Ten Important Benefits Issues for 2005
NetPay NewsletterFebruary 24, 2005
Posted with the Permission of Payroll Data Services, LLC (www.payrolldata.com).
1. Health Savings Accounts (HSAs). Federal law provides a number of income tax deductions and exclusions for contributions to HSAs. Wisconsin, however, does not provide similar state income tax breaks for HSA contributions. As a result, an individual's HSA contributions are not deductible for Wisconsin income tax purposes, and an employee's HSA contributions made under a cafeteria plan are taxable wages for state income tax purposes (even though they are not for federal income tax purposes). Also, in Wisconsin, employer contributions to an employee's HSA are taxable wages, and an HSA's earnings are subject to state income tax.
On February 15th, by a 63-33 vote, the State Assembly passed a bill that would provide state income tax breaks for HSA contributions. However, even if the bill passes the Senate, its prospects are uncertain. Governor Doyle vetoed a similar bill in 2004, and is expected to veto this one as well. It is unclear whether the bill has sufficient support in the state legislature to override the Governor's expected veto.
2. COBRA. In 2005 most group health plans will become subject to new rules related to COBRA health care continuation coverage. As before, plans that are subject to COBRA must provide new plan participants and their covered spouses with a "general notice" of their COBRA rights, and must provide participants and their covered dependents with an "election notice" when a qualifying event occurs which results in a loss of plan coverage. The new rules clarify the content and timing requirements applicable to these two notices. The U.S. Department of Labor (DOL) has posted model general and election notices at http://www.dol.gov/ebsa/modelgeneralnotice.doc and http://www.dol.gov/ebsa/modelelectionnotice.doc, respectively. Employers should customize these model notices to comply with the new content requirements applicable to general and election notices.
Group health plans also will be subject to two new notice requirements. The first, a notice of early termination of COBRA coverage, must be provided when an individual's COBRA coverage expires before the end of the applicable maximum COBRA coverage period (usually 18 or 36 months). For example, if an individual's COBRA coverage terminates early because he or she did not make a timely payment of the COBRA premium, the plan must notify the individual that he or she no longer has COBRA coverage.
The second new notice, the notice of non-eligibility for COBRA coverage, generally is to be provided when a plan receives a notice related to an individual's COBRA coverage, but determines that the individual in question is not entitled to COBRA coverage. For example, this notice will be required when a plan receives a notice that an employee is divorcing and that the ex-spouse would like to elect COBRA coverage, but the plan determines that the spouse is not entitled to COBRA coverage because the employee does not participate in the plan.
The new rules apply to COBRA notice obligations that arise on or after the first day of the first plan year beginning on or after November 26, 2004. Calendar year plans became subject to the new rules for COBRA notice obligations that arise on or after January 1, 2005.
3. Military Leave. On December 10, 2004, President Bush signed new legislation that updates the Uniformed Services Employment and Reemployment Rights Act (USERRA). Under USERRA, if an employee is called to active military service, the employer must offer the employee (and his or her covered dependents) the choice to continue to participate in the employer's group health plan for up to 18 months. Under the new law, this 18-month period is extended to 24 months for any employee leaving for military service who elects coverage on or after December 10, 2004. This change will likely necessitate amendments to employers' health plan documents and updates to summary plan descriptions.
Additionally, the new legislation requires employers to provide employees with notice of the rights, benefits and obligations associated with USERRA. The DOL will issue a model notice for this purpose no later than March 10, 2005. The notice will be required as soon as the DOL issues the model notice. Employers will be able to satisfy this requirement by posting the notice where the employer customarily posts other required notices for employees.
4. Retiree Health Care. In response to a lawsuit filed by the American Association of Retired Persons (AARP), the Equal Employment Opportunity Commission (EEOC) delayed its implementation of rules regarding the coordination of retiree health care benefits with Medicare. The rules would permit employers to provide lesser medical benefits to Medicare-eligible retirees than to retirees not yet Medicare-eligible. These rules are the EEOC's response to a controversial 2000 federal appellate court decision which held that reducing retiree health care benefits for Medicare-eligible retirees generally violates the federal Age Discrimination in Employment Act.
The EEOC has argued that, if employers cannot reduce the health care benefits they provide to Medicare-eligible retirees, then employers will drop retiree health care benefits altogether. The AARP, however, has argued that the EEOC acted illegally by limiting the scope of the Age Discrimination in Employment Act in this manner.
The EEOC indicated that it will not implement these rules before April 5, 2005. Given the uncertainty that employers face with respect to this issue, this delay is not welcome news.
5. Dependent Changes. Congress recently modified the definition of "dependent" for a variety of federal income tax purposes, effective January 1, 2005. As a result of these modifications, some individuals may no longer qualify as "dependents" under employers' medical and cafeteria plans (including health and dependent care flexible spending accounts). Although the IRS has issued further guidance to minimize the effect that these changes have on employee benefit plans, employers need to review these changes to determine whether their plans are affected. If so, plan amendments and summary plan description changes may be necessary.
6. Automatic Enrollment. The inadequate savings rate of Americans has received a lot of attention recently as a part of the debate over Social Security. To boost savings rates, some employers have added "automatic enrollment" features to their retirement plans, under which eligible employees automatically are enrolled in the plan unless they opt out, and automatic employee contributions are made to the plan on their behalf. The typical automatic contribution is between 2-6% of employees' compensation.
Automatic enrollment has been approved by the IRS, and actually has increased employees' plan participation. The IRS has emphasized that employees must be fully informed in advance of a plan's automatic enrollment provisions, and employees must have the option to change the amount of their automatic contributions.
One drawback to automatic enrollment is that it may lull employees into the false belief that their automatic contributions will provide them with adequate retirement savings. Another drawback is that employers will need to determine how to invest participants' automatic contributions, and many employers do not want this responsibility.
7. Retirement Plan Fees. Retirement plan fees have been in the news lately. Employers and plan participants alike find it difficult to understand these fees, and they don't often realize the negative impact they can have on a plan's investment performance.
The Employee Retirement Income Security Act (ERISA) provides that only reasonable plan fees may be paid from plan assets. Many employers don't understand the type or amount of fees which are paid from their plans' assets. Federal regulators are paying increasing attention to retirement fees, however. For example, the DOL is trying to improve participants' understanding of retirement plan fees, and hopes to propose a new fee disclosure policy before the end of 2005.
Employers should periodically review the fees charged to retirement plan participants' accounts to ensure they are reasonable. Although it is difficult to do an "apples-to-apples" comparison of one provider's fees to another, employers can request proposals from several providers in order to get a benchmark. In any case, employers should not be afraid to ask their current providers to lower their fees. Some providers may be willing to negotiate, particularly if they have long-standing relationships with the employer.
8. Forms of Payment. To reduce administrative burdens, some employers are amending their retirement plans to eliminate all forms of payment (e.g., installment payments and certain annuities), except for the single lump sum. Until recently, an employer generally had to provide participants with 90 days' advance written notice before amending the plan to remove forms of payment. However, the IRS recently issued final rules waiving this advance notice requirement.
9. Automatic Rollovers. Many retirement plans include mandatory distribution provisions, which require that if a participant terminates employment with a small vested account balance (usually $5,000 or less), the account will be distributed in a single lump sum without the participant's prior consent. Recent legislative changes require that if the mandatory distribution exceeds $1,000 and the participant fails to make an affirmative election between receiving the distribution in cash or rolling it over to an IRA or another employer's plan, then the retirement plan must automatically roll the distribution over to an IRA established in the participant's name. These new rules generally apply to mandatory distributions made on or after March 28, 2005.
The new rules will require the plan administrator to notify each affected participant that the distribution will be rolled over into an IRA, absent an affirmative election otherwise. Addi¬tionally, employers that continue to utilize the mandatory distribution provisions must adopt a plan amendment reflecting the automatic rollover requirements by the end of the first plan year ending on or after March 28, 2005. The IRS has provided a sample amendment for this purpose.
In response to these changes, many plan sponsors have lowered the mandatory distribution threshold from $5,000 to $1,000 so that the new automatic rollover rules will not apply to their plans. Others have removed the mandatory distribution provision from their plans altogether. Plan sponsors that continue to utilize these provisions will need to establish a relationship with an IRA trustee. In any case, once the employer decides on an approach, the employer must amend the plan to add the automatic rollover provision or to remove or change the mandatory distribution provision.
10. Nonqualified Deferred Compensation. President Bush signed new legislation that fundamentally changes the federal income taxation of nonqualified deferred compensation. Although certain transition relief is available, nonqualified deferred compensation plans and arrangements (including one-person agreements) generally must comply with the new rules in 2005.
Under these new rules, all vested deferred compensation, for prior and current taxable years, will be subject to federal income tax (as well as a 20% penalty and interest) unless the plan document and actual plan operations meet stringent requirements. These severe results magnify the importance of full compliance with the new rules.