ERISA Lawyer Blog

According to a News Release (dated January 12, 2012), the Employee Benefits Security Administration (the "EBSA") has released the 2011 Form M-1 annual report for multiple employer welfare arrangements ("MEWAs"). MEWA administrators may use the EBSA's online filing system to expedite processing of the form. The online filing system is available on the EBSA's website at http://www.askebsa.dol.gov/mewa.

According to the News Release, a MEWA is an arrangement that offers welfare benefits (such as medical, accident, or disability benefits) to the employees of two or more employers or to their beneficiaries. MEWAs that offer medical benefits are required to file the Form M-1. The filing deadline for the 2011 Form M-1 is March 1, 2012. However, MEWA administrators can request an automatic 60-day extension until May 1, 2012. The 2011 form is very similar to the previous year's form, with a few changes to reflect new laws that became effective in 2011.

The Internal Revenue Service ("IRS") has issued Notice 2012-9. This notice revises and restates the rules for reporting the cost of group health care plan coverage on Form W-2. These rules first apply to the 2012 Form W-2s (those which report information for the 2012 calendar year and are generally issued to employees in January, 2013).

The reporting requirement does not apply to an employer which issued under 250 Form W-2s for the previous calendar year (counting those issued by a section 3504 agent). It applies to everyone else (with very limited exception). All affected employers should make sure that their accounting systems are tracking the health care costs that must be reported, and become familiar with the reporting requirement. I have an article on the reporting requirement. If you would like a copy, please call me (516-307-1550) or contact me using the contact feature on the right-hand side of the blog.

The Internal Revenue Service (the "IRS") has updated its FAQs on new Form 8955-SSA to provide guidance on the notice that must be given to a separated employee with deferred vested benefits under a retirement plan. Here is what the IRS said.

Question 8 on Form 8955-SSA asks whether the plan administrator has provided an individual statement to each participant who is required to receive one (that is, each separated participant with unpaid vested benefits under the plan). The instructions to the Form add that the plan administrator must, before the expiration of the time for the filing of the Form, furnish to each affected participant a statement setting forth the information required to be contained in the Form (note that the 2009 and 2010 Forms-and thus the associated notices- are due by January 17, 2012 for calendar year plans, or if later by the last day of the seventh month after the close of the plan year plus extensions for others). When can question 8 be answered "yes"?

Question 8 may be answered "yes" if:

-- the required information was timely furnished to participants in other documentation such as benefit statements or distribution forms. A separate statement designed specifically to satisfy this requirement is not needed; and

--the statements or other documentation issued to the participants include the following information-

Name of the plan,
Name and address of the plan administrator,
Name of the participant, and
Nature, amount, and form of the deferred vested benefit to which such participant is entitled.

Thus, for purposes of completing Form 8955-SSA, the plan administrator's notice to the plan participant does not need to include the participant's social security number, the codes on page 2 of the Form 8955-SSA used to identify previously reported participants, or any information regarding any benefits which are forfeitable if the participant dies before a certain date.

In Employee Plan News (December 20, 2011), the Internal Revenue Service (the "IRS") provided some thoughts on leased employees. Here is what the IRS said.

EPCU Project on Leased Employees. The Employee Plans Compliance Unit (the "EPCU") has completed a project to determine if plan sponsors properly considered leased employees for qualified plan purposes. When leased employees aren't considered, they may be improperly excluded from the plan, the plan's testing and limitations may be incorrect, and the plan may discriminate in favor of highly compensated employees. In general, the results of the project were that :

-- approximately 65% of the employers surveyed did not actually have any leased employees , and didn't fully understand what it means to be a leased employee for purposes of the qualified plan rules; and

-- approximately 25% of the employers surveyed correctly applied the leased employee rules, or used the Employee Plans Compliance Resolution System (the "EPCRS") to correct plan errors that occurred when they didn't properly apply the rules (it is not clear what happened to the final 10% of surveyed employers).

Overview of Leased Employee Rules. Generally, a leased employee is defined by the Internal Revenue Code, Treasury Regulations and other IRS guidance as an individual whose services are purchased from a leasing organization and provided to a recipient company. For retirement plan purposes, the recipient company must treat a leased employee the same as a common law employee. This means that if a leased employee meets the age and service requirements of the plan, he or she must be allowed to participate in the plan. However, a sponsor may specifically exclude leased employees from participating in the plan, but must still consider them when performing the plan's coverage and nondiscrimination testing.

Who is a Leased Employee?

To be considered a leased employee, an individual must meet four requirements:

1. Agreement - The leased employee's services must be detailed in an agreement between the recipient company and the leasing organization. The agreement requires the recipient company to pay a fee to the leasing organization for the leased employee's services.

2. Service - The leased employee's services to the recipient company must be on a substantially full-time basis, for at least one year. The leased employee meets this requirement if, during the year, he or she is credited with the lesser of 1,500 hours of service or 75% of the hours of service (not less than 500) that are customarily performed by an employee of the recipient in the same position. If the leased employee works for a company that's related to the recipient company sponsoring the plan, then work with the related company is considered for both the one year and the1,500 hour requirements. If an individual was previously a common law employee of the recipient company before becoming a leased employee, that service is also considered for the one year and the1,500 hour tests.

3. Direction or Control - The recipient company must have primary direction or control over the services performed by the leased employee. Several factors are considered when determining primary direction and control:

• when, where and how the leased employee is to perform the service;
• whether the service must be performed by a particular person;
• whether the recipient company supervises the leased employee's service; and
• whether the employee must perform service in the order set by the recipient company.

It is irrelevant whether the recipient company has the right to fire the leased employee or that the leased employee works for other companies.

4. Common Law Employer - Based on facts and circumstances, the leasing company must be the common law employer of the leased employee.

Plan Requirements. When a recipient company maintains a qualified plan, their leased employees are required to be treated as common law employees for the following plan purposes:

• Eligibility - IRC section 410(a)
• Coverage - IRC section 410(b)
• Nondiscrimination - IRC section 401(a)(4)
• Vesting - IRC section 411
• Contributions and Benefits - IRC section 415
• Compensation - IRC section 401(a)(17)
• Top-Heavy Rules - IRC section 416

In Employee Plans News (December 20, 2011), the Internal Revenue Service (the "IRS") provided guidance on whether contributions to a tax-qualified, defined contribution retirement plan may be based on S Corp distributions made to an individual who is both a shareholder and employee. Here is what the IRS said.

Contributions to the plan can be made only from compensation, which, in the case of a self-employed individual, is earned income. Distributions received as a shareholder of an S corporation do not constitute earned income for these purposes (see IRC sections 401(c)(2) and 1402(a)(2)).

If an individual is a common law employee of the S corp, as well as a shareholder:

• the individual can make salary deferral contributions to the 401(k) plan based on his or her Form W-2 compensation from the S corp; and
the S corp can make matching or nonelective contributions to the plan based on that Form W-2 compensation.

An individual cannot make contributions to a self-employed tax qualified, defined contribution retirement plan from his or her S corp distributions. Although, as an S corp shareholder, the individual receives distributions similar to distributions that a partner receives from a partnership, those shareholder distributions are not earned income for these purposes (see IRC section 1402(a)(2)). Therefore, an individual cannot establish such a plan for himself or herself based solely on being an S corp shareholder.

In IR-2011-121, the Internal Revenue Service (the "IRS") reminds taxpayers that low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2011 and the years ahead. Here is what the IRS said.

The saver's credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Eligible workers still have time to make qualifying retirement contributions and get the saver's credit on their 2011 tax return. People have until April 17, 2012, to set up a new individual retirement arrangement or add money to an existing IRA and still get credit for 2011. However, elective deferrals must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2012 contributions soon so their employer can begin withholding them in January.
The saver's credit can be claimed by:

• Married couples filing jointly with incomes up to $56,500 in 2011 or $57,500 in 2012;

• Heads of Household with incomes up to $42,375 in 2011 or $43,125 in 2012; and

• Married individuals filing separately and singles with incomes up to $28,250 in 2011 or $28,750 in 2012.

Although the maximum saver's credit is $1,000, $2,000 for married couples, it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers. A taxpayer's credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver's credit, and its instructions have details on figuring the credit correctly.

Although the maximum saver's credit is $1,000, $2,000 for married couples, it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers. A taxpayer's credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver's credit, and its instructions have details on figuring the credit correctly.

Other special rules that apply to the saver's credit include the following:

• Eligible taxpayers must be at least 18 years of age.

• Anyone claimed as a dependent on someone else's return cannot take the credit.

• A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.

• Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2011, this rule applies to distributions received after 2008 and before the due date, including extensions, of the 2011 return. Form 8880 and its instructions have details on making this computation.

• More information about the credit is on IRS.gov.

According to Announcement 2011-82, the Internal Revenue Service (the "IRS") will no longer rule on elective demonstrations that a plan has satisfied coverage and nondiscrimination requirements as part of the determination letter process for tax-qualified retirement plans. Thus, an employer will not be able to rely on a determination letter as to whether the plan satisfies the requirements of section 401(a)(4), 401(a)(26), or 410(b) of the Internal Revenue Code (the "Code"). This change is effective for applications for determination letters filed on or after February 1, 2012, in the case of plans under a 5-year remedial amendment cycle (other than terminating plans) (generally individually designed plans), and on or after May 1, 2012, in the case of terminating plans and plans under a 6-year remedial amendment cycle (generally pre-approved plans).

The IRS will continue to determine whether a plan's benefit or contribution formula satisfies the requirements of a nondiscriminatory design-based safe harbor, and whether a plan's terms satisfy sections 401(k) and 401(m) of the Code, as part of the determination letter process.

The Internal Revenue Service ("IRS") has issued Notice 2011-97. This Notice contains the 2011 Cumulative List of Changes in Plan Qualification Requirements (the "2011 Cumulative List"), described in section 4 of Rev. Proc. 2007-44. According to the Notice, the 2011 Cumulative List contains a list of the changes to plan qualification requirements, and is to be used by plan sponsors and practitioners submitting determination letter applications for plans during the period beginning February 1, 2012 and ending January 31, 2013. These plans will primarily be single employer individually designed defined contribution plans, including employee stock ownership plans (ESOPs), single employer individually designed defined benefit plans, and multiple employer individually designed plans that are in Cycle B. Generally, an individually designed plan is in Cycle B if the last digit of the employer identification number of the plan sponsor is 2 or 7.

The Notice reminds us that the list of changes in the Notice does not extend the deadline by which a plan must be amended to comply with any statutory, regulatory, or guidance changes. The general deadline for timely adoption of an interim or discretionary amendment can be found in section 5.05 of Rev. Proc. 2007-44.

In Retirement News for Employers (Fall 2011), the Internal Revenue Service ("IRS") talks about how an employee can maximize his or her salary deferrals in 2012. Here is what the IRS says:

Does your employer's retirement plan allow you to make contributions from your salary? If so, you are likely to be asked to complete a salary deferral form (salary reduction agreement) now to indicate the amount you want to contribute to the plan from your salary in 2012.

To maximize your retirement savings, contribute as much as possible to the plan up to the 2012 allowed limits of: (1) $17,000 to 401(k) or 403(b) plans or (2) $11,500 to SIMPLE plans. If you are 50 or older by the end of 2012, your plan may allow you to make additional (catch-up) contributions of (a) $5,500 to 401(k) or 403(b) plans or (b) $2,500 to SIMPLE plans.

Remember, in addition to saving more for your retirement, there are other benefits of making salary deferral contributions to the plan. For example:

• you may reduce your taxable income by making pre-tax contributions;

• your employer may match your contributions to the plan (for example, your employer may contribute 50 cents for each dollar that you contribute to the plan, up to a certain amount); and

• you may qualify for the retirement savings contributions credit of up to $1,000 (up to $2,000 if filing jointly) for contributing to the plan and this credit may reduce your federal income tax liability.

If you decide to contribute less than the maximum allowed at this time, you may be able to increase your contributions by completing a new salary deferral form during 2012. Contact your employer for details about the retirement plan, including how much you can contribute from your salary, whether the employer also makes contributions on your behalf and whether you can change the amount of your contributions to the plan in 2012.

In Retirement News for Employers (Fall 2011), the Internal Revenue Service ("IRS") provides guidance on distributions from tax-qualified retirement plans. Here is what the IRS said:

The method by which retirement plan benefits are distributed is determined by options available under the plan and elections made by participants and beneficiaries. Defined contribution plans, such as 401(k)s and profit-sharing plans, generally pay retirement benefits in a lump sum or installments. The normal method of distribution in defined benefit plans, on the other hand, is an annuity paid over the employee's life or the joint lives of the employee and his or her spouse, unless consent from the employee and, if married, the employee's spouse is obtained.

When an employee terminates employment prior to normal retirement age, before a distribution can be made (except in the case of cash-outs described in Lump-Sums and Installments below), the employee must be given a written notice explaining the available benefit payment options under the plan, the right to delay payment until the later of the plan's normal retirement age or age 62, and the consequences of failing to delay payment.

A plan sponsor should know what forms of distribution are available to participants and beneficiaries under the plan, retain participant distribution election forms together with notarized spousal consents, if applicable, and communicate with the plan administrator about who provides the notice and consent forms, and who calculates and pays out benefits.

Lump-Sums and Installments. A plan can make a lump-sum distribution of a participant's or beneficiary's entire accrued vested benefit without consent (a cash-out) if the benefit is $5,000 or less. If the benefit is more than $5,000, a lump-sum distribution can only be made with the participant's (and spouse's, if applicable) written consent. Installment payments are made at regular intervals, for a definite period (such as 5 or 10 years) or in a specified amount (for example, $2,000 a month) to continue until the account is depleted.

Annuities. Annuity payments are made from a defined benefit plan or under a contract purchased by a defined contribution plan. Payments are made at regular intervals over a period of more than one year, depending on the type of annuity. If the participant is married prior to the first day of the period for which benefits are paid as an annuity, a plan subject to the spousal annuity requirements must pay benefits in the form of a qualified joint and survivor annuity (a "QJSA"). In this case, if the participant dies before the spouse, the plan pays the spouse a life annuity. A participant, with proper spousal consent, may waive the QJSA and chose another payment option. Plans subject to the QJSA rules may also have to offer participants a qualified optional survivor annuity (QOSA) that provides a surviving spouse an annuity equal to either 50% or 75% of the annuity payments to be made during the participant's life.

For a married, vested participant who dies before the annuity starting date, the plan must pay a qualified pre-retirement survivor annuity (a "QPSA") to the surviving spouse. A married participant, with spousal consent, may waive either the QJSA or QPSA annuities and choose an alternate form of distribution provided under the terms of the plan. An unmarried participant must receive a single-life annuity unless waived.

Plans Subject to QJSA/QPSA. Most defined contribution plans are not subject to the QJSA and QPSA rules. However, when a married participant dies, these plans must pay the entire remaining vested account balance to the participant's surviving spouse unless the spouse has consented to another beneficiary. Defined benefit, money purchase pension plan and target benefit plans must offer QJSAs and QPSAs if a participant's vested accrued benefit is more than $5,000, but may offer other payment options as well. Defined contribution plans must also offer QJSAs and QPSAs for account balances over $5,000 unless: (1) the participant doesn't choose a life annuity under the plan, (2) the plan pays the entire remaining vested account balance on the married participant's death to the surviving spouse unless the spouse has consented to another beneficiary and (3) the plan is not a transferee of a plan that was subject to QJSA/QPSA.

The Internal Revenue Service (the "IRS") has issued FAQs which provide guidance on new Form 8955-SSA. This form is to be used to report to the IRS retirement plan participants, who have separated from service with deferred vested benefits in the plan. It replaces Schedule SSA. According to the FAQs, Form 8955-SSA is to be used for Plan Year 2009 filings and thereafter. The due date for filing the 2009 and 2010 Forms 8955-SSA is the later of (1) January 17, 2012 or (2) the due date that generally applies for filing the Form 8955-SSA for the 2010 plan year (the last day of the seventh month after the close of the plan year (plus extensions)).

The FAQs note that:

-- the January 17, 2012 due date may not be extended by filing Form 5558 (but a Form 5558 may be filed to extend a due date that falls after January 17, 2012);

-- a Schedule SSA filed for Plan Year 2009 and/or Plan Year 2010 before April 20, 2011 will be treated as satisfying the applicable reporting obligations;

--Form 8955-SSA should be filed after April 20, 2011, even for years before PlanYear 2009; and

-- a participant's individual statement must be furnished to the separated participant no later than by the due date for filing the Form 8955-SSA on which he or she is being reported.

In Notice 2011-96, the Internal Revenue Service (the "IRS") has extended the deadline to amend a plan to comply with the limitations on benefit accruals and payments imposed by section 436 of the Internal Revenue Code (the "Code") on an underfunded plan. The Notice also contains a sample amendment that may be adopted to meet section 436.

Section 436 contains the following limitations, which apply to a single-employer defined benefit plan. When a plan's adjusted funding target attainment percentage (the "AFTP") for a plan year is less than 60%, section 436(d)(1) prohibits the payment of certain "prohibited payments", including single lump sum distributions, and section 436(e)(1) requires benefit accruals to cease. Section 436(b)(1) prohibits the payment of an "unpredicatable contingent event benefit", such as a plant shutdown benefit, when the AFTP for a plan year is less than 60%, or would be less than 60% after taking the event into account. When a plan's AFTP for a plan year is less than 80%, but not less than 60%, section 436(d)((3) limits the portion of a benefit that may be paid in a single lump sum distribution or other prohibited payment. Section 436(c)(1) prohibits a plan amendment from taking effect if the amendment increases the plan's benefits and the plan's AFTP for the plan year is less than 80%, or would be less than 80% taking the benefit increase into account. Section 436 applies in plan years that begin after 2007, with a later effective date for collectively bargained plans.

When does a plan have to be amended to comply with section 436? Under the Notice, in general, the amendment must be adopted by the latest of:

--the last day of the first plan year that begins after 2011;

--the last day of the first plan year for which section 436 applies to the plan; or

--the due date (including extensions) of the employer's tax return for the tax year that contains the first day of the first plan year for which section 436 applies to the plan.

Caution: The filing of a determination letter application for an individually designed defined benefit plan may accelerate the deadline. In general, for any such application filed after January 31, 2012, the restated plan submitted with the application must have been amended to comply with section 436.

The extension provided by the Notice is conditioned on the amendment being effective as of the effective date of section 436 for the plan, and on the operation of the plan being in accordance with the amendment from and after the amendment's effective date. An amendment which eliminates or reduces a Code section 411(d)(6) protected benefit will not cause the plan to fail to meet the anti-cutback requirements of that section if the amendment is adopted by the deadline provided in the Notice, and the elimination or reduction is made only to the extent needed to comply with section 436.

The Employee Benefits Security Administration (the "EBSA") has issued FAQs, which provide guidance on the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (the "Mental Health Parity Act" or "MHPA"), as applicable to group health plans (among others).

According to the FAQs, the MHPA specifies that the financial requirements and treatment limitations imposed by a group health plan on mental health and substance use disorder benefits cannot be more restrictive than the predominant financial requirements and treatment limitations that apply to substantially all medical and surgical benefits. The MHPA also prohibits the plan from imposing financial requirements or treatment limitations that are applicable only to mental health or substance use disorder benefits.

Under regulations issued under the MHPA, a group health plan generally cannot impose a financial requirement (such as a copayment or coinsurance) or a quantitative treatment limitation (such as a limit on the number of outpatient visits or inpatient days covered) on mental health or substance use disorder benefits in any of 6 classifications that is more restrictive than the financial requirements or quantitative treatment limitations that apply to at least 2/3 of medical/surgical benefits in the same classification. Thus, if the plan generally applies a $25 copayment to at least 2/3 of outpatient, in-network, medical/surgical benefits, a higher copayment could not be imposed on outpatient, in-network mental health or substance use disorder benefits.

Further, group health plans often impose nonquantitative treatment limitations, such as:

--medical management standards limiting or excluding benefits based on medical necessity or medical appropriateness, or based on whether a treatment is experimental or investigative;

--standards for provider admission to participate in a network, including reimbursement rates; and

--methods used to determine usual, customary, and reasonable fee charges.

The MHPA regulations provide that, under the terms of the plan as written and in practice, any processes, strategies, evidentiary standards, or other factors used in applying the nonquantitative treatment limitation with respect to mental health or substance use disorder benefits must be comparable to, and applied no more stringently than, the processes, strategies, evidentiary standards, or other factors used in applying the limitation with respect to medical/surgical benefits. However, differences are permitted when there are recognized clinically appropriate standards of care.

The FAQs then apply the above rules to situations involving prior authorizations for benefits and other matters. For example, the FAQs clarify that the plan cannot require prior authorization as to the medical necessity of receiving mental health and substance abuse disorder benefits, if it does not require such prior authorization for medical/surgical benefits.

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The Employee Benefits Security Administration (the "EBSA") has issued FAQs, which announce that the effective date for the rules requiring group health plans to furnish the Summary of Benefits and Coverage (the "SBC") and the related Uniform Glossary (the "Glossary") has been postponed. The effective date had been March 23, 2012.

According to the FAQs, on August 22, 2011, the government had issued proposed regulations and proposed templates in connection with implementation of the SBC and Glossary requirements of PHS Act § 2715(introduced by the recent health care legislation). Rather than requiring group health plan sponsors to comply with the proposed rules, and then make changes when the final rules are issued, the EBSA says that, until final regulations are issued and effective, plans and issuers are not required to comply with the SBC and Glossary requirements of PHS Act section 2715. The EBSA anticipates that the final regulations, once issued, will include an effective date that gives group health care plans sufficient time to comply.

Its that time of year again! In IR-2011-103, which can be found here, the Internal Revenue Service (the "IRS") has announced the pension plan limits that will apply in 2012. These limits include the following:

--The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $16,500 to $17,000.

--The catch-up contribution limit for 401(k), 403(b) and 457(b) plans for those aged 50 and over remains unchanged at $5,500.

--The limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) of the Code is increased from $195,000 to $200,000.

--The limitation for defined contribution plans under section 415(c)(1)(A) of the Code is increased from $49,000 to $50,000.

--The annual compensation limit under sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) of the Code is increased from $245,000 to $250,000.

--The dollar limitation under section 416(i)(1)(A)(i) of the Code concerning the definition of key employee in a top-heavy plan is increased from $160,000 to $165,000.

--The limitation used in the definition of highly compensated employee under section 414(q)(1)(B) of the Code is increased from $110,000 to $115,000.

See IR-2011-103 for the more technical limits.