Qualified Retirement Plans
On May 18, 2009, the Internal Revenue Service (IRS) published proposed regulations that solve a problem for certain safe harbor 401(k) plans. Proposed Treasury Regulation 1.401(k)-3 and 1.401(m)-3. Existing rules provide two alternative ways to establish a safe harbor 401(k) plan. One alternative requires the employer to make specified minimum employer matching contributions to the plan. The second alternative requires the employer to make a minimum nonelective employer contribution to the plan.
In response to current economic conditions, employers sponsoring safe harbor 401(k) plans, like many other employers, are sometimes compelled to reduce employer deposits into their sponsored 401(k) plans during the year. Existing rules permit employers sponsoring safe harbor 401(k) plans to which the employer makes the necessary matching contributions to reduce or suspend their 401(k) safe harbor matching contributions mid-year if certain conditions are met, including adoption of a plan amendment and advance notification to participants.
Until the proposed regulations were issued (they may be relied on effective May 18, 2009), the only means to reduce or eliminate the contribution of employers sponsoring safe harbor 401(k) plans relying on the employer nonelective contribution alternative was to terminate the plan in its entirety. This was not an attractive alternative for the affected participants who would no longer enjoy the pretax savings feature of the plan.
The proposed regulations permit an employer sponsoring a safe harbor 401(k) plan that relies on the employer making required minimum nonelective contributions to suspend or reduce its contributions mid-year, provided certain conditions are met, including — under some circumstances — the employer has suffered a substantial business hardship (comparable to the substantial business hardship described in Internal Revenue Code (Code) Section 412(c)). Employers sponsoring safe harbor 403(b) plans are provided similar relief.
Timothy Hauser, an associate solicitor in the U.S. Department of Labor’s (DOL) Plan Benefits Security Division, recently offered some useful guidance for ERISA fiduciaries when dealing with experts. The advice is timely now, as fiduciaries under the Employee Retirement Income Security Act of 1974, as amended (ERISA) confront the many challenges presented by current economic conditions. Here are the key points:
These points are excellent reminders of best practices for ERISA fiduciaries and, if followed, should significantly reduce exposure to loss for breach of fiduciary duty to ERISA plan participants.
IRS has announced dollar limits for Health Savings Accounts (HSAs) and High Deductible Health Plans (HDHPs) for 2010. Revenue Procedure 2009-29. For calendar year 2010, the annual limitation on deductions for an individual with self-only coverage under an HDHP is $3,050. For calendar year 2010, the annual limitation on deductions for an individual with family coverage under an HDHP is $6,150.
For calendar year 2010, an HDHP is defined as a health plan with an annual deductible that is not less than $1,200 for self-only coverage or $2,400 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $5,950 for self-only coverage or $11,900 for family coverage.
The implementation of the new mandatory reporting requirements by employers and insurers for Medicare has been delayed three months. Section 111 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 added significant new mandatory reporting requirements for group health plans; liability insurance, including self-insurance; no-fault insurance; and workers’ compensation benefits, to report where they have made a payment to a Medicare beneficiary. All mandatory reporters must register with the Center for Medicare & Medicaid Services (CMS) no later than September 30, 2009. The original deadline was June 30, 2009.
The intent of the law is to change significantly how the Medicare secondary payer rules are enforced, putting a substantial burden on employers and insurers to give Medicare key information needed for enforcement of the rules, as claims are being paid by them to persons who are covered by Medicare. The reports are required quarterly, and the sanction for failing to report can be as much as $1,000 per day per claim. Our concern is that employers, particularly self-funded employers, may not have focused on these reporting requirements yet. Now there is an additional three-month period to catch up, if necessary.
The CMS Web site is an excellent resource for these new reporting requirements.
IRS Notice 2009-48 provides guidance on the treatment of certain employer-owned life insurance contracts. New Code Sections 101(j) and 863 were added by the Pension Protection Act of 2006. Code Section 101(j)(1) provides that, in the case of an employer-owned life insurance contract, the amount excluded from gross income of an applicable policyholder under Code Section 101(a)(1) in the event of the death of the insured shall not exceed an amount equal to the sum of the premiums and other amounts paid by the policyholder for the contract. In general, an employer-owned life insurance contract is a life insurance contract (i) that is owned by a person engaged in a trade or business, (ii) under which contract that person is a beneficiary, and (iii) that covers the life of an insured who is an employee on the date the contract is issued. An applicable policyholder is a person who owns an employer-owned life insurance contract or a related person as described in Code Section 101(j)(3).
Notwithstanding the general rule, which significantly limits the ability of employers to receive tax-free income under life insurance contracts covering their employees, there are exceptions provided in Code Section 101(j)(2) in the case of certain employer-owned life insurance contracts with respect to which certain notice and consent requirements are met. Those exceptions are based either on (i) the insured’s status as an employee at any time during the 12-month period before the insured’s death or as a director, a highly compensated employee, or highly compensated individual at the time the contract is issued, or (ii) the extent to which death benefits are paid to (or used to purchase an equity interest in the applicable policyholder from) a family member, trust, or estate of the insured employee. Code Section 6039I provides that every applicable policyholder that owns one or more employer-owned life insurance contracts issued after August 17, 2006 must file a return, at such time and in such manner as the Treasury Secretary prescribes, setting forth specific information for each year the contracts are owned. In order to satisfy this requirement, a taxpayer must file Form 8925 with the taxpayer’s income tax return for each taxable year ending after November 13, 2007.
A contract of life insurance that is subject to a split-dollar arrangement is an employer-owned life insurance contract if the contract is owned by a person engaged in a trade or business and is otherwise described in Code Section 101(j)(3). Under Code Section 101(j)(2)(B), however, the general rule of Code Section 101(j)(1) does not apply to the extent any amount received by reason of death is paid to a family member of the insured, an individual who is a designated beneficiary, or a trust established for the benefit of a family member or designated beneficiary.
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.
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
Casey K. Fleming
Robert E. Goldstein
Andrew D. Gregor
Samuel F. Hoffman
Sarah B. Krause
Harvey A. Kurtz
Gwenn Girard Lukas
Belinda S. Morgan
Greg W. Renz
Leigh C. Riley
Michael H. Woolever