The Continuing Appropriations Act (CAA 23) was enacted on December 29, 2022, after receiving President Biden’s signature. In addition to several other measures, the law includes a two-year extension of telehealth coverage flexibility for health savings account (HSA)-compliant high-deductible health plans.
There are also some provisions that directly impact retirement benefit plans. Overall, CAA 23 includes a variety of legislative changes that will have both direct and indirect impacts on service providers and plan sponsors of group health plans.
Here are some items that every organization should know about the employee benefits law changes that are affecting federal spending.
CAA 23 Is Changing Employee Benefits Laws
The year-end signing of the omnibus spending bill resulted in some significant changes to employee benefits laws in the US. Some of the most significant changes involve retirement under provisions written in the Setting Every Community Up for Retirement Enhancement (SECURE 2.0) Act of 2022. These provisions were created to provide greater flexibility to employer-sponsored qualified retirement plans.
Other major provisions deal with health care, particularly telehealth benefits. CAA 23 will extend recent guidance that allows some telehealth benefits to be given on a first-dollar basis under a high-deductible health plan (HDHP) without also making the recipient ineligible from contributing to a HSA.
There will be an extended period before any formal plan amendments need to be adapted to reflect these changes. For private sector plans, this will likely be at the end of the 2025 plan year. For certain governmental or collectively bargained plans, this may be at the end of the 2027 plan year.
Telehealth Coverage Is in Question Under HSA Rules
There are strict rules surrounding who can open and contribute to a HSA. According to federal guidelines, a person can open a health savings account if they are covered under a qualifying HDHP which meets the maximum out-of-pocket threshold and the minimum deductible for the year. This person cannot be covered by any other medical plan, including Medicare, TRICARE, or TRICARE for life.
In addition, this person cannot be claimed as a dependent on someone else’s tax return. Other federal guidelines state that a person cannot open a HSA if they have not used US Veterans Administration (VA) medical benefits in the previous three months or have any disqualifying alternative medical savings account, such as a health reimbursement account (HRA) or flexible spending account (FSA).
This means that a person who receives telehealth and other remote services before meeting a deductible under a HDHP would be deemed ineligible to contribute to a HSA. The CARES Act and CAA 2021 have provided some relief by preventing first-dollar telehealth coverage under HDHP from being disqualifying. However, this relief was set to expire at the start of 2023. CAA 23 extends this relief until January 1, 2025.
Expanded Automatic Enrollment in Retirement Plans
Existing rules established by the Internal Revenue Service (IRS) state that some qualified retirement plans, such as 401(k) and 403(b) plans, must automatically enroll employees who have a preset contribution percentage unless the employee chooses another percentage or opts out completely.
For plan years following December 31, 2024, a new code has been added by SECURE 2.0 which will require the plan to include automatic enrollment to qualify under Code Section 414(w).
These new changes will also allow permissible withdrawals within a 90-day period after an initial contribution. It will also provide for automatic contributions of a minimum of 3 percent but no more than 10 percent during the first year of participation.
Emergency Savings for Non-Highly Compensated Employees
Under SECURE 2.0, employers are allowed to offer non-highly compensated employees (NHCE) emergency savings accounts that are directly linked to individual account plans.
A NHCE is an employee who is not a highly compensated employee, which refers to an individual who owned more than five percent of the interest in an organization at any time during the current year or previous year. In addition, this person must have received compensation from the organization of more than $135,000 in 2022.
Employers have the option to automatically opt employees into these accounts at a maximum of three percent of their salary. In addition, the portion of the account that is attributable to the employee’s contribution must be capped at $2,500.
These contributions must be made post-tax and withdrawals are allowed at least once each calendar month. If employment is terminated at any time, these accounts are portable and can be rolled into an individual retirement account (IRA) or Roth-defined contribution plan.
New Starter 401(k) Plan Design
Plan years that begin on or after January 1, 2024 will also experience plan design changes to 401(k) plans. Under SECURE 2.0, employers will be permitted to establish a “starter 401(k) deferral-only arrangement,” otherwise known as a Starter 401(k).
This type of plan is sponsored by an eligible employer and each eligible employee must be treated as having elected to have their employer make elective contributions to an amount that is equal to an applicable qualified contribution percentage. The workforce as a whole must be permitted to participate in this arrangement with the exception of employees who do not meet service or age limits.
An employer may offer a Starter 401(k) only if both the employer and predecessor employer maintained a different qualified plan for the year. There may be an exception in situations where an employer would violate this rule due to a business transaction during a specified transition period.
Reduced Service Requirement for Part-Time Employees to Enter Retirement Plans
The importance of offering employees retirement plan options regardless of number of hours worked continues to be a priority. Under the SECURE Act 2019, a new provision was created that called for some qualified retirement plans to permit long-term, part-time employees to participate. One such requirement of this provision is that an employee had to work a minimum of 500 hours for the employer for a period of three consecutive years to be eligible.
Due to the implementation of SECURE 2.0, plan years starting on or after January 1, 2025 will reduce the service requirement for employees from three consecutive years to two years.
This means that a 401(k) plan must allow an employee to make elective deferrals if he or she worked a minimum of 500 hours per year for a consecutive period of two years. The employee must also have met the minimum age requirement by the end of that period, which is 21 years old.
Ask How New City Insurance Can Help Your Organization Navigate Through Federal Benefits Law Changes
CAA 2023 has resulted in multiple additional employee benefit provisions that are expected to continue affecting federal spending and changing the way that employers offer benefits to employees.
Due to the complexity of these ever-evolving laws and regulations, it is important for growing businesses to work with an experienced employee benefits consulting firm that can provide guidance on how best to structure and manage employee benefits.
For more information on what to know about employee benefits law changes that are affecting federal spending, schedule a consultation with the experts at New City Insurance by calling 888.210.2765 or sending us a message online.