With the year-end fast approaching, employers should take time to review their employee benefit plans and assess whether any actions, such as adopting plan amendments and implementing administrative changes, must be taken before December 31, 2010. To assist in that process, this article lists the primary compliance issues and developments affecting health and welfare plans, retirement plans and executive compensation programs that employers should consider.
HEATH AND WELFARE PLANS
HEALTH CARE REFORM REQUIREMENTS
ALL PLANS
- Grandfathering: Employers should determine
whether each medical plan benefit option will be grandfathered or
non-grandfathered. If a medical plan benefit option is
grandfathered, model language should be included in applicable
documents; the U.S. Department of Labor (DOL) model language is
available online. (View additional details.)
- Pre-existing condition exclusions: Employers
must eliminate medical plan pre-existing condition limitations for
children under age 19 effective for plan years beginning on or
after September 23, 2010. Although notice is not required,
including language in applicable documents is recommended.
- Lifetime limits: Employers must eliminate
lifetime dollar limits on "essential health benefits"
effective for plan years beginning on or after September 23, 2010.
Lifetime limits are still permitted for non-essential health
benefits. Individuals who previously lost coverage due to reaching
a lifetime limit before the new restrictions become effective must
be notified of their right to special enrollment (at least 30
days), with coverage effective no later than the first day of the
plan year starting on or after September 23, 2010. Employers should
provide the model notice that a lifetime limit on essential health
benefits no longer applies and that individuals who previously
reached the plan's lifetime limit, if still covered under the
plan, are once again eligible to enroll in the plan; the DOL model
notice regarding lifetime limits is available online.
- Annual limits: Employers must ensure annual
limits on "essential health benefits" are not less than
$750,000 for the plan year beginning on or after September 23,
2010, but before September 23, 2011 (or $1.25 million for the plan
year beginning on or after September 23, 2011, but before September
23, 2012; $2 million for the plan year beginning on or after
September 23, 2012, but before January 1, 2014; may no longer
impose annual limits for plan years beginning on or after January
1, 2014). Annual limits are still permitted for non-essential
health benefits.
- Dependent coverage: Employers must extend
dependent coverage to adult children until age 26, regardless of
student status, marital status, financial dependence or place of
residence. If the plan is grandfathered, coverage does not need to
be extended if the child is eligible for group health coverage
through his or her own employer. If the plan is not grandfathered,
dependent coverage must be extended regardless of whether the child
is eligible for group health coverage through his or her own
employer. Dependent children whose coverage, prior to the first day
of the plan year starting on or after September 23, 2010, was
terminated or did not begin because the availability of dependent
coverage for children under the plan or policy ended before the
attainment of age 26 must be notified of their right to special
enrollment (at least 30 days), with coverage effective no later
than the first day of the plan year starting on or after September
23, 2010. Employers should provide the model notice regarding the
extended dependent coverage; the DOL model notice regarding the
extended dependent coverage is available online.
- Early Retiree Reinsurance Program (ERRP): As
applicable, employers should apply for certification or claims
reimbursement from the ERRP and, once approved, should follow ERRP
instructions regarding eligible claims and submission. Employers
should provide the model notice to participants describing
potential uses for reimbursement payments; the U.S. Department of
Health and Human Services model ERRP notice is available
online.
- Over-the-counter drugs: Employers must amend
their health flexible spending accounts, health reimbursement
arrangements and health savings accounts to require prescriptions
for reimbursement of over-the-counter drugs (except insulin), and
notify participants of this new restriction. This change is
effective January 1, 2011 (regardless of the grace period for 2010
plan year).
- Retiree only plans: Medical plans containing
less than two active participants are not subject to the health
care reform rules. Employers should consider establishing retiree
medical plans separate and apart from active medical plans to take
advantage of the exemption.
NONGRANDFATHERED PLANS
- Preventive care: Medical plans must provide
first dollar coverage with no cost-sharing for certain preventive
services and immunizations which are administered under certain
circumstances, effective for plan years beginning on or after
September 23, 2010. This requirement does not apply to
out-of-network benefits. Details regarding preventive services and
eligible immunizations can be found online.
- Claim/appeals: Medical plans are subject to
new internal and external claims procedures, effective for plan
years beginning on or after September 23, 2010. Employers should
review their plans' claims and appeals procedures to ensure
they comply with the expanded internal and external claims and
appeals rules.
- Emergency services: Emergency services
coverage under a medical plan is subject to various new
requirements, effective for plan years beginning on or after
September 23, 2010. For instance, such coverage (both in-network
and out-of-network) must be provided without preauthorization.
Also, a medical plan cannot impose higher cost-sharing for
out-of-network emergency services or any administrative
requirements, or limitations on benefits for out-of-network
emergency services that are more restrictive than those imposed on
in-network emergency services. Employers should ensure their
medical plans comply with the various new requirements on emergency
services coverage.
- Provider selection and referrals: If a medical
plan allows designation of a primary care physician, it must also
allow participants to select any available in-network primary care
provider, or any allopathic or osteopathic physician specializing
in pediatrics in the case of a child. Also, a referral for ob-gyn
services provided by an in-network provider may not be required.
These new requirements are effective for plan years beginning on or
after September 23, 2010. Employers should ensure their medical
plans comply with these new requirements.
- Non-discrimination: Similar to self-insured
medical plans, fully insured medical plans may not discriminate in
favor of highly compensated individuals, effective for policy years
beginning on or after September 23, 2010. Employers should review
their medical plans to determine whether they discriminate in favor
of highly compensated individuals.
ADDITIONAL REQUIREMENTS
- Children's Health Insurance Program
(CHIP): CHIP required that the medical plan document and
summary plan description (SPD) be amended effective April 1, 2009,
to provide a special enrollment opportunity and notice to employees
and dependents who are eligible, but not enrolled for coverage
under the plan. The special enrollment opportunity is available
when the employee's or dependent's Medicaid or CHIP
coverage is terminated as a result of loss of eligibility or the
employee or dependent becomes eligible for a premium assistance
subsidy under Medicaid or CHIP. This special enrollment opportunity
should be requested by the employee or dependent within 60 days of
the loss of coverage or determination of eligibility. In addition
to the special enrollment communication, employers are required to
provide a CHIP Notice annually to their employees. The initial CHIP
Notice must be provided by the later of May 1, 2010, or the first
day of the first plan year after February 4, 2010 (e.g., January 1,
2011, for calendar-year plans).
- Genetic Information Nondiscrimination Act
(GINA): GINA prohibits group health plans and insurance
issuers from discriminating on the basis of genetic information
with respect to eligibility, premiums and contributions, effective
for plan years beginning one year after May 21, 2008 (e.g., January
1, 2010, for calendar-year plans). Employers should amend their
plan documents, SPDs and other applicable documents, as necessary,
to reflect this requirement.
- Michele's Law: If a medical plan covers
dependents based on full-time student status, coverage must be made
available when a child is unable to attend school on a full-time
basis due to a medically necessary leave of absence, effective for
plan years beginning on or after October 9, 2009. Such coverage
must be extended until the earlier of one year from the start of
the medically necessary leave of absence or the date on which such
coverage would otherwise terminate under the terms of the medical
plan. Employers should amend their plan documents, SPDs and other
applicable documents, as necessary, to reflect this
requirement.
- Mental Health Parity and Addiction Equity Act of 2008
(MHPAEA): The MHPAEA was enacted to create parity for
mental health and substance abuse benefits, effective for plan
years beginning on or after October 2, 2009 (e.g., January 1, 2010,
for calendar-year plans). The new requirements only affect group
health plans with 51 or more employees in the prior calendar year.
Employers should review coverages to ensure equity in accordance
with the requirements under the MHPAEA and, if necessary, amend
their plan documents, SPDs and other applicable documents, as
necessary, to comply with those requirements.
- HIPAA privacy: The Health Information
Technology for Economic and Clinical Health Act of 2009 (HITECH)
included detailed breach notification requirements, effective for
breaches discovered after September 23, 2009; however, no penalties
will be assessed until after February 2010 (or, if later, after
final regulations are released). Employers should ensure their plan
documents, SPDs, business associate agreements and other applicable
documents are updated, as necessary, to reflect the new HITECH
requirements.
- Educational assistance programs: The exclusion
under Code Section 127 for qualifying educational assistance
benefits provided to employees is scheduled to expire at the end of
2010. Future legislation may reinstate the exclusion, possibly
retroactive to January 1, 2011. In the interim, employers should
consider whether to continue or suspend such programs.
QUALIFIED RETIREMENT PLANS
ALL PLANS
- HEART Act: Certain amendments are required
under the Heroes Earnings Assistance and Relief Tax (HEART) Act of
2008 and must generally be adopted by the last day of the first
plan year beginning on or after January 1, 2010 (e.g., December 31,
2010, for calendar-year plans). However, certain amendments are
optional under the HEART Act and must be adopted by the general
deadline (or, if later, by the last day of the first plan year in
which the amendment becomes effective).
REQUIRED AMENDMENTS:
- Differential wage payments: Differential wage
payments are amounts paid to an employee on active duty for a
period of more than 30 days and which would have been received from
the employer absent being called to active duty. A plan is required
to include differential wage payments in the definition of
compensation when applying applicable provisions of the Internal
Revenue Code, such as the 415 benefit and contribution
limits.
- Survivor benefits: A plan is required to
provide that survivors of a participant who dies while performing
qualified military service must be entitled to receive the same
benefits (other than benefit accruals for the period of qualified
military service) that would otherwise have been provided under the
plan to such survivors had the participant resumed employment and
then terminated employment on account of death (in other words,
treated as if the participant had died while employed). These
additional benefits can include accelerated vesting, ancillary life
insurance benefits or other survivor benefits.
- Vesting service: A plan is required to provide
service credit for vesting purposes for the period of a deceased
participant's qualified military service.
OPTIONAL AMENDMENTS:
- Differential wage payments: A plan may include
differential wage payments in compensation for determining
contributions and benefits.
- Vesting service: A plan may provide service
credit for vesting purposes for the period of qualified military
service for participants who become disabled while performing such
service, to the extent permitted under other applicable
rules.
- Benefit accruals: A plan may provide benefit
accruals for the period of qualified military service for all
participants who die or become disabled while performing such
service on reasonably equivalent terms.
- Non-spouse beneficiary direct rollovers: A
plan could have allowed non-spouse beneficiaries to request a
direct rollover of an eligible rollover distribution to an
inherited IRA as early as January 1, 2007. However, the Worker,
Retiree and Employer Recovery Act of 2008 (WRERA) made this
mandatory for plan years beginning after December 31, 2009.
Employers who did not voluntarily implement this direct rollover
option prior to the first plan year beginning after December 31,
2009, must amend their plans by the end of the first plan year
beginning after December 31, 2009 (i.e., December 31, 2010, for
calendar-year plans) to make this option available to non-spouse
beneficiaries.
- Determination letter filing: Cycle E: Cycle E
is the last filing cycle in the Economic Growth Tax Relief
Reconciliation Act of 2001 round of determination letter filings.
Employers with an Employer Identification Number (EIN) that ends in
5 or 0 should plan to submit an on-cycle application by January 31,
2011.
DEFINED BENEFIT PLANS
- Cash balance/hybrid plan final regulations: In
October 2010, the U.S. Treasury Department and Internal Revenue
Service (IRS) released the final cash balance/hybrid plan
regulations. The final regulations include many requirements, such
as three-year vesting schedules, the protections against benefit
reductions based on age and the standards for setting interest
credits at a rate not greater than the market rate of return. The
final regulations generally apply to plan years beginning on or
after January 1, 2011. Amendments are required by the end of the
first plan year beginning on or after January 1, 2010 (e.g.,
December 31, 2010, for calendar-year plans).
- Benefit restrictions based on plan funding: In
October 2009, the Treasury Department and IRS released final
regulations providing guidance on the funding-based benefit
restrictions on defined benefit plans (excluding multi-employer
plans) under Code Section 436. Many plans were amended to comply
with the regulations in 2009, but certain clarifying amendments are
still required for such plans. Amendments for the final regulations
are generally required by the end of the first plan year beginning
on or after January 1, 2010 (e.g., December 31, 2010, for calendar
year plans).
DEFINED CONTRIBUTION PLANS
- HEART Act: A plan may treat a participant as
having severed employment (for distribution purposes, including
distributions from a designated Roth account) while on active duty
for a period of more than 30 days. (See amendment deadline above
applicable to optional HEART Act amendments.) If a participant
elects to receive such distribution, the participant's right to
make elective deferrals or after-tax employee contributions must be
suspended for the six-month period after the distribution date.
Also, unless an exception applies, the distribution will be subject
to the 10 percent penalty tax for early distributions if it is not
timely rolled over into an eligible retirement plan.
- Waiver of required minimum distributions: The
WRERA permitted employers to suspend otherwise required minimum
distributions under a defined contribution plan for the 2009 plan
year. Related amendments generally must be adopted by the last day
of the first plan year beginning on or after January 1, 2011 (e.g.,
December 31, 2011, for calendar year plans). However, employers may
wish to consider adopting those amendments in 2010.
- Diversification of publicly traded employer
stock: Defined contribution plans that invest in publicly
traded employer securities must permit participants to invest their
accounts in other investments. Amendments are required by the end
of the first plan year beginning on or after January 1, 2010 (e.g.,
December 31, 2010, for calendar year plans).
PUERTO RICO AND DUAL-QUALIFIED PLANS
- Transfers from plans intended to be qualified both in the
United States and in Puerto Rico (dual-qualified plans) to Puerto
Rico-only qualified plans must be made before January 1, 2011, to
avoid qualification and tax problems. (View additional details.)
However, based on a recent letter from the IRS to Senator Arlen
Specter, there may be concern with regard to the pooling of assets
of Puerto Rico and U.S. plans for investment purposes in a U.S.
group or master trust arrangement.
EXECUTIVE COMPENSATION
DEFERRED COMPENSATION ARRANGEMENTS
- Correction of certain plan document failures:
Plan documents for non-qualified deferred compensation arrangements
can be corrected to comply with Code Section 409A for certain
violations without any penalty, provided correction is completed by
year-end under Notice 2010-6. This correction opportunity is
particularly helpful for plans that may not have previously been
identified as subject to Code Section 409A or that have not been
amended for the final regulations under Code Section 409A.
Employers must report use of the correction program on annual tax
filings. Plan sponsors should review plan documents now and
consider correcting any defects using Notice 2010-6 before year-end
to take advantage of the correction opportunity. Correction after
this year could result in severe adverse tax consequences for
affected individuals. View additional details on available
corrections.
- Correction of certain operational failures:
Correcting a failure to comply with Code Section 409A in operation
by the end of 2010 under Notice 2008-113 could produce a more
favorable tax result for the affected individual (i.e., reduced
penalties or no penalties) than if it is corrected in a later year.
Common failures typically eligible for correction include
inadvertent deferral or acceleration of payments due to
administrative error. Employers should confirm that benefits with
scheduled payment dates in 2010 are paid before year-end. Employers
should also identify any other potential operational failures and
determine whether correction should be made this year under Notice
2008-113.
- Employment agreements and continued health coverage
after employment termination: New nondiscrimination rules
under Code Section 105(h) generally apply to insured health plans
for policy years beginning after September 23, 2010. If a highly
paid individual receives continued coverage on a pre-tax (or
employer-subsidized) basis in a discriminatory manner under a
policy that is not grandfathered, the insurance proceeds will be
taxable to that individual. Employers should consider providing a
taxable cash subsidy for highly paid individuals to purchase
continued health coverage after employment termination in lieu of
providing this coverage on a pre-tax (or employer-subsidized) basis
under a group health plan.
INCENTIVE STOCK OPTION (ISO)/EMPLOYEE STOCK PURCHASE PLAN (ESPP) REPORTING
- New filing with IRS for stock transfers in
2010: A new IRS reporting requirement under Code Section
6039 will require employers for the first time to file returns
directly to the IRS for ISO and ESPP stock transfers that occurred
in 2010 (in addition to providing participant statements by January
31, 2011). Filings under this requirement are unlikely to be
covered under existing arrangements with plan vendors. In order to
be in a timely position to file with the IRS in early 2011,
employers should plan now for complying with this new requirement.
View the final versions of Form 3921and Form 3922 as well as the
instructions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.