Employee Benefits Legal Blog

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

kmcmurdy@foxrothschild.com (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

kmcmurdy@foxrothschild.com (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

kmcmurdy@foxrothschild.com (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

kmcmurdy@foxrothschild.com (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?

kmcmurdy@foxrothschild.com (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.

IRS Announces Cost-of-Living Increases for Qualified Retirement Plans

kmcmurdy@foxrothschild.com (Keith R. McMurdy) — Fri, 16 Oct 2009 09:47:26 -0500

Susan Jordan, a partner in our Pittsburgh office, shares the following:

In a news release (IR-2009-94) on October 15, 2009, the IRS announced the cost-of-living adjustments to the various dollar limitations applicable to qualified retirement plans for 2010. Virtually all of the limitations remain unchanged from 2009.

1. LIMIT ON COMPENSATION: The maximum amount of compensation that may be counted for plan purposes remains at $245,000 for plan years beginning in 2010.
2. LIMITS ON CONTRIBUTIONS AND BENEFITS. The maximum limit on annual additions to a defined contribution plan is unchanged at $49,000. The maximum annual benefit which may be accrued under a defined benefit plan will remain $195,000 as in 2009.
3. 401(k) DEFERRAL LIMIT. For purposes of 401(k) plans, the maximum limitation on voluntary salary deferrals for calendar year 2010 is $16,500 as in 2009, while the limit on catch-up deferrals by those age 50 or older increases stays at $5,500.
4. IDENTIFICATION OF HIGHLY COMPENSATED AND KEY EMPLOYEES. Effective for plan years beginning in 2010, as in 2009, a Highly Compensated Employee is any employee who (a) was a 5% owner during the current or preceding year, or (b) who received compensation from the employer during the preceding year in excess of $110,000. The dollar limit used to define a key employee in a top heavy plan under IRC Section 416(i)(1)(A)(i) is preserved at $160,000.
5. SEP THRESHOLD. As in 2009, the compensation minimum for which coverage is required for a simplified employee pension plan (SEP) is $550.
6. TAXABLE WAGE BASE. As announced separately, for the first time since 1975, when the cost of living adjustments went into effect, Social Security and Supplemental Security Income benefits will not be increased for any cost of living adjustment. In such circumstances, the statute prohibits an increase in the maximum amount of earnings subject to the Social Security tax. Consequently, the Social Security taxable wage base for 2010 will be $106,800, as in 2008. For plan years which operate on a fiscal year basis, this wage base will be effective for plan years beginning in 2010.

* * * * * * * * *
We frequently are asked to provide the contribution formula needed to maximize contributions for an individual with compensation at or above the maximum limit. The formula remains the same as applicable in 2009, so for a calendar year profit sharing plan integrated at the Social Security wage base, the contribution formula needed to achieve the maximum permissible allocation for an individual with compensation of $245,000 or more is:
16.78473% up to $106,800, plus 22.48473% in excess of $106,800 (up to $245,000)

For a calendar year 401(k) plan integrated at the Social Security wage base and using the 3% safe harbor design, the profit sharing contribution formula which, in the aggregate (with a $16,500 deferral and $7,350 safe harbor contribution), will achieve the maximum permissible allocation for an individual with compensation of $245,000 or more is:
7.05004% up to $106,800, plus 12.75004% in excess of $106,800 (up to $245,000)

Survey of States with "Extra" Dependent Coverage

kmcmurdy@foxrothschild.com (Keith R. McMurdy) — Mon, 12 Oct 2009 15:30:35 -0500

In light of New York's recent adoption of coverage for individuals up to age-29, I thought it would be worthwhile to consider what other states have passed similar laws. This is by no means intended to cover all of the specifics of each state, but I thought it was interesting to see the number of states that provide some insurance extension options to adult children.

Colorado: Adult can be eligible until the 25th birthday
Connecticut: Coverage up to age 26
Delaware: until they turn 24
Florida: up to age 25
Idaho: also until age 25
Illinois: until age 26, unless they are veterans and then to age 30
Indiana: until age 24
Iowa: under age 25
Maine: up to age 25
Maryland: also up to age 25
Massachusetts: age 25 again
Minnesota: unmarried children up to age 25
Montana: age 25
New Hampshire: until age 26
New Jersey: until age 30
New Mexico: age 25
Oregon: age 23
Pennsylvania: Age 29
Rhode Island: age 25
South Dakota: until their 29th birthday
Texas: up to their 25th birthday
Utah: until their 26th birthday
Virginia: under 25
Washington: up until age 25

Each of these states have specific rules for eligibility and age is not the only requirements. Most require children to be unmarried, and some do have residency restrictions. However, it does appear that all of these rules apply to insured policies issued specifically in those states, so self-insured or self-funded plans would not be impacted. State rules vary with respect to whether an employer is required to provide the extension, has an option, or if it is strictly a requirement on the part of the insurance company.

So, in sum, don't assume that children automatically age off of the plan if they are "of age" and not a full time student. Check with your benefit professional (or your attorney) to confirm that you are offering appropriate coverage to adult children.

"Disabled" Under the Plan v. "Disability" under the ADA

kmcmurdy@foxrothschild.com (Keith R. McMurdy) — Tue, 29 Sep 2009 09:44:34 -0500

In conjunction with the 2008 amendments to the Americans with Disabilities Act, the Equal Employment Opportunity Commission is proposing certain changes to its rules and regulations governing disability issues under the ADA. While these proposed changes may not have a direct impact on administration of disability plans, they certainly will add a level of confusion over what is and is not a "disability" when dealing with employees and plan participants.

The proposed rules impact the way disability is defined for purposes of determining whether an impairment exists. A disability is traditionally defined as something impairing major life activities. The rules somewhat broaden the definition of disability to include major bodily functions (e.g., "functions of the immune system, normal cell growth, digestive, bowel, bladder, neurological, brain, respiratory, circulatory, endocrine, and reproductive functions") as part of major life activities. The new rules will also provide that an employee no longer has to show that the employer perceived the individual to be substantially limited in a major life activity, and instead says that an applicant or employee is "regarded as" disabled if he or she is subject to an action prohibited by the ADA (e.g., failure to hire or termination) based on an impairment that is not transitory and minor. This will have substantial impact on considerations for reasonable accommodation.

I say that this should not have a significant impact on disability plans because the definition of "disabled" under most disability plans requires some showing that the participant is unable to perform the material and substantial requirements of their primary job function. Plans generally anticipate an individual becoming disabled rather that being disabled at the time of enrollment. However, I do believe that the broadening of the ADA definition of disability will require disability plan administrators to be more cognizant of how impairments of major life functions (now not necessarily purely physical in nature) can raise to the level of a complete disability under a plan definition.

For example, a cognitive impairment does not typically manifest itself in outward ways. As a result of a neurological condition, an employee/participant may develop memory loss or difficulty with fact retention. Under the new ADA definition, this cognitive impairment would appear to be a disability affecting a major life function (that of communication and neurological difficulty). The impairment alone may not trigger a claim for disability benefits, but it might require an employer accommodation under the ADA. If the impairment progress to the point where the employee can no longer function in their job, it would arguably give rise to a claim as a disability under the disability benefits plan.

So the changes to the definition of "disability" under the ADA do not necessarily change the definition of "disabled" under the terms of a disability plan. But this is not to suggest that all impairments to major life activities will ultimately give rise to claims for benefits under disability policies. But at the same time, employers acting as plan administrators should become very familiar with both the definition of "disability" under the ADA and the definition of "disabled" under the terms of their disability coverage. The safest way to avoid future conflicts over eligibility for plan benefits is to make yourself aware now of the legal terms and restrictions and be prepared to explain or distinguish a "disability" from "disabled" under the law.

Beware Public Sentiment in Benefit Reductions and Layoffs

kmcmurdy@foxrothschild.com (Keith R. McMurdy) — Mon, 28 Sep 2009 10:48:26 -0500

I recently read a couple articles that suggest that employers are more inclined to institute layoffs and salary freezes than they are to cut retirement benefits. I also read an article that suggested that employers are more inclined to decrease or eliminate health benefits rather than institute layoffs. It seems to me that in these troubled economic times, there is no clear answer as to what is the appropriate solution or the correct way (or the most effective way) to bring down personnel costs.

However, I have a seen a number of articles and press releases from various sources that criticize companies that use cost-control measures like reducing staff or benefit levels as unfair. Particularly if the company is perceived as a large employer or is viewed as still being "profitable" while taking advantage of the workers. Executive compensation is obviously in the news and highly paid executives with generous benefits packages make for good villains when employee benefits are generally being cut to make budget.

It strikes me that in addition to having a sound fiscal plan for taking steps to adjust benefits packages (or to reduce payroll or staff), employers and plan sponsors would do well to prepare a game plan to deal with the public and negative press. I read an excellent blog post by Alan Metrick of Alan Metrick Communications that can be read here. He suggests (and I tend to agree) that any good plan for reduction of force or benefits also includes a prepared public message that the employer controls. It makes sense to me that a plan sponsor should also consider being prepared to answer public questions about plan adjustments (like reduction or elimination of benefits) if challenged by an active media.

So when considering changes to benefit plans that have a negative connotation (like eliminating employer matches to 401(k) plans or terminating life insurance benefits), I encourage plan sponsors to also make a plan to respond to concerns both from employee and the public in advance of these changes. You might not be able to make everyone happy with your decision, but you will at least be prepared to defend it.

Required Notices for Retirement Plans

kmcmurdy@foxrothschild.com (Keith R. McMurdy) — Mon, 21 Sep 2009 16:08:10 -0500

Because I have previously made reference to certain required or notices for welfare plans, I would be remiss in not bringing up some requirements for retirement plans.

First the notices. Retirement plans have a number of annual notice requirements, so this should service simply as a reminder of what notices are due. The annual Safe Harbor 401(k) Plan Notice is due not later than 30 days prior to the beginning of the next plan year. So for calendar year plans, that would be by December 1, 2009. Also due in that same time period is the Qualified Default Investment Alternative Notices that would apply to plans that have provided for default elections. Finally, don't forget the 401(k) Plan Annual Automatic Enrollment Notices, also due 30 days prior to the beginning of the next plan year.

If you have a defined benefit plan, you have to send a Defined Benefit Plan Annual Funding Notice within 120 days of the end of the plan year (or by April 30, 2010 for a plan year ending 12/31/09). Participant Benefit Statements are due every three years or annually (depending on the election of the plan administrator), so you need to prepare those by December 31, 2009, if required. Participant Benefit Statements for Defined Contribution Plans are due quarterly, and are timely if provided within 45 days of the end of the quarter. For calendar year plans, they would be due February 15, 2010.

In addition to these notices, there are several required and optional plan amendments for defined benefit and defined contribution plans that may be applicable to your plan (or that you may have adopted). If the plans were amended during the last plan year, don't forget to send a Summary of Material Modifications to participants to alert them to the changes. If you have questions about what amendments were available or concerns about making sure you have adopted all appropriate amendments, contact your plan professional of your attorney at Fox Rothschild to set up a review of your retirement plan.

What in the Heck is "Unsecured PHI?"

kmcmurdy@foxrothschild.com (Keith R. McMurdy) — Thu, 17 Sep 2009 13:15:46 -0500

By now most plan administrators should be aware that there is something called the HITECH Act and that the ARRA of 2009 made some changes to HIPAA with respect to medical privacy and security regulations. In my August 24, 2009 entry about plan compliance items, I make reference to the HITECH Act and the new "security breach" requirements and the need to update business associate agreements. But as a follow up, I wanted to dig a little deeper into what this security breach component is and what it means and take a look at the creation of a class of information called "unsecured protected health information."

Often when I am having discussions about HIPAA, questions are are raised about what constitutes PHI. Technically it is individually identifiable information about past, present or future medical care or diagnosis. So while the medical care or diagnosis part was protected, the individual identifiers themselves were NOT protected by HIPAA privacy. Now I believe that changes.

ARRA creates a class of information called “Unsecured Protected Health Information” which is protected health information (PHI) that is not secured through the use of a technology or methodology specified by HHS as one that renders the PHI as unusable, unreadable or indecipherable to unauthorized individuals. In other words, if it is not encrypted under the technology requirements, it is unsecured. And that may be all there is too it. But I actually think unsecured PHI might go a little deeper.

I think that unsecured PHI might also be that that information that is part of the PHI records, but not necessarily PHI that is specifically secured and protected by HIPAA. So I think we might now have "secured PHI" like a medical diagnosis, and "unsecured PHI" which would be the social security number of the patient who received the diagnosis.

The Department of Health and Human Services is required to issue guidance specifying the technologies and methodologies that render PHI as unusable, unreadable or indecipherable to unauthorized individuals within 60 days of the enactment date (i.e., April 18, 2009) and annually thereafter. Until the guidance is issued, covered entities may rely on a technology or methodology which is developed or endorsed for this purpose by a standards developing organization accredited by the American National Standards. That would appear to cover the technological component but I think it overlooks the fact that PHI does not exist only in electronic format. You can't encrypt a piece of paper, but you still have to protect what is on it.

So I think that, at least in some respects, the purpose of the ARRA changes is that while technically all PHI is protected, not all ancillary information contained within the PHI is necessarily subject to the current protections. If secure PHI is improperly released, there are corrective mechanisms in place under the original regulations. But what to do about that ancillary information that was part of the PHI that is not necessarily protected but should still be secured? Maybe it is now defined as unsecured PHI and new standards apply to it.

The ARRA creates a new notice obligation when the security of an individual’s unsecured PHI is breached. In other words, if unsecured PHI (like social security numbers) gets out, the entity that let it escape has breached this new obligation to protect it. The security of that information is compromised. If the security of this PHI is breached or believed to have been breached, then the covered entity that becomes aware of the breach must notify each impacted individual of the breach, in writing, without unreasonable delay but no later than 60 calendar days after discovery of the breach. Business associates are subject to the same requirement except that the business associate must notify the covered entity of the breach.

The notice must be in writing and sent to the individual’s last known address (or electronically if permitted by the individual) or through an alternative method if the individual’s address is not known. If there are 10 or more individuals for whom an address is not available, the notice must be posted conspicuously on the covered entity’s website or in other major print or broadcast media. If the breach involves more than 500 individuals in one state or jurisdiction for whom an address is not available, the notice must be provided through major media outlets servicing the state or jurisdiction.

The notice must contain (1) a brief description of the breach, including the date of the breach and the date it was discovered; (2) a description of the types of unsecured PHI involved in the breach (e.g., social security number, account number, address, etc.); (3) the steps an individual should take to protect himself from potential harm resulting from the breach; (4) a brief description of actions the covered entity is taking to investigate and mitigate losses from the breach; and (5) contact information in case there are additional questions.

In the end, I find I have not answered my own questions. Hopefully, once the final guidance is rendered from HHS, there will be more clarification. But I do think that it is certainly part of a "best practices" approach to privacy policies for health plans to make sure that ALL parts of the PHI record are treated as protected.

Union Can be Liable for Employer's Withdrawal Liability

kmcmurdy@foxrothschild.com (Keith R. McMurdy) — Wed, 09 Sep 2009 09:46:32 -0500

If you are an employer participating in a multiemployer pension fund, the last few months have probably brought up discussions about underfunding or withdrawal liability. Briefly, withdrawal liability is the amount of unfunded liability that an employer has to pay when they cease being a contributing employer to a pension fund. If you are familiar with it, this case might interest you.

In Pittsburgh Mack Sales v. IUOE Local No. 66 (Case No. 07-3938, 2009), the Third Circuit Court of Appeals found that a union's agreement to indemnify an employer for withdrawal liability to a pension plan was valid and enforceable, vacating the lower court decision that the agreement would violate "public policy." Factually, the collective bargaining agreements between the company and the union contained a provision that provided that the union would hold the employer harmless for any liability to the fund in excess of specified contributions.

The company sold its assets to another entity and the pension fund assessed $413,000 in withdrawal liability. The company demanded that the union hold it harmless and litigation ensued. The District Court ruled in favor of the union under a theory that the indemnity provision was contrary to public policy and that ERISA laws governing withdrawal liability could not be defeated by contract. The Third Circuit disagreed, stating there was no "well-defined and dominant" public policy that would justify overriding the contract provisions and that the parties could contract away responsibility for withdrawal liability.

This decision is interesting primarily because the tradition view of withdrawal liability under the Multiemployer Pension Plan Arbitration Act (MEPPA) is that the withdrawing employer is liable by statute, and payment is due under the terms of that statutory framework. However, this decision appears to give rise to the possibility that, while the liability cannot be avoided by contract, a contract can be created that indemnifies employers for that withdrawal liability. In other words, you cannot contract away the liability, but you can contract for someone else to pay the company back for the loss.

So next time you are in collective bargaining, consider asking for a similar provision. This case says it might be worth asking.

New York Continuation Coverage Model Notice

kmcmurdy@foxrothschild.com (Keith R. McMurdy) — Wed, 02 Sep 2009 10:29:12 -0500

In conjunction with New York State continuation coverage and the ARRA (which provides for the 65% subsidy), the New York Department of Insurance has published a model New York State Continuation Coverage election notice. It is available through this link. This notice applies to New York state continuation coverage (mini-COBRA) and includes the subsidy election form.

Don't Forget to Tell Your Employer When You Get New Coverage

kmcmurdy@foxrothschild.com (Keith R. McMurdy) — Mon, 31 Aug 2009 17:05:58 -0500

In connection with the 65% COBRA subsidy that went into effect earlier this year, there is a provision that provides that an individual is no longer eligible for the subsidy if they are eligible for other coverage, including Medicare. This means that if an employee is receiving the COBRA subsidy and gets a new job and becomes eligible for coverage with that new employer, they are no longer eligible for the 65% premium subsidy.

The IRS has clarified that an individual who is receiving the subsidy is under an affirmative obligation to notify their old employer that they are eligible for other coverage and that they must cease receiving subsidy payments. Individuals who continue to receive subsidy payments after they are eligible for other coverage are subject to a penalty under new IRC Section 6720C. That penalty is 110% of the subsidy obtained after the date of eligibility for new coverage.

The model notices issued by the IRS included a model form for notifying plans that the employee is eligible for other coverage. In addition, the IRS has provided that anyone who suspects that an individual is receiving a subsidy after they become eligible for other coverage may report the violation to the IRS using form 3949-A (Information Referral). Click here of a copy of the form.

2010 Compliance Items for Group Health Plans

kmcmurdy@foxrothschild.com (Keith R. McMurdy) — Mon, 24 Aug 2009 16:38:19 -0500

By this time, all health plan administrators should be aware of the required annual notices like the Women's Health and Cancer Rights Act notice and the Medicare Part D notice. Plus we have updated our COBRA notices to comply with the COBRA subsidy requirements of the ARRA. So now let's take stock of what changes are in store for 2010.

1. Mental Health Parity Act. For plan years after 10/3/09, a group health plan that provides mental health and substance abuse benefits cannot have special caps for benefits related to treatment for these disorders. Co-pays, deductibles, limits and out-of-pocket expenses cannot be more restrictive for these treatments than for medical or surgical benefits under the plan.

2. COBRA Subsidies under the ARRA. Remember that the COBRA subsidy is currently set to end as of December 31, 2009, meaning that for qualifying events occurring after 1/1/2010, COBRA notice and election forms will NOT contain information about eligibility for the subsidy. So plan administrators should be prepared to go back to standard COBRA notices (unless the subsidy is extended).

3. Children's Health Insurance Program Re-authorization (CHIP). As of April 1, 2009, all plan must provide for the special 60 day enrollment period for employees and dependents who become eligible or cease being eligible for premiums assistance under Medicaid or state children's health insurance programs. Plans have to be updated to include this special enrollment period. There is also an annual notice requirement beginning 1/1/2010.

4. Michelle's Law. For plan years after 10/9/09, a group health plan cannot terminate coverage for a dependent college student because of a loss of full-time student status where the loss of status is due to a medically necessary leave of absence. Information about Michelle's Law must be provided with any notice explaining eligibility for coverage as a dependent student.

5. Genetic Information Non-Discrimination Act. For plan years after 5/21/09, the plan must provide that genetic information cannot be requested, required or purchased for underwriting purposes and will not be used for enrollment. Also, participants cannot be required to undergo a genetic test and genetic information cannot be used to set contribution rates or premiums.

But wait, there is more.

6. The HITECH Act. As of 9/18/09, the HITECH Act requires plans to provides notices to participants of any unauthorized disclosures of unsecured protected health information. As of 2/17/2010, business associates are responsible for their own compliance with HIPAA medical privacy, participants cannot receive marketing communications without prior consent and plans are required to provide PHI to participants in electronic format if the information maintained by the plan is kept in an electronic format.

7. The HEART Act. Under the Heroes Earnings Assistance and relief Tax Act of 2008, a cafeteria plan or FSA may now permit a reservist called to active duty (for at least 180 days or indefinite call-up) to receive a distribution of the balance of the reservist's account. Plan amendments are permitted through 12/31/09 and can be retroactive to reservists called up to duty on or after 6/18/08. Plans expecting to provide this exemption in the 2010 plan year must be amended before the 12/31/09 deadline.

So technically these are not 2010 amendments but they are things to look at for the upcoming plan year to make sure the plan has appropriate amendments and notices. If you have any questions about applicability to your plan, contact your service provider or counsel and they will walk you through the compliance process.

IRS Reports Common Mistakes in Plan Administration

kmcmurdy@foxrothschild.com (Keith R. McMurdy) — Mon, 17 Aug 2009 16:52:24 -0500

In an era where we all like to see statistic and trends, the Internal Revenue Service has obliged by publishing a list of common recurring mistakes it sees in large case audits of qualified retirement plans. The mistakes were identified through submissions under the Voluntary Correction Program. While this list mainly identifies concerns with qualified retirement plans, it also provides a pretty fair checklist of concerns for welfare plan administrators looking to ensure compliance.

Common Mistakes Across All Retirement Plan Types. This first list covers the general common problems associated with both defined contribution and defined benefit retirement plans. Note that many would apply to welfare plans generally:

Failure to timely amend the plan document for changes in the law;
Failure to follow the plan's definition of and limits on compensation for contribution purposes;
Failure to enroll eligible employees and/or to exclude ineligible employees;
Failure to meet the legally-required minimum distribution provisions in the plan;
Failure to follow the in-service distribution provisions in the plan;
Failure to use correct distribution forms, make timely distributions and file correct tax reporting on distributions;
Failure to follow the plan's vesting schedule;
Failure to retain records and maintain internal controls regarding administration of the plan;
Failure to follow the terms of a qualified domestic relations order (QDRO); and
Exceeding the legal maximums on contributions and benefits under the plan.

Common Mistakes for 401(k) Plans in particular. A more detailed list is provided specific to 401(k) plans:

Failure to pass ADP/ACP nondiscrimination testing
Failure to to provide for minimum top heavy benefit contributions
Failure to Satisfy IRC 415 limits

Common Mistakes for Defined Benefit Plans. For defined benefit plan, the list includes:

Benefit calculations based on inaccurate data;
Failure to provide the required notice when benefits are suspended; and
Premature or delinquent commencement of benefits.

To access the EPTA Audit Team Compliance Trends and Tips click here. What is interesting about this link is that it also provides a link to the "Correcting Plan Errors" main page which has guides for identifying and correcting plan errors, including a 41 page guide to identifying and fixing common 401(k) errors. Bear in mind that the IRS specifically disclaims providing legal advice and reliance on the guide is not a justification for avoidance of penalties and interest if a subsequent audit does reveal problems with the plan. But as a starting point, plan administrators should at least consider this summary a checklist of useful things to look at and discuss with their plan professionals.

When COBRA and Leaves Collide

kmcmurdy@foxrothschild.com (Keith R. McMurdy) — Tue, 11 Aug 2009 17:07:08 -0500

A partner of mine recently came to me with this question: if any employee is out on leave, when does the employer send the COBRA notice? "Good question" I said, "what type of leave and what does the company's leave policy provide?" Well, it got me to thinking (and researching) COBRA and leaves and when the "qualifying event" is triggered.

I came across an article about a case called Jennings v. Crane, out of the Western District of Kentucky where an employee was terminated while out on leave. The company wanted the COBRA to qualifying event to be when the leave started. The employee said it started when he was fired. In the end, the Court sided with the employee, but did so after looking at the company leave policy and what the health plan said about leaves of absence. In other word, what did the plan sponsor tell the participants about COBRA and leaves of absence.

The DOL is very specific about what happens while an employee is out on FMLA leave. An FMLA leave is not a qualifying event, but a qualifying event may occur when the employee notifies the employer of the intent not to return to work. The DOL is much less specific about COBRA when someone is out on some other type of leave. The employer has to define how leave will apply.

Hypothetically, think of an employee who goes out on a leave for 6 weeks. At the end of 6 weeks, the employee does not return to work and the employer has no idea if he will ever return. Is that a qualifying event under COBRA? Is the employee treated as losing coverage in the day he does not return to work? Can he extend the leave indefinitely and never trigger COBRA? All are possible if the employer is not paying attention and does not take the time to the following:

1. When you design your group health plan, decide how a leave of absence will be treated and when the leave will trigger COBRA continuation. A plan sponsor can clearly define when the loss of coverage will occur under various leave situations.

2. Establish a written leave policy that incorporates the health plan leave provisions. How many weeks of leave can an employee have? What is the process for requesting leave? When will the leave end and the employee be treated as terminated? When will the leave result in loss of coverage? Many times smaller employers do not establish a leave policy and then are frustrated about employees who go out on absences and leave these administrative questions up in the air.

3. Administer your leave policy consistently. If you require doctors' notes, get them. If you require return to work certifications, then make sure you have them in a timely manner. If going out on leave triggers COBRA, then make sure the notice goes out as soon as the leave starts. Do it the same way for every employee, every time.

Regardless of the size of your workforce, you need to be aware of the possibility of employees being out indefinitely, and if they are on your company health plan, indefinite leave could mean you continue to pay for coverage without any clear determination of when the COBRA qualifying event occurs. Plus, establishing a leave policy will make it easier to manage your workforce because you can define how and when leave can be taken which avoid confusion when leaves occur.

FTC Announces Delay in Red Flag Rules

kmcmurdy@foxrothschild.com (Keith R. McMurdy) — Thu, 06 Aug 2009 14:42:06 -0500

Susan Jordan, a partner in our Pittsburgh office, provides the following:

The Federal Trade Commission (FTC) recently announced that it is delaying enforcement of its “red flag” rules until November 1, 2009. The red flag rules were previously supposed to be enforced beginning August 1, 2009 after being delayed once already. The rules are part of anti-fraud regulation designed to identify and respond to warning signs that could indicate identity theft and were developed under the Fair and Accurate Credit Transactions Act of 2003. The red flag rules require certain entities to implement written identity theft prevention programs. Additionally, the FTC issued guidance addressing concerns for many employee benefit plan administrators about application of the rule to qualified plans.

The broad scope of the red flag rules have raised questions about whether the red flag rules applies to various entities, including qualified retirement plans. The concerns include whether a plan sponsor or plan become a creditor by permitting participants to take loans for the plan. In its guidance, the FTC has eased some concerns on this issue by taking the position that allowing participants to borrow from their fund would not, by itself, make the plan sponsor or the qualified plan a covered creditor, as defined under the red flag rules. The FTC guidance also addresses several issues surrounding health FSAs offered under Section 125 cafeteria plans and health reimbursements arrangements.

The FTC guidance also states that the FTC staff is unlikely to pursue law enforcement action under the following circumstances:

(1) You know your clients individually. For example, some medical practices and law firms are familiar with everyone who walks into the office. In those circumstances, the FTC acknowledges that the risk is low that an identity thief can defraud a business by impersonating someone else.

(2) You provide services to customers in or around their home, such as by operating a lawn care or a home cleaning business. The FTC reasons that the risk of identity theft is extremely low in these situations because identity thieves generally do not want people to know where they live.

(3) You are involved in a type of business where identity theft is rare. The FTC guidance suggests that if there are no reports in the news, trade press, or among people in your line of business about identity theft and your business itself has not experienced incidents of identity theft, it is unlikely that identity thieves are targeting your business sector.

A copy of the FTC guidance can be found at: http://www.ftc.gov/bcp/edu/microsites/redflagsrule/faqs.shtm.

So Who Says You're Disabled? Plans Can Disagree with SSA

kmcmurdy@foxrothschild.com (Keith R. McMurdy) — Mon, 03 Aug 2009 13:13:49 -0500

Sometimes the hardest thing to interpret in benefit plans is when a disability occurs. Most questions about disability focus on short term and long term disability plans, but retirement plans and other welfare plans can have benefit levels that are triggered or impacted by a disability determination. Ultimately, the plan administrator is obligated to apply the terms of the plan to make a determination if a participant is "disabled" under the terms of the plan.

In Hobson v. Met Life, 2nd Cir., 7/29/09, the Court looked at a situation where a participant claimed complete disability which was denied by the plan administrator. After applying the now required Glenn analysis to the determination, the Court also had to look at a situation where the Social Security Administration made a determination that the participant was disabled. The plan administrator disagreed, applying the plan definition of disability to determine that the participant was not unable to work and was therefore not entitled to long term disability benefits. The Court agreed with the plan administrator, but issued a warning that if an administrator is going to disagree with SSA, it should make sure the basis for its determination, and ultimately the basis for its disagreement, be very carefully and completely explained. An SSA determination is not binding on a plan, but the plan had better explain WHY it disagrees in such a way that a meaningful appeal can be made.

This decision continues the long line of cases that gives deference to decisions made by plans that retain discretion. But I believe it also should serve as a reminder to plan administrators to be very thoughtful in the application of "determinations." Met Life was very thorough and collected a lot of medical information on its own. It had detailed notes and records about all of the steps it took in evaluating each stage of the claim and was meticulous in its record-keeping as to how the decision was ultimately made. It did not simply rely on an outside determination but did the hard legwork itself.

So from this case, it appears that SSA determinations are not the defining definition of "disability," but plans should be prepared to explain in detail how an alternative conclusion was reached. And be prepared to prove HOW the conclusion was reached.

Suspension or Reduction of Safe Harbor Non-Elective Contributions

kmcmurdy@foxrothschild.com (Keith R. McMurdy) — Mon, 27 Jul 2009 17:03:21 -0500

Theresa Borzelli, a partner in our Roseland, New Jersey office provided me with the following:

On May 18, 2009, the IRS issued proposed regulations that will allow employers with safe harbor 401(k) plans who incur a substantial business hardship to reduce or suspend the safe harbor non-elective contribution. Prior to these proposed regulations, only the safe harbor matching contribution could be reduced or suspended as an alternative to terminating the plan, but the only way to suspend a safe harbor non-elective contribution was by terminating the plan.

The IRS is requesting comments by August 17 with a public hearing scheduled for September 23. However, plan sponsors may rely on the proposed regulations. Should the final regulations be more stringent than the proposed regulations, the more stringent regulations will be prospective only.

What It Means to Plan Sponsors

A Plan Sponsor with a safe harbor 401(k) plan utilizing the non-elective contribution design wishing to suspend or reduce contributions must:

• Incur a substantial hardship as described in IRC§ 412(c);
• Notify all eligible employees of the reduction or suspension at least 30 days prior to the effective date;
• Provide employees with a reasonable opportunity to change their contribution election within a reasonable period of time after receiving the notice;
• Amend the plan to provide that the ADP test will be satisfied for the entire plan year in which the suspension or reduction occurs using the current year method; and
• Test that the plan satisfies the safe harbor non-elective contribution with respect to compensation paid up to the effective date of the amendment.

The amendment must be adopted after May 18, 2009, and the suspension can be effective no earlier than the later of 30 days after the notice is provided to all eligible employees and the date the amendment is adopted.

The Notice

The notice requirement is satisfied if each eligible employee is given a notice that explains:
• The consequences of the amendment,
• The procedures for changing elective deferral elections and
• The effective date of the amendment.

Bottom line: Before you do anything, you want to determine the impact of suspending/reducing the non-elective contribution on your top heavy status. You could find yourself eliminating the safe harbor non-elective contribution only to be faced with making a top heavy contribution. At the same time, determine if you can pass the nondiscrimination tests on a current year basis.

What Should You Do Now?

1. Work with counsel to determine if you can satisfy the substantial business hardship requirements.
2. Determine if you will be subject to the top heavy minimum contribution.
3. Determine if you will satisfy the ADP/ACP tests using the current year method.
4. Ensure that you make the non-elective contribution for the period up to the effective date of the amendment including pro-ration of compensation.
5. If you decide to utilize the proposed regulations:
a. Draft and distribute the notice to participants,
b. Amend your plan,
c. Perform nondiscrimination testing and
d. Perform top heavy testing.