So Smarty, Who’s a Highly Compensated Employee in 2000?
Last October, the IRS announced its COLAs for year 2000, including an increase from $80,000 in 1999 to $85,000 in 2000 in the definition of a highly compensated employee (“HCE”). Suppose an employee earns $82,000 in 1999 and $84,000 in 2000. For year 2000 testing purposes do you now drop this person to the non-highly compensated group? No, because an employee is an HCE in the current year only if his pay in the prior year exceeded the dollar limit for that prior year. Thus, because his pay exceeded $80,000 in 1999 this guy is an HCE in 2000 regardless of his 2000 pay. With pay below $85,000 in 2000, he is a non-HCE in 2001. So, if you were really smart you would have understood that the COLA increase announced as effective for 2000 is not really effective until 2001. This is all because the IRS simplified the definition of a HCE. See IRS Information Letter to Kyle Brown published in RIA Pension & Benefits Week p.2 (12/13/99).
COBRA Notification Simplified.
When an employee terminates employment, the employee, his spouse and his dependents are each entitled to notice of the right independently to elect COBRA coverage. So, does each person have to receive a separate notice? The DOL has recently held that if they all have the same last known address, a single notice sent by first class mail to that address is sufficient notice to all so long as the notice lists each beneficiary and explains that each one has a right to make a COBRA election. DOL Ad. Op. 99-14A. Prior to this guidance, many employers sent separate mailings or perhaps a single mailing stuffed with separate notices for each person.
Temporary Out.
Bielkie worked 13 years for GM, left for 20 years and then came back as a temporary employee for four years. Although conceding that the plan excluded temps from coverage, she protested the company’s failure to include her four years of temporary service in her pension calculation. She claimed that she was misclassified because her extensive hours corresponded to the company hand-book’s definition of a full-time employee. The court dismissed her claim, concluding that a court can overturn a plan administrator’s denial of coverage only if the denial was arbitrary and capricious, which it can never be where, as here, the plan on its face excluded temporary employees. Bielkie v. General Motors Corporation, 1999 U.S. App. LEXIS 20318 (6th Cir. 8/19/99). Despite GM’s success in Bielkie, the exclusion of temporaries remains a legal minefield. For example, the IRS has ruled that the exclusion of temporaries can be an impermissible length of service condition. Its reasoning: because temporary employment relates to service, if temporaries complete at least 1000 hours in a year, their exclusion violates ERISA’s requirement that the only permissible service condition is a one year of service waiting period. The Service’s rule has created consternation because the Code’s coverage rules effectively permit exclusions based on employee classifications (for example, excluding a division or an employee job classification) so long as the ratio percentage (70%) or average benefit test of Code Section 410(b) is satisfied. Employers reason that if one can exclude 30% of employees for other reasons, why can’t one exclude temps so long as they don’t make up more than 30% of the workforce. The Service’s position must also have been a mystery to Bielkie since she didn’t raise it.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require and further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative.