All participant-directed individual account plans (“PDIA Plans”) (e.g., most 401(k) plans) will be subject to new disclosure requirements as a result of regulations issued by the Department of Labor (the “DOL”) this past October. For calendar year plans, the rules are effective beginning on January 1, 2012 (and for non-calendar year plans the rules are effective as of the first plan year beginning on or after November 1, 2011). Under the new regulations, plan administrators (or persons designated by plan administrators) of PDIA Plans will be required to disclose certain plan and investment-related information, including fee and expense information, to plan participants and beneficiaries.
Disclosure of much of the information required by the new regulations was already required (even prior to the adoption of the regulations) for PDIA Plans that elected to comply with ERISA Section 404(c)’s requirements. The new regulations were issued under ERISA Section 404(a), with conforming amendments to regulations under ERISA 404(c), effectively extending 404(c)’s disclosure requirements to all PDIA Plans, including PDIA Plans that have not elected to comply with ERISA Section 404(c). PDIA Plans that have elected to comply with ERISA Section 404(c) should also be aware of additional requirements imposed by the new regulations.
The regulations are intended to address the increasing concern of the DOL that, as PDIA Plans continue to grow in popularity with employers, participants in such plans with primary responsibility for their own retirement investment decisions did not have access to the information necessary for them to make informed decisions about their retirement savings. The new regulations begin by recognizing that investment of plan assets is a fiduciary act and imposing a duty of disclosure upon plan administrators.
Three Types of Plan Related Information to be Disclosed
The new regulations require plan administrators to provide participants and beneficiaries with information that may be classified in one of the following three categories:
- General Plan Information, including:
- an explanation of the circumstances under which participants and beneficiaries may give investment instructions and any specified limitations on those instructions;
- a description of plan provisions relating to items such as voting rights appurtenant to an investment;
- an identification of any designated investment alternatives and managers offered under the plan; and
- a description of arrangements such as self-directed brokerage accounts that enable participants to select investments in addition to those specifically designated by the plan.
- Administrative Expenses Information, including:
- an explanation of fees and expenses for general plan administrative services (e.g., legal, accounting, and recordkeeping) that may be charged against the participants’ accounts and not reflected in the total annual operating expenses of any designated investment alternative; and
- a quarterly statement containing the following information: the dollar amount of the fees and expenses actually charged to the participant’s account for administrative services, a description of the services to which the charges relate, and an explanation that some of the plan’s administrative expenses were paid from the total annual operating expenses of one or more designated investment alternatives (e.g., through Rule 12b-1 fees).
- Individual Expenses Information, including:
- an explanation of fees and expenses that may be charged against the individual account on an individual, rather than a plan-wide basis (such as fees for processing qualified domestic relations orders and fees for investment advice), and that are not reflected in the total annual operating expenses of any designated investment alternative;
- a quarterly statement containing the following information: the dollar amount of the fees and expenses actually charged to the participant’s account for individual services and a description of the services provided for such amount.
Wait. There’s More: What About Investment Related Information?
Plan administrators of PDIA Plans must also provide participants and beneficiaries investment-related information that falls within one of the following five categories:
- identifying information, such as the name and type of the investment alternative;
- performance data, such as the average annual total return of the investment or the stated annual rate of return;
- benchmarks for investments without a fixed rate of return;
- fee and expense Information, such as the amount and description of any shareholder-type fees and the total annual operating expenses expressed both as a percentage of assets and as a dollar amount per each $1,000 investment; and
- internet website address that is sufficiently specific to lead participants to supplemental information regarding the designated investment alternative.
Investment-related information must be provided in a comparative format, such as a chart, that is designed to facilitate a comparison of the information for each designated investment alternative available under the PDIA Plan.
Plan administrators must provide participants and beneficiaries with plan-related and investment-related information on or before the date that the account may first be self-invested and at least annually thereafter. Certain items, such as certain administrative expenses and certain individual expenses, must be provided in a quarterly statement. The foregoing information may be provided as part of the plan’s summary plan description or in a pension benefit statement, provided it is furnished at the requisite frequency required under the regulations.
Plan administrators will not be liable under the completeness and accuracy requirements of the new disclosure rules if reasonably and in good faith the administrator relies on information that has been received from a plan service provider. However, plan administrators should be well prepared for questions from plan participants and beneficiaries about the information that is required to be disclosed under these new regulations.
On January 31, 2011, the Illinois Religious Freedom Protection and Civil Union Act (“Civil Union Act”) was signed into law. The Civil Union Act will take effect on June 1, 2011. Under the Civil Union Act, both opposite- and same-sex individuals will be permitted to enter into civil unions in the state of Illinois which will entitle them to the “same legal rights, obligations, responsibilities, protections, and benefits as are afforded by the law of Illinois to spouses.” As a result, the same employee benefits offered to spouses of employees may also be required to be offered to partners in a civil union. The Civil Union Act is intended to have a broad application and affect most employers in the state; however, the federal Defense of Marriage Act (“DOMA”) will likely negate many of the Civil Union Act’s requirements as they apply to plans governed by federal law. More specifically, DOMA provides that – for purposes of federal law only – a spouse can only be a husband or wife of the opposite sex. Thus, even in states that recognize civil unions, same-sex spouses cannot actually be treated as spouses for purposes of federal tax law or for certain purposes under ERISA. As an important aside, DOMA is currently under attack as being unconstitutional. If the Supreme Court ultimately strikes down DOMA, the impact of the Civil Union Law on private employers could be much more profound. Whether or not DOMA is struck down, ERISA is expected to preempt the Civil Union Act to the extent that it relates to an ERISA covered plan, such as a self-funded ERISA plan or a qualified retirement plan.
Employers who employ individuals in Illinois should review their benefit plans prior to the effective date of this new legislation to determine whether they may be subject to the Civil Union Act and whether federal law preempts any aspects of the new law with respect to their plans. Plan sponsors should also review their plans’ definitions of “spouse.” Since nothing in ERISA or DOMA prevents health plans from extending eligibility to members of civil unions (although there may be tax implications under federal law), the definition of spouse may be amended to expressly permit health coverage for individuals who enter into a valid civil union. Alternatively, employers of ERISA-governed plans may also wish to ensure that such coverage is not inadvertently granted by amending their plans accordingly.
As discussed in our Spring 2010 newsletter, the IRS previously issued two sets of guidance which permit the correction of both document and operational failures for nonqualified deferred compensation plans subject to Code Section 409A. On December 20, 2010, the IRS released Notice 2010-80, which provides additional 409A correction opportunities, both for the failure to follow the terms of the plan (an “operational failure”) and for the failure of a plan document to comply with Code Section 409A (a “document failure”). Primarily, the Notice:
- Clarifies that certain nonqualified deferred compensation plans linked to qualified retirement plans are eligible for document correction relief;
- Expands the types of plans eligible for document correction relief to include certain stock rights;
- Provides an additional document correction method where payments upon a severance from service are subject to a release of claims; and
- Modifies the reporting requirements for both document and operation failures.
On December 13, 2010, the U.S. District Court for the Eastern District of Virginia in Virginia v. Sebelius held that Section 1501 of the Patient Protection and Affordable Care Act (PPACA) (relating to Minimum Essential Coverage) “exceeds the constitutional boundaries of congressional power.” Although some sectors of the popular press hailed Virginia v. Sebelius as a declaration that “Obamacare” was unconstitutional, in fact, the Virginia case was narrowly focused only on the constitutionality of the Minimum Essential Coverage provision found in Section 1501 of PPACA and not on the constitutionality of any other PPACA provision.
The Minimum Essential Coverage provision requires (with the exception of some specified categories) that every U.S. citizen maintain a minimum level of health coverage beginning in 2014. The Virginia case addressed issues similar to those of other recent cases, including one filed in Florida by the attorneys general of Florida and 19 other states. From an employer’s point of view, the Virginia case was more important for what it did not hold than for what it did hold. The Virginia court did not rule on requirements governing employer-provided group health coverage, such as the automatic enrollment mandate for large employers, the eligible small employer tax credit, the new reporting requirements or the “assessable payment” that will be incurred by certain employers that do not offer health care coverage to their employees. The ruling did not affect the adult-child coverage mandate, the grandfathering rules, the requirements for external appeals, or any other provision directly affecting employer-provided health coverage. The Virginia court “severed” the minimum essential coverage provisions from the remainder of PPACA, thereby specifically providing that the unconstitutionality of Section 1501 did not affect any other provision of the new law.
This case has been appealed to the Fourth Circuit. On January 31, a federal district court in Florida also ruled that PPACA was unconstitutional because its provisions are unsupported by the Commerce Clause of the U.S. Constitution. This decision, in State of Florida v. U.S. Department of Health & Human Services, will undoubtedly be appealed soon to the Eleventh Circuit Court of Appeals. In time, the constitutionality of PPACA’s provisions is expected to reach the U.S. Supreme Court for decision. Stay tuned for further developments.
New Rules for HRA and FSA Debit Cards. The IRS has recently modified its previous position under PPACA that prohibited the use of FSA and HRA debit cards to purchase prescribed over-the-counter drugs beginning in 2011. Under IRS Notice 2011-5, debit cards can continue to be used to purchase prescribed over-the-counter (OTC) drugs at drug stores, pharmacies, and mail-order and web-based vendors that sell prescription drugs if certain requirements are met, such as presenting the prescription to the pharmacist and the pharmacist’s dispensing the OTC drug in the same manner as non-OCT prescriptions are handled.
Extension of EGTRRA Tax Cuts. Several favorable tax rules relating to employer-provided benefits were extended until 2012 under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Tax Relief Act”), the legislation that was passed late in 2010, which, among other things, extended the Bush-era tax cuts for another two years. (A more in-depth discussion of the Tax Relief Act appears in a recent firm newsletter issued by the Trusts and Estates Group). Specifically, under the Tax Relief Act, certain provisions in the following programs that previously were scheduled to sunset as of December 31, 2010 are now extended until December 31, 2012: employer-provided educational assistance, employer-provided qualified tuition reductions, Coverdell Education Savings Accounts, employer-provided child care tax credit, and employer-provided adoption assistance.
Grandfathered Plan Status under PPACA: New Interim Final Regulations. Late last year, interim final regulations relating to a health plan sponsor’s retention of “grandfathered status” for its plan under PPACA were revised. The revised regulations reverse a prior rule and now provide that a group health plan does not cease to be a grandfathered health plan, and thus will not lose its grandfathered status, merely because the plan (or its sponsor) enters into a new policy, certificate, or contract of insurance after March 23, 2010.
New Health Reform FAQs Issued. The Department of Labor has recently issued its fifth set of frequently asked questions relating to healthcare reform (PPACA) to address in detail the application of such requirements as automatic enrollment, coverage of adult dependents up to age 26, and mental health parity. The FAQs can be accessed at the DOL’s website. http://www.dol.gov/ebsa/faqs/faq-aca5.html.
PPACA’s Nondiscrimination Requirement for Insured Plans Delayed. As we previously reported, PPACA requires insured group health plans to satisfy nondiscrimination requirements similar to the Code Section 105(h) requirements applicable to self-funded plans. This mandate was scheduled to be effective for the first plan year beginning on or after September 23, 2010. Calendar year insured group plans that primarily benefit highly compensated individuals (such as executives) were expected to virtually disappear by January 1, 2011. However, IRS Notice 2011-1 the IRS (in coordination with the DOL and HHS) has suspended enforcement of the nondiscrimination rules until regulations are published; thus ensuring that discriminatory insured group health plans providing coverage to executives will continue to operate without compliance with PPACA’s nondiscrimination rules for the time being.
Another PPA Deadline Extension for Defined Benefit Plans. The Internal Revenue Service has once again extended the deadline for amending defined benefit plans to comply with certain provisions of the PPA. IRS Notice 2010-77 extends until the last day of the first plan year that begins on or after January 1, 2011 the deadline for plan amendments to single-employer defined benefit pension plans to comply with funding-based limits on benefits and benefit accruals and amendments to cash balance and other applicable defined benefit plans to comply with vesting and other special rules applicable to these plans.
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