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Top 10 Employee Benefit Changes for 2004

NetPay Newsletter
March 2004

Posted with the Permission of Payroll Data Services, LLC (

Employee benefit rules change every year. Ten of the most noteworthy changes for 2004 are:

  1. COBRA. This summer, the U.S. Department of Labor ("DOL") is expected to issue final rules related to COBRA health care continuation coverage that will significantly alter the timing and required content of COBRA notices and election forms. The new rules are also expected to impose two new notice requirements on health plans -- notice of early termination of COBRA coverage and notice that COBRA coverage is unavailable. To implement these changes, many health plan sponsors will need to rewrite their summary plan descriptions ("SPDs") and COBRA administration forms.
  2. Health Savings Accounts. The IRS is expected to issue additional rules in 2004 on health savings accounts ("HSAs"). When an HSA is coupled with a "high deductible health plan," certain HSA contributions are tax deductible. HSA investment earnings build up tax-free, and HSA balances can be carried over from one year to the next. HSA distributions are tax free if they are used for qualified medical expenses. An employer that sponsors a high deductible health plan may offer and contribute to an HSA through a cafeteria plan.
  3. Debit Cards. Last year, the IRS issued new rules regarding the payment of medical expenses using a credit or debit card linked to a health care flexible spending account ("FSA") or health reimbursement arrangement ("HRA"). These rules reduced much of the uncertainty about whether the use of these cards satisfies the IRS rules requiring substantiation of medical expenses.
  4. Over-the-Counter Drugs. The IRS recently announced that employees can use their health FSAs to pay for certain over-the-counter ("OTC") drugs, such as antacids, allergy and cold medicines, and painkillers, with pre-tax dollars. Previously, the IRS had ruled that the only types of drugs that could be reimbursed through an FSA were prescription drugs and insulin. FSAs are now more attractive to employees, and many employers are considering adding health FSAs to their cafeteria plans. Employers that already offer health FSAs should review their cafeteria plan documents and SPDs to determine whether changes must be made to include (or exclude) OTC drug coverage.
  5. Retirement Plan Correction Program. The IRS recently updated and streamlined its Employee Plans Compliance Resolution System ("EPCRS"), under which retirement plan sponsors can self-correct certain disqualifying plan errors. EPCRS covers qualified plans (such as 401(k) and profit sharing plans), SIMPLE IRAs, SEPs, and 403(b) plans. Plan sponsors should identify plan defects and correct them under EPCRS instead of waiting for the IRS to detect the defects on audit.
  6. Restatement Deadline. The deadline for sponsors of certain "off the shelf" retirement plans (i.e., volume submitter and prototype plans) to file for a favorable GUST determination letter with the IRS expired on February 2, 2004. However, a plan sponsor that missed that filing deadline may still amend its plan and submit it for the IRS's review under EPCRS.
  7. Plan Expenses. Last year, the DOL announced that 401(k) and profit sharing plan sponsors generally may charge participants' accounts for certain participant-level expenses (such as those related to a qualified domestic relations order determination, hardship withdrawal, or benefit distribution), as long as the method of allocating those expenses met the DOL's guidelines. Plan sponsors should review their plan documents to ensure that their expense allocation methods meet the DOL's requirements. Additionally, the allocation methods must be disclosed to participants in the SPD.
  8. Retirement Plan Governance. As a result of concerns raised by the Enron and mutual fund scandals, retirement plan sponsors are turning their attention to improvements in retirement plan governance. One starting point in this exercise is to identify each plan's fiduciaries. In any event, plan sponsors should review the current state of their plan's governance, and should adopt and comply with "best practices" to satisfy their fiduciary duties.
  9. New Contribution Limits. The limit on before-tax contributions to a 401(k) plan increased to $13,000 for 2004, and the catch-up contribution limit increased to $3,000. Additionally, the limit on compensation for retirement plan purposes increased to $205,000 for 2004, and the limit on contributions to a defined contribution plan increased to $41,000 (not including catch-up contributions). There are a number of plan designs that can enable business owners and other highly compensated employees to maximize their retirement savings while controlling employer costs.
  10. Executive Compensation Audits. The IRS recently announced that it will crack down on certain executive compensation arrangements for senior corporate executives and directors. The initiative will focus on issues such as stock-based and nonqualified deferred compensation, split-dollar life insurance and other executive perks.
Todd M. Cleary is a member of the Employee Benefits Practice Group at Godfrey & Kahn, S.C. in Milwaukee, Wisconsin. He works in employee benefits and tax law, primarily with retirement and health and welfare plans. Mr. Cleary graduated with Honors and Distinction from the University of Wisconsin in 1994, and from Cornell Law School in 1999. He can be reached at (414) 273-3500.

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