This article was originally posted to Seyfarth’s Global Privacy Watch blog.

Employers looking to enhance their suite of employee benefit programs, and focused on lessons learned during the pandemic on wellbeing, are interested in providing greater access to wellness tools. And, the vendors who support those tools are more than happy to provide them. Global spend in the health and wellness market would be around $24.8 billion in 2023 according to a study by Kilo Health. Wellness apps and wearables abound in all sorts of areas — from counting steps to nutrition to mental health to physical fitness to financial fitness. These tools are relatively inexpensive to provide and easily accessible to the workforce – many times with just a simple download to a smartphone. And, best of all they’re completely private with no middle man, and only the employee seeing their own data and progress. Right?  Well — not so fast. 

Federal Law

HIPAA is the federal statute that protects the privacy and security of individually identifiable health information, called Protected Health Information or PHI. Many people (plan sponsors and covered participants alike) assume that the wellness apps and the data they contain are protected by HIPAA. However, HIPAA does not address all types of health information.  For HIPAA to apply, the information must be created or maintained by a “covered entity”.  Covered entities are generally health care providers (e.g., doctors, hospitals, pharmacies) and health plans. 

Where the developer or license holder of a health application is a covered entity, and that entity maintains the application and the data that it collects, the underlying data will receive the protections of HIPAA. For example, a pharmacy may be the entity who is supplying patients with the access to the online application to manage their medications. In that case, the provider will have to design its security systems and protocols to meet HIPAA’s high standards.

However, many times the developer of a wellness application is not a health care provider and the application is not utilized by a provider for detecting, curing, mitigating, treating or preventing diseases. Common examples of these types of applications are those that track individuals’ walking steps or offer a tracker for weight or blood pressure. In this case, reviewing the privacy policy of the application and making an informed decision before loading personal information is critical.

On the other hand, where an employer is considering enhancing its benefits offering to include access to a wellness application or device, that benefit may be offered under and as part of its health plan. A clear example of this could be a heart monitor used for an individual complaining of an irregular or racing heartbeat. But, also a fitness tracker provided as part of the health plan’s wellness benefit could fall into this category. In that case, the wellness vendor will likely be functioning as a business associate to the health plan, and the individually identifiable health data collected on the app or device will be HIPAA PHI. This means that the vendor and the health plan will need to enter into a HIPAA compliant business associate agreement that lays out the possible uses of the PHI and how it is to be secured.

State Law

Where an ERISA health plan is not involved, and HIPAA therefore would not apply, employers should still consider the implications of state law. A number of states are getting into the privacy game by passing their own privacy laws. As part of these initiatives, the states are attempting to plug the holes around health data privacy which are present in the scope of HIPAA. For example, California, Texas, and Florida all endeavor to regulate the use of health data when used for purposes of “profiling”. Washington State passed a privacy statute directly pointed at health information.

However, almost all states’ privacy laws, with the exception of California’s, have an exclusion for information collected in the scope of an employment relationship. While providing benefits (and collecting information) related to workforce well-being is definitely an interest to the employer, the scope of the exclusion in these state privacy laws has not been litigated. As such, it is not clear if work place-adjacent activity, like the provision of wellness apps, would be covered by the employee exception in any given state.

Effectively, what this means is that even if HIPAA doesn’t apply to the employer’s provision of wellness apps or wearables, it is possible that a state law will apply. Therefore, it is possible that the employer will need to have its own privacy compliance program related to the collection and use of the wellness data.

Ultimately, employers who are deploying wellness apps need to consider the privacy implications at both the federal and state level before roll-out. If not, it is possible that the employer may generate privacy law liability without fully understanding its risk.

Seyfarth Synopsis: As previously reported here, on December 20, 2023, the IRS issued Notice 2024-2 (the “Notice”) providing guidance on several outstanding questions related to provisions under SECURE 2.0. This blog post summarizes the guidance under the Notice for in-service distributions to terminally ill employees that qualify for a waiver from the 10% early withdrawal tax that normally applies to early distributions from retirement plans.  In the Notice, distributions qualifying for relief from the early withdrawal tax are referred to as “terminally ill individual distributions” (“TI Distributions”). 

TI Distributions In General

  • What is a TI Distribution? A TI Distribution is an in-service distribution to a “terminally ill individual.” Notably, there is no independent right to receive a TI Distribution. Rather, the participant must otherwise be eligible to receive an in-service distribution (e.g., an age 59½, disability or hardship withdrawal) under the qualified retirement plan. In order for the in-service distribution to qualify as a TI Distribution, it must also meet additional requirements described below.
  • What is the advantage of having an in-service distribution classified as a TI Distribution? TI Distributions are exempt from the 10% early withdrawal tax. Also, participants have the right to repay TI Distributions as described below.
  • If a plan does not provide for TI Distributions, may a participant treat an in-service distribution as a TI Distribution? Yes. If the participant receives an otherwise permissible in-service distribution, like a hardship withdrawal, and that participant meets the requirements for a TI Distribution, then the participant may treat the distribution as a TI Distribution on his or her tax return to avoid paying the 10% early withdrawal tax. In that situation, when filing his or her taxes, the employee will need to claim on Form 5329 that the distribution is a TI distribution and retain the physician’s certification (see below) in his or her tax records.
  • Under which plans may a participant take advantage of the new TI Distribution rules? The guidance confirms that TI Distribution tax treatment will apply to in-service distributions from all “qualified retirement plans,” which include 401(k), 403(b) and defined benefit pension plans, as well as individual retirement accounts.

Terminally Ill Individuals and Certification

  • Who is a “terminally ill individual”? A “terminally ill individual” is someone who has been certified by a “physician” as having an illness or physical condition reasonably expected to result in death within 84 months of the date of the “certification of terminal illness.”
  • Who is a “physician”? A “physician” is a person who is State-qualified to practice medicine or osteopathy.
  • What must be included in the “certification of terminal illness”? A physician’s “certification of terminal illness” must include several items, including:
    • A statement that the participant has an illness or physical condition reasonably expected to result in death within 84 months after the date of certification;
    • A summary of the evidence used to support such certification;
    • The name and contact information of the physician;
    • The date the participant was examined and the date of the certification; and
    • The signature and attestation of the physician attesting to the information provided in the certification.

Self-certification by the participant is not permitted.

  • When must a certification of terminal illness be made? In order for a distribution to qualify as a TI Distribution, the certification must be made and dated no later than the date of the distribution.
  • What documentation must a participant give to the plan administrator to qualify for relief from the 10% tax on early withdrawals? In a plan that has been amended to provide for TI Distributions, a participant must provide the physician’s certification of terminal illness to the plan administrator. While the participant does not need to provide the underlying documentation, the participant should keep a copy of such documentation for their tax records. In a plan that is not amended to provide for TI Distributions, a participant does not need to provide the physician’s certification of terminal illness to the plan administrator.

Additional Provisions

  • Is there a limit on the amount that may be distributed as a TI Distribution? No, not directly. But plans may impose a minimum or maximum distribution amount on in-service distributions (e.g., withdrawals at or after age 59½ or hardship distributions), or a limit on the number of in-service withdrawals taken by a participant. If a plan that puts such a limit on a permissible in-service distribution, those same limits would apply if the participant qualifies for a TI Distribution.
  • Can a TI Distribution be repaid to the plan? Yes, if a plan adopts the TI Distribution rules, rules similar to those that apply to the recontribution of birth and adoption distributions apply to TI Distributions. For example, plans that provide for TI Distributions must accept repayments, even if the distribution did not come from that specific plan, as long as the participant is eligible to make rollover contributions to that specific plan. A special rule applies for distributions from a plan that does not specifically provide for TI Distributions. In that case, the participant may repay the distribution to an IRA. In any case, the repayment must be made during the 3-year period beginning on or after the date on which the distribution was received.

Plan Amendments

  • If a plan chooses to recognize TI Distributions, does the plan have to be amended? Yes, the plan must be amended if the plan sponsor chooses to permit these distributions (and accept repayment).
  • If a plan sponsor chooses to amend its plan to apply the special TI Distribution tax rules, what is the amendment deadline? The Notice provided an additional extension of the deadline to adopt SECURE, CARES and SECURE 2.0 amendments (including amendments for Terminally Ill Individual Distributions) to December 31, 2026 for non-governmental and non-collectively bargained plans (December 31, 2028 for collectively bargained plans, and December 31, 2029 for governmental plans).

As always, if you have any questions on how this impacts your retirement plan, please do not hesitate to reach out to your Seyfarth Employee Benefits attorney.

Seyfarth Synopsis: Under Section 604 of Secure 2.0, sponsors of 401(k), 403(b) and eligible governmental plans may allow employees to designate employer match (including match on student loan repayments) or nonelective contributions as Roth after-tax contributions at the time they are made. This provision was effective for contributions made after December 29, 2022 (i.e., the date Secure 2.0 was enacted). Since the issuance of Secure 2.0, a number of questions relating to this optional provision have been lingering. As previously reported here, on December 20, 2023, the IRS issued Notice 2024-2 (the “Notice”) providing guidance on several provisions under Secure 2.0, including Section 604.  A brief overview of the guidance issued relating to designated Roth employer contributions is provided below. 

Are plans required to allow employees to elect to make Roth employer contributions?

No.  The Notice clarifies – as we expected – that plans may, but are not required to allow participants to designate employer matching and/or nonelective contributions as Roth.  This is the case even if the plan allows employees to make Roth employee contributions.

Continue Reading “SECURE-ing” the Answers to Outstanding Questions on the Rothification of Employer Contributions  

Seyfarth Synopsis: Adding to the holiday joy of employee benefits practitioners nationwide, yesterday the IRS issued guidance on several outstanding questions related to SECURE 2.0. At this time of year, we are especially thankful that the guidance was issued on a day other than the day before or following a national holiday.

The so-called “grab bag” of guidance, IRS Notice 2024-2, provides answers to several outstanding SECURE 2.0 questions, including but not limited to:

  • Required automatic enrollment in newly established 401(k) and 403(b) plans;
  • Providing small financial incentives for contributing to a 401(k) or 403(b) plan;
  • Withdrawals for terminally ill employees that qualify for the 10% early withdrawal tax waiver;
  • Optional treatment of employer contributions as Roth contributions;
  • The safe harbor correction method for errors relating to employee contributions to plans;
  • Mid-year replacement of SIMPLE plans with safe harbor 401(k) plans;
  • Clarification of the accrual rules for cash balance pension plans; and
  • The deadline for amending plans to reflect the CARES and SECURE Acts and SECURE 2.0.

Although the Notice does not provide comprehensive guidance on SECURE 2.0 (notably, it does not include guidance on the mandatory Roth catch-up contribution provision), it does address several important questions that plan sponsors and administrators have been wrestling with over the past year.

We will be providing more substantive information on Notice 2024-2 over the coming days, but in the meantime, Happy Holidays!

On November 24, 2023, the IRS issued highly anticipated proposed regulations concerning the provisions under SECURE and SECURE 2.0, requiring 401(k) plans to expand deferral eligibility for long-term part-time employees. The proposed rules answer a number of burning questions that have been lingering since 2019 when SECURE was first enacted. In this special episode, Seyfarth Partner Diane Dygert and our very own co-host Sarah Touzalin delve into the intricacies of identifying long-term part-time employees, the nuanced vesting rules applicable to long-term part-time employees, the newly introduced concept of former long-term part-time employees, and what, if anything, plan sponsors and administers need to do for 2024. Grab your cup of coffee and tune in for a lively discussion of these proposed rules!

Click here to listen to the full episode.

Browse Episodes | Follow on Soundcloud | Follow on iTunes │Follow on Spotify

Earlier this year, the Biden-Harris Administration took a firm stance against ‘junk insurance’ by introducing regulations aimed at impacting short-term limited duration insurance policies, independent non-coordinated coverage, and level funded plan arrangements. In this episode, our guests Diane Dygert and Benjamin Conley provide insights on these proposed regulations, addressing employee comprehension gaps, coverage notifications, and potential tax implications. Diane and Ben also draw from practical examples, stressing the importance for employers to reassess FICA avoidance strategies. Grab your cup of coffee and tune in to hear Richard and Sarah discuss the current regulatory landscape and what employers should consider when offering or renewing such benefit plans.

Click here to listen to the full episode.

Browse Episodes | Follow on Soundcloud | Follow on iTunes │Follow on Spotify

Seyfarth Synopsis: The IRS has announced an increase to the applicable dollar amount for determining the Patient-Centered Outcomes Research Institute (“PCORI”) Fee for 2024 as well as other health and welfare limits.

The Affordable Care Act (ACA) established the PCORI to support research on clinical effectiveness. The PCORI is funded (through the Patient-Centered Outcomes Research Trust Fund) in part by fees paid by certain health insurers and sponsors of self-insured health plans (“PCORI fees”). The PCORI fee is determined by multiplying the average number of covered lives for the plan year times the applicable dollar amount, and is reported and paid annually (by July 31) to the IRS using Form 720 (Instructions to Form 720 are available here). The applicable dollar amount as set by the IRS for plan years ending on or after October 1, 2022 and before October 1, 2023 was $3.00 per covered life.

The IRS has issued Notice 2023-70 announcing the applicable dollar amount that must be used to calculate the fee for plan years that end on or after October 1, 2023 and before October 1, 2024. This 2023-24 PCORI fee is $3.22 per covered life, an increase of $0.22 per covered life from 2023. The PCORI fee for a 2023 calendar year plan, calculated as $3.22 per covered life, is due by July 31, 2024.

For more information on paying the PCORI fee, see our prior posts here,  here and here, and the IRS website here. Also refer to this IRS page for a helpful chart describing the applicability of the PCORI fee to various health arrangements.

Additionally, the IRS has announced other 2024 cost-of-living adjustments for employer-sponsored health and welfare and related plans and programs (collectively, “plans”). The 2024 cost-of-living adjustments (and the changes from 2023) for these plans, from Rev. Proc. 2023-23 and Rev. Proc. 2023-34 are summarized in the table below:

* The amount excludable from an employee’s gross income for amounts paid by an employer for qualified adoption expenses through an AAP begins to phase out in 2024 for taxpayers with modified adjusted gross income (“MAGI”) in excess of $252,150 and is completely phased out in 2024 for taxpayers with MAGI of $292,150 or more.

** The HSA catch-up contribution limit is set by statute and does not adjust for inflation.

*** Dependent Care FSA limits are set by statute and do not adjust for inflation.

**** The HDHP out-of-pocket limit for family coverage also is subject to an “embedded” individual out-of-pocket limit of $9,450 (up from $9,100) on essential health benefits in a non-grandfathered HDHP, as required by the Affordable Care Act. The 2024 adjustment was announced by the U.S. Department of Health & Human Services here.

Please contact the employee benefits attorney at Seyfarth Shaw LLP with whom you usually work if you have any questions regarding the PCORI fee or the other limits on health and welfare and related plans.

True to form, the IRS released long-awaited proposed regulations during a long holiday weekend. This time they are narrowly focused on the eligibility rules for Long-Term Part-Time employees first introduced under the SECURE Act, and then expanded by SECURE 2.0. But, they did not disappoint, and are chock full of useful and detailed information on the topic. The IRS is now seeking comments and interested parties have until January 26, 2024.

We have digested the new proposal and hit the highlights in our Legal Update found here. As always, if you have any questions on how this impacts your retirement plan, please do not hesitate to reach out to your Seyfarth Employee Benefits attorney.

On October 31, 2023, the Department of Labor (“DOL”) issued its latest attempt at revising the rules regarding when investment professionals who provide “investment advice” to employee benefit plans or plan participants are a fiduciary under the Employee Retirement Income Security Act of 1974 (“ERISA”). This proposed rule represents the most recent bid by the DOL to expand on the fiduciary rule first established in 1975 to make more investment advisors ERISA fiduciaries, and as a result, subject to the high fiduciary standards imposed by ERISA. This time, however, the DOL has labeled its new rule as the “Retirement Security Rule”, rather than the more traditional “fiduciary” rule.

With this proposed rule, the DOL is attempting to replace the 1975 five-part test for whether a person is an ERISA fiduciary because they are providing investment advice with a three-part test designed to expand who is an ERISA fiduciary. An earlier DOL attempt under the Obama Administration to change the definition of who is a fiduciary was struck down by the Fifth Circuit Court of Appeals as over-reaching the DOL’s authority. Drafted to avoid this problem, the new proposed rule emphasizes relationships of trust and confidence. From the preamble to the proposed rule, it is clear that the DOL is concerned about investment professionals who work with plan participants who are deciding whether to rollover their ERISA plan account. The decision to execute a rollover of retirement plan benefits is generally a one-time decision that the DOL explains can have a significant impact on an individual’s retirement savings. Yet, under the 1975 rule, many advisors who assist participants with this decision are not ERISA fiduciaries when providing rollover advise on a one-time basis.

In order to avoid this result, the DOL proposes to re-write current rule that generally requires that the investment advice be provided on a “regular basis”. Under the proposed rule, the new requirement would be that the advice be provided on a regular basis as part of the advisor’s regular business, and the recommendation is made under circumstances indicating that the recommendation is based on particular needs or individual circumstance. In this way, providing rollover advice to a retirement investor on a one-time basis could fall within the definition of an ERISA fiduciary.

The DOL’s new release also proposes to update some existing prohibited transaction exemptions (“PTEs”) so that all the different investment professionals who would be ERISA fiduciaries under the revised rule would be subject to the same standards of conduct to qualify for a prohibited transaction exemption – i.e., that they must act in the “best interest” of the retirement investor when making a recommendation and take action to mitigate the investment advisor’s conflicts of interest.

Although the DOL’s proposal addresses the concern expressed by the Fifth Circuit Court of Appeals, it will no doubt be subject to challenge in the courts. We are already seeing requests from those in the investment industries for the DOL to extend the period for comments on the proposed rule (from 60 days to 120 days).

Stay tuned for a Seyfarth Legal Update that will drill down deeper into this new DOL guidance. If you have any questions, please do not hesitate to reach out to your Seyfarth Employee Benefits attorney.

Seyfarth Synopsis: The IRS just announced the 2024 annual limits that will apply to tax-qualified retirement plans. For a third year in a row, the IRS increased the annual limits, allowing participants to save even more in 2024. Employers maintaining tax-qualified retirement plans will need to make sure their plans’ administrative procedures are adjusted accordingly.

In Notice 2023-75, the IRS announced the various limits that apply to tax-qualified retirement plans in 2024. The “regular” contribution limit for employees who participate in 401(k), 403(b) and most 457 plans will increase from $22,500 to $23,000 in 2024. The “catch-up” contribution limit for individuals who are or will be age 50 by the end of 2024 is not changing, and remains $7,500 for 2024. Thus, if you are or will be age 50 by the end of 2024, you may be eligible to contribute up to $30,500 to your 401(k) plan in 2024. These same limitations apply if you work for a governmental or tax-exempt employer and participate in a 403(b) plan.

Continue Reading Want to Put More Away in Your 401(k)? Qualified Plan Limits Generally Increase in 2024