January 2010 Archives

January 26, 2010

ERISA-9th Circuit Rules That ERISA/Code Survivor Protections Do Not Carry Over To An IRA

In Charles Schwab & Co. v. Debickero, No. 07-15261 (9th Cir. 2010), the Court dealt with an interpleader action brought by Charles Schwab & Company ("Schwab"). In the interpleader, Schwab asked the Court to resolve a dispute over the ownership of an individual retirement account (the "IRA"), established by Wayne Wilson at Schwab. The disputing parties were Katherine Chandler, Wilson's surviving spouse, on the one hand, and Wilson's four adult children from a previous marriage, the named beneficiaries under the IRA, on the other hand. The funds in the IRA originated in the 401(k) plan of Wilson's employer, and were transferred by Wilson to an IRA at Smith Barney, and then transferred to the IRA at Schwab. The transfer out of the 401(k) plan was made after Wilson terminated his participation in the plan and before he married Chandler.

The Court noted that Chandler's primary claim to the IRA was that the automatic surviving spouse rules in section 205 of ERISA and section 401(a)(11) of the Code carry over to the IRA, since the IRA's funds originated in a 401(k) plan, to which those sections of ERISA and the Code apply. Those rules generally provide a lifetime annuity to a participant's surviving spouse. However, the Court found that these rules ceased to apply when- long before his marriage to Chandler- Wilson terminated his participation in the 401(k) plan and transferred the proceeds to an independent IRA, an arrangement to which those rules do not apply. As such, the Court rejected Chandler's claim to ownership over the IRA, so that the four named beneficiaries became the owners.

Comment: It has long been thought that the ERISA/Code automatic surviving spouse rules do not carry over (or otherwise apply) to an IRA, with respect to amounts transferred to the IRA from a qualified retirement plan (such as a 401(k) plan), or with respect to any other amounts. Thus, the Court's decision is not a surprise. I like the use of the interpleader to resolve disputes over funds and ownership. Allowing the Court to decide the dispute lets the bank or other financial institution avoid paying amounts out of the IRA (or any plan or arrangement at issue) to the wrong individual, and later having to pay the right individual those same amounts out of its own pocket.

January 25, 2010

Employee Benefits-IRS Guidance On Heart Act Distributions To Military Personnel

As noted in my last blog, in Notice 2010-15, the IRS provides guidance on certain provisions of the Heroes Earnings Assistance and Relief Tax Act of 2008 (the "HEART Act " or "Act"). One topic covered is distributions from 401(k), 403(b) and 457 plans.

The Notice indicates that section 414(u)(12)(B) of the Internal Revenue Code (the "Code"), as added by section 105 of the Act, treats any individual, who is on active military duty for more than 30 days, as having severed from employment for purposes of receiving a distribution from a 401(k), 403(b) or 457 plan. Thus, if the plan permits, a 401(k), 403(b) or 457 plan may make a distribution to this individual. However, if the plan does so, then the individual cannot make elective deferrals or employee contributions to any plan of the employer during the 6-month period beginning on the date of the distribution. The distribution is generally an eligible rollover distribution, and is thus eligible for rollover treatment.

The Notice points out that, under pre-Act section 72(t)(2)(G)(iii) of the Code, the 10% penalty for an early payment from a 401(k) plan or 403(b) plan does not apply to a "qualified reservist distribution". A qualified reservist distribution is one which is:

--attributable to elective deferrals under a 401(k) or 403(b) plan; and

--made to a member of the reserves who has been ordered or called to active duty for more than 179 days or for an indefinite period.

A qualified reservist distribution can be made, without regard to otherwise applicable restrictions under section 401(k) and 403(b) on in-service distributions of amounts attributable to elective deferrals. Prior to the Act, the rules for qualified reservist distributions applied to individuals ordered or called to active duty after September 11, 2001, and before December 31, 2007. Section 107 of the Act amends section 72(t)(2)(G) of the Code to delete the reference to December 31, 2007, so that the special rules for qualified reservist distributions no longer have an expiration date.

As a technical matter, the Notice states that, if an individual is eligible under a 401(k) plan to receive a distribution as a result of a deemed severance from employment under section 414(u)(12)(B), and is also eligible under the plan to receive a qualified reservist distribution under section 72(t)(2)(G)(iii), then the distribution is treated as a qualified reservist distribution. This way, the distribution is not subject to the 6-month restriction on elective deferrals and employee contributions, or to the 10-percent early payment penalty under section 72(t). Presumably, the same rule would apply in the case of a distribution from a 403(b) plan.

The Notice indicates that a 401(k) plan must be amended by the final day of the first plan year starting on or after January 1, 2010 (2012 for government plans) to reflect the above rules, to the extent that the plan wishes to currently use them.

January 22, 2010

Employee Benefits-IRS Issues Guidance On Heart Act Rules

In Notice 2010-15, the IRS provides guidance, in the form of Q & As, on certain provisions of the Heroes Earnings Assistance and Relief Tax Act of 2008 (the "Act"). The Notice addresses the following sections of the Act: section 104 (relating to survivor and disability payments with respect to qualified military service), section 105 (relating to treatment of differential military pay as wages), section 107 (relating to distributions from retirement plans to individuals called to active duty), section 109 (relating to contributions of military death gratuities to Roth IRAs and Coverdell education savings accounts), and section 111 (relating to an employer credit for differential wage payments to employees who are active duty members of the uniformed services).

Among the points made by the Notice are:

--Under section 401(a)(37) of the Internal Revenue Code (the "Code"), as added by section 104 of the Act and applying to qualified retirement plans, the survivors of a participant who dies while performing qualified military service are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) that would be provided under the plan if the participant had resumed employment and then terminated employment on account of death. These benefits include accelerated vesting, ancillary life insurance benefits, and other survivor's benefits which are contingent on a participant's termination of employment on account of death.

-- Section 401(a)(37) provides that vesting service, but not benefit accruals (whether benefit accruals under a defined benefit plan or contributions under a defined
contribution plan), must be provided for a period of qualified military service for
purposes of determining the amount of, and entitlement to, any death benefit payable with respect to a deceased participant.

--Section 401(a)(37) does not apply with respect to a participant who dies while
performing military service, unless that participant had reemployment rights under USERRA with the employer maintaining the plan.

--Section 414(u)(9) of the Code, added by section 104 of the Act and applying to qualified retirement plans, allows an employer to provide benefit accruals to a participant who dies or becomes disabled while performing qualified military service, as if the individual had resumed employment in accordance with his or her USERRA reemployment rights on the day preceding death or disability, and then died or became disabled the next day. The Notice indicates that this rule may be used only if all participants are treated the same way. This rule is permissive, not mandatory.

--A plan must be amended to reflect the requirements of section 401(a)(37) and (if used by the employer) section 414(u)(9) by the last day of the first plan year beginning on or after January 1, 2010 (January 1, 2012, for governmental plans).

January 19, 2010

ERISA-DOL Clarifies That Deadline For Depositing Contributions (Including New Safe Harbor) Applies to Plan Loan Repayments

In its Final Rule pertaining to the safe harbor deadline for depositing contributions in small employee benefit plans (see my blog of January 14), the Department of Labor (the "DOL") clarified that:

--the deposit of plan loan repayments received or deducted from pay by the employer are subject to the deposit deadlines applicable to employee plan contributions in the ERISA regulations; and

--the new safe harbor deadline for depositing employee plan contributions in a plan with under 100 participants- deposit required within 7 business days of receipt - is available for loan repayments.

The preamble to the Final Rule says:The DOL had proposed to amend paragraph (a)(1) of § 2510.3-102 of the ERISA regulations to extend the application of the regulation to amounts paid by a participant or beneficiary or withheld by an employer from a participant's wages for purposes of repaying a participant's loan (regardless of plan size). See Advisory
Opinion 2002-02A (May 17, 2002). The proposal also served to extend the availability of the 7-business day safe harbor to loan repayments to plans with fewer than 100 participants.The Final Rule adopts these proposals

January 14, 2010

ERISA-DOL Issues Final Safe Harbor Rule On Deadline For Depositing Employee Contributions In Small Employee Benefit Plans

In a Press Release, dated December 13, 2009, the Department of Labor (the "DOL") announced the publication of a final rule, which provides a safe harbor deadline for depositing employee contributions in a small pension or welfare benefit plan (i.e., a plan that has under 100 participants). This deadline is the seventh business day after the day on which the contribution in question is received or withheld from pay by the employer.

According to the Press Release, at present, employers of all sizes must transmit employee contributions to pension plans as soon as they can reasonably be segregated from the general assets of the employer, but no later than by the 15th business day of the month following the month in which the contributions are received or withheld from pay by the employer. The latest date for forwarding participant contributions to health plans is 90 days from the date on which such amounts are received or withheld. The new final rule provides the safe harbor deadline described above.

The final rule is to be published in the January 14, 2010, edition of the Federal Register and will be effective on the date of publication.

January 14, 2010

Employee Benefits-Notices Must Be Provided For Extended COBRA Subsidy

In my blog yesterday (January 13), I discussed the new FAQs issued by the Department of Labor (the "DOL") on the extension of the 9 month COBRA Subsidy originally made available by the American Recovery and Reinvestment Act of 2009 ("ARRA"), and extended to 15 months by The Department of Defense Appropriations Act, 2010 ("DODA"). In that discussion, I identified a "Transition Period" as being the period which begins immediately after the end of an individual's 9 month period of entitlement to the Subsidy under ARRA prior to its amendment by DODA. Plan administrators are required to provide notices to COBRA beneficiaries about the Subsidy and the DODA extension. The FAQs indicate the following about these notices.

After ARRA was enacted, the Department of Labor (the "DOL") created a "General Notice", which a plan administrator of a plan providing COBRA coverage may use to satisfy its obligation to provide notice of COBRA rules and rights, and which includes information on the Subsidy provided by ARRA. A plan administrator must provide, as part of the COBRA election notice materials, a General Notice to all qualified beneficiaries, not just covered employees, who experience a qualifying event at any time from September 1, 2008 through February 28, 2010, regardless of the type of qualifying event. For qualifying events occurring after December 19, 2009, a General Notice-updated to reflect DODA- must be provided within the normal timeframe for providing a COBRA election notice.

If an individual has already been provided COBRA election notice materials which did not include a General Notice that was updated to reflect DODA, that individual must be provided a separate notice of the DODA changes to ARRA (the "Premium Assistance Extension Notice"). Listed below are the affected individuals and the associated timing requirements.

• Individuals who were "assistance eligible individuals" (see my January 13 blog) as of October 31, 2009 (and are not in a Transition Period), and individuals who experienced a termination of employment on or after October 31, 2009 and lost health coverage, must be provided the Premium Assistance Extension Notice by February 17, 2010; or
• Individuals who are in a Transition Period must be provided the Premium Assistance Extension Notice within 60 days after the start of the Transition Period.

Further, if an individual experienced a qualifying event at some time on or after October 31, 2009 (but before December 19, 2009) and was provided a timely COBRA election notice which is, or is modeled after, the DOL's original ARRA General Notice, then:
--if the qualifying event was something other than a termination of employment, nothing needs to be done.
--if the qualifying event was a termination of employment, the Premium Assistance Extension Notice must be provided by February 17, 2010.

If an individual is covered under more than one category of notice recipients, then that individual must be provided with the notice due at the earliest date. The DOL has issued a revised General Notice and a Premium Assistance Extension Notice. These notices may be found here.



January 13, 2010

Employee Benefits-DOL Adds New FAQs On Extension Of COBRA Subsidy To Its Website

On its website, the Department of Labor (the "DOL") has added new facts and questions ("FAQs") on the COBRA subsidy extension. The new FAQs are here. The new FAQs say the following.

The federal government's stimulus package, which was enacted in February 2009 as the American Recovery and Reinvestment Act of 2009 ("ARRA"), temporarily reduces, for assistance eligible individuals, the premium for COBRA continuation health care coverage, or comparable State law continuation health care coverage ("COBRA coverage"). The premium reduction, called the "Subsidy", reduces the premium for COBRA coverage to 35% of the amount of the premium that otherwise would be charged, and is available for 9 months. An "assistance eligible individual" is an individual who is eligible for COBRA coverage because of the individual's own or a family member's involuntary termination from employment that occurred during the period of September 1, 2008 through December 31, 2009. An individual who is eligible for other group health coverage (such as a spouse's plan) or Medicare, or who is otherwise not entitled to COBRA coverage, is not eligible for the Subsidy.

The Department of Defense Appropriations Act of 2010 ("DODA") was signed by the President on December 19, 2009. DODA amended ARRA to extend:
-- the period during which the involuntary termination of employment must occur to qualify for the Subsidy for two months (from January 1, 2010 to February 28, 2010); and
-- the maximum period for receiving the Subsidy for an additional six months (from nine to 15 months).

DODA creates a "transition period", which begins immediately after the end of an individual's 9 month period of entitlement to the Subsidy under ARRA prior to its amendment. If an individual's transition period starts in December, and the individual fails to pay the December and January premiums (the "Late Premiums") for COBRA coverage, the individual will be able to reinstate his or her COBRA coverage, and receive the additional six months of the Subsidy, so long as the Late Payments are made retroactively, by the latest of: February 17, 2010, 30 days after the notice (described below) was provided, or the end of the otherwise applicable grace period under the applicable plan for the Late Payments. An individual in a transition period must be provided notice of the extension of the Subsidy within 60 days after the first day of the period. The notice must include information on the extension of the Subsidy from 9 to 15 months, and inform the individual that he or she may make the Late Payments retroactively.

Also, if the individual's transition period starts in December, and the individual already paid the full December premium, then the individual should contact the plan administrator, employer sponsoring the plan, or insurance issuer to discuss obtaining, due to the extended Subsidy, a refund or credit against future premium payments. If this individual receives a bill for 100% of the December premium, he or she should pay only 35% of the premium, by the later of February 17, 2010 or 30 days after notice of the Subsidy extension is provided by the plan administrator. Furthermore, this individual may pay only 35% of the December premium, even if he or she has not yet received an updated bill or the notice described above from the plan administrator.

The FAQs remind us that, if an individual's plan or insurer determines that he or she is not eligible for the Subsidy, the individual can request an expedited review of the denial from the DOL (for private sector plans) or the Department of Health and Human Services (for Federal, State, and local government employees, as well as continuation health care coverage under State law).

The FAQs also discuss the notices that a plan administrator must provide to an individual under ARRA, as amended by DODA-to be covered in a future blog.

January 11, 2010

ERISA-DOL Announces That EFAST2 Is Operational

In a Press Release dated January 8, 2010, the Department of Labor (the "DOL") said that its EFAST2 online filing system is operational to receive and process Form 5500 filings.

According to the Press Release, the DOL's Employee Benefits Security Administration (the "EBSA") converted to a total electronic system of online filing for the Forms 5500 and new the Form 5500-SF on December 31, 2009. Now the all-electronic EFAST2 system allows the public to submit and access filings online at www.efast.dol.gov. The revised EFAST Web site has been updated to provide filers with a variety of tools and guidance, including the 2009 and 2010 Form 5500 and new Form 5500-SF schedules and instructions, Frequently Asked Questions, user guides, and a tutorial. Filers and preparers can register for an account, complete the required forms and schedules online in multiple sessions, print a copy for their records, and submit it at no cost.

Filers may also use EFAST2-approved software to complete and submit their filings. EFAST2-approved software is expected to be easier to use and provide more value-added features than the Government web application. A list of EFAST2-approved software is available at on the Web site above. Filers must submit the 2009 and 2010 annual return/report forms and schedules electronically through EFAST2. Prior year delinquent or amended Form 5500 filings also now must be filed electronically except that timely 2008 plan year filings may still be filed through the original EFAST on paper until October 15, 2010 or electronically through June 30, 2010.

Important changes for the 2009 and 2010 Form 5500s include:
• Mandatory electronic filing
• Introduction of the new, two-page Form 5500-SF for eligible small plan filers
• Expanded disclosure on Schedule C of indirect service provider compensation
• Expanded reporting by Code section 403(b) plans
• Removal of IRS Schedules E and SSA. Information on participants with deferred vested benefits who separated from the service covered by the plan now must be filed directly with the Internal Revenue Service

January 8, 2010

Employment-Court of Appeals For The District of Columbia Circuit Rules That Auto Damage Adjusters Are Exempt From FLSA Overtime Rules

In two consolidated cases, Robinson-Smith v. Government Employees Insurance Company, No. 08-7146 (Cir. Court D.C. 2010), and Lindsay v. Government Employees Insurance Company, No. 08-7147 (Cir. Court D.C. 2010), the plaintiffs had worked for the Government Employees Insurance Company ("GEICO") as auto damage adjusters-employees who review, negotiate and settle a customer's claim for insurance to cover damage to the customer's automobile. They sued GEICO for overtime pay under the Fair Labor Standards Act (the "FLSA"). GEICO had treated the plaintiffs as being exempt "administrative" employees and therefore not entitled to overtime under the FLSA. The district court ruled against GEICO, and GEICO appealed that decision.

In analyzing the case, the Court noted that certain employees, including those who work in a "bona fide executive, administrative, or professional capacity," are exempt from the overtime requirements of the FLSA. Under DOL regulations in effect at the time the suit was filed, whether an employee works in a "bona fide administrative capacity" can be determined using a "short test" when the employee makes more than $250 per week. Once the earnings requirement is met-which it is as to the plaintiffs in this case-the short test has two prongs: first, the employee's primary duty must be administrative in nature, and second, his or her primary duty must include work requiring the exercise of discretion and independent judgment. The Court said that the first prong is met in this case, since the plaintiffs' primary duty is administrative, that is, it consists of the performance of office or non-manual work directly related to GEICO's management policies and business operations.

The Court further said that, to establish the second prong of the short test, GEICO must show that the plaintiffs' primary duty includes work requiring the exercise of discretion and independent judgment (as distinguished from the mere use of skill in applying well established techniques) and that the discretion is exercised free from immediate supervision and with respect to matters of significance. The Court concluded that this prong was met as to the plaintiffs. The record shows that the primary duty of a GEICO auto damage adjuster, which-again- consists of the assessment, negotiation and settlement of automobile damage claims, includes the exercise of discretion and independent judgment. The auto damage adjuster exercises at least some discretion, in that he or she engages in negotiations with customers over the total amount of the customer's losses as often as 60 times per year, and that is frequently enough to meet the "primary duty" requirement (even 20 times would be enough). Further, the auto damage adjuster has the power to make independent choices free from immediate direction or supervision. This is the case, even though the adjusters had to follow GEICO's procedures and guidelines, and despite review at a higher level, since the adjusters usually worked without immediately supervision and made decisions that were reviewed only after their estimate of the loss was written and the customer's claim paid. Finally, the auto damage adjusters made choices with respect to matters of significance, as they were empowered to negotiate with claimants and body shops and settle claims up to $10,000 or $15,000--all actions that bind GEICO financially.

As such, the Court found that the plaintiffs/auto damage adjusters were employed in a "bona fide administrative capacity", and were therefore exempt from the FLSA's overtime requirements. It therefore reversed the district court's ruling against GEICO. The Court noted that the regulations in effect at the time the plaintiffs' claims were filed were subsequently revised, but indicated that the same result-exemption from FLSA overtime requirements-would obtain under the revised regulations.

And yes, in a footnote the Court said "The district court had no occasion to decide whether the job of a GEICO auto damage adjuster is so easy a caveman could do it". You knew that had to come in somewhere.

January 6, 2010

Executive Compensation- IRS Issues Procedures To Correct Section 409A Document Failures

The IRS has issued Notice 2010-6, which contains procedures for voluntarily correcting many types of failures to comply with the document requirements that apply to nonqualified deferred compensation plans under Section 409A of the Internal Revenue Code. The Notice provides:

--clarification that certain language commonly included in plan documents will not
cause a document failure;

-- relief which permits correction of certain document failures without current income inclusion or additional taxes under Section 409A, so long as, in certain cases, the corrected plan provision does not affect the operation of the plan within
one year following the date of correction;

--relief limiting the amount currently includible in income and the additional taxes
under Section 409A for certain document failures, if correction of the failure affects the
operation of the plan within one year following the date of correction;

--relief permitting correction of certain document failures without current income
inclusion or additional taxes under § 409A, if the plan is generally the service recipient's
first plan of that type, and the failure is corrected within a limited period following the plan's adoption; and

--transition relief permitting corrections of certain document failures without
current income inclusion or additional taxes under Section 409A, if the document failure
is corrected by December 31, 2010, and any operational failures resulting from
the document failure are also corrected in accordance with IRS Notice 2008-113 by December 31, 2010.

The Notice also clarifies certain aspects of IRS Notice 2008-113, which addresses
various failures of nonqualified deferred compensation plans to comply with Section 409A in operation, including clarification of:

--the application of the subsequent year correction method to late payments of
amounts deferred; and

--the calculation of the amount that must be paid to the service provider as a
correction of a late or ealy payment of a deferred amount, if the payment
would have been made in property, such as shares of stock.