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

Theresa Borzelli, a partner in our Roseland, New Jersey office provided me with the following:

On May 18, 2009, the IRS issued proposed regulations that will allow employers with safe harbor 401(k) plans who incur a substantial business hardship to reduce or suspend the safe harbor non-elective contribution. Prior to these proposed regulations, only the safe harbor matching contribution could be reduced or suspended as an alternative to terminating the plan, but the only way to suspend a safe harbor non-elective contribution was by terminating the plan.

The IRS is requesting comments by August 17 with a public hearing scheduled for September 23. However, plan sponsors may rely on the proposed regulations. Should the final regulations be more stringent than the proposed regulations, the more stringent regulations will be prospective only.

What It Means to Plan Sponsors

A Plan Sponsor with a safe harbor 401(k) plan utilizing the non-elective contribution design wishing to suspend or reduce contributions must:

• Incur a substantial hardship as described in IRC§ 412(c);
• Notify all eligible employees of the reduction or suspension at least 30 days prior to the effective date;
• Provide employees with a reasonable opportunity to change their contribution election within a reasonable period of time after receiving the notice;
• Amend the plan to provide that the ADP test will be satisfied for the entire plan year in which the suspension or reduction occurs using the current year method; and
• Test that the plan satisfies the safe harbor non-elective contribution with respect to compensation paid up to the effective date of the amendment.

The amendment must be adopted after May 18, 2009, and the suspension can be effective no earlier than the later of 30 days after the notice is provided to all eligible employees and the date the amendment is adopted.

The Notice

The notice requirement is satisfied if each eligible employee is given a notice that explains:
• The consequences of the amendment,
• The procedures for changing elective deferral elections and
• The effective date of the amendment.

Bottom line: Before you do anything, you want to determine the impact of suspending/reducing the non-elective contribution on your top heavy status. You could find yourself eliminating the safe harbor non-elective contribution only to be faced with making a top heavy contribution. At the same time, determine if you can pass the nondiscrimination tests on a current year basis.

What Should You Do Now?

1. Work with counsel to determine if you can satisfy the substantial business hardship requirements.
2. Determine if you will be subject to the top heavy minimum contribution.
3. Determine if you will satisfy the ADP/ACP tests using the current year method.
4. Ensure that you make the non-elective contribution for the period up to the effective date of the amendment including pro-ration of compensation.
5. If you decide to utilize the proposed regulations:
a. Draft and distribute the notice to participants,
b. Amend your plan,
c. Perform nondiscrimination testing and
d. Perform top heavy testing.

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Some interesting changes to Pennsylvania and New York health insurance laws have come through recently that warrant some attention.  They deal with the extension of coverage through age 29 and also the extension of continuation coverage as a whole.

First, Pennsylvania.  Effective June 10, 2009, Pennsylvania allows for adult children to retain coverage under their parents'' health plan up to age 30 (or through age 29).  Unmarried children who have no dependents, are residents of PA or are full time students are eligible for this extension.  The extension of coverage is at the option of the employer and does not preclude an increase in premiums for employers who elect the extension coverage.  Insurers writing policies or renewals after December 7, 2009 (180 days after the effective date of the law) are obligated to offer the extension coverage and employers may elect to include the coverage.  It applies only to medical coverage, not to vision and dental.  Self-funded plans are exempt.  Because employers are not mandated to make the coverage available, and because the extension could increase overall premiums for the employer, we will have to watch to see how many employers actually implement the coverage.

Second, New York.  Effective July 24, 2009, New York requires commercial insurers providing group health coverage to extend an option to continue group health coverage to unmarried children who have "aged off" of their parents' group plan.  Adult children can maintain the coverage through age 29 provided they are not eligible for other employer coverage and are not covered by Medicare.  Employers are not required to pay the premiums for the adult children who elect this coverage, so the election is entirely at the discretion of the adult child and not controlled by the employer.  This law is apparently directed at insurers only and will not require employers to make any specific election.

Third, New york again.  This one is a little trickier and will require further clarification.  Effective July 1, 2009, commercial insurers offering group health policies are required to offer continuation coverage for 36 months.  This extension would allow employees or members who have otherwise exhausted federal COBRA to maintain coverage for up to 36 months if the COBRA benefits did not extend to that full 36 months.  This bill allows workers, regardless of the size of their employer, to extend coverage to the full 36 months by returning to state continuation coverage after federal COBRA has been exhausted.  Eligible participants have to pay the premiums but their experience may impact the overall rating for employers.  This additional 18 months should not be subject to the federal COBRA subsidy regulations.  Again, as a new law, we will have to watch for the actual impact, but for now it looks like after the 18 months of COBRA is exhausted, the participant could continue to obtain an additional 18 months of continuation coverage on their former employer's New York insurance policy.

We will continue to monitor these new laws and update employers on the impact and any guidance issued.  However, employers in New York and Pennsylvania should make themselves aware of these changes and be prepared to seek counsel if employee ask questions about how they can take advantage of these options.

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Except in very limited circumstances, Section 204(g) of ERISA provides that the accrued benefit of a participant under a plan may not be decreased.  This is generally referred to as ERISA's "anti-cutback" provision.  I happened to be looking at this provision recently because of discussions I ma having with employers about eliminating certain benefits as a cost saving mechanism.  Of course the question asked is what constitutes an improper cutback.

On July 17, 2009, the Tenth Circuit Court of Appeals issued a decision in Karber v. Qwest Pension Plan that considered the elimination of a Pensioner Death Benefit component of its Death Benefit Plan.  Although not all employers have "death benefit plans," this decision did take the time to explain some of the issues facing employers when considering reduction of benefits.

The Court decided that a death benefit was not a "retirement type benefit" or retirement subsidy that would be part of a pension plan.  This is significant because retirement-type benefits are subject to vesting requirements, giving rise to an argument that the benefit had "accrued."  The benefit was not impacted by years of service and the participant did not earn portions of the benefit for each year of service.  Generally non-retirement benefits, such as welfare plans, do not vest.  This lack of vesting makes it difficult to argue that the benefit has "accrued," meaning that, generally, it is easier to reduce them.  Notice I said generally.

The Court also had to consider the issue of "contract vesting" which was essentially an argument that the language of the plan itself precluded reduction of benefits.  The Court also had to contend with an argument that some other contractual promise existed to preclude the reduction.  While the Court ruled that contract vesting did not apply, the fact that the Court considered this component serves as a reminder that a simple reduction of benefits could give rise to a cause of action based on prior representations.

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In prior posts I have set out why I think it is essential that 401(k) plan sponsors pay more attention to fees being paid to service providers and why I think that the next great wave of fiduciary breach litigation will involve failure of plan sponsors to control plan costs.  In response to a prior post, someone told me that they were not worried because their employees understood 401(k) fees.  Well, I think you should still worry.

The TransAmerica Center for Retirement Studies published a fee study on June 19, 2009, that surveyed 3,466 employees and 596 employers, asking them questions about concerns regarding 401(k) fee disclosures.  What I found most interesting about the results is this: 92% of employers thought they had a clear understanding of fees and 73% believed that their employees have a similar understanding.  Yet only 29% of employees said they had a clear understanding, with 48% saying they were "unaware" and 23% saying they were not sure.  Taken on its face, that's roughly 71% of a plan population that does not profess to understanding fees.

Similar surveys in the past have also concluded that the majority of plan participants do not understand plan administration, do not feel plan limitations are adequately communicated and are unaware of plan features like vesting requirements and annual contribution limits.  At the same time, plan sponsors almost uniformly assert that their plan participants are well informed.  Plan sponsors cannot force participants to educate themselves about plan terms.  But they can certainly make sure terms (and fees) are well communicated and information is presented in plain, easy to understand language for those participants who do want to learn.

Communication to participants is almost always a key consideration when looking at ERISA litigation.  Good plan sponsors (which is to say the ones who seem to avoid lawsuits) routinely provide information to participants so they understand the commitment to appropriate plan administration.  So embrace that fiduciary duty and communicate.  It's a great way to keep participants happy and might help avoid lawsuits.

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One of the most significant debates about wellness programs has been what works best, the carrot or the stick.  Can you increase wellness amongst a population by providing incentives to employees to watch their health risk factors, or is it better to punish them for not getting healthy?

The July 8 edition of the Wall Street Journal Online has an interesting article about the efforts of AmeriGas to increase employee participation in its "voluntary" wellness program.  Workers were given 1 year to complete various physicals, which were covered at 100%, or risk losing their health insurance.  The article goes on to discuss the anecdotal results of employees who discovered poor health as a result of the tests and were encouraged to get healthier. 

Obviously the "complete the tests or lose coverage" sounds like a big stick.  But ultimately the wellness program still ends up relying on employees wanting to get healthier after hearing their tests results.  AmeriGas did not tell employees they would lose coverage if they had bad test results, which is a significantly different stick.  I have talked in the past about the difficulty of requiring employees to get health or face higher premiums.  I have also talked about the possibility of using a reduction in premiums for employee who do get healthier, through things like smoking cessation incentives, weight loss incentives and the like.  The AmeriGas approach presents a third option, forcing them to get tested so at least they can see what they need to fix.

The recent congressional efforts to address nationalized health care have wellness components as part of the focus.  The problem will be if employers take this effort too far and start to discriminate against workers based on health conditions.  Any employer thinking about implementing any type of wellness program, be it increased premiums, decreased premiums or mandatory testing, must take into consideration the discrimination laws of the state in which it operates.  States vary considerably in their definition of "protected classes" for disability purposes.  Mandating a particular lifestyle could subject employers to claims of discrimination depending on the steps taken.

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Though not technically an "employee benefits" topic, it is important to note that the federal minimum wage is set to increase to $7.25 pr hour on July 24, 2009.  For benefit plan structures that are impacted by wage rates, this may have an immediate impact that will have to be addressed.

For the US Department of Labor list of minimum wage rates per state, click here.

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With the continued discussion in Congress over responsibilities of divulging and monitoring 401(K) plan fees and expenses, one can lose sight of who has the responsibility for checking and who is actually a "fiduciary" for the plan.  Before the new rules are laid out, let's consider some of the key players in the process.

"Plan Sponsor."  This is the entity creating the plan.  It can be a company, a Board of Directors of a company or some other governing body, but ultimately this entity is the number 1 fiduciary of the plan.  It will be assumed that the plan sponsor has a fiduciary role, that is to "exercise discretionary authority over the plan assets."  Participants may direct their investments, but the plan sponsor is the entity who chooses the investment options and controls the cost.  Fiduciary? Yes.

"Plan Administrator."  This is the person or entity that controls and manages the plan.  Fiduciary functions may be delegated to others, but the Plan Administrator ultimately retains control over the plan.  The Plan Sponsor can act as the Administrator, or it can be a retained service provider.  But since it controls the assets, it has discretionary authority.  Fiduciary? Yes.

"Plan Trustee."  A Trustee holds, invests and pays plan assets.  If the trustee is empowered with authority to make discretionary decisions, it can be a fiduciary.  But often times a Trustee is merely empowered to act under the direction of the plan administrator or another fiduciary.  If the Trustee has no independent authority and can only act by direction, there may not be fiduciary status.  Fiduciary? Maybe.

"Plan Investment Committee."  If an investment committee is established for the plan, the committee acts to make investments within the investment program established by the sponsor or administrator.  For example, the administrator may approve investment into a certain class of funds, but the committee chooses the actual funds that will be offered.  Because the investment committee should only be making recommendations to the administrator or the sponsor, it is not directly controlling plan assets.  Fiduciary? Probably not.

"Investment Manager."  This person or entity is given specific investment instructions from the sponsor or administrator regarding authority to make investments.  The manager may not exercise its own judgment but should only act on the instructions given to it.  Fiduciary? Probably not.

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Seth Corbin, from our Pittsburgh office, brought the following to my attention:

Effective July 1, 2010, qualified plans that make loans to participants will no longer be required to comply with the detailed disclosure requirements under the Truth in Lending Act.  Prior to the Federal Reserve's changes to Regulation Z under the Truth in Lending Act, the disclosure requirements applied to qualified plans that made more than 25 loans per year and where the amount financed was $25,000 or less.

The Truth in Lending Act was enacted in 1968 to require creditors to disclose credit terms in a uniform manner.  The goal of the Act is that these required disclosures would allow consumers to more easily compare credit terms available to them and avoid unfair or fraudulent credit practices. Although both the Act and Regulation Z have changed over the years, employee benefit plans that have sufficient loan activity have had to comply with these consumer lending protections much like any institution offering commercial loans.

The Federal Reserve, in amending Regulation Z, has exempted qualified plans from complying with the Truth in Lending Act so long as the loan is made to a plan participant, is compromised of fully vested funds from that participant's account, and the loan is made in compliance with Internal Revenue Code Section 72(p).  Plan sponsors and administrators will still need to comply with both ERISA and the Internal Revenue Code with respect to plan loans.

A copy of the regulations can be found at here.
 

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