Qualified Retirement Plans
The Internal Revenue Service (IRS) has issued the 2008 Cumulative List of Changes in Plan Qualification Requirements (Notice 2008-108). This is an annual listing of the changes an individually designed single-employer plan must take into account when preparing to apply for a determination letter during Cycle D, which begins February 1, 2009 and ends January 31, 2010. An individually designed single-employer plan is in Cycle D if the last digit of the plan sponsor’s employer identification number is four or nine. The 2008 list includes the first updates for the Pension Protection Act of 2006 (PPA) and special rules under the Heroes Earnings Assistance and Relief Tax Act of 2008. About 48 new changes are included, although all changes do not apply to all plans.
The U.S. Department of Labor (DOL) has issued extensive guidance regarding the Employee Retirement Income Security Act (ERISA) Fidelity Bonding Requirements (Field Assistance Bulletin 2008-04). The guidance consists of a collection of the most frequent questions received by DOL on ERISA fidelity bonding issues and DOL’s responses to those questions. It is available at: http://www.dol.gov/ebsa/regs/fab2008-4.html. In most instances, $500,000 per plan is the maximum ERISA fidelity bond amount that can be required for a plan official. Effective for plan years beginning on or after January 1, 2007, however, the maximum required bond amount is $1,000,000 for officials of plans holding employer securities. This bulletin should be very useful for determining the sufficiency of ERISA fidelity bonding arrangements.
The PPA included many provisions (initially effective in 2007 and 2008) intended to strengthen funding of defined-benefit pension plans. Some of the new provisions are sanctions and restrictions that apply if certain funding levels are not maintained. The recent decline in financial markets has caused many defined-benefit plans to become severely underfunded and possibly subject to these relatively new sanctions and restrictions. The plan actuary must determine the plan’s adjusted funding target attainment percentage (AFTAP) in order for a plan to determine how the new rules will apply to it. Many uncertainties remain in applying the new funding rules, and the U.S. Congress is being petitioned to provide emergency relief for pension plans from the most onerous requirements of the new law.
IRS Code Section 403(b) final regulations are effective January 1, 2009. The most significant and immediate impact is that each 403(b) program must be maintained pursuant to a written plan document by January 1, 2009. All 403(b) plans or arrangements should be reviewed for compliance with the new final regulations before year end.
The Emergency Economic Stabilization Act of 2008 (EESA) provides retirement plan-related relief for victims of the Midwestern flood disaster in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Wisconsin. The relief applies to disaster victims of floods, severe storms, and tornadoes as declared by the Federal Emergency Management Agency (FEMA) on or after May 20, 2008 and before August 1, 2008. EESA waives the 10-percent penalty tax on early withdrawals made before January 1, 2010, if the withdrawal is made from an individual retirement account (IRA) or a tax-favored retirement plan (under Code Sections 401(k), 403(b), or 457(b)) and is considered to be a “qualified disaster recovery assistance distribution.” The withdrawal cannot exceed $100,000, and the 20-percent withholding tax does not apply. Also, if a hardship withdrawal was taken within a specified six-month period to be used for a home purchase that did not happen because of the Midwestern flood disaster, the money may be contributed back to the plan if done by the end of February 2009. Plan loan limitations are effectively doubled (up to the lesser of $100,000 or 100 percent of the vested accrued balance) on loans from a Code Section 401(a) plan or 403(b) plan made before January 1, 2010, in connection with the effects of the flood disaster. Loan repayments on existing loans also may be deferred an additional 12 months without triggering a default, with appropriate adjustments for interest. There are many technical rules for EESA relief eligibility, and the applicable plan would need to be amended to make EESA relief available.
The United States Court of Appeals for the Fifth Circuit found no remedy under ERISA for an employer’s failure to mail life insurance conversion forms to a former employee’s correct address. The practical message of Hobbs v. Baker Hughes Oilfield Operations, Inc., (2008 WL 4411521, 5th Cir. 2008) is that employers should be sure to notify participants properly of their conversion rights under life insurance programs provided by the employer. The conversion rights typically are established by state insurance laws and expire within 30 days after separation from service. It is far simpler and less costly to inform employees about their conversion rights under state law in the plan’s summary plan description and to maintain a regular system for getting conversion notice information to departing employees promptly, than to face costly litigation when the unexpected happens.
Beginning in January 2009, group health plans must collect and provide additional data to the Centers for Medicare & Medicaid Services (CMS), instead of the Health Care Financing Administration, to assist Medicare in the administration of the new Medicare secondary payer mandatory reporting requirement. Under the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA), beginning January 1, 2009, the insurer or third-party administrator (TPA) for an insured group health plan, as defined in IRS Code Section 5000(b)(1), and the plan administrator or plan fiduciary of a self-insured or self-administered group health plan must:
To assist with compliance with this reporting requirement, CMS has issued the “MMSEA Section 111 MSP Mandatory Reporting GHP User Guide.” Plans that fail to comply may be subject to a $1,000-per-day penalty. The required information includes birth dates of plan participants’ dependents and whether they are entitled to Medicare as secondary coverage. This may be information that participants would rather not disclose.
All nonqualified deferred compensation plan and arrangement documentation must be in compliance with the requirements of IRS Code Section 409A by December 31, 2008. On November 10, 2008, Acting Deputy Benefits Tax Counsel Helen H. Morrison advised that Code Section 409A will go into effect stating, “you can hold me to that.” Stephen B. Tackney, IRS Senior Counsel, said that he would be the one who would draft any extension of IRS Code Section 409A and “there is no indication it is going to happen.”
Legal News is part of our ongoing commitment to providing legal insight to our employee benefits clients and colleagues. If you have any questions about or would like to discuss these topics further, please contact your Foley attorney or any of the following individuals:
Katherine L. Aizawa
Christopher S. Berry
Lloyd J. Dickinson
Gregg H. Dooge
Carl D. Fortner
Robert E. Goldstein
Samuel F. Hoffman
Sarah B. Krause
Harvey A. Kurtz
Belinda S. Morgan
Isaac J. Morris
Greg W. Renz
Leigh C. Riley
Timothy L. Voigtman
Michael H. Woolever