The impending year end requires plan sponsors to make changes to their benefit plans to comply with new laws and regulations. This Alert focuses on changes that will have to be made to 403(b) retirement plans and to large group health plans.
We hope you find this information helpful. Please contact any member of our Employee Benefits or Healthcare Industry Teams with questions.
All entities sponsoring 403(b) plans for their employees need to make sure that their plans have been properly amended to comply with the new IRS regulations before the end of 2009. Also, plan sponsors should review their 403(b) plans’ operational compliance during this year and retroactively correct any failures before the end of the year.
Initially final regulations under Code § 403(b) required sponsors of § 403(b) plans to have a plan document in place by January 1, 2009. In a 2008 Notice, the IRS extended that deadline. Plan sponsors now have until December 31, 2009 to adopt a written plan that satisfies the requirements of the final regulations (effective as of January 1, 2009). In order to avail itself to this relief, the plan sponsor has to operate the plan in accordance with a reasonable interpretation of the law and, before the end of 2009, must take actions to correct any operational failures occurring during the 2009 year.
PLAN SPONSORS CANNOT WAIT UNTIL THE LAST DAY IN DECEMBER TO AMEND THEIR PLANS AND IDENTIFY AND CORRECT ANY PROBLEMS THAT MAY HAVE OCCURRED IN 2009.
403(b) plans that allow employees to defer a portion of their salary to the plan, but do not provide for employer contributions, are subject only to the “universal availability” rule. This means that all employees of an eligible employer must be eligible to elect to make deferrals to the 403(b) plan.
However, 403(b) plans providing employer contributions must satisfy the coverage and non-discrimination rules under Code §§ 410(b), 401(m), 401(a)(4) and 401(a)(6). Prior to the enactment of the final regulations, plans generally relied on a “reasonable good faith” standard to comply with these rules. Beginning in 2009, this standard is no longer available.
EMPLOYER SPONSORS WHO MAKE CONTRIBUTIONS ON BEHALF OF THEIR EMPLOYEES TO 403(b) PLANS NEED TO CONSULT WITH THEIR RECORDKEEPERS TO DETERMINE IF COVERAGE AND NONDISCRIMINATION TESTS MAY BE A PROBLEM FOR 2009. EMPLOYERS MAY WANT TO CONSIDER ADOPTING A SAFE HARBOR 403(b) FORMULA.
Under the final regulations, the plan document may allocate to the employer or another entity (but not to the employee) responsibilities for performing functions to administer the plan, including functions to assure compliance with Code § 403(b) and its regulations.
PLAN SPONSORS WILL NEED TO NEGOTIATE WITH VENDORS THAT THEY EXPECT TO ASSUME ADMINISTRATIVE RESPONSIBILITIES FOR THE 403(b) PLANS. THE PLAN DOCUMENT NEEDS TO SPECIFY WHO WILL BE PERFORMING ADMINISTRATIVE RESPONSIBILITIES. CURRENT CONTRACTS WITH VENDORS WILL NEED TO BE AMENDED OR NEW CONTRACTS WILL NEED TO BE EXECUTED.
The new regulations no longer permit “90-24 transfers.” Participants can no longer unilaterally transfer monies freely from accounts held in the plan to accounts outside the plan. The new rules require that transfers occur between “approved vendors” and/or “unapproved vendors” who have entered into Information Sharing Agreements.
In implementing the new regulations, employers may ignore certain contracts and transfers: (i) a 90-24 transfer occurring on or before September 24, 2007; (ii) accounts of former employees that have not received any contributions after December 31, 2004; and (iii) 403(b) contracts issued between 2005 and 2008 held for former employees or their beneficiaries that have not received contributions after December 31, 2008. For 403(b) accounts for active employees issued between 2005 and 2008 that have not received any contributions after December 31, 2008, the employer must make a good-faith reasonable effort to obtain information about the unapproved vendors and provide the vendors with the name and contact information of the party responsible for 403(b) compliance for the plan. This enables the vendor to contact the plan administrator prior to making a participant loan or distribution.
IF PLAN SPONSORS HAVE NOT YET SURVEYED PLAN PARTICIPANTS TO DETERMINE IF THEY MAY HAVE CONTRACTS OR ACCOUNTS WITH UNAPPROVED VENDORS, THIS SHOULD BE DONE IMMEDIATELY. IF CONTRIBUTIONS TO UNAPPROVED VENDORS ARE MADE IN 2009, INFORMATION SHARING AGREEMENTS MUST BE EXECUTED.
Any non-governmental and non-church plan sponsors of 403(b) plans need to determine whether the plan is governed by ERISA. In limited circumstances, ERISA coverage may be avoided. If an employer does not contribute to the 403(b) plan and has only minimal ministerial administrative involvement with the plan and all rights under the contract or the account is enforceable solely by the participant or beneficiary, then ERISA will not apply. On the other hand, if the plan sponsor makes contributions to the plan or approves participant loans, authorizes hardship withdrawals, processes plan distributions or undertakes other discretionary administrative acts, then ERISA rules would apply.
ERISA requires 403(b) plans to file Form 5500. Previously, 403(b) plans had been subject to very limited annual reporting requirements. However, the final regulations eliminated the special annual reporting requirements for 403(b) plans. Moreover, 403(b) plans with 100 or more participants (“large plans”) must include audited financial statements with their Form 5500. Moreover, all plans must now comply with the new reporting requirements for plan fees and expenses on the 2009 Form 5500.
Because of concerns expressed by employers that they may not be able to obtain financial data needed to satisfy Form 5500 reporting requirements, the Department of Labor (“DOL”) issued Field Assistance Bulletin (FAB) 2009-02 on July 30, 2009, which provided transition relief for administrators of 403(b) plans. Pre-2009 annuity contracts and custodial accounts are not treated as part of the employer’s ERISA plan or as plan assets for purposes of Form 5500 filing requirements. Further, former or current employees holding these contracts or accounts are not counted as participants for annual reporting purposes. The pre-2009 contracts or accounts are subject to this exemption only if: (i) no contributions have been made to them on or after January 1, 2009; (ii) the rights under the contracts or accounts are solely enforceable by the participant or beneficiary; and (iii) the owners of the contracts or accounts are fully vested in them.
PLAN SPONSORS NEED TO DETERMINE WHETHER THEIR 403(B) PLANS ARE COVERED BY ERISA OR NOT. IF SO, THEY NEED TO MAKE SURE THAT THEY RETAIN A FIRM TO INDEPENDENTLY AUDIT THE 403(B) PLAN (IF APPLICABLE) AND THEIR PLAN VENDORS ARE WILLING AND ABLE TO PROVIDE FEE AND EXPENSE INFORMATION REQUIRED IN FORM 5500.
Section 403(b) final regulations require substantial changes in the way these plans have been operated in the past. It is important that plan sponsors understand these changes so as to maintain the tax advantages to participants and beneficiaries. Some 403(b) sponsors may even consider changing their 403(b) plans to 401(k) plans.
For more information about the new regulations and FAB 2009-02 and how they impact on your 403(b) plan, please contact or your Baker Hostetler Employee Benefits attorney.
The new Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (the “Act”) will become effective for calendar year group health plans beginning January 1, 2010. The Act applies to group health plans with 51 or more employees in the prior calendar year. The law prohibits group health plans from imposing different financial requirements or treatment limitations on mental health and substance abuse benefits than those applicable to medical and surgical benefits.
The Mental Health Parity Act of 1996 prohibited group health plans from placing annual or lifetime dollar limits on mental health benefits that were lower than annual or lifetime dollar limits for medical and surgical benefits provided under the plan. These requirements will continue.
The new law expands coverage for mental health benefits and substance abuse benefits. The Act prohibits group health plans from applying financial requirements or treatment limits for mental health and substance abuse benefits that are more restrictive than the predominate financial requirements and treatment limits that are applicable to substantially all medical and surgical benefits. Financial requirements include deductibles, copayments, coinsurance and out-of-pocket expenses. Treatment limitations include limits on the frequency of treatment, number of visits, days of coverage, or other limits on the scope or duration of treatment. The Act also requires plans to allow out-of-network mental health or substance abuse benefits if the plan offers out-of-network medical and surgical benefits. The Act does not require plans to offer mental health or substance abuse benefits (although state laws may require insured group health plans to do so).
There are two new disclosure requirements imposed on plans that offer mental health or substance abuse benefits. Plans must disclose, upon request, the criteria for medical necessity determinations. Moreover, the reason for the denial of benefits (or coverage) for reimbursement of such benefits must be given to the participant or beneficiary in accordance with regulations. These disclosure requirements are similar to those already found in the claims procedure regulations -- i.e., the reasons for the adverse determination must be provided to the claimant upon denial and if an internal rule, guideline, protocol or similar criteria was relied on in making the adverse determination, then a copy of such rule, guideline, protocol or other criteria must be provided to the claimant free of charge.
The Act contains a cost exemption if the parity requirements result in an increase of the total plan costs by 2% in the first plan year or 1% in the succeeding years. Exemption determinations of increases on actual costs have to be made and certified by a licensed actuary. The cost exemption will not apply for at least six months. The cost exemption is for one plan year increments and the calculations for the exemption are based on the prior year’s figures. The plan must notify the Secretary of Labor (for self-funded plans) or the Secretary of Health and Human Services (for insured plans), the appropriate state agencies and the participants and beneficiaries that the plan intends to utilize the cost exemption. The notice to participants and beneficiaries must be given prior to the effective date of the cost exemption. The notifications to the Secretary of Labor (or the Secretary of Health and Human Services), which are to be kept confidential, must include information on: (i) the number of covered lives as of the date of notification and at the time of prior election of the cost exemption (if any); (ii) the total cost of benefits provided under the plan (for both the plan year upon which the cost exemption is sought and the prior year); and (iii) the total cost of mental health and substance abuse benefits (for both the plan year upon which the cost exemption is sought and the prior year). These exemption requirements are onerous enough to discourage group health plans from seeking exemptions.
No proposed or interim regulations have been issued, although questions were asked by the agencies and comments from the public have been solicited. Despite the lack of guidance, compliance with the new law is required.
Plan sponsors of covered group health plans need to make sure their plans are amended to comply with the new requirements. It is also important to review the plan’s provisions to ensure compliance with State parity laws. State laws are not preempted by the federal law to the extent they are stricter than federal law, as applied to insured health plans. ERISA self-funded group plans are not subject to state parity laws.
For more information or for advice on compliance with these requirements, please contact or any Baker Hostetler Employee Benefits attorney.
Subscribe to Baker Hostetler’s Benefits Broadcast
Baker & Hostetler LLP publications are intended to inform our clients and other friends of the Firm about current legal developments of general interest. They should not be construed as legal advice, and readers should not act upon the information contained in these publications without professional counsel. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you written information about our qualifications and experience. © 2009 Baker & Hostetler LLP