the IRS just reminded employers there are other considerations as well.
Via its Office of Chief Counsel, the agency just released a memorandum on its views of the tax treatment of rewards under employer wellness plans.
Note: IRS memoranda don’t constitute formal advice. However, they do give employers a good understanding of how the agency views compliance topics.
The memorandum confirms that certain tax rules apply to employer-sponsored wellness program. Coverage — including health screenings and other medical care — provided by an employer-sponsored wellness program is generally excluded from an employee’s income under specific sections of The Tax Code. But cash rewards or cash-equivalent rewards earned as a result of a wellness program are a different story.
According to the IRS, if an employee earns a cash reward under the program, that reward must be included in the employee’s gross income under Code Section 61 and is a payment of wages subject to employment taxes.
In addition, if an employee earns a cash-equivalent reward that isn’t excludible from his or her income — e.g., the payment of gym membership fees — the fair market value of that reward will be included in the employee’s gross income and is a payment of wages subject to employment taxes.
A few additional clarifications in the IRS memorandum:
Find the original article here.
Bilski, J. (2016, June 10). Fed reveal how to handle tax treatment of wellness rewards [Web log post]. Retrieved from http://www.hrmorning.com/feds-reveal-how-to-handle-tax-treatment-of-wellness-rewards/
The IRS is giving a pass this year but encourages those who missed the deadline to file ACA Forms to still complete filing returns. See the article below from ThinkHR.com for more information.
Original Post from ThinkHR.com on July 1, 2016
If you are an applicable large employer, self-insured employer, or other health coverage provider, the deadline to electronically file ACA information returns (e.g., Forms 1094-B, 1095-B, 1094-C and 1095-C) with the IRS was June 30, 2016. The ACA Information Returns (AIR) system will remain up and running after the deadline. If you were not able to submit all required ACA information returns by June 30, 2016, you are advised to complete the filing of your returns after the deadline.
It is important to note the following:
The IRS is aware that some filers are still in the process of completing their 2015 tax year filings. As is the case for other information returns, penalties may be associated with the submission of the ACA information returns for failure to timely file required returns. As the IRS has publicly stated in various forums in recent months, filers of Forms 1094-B, 1095-B, 1094-C and 1095-C that miss the June 30, 2016 due date will not generally be assessed late filing penalties under section 6721 if the reporting entity has made legitimate efforts to register with the AIR system and to file its information returns, and it continues to make such efforts and completes the process as soon as possible. In addition, consistent with existing information reporting rules, filers that are assessed penalties may still meet the criteria for a reasonable cause waiver from the penalties.
If you are not an electronic filer and you missed the May 31, 2016 paper filing deadline for ACA information returns, you should also complete the filing of your paper returns as soon as possible.
For more information, the IRS provides helpful questions and answers on the ACA reporting requirements for applicable large employers here.
Read the original article here.
Unknown (2016, July 1). IRS Update on Filing ACA Forms After June 30, 2016 [Web log post]. Retrieved from https://www.thinkhr.com/blog/hr/irs-update-on-filing-aca-forms-after-june-30-2016/