Year-End Deadlines Approach for Employee Benefit Plans

November 15, 2011

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 taken by December 31st.  This year, the biggest concerns arise out of the Patient Protection and Affordable Care Act and its companion law, the Health Care and Education Reconciliation Act of 2010 (jointly, “the Health Care Reform Acts”).  While the courts are still weighing the legality of certain parts of the Health Care Reform Acts, some new requirements go into effect early in 2012, and plan sponsors need to be ready to comply with them.

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 2011.

Health Care Plans

Claims Procedures and External Review Process
To comply with the Health Care Reform Acts, non-grandfathered health plans need to (a) update their current internal ERISA claims procedures and (b) provide for an independent external review process.  Some of the new rules are effective for plan years beginning on or after July 1, 2011, while others are not effective until plan years beginning on or after January 1, 2012.  Generally speaking, this means the effective date for full compliance is January 1, 2012 for calendar-year plans.

Complete information on the new requirements can be found here.

Summary of Benefits and Coverage
The Health Care Reform Acts require health insurance companies and group health plans to provide applicants and enrollees with a uniform “summary of benefits and coverage” (SBC).  The SBC is intended to help individuals better understand and compare their health coverage options.

Group health plans and insurers must be prepared to start delivering SBCs no later than March 23, 2012.  Comments on the feasibility of this effective date (which is set by statute) have been requested, and some relief may eventually be granted.  However, we believe best practices dictate the preparation of the SBC well in advance of March 23, 2012.

The U.S. Departments of Health and Human Services, Labor, and Treasury have issued proposed regulations addressing the new SBC requirement.  Here are some of the items the SBC must include:

  • uniform definitions of standard insurance terms and medical terms;
  • a description of the health coverage and an explanation of any exceptions, reductions, and limits on coverage;
  • premiums (or other cost of coverage), and information about any cost-sharing provisions;
  • examples that illustrate coverage for common benefit scenarios (including pregnancy and chronic medical conditions) and related cost-sharing;
  • an Internet address for getting information about prescription drug coverage, if a formulary is used for providing the coverage;
  • contact information for the group health plan or insurer, telling who to call with questions and how to get a copy of the plan document or insurance policy.

The SBC cannot exceed four double-sided pages, must use a minimum 12-point font, must be understandable to the average enrollee, and must be provided free of charge.  It may be distributed in either electronic or paper format.

A group health plan should have an SBC for each benefit package that is available under the plan.  SBCs may be prepared and distributed either by the group health plan or by its insurer.

An insurer is required to provide an SBC to a group health plan (or the plan’s sponsor) at definite times listed in the proposed regulations.  In turn, the plan (or its insurer) must provide an SBC to a participant or beneficiary:

  • with enrollment application materials;
  • before the first day of coverage, if there have been any changes in the information that must be in the SBC;
  • annually, upon renewal of coverage;
  • within seven days of enrollment pursuant to a special enrollment period;
  • upon request.

The proposed SBC regulations say that, initially, a group health plan or insurer must give a participant or beneficiary an SBC for each benefit package that is available to him/her.  At renewal time, the individual only needs to receive the SBC for the benefit package he/she is enrolled in – but if the individual requests SBCs for other benefit packages that are available to him/her, the plan or insurer must provide them.

Plan sponsors should note that a $100-per-day penalty will apply for failing to properly provide the SBC.  This penalty is an excise tax under Internal Revenue Code §4980D, and is separate from the fine of $1,000 per failure that may be imposed on plans and insurers under the Public Health Service Act.

Nondiscrimination Rules for Fully Insured Health Plans  
Until recently, fully insured health plans were not prohibited from discriminating in favor of the highly compensated.  But now the Health Care Reform Acts provide that the nondiscrimination rule of Internal Revenue Code §105(h), which has always applied to self-insured health plans, applies to fully insured plans as well.

While this new rule has technically been in effect since August 23, 2010, the IRS said in Notice 2011-1 that fully insured plans do not have to comply with the nondiscrimination rule until the IRS issues new guidance.  While §105(h) has been “on the books” for many years, its application has not been a model of clarity – and, of course, the existing regulations are geared toward self-insured plans.

We anticipate guidance in this area sometime in 2012.  In the meantime, sponsors of fully insured health plans will not be subject to the excise tax under Internal Revenue Code §4980D.  However, plan sponsors should seriously consider reviewing the existing rules and engaging in “sensitivity testing” to ensure that no major plan design changes will be necessary once the new rules are finalized.

Tax-Qualified Retirement Plans

Cycle A Plans
Plan sponsors whose employer identification numbers end in -1 or -6 are in IRS determination letter filing “Cycle A.”  A Cycle A sponsor must apply for a new determination letter for each of its tax-qualified retirement plans no later than January 31, 2012.  Each determination letter application must be accompanied by an amended and restated plan that complies with the Pension Protection Act of 2006 and other recent legislation.

Amendment Deadline for Cash Balance Pension Plans
ERISA and the Internal Revenue Code contained no provisions explicitly governing “cash balance” pension plans until the Pension Protection Act of 2006 came along.  Now, Internal Revenue Code §411(a)(13) and §411(b)(5) (and parallel ERISA provisions) apply to “applicable defined benefit plans,” which include cash balance plans.

In October, 2010, the IRS issued final regulations under §411(a)(13) and §411(b)(5).  By the last day of the 2011 plan year (i.e., December 31, 2011 for a calendar-year plan), cash balance plans must be amended to comply with the provisions of the final regulations that are effective in 2011.  Certain provisions of the regulations have a later effective date, and IRS Notice 2011-85 has extended the amendment deadline for these.

Final “Go Live” Dates for New Disclosure Rules
The U.S. Department of Labor (“DOL”) has announced its final extensions of the effective dates for two major disclosure initiatives – service provider disclosures to plan fiduciaries under ERISA §408(b)(2), and disclosures to plan participants under ERISA §404(a) and §404(c).

Service Provider Disclosures

Under ERISA, a contract or arrangement between a retirement plan and a service provider must be “reasonable” or it will constitute a prohibited transaction.  Intending to help plan fiduciaries assess “reasonableness,” the DOL recently issued new regulations specifying the type and extent of information about fees and services that a service provider must disclose to a plan fiduciary.  The DOL referred to the new rules as “a roadmap for disclosure” that will be of value to all parties.  

Deadline:  The effective date of the new disclosure rules has changed more than once.  Now, the DOL has announced that service providers covered by the regulations must supply the required information to their current customers no later than April 1, 2012.

Disclosures to Participants

The DOL has issued new regulations requiring plan administrators to disclose plan fees and other investment-related expenses to participants and beneficiaries who have the right to direct the investment of their individual plan accounts.  Plan administrators must make these disclosures on a quarterly basis.

The DOL recognizes that the information required for participant-level disclosures may be information that the plan’s service provider(s) must supply.  Therefore, the effective date of the participant-level fee disclosure rule is tied to the effective date of the service provider disclosure rule discussed above.

Deadline:  Initial fee and expense disclosures must be furnished to plan participants and beneficiaries no later than the later of:

– 60 days after the first day of the plan year that begins after
October 31, 2011, or

– 60 days after April 1, 2012 (i.e., May 31, 2012).

All ensuing quarterly disclosures must be furnished no later than 45 days after the end of the quarter.

Reminder: Annual Safe Harbor Plan Notice  
Each year, a safe harbor plan notice must be provided to all employees eligible to participate in a “safe harbor plan” – that is, a 401(k) plan or 403(b) plan that is designed to avoid ADP and ACP testing by providing a specific level of employer contributions.  The safe harbor plan notice must state what the employer’s contributions for the plan year will be and give employees information about making elective deferrals.

Deadline:  The safe harbor plan notice must be issued at least 30 days (but not more than 90 days) before the beginning of each plan year.

Immigration News

H-1B Cap Likely To Be Exhausted Before the End of December
Recent weeks have seen increasing usage of H-1B numbers by U.S. employers of foreign national professionals.  As of late October, over 66,000 of the 85,000 new H-1B visas available for the current fiscal year had been allocated.  It is quite likely that the annual H-1B quota will be reached before the end of 2011.  Thereafter, new H-1B visas will not become available until October 1, 2012.

We advise employers who are considering the filing of an H-1B petition to have these prepared without delay, as the U.S. Citizenship and Immigration Service announces the exhaustion of the cap only after the fact.  Filing H-1B petitions this November will give the greatest assurance that they will not be rejected due to the unavailability of visas.  For those H-1B petitions that cannot be filed in time, the filing season for the next fiscal year’s H-1B numbers will begin on April 2, 2012.

Executive Compensation

Registration Statements For “Top-Hat” Plans
Where a nonqualified deferred compensation plan covers only a select group of management or highly compensated employees, the plan will be exempt from most of the requirements of ERISA.  Such limited coverage plans are often referred to as “top-hat plans.”

Even with its special status, a top-hat plan is required to file annual reports on Form 5500 unless the sponsoring employer has filed a one-time registration statement in accordance with U.S. Department of Labor (“DOL”) regulations.  This alternate method of complying with ERISA’s reporting and disclosure requirements is both simple and often overlooked.

Because top-hat plan registration statements were the subject of a recent DOL advisory opinion, this is a good time to make certain that your top-hat plans have in fact been registered.  The registration statement must include the name and address of the employer, its employer identification number, and a declaration that the employer maintains a plan (or plans) “primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.”

The DOL regulations say explicitly, “Only one statement need be filed for each employer,” as long as that one statement reveals the number of top-hat plans maintained by the employer and the number of participants in each plan.

A top-hat plan registration statement should be filed within 120 days after a given plan becomes subject to ERISA’s reporting requirements.  For employers who have failed to meet this deadline, a correction procedure is available through the DOL for a modest fee.