Qualified Retirement Plans
The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), enacted in late December 2008, waives any required minimum distribution (RMD) for 2009 from retirement plans that hold each participant’s benefit in an individual account such as 401(k), 403(b), and certain 457(b) plans. (WRERA, PL 110-458) WRERA also waives any RMD for 2009 from an individual retirement account (IRA). WRERA also contains technical corrections to the Pension Protection Act of 2006 (PPA), including:
WRERA makes many other technical changes that may be of interest in specific situations and with specific types of plans.
The U.S. Department of Labor (DOL) issues final regulations on assessment of civil penalties for failure to provide documents to participants. (29 CFR Section 2560.502c-4) Civil penalties of up to $1,000 per day may be assessed against plan administrators for failure to deliver certain documents to participants and beneficiaries, as required by the Employee Retirement Income Security Act of 1974 (ERISA) and the PPA. The documentary disclosure is required with regard to notice of funding-based limitations on certain forms of distributions from pension plans, multi-employer plan information to be made available on request, and notice of potential withdrawal liability. The rule also covers failure to provide the automatic contribution notice required by ERISA Section 514(e)(3). The existence of such substantial penalties is a reminder to each plan administrator to identify all required notices and disclosures applicable to its plans, to calendar them as needed, and to monitor their preparation and distribution on a regular basis.
Internal Revenue Service (IRS) issues final regulations on automatic contribution arrangements. (26 CFR Sections 1.401(k)-2, -3; 1.401(m)-2, -3; and 1.414(w)-1) Automatic contribution arrangements, as facilitated by PPA, have become a popular tool for expanding coverage of 401(k) plans, 403(b) plans, and certain Code Section 457(b) plans. An automatic contribution arrangement provides that, in the absence of an affirmative election by an eligible employee, an automatic deferral election will apply to the participant. The rules do not apply to automatic contribution arrangements set up under guidance available before the enactment of PPA in 2006 such as those described in Revenue Ruling 2000-8. The final rules apply to qualified automatic contribution arrangements (QACAs) and eligible automatic contribution arrangements (EACAs). Effective dates vary based on the specific rule, from plan years beginning on or after January 1, 2008, to plan years beginning on or after January 1, 2010.
The final rules dropped a requirement of the proposed regulations that plans invest automatic contributions in a qualified default investment alternative (QDIA), when there is no participant investment direction on file. Also, despite many requests for this provision, the final rules do not allow an employer to create an EACA that is initially effective other than on the first day of the plan year. As most plan administrators of plans using QACAs and EACAs understand, the compliance requirements are highly technical and require close attention to detail. The IRS and DOL have published Automatic Enrollment 401(k) Plans, which provides a good general background on these programs. It is available from the DOL Web site: http://www.dol.gov/ebsa/pdf/automaticenrollment401kplans.pdf.
Economic distress brings additional retirement plan issues to the surface. Layoffs, reducing or suspending matching contributions, and wage and salary reductions all have benefit plan implications. Layoffs approaching or exceeding 20 percent of a plan’s active participants may trigger a partial termination, which requires 100-percent vesting for all affected participants. Layoffs also may result in payment of severance pay. Rules regarding how to treat severance pay under 401(k) and other retirement plans have recently changed. Reducing or suspending matching contributions may require notice to participants, especially in the case of safe harbor 401(k) plans. Wage and salary reductions may affect employees’ eligibility under employee welfare benefit plans in particular, with consequences that may be unintended. If a group health plan requires an employee to work 37.5 hours per week to be eligible, and the work week is cut to 34.5 hours, for example, affected employees may cease to be eligible under the specific terms of the group health insurance policy, or the stop-loss insurance policy for a self-funded plan, unless an agreement is reached with the insurer to extend coverage to those affected by the reduced work week. Summary plan descriptions may be affected, and summaries of material modifications may be required. These are only brief descriptions of the many employee benefits issues that may arise as employers react to the current economic situation. It is important to determine how changes a company may be making will affect its specific plans and the affected employees.
The U.S. Supreme Court issued a decision that reinforces the “plan documents rule” for plans subject to ERISA. In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, No. 07-636, 555 U.S. __, 2009 US Lexis 869 (U.S. Jan 26, 2009), a participant had listed his then-wife as his beneficiary. The couple later divorced. In the divorce decree, the wife disclaimed any right she had to plan benefits. However, the participant never changed his beneficiary designation before his death. Despite the divorced wife’s disclaimer, the Supreme Court (Court) held that the plan administrator acted correctly by following the plan documents and paying the deceased participant’s account balance to the participant’s designated beneficiary (the former wife). In the absence of a valid waiver under an established plan procedure, the Court found that the plan administrator acted properly by following the terms of the plan and requiring payment to a validly designated beneficiary.
Plan administrators should compare administrative practices that may have become part of the plan’s routine administration to determine if they are consistent with the language of the plan. For example, if a plan administrator routinely disqualifies a divorced spouse from being a beneficiary (unless re-designated by the participant after the divorce), the plan administrator should make certain that action is authorized by the plan document.
The United States Court of Appeals for the Seventh Circuit ruled that the sponsor of a 401(k) plan had no fiduciary duty to disclose revenue-sharing arrangements to plan participants. (Hecker v. Deere & Co., No. 07-3605 (7th Cir. 2009)). In the first appellate court decision of its kind, the Seventh Circuit ruled that the sponsor of a 401(k) plan that offered mutual funds as its investment options was not required to disclose to plan participants an arrangement pursuant to which the provider of the mutual funds paid some of the asset-based fee revenue it received upon sale of the funds to the plan, to a sister company serving as the plan trustee and record keeper, to pay for the trustee and recordkeeping expenses incurred on behalf of the plan.
The American Recovery and Reinvestment Act of 2009 (ARRA), which became law on February 17, 2009, includes new Consolidated Omnibus Budget Reconciliation Act (COBRA) rules to help involuntarily terminated employees maintain group health plan coverage. (American Recovery and Reinvestment Act of 2009, P. L. 11-5, Title III, Premium Assistance for COBRA Benefits). Our February 20, 2009, Legal News Alert on COBRA provisions in the ARRA can be viewed at: http://www.foley.com/publications/pub_detail.aspx?pubid=5732.
The DOL offers a frequently updated Web page to provide employers with information on COBRA continuation assistance, located at: http://www.dol.gov/ebsa/COBRA.html.
New answers to questions concerning the new COBRA rules are appearing every day. Foley's Employee Benefits attorneys are hosting a special edition of their very popular Employee Benefits Broadcast on March 24, 2009. This session will address the new COBRA provisions in the ARRA. For more information, please visit http://www.foley.com/news/event_detail.aspx?eventid=2683.
The Children’s Health Insurance Program Reauthorization Act of 2009 (2009 CHIP) became law on February 4, 2009. (PL 111-30) 2009 CHIP provides health insurance to children living with families that are not poor enough to be eligible for Medicaid, but are unable to afford private health insurance. The new act is effective April 1, 2009. Under 2009 CHIP, group health plans and related cafeteria plans are required to provide special enrollment rights for an employee who is eligible for, but not enrolled in, coverage under the plan if certain conditions are met. These conditions include the loss of coverage under Medicaid or the children’s health insurance program operated under 2009 CHIP, or a timely request for coverage under the group health plan if the employee becomes eligible for premium assistance under Medicaid or 2009 CHIP. Group health plans and related cafeteria plans may require amendment to conform to these requirements.
“Top-hat plan” registration requirements are the subject of a new DOL advisory opinion. (Advisory Opinion 2008-08A) A requirement for a nonqualified deferred compensation plan to be exempt from all requirements of ERISA, other than certain reporting requirements and enforcement rules, is that coverage must be restricted to a select group of management or highly compensated employees. Such limited coverage plans are often referred to as top-hat plans. A top-hat plan is required to file annual reports on Form 5500 unless the sponsoring employer has met the “top-hat plan registration requirement” found in DOL regulation 29 CFR Section 2520.104-3. The top-hat plan registration requirement is both simple and often overlooked. It requires that the employer sponsoring a top-hat plan must file a statement with the DOL that includes the name and address of the employer, its employer identification number, a statement of the number of such plans and the number of participants, together with certain representations concerning the plan. The statement must be filed within 120 days after the plan becomes subject to the reporting requirements of ERISA. If an employer files a top-hat registration statement, it is generally understood that it also will be applicable for any top-hat plans subsequently established by the same employer and members of that employer’s controlled group.
The advisory opinion provides that the “employer” that is identified in the registration statement for a plan of a controlled group of corporations or a group of trades or businesses under common control may be:
If only one member of a group of employers is named, the registration statement should include some general identification information regarding other members of the group. An updated registration statement is not required so long as the employer named continues to be an employer of employees covered by the plan.
The issuance of this advisory opinion is a timely reminder to determine whether a top-hat registration statement has been filed with the DOL on behalf of nonqualified deferred compensation plans, if any. A late filing correction procedure is available for a modest fee from the DOL.
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