New Developments Affecting Employee Benefit PlansThe North Florida Chapter of the Association of Corporate CounselFebruary 23, 2010
New Developments in EB • Health Care Reform • COBRA Subsidy Extension • Cafeteria Plan Update • Genetic Information Nondiscrimination Act • Third-party Service Agreements • Correction Program under 409A • Qualified Performance Based Compensation under 162(m) • New Defined Benefit Plan regulations
Health Care Reform • Employer Mandate • Individual Mandate • Insurance Exchange • Plan Design • Financing • Timelines • President’s Health Care Reconciliation Bill • Republican Proposals
Employer Mandated Health Insurance • Pay or play • Large employers must offer individual and family, or if participant declines must make contribution to the exchange. • House Bill - excise tax penalty equal to 8% of wages, plus possible $100 per day per employee. • Senate Bill - ($750) for full time employees. • Employer contributions of 72.5% of premium cost for single and 65% for those electing family coverage • Notice requirements
Individual Mandate – Obtain Health Insurance • Most individuals are required to maintain acceptable coverage under a health plan • Those exempted include nonresident aliens, individuals who live and work outside US, qualified religious exemptions, those not lawfully in the US. • Penalty tax for those who don’t get coverage
Insurance Exchange • House and Senate Bills • Creates health care exchanges (think Lending Tree, but with health Insurance) • Plans must meet basic affordability and benefit requirements • Four levels of overages 70%, 85% and 95% and premium plus • Imposes 5k-10k limits on cost sharing • Companies would contribute to premium costs • CBO Estimates that 30-40 million would go to exchange • Creates public plan that would negotiate rates with providers and would be offered through the exchange • No public option in the Senate Bill
Employer Plan Design Requirements • Auto enrollment for individual coverage at lowest premium • No lifetime dollar limits for essential benefits • No annual benefit limit maximums • Limits situations where insurer or plan may rescind (self insured plans) are exempt • Health plans must provide certain preventative health care services • A $600 fee imposed on large employers that require waiting periods of more than 60 days
Employer Plan Design cont. • Incorporate ERISA appeals process but could add additional outside de novo review • Pre-existing condition and exclusion periods are reduced or eliminated • New premium rating rules (premiums may vary based only on age (by no more than 2:1 ratio) • May not rate based on health factors • Tobacco use (by no more than 1.5:1)
Employer Plan Design cont. • Under the house bill may not reduce retiree benefits unless reduction is also made to active employees. • Reinsurance for early retirees • Must notify plan enrollees of any increase or decrease in coverage or cost sharing at least 90 days before the effective date of such change • New disclosure standards • Must provide certain information to the IRS to show compliance with essential benefit requirements and persons covered
Financing • House bill • 5.4% tax on MAGI over 500k for single filers • Self Insured plans must pay a “fair share per capita” amount • Reduce or eliminate Medicare Part D subsidy deduction • Reduce waste fraud and abuse • Senate bill • .9% tax on wages over 200k for single filers • Yearly fee of $1-$2 x number of lives insured under self insured plans • Reduce or eliminate Medicare Part D subsidy deduction • Excise tax on “Cadillac plans” • Reduce waste fraud and abuse
House Bill - Timeline • Employer responsibility to provide HC – 1/1/13 • Individual responsibility to maintain HC – 1/1/13 • Employer plan design provisions – generally 1/1/13 • No lifetime or aggregate limits, or insurance rescissions 1/1/10 • HSA penalties -1/1/11 • Retiree provisions – 1/1/10 • Fees and taxes – generally 1/1/13 • Eliminate deduction for Medicare part D - 1/1/13 • Insurance exchange 1/1/13
Senate Bill - Timeline • Employer Responsibility to provide HC – 1/1/14 • Individual Responsibility to maintain HC – 1/1/13 • Employer plan design provisions – generally 1/1/13 • No lifetime or aggregate limits, or insurance rescissions – 6 months after enactment • FSAs limited to 2.5K – 1/1/10 • HSA penalties – 1/1/11 • Retiree provisions 1/1/10 • Fees and taxes – generally 1/1/13 • Eliminate deduction for Medicare part D - 1/1/11 • Insurance exchange 1/1/14
President’s Proposal • Issued a summary proposal on 2/22/10 • Not big on details • Very similar to the Senate bill • Premium tax credits for those close to the federal poverty line
Republican Proposals/Ideas • Medical malpractice liability caps • Allowing sales of health insurance across state lines • Allow small employers to band together to purchase health insurance
COBRA Subsidy: The Basics • Part of the American Recovery and Reinvestment Act of 2009 (“ARRA”) • Signed February 17, 2009; COBRA provisions were effective immediately • Affects most employees who become eligible for COBRA due to an involuntary termination on or after September 1, 2008, and originally, before on December 31, 2009 • Second chance at COBRA election (known as the “extended election”) for many already terminated employees
COBRA Subsidy: The Basics • Government subsidy • equal to 65% of the employee’s COBRA premium; • for a maximum of 9 months; • eligible employee ends up paying 35%. • The employer, insurer, or multiemployer plan “fronts” the subsidy payment and recoups it through a payroll tax credit.
Question Who is eligible for the subsidy?
Answer • “Assistance Eligible Individuals” (AEIs) are: • qualified beneficiaries – who actually elect COBRA coverage • who become eligible for COBRA continuation coverage after September 1, 2008 • as a result of their involuntary termination of employment during that time frame • Limitations on AEI status: • A qualified beneficiary who has a qualifying event because of a reduction in hours, divorce, or aging out of dependent status is not an AEI • Limitations and exclusions for high income AEIs • Special “second chance” rule for AEIs with a termination date between September 1, 2008 and February 17, 2009 who failed to elect COBRA or who elected COBRA and are no longer enrolled.
Question What is the “Second Chance” or “Extended Election?”
Answer • AEIs who: • terminated before February 17, 2009 (but after September 1, 2008) and failed to elect COBRA; or • terminated before February 17, 2009 (but after September 1, 2008) and elected COBRA but are no longer covered as of February 17, 2009 • Have a second chance to elect COBRA coverage by electing subsidized COBRA coverage. • Notice must be provided to AEIs by April 18, 2009. Model notices have been provided by the Department of Labor. • Elections must be made in 60 days following receipt of the notice (retroactive to February 17, 2009); 35% premium payment must be made in 45 days after the date of the election (premium will be retroactive to February 17, 2009).
How Is COBRA Subsidy Claimed? • After the payor pays the subsidy, it may claim that amount as a credit against payroll taxes owed on Form 941. Payroll taxes include: • Income tax withheld at source • Employer’s FICA tax • Active employees’ FICA tax
Department of Defense Appropriations Act • On December 19, 2009, President Obama signed the Department of Defense Appropriations Act, 2010 (the DOD Act), • Extended the COBRA subsidy program class through the end of February 2010 and • Expanded the COBRA subsidy period to 15 months.
Extension of Eligible Class • The window for determining eligibility for participation in the program was extended by two months. • The revised program will apply to individuals who lose their group health plan coverage due to an involuntary termination of employment between January 1, 2010 and February 28, 2010. • Under ARRA, the deadline was December 31, 2009.
Extension of Subsidy Period • The DOD Act extended the duration of the subsidy by six months. • All AEIs may participate in the COBRA subsidy program for a total of 15 months, rather than the previous nine months. • If an AEI’s nine-month ARRA COBRA subsidy period has lapsed, the new rules are effective retroactively to the date the prior period ended. • The new rules do not extend the normal 18-month COBRA continuation period.
AEIs who dropped their COBRA coverage when the ARRA COBRA subsidy expired must be given the opportunity to regain subsidized COBRA coverage by paying COBRA premiums retroactively. • Employers must now treat these individuals as eligible for the extended period of COBRA coverage if they pay the reduced premium amount for the entire period since the lapse of their COBRA coverage • by February 17, 2010 or • , if later, 30 days after they receive proper notice of their new rights under the law.
AEIs who continued to pay full COBRA premiums for coverage following the lapse of the ARRA subsidy are entitled to reimbursement for their payment of the 65% subsidy. • Under the DOD Act, employers must either make a reimbursement payment equal to the excess portion paid or credit that amount toward future premiums payable, • provided that it is reasonable to believe that the credit will be used within 180 days.
Notice • Notice must be given to AEIs who either: • (i) were eligible for assistance on or after October 31, 2009 or • (ii) become AEIs due to a voluntary or involuntary termination of employment on or after that date. • This notice was required • no later than February 17, 2010 or • within the timeframe mandated under ARRA if the individual becomes eligible for assistance after December 19, 2009.
Notice • Notice describing the AEI’s right to pay retroactive premiums to reinstate coverage and the right to reimbursement for overpayment • It must be given to individuals within the first 60 days in their “transition period”. • This is the period that begins immediately after the end of the nine-month ARRA COBRA subsidy period.
Jobs for Main Street Act of 2010 • The House of Representatives has passed the Jobs for Main Street Act of 2010 (the Jobs Act), • Would further expand the COBRA subsidy program class through the end of June 2010 if enacted. • The Jobs Act is expected to be taken up by the Senate in the coming year.
Extension of Eligible Class • The Jobs Act would extend the window for determining eligibility for participation in the program by an additional four months from the DOD Act deadline (February 28, 2009) to June 30, 2010. • The Jobs Act would expand the class of employees who are eligible for assistance. Employees who lose group health plan coverage due to a reduction in hours that is followed by an involuntary termination of employment would be considered AEIs if other requirements for eligibility are met.
Retiree Health Plan Coverage • Under current law, individuals who are eligible for post-employment coverage under certain types of retiree health plans are not eligible for the COBRA subsidy. • The Jobs Act would clarify that retiree health coverage does not automatically disqualify an individual from eligibility for a COBRA subsidy.
Employer Payroll Tax Liability • Under current law, employers are at risk for improper payroll withholding when they make an incorrect determination regarding an AEI’s eligibility for the COBRA subsidy. • The Jobs Act would provide a safe harbor for those employers that • maintain proper documentation, • attest to the involuntary nature of the termination, and • base their decisions on a reasonable interpretation of the provisions under ARRA and other related administrative guidance.
Notification • The Jobs Act would require employers to distribute an additional explanation of the changes created by the legislation. • Thus, employers would be required to supply one or more notices in addition to those that are currently required.
Penalties for Non-Compliance • The Jobs Act would expose employers to increased penalties for violations of ARRA provisions. • The Jobs Act would create a civil penalty of $110 per day where a COBRA subsidy is not provided within 10 days of an agency determination that an individual is entitled to a subsidy.
Cafeteria Plan Update • Proposed Rules issued in 2007; final regulations out later this spring with effective dates as early as of the end of 2010. • This time there serious • Must have plan document • Benefit descriptions • Participation rules • Election procedures • Employer contributions • Must comply in operation
Cafeteria Plan Update • Nondiscrimination Rules • Greatly expanded nondiscrimination rules for eligibility (as well as contributions and benefits) • Borrows some retirement plan concepts • Objective test to determine whether elected benefits are discriminatory. • Cafeteria plans will have to show each year that the utilization of benefits by highly compensated participants is not discriminatory
Genetic Information Nondiscrimination Act • New GINA Rules became effective 12/31/09 • Prohibits GHPs and health insurers from denying coverage to a healthy individual or charging that person higher premiums on due genetics • Bars employers from using individuals' genetic information when making hiring, firing, job placement, or promotion decisions.
Genetic Information Nondiscrimination Act • Wellness plans cant provide rewards for providing genetic information (eg. Family history info): • Premium discounts, changes in deductibles, rebates and other information • Self reporting violations with excise tax • What to do if you probably collected the info prior to GINA effective date
Third-Party Service Agreements “The Employer shall fully indemnify TPS and hold it harmless from loss or liability, including reasonable legal fees and costs, which TPS sustains in discharging its duties and responsibilities under this Agreement, unless such loss or liability directly results from TPS’s gross negligence or willful misconduct. Notwithstanding, the foregoing TPS shall in all events be indemnified by the Employer from loss or liability for all amounts in excess of the lesser of (i) amount of annual fees charged by TPS under this agreement or (ii) $50,000.”
Third-Party Service Provider Agreements • Is it enforceable? • Is it prudent to enter into such an Agreement with a liability limitation or indemnification provision? • Is it reasonable? • “Gross negligence, willful misconduct” • Limits on liability equal to fees or a cap • Limits time to discover mistakes to 60 days after providing information such as trust or participant statements • Take indemnified amounts from the plan
409A Document Correction • General principles similar to qualified plan correction program • Types of errors eligible • Impermissible payment events; separation from service, change in control, disability • Impermissible payment period following a permissible payment event; longer than 90 days; executing a release • Choice between permissible payment events • Discretion to accelerate payment events • Not including six month delay
409A Document Correction • Transition Relief for those corrected by 12/31/10 • After 12/31/10, correction may require participants include a certain amount in income (50%-20%); and pay the excise tax on such amounts • Stock plans are not eligible.
162(m) Deductibility • $1 million deductibility cap for amounts paid by public companies to CEO and three highest paid, unless qualified performance based compensation • Prior Rev. Rul. 2008-13, accelerated vesting and payout of bonus and equity upon involuntary termination and retirement were deductible. • Rev. Rul 2008-13 clarifies these positions.
Defined Benefit Plan Regulations • PPA added new Code Section 430 (funding rules) and 436 (limitation on the accrual and payment of benefits for underfunded plans) • Under 436, cannot pay benefits • upon plant shutdown if funding level below 60% • cannot be amended to increase benefits, establish new benefits, increase the rate of accrual or accelerate the vesting schedule if less than 80% • Cannot pay lump sum distributions if funding level more than 60% but less than 80%, or if bankrupt • If below 60% funded the plan is automatically frozen
Defined Benefit Plan Regulations • Plans must be amended for these requirements • These must be communicated to participants • Any amendment that is otherwise ineffective will become effective once the plan meets the applicable funding requirements • Participants who were not otherwise given the opportunity to receive a lump sum distribution due to a funding limitation may elect a lump sum distribution after funding requirements are met • Allow plans to change interest rates for determining funding levels
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