Employee Benefits Legal Blog

DOL Issues Interim Rules for the Mental Health Parity Act

Keith R. McMurdy — Mon, 01 Feb 2010 12:53:10 -0500

The Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA), which amended the Public Health Service Act, the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code, generally is effective for plan years beginning on or after October 3, 2009. For calendar year plans, the effective date is January 1, 2010. The Departments of Labor (DOL), Health and Human Services (HHS), and the Treasury have published an interim final rule implementing the provisions of MHPAEA. The regulation is effective on April 5, 2010, and applicable to plan years beginning on or after July 1, 2010.

Also available is a DOL Fact Sheet that explains the anticipated changes and impact of the provisions in the interim final rule. It is not anticipated that this "interim" final rule will be changed between now and the July 1, 2010 final effective date.

If you are familiar with the Mental Health Parity Act of 1996 (MHPA), you are probably aware of the requirements that there be parity with respect to aggregate lifetime and annual dollar limits for mental health treatment and other major medical benefits. Since MHPA did not apply to substance use disorder benefits, MHPAEA was enacted to continue the MHPA parity rules as to limits for mental health benefits, and amended them to extend to substance use disorder benefits. Therefore, plans and issuers that offer substance use disorder benefits subject to aggregate lifetime and annual dollar limits must comply with the MHPAEA’s parity provisions.

We expect more guidance to be issued, but for plan sponsors that are concerned about compliance with the new act, start with the assumption that treatment for addiction gets the same protection as treatment for other mental illness claims. As more guidance is issued, we will post that information.

DOL's New "Safe Harbor Rule" for Employee Contributions: 7 Days

Keith R. McMurdy — Mon, 25 Jan 2010 16:40:35 -0500

Employee contributions to retirement plan have to be treated as plan assets and submitted to the plan in a timely manner. The old rule required that while employee contributions had to be segregated from the employer's general assets, there was limited guidance about how long the employer had to submit those withheld contributions to the plan. There is a requirement that they be submitted in a "reasonable" time frame at the earliest reasonable date, not later than the 15 business days into the month following the month in which employee contributions were withheld. But there was no "safe harbor" defining what would be reasonable.

Now, at least for small plans, there is a "safe Harbor" of 7 business days. Employers that sponsor a plan covering fewer than 100 participants (small plans) will be deemed to be in compliance with the "earliest possible date" if contributions are remitted to the plan within 7 business days. Any plan sponsor who remits the contributions within the 7-day window will be considered as having made a timely deposit.

This is important because plan participants assume employers put money into a 401(k) plan on the day it is withheld. In a volatile stock market, timing can be everything. Employee can claim that any delay in remittance was a breach of fiduciary duty because it hurt plan participants. At least now, a plan sponsor can use the 7-day rule as a safety net to be able to confirm satisfaction of fiduciary responsibilities.

The contributions don't have to be allocated within 7 days, only contributed to the plan. The 7 business days are counted from the day amounts are withheld. The effective date of the rule is January 14, 2010. The safe-harbor period applies on a deposit-by-deposit basis, so failure of one deposit does not take the safe-harbor away for future deposits. The 7-day rule also applies to welfare plans and cafeteria plans. This rules does not apply to large (over 100 participants) plans. They are still governed by the "15th-business day of the next month" guideline.

So if you are the sponsor of a small plan, I highly recommend that you review your administrative procedures to take advantage of the 7-day safe harbor and review with your plan service providers their procedures to ensure quick transmission of employee contributions. Failure to comply does not necessarily mean that a fiduciary duty has been breached, but it is better to be "safe harbor" than sorry.

Sick Pay Plans: Does ERISA Care?

Keith R. McMurdy — Wed, 20 Jan 2010 10:16:35 -0500

As of November 30, 2009, 15 states had proposed mandatory sick-leave laws to require employers to provide paid sick days to employees. San Francisco, Milwaukee and Washington DC have municipal ordinances that require some mandatory sick leave and the New York City council has proposed similar regulation. Federal regulation was proposed on both the Senate and the House of Representatives. The purpose of this entry is not to survey the state or cities that have adopted these regulations, and if you have concerns that you might be subject to mandatory sick leave laws, I encourage you to reach out to your attorney at Fox Rothschild and make sure you are in compliance.

Instead, I am looking at whether an employer can create a "sick pay plan" to satisfy the obligation to pay sick days and create an ERISA governed welfare plan. Such a plan might be beneficial for an employer for tax purposes or administrative purposes, or it might be part of preserving employee good will. Under IRC sections 105 and 162, a business cannot deduct wages paid to a disabled employee. The key word is wages. IRC section 106 requires that a company pay wages only to employees who render services. However, a company can pay wages to disabled employees under a section 105 qualified sick-pay plan (QSPP).

Generally 29 CFR 2510.3-1 provides that the definition of "employee welfare benefit plans" in Section 3(1) of ERISA does not include arrangements that pay an employee's normal compensation, out of the employer's general assets, on account of periods of time during which the employee is physically or mentally unable to perform his or her duties, or is otherwise absent for medical reasons. This "sick pay" exclusion is designed to exempt from ERISA requirements payroll and employment practices when the benefits are uninsured and paid out of the employer’s general assets, such as vacation pay, holiday pay and short-term disability pay or sick leave.

Generally we can assume that disability plans, when funded through insurance, are probably ERISA plans. But what about a truly "short term" type of benefit that provides compensation for something like 5 missed work days? Going back to PWBA Advisory Opinion 96-16A (8/27/1996), the DOL looked at a three phase disability plan that provided compensation replacement coverage for three disability periods: really short (5 to 10 days), short (11 days to one year) and long term (more than one year until retirement). The plan replaced compensation where absences was due to illness or injury. The plan was unfunded and paid out of the general assets of the company, but the Company retained discretion to pay benefits through a group disability income insurance policy, a trust or a separate account.

The specifics of this plan are not so interesting as the DOL's decision that the entire arrangement was not a "payroll practice" within the meaning of 29 CFR 2510.3-1. But what if "phase one" coverage (5-10 days) was separated out? Would that sick-pay arrangement have qualified? What about a sick pay plan covering days 1-4? In this case, I believe the answer lies somewhere closer to our analysis of severance plans and the determination of whether they should be treated as ERISA plans. For example, we look to things like the funding arrangement and the ongoing administrative requirements. An employer who pre-funds sick pay at the beginning of the year, or sets aside a trust from which sick-pay benefits are paid may be creating something outside the payroll function. If the sick pay arrangement requires some additional administration beyond a simple payment of wages (such as cost of living adjustments or eligibility requirements) would appear to look more like a "plan" rather than a payroll practice.

Ultimately this brings me back around to Qualified Sick Pay Plans (sometimes referred to as "salary continuation plans") under IRC Section 105. These plans solve the issue by creating an ERISA plan that provides for sick pay. As with other ERISA plans, you have to have appropriate documentation and administration. It has to be funded in some fashion and can be done through the purchase of insurance. A Qualified Sick Pay Plan may also permit a business owner from paying himself (or herself) a salary while disabled, and then deducting the payments allowable business expense.

So if you are in a jurisdiction considering mandating sick pay, it might be worthwhile for your company to consider a Qualified Sick Pay Plan, not as a means of avoiding the law, but as a means of using this framework to minimize potential negative financial impact of those laws.

DOL Issues Updated Model Notices for COBRA Subsidy Extension

Keith R. McMurdy — Thu, 14 Jan 2010 09:28:11 -0500

As promised in my last entry, the DOL has issued model notices to help plans and individuals comply with these requirements. Each model notice is designed for a particular group of qualified beneficiaries and contains information to help satisfy ARRA's notice provisions, including those added by the 2010 DOD Act the extend the subsidy period through Feb. 28, 2010.

The DOL Notices are available using the DOL website. Click here for that connection.

Plans subject to the Federal COBRA provisions must provide the Updated General Notice to all qualified beneficiaries (not just covered employees) who experienced a qualifying event at any time from September 1, 2008 through February 28, 2010, regardless of the type of qualifying event, and who have not yet been provided an election notice. This model notice includes updated information on the premium reduction as well as information required in a COBRA election notice.

Plan administrators must provide notice to certain individuals who have already been provided a COBRA election notice that did not include information regarding ARRA, as amended. The model Premium Assistance Extension Notice includes information about the changes made to the premium reduction provisions of ARRA by the 2010 DOD Act. This notice should go to:

Individuals who were "assistance eligible individuals" as of October 31, 2009 (unless they are in a transition period - see below), and individuals who experienced a termination of employment on or after October 31, 2009 and lost health coverage (unless they were already provided a timely, updated General Notice) must be provided notice of the changes made to the premium reduction provisions of ARRA by the 2010 DOD Act by February 17, 2010;
Individuals who are in a "transition period" must be provided this notice within 60 days of the first day of the transition period. An individual's "transition period" is the period that begins immediately after the end of the maximum number of months (generally nine) of premium reduction available under ARRA prior to its amendment. An individual is in a transition period only if the premium reduction provisions would continue to apply due to the extension from nine to 15 months and they otherwise remain eligible for the premium reduction.

Individuals who experienced a qualifying event (that was a termination of employment) in December 2009 but who were not eligible for COBRA coverage until January 2010 were likely not provided proper notice of the extension. These individuals should get the Updated General Notice AND the full 60 days from the date the updated notice is provided to make a COBRA election.

Insurance issuers that provide group health insurance coverage must send the Updated Alternative Notice to persons who became eligible for continuation coverage under a State law. Continuation coverage requirements vary among States and issuers should modify this model notice as necessary to conform it to the applicable State law.

More COBRA Subsidy Communications from the DOL

Keith R. McMurdy — Tue, 12 Jan 2010 10:37:59 -0500

The US Department of Labor has provided 2 more Fact Sheets regarding the COBRA subsidy extension. One is a Fact Sheet that provides a general explanation of the extension. The second is a Frequently Asked Questions sheet that answers some more specific questions from an employee's point of view.

I found these notices particularly useful because the introduce the concept of "transition period" as it relates to the change from 9 months to 15 months. An individual’s “transition period” is the period that begins immediately after the end of the maximum number of months (generally nine) of premium reduction available under ARRA prior to its amendment. An individual is in a transition period only if the premium reduction provisions would continue to apply due to the extension from nine to 15 months and they otherwise remain eligible for the premium reduction. Individuals in a transition period must be provided notice of the extension within 60 days of the first day of their transition period. The notice must include information on the extension from nine to 15 months and the ability to make retroactive payments for certain unpaid reduced premiums.

Neither sheet specifically addresses what happens if an individual who would otherwise be eligible for the subsidy allowed the COBRA coverage to lapse prior to November 30, 2009. But prior explanations provide that if an individual lost COBRA coverage because of expiration of eligibility (or failure to pay premiums) before exhaustion of the full 9 months and BEFORE 11/30/09, that individual cannot jump back into COBRA and get the additional 6 months. There is no new "special election period" as there was under the first subsidy bill.

Bear in mind that there will probably be further revision to the COBRA subsidy rules as we get close to the 2/28/2010 sunset of this provision, so be prepared to issue new notices as more regulation and guidance are given.

Section 409A Plan Document Correction Program Relief

Keith R. McMurdy — Fri, 08 Jan 2010 14:54:30 -0500

In Notice 2010-6, which was published in early January, the IRS at long last provided guidance as to how taxpayers may voluntarily correct certain document failures that otherwise would cause a nonqualified deferred compensation plan to contravene the requirements of Internal Revenue Code Section 409A, triggering severe income tax consequences. The Notice also clarifies earlier guidance dealing with operational failures by nonqualified deferred compensation plans.
Susan Jordan and Seth Corbin of our Pittsburgh office have prepared an excellent summary that can be accessed here.

IRS Explains Nonspousal Rollover Distributions

Keith R. McMurdy — Wed, 06 Jan 2010 14:36:02 -0500

Having spent the holidays catching up on some professional reading, I came across the IRS Fall 2009 issue of Retirement News for Employers which has some valuable information about .

Non-spousal rollovers were not available before the new Pension Protection Act provision, which became effective for distributions made after December 31, 2006. After PPA, plans were permitted to allow non-spouse beneficiaries the option of rolling over distributions, but plans were not required to provide that option. The Worker, Retiree and Employer Recovery Act of 2008 makes the non-spousal rollover provision mandatory for plan years beginning after December 31, 2009.
Plans will have to offer the rollover alternative to non-spouse beneficiaries receiving plan death benefits.

Plans are required to offer a non-spouse beneficiary the option to do a direct rollover (a trustee-to-trustee transfer) of an eligible rollover distribution to an inherited IRA. Plan administrators are required to give all non-spouse beneficiaries a written notice explaining the direct rollover rules and the mandatory 20% income tax withholding rules for distributions not directly rolled over. This explanation should be provided to the non-spouse beneficiary no earlier than 180 days and no later than 30 days before making the distribution. The good news is that sample notices to non-spouse beneficiaries are available in IRS Notice 2009-68.

Rollover must be to inherited IRA. The IRS makes clear that a non-spouse beneficiary can only roll over the distribution of an inherited amount into an inherited IRA. Under an inherited IRA, the designated non-spouse beneficiary:

cannot make any contributions to the inherited IRA;
cannot roll over any amounts into or out of the inherited IRA, but may do a trustee-to-trustee transfer into another inherited IRA in the original deceased account owner's name with the same beneficiary;
has the same basis in the inherited traditional IRA assets as the original deceased account owner;
may not combine the basis in this inherited IRA with the basis in his or her own traditional IRAs, or any of his or her other inherited IRAs;
will not owe taxes on the inherited traditional IRA assets until he or she receives distributions from the IRA; and
must begin receiving distributions under the beneficiary distribution rules.

So as we start out 2010, add model notice 2009-68 to your plan administration repertoire and use when necessary. And if you have not looked at the new required amendments for 2010, consider reaching out to your plan professionals or legal counsel for information about what you might be missing.

The Latest from the DOL on COBRA Subsidies

Keith R. McMurdy — Mon, 28 Dec 2009 13:28:30 -0500

The DOL issued a fact sheet regarding the extension of the COBRA premium subsidy on December 23 and it is available here. I think there are some points of clarification that are important in the notice.

First, while the period for measuring the involuntary termination for eligibility must occur during the period that began September 1, 2008 and ends on February 28, 2010, the premium reduction period in this extension only applies to periods of health coverage that began on or after February 17, 2009 and lasts for up to 15 months.

Second, the extension of the COBRA premium reduction eligibility period is currently only for two months until February 28, 2010. In addition, individuals who had reached the end of the reduced premium period before the legislation extended it to 15 months will have an extension of their grace period to pay the reduced premium. To continue their coverage they must pay the 35 percent of premium costs by February 17, 2010, or, if later, 30 days after notice of the extension is provided by their plan administrator.

Third, the notice seems to make clear that there is no premium reduction for premiums paid for periods of coverage that began prior to February 17, 2009. Therefore, individuals whose nine months of subsidy expired before the passage of this extension would not be able to "re-elect" this extra six months of subsidy.

Fourth, individuals who lost their subsidy and paid the full 100 percent premium in December 2009 should contact their plan administrator or employer sponsoring the plan to discuss a credit for future months of coverage or a reimbursement of the overpayment.

My interpretation is that if an individual exhausted their nine months of subsidy eligibility prior to November 30, 2009, or who dropped COBRA coverage prior to November 30, 2009 and did not pay December premiums would not be eligible to receive the additional 6 month extension. So you have to be on COBRA, receiving the subsidy, and paid current thought November 30, 2009 to get the additional 6 months, which would then allow you to retroactively receive a refund of 65% from your December 2009 premiums.

Going forward, the new subsidy period is 15 months, so individuals who have not used up all 9 months of their subsidy eligibility should be told about the extension. We are expecting a sample notice to be circulated shortly.

....and now the Senate Passes the COBRA Subsidy Extension

Keith R. McMurdy — Mon, 21 Dec 2009 09:20:00 -0500

Following up on last Friday's entry, the Senate approved the same extension of the COBRA subsidy that the House passed. The nine-month, 65% premium subsidy is extended by six months to a total of fifteen months. The subsidy now is available to those who involuntarily lose their jobs through Feb. 28, 2010. The legislation also provides an additional six months of subsidized coverage for beneficiaries whose initial nine month COBRA premium subsidy has run out. In addition, the legislation gives beneficiaries whose subsidy ran out and who did not pay the full premium a second chance to opt for coverage. For example, a beneficiary whose nine months of subsidized coverage ran out Nov. 30 and who did not pay the regular unsubsidized December, 2009 premium can pay the 35% premium share in January, 2010 and receive coverage for December. The legislation requires employers to notify current COBRA beneficiaries and future beneficiaries of the new 15-month premium subsidy.

The legislation applies to coverage under the federal COBRA law and Public Health Act and any state continuation laws ("mini-COBRA"). The law provides a subsidy for continuation coverage for any employee or dependent who loses coverage under a group health plan during the period beginning September 1, 2008 and now ending on February 28, 2010. If an employee or dependent meets the definition of "qualified beneficiary" under COBRA, that person is eligible for a subsidy if he or she is entitled to COBRA as a result of the employee's involuntary termination of employment.

Qualified beneficiaries are required to pay only 35% of the required continuation premium for up to fifteen months, while the employer is required to pay the remaining 65% of the premium. The respective portions of the premiums are based on the continuation premium that would have otherwise been required to be paid by the qualified beneficiary. If the employer has already agreed to pay a portion of the COBRA premium as part of a severance agreement or other shut-down arrangement, the employee would need to pay only 35% of the portion of the premium not paid by the employer.

For plans subject to federal COBRA (insured, self-insured or self-funded), employers must cover the remaining 65% percent of the premium, but are entitled to a refundable credit taken toward payment of payroll taxes. The credit is applied as though the employer had submitted an equivalent amount of payroll tax on the date the qualified beneficiary's payment is received. This payroll tax credit only applies to COBRA premiums paid by the employer by reason of the law so employers who voluntarily agree to pay portions of COBRA premiums as a result of any other arrangement would not be entitled to the payroll tax credit.

The subsidy is not available to all former employees and their dependents. The subsidy does not apply for any months that begin after the qualified beneficiary becomes eligible for coverage under another "group health plan" or Medicare. So the subsidy ends when the COBRA period would normally end. If a qualified beneficiary becomes eligible for another group health plan or Medicare during the subsidy period, the qualified beneficiary must provide notice of such eligibility to the plan. A qualified beneficiary who does not provide this notice is liable for 110 percent of the improperly paid subsidy amount.

There is an income limitation that applies to qualified beneficiaries, but the employer is not required to administer or account for the income of the beneficiary when providing the subsidy. A qualified beneficiary is not entitled to a COBRA subsidy during a year in which he or she is a taxpayer, or spouse or dependent of a taxpayer, whose federal modified adjusted gross income exceeds $145,000 (or $290,000 in the case of a taxpayer filing a joint return). The available COBRA subsidy is reduced for years in which gross income exceeds $125,000 (or $250,000 for joint returns). Qualified beneficiaries will be required to account for the subsidy on their own tax return so the employer will not be required to make any adjustment to its payment of the subsidy. As a result of the income limitation and other requirements for eligibility, qualified beneficiaries must make an election to receive the COBRA subsidy following notice of potential eligibility.

What is Required?

Immediately change COBRA election notices to incorporate this new law by advising newly potentially eligible former employees and beneficiaries that the COBRA subsidy is available for 15 months (changed from nine months) relating to an involuntary termination of employment occurring on or before February 28, 2010 (changed from December 31, 2009).
Advise currently eligible beneficiaries who have elected the COBRA subsidy that eligibility has been extended from nine to fifteen months. This notice is required to be issued within 60 days from enactment (which is expected this week) to anyone who was receiving the subsidy on or after October 31, 2009. The U.S. Department of Labor is expected to issue model notices.
Provide special notice to those individuals who lost assistance of the ability to make retroactive premium payments. Payment of the premium must be made within 60 days of enactment of the law or 30 days from notice, whichever is later

.We are anticipating that additional guidance, model notices and regulatory explanations will follow over the next several weeks. In the interim, employers should prepare for immediate implementation of the COBRA subsidy extension and consider its impact in any decisions involving force reductions. For more information, or for assistance in compliance, please contact Steven K. Ludwig at 215-299-2164 or Keith McMurdy at 212-878-7919.

House Passes COBRA Subsidy Extension

Keith R. McMurdy — Fri, 18 Dec 2009 09:54:57 -0500

On December 16, the U.S. House of Representatives approved legislation that would extend the federal subsidy of COBRA premiums for employees who were involuntarily terminated.

H.R. 3326, which was actually a bill that provided for Defense Department funding, include a provision that would extend the 9 month subsidy period by an additional 6 months (for a total of 15 months) and would extend the eligibility period to persons who have an involuntary termination through February 28, 2010. The subsidy remains at 65% of premium, meaning employees would still pay 35%.

It appears that the general intent of the bill is to extend edibility through 2/28/2010. There are no specific details yet with respect to whether those who have exhausted the 9 month existing subsidy could obtain the additional 6 months, or if those who have dropped COBRA coverage prior to 12/31/09 because of exhaustion of the subsidy will be eligible to re-elect coverage to take advantage of the extension. Those details would have to come from the IRS and DOL, assuming the measure passes the Senate.

Also, H.R. 2847 is still pending with a provision to extend eligibility through June 30, 2010. As with H.R. 3326, details are still missing concerning retroactive application but we anticipate guidance on that issue if either (or both bills) ultimately become law. Stay tuned.

2010 Compensation and Benefits Limits: In Case You Forgot

Keith R. McMurdy — Thu, 10 Dec 2009 16:39:15 -0500

In preparation for the 2010 plan year, I wanted to remind everyone of some of the applicable limits for benefit plans. Most of these are unchanged from 2009, but there are some significant changes for health savings accounts:

Maximum Annual Pension (defined benefit): $195,000
Maximum Annual Addition (defined contribution): $49,000
401(k)/403(b)/457 Deferrals: $16,500
"Catch-up" Contribution: $5,500
Compensation Limit: $245,000
Highly Compensated: $110,000
HSA Annual Contribution Limit (Single): $3,050
HSA Annual Contribution Limit (Family): $6,150
HDHP Minimum Deductible (Single): $1,200
HDHP Minimum Deductible (Family): $2,400
HDHP Maximum Out-of-Pocket (Single): $5,950
HDHP Maximum Out-of-Pocket (Family): $11,900
HSA "Catch-up" Contribution Limit: $1,000

Also, the Social Security Wage Base remains at $106,800 and for 2010, there is a 0% cost of living increase.

Some Follow Up on The COBRA Subsidy

Keith R. McMurdy — Fri, 04 Dec 2009 15:19:51 -0500

As the 12/31/09 deadline approaches for eligibility for the COBRA subsidy, and with no extension yet approved, I wanted to go ahead and add some additional comments about the subsidy and eligibility.

First, I have received a lot of questions about whether there has to be an actual loss of coverage prior to 12/31/09 or if the qualifying event is enough. Under one scenario, the employee is terminated on 12/10/09, but has coverage through the end of the month. So he does not lose coverage until January 1, 2010. That person does not appear to be eligible for the subsidy because they did not have both a qualifying event AND a loss of coverage prior to 12/31/09. So they would not be eligible for the subsidy.

Second, I have received a number of questions from elected officials about their eligibility. The IRS guidance states the following: An elected official that ran for office and was not re-elected and is out of office prior to 12/31/09 is considered to be involuntarily terminated; An elected official that completed his or her term prior to 12/31/09 and was precluded from running for re-election because of term limits is considered involuntarily terminated; An elected official who was eligible to run for re-election and chose not to run is considered to have voluntarily terminated and is not eligible for the subsidy.

I will continue to post as we get closer to the 12/31/09 deadline, so watch for additional guidance and commentary.

DOL Issues More Guidance on COBRA Continuation Assistance

Keith R. McMurdy — Wed, 02 Dec 2009 12:10:20 -0500

In response to multiple questions about the COBRA Subsidy Assistance, the Department of Labor has created an updated website that can be accessed here. Although the COBRA subsidy assistance has not been extended beyond December 31, 2009, there are bills pending in congress that would possibly extend it. I believe that this effort by the DOL to provide more guidance indicates that there is likely an extension coming.

DOL Issues Revised Employment Law Guide

Keith R. McMurdy — Mon, 30 Nov 2009 14:03:56 -0500

The United States Department of Labor (DOL) has issued revised version of their Employment Law Guide and the First Step Employment Law Advisor, which are both available online here.

Ordinarily I would shy away from talking about general labor and employment topics, but I think it is very important for plan sponsors who are also employers to be aware of important compliance issues. Because of the significant interaction between employment laws and benefit laws, I find that I routinely have to be cognizant of various general employment issues that impact benefit offerings and administration of benefit plans. The employment law guide does include topics for health benefits and retirement benefits and they do have good information about record keeping standards for benefit plans. There is also a link to the Reporting and Disclosure Requirements for Employee Benefit Plans, a guide published in October of 2008 that lists all required documentation for benefit plans under federal law.

In addition, the Guide includes information about FMLA, wage and hour requirements and various workplace standards and postings that can help employers self-audit their employment practices. There are also links for OSHA requirements and immigration standards, as well as the whistle-blower laws and WARN laws.

The First Step Employment Law Advisor is an interactive tool that allows employers (or potential employers) to create a customized "results" list of federal laws that apply to them. While it does not cover state laws, I found the information provided for federal regulations to be fairly comprehensive and easy to understand. It would be a good resource for any employer looking to verify their employment practices.

In sum, I guess this entry is simply a reminder of the importance of general compliance in all forms of employment practices, not just employee benefits. If you are an employer and a plan sponsor, I think these guides would be worth a look. Of course if the standards presented raise any questions or concerns about your benefit or employment practices, you can reach out to your attorney at Fox Rothschild for more detailed assistance.

Target Date v. Target Risk Funds: Is Either One Better for Your Plan?

Keith R. McMurdy — Mon, 23 Nov 2009 11:35:05 -0500

The Pension Protection Act (PPA) seems to have opened the market of investment options available for the qualified default investment alternatives (QDIA) and, in my opinion, encouraged the implementation of QDIA as a means of protecting plan participants who do not actively pay attention to their plans. I am not suggesting that either target date fund or target risk funds are a superior option for a QDIA, but if a plan administrator is not familiar with these terms, it would be wise to investigate further.

A "target date" fund is designed to reallocate investments automatically as a participant comes closer to retirement age (end target date of retirement). The idea behind these funds is that the investment will be managed with eye toward maximizing investment return with a changing risk level based on proximity to anticipated cash-out date. They would be more conservative on risk the closer you get to the fund end date. "Target risk" funds, however, are designed to expose the participant to a static risk level over the life of the investment and do not have a changing exposure to risk, but may change investments. These funds typically have conservative, aggressive and moderate risk levels.

Unlike target date funds, which assume that the participant's level of risk should decrease as they get older, target risk funds assume that the participant themselves (or the plan administrator in the case of a QDIA) will diversify into other risk level funds as needed over the life of their investments. For example, the assumption is that as a participant gets closer to retirement, they will shift their defined contribution allocation from "aggressive" to "moderate" or "conservative" of their own accord. But which is better for QDIA purposes? Should you choose a QDIA option that is risk specific or retirement age specific?

Remember that a QDIA, to provide protection for fiduciaries, the final regulations provide four QDIA investment alternative mechanisms, rather than specific products. An example of a product for each category is provided.

A product with a mix of investments that takes into account the individual’s age, retirement date, or life expectancy (for example, a life-cycle or targeted-retirement-date fund);
A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (for example, a balanced fund);
An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date (for example, a professionally-managed account); and
A capital preservation product for only the first 120 days of participation. This eases administration, for example, in the case of workers that opt-out of participation within 90 days. After 120 days, the plan fiduciary must redirect the participant’s investment into the above three QDIA categories (unless the participant opted-out of the plan or redirected investments during the 90 days).

The QDIA does not have to constitute a single investment option (such as a target date fund), but could consist of several options (such as part aggressive, part conservative, part moderate target risk fund). I think it is important for plan sponsors, in selecting appropriate fund options for QDIAs, to take into account the plan population and be aware of potential impact of each QDIA investment option. The plan fiduciary must also prudently select and monitor an investment fund, model portfolio, or investment management service within any category of QDIAs. For example, a plan fiduciary that chooses an investment management service must undertake a careful evaluation to prudently select among different investment services.

So it is possible that target date funds are best for your plan. It is also possible that target risk funds are the better option. But in any event, both should be considered as part of an informed fiduciary decision regarding QDIA options. One may not be better than the other. But plan sponsors should definitely make themselves aware of the positives and negatives of both if they are to be included (or excluded) from the QDIA.

Defined Benefit Plan Sponsors: Don't Forget to Post Your 5500

Keith R. McMurdy — Tue, 17 Nov 2009 16:24:19 -0500

The Pension Protection Act ("PPA") created a number of notice and reporting requirements, and plan sponsors are starting to send out various notices to participants. The Department of Labor ("DOL") is starting the process of issuing guidance and coming into its own compliance obligations. But I think there is one provision that might have been overlooked because of the timing of the requirement.

The PPA requires that defined benefit plans must disclose actuarial information related to the funding status of the plans. The PPA provides that this information must be posted on the employer’s intranet for all plan years beginning after December 31, 2007. This would mean that the 2008 5500, normally due by October 15, 2009, should be posted now (assuming it was filed). Employers that sponsor calendar-year defined benefit pension plans are now required to post the actuarial information included on the 2008 Form 5500. Of course, this requirement only applies to employers who maintain an intranet site for employee communications and does not obligate employers to create such an intranet site. So if you have a company intranet website, and a defined benefit plan, this requirement applies to you.

The new rules provide that the information that must be posted is the identification, basic plan information and actuarial information included in the annual report. It must be filed with the DOL (electronically) and must be available on the employer’s intranet site. It does not appear that the statute obligates employers to post the entire 5500 including all schedules. Rather it appears to be limited to the identification information in Part 1, basic plan information from Part 2, and the actuarial information in Schedule SB. So while it would seem that service provider information on Schedule C might be relevant, it is not required to be disclosed.

Unfortunately the DOL has provided no guidance with respect to when employers must post the plan information, or in what format it must be posted. However, the DOL has 90 days to post their version of the filing under the new rules, so it is probably reasonable to infer the same 90 days would apply to an employer. Most likely, an employer can post the filing as a .pdf document and would be in compliance but there is nothing formal on that issue.

The PPA also made some other changes to participant disclosure requirements for defined benefit plans. One significant change is that it eliminated the obligation to provide summary annual reports. However, it replaced that obligation with the 5500 posting requirement outlined above, and an annual funding notice requirement that describes the funding status of the plan. So for employers, not only do we have to send notices regarding funding status, but we have to post the 5500. Remember, this is for defined benefit plans, not defined contribution plans.

Granted, this posting requirement is not an epic change in comparison to some of the other requirements of the PPA. But for plan sponsors committed to full statutory compliance, this is one that should not be overlooked.

Changing Your Benefit Plans: Reservations Required

Keith R. McMurdy — Tue, 10 Nov 2009 13:47:28 -0500

Whenever I consider trying a new restaurant, I check to see about reservations. Some places list them as "preferred," "required," "suggested" or "not taken." Even establishments that require reservations may not really require them, but the thought of having to plan in advance sort of kills the adventure of changing plans. Well, when it comes to administration of benefit plans, reservations are not only a good thing, they are absolutely required.

In this case, I am referring to reservation provisions in plans that allow the plan administrator to suspend, modify, amend or terminate any particular plan or benefit provided thereunder. A well-drafted plan document (and corresponding summary plan description) will include plain language reserving the right of the sponsor to change the plan and modify benefits which then allows for a defense to claims that a particular benefit is guaranteed to participants. The general rule is that for a plan to be able to change things, it has to tell participants that it has the ability to make changes.

Recently, the U.S. District Court for the Southern District of Iowa looked at a case where a class of retirees claimed that their former employer violated ERISA by amending their health insurance plan to eliminate certain medical benefits. The retirees claimed that their right to the benefits was "vested" because they believed it was promised they would never lose benefits. After trial, the Court ruled that the existence of a provision in the company plan providing that it could be amended or terminated at any time acted as a bar to any claim that the benefits could never be modified. If a plan specifically reserves the right to change, then it can't be denied the ability to change. See Brubaker v. Deere & Co., 08-CV-00113.

A reservation provision does not automatically provide an unfettered ability to modify plans. Certainly there are numerous cases providing that separately bargained agreements or contracts can provide a specific limitation to the ability of a sponsor to amend a plan (like collective bargaining agreements or supplemental retirement programs). But reservations provisions do provide some measure of protection to plan sponsors from general claims that amendment is prohibited. At a time when many employers are looking at changing benefit plan structures to control costs, I would certainly recommend checking first to see if the plan has reserved the right to make the changes in advance of any decision to cut benefits. And if your plan does not include such a provision, it should be amended to protect the sponsor going forward.

IRS Guidance on Required Minimum Distributions for 2009

Keith R. McMurdy — Tue, 03 Nov 2009 17:01:43 -0500

In late 2008, Congress passed the Worker, Retiree and Employer Recovery Act ("WRERA"). It included a waiver of required minimum distributions (RMDs) for retirement plans for calendar year 2009. In some situations, RMDs were made anyway, either because plan administrator were not prepared to make changes or they were concerned about sticking closely to plan language. Fortunately, the IRS has issued come guidance on how to handle the situation. Notice 2009-82 provides relief for people who have already received a 2009 RMD this year. Individuals now generally have until the later of Nov. 30, 2009, or 60 days after the date the distribution was received, to roll over the distribution.

Remember, generally, a required minimum distribution is the smallest annual amount that must be withdrawn from an IRA or an employer’s plan beginning with the year the account owner reaches age 70½. The 2008 law waives required minimum distributions for 2009 for IRAs and defined contribution plans (such as 401(k)s) and allows certain amounts distributed as 2009 RMDs to be rolled over into an IRA or another retirement plan.

The notice also provides guidance for retirement plan sponsors. It contains two sample plan amendments that plan sponsors may adopt or use to amend their plans to either stop or continue 2009 required minimum distributions. Both sample amendments provide that participants and beneficiaries can choose to receive or not to receive 2009 required minimum distributions. Also, both sample amendments allow the employer to offer direct rollover options of certain 2009 required minimum distributions. Plan sponsors may need to tailor the sample amendment to their plan’s particular terms and administration procedures and must adopt the amendment no later than the last day of the first plan year beginning on or after Jan. 1, 2011 (Jan. 1, 2012 for governmental plans).

Notwithstanding the amendment, employers must decide what to do about RMDs before November 30, 2009. Employers must decide whether to (1) suspend all RMDs for 2009 unless the participant affirmatively requests the distributions, (2) distribute all RMDs unless the participant affirmatively requests a waiver, or (3) continue RMDs for 2009 in accordance with the existing plan provisions without any participant choice. Plan must be operated in accordance with the administrative procedures after November 30, 2009

So the action plan would be as follows:

Decide your administrative option
Select the Appropriate Amendment (if you are making a change)
Notify the Participants

Note that there is no inidication that RMD waivers will be permitted for 2010.

If you have questions about RMDs and your retirement plan, please contact a Fox Rothschild attorney for assistance.

Deadline for Medicare Part D Notice is Upon Us

Keith R. McMurdy — Wed, 28 Oct 2009 15:29:10 -0500

Theresa Borzelli, a partner in our Roseland office, provides the following update on Medicare Part D notice requirements:

The November 15 deadline for providing the Medicare Part D creditable coverage notice is fast approaching. This annual Notice must be provided by an employer who sponsors a health plan with prescription drug coverage. The Notice explains the benefits provided under the prescription drug plan and whether the employer's plan is at least equal to the prescription drug benefits offered under Medicare Part D so the participant can make an informed decision as to whether to enroll in Medicare Part D. This November 15 deadline coordinates with the start of the annual Medicare Part D open enrollment.

This Notice of Creditable Coverage must be provided

--- at least annually before November 15;
--- whenever a Medicare-eligible employee enrolls in the employer's health plan;
--- whenever there is a change in the creditable or non-creditable status of the employer's health plan's prescription drug benefit coverage;
--- whenever an individual requests the Notice.

Employers who establish their own Part D comparable plan or who contract for such a plan do not have to provide the Notice.

The Centers for Medicare and Medicaid Services (CMS) includes sample Notices and guidance on its website.

QDROs: Does a "Sham Divorce" Matter?

Keith R. McMurdy — Tue, 27 Oct 2009 16:12:07 -0500

Interesting economic times create interesting problems for plan administrators. Consider the possibility that a couple may get divorced solely for the purpose of withdrawing pension benefits from a pension plan. Seem far fetched? Well, not really.

In Brown v. Continental Airlines, the Court in the Southern District of Texas considered a case where pilots, concerned about the health of their pension plan, got divorced and had QDROs submitted that called for distribution of their pensions to their ex-spouses. The plan administrator became concerned that the pilots were continuing to live with their ex-spouses as if no divorce had occurred or even remarried their ex-spouses after the distribution was made. The plan administrator sought to have the distributions returned to the plan because it believed the divorces were "sham transactions."

The good news for plan administrators and sponsors is that the Court confirmed that the administrator could rely on the QDRO. Orders have to be obeyed unless they fail under the specific terms of the statute.

What information must a domestic relations order contain to qualify as a QDRO under ERISA? QDROs must contain the following information:

The name and last known mailing address of the participant and each alternate payee
The name of each plan to which the order applies
The dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee
The number of payments or time period to which the order applies

And there are certain provisions that a QDRO must not contain:

The order must not require a plan to provide an alternate payee or participant with any type or form of benefit, or any option, not otherwise provided under the plan
The order must not require a plan to provide for increased benefits (determined on the basis of actuarial value)
The order must not require a plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO
The order must not require a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and his or her subsequent spouse

But the administrator is not required to (nor apparently allowed to) divine the intent of the parties when creating the QDRO. If the requirements are met, it must be treated as valid.

So while the plan administrator in this case did not get the money back, for the rest of us it affirms that following your statutory duties and confirming that the QDRO meets the requirements of the law is enough. Plan administrators do not have to evaluate whether the purpose of the QDRO (or the divorce) is to circumvent the other requirements of the plan.