IRS Lifts the Veil on New Form 8955-SSA

May 9, 2011 – 4:42 pm

The IRS recently released a draft version of the new Form 8955-SSA. We’ve been reporting in previous posts about the new Form 8955-SSA filing requirements and additional details provided by the IRS. Now, they’ve lifted the veil on what the form will actually look like.

Here are a couple of quick observations of what’s changed from the old Form 5500 Schedule SSA:

  • The Basic Plan Information section has been expanded slightly. There’s now additional space to enter a plan sponsor’s “trade name” and “in care of name”. Presumably this is to make it easier to find a plan sponsor in the future.
  • There’s additional space for foreign addresses of plan sponsors.
  • There is a short section for disclosing the total number of records reported on the 8955-SSA, as well as a certification that each of these participants received an individual statement (if required).
  • The participant information remains substantially unchanged. One small difference is that sponsors no longer need to report the number of “shares” for defined contribution plans, just the total account value.

Overall, the draft Form 8955-SSA is very similar to previous generations. We’ll keep you posted about the final filing requirements when they are released.

By Mark Schulte | Posted in Defined benefit plans, Private pensions | Comments (0)

Public Safety Benefits Can Significantly Affect OPEB Liabilities

May 2, 2011 – 4:41 pm

Federal, state and local regulations often include mandated health benefits for officers disabled in the line of duty. These benefits are a way to reward officers for protecting and serving the public at great risk of bodily harm. The value of these benefits must be accounted for under GASB accounting rules, and there are a few important considerations when doing so.

Important considerations for OPEB plans:

- Determining the implicit rate subsidy (health cost in excess of the average premium). This may include expected health care costs for disabled officers that are significantly higher than for non-disabled individuals.  Another factor to consider is whether or not disabled officers are Medicare-eligible. If so, how does that reduce the expected health care costs?

- Determining the direct subsidy (portion of the premium paid by the employer).  This is the premium cost not only for disabled officers, but also for dependents.

- Length of benefit coverage. Unlike regular retiree health care which can begin around age 50 to 55 for officers, disability health care begins much earlier.  Often officers disabled in the line of duty are in their 30’s and 40’s.

The earlier start creates significant additional costs.  For example, the direct subsidy for a disabled officer age 40 could exceed $150,000 ($6,000 in premium per year for 25 years) – and this does not include any costs for dependent coverage or the implicit subsidy. Read More »

By Chris Grabrian, ASA, EA, MAAA | Posted in FAS 106, GASB 45, Other post-employment benefits (OPEB), Public plans, Uncategorized | Comments (0)

OPEB Participation Rates – “Kind of a Grey Area” Under Healthcare Reform

May 2, 2011 – 3:27 pm

One of the highest impact assumptions in OPEB actuarial valuations is the participation rate.  This rate represents the percent of future retirees assumed to participate in the employer’s health plan during retirement.

The participation assumption has a direct and leveraged effect on OPEB liabilities.  For example, if the assumption is that 60% of employees are assumed to elect coverage at retirement, but the actual “crystal ball” rate is 40%, then the plan’s liability is 1½ times what it should be.  As a result of healthcare reform, similar examples may become a reality that employers and actuaries should address proactively. 

How will healthcare reform affect participation rates?  That’s kind of a grey area.  How grey?  “Charcoal” as Fletch would say.

Participation rates will be different in the future due to anticipated cost-saving changes to retiree plans by employers.  Recently, 61% of the companies included in an Aon Hewitt survey were either already evaluating or expected to evaluate their long-term retiree medical strategy by the end of 2011.

Read More »

By Chris Grabrian, ASA, EA, MAAA | Posted in FAS 106, GASB 45, Other post-employment benefits (OPEB), Public plans | Comments (0)

How will the “Cadillac Tax” impact your OPEB plan?

April 26, 2011 – 12:40 pm

 Although the effect of healthcare reform on retiree health plans is difficult to gauge at this point, there are several provisions that could impact the long-term costs   and strategies for employer plans. Let’s start with the so-called “Cadillac Tax” on high-cost insurance plans effective in 2018.

 What it is:

 A non-deductible 40% excise tax paid by the coverage provider (employer and/or insurer) on the value of health plan cost in excess of certain thresholds. Currently, most plans are well below the thresholds, but are likely to exceed them in the next decade. This is because the thresholds will be indexed at CPI-U which is significantly lower than medical inflation rates affecting plans.

Purpose of the provision:

One of the goals of the Patient Protection Affordable Care Act (PPACA) was to lower long-term healthcare costs. By their nature, plans with generous benefits implicitly encourage participants to maximize their usage and thus cause higher medical costs. This provision seeks to discourage high-cost plans by leveling a tax on “excessive” benefits and possibly help fund healthcare reform.

Important considerations for retiree health plans:

Health plan costs for early retirees, which are often significantly higher than employee costs, may exceed their thresholds sooner, even though thresholds for early retirees are slightly higher than thresholds for employees. Read More »

By Chris Grabrian, ASA, EA, MAAA | Posted in FAS 106, GASB 45, Other post-employment benefits (OPEB), Public plans | Comments (0)

Start Thinking About the Impact of Medicare Reform on OPEB Plans

April 26, 2011 – 7:51 am

Employers who offer retiree health benefits to their employees have something new to think about: How will proposed Medicare reforms impact my plan and its costs? Although changes to the Medicare system are likely a long way off, Medicare reform is a hot topic lately and changes to the program could have a dramatic effect on your retiree obligations if you aren’t prepared for it.

A recent Governing article provides a good summary of the relevant issues for public employers. Many of these ideas are equally applicable to private sector retiree health and OPEB plans. I thought it would be useful to summarize some of these points and add a couple of other considerations.

- If a retiree medical plan offers post-65 coverage to retirees, it is often through a Medicare supplement plan which just pays costs that aren’t covered by Medicare. If Medicare payments for benefits decrease, then this will increase the costs paid by the employer plan. Read More »

By Mark Schulte | Posted in FAS 106, GASB 45, Other post-employment benefits (OPEB), Public plans | Comments (0)

It’s now or never for ERRP application

April 4, 2011 – 3:49 pm

We all knew this day would come, and now it’s here.  New applications for the Early Retiree Reinsurance Program (ERRP) will be received only until 5 pm on Thursday, May 5th.

The last time we blogged about this, the ERRP money was going fast.  Now the urgency is clear.

So if you’ve been thinking about applying, it’s now or never.   Elvis says so.

By Jim van Iwaarden | Posted in Defined benefit plans, Early Retiree Reimbursement Program (ERRP), FAS 106, GASB 45, Other post-employment benefits (OPEB), Public plans, Uncategorized | Tagged , , , , , , , | Comments (0)

Strategic 401(k) Design: Preventing ADP Failures

March 31, 2011 – 10:35 am

If your 401(k) plan is failing the Actual Deferral Percentage (ADP) test, then it’s time to consider some plan design changes. You need to figure out a way to encourage non-highly compensated employees (NHCEs) to save more retirement money in their 401(k) accounts while keeping benefit costs under control. This post will guide plan sponsors through some strategic (yet straightforward) benefit changes that can improve your plan’s chances of passing the ADP test next year.

1. Add a 401(k) match. If your plan doesn’t already have a 401(k) match, adding one will encourage employees to at least defer a minimal amount into their 401(k) accounts. More NHCE deferrals = better ADP test results.

2. Enhance the current 401(k) match. If your plan already has a match but it isn’t getting NHCEs to defer, then there are a couple of options:

- Increase the match: Maybe that 1% match just isn’t worth it for some folks. A 3% match is about average, and any increase can be factored-in when considering an employee’s total compensation package.

- “Extend” the match: The goal here is to increase the amount of compensation eligible for a match while not increasing employer costs. For example, if you currently match 50% of the first 6% deferred then consider amending the plan to match 40% on the first 7½% deferred. Both formulas have a potential match of 3% of compensation, but the latter encourages employees to save at a higher rate in order to earn the full match.

3. Add an automatic enrollment feature. An Eligible Automatic Contribution Arrangement (EACA) is a feature where new participants are automatically enrolled in the 401(k) plan at a uniform deferral rate, unless they elect to opt out. If your 401(k) plan is suffering the ADP failure blues because few new hires are deferring, then this is a great way to increase your ADP rate and encourage employees to save for retirement. There’s also the Qualified Automatic Contribution Arrangement (QACA) option, which is a safe harbor plan combined with an automatic enrollment feature.

4. Add a “safe harbor” plan design. If you adopt one of these IRS-prescribed benefit formulas, then you get a “free pass” on ADP testing. Safe harbor benefits are 100% vested immediately and you must provide notice of the safe harbor status to participants at least 30 days prior to the start of the plan year. The minimum safe harbor benefit formulas are:

- At least a 3% automatic (i.e., non-matching) employer contribution to each participant’s 401(k) account; or

- An employer match of at least 100% on the first 3% deferral plus a match of at least 50% on the next 2% deferral (i.e., a potential match of 4% of pay).

If you have a cross-tested profit-sharing plan or cash balance plan, then the 3% non-elective option is often the best choice since those benefits count towards the non-discrimination tests whereas the matching formula does not.

Each of the options above has variations and can be combined with the others. Combined with a thorough campaign to educate participants about the changes, they’ll improve your chances of passing the ADP tests next year and avoid having to refund HCE deferrals as taxable income.

By Mark Schulte | Posted in 401(k) plan, Cash balance plans, Defined contribution plans, Private pensions, profit sharing plan | Tagged , , , , , , | Comments (1)

Watch Out for Approaching ADP/ACP Correction Deadlines

March 7, 2011 – 2:27 pm

Plan sponsors should check their calendars and be aware that the deadline for making corrective distributions to HCEs (without an excise tax penalty) for a failed ADP or ACP test is quickly approaching.

- General deadline is within 2 ½ months after end of plan year (i.e., March 15th for calendar year plans).

- The deadline is extended to 6 months after end of plan year for plans with an Eligible Automatic Contribution Arrangement (EACA, i.e. an automatic enrollment provision which meets certain criteria).

The Actual Deferral Percentage (ADP) test is an annual assessment which compares the percentage of compensation deferred into a 401(k) plan by Non-Highly Compensated Employees (NHCEs) versus the percentage for HCEs. IRS rules state that if the HCE percentage exceeds the NHCE percentage by too much, then the plan fails the ADP test. The intent is to make sure that HCEs are not disproportionately benefiting from a 401(k) plan compared to NHCEs.

When a plan fails the ADP test, the most common correction method is to refund a portion of HCE deferrals as taxable income. Another option is for the employer to make additional Qualified Non-Elective Contributions (QNECs) to NHCE 401(k) accounts and treat those as elective deferrals for the test, but this method is more costly.

With the economic downturn of recent years, many NHCEs have reduced the amount they are saving in their 401(k) plan. There is also less incentive for them to save if the employer match has been suspended. A decrease in NHCE deferrals can cause an ADP testing failure, with the result that 401(k) deferral opportunities may be limited for HCEs until the NHCE savings rate increases.

Similarly, the Actual Contribution Percentage (ACP) test compares the extent to which NHCEs benefit from a 401(k) match compared to HCEs. Since the 401(k) match is highly dependent upon participant deferrals, a drop in NHCE deferral rate can cause an ACP testing failure too. The IRS has a nice short summary of ADP/ACP testing failures.

In future posts, we’ll examine ways of designing plans to minimize the likelihood of ADP and ACP testing failures on a prospective basis.

By Mark Schulte | Posted in Defined contribution plans | Tagged , , | Comments (0)

IRS Unveils Details of New Form 8955-SSA

March 4, 2011 – 4:30 pm

In Announcement 2011-21, the IRS released details regarding filing requirements for the new Form 8955-SSA, which will be used to report participants with deferred vested benefits from an employer-sponsored retirement plan. For calendar year plans, the 2009 8955-SSA due date (without extension) will generally be August 1, 2011.

As mentioned in our earlier post on the 8955-SSA, this annual filing replaces the former Form 5500 Schedule SSA. In general, plan sponsors filed their 2009 Form 5500 without the Schedule SSA and have been waiting for further guidance with regards to the 8955-SSA. Additional details from the announcement are summarized below.

Availability of Forms

- The 2009 8955-SSA is expected to be released shortly.

- The 2010 8955-SSA is still in development and is expected to be available later this year. However, plan sponsors may choose to use the 2009 form to complete the 2010 filing. Read More »

By Mark Schulte | Posted in Defined benefit plans, Private pensions | Tagged , | Comments (1)

ERRP update: it’s time to make your move

February 17, 2011 – 4:19 pm

In our last ERRP post, we noted that $1 billion of the original $5 billion in Early Retiree Reinsurance Program (ERRP) funds has been paid out.  Now, according to an article this week in Business Insurance, the US Dept of Health and Human Services (HHS) estimates that $3.6 billion will have been paid out in fiscal 2011 (ending 9/30/11).  That leaves only $1.4 billion for next year – and then it’s gone.

So, if you’re thinking about applying, it’s time to make your move.  The application process isn’t as bad as it initially appeared.  Our last ERRP post outlines how to go about it.

By Jim van Iwaarden | Posted in Early Retiree Reimbursement Program (ERRP), FAS 106, GASB 45, Other post-employment benefits (OPEB), Public plans | Comments (1)
Follow

Get every new post delivered to your Inbox.