Governance and Compliance Advisory Update: November 2009
October saw significant activity with respect to retirement, executive compensation, welfare and other benefit legislation, regulations and rulings. On the legislative front:
- President Obama signed a bill broadening the scope of the Family Medical Leave Act (FMLA) to cover employees with family members in the military.
- Maine voters overturned the state’s same-gender marriage law, while California began recognizing same-gender marriages from other states and countries.
- Congress introduced a pension funding relief bill, and bills to limit deductible compensation for health insurers and extend COBRA coverage and the federal subsidy.
On the regulatory front, the Department of Labor (DOL) issued regulations on minimum funding and benefit restrictions, while the IRS provided limited relief regarding benefit restriction notice requirements to participants and beneficiaries. In addition, the IRS issued qualified plan limits for 2010. The Equal Employment Opportunity Commission (EEOC) issued guidance on the legality of health risk assessments (HRA), and the Department of Health and Human Services (HHS) published regulations covering new HIPAA security and privacy rules.
As we went to press, the IRS published cash balance plan interest-rate relief, which we will discuss in the December 2009 GCA Update.
In the courts, there were key decisions concerning cash balance plans, specifically linking interest rates, investment strategy and the use of the "fractional test" to accrue benefits.
FMLA military leave rights expanded
President Obama signed the National Defense Authorization Act for Fiscal Year 2010, which permits family members to take 26 weeks of FMLA leave in a single 12-month period to care for a "covered servicemember" undergoing medical treatment, recuperation or therapy within five years after the individual separates from military service with respect to a serious service-related injury or illness incurred or aggravated while on active duty. In addition, the new law extends the availability of FMLA leave to employees with family members on active duty in a regular component of the Armed Forces during deployment to a foreign country.
Insight: Under prior law, the FMLA only applied to family members serving in the National Guard who were Reserve members deployed in support of a "contingency operation." Further, the injury or illness must have occurred while on active duty, as the FMLA did not apply after the individual had left the armed forces. To reflect the new changes in family military leave, employers need to update their FMLA policies, benefit plans and SPDs. Employers that need assistance revising these documents can contact Towers Perrin's GCA and Change Implementation team, which specializes in employee communications.
A copy of the law can be found here.
Maine voters reject same-gender marriage
Maine voters overturned a state law that would have permitted same-gender couples to marry. Earlier this year, legislation was enacted in Maine authorizing same-gender marriages. However, implementation of the law was put on hold pending the results of the ballot referendum that put the fate of same-gender marriage in Maine in the hands of the electorate.
Insight: For more information about how same-gender marriages and domestic partnerships affect employee benefits, please see the May 2009 GCA Update.
California recognizes legal same-gender marriages from other states and countries
California will recognize same-gender marriages legally entered into in other states and countries, under a bill signed into law. In November 2008, voters in California approved a ballot initiative that banned same-gender marriages in the state. However, same-gender marriages legally performed in California on or after June 17, 2008 and through the November 4, 2008 election date continue to be recognized as valid. As noted in the June 2009 GCA Update, in May 2009, the California Supreme Court upheld Proposition 8.
Insight: As discussed in the August 2009 GCA Update, Washington, D.C., has a similar law to California's. In addition, same-gender marriages are permissible in Connecticut, Iowa, Massachusetts, New Hampshire (effective January 1, 2010) and Vermont, as well as in Canada.
Pension funding relief introduced
Representative Pomeroy [D-ND] introduced the Preserve Benefits and Jobs Act of 2009, which was previewed in the September 2009 GCA Update. The bill provides an extended period of time to either amortize 2008 experience losses (by allowing sponsors to choose between extending the period to nine years [from seven] with interest-only payments for the first two years, subject to a minimum contribution based on 2008 contribution levels) or fund losses over a 15-year period. To take advantage of this relief, sponsors would have to satisfy a "maintenance of effort" requirement. The bill includes a number of additional provisions for defined benefit (DB) plans. For example, the bill:
- liberalizes asset smoothing in 2009 and 2010
- provides that the greater of a plan’s 2008 funded status or its 2010 funded status is to be used to determine whether or not the benefit restriction that freezes accruals will apply in 2010
- delays the effective date of benefit restrictions for union-negotiated plans until after the 2011 plan year
- provides that the funded status used to determine if credit balances can be used to offset minimum funding requirements for 2010 and 2011 is no less than the 2008 funded status
- increases the funding threshold from 80% to 90% for PBGC Form 4010 filings
- clarifies that investment-related expenses are not included in target normal cost
- excludes Social Security Level Income options from the accelerated distribution benefit restrictions
- prohibits plan sponsors from adopting early retirement windows that provide lump sum payments, unless a plan is at least 120% funded.
Insight: Under the proposed legislation, to take advantage of the change in the amortization period, plan sponsors must either continue providing a minimum level of accruals under their DB plan, make a 3% nonelective contribution to a defined contribution (DC) plan for any employees frozen out of the DB plan, or freeze all nonqualified deferred compensation plans with respect to key employees and subject them to the same benefit restrictions that apply to the qualified plan. This "maintenance of effort" requirement must continue for either two or eight years, depending on the extended amortization schedule elected.
As noted in the September 2009 GCA Update, the conditions applicable to extending the amortization period may make this provision unpopular. While plan sponsors may welcome some of the proposal's other relief provisions, it remains to be seen how much Congressional support it will receive.
A copy of the bill can be found here.
Senate Finance Committee approves limits on deductible compensation for health insurance providers
The Senate Finance Committee approved an amendment to its health care reform legislation, which limits the deduction for compensation paid to officers, employees, directors, and other workers or service providers (such as consultants) of certain health insurance providers to $500,000. In addition, exceptions from the long-standing Section 162(m) $1 million deduction limit for performance-based compensation, commissions or remuneration under existing binding contracts would not apply.
Insight: In a departure from general tax policy, the deduction limit will apply to deferred compensation paid after termination of employment or once the limit ceases to apply. Employers with self-insured plans are exempted from these limits. Insurers who would be subject to these limits (and that wish to maintain their deductions) will need to revise existing employment contracts and deferred compensation agreements. Insurers will likely need to work with highly paid individuals to make up any compensation cutbacks in a manner that is not subject to these limits. Employers looking for alternative ways to compensate employees who may be subject to these limits should reach out to their Towers Perrin Executive Compensation and Rewards consultant for advice.
A copy of the legislation can be found here.
Bill introduced to extend COBRA duration and related 65% federal subsidy
Representative Sestak [D-PA] introduced the Extended COBRA Continuation Protection Act of 2009, which would extend from 18 months to 24 months the maximum COBRA period for individuals whose COBRA coverage is due to a termination of employment or a reduction in hours. The extended period would only apply to individuals who become eligible for COBRA on or after April 1, 2008 and before January 1, 2010. Separately, the bill would extend the federal government’s 65% COBRA subsidy eligibility period to individuals involuntarily terminated who lose group health plan coverage on or before June 30, 2010 (as opposed to on or before December 31, 2009). In addition, the bill would extend the maximum period that an individual can receive the 65% COBRA subsidy from nine months to 15 months, but not later than December 31, 2010.
Insight: A special transition rule and election period would apply for COBRA-qualified beneficiaries whose 18-month COBRA coverage period ended before the bill’s date of enactment. Employee communications and election forms would need to be updated to reflect changes to the maximum COBRA period and the subsidy extension, and current COBRA beneficiaries would need to be notified of these changes. In addition, plan sponsors would need to coordinate these efforts with their insurance companies and COBRA vendors to ensure all necessary changes are implemented and followed.
A copy of the bill can be found here.
Final regulations released on minimum funding and benefit restrictions
The IRS released final regulations under Sections 430 and 436 that provide guidance on:
- measuring the value of plan assets and benefit liabilities used for determining the funding requirements in single-employer DB pension plans
- using credit balances maintained in single-employer DB pension plans
- applying benefit restrictions to certain underfunded DB pension plans.
Insight: The regulations are effective for plan years beginning on or after January 1, 2010, although plan sponsors may rely on them earlier. Towers Perrin's Client Advisory discussing these regulations in detail can be found here.
A copy of the regulations can be found here.
Qualified plan limits for 2010
The IRS released qualified plan limits for 2010, and none of the limits decreased due to current inflation levels (See the September 2009 GCA Update). The IRS interpreted the Internal Revenue Code in a way that prohibits a decrease in the limits from taking effect. As a result, the 2010 limits will remain the same as the 2009 limits. The limits are:
- 415 annual benefit limit under a DB plan: $195,000
- 415 limit for DC plans: $49,000
- 402(g) limit on elective deferrals: $16,500 (participants under 50), $22,000 (participants age 50 and over)
- 401(a)(17) annual compensation limit: $245,000.
EEOC issues letter on HRAs and ADA compliance
The EEOC issued an informal discussion letter that concluded employers may not base reimbursement of medical expenses under a health reimbursement arrangement (HRA) on an employee’s completion of an HRA. Earlier this year, the EEOC issued similar informal guidance that concluded employers are not permitted to condition health plan enrollment upon completion of an HRA.
Insight: The EEOC's position is based on concerns that an HRA would violate the Americans with Disabilities Act (ADA) due to, among other things, disability-related questions in the assessment. Employers that require employees to complete an HRA should confer with legal counsel on how to revise their policies to avoid running afoul of the EEOC. In addition, Towers Perrin's Health and Welfare Group can help employers design alternative arrangements to ensure ADA and EEOC compliance.
A copy of the letter can be found here.
HHS issues regulations on enhanced HIPAA privacy and security enforcement provisions
HHS issued an interim final rule that brings the HIPAA Privacy and Security enforcement provisions into conformity with statutory amendments made by the Health Information Technology for Economic and Clinical Health (HITECH) Act. The HITECH Act adopted a broad range of HIPAA privacy and security amendments, including increases in the civil monetary penalties for HIPAA violations. The interim final rule takes effect on November 30, 2009, and specifically incorporates the HITECH Act’s enforcement provisions that became effective February 18, 2009, but not those that have not yet taken effect.
Insight: Plan amendments reflecting the new HIPAA rules are required by February 2010. Towers Perrin is currently conducting HIPAA audits on behalf of many clients with respect to the new privacy and security rules in advance of the February 2010 deadline.
A copy of the regulations can be found here.
Change in cash balance plan investment policy is not a cutback
A district court in the Eastern District of Wisconsin ruled that, where a cash balance plan's interest credits are determined with reference to actual trust investment returns (in this case, 75% of trust returns with a 4% floor), a change to trust investment policy resulting in lower returns was not a formal or informal amendment that violates ERISA’s anti-cutback rule.
Insight: Although this plan design may work from a protected benefit perspective, it remains to be seen whether it can withstand scrutiny under the market rate of interest cap.
The case is Thompson v. Retirement Plan for Employees of S.C. Johnson & Sons, Inc.
Use of "fractional test" in cash balance plan is permissible
The Second Circuit Court of Appeals concluded that Citigroup did not violate ERISA's minimum benefit accrual rules by using a "fractional test" in its cash balance plan. In addition, the court ruled that the fractional test did not have to be applied on a year-by-year basis. Instead, the fractional test could be applied when participants severed their employment with the company. Finally, the court concluded that ERISA does not require the 204(h) notice to include a description of how the plan will comply with the minimum benefit accrual rules.
Insight: Applying the fractional rule by looking back over a participant's employment period with the plan sponsor, rather than on a year-by-year basis, allows the plan to provide greater benefits to longer-service (and potentially higher-paid) employees, and reduce pension costs applicable to short-service/high-turnover (and potentially lower-paid) employees. By favoring longer-service employees, the design is reminiscent of a final-average-earnings plan.
A copy of the case, Lonecke v. Citigroup Pension Plan, can be found here.
Notice of benefit restrictions under ERISA Section 101(j)
In a special edition of Employee Plans News, the IRS provided some limited relief to plan sponsors with respect to the notice they must provide within 30 days after certain benefit restrictions are imposed. The newsletter states that notice of a benefit restriction affecting the availability of lump sums does not need to be sent to participants and beneficiaries in pay status who — without regard to any benefit restrictions — can no longer elect a lump sum payment.
Insight: This is welcome relief for plan sponsors who would otherwise have had to send notices to participants in pay status, which would have possibly raised undue questions and concerns among participants.
A copy of the special edition can be found here.
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