Employee Benefits Developments for October and November 2009

Qualified Retirement Plans

IRS issued final regulations pursuant to Code Sections 430 and 436 for single employer defined benefit pension plans. (Treasury Decision 9467, 10/07/2009) The regulations reflect provisions added by the Pension Protection Act of 2006, as amended (PPA), and the Worker, Retiree, and Employer Recovery Act of 2008. The statutory provisions generally apply in 2008 but the regulations apply for plan years beginning on or after January 1, 2010. The regulations address:

• Interest rates used to determine present value under the defined benefit funding rules (Treas. Reg. 1.430(h)(2)-1)
• Determination of target normal cost and the funding target (Treas. Reg. 1.430(d)-1)
• Effect of prefunding balances and funding standard carryover balances (Treas. Reg. 1.430(f)-1)
• Valuation dates and valuation of plan assets (Treas. Reg. 1.430(g)-1)
• At-risk rules for defined benefit plans (Treas. Reg. 1.430(i)-1)
• Implementation of Code Section 436 limits on benefits and benefit accruals (Treas. Reg. 1.436-1)

All single employer defined benefit pension plans must be reviewed and amended for compliance with the final regulations. Plan amendments for PPA are to be adopted by the last day of the first plan year beginning on or after January 1, 2009 — which means by December 31, 2009 for calendar year plans.

The annual review of calendar year retirement plans to determine all necessary amendments should be completed before December 31, 2009. Year-end amendment deadlines exist for provisions of the PPA. The required changes vary based on the type of plan and the amendments already adopted. Required PPA amendments include funding based benefit restrictions for defined benefit pension plans, authorization of direct rollovers from qualified plans to Roth IRAs, adding the “qualified optional survivor annuity,” and eliminating the requirement to distribute “gap period” earnings on excess deferrals under 401(k) plans. Qualified plans under Cycle D of the IRS determination letter procedures need to be filed by January 31, 2010.

Welfare Plans

U.S. Department of Labor official is “cautiously optimistic” that Congress will continue the COBRA premium subsidy for health care continuation coverage. Phyllis Borzi, Assistant Secretary of Labor for the Employee Benefits Security Administration, reported on December 3, 2009 that she is cautiously optimistic that the subsidy will be extended. The DOL advised on December 2, 2009 that an individual “who does not become eligible for COBRA until after December 31, 2009, does not meet the qualifications to be an assistance eligible individual” under the current COBRA-subsidy program. Legislation has been introduced in the Senate to extend the subsidy program to persons involuntarily terminated through June 30, 2010; to extend the subsidy period from nine months to 15 months; and to increase the federal subsidy from 65 percent to 75 percent.

Executive Compensation

IRS will audit 6,000 U.S. companies to determine if all required payroll taxes are paid. The audits are intended to review and analyze compliance in the areas of payroll taxes (nonfilers in particular), independent contractor status, fringe benefits, and executive compensation. The primary audit goals include: (i) reducing the tax gap by increasing tax compliance and payroll tax collections and (ii) reducing the number of “misclassified” independent contractors. It is reported that the IRS will devote special attention to executive compensation such as loans, executive travel, nonqualified deferred compensation and Code Section 409A compliance, retirement contracts, stock-based compensation, and golden parachutes (including whether the executives properly included the amounts in gross income). All types of business organizations will be targeted, including pass-through entities. Employers may wish to conduct internal compliance reviews in advance, to correct problems and reduce the number of potential audit issues and audit-related fees and penalties. Protecting the attorney-client privileged status of the compliance review and other preparations for an audit should be carefully considered.

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: