Employee Benefits and Compensation Attorneys


Thomas R. Hoecker
602.382.6361
thoecker@swlaw.com

Marvin S. Swift, Jr.
602.382.6211
mswift@swlaw.com

Nancy K. Campbell
602.382.6374
ncampbell@swlaw.com

Denise L. Atwood
602.382.6297
datwood@swlaw.com

Greg R. Gautam
602.382.6356
ggautam@swlaw.com

Amanda K. Hines
602.382.6529
ahines@swlaw.com

Eva N. Kerr
602.382.6245
ekerr@swlaw.com

Anne M. Meyer
602.382.6595
ameyer@swlaw.com

Megan R. Thiel
602.382.6523
mthiel@swlaw.com

Sara R. Van Houten
602.382.6342
svanhouten@swlaw.com

 

 
  Snell & Wilmer L.L.P. Snell & Wilmer L.L.P.
The Corporate Communicator
 
November 2009
 

2009 End of Year Plan Sponsor “To Do” Lists

In this issue we provide seven “to do” lists that may require you to take action before the end of 2009 or in early 2010.  Many of the action items are a result of the Pension Protection Act of 2006 (the “PPA”) and may require plan amendments.

For your convenience, we have broken the “to do” lists into seven categories (accessible via the menu on the left).

All Qualified Plans “To Do” List

  • Adopt Pension Protection Act Amendments: The Pension Protection Act of 2006 (the “PPA”) made many changes that impact qualified plans.  We have previously reported on those changes in our 2006, 2007, and 2008 End of Year Plan Sponsor “To Do” Lists.  Some of the PPA changes took effect as early as the date the PPA was enacted, August 17, 2006, while others had delayed effective dates.  The PPA included a helpful provision that allows all PPA amendments, whether mandatory or optional, to be adopted by the last day of the 2009 plan year (i.e., December 31, 2009 for plans with calendar year plan years).  Accordingly, all plan sponsors must adopt a conforming PPA amendment reflecting how the plan has been administered on the various PPA changes by the last day of the 2009 plan year (i.e., December 31, 2009 for calendar year plans).    If we prepare your qualified plan documents, we will send you a PPA amendment before the appropriate deadline.  If someone else prepares your plan documents, you should check with your document preparer to confirm that they will timely amend your plan for the PPA.
  • Adopt Design Changes by the End of the Plan Year:  If you made any design changes to the plan during the year, you generally must amend your plan to reflect those design changes by the last day of the 2009 plan year (i.e., December 31, 2009 for calendar year plans).
  • Adopt EGTRRA Restatement if in Cycle D:  If your qualified plan is individually designed and falls in Cycle D (i.e., the employer identification number associated with the plan ends in 4 or 9, the plan is a multiemployer plan, or you have made a Cycle D election) you must restate the plan on or before December 31, 2009 and submit the plan for an EGTRRA determination letter on or before January 31, 2010.  We previously sent detailed information about EGTRRA restatements to those clients who have asked us to be responsible for keeping their plans updated.
  • Review 2010 Plan Limits:  Familiarize yourself with the 2010 plan limits, which are unchanged from the 2009 limits.  See Retirement Plan Limits for 2010 for more information.
  • Comply with HEART Act Changes:  The Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”) made changes that impact qualified plans.  Some of the changes are mandatory (e.g., plans must provide additional death benefits, other than benefit accruals, when a participant dies during active military duty, and differential wage payments must be treated as compensation) and others are optional (e.g., plans may provide contributions or benefit accruals if a participant dies or becomes disabled during active military duty).  Some of the changes took effect as early as January 1, 2007, while others are effective January 1, 2009.  Plan sponsors should familiarize themselves with the changes, determine whether any benefits must be provided retroactively, and make adjustments to plan administration on a going-forward basis.  Plan sponsors must adopt a conforming amendment by the end of the 2010 plan year.  See Heroes Earnings Assistance and Relief Tax Act of 2008 for more information.  
  • Update Section 402(f) Eligible Rollover Distribution Notices:  In Notice 2009-68, the IRS released two new model rollover notices that may be provided to participants, alternate payees, and beneficiaries who receive eligible rollover distributions from qualified retirement plans, such as pension plans and Section 401(k) plans.  Such notices are commonly called “Section 402(f) eligible rollover distribution notices.”   Now that the IRS has issued new model notices, plan sponsors should update their Section 402(f) eligible rollover distribution notices.  See IRS Issues Two New Sample 402(f) Eligible Rollover Distribution Noticesfor more information.

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Section 401(k) Plans “To Do” List

  • Comply with Items on All Qualified Plans List:  The items on the All Qualified Plans list also apply to Section 401(k) plans. 
  • Provide Section 401(k)/401(m) Safe Harbor Notice by December 2, 2009 for Calendar Year Plans:  As a reminder, if your plan has a Section 401(k)/401(m) contribution safe harbor, you must provide the safe harbor notice at least 30 days, but not more than 90 days, before the beginning of each plan year (i.e., December 2, 2009 for calendar year plans)
  • Provide Annual Automatic Enrollment Notice by December 2, 2009 for Calendar Year Plans: As a reminder, for those of you who have adopted an automatic contribution arrangement, an eligible automatic contribution arrangement (“EACA”), or a qualified automatic contribution arrangement (“QACA”), or any combination thereof, you must give an annual automatic enrollment notice at least 30 days, but not more than 90 days, before the beginning of each plan year (i.e., December 2, 2009 for calendar year plans). 
  • Provide Annual Qualified Default Investment Alternative Notice by December 2, 2009 for Calendar Year Plans:  As a reminder, for those of you who are relying on the qualified default investment alternative (“QDIA”) safe harbor, you must give an annual notice at least 30 days, but not more than 90 days, before the beginning of each plan year (i.e., December 2, 2009 for calendar year plans).
  • If Adding Qualified Automatic Contribution Arrangement or Eligible Automatic Contribution Arrangement for 2010, Adopt Amendment Before the 2010 Plan Year:  Neither a QACA nor an EACA may be adopted mid-year.  Accordingly, if you wish to add a QACA or an EACA to your plan for the 2010 plan year, you must adopt an amendment by December 31, 2009 for calendar year plans.  
  • Comply with Additional HEART Act Changes:  In addition to the Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”) changes listed on the All Qualified Plans “To Do” List, effective January 1, 2009, Section 401(k) plans must allow for distributions of elective deferrals to certain participants who are on active military duty for a period of more than 30 days.  If a participant takes such a distribution from the plan, the participant is prohibited from making elective deferrals or employee contributions during the 6-month period beginning on the date of the distribution.  As with most other HEART Act amendments, plan sponsors must adopt  a conforming amendment by the last day of the first plan year beginning on or after January 1, 2010 (i.e., December 31, 2010 for calendar year plans).  To ease administration, some plan sponsors are choosing to implement only the mandatory HEART Act distributions and not the optional PPA qualified reservist distributions.  If a plan sponsor wants to retroactively add a PPA qualified reservist distribution, the plan must be amended to make this change by the end of the 2009 plan year.  See Heroes Earnings Assistance and Relief Tax Act of 2008 for more information.
  • Comply with Required Minimum Distribution Waiver for 2009:  As we reported in our March 2009 Employee Benefits Update, the Worker, Retiree, and Employer Recovery Act of 2008 waived required minimum distributions (“RMDs”) for 2009.  On September 24, 2009, the IRS issued Notice 2009-82, which provides guidance on the waiver of 2009 RMDs and two sample amendments.  The first sample amendment provides that the plan will pay out distributions of 2009 RMDs unless the participant elects otherwise.  The second sample amendment provides that the plan will not pay out distributions that include 2009 RMDs unless the participant elects otherwise.  Plan sponsors must adopt conforming amendments by the last day of the first plan year beginning on or after January 1, 2011 (i.e., December 31, 2011 for calendar year plans) to reflect the waiver of 2009 RMDs.  In the meantime, plans must be administered in accordance with the new rules.  See IRS Issues Additional Guidance on the Waiver of 2009 Required Minimum Distributions for more information.

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Defined Contribution Plans (Other Than Section 401(k) Plans) “To Do” List

  • Comply with Items on All Qualified Plans List:  The items on the All Qualified Plans list also apply to defined contribution plans. 
  • Provide Annual Qualified Default Investment Alternative Notice by December 2, 2009 for Calendar Year Plans:  As a reminder, for those of you who are relying on the qualified default investment alternative (“QDIA”) safe harbor, you must give an annual notice at least 30 days, but not more than 90 days, before the beginning of each plan year (i.e., December 2, 2009 for calendar year plans).
  • Comply with Required Minimum Distribution Waiver for 2009:  As we reported in our March 2009 Employee Benefits Update, the Worker, Retiree, and Employer Recovery Act of 2008 waived required minimum distributions (“RMDs”) for 2009.  On September 24, 2009, the IRS issued Notice 2009-82, which provides guidance on the waiver of 2009 RMDs and two sample amendments.  The first sample amendment provides that the plan will pay out distributions of 2009 RMDs unless the participant elects otherwise.  The second sample amendment provides that the plan will not pay out distributions that include 2009 RMDs unless the participant elects otherwise.  Plan sponsors must adopt conforming amendments by the last day of the first plan year beginning on or after January 1, 2011 (i.e., December 31, 2011 for calendar year plans) to reflect the waiver of 2009 RMDs.  In the meantime, plans must be administered in accordance with the new rules.  See IRS Issues Additional Guidance on the Waiver of 2009 Required Minimum Distributions for more information. 

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Defined Benefit Plans “To Do” List

  • Comply with Items on All Qualified Plans List:  The items on the All Qualified Plans list also apply to defined benefit plans.
  • Post Portions of Form 5500 on Company’s Intranet:  The Pension Protection Act  (“PPA”) requires a sponsor of a defined benefit pension plan that maintains an intranet website for the purpose of communicating with employees (and not the public) to post portions of the defined benefit plan’s Form 5500 on the intranet.  This new requirement applies to the 2008 Form 5500.  Plan sponsors may post the basic Form 5500 and the actuarial information included in the Form 5500, or Plan sponsors may post the entire Form 5500, other than the Schedule SSA. 
  • Comply with Annual Funding Notice to Participants:  As a reminder, the PPA requires single employer defined benefit plan sponsors to provide participants with an annual notice of the plan’s funding status within 120 days of the end of the plan year to which the notice relates.  Plans with fewer than 100 participants do not have to provide the notice until the Form 5500 annual report is due for the plan year.  This notice requirement was originally effective for plan years beginning after December 31, 2007.
  • Comply with Participant Notice Requirement if Adjusted Funding Target Attainment Percentage is less than 80%:  As a reminder, in addition to the annual funding notice described above, Section 101(j) of ERISA requires a plan administrator to provide a notice to participants if the plan is subject to a restriction on payment of benefits.  These restrictions become applicable if the plan’s adjusted funding target attainment percentage is less than 80%.  Plan administrators are not required to provide this notice to participants and beneficiaries in pay status.  This notice requirement was originally effective for plan years beginning after December 31, 2007.
  • Comply with PBGC Notice Requirement if Funding Target Attainment Percentage is less than 80%:  As a reminder, the PPA requires plan sponsors of defined benefit plans to notify the PBGC if the plan has a funding target attainment percentage of less than 80%. The PPA also requires additional funding information as part of the notice. The PBGC notice requirements were effective for years beginning after December 31, 2007. You should check with your plan actuary regarding the implementation and impact of these new rules.
  • Provide Pension Benefit Statement:  In our May 2007 Employee Benefits Update, we reported that the PPA now requires defined benefit plans to automatically provide benefit statements to participants and increases the amount of information that benefit statements must include.  Defined benefit plans are generally required to provide benefit statements at least once every three years.  As a reminder, the first benefit statement is due for the 2009 plan year (i.e., must be furnished within 45 days of the end of the 2009 plan year) unless you previously elected to take advantage of the alternative notice requirement.
  • Automatic Approval to Select Interest Rates for 2010 Plan Year:  The IRS issued final regulations that provide automatic approval to select new interest rates used for certifying the funding targets for defined benefit plans for a plan year beginning in 2010.  Accordingly, plan sponsors should check with their plan actuary regarding the implementation and impact of these new rules. 
  • Elimination of Whipsaw Calculation for Cash Balance Pension Plans:  Generally if a cash balance plan credits interest at a rate higher than the interest rate provided under Section 417(e) of the Code and the plan wants to pay a participant a lump sum benefit, the Plan is required to calculate the lump sum benefit by:  (1) projecting the participant’s account balance to normal retirement age using the higher crediting rate; and then (2) discounting back to the current date using the lower Section 417(e) rate.  This calculation is known as a “whipsaw” calculation.  Under the PPA, plans that meet certain requirements may be amended to eliminate the whipsaw calculation for distributions made after August 17, 2006.  Any plan amendment to eliminate the whipsaw calculation must be adopted on or before the last day of the 2009 plan year (i.e., December 31, 2009 for calendar year plans).  Prior to eliminating the whipsaw calculation, plan sponsors need to determine whether a Section 204(h) notice is required.  

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Section 403(b) and Section 457(b) Plans “To Do” List

  • Adopt a Written Section 403(b) Plan by December 31, 2009:  Under the new Section 403(b) final regulations, for the very first time, Section 403(b) programs are required to be maintained pursuant to a written plan, which both in form and operation, satisfies the Section 403(b) requirements and contains all the terms and conditions for eligibility, limitations, and benefits under the plan.  Plan sponsors of Section 403(b) programs must adopt a formal plan by December 31, 2009, subject to certain transition rules that apply to collectively bargained plans and church plans.  Plan sponsors will also have to enter into appropriate service agreements and information sharing agreements with vendors who issue annuity contracts and custodial accounts under the plan.
  • Adopt Pension Protection Act Amendments: The Pension Protection Act of 2006 (the “PPA”) made many changes that impact qualified plans.  We have previously reported on those changes in our 2006, 2007, and 2008 End of Year Plan Sponsor “To Do” Lists.  Some of the PPA changes took effect as early as the date the PPA was enacted, August 17, 2006, while others had delayed effective dates.  The PPA included a helpful provision that allows all PPA amendments, whether mandatory or optional, to be adopted by the last day of the 2009 plan year (i.e., December 31, 2009 for plans with calendar year plan years).  Accordingly, all plan sponsors must adopt a conforming PPA amendment reflecting how the plan has been administered on the various PPA changes by the end of the 2009 plan year (i.e., December 31, 2009 for calendar year plans).  If we prepared your Section 403(b) plan document, we will send you a PPA amendment before the appropriate deadline.  If someone else prepares your Section 403(b) plan documents, you should check with your document preparer to confirm that they will timely amend your plan for the PPA.
  • Review 2010 Plan Limits:  Familiarize yourself with the 2010 plan limits, which are unchanged from the 2009 limits.  See “Retirement Plan Limits for 2010” for more information.
  • Comply with Additional HEART Act Changes:  In addition to the Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”) changes listed on the All Qualified Plans “To Do” List, effective January 1, 2009, Section 403(b) and 457(b) plans must allow for distributions of elective deferrals to certain participants who are on active military duty for a period of more than 30 days.  If a participant takes such a distribution from the plan, the participant is prohibited from making elective deferrals or employee contributions during the 6-month period beginning on the date of the distribution.  As with most other HEART Act amendments, plan sponsors must adopt  a conforming amendment by the last day of the first plan year beginning on or after January 1, 2010 (i.e., December 31, 2010 for calendar year plans).  To ease administration, some plan sponsors are choosing to implement only the mandatory HEART Act distributions and not the optional PPA qualified reservist distributions.  If a plan sponsor wants to retroactively add a PPA qualified reservist distribution, the plan must be amended to make this change by the end of the 2009 plan year.  See Heroes Earnings Assistance and Relief Tax Act of 2008for more information.
  • Provide Safe Harbor Notice by December 2, 2009 for Calendar Year Plans:  If your Section 403(b) plan uses an ACP contribution safe harbor, you must provide the safe harbor notice at least 30 days, but not more than 90 days, before the beginning of each plan year (i.e., December 2, 2009 for calendar year plans)
  • Provide Annual Automatic Enrollment Notice by December 2, 2009 for Calendar Year Plans: If your Section 403(b) plan is subject to ERISA and has automatic deferrals, you must give an annual automatic enrollment notice at least 30 days, but not more than 90 days, before the beginning of each plan year (i.e., December 2, 2009 for calendar year plans). 
  • Provide Annual Qualified Default Investment Alternative Notice by December 2, 2009 for Calendar Year Plans: If your Section 403(b) plan is subject to ERISA and you are relying on the qualified default investment alternative (“QDIA”) safe harbor, you must give an annual notice at least 30 days, but not more than 90 days, before the beginning of each plan year (i.e., December 2, 2009 for calendar year plans).
  • Comply with New Form 5500 Reporting Requirements:  Effective for plan years beginning on or after January 1, 2009, Section 403(b) plans covered by ERISA are subject to standard Form 5500 filing requirements, including an annual plan audit for large plans (i.e., plans with 100 or more participants) and detailed financial information for small Section 403(b) plans (i.e., plans with fewer than 100 participants).  In response to concerns raised by Section 403(b) plan sponsors and administrators concerning their ability to identify and obtain information on certain annuity contracts and custodial accounts, the Department of Labor granted some relief in Field Assistance Bulletin 2009-02 (“FAB 2009-02”).  For example, FAB 2009-02 provides that certain annuity contracts and custodial accounts do not need to be treated as part of the Section 403(b) plan provided: (1) the contract or account was issued before January 1, 2009; (2) the employer ceased to have any obligation to make contributions (including employee salary reduction contributions) and in fact ceased making contributions to the contract or account before January 1, 2009; (3) all of the rights under the contract or account are legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer; and (4) the individual owner is fully vested in the contract or account.  The new Form 5500 filing requirements for the 2009 plan year become due in 2010.  Plan sponsors of ERISA Section 403(b) plans should retain the services of a Form 5500 service provider and, if the Section 403(b) plan is a large plan, an independent qualified accountant, as soon as possible to begin working on the 2009 Form 5500 filing.
  • Update Section 402(f) Eligible Rollover Distribution Notices:  In Notice 2009-68, the IRS released two new model rollover notices that may be provided to participants, alternate payees, and beneficiaries who receive eligible rollover distributions from qualified retirement plans, such as pension plans, Section 401(k) plans, and Section 403(b) plans.  Such notices are commonly called “Section 402(f) eligible rollover distribution notices.”   Now that the IRS has issued new model notices, plan sponsors should update their Section 402(f) eligible rollover distribution notices.  See IRS Issues Two New Sample 402(f) Eligible Rollover Distribution Noticesfor more information.
  • Comply with Required Minimum Distribution Waiver for 2009:  As we reported in our March 2009 Employee Benefits Update, the Worker, Retiree, and Employer Recovery Act of 2008 waived required minimum distributions (“RMDs”) for 2009.  On September 24, 2009, the IRS issued Notice 2009-82, which provides guidance on the waiver of 2009 RMDs and two sample amendments.  The first sample amendment provides that the plan will pay out distributions of 2009 RMDs unless the participant elects otherwise.  The second sample amendment provides that the plan will not pay out distributions that include 2009 RMDs unless the participant elects otherwise.  Plan sponsors must adopt conforming amendments by the last day of the first plan year beginning on or after January 1, 2011 (i.e., December 31, 2011 for calendar year plans) to reflect the waiver of 2009 RMDs.  In the meantime, Section 403(b) plans must be administered in accordance with the new rules.  See IRS Issues Additional Guidance on the Waiver of 2009 Required Minimum Distributions for more information. 

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Health and Welfare Plans “To Do” List

  • Comply with New Mental Health Parity Rules:  As reported in our October 2009 Employee Benefits Update, the economic stimulus package that was adopted in October 2008 included the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (“Wellstone Parity Act”).  The Wellstone Parity Act expands the current mental health parity provisions in ERISA to require parity in mental health and substance use disorder benefits.  The Wellstone Parity Act does not require that employers offer mental health and substance use disorder benefits in their group health plans.   However, if mental health and substance use disorder benefits are offered, the group health plan cannot impose financial requirements (e.g., deductibles, copayments, coinsurance, and out-of-pocket limits) or treatment limitations (e.g., limits on the frequency of treatment, number of visits, and days of coverage) that are more restrictive than the predominant financial requirements and treatment limitations that apply to substantially all medical and surgical benefits covered under the plan.  Congress recently indicated that plans cannot impose a separate but equal deductible for mental health and substance use disorder benefits.  In addition, if the group health plan offers out-of-network providers for medical and surgical benefits, it must provide out-of-network providers for mental health and substance use disorder benefits.  The new parity requirements are effective for plan years beginning on or after October 3, 2009 (i.e., January 1, 2010 for calendar year plans).  A small employer and a cost exemption are available.  The relevant federal agencies intend to release regulations implementing the Wellstone Parity Act in January 2010.  In the meantime, plan sponsors should make appropriate changes to their group health plan benefits to comply with the new parity requirements and amend their plans before the rules take effect.
  • Comply with Michelle’s Law:  Michelle’s Law requires group health plans to continue coverage for dependent college students who take medically necessary leaves of absence for up to one year or, if earlier, the date on which coverage would otherwise end under the plan.  Additionally, any notice regarding a requirement for certification of student status must include a description of the requirements for continued coverage during a medically necessary leave.  Michelle’s Law is effective for plan years beginning more than one year on or after October 9, 2008 (i.e., January 1, 2010 for calendar year plans) and to medically necessary leaves beginning during such plan years.  See “Michelle’s Law” for more information.
  • Comply with GINA:  As reported in our September 2008 Legal Alert, the Genetic Information Nondiscrimination Act of 2008 (“GINA”) prohibits genetic discrimination in two general areas: (1) employment; and (2) health insurance.  Title I of GINA prohibits group health plans and health insurance issuers from discriminating on the basis of genetic information with respect to eligibility, premiums, and contributions and is effective for plan years beginning on or after May 21, 2009 (i.e., January 1, 2010 for calendar year plans).  Title II of GINA prohibits employers from discriminating on the basis of genetic information in employment decisions and acquiring genetic information except in limited circumstances (e.g., wellness programs that meet certain requirements) and is effective on November 21, 2009.   Genetic information is broadly defined to include information about the genetic tests of an employee and the employee’s family members, as well as the employee’s family medical history.  “Family members” is broadly defined to include dependents (or eligible dependents) under the employer’s group health plan and fourth degree relatives of the employee or the employee’s dependents.  On October 7, 2009, the Departments of Labor, Treasury, and Health and Human Services jointly published interim final regulations addressing GINA’s Title I requirements effective for plan years beginning on or after December 7, 2009 (i.e., January 1, 2010 for calendar year plans).  These new rules will have a significant impact on health risk assessments and other wellness programs.  Employers should examine their group health plans, wellness programs (especially health risk assessments), and employment practices and make any necessary changes to comply with GINA.  See Interim Final Regulations under Title I of GINA and the Impact on Wellness Programs for more information.
  • Consider Whether to Allow Qualified Reservist Distributions from Health Flexible Spending Accounts:  The Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”) allows employers to provide that employees who are called to active duty for 180 or more days or indefinitely can take a qualified reservist distribution from their health flexible spending accounts.  A “qualified reservist distribution” for this purpose is a distribution of all or a portion of the balance of an employee’s health flexible spending account that is made during the period of the call up or order and ending on the last day reimbursements could otherwise be made under the health flexible spending account for the plan year.  The purpose of the change is to prevent reservists from forfeiting their health flexible spending balances when called to active duty.  Such distributions are taxable and must be reported as wages on the employee’s W-2 for the year in which the distribution is paid to the employee.  This is an optional change that could have been implemented as early as June 17, 2008.  IRS Notice 2008-82 includes a transition rule allowing plans to be retroactively amended for qualified reservist distributions made before January 1, 2010.  The retroactive amendment must be adopted by December 31, 2009.  See Heroes Earnings Assistance and Relief Tax Act of 2008 for more information.
  • Comply with CHIPRA:  As described more extensively in our March 2009 Employee Benefits Update, the Children’s Health Insurance Program Reauthorization Act of 2009 (“CHIPRA”) allows states to offer premium assistance subsidies to pay for coverage under an employer-sponsored group health plan for low-income children and their parents.  States may either reimburse employees the amount paid for employer group health coverage or pay employers directly.  CHIPRA also added two new special enrollment right events.  Effective April 1, 2009, group health plans must allow employees and their dependents to enroll in the plan mid-year if either of the two following conditions is met: (1) an employee or dependent becomes ineligible for coverage under a Medicaid plan or a state child health plan, and as a result, such coverage is terminated; or (2) an employee or dependent becomes eligible for a premium assistance subsidy for the group health plan under Medicaid or the state child health plan.  The employee must request coverage within 60 days (rather than the 30-day period that applies to other special enrollment events) of the date of the special enrollment event.  In order to comply with CHIPRA, plan sponsors should amend their plan documents, and revise their summary plan descriptions and special enrollment notices. 
  • Amend Group Health Plans to Reflect COBRA Premium Subsidy:  As described more extensively in our March 2009 Employee Benefits Update, the American Recovery and Reinvestment Act of 2009 (“ARRA”), provides for a 65% federal subsidy of COBRA premiums, for up to nine months, for employees (and their family members) who are involuntarily terminated from employment between September 1, 2008 and December 31, 2009.  The premium subsidy is available for periods of coverage beginning on or after February 17, 2009, which for most plans means March 1, 2009.  As explained in our prior Employee Benefit Updates, group health plans subject to the COBRA continuation provisions are subject to the premium reduction provisions, various notice requirements, and an additional election period, the deadlines of which have already passed or are ongoing.  Employers subject to the COBRA premium subsidy should additionally consider amending their group health plans to reflect the COBRA premium subsidy. 
  • Comply with Two New FMLA Leave Events:  The National Defense Authorization Act for Fiscal Year 2008 (“NDAA”) amends the Family and Medical Leave Act of 1993 (the “FMLA”) so eligible employees are now also permitted to take 12 weeks of leave for a “qualifying exigency” arising because a spouse, son, daughter, or parent is on active duty (or has been notified of a call or order to active duty) in the Armed Forces in support of a “contingency operation.”  Additionally, NDAA amends the FMLA so an eligible employee who is the spouse, son, daughter, parent, or next of kin of a “covered servicemember” is entitled to up to 26 weeks of leave to care for the servicemember with a serious illness or injury.  As with other types of FMLA leave, group health plan coverage must be maintained for the duration of these two new types of FMLA leave at the same level and under the same conditions that coverage would have been provided if the employee had remained continuously employed.  The covered servicemember leave provisions of NDAA became effective on January 28, 2008, when NDAA was enacted.  The qualifying exigency leave provisions of NDAA became effective on January 16, 2009.  To comply with NDAA, plan sponsors should update FMLA notices to reflect the two new FMLA leave events, amend group health plans and cafeteria plans (as needed) to reflect the two new FMLA leave events, and revise summary plan descriptions.
  • Comply with HIPAA HITECH Act:  As previously reported in our August and September 2009 Employee Benefits Updates, the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”), which was part of the American Recovery and Reinvestment Act of 2009, made some significant changes to the privacy and security requirements under HIPAA.  Many of the changes will become effective on February 17, 2010 or later, but one important change involving the new notification requirements for breaches of unsecured protected health information (“PHI”) became effective on September 23, 2009.  The new breach notification rules require that group health plans notify affected individuals and the Department of Health and Human Services (“DHHS”) when there is a breach of unsecured PHI.  Plan sponsors who must comply with HIPAA’s privacy and security rules should determine what PHI, if any, can be secured in accordance with guidance issued by DHHS, update their HIPAA policies and procedures and business associate agreements to address the new breach notification requirements, train their staff, and comply with the other administrative requirements included in new rules.  DHHS has stated that it will not impose sanctions for failing to provide the required notifications for breaches discovered before February 22, 2010, however, plan sponsors should take steps to comply with the new requirements as soon as possible.  With respect to the other changes in the HITECH Act, plan sponsors should amend their business associate agreements, revise their HIPAA policies and procedures, update their HIPAA privacy notice and other privacy rights forms, train their staff, and make any necessary conforming plan amendments.
  • Monitor Cafeteria Plan Regulations:  The IRS issued proposed Section 125 regulations in 2007.  The proposed regulations were originally set to apply to plan years beginning on or after January 1, 2009, which would have required calendar year plans to be amended by December 31, 2008 to comply with the new rules.  The IRS is still working on the final regulations and has informally indicated that because of the delay in issuing the final regulations, the regulations will apply, at the earliest, to plan years beginning on or after January 1, 2011.  Plan sponsors should continue to monitor the issuance of the final regulations.

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Executive Compensation “To Do” List

  • Public Companies May Need to Amend “Performance-Based Compensation” Arrangements to Address 162(m) IRS Guidance By Year End:  Section 162(m) of the Internal Revenue Code exempts from the $1 million cap, amounts paid to a public company’s CEO and certain other executive officers that qualify as “performance-based compensation.”  On February 21, 2008 the IRS officially reversed a long standing position and released Revenue Ruling 2008-13, which held that compensation will not qualify for the Section 162(m) exception if it is paid at target levels upon an executive’s termination of employment without cause or for good reason (regardless of whether the performance target is met).  Revenue Ruling 2008-13 provided significant transition relief, however, the IRS will begin enforcing its new position for performance periods beginning after January 1, 2009. As a result, agreements and incentive plans that pay performance based awards upon termination of employment without cause or for good reason (regardless of performance) and that have performance periods beginning after January 1, 2009 must be brought into compliance with Revenue Ruling  2008-13 by December 31, 2009.
  • Special Section 409A Correction Transition Relief Expires in 2009 for Operational Failures Affecting Non-Insiders:  At the end of 2008, the IRS issued Notice 2008-113, which sets forth an expanded Code Section 409A correction program for certain operational failures.  The expanded correction program, which is available as of January 1, 2009, provides special transition relief for operational failures that occurred on or before December 31, 2007 for “non-insiders.”  The operational failures to which the transition relief applies are: (1) failure to defer an amount that should have been deferred in a taxable year; (2) payments that occur more than 30 days prior to the specified payment date and payments to a “specified employee” prior to the expiration of the six-month period following the employee’s separation from service; and (3) deferral of amounts that should have been paid to the employee during the taxable year.  The correction of any of these operational failures must be made on or before the last day of the taxable year following the taxable year in which the failure occurred.  The transition relief provides that, for this purpose, the employee’s taxable year ending in 2009 will be deemed to be the next taxable year following the taxable year during which the failure occurred.  This relief is not available for any operational failure that occurred with respect to an “insider” (any director or officer of the employer or a beneficial owner (directly or indirectly) of more than 10% of any class of any equity security of the employer). The 409A correction program is available only for inadvertent, unintentional operational failures and employers must take commercially reasonable steps to avoid a recurrence of the operational failure.  Correction under the transition relief is not available for any employee whose federal tax return is under examination for the year in which the operational failure occurred. In addition, no correction is available for errors that occur during any tax year of an employee in which the employer experiences a substantial financial downturn or in which there are circumstances that indicate there is significant risk that the employer will not be able to pay the amount deferred when the payment becomes due to the employee pursuant to the terms of the plan.
  • Consider Shareholder Reapproval of Section 162(m) Performance Compensation Plans Approved in 2005:  The Section 162(m) regulations require that shareholders reapprove the performance goals with respect to which performance-based compensation is paid every five years (other than stock options and SARs). This means that companies that obtained shareholder approval of plans containing discretionary Section 162(m) performance goals in 2005 must resubmit the plans for shareholder approval in 2010. This is generally done by having the shareholders reapprove an updated plan.
  • Code Section 6039 Information Statements Due by January 31, 2010: Section 6039 requires a corporation to file a return and provide a written information statement to each employee or former employee regarding:  (1) the transfer of stock pursuant to the exercise of an Incentive Stock Option (“ISO”); and (2) the transfer by the employee or former employee of stock purchased under an Employee Stock Purchase Plan (“ESPP”).  Section 6039 applies to stock purchased under an ESPP if the stock was purchased at a permitted discount.  For ISO grants and ESPP transfers occurring in 2009, the Section 6039 information statements must be provided no later than January 31, 2010. 
  • Review Grant Procedures for Upcoming Equity-Based Grants:  The stock option backdating scandals raised serious corporate, tax, accounting, and legal issues that can be resolved by an employer carefully reviewing its grant practices and procedures.  An employer should carefully review its stock plan to determine which entity is charged with making grants under the plan and put in place best practice procedures to ensure the proper entity takes the appropriate action as of the date the awards are considered granted.

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Retirement Plan Limits for 2010

The IRS announced the cost-of-living adjustments to various retirement plan limits for 2010.  For 2010, these limits will remain unchanged because the cost-of-living index for the quarter that ended September 30, 2009 was less than the cost-of-living index for the same quarter a year ago.  The IRS said that, pursuant to the procedures under the Social Security Act for adjusting benefit amounts, any decline in the index cannot result in a reduced benefit limit.  The key 2010 dollar limits are noted below. 

The Social Security Administration separately announced the taxable wage base for 2010, which is noted at the end of the chart.

Maximum Qualified Retirement Plan Dollar Limits

 

2009

2010

Limit on Section 401(k) deferrals (Section 402(g))

$16,500

$16,500

Dollar limitation for catch-up contributions (Section 414(v)(2)(B)(i))

$5,500

$5,500

Limit on deferrals for government and tax-exempt organization deferred compensation plans (Section 457(e)(15))

$16,500

$16,500

Annual benefit limitation for a defined benefit plan (Section 415(b)(1)(A))

$195,000

$195,000

Limitation on annual contributions to a defined contribution plan (Section 415(c)(1)(A))

$49,000

$49,000

Limitation on compensation that may be considered by qualified retirement plans (Section 401(a)(17))

$245,000

$245,000

Dollar amount for the definition of highly compensated employee (Section 414(q)(1)(B))

$110,000

$110,000

Dollar amount for the definition of key employee in a top-heavy plan (Section 416(i)(1)(A)(i))

$160,000

$160,000

Dollar amount for determining the maximum account balance in an ESOP subject to a five-year distribution period (Section 409(o)(1)(C)(ii))

$985,000

$985,000

SIMPLE retirement account limitation (Section 408(p)(2)(E))

$11,500

$11,500

Social Security Taxable Wage Base

$106,800

$106,800

Heroes Earnings Assistance and Relief Tax Act of 2008

On June 17, 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”), a bill primarily designed to provide tax relief for our nation’s military personnel and their families.  A summary of the key benefits-related provisions and what actions plan sponsors must take to comply with the HEART Act follows. 

Death Benefits
All qualified plans, Section 403(b) plans, and governmental Section 457(b) plans are required to provide that, in the case of a participant who dies while performing qualified military service, the survivors of the participant are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) that would be provided under the plan had the participant resumed employment and then terminated employment on account of death.  For example, if a plan provides for accelerated vesting, ancillary life insurance benefits, or other survivor benefits that are contingent upon a participant’s death, the plan must provide these benefits to the beneficiary of a participant who dies during qualified military service. 

This mandatory change applies to deaths occurring on or after January 1, 2007, which means that plan sponsors must review their records to determine if any participants died while performing qualified military service and, if so, provide their survivors with any additional benefits due to them under the plan.

Qualified plans, Section 403(b) plans, and governmental Section 457(b) plans must be amended no later than the last day of the plan year beginning on or after January 1, 2010 (or January 1, 2012 for governmental plans).

Benefit Accruals       
Qualified plans, Section 403(b) plans, and governmental Section 457(b) plans may, but are not required to, treat a participant who dies or becomes disabled while performing qualified military service as if the participant resumed employment the day before the death or disability and then terminated employment on the date of death or disability.  The plan may provide for full or partial benefit accruals or contributions, as long as all individuals performing qualified military service who die or become disabled prior to reemployment are credited with benefits on reasonably equivalent terms.  If the contributions are normally contingent upon employee elective deferrals or after-tax contributions, the plan sponsor must calculate the contribution based on the actual average contributions or deferrals made by the employee during the 12-month period prior to military service (or, if less, the average for the actual period of service).

This optional change applies to deaths and disabilities occurring on or after January 1, 2007.  Plan sponsors that decide to make this change must determine whether they want to make this change retroactively or prospectively.  It is not clear whether plan sponsors that make this change will have to make up elective deferrals and after-tax contributions as well, so plan sponsors may want to wait for more guidance from the IRS before making a decision.

Plan sponsors that wish to make this change must amend their qualified plans, Section 403(b) plans, and/or governmental Section 457(b) plans no later than the last day of the plan year beginning on or after January 1, 2010 (or January 1, 2012 for governmental plans).

Treatment of Differential Military Pay as Wages
Effective January 1, 2009, differential wage payments must be treated as wages and subject to Federal income tax withholding.  A differential wage payment is any payment which: (1) is made by an employer to an individual with respect to any period during which the individual is on active duty for a period of more than 30 days; and (2) represents all or a portion of the wages that the individual would have received had the individual been performing services for the employer. 

Employers should modify their payroll practices to ensure that differential wage payments paid on or after January 1, 2009 are treated as wages and that Federal income taxes are properly withheld.

Treatment of Differential Military Pay as Compensation for Plan Purposes
The HEART Act establishes the following new differential wage payment rules with respect to qualified retirement plans, Section 403(b) plans, and governmental Section 457(b) plans:

  • An individual receiving differential wage payments must be treated as an employee of the employer making the payment;
  • Differential wage payments are required to be treated as compensation under these plans; and
  • Contributions or benefits that are based on differential wage payments will satisfy certain nondiscrimination requirements as long as: (1) all employees are entitled to receive differential wage payments on reasonably equivalent terms; and (2) all employees eligible to participate in a retirement plan maintained by the employer are entitled to make contributions based on such differential payments on reasonably equivalent terms.

It is not clear whether the HEART Act requires that:  (1) employees be allowed to make elective deferrals on their differential wage payments; and (2) plan sponsors include differential wage payments when calculating employer contributions or accruals.  Several groups have requested clarification from the IRS on this issue, pointing out that mandating contributions and benefit accruals on these voluntary payments seems inconsistent and, in certain circumstances, would actually reduce benefits (e.g., in final average defined benefit plans). 

This mandatory change is effective January 1, 2009. 

Qualified plans, Section 403(b) plans, and governmental Section 457(b) plans must be amended no later than the last day of the plan year beginning on or after January 1, 2010 (or January 1, 2012 for governmental plans).

Distributions of Elective Deferrals
A participant in a Section 401(k) plan, Section 403(b) plan, or governmental Section 457(b) plan who is receiving differential wage payments will nonetheless be treated as severed from employment during any period the participant is on active duty for a period of more than 30 days and may take a distribution of his/her elective deferrals.  If a participant takes a distribution from the plan, the participant is prohibited from making elective deferrals or employee contributions during the 6-month period beginning on the date of the distribution.

Presumably, participants who are not receiving differential wage payments, but who are on active duty for a period of more than 30 days, may also take a distribution, however, further guidance from the IRS on this issue is welcome.  It is also unclear whether the participant must wait until the 31st day of active duty to take the distribution. 

This mandatory change is effective January 1, 2009. 

Qualified plans, Section 403(b) plans, and governmental Section 457(b) plans must be amended no later than the last day of the first plan year beginning on or after January 1, 2010 (or January 1, 2012 for governmental plans). 

PPA Section 401(k) and Section 403(b) Qualified Reservist Distributions
The Pension Protection Act of 2006 (the “PPA”) amended Section 72(t) of the Internal Revenue Code to provide that the 10% early withdrawal penalty does not apply to a qualified reservist distribution (“QRD”).  A QRD is a distribution of elective deferrals under a Section 401(k) plan or Section 403(b) plan that is made to a reservist called up for active duty between September 11, 2001 and December 31, 2007 for at least 179 days or for an indefinite period, provided that such distribution is made during the individual’s period of active duty.  Individuals may repay all or part of the distribution back into an IRA within two years after the period of active duty.

The HEART Act makes the rules applicable to QRDs permanent with respect to individuals ordered or called to active duty on or after December 31, 2007. 

Section 401(k) and Section 403(b) plan sponsors are not required to provide for QRDs.  Plan sponsors that have allowed these distributions must amend their plans to include these provisions no later than the last day of the 2009 plan year.

There is some overlap between the HEART Act elective deferral distributions and the PPA QRDs.  Plan sponsors should familiarize themselves with the rules applicable to both to ensure that their plans are administered correctly.

Health FSA Qualified Reservist Distributions
The HEART Act amends Code Section 125 to allow employers to provide QRDs from health FSAs to employees who are called to duty for 180 or more days or indefinitely.  A QRD for this purpose is a distribution of all or a portion of the balance in an employee’s health FSA account that is made during the period of the call up or order and ends on the last day that reimbursements could otherwise be made under the health FSA for the plan year.  The purpose of the change is to prevent reservists from forfeiting their health FSA balances when called to active duty. Such distributions are taxable and must be reported as wages on the employee’s W-2 for the year in which the QRD is paid to the employee.  This is an optional change.  Employers that want to permit QRDs may do so effective as early as June 17, 2008.  IRS Notice 2008-82 includes a transition rule allowing plans to be retroactively amended for QRDs made before January 1, 2010.  The retroactive amendment must be adopted by December 31, 2009.

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IRS Issues Two New Sample 402(f) Eligible Rollover Distribution Notices

In Notice 2009-68, the IRS released two new model rollover notices that may be provided to participants, alternate payees, and beneficiaries who receive eligible rollover distributions from qualified retirement plans, such as pension plans, Section 401(k) plans, and Section 403(b) plans.  Such notices are commonly called “Section 402(f) eligible rollover distribution notices.”   

The model notices satisfy Section 402(f) of the Internal Revenue Code and update the model notice that the IRS issued in 2002.  The first model notice applies to a distribution from an account other than a designated Roth account while the second model notice applies to a distribution from a designated Roth account. 

As explained in Notice 2009-68, plan sponsors may customize the model notices by omitting information that does not apply to their plan.  For example, if a plan does not hold after-tax employee contributions, it would be appropriate for the section “If your payment includes after-tax contributions” in the explanation for payments not from a designated Roth account to be eliminated.  Similarly, if a plan does not provide for distributions of employer stock or other employer securities, it would be appropriate for the section “If your payment includes employer stock that you do not roll over” to be eliminated.  Other information that may not be relevant to a particular plan includes, for example, the sections “If your payment is from a governmental Section 457(b) plan,” and “If you are an eligible retired public safety officer and your pension payment is used to pay for health coverage or qualified long-term care insurance.” 

Now that the IRS has issued new model notices, plan sponsors should consider using a new Section 402(f) eligible rollover distribution notice for their qualified plans as soon as possible.  It may be preferable to use a different notice for each plan, with each notice tailored to each plan.  

We can assist plan sponsors with preparing new notices.  However, plan sponsors should first check with their third party administrator to see if they are preparing, and tailoring, a notice.


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IRS Issues Additional Guidance on the Waiver of 2009 Required Minimum Distributions

As we reported in the March 2009 Employee Benefits Update, the Worker, Retiree, and Employer Recovery Act of 2008 (“WRERA”) waived required minimum distributions (“RMDs”) for 2009.  On September 24, 2009, the Internal Revenue Service issued Notice 2009‑82, which contains two sample plan amendments that plan sponsors may use to amend their plans to comply with the 2009 RMD waiver.  The Notice also provides transition relief for plan sponsors and rollover relief for participants and beneficiaries through November 30, 2009.

Sample Amendments
Both sample amendments provide participants and beneficiaries the choice between receiving and not receiving distributions related to 2009 RMDs, but only if the distribution would otherwise be equal to the 2009 RMD or would be a payment in a series of substantially equal distributions (that includes the 2009 RMD) made at least annually and is expected to last for the life of the participant, the joint lives of the participant and the participant’s beneficiary, or for a period of at least 10 years.  One sample amendment provides that the plan will pay out distributions of 2009 RMDs unless the participant elects otherwise.  The second sample amendment provides that the plan will not pay out distributions that include 2009 RMDs unless the participant elects otherwise. 

Both sample amendments also provide direct rollover choices regarding 2009 RMDs.  The default in each amendment is that the plan will offer a direct rollover option only for pre-WRERA eligible rollover distributions (i.e., a direct rollover option will not be offered for 2009 RMDs nor for amounts that can be rolled over solely due to the transition relief provided in the Notice).  One option permits a direct rollover of 2009 RMDs and of other amounts that may be rolled over pursuant to the transition relief provided in the Notice.  The other option permits the direct rollover of the entire amount of a distribution, but only where the distribution consists of part or all of a 2009 RMD amount and an additional amount that is an eligible rollover distribution.

Plan sponsors may need to modify the language in the sample plan amendments to conform to their plan’s terms and administrative procedures.  Plan sponsors must amend their plans before the last day of the first plan year beginning on or after January 1, 2011 (i.e., December 31, 2011 for calendar year plans).

Plan Operation Relief
The Notice provides transition relief to plan administrators who were unable to timely modify procedures relating to 2009 RMDs to accommodate the new rules.  A plan will not be treated as failing to satisfy the requirement that it be operated in accordance with its terms merely because during the period beginning on January 1, 2009 and ending on November 30, 2009: (1) the plan paid or did not pay 2009 RMDs; (2) the plan sponsor failed to give participants and beneficiaries the option of receiving or not receiving distributions that include 2009 RMDs; or (3) the plan sponsor offered or failed to offer a direct rollover option for 2009 RMDs or for other amounts that could be rolled over pursuant to the rollover relief provided under the Notice.

Rollover Relief
Participants and spousal beneficiaries may elect a 60-day indirect rollover of 2009 RMDs or of a distribution that would be a payment in a series of substantially equal distributions (that includes the 2009 RMD) made at least annually and is expected to last for the life of the participant, the joint lives of the participant and the participant’s beneficiary, or for a period of at least 10 years.  To assist participants and spousal beneficiaries who have already received distributions in 2009 but may have been unsure of which amounts could be rolled over, the Notice gives participants and spousal beneficiaries until the later of November 30, 2009 or 60 days after the date the distribution was received, to roll over the distribution.  No more than one distribution from an IRA in 2009 will be eligible for the rollover relief.

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Michelle’s Law

Michelle’s Law allows a college student with a “serious illness or injury” who is a covered dependent under a group health plan to continue group health plan coverage for up to one year while on a “medically necessary leave of absence.”  Coverage may terminate before the end of the one year period if coverage would otherwise terminate under the terms of the plan.  For example, if a plan only covers students to age 25, and a student takes a medically necessary leave of absence at age 24½, under Michelle’s Law the student’s coverage would terminate at age 25, not age 25½.  Michelle’s Law also requires that any notice regarding a requirement for certification of student status must include a description of the requirements for continued coverage during a medically necessary leave.

Michelle’s Law is effective for plan years beginning more than one year on or after October 9, 2008 (i.e., January 1, 2010 for calendar year plans) and to medically necessary leaves beginning during such plan years.  Unfortunately, no regulations or other formal guidance has been issued on Michelle’s Law, so it is not clear how this law will interact with COBRA.  It is also currently unclear how “medically necessary” and “serious injury or illness” are defined.  

In order to comply with Michelle’s Law health plan sponsors should amend their plan documents, revise their summary plan descriptions, and update notices regarding certification of student status.

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Interim Final Regulations under Title I of GINA and the Impact on Wellness Programs

The Genetic Information Nondiscrimination Act of 2008 (“GINA”) was signed into law on May 21, 2008.  This new law prohibits genetic discrimination in two general ways - employment and health plans/insurance.  Title I of GINA prohibits group health plans, health insurance issuers, and issuers of Medicare supplemental policies from discriminating against individuals on the basis of genetic information.  Title II prohibits employers from discriminating on the basis of genetic information in employment decisions and acquiring genetic information except in limited circumstances (e.g., wellness programs that meet certain requirements). 

On October 7, 2009, the Departments of Labor, Treasury, and Health and Human Services jointly published interim final regulations addressing GINA’s Title I requirements.  The interim final regulations are effective for plan years beginning on or after December 7, 2009 (i.e., January 1, 2010 for calendar year plans).  These new rules will have a significant impact on health risk assessment and other wellness programs.  Employers should familiarize themselves with the new rules and make any necessary changes to their wellness programs to comply with the new requirements.

Definitions
“Genetic information” is broadly defined to include information about the genetic tests of an individual or the individual’s family members, the manifestation of a disease or disorder in family members of such individual (i.e., the individual’s family medical history), or any request of or receipt by the individual or family members of genetic services.

“Genetic services” is defined as a genetic test, genetic counseling, or genetic education.

A “genetic test” is generally defined as the analysis of an individual’s DNA, RNA, chromosomes, proteins, or metabolites that detects genotypes, mutations, or chromosomal changes.  A genetic test does not include an analysis of proteins or metabolites that does not detect genotypes, mutations, or chromosomal changes, or an analysis of proteins or metabolites that is directly related to a manifested disease.  Accordingly, a test to determine whether an individual has a BRCA1 or BRCA2 variant is a genetic test.  However, an HIV test, complete blood count, cholesterol test, liver function test, or tests for the presence of alcohol or drugs are not genetic tests. 

A disease, disorder, or pathological condition is considered “manifested” when an individual has been or could reasonably be diagnosed by a health care professional with appropriate training and expertise in the field of medicine involved.  However, a disease, disorder, or pathological condition is not manifested if a diagnosis is based principally on genetic information.

“Family members” are broadly defined in GINA to include both: (1) dependents of an individual who are or may become eligible under the terms of a group health plan; and (2) anyone who is a relative of the individual or the dependent of the individual (up to the fourth degree), including relatives by affinity (i.e., relatives by marriage or adoption) and relatives with less than full-blood relationships with the individual (e.g., half-siblings, who share only one parent).

Title I Prohibitions
Title I of GINA generally prohibits group health plans and health insurance issuers 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; and
  • Requesting, requiring, or purchasing genetic information prior to or in connection with enrollment, or at any time for underwriting purposes.

Prohibition on Adjusting Group Premiums
Prior to GINA, group health plans and health insurance issuers were prohibited from discriminating against an individual on the basis of genetic information, as well as other health factors.  However, plans and issuers were allowed to adjust premium or contribution amounts for the group health plan as a whole based on genetic information. 

GINA and the interim final regulations expand upon the nondiscrimination requirements under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) by prohibiting group health plans and health insurance issuers from adjusting premium or contribution amounts for the group health plan as a whole on the basis of genetic information of an individual in the group.  Even if a plan or issuer has lawfully obtained genetic information (e.g., genetic information collected prior to GINA’s effective date), the plan or issuer is still prohibited from using that information to discriminate.

GINA does not prohibit a group health plan or health insurance issuer from increasing the premium or contribution amount for a group plan based on the manifestation of a disease or disorder of an individual enrolled in the plan.  However, the plan or issuer may not use the manifested disease or disorder of one individual as genetic information about other group members to further increase the premium or contribution amount. 

Limitation on Requesting or Requiring Genetic Testing
GINA generally prohibits group health plans and health insurance issuers from requesting or requiring an individual to take a genetic test.  There are three exceptions to this prohibition:

  • A health care professional who is providing health care services to an individual can request that the individual undergo a genetic test.
  • A plan or issuer may obtain and use the results of a genetic test to make a determination regarding payment.  However, plans and issuers are only permitted to request the minimum amount necessary to make this determination.
  • A plan or issuer may request, but not require, that a participant or beneficiary undergo a genetic test for research purposes provided certain conditions are met.

Prohibition on Collection of Genetic Information
GINA generally prohibits group health plans and health insurance issuers from requesting, requiring, or purchasing genetic information: (1) for underwriting purposes; or (2) prior to or in connection with enrollment.

Underwriting Purposes
Group health plans and health insurance issuers must not request, require, or purchase genetic information for underwriting purposes.  “Underwriting purposes” has been defined broadly to include more than just activities related to rating and pricing a group health policy.  Underwriting includes rules for eligibility or the computation of premiums or contributions under the plan, including changes in deductibles or other cost-sharing mechanisms, or providing discounts, rebates, payments in kind, or other premium differential mechanisms in return for activities such as completing a health risk assessment (“HRA”) or participating in a wellness program. This is the result even if the rewards are not based on the outcomes of the assessment.  Rewards provided for completing HRAs that request genetic information, including family medical history, violate GINA. 

The final interim regulations clarify that if an individual seeks a benefit under the plan, the plan or issuer can request family medical history or other genetic information to make a determination whether the benefit is medically appropriate for purposes of payment.  The determination of whether the benefit is medically appropriate is not within the meaning of “underwriting purposes.” 

Disease management programs may also be impacted by GINA if they utilize HRA results to determine eligibility.  A plan cannot request genetic information in an HRA and use such information to determine if an individual is eligible for additional benefits under the plan by being enrolled in a disease management program.  However, a plan can advertise its disease management program to all participants and condition benefits under the disease management program upon a showing by an individual that the individual is at risk for specific diseases, even if such showing involves genetic information, provided certain conditions are met. 

Prior to or in Connection with Enrollment
Group health plans and health insurance issuers must not request, require, or purchase genetic information with respect to any individual prior to or in connection with the individual’s enrollment.  Genetic information is considered collected prior to enrollment if it is collected before the individual’s effective date of coverage under the plan. If a plan affirmatively requires individuals to reenroll on an annual basis or allows individuals to change their enrollment, a collection of genetic information made after initial enrollment will not be considered made prior to a subsequent enrollment unless the information will be used to affect that subsequent enrollment. 

Impact on Wellness Programs
The prohibition on collecting genetic information for underwriting purposes and prior to or in connection with enrollment will have a significant impact on wellness programs and HRAs in particular. 

  • Plans and issuers cannot provide a reward for completing an HRA that requests genetic information, including family medical history, because this will violate GINA.  The reward is prohibited even if it is not based on the outcome of the assessment, which would otherwise not violate the HIPAA nondiscrimination rules for wellness programs. 
  • Plans and issuers also cannot collect genetic information through an HRA prior to or in connection with enrollment, even if no rewards are provided.

Plan sponsors who currently use HRAs should consider following one of the following approaches to comply with Title I of GINA:

Option 1:  Eliminate the reward and request that the HRA be completed after the individual enrolls in the group health plan. 
If a plan or issuer believes that the genetic information requested in its HRAs is necessary, it must not offer an incentive for completing the HRA and cannot request that the HRA be completed prior to or in connection with enrollment.  This includes not enrolling individuals in disease management programs based on genetic information provided in response to questions in the HRA.

In addition, if the HRA is considered a wellness program under Title II of GINA, the employer must comply with the requirements under Title II that apply to wellness programs.  The Equal Employment Opportunity Commission has not yet finalized its regulations under Title II, so it remains unclear what types of programs will be considered wellness programs subject to Title II.  Voluntary wellness programs must meet the following requirements: (1) the individual must provide prior, knowing, voluntary, and written authorization; (2) the authorization must describe the genetic information being sought, the general purposes for which it will be used, and the restrictions on further disclosures; (3) only the individual and the licensed health care professional providing the services can receive the genetic information; and (4) genetic information will not be disclosed to the employer except in aggregate terms that do not disclose the identity of specific individuals.  How an HRA would comply with these requirements if it is considered a wellness program is uncertain.

Option 2:  Eliminate questions that request genetic information. 
A plan or issuer that wants to provide rewards for completing an HRA or who does not want to risk not complying with the wellness program requirements under Title II, should remove all questions from the HRA that requests genetic information, including family medical history.  This includes open-ended questions that might result in an individual providing genetic information.  If it is reasonable to anticipate that an individual may respond to an open-ended question by providing genetic information, the open ended question must be followed by instructions indicating that genetic information should not be provided.  For example, any question that might solicit genetic information should include the following statements: “In answering this question, you should not include any genetic information.  That is, please do not include any family medical history or any information related to genetic testing, genetic services, genetic counseling, or genetic diseases for which you believe you may be at risk.”  If any genetic information is provided in the HRA notwithstanding disclosures in the document instructing individuals not to include such information, the genetic information cannot be used for underwriting purposes.

When asked what plan sponsors should do if they have already solicited HRAs that included requests for genetic information and promised rewards in 2010 (e.g., a reduced premium over the course of the year), a representative from the IRS has informally stated that such incentive will violate GINA and that plan sponsors should consider: (1) accelerating payment of the reward prior to January 1, 2010; (2) giving the reduced premium to all plan participants; or (3) not providing the reduced premium and communicating this to affected individuals.

HIPAA Privacy
GINA also directs the Secretary of Health and Human Services to revise HIPAA’s privacy rules to prohibit the use or disclosure of genetic information for underwriting purposes by group health plans and health insurance issuers.  On October 7, 2009, the Department of Health and Human Services published proposed regulations modifying HIPAA’s privacy rule making this change, coordinating the privacy rule with the Title I GINA regulations, and requiring that health plans that use or disclose protected health information (“PHI”) for underwriting purposes revise their HIPAA privacy notices to include a statement making clear that they are prohibited from using or disclosing PHI that is genetic information for such purposes.  The changes to the privacy rules will not be effective until 180 days after the final regulations are issued.

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©2009 All rights reserved. Notice: As part of our effort to inform you of changes in the law, Snell & Wilmer L.L.P. provides legal updates regarding general legal issues related to employee benefits matters. Please be aware that this update is provided as a courtesy and will not establish or reestablish an attorney-client relationship or assumption of responsibility by Snell & Wilmer to take any action with respect to your employee benefit matters. The purpose of the above article is to provide readers with general information about recent changes in the law that may impact their employee benefit plans. The article should not be considered legal advice or opinion because its contents may not apply to the specific facts of a particular case. In addition, to ensure compliance with Treasury Regulations governing written tax advice, please be advised that any tax advice included in this communication, including any attachments, is not intended, and cannot be used, for the purpose of (i) avoiding any federal tax penalty or (ii) promoting, marketing, or recommending any transaction or matter to another person.
 
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