Employee Benefits Legal Blog : Employee Benefits Lawyer & Attorney : Fox Rothschild Law Firm : Health Care, Retirement, ERISA : Philadelphia, New York, Northeast

Whenever I consider trying a new restaurant, I check to see about reservations.  Some places list them as "preferred," "required," "suggested" or "not taken."  Even establishments that require reservations may not really require them, but the thought of having to plan in advance sort of kills the adventure of changing plans.  Well, when it comes to administration of benefit plans, reservations are not only a good thing, they are absolutely required.

In this case, I am referring to reservation provisions in plans that allow the plan administrator to suspend, modify, amend or terminate any particular plan or benefit provided thereunder.  A well-drafted plan document (and corresponding summary plan description) will include plain language reserving the right of the sponsor to change the plan and modify benefits which then allows for a defense to claims that a particular benefit is guaranteed to participants.  The general rule is that for a plan to be able to change things, it has to tell participants that it has the ability to make changes.

Recently, the U.S. District Court for the Southern District of Iowa looked at a case where a class of retirees claimed that their former employer violated ERISA by amending their health insurance plan to eliminate certain medical benefits.  The retirees claimed that their right to the benefits was "vested" because they believed it was promised they would never lose benefits.  After trial, the Court ruled that the existence of a provision in the company plan providing that it could be amended or terminated at any time acted as a bar to any claim that the benefits could never be modified.  If a plan specifically reserves the right to change, then it can't be denied the ability to change.  See Brubaker v. Deere & Co., 08-CV-00113.

A reservation provision does not automatically provide an unfettered ability to modify plans.  Certainly there are numerous cases providing that separately bargained agreements or contracts can provide a specific limitation to the ability of a sponsor to amend a plan (like collective bargaining agreements or supplemental retirement programs).  But reservations provisions do provide some measure of protection to plan sponsors from general claims that amendment is prohibited.  At a time when many employers are looking at changing benefit plan structures to control costs, I would certainly recommend checking first to see if the plan has reserved the right to make the changes in advance of any decision to cut benefits.  And if your plan does not include such a provision, it should be amended to protect the sponsor going forward.

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In late 2008, Congress passed the Worker, Retiree and Employer Recovery Act ("WRERA").  It included a waiver of required minimum distributions (RMDs) for retirement plans for calendar year 2009.  In some situations, RMDs were made anyway, either because plan administrator were not prepared to make changes or they were concerned about sticking closely to plan language.  Fortunately, the IRS has issued come guidance on how to handle the situation.  Notice 2009-82 provides relief for people who have already received a 2009 RMD this year.  Individuals now generally have until the later of Nov. 30, 2009, or 60 days after the date the distribution was received, to roll over the distribution.

Remember, generally, a required minimum distribution is the smallest annual amount that must be withdrawn from an IRA or an employer’s plan beginning with the year the account owner reaches age 70½.  The 2008 law waives required minimum distributions for 2009 for IRAs and defined contribution plans (such as 401(k)s) and allows certain amounts distributed as 2009 RMDs to be rolled over into an IRA or another retirement plan. 
 
The notice also provides guidance for retirement plan sponsors.  It contains two sample plan amendments that plan sponsors may adopt or use to amend their plans to either stop or continue 2009 required minimum distributions.  Both sample amendments provide that participants and beneficiaries can choose to receive or not to receive 2009 required minimum distributions.  Also, both sample amendments allow the employer to offer direct rollover options of certain 2009 required minimum distributions.  Plan sponsors may need to tailor the sample amendment to their plan’s particular terms and administration procedures and must adopt the amendment no later than the last day of the first plan year beginning on or after Jan. 1, 2011 (Jan. 1, 2012 for governmental plans).

Notwithstanding the amendment, employers must decide what to do about RMDs before November 30, 2009.  Employers must decide whether to (1) suspend all RMDs for 2009 unless the participant affirmatively requests the distributions, (2) distribute all RMDs unless the participant affirmatively requests a waiver, or (3) continue RMDs for 2009 in accordance with the existing plan provisions without any participant choice.  Plan must be operated in accordance with the administrative procedures after November 30, 2009

So the action plan would be as follows:

1. Decide your administrative option
2. Select the Appropriate Amendment (if you are making a change)
3. Notify the Participants

Note that there is no inidication that RMD waivers will be permitted for 2010.

If you have questions about RMDs and your retirement plan, please contact a Fox Rothschild attorney for assistance.

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Theresa Borzelli, a partner in our Roseland office, provides the following update on Medicare Part D notice requirements:

The November 15 deadline for providing the Medicare Part D creditable coverage notice is fast approaching. This annual Notice must be provided by an employer who sponsors a health plan with prescription drug coverage. The Notice explains the benefits provided under the prescription drug plan and whether the employer's plan is at least equal to the prescription drug benefits offered under Medicare Part D so the participant can make an informed decision as to whether to enroll in Medicare Part D. This November 15 deadline coordinates with the start of the annual Medicare Part D open enrollment.

This Notice of Creditable Coverage must be provided

--- at least annually before November 15;
--- whenever a Medicare-eligible employee enrolls in the employer's health plan;
--- whenever there is a change in the creditable or non-creditable status of the employer's health plan's prescription drug benefit coverage;
--- whenever an individual requests the Notice.

Employers who establish their own Part D comparable plan or who contract for such a plan do not have to provide the Notice.

The Centers for Medicare and Medicaid Services (CMS) includes sample Notices and guidance on its website.

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Interesting economic times create interesting problems for plan administrators.  Consider the possibility that a couple may get divorced solely for the purpose of withdrawing pension benefits from a pension plan.  Seem far fetched?  Well, not really.

In Brown v. Continental Airlines, the Court in the Southern District of Texas considered a case where pilots, concerned about the health of their pension plan, got divorced and had QDROs submitted that called for distribution of their pensions to their ex-spouses.  The plan administrator became concerned that the pilots were continuing to live with their ex-spouses as if no divorce had occurred or even remarried their ex-spouses after the distribution was made.  The plan administrator sought to have the distributions returned to the plan because it believed the divorces were "sham transactions."

The good news for plan administrators and sponsors is that the Court confirmed that the administrator could rely on the QDRO.  Orders have to be obeyed unless they fail under the specific terms of the statute. 

What information must a domestic relations order contain to qualify as a QDRO under ERISA?  QDROs must contain the following information:

1. The name and last known mailing address of the participant and each alternate payee
2. The name of each plan to which the order applies
3. The dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee
4. The number of payments or time period to which the order applies

And there are certain provisions that a QDRO must not contain:

1. The order must not require a plan to provide an alternate payee or participant with any type or form of benefit, or any option, not otherwise provided under the plan
2. The order must not require a plan to provide for increased benefits (determined on the basis of actuarial value)
3. The order must not require a plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO
4. The order must not require a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and his or her subsequent spouse

But the administrator is not required to (nor apparently allowed to) divine the intent of the parties when creating the QDRO.  If the requirements are met, it must be treated as valid. 

So while the plan administrator in this case did not get the money back, for the rest of us it affirms that following your statutory duties and confirming that the QDRO meets the requirements of the law is enough.  Plan administrators do not have to evaluate whether the purpose of the QDRO (or the divorce) is to circumvent the other requirements of the plan.

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Susan Jordan, a partner in our Pittsburgh office, shares the following:

In a news release (IR-2009-94) on October 15, 2009, the IRS announced the cost-of-living adjustments to the various dollar limitations applicable to qualified retirement plans for 2010. Virtually all of the limitations remain unchanged from 2009.

1. LIMIT ON COMPENSATION: The maximum amount of compensation that may be counted for plan purposes remains at $245,000 for plan years beginning in 2010.
2. LIMITS ON CONTRIBUTIONS AND BENEFITS. The maximum limit on annual additions to a defined contribution plan is unchanged at $49,000. The maximum annual benefit which may be accrued under a defined benefit plan will remain $195,000 as in 2009.
3. 401(k) DEFERRAL LIMIT. For purposes of 401(k) plans, the maximum limitation on voluntary salary deferrals for calendar year 2010 is $16,500 as in 2009, while the limit on catch-up deferrals by those age 50 or older increases stays at $5,500.
4. IDENTIFICATION OF HIGHLY COMPENSATED AND KEY EMPLOYEES. Effective for plan years beginning in 2010, as in 2009, a Highly Compensated Employee is any employee who (a) was a 5% owner during the current or preceding year, or (b) who received compensation from the employer during the preceding year in excess of $110,000. The dollar limit used to define a key employee in a top heavy plan under IRC Section 416(i)(1)(A)(i) is preserved at $160,000.
5. SEP THRESHOLD. As in 2009, the compensation minimum for which coverage is required for a simplified employee pension plan (SEP) is $550.
6. TAXABLE WAGE BASE. As announced separately, for the first time since 1975, when the cost of living adjustments went into effect, Social Security and Supplemental Security Income benefits will not be increased for any cost of living adjustment. In such circumstances, the statute prohibits an increase in the maximum amount of earnings subject to the Social Security tax. Consequently, the Social Security taxable wage base for 2010 will be $106,800, as in 2008. For plan years which operate on a fiscal year basis, this wage base will be effective for plan years beginning in 2010.

* * * * * * * * *
We frequently are asked to provide the contribution formula needed to maximize contributions for an individual with compensation at or above the maximum limit. The formula remains the same as applicable in 2009, so for a calendar year profit sharing plan integrated at the Social Security wage base, the contribution formula needed to achieve the maximum permissible allocation for an individual with compensation of $245,000 or more is:
16.78473% up to $106,800, plus 22.48473% in excess of $106,800 (up to $245,000)

For a calendar year 401(k) plan integrated at the Social Security wage base and using the 3% safe harbor design, the profit sharing contribution formula which, in the aggregate (with a $16,500 deferral and $7,350 safe harbor contribution), will achieve the maximum permissible allocation for an individual with compensation of $245,000 or more is:
7.05004% up to $106,800, plus 12.75004% in excess of $106,800 (up to $245,000)

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In light of New York's recent adoption of coverage for individuals up to age-29, I thought it would be worthwhile to consider what other states have passed similar laws.  This is by no means intended to cover all of the specifics of each state, but I thought it was interesting to see the number of states that provide some insurance extension options to adult children.

1. Colorado: Adult can be eligible until the 25th birthday
2. Connecticut: Coverage up to age 26
3. Delaware: until they turn 24
4. Florida: up to age 25
5. Idaho: also until age 25
6. Illinois: until age 26, unless they are veterans and then to age 30
7. Indiana: until age 24
8. Iowa: under age 25
9. Maine: up to age 25
10. Maryland: also up to age 25
11. Massachusetts: age 25 again
12. Minnesota: unmarried children up to age 25
13. Montana: age 25
14. New Hampshire: until age 26
15. New Jersey: until age 30
16. New Mexico: age 25
17. Oregon: age 23
18. Pennsylvania: Age 29
19. Rhode Island: age 25
20. South Dakota: until their 29th birthday
21. Texas: up to their 25th birthday
22. Utah: until their 26th birthday
23. Virginia: under 25
24. Washington: up until age 25

Each of these states have specific rules for eligibility and age is not the only requirements.  Most require children to be unmarried, and some do have residency restrictions.  However, it does appear that all of these rules apply to insured policies issued specifically in those states, so self-insured or self-funded plans would not be impacted.  State rules vary with respect to whether an employer is required to provide the extension, has an option, or if it is strictly a requirement on the part of the insurance company.

So, in sum, don't assume that children automatically age off of the plan if they are "of age" and not a full time student.  Check with your benefit professional (or your attorney) to confirm that you are offering appropriate coverage to adult children.

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In conjunction with the 2008 amendments to the Americans with Disabilities Act, the Equal Employment Opportunity Commission is proposing certain changes to its rules and regulations governing disability issues under the ADA.  While these proposed changes may not have a direct impact on administration of disability plans, they certainly will add a level of confusion over what is and is not a "disability" when dealing with employees and plan participants.

The proposed rules impact the way disability is defined for purposes of determining whether an impairment exists.  A disability is traditionally defined as something impairing major life activities.  The rules somewhat broaden the definition of disability to include major bodily functions (e.g., "functions of the immune system, normal cell growth, digestive, bowel, bladder, neurological, brain, respiratory, circulatory, endocrine, and reproductive functions") as part of major life activities.  The new rules will also provide that an employee no longer has to show that the employer perceived the individual to be substantially limited in a major life activity, and instead says that an applicant or employee is "regarded as" disabled if he or she is subject to an action prohibited by the ADA (e.g., failure to hire or termination) based on an impairment that is not transitory and minor.  This will have substantial impact on considerations for reasonable accommodation.

I say that this should not have a significant impact on disability plans because the definition of "disabled" under most disability plans requires some showing that the participant is unable to perform the material and substantial requirements of their primary job function.  Plans generally anticipate an individual becoming disabled rather that being disabled at the time of enrollment.  However, I do believe that the broadening of the ADA definition of disability will require disability plan administrators to be more cognizant of how impairments of major life functions (now not necessarily purely physical in nature) can raise to the level of a complete disability under a plan definition.

For example, a cognitive impairment does not typically manifest itself in outward ways.  As a result of a neurological condition, an employee/participant may develop memory loss or difficulty with fact retention.  Under the new ADA definition, this cognitive impairment would appear to be a disability affecting a major life function (that of communication and neurological difficulty).  The impairment alone may not trigger a claim for disability benefits, but it might require an employer accommodation under the ADA.  If the impairment progress to the point where the employee can no longer function in their job, it would arguably give rise to a claim as a disability under the disability benefits plan.

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I recently read a couple articles that suggest that employers are more inclined to institute layoffs and salary freezes than they are to cut retirement benefits.  I also read an article that suggested that employers are more inclined to decrease or eliminate health benefits rather than institute layoffs.  It seems to me that in these troubled economic times, there is no clear answer as to what is the appropriate solution or the correct way (or the most effective way) to bring down personnel costs.

However, I have a seen a number of articles and press releases from various sources that criticize companies that use cost-control measures like reducing staff or benefit levels as unfair.  Particularly if the company is perceived as a large employer or is viewed as still being "profitable" while taking advantage of the workers.  Executive compensation is obviously in the news and highly paid executives with generous benefits packages make for good villains when employee benefits are generally being cut to make budget. 

It strikes me that in addition to having a sound fiscal plan for taking steps to adjust benefits packages (or to reduce payroll or staff), employers and plan sponsors would do well to prepare a game plan to deal with the public and negative press.  I read an excellent blog post by Alan Metrick of Alan Metrick Communications that can be read here.  He suggests (and I tend to agree) that any good plan for reduction of force or benefits also includes a prepared public message that the employer controls.  It makes sense to me that a plan sponsor should also consider being prepared to answer public questions about plan adjustments (like reduction or elimination of benefits) if challenged by an active media.

So when considering changes to benefit plans that have a negative connotation (like eliminating employer matches to 401(k) plans or terminating life insurance benefits), I encourage plan sponsors to also make a plan to respond to concerns both from employee and the public in advance of these changes.  You might not be able to make everyone happy with your decision, but you will at least be prepared to defend it.

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Because I have previously made reference to certain required or notices for welfare plans, I would be remiss in not bringing up some requirements for retirement plans. 

First the notices.  Retirement plans have a number of annual notice requirements, so this should service simply as a reminder of what notices are due.  The annual Safe Harbor 401(k) Plan Notice is due not later than 30 days prior to the beginning of the next plan year.  So for calendar year plans, that would be by December 1, 2009.  Also due in that same time period is the Qualified Default Investment Alternative Notices that would apply to plans that have provided for default elections.  Finally, don't forget the 401(k) Plan Annual Automatic Enrollment Notices, also due 30 days prior to the beginning of the next plan year. 

If you have a defined benefit plan, you have to send a Defined Benefit Plan Annual Funding Notice within 120 days of the end of the plan year (or by April 30, 2010 for a plan year ending 12/31/09).  Participant Benefit Statements are due every three years or annually (depending on the election of the plan administrator), so you need to prepare those by December 31, 2009, if required.  Participant Benefit Statements for Defined Contribution Plans are due quarterly, and are timely if provided within 45 days of the end of the quarter.  For calendar year plans, they would be due February 15, 2010.

In addition to these notices, there are several required and optional plan amendments for defined benefit and defined contribution plans that may be applicable to your plan (or that you may have adopted).  If the plans were amended during the last plan year, don't forget to send a Summary of Material Modifications to participants to alert them to the changes.  If you have questions about what amendments were available or concerns about making sure you have adopted all appropriate amendments, contact your plan professional of your attorney at Fox Rothschild to set up a review of your retirement plan.

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