Client Alert from the Employee Benefits & Executive Compensation Practice

June 9, 2009

Mental Health Parity Act Expansion

Enacted on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) includes provisions that greatly expand the Mental Health Parity Act of 1996 (“MHPA”).  Prior to EESA, the MHPA only mandated parity between mental health benefits and surgical/medical benefits with respect to annual or lifetime dollar limits.  This effectively meant that more restrictive limits (e.g., higher co-pays) could still be applied to mental health benefits.  With EESA, MHPA now requires parity as to all financial requirements and treatment limitations and expands mental health benefits to include substance use disorder coverage.  “Financial requirements” is defined to include deductibles, copayments, coinsurance, and out-of-pocket expenses.  “Treatment limitations” is generally defined as limits on the frequency of treatment, number of visits, days of coverage or “other similar limits on the scope or duration of treatment.”  EESA is effective the first day of the plan year that begins one year after the date of enactment.  For most plans, this means January 1, 2010.  Other noteworthy provisions that affect the MHPA can be viewed here.

Investment Advice Regulations Delayed Again-New Legislation Proposed

The U.S. Department of Labor has again delayed the effective date of its investment advice regulations.  The Pension Protection Act of 2006 (“PPA”) created a new statutory prohibited transaction exemption for certain investment advice arrangements.  The DOL’s initial regulations were to be effective March 23, 2009.  However, with the change in administration the effective date was pushed back to May 22, 2009.  The DOL has again pushed back the effective date to November 18, 2009 to allow additional time for it to evaluate questions of law and policy concerning the rules.

Also of note: Congressman Robert Andrews of New Jersey introduced the “Conflicted Investment Advice Prohibition Act of 2009” (H.R. 1988).   If enacted, the new legislation would restrict the types of investment advice that providers and plan sponsors could offer plan participants.  We will be monitoring the progress of this legislation and will provide any necessary updates.

A copy of the proposed legislation can be found here.  

PPA Amendments Must Be Adopted by the End of the 2009 Plan Year

By the last day of the plan year beginning in 2009, all qualified retirement plans must be amended to comply with the requirements of the Pension Protection Act of 2006 (“PPA”).  The following are some of the most significant PPA changes:

  • A defined contribution plan must provide that employer contributions will vest under a 2/20 graded or a 3-year cliff vesting schedule;
  • A defined benefit plan must include provisions reflecting new Internal Revenue Code section 436, which limits or prohibits the payment of benefits and prohibits further benefit accruals if the plan is poorly funded;
  • A cash balance plan must reflect a number of new rules that, generally, will simplify plan administration-the trade-off is a 3-year vesting requirement
  • A 401(k) plan must permit “qualified reservist distributions” of elective deferrals;
  • A pension plan must provide a “qualified optional survivor annuity”; and
  • A plan may give required benefit and tax information to a participant up to 180 days before the particiĀ­pant’s intended benefit commencement date and may allow the participant’s beneĀ­fit election period to be as long as 180 days.

For calendar-year plans, the deadline for adopting PPA amendments is December 31, 2009. 

While some PPA amendments may have been adopted already, plan sponsors should review their retirement plans with legal counsel to make sure that all necessary changes (including minor technical changes) are embodied in amendments by the end of the 2009 plan year.

Employers Beware — Circuit Court Chips Away At Exhaustion Doctrine

For at least two decades, district courts have readily dismissed claims for benefits where the claimant failed to exhaust all available administrative remedies under a plan before filing a lawsuit.  Under the exhaustion doctrine, a claimant must first obtain a final decision from a plan administrator denying the claim before filing in court.  But a recent case from the Sixth Circuit has flouted that important doctrine.

In Durand v. The Hanover Insurance Group, the plaintiff challenged the “legality” of the plan’s methodology for calculating lump sum distributions from a cash balance plan.  While the plan used a variable rate to calculate a participant’s interest credits during employment, the plan used a fixed rate to project forward and discount back to present value when a participant sought a lump sum distribution from the plan.  The Sixth Circuit characterized the plaintiff’s claim as a challenge to the “legality of the plan’s methodology” as opposed to a challenge to the plan administrator’s calculation of the claimant’s benefits.  According to the Sixth Circuit, the former represents a question to be decided by the courts, and the latter requires a “mere interpretation” of the plan that must first be subject to the plan’s administrative review process.  Thus, the Sixth Circuit invoked the “futility” doctrine and held that the plaintiff need not have first exhausted her administrative remedies before filing in court.

If this trend toward the erosion of the exhaustion doctrine continues, plan administrators may face the prospect of having benefit denials recast by creative plaintiffs as “illegal” denials of plan benefits. 

The Sixth Circuit’s opinion may be viewed here

New Rules on Employer-Owned Life Insurance

On May 27th, 2009, the IRS issued Notice 2009-48, which sets forth new reporting and notice obligations for certain employer-owned life insurance policies. The new rules become effective June 15, 2009.

The Pension Protection Act of 2006 (“PPA”) added new rules that require employers holding life insurance policies on employees and directors  to provide notice of the existence of certain policies to the insured employees and directors and also to provide notice of certain policies to the IRS. In this new notice, IRS provides comprehensive guidance on which employer-owned life insurance contracts are covered by the new rules, explains how various exceptions to the new rules apply, and outlines the various notice and consent requirements. The new guidance is effective June 15, 2009, but IRS won’t challenge a taxpayer who made a good faith effort to comply with the PPA based on a reasonable interpretation before this date.

An annual notice to the IRS (on Form 8925) must show the number of employees employed by the policyholder at the end of the year, the number of such employees insured under the contract, the total amount of insurance in force at the end of the year, and the type of business in which the policyholder is engaged, and must also certify that a valid consent was obtained from each insured employee (or the number of employees for whom such consent was not obtained). Compliance with the new rules can help an employer avoid taxable income on the proceeds of the policy.

Please click here to see a copy of IRS Notice 2009-48.