IN THIS ISSUE
- IRS Extends Remedial Amendment Period
- IRS Issues Final and Proposed COBRA Regulations
- Parking and Transit Reimbursement Programs
- IRS and DOL Address Paperless Transactions
IRS EXTENDS REMEDIAL AMENDMENT PERIOD
Effective April 19, 1999, the Internal Revenue Service extended the "remedial amendment period" for new plans and plan amendments to comply with the changes required by the Uruguay Round Agreements Act of 1994 (GATT), the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), the Small Business Job Protection Act of 1996 (SBJPA), the Taxpayer Relief Act of 1997 (TRA97) and the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA98). Under previous revenue procedures, all qualified retirement and savings plans subject to these changes had to be amended and submitted to the IRS prior to the end of the plan year beginning in 1999 (December 31, 1999 for calendar year plans). new revenue procedure extends this deadline to the end of the plan year beginning in the year 2000 (December 31, 2000 for calendar year plans). As with prior revenue procedures, plans must be maintained in operational compliance with the applicable new rules, and the amendments must be effective retroactively to the effective date of the new rules. ver, defined benefit plans that have deferred the effective date of the GATT changes in Code section 417(e) (affecting the calculation of lump sum distributions) to the first day of the first plan year beginning after 1999) (January 1, 2000 for calendar year plans) should be amended by that date to incorporate the new rules. If the GATT amendment is delayed by reason of the extended remedial amendment
period, any participant who received a distribution between the GATT effective date and the date of the amendment must receive the higher of the lump sum amount calculated pursuant to the amendment or the lump sum amount calculated pursuant to the pre-amendment provisions of the plan.
IRS ISSUES FINAL AND PROPOSED COBRA REGULATIONS
On February 2, 1999, the Internal Revenue Service issued revised final regulations on COBRA coverage and notice requirements, based primarily on the proposed regulations that were issued more than 10 years earlier, but reflecting case law and legislative changes that have developed over that time period. The IRS also issued proposed regulations and requests for comments on COBRA issues arising in business transactions, flexible spending accounts, multiemployer welfare plans and Family Medical Leave Act (FMLA) situations. An employer can follow the proposed regulations pending issuance of final regulations and thereby avoid any enforcement efforts by the IRS, but participants can challenge the employer's actions, and courts may not defer to regulations that are merely in proposed form.
The Final Regulations
While the final regulations generally track the old proposed regulations, one key difference is the elimination of the requirement that an employer offer "core" coverage as a separate COBRA option.Now, the employer has broad flexibility to define the scope of its "plan" subject to COBRA, and may require the qualified beneficiary to elect either all group medical coverage or none. The final regulations continue the proposed rules regarding the provision of coverage during the time period between the qualifying event (or loss of coverage) and the election date or date payment is made. If any inquiry concerning coverage is made by a provider during this period, the provider must be advised of the possibility of COBRA coverage in the event of a future election. The final regulations codify the "mailing rule" adopted by many courts. This rule states that elections, revocations of waivers and premium payments are deemed made on the date of mailing. The final regulations change some of the proposed rules relating to the provision of alternative coverage after a qualifying event, such
as subsidized coverage for a period of time, or free or reduced-cost coverage that is not identical to the active employee coverage. Under the final regulations, a new qualifying event during the coverage period that causes the dependent to lose coverage will trigger a COBRA right. However, the expiration of the alternative coverage (even if it occurs before the maximum COBRA period would have expired) will not trigger any additional right to COBRA coverage in the absence of an intervening qualifying event. The final regulations clarify that if an employee removes his or her spouse from coverage "in anticipation of a divorce or legal separation," that event is not, in and of itself, a qualifying event. However, when the plan receives notice of the divorce or legal separation, the plan
must then provide COBRA coverage effective on the date of the divorce or legal separation, but not earlier. The final regulations clarify that any child born to or placed for adoption with the covered employee (or former employee) during the COBRA coverage period is a "qualified beneficiary," but this is not true for a child born
to or adopted by a dependent of the employee or for a subsequent spouse, even if coverage must be provided to that person pursuant to the plan. Upon a subsequent divorce or death of the former employee, these non-qualified beneficiaries may lose coverage and will not be given an additional COBRA election or extended coverage period. Under the 29-month extension provided to qualified individuals if a member of the family unit is disabled, the final regulations indicate that the COBRA premium can be increased to 150 percent only if the disabled individual is part of the family unit that elects COBRA. Also, the 29-month extension is available even if a child who is disabled is born or adopted by the former employee after the original qualifying event (in which case the 60-day period for obtaining a Social
Security disability determination begins with the date of birth or adoption). The final regulations modify the method of determining the scope of a single group health plan, and whether a plan is a "small employer plan." The regulations also clarify that where group health benefits are offered in conjunction with a cafeteria or flexible benefit plan, only the group health benefits (including flexible spending accounts) are subject to COBRA. The regulations also modify the rules applicable to the calculation of deductibles and maximum limits where a family unit is split as a result of COBRA, and modify the rules applicable when the plan covering a COBRA beneficiary is terminated.
The final regulations also contain some details on the timing of COBRA premium changes and the timing of payments.
Plans are not permitted to terminate COBRA coverage if a payment is short by an insignificant amount (such as transposed digits on a check). The COBRA beneficiary must be given a reasonable time (such as 30 days) to make up the shortfall.
The final regulations apply to qualifying events that occur in plan years beginning on or after January 1, 2000. The IRS will consider compliance with the old proposed regulations or the new ones to be good faith compliance with a reasonable interpretation of COBRA until that date, except to the extent inconsistent with new legislation or Supreme Court decisions.
The Proposed Regulations
The IRS is proposing that flexible spending accounts (FSAs) should be given limited relief from COBRA obligations. If the FSA is exempt from HIPAA (because the benefits are no greater than twice the employee's salary reduction and another group health plan is available to the employee), the employer need not provide a COBRA election with respect to the FSA if, for the remainder of the current plan year, the maximum amount that the FSA could charge under COBRA exceeds the maximum benefit remaining available to the qualified beneficiary. If the qualified beneficiary has a greater benefit remaining available for the remainder of the plan year than the amount of the maximum COBRA charge, COBRA would have to be offered. ver, if the maximum annual COBRA charge would exceed the annual FSA benefit, COBRA only has to be offered for the remainder of the
plan year in which the qualifying event occurred. The proposed regulations address COBRA obligations in the context of business transactions. In the case of a stock sale, no COBRA obligations arise for employees who continue in employment with the sold corporation, because there has been no qualifying event. In the case of an asset sale, the seller will be required to provide COBRA notices (and COBRA) to all affected employees, even if the buyer is going to adopt the seller's plan. However, if the buyer is a "successor employer" (see below) and provides
immediate coverage, there is no qualifying event. The proposed regulations also address the obligation to provide COBRA coverage to persons who are already on COBRA as a result of a qualifying event involving one of the employees of the business involved in a transaction. Generally, those persons (M&A qualified beneficiaries) would continue to be covered by the seller's plan, whether or not the transaction is a stock sale or an asset sale. However, if the seller no longer maintains a group health plan as a result of the transaction, the buyer in a stock sale must provide coverage to M&A qualified beneficiaries. The buyer in an asset sale might be a successor employer and may have the obligation to provide COBRA coverage to M&A qualified beneficiaries. The parties to a transaction
could agree to allocate these COBRA responsibilities differently from the presumptive rules, but if the assigned party defaulted, the presumptive party would then have the obligation to provide future COBRA coverage. If you have specific questions concerning the application of the new final or proposed regulations to your group health plan, please call any member of the benefits group. Keep in mind that your COBRA notices may have to be revised to reflect these new rules.
PARKING AND TRANSIT REIMBURSEMENT PROGRAMS
Code 132(f) was amended last year to increase the amount of transit pass and parking benefits that could be excluded from income as a "qualified transportation fringe benefit" to $65 per month for transit passes and $175 per month for parking (effective 1999). That section also was amended to allow cash reimbursement for a transit pass or parking expense, and to allow the employee to "choose between any qualified transportation fringe and compensation which would otherwise be includible in gross income." Nevertheless, qualified fringe benefits still cannot be included in a "cafeteria plan" subject to Section 125 of the Code. It is fairly clear
that even though the Congressional intent was to allow employers to provide additional cash compensation to employees who chose not to use an available transit pass or parking benefit, nothing prevents an employer and employee from agreeing in advance to reduce the employee's compensation by an amount equal to the transit pass or parking benefit that the employer will provide on account of that agreement. However, because the resulting agreement is not a "cafeteria plan" under Section 125 that allows a participant to "choose among two or more benefits consisting of cash and qualified benefits," a number of open questions remain:
- Will state or federal labor departments recognize the transportation fringe benefit as counting toward minimum
wage obligations (as they do for cafeteria plans)? All of the prior rulings relate to cafeteria plans, but clearly hold that if the employee has the option of receiving the tax-free benefit (in this case, parking reimbursement)in cash, the benefit will count toward minimum wage. efore, it is reasonable to assume that state and federal labor departments will allow salary-reduction reimbursement arrangements to count toward minimum wage obligations. - Can an employee make a cash or transportation benefit election more than once per year, because the election is not constrained by the cafeteria plan rules? It appears that the traditional "constructive receipt" rules apply, so that an election should be made in advance of the period for which the income is to be reduced, and in advance of the time that the employee incurs the parking or transit expense.
- Must the "use-it-or-lose-it" rule (applicable to medical and dependent care spending accounts) be applied to the transportation/parking reimbursement account? The present indications are that *use-it-or-lose-it* is not applicable
to transit or parking reimbursement. Therefore, pending additional guidance from the IRS, it appears that any unused
balances can be carried forward to future years, or paid out in cash (subject to taxation) during the following year. - Are parking or transit reimbursements subject to F.I.C.A. or F.U.T.A. tax, or to state income tax? Parking or transit reimbursements (if properly documented) are not subject to F.I.C.A. or F.U.T.A. taxation. However, they are subject to state income tax in Pennsylvania and New Jersey.
- Is a written plan document required? No. The program is not subject to ERISA, and no plan document is required under the Code. However, the terms of the program should be established in writing, probably in the materials explaining the program and providing for the salary reduction election and reimbursement of parking or transit expenses.
- Are there any non-discrimination rules? No. But partners and other self-employed individuals (including shareholder-employees
of subchapter "S" corporations) are not eligible. - Because other benefit plans define "wages" as including salary reduction agreements under Section 125, all of those other plans will have to be amended to reflect reduced amounts under the transportation fringe arrangement. Prototype plans probably are not set up to deal with parking reimbursement.
- For the same reason, the transportation fringe reduction will not be included in 415 wages (for maximum benefits in qualified retirement plans), and will cause the "testing" definition of wages to fall outside a safe harbor definition under Code 414(s). Similarly, a plan that satisfies a safe-harbor design under Code 401(a)(4) may no longer fall within a safe harbor if amounts designated for transportation reimbursement are included in pensionable wages.
- Note that a reimbursement approach cannot be used for mass transit expenses if a pass or voucher program is "readily available for direct distribution by the employer to the employee."
For more information about establishing a transportation reimbursement program for your employees, please contact
a member of the benefits group.
IRS AND DOL ADDRESS PAPERLESS TRANSACTIONS
The IRS has issued a Notice and Proposed Regulations that authorize a number of transactions to be performed electronically
or by telephone ("paperless" transactions). The Department of Labor (DOL) has also issued proposed regulations that allow all ERISA pension and welfare benefit plans to provide participants with Summary Plan Descriptions (SPDs),
Summaries of Material Modifications (SMMs), updated SPDs and Summary Annual Reports (SARs) by using electronic media. When and if the Proposed Regulations are finalized, most of the administration of defined contribution plans will be able to be conducted without paper documents, and administration of defined benefit plans may be simplified.
Under the Notice, the IRS confirmed that paper copies are not necessary for enrollments, transfers, election and investment changes, and consents to distributions (except for spousal consents). Similarly, most aspects of loan transactions may be conducted electronically or by telephone. The IRS noted that the plan administrator is under a fiduciary obligation to ensure that the electronic or telephonic means of administration is accurate and secure.
Any electronic medium must be reasonably designed to provide notice in a manner no less understandable than a written
paper document and reasonably preclude any other individual besides the participant from consenting to a paperless transaction. This may require that the system include encryption, PINs, or other security arrangements, and that
written or electronic confirmations should be distributed to the participant, with an opportunity to reverse the transaction if not properly authorized. Participants must be told that they have the right to request and receive, free of charge, a paper copy of the particular document. The Notice and Proposed Regulations are written in general terms, so that new technologies may be applied as they are developed. Under the IRS Proposed Regulations, the IRS would allow notices of rights to rollover a qualifying distribution, notices of joint-and-survivor annuity rules, and consents, to be administered by paperless means. Under the DOL Proposed Regulations, electronic delivery of plan documents such as a SPD, SMM or SAR would be permitted if participants are also advised of the significance of the documents along with descriptions of changes impacting plan benefits, and that they have the right to request and receive, free of charge, a paper copy of the particular document. The IRS and DOL proposed regulations prescribe certain additional safeguards employers will need to follow before implementing an electronic delivery system. The DOL Proposed Regulations also allow electronic maintenance and storage of plan records subject to certain procedural safeguards, security measures and monitoring. Electronic records must be able to be converted into legible and readable paper documents.