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Retirement Plan News

Spring 2017

Handling QDROS for Your Retirement Plan

When couples divorce, one spouse’s retirement benefits may be divided as part of a property settlement. Although federal law generally does not allow plan participants to assign or alienate their retirement plan interests, there is a limited exception. Retirement benefits may be assigned to a spouse, former spouse, child, or other dependent to satisfy family support or marital property obligations through a domestic relations order if the plan administrator determines it is a qualified domestic relations order (QDRO).

Definitions
Knowing how the law defines “domestic relations order” is the first step in making a proper determination. A domestic relations order (1) is a judgment, decree, or order, including the approval of a property settlement agreement, (2) is made pursuant to state domestic relations law, and (3) relates to the provision of child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a plan participant (called “alternate payees”). A QDRO is a domestic relations order that creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to receive, all or a portion of a participant’s plan benefits and that meets certain additional requirements.

Required information
A QDRO must contain the following information:

  • The name and last known mailing address of the participant and each alternate payee
  • Each retirement plan affected by the order
  • The dollar amount or percentage of the benefit to be paid to the alternate payee or the method for determining the amount or percentage
  • The number of payments or the time period to which the order applies

Certain Provisions Not Allowed
Before making a determination that a domestic relations order is qualified, the plan administrator must make sure that the order does not require the plan to provide any form of benefit, or any option, that is not otherwise provided for under the plan.
Additionally the order may not require the plan to pay an alternate payee benefits that are required to be paid to another alternate payee under a previous QDRO

QDRO Procedures
Your retirement plan should have written procedures for determining whether any domestic relations orders it receives are QDROS and for administering distributions pursuant to QDROS. When a domestic relations order is received the plan administrator should promptly notify the plan participant and alternate payee that the order has been received and provide a copy of the QDRO procedures.

The procedures should describe any time limits for making a determination, which must be accomplished within a reasonable period after receipt of the order. Include the steps the administrator will take to protect and preserve retirement assets or benefits upon receipt of a domestic relations order. (Note that during the determination period, the plan administrator is required to separately account for the amounts which would have been payable to the alternate payee during such period.) The procedures should also describe the process for obtaining a review of the administrator’s QDRO determination.
As part of the procedures, a plan can include an explanation of the information the plan will make available to prospective alternate payees to assist with QDRO preparation, such as participant benefit statements and the summary plan description. According to the U.S. Department of Labor, a plan administrator may condition disclosure of this information on an alternate payee’s providing the plan with sufficient information to reasonably establish that the disclosure request is being made in connection with a domestic relations proceeding.

Payment Timing
If an alternate payee is to receive a separate interest under a QDRO, the order may specify the time the alternate payee will receive the interest or assign to the alternate payee the same right the participant would have had under the plan with respect to payment timing. Either way, the QDRO may not provide for payment to be made to the alternate payee any earlier than the participant’s “earliest retirement age” (unless the plan permits payments at an earlier date).

Generally, a participant’s earliest retirement age is the earlier of two dates:

  1. the date on which the participant is entitled to a distribution under the plan or
  2. the later of either

a. the date the participant turns 50 or

b. the earliest date on which the participant could begin receiving benefits under the plan if the participant separated from service with the employer.

Conclusion
The QDRO rules contain other details not covered in this broad overview. Since failure to follow proper QDRO procedures can have serious repercussions, including potential disqualification of your plan, you may want to review your plan’s procedures with a professional advisor to ensure that all bases are covered.

Keys to Avoiding Compensation Errors

The plan’s definition of “compensation” is important for many different aspects of plan administration – including elective deferrals, allocations, and discrimination testing. Plan sponsors need to be certain that the definition of compensation is properly applied. Failure to do so could result in an operational failure and possibly affect the plan’s qualified status.
Mistakes may arise because many plan sponsors operate their plan based on a plan summary of the definitions and operational requirements. But as the plan is amended, the compensation definition may change while the plan continues to operate as it had previously. To avoid compensation-related mistakes, the IRS recommends the following:

  • Review your plan document for the definition of compensation for each plan purpose.
  • Use the statutory definition of compensation when required.
  • Ensure that your payroll processor and plan administrator receive accurate compensation data.
  • Simplify your plan’s definition of compensation by considering using one definition for all plan purposes.
  • Review your plan for errors and use the IRS correction programs to fix them as quickly as possible.

In addition, your plan may avoid mistakes by properly training the plan personnel who determine compensation to confirm they understand the plan document.

Determining 401(k) Plan Eligibility Requirements

Establishing eligibility requirements for plan participation requires consideration of both the broad range of available options and the potential effects that different sets of eligibility requirements may have on hiring, retention, and administrative costs. Following is a brief overview of the applicable rules.

Conditions of Eligibility
Federal law establishes the limits of what conditions may be set on eligibility. Generally, plans may require employees to attain any age up to 21 years old before they may become participants in the plan. Plans may also require up to one year of service before employees may make elective contributions. If a 401(k) plan also provides for other types of employer contributions (such as matching on nonelective contributions), it may require that employees complete up to two years of service before being eligible to receive these contributions. In such cases, however, the employees must be 100 percent vested in the employer contributions.

1,000 Hours-of-Service Rule
Generally, a “year of service” is a 12-month period during which an employee completes the number of hours of service specified in the plan. A plan may not specify more than 1,000 hours for this purpose.
An employee’s first year of service is measured during a 12-consecutive-month “initial eligibility computation period,” which begins on the employee’s “employment commencement date.” For periods after the initial eligibility computation period, the plan must measure service for participation purposes either during the 12-consecutive-month periods that begin on the anniversaries of the employment commencement date or during the plan years that include such anniversaries

Elapsed time Method
The elapsed time method is an alternative for retirement plans to define crediting service for eligibility. In this system, a year of service is completed when the employee completes 12 months or 365 days of service regardless of how much he or she actually worked during that period. This system is easier to administer because it does not require keeping track of actual or equivalent hours of service during distinct 12 month periods.
Instead, the employer monitors the period beginning with the employee’s date of hire through the date the employee meets the eligibility requirements. This method requires only that the employee be employed on both the original hire date and on the last date of the eligibility period established by the plan.

Effect of Service Spanning Rule
The IRS has service spanning rules that apply under the elapsed-time method. Generally, under these rules, the employee is not penalized for absences of less than 12 consecutive months. For example, assume a company has a one-year elapsed-time eligibility requirement. If an employee is hired on June 15, 2016, leaves the company on August 20, 2016, and then is rehired on February 10, 2017, he or she fulfills the one~year service requirement since the absence was less than one year.

Setting Eligibility Terms
When choosing eligibility requirements, retirement plan sponsors should consider such issues as the number of part-time employees they have, the goals of their 401(k) plans, and how different eligibility requirements might affect administrative costs. For example, if a company has high employee turnover, it may choose longer service requirements to reduce its administrative burdens. For similar reasons, an employer with numerous part-time employees may wish to avoid the elapsed time method. On the other hand, sponsors may want to consider whether raising the eligibility requirements might make hiring top talent more difficult and/or impair their employees’ ability to prepare for retirement.

Recent Developments

IRS Proposal for Plan Forfeitures
The IRS has proposed new regulations regarding the use of forfeitures by 401(k) plans to fund qualified non-elective contributions (QNECS) and qualified matching contributions (QMACS). Plan sponsors typically use QNECs and QMACS to correct testing failures. Under existing rules, the QNECs and QMACS must be nonforfeitable at the time of contribution. This requirement limits their use, because forfeitures are typically subject to a vesting schedule at the time of contribution. Under the proposed regulations, contributions will qualify as QNECS or QMACS if they meet the nonforfeitability and distribution requirements at the time they are allocated to participants’ accounts, rather than when they are first contributed to the plan.

Retirement Health Expenses
The latest estimates from the Employee Benefit Research Institute show that a married couple retiring in 2016 needs $165,000 to have a 50% chance of being able to cover health costs in retirement. A 65-year-old man would need $72,000 in savings and a 65-year-old woman would need $93,000 to have a 50% chance of having enough money saved to cover health expenses in retirement. These projections assume median drug expenses throughout retirement. The study excludes long-term care expenses and health care expenses not traditionally covered by Medicare.

Fairly Confident for Retirement
A recent Ipsos/USA Today survey of Americans between the ages of 45 and 65 found that 77% feel strongly or somewhat agree that they will need to save more to afford the type of retirement they prefer. But 59% feel very or somewhat prepared for retirement and 55% are very or somewhat confident that they will have enough money to get them through retirement. To help get them to the retirement lifestyle they want, 65% of those surveyed state they are very or somewhat likely to contribute at least $100 toward their retirement savings in the next six months.
To fund their retirement, 42% plan to rely mostly on their savings or benefits.

The general information in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation.

Copyright © 2017 by DST

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Health & Welfare Notes

Vol. 22, Issue 2    Spring 2017

Reminder: PCORI Fee Due by July 31, 2017. The Affordable Care Act (ACA) imposes a fee on health insurance issuers and self‑insured plan sponsors in order to help fund the Patient‑Centered Outcomes Research Institute (PCORI). The fee is required to be reported and paid once a year, no later than July 31 of the calendar year immediately following the last day of the plan year.

The PCORI fee that is due by July 31, 2017 is $2.26 per covered life for plan years ending October – December 2016 and $2.17 per covered life for plan years ending January – September 2016.

“Covered lives” include all covered participants and dependents, including retirees and those on COBRA. The IRS allows several different methods for determining the average number of covered lives. For more information about these methods, fee amounts, and the health plans that are required to pay the PCORI fee, see https://www.irs.gov/uac/newsroom/patient‑centered‑outcomes‑research‑institute‑fee.

Form 720 (Rev. April 2017), along with related payment voucher Form 720‑V, should be used to report and remit the PCORI fee to the IRS (see Part II, lines marked “IRS No. 133” on the second page of the Form 720). Although the Form 720 is designed for quarterly payments of certain excise taxes, the PCORI fee is paid only annually. The instructions also note that deposits are not required for PCORI fees (that is, the fees are paid when the Form 720 is filed), so plan sponsors are not required to use the IRS’s Electronic Federal Tax Payment System (EFTPS) to pay these fees. Self-insured multiemployer plans may pay the PCORI fee from plan assets.

Checklist Released Identifying Steps to Take Under HIPAA Immediately After Cyber Attack. Health and Human Services, Office for Civil Rights (OCR) has issued a Quick‑Response Checklist in response to the recent WannaCry ransomware attacks. This Checklist is a guide explaining the steps a HIPAA covered entity or its business associate (the entity) must do to properly respond to a ransomware attack or cyber‑related security incident. The Checklist provides a timely reminder of the need for robust breach preparation, response, and recovery plans. The Checklist provides that affected entities—

  • Must execute its response and mitigation procedures and contingency plans. For example, affected entities should take immediate actions to fix any technical or other problems to stop the incident and mitigate any impermissible disclosures of protected health information (PHI). Noting HIPAA’s broad definition of security incidents that trigger an obligation to act, the Checklist refers to OCR’s ransomware guidance for some specific recommendations.
  • Should report the crime to other law enforcement agencies. Entities may report to local or state law enforcement agencies, the FBI, and/or the Secret Service. Their reports generally should not include PHI (unless otherwise permitted by the HIPAA Privacy Rule).
  • Should report all cyber threat indicators to federal and information‑sharing and analysis organizations (ISAOs), including the Department of Homeland Security, the HHS Assistant Secretary for Preparedness and Response, and private-sector cyber-threat ISAOs. Federal law defines cyber threat indicators as information that is necessary to describe or identify security vulnerabilities and other attributes of cybersecurity threats. Disclosure of cyber‑threat indicators is intended to alert other entities and the federal government to possible
    or actual threats and vulnerabilities to information systems, and associated harms. Any such reports, which generally are not forwarded to OCR, should not contain PHI.
  • Must report the breach to OCR as soon as possible, but no later than 60 days after the discovery of a breach affecting 500 or more individuals. The Checklist notes that OCR presumes all cyber‑related security incidents in which PHI was accessed, acquired, used, or disclosed are reportable breaches unless the PHI was encrypted by the entity at the time of the incident or the entity determines, through a written risk assessment, that there is a low probability that the PHI was compromised during the breach. The breach notification rule establishes the content and timing requirements for notices to affected individuals, OCR, and, if a breach affects more than 500 individuals in a state, the news media. If the breach affects less than 500 individuals, the entity must report to OCR no later than 60 days after the end of the calendar year. If it is determined that there was no breach of electronic PHI, the entity must document and retain all information considered during the risk analysis of the cyber‑attack to include how it was determined that the incident was not considered a breach.

The Checklist is available at https://www.hhs.gov/sites/default/files/cyber‑attack‑checklist‑06‑2017.pdf .
[Thomson Reuters EBIA Weekly Newsletter, June 15, 2017; Total HIPAA Compliance, Blog, June 13, 2017]

CMS Issues 2018 Medicare Part D Benefit Parameters for Creditable Coverage Disclosures
Under Medicare Part D regulations, most group health plan sponsors offering prescription drug coverage to Part D eligible individuals (including active or disabled employees, retirees, COBRA participants, and beneficiaries) must disclose to those individuals and to the Centers for Medicare & Medicaid Services (CMS) whether the plan’s prescription drug coverage is creditable or non‑creditable. For coverage to be creditable, its actuarial value must equal or exceed the actuarial value of defined standard Medicare Part D coverage under CMS guidelines. Basically, the actuarial equivalence determination measures whether the employer’s coverage is, on average, at least as good as standard Medicare prescription drug coverage; if it is, the employer’s coverage is creditable.

On April 3, 2017, CMS released the following 2018 parameters for the defined standard Medicare Part D prescription drug benefit:

  • Deductible: $405 (a $5 increase from 2017);
  • Initial coverage limit: $3,750 (a $50 increase from 2017);
  • Out‑of‑pocket threshold: $5,000 (a $50 increase from 2017);
  • Total covered Part D spending at the out‑of‑pocket expense threshold for beneficiaries who are not eligible for the coverage gap discount program: $7,508.75 (an $83.75 increase from 2017);
  • Estimated total covered Part D spending at the out‑of‑pocket expense threshold for beneficiaries who are eligible for the coverage gap discount program: $8,417.60 (a $346.44 increase from 2017); and
  • Minimum cost‑sharing under the catastrophic coverage portion of the benefit: $3.35 for generic/preferred multi‑source drugs (a $.05 increase from 2017), and $8.35 for all other drugs (a $.10 increase from 2017).

These parameters will be used to determine whether a plan’s prescription drug coverage is creditable for 2018. The Notice of Creditable Coverage must be provided: (1) at least once a year before October 15; (2) whenever a Medicare-eligible employee enrolls in the health plan; (3) whenever there is a change in the creditable or non-creditable status of the health plan’s prescription drug coverage; and (4) whenever an individual requests a notice.
[Thomson Reuters EBIA Weekly Newsletter, April 6, 2017]

Disclaimer – This newsletter’s purpose is to inform our clients and colleagues of recent legislative health care-related developments. It is not intended, nor should it be used, as a substitute for specific legal advice.

Health and Welfare Notes is prepared four to six times annually and will accompany Retirement News. If there are questions concerning the information discussed, call richard Gabriel associates and ask for Gabe Zinni, Cindy Swartz, Nancy Cunningham or Karen Irwin.

richard Gabriel associates
Actuarial and Employee Benefits Consultants
601 Dresher Road, Suite 201
Horsham, PA   19044-2203
Phone (215) 773-0900   —   Fax (215) 773-9907   —   Email: rga@rgabriel.com

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