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

Employee contributions to retirement plan have to be treated as plan assets and submitted to the plan in a timely manner.  The old rule required that while employee contributions had to be segregated from the employer's general assets, there was limited guidance about how long the employer had to submit those withheld contributions to the plan.  There is a requirement that they be submitted in a "reasonable" time frame at the earliest reasonable date, not later than the 15 business days into the month following the month in which employee contributions were withheld.  But there was no "safe harbor" defining what would be reasonable.

Now, at least for small plans, there is a "safe Harbor" of 7 business days.  Employers that sponsor a plan covering fewer than 100 participants (small plans) will be deemed to be in compliance with the "earliest possible date" if contributions are remitted to the plan within 7 business days.  Any plan sponsor who remits the contributions within the 7-day window will be considered as having made a timely deposit.

This is important because plan participants assume employers put money into a 401(k) plan on the day it is withheld.  In a volatile stock market, timing can be everything.  Employee can claim that any delay in remittance was a breach of fiduciary duty because it hurt plan participants.  At least now, a plan sponsor can use the 7-day rule as a safety net to be able to confirm satisfaction of fiduciary responsibilities. 

The contributions don't have to be allocated within 7 days, only contributed to the plan.  The 7 business days are counted from the day amounts are withheld.  The effective date of the rule is January 14, 2010.  The safe-harbor period applies on a deposit-by-deposit basis, so failure of one deposit does not take the safe-harbor away for future deposits.  The 7-day rule also applies to welfare plans and cafeteria plans.  This rules does not apply to large (over 100 participants) plans.  They are still governed by the "15th-business day of the next month" guideline.

So if you are the sponsor of a small plan, I highly recommend that you review your administrative procedures to take advantage of the 7-day safe harbor and review with your plan service providers their procedures to ensure quick transmission of employee contributions.  Failure to comply does not necessarily mean that a fiduciary duty has been breached, but it is better to be "safe harbor" than sorry.

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As of November 30, 2009, 15 states had proposed mandatory sick-leave laws to require employers to provide paid sick days to employees.  San Francisco, Milwaukee and Washington DC have municipal ordinances that require some mandatory sick leave and the New York City council has proposed similar regulation.  Federal regulation was proposed on both the Senate and the House of Representatives.  The purpose of this entry is not to survey the state or cities that have adopted these regulations, and if you have concerns that you might be subject to mandatory sick leave laws, I encourage you to reach out to your attorney at Fox Rothschild and make sure you are in compliance.

Instead, I am looking at whether an employer can create a "sick pay plan" to satisfy the obligation to pay sick days and create an ERISA governed welfare plan.  Such a plan might be beneficial for an employer for tax purposes or administrative purposes, or it might be part of preserving employee good will.  Under IRC sections 105 and 162, a business cannot deduct wages paid to a disabled employee.  The key word is wages.  IRC section 106 requires that a company pay wages only to employees who render services.  However, a company can pay wages to disabled employees under a section 105 qualified sick-pay plan (QSPP).

Generally 29 CFR 2510.3-1 provides that the definition of "employee welfare benefit plans" in Section 3(1) of ERISA does not include arrangements that pay an employee's normal compensation, out of the employer's general assets, on account of periods of time during which the employee is physically or mentally unable to perform his or her duties, or is otherwise absent for medical reasons.  This "sick pay" exclusion is designed to exempt from ERISA requirements payroll and employment practices when the benefits are uninsured and paid out of the employer’s general assets, such as vacation pay, holiday pay and short-term disability pay or sick leave.

Generally we can assume that disability plans, when funded through insurance, are probably ERISA plans.  But what about a truly "short term" type of benefit that provides compensation for something like 5 missed work days?  Going back to PWBA Advisory Opinion 96-16A (8/27/1996), the DOL looked at a three phase disability plan that provided compensation replacement coverage for three disability periods: really short (5 to 10 days), short (11 days to one year) and long term (more than one year until retirement).  The plan replaced compensation where absences was due to illness or injury.  The plan was unfunded and paid out of the general assets of the company, but the Company retained discretion to pay benefits through a group disability income insurance policy, a trust or a separate account.

The specifics of this plan are not so interesting as the DOL's decision that the entire arrangement was not a "payroll practice" within the meaning of 29 CFR 2510.3-1.  But what if "phase one" coverage (5-10 days) was separated out?  Would that sick-pay arrangement have qualified?  What about a sick pay plan covering days 1-4?  In this case, I believe the answer lies somewhere closer to our analysis of severance plans and the determination of whether they should be treated as ERISA plans.  For example, we look to things like the funding arrangement and the ongoing administrative requirements.  An employer who pre-funds sick pay at the beginning of the year, or sets aside a trust from which sick-pay benefits are paid may be creating something outside the payroll function.  If the sick pay arrangement requires some additional administration beyond a simple payment of wages (such as cost of living adjustments or eligibility requirements) would appear to look more like a "plan" rather than a payroll practice.

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As promised in my last entry, the DOL has issued model notices to help plans and individuals comply with these requirements. Each model notice is designed for a particular group of qualified beneficiaries and contains information to help satisfy ARRA's notice provisions, including those added by the 2010 DOD Act the extend the subsidy period through Feb. 28, 2010.

The DOL Notices are available using the DOL website.  Click here for that connection.

Plans subject to the Federal COBRA provisions must provide the Updated General Notice to all qualified beneficiaries (not just covered employees) who experienced a qualifying event at any time from September 1, 2008 through February 28, 2010, regardless of the type of qualifying event, and who have not yet been provided an election notice. This model notice includes updated information on the premium reduction as well as information required in a COBRA election notice. 

Plan administrators must provide notice to certain individuals who have already been provided a COBRA election notice that did not include information regarding ARRA, as amended.  The model Premium Assistance Extension Notice includes information about the changes made to the premium reduction provisions of ARRA by the 2010 DOD Act.  This notice should go to:

1. Individuals who were "assistance eligible individuals" as of October 31, 2009 (unless they are in a transition period - see below), and individuals who experienced a termination of employment on or after October 31, 2009 and lost health coverage (unless they were already provided a timely, updated General Notice) must be provided notice of the changes made to the premium reduction provisions of ARRA by the 2010 DOD Act by February 17, 2010;
2. Individuals who are in a "transition period" must be provided this notice within 60 days of the first day of the transition period. An individual's "transition period" is the period that begins immediately after the end of the maximum number of months (generally nine) of premium reduction available under ARRA prior to its amendment. An individual is in a transition period only if the premium reduction provisions would continue to apply due to the extension from nine to 15 months and they otherwise remain eligible for the premium reduction.

Individuals who experienced a qualifying event (that was a termination of employment) in December 2009 but who were not eligible for COBRA coverage until January 2010 were likely not provided proper notice of the extension.  These individuals should get the Updated General Notice AND the full 60 days from the date the updated notice is provided to make a COBRA election.

Insurance issuers that provide group health insurance coverage must send the Updated Alternative Notice to persons who became eligible for continuation coverage under a State law.  Continuation coverage requirements vary among States and issuers should modify this model notice as necessary to conform it to the applicable State law. 

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The US Department of Labor has provided 2 more Fact Sheets regarding the COBRA subsidy extension.  One is a Fact Sheet that provides a general explanation of the extension.  The second is a Frequently Asked Questions sheet that answers some more specific questions from an employee's point of view. 

I found these notices particularly useful because the introduce the concept of "transition period" as it relates to the change from 9 months to 15 months.  An individual’s “transition period” is the period that begins immediately after the end of the maximum number of months (generally nine) of premium reduction available under ARRA prior to its amendment.  An individual is in a transition period only if the premium reduction provisions would continue to apply due to the extension from nine to 15 months and they otherwise remain eligible for the premium reduction.  Individuals in a transition period must be provided notice of the extension within 60 days of the first day of their transition period.  The notice must include information on the extension from nine to 15 months and the ability to make retroactive payments for certain unpaid reduced premiums.

Neither sheet specifically addresses what happens if an individual who would otherwise be eligible for the subsidy allowed the COBRA coverage to lapse prior to November 30, 2009.  But prior explanations provide that if an individual lost COBRA coverage because of expiration of eligibility (or failure to pay premiums) before exhaustion of the full 9 months and BEFORE 11/30/09, that individual cannot jump back into COBRA and get the additional 6 months.  There is no new "special election period" as there was under the first subsidy bill.

Bear in mind that there will probably be further revision to the COBRA subsidy rules as we get close to the 2/28/2010 sunset of this provision, so be prepared to issue new notices as more regulation and guidance are given.

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In Notice 2010-6, which was published in early January, the IRS at long last provided guidance as to how taxpayers may voluntarily correct certain document failures that otherwise would cause a nonqualified deferred compensation plan to contravene the requirements of Internal Revenue Code Section 409A, triggering severe income tax consequences. The Notice also clarifies earlier guidance dealing with operational failures by nonqualified deferred compensation plans.
Susan Jordan and Seth Corbin of our Pittsburgh office have prepared an excellent summary that can be accessed here.

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Having spent the holidays catching up on some professional reading, I came across the IRS Fall 2009 issue of Retirement News for Employers which has some valuable information about .

Non-spousal rollovers were not available before the new Pension Protection Act provision, which became effective for distributions made after December 31, 2006.  After PPA, plans were permitted to allow non-spouse beneficiaries the option of rolling over distributions, but plans were not required to provide that option.  The Worker, Retiree and Employer Recovery Act of 2008 makes the non-spousal rollover provision mandatory for plan years beginning after December 31, 2009.
Plans will have to offer the rollover alternative to non-spouse beneficiaries receiving plan death benefits.

Plans are required to offer a non-spouse beneficiary the option to do a direct rollover (a trustee-to-trustee transfer) of an eligible rollover distribution to an inherited IRA.  Plan administrators are required to give all non-spouse beneficiaries a written notice explaining the direct rollover rules and the mandatory 20% income tax withholding rules for distributions not directly rolled over.  This explanation should be provided to the non-spouse beneficiary no earlier than 180 days and no later than 30 days before making the distribution.  The good news is that sample notices to non-spouse beneficiaries are available in IRS Notice 2009-68.

Rollover must be to inherited IRA.  The IRS makes clear that a non-spouse beneficiary can only roll over the distribution of an inherited amount into an inherited IRA. Under an inherited IRA, the designated non-spouse beneficiary:

1. cannot make any contributions to the inherited IRA;
2. cannot roll over any amounts into or out of the inherited IRA, but may do a trustee-to-trustee transfer into another inherited IRA in the original deceased account owner's name with the same beneficiary;
3. has the same basis in the inherited traditional IRA assets as the original deceased account owner;
4. may not combine the basis in this inherited IRA with the basis in his or her own traditional IRAs, or any of his or her other inherited IRAs;
5. will not owe taxes on the inherited traditional IRA assets until he or she receives distributions from the IRA; and
6. must begin receiving distributions under the beneficiary distribution rules.

So as we start out 2010, add model notice 2009-68 to your plan administration repertoire and use when necessary.  And if you have not looked at the new required amendments for 2010, consider reaching out to your plan professionals or legal counsel for information about what you might be missing.

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The DOL issued a fact sheet regarding the extension of the COBRA premium subsidy on December 23 and it is available here.  I think there are some points of clarification that are important in the notice. 

First, while the period for measuring the involuntary termination for eligibility must occur during the period that began September 1, 2008 and ends on February 28, 2010, the premium reduction period in this extension only applies to periods of health coverage that began on or after February 17, 2009 and lasts for up to 15 months. 

Second, the extension of the COBRA premium reduction eligibility period is currently only for two months until February 28, 2010.  In addition, individuals who had reached the end of the reduced premium period before the legislation extended it to 15 months will have an extension of their grace period to pay the reduced premium.  To continue their coverage they must pay the 35 percent of premium costs by February 17, 2010, or, if later, 30 days after notice of the extension is provided by their plan administrator.

Third, the notice seems to make clear that there is no premium reduction for premiums paid for periods of coverage that began prior to February 17, 2009.  Therefore, individuals whose nine months of subsidy expired before the passage of this extension would not be able to "re-elect" this extra six months of subsidy. 

Fourth, individuals who lost their subsidy and paid the full 100 percent premium in December 2009 should contact their plan administrator or employer sponsoring the plan to discuss a credit for future months of coverage or a reimbursement of the overpayment.

My interpretation is that if an individual exhausted their nine months of subsidy eligibility prior to November 30, 2009, or who dropped COBRA coverage prior to November 30, 2009 and did not pay December premiums would not be eligible to receive the additional 6 month extension.  So you have to be on COBRA, receiving the subsidy, and paid current thought November 30, 2009 to get the additional 6 months, which would then allow you to retroactively receive a refund of 65% from your December 2009 premiums.

Going forward, the new subsidy period is 15 months, so individuals who have not used up all 9 months of their subsidy eligibility should be told about the extension.  We are expecting a sample notice to be circulated shortly.

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Following up on last Friday's entry, the Senate approved the same extension of the COBRA subsidy that the House passed.  The nine-month, 65% premium subsidy is extended by six months to a total of fifteen months.  The subsidy now is available to those who involuntarily lose their jobs through Feb. 28, 2010.  The legislation also provides an additional six months of subsidized coverage for beneficiaries whose initial nine month COBRA premium subsidy has run out.  In addition, the legislation gives beneficiaries whose subsidy ran out and who did not pay the full premium a second chance to opt for coverage.  For example, a beneficiary whose nine months of subsidized coverage ran out Nov. 30 and who did not pay the regular unsubsidized December, 2009 premium can pay the 35% premium share in January, 2010 and receive coverage for December.  The legislation requires employers to notify current COBRA beneficiaries and future beneficiaries of the new 15-month premium subsidy.

The legislation applies to coverage under the federal COBRA law and Public Health Act and any state continuation laws ("mini-COBRA").  The law provides a subsidy for continuation coverage for any employee or dependent who loses coverage under a group health plan during the period beginning September 1, 2008 and now ending on February 28, 2010.  If an employee or dependent meets the definition of "qualified beneficiary" under COBRA, that person is eligible for a subsidy if he or she is entitled to COBRA as a result of the employee's involuntary termination of employment.

Qualified beneficiaries are required to pay only 35% of the required continuation premium for up to fifteen months, while the employer is required to pay the remaining 65% of the premium.  The respective portions of the premiums are based on the continuation premium that would have otherwise been required to be paid by the qualified beneficiary.  If the employer has already agreed to pay a portion of the COBRA premium as part of a severance agreement or other shut-down arrangement, the employee would need to pay only 35% of the portion of the premium not paid by the employer.

For plans subject to federal COBRA (insured, self-insured or self-funded), employers must cover the remaining 65% percent of the premium, but are entitled to a refundable credit taken toward payment of payroll taxes.  The credit is applied as though the employer had submitted an equivalent amount of payroll tax on the date the qualified beneficiary's payment is received.  This payroll tax credit only applies to COBRA premiums paid by the employer by reason of the law so employers who voluntarily agree to pay portions of COBRA premiums as a result of any other arrangement would not be entitled to the payroll tax credit.

The subsidy is not available to all former employees and their dependents.  The subsidy does not apply for any months that begin after the qualified beneficiary becomes eligible for coverage under another "group health plan" or Medicare. So the subsidy ends when the COBRA period would normally end. If a qualified beneficiary becomes eligible for another group health plan or Medicare during the subsidy period, the qualified beneficiary must provide notice of such eligibility to the plan.  A qualified beneficiary who does not provide this notice is liable for 110 percent of the improperly paid subsidy amount.

There is an income limitation that applies to qualified beneficiaries, but the employer is not required to administer or account for the income of the beneficiary when providing the subsidy.  A qualified beneficiary is not entitled to a COBRA subsidy during a year in which he or she is a taxpayer, or spouse or dependent of a taxpayer, whose federal modified adjusted gross income exceeds $145,000 (or $290,000 in the case of a taxpayer filing a joint return).  The available COBRA subsidy is reduced for years in which gross income exceeds $125,000 (or $250,000 for joint returns).  Qualified beneficiaries will be required to account for the subsidy on their own tax return so the employer will not be required to make any adjustment to its payment of the subsidy. As a result of the income limitation and other requirements for eligibility, qualified beneficiaries must make an election to receive the COBRA subsidy following notice of potential eligibility.

What is Required?

1.  Immediately change COBRA election notices to incorporate this new law by advising newly potentially eligible former employees and beneficiaries that the COBRA subsidy is available for 15 months (changed from nine months) relating to an involuntary termination of employment occurring on or before February 28, 2010 (changed from December 31, 2009).
2. Advise currently eligible beneficiaries who have elected the COBRA subsidy that eligibility has been extended from nine to fifteen months. This notice is required to be issued within 60 days from enactment (which is expected this week) to anyone who was receiving the subsidy on or after October 31, 2009. The U.S. Department of Labor is expected to issue model notices.
3. Provide special notice to those individuals who lost assistance of the ability to make retroactive premium payments. Payment of the premium must be made within 60 days of enactment of the law or 30 days from notice, whichever is later

.We are anticipating that additional guidance, model notices and regulatory explanations will follow over the next several weeks. In the interim, employers should prepare for immediate implementation of the COBRA subsidy extension and consider its impact in any decisions involving force reductions. For more information, or for assistance in compliance, please contact Steven K. Ludwig at 215-299-2164 or Keith McMurdy at 212-878-7919.

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On December 16, the U.S. House of Representatives approved legislation that would extend the federal subsidy of COBRA premiums for employees who were involuntarily terminated.

H.R. 3326, which was actually a bill that provided for Defense Department funding, include a provision that would extend the 9 month subsidy period by an additional 6 months (for a total of 15 months) and would extend the eligibility period to persons who have an involuntary termination through February 28, 2010.  The subsidy remains at 65% of premium, meaning employees would still pay 35%.

It appears that the general intent of the bill is to extend edibility through 2/28/2010.  There are no specific details yet with respect to whether those who have exhausted the 9 month existing subsidy could obtain the additional 6 months, or if those who have dropped COBRA coverage prior to 12/31/09 because of exhaustion of the subsidy will be eligible to re-elect coverage to take advantage of the extension.  Those details would have to come from the IRS and DOL, assuming the measure passes the Senate.

Also, H.R. 2847 is still pending with a provision to extend eligibility through June 30, 2010.  As with H.R. 3326, details are still missing concerning retroactive application but we anticipate guidance on that issue if either (or both bills) ultimately become law.  Stay tuned.

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