Client Alert from the Employee Benefits Group - November 2010
2010 Year-End Compliance Checklist for
Employee Benefit Plans
By Jeremy J. Sharp
With 2010 rapidly drawing to a close, employers should be mindful of a number of compliance issues relating to employee benefit plans to ensure that they comply with applicable legislative and regulatory guidance. The following list summarizes a number of compliance issues for employers to consider as the year-end approaches:
QUALIFIED PLANS
Defined Contribution (DC) Plans:
Minimum Required Distribution Waiver: Required minimum distribution ("RMD") rules under the Internal Revenue Code (the "Code") generally require that annual minimum distributions begin once a participant reaches age 70 1/2. The Worker, Retiree and Employer Recovery Act of 2008 ("WRERA") permitted plans to depart from the normal RMD rules for 2009, and offered multiple alternatives to plan sponsors for the RMDs that would have been made for the 2009 calendar year. For employers who have already adopted this change administratively, but have not yet amended their plans in writing, such amendment must be completed by December 31, 2010.
Diversification of Publicly-Traded Employer Stock: On May 19, 2010, the IRS published final regulations under Code Section 410(a)(35) governing diversification requirements for employer securities held in a defined contribution plan, including the provision of multiple additional investment options and the right to divest accounts from employer securities. Amendments to comply with the final regulations must be adopted by the end of the first plan year beginning on or after January 1, 2010.
Defined Benefit (DB) Plans:
Funding-Based Benefit Restrictions: Code Section 436 includes several funding-based restrictions upon benefit payments and accruals as well as plan amendments where a plan does not satisfy certain funding targets. Plans that are less than 80 percent funded cannot be amended to increase benefits. For plans that are between 60 percent and 80 percent funded, the amounts that the plan can use to make lump sum distributions or to purchase annuities are restricted. Plans that are less than 60 percent funded cannot make lump sum distributions nor other accelerated payments. Amendments to comply with Code Section 436 must be adopted by the last day of the plan's 2010 plan year.
Cash Balance/Hybrid Plans: In addition to other requirements, cash balance and other hybrid pension plans must provide for three-year cliff vesting, an assurance that no reduction or cessation of benefit accruals will occur based solely upon a participant's age, and interest crediting at not greater than a market rate of return. Amendments adopting these requirements must be adopted by the end of the first plan year beginning on or after January 1, 2010.
Year-End Compliance Issues for both DC and DB Plans:
Discretionary Amendments Adopted In 2010: Absent a different amendment deadline, discretionary amendments must be adopted by the last day of the plan year during which the amendment was adopted. As such, for calendar year plans, any discretionary amendment to plan design that was effective during 2010 must be reduced to writing and adopted by December 31, 2010.
Cycle E Plan Determination Letter Filings: Under the IRS' cyclical determination submission process, Cycle E employers must submit their plans to the IRS no later than January 31, 2011. Cycle E employers are those whose Employer Identification Number ("EIN") ends in either 0 or 5. Prior to submission, Cycle E plans must be amended and restated in accordance with the 2009 Cumulative List published by the IRS.
HEART Act: The Heroes Earnings Assistance and Relief Tax Act of 2008 ("HEART Act") includes a number of provisions affecting benefits under qualified plans for military personnel and their families. The deadline for amendments to comply with the HEART Act is December 31, 2010.Rollover Notices: In IRS Notice 2009-68, the IRS furnished two new safe harbor notices under Code Section 402(f) (also referred to as rollover notices) to describe the tax consequences of receiving a distribution. One of the new notices is for use with Roth accounts, the other for non-Roth accounts, and use of either will result in the plan sponsor being deemed to have complied with Code Section 402(f). Employers should consider updating their rollover notices prior to the 2010 year-end.
Rollovers to Non-Spouses: Qualified plans must permit non-spousal beneficiaries to make a direct rollover of a plan benefit. This provision was previously optional, but was made mandatory by WRERA for plan years beginning on or after December 31, 2009. As a result, qualified plans should be amended to allow such rollovers by the end of the 2010 plan year.
HEALTH AND WELFARE PLANS
Health Plans (Health Care Reform): Health care reform under the Patient Protection and Affordable Care Act ("PPACA") has introduced a number of new requirements, and employer obligations turn primarily upon whether or not a particular health plan is "grandfathered" under the PPACA rules. In addition to making plan amendments to memorialize specific plan changes made to comply with PPACA (such as changes to dependent definitions, removal of lifetime limits, changes relating to annual limits, removal of pre-existing condition exclusions for children under 19, employer's right to rescind coverage retroactively in the event of fraud or intentional misrepresentation of a material fact), new obligations include:
Extension of Coverage to Older Dependents Notice: For plan years beginning on or after September 23, 2010, PPACA mandates that group health plans that offer dependent coverage extend this coverage to dependents who have not yet reached age 26 (although grandfathered plans do not have to offer such extension to dependents who have other employer-provided health coverage available). These dependents must be provided written notice of the right to enroll and at least a 30-day period during which to enroll. In Ohio, state law provides for extension to dependents who have not yet reached age 28 and do not have other employer-provided health coverage available (Note: The Ohio state law extension applies to insured plans and generally exempts self-insured plans).
Elimination of Lifetime Limits Notice: PPACA prohibits lifetime limits for plan years beginning on or after September 23, 2010, a change that applies whether or not the plan is grandfathered. Employers must provide written notice and an opportunity to re-enroll in the plan to any participants or beneficiaries whose coverage was previously terminated due to reaching a lifetime limit.
Grandfathered Status Notice: Grandfathered plans must provide notice of grandfathered status and contact information for questions to participants in all plan materials describing plan benefits.
Patient Protection Notice: Non-grandfathered plans must provide notice to participants of certain new rights, such as the right to designate a primary care physician or pediatrician and rights relating to obstetrical/gynecological and preventive services. This notice must be provided with the plan's summary plan description or other similar description of benefits under the plan.
Health Plans (Ongoing Obligations): Of course, health care reform and PPACA left intact a number of existing obligations for employers sponsoring group health plans, including certain notice obligations:
Women's Health and Cancer Rights Act (WHCRA) Notice - annual.
Children's Health Insurance Program Reauthorization Act of 2009 ("CHIPRA") Notice - annual; the U.S. Department of Labor ("DOL") published a model CHIPRA notice in February 2010.
Medicare Part D Notice of Creditable/Non-Creditable Coverage - annual; on or before November 15th.
HIPAA Notice of Privacy Practices - at least every three years (full notice or simple reminder notice as to how to obtain copy of full notice).
Cafeteria Plans:
Amendment to Cover Older Dependents: While coverage for dependents up to age 26 is not required until the beginning of the first plan year beginning on or after September 23, 2010, some employers chose to admit these dependents early. Effective March 30, 2010, cafeteria plan, health flexible spending accounts ("FSAs") and health reimbursement accounts ("HRAs"), can extend their tax-favored coverage and benefits to such dependents, and retroactive amendment to the plan must be made by December 31, 2010. Also, even if they did not provide such coverage during 2010, cafeteria plans, FSAs and HRAs should be amended by December 31, 2010, to extend such coverage prospectively.
Over-the-Counter Drugs: Beginning in 2011, expenses for over-the-counter drugs (excluding insulin) can no longer be reimbursed from a FSA or a HRA without a doctor's prescription. Such plans must be amended by December 31, 2010, to ensure operational compliance with the new rules in 2011.
NONQUALIFIED DEFERRED COMPENSATION PLANS/EXECUTIVE COMPENSATION
Correction of Certain Document Failures: IRS Notice 2010-6, released earlier this year, established a voluntary document correction program that permits employers maintaining nonqualified deferred compensation plans to correct certain document failures under Code Section 409A. Importantly, Code Section 409A contains significant penalty taxes, and the voluntary correction program established under Notice 2010-6 can afford substantial relief from such penalties if correction of the failure is completed before January 1, 2011.
Considerations in Advance of 2011: Deferral elections and plan design amendments affecting nonqualified deferred compensation benefits that will accrue during 2011 should be completed by the end of 2010 in order to receive maximum effect while avoiding potential penalty taxes.
The information in this Client Alert is a summary of often complex legal issues and may not cover all of the "fine points" of a specific situation or court jurisdiction. Accordingly, it is not intended to be legal advice, which should always be obtained in consultation with an attorney. The lawyers in Walter & Haverfield's Employee Benefits Law Group will be pleased to assist with any questions regarding the various compliance issues discussed in this Client Alert.
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