Qualified Retirement Plans
The IRS issued an updated model tax notice for qualified plans to provide to recipients of eligible rollover distributions from an employer plan. (Notice 2009-68). This notice is often referred to as the ERISA Section 402(f) tax notice. A model Section 402(f) tax notice was last issued in 2002. Notice 2009-68 contains a version of the model notice that applies to the distribution of designated Roth contributions and one that applies to the distribution of traditional contributions. These updated model Section 402(f) tax notices reflect changes in the law since 2002 and reorganize and simplify the presentation of information. Notice 2009-68 is available at http://www.irs.gov/pub/irs-drop/n-09-68.pdf.
The plan administrator is required to provide a Section 402(f) tax notice within a reasonable time (rules specify time periods and exceptions) before the date an eligible rollover distribution occurs, but not fewer than 30 days before the date of the distribution (although a participant may waive the 30-day notice requirement in certain situations). Plan administrators are not required to use a model notice to provide the notice required by ERISA Section 402(f) but are ensured of compliance if a model notice is used. The updated Section 402(f) tax notice may be used immediately but must be used after December 31, 2009, to ensure compliance with notice requirements. In order to remain a safe harbor notice, the model notices provided in Notice 2009-92 must be updated by the plan administrator for any law changes applicable to the notice occurring after September 28, 2009.
The IRS issued Revenue Ruling 2009-30, Notice 2009-65, Notice 2009-66, and Notice 2009-67, offering guidance on automatic enrollment and automatic contribution increase arrangements in 401(k) plans and SIMPLE IRA plans. Revenue Ruling 2009-30 illustrates how a 401(k) plan may implement an increasing default contribution percentage, including the ability to gear automatic increases in the default contribution percentage to the timing of annual compensation increases. Notice 2009-65 contains two sample amendments plan sponsors can use to add automatic contribution features to their 401(k) plans. The first can be used to add a basic automatic contribution arrangement, and the second to add an eligible automatic contribution arrangement.
Notice 2009-66 provides guidance to facilitate automatic enrollment in SIMPLE IRA plans, including questions and answers relating to the inclusion of an automatic contribution arrangement in a SIMPLE IRA plan. Notice 2009-67 provides a sample amendment that can be used to add an automatic contribution arrangement to a SIMPLE IRA plan.
The IRS issued guidance on employee and employer contributions of paid time off (PTO) to 401(k) plans, both annually and at a termination of employment. (Revenue Ruling 2009-31 and Revenue Ruling 2009-32) The guidance permits amendments to a 401(k) plan to allow contributions of unused PTO that otherwise would be forfeited or to allow a participant to elect to contribute unused PTO in lieu of receiving cash and discusses the tax consequences of such contributions. The former contributions are treated as employer nonelective contributions, and the latter as employee elective contributions. These rules are not yet applicable to Code Section 403(b) plans, although IRS personnel have suggested that the rules will soon be extended to those plans.
The IRS issued guidance on qualified plan operations and rollovers affected by the 2009 waiver of required minimum distributions enacted as part of the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA). (Notice 2009-82) The guidance acknowledges that it is issued late in 2009. Certain events that may have occurred prior to November 30, 2009, which may not be consistent with the guidance in Notice 2009-82, will not cause plans to fall out of compliance. The notice also indicates that distributions to plan participants in 2009 would be eligible for rollovers provided that the payments were equal in value to the 2009 required minimum distribution, or were one or more payments in a series of substantially equal distributions that included a 2009 required minimum distribution, and other requirements under Internal Revenue Code Section 402(c) regarding rollovers are satisfied. The 60-day maximum period to complete a rollover also is extended until November 30, 2009.
Notice 2009-82 also contains sample amendments that plans may use to authorize the suspension of 2009 required minimum distributions. The adoption of an authorizing amendment is required and must be completed not later than the last day of the plan year beginning on or after January 1, 2011. Despite the deferred date for amending the plan, decisions should be made now regarding (i) whether waived 2009 required distribution amounts will be paid out automatically or on request only, and (ii) whether or not such amounts are eligible under the plan for direct rollover, so that the plan may be uniformly administered for all affected participants and beneficiaries.
Plans that have already made 2009 required minimum distributions may need to take prompt action to advise recipients of those distributions of any additional rights and opportunities provided under this guidance before the transition period ends on November 30, 2009.
The U.S. Department of Labor (DOL) announced its intention to pursue criminal prosecution of violators who fail to forward participant contributions to employee benefit plans. The announcement said that the new enforcement project is designed to “target the most egregious and persistent violations and to protect the most vulnerable employee populations, by pursuing criminal prosecution of individuals who commit crimes involving contributory health and retirement plans.” Plans are advised to monitor closely the handling of any employee contributions and make every effort to deposit them into the applicable plans as rapidly as possible.
New York and Wisconsin have recently joined the ranks of states mandating that group health insurance policies make coverage available to certain adult children of covered individuals. Typically, such state laws have an upper-age limit on which children must be offered coverage and include specific general eligibility conditions, for which exceptions may exist. A Wisconsin exception eliminates the upper-age limit for certain adult children returning from military service. These laws do not affect self-funded group health plans and cannot require an employer offering an insured group health plan to bear any of the cost of such mandated coverage if that coverage is not otherwise provided under the terms of the employer’s group health plan. Such state mandates also have no impact on the definition of who is a tax dependent under the federal Internal Revenue Code. If such mandated coverage of an individual is requested under an employer’s insured group health plan, it will be important to determine in advance what the obligations of the employer are with regard to premium payments, including obligations under any cafeteria plan providing for pretax payment of health insurance premiums; how the insurance company will determine and allocate the incremental cost of such mandated coverage; and what the income tax consequences are to the covered employee.
New interim final regulations are issued by the IRS, the DOL, and the U.S Department of Health and Human Services to implement provisions of the Genetic Information Nondiscrimination Act of 2008 (GINA). (Preamble to TD 9464; Treas. Reg. 54.9801-1 and -2; Treas. Reg. 54.9831-1; and Treas. Reg. 54.9802-3T) GINA prohibits discrimination based on genetic information in employment-based health coverage as well as individual market health insurance and Medicare supplemental coverage. In general, group health plans cannot:
The rules apply in plan years that begin after May 21, 2009. This means they apply for calendar-year plans on January 1, 2010. The interim final regulations are complex and include detailed explanations of how GINA applies to many pertinent Internal Revenue Code provisions.
The Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA) is generally effective for plan years beginning after October 2, 2009, which means January 1, 2010 for calendar-year plans. (There is an alternative effective date for collectively bargained group health plans.) Plan sponsors need to review their plans for compliance with this complex law. MHPAEA extends the coverage of the Mental Health Parity Act of 1996 to include substance-use-disorder benefits. In addition, MHPAEA imposes several new requirements on group health plans that offer both medical/surgical benefits and mental health and/or substance-use-disorder benefits relating to certain financial requirements (deductibles, co-payments, coinsurance, and out-of-pocket expenses); treatment limitations; out-of-network providers; and the availability of plan information.
An interesting survey released by Frederic W. Cook & Co., Inc. analyzed SEC filings made by 125 of the largest publicly traded U.S. companies for the 2006 – 2009 period and found the companies made a range of modifications to change-in-control policies. Specifically, the companies:
According to the survey, the pace of change is accelerating, particularly in three areas: excise tax gross-ups, single-trigger change-in-control provisions, and walk-away rights or windows. The trend is to eliminate or constrain all three.
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
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