I know how demanding the field of HR can be. The day-to-day practical issues you face are challenging, and on top of that you must always focus on the big-picture critical issues that affect your organization. While it’s a rewarding career, it can also be overwhelming at times.
As you juggle your responsibilities, it helps to meet others who are dealing with some of the same issues and to talk about goals and solutions. To facilitate such connections,
The peer group will meet from to the last Thursday of the month, at the
I hope you’ll consider joining us. If you have questions, please call
Because the consequences of failing to meet this amendment deadline could be quite severe, plan sponsors should take immediate action to verify that all of the necessary amendments have been adopted. As further explained below, Spencer Fane’s Employee Benefits Group is ready to assist in this process.
Mandatory PPA Changes
Although the more significant PPA changes affect defined benefit plans, several of the changes will also apply to defined contribution plans. For example, virtually all defined benefit plans must be amended for the following PPA changes:
Depending on the type of plan, defined contribution plans may need to be amended to reflect the following PPA provisions:
Optional PPA Provisions
In addition to these mandatory changes, the PPA contained a number of provisions that plans may choose to adopt. These optional PPA provisions include the following:
A plan that chose to implement any of these optional PPA provisions during 2009 must also be amended by the end of this year.
Discretionary Plan Amendments
Finally -- and entirely unrelated to these PPA changes -- current IRS guidance requires that any “discretionary” change in a plan’s operations be reflected in a plan amendment by the last day of the plan year in which that change was implemented. An example of such a discretionary change might be the addition of distribution option. Under this rule, any calendar-year plan implementing a discretionary change during 2009 must be amended by December 31, 2009, to reflect that change.
Consequences of Failing to Amend
The consequences of missing any of these amendment deadlines could be quite severe. The plan would lose its tax-qualified status. And, unfortunately, this is not the type of disqualifying defect that can be corrected under the IRS’s Self-Correction Program (“SCP”). Rather, the plan’s sponsor would have to participate in the Voluntary Correction Program (“VCP”). This would require both a submission to the IRS and the payment of a compliance fee.
We therefore strongly recommend that retirement plan sponsors review the terms of their plans to ensure that all PPA-related and discretionary changes have been reflected in appropriate plan amendments. Due to the number and variety of PPA changes, this will not be a simple task.
As a service to our clients (both current and new), Spencer Fane’s Employee Benefits Group will charge a flat fee of only $500 to review any qualified retirement plan to determine whether additional changes must be adopted by the end of the current plan year to document any of the mandatory PPA provisions. If we receive sufficient information concerning optional or discretionary changes implemented during 2009, our review will cover those types of amendments, as well. If this review confirms that all required amendments have already been adopted, the plan sponsor will enjoy relatively inexpensive peace of mind. If our review determines that additional amendments are needed, we will draft those amendments by the applicable deadline for our standard hourly fee.
Other Amendment Deadlines
Sponsors should also be aware of two other amendment deadlines of note. First, the deadline has already passed for virtually all qualified plans to adopt amendments needed to comply with final regulations issued under Section 415 of the Tax Code. Any sponsor that has missed this deadline should nonetheless adopt an appropriate Section 415 amendment in the near term. The failure to meet this amendment deadline may be corrected under VCP for a fairly minimal compliance fee of $375.
Second, as explained in our February 2009 article, qualified plans falling within “Cycle D” of the IRS’s determination letter program must be amended and restated -- and a determination letter application filed with the IRS -- by January 31, 2010. This deadline is entirely unrelated to the plan year on which a plan operates. In general, a plan falls within Cycle D if the sponsoring employer’s tax identification number ends with either “4” or “9.” The changes that must be incorporated into a Cycle D plan are even more extensive than the PPA changes summarized above. Accordingly, the sponsor of any Cycle D plan that has not already begun this review and amendment process should do so without further delay.
About the Author
Kenneth A. Mason
Ken heads the Employee Benefits Group at Spencer Fane. He concentrates on ERISA and other aspects of employee benefits law, including both tax and fiduciary issues, substantial involvement with retirement and welfare plans, executive deferred compensation, federal employment discrimination statutes, and issues unique to governmental and other tax-exempt employers. Ken is a Past-Chair of both the Employee Benefits Committee of the Kansas City Metropolitan Bar Association and the Employee Benefits Institute of Kansas City. He has been on the faculty of the American Bankers Association National Retirement Trust School and is listed in The Best Lawyers in America®.
|HHS Posts Online Breach Notification Form|
As explained in our March 2009 and September 2009articles, employer health plans and other “covered entities” are required to notify affected individuals and the Department of Health and Human Services (“HHS”) when they breach certain of the privacy requirements imposed by the Health Insurance Portability and Accountability Act (“HIPAA”). HHS has now posted on its website an online form by which such breaches may be reported to HHS.
The online form differentiates between breaches affecting fewer than 500 individuals and those affecting 500 or more. This is because breaches affecting fewer than 500 individuals need not be reported to HHS until 60 days after the end of the calendar year in which the breach occurred, whereas larger breaches must be reported within 60 days after discovery of the breach (i.e., the same deadline that applies to notifying affected individuals).
The online form asks for a substantial amount of information concerning each breach. For instance, a plan should be prepared to describe the type and location of the breach, the type of information that was disclosed (demographic, financial, or clinical), the safeguards that were in place to prevent the breach, actions taken to notify the affected individuals and media of the breach, and any subsequent mitigation or corrective actions.
Business associates of covered entities will become subject to these breach notification requirements as of February 17, 2010. Their obligation, however, is simply to notify the covered entity of the breach – including the names of the individuals who were affected by it. It is then up to the plan or other covered entity to fill out the online form. Plans will therefore want to ensure that all of their business associates are aware of this breach notification requirement – and have committed themselves to complying with the reporting rule
In September of this year, the IRS issued official guidanceon how employers may convert unused leave under a bona fide sick leave, vacation leave, or paid-time-off (“PTO”) program into contributions to a qualified, defined contribution plan (such as a profit sharing or 401(k) plan). Revenue Rulings 2009-31 and 2009-32 provide a virtual “roadmap” for how the value of unused leave (that might otherwise be forfeited each year or paid out in cash on termination of employment) may be used as a basis for making additional employer contributions, or in some cases, employee elective deferrals, to such a plan. The concept of converting the value of unused leave into a contribution to a qualified retirement plan is not entirely new. The IRS has previously issued private letter rulings to several individual plan sponsors (mostly governmental employers, who need not deal with the Tax Code’s nondiscrimination rules) with respect to specific leave conversion arrangements. However, the Obama Administration pushed for the issuance of these revenue rulings – which may be relied upon by all plan sponsors –as part of a larger effort to promote retirement savings.
Overview of the Rulings
The concept of converting the value of unused leave into a contribution to a qualified retirement plan is not entirely new. The IRS has previously issued private letter rulings to several individual plan sponsors (mostly governmental employers, who need not deal with the Tax Code’s nondiscrimination rules) with respect to specific leave conversion arrangements. However, the Obama Administration pushed for the issuance of these revenue rulings – which may be relied upon by all plan sponsors –as part of a larger effort to promote retirement savings.
Revenue Ruling 2009-31 addresses the annual conversion of unused leave, while Revenue Ruling 2009-32 addresses the conversion of unused leave upon termination of employment. Both rulings address two alternative scenarios: (i) where amounts that might otherwise be forfeitedunder the PTO program are instead converted into non-elective employer contributions to a qualified plan, and (ii) where amounts that might otherwise be paid in cashunder the PTO program are instead converted, at an employee’s election, into additional “pre-tax deferrals” to a 401(k) plan. The ruling that addresses the conversion of unused leave on termination of employment also addresses employees who terminate late in the year, and whose “leave conversion” contributions are therefore made the following year.
Annual Leave Conversion Elections
With respect to annual leave conversions, the ruling contemplates (in one scenario) that an employer has a PTO program that credits up to 240 hours of PTO per year (based on years of service), but does not allow for carryover of unused leave. Instead, any unused leave is simply forfeited at year end. In that scenario, the IRS ruled that the employer may amend its PTO program (and its qualified retirement plan) to provide that the value of any unused PTO (that would otherwise be forfeited) will instead be converted into an employer non-elective contribution to the qualified plan.
Because such an employer contribution would not be the same percentage of pay for all employees, any non-governmentalplan will be required to perform additional testing (referred to as the “401(a)(4) general nondiscrimination test”) to ensure that the leave conversion contributions do not discriminate in favor of highly compensated employees (“HCEs”). In addition, if the contribution would cause any employee to exceed the Section 415 limit on “annual additions” to a participant’s account (which is $49,000 for both 2009 and 2010), the excess must be paid in cash, rather than contributed to the plan.
In the alternative scenario, the PTO plan does allow employees to carry over a limited number of PTO hours, but provides that any unused hours in excess of the carryover limit will be paid to the employee in cash, during February of the following year. In this scenario, the IRS ruled that the employer may allow employees to elect, no later than December 31, to convert all or a portion of the unused leave that cannot be carried over (the portion that would otherwise be paid out in cash in the following year) into an “employee pre-tax deferral” to the plan. Because the cash would not have been payable until the following year, any amount the employee elects to convert will also count as a deferral for the following year.
Thus, if at the end of 2009, an employee has 100 hours of unused leave, but the PTO policy allows only 40 hours to be carried over (and provides for the other 60 to be “cashed out” in the following year), the employee may elect to convert all or a portion of the value of that 60 hours into an “employee contribution” to the plan. This amount will count against the $16,500 limit on the employee’s 401(k) deferrals for the 2010 calendar year. The second ruling addresses four different scenarios involving the conversion of unused leave on termination of employment. In the first scenario, the PTO program provides for unused PTO to be paid out in cash within 60 days of termination of employment. The IRS ruled that, in this situation, the employer could amend the PTO plan (and the qualified plan) to provide that, instead of paying out the unused PTO in cash, the value of the unused PTO would be contributed to the plan as an employer non-elective contribution. The only portion to be paid in cash would be the amount, if any, that would cause the plan to exceed the $49,000 limit on annual additions. Alternatively, the employer could amend the PTO plan (and the qualified plan) to provide that employees could elect, prior to termination, to convert a portion of their leave cash-out amount into an employee pre-tax contribution to the plan. This contribution would count against the employee’s $16,500 limit on 401(k) deferrals for the year in which it is credited to the qualified plan.
Leave Conversion Elections on Termination of Employment
The second ruling addresses four different scenarios involving the conversion of unused leave on termination of employment. In the first scenario, the PTO program provides for unused PTO to be paid out in cash within 60 days of termination of employment. The IRS ruled that, in this situation, the employer could amend the PTO plan (and the qualified plan) to provide that, instead of paying out the unused PTO in cash, the value of the unused PTO would be contributed to the plan as an employer non-elective contribution. The only portion to be paid in cash would be the amount, if any, that would cause the plan to exceed the $49,000 limit on annual additions.
Alternatively, the employer could amend the PTO plan (and the qualified plan) to provide that employees could elect, prior to termination, to convert a portion of their leave cash-out amount into an employee pre-tax contribution to the plan. This contribution would count against the employee’s $16,500 limit on 401(k) deferrals for the year in which it is credited to the qualified plan.
The final two scenarios involve a situation in which an employee terminates late in the year, and the leave cashout (and consequently the conversion to employer or employee contributions) occurs in the following year, when the participant has no other compensation. Ordinarily, this could pose a problem because the alternative Section 415 limit on annual additions is 100% of a participant’s “compensation.” However, so long as the employer has amended the plan, as permitted under the final Section 415 regulations, to include in the definition of “compensation” any leave cash-outs that are paid within 2 1/2 months after termination of employment (or by the end of the plan year of termination, if later), the leave conversion contributions will not cause the Section 415 limit to be exceeded, even though the participant receives no other “compensation” from the employer in that year.
Proceed With Caution
Plan sponsors contemplating any type of leave conversion arrangement should proceed with caution, as there are a number of potential pitfalls. First, the employer must make sure that the PTO program qualifies as a “bona fide” sick, vacation or other leave arrangement, and is therefore exempt from the constraints imposed by Code Section 409A. The PTO program should also not include any cash-out or “buy-back” provisions that would implicate the IRS rules regarding constructive receipt.
In addition, sponsors should make sure that any leave conversion contributions do not cause their retirement plans to lose their tax-qualified status. This could happen if the contributions cause a participant’s annual additions to exceed the Section 415 limit. Any private (i.e., non-governmental) employer will also want to ensure that non-elective leave conversion contributions do not cause the plan to fail the Section 401(a)(4) nondiscrimination test. This may effectively require that HCEs be excluded from the leave conversion feature. Finally, an employer will want to make sure that any “elective” contributions are properly counted against the $16,500 limit on 401(k) deferrals for the appropriate year, and that any deferral elections are made in a timely manner.
For all of these reasons, we strongly advise that sponsors work with experienced benefits counsel when designing a program to convert unused leave into retirement plan contributions.
Update Your Rollover Notices for 2010
The IRS has finally updated the model rollover notice it issued in 2002. In fact, we now have two new models. Plan administrators will want to start using these new notices on or before January 1, 2010.
When Congress created the direct rollover concept in 1993, it also mandated that each recipient of a rollover-eligible distribution receive an explanation of the options available to that recipient, including the tax treatment of each option. The IRS issued a model of such a rollover notice in 2002, but that model was soon rendered obsolete by a series of statutory changes broadening the rollover rules.
For instance, the direct rollover option was made available to more types of plans (including Section 403(b) tax-sheltered annuities, governmental Section 457(b) plans, and Roth IRAs), additional recipients (including non-spousal beneficiaries), and more types of distributions (including Roth and other after-tax amounts).
The IRS has finally rectified this problem by issuing updated rollover notices. One such notice applies only to distributions made from Roth accounts, while the other applies to all other types of distributions. According to the IRS, any recipient of a distribution from both a Roth and a non-Roth account should receive both notices.
These new notices are not just updated. They have also been simplified. Moreover, they are organized in a way that should make it fairly easy to delete language that does not apply to a particular plan, recipient, or distribution. For instance, plan administrators might consider deleting the portions of the notice dealing with after-tax amounts, employer stock, governmental 457(b) plans, outstanding participant loans, nonresident aliens, and/or non-spousal beneficiaries. Deleting such language (where appropriate to do so) can substantially shorten the rollover notice.
As of January 1, 2010, these new notices will replace the 2002 model as the safe-harbor method of satisfying the rollover notice requirement. Most plan administrators will therefore want to move to these new notices by no later than that date. Both of these model notices are posted on theIRS website.
In the 2010 National Defense Authorization Act ("NDAA") signed by President Obama on October 28, 2009, Congress expanded the military-related family and medical leave that it created in the 2008 NDAA. The expansion became effective upon the President's signature. This new legislation means the Family Medical Leave Act regulations that became effective earlier this year are already outdated with respect to military-related FMLA leave.
Caregiver Leave Expansion
The FMLA permits up to 26 weeks of leave for an eligible employee who is the spouse, son or daughter, parent or next of kin of a service-member in the Regular Armed Forces, National Guard or Reserves to care for such a service-member who has incurred a serious injury or illness in the line of duty while on active duty. Prior to the most recent amendments, this generally meant that treatment for, recuperation from or therapy for the serious injury or illness had to commence while the service-member was still a member of the military (or on the temporary disability retired list) in order for the family member to take FMLA leave to care for the service-member. In other words, if an injury or illness did not manifest itself until after the individual was discharged from the military (e.g., post-traumatic stress disorder), a family member would not have been able to take FMLA caregiver leave to care for the individual.
The above limitation has now been modified. Under the new rules, the serious injury or illness still needs to be incurred while the service-member is in the military, but treatment, recuperation and/or therapy for it can now begin as late as five years after the service-member's discharge from the military. For example, if a service-member is discharged from the military on November 1, 2009 (after serving in Iraq), and begins treatment for service-related PTSD two years later, a covered family member will be able to take FMLA leave at that time to care for the service-member. Moreover, the definition of "serious injury or illness" is also expanded to cover not only an injury or illness incurred by the service-member in the line of duty on active duty, but also an injury or illness that existed before the beginning of the service-member's active duty that was aggravated by service in the line of duty on active duty. The eligible employee is still limited to a total of 26 weeks of leave related to the service-member within a single 12 month period beginning with the first use of the leave.
Qualifying Exigency Leave Expansion
Under the original version of the FMLA military leave provisions, as implemented through the FMLA regulations earlier this year, eligible employees may take leave for a "qualifying exigency" arising from a spouse's, child's or parent's active duty or call to active duty as a member of the Reserves or National Guard in support of a "contingency operation" declared by the Secretary of Defense, the President or Congress. This leave entitlement is up to 12 work weeks of unpaid leave in the employer's normally designated 12 month period (when combined with all other FMLA leave except FMLA caregiver leave). The original provisions did not provide "exigency" leave related to active duty members of the Armed Forces on a theory that such active duty members and their families are always to be prepared for an assignment overseas. The 2010 NDAA discards this theory and extends coverage to eligible family members of: (1) any member of the Regular Armed Forces who is deployed to a foreign country (regardless of the nature of the service performed in that foreign country and regardless of whether it is in support of a contingency operation); and (2) any member of the Reserves or National Guard who is on federal active duty in a foreign country or is called to federal active duty in a foreign country, provided that such active duty is in support of a contingency operation. The "qualifying exigencies" have not changed and include: short notice deployment, military events, arranging for child care, arranging financial or legal matters, attending counseling, assisting with the military member's rest and recuperation, post-deployment activities and similar activities as agreed upon by the employer and employee.
The expansion of caregiver leave and exigency leave clearly will increase the potential number of employees who may be entitled to take such leave. Employers should consider several steps to comply with the recent changes in the law.