Benefits Counselor - January 2025

RETIREMENT PLAN UPDATES

Senate Advances the Social Security Fairness Act

President Biden signed the Social Security Fairness Act (H.R. 82), which passed the Senate by a large margin and with bipartisan support in December, into law on January 5. This legislation endeavors to expand Social Security benefits to millions of Americans employed in the public sector by eliminating the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO), which together prevent certain retirees with a public pension from collecting their full Social Security benefit. The WEP and GPO were initially passed in 1977 and 1983, respectively, to reduce the cost of Social Security, and the two policies impact approximately 4 percent of all beneficiaries. Despite the associated increase in Social Security cost, the Act has been largely hailed as a victory for public service workers facing retirement. The Act is effective for all months after December 2023, meaning retroactive payments will be required.

IRS Sets Forth the 2024 Required Amendments List for Qualified and 403(b) Plans

The IRS has published its annual Required Amendments List for 2024 in Notice 2024-82. Plans generally have until December 31, 2026 to amend plan documents in accordance with the List. However, as with prior years, the List does not include any changes that would require amendment to most plans.

Part A, which applies to changes that generally will require an amendment to most plans, includes no changes. Part B applies to changes that the Internal Revenue Service (IRS) does not believe will require an amendment to most plans, but will in some circumstances, and includes: (1) the application of the section 415 limit for certain employees of rural electric cooperatives per section 119 of the SECURE 2.0 Act of 2022 (SECURE 2.0); and (2) reforms to the family attribution rule under SECURE 2.0 section 315. Finally, Part C applies to changes that relate to optional plan provisions previously adopted and includes: (1) guidance for Coronavirus-related distributions from retirement plans under the CARES Act; (2) guidance on transition relief and waiver of 2020 required minimum distributions; (3) other miscellaneous changes under the Miners Act; (4) limitations on repayment of qualified birth and adoption distributions under SECURE 2.0 section 311; (5) other amendments to SECURE under SECURE 2.0 section 401; (6) guidance on anti-abuse rules related to pension-linked emergency savings accounts under SECURE 2.0 section 127; (7) other miscellaneous changes under SECURE 2.0; and (8) exceptions to the 10 percent additional tax under section 72(t) of the Internal Revenue Code (the Code).

IRS Extends Applicability Date for Future Required Minimum Distribution Regulations

Proposed regulations providing guidance on required minimum distribution (RMD) rules under SECURE and SECURE 2.0 will now apply beginning in the 2026 distribution year, not 2025 as originally proposed, in response to comments raising concerns over meeting the earlier compliance deadline. The proposed regulations amend rules regarding determination of the designated beneficiary, RMDs from defined contribution plans, defined benefit plans and annuity contracts to reflect changes made by SECURE 2.0. Until the regulations are finalized and made applicable, taxpayers should apply a reasonable, good-faith interpretation of the relevant statutory provisions.

Cornell Fiduciary Breach Case Now Pending before the Supreme Court

The Supreme Court of the Unites States has agreed to review Cunningham v. Cornell University. The plaintiffs, participants in the University’s 403(b) plans, claim that Plan fiduciaries breached their duties under the Employee Retirement Income Security Act of 1974 (ERISA) by allowing for excessive fees, failing to monitor and remove imprudent investments and engaging in prohibited transactions. Cunningham raises the issue of whether plaintiffs need to actually demonstrate that defendants engaged in prohibited transactions, or if the burden is on defendants to show the applicability of an exemption.

The case will appear before the Court on the participants’ appeal of the Second Circuit’s dismissal on the grounds that plaintiffs failed to plausibly demonstrate that the recordkeeping fees were unreasonable and thereby failed to state a prohibited transaction claim. The Second Circuit’s ruling constituted a split from the Eighth and Ninth Circuits, which generally allow prohibited transaction claims to survive a motion to dismiss even without demonstrated harm, as long as the plaintiff can show that there was a transaction with a party in interest. Other circuits, including the Third, Seventh and Tenth, favor the Second Circuit’s reading. The U.S. Department of Labor (DOL) has filed an amicus brief in support of the Plan participants, arguing that “ERISA is most naturally read to place the burden of pleading and proving the (ERISA) exemptions on the defendant fiduciary,” and criticizing the Second Circuit’s holding as an incorrect interpretation. The DOL further wrote that ERISA’s prohibited transaction and exemption provisions “reinforce[] the conclusion that the defendant bears the burden of identifying, pleading and proving the particular exemption on which it seeks to rely.” The Court will hear oral arguments on January 22, 2025 and hopefully will offer clarity as to pleading standards for prohibited transaction claims.

New Jersey District Court Dismisses Forfeitures Lawsuit

On December 19, the U.S District Court for the District of New Jersey dismissed a class action complaint alleging that Honeywell International had violated its fiduciary duties under ERISA by using forfeitures to reduce employer contributions, rather than to offset Plan expenses. In Barragan v. Honeywell International, Inc., the court determined that such use was both (1) permitted by the Plan document, which allowed forfeitures to be used to reduce employer contributions, defray administrative expenses, correct errors, restore participants’ accounts, or any other way permitted by law; and (2) compliant with Treasury regulations.

The court agreed that decisions regarding allocation of forfeited amounts are fiduciary in nature, but it found no violation of ERISA and declined to conclude that a fiduciary must, regardless of the circumstances, choose to pay administrative costs whenever presented with a decision regarding forfeited amounts. In arguing that Honeywell International violated its duties of loyalty and prudence by allocating the forfeitures to reduce employer contributions, the court noted that the plaintiffs failed to “cite any binding authority” and instead relied on “out-of-circuit, non-precedential opinions.” This decision stands in contrast with other recent cases in California district courts, which allowed similar cases to proceed on the basis that the exercise of discretion over allocation of forfeited amounts could breach the fiduciary duty of loyalty.

DOL Files Amicus Brief in Eleventh Circuit Case on Reasonable Actuarial Factor Analysis

The DOL has filed an amicus brief in Drummond v. Southern Company Services, supporting participants of a pension plan who received benefits in the form of a qualified joint and survivor annuity (QJSA) based on mortality tables that participants argue are unreasonably old. Both the participants and the DOL call on the Eleventh Circuit to reverse the lower court’s dismissal. Under ERISA, a QJSA is required to be the default form of survivor pension benefits for married participants of all defined benefit plans and some defined contribution plans. A QJSA lasts for the lifetime of the spouse, which must be “not less than 50 percent of (and is not greater than 100 percent of) the amount of the annuity which is payable during the joint lives of the participant and the spouse” and “is the actuarial equivalent of a single life annuity for the life of the participant.” While ERISA does not define “actuarial equivalent” or “life of the participant,” existing Treasury regulations require actuarial equivalence to be based on reasonable, consistently applied factors. The DOL is now supporting the plaintiff’s position that the defendants’ use of outdated mortality assumptions “from the mid-1900s” violates ERISA’s actuarial equivalence requirement and other fiduciary obligations and resulted in unreasonably and imprudently reduced benefits. The challenged mortality tables include a 1951 Group Annuity Table based on life expectancy from years 1946 to 1950. In addition to challenging the reasonableness of such tables, the amicus brief reinforces the validity of the applicable Treasury regulations, affirming their enforceability in anticipation of a possible Loper Bright argument challenging the Treasury’s interpretation of ERISA.

Compliance Reminder – Changes in 2025 under SECURE 2.0

Many provisions of SECURE 2.0 go into effect in 2025.

Effective January 1, 2025, the limit on catch-up contributions for employees aged 50 and older is increased to the greater of (1) 50 percent more than the regular catch-up amount in 2025; and (2) $10,000 for employees aged 60 to 63. Additionally, SECURE 2.0 requires that catch-up contributions by certain participants be made on a Roth basis; the IRS has designated an administrative transitional period for this requirement, which lasts for the first two taxable years after December 2023 and therefore expires at the end of this year. Also effective January 1, SECURE 2.0 requires employers to ensure 401(k) participation for long-term, part-time workers (not including collectively bargained plans) and expands automatic enrollment for newly established 401(k) and 403(b) plans.

Generally, most retirement plans will have until December 31, 2026 to amend plan documents to incorporate changes related to SECURE 2.0; notably, government plans and collectively bargained plans have later compliance deadlines of December 31, 2028 and 2029, respectively. Still, all plans should begin administering these changes as soon as possible ahead of the amendment deadline.

HEALTH AND WELFARE PLAN UPDATES

New Laws Reduce the Burdens of ACA Reporting

In early December, Congress passed the Paperwork Burden Reduction Act (H.R. 3797) and the Employer Reporting Improvement Act (H.R. 3801), (together, the Acts), both of which modify the reporting requirements established by the Affordable Care Act (the ACA). President Biden signed the Acts into law on December 23. Together, the Acts significantly reduce the administrative burden relating to Forms 1095-B and 1095-C, which demonstrate compliance with the ACA’s minimum essential coverage requirements.

The Acts will allow health plans and Applicable Large Employers (ALEs) to: (1) furnish Forms 1095-B and 1095-C to covered individuals only upon request, (2) substitute a covered individual’s birth date for their Tax Identification Number (TIN) in such forms when necessary; and (3) offer such forms electronically with participant consent. The ACA’s reporting requirements are otherwise unchanged. H.R. 3801 also requires the IRS to give ALEs at least 90 days—instead of the 30 days previously afforded—to respond to an IRS letter notifying such ALE of a proposed assessment due to a lack of affordable minimum essential coverage and establishes a six-year statute of limitations for IRS collection of related penalty assessments. Supporters of this legislation hope that it will make ACA reporting less time consuming and more cost-effective, easing access to health care and reducing the burden on employers seeking to provide health care coverage for their employees.

HHS Proposes Updates on Cybersecurity for Patient Data

On December 27, the U.S. Department of Health and Human Services (HHS) Office for Civil Rights issued a Notice of Proposed Rulemaking which would modify the HIPAA Security Rule to strengthen cybersecurity protections for electronically stored PHI. Among other proposed changes, the Rulemaking clarifies that all implementation specifications are required (by eliminating the distinction between “required” and “addressable” specifications), imposes specific compliance time periods (e.g., vulnerability scanning every six months and penetration testing at least every twelve months) and mandates new security controls that are more prescriptive and less general (e.g., specifically requiring encryption of electronic PHI). The Rulemaking also establishes an affirmative obligation to monitor business associates for compliance with security rule on an annual basis and obtain an independent evaluation of each business associate’s electronic security systems.

It is important to note that this is merely a proposal, and the Rulemaking is subject to change. The current Security Rule remains in effect while HHS solicits comments from any interested parties and prepares for a determination regarding a final rule.

Telehealth Exemption for HDHPs Expired as of December 31

Despite hopes that another extension would be granted, President Biden’s American Relief Act of 2025, as signed into law on December 21, 2024, did not extend the safe harbor for high-deductible health plan (HDHP) sponsors to reimburse telehealth services on a pre-deductible basis for participants with a health savings account (HSA). As such, as of January 1, 2025, HDHP participants will not be eligible for HSA contributions if they can receive free or below-market telehealth services before meeting their HDHP deductible. The HDHP telehealth safe harbor was originally established as part of the Coronavirus Aid, Relief and Economic Security Act of 2020 (CARES Act) and has been extended multiple times in the past few years. Now, the future of the telehealth extension is uncertain, pending additional action from Congress.

IRS Announces PCORI Fee Adjustment for 2024-25

IRS Notice 2024-83 provides the adjusted applicable dollar amount used in calculating the Patient-Centered Outcomes Research Institute (PCORI) fee. The PCORI fee is calculated by multiplying the average number of lives covered under a plan by the applicable dollar amount for the year. The applicable dollar amount for policy and plan years that end on or after October 1, 2024 and before October 1, 2025 is $3.47, an increase from $3.22 in the previous federal fiscal year. The increase is calculated to adjust for any increase in the HHS’s projected per capita amount of National Health Expenditures.

Texas Court Invalidates the ACA’s Fixed Indemnity Notice Requirement

In Manhattan Life Insurance and Annuity Co. v. HHS, a Texas district court invalidated a notice requirement established by Short-Term, Limited-Duration Insurance (STLDI) regulations promulgated by the DOL, HHS and the Treasury in March 2024. The regulations amended the definition of STLDI and updated the relevant notice standard to help health care consumers differentiate between STLDI and comprehensive coverage by incorporating simple, concise language to be displayed prominently. In an action brought under the Administrative Procedure Act, the Eastern District of Texas determined that the final notice requirement (1) exceeded the Departments’ statutory authority; and (2) was not a logical outgrowth of the proposed Rulemaking. While the decision vacates the relevant provisions of the STLDI regulations and purports to apply nationwide, it is still a lower court decision, and interested parties should continue to monitor subsequent appeals, decisions from other lower courts and any additional Rulemaking.

Compliance Reminder - HIPAA Rule Strengthening the Privacy of Reproductive Healthcare is Now Effective

The HHS HIPAA Privacy Rule to Support Reproductive Health Care Privacy, finalized in April 2024, went into effect on December 23. The Rule strengths privacy protections for reproductive health services, including abortion, by prohibiting health plans and other “Covered Entities” from disclosing protected health information (PHI) for the purpose of: (1) conducting any criminal, civil or administrative investigation or imposing criminal, civil or administrative liability on any person for the “mere act of seeking obtaining, providing, or facilitating reproductive health care, where such health care is lawful under the circumstances in which it is provided”; and (2) identifying any person for the purpose of such investigation or imposition of liability. Covered Entities are still permitted to use or disclose PHI for other permitted reasons. The Rule also includes a presumption that reproductive health care provided by a person other than the Covered Entity is lawful, absent actual knowledge or factual information that the reproductive healthcare was not lawful. Finally, the now-effective rule requires Covered Entities, when receiving a request for PHI related to reproductive healthcare, to also obtain a signed attestation that the PHI will not be used or disclosed for a prohibited purpose.

Notably, the Rule has already been challenged by a Texas district court in Purl v. HHS, which has temporarily enjoined enforcement against a singular health care entity on the basis that the HHS may have exceeded its statutory grant of authority under HIPAA; a final decision is currently pending.

GENERAL/PUBLIC PLAN/INVESTMENT UPDATES

2024 Form 5500 Series

The DOL, IRS and PBGC have jointly announced the 2024 Form 5500 series, to be used in filing for the 2024 benefit year. The agencies made minimal substantive changes to the Forms. Plans with a pension-linked emergency savings account feature must now include characteristics code 2Y on line 8a of Form 5500, or line 9a of Form 5500-SF. Additionally, the administrator of a defined contribution group arrangement may now file a single Form 5558 to request a Form 5500 extension without attaching a list of all participating plans. The Form 5558 also may now be filed electronically. Finally, the Forms now reflect the updated maximum administrative penalty for Form 5500 failures of $2,670 per day. Other changes to the Series are non-substantive, and the general changes for the 2024 Series are unlikely to impact most plans.

COMPLIANCE DEADLINES AND REMINDERS

Plan sponsors should be preparing to take action on the following upcoming deadlines. If you have any questions or need any assistance on these items, please reach out to your Reinhart attorney.

General

Forms 1099-MISC and 1099-NEC: If a plan makes payments of more than $600 for certain services, rent or other specified purposes, such plan must furnish the applicable form to the service provider or recipient of payment by January 31, 2025 and file with the IRS by February 28, 2025 (or March 31, 2025, if filing electronically).

Forms W-2 and W-3: Plans with employees must furnish Form W-2 to employees by January 31, 2025 and file from W-3 with the Social Security Administration by January 31, 2025, regardless of whether filing on paper or electronically.

Health and Welfare Plans

Fixed Indemnity Policy Notice: The notice for fixed indemnity excepted benefits coverage must be displayed in marketing, application or enrollment materials for plan years beginning on or after January 1, 2025. Note, this requirement was vacated by a Texas district court and may not be enforceable until further action is taken.

HIPAA Annual Breach Report: The annual breach report for HIPAA breaches affecting fewer than 500 individuals is due within 60 days of the end of the calendar year in which the breach was discovered, or by March 1, 2025 for breaches discovered during the 2024 calendar year. We note that breaches affecting more than 500 individuals must be reported within 60 days of discovery, regardless of when in the calendar year such breach occurs.

Medicare Creditable Coverage: Plans must report the creditable coverage status of their prescription drug plan to the Centers for Medicare & Medicaid Services annually, no later than 60 days from the beginning of a plan year. For calendar year plans, this date is March 1, 2024. The disclosure can be completed online.

Forms 1094-B and 1095-B and Forms 1094-C and 1095-C: Forms 1094-B/C and 1095-B/C must be filed with the IRS by February 28, 2025 (or March 31, 2025, if filing electronically).

Retirement Plans

Form 1099‑R: Plan sponsors must provide Form 1099-R to plan participants by January 31, 2025, including a statement of the participant’s account as of December 31, 2024, and must file the Form 1099-R with the IRS by February 28, 2025 (or April 1, 2025, if filing electronically).