November 2, 2006
Pre-Planning for the End of 2006
This has been a busy year in the employee benefits area. A number of significant legal changes have occurred in 2006. Many of these changes alter or may alter the operation of your benefit plans. While two months still remain in 2006, we recommend you review your plan documents now in preparation for the end of the year. Your plan documents should be reviewed with the following developments in mind:
Pension Protection Act of 2006 (“PPA”). In addition to sweeping pension reform, the PPA makes substantial changes to certain § 457 plans and amends ERISA’s definition of governmental plans. Some key changes of which our clients should be aware include:
- Retired Public Safety Officers. Beginning January 1, 2006, eligible retired public safety officers can direct the distribution of up to $3,000 per year from an eligible governmental retirement plan to pay for qualified health insurance premiums. This is a permissive (i.e., not mandated plan feature). Offering this feature requires review and adjustment of plan documentation and vendor cooperation.
- Indian Tribal Programs. The Act clarifies that a plan is treated as a governmental plan (i.e., exempt from ERISA) if it is maintained by an Indian tribal government or a subdivision, agency, or instrumentality of a tribal government. All of the participants must be employees whose services are substantially in the performance of essential governmental functions, and not in the performance of commercial activities. For example, a governmental plan would include a plan of a tribal government if all of the participants are teachers in tribal school, but a governmental plan would not include a plan covering tribal employees who are employed by a hotel, casino, or convenience store, operated by a tribal government. This change was effective for plan years beginning on or after August 17, 2006. Subsequently, the IRS issued guidance providing transitional relief until September 30, 2007.
Health Savings Accounts (“HSAs”). As we highlighted here, the IRS released final regulations clarifying previous guidance given with respect to employer contributions to an employee’s HSA. If an employer chooses to make contributions to an employee’s HSA, the contribution made to one employee must generally be “comparable to” contributions made for similarly situated employees. The final regulations expand the groups of similarly situated employees. Employees can be divided into groups based upon the following coverage levels: self-only, self plus one, self plus two, and self plus three or more. In addition, former employees are tested separately, and collectively bargained employees covered by a bona fide collective bargaining agreement are excluded from the comparability testing.
If a contribution is deemed to be made through a cafeteria plan, employer HSA contributions are not subject to the comparability testing. Rather, they are included in the overall cafeteria plan nondiscrimination testing. Including HSA contributions as part of the cafeteria plan nondiscrimination testing can significantly impact that testing.
Reminder for Flex Plans. The IRS has approved the use of a 2½ month claims grace period for reimbursement accounts contained in flex plans. The grace period allows participants to use current year benefits to pay for claims incurred during the first 2½ months of the following plan year. In order for the grace period to be available and not preclude HSA eligibility, an amendment is needed to the plan document. Special amendments must be made before January 1st. See our prior alert “Health Savings Account Eligibility During a Cafeteria Plan Grace Period.”
Health Reimbursement Arrangements (“HRAs”). Confirming the information we received from Harry Beker described here, the IRS formally issued a ruling stating it was not acceptable to have a designated beneficiary (other than the employee’s spouse or dependents of the employee) as a recipient of HRA funds even if the distribution is for reimbursement of medical expenses. New HRAs adopted after the ruling should not allow the designation of a beneficiary other than a spouse or dependents. Existing HRAs with plan designs that do not comply with this ruling must be amended to be brought into compliance.
Using Electronic Payment Cards. In July 2006, the IRS provided further guidance regarding the use of debit cards, credit cards, and stored value cards for use by participants in HRAs, health flexible spending accounts (health “FSAs”), and, for the first time, dependent care assistance programs (“DCAPs”). This new guidance expands upon guidance initially provided in 2003.
Reminder: Special substantiation rules applicable to electronic payment card programs should be reflected in your plan documentation. In addition, if your plan is subject to ERISA, the documentation should clearly indicate that use of the card is not a “claim” for purposes of the plan’s claims and appeals procedures.
When first proposed, the use of a payment card system to reimburse eligible medical expenses appeared burdensome. Under this new guidance, the use of a payment card system appears more attractive. The IRS expanded the methods to substantiate eligible medical expenses. Under copayment match substantiation, if an employer’s health plan has copayments in specific dollar amounts, card transactions will be considered fully substantiated if the amount of the transaction at a health care provider equals an exact multiple of not more than five times the dollar amount of the copayment. The new guidance also allows automatic substantiation when a card used at any merchant (including those that are not health care providers (e.g., Target, WalMart)) to purchase eligible medical supplies, provided an inventory tracking system is in place. Finally, the IRS has provided a way to substantiate claims – regardless of whether a card is used – for employers who receive information from a third party, such as an explanation of benefits (EOB). Despite these expansions, the guidance emphatically re-stated that self-substantiation of a claim is still not authorized under the Code.
If you use or are considering using a payment card system, make sure you review your SPD, plan documents, and administrative services agreement to ensure they reflect the special substantiation rules, including the new substantiation rules discussed above.
The Working Families Tax Relief Act (“WFTRA”). WFTRA was passed near the end of 2004 and became effective in 2005. In our end of the year review published last year, we mentioned that WFTRA revised the definition of “dependent” in sections of the Internal Revenue Code that address exemptions for individual federal tax returns and tax-free coverage under group health plans and dependent care assistance programs. There are differences between the previous definition of dependent and the WFTRA definition. In addition, the WFTRA definition does not always match the requirements of state insurance laws. As a result, some plans provide coverage to “dependents” who are not tax dependents. This coverage should be taxed to employees. In addition, because of the changes, references to Code sections in the plan’s definition of “dependent” may be inaccurate. All group health plans should be reviewed to determine whether changes to the definition of dependent are needed to ensure tax-free coverage.
The Defense of Marriage Act (“DOMA”). DOMA provides that for purposes of all federal statutes, “marriage” means only a legal union between a man and a woman, and “spouse” refers only to a person of the opposite sex. Thus, under DOMA, legally married same-sex partners are not considered “spouses” for purposes of any federal law. As a result, the value of employer-paid same-sex partner benefits is generally taxable to the employee. Employers should review their benefit plans and related documents in light of DOMA’s definition of spouse.
Dependent Care Reimbursement Expenses. As we previously discussed here, the IRS proposed regulations outlining which dependent care expenses can be properly reimbursed. The proposed regulations redefine “qualifying individual” in light of WFTRA. The proposed regulations confirm previous guidance that expenses for kindergarten are not eligible because they are primarily for education, but expenses for pre-school or similar programs below the kindergarten level may be eligible expenses, even if education is a significant part of the program. The proposed regulations also provide new guidance on transportation expenses, expenses incurred while an employee is absent from work, and reimbursements for part-time employees. If you sponsor a dependent care reimbursement plan, you should review your plan documentation to ensure it is consistent with the rules contained in the proposed regulations.
Divorce Situation for Dependent Care. On September 20, 2006, the IRS issued Notice 2006-86 addressing certain “tie-breaking” rules where more than one individuals claim a child as a “qualifying child” for various purposes under the Internal Revenue Code (the “Code”). We outlined the “tie-breaking” rules here. Dependent care reimbursement documentation, including enrollment materials, should be reviewed to ensure they accurately describe these tie-breaking rules.
Note: Because these rules impact whether a person can treat a child as a qualifying child, they also directly impact whether an employee should enroll in a dependent care reimbursement program and/or the amount of the employee’s election. With open enrollment for calendar year plans occurring now, these rules should be communicated to employees immediately.
Wrap Plans and 5500 Filings – Make Adjustments Now. DOL requires annual form 5500 filings for most ERISA plans. For employers with multiple plans, ERISA allows for the use of a wrap document that combines multiple plans into a single plan for the purposes of the annual filing. By creating a wrap document, an employer can reduce the number of form 5500s needed to be filed. If you are filing a single Form 5500 for multiple benefits, or would like to do so, it is important to make adjustments to your plan documents now, prior to the start of the plan year.
Deferred Compensation and 409A. In September 2005, the IRS released proposed regulations for Section 409A of the Internal Revenue Code. Under the proposed regulations, the deadline by which nonqualified deferred compensation plans need to be amended to comply with 409A generally was extended until December 31, 2006. On October 4, 2006, the Treasury Department and IRS issued Notice 2006-79 which provides an extension of existing transition relief for nonqualified deferred compensation arrangements that will be subject to the requirements of the regulations under section 409A. The Notice extends the deadline for complying with section 409A from January 1, 2007 to January 1, 2008.
COBRA. On May 26, 2004, the DOL issued final regulations clarifying and expanding group health plans’ obligations to provide notices of COBRA continuation coverage rights to qualified beneficiaries. We still find some plans are not providing the proper notices mandated by the final regulations. In addition, some plans have not established or properly documented notification procedures addressed in the regulations. Review your COBRA language and practices to ensure compliance with the final regulations. If you use a third party administrator, confirm that it has made the necessary updates.
Uniformed Services Employment and Reemployment Rights Act (“USERRA”). We noted here the release of new regulations with respect to USERRA. The new regulations required USERRA notices to be in place by January 18, 2006. The regulations also allow plans to establish procedures regarding the election of USERRA continuation coverage and the payment of premiums for such coverage. Plan sponsors should review their documents to ensure they establish procedures consistent with the new regulations.
Medicare Part D. Medicare Part D prescription drug plans became effective on January 1, 2006. All group health plans that provide prescription drug benefits, such as major medical plans and HRAs (but not medical reimbursement features of a flex plan), are required to provide certain disclosures to Medicare eligible participants (both active employees and retirees). The Center for Medicare and Medicaid Services recently proposed amendments to the disclosure notices. As we noted here, Plan sponsors have an ongoing obligation to provide these notices before the annual Medicare Part D enrollment period. These notices must be provided before November 15, 2006. Remember, the notice requirements apply to all plans with prescription drug benefits, not just those plans that provide for retiree coverage. If you have not provided the annual notice, immediate action is required.
HIPAA Privacy & Security. As we highlighted here, new HIPAA regulations require amendments to plan documents, amendments to business associate agreements, updated and additional HIPAA policies and procedures, additional HIPAA training, and possible changes to your IT systems. These amendments and updated policies and procedures should already exist.
If you have any questions about the foregoing items, or need assistance bringing your plans, policies, or notices into compliance, please contact us.
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The information contained in this ALERT is intended for general information purposes only and does not constitute legal advice relative to a specific situation.