Employee Benefits Developments for March 2009

09 April 2009 Publication

Legal News: Employee Benefits

Qualified Retirement Plans

For defined benefit plans, the first annual pension funding notice required by the Pension Protection Act of 2006 (PPA) is due to be provided to plan participants by April 30, 2009 for calendar year plans (120 days after the end of the plan year beginning in 2008). Small plans (no more than 100 total participants throughout the year) have until the Form 5500 is due for the plan year beginning in 2008 to provide the first annual notice. Guidance and a sample notice are included in U.S. Department of Labor (DOL) Field Assistance Bulletin 2009-01 available at: http://www.dol.gov/ebsa/regs/fab2009-1.html.

Plan sponsors are reminded of the requirement to notify participants entitled to receive benefits from a defined benefit pension plan or a money purchase pension plan of the consequences of failing to defer the distribution of their benefits. This requirement was added by Section 1102(b)(2)(B) of the PPA and is currently in effect. Participants in such plans must receive their benefits in the form of a qualified joint and survivor annuity (QJSA) unless the participant elects an alternative form of payment and the participant’s spouse, if any, consents to the alternate form. The election and spousal consent are not valid, however, unless the participant has received a notice (often referred to as the QJSA notice) that includes a general description of the forms of benefit payment available under the plan. If the benefit is immediately available to the participant, then the participant must be informed of the right, if any, to defer receipt of the distribution and, as required by the PPA, the consequences of the failure to defer such receipt. Compliance with this change means that a plan’s QJSA notice should be revised. The Internal Revenue Service (IRS) recently commented that many employers have not made the necessary changes to their QJSA notices.

IRS Notice 2007-7 provides the following guidance that may be relied on as a safe harbor: (1) in the case of a defined benefit plan, the QJSA notice should include a description of how much larger benefits will be if the commencement of distributions is deferred (this description can be based solely on the normal form benefit); (2) in the case of a money purchase pension plan, the QJSA notice should include a description indicating the investment options available under the plan (including fees) that will be available if distributions are deferred; and (3) for both kinds of plans, the QJSA notice should include any text from the summary plan description that contains any special rules that might materially affect a participant's decision to defer.

The United States Court of Appeals for the Seventh Circuit recently held that the value of the benefit to which a participant is entitled under a defined benefit plan must be determined as of the participant’s retirement date and not as of any later date upon which the participant applies for benefits. Contilli v. Local 705 Int’l Bhd. of Teamsters Pension Fund, 2009 U.S. App. Lexis 6102 (7th Cir.; Mar. 23, 2009). In the case, the plaintiff participant passed the plan’s normal retirement age when he stopped working in October 1997. He filed the required application to commence receiving pension benefits in January 1998. Payment of benefits commenced in February 1998 without either an actuarial adjustment for the three-month delay in payment from his retirement date or payment of pension benefits for those three months (November through January). The court held that, under the Employee Retirement Income Security Act of 1974, as amended (ERISA), the plaintiff had a nonforfeitable right to the value of his benefit as of his retirement date, and that the plan was required to make the three missed payments or make an actuarial adjustment to future payments to account for the delay in the payment commencement date. This holding of the court is consistent with the position of the IRS on this issue but not, of course, with the position of the Central States Teamsters Pension Fund or with a significant number of other benefits practitioners. Plan sponsors should review their defined benefit plans for consistency with this ruling.

The Board of Governors of the Federal Reserve System approved final rules exempting loans from employer-sponsored individual account retirement plans from the Truth in Lending Act of 1968 disclosure requirements (known as Regulation Z). The exemption applies to loans to participants from tax-qualified retirement plans under Internal Revenue Code (Code) Section 401(a), tax-sheltered annuity plans under Code Section 403(b),and eligible governmental deferred compensation plans under Code Section 457(b). Unfortunately, the final regulation is not effective until July 1, 2010. Until then, compliance with Truth in Lending Act requirements is still necessary.

Welfare Plans

The DOL has issued model notices for use in connection with providing the Consolidated Omnibus Budget Reconciliation Act (COBRA) premium subsidy under the American Recovery and Reinvestment Act of 2009 (ARRA). The ARRA provides that certain qualified beneficiaries who are eligible for COBRA continuation of health coverage (or similar continuation coverage under state law) may receive a 65-percent subsidy of their COBRA premium for up to nine months, usually funded by a payroll tax credit to the employer equal to the 65-percent subsidy. The new law requires that written notice of the availability of the COBRA premium subsidy must be provided to all individuals who had any COBRA qualifying event during the period of September 1, 2008 through December 31, 2009. The initial round of notices, for individuals having a COBRA qualifying event during the period of September 1, 2008 through February 16, 2009, are to be issued by April 18, 2009. The DOL’s Web site for access to the forms and significant other information regarding the COBRA premium subsidy is found at: http://www.dol.gov/ebsa/COBRA.html. The model COBRA notices are unlikely to provide enough information for most recipients to understand who is eligible for the premium subsidy and what steps need to be taken to receive it. Many employers will wish to send clarifying letters or memorandums to provide additional explanations or modify the model notices to include more information.

As noted above, the new COBRA premium subsidy also is available to small employers covered under state mini-COBRA laws but not covered by COBRA. Fortunately, most if not all of these plans are likely to be fully insured so there will be an insurance company and/or a broker available to assist with compliance. Small employers (fewer than 20 employees) should be sure to check with their health insurance provider and/or their insurance broker to determine how their state’s mini-COBRA law is being administered in relation to the COBRA premium subsidy and what their obligations are under the new law.

The IRS has issued guidance for the COBRA premium subsidy rules that define involuntary termination. (IRS Notice 2009-27). One requirement of eligibility for the COBRA premium subsidy is that the former employee must have been involuntarily terminated from employment in order to qualify as an assistance eligible employee (AEI). In Notice 2009-27, an involuntary termination is “a severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services” based on all the facts and circumstances. The first nine questions and answers in the notice are intended to explain what the definition means.

The ARRA changed the privacy rules of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The HIPAA privacy rules apply to covered entities under HIPAA, including group health plans sponsored by employers as well as health insurers, HMOs, and long-term care insurers, and their business associates. Group health plans that are self-funded by the employer (rather than being insured) will have third-party administrators, which are business associates, and, in some cases, the employer also may process protected health information (PHI), so employers with this type of plan will want to be sure that its plan and business associates are in compliance with the new rules by the effective dates. The ARRA requires every covered entity to notify a person when there has been a breach of that person’s PHI and to notify the U.S. Department of Health & Human Services (HHS) of all breaches. Notice to the affected person is required within 60 days of when the breach is discovered. In any case in which a breach affects 500 or more persons, local media outlets also must be notified. Notice is required immediately to HHS if the breach affects 500 or more persons and other breaches are to be reported, in the aggregate, on an annual basis. This rule becomes effective 30 days after the applicable regulations are issued (and the regulations are to be issued by August 17, 2009).

Business associates are made subject to the key privacy rules of HIPAA effective February 17, 2010. Under prior law, the privacy rules only applied to covered entities. Under the ARRA, business associates will be required to notify the covered entity of any breach of confidentiality of PHI that was obtained from that covered entity, and the same civil and criminal penalties will apply to business associates as are applicable to covered entities. These new rules must be included in business associate agreements, so existing business associate agreements will need to be amended by the effective date of the new requirements.

The ARRA also adopted significant additional changes to the HIPAA privacy rules regarding requests for restrictions on the use of PHI, access to electronic medical records, and accounting for disclosures of electronic medical records. Extensive regulations from HHS appear to be necessary before most of these changes can be implemented.


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
San Francisco, California

Christopher S. Berry
Madison, Wisconsin

Lloyd J. Dickinson
Milwaukee, Wisconsin

Gregg H. Dooge
Milwaukee, Wisconsin

Casey K. Fleming
Milwaukee, Wisconsin

Robert E. Goldstein
San Diego, California

Andrew D. Gregor
San Diego, California

Samuel F. Hoffman
San Diego, California

Sarah B. Krause
Milwaukee, Wisconsin

Harvey A. Kurtz
Milwaukee, Wisconsin

Gwenn Girard Lukas
Milwaukee, Wisconsin

Belinda S. Morgan
Chicago, Illinois

Greg W. Renz
Milwaukee, Wisconsin

Leigh C. Riley
Milwaukee, Wisconsin

Michael H. Woolever
Chicago, Illinois


Internal Revenue Service regulations generally require that, for purposes of avoiding United States federal tax penalties, a taxpayer may only rely on formal written opinions meeting specific requirements described in those regulations. This newsletter does not meet those requirements. To the extent this newsletter contains written information relating to United States federal tax issues, the written information is not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal tax penalties, and it was not written to support the promotion or marketing of any transaction or matter discussed in the newsletter.

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