On January 27, 2011, the New York Times reported that Moody’s Investors’ Service has started to recalculate the States’ debt burdens to include the unfunded pension obligations owed to State employees. To date, States have not shown their unfunded pension obligations on their audited financial statements. Among the states with the largest per capita liability for unfunded pension benefits are Connecticut, Hawaii, Illinois, New Jersey, Kentucky, Massachusetts, Mississippi, Rhode Island and Alaska, according to the Times’ report. The change comes at a time when investors have grown increasingly wary about investing in state and local municipal bonds.

Continue Reading MOODY’S WILL COUNT UNFUNDED STATE PENSION BENEFITS IN RATING STATE BONDS

The IRS, on December 17, 2010, issued Revenue Ruling 2010-17, which sets forth examples of certain expenses that may be eligible for an unforeseeable emergency distribution from an IRC Section 457(b) deferred compensation plan. Section 457(b) plans generally may permit hardship distributions for unforeseeable emergencies if certain requirements are met. The ruling concludes that residential flood damage and funeral expenses of a non-dependent child may be unforeseeable emergencies arising from events beyond the participant’s control. The ruling makes clear, however, that accumulated credit card debt is not eligible for an unforeseeable emergency distribution.


Section 457(b) plans that so provide, may offer distributions to a participant based on an unforeseeable emergency for:

(i) an illness or accident of the participant, the participant’s beneficiary, or the participant’s or beneficiary’s spouse or dependents;

(ii) property loss caused by casualty (e.g., damage from a natural disaster not covered by homeowner’s insurance) of the participant or beneficiary;

(iii) funeral expenses of the participant’s spouse or dependent; and

(iv) other similar extraordinary and unforeseeable circumstances resulting from events beyond the control of the participant or beneficiary (such as imminent foreclosure or eviction from a primary residence, or to pay for medical expenses or prescription drugs).

The participant must show that the emergency expenses could not otherwise be covered by insurance, liquidation of the participant’s assets or ceasing deferrals under the plan.
The ruling lists three examples of participant requests for emergency distributions:

(i) to repair significant water damage to the participant’s principal residence not covered by insurance (permitted),

(ii) to pay funeral expenses of the participant’s non-dependent adult child (permitted), and

(iii) to pay credit card debt (not permitted).

The examples and related rules cited in the ruling also apply to emergency distributions from a nonqualified deferred compensation plan subject to Code Section409A.

For additional information on the effect of this ruling, please contact Michael G. Kushner (914)-514-6139 (michael.kushner@jacksonlewis.com) or your regular contact within the Kackson Lewis Pensions & Benefits Practice.

The Internal Revenue Service has given a last-minute holiday gift to sponsors of insured group health plans.  It announced delayed enforcement for the new nondiscrimination provisions applicable to insured group health plans under the Patient Protection and Affordable Care Act of 2010 (as amended by the Health Care and Education Reconciliation Act of 2010; together the “Health Care Reform Law”).

The Health Care Reform Law requires non-grandfathered insured group health plans to satisfy the requirements of Internal Revenue Code Section 105(h)(2), previously applicable only to self-funded group health plans.  Thus, the new law effectively prohibits non-grandfathered insured group health plans from favoring highly compensated individuals with respect to eligibility or benefits.  It further provides that rules “similar to” Code Section 105(h)(3), (4), and (8) would apply, but left it to the enforcement agencies (including IRS) to come up with  those rules.  Meanwhile, the Health Care Reform Law would require sponsors of noncompliant plans to pay a hefty excise tax ($100 per day per affected individual) beginning, for most, with the 2011 plan year.  This seemingly sounded a death knell for many executive medical arrangements and sent employers in search of alternative ways to meet contractual obligations and otherwise continue to provide desired benefits without running afoul of the new law. 

The IRS issued Notice 2001-11 on December 22, 2010, which provides relief from the excise tax applicable to the nondiscrimination provision.  As an added token of holiday spirit, the IRS suggested that the regulations, once issued, would not apply until the plan year beginning some period of time thereafter.

In the same notice, the IRS requested additional public comments on the application of the nondiscrimination rules to insured group health plans.  Comments must be submitted not later than March 11, 2011.  Regulations, therefore, are not expected until April or later.

Jackson Lewis attorneys are available to answer inquiries regarding this and other workplace developments.

IRS Notice 2010-6 previously provided guidance concerning how to make payment of nonqualified deferred compensation that is subject to the signing of a release complaint with Section 409A. 

Essentially, it provides that a plan may not allow an employee to delay or accelerate the timing of a payment as a result of the employee’s actions (such as signing a release), provided, however, that if the plan provides for payment (subject to the employee’s action) within a designated period following the permissible payment event under Section 409A, the plan must provide for payment only on the last day of such designated period.

If the plan does not provide for payment (subject to the employee’s action) within a designated period following the permissible payment event under Section 409A, the plan must provide for payment only upon a fixed date either 60 or 90 days following the occurrence of the permissible payment event. Notice 2010-80 modifies this guidance by providing an additional method to make the payment of deferred compensation contingent upon an employee’s actions, such as signing a release, compliant with Section 409A (and an additional method to correct certain document failures involving payments contingent upon an employee’s actions). Under this additional method, a plan may provide for payment during a specified period not longer than 90 days following a permissible payment event, provided that if the period begins in one year and ends in the subsequent year, the payment must be made in the subsequent year.

With respect to correcting plans to comply with this guidance in Notice 2010-80, Notice 2010-80 contains significant transition relief concerning the date by which plans must be amended. This is a general summary of the modified procedure. Jackson Lewis attorneys are available to answer your questions about the Section 409A correction procedures.

Employers continue to experience a rise in the cost of providing health coverage to employees, despite health care reform under the Patient Protection and Affordable Care Act (PPACA). Whether that will change when the new law is fully implemented remains to be seen. For the time being, however, employers continue to struggle with escalating costs and many are looking to wellness programs as part of the solution.

1303029Congress seems to agree. Under the PPACA, beginning in 2014, employers can increase the wellness incentive they provide under their group health plans from 20% to 30% of premium. The new law also provides for information gathering and funding to study wellness programs with an eye toward enhancing their effectiveness.

Even before health care reform, many looked to wellness programs as an important tool for helping to bend the health care cost curve by getting employees more educated about their own health and their health care options, and by providing incentives to encourage healthier behaviors. Competing statistics concerning wellness programs effectiveness exist for sure, although common sense certainly seems to support providing people with services, tools and/or resources to help them move away from unhealthy behaviors, such as smoking, to healthier behaviors, such as exercising, taking medications as prescribed, and eating right.

The success of any wellness program depends on three things – participation, participation and participation. You could design the best program for your employees and if, for example, they can not trust that their personal information will be maintained privately, participation likely will be low. Likewise, if rank and file employees do not see management participating or cannot understand the program, they might be less inclined to participate.

So what are some tips for designing/driving participation in your wellness programs:

 

Continue Reading Wellness Programs: A 2011 Prescription for Participation and Success

The Financial Accounting Standards Board (“FASB”) issued an Exposure Draft (the “Draft”) September 1, 2010, proposing changes to U.S. Generally Accepted Accounting Principles (“GAAP”), which, if adopted, would require participating employers in multiemployer pension plans to disclose in their financial statements additional information concerning their obligations to such plans. The Draft would apply to public companies for fiscal years ending after December 15, 2010 and to non-public companies exactly one year later.

Participating employers in multiemployer plans have become increasingly exposed to withdrawal liability risks due to the economic downturn, combined with the stricter funding rules for financially troubled plans added by the Pension Protection Act of 2006 “PPA 2006”). The Draft would require employers to disclose certain information about the plans in which they participate, about the employer’s participation in the plans and about the effect of the employer’s participation on its cash flow.

The Draft would require employers to disclose, in footnotes to their financial statements, such items as the number of multiemployer plans in which they participate, their exposure to significant risks resulting from such participation, how plan participants’ benefits are calculated, whether the employer is represented on the plan’s board of trustees, the financial consequences of the employer’s ceasing contributions to the plan (e.g., potential withdrawal liability) and, for underfunded plans, the impact on the employer of the plan’s adoption of any PPA 2006 funding improvement or funding rehabilitation plan.

Employers’ financial statement also would have to include a narrative describing any unique events occurring in the current contribution period that might affect the comparability of the current period’s data to prior and future periods, the plan’s total assets and liabilities and the employer’s share thereof, any contractual obligations requiring the employer to make minimum levels of contributions, the amount of employer contributions for the current year and the amount of projected contributions for the following year, any major trends in contribution levels and the potential impact on the employer’s financial condition of its withdrawal from the plan or from the plan’s winding up.

In view of the proposed changes, participating employers in multiemployer plans should make certain they can obtain the data needed to provide the required disclosures in time for inclusion in their annual financial statements. If such a procedure does not exist, employers should consult with their professional advisors and with plan representatives to determine how such information will be provided and transmitted to the employer in time to be included in the employer’s annual financial statement.

For example, the Draft would require financial statements to include estimates of current withdrawal liability from plans in which the employer participates. ERISA Section 101(l) allows employers to request from the plan an estimate of withdrawal liability once in every 12-consecutive month period. Plans are only required to provide such information in response to an employer’s written request and have 180 days from receipt of the written request in which to provide the estimate. As a result, if the Draft is adopted as currently written, the entire burden would fall on employers to obtain timely information for its financial statements unless the employer could negotiate with the plan a contractual schedule which would require the plan to annually provide the required data in a timely manner.

 

The Patient Protection and Affordable Care Act (Affordable Care Act), requires the Secretary of Health and Human Services (HHS) to impose restrictions on the imposition of annual limits on the dollar value of essential health benefits in a new or existing group health plan for plan years beginning on or after September 23, 2010 and prior to January 1, 2014. Interim final regulations published on June 28, 2010, established these restricted annual limits, along with the possibility for a waiver from these restricted annual limits as granted by HHS if complying with the interim final regulations would result in a significant decrease in access to benefits or a significant increase in premiums.

 

On September 3, 2010, HHS provided some initial guidance on the waiver process.  On November 5, 2010, HHS updated that guidance, the provisions of which applicable to group health plans are summarized below. Plans seeking a waiver should be sure to make their best case and, if granted, implement as appropriate.

 

Notice Requirement. As a condition of receiving a waiver of the annual limits requirements, group health plans must notify each participant that the plan does not meet the restricted annual limits for essential benefits set forth in the interim regulations due to the waiver obtained by the plan. Notice requirements: 

·        Include the dollar amount of the annual limit along with a description of the plan benefits to which it applies.

·        Prominently display the notice in clear, conspicuous 14-point bold type.

·        State the waiver applies for only one year.

·        HHS will soon be issuing a model notice language for health insurance issuers which will be posted on the website in the near future at: http://www.hhs.gov/ociio/regulations/index.html.

 

Factors Considered. HHS has stated that all applications will be reviewed on a case-by-case basis. However, the Bulletin lists several factors that may be considered as each application is reviewed to determine whether compliance with the interim regulations would result in a “significant decrease in access to benefits” or a “significant increase in premiums.” The Bulletin sets out the following factors:

 

  • The application’s explanation as to how compliance with the restriction on annual limits would result in a significant decrease in access to benefits.
  • The policy’s current annual limits. Higher annual limits would be more likely to experience lower premium increases to comply with the restricted annual limit requirement than plans with lower limits.
  • The change in premium in percentage terms. The lower the percentage increase to comply, the less likely compliance with the restricted annual limit requirement would be found to be “significant.”
  • The change in premium in absolute dollar terms. A large percentage increase may only translate to a small increase in absolute dollar terms and therefore may not be “significant.”
  • The number and type of benefits affected by the annual limit. Some policies have limits on only some essential health benefits, such as prescription drugs, and may not significantly increase the overall cost of health insurance for enrollees.
  • The number of enrollees under the plan seeking the waiver.  

Mini-Med Policies and Medical Loss Ratio Requirement.  Because the premium and cost structure of mini-med policies create significant challenges for those plans in regard to satisfying the medical loss ratio requirements, expect to see medical loss ration regulations addressing, among other things, a special methodology that takes into account the special circumstances of mini-med plans in determining how administrative costs are calculated for medical loss ratio purposes.

 

Record Retention and Audits. As a condition for obtaining a waiver, HHS retains audit authority over applicants. In the event of an audit, if it is determined that the data submitted to HHS in support of a waiver contain material mistakes or omissions, HHS may in its discretion deny future waiver requests.

Last year, the IRS began auditing deferred compensation plans and arrangements under IRC Section 409A, which imposes restrictions on both the terms and the operation of such plans unless an exemption applies. This program began in 2009,  the first year that plan documents had to comply with  Section 409A  in writing (beginning in 2006, plans had to comply in operation only). The program will include 6,000 random audits of employer-sponsored NQDC plans and will run through the end of 2012.

Even though the audit program is relatively new, practitioners have informally shared anecdotal evidence on which  issues the IRS appears focused on so far. The list of issues below is not exhaustive and other issues may be raised, depending on the nature and identity of the employer and its NQDC arrangements.

In general, however, it appears that the IRS is requesting detailed documentation on the following areas (i) if a plan intends to rely on the “short-term deferral” exception, the plan clearly must disclose the relevant terms, including detailed information on any forfeiture risks, (ii) employees’ initial and “second” deferral elections must include specific terms for making elections, and  specify both the initial and new payment dates, (iii) plan documents must provide detailed information on any events that would trigger the acceleration of benefit payments, particularly events triggered by an employer’s deteriorating financial condition, and (iv) plans’ treatment of “specified employees,” (certain senior executive officers of publicly traded companies) who are subject to the general rule that payments cannot begin earlier than six months after termination of employment. Plan documents must clearly identify which employees are “specified employees” and plans must maintain detailed records of such employees’ termination dates and the dates on which payments began.

Section 409A imposes harsh penalties on employees who benefit under NQDC plans that do not satisfy Section 409A’s documentary or operational compliance rules. Violations can subject employees to immediate income tax on deferred amounts, a 20% penalty tax and a “premium interest” penalty. To protect employees against these harsh sanctions, some employers agree to pay some or all of the tax cost to an employee who is penalized under tax "gross up" provisions. Thus, 409A violations can trigger both employer and employee tax liabilities.

Clients that maintain NQDC arrangements even if they have initially reviewed their documents for Section 409A compliance before the documentary compliance rules took effect in 2009, may wish to re-review their plans  in light of the areas in which the IRS initially appears to be concentrating. Plans that correct documentary or operational defects voluntarily before receiving notice of an audit often, under the IRS’s voluntary compliance program, can settle such issues with the IRS for significantly reduced sanctions.

Even if an employer receives an audit notice under Section 409A, it still may be able to negotiate limits on the scope of the audit by agreeing in advance with the examining agent on which subjects will be covered and which documents must be produced. Such agreements can greatly reduce the cost of the audit and  the paperwork burden on employers. Having all NQDC documentation organized and readily accessible to the agent also can help minimize audit costs and administrative burdens.

 

The Pension Protection Act of 2006 (“PPA”) created certain funding classifications for multiemployer pension plans. Seriously underfunded plans are classified as either “critical” (“red zone”) or endangered (“yellow zone”). Plans that fall in between these two levels are considered “seriously endangered” (“orange zone”) plans. Such plans must send participating employers a notice about the plan’s underfunded status and provide any bargaining parties with a funding bail-out plan (which consists of one or more schedules providing for increased contributions, and/or decreased future benefit accruals) to incorporate into the parties’ next CBA. Such a plan is called a “rehabilitation plan” for plans in critical status, and a “funding improvement plan” for plans in endangered status.

Once a funding improvement or rehabilitation plan is in effect, an employer’s failure to make the required contribution within the plan’s contribution deadlines triggers an excise tax equal to 100% of the contributions due.  The tax applies in addition to the usual remedies available under the CBA and ERISA for delinquent contributions (e.g.., liquidated damages, interest, etc.) An employer subject to the excise tax must report it on IRS Form 5330 by the last day of the 7th month after the end of the employer’s tax year or 8½ months after the last day of the plan year that ends with or within the filer’s tax year.

Under  IRC §4971, however, the IRS may waive the tax in whole or part if it determines the failure to make timely contributions was due to reasonable cause and not willful neglect. “Reasonable cause” includes factors indicating that the tax would be an excessive or otherwise inequitable burden relative to the size and nature of the violation. 

Employers that are assessed the 100% tax, therefore, should present to the IRS any mitigating factors. Such factors can include unanticipated changes in business or liquidity conditions, the devastating effect that paying the tax would have on the employer’s ability to continue its business and make future contributions, and, if applicable, the fact that the contribution was made shortly after the due date, was not large relative to the plan’s overall size, did not damage participants and the fact that the employer has a good track record of making timely contributions. Evidence that the plan has been meeting the goals of its funding rehabilitation plan also could help persuade IRS to mitigate the tax. It should be remembered that the primary  interest of both the IRS and the PBGC is to restore underfunded multiemployer plans to good financial health and that forcing an employer that has been making contributions in good faith to pay a 100% excise tax can impede a plan’s ability to restore its financial health. 
 

As group health plans brace for open enrollment periods under the new Patient Protection and Affordable Care Act of 2010, one of the key issues they face is the Act’s new coverage requirements for adult children. Previously, a child became ineligible for family coverage under a group health plan for federal tax purposes once the child reached age 19, or in the case of a child who was a full-time student, age 24. The Act raised the maximum age for adult children to age 26 and eliminated the requirement that the child be a full-time student. These FAQs include questions posed by plan sponsors concerning the new requirement, as well as model language to use to notify dependents of their coverage options. Plan sponsors should study the new requirement, as it is likely to be a hot button issue for many employees.