Employee Benefits Developments for December 2009

21 January 2010 Publication

Legal News: Employee Benefits

Qualified Retirement Plans

The deadline for certain required plan amendments has been extended. On December 11, 2009, the IRS issued Notice 2009-97 to give plan sponsors additional time to adopt plan amendments for certain requirements of the Internal Revenue Code (Code) added by the Pension Protection Act of 2006 and subsequently modified by the Worker, Retiree, and Employer Recovery Act of 2008. The deadline is extended to the last day of the first plan year that begins on or after January 1, 2010. Operational compliance is required during the extension period. The extension applies to:

  • Funding-based limits on benefits and benefit accruals under Code Sections 401(a)(29) and 436 for single employer defined benefit plans
  • Vesting and other special rules for cash balance and other Code Section 411(a)(13)(C) defined benefit plans to meet Code Section 411(a)(13) and Code Section 411(b)(5) requirements
  • Defined contribution diversification requirements under Code Section 401(a)(35)(E)

Most plan sponsors did not wait until December to adopt amendments required to be adopted by the last day of that month, so many employers adopted a good-faith version of these amendments before the extension was granted. Such good faith amendments should be sufficient in most instances until the plan’s request for its next IRS determination letter, at which time refinements based on final rules and guidance may be agreed upon.

Plan distributions to nonspouse beneficiaries become subject to most of the same rules that apply to other eligible rollover distributions for plan years beginning after December 31, 2009. Beginning with the plan year commencing in 2010, plan administrators are required to give all nonspouse beneficiaries of deceased plan participants a written notice explaining the direct rollover rules and the mandatory 20-percent income tax withholding rules for distributions made to them that are not directly rolled over. Samples of the written tax notice are provided in IRS Notice 2009-68. (This treatment was optional prior to 2010.)

Welfare Plans

On December 19, 2009, the COBRA subsidy, created by the American Recovery and Reinvestment Act of 2009 (ARRA), was extended in three ways. The initial program provided that assistance-eligible individuals, individuals who experienced a COBRA-qualifying event that is an involuntary reduction of employment from September 1, 2008 through December 31, 2009, would be permitted to pay 35 percent of the applicable COBRA premium for up to nine months. Under the extended program, (1) the COBRA premium reduction eligibility period is extended for two months until February 28, 2010, so that assistance-eligible individuals who experience an involuntary termination of employment and are eligible for COBRA prior to March 1, 2010 are now eligible for the subsidy; (2) the subsidy period is extended for an additional six months (from nine to 15 months); and (3) assistance-eligible individuals who reached the end of the subsidized premium period before December 19, 2009 will have an extension of their COBRA premium grace period to pay the reduced premium. The extended grace period ends February 17, 2010 or, if later, 30 days after notice of the extension is provided by the plan administrator. Assistance-eligible individuals who lost the subsidy and paid the full 100-percent premium in December 2009 must be given a credit or a refund for the overpayment. Plan administrators also must provide notice about these extensions to assistance-eligible individuals no later than February 17, 2010, including providing additional information to individuals who experienced a termination of employment on or after October 31, 2009 and already received a COBRA notice.

The U.S. Department of Labor (DOL) is expediting the preparation of new and revised notices on the COBRA-subsidy extension. The DOL has announced that it intends to issue a “premium assistance extension notice” that plan administrators and other entities subject to COBRA or state mini-COBRA laws will have to send by February 17, 2010. DOL also announced that it will update model notices issued as mandated under the initial ARRA legislation and create packages designed for particular groups of qualified beneficiaries that will include a comprehensive set of forms and notices. A Federal Register notice will be issued when the revised ARRA notices are available.

Rule changes effective in 2010 require self-reporting and excise tax payment for compliance problems with common health and welfare plan programs. Under new final IRS regulations, employers and certain third parties must self-report and pay excise taxes regarding failures to comply with the requirements of Code Sections 4980B (COBRA continuation coverage requirements); 4980D (group health plan requirements relating to HIPAA portability, access, renewability, and nondiscrimination rules); 4980E (requirement that employers make comparable contributions to Archer Medical Savings Accounts); and 4980G (requirement that employers make comparable contributions to health savings accounts). Prior to 2010, employers (and certain third parties) typically corrected problems as they were identified and did not pay the related excise taxes unless they were assessed by the IRS. This change is very significant. New Form 8928, “Return of Certain Excise Taxes under Chapter 43 of the Internal Revenue Code,” (available on www.irs.gov) is used for this purpose. Failure to file the form on a timely basis and pay the applicable excise taxes may result in late filing fees and interest. The excise tax for these items generally is $100 per day per affected person.

Employers should ensure that responsible human resources staff members have adequate training and compliance checklists to avoid the need to self-report the indicated problems. Periodic compliance reviews and careful monitoring of outside administrators also is essential.

Interim final regulations have been issued concerning the provisions of the Genetic Information Nondiscrimination Act (GINA) applicable to group health plans. (Treasury Decision 9474, October 7, 2009) The rules are effective generally for plan years beginning on or after December 7, 2009. The rules prohibit group health plans from:

  • Increasing the group premium or contribution amounts based on genetic information
  • Requesting or requiring an individual or family member to undergo a genetic test
  • Requesting, requiring, or purchasing genetic information prior to or in connection with enrollment, or at any time for underwriting purposes

Practical application of these prohibitions will include, for example, not using a health risk assessment program to require an individual to provide genetic information to qualify for a reward such as a reduced premium and not requiring an individual to undergo genetic testing except in specific situations where the testing is necessary to determine medically necessary treatment. Employers also should verify that their third-party administrators are in full compliance with these rules.

Executive Compensation

IRS announces a program to permit taxpayers to correct certain failures of a nonqualified deferred compensation plan to comply with the plan documentation requirements of Code Section 409A. (Notice 2010-6) A previously issued notice (2008-113) remains in effect to address certain operational failures under Code Section 409A. The Code Section 409A document correction program is limited and complex, but may be useful under certain circumstances. Of interest may be the provision that, in certain circumstances, corrections made before December 31, 2010 may excuse a related operational violation.


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
San Francisco, California
415.438.6483
kaizawa@foley.com  

Christopher S. Berry
Madison, Wisconsin
608.258.4230
cberry@foley.com  

Lloyd J. Dickinson
Milwaukee, Wisconsin
414.297.5821
ljdickinson@foley.com  

Gregg H. Dooge
Milwaukee, Wisconsin
414.297.5805
gdooge@foley.com  

Casey K. Fleming
Milwaukee, Wisconsin
414.319.7314
cfleming@foley.com  

Robert E. Goldstein
San Diego, California
858.847.6710
rgoldstein@foley.com  

Andrew D. Gregor
San Diego, California
619.685.6476
agregor@foley.com  

Samuel F. Hoffman
San Diego, California
619.685.6414
shoffman@foley.com  

Sarah B. Krause
Milwaukee, Wisconsin
414.319.7340
skrause@foley.com  

Harvey A. Kurtz
Milwaukee, Wisconsin
414.297.5819
hkurtz@foley.com  

Belinda S. Morgan
Chicago, Illinois
312.832.4562
bmorgan@foley.com  

Greg W. Renz
Milwaukee, Wisconsin
414.297.5806
grenz@foley.com  

Leigh C. Riley
Milwaukee, Wisconsin
414.297.5846
lriley@foley.com  

Michael H. Woolever
Chicago, Illinois
312.832.4594
mwoolever@foley.com