Employee Benefits and Actuarial Consultants
| Vol. 13, Issue 1 |
March/April 2008 |
The following is a summary of recent items of interest that have been addressed in various Employee Benefits publications.
National Defense Authorization Act Amends FMLA. On January 28, 2008, President Bush signed into law the National Defense Authorization Act for Fiscal Year 2008 (NDAA) which includes a provision (section 585) that amends the Family and Medical Leave Act of 1993 (FMLA). This is the first expansion of the FMLA since its enactment in 1993. The NDAA permits a "spouse, son, daughter, parent, or next of kin" to take up to 26 workweeks of leave to care for a "member of the Armed Forces, including a member of the National Guard or Reserves, who is undergoing medical treatment, recuperation, or therapy, is otherwise in outpatient status, or is otherwise on the temporary disability retired list, for a serious injury or illness." Next of kin, for this purpose, is defined as an individual’s "nearest blood relative." This new category of leave is an exception to the normal 12-weeks-per-year limit on FMLA leave. The 26 weeks of leave may be taken only during one 12-month period but may be taken intermittently. The 26-week limit includes any other FMLA leave taken in that period. For example, if an employee had already taken seven weeks of FMLA leave because of the employee's own serious health condition, the employee could take up to 19 additional weeks of leave related to the service member's disability. This amended provision of the FMLA is effective as of January 28, 2008, the date of the President’s signing. The DOL states that it is working quickly to prepare more comprehensive guidance and that in the meantime employers are to "act in good faith in providing leave under the new legislation."
The NDAA also permits an employee to take FMLA leave for "any qualifying exigency (as the Secretary of Labor shall, by regulation, determine) arising out of the fact that the spouse, or a son, daughter, or parent of the employee is on active duty (or has been notified of an impending call or order to active duty) in the Armed Forces in support of a contingency operation." This new category of leave may be taken intermittently or on a reduced schedule, and counts toward the normal 12-week maximum for annual leave, or toward the new 26-week maximum where leave to care for an injured service member is used. By its express terms, this provision of the NDAA is not effective until the Secretary of Labor issues final regulations defining "any qualifying exigency." However, the DOL encourages employers to provide this type of leave to qualifying employees in the interim.
A DOL website provides additional information on the two new types of leave, as well as a marked copy of the FMLA showing all of the changes made by the new law (see http://www.dol.gov/esa/whd/fmla/NDAA_fmla.htm). Employers subject to the FMLA generally must maintain group health plan benefits for employees on FMLA leave on the same terms and conditions as if the employees had continued to work, and must restore such coverage when employees return from leave. Employers and administrators should review plan documents, administrative procedures, and forms for update that may be needed for the new leave requirements. [Medical Benefits, February 28, 2008; EBIA Weekly, 01/31/2008]
Dental Coverage Survey. The Segal Survey of Dental Coverage found that 82% of group health plans offer dental coverage which lags behind only medical and prescription drug coverage as the most utilized benefit provided to employees. The survey reflected that 54% of group plans provided access to dental networks, either as a dental preferred provider organization (DPPO) or a dental HMO (DHMO). The average network utilization, as measured by the percentage of dollars paid, was 59%. However, for standard DPPO plans that are smaller and offer deeper discounts, the rate of network utilization was between 25% and 40%.
In recent years, employers have been encouraged to manage the cost of their health care and prescription drug plans. Likewise, employers should consider managing the cost of their dental plans, to include reviewing the plan's covered procedures and its list of exclusions and limitations; considering offering a DPPO/DHMO (new networks have emerged in recent years that provide an opportunity for both plan sponsor and participant savings); considering converting a fully insured plan to a self-insured plan. [CCH Employee Benefits Management Directions, March 25, 2008; CCH@ HR Management, April 1, 2008]
Using an Electronic Payment Card under A Health FSA. IRS guidance restricts the merchants at which health FSA electronic payment cards can be used. Under the guidance, card use generally must be limited to two categories of merchants. First, cards can be used at medical care providers (e.g., physicians, dentists, vision-care offices, and hospitals), as identified by merchant category code (MCC). When cards are used at these health care-related merchants, some categories of expenses will qualify for automatic substantiation. However, for expenses that do not qualify, employers must obtain after-the-fact substantiation and must have procedures to recoup any improper payments (often called "pay and chase" provisions). Second, electronic payment cards can be used at merchants (including merchants that aren't medical care providers as identified by MCC) that have in place an inventory information approval system (IIAS) to ensure that cards are used only for eligible medical care expenses. Special rules apply to stores with the "drug stores and pharmacies" MCC. During 2008, these stores are treated as medical care providers for purposes of the rules for health FSA electronic payment card transactions. However, after December 31, 2008, cards may not be used at stores with the drug stores and pharmacies MCC unless (1) the store uses an IIAS; or (2) 90% of the store's gross receipts during the prior taxable year (determined on a store-location-by-store-location basis) consisted of items that qualify as Code Section 213(d) medical care expenses. Prior to January 1, 2008, IRS transition relief had treated supermarkets, grocery stores, discount stores, and wholesale clubs without health care-related MCCs as medical care providers for card transactions occurring on or before December 31, 2007. However, this transition relief expired December 31, 2007, and therefore, cards can no longer be used at these merchants unless an IIAS is in place. [EBIA Weekly, 04/17/2008]
|
July/August 2008 |
401(k) Supreme Court Case
Supreme Court Decision. In a 9-0 decision, the Supreme Court ruled that ERISA allows a participant in a defined contribution plan to sue for reimbursement of investment losses. The losses suffered by the participant's individual account in the case (which occurred during a market downturn in the early 2000s) resulted from a failure of the plan fiduciaries to follow investment directions. Prior to the downturn, the participant instructed the employer to make changes to his investment allocations. However, these instructions were not executed. As a result, the participant's account lost $150,000 before either party realized what had occurred.
In LaRue, plan participant sought to make his individual account whole. The employer argued that this was not what was meant by recovery on behalf of the plan. The trial and federal appeals courts ruled in favor of the employer based on Russell. However, the Supreme Court disagreed.
The Supreme Court found that while ERISA does not provide a remedy for individual injuries as distinct from plan injuries, it does authorize recovery for fiduciary breaches that impair the value of plan assets. In the defined contribution context, this means restoring the losses in a particular participant's individual account. The court unanimously agreed that if an employer fails to follow a participant's investment direction and the participant's retirement benefit is reduced as a result, then, as fiduciary, the employer is responsible. Thus, the Supreme Court's decision abides by the principle of making the plan and, thus, the participant "whole."
The Majority Opinion. Justice Stevens cited fiduciary responsibility in accordance with ERISA Section 409(a):
"Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary. A fiduciary may also be removed for a violation of section 411 of this Act."
Justice Stevens stated that a "defined contribution plan" promises the participant the value of an individual account at retirement. The balance in that account is a function of how much the participant contributes and the investment performance of those contributions. In LaRue, the employer's failure to execute the participant's investment directions resulted in the reduction of the participant's retirement account balance. Thus, the employer's conduct constituted a breach of fiduciary duty for which the employer could 1) be held responsible and 2) be required to make the participant whole under ERISA. Therefore, whether such a fiduciary breach affects all participants or only one, it creates the type of harm that is an issue under ERISA Section 409(a).
Fiduciary Responsibility Unchanged. The fact that this case may open up the employer (as plan fiduciary) to lawsuits cannot be dismissed. However, the fiduciary requirements have not changed.
Employers as fiduciaries must continue to comply with the fiduciary responsibilities inherent in a qualified plan and act diligently to protect the assets of the plan. Responsibilities include:
Using plan assets solely for the benefit of the participants and beneficiaries (the exclusive benefit rule),
Exercising prudence in investment choices and diligence and care on behalf of the participant (the prudent person rule), and
Creating an investment policy statement and reviewing it periodically.
For more information on fiduciary responsibilities, the Department of Labor has compiled a booklet entitled "Meeting Your Fiduciary Responsibilities." It can be found at: www.dol.gov/ebsa/pdf/fiduciaryresponsibility.pdf.
EGTRRA Opinion Letters
On March 31, 2008, the IRS began issuing EGTRRA Opinion Letters for prototype and volume submitter defined contribution plans and announced that employers using these plans have until April 30, 2010, to adopt them.
Six Year Cycle. The EGTRRA document is the first to be approved under the IRS's new six-year restatement cycle for preapproved plans, which started in 2005. It calls for plans to be restated every six years, submitted to the IRS for a new Opinion or Advisory Letter, and, once approved, adopted by employers.
As part of the cyclical process, the IRS issues an annual list of items that must be incorporated into plans that are being submitted for approval the following year. The EGTRRA document just approved contains the required changes from the 2004 IRS Cumulative List (issued as IRS Notice 2004-84), including EGTRRA changes, the final required minimum distribution rules, the final 401(k) and (m) regulations, and more.
Incorporating Changes. Changes that have occurred since Notice 2004-84 was issued are not included in the document. Those - and any subsequent changes – will be included in the next six-year restatement cycle. However, the IRS requires that changes between restatements be incorporated into the plan document as “snap-on” interim amendments. For example, the final 415 regulations (issued in 2007) will be a required snap-on amendment that will apply to limitation years beginning on or after July 1, 2007. In addition, there will be a snap-on amendment for the Pension Protection Act of 2006 (PPA).
Note: Plans must operate in accordance with PPA provisions, even though documents will not be amended until sometime in 2009.
Deadline for Depositing Deferrals
The Basic Rule Is Unchanged. The general rule for depositing plan deferrals has not changed. Amounts withheld by an employer must become plan assets "as soon as possible," which technically means on the earliest date on, which the amounts can reasonably be segregated from the employer's general assets. But it's difficult to know exactly when a deposit is late under this as-soon-as-possible requirement. Advisors as well as plan sponsors have been uncertain about how to satisfy this requirement. And employers were often unaware that they potentially engaged in a prohibited transaction if they took even one day longer than normal to make a deposit.
New Clarification. The proposed regulations offer a “seven-business-day safe harbor” for employers with small plans (less than 100 participants as of the first day of the plan year) to make deposits to their plans. The actual deadline would be the seventh business day following the day that amounts would have been payable to the participant in cash or received by the employer to repay a participant loan. The funds do not have to be allocated to participant accounts within the seven-day time frame or even invested: They need only be deposited in a plan account.
The DOL’s new guidance is extremely helpful. It provides a much higher degree of certainty with respect to the timeliness of deferral (and loan repayment) deposits. Before deciding on the proposed time frame, the DOL performed a number of studies and considered five and 10-day deadlines. The seven-day rule seemed easiest to implement.
Example: Acme Enterprises sponsors a 401(k) plan. There are 30 participants in the 401(k) plan. Acme has one payroll period for its employees and uses an outside payroll processing service to pay employee wages and process deductions. Acme has established a system under which the payroll processing service provides payroll deduction information to Acme within one business day after paychecks have been issued. Acme checks this information for accuracy within five business days and then forwards the withheld employee contributions to the plan. The total amount of the withheld employee contributions is deposited with the trust maintained under the plan on the seventh business day following the date on which the employees are paid. Under the DOL’s proposed safe harbor, when participant contributions are deposited with the plan by the seventh business day following a pay date, the contributions are deemed to be contributed to the plan on the earliest possible date on which such contributions can reasonably be segregated from Acme’s general assets.
Note: According to reports, DOL auditors are interpreting the rules as follows: If a plan complies with the seven-day period, fine. If not, penalties apply starting after three or five days – not seven – from when deferrals are withheld.
Effective Date. The new rules will go into effect when the final regulations are published in the Federal Register. Nonetheless, small plans may begin taking advantage of the seven-business-day safe harbor period provided in this proposal right away.
Recent Developments
Qualified Optional Survivor Annuity (QOSA). Effective for plan years starting on January 1, 2008, and thereafter, the Pension Protection Act of 2006 (PPA) has amended the qualified joint and survivor annuity (QJSA) rules. Plans subject to these annuity requirements must now offer participants a qualified optional survivor annuity (QOSA) and a written explanation of the terms and conditions of the QOSA.
What this generally means is that a plan that is subject to the QJSA requirements must now provide participants with additional options regarding the spouse's survivor annuity. Under the new QOSA provisions, if a plan normally provides a survivor annuity that is equal to or greater than 75% of the annuity amount payable during the joint lives of the participant and his or her spouse, then the participant must be given the option to elect a survivor annuity of 50%. Similarly, if the normal amount of the survivor annuity is 50%, the participant must be given the option to choose a 75% annuity. The QOSA must be at least actuarially equivalent to a single life annuity payable at the same time as the QOSA. It is important to note that the QOSA does not have to be actuarially equivalent to the plan's QJSA.
In general, the QOSA requirement applies to distributions with annuity starting dates in plan years beginning after December 31, 2007. (There is a special rule for collectively bargained plans.) Plans must operate under this PPA provision but do not have to be amended until 2009. Plans, including many prototype plans, that have a Q]SA with a 50% survivor annuity and provide an option for 75% do not need to be amended because the QOSA requirements are already satisfied.
IRS Videos Available Online. The IRS has made a number of video clips available online via the Retirement Plans Community web page at www.irs.gov/ep. These short videos provide useful information on a number of topics of interest to both employers and participants. Videos of interest to employers include Maintaining Your Plan (which provides tips on what employers/sponsors can do to keep their retirement plan healthy), IRS Enforcement Priorities, Stopping Abuses in Retirement Plans, Self-Correcting Plan Mistakes (a discussion of self-correction for common plan mistakes), and Fixing Plan Mistakes Found During an IRS Audit. Increasing Your Retirement Savings and Managing Your IRA may be of interest to participants.
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.