Employee Benefit Plans Alert – June 2024 Edition
By Louis F. LiBrandi, Partner; Joel Sowell, Manager; Anthony Bianchi, Supervisor; and Keely Portillo, Supervisor
This edition of Employee Benefit Plans Alert focuses on the following topics:
- How We Can Help You with Employee Benefit Plan Problem Areas
- Common Affordable Care Act (ACA) Penalty Situations
- One More Tax Form Requiring Reporting: Form 720
- SECURE 2.0 Act Changes to Form W-2 Reporting
Employee Benefit Plan Problem Areas
The Employee Benefit Services Group at PKF O’Connor Davies works closely with plan administrators and employers to review, research and reply to Internal Revenue Service (IRS) and Department of Labor (DOL) notices and examinations. We also help with common corrections that occur in the operations and reporting of employee benefit plans.
We are seeing an uptick in 2024 in correspondence from government regulators, with many letters including assessed penalty amounts. These letters identify “missing” Form 5500 (i.e., not filed Form 5500), employment and payroll taxes either not filed or filed late and errors identified in the tax Form 1095-C relating to the ACA requirements. Specific issues relating to the ACA matters are discussed in detail below.
For most situations, we have been able to use our resources to quickly understand why the current letters include penalty assessments and then obtain copies or transcripts of an employer’s account to determine the reason the penalty is being applied.
Upon research, a comprehensive response to the letter is drafted, including reasonable cause or first-time penalty abatement (when applicable). This process has resulted in many penalties being abated or the amount owed reduced.
Common corrections related to retirement plan omissions include using voluntary correction programs sponsored by the IRS and the Department of Labor.
- Voluntary Correction Program (VCP): Mistakes relating to retirement plans are not uncommon (e.g., how a plan is operated, plan document errors, untimely adoption of required amendments, not following the terms of the plan). Our team frequently helps plan sponsors (not under current investigation by the IRS) apply to correct these mistakes. We recently assisted a plan that was making employer contributions that were not in compliance with the plan document. We helped the plan sponsor with the VCP application and crafted retroactive plan document language to put the plan back in compliance. This program is administered by the IRS.
- Voluntary Fiduciary Correction Program (VFCP): VFCP is similar to VCP in that it allows plan sponsors to self-report and correct plan issues. However, VFCP is administered by the U.S. Department of Labor (DOL) and concerns corrections of possible violations of Title I of the Employee Retirement Income Security Act (ERISA). One violation that happens frequently occurs when plan sponsors do not remit employee contributions and loan payments to the plan within the time limits prescribed by ERISA. In these cases, we assist plan sponsors with the VFCP application, perform calculations of the lost earnings to make plan participants whole and assemble the documentation required by the DOL to demonstrate that the proper correction has taken place.
- Form 5330: Several different prohibited activities, such as the late deposit of employee contributions listed above or failing to timely issue refunds related to non-discrimination testing, can result in excise taxes that must be paid to the IRS. Our team can help determine the amount of applicable excise taxes owed to the IRS and complete Form 5330, which must accompany the payment. While the IRS issued guidance that Form 5330 can be filed electronically through an IRS-authorized e-file provider, an IRS official shared at a recent AICPA conference that the system is not yet fully operational and Form 5330 can continue to be paper filed to the IRS.
In addition to the above-outlined assistance we provide our clients, we offer a comprehensive range of services to help plan sponsors stay in compliance.
Common ACA Penalty Situations
The IRS continues to enforce provisions of the Affordable Care Act (ACA). Nearly a decade after the coverage and reporting requirements were put into place for the 2015 reporting year, we continue to see a steady number of employers receiving notices for (but not limited to) the following:
- Not offering health coverage to 95% of full-time (by ACA standards) employees.
- Not offering affordable coverage to ACA full-time employees.
- Failing to file the forms mandated by ACA – Forms 1094-C and 1095-C.
The first penalty can often be the most serious. Why? Because if an employer falls below the threshold of offering minimum essential coverage to 95% of its full-time employees, then the penalty is assessed on the total number of full-time employees (less a small exclusion amount of 30 full-time employees). For example: If an employer has 1,030 employees and falls below the 95% threshold for each month of 2023, the penalty amount would be 1,000 times $2,970 (for 2024), or $2,970,000. It is not uncommon to see six- or seven-digit penalty assessments.
The second penalty is assessed on an individual basis but can still be significant. If an employee receives a premium tax credit to purchase healthcare coverage, the IRS will refer to the individual’s Form 1095-C to determine whether coverage deemed to be affordable was offered. If such coverage was not offered, then the employer will be subject to a different penalty. The penalty for not offering affordable coverage is actually higher on an individual basis than the 95% penalty but frequently ends up being lower in total dollars.
Some employers simply fail to file the right forms each year. ACA is still a relatively new requirement, and we are seeing employers who are not aware of the filing requirements. Turnover or management changes often lead to confusion or omission of duties. Unfortunately, these situations are not typically identified until an IRS notice arrives in the mail. How should employers mitigate this penalty risk? The first and easiest thing to do is to ensure that the forms required by ACA are produced, distributed and filed each year in a timely and accurate manner. Thankfully, many outside service providers – from accounting firms to payroll providers – can assist employers in understanding exactly which forms need to be filed.
Beyond timely and accurate filing, employers need to ensure that the data used to prepare ACA forms is accurate and adequately reflects the events of the reporting year in question. Oftentimes, notices relating to the first two items noted above can be challenged because the employees causing the penalty turn out not to be ACA full-time employees after the data is reexamined. Nevertheless, this analysis can cost an employer more money in professional service fees and possibly even penalty assessments for incorrect reporting starting with the 2021 reporting year, as the IRS has eliminated its allowance of good faith reporting for ACA-related filings.
The Employee Benefits Service Group at PKF O’Connor Davies can assist you if you’ve received notices related to any of the situations described above. We have worked with many clients to help reduce or even eliminate ACA-related penalties entirely. It is easy for employers to overlook individual forms that could cause a penalty risk, due to the fact that ACA forms are typically prepared in large batches with only basic validation checks. If a penalty situation does occur, our team is capable of thoroughly analyzing your source data to determine whether a penalty should apply.
ACA FORM 720
In 2012, the Affordable Care Act established the Patient-Centered Outcomes Research Institute (PCORI) Fee, which needs to be paid by the plan sponsor of self-insured health plans (e.g., health reimbursement account [HRA]) using Form 720. Form 720 needs to be paper filed to the IRS Center in Ogden, Utah no later than July 31 of the calendar year following the last day of the plan year to which the fee applies. The PCORI fee requirement is scheduled to expire in the 2029 plan year.
The fee is calculated by multiplying the average number of lives covered by the applicable dollar amount for that specific plan year. There are a few acceptable methods to calculate the average number of covered lives requiring the reporting and payment of the PCORI fee. The most common method is referred to as the Form 5500 Method.
The PCORI fee dollar amount is adjusted annually. On October 18, 2023, the IRS released Notice 2023-70 announcing the adjusted applicable dollar amount for plan years ending before October 1, 2024. For a policy or plan year ending on or after October 1, 2023 and before October 1, 2024 (calendar year plans ending December 31, 2023), the applicable fee is $3.22 per covered life.
We have assisted many of our clients with this annual filing requirement, as well as evaluating the optional methods available for reporting.
SECURE 2.0 Act Changes to Form W-2 Reporting
The SECURE 2.0 Act contains provisions that may impact the amount being reported on Forms W-2 for the 2023 tax year. The IRS published Notice 2024-2 to provide guidance for certain provisions of the SECURE 2.0 Act, including provisions impacting W-2 reporting for the 2023 tax year. The provisions that may affect the 2023 Form W-2 reporting are:
- Section 113 of the SECURE 2.0 Act: De minimis Financial Incentives
Section 113 of the SECURE 2.0 Act allows employers to offer small financial incentives (e.g., gift cards) to employees to boost participation in retirement plans.
The offering of de minimis financial incentives is included in employees’ wages and they are subject to all applicable employment taxes unless there is an applicable exemption. - Section 601 of the SECURE 2.0 Act: Roth Simple and Roth Simplified Employee Pension (SEP) Individual Retirement Accounts (IRAs)
Section 601 of the SECURE 2.0 Act allows employers to offer employees the option to designate elective and non-elective contributions to a Roth SEP or Roth SIMPLE IRA. Contributions made at the employee’s election to a Roth SEP or Roth SIMPLE IRA are subject to federal income tax withholding, the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). These contributions should be included in boxes 1, 3 and 5 (or box 14 for railroad retirement taxes) of Form W-2. They’ll also be reported in box 12 with code F (for a SEP) or code S (for a SIMPLE IRA).
Employer contributions are not subject to federal tax withholding, FICA or FUTA; however, the employer contribution amount needs to be reported on Form 1099-R in boxes 1 and 2a for the year they are allocated to the participant’s account with code “2” or “7” in box 7 and a checked IRA/SEP/SIMPLE checkbox. - Section 604 of the SECURE 2.0 Act: Optional Treatment of Non-Elective or Matching Contributions as Roth Contributions
Under Section 604 of the Secure 2.0 Act, plans can allow participants to designate non-elective and matching contributions made to a retirement plan as Roth contributions. This change became effective December 30, 2022.
These contributions are not subject to federal income tax or Social Security/Medicare tax, but they need to be reported on Form 1099-R in boxes 1 and 2a for the year they are allocated to the participant’s account with code “G” in box 7.
If you filed Form W-2 for the 2023 tax year without following these guidelines, it will need to be corrected by filing Form W-2c.
Contact Us
The Employee Benefit Services Group at PKF O’Connor Davies is ready to assist you with any of your retirement plan’s compliance needs. If your plan does not need an audit, our team of specialists can still assist your plan with regulatory filings, compliance testing and comprehensive tax compliance reviews.
For more information, please contact your PKF O’Connor Davies client services team or:
Louis F. LiBrandi, EA, CEBS, ChFC, TGPC
Partner
Employee Benefit Services Group
llibrandi@pkfod.com | 646.449.6327