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Governance and Compliance Advisory Update: September 2009 - Thought Leadership - Towers Perrin
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September 2009

Governance and Compliance Advisory Update: September 2009

In typical August fashion (August 2008 notwithstanding), legislative, regulatory and other guidance was minimal. Most of these developments relate to health and welfare plans, particularly IRS guidance on over-the-counter items for FSAs. The HHS released final regulations covering security breaches under new HIPAA rules; Ohio initiated required health care coverage for uninsured and older dependent children, and Massachusetts clarified rules under its "pay or play" mandate.

In addition:

  • A new bill set to be introduced in September provides pension funding relief only if certain qualified retirement plan contributions continue and nonqualified plans are frozen.
  • The EEOC updated its compliance manual to address pension plan payments in light of the Ledbetter Act.
  • The IRS announced plans to issue guidance on "DB(k)" plans, which may be adopted by certain small employers beginning in 2010.
  • Cost-of-living adjustments, including the 401(k) contribution limit and the includable compensation limit, may decrease in 2010, due to current inflation levels.

Next month, we will review the IRS "Savings Initiatives" guidance, released just after the Labor Day holiday, which addresses automatic enrollment escalators, automatic enrollment model amendments, unused paid time off in a 401(k) plan and new model 402(f) notices.

Legislative Developments

Proposed Pension Funding Relief Requires Changes to Other Plans

Representative Pomeroy released draft legislation he expects to introduce that requires plan sponsors that want to extend the amortization period for 2008 investment losses in their defined benefit plan to:

  • continue providing a minimum level of accruals under their defined benefit plan
  • make a 3% nonelective contribution to a defined contribution plan for any employees frozen out of the defined benefit plan
  • freeze all nonqualified deferred compensation plans with respect to top-hat employees.

The proposed legislation includes a number of other pension funding and benefit restriction relief provisions, including a widening of the asset smoothing corridor, a free pass on interest-rate method changes for 2010, the use of 2008 funded status for restrictions on benefit accruals for 2010 and an extension of the delayed effective date for benefit restrictions for collectively bargained plans until 2012.

Insight: The conditions applicable to extending the amortization period may make this provision unpopular. While sponsors would welcome many of the proposal's other relief provisions, it remains to be seen how much Congressional support it will receive because some regulatory agencies are likely to argue against its adoption.

A copy of the draft legislation can be found here. 

Regulatory Developments

EEOC Addresses Effect of Ledbetter Act on Pension Payments 

Responding to the Lilly Ledbetter Fair Pay Act of 2009, the U.S. Equal Employment Opportunity Commission (EEOC) added a new section to its compliance manual. The act provides that a new filing limitation period begins each time an individual receives "wages, benefits or other compensation" if such payment is based on an earlier discriminatory compensation decision. The manual now provides that wages, benefits or other compensation, for purposes of the Ledbetter Act, include pension payments.

Insight: Notwithstanding their inclusion as wages, the manual recognizes that the Ledbetter Act was not intended to change current law in determining when pension payments are considered to be received. Therefore, the manual notes that, based on Congressional findings, even though the EEOC has included pension payments as wages, etc., for Ledbetter Act purposes, they may be considered paid at retirement, not at the time each pension check is issued. Assuming a court agrees, annuity payments that relate to prior discrimination will not extend the statute of limitations.

A copy of the updated compliance manual can be found here.

IRS plans to issue guidance for "DB(k) plans"

DB(k) plans were authorized by the Pension Protection Act for small employers (fewer than 500 employees), beginning with the 2010 plan year. The DB portion would be required to provide final pay or cash balance benefits and three-year vesting. The 401(k) portion would be required to have an automatic enrollment feature, meet minimum matching contribution requirements, and provide immediate vesting on matching contributions. Even though the required level of match in a DB(k) plan (50% of the first 4% of compensation) is less than what is required under a 401(k) safe harbor plan, the combined plan would be deemed to satisfy the actual deferral percentage (ADP) test. In addition, actual contribution percentage (ACP) testing could be avoided if other requirements of ACP safe harbor are satisfied (e.g., no match on contributions in excess of 6% of compensation). The top-heavy rules would also be deemed to be satisfied.

Insight: Employers that are considering this type of plan should ensure that their vendor is capable of administering it (and that vendor fees are reasonable). Also, small employers who only have a 401(k) plan should consult with appropriate advisors (an actuary, accountant or tax professional) to understand the funding, cash flow, tax and other financial impacts of implementing a defined benefit plan. It is possible, but not yet clear, whether these rules could serve as a blueprint for Section 414(k) plans in general, of which DB(k) plans are a subset.

A copy of the announcement can be found here.

IRS Releases Guidance on Over-the-Counter Items for FSAs and HRAs

The IRS published considerations for determining whether certain over-the-counter (OTC) items qualify as medical care expenses that may be reimbursed by a health flexible spending account (FSA) or a health reimbursement arrangement (HRA). In its guidance, the IRS sorted OTC expenses into several categories:

  • Dual-purpose items that may be personal items (ineligible) or may qualify as medical care (eligible), depending upon their use.
  • Medical-only items, the only purpose of which is to treat a disease, illness, or mental or physical defect, may qualify as medical care.
  • Excess cost of otherwise personal items specially designed to treat or alleviate a medical condition (e.g., the excess cost for diabetic socks, compression hose or orthopedic shoes) may be an allowable medical care expense.
  • Food and food thickeners that substitute for the food an individual would normally consume to meet nutritional requirements are not a medical care expense.

Insight: Although not addressed by the IRS, the same analysis would generally apply to reimbursement of these expenses from a health savings account (HSA). Plan sponsors should update their FSA, HRA and HSA communications (including SPDs) to reflect these changes.

A copy of the IRS guidance can be found here.

HHS Issues HIPAA Privacy and Security Breach Notification

The Department of Health and Human Services (HHS) issued regulations that require covered entities, such as employer group health plans, to notify individuals if their "unsecured" protected health information (PHI) is breached. The covered entity must notify: individuals as soon as practical, but no later than 60 days after discovery; the Secretary of HHS; and, if the breach involves data from 500 or more individuals, major media outlets.

Insight: Employers should update their HIPAA policies and procedures to reflect these notice requirements. The HHS has announced that, in order to allow sufficient time for covered entities to comply with these changes, it will use its enforcement discretion and will not impose sanctions for noncompliance before February 22, 2010.

A copy of the regulations can be found here.

2010 Contribution Limits May Decrease

The formula for calculating various qualified plan limits may produce lower limits in 2010 than current 2009 figures, depending on current inflation levels. The limits subject to cost-of-living adjustments (COLAs) include the compensation limit, the limit on annual benefits and additions, the limit on elective deferrals, the limit on catch-up contributions and the limit on the amount of compensation used to identify highly compensated employees.

Insight: It is not clear from the Internal Revenue Code, which includes the formula for determining COLAs, what actually would happen in this situation. There are two possible interpretations: 1) the limit for a particular year can never be lower than it was in the prior year, or 2) the limit for a particular year can decrease, but never be lower than the amount of the limit in the base year. The IRS is analyzing this situation, and various employee benefit trade organizations (e.g., the American Benefits Council) are preparing letters asking that these limits not decrease. If the limits are decreased, plan sponsors should consider a comprehensive communication strategy to notify and educate participants about this change.

Other Developments

Ohio Enacts Cafeteria Plan Mandate and Extends Dependent Coverage

Ohio's recently enacted state budget requires employers to offer uninsured employees the opportunity to purchase personal coverage with pretax dollars under a Section 125 plan, starting January 1, 2011. In addition, Ohio insurers must modify group health insurance policies to extend eligibility to employees' unmarried children up to age 28, provided the child is: 1) an Ohio resident or a full-time student, 2) not employed by an organization that offers health insurance and 3) not eligible for coverage under Medicaid or Medicare.

Insight: The cafeteria plan mandate is subject to approval from both the DOL and the IRS. The expanded dependent coverage applies only to insured coverage issued on or after July 1, 2010; it does not apply to a self-insured plan. Employers with an office or facility in Ohio should review their health plans, SPDs and other employee communication materials and revise them as necessary to reflect these changes.

A copy of the budget can be found here.

Massachusetts Proposes Clarification of Pay-or-Play Mandate

Proposed regulations include a new requirement providing that, in order to satisfy the pay-or-play mandate, an employer must adopt and maintain a written health plan, and maintain written documentation for employees about the plan and the employer's contribution. The regulations also provide that a premium reimbursement arrangement may be used to comply with the pay-or-play mandate.

Insight: Proposed regulations notwithstanding, maintaining a written plan document is a best practice. Employers should also consider adopting a written procedure to ensure that other employee communication requirements in the proposed regulations are met.

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This document is incomplete without the accompanying discussion by a Towers Perrin consultant. All materials and intellectual capital contained within are property of Towers Perrin. This publication was prepared to support our clients' need for information on the issues discussed. Recipients should understand that this publication does not constitute, and should not be used as a substitute for, legal, accounting, actuarial, tax or other professional advice. If such advice is required, the recipient should engage the services of the appropriate professional.