ESOPs & Employee Benefits Q1 2023 Client Update
Welcome to Spring! We hope the new season finds you ready for the upcoming benefits changes that 2023 has in store. Please find a few updates below and, as always, feel free to reach out with any other questions you may have.
End of COVID Emergency Periods to Affect Benefit Plan Deadlines and Coverage
The end of an era is near as the Biden Administration has announced its intent to end both the COVID “public health emergency” and the presidentially declared “national emergency” that have now lasted more than three years. Along with the lapse of those emergency periods, the benefit plan relief provisions associated with them will also expire. The emergency periods are currently anticipated to end on May 11, 2023.
Once the emergency periods end:
- group health plans will no longer be required (but are encouraged) to cover COVID testing without cost-sharing;
- pending further guidance, high-deductible health plans can still provide COVID testing and treatment before the participant reaches their deductible;
- the “tolling” of a participant’s deadline to enroll in COBRA, make COBRA premium payments, file claims and appeals for benefits, and use certain special enrollment rules will stop and the regular timing rules will begin to apply again, although not immediately.
Employers should begin coordinating with any service providers who may play a role in this transition.
Form 5500 Changes May Eliminate Audit Requirement for Smaller Plans
In what will be welcome relief for many smaller employers, the Department of Labor announced new rules for determining which qualified retirement plans will require a plan audit. Historically, plans with over 100 participants have needed an independent audit each year as part of their Form 5500 filing. Whether a plan exceeded that threshold was based on the number of eligible employees, even if those employees didn’t participate in the plan at all. This often required plans with over 100 eligible employees to receive an audit, even if the number of participants with account balances was significantly lower.
Beginning in 2023, instead of counting eligible employees as of the first day of the year, the threshold will be based on the number of participants with account balances as of the first day of the year. For plans with over 100 eligible employees, but with a low participation rate, this change could result in the plan no longer needing an audit.
While the new rules will be effective in 2023, it’s important to remember that the audit taking place during the summer/fall of 2023 is for the 2022 plan year, so the threshold will still be determined under the old rules.
SECURE 2.0 Provisions Effective in 2023
As discussed in more detail in our last client alert, the new “SECURE 2.0” legislation will affect employer retirement plans significantly over the coming years. Although many of the law’s provisions do not take effect until 2024 or later, a few rules apply currently. Although not a complete list of the provisions now in effect, the following SECURE 2.0 provisions are the most likely to affect plan sponsors during 2023:
- The new starting age for required minimum distributions is 73, for anyone who had not yet turned age 72 by December 31, 2022
- Employers can provide small financial incentives (for example, a modest gift card) to employees who contribute to a retirement plan
- Plan sponsors have more flexibility in deciding whether to pursue recovery of overpayments from retirees, who also received some protective conditions on repaying previous overpayments
- Expanded self-correction opportunities are available under the IRS’s correction program
- Governmental 457(b) plans can allow employees to change their contribution rates at any time, not just the first day of the next month
- SEP IRAs and SIMPLE IRAs may allow Roth accounts (although additional guidance is still needed on some open questions)
- Plans can, if the employer chooses, allow employees to elect to receive employer contributions as Roth contributions (again, additional guidance is needed)
With the plan-document amendment deadline delayed until 2025, employers will need to be careful about following these operational rules that may not be reflected in the plan document for several more years.
Department of Labor Proposes Self-Correction Rules for Late 401(k) Deposits
After releasing an initial proposal in late 2022, the DOL is now seeking additional input on its proposed changes to allow self-correction by employers who are late when depositing 401(k) deferrals and loan payments. Where late deposits occur, the employer is required to correct the error by providing “lost interest” to the accounts of affected employees. Currently, an employer that fails to deposit payroll deductions into the plan on time (generally within a few days) has no formal correction options except a detailed and sometimes costly voluntary correction program offered by the DOL, even where the lost interest amounts to a few dollars (or less) for each employee. As a result, many employers with relatively small late deposits resort to “informal” self-corrections that do not carry any protection from later DOL scrutiny.
The proposed self-correction program would eliminate the detailed filing for DOL review and approval, but would still require an electronic notice to the DOL with similar information. Also, the program would only be open to correct errors where (1) the late deposits and lost earnings are all made within 180 days of the original mistake, and (2) the total amount of lost interest is no more than $1,000. The proposal also makes it clear that the employer would still have significant recordkeeping responsibilities and that the DOL may use the notice filings to “communicate with repeat users” of the self-correction program, which could steer employers with very small corrections back into the current “informal” self-correction method that provides less certainty but that is significantly simpler.
The self-correction program will not take effect until the DOL formally issues final rules.
Virginia’s State-Run Payroll Deduction IRA Program to Start in 2023
Finally, although the exact timing remains unclear, Virginia’s mandatory payroll-deduction IRA program is anticipated to start in mid-2023. The “RetirePath” program, which was created by law in 2021, directs the existing Virginia 529 college savings program to facilitate IRA accounts to expand retirement savings.
The RetirePath program will cover private-sector employers (including non-profits) with more than 25 employees who do not sponsor an employee retirement plan. If an employer is covered, it will need to register with the RetirePath program and begin automatic enrollment (i.e., mandatory enrollment, unless the employee opts out) of employee payroll deductions starting at 5% of pay and increasing annually. The default IRA account opened for an employee (again, unless the employee elects otherwise) will be a Roth IRA, meaning payroll deductions will be after-tax. Employees will be responsible for making their own investments and following annual contribution limits.
Employers with over 25 employees that do not already offer a retirement plan may want to look into their alternatives before the RetirePath program takes effect.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.