Employee Benefits & Executive Compensation Client Alert – Fall 2005
Extension of Use it or Lose it Grace Period Under Flex Plans
The IRS issued welcome relief for participants in health and dependent care flex spending arrangements (FSAs) by granting a 2 1/2month grace period following the end of the taxable year during which covered expenses may be incurred. Under this new rule, described in Notice 2005-42, a participant with funds remaining in his FSA account at the end of a plan year may continue to use these funds to pay for covered expenses incurred up to 2 1/2months following the end of the plan year (e.g., March 15 for calendar-year plans). Previously, the participant would have been forced by the use it or lose it rule to forfeit any amounts remaining in the FSA at the end of the plan year.In order to take immediate advantage of this new rule, plan documents must be amended by the last day of the current plan year. Participant communications should also be prepared in advance to ensure that participants are informed of the change with enough time remaining in the plan year to allow them to adjust their spending habits accordingly.
HIPPA Security Standards
Regulations issued under HIPAA concerning the security of protected health information stored in electronic form (e-PHI) are now effective for most group health plans. Compliance with these regulations requires, at a minimum, preparation of a policies and procedures manual identifying employees with access to e-PHI and setting forth rules concerning security issues, such as electronic access rights to e-PHI and encryption of e mail messages containing e-PHI. If your firm sponsors a group health plan but has not yet formulated a compliance strategy, our benefits team can help you assess how these regulations apply to your plan.
Outsourcing Leads to Potential ERISA Liability
Many employers have found it advantageous to outsource certain employees by reclassifying them as independent contractors or by reassigning them to different divisions. Doing so often results in cost savings to the employer due to reduced benefits. But, employers should beware. These cost savings could also lead to litigation under section 510 of ERISA, which prohibits employers from discharging an employee with the intent of interfering with the attainment of ERISA rights. A recent case from the 8th Circuit– Register v. Honeywell Federal Manufacturing & Technologies, LLC, 2005 WL 367319 (8th Cir. 2005)– highlights the importance of one key factor in outsourcing cases: proof of the employer’s intent. In this case, a number of employees who alleged they received reduced pension benefits as a result of outsourcing thought they had uncovered a smoking gun in a statement from the employers annual report indicating that the outsourcing had resulted in benefits-related cost savings for the employer of $5.7 million. Despite this evidence, the court ultimately sided with the employer, holding that the employer had adequately demonstrated other, non-benefits-motivated reasons for the outsourcing. The employer in this case helped its cause tremendously by offering to amend its pension plans to enable many of the outsourced employees to reach retirement milestones. If your company is considering outsourcing employees, consult with benefits counsel to ensure that non-benefits-motivated reasons for the move are adequately documented.
Proposed Regulations on Code Section 415 Benefit Limitations
Proposed regulations under Code section 415– which limits the amount of the annual benefit payable under defined benefit plans and the amount of annual contributions to defined contribution plans– were published on May 31, 2005. These regulations are largely a codification of previous guidance from various sources, but include several important clarifications. Highlights of the proposed regulations include the following:
- Post-severance compensation. The proposed regulations indicate, as a general rule, that participants may make elective deferrals on compensation paid within 2 1/2months following severance, and that such severance payments are included in the participants compensation for Code section 415(c) purposes.
- Multiple annuity starting dates. The proposed regulations clarify a previously confusing set of rules about how to calculate the effect of prior distributions from previous years in calculating the 415 limit in the current year. These regulations, once finalized, will be effective for limitation years starting on or after January 1, 2007.
Non-qualified Deferred Compensation
409A Regulations Expected Soon
Drafts of proposed regulations under new Code section 409A are near completion and are expected to be published soon. Inside sources at the Treasury Department indicate that these regulations are quite lengthy and will clarify many outstanding issues that have not yet been addressed by official guidance. Sponsors of nonqualified deferred compensation arrangements should be aware that once these regulations are published, existing plans may have only a short period of time to make any necessary plan amendments.
IRS Issues Audit Guide on Executive Benefits
The IRS has published a guide for its auditors focusing on the tax treatment of payments and perks given to departing or retiring executives. Under these guidelines, IRS auditors will focus heavily on fringe benefits such as club membership dues (which are deductible to the corporation only if included in the executive’s income as compensation), home improvements (including furnishings purchased by the employer for the executive’s home office), non-commercial air travel, and qualified retirement planning services. Employers who have executive fringe benefits such as these should review the IRS Audit Guide to determine which of these practices are likely to attract IRS scrutiny.
Federal Credit Union Eligibility to Sponsor 457(b) Arrangements
The IRS has postponed issuance of definitive guidance concerning the status of federally chartered credit unions as eligible employers for purposes of the nonqualified deferred compensation provisions of Code section 457(b). In Notice 2005-58, the IRS indicated that federally chartered credit unions that already sponsor such arrangements may continue to maintain them until further notice, provided that the credit union has consistently treated itself as a tax-exempt governmental entity. In the event that future guidance establishes that credit unions are not eligible employers for purposes of section 457, the IRS has promised to provide a reasonable transition period to enable credit unions to amend any existing plans accordingly.
22nd Annual Employment Law Update: Rules of the Game
On November 3rd, the K&C Employment Law Team will host the premiere showing of the 22nd Annual Employment Law Update – Rules of the Game, at the Chesapeake Conference Center. This year’s program is designed to provide employers with the rules to reduce risk in the ever-changing legal environment.
Topics to be featured include Employee Handbooks, Workers’ Compensation, Dealing with the Problem Absentee Employee, Workplace Harassment & Misconduct Investigations and more.
For more information, please contact Nicole Naidyhorski at (757) 624-3232.
This program has been approved for 5 credit hours toward PHR and SPHR recertification through the Human Resource Certification Institute (HRCI). For more information about certification or recertification, please visit the HRCI homepage at www.hrci.org.
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.
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.