2012 Year End Benefit Plan Compliance Checklist and Reminders for Employers
By comparison to past years, the end of 2012 and beginning of 2013 seem not to bring all that much in the way of new legal compliance burdens regarding retirement plans, health plans, and deferred compensation plans. For the most part employers face the continued implementation of changes in law enacted in prior years, most notably the Patient Protection and Affordable Care Act of 2010, along with the assorted notice and disclosure requirements that have become (or are quickly becoming) routine. Nevertheless, no year can end or begin in the world of employee benefits and executive compensation without a review of some of the key obligations that employers must fulfill in order to prudently administer their benefits and compensation programs. In that spirit, we offer the following summary of some of the more significant requirements employers should keep in mind as they close out 2012 and begin 2013.
Final Pension Protection Act amendment to reflect Code Section 436 funding-based benefit restrictions. Employers have until the last day of the first plan year beginning in 2012 (December 31, 2012, for calendar year plans) to amend their defined benefit pension plans to incorporate the funding-based limits on benefit distributions and benefit accruals set forth under Code Section 436. This amendment should complete the formal implementation of the Pension Protection Act of 2006. Employers will find sample amendment language for Code Section 436 compliance in IRS Notice 2011-96.
Cycle B determination letter applications due January 31, 2013. Employers having tax identification numbers ending in 2 or 7 should be working now on determination letter applications with respect to their tax-qualified retirement plans. The filing window for Cycle B determination letter applications opened February 1, 2012 and applications are due no later than January 31, 2013.
Self-correction of significant errors. Employers with tax-qualified retirement plans that may have experienced "significant" operational failures but are eligible for self-correction under IRS Revenue Procedure 2008-50 should keep in mind the two-year window for the correction of such errors under the Self-Correction Procedure of EPCRS ("SCP"). Therefore, an employer whose plan experienced a significant failure during the plan year ended December 31, 2010 would have until December 31, 2012 to complete the correction of the failure under the SCP. Insignificant errors may be corrected under the SCP at any time as long as the other criteria for SCP correction are also satisfied. See IRS Revenue Procedure 2008-50 for more information.
Changes in plan design or administration. In general, employers must amend their plans to reflect changes in plan design or plan administration no later than the end of the plan year in which those changes first take effect. Note, however, that changes having the effect of reducing future benefit accruals or altering safe harbor designs must be adopted in advance of effective dates as and to the extent required by law.
Important notices relating to retirement plans. Over the past few years it seems that the number (and frequency) of notices employers are required to provide with respect to their tax-qualified retirement plans have increased. We note the following:
- QDIA Notice. Most employers use a qualified default investment alternative to determine the investment of the retirement accounts of participants who fail to make a valid (and timely) investment election. The annual notice describing the QDIA and the rights of plan participants regarding the investment of their accounts must be given at least 30 days before the beginning of each plan year.
- 401(k) Automatic Enrollment Notice. Many employers have amended their 401(k) plans to provide for the automatic enrollment of eligible employees, and many of those plans also call for annual increases in the deferral percentages applied for those employees. The annual notice to covered employees explaining those features and the right to opt out must be provided at least 30 days before the beginning of each plan year.
- 401(k) Safe Harbor Notice. Employers that have adopted 401(k) plans with safe harbor contributions designed to automatically satisfy applicable nondiscrimination requirements must provide an annual notice explaining the safe harbor design at least 30 days before the beginning of each plan year. The notice must describe the safe harbor employer contribution and a number of related matters, including any changes in the deferral or total contribution limits under federal law.
- Fee Disclosure Notices. Employers maintaining defined contribution plans that allow participant-directed investing (i.e., virtually all 401(k) and other defined contribution plans) began to provide quarterly fee disclosures to participants in July and August of this year. The first quarterly disclosure (covering the quarter ended September 30, 2012) should have been provided to participants by November 14, 2012. The notice must disclose, among other things, all investment-related expenses paid from participant accounts during the previous quarter.
Health Care Reform and Other Welfare Plan Issues
The reelection of President Obama and the preservation of Democratic Party control of the U.S. Senate have effectively ended any serious discussion regarding the repeal of the Patient Protection and Affordable Care Act of 2010. While the release of regulations and other guidance by the federal agencies charged with implementing health care reform has been impressive, we expect the pace of publications from these agencies to increase in the coming year. Employers (and many states) that have been delaying their own compliance efforts now need to respond accordingly. The most significant changes in health plan administration and employer shared responsibility obligations will take effect in 2014. The following significant changes, however, take effect in 2013:
- $2,500 limit on employee contributions to health FSAs. Beginning in 2013 employers must limit employee pre-tax contributions to a health flexible spending arrangement to no more than $2,500 per year. While employers have until December 31, 2014, to amend their plan documents to reflect the new limit, the limit must be applied operationally effective January 1, 2013.
- Form W-2 reporting. The cost of employer-sponsored health coverage must be reported on each employee's Form W-2 beginning this year (Forms W-2 for 2012, issued in January 2013).
- Notice regarding state health insurance exchange. Starting in 2013 employers will be required to notify their employees about the availability of state health insurance exchanges, as well as the availability of federal tax credits to purchase health insurance coverage. The notice requirement takes effect March 1, 2013, although specific guidance regarding the content of the notice has not yet been issued. The content of the notice may vary from state to state depending upon the form and administration of the state's exchange.
- Comparative effectiveness research fee. For plan years 2012 through 2018, insurance carriers and employers that sponsor self-funded group health insurance plans will have to pay a per member, per year comparative effectiveness research fee provided to fund the Patient Centered Outcomes Research Institute. The amount of the fee is $1 per covered individuals for the first plan year ending on or after September 30, 2012, and $2 per covered individual thereafter (indexed for inflation). For self-funded plans, the first fee payment is due July 31, 2013 and it is to be submitted using IRS Form 720. Although insurers are directly responsible for paying the fee, it is widely expected that insurers will simply pass the fee along to employers who purchase their group products.
- Summaries of Benefits and Coverage. The Summary of Benefits and Coverage ("SBC") must be provided to participants in group health plans as of the first day of the first open enrollment period beginning on or after September 23, 2012 or, for participants and beneficiaries who do not enroll or reenroll through open enrollment, the first day of the first plan year beginning on or after September 23, 2012 (January 1, 2013 for calendar year plans). A model SBC, as well as other guidance in the form of FAQs, can be found on the U.S. Department of Labor Web site.
- Increased Medicare tax on high-income filers. Beginning in 2013 employers must withhold an additional 0.9% payroll tax on top of the employee portion of the Medicare FICA tax for higher income employees. The additional tax is imposed on wages in excess of $200,000 for single filers and $250,000 for joint filers. Employers must withhold the additional tax on behalf of all employees who have annual wages in excess of $200,000 regardless of their marital or tax return filing status. Now is the time to update payroll systems to assure the proper implementation of the new payroll tax.
- Massachusetts wellness program tax credit. The Commonwealth of Massachusetts has enacted legislation that provides a sizeable tax credit to employers that establish wellness programs for their employees. Specifically, the available tax credit is equal to 25% of the cost of implementing a wellness program, up to an annual maximum of $10,000. Program costs exceeding the annual limit in the initial year may be carried over into subsequent years for credit against future tax liabilities. The law is aimed primarily at small businesses, and the Massachusetts Department of Public Health is expected to issue regulations with further details relating to eligibility for the tax credit soon. (Maine enacted a similar law in 2011, but the tax credit is much more limited, applies only to small employers, and is not available until the 2014 taxable year.)
- Supreme Court Review of Circuit Court DOMA decisions. Two federal Circuit Courts of Appeal have now found the Defense of Marriage Act ("DOMA") to be unconstitutional, and the U.S. Supreme Court is expected to rule on the matter as early as next year. The ruling on the fate of DOMA is particularly timely given the outcomes of recent citizen initiated referenda in four states, which resulted in the legalization of same-sex marriage in those states (in addition to those states that already permit same-sex couples to marry).
- Effect of Same-Sex Marriage Referendum in Maine. On November 6th Maine voters approved the issuance of marriage licenses to same-sex couples and the first licenses could be issued before the end of this year. The implementation of marriage equality in Maine will have a dramatic impact on many of the activities and events that occur in the context of marriage – certain health care decisions, parental and custodial rights, the disposition of real and personal property, to name a few – and upon the income and transfer tax consequences of those activities. Nonetheless, for so long as the federal Defense of Marriage Act remains the law of the land, the practical impact of same-sex marriages on the administration of employee benefit plans that are governed by ERISA and/or the Internal Revenue Code is likely to be modest. That is because the favorable tax attributes and other rights (such as COBRA) that are afforded to a person who is considered a "spouse" under federal law will remain the province of heterosexual married couples. As noted above, the fate of DOMA is expected to be decided by the U.S. Supreme Court as early as next year.
Section 409A Correction Deadline for Deferred Compensation Plans
Much has been written already regarding the deadline for correcting defects in the language of deferred compensation arrangements that condition the payment of benefits upon the execution of a release, non-compete, or non-solicitation agreement by the departing employee. The concern is that the terms linking the timing of the payments to the execution of a release or restrictive covenant could effectively give the employee the unilateral ability to control the timing of the payment (e.g., delay the payment to the following calendar year by delaying the execution of the release). One way to correct the problem is to amend the arrangement to set a fixed payment date, such as 60 days following termination of employment, and make a failure to execute a release or restrictive covenant a condition of payment such that a failure to execute the release in time would result in a loss of the benefit. (Be sure to set a date that allows for the expiration of any applicable revocation period.)
IRS Notice 2010-80 gives employers until December 31, 2012 to correct this problem. Employers are strongly encouraged to review any deferred compensation arrangements – including employment agreements, retention agreements, and change in control agreements that call for severance benefits – to determine whether corrective action is necessary by the end of the year.
Note that severance benefits meeting the "separation pay" exception under Code Section 409A would not be subject to this requirement. That is because "separation pay" is not considered deferred compensation under Code Section 409A. Any employer that is unsure whether its severance benefit program or policy falls within the "separation pay" exception are advised to review those arrangements now in order to avoid an unpleasant surprise later.