Amendments to Qualified Retirement Plans required by the Small Business Job Protection Act of 1996 (SBJPA), Taxpayer Relief Act of 1997 (TRA 97), Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), the General Agreement on Tariffs and Trade (GATT) and the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98)
The SBJPA, TRA 97, USERRA, GATT and RRA 98 require amendments (generally referred to as GUST Amendments) to be made to most, if not all, qualified retirement plans. In addition, determination letter applications on most of the amended plans should be filed with the IRS on or before the deadline for amending the Plans. The Internal Revenue Service (IRS) on April 5, 1999, announced an extension of the amendment period to no later than the last day of the first plan year that begins on or after January 1, 2000. For calendar year plans, therefore, the current deadline for adopting amendments and submitting plans to the IRS for a favorable determination letter is now December 31, 2000.
The required amendments generally include revisions to the definition of "highly compensated employee," changes in ADP and ACP testing rules for 401(k) contributions and matching contributions, small account distribution limit increases, changes to the minimum required distribution (age 70 1/2) rules and changes to the direct rollover rules.
You should contact your retirement plan document provider to determine the planned timing of the required amendments. We would be happy to assist you in reviewing the amendments made to your plan.
Your plan must be completely restated for the GUST Amendments. The IRS has stated that it will not accept determination letter applications on plans that are not restated.
While a determination letter from the IRS is not required on the plan amendments, we strongly recommend that a determination letter be requested. A determination letter gives assurance that the plan is qualified in form. Furthermore, if the determination letter is submitted to the IRS by the last day for amending the plan, then the plan sponsor preserves certain rights during what is known as the "remedial amendment period" to make any additional changes to the plan required by the IRS and have those changes be retroactively effective.
The determination letter application requires substantial advance preparation and requires the plan sponsor to collect substantial data to be included in the IRS application form. So you should not wait until the last minute to start the amendment and application processes.
We would be happy to answer any questions that you may have with respect to the plan amendment and IRS submission process.
IRS Issues New Guidance on COBRA
IRS issued final regulations on COBRA in February 1999. COBRA, which refers to the Consolidated Omnibus Budget Reconciliation Act of 1985, has been operated under proposed regulations and numerous court decisions for the fourteen years since its adoption. The IRS also issued proposed regulations in February providing additional guidance in several areas of COBRA administration.
The final regulations provide some much needed answers to issues that have existed since COBRA was enacted. The final regulations include some surprises, but overall the regulations are welcome for a consistent approach in previously unclear areas.
The final regulations are not effective until January 1, 2000, but employers may rely on them now in administering health plans. obligations under COBRA. Employers also may rely on the proposed regulations.
Highlights of the final and proposed COBRA regulations include:
- Adopting the ruling of the United States Supreme Court decision in Geissel, clarifying that other group health insurance coverage, including Medicare coverage, that is in existence prior to a COBRA election is not a basis for terminating COBRA coverage. Only other group health insurance coverage that first becomes effective after a COBRA election has been made is a basis for terminating COBRA continuation coverage.
- Moving away from the core/noncore coverage requirement and providing employers more flexibility in determining the number of group health plans the employer maintains.
- Limiting the application of COBRA to many health care spending accounts. Such spending, or reimbursement, accounts are typically offered under cafeteria, or flexible benefit, plans.
- Providing additional guidance on determining whether a group health plan qualifies as a small employer plan that is exempt from the COBRA requirements.
- Providing basic rules for determining COBRA liabilities in certain corporate transactions, such as asset sales and sales of subsidiaries.
Areas where the final regulations clarify previously unclear issues include:
- Clarifying what constitutes a loss of group health coverage for COBRA purposes. Under the final regulations, for example, an increase in the premium cost for group health coverage resulting from a qualifying event, such as switching from full-time to part-time employment, is a loss of coverage under COBRA and requires a COBRA election to be made available.
- Confirming that if an employee drops his or her spouse from group health coverage in anticipation of a divorce, the removal of the spouse from coverage is a reduction or elimination of coverage in anticipation of a qualifying event that must be disregarded in determining whether the divorce results in a loss of coverage for COBRA purposes.
- Clarifying the effect of the requirement under the Health Insurance Portability and Accountability Act of 1996 (HIPPA) that a child born to or placed for adoption with a covered employee during the COBRA continuation period is a qualified beneficiary.
- Clarifying the COBRA continuation coverage that must be provided to a COBRA beneficiary who moves out of the service area of a self-funded plan or a region-specific HMO.
- Clarifying that a COBRA election is made on the date that it is sent to the COBRA administrator, such as the date the election is placed in the mail, rather than on the date that the COBRA administrator receives the election. Payment of COBRA premiums also occurs on the day that the payment is sent to the COBRA administrator, rather than on the day that the COBRA administrator receives the payment.
- Clarifying the response required from a plan administrator if the group health plan receives a request for coverage information from a provider, such as a doctor or hospital, during a period when COBRA status is in question, such as during the election period before the election is made, or during a payment period before the payment is made. The regulations require that a complete statement of the situation must be given to the provider. For example, if the inquiry is made during the COBRA election period and retroactive benefits are provided after the COBRA election is made, the provider must be informed that the person is eligible for COBRA, but has not yet elected it, and that if the person elects COBRA, the person will receive retroactive coverage.
- Clarifying that the disability extension period applies to all related beneficiaries, even if the disabled person does not elect to be covered under COBRA, and clarifying under what conditions and to whom the 150% of premium charge may be applied during, and beyond, the COBRA disability extension period.
- Clarifying that an employee may not decline COBRA coverage for his or her spouse.
- Reiterating the statutory requirements that COBRA premiums must be set for an entire 12-month period. Generally, therefore, a mid-year change in insurers or a premium increase (such as may occur if the COBRA year and the insurance policy year differ) will not allow an increase in COBRA premiums during the year.
The final regulations will require changes in SPDs and COBRA notices. We would be happy to answer questions that you may have with respect to the final and proposed COBRA regulations and review your COBRA forms.
IRS and DOL Issue Guidance on Electronic Plan Administration
Both the Internal Revenue Service (IRS) and the Department of Labor (DOL) have issued guidance generally approving electronic plan administration. While some documents still must be made available by paper, and some administration steps cannot be accomplished electronically, the guidance gives official approval to the administration method currently being used by many plan administrators.
The IRS has issued two forms of guidance, a Notice and Proposed Regulations.
In Notice 99-1, the IRS identified specific qualified retirement plan administration areas where the Internal Revenue Code (the Code) does not require a written document. The areas include:
- plan enrollment
- designating the rate of pre-tax [401(k)] and after-tax contributions
- designating beneficiaries, except for beneficiary designations where spousal consent is required
- electing direct rollovers
- electing investment allocations for future contributions
- changing investment allocations for amounts held under the plan
- inquiring about general plan information, such as distribution alternatives, and
- inquiring about account information, such as account balances and investment allocations
The Notice states that electronic media may be used for the above activities. Electronic media includes, under the Notice, e-mail, the Internet, intranet systems and automated telephone systems.
In its Proposed Regulations, the IRS provided proposed guidance in three specific areas of plan administration: the Code Section 204(f) direct rollover notice, the Code Section 411(a)(11) notice and participant consent for distributions in excess of $5,000, and the Code Section 3405 notice on withholding for distributions that are not direct rollover distributions. A common requirement is that complex notices cannot be provided through a telephone response system.
Direct Rollover Notice
The direct rollover notice must be given to any person receiving a distribution from a qualified plan. The notice must be provided no earlier than 90 days and no later than 30 days before the distribution occurs or commences, although the participant may waive the 30 day waiting period. Under the Proposed Regulations, the IRS made the following changes:
- Manner of providing notice. The notice may be provided through electronic media, such as e-mail or a website. However, the complete direct rollover notice is too complex for oral delivery through a telephone response system. The participant must be informed that a written copy of the notice will be provided free, upon request. Posting the notice or providing the participant the means to print the notice is not adequate to meet this written notice requirement. The notice provided via electronic media must be no less understandable than a written, paper notice.
- Timing of notice. The IRS has eased the 90/30 day requirement somewhat. The notice can be provided in its full form in some manner, such as in a Summary Plan Description (SPD) or a brochure, at any time. The full written notice must be kept updated. Then, within the 90/30 day period, a summary of the notice may be provided to the participant. The summary must specify the material provisions of the full notice, must refer the participant to the most recent occasion on which the full notice was published (such as the page number of the SPD where the full notice may be found), and must advise the participant that a copy of the full notice will be provided free, upon request. This summary of the direct rollover notice can be provided through a telephone response system.
Distribution Notice and Election of Distribution
The requirements for providing the distribution notice under Section 411(a)(11) are the same as those for the direct rollover notice. However, a plan with relatively simple distribution alternatives, such as lump sum and installments only, may provide the distribution notice through a telephone response system.
The Proposed Regulations also provide guidance on how a participant may elect a distribution using electronic media. The guidance focuses primarily on the safety of the system in preventing unauthorized use, the system.s ability to provide review and rescission of the election, and the system.s ability to provide a formal confirmation of the election to the participant.
The same timing and summary rules apply as are described under the direct rollover notice requirement.
Withholding Notices
Rules similar to those described for the Direct Rollover Notice apply to the provision of withholding notices through electronic media.
Cafeteria Plan Administration
While cafeteria plan administration is not addressed in the IRS. guidelines, the IRS has informally indicated that cafeteria plan administration also may be handled through electronic media.
Effective Date
The Proposed Regulations are not yet effective, but may be relied on by plan administrators. The Proposed Regulations will become effective the first day of the first plan year occurring on or after the date that is six months from the date the final regulations are published in the Federal Register.
Items Not Addressed
A number of items are not addressed in the Notice or in the Proposed Regulations or are specifically excluded, at least for now, from being provided through electronic media.
- Any election or beneficiary designation that requires spousal consent is excluded. Therefore, any plan that offers annuity forms will be limited in its ability to use electronic media for certain aspects of plan administration. Also, any beneficiary designation by a married participant in which the spouse is not the primary beneficiary must still be provided in the form of a paper beneficiary designation form with required, witnessed spousal consent.
- Safe harbor notices for 401(k) safe harbor plans (those plans for which ADP and ACP tests are not required) must be provided in the form of a separate, written notice and may not be provided through electronic media or in a Summary Plan Description.
- Plan loans; however, specific loan guidance is expected later in 1999.
- The guidance does not apply to Section 403(b) tax-deferred annuity plans or to Section 457 plans sponsored by governmental bodies or tax-exempt employers.
Department of Labor Guidance
The Department of Labor also has issued guidance in the form of Proposed Regulations designed to create a safe harbor allowing all ERISA covered employee benefit plans (including both retirement plans and welfare plans) to provide required information to participants through electronic media. The required information addressed in the Proposed Regulations includes Summary Plan Descriptions (SPDs), Summaries of Material Modifications (SMMs) and Summary Annual Reports (SARs).
The DOL reiterates in the Proposed Regulations that its guidance only creates a safe harbor and is not the sole means of distributing such information through electronic media. The safe harbor in the DOL.s Proposed Regulations mirrors the guidelines provided in the interim regulations issued under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) for electronic communication of certain health plan documents. The safe harbor requires that:
- the system for furnishing documents must result in actual receipt by the participant, and the plan administrator must ensure the actual receipt by use of a checking method such as return-receipt electronic mail or periodic surveys
- electronically delivered documents must be prepared and furnished in a manner consistent with the style, format and content requirements for a written document under the DOL.s existing regulations
- each participant must be notified of the forthcoming documents to be furnished by electronic media and the significance of the documents
- each participant must be notified of the right to receive a paper copy of the document from the plan administrator upon request and free of charge
The safe harbor distribution method applies only for participants who:
- have the ability at their worksite to effectively access documents furnished electronically, and
- have the opportunity at their worksite to readily convert documents furnished electronically to a paper form free of charge.
As with the IRS. Proposed Regulations, the DOL.s Proposed Regulations will become effective the first day of the plan year beginning at least six months after the issuance of the regulations in final form.
Recordkeeping and Retention Guidance
Both the IRS and the DOL also have issued guidance on the maintenance and retention of plan records through electronic storage methods. The guidance is too extensive to be covered in this Cooley Alert; however, we would be happy to discuss the guidance with you on an individual basis.