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Year-End Deadlines Approach for Employee Benefit Plans

November 2, 2010


It’s that time of year again when plan sponsors need to review their employee benefit plans and programs to see whether amendments must be adopted or other actions must be taken by December 31st.  This year, new legislation affects both health care plans and retirement plans.  The summary below highlights a number of today’s important benefits issues and the related deadlines.  These matters need your attention before the end of 2010.

Tax-Qualified Retirement Plans

Cycle E Plans

Plan sponsors whose employer identification numbers end in -5 or -0 are in IRS determination letter filing “Cycle E.”  A Cycle E sponsor must apply for a new determination letter for each of its tax-qualified retirement plans no later than January 31, 2011.  Each determination letter application must be accompanied by an amended and restated plan that complies with both the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Pension Protection Act of 2006 (“PPA”).

§436 Amendment Deadline

Most PPA amendments to tax-qualified retirement plans had to be adopted by the last day of the plan year beginning in 2009.  But, at the last minute, the IRS extended the deadline for amending defined benefit plans to comply with new Internal Revenue Code §436.

New §436, added by PPA, imposes limits on amendments to, benefit accrual under, and benefit payments from underfunded defined benefit plans.  All single-employer defined benefit plans are required to include provisions that reflect §436.

If a defined benefit plan has not yet been amended to include §436 provisions, a §436 amendment must be adopted by the extended deadline – the last day of the plan year beginning in 2010 (i.e., December 31, 2010 for calendar-year plans).

Other Amendments Required

The Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”) and the Worker, Retiree, and Employer Recovery Act of 2008 (“WRERA”) both contain provisions that affect tax-qualified retirement plans.  Plans must be amended to comply with the HEART Act and WRERA by the last day of the plan year beginning in 2010 – that is, by December 31, 2010 for calendar-year plans.

HEART Act

1.  For the purposes of Internal Revenue Code §415, a plan’s definition of compensation must include any “differential wage payments” that the employer pays to an employee while the employee is serving in the military.

2.  A plan must provide that, if a plan participant dies while performing “qualified military service,” his/her survivors will get the death benefits they would have gotten if the participant had returned to work and then died.  (Note:  For a defined benefit plan, this new requirement does not mean that the plan is required to give benefit accrual service for the deceased participant’s period of qualified military service.)

3.  A 401(k) plan must permit “qualified reservist distributions” of a participant’s elective deferrals while the participant is serving in the military.

WRERA

PPA gave plans the option of offering direct rollovers to non-spouse beneficiaries; then WRERA made it mandatory for plans to include a non-spouse rollover option.  Therefore, a plan’s direct rollover provision must be amended – if it has not been amended already – to give a non-spouse beneficiary the right to do a direct rollover of a rollover-eligible distribution.  A non-spouse beneficiary may do a direct rollover only to an IRA.

Health Care Plans

The new health care reform package – consisting of two new laws, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (“Health Care Reform” or “Health Care Reform Acts”) – will require many changes to plan documents and plan administration over the next few years.  Here is what plan sponsors need to think about and take action on before December 31, 2010.

Grandfathered versus Non-Grandfathered Plans

Certain provisions of the Health Care Reform Acts do not apply (or apply with a delayed effective date) to “grandfathered” plans.  Therefore, plan sponsors need to know whether their health plans are grandfathered or not.

Basically, a grandfathered plan is any group health plan that was in existence on March 23, 2010 (the date the Patient Protection and Affordable Care Act was signed into law).  However, regulations provide that certain plan changes made after March 23, 2010 can cause a plan to lose its grandfathered status.  As a result, grandfathered status is likely to disappear over time.

The sponsor of a grandfathered plan must notify plan members and beneficiaries of the plan’s grandfathered status before January 1, 2011.  The plan’s grandfathered status also needs to be reflected in various plan communications.

If you think your plan is grandfathered but you aren’t certain, please contact a member of the MMWR Employee Benefits Practice Group for additional information and help with your analysis.

Dependent Coverage

For plan years beginning on and after September 23, 2010, Health Care Reform makes two significant changes in the rules affecting dependents covered by a health plan:

1.  Health plans are required to cover plan members’ dependent children until those children are age 26.

2.  Pre-existing condition exclusions for individuals under age 19 are prohibited.

All group health plans are affected by the new rules.  But, until 2014, a grandfathered group health plan is required to offer dependent child coverage up to age 26 only where a particular child is not eligible to enroll in an employer-sponsored health plan (other than a parent’s health plan).

In addition, a stand-alone health reimbursement arrangement (“HRA”), as well as any health flexible spending account (“health FSA”) that is an “excepted benefit” under HIPAA (i.e., receives employer contributions and is the employer’s only health plan), must comply with the new rules relating to dependents.

Documentation

Effective with the first plan year beginning on or after September 23, 2010:

  • Each affected plan must be amended.
  • Open enrollment materials and other plan communications – including summary plan descriptions – must be updated to reflect the new rules.

Of Immediate Concern

Each affected plan must offer a special 30-day enrollment opportunity for dependent children who were previously excluded from plan coverage on the basis of their age.  The plan’s open enrollment period is the most practical time to do this.

Claims Review Procedures

Non-grandfathered group health plans must put more stringent claims review procedures into effect for plan years beginning on and after September 23, 2010.  Recent regulations flesh out the Health Care Reform requirements.  These are just some of the new rules:

  • Urgent care claims must be decided within 24 hours.
  • Notices regarding claims and appeals must be provided “in a culturally and linguistically appropriate manner.”
  • The plan must provide continued health care coverage to a claimant while his/her appeal is pending.
  • The plan’s claims and appeals process must be designed to “ensure the independence and impartiality of the persons involved in making the decision.”
  • An external appeals process must be provided, in addition to the plan’s internal claims and appeals process. (For an insured plan, the external appeals process will be provided through the insurer.)

Important:  A non-grandfathered group health plan must comply in operation starting on the first day of the first plan year that begins on or after September 23, 2010.

Documentation

Effective with the first plan year beginning on or after September 23, 2010:

  • Each non-grandfathered group health plan must be amended, and summary plan descriptions must be updated.
  • Notices issued with respect to the claims and appeals process must conform to the standards set by the Health Care Reform Acts and the regulations.

Lifetime and Annual Limits

For plan years beginning on and after September 23, 2010, Health Care Reform prohibits lifetime limits on the “essential benefits” provided by a group health plan, and permits only restricted annual limits.  Annual limits will be completely phased out by 2014.

For the first plan year beginning on or after September 23, 2010, the restricted annual limit on essential health benefits is $750,000.  For the following two plan years, the restricted annual limits are $1,250,000 and $2,000,000.

Both grandfathered and non-grandfathered group health plans are subject to the new rules that prohibit lifetime limits and restrict annual limits.

Exception

If raising a group health plan’s annual limits to the specified level would result in a significant decrease in access to benefits for current plan members, or a significant increase in premiums paid by plan members, the plan sponsor may apply to the Secretary of Health and Human Services for a one-year waiver.  The application must be submitted at least 30 days before the beginning of the plan year.  For more information, click here.

Documentation

Effective with the first plan year beginning on or after September 23, 2010:

  • Group health plans that have limits on “essential benefits” must be amended. All lifetime limits must be eliminated; therefore, a plan that has obtained a waiver for its annual limits may still need to be amended to remove lifetime limits.
  • Open enrollment materials and other plan communications – including summary plan descriptions – must be updated to reflect the new rules.

Of Immediate Concern

Each group health plan must offer a special 30-day enrollment opportunity for employees and dependents who were previously excluded from plan coverage because they had reached a lifetime limit.  The plan’s open enrollment period is the most practical time to do this.

Nondiscrimination Rules

Under the Health Care Reform Acts, an insured, non-grandfathered group health plan is prohibited from discriminating in favor of highly compensated individuals, effective for plan years beginning on and after September 23, 2010.  The new nondiscrimination rules for insured plans parallel those that already apply to self-funded plans under Internal Revenue Code §105(h), and use the same definition of “highly compensated individual.”

Testing:  For plan years beginning on and after September 23, 2010, each insured, non-grandfathered group health plan that covers highly compensated individuals must be tested annually to see whether it passes “eligibility” and “benefits” tests.  The test results should be documented.

If an insured, non-grandfathered plan is found to discriminate in favor of highly compensated individuals, adverse tax consequences to the highly compensated individuals could result.

Emergency Services

Under Health Care Reform, emergency services provided by a non-grandfathered group health plan must be made available without pre-authorization and at the in-network charge or co-pay, no matter where (or by whom) the emergency services are provided.

Important:  A non-grandfathered group health plan must comply in operation starting on the first day of the first plan year that begins on or after September 23, 2010.

Documentation

Effective with the first plan year beginning on or after September 23, 2010:

  • Each non-grandfathered group health plan must be amended.
  • Plan communications – including summary plan descriptions – must be updated to reflect the new rule.

Over-the-Counter Medicines

Health Care Reform provides that, effective January 1, 2011, health FSAs and HRAs must stop reimbursing expenses for over-the-counter medicines (except insulin and over-the-counter medicines that are prescribed).

Important:  Operational compliance must begin on January 1, 2011.

Documentation

Effective January 1, 2011:

  • Health FSAs and HRAs must be amended. In the case of a health FSA, the deadline for adopting the amendment is June 30, 2011.
  • Open enrollment materials and other plan communications – including summary plan descriptions – must be updated to reflect the new rule.

Some Good News:  W-2 Reporting Delayed

Health Care Reform requires the sponsors of grandfathered and non-grandfathered group health plans to include the cost of “applicable employer-sponsored coverage” on each plan member’s Form W-2.  This new requirement was originally effective for 2011.  However, the Internal Revenue Service recently provided transition relief, making the new Form W-2 reporting requirement optional for 2011.

New Correction Program for

Nonqualified Deferred Compensation Plans

IRS Notice 2010-6 established a limited voluntary correction program for nonqualified deferred compensation plans.  Where a nonqualified plan’s documentation does not satisfy all the requirements of Internal Revenue Code §409A, the plan sponsor may correct the “document failure” by means of the new program.  In some cases, penalties will be waived if the document failure is corrected by December 31, 2010.