Archive for March, 2008

Plan Document Requests – Failure to Comply Can Cost Big $

March 27th, 2008

Plan document requests seem like a simple matter.  A participant requests a copy of a plan document from the plan sponsor and the plan sponsor provides it, right?  Not always.

Recently, a federal judge awarded a penalty of $50 per day to a pension plan participant because she was not given the plan document she requested.  Additionally, the ex-wife of the plan trustee was the person against whom the penalty was awarded.

ERISA provides a maximum penalty of $110 per day for each day the requested document is not provided.  Plan administrators generally have 30 days from the date of the request to get the document to the requestor. 

Additionally, courts have found that the burden of complying with the request is on the plan administrator.  For instance, even where the participant does not specifically request the plan document, the plan administrator is responsible for providing it when the information that the participant has requested would be found in the document.

In the recent case, the ex-wife of a pension participant asked for the plan documents in mid-1996 after she was awarded $50,000 from her ex-husband’s pension plan in their divorce.  The plan failed to comply with the request and never send the actual plan document. 

U.S. District Judge Oliver W. Wanger of the U.S. District Court for the Eastern District of California rejected the plaintiff’s claim for the $110 per day penalty stating that some documents had been provided.  However, because the plan document had not been provided, he awarded her a $50 per day penalty from June 6, 1996, to September 25, 2005 – a total of $160,310.

This case is just a reminder for employers to ensure that their plan administrators comply with requests for plan documents from participants within the 30 days specified under ERISA.  Additionally, if plan documents are not up-to-date, employers should work with their benefits counsel to get the documents in compliance with current law so they will be ready to respond to requests.  As shown by this recent case, failure to comply can be very costly for employers.

Expanding ‘Dependent’ Coverage under Health Insurance Plans

March 24th, 2008

According to the U.S. Census Bureau, the fastest growing population of uninsured individuals is young adults – people between the ages of 19 and 34. Most employer-sponsored plans provide that dependents of employees cease eligibility under the parent’s plan as of age 19. Often, dependent eligibility is extended for dependents who are full-time students until the earlier of graduation or some specified age (e.g. age 23).

In order to address this ever-growing uninsured segment, numerous states have enacted or proposed legislation that changes the definition of dependent under health insurance plans. The statutes affecting dependent status vary greatly from state to state. Examples of some of this legislation are:

  • Utah – dependents may not “age-out” until the dependent’s 26th birthday
  • New Jersey – dependents eligible for coverage until the dependent’s 30th birthday (regardless of student status), provided the dependent does not have dependents of his/her own
  • Colorado – dependents are eligible for coverage until the dependent’s 25th birthday (regardless of student status), provided the dependent is unmarried, financially dependent on insurance provider, and shares the same address as insurance provider
  • Connecticut – dependents are eligible for coverage up to age of 26
  • Pennsylvania – full-time students whose studies are interrupted by service in the reserves or the National Guard must be extended health care benefits as a dependent of their parent until they finish school, regardless of their age
  • Delaware – dependents eligible for coverage up to age 24 and premium for over age 18 dependent coverage may not exceed 102% of the under age 18 premium
  • Illinois – dependents called to military active duty between the ages of 19 and 23 remain a dependent (as long as they are a full-time student) after their 23rd birthday for the amount of time they spent serving, with the cut-off age being 25

Employers that have employees in multiple states should consult with benefits counsel to ensure that their employer-sponsored health plan is being administered consistently and in compliance with each state’s mandated dependent coverage provisions. At the same time, other benefits practices that could be impacted by a change in the definition of dependent (such as COBRA administration) should also be reviewed and updated accordingly.

Basic Overview of Retirement Plans

March 19th, 2008

Currently, the IRS allows employers to establish retirement plans for their employees that have certain tax benefits for employers and employees. The main benefits are that the employer’s contribution can be deducted as a business expense when it is made, employees can defer taxes on the funds until they are distributed, and earnings on the employer contributions are tax deferred. There are two main types of plans – Defined Contribution (DC) plans and Defined Benefit (DB) plans.

Defined Contribution (DC) Plans

A DC plan is a type of pension plan where there is an individual account for each participant and for benefits are based solely upon the amount contributed to the participant’s account and their earnings. The annual contribution is defined in the plan document, and the contribution is subject to minimum and maximum allocation rules.

The actual benefit a participant receives from a DC plan upon retirement depends solely on the accumulation of annual contributions and fund earnings. Provided that the sponsoring employer prudently invests the plan assets in the best interests of the plan participants, the employer is not liable for investment losses. In these plans the investment risk is borne by the participants.

There are four categories of DC plans that are allowed. These are profit sharing plans, money purchase plans, stock bonus plans, and target benefit plans. Examples of these plans include 401(K) plans, Savings Incentive Match Plan for Employees (SIMPLE) plans, and Employee Stock Ownership Plans (ESOPs).

Defined Benefit (DB) Plans

A DB plan is defined as “any pension plan other than” a DC plan. These plans are the traditional “pension plans”, where an employer pays their retirees a set monthly benefit until the retiree’s death. In a DB plan, the plan document specifies the benefit due to a participant at retirement.

These plans are subject to minimum funding requirements and must provide a qualified joint and survivor annuity option. The accrued benefit amount is guaranteed to the participant, regardless of any investment fluctuations; therefore, the employer bears the fund’s investment risk, not the participant.

There are generally three types of DB plans, based on the method of calculating the accrued benefit. These are a flat benefit plan, a fixed benefit plan and a unit benefit plan.

Requirements for Plan Qualification

In order to become a “qualified” plan under the Code, all plans must meet certain requirements. Although the substantive requirements under the Code can vary depending on what type of plan is at issue, the fundamental and formal requirements of qualification apply to all “qualified” plans.

The fundamental requirements include that the plan must:

  • Be provided for the exclusive benefit of the participants and/or beneficiaries;
  • Be established with the intent to be permanent; and
  • Prohibit the use of plan assets for anything other than providing plan benefits or paying administrative and investment expenses.

The formal requirements for plan qualification are that the plan:

  • must be in effect by the end of the employer’s taxable year in which the deduction is claimed;
  • must be documented as a formal, written plan; and
  • must be communicated to employees.

Additionally, all qualified plans must follow certain basic requirements, including minimum coverage requirements, non-discrimination requirements, minimum vesting requirements, limitations on benefits and contributions, and distribution requirements.

Qualified retirement plans can be complex and the rules that govern them are very specific. Additionally, the laws relating to these plans can change. One of the most recent laws that affect retirement plans is the Pension Protection Act of 2006 (PPA). Employers should periodically review or have their benefits attorney review their plans to ensure compliance with changing laws. Additionally, when contemplating establishing a plan, employers should work with their benefits attorney to discuss options and find a plan that will work best for them.

Succession Planning – It’s Not Just for CEOs

March 14th, 2008

The 79 million Baby Boomers in the U.S. continue to charge full-speed toward retirement age.  The oldest of the Boomers will turn 65 in 2011, and from that point on, it is likely that more workers will be leaving the workforce than will be entering it.  Companies need to face the reality that there will soon be a significant gap in the workforce, assess how it will impact their organization, and implement a company-wide succession planning project.  According to a recent report released by the Aberdeen Group, succession planning is underutilized by most small and mid-sized businesses.  Only 35% of small and mid-sized businesses have a succession plan in place.

Although succession planning is most frequently used for presidents, CEOs, or other senior management personnel, it can be a useful tool for virtually all levels of an organization, regardless of the organization’s size.  Many businesses have positions that require specialized knowledge, skills and/or abilities.  If the employee that filled such a position retired or left the company, the company needs to ensure that there is someone immediately available with the same specific skill set to take over.  This is especially crucial for small to mid-sized businesses, where there is little-to-no employee redundancy, and everyone’s job is vital to conducting ongoing business activities.

A company’s first step in succession planning should be to conduct a risk evaluation.  This can be accomplished by examining every position in the company and assessing (1) possible retirement plans of the individual working in the position, (2) importance of the position in relation to the overall functioning of the company, and (3) current status of possible replacements for the individual working in the position.

Once the risk evaluation is complete, the company should develop a strategy for minimizing the potential impact of retirements by various HR tools, including succession planning and updating recruitment and training policies.  Some potential avenues to explore include:

  • Create consulting agreements with senior managers that would provide access to their knowledge and experience after retirement
  • Create policies and procedures allowing for part-time return to work after retirement
  • Update existing training policies and procedures to allow for accelerated training opportunities for key positions

Keep in mind that employment and employee benefits issues could arise as a result of the succession planning.  For example, re-hiring retirees can have an impact on benefits eligibility.  Consulting with your benefits attorney during the risk evaluation and strategy development can identify and correct employment and benefit issues before the employer implements policies and procedures that can create problems in these other areas.

Consumer-Driven Health Plans – An Opportunity to Control Costs

March 12th, 2008

With the ever increasing costs of health care plans, many employers are turning to what are called “consumer-driven health plans”.  Plans that are considered consumer-driven include health savings accounts (HSA) and health reimbursement accounts/health reimbursement arrangements (HRA).  

A HSA is a medical savings account that has tax advantages and is used in conjunction with a High Deductible Health Plan (HDHP).  Funds contributed to an HSA are not subject to federal income tax when they are deposited and may be used to pay for qualified medical expenses without federal tax liability.  Additionally, withdrawals can be made for non-medical expenses.  However, when a withdrawal is made for non-medical expenses, it is treated similarly to an IRA in that there may be tax advantages if the funds are taken after retirement age and penalties if they are taken earlier.

A HRA is an arrangement with tax advantages that allows an employer to reimburse medical expenses paid by participating employees.  Reimbursement may only be made for expenses for those items, such as co-pays, coinsurance, deductibles and services, which are not covered by the company’s health insurance plan and have been agreed to by the employer.  However, any employer sponsored health plan may qualify, not just a HDHP.

According to survey data from the American Association of Preferred Provider Organizations (AAPPO), about 7% of employers now offer consumer-health care plans.  Additionally, the number of employers who offer these plans are expected to increase since 11% of employers who do not offer these plans say they will probably begin offering them this year. 

Large corporations have been leading the charge in offering these plans.  Indeed, 41% of employers with more than 20,000 employees now offer either a HSA or a HRA.  According to the survey data, these employers say the main reason driving this change is the need to lower the organization’s benefit costs. 

The data that Mercer, who conducted the survey for the AAPPO, collected showed the on average a HSA cost the employer $5,679 per employee as compared to $6,644 per employee for a PPO with a high deductible.  This can be a significant savings for an employer. 

Employers looking to control rising health care plan costs should consider exploring what consumer-driven health care plans offer and deciding if they will work for their company.  Working with their employee benefits attorney they can review their current plans, discuss various consumer-driven health plans and implement any changes that make sense.

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