The Internal Revenue Service, the Department of Labor and the Department of Health and Human Services have issued regulatory guidance recently in a number of areas. Brief summaries of these developments and potential opportunities and concerns for employers are as follows:
- New Form 5500 Issued. The IRS, DOL and the Pension Benefit Guaranty Corporation have adopted a new annual return/report form that plan administrators must file for plan years beginning on or after January 1, 1999. The new package replaces the old Form 5500 and Form 5500-C/R with a single form containing a more basic set of information. The package includes thirteen schedules, five of which are specific to retirement plans, seven of which report financial information and one report for fringe benefit plans (cafeteria plans, education assistance plans and adoption assistance plans). There are a number of other changes which will require close attention from plan administrators.
- COBRA Regulations. In a recent DOL Opinion (AO 99-14A), the DOL stated that a single mailing addressed to multiple qualified beneficiaries residing at the same address would be deemed good faith compliance with COBRA election notice requirements. The mailing can incorporate multiple notices or one notice that names each qualified beneficiary. Also, recent COBRA regulations made several important changes, including clarification of how the COBRA period may be limited to 18 rather than 36 months.
- 403(b) Plan Nondiscrimination Rules. The qualified plan nondiscrimination rules are generally applicable to nongovernmental Section 403(b) tax sheltered annuity plans beginning with the 1999 plan year.
- New 402(f) Rollover Notice. The IRS has released an updated version of the safe harbor explanation that employers may use to satisfy the Internal Revenue Code Section 402(f) notice requirement to recipients of eligible rollover distributions from qualified and 403(b) plans. The old model notice, which was issued in 1992, is now obsolete. The new notice reflects a number of recent statutory and regulatory changes.
- DOL Audits of 401(k) Plan Expenses and Investment Education. In conducting DOL audits of pension plans, great emphasis is being placed on the nature and amount of fees being paid, particularly fees passed through to participants. In addition, employers are increasingly moving toward the provision of investment advice rather than mere education. Knowing where the line is drawn is critical, since an employer could be deemed to be a fiduciary if the employer offers or facilitates the offering of investment advice.
- Transit Benefits. The IRS recently issued proposed rules clarifying the rules for permitting employees to pay up to $65 per month on a pre-tax basis for mass transit (increasing to $100 per month in 2002) and up to $175 per month toward parking expenses. The regulations clarify that an employee who commutes by mass transit and also incurs parking expenses may utilize both limits, in the aggregate. Employee elections may be revoked during the year and contributions can be carried over to the next year if not used.
Amendments to Small Pension Plan Audit Exemption. Pension plans (including for this purpose profit sharing and 401(k) plans) with fewer than 100 participants at the beginning of a plan year currently need not have their plans audited. Under proposed amendments to the exception, and in response to cases of embezzlement and other abuses, the exemption would only apply if at least 95% of the assets are "qualifying plan assets," which are, generally, assets held by a bank, insurance company, SEC registered broker-dealer or other organization authorized to act as an IRA Trustee. If more than five percent of the assets are non-qualifying, there are enhanced disclosures to participants that are required. The proposed amendments do not affect welfare plans.
IRS Audits of Cafeteria Plans. The IRS has undertaken a program of auditing cafeteria plans, the purported main purpose of which is to promote compliance. The IRS notes that the main issue and problem is the lack of a written plan document that accurately reflects the plan in operation. The IRS will also look at nondiscrimination testing, which could result in income and employment taxes being assessed to all participating employees. The IRS has just issued draft audit guidelines.
IRS Guidance on 401(k) Safe Harbors. Prior IRS guidance required that plans be amended before the start of a plan year to state which of the two safe harbor methods would be used. The IRS now will give employers flexibility to wait until 30 days before the end of the plan year to amend the plan to switch from a current-year testing method to a three percent non-elective safe harbor. Also, if a safe harbor is newly adopted, employers have until May 1, 2000 to notify employees for the 2000 plan year. This change provides a significant opportunity for plans to adopt a "wait and see" approach to the safe harbor. Employers will now have the majority of the plan year to see if a safe harbor makes sense, making the safe harbor contribution, in effect, a discretionary contribution. In addition, a matching contribution safe harbor may be discontinued in mid-year.
QMSCO. ERISA was amended in 1993 to require group health plans to cover dependent children, including children placed for adoption, pursuant to a qualified medical child support order ("QMCSO"). A QMCSO is a medical child support order issued under state law that creates or recognizes the right of an "alternate recipient" to receive benefits for which the participant is eligible under a group health plan. Subsequently, The Child Support and Incentive Act of 1998 expanded the coverage requirements to include ERISA-exempt governmental group health plans and church plans, and provided for a uniform, federal national medical support notice, with detailed time-lines to effectuate coverage. The law requires plan administrators, upon receipt of the notice from the employer, to accept an appropriately completed notice that also satisfies the requirements of ERISA as a QMCSO. The recently proposed DOL regulations contain a model national medical support notice to be issued by state agencies as a means of enforcing the health care coverage provisions in a QMCSO. Employers will soon have to deal with the QMCSO issue.
Health Information Privacy Regulations. The Department of Health and Human Services recently released proposed rules regarding the confidentiality of electronic health information. Although the greatest impact of these rules will be on health care providers, employers will also be affected since the definition of "covered entities" includes insured and self-insured health plans, as well as employers, to the extent they perform administrative functions involving electronic health information. The regulations apply to information stored or transmitted in electronic form, and to printouts of that electronic data. Individually identifiable health information may be disclosed without patient consent for broadly defined "health care operations." Virtually all other uses of individually identifiable information would have to be separately and specifically authorized by the patient in writing. The insurance industry claims that the cost of compliance with these rules will be astronomical. After HHS reviews public comments on the proposal, the agency will finalize the regulations, which will not go into effect until 24 months thereafter.
Ticket to Work Act of 1999. Under this recently enacted legislation, the Internal Revenue Code Section 127 exclusion from income for employer-provided educational assistance plans for undergraduate courses is extended until December 31, 2001, effective with respect to courses beginning after May 31, 2000 and before January 1, 2002. Also, Internal Revenue Code Section 420 which permits the transfer of excess pension assets to Section 401(h) retiree medical accounts, is extended to transfers in tax years beginning before January 1, 2006.
IRS Reviewing "New Comparability" Plans. In IRS Notice 2000-14, the IRS announced that it is reconsidering certain types of cross-tested plans and may restrict their application in cases where the IRS believes the effect may be discriminatory. Current arrangements may be grandfathered, so employers who have been considering new comparability plans should act soon.
DOL Proposes Cross-Trading Class Exemption. The DOL recently proposed a class exemption to permit investment managers to execute cross-trades between their passively managed accounts. The relief is broader than that provided in the very first class exemption granted under ERISA, PTCE 75-1, and is not as broad as individual exemptive relief granted in several individual exemptions.
Proposed DOL Rules Permit Electronic Transmission of SPD's and SAR's. Summary Plan Descriptions and Summary Annual Reports for all plans subject to ERISA reporting and disclosure requirements may now distribute these documents electronically, subject to the conditions set forth in the DOL regulations. In addition, certain ERISA-required records may also be stored electronically.