Employee Benefits Alert – Fall 2010
Year-End Task List for Sponsors of Employee Benefit Plans
The end of the year is approaching fast and with it the obligatory IRS and Department of Labor deadlines for employers to comply with new requirements applicable to qualified retirement plans, nonqualified deferred compensation plans, and health & welfare plans. This alert highlights the major plan-related projects that should be on employers’ task lists as we begin the fourth quarter.
- Required Determination Letter Application for Some Individually Designed Plans. Employers whose employer identification number (EIN) ends in 5 or 0 must adopt certain amendments and prepare IRS determination letter applications no later than January 31, 2011. This requirement applies to all individually designed retirement plans (i.e., not prototype plans), including 401(k) plans, defined benefit plans, and employee stock ownership plans (ESOPs).
- Military Personnel Plan Changes. The Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”) contains several benefit-related changes that apply to eligible military personnel and their families. These changes include provisions relating to wage differential payments and continued vesting credit for eligible participants during periods of qualified military leave. All qualified plans must be amended to reflect applicable provisions of the HEART Act no later than December 31, 2010.
- Funding Based Restrictions for Defined Benefit Plans. New section 436 of the Internal Revenue Code (the “Code”) imposes certain restrictions on underfunded defined benefit plans. Plans that fall below specified funding thresholds are prohibited from making lump sum or other accelerated benefit distributions and from adopting certain amendments to increase benefits. Under an extension granted by the IRS last December, sponsors of defined benefit plans must adopt amendments to reflect the requirements of Code section 436 no later than December 31, 2010.
- Employer Securities Diversification Requirements. Publicly traded employers with defined contribution plans invested in employer stock are subject to new rules under Code section 401(a)(35) that require employers to permit participants to elect to diversify the portion of their accounts holding employer securities into alternative investments. Final Treasury regulations implementing these diversification rules go into effect on January 1, 2011. Publicly traded employers should adopt necessary amendments and familiarize themselves with the application of these rules no later than December 31, 2010.
- Rollover of Death Benefits by Nonspousal Beneficiaries. The Pension Protection Act of 2006 included a provision that permitted, but did not require, plans to allow nonspousal beneficiaries who received certain death benefit distributions to roll over their plan distributions into another qualified plan or IRA. Subsequent legislation made this nonspousal rollover right mandatory for plan years beginning after December 31, 2009. Accordingly, calendar-year plans should be amended to include these rollover provisions no later than December 31, 2010.
- Rollover Notices. Participants who receive certain plan distributions are required to be provided with rollover notices explaining the participant’s right to elect a tax-free rollover. Late in 2009, the IRS released two new model rollover notices, one designed for distributions from a non-Roth account and the other for distributions from a Roth account. Particularly for plans that include Roth provisions, we recommend that employers update their form rollover notice to reflect the provisions of the applicable IRS model notice.
- In-Plan Roth Conversions. Employers who sponsor 401(k) plans that allow for after-tax “Roth” contributions or who are thinking of adding Roth features to existing 401(k) plans should be aware of a recent legislative change that allows certain participants to convert a portion of their existing pre-tax 401(k) accounts into Roth accounts while those amounts are still within the plan. This option may be attractive to participants who anticipate higher tax rates in future years and wish to effectively “lock-in” current tax rates by making a conversion election applicable to the 2010 tax year. In order to take advantage of this opportunity in the current year, employers should adopt any necessary plan amendments and make related administrative changes no later than December 31, 2010.
Nonqualified Deferred Compensation Arrangements
- Code Section 409A Document Corrections. Code section 409A, which generally went into effect on January 1, 2005, but which has been subject to a number of transitional phase-in rules, imposes numerous requirements on nonqualified deferred compensation arrangements, including the requirement that the plan document contains certain required provisions. A voluntary correction program introduced by the IRS in early 2010 allows employers and participants to correct enumerated plan document violations in exchange for a reduced penalty. Additionally, under a special transition rule outlined in the correction program, all penalties are waived for certain plan document failures that are corrected before January 1, 2011. Employers who have any question about whether the terms of their nonqualified plans satisfy all requirements of Code section 409A should initiate any necessary corrective action as soon as possible in order to qualify for this temporary penalty waiver.
- Code Section 409A Operational Corrections. In addition to the document failure correction program discussed above, the IRS maintains a separate program allowing employers to voluntarily correct certain operational failures occurring in connection with a nonqualified deferred compensation arrangement. The rules of the program generally provide reduced penalties and more favorable correction terms with respect to operational failures that are corrected within the same tax year that the failures occurred. Employers who have experienced any Code section 409A related failures during 2010 should plan to take any necessary corrective measures, including any applicable filings with the IRS, no later than December 31, 2010, in order to qualify for these favorable correction terms.
Health & Welfare Plans
- Dependent Coverage. The Patient Protection and Affordable Care Act of 2010 (the “PPACA”) made a number of changes applicable to employer-sponsored health care plans, some of which are phased in over the next few years and some of which are effective beginning in 2010. Among these changes is a new requirement that group health plans providing for dependent coverage must expand coverage to dependent children through age 26. Certain “grandfathered” plans may choose to limit this coverage to dependents who are not eligible for other employer coverage. This rule is generally effective for plan years beginning after September 23, 2010, but could be adopted earlier on a voluntary basis. In order to comply with this new requirement, amendments to health plan and cafeteria plan documents and SPDs should generally be adopted by December 31, 2010. Additionally, these provisions should be reflected in open enrollment materials and other plan communications with respect to the 2011 plan year.
- Special Enrollment Rights. Group health plans may need to extend special enrollment rights to children who had previously aged out of plan coverage but now qualify for dependent coverage under the PPACA. These rights should be described in open enrollment materials applicable for the 2011 plan year.
- Preexisting Condition Exclusions and Rescission Clauses. Effective upon passage of the PPACA, group health plans may no longer include pre-existing condition exclusions for children under age 19. Additionally, plans are prohibited from containing certain “rescission” clauses that would terminate coverage retroactively except in the case of fraud or intentional misrepresentation. Plan terms in violation of these prohibitions should be removed no later than the beginning of the 2011 plan year.
- Over-the-Counter Drugs. Effective January 1, 2011, flexible spending arrangements may no longer reimburse expenses for purchases of over-the-counter drugs without an accompanying physician prescription. Flexible spending plans and/or cafeteria plan documents, as well as open enrollment materials for the 2011 plan year, should be amended to reflect this change.
- Preventive Care and Patient Protections. Effective for plan years beginning after September 23, 2010, group health plans that are not grandfathered will be required to cover certain preventive health services without imposing any cost-sharing requirements, and to provide other enumerated patient protections such as the requirement to provide participants with the ability to select their primary care physicians without prior authorization. Again, these changes should be communicated in open enrollment materials and included in applicable plan documents.
- Tax Reporting. Effective for tax years beginning after December 31, 2010, employers must report the aggregate cost of employer-sponsored health coverage on Form W-2. While W-2s including this information will not be issued until after the end of the 2011 tax year, administrative changes may be required in advance in order for employers to compute and monitor health coverage expenses throughout the year. Additional guidance on this reporting requirement is expected in 2011.
- Mental Health Parity and Addiction Equity Act of 2008. Final regulations issued under the Mental Health Parity and Addiction Equity Act of 2008 go into effect for the first plan year beginning after July 1, 2010. These regulations generally require that a group health plan must establish full parity between mental health and substance abuse benefits and medical and surgical benefits. Employers who sponsor calendar year plans should begin planning appropriate adjustments to plan coverage in advance of January 1, 2011.
- CHIPRA Notice. The Children’s Health Insurance Program Reauthorization Act of 2009 imposed a new notice requirement applicable for plan years beginning after May 1, 2010. The Department of Labor has issued a model notice describing premium assistance programs available to certain plan participants under Medicaid or CHIPRA, that employers may use to satisfy this notice requirement. Employers who have not already provided this notice should add it to their open enrollment materials for the 2011 plan year.
Members of the Employee Benefits Practice Group at Kaufman & Canoles are standing by to assist with any and all items on your year-end checklist. Please contact one of our attorneys if you wish to discuss any of these requirements in greater detail.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.