November 2010 Archives

November 30, 2010

Employee Benefits-IRS Provides Guidance On Rollovers Of Amounts Held In 401(k) and 403(b) Plans to Roth Accounts In The Same Plan

In Retirement News for Employers - Fall 2010 Edition, the Internal Revenue Service ("IRS") provides guidance on rollovers of amounts held in 401(k) and 403(b) plans to Roth accounts in the same plan ("in-plan Roth rollovers"). These rollovers allow a participant to convert retirement savings in the plan to Roth contributions. Here are the highlights:

An "in-plan Roth rollover" is a rollover, made after September 27, 2010, of an eligible rollover distribution (an "ERD") from a non-Roth account in a 401(k) plan or 403(b) plan into a designated Roth account in the same plan. A non-Roth account means any plan account that does not hold designated Roth contributions. Besides plan participants, surviving spouse beneficiaries and alternate payees who are current or former spouses are eligible to make an in-plan Roth rollover. Unlike a conversion or rollover to a Roth IRA, a participant may not recharacterize any portion of an in-plan Roth rollover. If an outstanding plan loan is included in an in-plan Roth rollover, the balance of the loan is treated as a taxable amount.

401(k) and 403(b) plans have the following deadlines to be amended to allow 2010 in-plan Roth rollovers:

--for 401(k) plans, the later of the last day of the year in which the amendment is effective or December 31, 2011.

--for safe harbor 401(k) plans, the later of the day before the first day of the plan year in which the safe harbor plan provisions are effective or December 31, 2011.
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-for 403(b) plans, the later of the plan's remedial amendment period (described in Announcement 2009-89) or the last day of the first plan year in which the amendment is effective.

The 401(k) or 403(b) plan must be operated in accordance with the amendment, beginning on the amendment's effective date. A 457(b) government plan may adopt an amendment to include a designated Roth account after December 31, 2010, and then allow in-plan Roth rollovers.

To allow an in-plan Roth rollover, a plan can be amended to allow an in-service distribution from the plan's non-Roth accounts, with the entitlement to the distribution conditioned on the participant rolling it over to a designated Roth account in the same plan. However, the plan cannot impose this condition on any existing distribution options available under the plan.

An in-plan Roth rollover is not treated as a distribution for the following purposes: (1) transferring a plan loan to the designated Roth account without changing its repayment schedule; (2) requiring spousal consent; (3) requiring a participant's consent before an immediate distribution of an accrued benefit of more than $5,000; and (4) eliminating a participant's right to optional forms of benefit. If a plan offers in-plan Roth rollovers, it must include a description of this feature in the written explanation (the 402(f) Notice) the plan provides to participants who receive an ERD.

The IRS also provides guidance on: taxability and withholding (including that mandatory 20% withholding does not apply to an in-plan Roth rollover), reporting of 2010 in-plan Roth rollovers, and participant Form 8606 reporting. Also, to provide further guidance on in-plan Roth rollovers, the IRS has issued Notice 2010-84.


November 29, 2010

Employee Benefits-IRS Provides Guidance On Reporting Conversions Of Amounts Held In 401(k) and 403(b) Plans to Roth Contributions In The Same Plan, And Says That 20% Withholding Does Not Apply

Section 2112 of the Small Business Jobs Act allows a participant in a 401(k) plan or a 403(b) plan to make a direct rollover of the amounts held in his or her account under that plan to a designated Roth account in the same plan ("in-plan Roth conversion") after September 27, 2010. The taxable amount rolled over is includible in income equally in 2011 and 2012, unless the taxpayer elects to include all of it in 2010. The additional tax under section 72(t) does not apply to these rollovers.

In "Changes to Current Tax Forms, Instructions, and Publications" on the IRS's website, the IRS provides guidance on reporting these conversions. According to the website, the conversion should be reported on Form 1099-R as follows. The total amount converted should be reported in box 1 (Gross distribution). The taxable amount should be reported in box 2a. Any basis in the amount converted should be reported in rollover in box 5 (Employee contributions). Code G should be inserted in Box 7.

Mandatory 20% withholding does not apply to in-plan Roth conversions.

The IRS website further indicates that distributions made to a participant in 2010 from a designated Roth account must be reported on a separate Form 1099-R. The portion of a distribution from a designated Roth account that is allocable to an in-plan Roth conversion must be reported on that form. The distribution should be reported in the same manner as any other distribution from a designated Roth account. However, in the blank box to the left of box 10, enter the amount of the distribution allocable to the in-plan Roth conversion.


November 23, 2010

Executive Compensation-IRS Issues New Forms To Be Used To Report Transfers Of Stock Pursuant To An Exercise Of An Incentive Stock Option Or An Option Under An Employee Stock Purchase Plan

The Internal Revenue Service ("IRS") has issued Forms 3921 and 3922 (both information returns), to be used by corporations to report certain transfers of stock to employees. According to IRS Instructions, Forms 3921 and 3922 are required to be filed for such stock transfers occurring after 2009. The filing of these information returns is required by section 6039 of the Internal Revenue Code (the "Code"), as amended by the Tax Relief and Health Care Act of 2006. Form 3921 is to be used to report a corporation's transfer of stock pursuant to an employee's exercise of an incentive stock option described in section 422(b) of the Code. Form 3922 is to be used to report a transfer of stock by an employee where the stock was acquired pursuant to the exercise of an option described in Section 423(c) of the Code (that is, an option granted under an employee stock purchase plan, where the exercise price is less than 100% of the value of the stock on the date of grant, or is not fixed or determinable on the date of grant).

November 22, 2010

ERISA-Sixth Circuit Upholds A Plan Administrator's Termination Of Disability Benefit Due To Substantial Evidence Showing No Disability As Defined By The Plan

In Schwalm v. Guardian Life Insurance Company of America, No. 09-4275 (6th Cir. 2010), the plaintiff, John Schwalm ("Schwalm"), contended that the decision of the defendant, Guardian Life Insurance Company of America ("Guardian"), to terminate his long-term disability benefits was arbitrary and capricious, contrary to the requirements of ERISA. The district court reviewed the administrative record,determined that Guardian's decision was supported by substantial evidence, and dismissed Schwalm's complaint. The Sixth Circuit Court affirmed the District Court' s decision.

Schwalm had injured his back in 1999. He had a herniated disk that required several surgeries. He had been working at Acero, Inc., as chief executive officer, earning $140,000 per year. He was a participant in the long-term disability plan sponsored by Acero. Guardian was the insurer and plan administrator for the plan. Guardian had discretion to determine a participant's eligibility for benefits, and to construe and apply the plan's terms. In 2003, Schwalm filed an application for long-term disability benefits with Guardian. Guardian began to pay the benefits. Under the plan's definition of disability, which begins to apply two years after the application for benefits is filed, the participant is disabled if he remains not able to perform, on a full-time basis, the major duties of any gainful work. In turn, the plan also defines the term "gainful work" as work for which the participant is or may become qualified by training, education or experience. Such work must also be consistent with the level of the participant's pre-disability earnings. Guardian decided to terminate Schwalm's long-term disability benefits, based on this definition.

In reviewing the case, the Sixth Circuit Court said that where, as here, the plan administrator-Guardian- has discretionary authority to determine eligibility and
construe policy terms, the courts apply the deferential arbitrary and capricious standard when reviewing the plan administrator's decision to terminate benefits.
In such a case, based on the evidence, when it is possible to offer a reasoned explanation for the plan administrator's decision, that decision is not arbitrary or capricious. A plan administrator's decision reviewed according to the arbitrary and capricious standard must be upheld if it results from a deliberate principled reasoning process and is supported by substantial evidence.

In this case, Guardian specifically explained that it was discontinuing benefits because the medical and other evidence demonstrated Schwalm was able to return to gainful employment, at a salary consistent with his pre-disability earnings. In making this determination, under the plan's definition of disability, Guardian gave substantial attention to Schwalm's physical and cognitive capabilities and his ability to return to work at such a salary. Guardian acknowledged that Schwalm had stated to his own doctors that he had "lost the ability to earn a living" and that he was working as many as fifty hours per week for no salary. However, Guardian dismissed Schwalm's statement, concluding that it is not supported by the medical and other information Guardian had in its claim file. Notably, Schwalm had entered into a "Cooperation Agreement", which provided for his participation in a new venture with a target salary of $115,000 per year. Although Schwalm had not yet begun to draw a salary, the agreement provided some indication of Schwalm's own salary expectations and his own perceived ability to perform effectively at a high level. The definition of disability provided by the plan does not require that the participant actually earn a salary consistent with his pre-disability salary, only that he "is able to perform . . . the major duties" of such an occupation. The Court concluded that substantial evidence supported Guardian's conclusion that Schwalm was no longer disabled within the meaning of the plan. It therefore affirmed the district court's decision.

November 19, 2010

ERISA-EBSA Issues Proposed Rules For Section 101(f) Annual Funding Notice For Defined Benefit Plans

The Department of Labor's Employee Benefits Security Administration (the "EBSA") has released a proposed rule pertaining to the requirement under section 101(f) that annual funding notices be provided. The EBSA also released a Fact Sheet which discussed the proposed rule. Here is what the Fact Sheet says:

By way of background, prior to the Pension Protection Act of 2006 (the "PPA"), only multiemployer plans were required to provide annual funding notices under section 101(f) of ERISA. The PPA made significant changes to section 101(f) of ERISA by extending the requirement to provide the annual notices to single-employer plans, and by enhancing the content of the notice. In February 2009, the EBSA issued Field Assistance Bulletin 2009-01 to provide interim guidance on the annual funding notice requirement until final regulations are published.

The proposed rule requires the plan administrator of a defined benefit plan, which is subject to Title IV of ERISA, to furnish a funding notice each year. The recipients are: the Pension Benefit Guaranty Corporation (the "PBGC"), each plan participant and beneficiary, each labor organization representing the participants or beneficiaries, and, in the case of a multiemployer plan, each employer that has an obligation to contribute to the plan.

The contents of the notice must include:
(1) the plan's funding percentage - Single-employer plans must report their "funding target attainment percentage", and multiemployer plans must report their "funded percentage." The funding percentage of a plan is a measure of how well the plan is funded on a particular date. In general, the higher the percentage, the better funded the plan. The funding percentage must be reported for the past three plan years.
(2) the plan's assets and liabilities - The notices must include, among other things, a statement of the value of the plan's assets and liabilities on the same date used to determine the plan's funding percentage. The notices also must include a description of how the plan's assets are invested as of the last day of the plan year and a statement of the plan's funding policy.
(3) the PBGC guarantees and other Title IV information - The notices must include a general description of the benefits under the plan that are eligible to be guaranteed by the PBGC, along with an explanation of the limitations on the guarantee and the circumstances under which such limitations apply. Single-employer plan notices must include a summary of the rules governing plan termination and multiemployer plan notices must include a summary of the rules governing reorganization or insolvency.

The funding notices generally must be furnished no later than 120 days after the close of the plan year. Plans with 100 or fewer participants may furnish the notices no later than by the filing of the plan's annual report, including filing extensions. The proposed rule includes two model notices (one for single-employer plans and one for multiemployer plans). Pending the adoption of a final rule, a plan administrator may use these models, or the models contained in Field Assistance Bulletin 2009-01, to meet the annual notice requirement.

November 17, 2010

ERISA-EBSA Announces Nationwide Enforcement Actions To Protect Retirement And Health Benefits

According to a News Release (dated November 16, 2010), the Employee Benefits Security Administration (the "EBSA"), of the Department of Labor (the "DOL"), has announced a series of enforcement actions to protect more than $7 million for workers in retirement plans or health plans governed by ERISA.

According to the News Release, under ERISA, the DOL has the authority to conduct civil and criminal investigations to protect employee benefit programs and the assets set aside to pay benefits to workers and their families. The enforcement cases announced today represent civil cases filed in federal district courts across the country to protect the contributions made by employees and matching contributions promised by their employers. In these cases, workers had contributions to their pension or health plans withheld from their paychecks, but the employers did not deposit those contributions in the plans. Instead, the employers kept the workers' contributions and used them for their own purposes or other purposes unrelated to the plans.

The News Release further said that, in the criminal arena, the EBSA works with U.S. attorneys as well as state and local law enforcement agencies nationwide to bring criminal cases under ERISA that protect the contributions of American workers. The Contributory Plans Criminal Project is the EBSA's first criminal national enforcement project targeting persons who commit fraud and abuse against participants and beneficiaries of contributory employee benefit plans, including 401(k)s and contributory health plans.

The EBSA's "10 Warning Signs That Your 401(k) Contributions are Being Misused" provide workers with useful information to identify possible problems with their benefit programs. These may include situations where too much money is concentrated in one type of investment, unusually high administrative expenses, or improper business dealings with parties who manage and invest plan money.

Fact sheets on EBSA's civil and criminal enforcement programs, along with the 10 warning signs, are available at http://www.dol.gov/ebsa.

November 16, 2010

Employee Benefits-Governing Departments Amend Regulation On "Grandfathered" Health Plans Under The Affordable Care Act

According to a Press Release, the Departments of Health and Human Services, Labor and Treasury (the "Departments") have amended their regulation on grandfathered health care plans.

By way of background, on June 17, 2010, the Departments issued the "grandfather" regulation. This regulation addressed how employer-sponsored group health care plans can retain their grandfathered status, which exempts them from certain new requirements under the Affordable Care Act (such as nondiscrimination and external claims review). The grandfather regulation includes a number of rules for determining when changes to a health care plan causes the plan to lose its grandfathered status. For example, a plan could lose its grandfather status if the employer makes certain significant changes to the plan that reduce benefits or increase costs to participant. The Departments have adopted an amendment which modifies one aspect of the original regulation.

Previously, one of the ways a health care plan could lose its grandfather status was if the employer changed issuers - switching from one insurance company to another. The original regulation only allowed self-funded plans to change third-party administrators without necessarily losing their grandfathered plan status. The new amendment allows all insured group health care plans to switch insurance companies without losing grandfathered status, so long as the structure of the coverage, as offered by the new insurer, does not violate one of the other rules for maintaining this status.

November 11, 2010

Employee Benefits-EEOC Issues Final Rules on GINA

In a Press Release dated November 9, 2010, the Equal Employment Opportunity Commission (the "EEOC") announced that it has issued final regulations which implement the employment provisions (Title II) of the Genetic Information Nondiscrimination Act of 2008 ("GINA"). According to the Press Release, GINA prohibits use of genetic information to make decisions about health insurance and employment, and restricts the acquisition and disclosure of genetic information. The Press Release also says:

Title II of GINA represents the first legislative expansion of the EEOC's jurisdiction since the Americans with Disabilities Act of 1990. It prohibits employment discrimination based on genetic information, and restricts the acquisition and disclosure of genetic information. Genetic information includes:

--information about the genetic tests of an individual his or her family members;

--family medical history;

--requests for and receipt of genetic services by an individual or a family member; and

--genetic information about a fetus carried by an individual or family member, or about an embryo legally held by the individual or family member using assisted reproductive technology.

The final regulations:

-- provide examples of genetic tests;

--more fully explain GINA's prohibition against requesting, requiring, or purchasing genetic information;

--provide model language employers can use when requesting medical information from employees to avoid acquiring genetic information; and

--describe how GINA applies to genetic information obtained via electronic media, including websites and social networking sites.

The final regulations, background information and Q & As on the final regulations may be found through this website.

November 5, 2010

Employee Benefits-IRS Announces Pension Plan Limitations for 2011

In IR-2010-108 (10/28/10), the Internal Revenue Service (the "IRS") announced cost- of- living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2011. In general, these limits will either remain unchanged from those in effect for tax year 2010, or the inflation adjustments for 2011 were small. Highlights include:

--The elective deferral (contribution) limit for employees who participate in section 401(k), 403(b), or 457(b) plans, and the federal government's Thrift Savings Plan remains unchanged at $16,500.

--The catch-up contribution limit under those plans for those aged 50 and over remains unchanged at $5,500.

--The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are active participants in an employer-sponsored retirement plan and have modified adjusted gross incomes (AGI) between $56,000 and $66,000, unchanged from 2010. For married couples filing jointly, in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $90,000 to $110,000, up from $89,000 to $109,000. For an IRA contributor who is not an active participant in an employer-sponsored retirement plan and is married to someone who is an active participant, the deduction is phased out if the couple's income is between $169,000 and $179,000, up from $167,000 and $177,000.

--The AGI phase-out range for taxpayers making contributions to a Roth IRA is $169,000 to 179,000 for married couples filing jointly, up from $167,000 to $177,000 in 2010. For singles and heads of household, the income phase-out range is $107,000 to $122,000, up from $105,000 to $120,000. For a married individual filing a separate return, the phase-out range remains $0 to $10,000.

--The AGI limit for the saver's credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $56,500 for married couples filing jointly, up from $55,500 in 2010; $42,375 for heads of household, up from $41,625; and $28,250 for married individuals filing separately and for singles, up from $27,750.


November 4, 2010

ERISA-Third Circuit Holds That A Beneficiary's Decision To Retire Is Not The Detrimental Reliance Needed To Establish A Claim For Breach Of Fiduciary Duty Under ERISA

In Shook v. Avaya Inc., No. 09-4043 (3rd Circuit 2010), Richard and Karen Shook, husband and wife, filed suit against Avaya Inc., Richard's former employer, alleging a violation of ERISA. The Shooks contended that Avaya breached its fiduciary duty owed to them as participant and beneficiary under the Avaya Pension Plan, by sending them a series of misleading letters regarding Richard's pension benefits. Based on Avaya' s representation of the length of Richard's service, the Shooks alleged that Richard calculated his expected pension benefit and the couple decided that Karen should retire from her job at a different company (Verizon). The District Court granted summary judgment against the Shooks, and they appealed. The Third Circuit Court affirmed that decision, finding that the Shooks' decision that Karen should retire fails to constitute the detrimental reliance needed to establish a claim for breach of fiduciary duty under ERISA.

In analyzing the case, the Court stated that one element needed to establish a claim for breach of fiduciary duty under ERISA is that the plaintiff detrimentally relied on a misrepresentation or inadequate disclosure made by the fiduciary. The Court stated that detrimental reliance encompasses both an injury and reasonableness. To demonstrate sufficient reliance, the plaintiff must have taken some action as a result of the misrepresentation; the mere expectation of a continued benefit is not enough. This reliance may be based on an employee's retirement decision, or on a decision to decline other employment opportunities, to forego the opportunity to purchase supplemental health insurance, or any other important financial decision pertaining to retirement.

However, in this case, the Shooks' joint decision that Karen should retire from her position at Verizon does not constitute an important financial decision pertaining to retirement for these purposes. The decision must relate to the employee's plan. The Shooks' decision pertained to a non-employee, who was not a participant in the Avaya Pension Plan. This decision did not implicate Richard's or Karen's benefits under the Avaya Pension Plan or affect Richard's retirement. Any reliance on the letters from Avaya is simply too attenuated to hold Avaya liable as a fiduciary. Further, the reliance in this case is not detrimental because the decision in question could not have been forseeable by Avaya. Thus, the Court found that the Shooks' claim for breach of fiduciary duty fails.

November 3, 2010

Employee Benefits-EBSA Issues FAQs IV On The Affordable Care Act

The Employee Benefits Security Administration (the "EBSA") continues to issue FAQs on the Affordable Care Act. These FAQs were dubbed "FAQs IV". FAQs IV consist of 3 questions and answers. Here is what they say on employer-provided benefits :

The EBSA notes that the interim final grandfather regulations-previously issued by the Departments of Health and Human Services, Labor and the Treasury (the "Departments") - provide that, to maintain status as a grandfathered health plan (and not have to meet some new Affordable Care Act requirements), the plan must include, in any materials provided to participants and beneficiaries that describes the plan's benefits, a statement that the plan believes it is grandfathered. To meet this requirement, the plan may include the model disclosure language provided in the interim final grandfather regulations (or a similar statement) in any summary of the plan benefits provided to participants and beneficiaries, such as the summary plan description. It is not necessary to include the required statement with each communication from the plan to participants and beneficiaries (such as an explanation of benefits or "EOB"), although inclusion is permitted and encouraged.

The EBSA presents the situation of an employer, who had maintained a plan, prior to the enactment of the Affordable Care Act, which reimburses expenses for special treatment and therapy of eligible employees' children with physical, mental, or developmental disabilities (the "Children's Plan"). The treatment or therapy is not covered by the employer's primary medical plan. Reimbursable expenses may include the costs of:
-- special treatment or therapy from licensed clinics or practitioners;
-- day or residential special care facilities;
-- special education facilities for learning-disabled children;
--camps offering medically oriented programs that are part of a child's continued treatment; or
--special devices.

The Children's Plan is operated separately from the employer's primary medical plan. Employees may participate in the Children's Plan, without participating in the primary medical plan. The Children's Plan limits the total benefits for any eligible child to a specified lifetime dollar amount. The EBSA indicates that it would be a reasonable good faith interpretation of the Affordable Care Act and the underlying regulations for the plan sponsor to take the position that the per-child lifetime limit under the Children's Plan does not violate the prohibition, under section 2711 of the Public Health Service Act (PHS Act) and the underlying regulations, on imposing a lifetime dollar limit on "essential health benefits". The imposition by the Children's Plan of the per-child lifetime limit will not result in an enforcement action by the Departments under PHS Act section 2711.

November 3, 2010

Employee Benefits-EBSA Issues FAQs IV On The Affordable Care Act

The Employee Benefits Security Administration (the "EBSA") continues to issue FAQs on the Affordable Care Act. These FAQs were dubbed "FAQs IV". FAQs IV consist of 3 questions and answers. Here is what they say on employer-provided benefits :

The EBSA notes that the interim final grandfather regulations-previously issued by the Departments of Health and Human Services, Labor and the Treasury (the "Departments") - provide that, to maintain status as a grandfathered health plan (and not have to meet some new Affordable Care Act requirements), the plan must include, in any materials provided to participants and beneficiaries that describes the plan's benefits, a statement that the plan believes it is grandfathered. To meet this requirement, the plan may include the model disclosure language provided in the interim final grandfather regulations (or a similar statement) in any summary of the plan benefits provided to participants and beneficiaries, such as the summary plan description. It is not necessary to include the required statement with each communication from the plan to participants and beneficiaries (such as an explanation of benefits or "EOB"), although inclusion is permitted and encouraged.

The EBSA presents the situation of an employer, who had maintained a plan, prior to the enactment of the Affordable Care Act, which reimburses expenses for special treatment and therapy of eligible employees' children with physical, mental, or developmental disabilities (the "Children's Plan"). The treatment or therapy is not covered by the employer's primary medical plan. Reimbursable expenses may include the costs of:
-- special treatment or therapy from licensed clinics or practitioners;
-- day or residential special care facilities;
-- special education facilities for learning-disabled children;
--camps offering medically oriented programs that are part of a child's continued treatment; or
--special devices.

The Children's Plan is operated separately from the employer's primary medical plan. Employees may participate in the Children's Plan, without participating in the primary medical plan. The Children's Plan limits the total benefits for any eligible child to a specified lifetime dollar amount. The EBSA indicates that it would be a reasonable good faith interpretation of the Affordable Care Act and the underlying regulations for the plan sponsor to take the position that the per-child lifetime limit under the Children's Plan does not violate the prohibition, under section 2711 of the Public Health Service Act (PHS Act) and the underlying regulations, on imposing a lifetime dollar limit on "essential health benefits". The imposition by the Children's Plan of the per-child lifetime limit will not result in an enforcement action by the Departments under PHS Act section 2711.