Benefits In Brief

After more than four years of regulatory starts and stops, plus the threat of a legislative solution, two separate sets of fee disclosure regulations issued by the Department of Labor (“DOL”) will finally become effective this summer.  Covered service providers must provide certain compensation and fee information to plan fiduciaries by July 1, and fiduciaries of participant-directed plans must provide participants with certain plan expense and investment fee information by August 30.  As those deadlines approach, the DOL has just issued additional guidance (in the form of Field Assistance Bulletin 2012-02) on the participant fee disclosure rules, and has indicated that it plans to issue similar guidance regarding the service provider fee disclosure requirements in the very near future.

The IRS has recently made changes to its determination letter program that are designed to (i) eliminate features that are of limited utility to plan sponsors, and (ii) improve efficiency by reducing the time it takes to process applications.  However, under the modified procedures, some employers adopting pre-approved plans will no longer be able to apply for (or receive) determination letters with respect to their plans.  This article reviews the changes to the determination letter program and the impact on qualified plan sponsors who seek assurance that the form of their plan satisfies the requirements of the Tax Code.

Both the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (the “Code”) generally prohibit fiduciary investment advisers from receiving compensation from the investment vehicles that they recommend to plan participants and IRA holders.  However, the Pension Protection Act of 2006 amended ERISA to create a new statutory exemption from the prohibited transaction rules that is designed to expand the availability of fiduciary investment advice to participants in individual account plans and IRAs, subject to specific safeguards and conditions.

Employers sponsoring ERISA-covered, participant-directed, individual account plans (such as 401(k) or 403(b) plans) are constantly reminded of their fiduciary duties. In recent years, almost any discussion of these duties has included the issue of fees that are charged to participants’ accounts (or that otherwise affect a participant's account balance). Fiduciaries are being told that they must (i) know what fees are being charged to or paid from plan assets, (ii) understand what those fees are for, (iii) make sure that the fees paid are reasonable in relation to the services provided, (iv) disclose certain fees to plan participants, and (v) report certain fees to the government. But where are all of these requirements coming from? And why is there so much more focus on fees than there was 10 years ago?

In an apparent change of position, the IRS has now indicated (in Announcement 2011-14) that breast pumps and supplies that assist lactation qualify as medical care expenses under Code Section 213(d) because they are for the purpose of affecting a structure or function of the lactating woman’s body.

One of the most common questions we receive from employers sponsoring group health plans is, “Can we offer different health benefits to different employees?” Related questions include, “Can we make our hourly employees pay a greater percentage of the cost of the plan than our higher-paid salaried employees?” or “Can we limit health benefits solely to managers and executive level employees?” And for the last 20 years, the answer has been, “Yes, so long as your plan is fully-insured.”

On December 22, 2010, the Internal Revenue Service announced (in Notice 2011-1) that insured group health plans will not be required to comply with the nondiscrimination requirements under health care reform until some time after the IRS issues regulatory guidance on those requirements.

On September 27, 2010, President Obama signed the Small Business Jobs and Credit Act of 2010 (the “Act”), which includes two provisions designed to promote retirement preparation (while raising revenue for the federal government). The first would permit Roth contributions to Section 457(b) plans maintained by state or local governments (a feature that is currently limited to 401(k) and 403(b) plans). The second would permit certain amounts in 401(k), 403(b) and governmental 457(b) plans to be converted to Roth accounts within the plan (i.e., an “in-plan” conversion option).

On October 12, 2010, the IRS released Notice 2010-69, which provides interim relief from the Affordable Care Act ("ACA") requirement that the cost of coverage under employer-sponsored group health plans be reported on Forms W-2 provided to employees. According to the Notice, such W-2 reporting will now be optional for 2011, but will be required for 2012. This interim relief is designed to give employers additional time to adjust their payroll systems and update procedures to comply with the new reporting requirement.

On September 27, 2010, President Obama signed the Small Business Jobs and Credit Act of 2010 (the “Small Business Jobs Act” or the “Act”). The Act provides $12 billion in tax cuts for small businesses and a $30 billion lending fund to improve the availability of credit for small firms. The bill also includes two provisions designed to promote retirement preparation (while raising revenue for the federal government). The first permits Roth contributions to 457(b) plans maintained by state or local governments (a feature that is currently limited to 401(k) and 403(b) plans). The second permits certain amounts in 401(k), 403(b), and governmental 457(b) plans to be converted to Roth accounts within the same plan (i.e., an “in-plan” conversion option). The in-plan Roth conversion option became effective upon enactment, while the Roth 457(b) option takes effect in 2011.

On July 15, 2010, the Department of Labor (“DOL”) issued “interim” final regulations regarding the fee information that service providers must disclose to fiduciaries of ERISA-covered retirement plans. This information is intended to assist fiduciaries in assessing the reasonableness of contracts or arrangements for the provision of services to the plan, including the reasonableness of the service provider’s compensation and the potential for conflicts of interest.

Under the Affordable Care Act, group health plans providing coverage to dependent children will soon be required to make coverage available to a covered employee’s adult child until the child’s 26th birthday, even if the child is no longer a full-time student and even if the child can no longer be claimed as the employee’s “dependent” on the employee’s federal income tax return. This requirement to extend group health plan coverage until an adult child’s 26th birthday applies to both insured and self-insured plans (regardless of the plan’s status as a “grandfathered” plan), and is effective for plan years beginning after September 23, 2010 (i.e., January 1, 2011, for calendar-year plans).

Prior to enactment of the Affordable Care Act, employee health benefits provided through an insurance contract (i.e., fully insured benefits) were not subject to any income-based nondiscrimination requirements under the Tax Code. Thus, an employer could provide more generous health insurance benefits to executives or other highly compensated individuals through the purchase of individual or group insurance policies. As a reesult of the Act, that will soon change.

The American Jobs Creation Act of 2004 changed the landscape of compensation arrangements by adding Section 409A of the Internal Revenue Code, which imposes strict operational and documentation requirements on nonqualified deferred compensation arrangements. Section 409A applies to any plan, agreement, or arrangement that creates (in a given tax year) a legally binding right to compensation that is payable in a later year. Consequently, Section 409A applies to a wide variety of arrangements, including supplemental retirement programs, bonus plans, incentive compensation arrangements, employment agreements, severance agreements, and equity compensation plans.

In September of this year, the IRS issued official guidance on how employers may convert unused leave under a bona fide sick leave, vacation leave, or paid-time-off (“PTO”) program into contributions to a qualified, defined contribution plan (such as a profit sharing or 401(k) plan). Revenue Rulings 2009-31 and 2009-32 provide a virtual “roadmap” for how the value of unused leave (that might otherwise be forfeited each year or paid out in cash on termination of employment) may be used as a basis for making additional employer contributions, or in some cases, employee elective deferrals, to such a plan.

Under recent IRS guidance, sponsors of many defined contribution plans must decide, by November 30, 2009, how to handle required minimum distributions (“RMDs”) for the 2009 calendar year. Participants who have already received 2009 distributions that consisted of (or included) a 2009 RMD have until this same date to roll that RMD into an IRA or eligible retirement plan in a tax-free rollover.

The 2009 calendar year is a time of great change for employers sponsoring Section 403(b) tax-sheltered annuity plans. The first new IRS regulations in over 40 years, which became effective on January 1, 2009, have redefined a sponsoring employer’s roles and responsibilities with respect to these programs. Under those regulations, 403(b) plans must be maintained pursuant to a “written plan” (although, in separate guidance, the IRS has given plan sponsors until the last day of 2009 to have this “written plan” in place).

Part 4 of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA") sets forth the rules that apply to fiduciaries of ERISA-covered employee benefit plans.  These "fiduciary responsibility" rules include the requirement to hold plan assets in trust, a fiduciary's duties of loyalty, prudence, diligence and diversification, and the prohibition on certain transactions between the plan and parties-in-interest.  One of the lesser-known (but still important) rules is the requirement (under Section 412 of ERISA) that every person who "handles" funds or other property of the plan be bonded.

Since 1999, employers sponsoring Section 401(k) plans have been able to avoid ADP/ACP nondiscrimination testing (and the possibility of refunds to highly compensated employees in the event of a testing failure) by providing an annual notice to employees and making fully vested "safe-harbor" employer contributions. These "safe-harbor" contributions -- which must be made on behalf of all eligible non-highly compensated employees -- may be structured as either (i) matching contributions (which generally must total at least 4% of pay for those who defer at least 5% of pay) or (ii) non- matching contributions (referred to by the IRS as "nonelective" contributions) of at least 3% of pay.

If your company sponsors a retirement plan that is qualified under Section 401(a) or 403(a) of the Internal Revenue Code (such as a 401(k) plan, a profit sharing plan, or a defined benefit pension plan), your plan must periodically be amended for changes in the tax laws and/or the regulations governing such plans. Those changes include the final regulations under Code Section 415 (regarding the limit on annual additions to defined contribution plans and the limit on annual benefits payable under defined benefit plans).

The U.S. Supreme Court has ruled that plan administrators may rely on the documents governing the plan, and have no duty to look beyond those documents, to determine the beneficiary of a deceased plan participant.

Employer-provided family health coverage is generally tax-free to employees so long as the employee’s covered family members can be claimed as dependents on the employee’s federal income tax return. A taxpayer may claim another individual as a “dependent” for federal income tax purposes only if that person is the taxpayer’s “qualifying child” or “qualifying relative” under Section 152 of the Internal Revenue Code.

On July 23, 2008, the Department of Labor issued proposed regulations setting forth the information that plan fiduciaries will soon be required to provide (and the manner in which such information must be provided) to participants who are allowed to direct the investment of their accounts in defined contribution plans. This is the third and final piece of guidance in a three-part initiative by the DOL (starting with regulations finalized in November 2007 regarding Form 5500 reporting, and followed by regulations proposed in December 2007 on the information service providers must disclose to plan sponsors) designed to improve the transparency of fees and expenses in participant-directed defined contribution retirement plans (such as 401(k) plans and 403(b) arrangements) that are subject to ERISA.

Employers are reminded that all plans, arrangements or agreements (other than tax-qualified retirement plans) that defer compensation must fully comply with the final regulations under Internal Revenue Code Section 409A by December 31, 2008!

On April 5, 2007, the IRS and the Department of Treasury issued final regulations regarding the limitations, under Section 415 of the Internal Revenue Code (the “Code”), on contributions and benefits under qualified retirement plans. Although plan sponsors generally have until the due date (including extensions) of their 2008 tax return to amend their plans to comply with these regulations, there are very good reasons to amend plans before that deadline. In many cases, the sooner the better!

There has never been greater attention in Washington, D.C. to the issue of fees charged to individual participants in 401(k) plans, how those fees are shared among a plan’s service providers, and the disclosure of those fees/revenue sharing arrangements to plan sponsors and plan participants.