As required by ARRA, the Department of Labor has created four model notices to assist employers, plan sponsors and administrators in complying with the new notice requirements.  Each of the model notices is applicable to a particular group of COBRA qualified beneficiaries.  The model notices and additional information about satisfying the notice provisions of ARRA can be found at:

http://www.dol.gov/ebsa/COBRAmodelnotice.html

The notices must be provided to COBRA qualified beneficiaries by April 18, 2009.

Please contact our office for more information or to speak directly with a benefits attorney about your individual situation.

Provisions of the Act

The Act provides a federal government subsidy of COBRA continuation premiums for a maximum of 9 months for certain individuals who are COBRA qualified beneficiaries because of a covered employee’s involuntary termination of employment.  The federal government will subsidize 65% of the COBRA premium actually charged to an “assistance eligible individual” (AEI) for up to 9 months.  The subsidy applies to coverage under both the federal COBRA law and any state “mini-COBRA” laws (i.e., state continuation laws applicable to employers with fewer than 20 employees).

Under the Act’s provisions, a group health plan may only require an AEI to pay 35% of the COBRA premium that the AEI would otherwise be required to pay.  The federal government will reimburse an employer for the remaining 65% of the COBRA premium by allowing the employer to take a credit against the employer’s liability to deposit payroll taxes and federal income taxes withheld from employees’ compensation.  The credit is applied as though the employer or insurer had submitted an equivalent amount of payroll tax on the date the qualified beneficiary’s payment is received.

Assistance Eligible Individual

An “assistance eligible individual” is defined by the act as a COBRA qualified beneficiary who:

• Is eligible for COBRA coverage at any time on or after September 1, 2008 and on or before December 31, 2009;
• Elects COBRA coverage either during the original COBRA election period or during the special election period provided by the Act; and
• Is a COBRA qualified beneficiary because of an involuntary termination of a covered employee’s employment (other than for gross misconduct) that occurs on or after September 1, 2008 and on or before December 31, 2009.

An AEI may be a covered employee or a covered employee’s covered spouse or dependent child who became a qualified beneficiary because of the involuntary termination of the covered employee’s employment.

Period of Coverage

The subsidy applies to periods of COBRA continuation coverage beginning after the enactment of the Act.  A “period of coverage” is the monthly (or shorter) period for which COBRA premiums are charged.  For group health plans using calendar months as the period of coverage, the subsidy applies beginning March 1, 2009.  The subsidy ceases to apply (and a plan administrator may again charge the full COBRA premium) as of the earliest of:

• The date the AEI becomes eligible for coverage (not actually covered) under another group health care plan (other than plans providing only dental, vision, counseling, or referral services, a health care flexible spending plan, or a health reimbursement arrangement) or Medicare coverage; or
• 9 months after the first day of the first month to which the subsidy applies; or
• The end of the maximum COBRA coverage period required by law (including permissible early terminations); or
• For an AEI who elects COBRA during the special enrollment period provided under the Act, the end of the maximum COBRA coverage period that would have applied if the AEI had elected COBRA coverage when first entitled to do so.

An AEI who becomes eligible for coverage under another group health plan is required to notify the plan providing COBRA coverage in writing.   An AEI who fails to provide the required written notice is subject to a penalty of 110% of the subsidy provided for the AEI after the date the AEI became eligible for the other coverage.

Subsidy Reimbursement

The subsidy does NOT apply to COBRA premiums for health care flexible spending accounts.  In situations where a group health plan charges less than the maximum permissible COBRA premium, 35% of the premium must be paid by the AEI or on the AEI’s behalf by someone other than the AEI’s employer or that employer cannot claim a subsidy credit until the group health plan has actually received the 35% of the COBRA premium as required by the Act.  An employer is only permitted to claim a subsidy credit of 65% of what the total COBRA premium would be if the amount actually paid by the AEI was 35% of the total COBRA premium.

High-Income Individuals

Although all AEIs are technically eligible for the subsidy, any AEI who is a “high-income individual” or the spouse or dependent of a high-income individual will be required to repay the subsidy as an additional tax (“recapture tax”) on the high-income individual’s individual tax return for the year in which the subsidy was provided.  A “high-income individual” is defined as a single taxpayer with modified adjusted gross income in excess of $145,000 or a married taxpayer filing jointly with federal modified adjusted gross income in excess of $290,000.  The modified adjusted gross income for this purpose is adjusted gross income determined without regard to Code §911 (relating to U.S. citizens or residents living abroad), Code §931 (income from sources in Guam, American Samoa, or the Northern Mariana Islands), or Code §933 (income from sources in Puerto Rico).

The subsidy recapture tax begins to phase in for a single taxpayer with federal modified adjusted gross income in excess of $125,000 or a married taxpayer filing jointly with modified adjusted gross income in excess of $250,000.  However, qualified beneficiaries may make a one-time election to waive the COBRA subsidy.  Details regarding the form and manner of this election are to be provided by the Treasury Department following enactment of this new law.

Special Election Period for AEIs

The Act also provides for a special election period for AEIs.  An individual who would be an AEI except that the individual does not have a COBRA coverage election in effect on the date of enactment of the Act must be given a second chance to elect COBRA coverage.  This special election period begins on the date of enactment of the Act and ends 60 days after the plan administrator provides the required notice to the individual.

COBRA coverage for an AEI who elects COBRA during the special election period begins on the first day of the first COBRA coverage period beginning after the date of enactment of the Act (March 1, 2009 for group health plans using calendar months as COBRA coverage periods).  COBRA coverage is NOT retroactive to the date the AEI originally lost coverage.  The COBRA coverage period for an AEI who elects COBRA during the special election period ends when COBRA coverage would otherwise have ended if the AEI had elected COBRA when initially eligible to do so after the qualifying event.  The period beginning on the original qualifying event date and ending on the first day of the first COBRA coverage period beginning after the date of enactment of the Act is disregarded when determining if the AEI had a 63-day significant break in coverage for purposes of applying pre-existing condition exclusions.

Generally, a COBRA qualified beneficiary is only permitted to elect COBRA continuation coverage that is the same as the coverage the qualified beneficiary had as of the date of the COBRA qualifying event.  The Act permits (but does not require) an employer to allow AEIs (including AEIs that have COBRA coverage without the special election) to elect a health care coverage option different from the health care coverage originally offered to the AEI under COBRA.  The COBRA premium for the different coverage cannot exceed the COBRA premium for the coverage in which the AEI was enrolled when the COBRA qualifying event occurred.  The different coverage must be coverage the employer is offering to its active employees at the time the AEI elects the different coverage.  Additionally, the different coverage cannot provide only dental, vision, counseling or referral services (singly or in any combination) and cannot be a health care flexible spending account or an on-site facility primarily providing first aid, prevention, or wellness care.  If an employer decides to offer the different coverage option to an AEI, the employer must provide the AEI an election notice and allow an election period of not less than 90 days.

Extension of Coverage for Certain Individuals

The Act also extends COBRA continuation coverage periods for certain individuals receiving Trade Adjustment Assistance benefits or pension benefits from the Pension Benefit Guaranty Corporation (PBGC).  The initial COBRA coverage period is extended for these two groups of COBRA qualified beneficiaries following a termination of employment or reduction in hours of a covered employee COBRA qualifying event:

• If the covered employee has (as of the qualifying event date) a nonforfeitable right to receive any pension benefits directly from the Pension Benefit Guaranty Corporation, the maximum COBRA coverage period for the covered employee ends on the covered employee’s date of death;
• If the maximum COBRA coverage period for the covered employee’s surviving spouse or dependent children ends 24 months after the covered employee’s date of death; or
• If the covered employee is a Trade Adjustment Assistance-eligible individual (as of the date COBRA coverage would otherwise end because of the regular 18-month or 36-month COBRA coverage periods), the maximum COBRA coverage period ends on the date the covered employee ceases to be a Trade Adjustment Assistance-eligible individual.

Actions Required of Plan Sponsors

For most plan sponsors, beginning March 1, 2009, group health plan administrators must take all necessary actions to provide the 65% subsidy to AEIs.  Generally, this means ensuring that an AEI is only required to pay the reduced COBRA premiums for periods of coverage beginning on or after March 1, 2009.

If an AEI pays the full COBRA premium for the first or second period of coverage beginning after the date of enactment of the Act (i.e., periods of coverage for March and April 2009), the plan administrator must either:

• Credit the subsidized portion of the premium against future COBRA premiums (if the plan administrator reasonably expects the overpayment to be fully applied to future COBRA premiums within 180 days); or
• Refund the subsidized portion within 60 days.

For any individual who becomes a COBRA qualified beneficiary after the enactment of the Act, the group health plan administrator must include with all other required COBRA election notices and forms specific information about the availability of the subsidy.  A group health plan administrator must also provide notices to two groups of AEIs within 60 days after the enactment of the Act:

• The first notice must go to all AEIs who currently have COBRA continuation coverage to advise them of the availability of the subsidy and the requirements to qualify for the subsidy; and
• The second notice must go to any individual who is entitled to the special enrollment period (this includes an individual who previously made a COBRA coverage election but whose COBRA coverage ended before the enactment date because of non-payment of premiums).

The notice to these individuals must advise them of:

• The availability of the subsidy;
• The requirements to qualify for the subsidy; and
• Additional information required by the Act, as well as providing the forms necessary for electing COBRA during the special election period.

Employers (or insurers, if applicable) will be required to file reports relating to the subsidy.  The specific types of reports and applicable deadlines will be determined in the future by the Treasury Department.  However, three types of reports are currently specified.  The employer (or insurer) must:

• Attest that each employee receiving the subsidy was involuntarily terminated;
• File an accounting to report the payroll tax credit taken for the reporting period and the estimated credits to be taken during the following reporting period; and
• File a report of all covered employees, the amount of subsidy treated as a payroll tax credit for each employee and a designation as to whether the subsidy is for coverage of one individual or two or more individuals.

Conclusion

The Act, while very beneficial for COBRA eligible individuals, creates an additional administrative burden for plan sponsors when complying with COBRA requirements.  Additionally, the time period between the Act’s enactment and the date most employers are required to comply with the Act is very short.  Plan sponsors are encouraged to contact their benefits counsel immediately to ensure compliance prior to the Act’s effective date.  Please contact our office for more information.

According to the Notice, the IRS will begin accepting determination letter applications for Cycle D plans on February 1, 2009.  The submission period for Cycle D plans will end on January 31, 2010.

Notice 2008-108 contains information for plan sponsors about specifically identified plan issues that should be reviewed in determining whether a plan has been properly updated for recent law changes.  Information on legal updates contained in the 2008 Cumulative list includes the:

• Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
• Pension Funding Equity Act of 2004 (PFEA)
• American Jobs Creation Act of 2004 (AJCA)
• Katrina Emergency Tax Relief Act of 2005 (KETRA)
• Gulf Opportunity Zone Act of 2005 (GOZA)
• Pension Protection Act of 2006 (PPA)
• U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007

According to the IRS, the 2008 Cumulative List does not include any guidance issued after October 1, 2008; any statutes enacted after October 1, 2008; any qualification requirements first effective in 2010 or later; or any statutory provisions that are first effective in 2009 for which there is no guidance identified in the Notice.  If a Cycle D plan submission for determination includes updates based on these excluded items, the IRS will not consider those updates in its determination letter review.  However, in order to be considered qualified by the IRS, a plan must comply with all relevant requirements, whether or not they are reflected in the 2008 Cumulative List.

The Notice also provides special rules for the PPA and the Heroes Earnings Assistance and Relief Act of 2008 (HEART).  Cycle D plans must be amended to include applicable PPA provisions.  However, Cycle D plans, whose first plan year beginning after January 1, 2009 ends on or after February 1, 2010, may defer submission of its plan until Cycle E, provided the Cycle E application is filed timely.  The plan will then be treated as a Cycle E plan only for the initial cycle and all subsequent filings would be made in Cycle D.

Cycle D plans may include HEART Act provisions but the IRS will not consider these updates in issuing determination letters for Cycle D plans.  However, since §107(a) of the HEART Act extends the applicability of qualified reservist distributions to participants ordered or called to duty after December 31, 2007, the IRS will treat an amendment for this HEART provision as if it were included in §1107 of the PPA.

Cycle D plan sponsors should have benefits counsel carefully review their qualified plans to determine what legal changes are required for their plans and which discretionary changes are desired.  For additional information or assistance, contact our office.

Unfortunately, just hoping that your retirement plan operations are working correctly is not enough.  In the ERISA retirement plan world, some of the biggest mistakes made by employers are operational errors rather than errors in the actual structure or documents of the plan.  Because not all operational mistakes are “bad” or harmful to employees, many employers do not feel there is an issue if they make an operational error, provided it is to the benefit of the employee.  However, even errors that result in favor of the employee cause a plan operation issue.

For example, a plan document provides that employees are eligible to participate only after 1 year of service, but the employer generously allows newly hired employees to participate immediately upon employment.  This generosity on the part of the employer, while beneficial rather than harmful to employees, is a failure to follow the terms of the plan and would constitute an operational failure that could create problems for the plan’s qualification if not corrected.

According to the IRS, some of the reasons employers give to explain why their plans are not operationally compliant include:

• Not knowing how to identify and fix any errors.
• Not wanting to have any unnecessary contact with the IRS.
• Assuming that the required annual financial audit identifies any errors that need to be addressed.
• Assuming that auditing the plan for operational compliance would be too expensive.

Employers should routinely self-audit their retirement plans for operational compliance.  This self-audit should be performed at least annually or more often if there are any significant change in demographics or if the employer is involved in a merger or acquisition.  Unfortunately, the annual financial audit performed by your CPA won’t necessarily catch all operational issues that might exist.

If operational mistakes are found, employers need to use the tools available to them to correct the errors quickly and with the minimum of expense.  The IRS recently released the “401(k) Fix-It Guide”, available on the IRS’ website, which provides employers with a list of the most common plan errors and advice on how to fix mistakes for 401(k) plans.

Additionally, one of the best tools available to employers in their quest to correct operational plan errors is the IRS’ Employee Plans Compliance Resolution System (EPCRS).  The EPCRS is a comprehensive system of correction programs offered by the IRS to employers who offer qualified retirement plans.  This program allows employers/plan sponsors to correct plan failures through three separate components:

• The Self-Correction Program (SCP),
• The Voluntary Correction Program (VCP), and
• The Audit Closing Agreement Program (Audit Cap).

The EPCRS was recently updated to assist employers in their voluntary compliance efforts.  The changes are effective as of September 2, 2008 and include:

• Standardized application forms,
• Reduced filing fee for some plan loan failures, and
• Expanded situations where waiver of income and excise taxes are allowed.

Everyone knows that mistakes happen.  Under ERISA, the trick is to identify and correct those mistakes quickly and cost-effectively.  Contrary to popular opinion, the IRS is more interested in ensuring plans are compliant than in “catching” employers doing something wrong.  Benefits counsel can assist your organization in self-auditing your plan to help identify any errors and working with you and any necessary governmental agency to resolve issues.  Please contact our office with any questions or for more information.

Generally, severance release and waivers are held to be enforceable, provided they comply with specific provisions required by laws such as the Older Workers Benefit Protection Act (OWBPA). However, with regards to waiving ERISA rights, a couple of recent cases indicate that employers need to evaluate their release and waiver language and procedures to ensure that they are getting the maximum protection against ERISA claims by former employees.

In March 2006, the U.S. District Court for the District of Connecticut ruled on Linder v. BYK-Chemie USA Inc. In this case, an executive executed a release and waiver upon termination of employment. However, after termination, he brought suit against his former employer based on the calculations used in the executive’s supplemental executive retirement plan (SERP). The court ultimately found that, in this specific case, the executive was barred from bringing suit by the executed release. However, in its ruling, the court adopted the position that the release of ERISA/benefit claims should require a greater scrutiny than the release of general claims. Therefore, the totality of the circumstances surrounding the release should be reviewed to ensure that the employee’s waiver of claims was voluntary and knowing.

In September 2007, the U.S. District Court for the District of Minnesota ruled on Groska v. Northern States Power Co. Pension Plan. In this case, two employers merged and employees were offered a choice of either competing for remaining positions or terminating employment with severance benefits. The plaintiff, Groska, opted to terminate employment and accept severance benefits, which required the execution of a release and waiver. Groska subsequently filed suit under ERISA, alleging improper claim denial and breach of fiduciary duty. With regard to the improper claim denial allegation, the court found that Groska had knowingly and voluntarily signed the release and waiver, so it was enforceable and barred the claim for improper denial. However, the court did not dismiss the breach of fiduciary claim as barred by the release and waiver. The court held that because ERISA recognizes the plan as a separate and distinct legal entity from the employer/plan sponsor, the release and waiver in favor of the employer did not automatically release the plan. Therefore, participants were still able to bring a claim against the plan itself under ERISA.

These decisions should prompt employers to review their “standard” release and waiver language and their processes for obtaining the executed release from former employees. Since the waiving of ERISA claims can be seen as needing a greater level of scrutiny than general contract claims, employers should evaluate whether the language currently being used provides the greatest shield possible. Additionally, since an employer’s release and waivers may not extend protection to the ERISA plan, the language should be updated to ensure the plan itself is afforded the greatest degree of protection available through the employer’s release and waiver. Benefits counsel can assist employers in reviewing the existing release and waiver language. Please contact our office with any questions or for additional information on how our attorneys can assist you.

Among the provisions of the PPA that affect DC plans, some of the most significant changes are effective for the 2008 plan year.  Highlights of a few of the PPA provisions effective for the 2008 plan year include:

Testing Changes

• Prior to the PPA, employers were required to calculate interest on the gap period for average deferral percentage (ADP) and annual contribution percentage (ACP) test failures. This requirement has been eliminated for ADP and ACP test failures, but is still required for excess deferrals.

Safe Harbor for Automatic Enrollment

• The PPA provides a safe harbor which allows employers to avoid ADP, ACP and top-heavy testing through an automatic deferral provision and employer match.

Rollovers to Roth IRA

• Prior to the PPA, Roth IRAs could only accept rollovers from a designated Roth account, a different Roth IRA or a non-Roth IRA (i.e. qualified rollover contributions). The PPA amended the definition of a qualified rollover contribution to Roth IRAs to include amounts distributed from other qualified plans under §401(a), §457(b), and §403(a) and (b) annuities.

Returned Contributions

• If an employer chooses to institute an automatic enrollment provision, under certain circumstances an automatically enrolled participant may withdraw from participation by requesting withdrawal from the plan within 90 days of the first contribution. The normal penalty for early withdrawal (10% tax) would not be applicable to these withdrawals.

While some of the PPA changes are mandatory, a number of them are discretionary. Employers that sponsor DC plans need to review their plan documents to determine which, if any, of the mandatory changes are applicable and have their plan documents updated accordingly.  Additionally, employers should assess the discretionary provisions of the PPA to determine whether they wish to implement any of the allowed changes.  Benefits counsel can assist you by detailing the allowed and mandatory changes, reviewing plan documents to determine which apply to your specific situation, and preparing any necessary amendments to the plan.  Please contact our office for more information.

Section 415 was originally added to the Code by the Employee Retirement Income Security Act of 1974(ERISA), and the initial regulations were issued in 1981.  In general, Section 415 sets limits on annual contributions allowed to qualified defined contribution (DC) plans and annual benefits provided under qualified defined benefit (DB) plans.  Included in Section 415 is a definition for compensation (§415(c)(3)) that is also used in a number of other instances for qualified plans, such as determining highly compensated employees and nondiscriminatory compensation for testing purposes.  One of the most significant provisions of the Section 415 final regulations involves post-employment compensation or severance pay.

The proposed regulations generally did not allow post-employment compensation to be considered compensation under Section 415 with 2 exceptions: (i) if the payments would have been paid if employment had been continued (such as overtime or commissions); or (ii) if the payments were due to accrued bona fide leave (such as vacation or sick leave) that would have been available if employment had been continued.  These exceptions would only apply if the compensation was paid out no later than 2 ½ months after termination of employment. 

With regard to the post-employment compensation, the final regulations adopted the proposed regulations with one adjustment.  The final regulations extend the time period for severance compensation payout.  Instead of requiring payment within 2 ½ months after termination of employment, payment of post-employment compensation (as allowed by the exceptions) must be made by the later of 2 ½ months after severance or the end of the limitation year that includes the participant’s termination date.

In addition, the final rules addressed areas such as:

• Post-termination payments from non-qualified deferred compensation plans as compensation
• Compensation paid to permanently and totally disabled participants
• Calculation of average compensation under a qualified defined benefit plan
• Combined contribution limits for participants in both a qualified DB plan and a qualified DC plan
• Required modifications due to the PPA

With certain exceptions, the final regulations are applicable to limitation years beginning on or after July 1, 2007.  For most plans, this means that the final regulations took effect as of January 1, 2008.  Generally, plans are required to be amended to comply with the Section 415 final regulations.  The plan amendments must be made by the employer’s deadline for filing its income tax return (including extensions) for tax year 2008 (sometime in 2009).  With 2008 already half gone, employers are encouraged to contact their benefits counsel to have their plans reviewed and amended for Section 415 changes as soon as possible.  For further questions about Section 415 changes, please contact our attorneys.

Consider the following:

Employment Practices

• 67% of all employment cases that litigate result in a judgment for the plaintiff
• 1/3 of employment case verdicts award punitive damages
• 75% or more of the total judgment amount awarded in an employment case is usually for punitive damages
• Based on 2000 data, median compensatory awards for employment cases were:
  • $268, 926 for age discrimination
  • $120,951 for race discrimination
  • $100,000 for gender discrimination
• Median compensatory awards rose from $78,592 to $218,000 between 1994 and 2000

Employee Benefits Plans

• From 2000 to 2001 the number of ERISA civil suits filed increased from 9,124 to 10,292 (almost 13%)
• In 2001, the Department of Labor investigated 4,862 businesses and recovered $648 million in penalties and damages
• In 2000, the average defense cost of a fiduciary liability claim was $124,000
• In 2000, 47% of fiduciary liability claims were based on benefits disputes (including denial of benefits)

How can an employer protect itself:

Self-Audits are reviews that companies usually undertake with the assistance of benefits counsel to identify legal compliance gaps in their plans, policies and/or operational procedures.  The audit focuses on areas that could place the company at risk for governmental fines and penalties, as well as expose the company to an increased risk of lawsuits.  These audits can be done for either or both a company’s employment practices and employee benefits plans. 

The scope of an audit can vary from a basic overview of plans, policies and procedures with identification of possible compliance gaps, to a comprehensive assessment and analysis with specific recommendations for methods of correction of any identified gaps and drafting and/or updating any needed plans, policies and procedures.  By conducting these voluntary self-audits, a company can significantly reduce the costs of future problems – costs that can have a huge impact on the company’s bottom line.

Employers should consider performing self-audits at least annually.  Additionally, when there are major changes to the law or major changes to the business, a self-audit should be done.  Employers should work with professionals with experience conducting these audits.  Employment and benefits lawyers can assist employers in auditing their policies, practices and plans.  Proactively identifying and addressing issues can be the best protection from legal action for an employer.

The following are some of the major laws passed along with a very brief description of a few of the provisions contained within the statute:

• National Defense Authorization Act (NDAA) – amends the Family and Medical Leave Act (FMLA) to create 2 new FMLA leave entitlements and modifies some Department of Defense contracting requirements.
• Pension Protection Act of 2006 (PPA) –  makes several modifications to retirement plans including funding requirements for defined benefit plans, authorizing the use of cash balance and hybrid pension plans and requiring more disclosure to plan participants.
• American Jobs Creation Act of 2004 (AJCA) – provides significant new rules for non-qualified deferred compensation plans, including the enactment of Internal Revenue Code Section 409A.
• Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) – expands the Medicare program including prescription drug coverage for post-65 and disabled Medicare beneficiaries and provides for a Medicare subsidy, which is excludable from income, payable to employers who provide retiree health coverage that is at least actuarially equivalent to the Medicare drug benefit.
• Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) – provides significant changes to retirement plans including increasing the allowable participant elective deferrals, allowing “catch-up” contributions, increasing compensation limits for some pension plans and changing the definition of compensation for deduction purposes.
• Health Insurance Portability and Accountability Act of 1996 (HIPAA) -  limits restrictions that a health plan can place on benefits for preexisting conditions, defines numerous offenses relating to health care and sets civil and criminal penalties for them and establishes regulations for the use and disclosure of Protected Health Information (PHI).
• Older Workers Benefit Protection Act of 1990 (OWBPA) – allows retirement plans to continue to have minimum age for eligibility and to have subsidized early retirement benefits provided it is voluntary.
• Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) -  requires specified employers to offer continuation of group health plan coverage to beneficiaries who no longer qualify for coverage due to certain events.
• Pregnancy Discrimination Act of 1978 (PDA) – requires employers to cover costs of pregnancy, childbirth and related medical conditions under the same terms as other medical conditions.

The above information is just a small portion of what is required by these laws as applied to benefit plans.  Additionally, there are many more laws that impact employee benefits plans then those few described above.  For example, the PPA, in addition to the brief overview already provided, requires additional extensive compliance for retirement plans and makes some of the other changes under previous laws mandatory.

Benefit plans and operational policies and procedures that have not remained current with new requirements are at risk for being non-compliant and subject to fines and penalties.  All employers should review their ERISA plans, including retirement and heath and welfare plans, as well as their operational policies and procedures, to verify that their plans, policies and procedures have been updated and amended for all applicable changes in the law.

Once plans, policies and procedures are current, employers need to remain vigilant to ensure continued compliance with changing laws.  Employment and benefits counsel can assist employers in reviewing and updating their existing plans to ensure compliance with all applicable laws, as well as assisting employers to proactively update their policies, plans and procedures as required for future changes.

These new regulations are due to take effect for plan years beginning on or after January 1, 2009, although employers may rely on the new rules prior to their expected effective date.  Some of the changes and clarifications made by the new proposed regulations include:

• Reinforcement that a written plan document is required to establish a plan
• Guidance on the plan participation for former employees and dual-status individuals
• Provision for an employee to pay for a prior employer’s COBRA premiums through the new employer’s cafeteria plan
• Clarification that employees are allowed a 30-day window after hire date for elections, even if the benefit will be retroactive to the hire date
• Extension of the rules for debit-card expense substantiation for dependent care FSAs
• Guidance on required nondiscrimination testing timing and methodology

Since the regulations affect all employers that allow employees to pay for benefits on a pre-taxed basis, as well as both healthcare and dependent care flexible spending accounts, employers should audit their cafeteria plans to ensure compliance with these new requirements.  While the new regulations shouldn’t require significant changes to the administration or design of previously compliant plans, there could be some necessary updates or compliance issues to be addressed.  With the release of final regulations, employers may see an increase in the IRS’ focus on the compliance of Section 125 plans.