Focus On Employee Benefits
Executive Compensation: Section 409A Reporting Required This Year for Plan Document Violations, Including Outstanding Discounted Options
Since shortly after Internal Revenue Code section 409A was enacted, employers have been required to report on their employees’ Forms W-2, box 12, code Z, Code section 409A income that results from a plan document or operational violation of Code section 409A. However, during transition under Code section 409A, which lasted through December 31, 2008, little code Z reporting actually occurred since there were very few operational violations, due to the generous transitional relief, and there could be no plan document violations since plans were only required to be documented in a manner compliant with Code section 409A beginning in 2009. However, now that the transitional period under Code section 409A is over and operational and plan document compliance is required, employers may need to consider code Z reporting of violations under Code section 409A.
Notice 2008-115 provides interim guidance to employers regarding reporting and wage withholding requirements under Code section 409A effective for 2008 and later years until the proposed reporting regulations (Prop. Reg. § 1.409A-4, REG-148326-05, 73 F.R. 19234 (December 8, 2008)) are finalized. The proposed regulations contain more details regarding the income calculation than does Notice 2008-115. For purposes of reporting, employers who follow the calculation rules in the proposed regulations will be treated as having complied with Notice 2008-115.
We expect there to continue to be very little code Z reporting in 2009 due, in part, to the IRS’s correction program in Notice 2008-113 for operational violations. However, one type of Code section 409A income that will need to be reported this year is the section 409A income from any outstanding discounted options. While most discounted options were corrected or exercised during transition, there may still be some outstanding. The spread on any such options outstanding as of the end of 2009 will need to be reported as code Z income. This will require a careful review of Notice 2008-113, as well as the more detailed guidance in the proposed regulations, and consideration of whether and how the employer will obtain the associated withholding taxes in connection with the Code section 409A income.
Qualified Retirement Plans: Timing Requirements for Plan Amendments
The end of 2009 marks the deadline for many plan sponsors to amend their qualified plans to comply with the Pension Protection Act of 2006. It also marks the deadline for plan sponsors to amend their plans to reflect so-called discretionary plan design changes. To help put these deadlines in context, the following provides a brief overview of the timing requirements for qualified plan amendments.
- “Interim” Plan Amendment Requirement. In Rev. Proc. 2007-44, the IRS provides comprehensive guidance regarding the deadlines for adopting most plan amendments. In general, a five-year remedial amendment period, during which an individually-designed plan can be retroactively amended to correct qualification provisions, will be available to plan sponsors that timely adopt “interim” amendments. The deadline for adopting an interim amendment depends on whether the amendment reflects a tax-qualification change or a discretionary change.
Interim plan amendments that reflect tax-qualification changes generally must be adopted by the end of the plan year in which they are effective, or if later, the due date of the plan sponsor’s tax return (including extensions). However, Congress typically provides extended deadlines with respect to statutory changes, for example, by allowing plan sponsors until the end of the 2009 plan year to adopt amendments related to the Pension Protection Act. Interim plan amendments that reflect discretionary changes must be adopted no later than the end of the plan year in which they become effective. As always, certain types of amendments, such as the reduction of future benefit accruals, must be adopted in advance pursuant to specific statutory and regulatory requirements.
There is no one-size-fits-all checklist that identifies each interim plan amendment that must be adopted -- required amendments depend in large part on the provisions in a particular plan document -- but there is guidance. Notice 2008-108 provides the IRS’s most recent cumulative list of statutory and regulatory changes as of October 1, 2008, that may require plan amendments. An updated list is expected later this month or in early December.
- Extended Remedial Plan Amendment Period. Under the IRS determination letter program (set forth in Rev. Proc. 2007-44), an individually-designed plan must apply for a determination letter by the end of its five-year cycle in order to qualify for an extended remedial amendment period. During the extended remedial amendment period, the plan document can be retroactively amended to correct qualification provisions. The current five-year cycle, Cycle D, ends on January 31, 2010, and applies to plans sponsored by companies with tax identification numbers ending in 4 or 9 and multiemployer plans. Note: Corrective plan amendments are generally limited to provisions for which interim amendments were timely adopted. Plan sponsors may want to evaluate whether any interim amendments have not been timely adopted before the plan is submitted for a determination letter. Non-amender sanctions are significantly lower under the IRS’s VCP program than when the IRS discovers the failure during the determination letter process (see Rev. Proc. 2008-50).
Health and Welfare: GINA Regulations Impact Health Risk Assessments
Susan Relland and Amy Healy
The Genetic Information Nondiscrimination Act of 2008 (GINA), signed into law by President Bush on May 21, 2008, prohibits the use of genetic information to discriminate in health benefits or employment. Interim final regulations issued October 7, 2009, define the scope of the prohibitions on the use of genetic information by employer-sponsored group health plans and health insurers. The regulations are effective for group health plans for plan years beginning on or after December 7, 2009. For calendar year plans, this means that the effective date is January 1, 2010.
GINA prohibits discrimination in health coverage based on genetic information. Specifically, group health plans and insurers may not adjust premium or contribution rates based on genetic information; request or require an individual or family member to undergo a genetic test; or request, require or purchase genetic information prior to or in connection with enrollment, or at any time for underwriting purposes. Wellness programs or health risk assessments (HRAs) that request genetic information, including family medical history, violate GINA if participants receive any type of reward for completion, including a discount or rebate in premiums or copayments.
Employers who wish to continue using HRAs have three options. First, an HRA that does not collect genetic information may offer an incentive or reward for completion. Second, an HRA may collect genetic information if it does not offer any incentive or reward for completion. Third, the two may be combined in a “bifurcated HRA” approach, whereby one HRA does not request genetic information and gives a reward for completion, and the second HRA requests genetic information but includes clear language that completion is voluntary and does not affect the reward given for completion of the first HRA.
Employers will need to review their plan documents and administration for compliance with the new restrictions imposed by GINA and the regulations. Special attention should be given to wellness programs, HRAs and any other enrollment forms to avoid requesting or requiring genetic testing or genetic information. Where it is reasonable to anticipate that health information may be received, explicit language must be added to make it clear to participants that genetic information should not be provided.
Given the time of year, employers may have already rolled out their open enrollment programs. As of January 1, 2010 (for a calendar year plan) no rewards may be given for completion of an HRA that collects genetic information. If an employer has already promised a reward for completion of an HRA that collects genetic information, informal remarks by officials from the Departments of Labor and Treasury suggest three possible approaches: (1) give the reward to all participants, regardless of whether they have completed the HRA; (2) give the reward to no participants; or (3) accelerate payment of the reward so that it is received by participants in 2009.
Health and Welfare: Year End Update Regarding COBRA Subsidy
With year end just around the corner, those responsible for administering the COBRA subsidy provisions of the American Reinvestment and Recovery Act of 2009 (employers, multiemployer group health plans, or insurers (Employers)) should take note of a few important items. The COBRA subsidy, which amounts to 65% of the COBRA premium, is intended to help involuntarily terminated workers who were displaced during the period from September 1, 2008, through December 31, 2009, retain their health insurance coverage.
First, Employers are not required to issue any information reporting documents (Forms W-2 or 1099) to involuntarily terminated workers to report the amount of the COBRA subsidy. Employers claiming the credit must, however, maintain documentation to support the credit claimed. Second, Employers must claim the COBRA subsidy using Form 941 and must file such claims on a Form 941 filed for a quarter in the year in which the subsidy was provided to the assistance-eligible individual. Although Employers have the discretion to claim the COBRA subsidy in a later quarter than the quarter in which the benefits were provided, Employers may not defer the subsidy claim beyond the calendar year in which the subsidy arises. For example, an Employer may claim its 2009 COBRA subsidy amounts entirely on its fourth quarter Form 941 even if those claims arose in the second or third quarter, but it may not claim its 2009 COBRA subsidy on a Form 941 filed for any period in 2010. Finally, legislation has been proposed in Congress to extend and expand upon the COBRA subsidy provisions. The COBRA Subsidy Extension and Enhancement Act of 2009 would extend the 9-month subsidy to 15 months, increase the government subsidy from 65% to 75%, and expand the eligibility to individuals who lose coverage due to an involuntary reduction in hours.
For Additional Information
For additional information, please contact any of the following attorneys in our ERISA/ Employee Benefits practice:
Elizabeth Drake, firstname.lastname@example.org, 202-626-5838
Mike Lloyd, email@example.com, 202-626-1589