Employee Benefits and Actuarial Consultants
| Vol. 15, Issue 4 |
July/August 2010 |
The following is a summary of recent items of interest that have been addressed in various Employee Benefits publications.
HealthCare Reform: Grandfathered Plan Regulations - Certain group health plans providing coverage on March 23, 2010 (the date health care reform was enacted) are "grandfathered plans," exempt from some, but not all, provisions of the Patient Protection and Affordable Care Act. Regulations issued June 14, 2010 provide guidance on what employers must do to maintain the grandfather status of their plans, including what changes will cause a plan to lose grandfathering status. The regulations also address special rules for determining whether collectively bargained plans are grandfathered plans and clarify that plans covering only retirees are not covered by the Act. The new regulations are effective immediately. Employers will need to decide whether the value of maintaining grandfather status for their health plans outweighs the value of making changes to the plan to control costs or achieve other business objectives.
Exemptions for Plan Years Beginning on or after 9/23/2010 - Grandfathered plans benefit from a complete exemption from certain requirements and delayed effective date for certain other requirements. Grandfathered plans are exempt from the following requirements that are otherwise applicable for plan years beginning on or after September 23, 2010:
Exemptions for Plan Years Beginning on or after 1/1/2014 - Grandfathered plans also benefit from a complete exemption from the following requirements otherwise applicable for plan years beginning on or after January 1, 2014:
Grandfathered plans must comply with many provisions of the Act. For example, they are subject to the prohibition against imposing lifetime limits on essential health benefits, the prohibition on rescinding coverage for reasons other than fraud, and the prohibition on pre-existing condition exclusions. Grandfathered plans are also subject to the prohibition against placing annual limits on the coverage of essential benefits, although prior to the plan year beginning January 1, 2014, a grandfathered plan may establish restricted annual limits on essential health benefits according to guidance to be issued by the Secretary of Health and Human Services. Grandfathered plans that offer dependent coverage also must extend coverage to children up to age 26, but prior to the plan year beginning on or after January 1, 2014, grandfathered plans need not provide coverage to an adult child who is eligible for other employer-sponsored coverage. In addition, for plan years beginning on or after January 1, 2014, grandfathered plans cannot provide a waiting period for eligibility in excess of 90 days.
Maintaining Grandfather Status - Disclosure Requirement. To maintain grandfather status, a plan must include a statement in any plan materials provided to participants describing plan benefits that the plan believes it is a grandfathered plan and must provide contact information for questions and complaints. The regulation provides model language for the disclosure.
Plan Documents - To maintain grandfather status, a plan must maintain records documenting the terms of the plan in effect on March 23, 2010 and any other documents necessary to verify status as a grandfathered health plan. In addition, the plan must make such records available for examination upon request.
Changes to the Plan - The regulation lists certain plan changes that would cause a plan to lose grandfather status. Subject to special rules discussed below relating to certain collectively bargained plans, changes that would cause a loss of status include:
It is not clear whether an employer who adds tiers of coverage, but keeps the contribution percentage towards each tier the same, would cause a plan to lose grandfather status.
Benefit Options - Under the regulations, grandfather status is determined separately for each benefit option under a health plan. Status can be lost for one benefit option under a plan, but maintained for another. If a benefit option is eliminated from a plan and employees are transferred to another option, the option to which the employees are transferred will be treated as an amendment to the eliminated option. Grandfather status will be lost for the option to which employees are transferred if the amendment would have caused the loss of grandfather status to the first plan. There is an exception: if there is a bonafide employment-based reason to transfer the employee into the other option, grandfathered status will not be lost. Reducing the cost of coverage is not a "bonafide employment-based reason."
Permissible Plan Changes - Plan changes that are effective after March 23, 2010 will not cause a plan to lose grandfather status if made pursuant to a contract entered into on or before March 23, 2010 or pursuant to written amendments to a plan adopted on or before March 23, 2010. Changes adopted prior to release of the regulation that would otherwise cause a plan to lose grandfather status will not result in a loss of status if the change is revoked in a timely manner. Changes made to comply with law and changes to increase benefits will not cause a plan to lose grandfather status. The regulation also states that for purposes of enforcement, the regulators will take into account good-faith efforts to comply with the Act prior to the issuance of the regulation and may disregard changes to plans that only modestly exceed the changes described.
Collectively Bargained Plans - The regulations confirm a significant distinction between insured and self-insured collectively bargained plans. An insured collectively-bargained plan will maintain its grandfathered plan status at least until the date on which the last of the collective bargained agreements relating to the coverage that was in effect on March 23, 2010 terminates. After that, whether or not the plan is a grandfathered plan is determined under the rules applicable to non-collectively bargained plans, comparing the coverage to the coverage in effect on March 23, 2010. This rules does not apply, however, to self-insured plans maintained pursuant to a collective bargaining agreement. The regulations also clarify that there is no delayed effective date for collectively bargained plans - insured or not - for provisions of the law that are applicable to grandfathered plans. Collectively bargained plans must comply with these provisions, including the applicable restrictions on lifetime and annual limits, the prohibitions on rescinding coverage for reasons other than fraud, and the prohibitions against pre-existing condition exclusions. They must also cover children to age 26, although for plan years before January 1, 2014, they do not need to cover adult children who have other employer-sponsored coverage available to them. These changes may need to be implemented before an existing bargaining agreement expires.
Retiree Only Plans - The new regulation clarifies that group health plans that cover only retirees and no current employees are not subject to the Act. It does not appear that an amendment to a plan to clarify that retirees and employees are in separate plans would cause a plan to lose grandfather status. (Excerpts from ThompsonCoburn LLP Alerts-July 2010).
|
July/August 2010 |
HEART Act clarifications
The HEART Act created a new tax code section (IRC Section 40l(a)(37)). It provides that survivors of a plan participant who dies on QMS will be entitled to any additional benefits other than benefit accruals relating to the participant's period of qualified military service - that would have been provided had the participant resumed employment and then terminated on account of death. Benefits include service credit, ancillary life insurance benefits, and other survivor benefits that are contingent upon a participant's death and vesting.
HEART requires that participants killed on QMS be treated as having returned to employment the day before their death and that vesting be provided accordingly; just as if the individual had died while he or shewas employed. In almost all defined contribution (DC) plans, this will result in 100% vesting. However, that may not be the case in defined benefit (DB) plans, which often,do not fully vest upon death. Although credit will be given as if the employee had died while employed for the purpose of vesting percentages, the plan is not required to include the participant's period of QMS when determining the amount of death benefits for either a DB or a DC plan.. However, the plan may opt to do so.
If a participant is not entitled to reemployment rights under USERRA, then the survivor benefits under the HEART Act do not apply.
The Notice also clarifies that the plan does not have to provide 100% vesting for service members who become disabled on QMS, although it may choose to do so.
Under the HEART Act, differential pay is considered compensation. Any individual receiving differential wage payments will be treated as an employee of the employer making the payment. Thus, if an employee on QMS is already a plan participant, his or her differential wage payments are considered compensation for qualified plan purposes, such as employer allocations and elective deferrals. (Note: Differential pay was an option in the final 415 regulations plan amendment and, thus, has already been either included or excluded in the plan's definition of compensation.)
Contributions resulting from differential wage payments may be included in nondiscrimination testing. However, this is not permitted -- nor desired -- if the amounts will cause the testing to fail. If these amounts are included in testing, they must be included for all employees receiving differential wage payments.
The qualified reservist distribution (QRD) was created by the Pension Protection Act of 2006 (PPA) and made permanent by the HEART Act. It is a distribution from an IRA or of deferrals from a 40l(k) or 403(b) plan to a member of a military reserve unit that was ordered or called to active duty for a period in excess of 179 days (or for an indefinite period). The QRD must be made between the date of the order or call to active duty and the date the active duty period ends. There is no 10% penalty on QRDs for participants under age 59½ .
A QRD or any portion of a QRD may be repaid up until two years after the day the active duty period ends. Whether the QRD is from a 40l(k), 403(b), or IRA, repayment may only be made to an IRA as after-tax amounts. Thus, there is no deduction for the repayment (unless it is made within the normal 60-day period allowed for rollovers). Since this is a rollover, it has no impact on the annual IRA contribution limit.
For distribution purposes, an individual called into active duty is deemed to be severed from employment after 30 days of active duty and may request a distribution of deferrals after that 30-day period. Deferrals are suspended for six months after such a distribution. Deemed severance distributions are eligible rollover distributions subject to the 20% mandatory income-tax withholding. A plan is not required to allow deemed severance distributions. If an individual has a real severance from employment and then returns to the job within six months of taking a distribution of deferrals, he or she can begin making elective deferrals immediately.
If an individual on active duty is eligible for both a deemed severance distribution and a QRD (after 179 days on active duty), the distribution will be treated as a QRD. Thus, there will be no six-month suspension of deferrals or 10% premature distribution penalty.
Plans must be amended for the HEART Act by the last day of the first plan year beginning on or after January 1, 2010. (The deadline for amending governmental plans is January 1, 2012.)
Exception to the early withdrawal penalty
Qualified plan distributions paid to participants who are younger than age 59½ are generally subject to a 10% excise tax. There are several exceptions to the age-59½ rule, however, most notably the exception for distributions paid to terminated participants age 55 or older.
Under Code Section 72(t)(2)(A)(v), payments made to qualified plan participants who have separated from service with their employer during or after the year they reach age 55 are exempt from the 10% early withdrawal penalty. Here are some practical examples:
John terminates employment on March 15, 2010, and elects to receive a lump-sum distribution of his 401(k) balance. He is age 57. John's distribution will not be subject to a 10% excise tax because he separated from service after attaining age 55.
Henry separates from service in 2007 at age 52. He reaches age 55 on February 28, 2010, and calls his employer to request a distribution. Henry asks if the 10% early distribution penalty applies now that he is 55 years old and is disappointed to learn that it does. Why? Because the 10% penalty is waived only for those participants who separate from service in the year they attain age 55 or thereafter. The fact that Henry did not receive the actual distribution until after age 55 is irrelevant. (He must wait until after age 59½ to avoid the penalty.)
Rebecca leaves her job on March 19, 2010, but will not be 55 years old until December 8, 2010. She withdraws her entire 401(k) balance on October 26, 2010. She had not yet attained age 55 at the time of severance nor at the time of the distribution. Will the 10% penalty apply?
No. The IRS clarified (Notice 87-13 Q&A 20) that distributions paid to a qualified plan participant who severs service during or after the year in which he/she reaches age 55 are exempt from the 10% early withdrawal penalty.
Bret retires at age 56 and directly rolls over his entire 401(k) balance into a traditional IRA to avoid the 20% mandatory federal income tax withholding, Bret will have to wait until he reaches age 59½ to withdraw funds from the IRA without penalty because the rule waiving the 10% penalty after separation of service at age 55 or after applies only to qualified plans and not to IRAs.
Blackout period and notice
The IRS is monitoring compliance with blackout period and notice rules. Here is a review:
A blackout period is defined as a period of more than three business days during which a participant is "temporarily suspended, limited, or restricted" from anyone of the following activities:
Directing or diversifying assets credited to his or her account,
Obtaining a distribution, or
Obtaining a loan.
Not every instance of suspended or restricted access is considered a blackout. Here are a few events that are not:
QDRO (qualified domestic relatiops order) restrictions on an individual's account
Restrictions or third party actions on an individual's account, such as a tax levy or beneficiary dispute of a deceased participant's account
"Regularly scheduled" restrictions, such as a regularly scheduled freeze on an investment, if it has been disclosed beforehand in an SPD, SMM, enrollment form, or investment material
Permanent restrictions, such as eliminating loan provisions from a plan or eliminating participant direction of investments
Restrictions on investment education services
A blackout notice must be written so the average plan participant can understand it. It must be provided to participants between 30 and 60 calendar days before the last date on which one of the three previously mentioned transactions may be exercised. For example, if the last day participants can make a transaction is June 20 and the blackout period is for 10 days, the blackout notice must be provided between April 21 and May 21.
The notice must include the length of the blackout period and provide beginning and ending dates. The notice may indicate the calendar weeks in which the blackout period begins and ends provided that a toll-free number and/or free website is included so participants can obtain the exact start and end dates. Contact information may be the name, address, and phone number of an individual, or it can be a department name, such as human resources.
The notice must specify only the rights being suspended. For example, if only plan loans are being suspended, then the notice should only address loans.
If the dates of the blackout period change after the notice is sent, a second notice must be provided to reflect the change.
Different restrictions may be included in the same notice. For example, the same notice may be used to announce a 25-day blackout for withdrawals and a 20-day blackout for investment changes.
Single participant plans are exempt from the blackout notice rules.
Directors and executive officers are prohibited from trading in employer stock during a blackout period imposed on participants in individual account plans. It is important to note that the restriction applies to stock owned outside of the plan subject to the blackout.
In. the following cases, notices must be given "as soon as reasonably possible." The 30-day time period may be shortened if:
Postponing the blackout period would violate ERISA's exclusive purpose rule or prudence rule,
The blackout period begins due to events that were unforeseeable or circumstances that were beyond the control of the plan administrator, or
The blackout period occurs solely in connection with a merger, acquisition, divestiture, or similar transaction involving the plan sponsor.
If providing a notice is completely impossible, then none is required.
A daily penalty of $100 will be imposed for each participant/beneficiary who does not receive a blackout notice. The penalty is imposed on a per-day late, per-violation basis. For example, if a plan has 200 participants and the blackout notice is five days late, the penalty would be 200 x 5 x $100, or $100,000. The plan administrator is liable for the penalty; it may not. be shifted to the plan.
Recent developments
The Department of labor (DOL) has stated that an overwhelming number of filings in the Voluntary Fiduciary Compliance Program (VFCP) involve late deposits of elective deferrals and loan repayments. Self-correction for these errors is very possible. Between the calculator on the DOL website that allows plans to compute earnings due to the plan on late deposits and the recently finalized rules for the seven-business-day safe harbor for depositing deferrals/loan repayments for small plans,* the correction process has been greatly simplified. Hopefully, a future VFCP update will include criteria permitting self-correction methods for late deferrals and/or loan repayments.
For a number of years, Form 5500 has asked plan sponsors to disclose if any deferrals were deposited Tate during the year. The 2009 Form 5500 also asks if late deposits were corrected, thus allowing plan sponsors to indicate that the plan has been made whole. This should prevent a common scenario where a plan sponsor reports a late deposit and makes the correction, only to then receive a letter from the IRS and/or the DOL about the need to make a correction.
* Note that if a small plan misses the safe harbor, interest and penalties are calculated from the benchmarked deposit date (usually three to five business days) and not from the end of the seven-day safe harbor period.
The Employee Benefits Security Administration (EBSA) closed 3,669 civil investigations in FY 2009. In over 72% of those cases, the agency found violations and obtained corrections. Criminal offenses involving employee benefit plans led to the indictment of 115 individuals. The agency also recovered $124.5 million for workers and their families by resolving individual complaints through informal resolution procedures. In addition, EBSA handled 365,457 inquiries from the public and conducted more than 1,500 education and outreach events for workers, employers, plan officials, and Congressional members.
Results were also achieved through the agency's compliance assistance programs. The popular Voluntary Fiduciary Correction Program (VFCP) received 1,692 applications from employers, plan officials, service providers; and other fiduciaries to self-correct ERISA violations. The Form 5500 Delinquent Filer Voluntary Compliance Program (DFVCP), which helps plan administrators comply with ERISA's filing requirements, received 26,603 filings.
ECONOMIC GROWTH AND TAX RELIEF
RECONCILIATION ACT OF 2001
On June 7, 2001, President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001. This new law makes over 40 specific changes to pension law as well as several important other benefits-related changes. The key areas of pension reform include raising contribution limits for IRAs and employer-sponsored retirement plans, liberalizing portability and vesting rules, and simplifying plan administration.
Summarized below are highlights of the retirement and benefits-related provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, AEGTRRA.@
The
maximum annual dollar limit for benefits under defined benefit plans is
increased from $140,000 to $160,000 in 2002. This dollar limit was reduced if
benefits began before attainment of the Social Security retirement age; now,
the reduction will only occur if benefits start before age 62.
The
maximum annual dollar limit on annual additions to defined contribution plans
is increased from $35,000 to $40,000 in 2002, indexed in $1,000 increments
each year thereafter.
The
annual compensation limit under IRC Sec. 401(a)(17) for determining
contributions and benefits is increased from $170,000 to $200,000 in 2002,
indexed in $5,000 increments for cost of living increases thereafter.
The
25% of compensation limitation on annual additions to defined contribution
plans is increased to 100% of compensation in 2002.
The
elective deferral limit to Sec. 401(k) plans is increased from $10,500 to
$11,000 in 2002, increasing in $1,000 increments each year until the limit
reaches $15,000 in 2006. Thereafter, the limit is indexed in $500 increments
each year.
The
100%-of-compensation defined benefit limit for multiemployer plans is
eliminated effective 2002.
Multiemployer plans are no longer aggregated with single-employer plans for
purposes of applying the 100% of pay limit, effective 2002.
The
deduction limit for profit-sharing and stock bonus plans is increased from 15%
to 25% of total compensation beginning in 2002. Employee elective deferrals
will be included in determining total compensation and they will no longer be
considered employer contributions for the purposes of the deduction limit.
Full
vesting in employer matching contributions is required under either a
three-year cliff vesting schedule or a six-year graded vesting schedule.
The top-heavy rules under IRC Sec. 416 are simplified.
Rollover rules are liberalized to provide further incentives for individuals
to keep distributed retirement benefits in tax-favored accounts and provide
more flexibility as to where money can be rolled over.
Involuntary cash-outs in excess of $1,000 must automatically be rolled over
to a plan sponsor-designated IRA unless the participant elects to receive it
directly or have the distribution directed to another plan or IRA. (This
provision is not effective until after the DOL finalizes regulations on
appropriate investment alternatives.)
Employers are allowed to disregard rollovers (and related earnings) received
from another retirement plan or IRA for purposes of applying the $5,000
mandatory cash-out threshold.
A
defined contribution plan receiving a participant's transfer in of benefits
from another retirement plan need not provide the same forms of distribution
as those available under the transferor defined contribution plan.
New tax credits added to encourage small employers to adopt retirement plans
for their employees and to encourage individuals to save adequately for
retirement.
The current liability full funding limitation for defined benefit plans is
increased to 165% in 2002, 170% in 2003, and then repealed in 2004.
An
excise tax equal to $100 per day (up to a maximum of $500,000) will be
imposed for a failure to provide advance written notice to participants of a
plan amendment that significantly reduces the rate of future benefit
accruals effective for plan amendments taking effect on or after June 7,
2001.
The
same desk rule is repealed; distributions after December 31, 2001 may
be made from the plan of the original employer to an employee who has not
actually separated from service but continues to work the same job for a
successor employer.
The IRC Sec. 127 tax exclusion for employer-provided educational assistance
is permanent.
The IRA contribution limit is increased from $2,000 to $3,000 in 2002-2004,
$4,000 in 2005-2007, and $5,000 in 2008 (to be adjusted annually for
inflation in $500 increments thereafter).
Eligible individuals age 50 and older may make "catch-up" contributions to IRAs of an additional $500 per year in years 2002-2005 and $1,000 each year thereafter.
Most of the provisions of EGTRRA (other than the participant notice requirement described above) are effective for plan years beginning on or after January 1, 2002. However, under a sunset provision in the law, all of the provisions expire on December 31, 2010. The Internal Revenue Code and ERISA will thereafter be applied and administered as if these provisions and amendments had not been enacted unless they are extended by subsequent legislation.
We will be providing a more comprehensive explanation of many of these provisions in the coming months.
REMINDER
Due to changes in various recent pension laws, all qualified pension plans must be amended by the last day of the plan year beginning on or after January 1, 2001 to comply with those laws, which are collectively referred to as "GUST." The GUST laws include the following:
General Agreement on Tariffs and Trade of 1994 (GATT).
Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA).
Small Business Job Protection Act of 1996 (SBJPA).
Taxpayer Relief Act of 1997 (TRA 97).
In addition, the IRS requires that plans must be restated when submitted to the IRS requesting a favorable Aletter of determination@ of the plan=s continued qualified status. This submission process must be made by the end of the plan year beginning in 2001. Therefore, calendar year plans must be submitted not later than December 31, 2001.
The principal changes are summarized below.
GATT: For plans that pay lump sums in the plan year beginning in 2000 and later, the lump sum amount must be determined based on a specified mortality table (GAM83 unisex mortality) and interest rates linked to the 30 year treasury bond rates. Lump sums determined on this basis will generally be lower than lump sums determined under PBGC rates.
USERRA: An employee who leaves employment to serve in the armed forces shall, upon re-employment, receive benefits and vesting service as if he had never left the plan provided the employee returns to service with the employer within the period allowed by law.
SBJPA: Under prior law, pension payments to active employees had to commence no later than age 70 2, even if the participant was still working. Under the new law, the pension commencement date for an active employee can now be deferred until the date of actual retirement if the participant is not a 5% owner. However, an actuarial increase in the benefit must be provided if benefit commencement is delayed beyond age 70 2 .
SBJPA: Five (5) year cliff vesting (or 3-7 year graded vesting) is required for multiemployer plans. The effective date must be the first plan year beginning on or after January 1, 1997 or, if later, the expiration of the last collective bargaining agreement in effect, but, in any case, not later than the plan year beginning in 1999. The new vesting schedule is not required to apply to participants who do not work at least one hour of service after the effective date of the change. No changes are require for single employer plans which already use 5 year cliff vesting.
SBJPA: For the plan year beginning in 2000, the combined benefit limit for participants in both a defined contribution pension plan and a defined benefit pension plan is repealed. This repeal allows a person participating in both types of plans to collect larger benefits.
SBJPA: The definitions of "highly compensated employee" and "leased employee" have been simplified. The family aggregation rule has been repealed, i.e., family members of the 10 most highly compensated employees are no longer included as "highly compensated" solely for being family members.
SBJPA: For distributions involving a qualified joint and survivor annuity, a plan may now permit a participant to waive the 30 day minimum waiting period between the participant's receipt of the written explanation of the terms of the annuity options and the annuity starting date, provided the first payment begins at least 7 days after receipt of the written explanation.
SBJPA: For defined contribution plans, the definition of compensation for purposes of determining the maximum permissible contribution has been expanded. This new definition will increase the annual amounts that can be contributed for nonhighly compensated employees.
SBJPA: A 401(k) plan allowing for early participation (before age 21 with one year of service) may elect an alternative nondiscrimination rule for compliance testing. This will make it easier for certain plans to meet the nondiscrimination tests.
TRA 97: Although ERISA has prohibited assignment or alienation of pension plan benefits for any purpose, the Taxpayer Relief Act of 1997 allows an exception for any participant who commits a breach of fiduciary duty or a crime against the plan.
TRA 97: For the first plan year beginning after August 5, 1997, the dollar limitation on lump sum payments that can be made without the participant=s consent is increased from $3,500 to $5,000.
As noted above, plan sponsors of calendar year plans must adopt the necessary plan amendments and submit their plans to the IRS by December 31, 2001. Plan years that begin after January 1, 2001 must complete their submission prior to the end of that plan year. Therefore, for example, for a plan year that begins on May 1, 2001, the submission must be made prior to April 30, 2002.
Please call us if we can be of assistance.