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Foreign plan reporting; FICA refund deadline; FICA early inclusion rule; Health and welfare guidance; IRS audits deferred compensation plans and 401(k) plans; "Auto IRAs"; qualified plan legislation; Administration's employee benefit proposal

Focus On Employee Benefits

Information Reporting: New Regulations Mandate Immediate Tax Return Disclosures for Employees Participating in Foreign Pension and Deferred Compensation Plans

Michael Lloyd

Last December, the IRS and Treasury issued temporary regulations under section 6038D and new Form 8938 (Statement of Specified Foreign Financial Assets), which implements the reporting requirements of the new section 6038D regulations. The new reporting requirement has its origins in the Hiring Incentives to Restore Employment ("HIRE") Act, enacted on March 18, 2010. Certain provisions of the HIRE Act are specifically targeted at curtailing tax evasion by wealthy U.S. individuals, and this new reporting requirement is intended to further that objective.

In general, the Form 8938 must be included with a taxpayer's 2011 Federal income tax return if the taxpayer (an individual or a business) has an interest in specified foreign financial assets valued above certain reporting thresholds. These value thresholds differ based upon the filer's marital status and place of residence. Employees having interests in foreign pension plans, foreign deferred compensation plans, or equity interests in foreign businesses (e.g., stock in a foreign corporation, a capital or profits interest in a foreign partnership, stock options, etc.) must report such interests on the Form 8938 if the aggregate value exceeds the designated thresholds. This new reporting requirement is in addition to the longstanding requirement to file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts) (FBAR reporting).. Employers may wish to consider promptly alerting their employees to these new reporting requirements due to the recent release of these rules and the government's significant enforcement efforts in this area.


Employment Taxes: Upcoming FICA Tax Deadlines and Current Developments

Anne Batter, Marianna Dyson, and Fred Oliphant

Quality Stores Refund Claims. For employers who had layoffs in 2008, April 16th is the last day for filing protective claims for refund of the FICA taxes withheld on severance payments based on the conclusion in Quality Stores that severance payments are not wages. In U.S. v. Quality Stores, 105 AFTR 2d 2010-1110 (W.D. Mich. 2010), the U.S. District Court for the Western District of Michigan held that severance payments made to employees in connection with the employer's closing of stores and distribution centers were not wages for FICA tax purposes. The case is on appeal to the Sixth Circuit, and is inconsistent with the Federal Circuit's opinion in CSX Corp. v. United States, 518 F. 3d 1328 (Fed. Cir. 2008), which held that payments to employees who were terminated or whose hours were reduced due to a reduction in force were wages for FICA tax purposes. Until the dispute is resolved, we generally advise employers to withhold FICA taxes on severance payments, but file claims for refund before the statute of limitations for filing an administrative claim for refund expires three years from the April 15th that follows the year at issue. The statute of limitations for filing claims for 2008 expires this April.

Use of Early Inclusion Rule in 2012. Clients with non-qualified defined benefits plans may want to consider making use of the "early inclusion" rule in the section 3121(v)(2) regulations this year to help their higher income employees avoid a 0.9% increase in Medicare taxes for 2013. Many companies apply FICA taxes to amounts deferred under their defined benefit plans in the year of the employee's termination because the amount of deferred compensation is not "reasonably ascertainable" before then. However, the regulations under section 3121(v)(2) allow the employer to subject the deferred compensation to FICA taxation earlier, before the amount is reasonably ascertainable, as long as the amounts are vested and the amount deferred is trued up (and subjected to FICA tax) when it later becomes "reasonably ascertainable." Since Medicare taxation rates for certain higher income employees ($200,000 in wages in the case of a single return, and $250,000 in the case of a joint return), but not for the employer, are scheduled to increase in 2013 by 0.9% many companies are considering making use of this early inclusion rule to FICA tax deferred compensation in 2012.

IRS Audits Focus on Interest Rates. Clients who have nonqualified deferred compensation obligations that grow based on a rate of interest should be aware that the IRS has begun to focus in its employment tax audits on identifying plans and arrangements that credit deferred compensation with an "excessive" interest rate. Where the IRS determines that such an excessive interest rate is used, the IRS treats the excessive interest as additional deferred compensation that should have been FICA taxed at vesting under section 3121(v)(2). Rather than seek to collect the FICA taxes in the earlier vesting years that may be closed, the IRS agents have asserted that the FICA taxes are due at the time of distribution under the non-duplication rule in the section 3121(v)(2) regulations. In light of this development, clients with deferred compensation plans may want to review their methodology for crediting income on deferrals.


Health and Welfare: Agencies Issue Final Regulations and Templates for Summary of Benefits and Coverage Document and Uniform Glossary of Terms

Garrett Fenton and Fred Oliphant

On February 14, 2012, the U.S. Departments of Labor ("DOL"), Health and Human Services ("HHS") and the Treasury ("Treasury") (collectively the "agencies") issued final regulations implementing provisions of the Patient Protection and Affordable Care Act ("PPACA") that require the development -- and distribution by group health plans (and health insurers) -- of a summary of benefits and coverage document ("SBC") and a uniform glossary of various commonly-used health coverage-related terms ("Uniform Glossary"). The final regulations require group health plans and health insurers to prepare and provide to certain individuals and entities (without charge) an SBC for each "benefit package" offered under the plan or coverage, whether "grandfathered" under PPACA or not, and to make available the Uniform Glossary.1

The final regulations generally follow the format of the agencies' proposed SBC regulations issued last summer (see our October 3, 2011 Focus On Employee Benefits), but make a number of modifications to the rules that, on the whole, have been viewed favorably by employers and health insurers.

Contemporaneous with the issuance of the final regulations, the agencies published guidance authorizing a number of finalized documents, including:

  1. A template for the SBC (,
  2. A sample completed SBC,
  3. Instructions for completing the SBC ( for group health plans and health insurance coverage, and for individual health insurance coverage),
  4. Sample language for completing the SBC ( and,
  5. Guides for the two "coverage example" calculations currently required to be included in the SBC ( and,
  6. Sample narratives to accompany the two coverage examples ( and, and
  7. The Uniform Glossary (

These documents are similar to their "proposed" counterparts issued last summer -- which had been based on materials prepared by a subgroup of the National Association of Insurance Commissioners ("NAIC") -- with some notable variations. The documents are authorized to be used for SBCs and Uniform Glossaries furnished with respect to plan years or coverage beginning before January 1, 2014, only. Additional SBC content requirements will apply for subsequent years (e.g., information relating to whether the plan or coverage provides "minimum essential coverage" and meets applicable "actuarial value" requirements under PPACA), and the agencies intend to issue updated materials accordingly.

On March 19, 2012, the DOL posted a set of 24 "FAQs" relating to the SBC requirements (available at (the "FAQs"). Although the FAQs are posted on the DOL's website, they appear to have been "prepared jointly" by all three of the agencies.

Effective Date

As was expected, the final regulations provide some relief from the statute's (and proposed regulations') March 23, 2012 effective date for compliance with the SBC rules. See our October 3, 2011 and December 21, 2011 Focus On Employee Benefits. For disclosures to group health plan participants and beneficiaries who enroll or re-enroll in coverage through an open enrollment period, the final regulations will apply as of the first day of the first open enrollment period beginning on or after September 23, 2012 (which, for a typical calendar-year plan, will be the upcoming open enrollment period for the 2013 plan year). For all other disclosures to group health plan participants and beneficiaries -- e.g., newly-eligible employees and HIPAA special enrollees who enroll in coverage mid-year -- the regulations will apply as of the first day of the first plan year beginning on or after September 23, 2012 (January 1, 2013 for calendar-year plans). However, the FAQs indicate that the agencies will not impose penalties for any failures related to the SBC rules, during the first year that those rules apply, with respect to "plans and issuers that are working diligently and in good faith" to comply with them.

SBC Distribution Requirements for Group Health Plans, Participants, and Beneficiaries

The final regulations require group health plans, plan administrators, and health insurers offering group health coverage to provide an SBC to a participant or beneficiary with respect to each benefit package for which he or she is eligible, at the following times and under the following circumstances:

  1. If the plan or insurer distributes written application materials for enrollment, then the SBC must be provided as part of those materials. Otherwise, the SBC must be provided by no later than the first date that the individual is eligible to enroll in coverage for himself or herself (or any beneficiaries).
  2. If there is any change to the information included in the SBC, after it is provided pursuant to category 1 (above) but before the first day of the participant's or beneficiary's coverage, then the plan or issuer must update and provide a current version of the SBC to the individual by no later than the first day of coverage. 
  3. For a HIPAA "special enrollee" that enrolls in coverage mid-year (e.g., upon marriage, the birth of a child, adoption, or placement for adoption), the plan or issuer must provide the SBC to the special enrollee by no later than 90 days after the date of enrollment. This 90-day period is consistent with the timeframe, under ERISA section 104(b)(1)(A), for furnishing a summary plan description ("SPD") to special enrollees, and is a departure from the proposed regulations (which would have required the SBC to be furnished within 7 days of a request for a special enrollment).
  4. If participants or beneficiaries are required to renew coverage for a succeeding plan year, then the plan or issuer must provide a new SBC upon the renewal of coverage. If a written (paper or electronic) application is required for renewal, then the SBC must be provided by the date the application materials are distributed. If renewal is automatic, then the SBC must be provided by no later than 30 days prior to the first day of coverage for the new plan year, with one exception that applies only to insured plans: if the insurance policy, certificate or contract for the plan has not yet been issued or renewed at least 30 days prior to the first day of the new plan or policy year, then the SBC must be provided as soon as practicable, but in no event later than 7 business days after (1) the policy, certificate, or contract is issued or (2) written confirmation of an intent to renew is received, whichever is earlier.
  5. If a participant or beneficiary makes a request for either an SBC, itself, or summary information about health coverage, then the plan or issuer must provide the SBC as soon as practicable, but no later than 7 business days following the request.
  6. If the plan or issuer makes a "material modification" to any of the terms of the plan or coverage that (1) would affect the content of the SBC, (2) is not reflected in the most recently-provided SBC, and (3) occurs mid-year (i.e., other than in connection with a renewal or reissuance of coverage), then the plan or issuer must provide notice of the modification, or an updated SBC, to participants and beneficiaries by no later than 60 days before the date that the modification will become effective.

Notably, for ERISA group health plans, this notice/updated SBC must be provided before the date by which a summary of material modification ("SMM") must be furnished under existing DOL regulations (which generally require an SMM to be provided within 210 days after the close of the plan year in which the modification is adopted, or, for a "material reduction in covered services or benefits," within 60 days after the modification is adopted). As in the proposed regulations, the preamble to the final regulations confirms that a timely and complete material modification notice/updated SBC provided for an ERISA-covered group health plan will satisfy the requirement to provide an SMM for those same plan or coverage changes.

The final regulations provide three "special rules to prevent unnecessary duplication with respect to group health coverage," which aim to streamline and simplify the provision of the SBC. First, although the requirement to furnish an SBC could apply to three different parties in the context of a single insured group health plan (i.e., the plan, the plan administrator, and the health insurer), it would be sufficient if any one party were to provide the SBC in a "timely and complete" manner. In this regard, the agencies anticipate that plans and issuers will make contractual arrangements to determine which party will distribute the SBCs. Second, the final regulations provide that a single SBC sent to a participant and any beneficiaries, at the participant's last known address, will satisfy the SBC disclosure obligations unless a beneficiary has a different last known address (in which case a separate SBC will need to be sent to the beneficiary at his or her last known address). This rule differs slightly from -- and is a bit more plan-friendly than -- its counterpart in the proposed regulations, which would have permitted a single SBC to be sent to an address where a participant and any beneficiaries were "known to reside." Third, for group health plans that offer multiple benefit packages (e.g., a PPO option, an HMO option, etc.), the plan or insurer will be required to provide a new SBC automatically upon renewal only with respect to the benefit package in which the individual is enrolled (unless the individual requests an SBC for another benefit package for which he or she is eligible).

Content of the SBC

The SBC content requirements under the final regulations, as reflected in the SBC template and related materials, are generally the same as the content requirements under the predecessor proposed regulations and guidance, with some notable exceptions. First, the final regulations eliminate the requirement, from the proposed regulations, that the SBC include information regarding premiums (or the cost of coverage in the case of a self-funded plan). The agencies recognized that providing such premium/cost information in an SBC would have been "administratively and logistically complex" with respect to individuals in divergent circumstances, and that such information could be "more efficiently and effectively provided by means other than the SBC." Second, although the final regulations authorize the agencies to identify up to six "coverage examples" for inclusion in the SBC -- each of which would describe a hypothetical situation/medical condition, sample treatment plan for a specified period of time, and estimated costs of the treatment plan -- the current requirement, as reflected in the SBC template, is to include only two coverage examples (namely having a baby (normal delivery) and managing type 2 diabetes (routine maintenance, well controlled)). The predecessor proposed template would have required a third coverage example (treating breast cancer) to be included in the SBC as well. The agencies may issue guidance in the future that will require the inclusion of additional coverage examples in the SBC. Third, the final regulations require the SBC to include a contact phone number to obtain a paper copy of the Uniform Glossary, and a disclosure regarding the availability of such paper copies.

Appearance and Manner of Distributing the SBC

The final regulations make some important modifications to the proposed regulations regarding the manner of distributing the SBC. For one thing, the final regulations eliminate the requirement, from the proposed regulations, that an SBC provided to group health plan participants and beneficiaries be furnished as a stand-alone document. Rather, the agencies have clarified that the SBC may be furnished either (1) as a stand-alone document or (2) in combination with other summary materials (i.e., an SPD), provided that the SBC "is intact and prominently displayed at the beginning of the materials (such as immediately after the Table of Contents in an SPD)," and is furnished in accordance with the final regulations' timing rules.

In addition, although the final regulations retain the requirement that the SBC be completed pursuant to the agencies' template and instructions, and presented in a uniform manner that meets specified formatting requirements, the preamble to the final regulations notes that some allowance will be made in certain cases where a plan's terms that are required to be included in the SBC cannot reasonably be described in a manner consistent with the templates and instructions. Specifically, in such circumstances, the plan or issuer may deviate from those materials, as long as it accurately describes the relevant terms using its "best efforts" to do so in a manner that is as consistent as possible with the templates and instructions. We continue to believe that employers would be well-advised to ensure that the SPD for any group health plan describes the terms and features of each benefit package using similar (or identical) language as the SBC, to avoid confusion, inconsistencies, and/or ambiguity.

The final regulations modify, somewhat, the rules regarding electronic distribution of an SBC to certain individuals. Similar to the proposed regulations, the final regulations provide that an SBC may always be furnished to a group health plan participant or beneficiary in paper form, and may be furnished electronically -- e.g., by e-mail or an internet posting -- to participants and beneficiaries who are already covered under the plan, provided that the DOL's general requirements for electronic distribution under Title I of ERISA are satisfied, pursuant to 29 CFR § 2520.104b-1 (which includes the DOL's "safe harbor" for electronic distribution).3 With respect to individuals who are eligible but not yet enrolled in a group health plan, the final regulations provide that the SBC may be furnished electronically if (1) the electronic format is "readily accessible" (e.g., in an html, Microsoft Word, or PDF format), (2) the SBC is provided in paper form (free of charge) upon request, and (3) if the electronic disclosure is made by an internet posting, the issuer or plan timely notifies the individual, in paper form (e.g., a postcard) or by e-mail, that the document is available on the internet, provides the internet address, and notifies the individual that a paper version is available upon request. The FAQs provide sample "postcard" or "e-card" language that may be used to satisfy the third element.

Finally, all SBCs must be presented in a "culturally and linguistically appropriate" manner, using the same thresholds and standards that apply for purposes of providing notices of adverse benefit determination under the agencies' regulations relating to claims, appeals and external review under PPACA. Accordingly, in specified counties in the U.S., plans and issuers must make certain language interpretation services available, and include in the English versions of SBCs a statement, in any applicable non-English language, disclosing the availability of those services. HHS has stated that it intends to issue additional guidance providing written translations of the SBC template, sample language, and the Uniform Glossary, in each of the four non-English languages that, at this time, could be implicated in various counties throughout the U.S. (i.e., Spanish, Chinese, Tagalog, and Navajo).

Application to "Account-Based" Plans

The preamble to the final regulations clarifies the manner in which the SBC rules apply to certain account-based plans, namely health flexible spending arrangements ("health FSAs"), health reimbursement arrangements ("HRAs"), and health savings accounts ("HSAs"). The general rule is that so-called "HIPAA-excepted" plans and benefits (including stand-alone dental or vision plans, for example), are not subject to the final regulations. Thus, an SBC need not be provided for a health FSA that qualifies as HIPAA-excepted.4 If a health FSA does not qualify as HIPAA-excepted, then it generally will be subject to the SBC rules. That being said, the preamble notes that for such non-HIPAA-excepted health FSAs that are "integrated" with major medical coverage, the SBC rules may be satisfied by denoting the effects of the health FSA -- in the SBC prepared for such major medical coverage -- in the appropriate spaces for deductibles, copayments, coinsurance, and benefits not otherwise covered by the major medical coverage.

HRAs are group health plans5 that generally do not qualify as HIPAA-excepted benefits, and thus are generally subject to the SBC rules. There is a distinction between "integrated" and "stand-alone" HRAs in this regard, however. A stand-alone HRA must satisfy the SBC requirements (although, as a practical matter, the preamble to the final regulations notes that many of the limitations that apply under traditional fee-for-service or network plans do not apply under a typical stand-alone HRA). An integrated HRA -- i.e., an HRA that is designed to reimburse employees who are enrolled in other major medical coverage for the copayments, deductibles, coinsurance, or other out-of-pocket expenses incurred in connection with that coverage -- will not separately need to satisfy the SBC requirements. Rather, similar to integrated health FSAs, the SBC prepared for the major medical coverage with which the HRA is integrated may denote the effects of the HRA, in the appropriate spaces for deductibles, copayments, coinsurances, and benefits not otherwise covered by the major medical coverage. HSAs, by contrast, typically are not group health plans and thus are not subject to the final regulations. That being said, the preamble to the final regulations notes that an SBC prepared for an HSA-compatible high-deductible health plan ("HDHP") may mention the effects of employer contributions to an HSA, in the appropriate spaces for deductibles, copayments, coinsurance, and benefits not otherwise covered by the HDHP.

Special Rules for Coverage Provided Outside the U.S.

The final regulations contain special rules relating to plans and policies that provide coverage for items and services provided outside the U.S., such as "expatriate plans." In lieu of summarizing such coverage in an SBC, a plan or issuer may provide an internet address (or similar contact information) for obtaining information about such coverage. However, if and to the extent that the plan or policy also provides coverage for medical items and services available within the U.S., an SBC that accurately summarizes those items and services must be provided in accordance with the final regulations.

Uniform Glossary

The final regulations require group health plans and health insurers to make available to participants, beneficiaries, applicants, policyholders, and covered dependents the Uniform Glossary, which contains uniform definitions of various medical- and health coverage-related terms (such as appeal, co-insurance, emergency medical condition, medically necessary, and many others). The Uniform Glossary must be available upon request, in either paper or electronic form (as requested), within 7 business days of receipt of the request. For electronic disclosures, this obligation can be satisfied simply by complying with the requirement to provide in an SBC an internet address -- which may be a place on the plan's or insurer's own website or simply a place on HHS's or DOL's website -- where the Uniform Glossary may be found, a contact phone number to obtain a paper copy of the Uniform Glossary, and a statement regarding the availability of such paper copies.

Preemption and Potential Penalties

For insured group health plans (and individual health insurance coverage), state laws that require the provision of an SBC that supplies more information than what is required under the final regulations may remain effective -- provided that any such additional information must be required to be "provided in a document that is separate from the SBC" -- whereas state laws that require the provision of an SBC that supplies less information will be preempted. (All such state laws generally will be preempted in the context of ERISA-covered, self-funded group health plans.)

A non-governmental ("private sector") group health plan that fails to provide an SBC in a timely and proper manner will be subject to an IRS-imposed excise tax of up to $100 per affected individual, per day of non-compliance, which must be self-reported on IRS Form 8928. In addition, the DOL intends to issue future regulations implementing procedures for assessing a $1,000 per-violation fine for a group health plan's "willful" failure to comply with the SBC requirements. The preamble notes, though, that the IRS and the DOL have entered a memorandum of understanding that coordinates enforcement and avoids duplication of efforts for shared jurisdiction.

A health insurer that fails to provide an SBC in a timely and proper manner typically will be subject to the enforcement mechanism(s) employed by the relevant state, and HHS separately may impose a fine of up to $1,000 for each individual to whom the health insurer "willfully fails" to provide an SBC or Uniform Glossary. However, HHS has indicated that it will use "enforcement discretion" if it determines that the applicable state is addressing willful violations adequately.


Employer/group health plan sponsors (and health insurers) should begin preparing now -- if they have not already -- to compose their SBCs, implement procedures to ensure their timely provision, and make available the Uniform Glossary. This may involve negotiations and contract modifications between employer/plan sponsors and their health insurance carriers or third-party administrators, to ensure that all parties are aware of their respective duties. For many group health plans, the SBC requirements will become applicable this fall, in connection with the open enrollment period for the 2013 plan year.


Health and Welfare: Agencies Issue "FAQ" Guidance on Automatic Enrollment, Pay-or-Play, and Waiting Period Provisions under Health Care Reform Legislation

Garrett Fenton and Fred Oliphant

On February 9, 2012, the Internal Revenue Service ("IRS"), Department of Labor ("DOL"), and Health and Human Services ("HHS") contemporaneously issued "substantially identical" guidance, in the form of frequently asked questions, regarding three provisions of the Patient Protection and Affordable Care Act ("PPACA") that will have major implications for employer-sponsored health plans: (1) automatic enrollment, (2) the employer shared responsibility penalty (also known as the "pay-or-play" or "free rider" penalty), and (3) the PPACA 90-day limitation on waiting periods. IRS Notice 2012-17; DOL Technical Release 2012-01; HHS FAQs from Employers Regarding Automatic Enrollment, Employer Shared Responsibility, and Waiting Periods. The new guidance provides information in response to questions received from "employers and other stakeholders" with respect to these provision, and outlines a number of approaches that the agencies are considering proposing in future rulemaking.

Automatic Enrollment Provisions

PPACA added section 18A to the Fair Labor Standards Act ("FLSA"), which generally requires that certain large employers that have more than 200 full-time employees automatically (1) enroll any new full-time employees into one of the employer's health plans (subject to any permissible waiting period), and (2) continue the enrollment of current employees who are enrolled in a health plan offered by the employer. The provision also requires such employers to provide adequate notice and an opportunity for an employee to opt out of any coverage in which he or she is automatically enrolled.

The DOL previously issued guidance stating that the responsibility to issue regulations on the automatic enrollment provisions had been delegated to the DOL's Employee Benefits Security Administration ("EBSA"), which would coordinate with the Treasury Department in developing the relevant guidance (particularly with respect to the determination of "full-time employee" status). See DOL, FAQs About Affordable Care Act Implementation Part V and Mental Health Parity Implementation, Q&A-2 (available at The previous guidance also indicated that the DOL would not require employers to comply with the automatic enrollment provisions until the issuance of implementing regulations, which initially were intended to be completed by 2014.

The new guidance states that the DOL has concluded that any regulations or other guidance implementing the automatic enrollment provisions "will not be ready to take effect by 2014," and affirms the position that employers need not comply with those provisions until "final regulations" are issued and applicable. The delay seems to be due, at least in part, to the need to coordinate the automatic enrollment regulations with the guidance being developed to implement other PPACA provisions (including the employer shared responsibility and waiting period provisions, described below), and the desire to provides adequate time for employers to comply. Accordingly, although the new guidance does not provide any insight as to the expected timeframe for regulations or other guidance to be issued under the automatic enrollment provisions, it appears that compliance will not be required for at least the next couple of years.

Employer Shared Responsibility Provisions

Under PPACA's employer shared responsibility provisions, certain "large" employers with 50 or more "full-time employees" (taking into account part-time / "full-time equivalent" employees) may be subject to a "free rider" penalty, effective beginning in 2014, in either of the following two scenarios.

  1. The employer fails, for any month, to offer its full-time employees -- defined to include any employee who works an average of at least 30 hours per week6 -- and their dependents the opportunity to enroll in "minimum essential coverage" under an eligible employer-sponsored plan, and at least one full-time employee is certified as having obtained a premium tax credit or cost-sharing reduction to purchase coverage through an Exchange.
  2. The employee offers its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan, but with respect to at least one full-time employee, that coverage is either "unaffordable" (i.e., the employee's share of the required premium or contribution exceeds 9.5% of his or her "household income") or does not provide a minimum actuarial value of 60%, and the employee thus opts out of the employer-sponsored plan and is certified as having obtained a premium tax credit or cost-sharing reduction to instead purchase coverage through an Exchange.

The IRS and Treasury Department previously requested comments on a variety of issues and potential approaches to implementing the shared responsibility provisions, including a suggested approach that would permit an employer to use a "look back/stability period safe harbor" -- as opposed to a month-by-month test -- to determine whether a current employee (other than a "new hire"), constitutes a full-time employee for purposes of these provisions. Such a safe harbor would permit an employer to "look back" at a defined period of at least three but no more than twelve consecutive calendar months, as chosen by the employer, to determine whether the employee averaged a sufficient number of hours during that period to be considered full-time (i.e., 30 hours per week, or possibly 130 hours per calendar month). If the employee was found to be full-time under this test, then he or she would be treated as a full-time employee for a subsequent "stability period" of at least six consecutive months (and in any event at least as long as the "look back" period) -- regardless of the number of his or her actual hours worked during the stability period -- as long as he or she remained an employee. See Notice 2011-36, Section V.

Comments have also been requested previously on a proposed "affordability safe harbor." This safe harbor would allow an employer who offered minimum essential coverage to determine if that coverage was "affordable" for a particular employee by reference to the amount of wages reported in Box 1 of the employee's Form W-2, as opposed to the employee's "household income" (which, for this purpose, is defined as the modified adjusted gross income of the employee and any member of his or her family -- including spouses and dependents -- who is required to file an income tax return for the year). Specifically, if the employee's portion of the premium or contribution for self-only coverage, under the employer's lowest-cost option providing an actuarial value of at least 60%, would not exceed 9.5% of an employee's Form W-2 (Box 1) wages, then the employer would not be subject to a shared responsibility penalty with respect to the employee. This would be true even in the scenario where an employee's contribution for coverage would not exceed 9.5% of his or her Form W-2 (Box 1) wages, but would exceed 9.5% of his or her household income (so that the employee would in fact be entitled to receive a premium tax credit or cost-sharing reduction to purchase coverage through an Exchange).

The new guidance confirms that the IRS and Treasury Department intend to issue proposed regulations or other guidance implementing both the "look back/stability period" safe harbor and the "affordability" safe harbor described above. The agencies also intend to issue guidance addressing how an employer may determine whether a newly-hired individual is a full-time employee for purposes of these provisions. Specifically, the guidance is expected to coordinate the full-time employee determination with the PPACA 90-day waiting period limitation (see discussion below) and to provide as follows: 

  1. In all cases, at least for the first three months after an employee's hire date, an employer will not be subject to a penalty due to its failure to offer coverage to the employee during that period -- e.g., due to the imposition of a three-month waiting period.
  2. If, based on the facts and circumstances at the time of hire, a new employee is reasonably expected to work full-time for the year, and does, in fact, work full-time for the first three months of employment, then the employer must either offer the employee coverage under its group health plan as of the end of that three-month period, or face a penalty thereafter (i.e., beginning with the fourth month of employment).
  3. If, based on the facts and circumstances at the time of hire, the employer cannot reasonably determine that a new employee is expected to work full-time for the year, then:

(a) If the employee ends up working full-time during the first three months of employment, and his or her hours during that three-month period are "reasonably viewed" -- as of the end of that period -- as representative of the hours that he or she is expected to work for the year, then the employee will be considered full-time as of the end of that three-month period. (If the employee works part-time -- i.e., less than 30 hours per week -- during the first three months of employment, then in no event will an employer shared responsibility penalty apply during the first six months of employment.)

(b) If the employee ends up working full-time during the first three months of employment, but his or her hours during that three-month period are reasonably viewed -- as of the end of that period -- as not representative of the hours that he or she is expected to work for the year, then the employer will be given an additional three-month period to determine the employee's status. In that case, no employer shared responsibility penalty will apply with respect to the employee during the first six months of employment. (If the employee ends up working part-time during the second three-month period of employment, then in no event will an employer shared responsibility penalty apply during the first nine months of employment.)

The IRS and Treasury Department expect to issue guidance regarding the rules applicable to other types of employees as well, including employees who transfer from one employment classification or status to another.

Waiting Period Provisions

PPACA added Public Health Service Act ("PHSA") section 2708, which prohibits a group health plan or health insurer that offers group coverage from applying any waiting period longer than 90 days, effective for plan years beginning on or after January 1, 2014. For this purpose, a waiting period is statutorily defined as "the period that must pass with respect to the individual before the individual is eligible to be covered for benefits under the terms of the plan." Pre-PPACA regulations issued jointly by the DOL, HHS, and Treasury Department further clarify that a waiting period is the period that must pass before coverage can become effective for an employee or dependent who is "otherwise eligible" to enroll under the terms of the plan. None of these provisions distinguish between full-time and part-time employees, in contrast to the employer shared responsibility and automatic enrollment provisions described above.

The new guidance confirms that the 90-day waiting period provisions begin only when the employee is otherwise eligible for coverage under the terms of the group health plan, and will not be interpreted to require an employer to offer coverage to part-time employees, or any other category of employees. This is because the waiting period provisions merely prohibit an "otherwise eligible" employee from having to wait more than 90 days before coverage is effective; they do not dictate which employees must, in fact, otherwise be eligible for coverage. For example, a plan would be permitted to impose eligibility conditions based on an employee's full-time status, a bona fide job category, or receipt of a license, unless those conditions were "designed to avoid compliance" with the waiting period provisions.

Forthcoming guidance is also expected to address the situation where employees (or certain classes of employees) do not become eligible for coverage under an employer's plan until they complete a specified number of cumulative hours of service within a specified time period, e.g., 750 hours of service, within a 12-month period. The IRS and Treasury Department expect the guidance to permit such eligibility conditions, provided that the required number of cumulative hours of service does not exceed a specified number that will be provided in the guidance. Using the example of a plan that requires 750 hours of service within 12 months, in order to be eligible for coverage, the employer would need to provide coverage to an employee by no later than 90 days after he or she completed 750 hours of service.


Although the new guidance does not, itself, provide any final rules, it has generally has been viewed favorably by employers who have been waiting for clarification of these issues since PPACA's enactment. The notice provides helpful insight regarding the manner in which the agencies are likely to implement these provisions in forthcoming regulations. Employers should be on the lookout for such regulations in the near future, and would be well-advised to begin developing a strategy to comply with the relevant provisions. To the extent that employers perceive problems with the proposals, the agencies have indicated that their comment or input would be welcome.


Employment Taxes: New Law Extends the Lower Employee Social Security Tax for the Rest of 2012; IRS Releases Revised Form 941

Michael Lloyd

Under the Middle Class Tax Relief and Job Creation Act of 2012, the 2 percent payroll tax cut for employees that was in effect for 2011 and previously extended through the end of February 2012, has been extended again through the end of 2012. Thus, for the rest of this calendar year, the Old-Age, Survivors, and Disability Insurance ("OASDI" or "Social Security") tax withholding rate will continue to be 4.2 percent instead of 6.2 percent. The reduced rate will not apply to the employee's Medicare portion of Federal Insurance Contribution Act ("FICA") taxes or to the employer's share of the FICA taxes. The 2 percent recapture tax, which had been imposed on certain highly-paid employees as part of the tax reduction extension through February, was repealed and does not apply to any period.

As with the prior rate reductions, the lower rate will not affect a worker's future Social Security benefits. The new law establishes that Transfers from the Federal Government's General Fund will make up for the reduced revenues into the Social Security Trust Fund resulting from reduced FICA taxes.

To enable employers to properly report the newly-extended payroll tax cut, the IRS has released a revised Form 941. The IRS will issue additional guidance, as needed, to implement the extended tax cut with further updates to be posted at


Qualified Plans: Experiences from a Recent Audit

Anthony Provenzano

We have listed below several issues that drew scrutiny as part of an IRS exam of a client's 401(k) plan.

  • Timely deposit of participant deferrals: You may think of this as a DOL issue, but the IRS reviewed the applicable payroll dates and the dates contributions were transferred (the cancelled checks).
  • Participant eligibility: Eligibility for the client's plan was limited to certain groups of employees. The IRS wanted documentation describing how the employer classified each employee, and the records underlying such classification.
  • Participation: The IRS requested documentation that each employee was offered participation when the employee became eligible. For example, could the employer provide documentation evidencing that a participant with no deferrals during a year was offered the opportunity to make such deferrals?
  • Nondiscrimination testing: In addition to reviewing the employer's nondiscrimination testing results, the IRS wanted to discuss and understand the regulatory basis for not aggregating the employer's two separate 401(k) plans.
  • W-2 reconciliation: The IRS reviewed whether the amounts reported on the Form W-2 as deferred under the 401(k) plan reconciled with the amount credited to the participant's account during the year.
  • Loans and hardships: The IRS examiner noted that plan loans and hardship withdrawals continue to be a significant source of plan administration issues. Employers should periodically review the loan and hardship documentation required by the 401(k) administrators to confirm that the procedures track the plan terms.
  • Compensation: Review the plan's definition of compensation as opposed to the actual compensation used for purposes of determining salary deferrals and matching contributions. In addition, confirm that the compensation used for purposes of the nondiscrimination testing matches the terms of the plan.
  • Fidelity bond: The initial IDR issued by the IRS requested the paperwork underlying the fidelity bond covering the plan.


Qualified Plans: Proposed Legislation Would Adopt "Automatic IRAs" and Make Other Significant Changes to the Rules Applicable to Qualified Plans

Elizabeth Drake

Congressman Richard Neal (D-MA) has introduced two bills, which if enacted, would introduce a new type of IRA and would change a number of rules affecting tax-qualified retirement plans.

H. R. 4049

H.R. 4049, the "Automatic IRA Act of 2012" (cosponsored with Earl Blumenauer (D-OR)), would expand personal savings and retirement savings coverage by allowing certain employees not covered by qualifying retirement plans to save for retirement through an automatic IRA arrangement, sometimes referred to as an "Auto IRA", that must be maintained by employers that do not maintain a qualifying retirement plan for such employees (including employers who maintain a qualifying retirement plan that does not cover employees of a particular division, subsidiary, or other business unit). Under an Auto IRA, employees would be automatically enrolled, subject to an opt-out election, with contributions made through payroll deductions. An employer who otherwise would be required to maintain an Auto IRA would not be required to do so if the employer qualified for the exception granted to certain small and new employers.

H. R. 4050

H. R. 4050, the "Retirement Plan Simplification and Enhancement Act of 2012", would make a number of changes, identified below, to the rules under the Internal Revenue Code (Code) and ERISA that are applicable to tax-qualified retirement plans.

  • Modification of automatic enrollment safe harbor. The bill would remove the present 10 percent contribution cap imposed by the 401(k) automatic enrollment safe harbor, and would authorize the Treasury to increase the present safe harbor minimum of 3 percent and to increase the minimum annual increases now provided under the safe harbor.
  • Mandatory participation of certain long-term, part-time workers in 401(k) plans. Under present law, an employer may generally exclude a part-time employee who works less than 1,000 hours per year from participating in the company's 401(k) plan. The bill would mandate participation in the 401(k) plan of an employee who has satisfied the minimum age requirement after 3 consecutive 12-month periods during each of which the employee has at least 500 hours of service. The present nondiscrimination and top-heavy rules would not apply to these newly covered part-time employees. The provision would not apply to employees under collectively bargained plans.
  • Separate application of top heavy rules to defined contribution plans covering part-time employees. The bill makes changes to the top heavy rules that apply to defined contribution plans. These changes are designed to encourage employers to cover employees who do not meet the age or service requirements but who, under present law, would receive a top heavy contribution if covered.
  • Startup credit for small employers. The bill would increase to $1,500 the credit for small employer pension plan start-up costs which is presently $500.
  • Eliminating barriers to use of multi-employer plans. The bill requires the Secretaries of the Treasury and Labor to prescribe administrative guidance (1) establishing conditions under which one employer participating in a multi-employer plan would not have liability under Title I of ERISA with respect to acts or omissions by one or more other participating employers; (2) under which a multi-employer plan may be treated as satisfying the qualification requirements of Code sections 401(a) and 413(c) despite the violations of such requirements of one or more participating employers; and (3) provide simplified means by which a multi-employer plan may satisfy the requirements of section 103 of ERISA.
  • Study of application of spousal consent rules to defined contribution plans. The bill would direct the Government Accountability Office to study the feasibility and desirability of extending the spousal consent requirements to defined contribution plans and to report the result of the study together with recommendations for legislative changes to the appropriate Congressional committees.
  • Administration of joint and survivor annuity requirements. The bill would amend provisions of ERISA to permit fiduciaries to appoint annuity administrators to administer individual account plans and the payment of any joint and survivor annuity required thereunder. Where agreement is reached regarding the administration of the joint and survivor annuity rules, such appointment would shield fiduciaries from liability for certain acts or omissions of the annuity administrator regarding such rules.
  • Lifetime income investments. the bill directs the Secretary of the Treasury to issue regulations clarifying that under a deferred contribution plan, specified age or service conditions with respect to a "lifetime income investment" (as defined in Code section 401(a)(38)(B)(ii), which would be enacted under the bill) would be disregarded in determining whether such lifetime income investment is currently available to an employee.
  • Rollover of insurance contracts to IRAs. The bill would modify the present proscription against an IRA investing in life insurance contracts by permitting an IRA to hold one or more insurance contracts that were rolled over to an IRA from a qualified retirement plan, provided that such contracts provide only incidental death benefits.
  • Portability of lifetime income options. The bill permits a defined contribution plan, upon its discontinuance of a lifetime income option, such as coverage under an annuity contract, to make a direct trustee-to-trustee transfer of the lifetime income option to an IRA or other eligible retirement plan for the benefit of the plan participant.
  • Exception from required minimum distribution rules. The bill would provide an exception to the RMD rules that presently require an employee to begin receiving retirement distributions at age 70 ½. Under the bill, if at the time the employee attains age 70 ½ , the aggregate balance of all of the employee's retirement plans does not exceed $100,000, the employee is not subject to the RMD rules.
  • Electronic communication of pension plan information. The bill would amend ERISA to provide that certain documents or materials that are required to be furnished to a plan participant or beneficiary may be furnished through the use of paper or furnished electronically to a recipient, if the recipient has access the electronic media and has consented to receive the documents or materials electronically, which consent may be withdrawn. Among a number of safeguards regarding electronic communications are those provided to ensure that the electronic communications are actually received, protect confidentiality, and are prepared and furnished in an appropriate manner.
  • Expansion of EPCRS. the bill directs the secretary of the Treasury to modify the Employee Plans Compliance Resolution System (EPCRS) to achieve certain results such as the self-correction of loan errors, providing a comprehensive correction program to plans maintained pursuant to Code sections 403(b) and 457(b), allowing custodians of individual retirement plans to address inadvertent errors, permit excise tax-free, self-correction of certain required minimum distribution errors, and establish correction methods for errors in implementing automatic enrollment and automatic escalation features.
  • Use of forfeitures to fund safe harbor contributions. The bill provides that certain 401(k) matching contributions or nonelective contributions shall not fail to satisfy the definition as such, merely because the contribution is funded in whole or in part by forfeitures.
  • Section 4062(e) of ERISA and PBGC action. The bill adds a new paragraph (2) to ERISA section 4062(e) that provides requirements that must be satisfied before an employer is treated as having a cessation under section 4062(e)(1). The PBGC is directed not to take any actions that would be inconsistent with these new requirements.
    Church plans. The bill provides new rules and would amend a number of the existing rules relating to church plans. The bill would: apply a number of rules including controlled group rules to church plans for purposes of aggregating and disaggregating such plans pursuant to Code section 414(c); provide that TEFRA grandfathered church plans treated as section 403(b) plans would be treated as a defined benefit plans and not defined contribution plans for purposes of applying the limitations of Code section 415; exempt plans that offer an "automatic contribution arrangement" from any State law which prohibits such an arrangement in any church plan; provide for tax-free transfers and mergers of church plans; and permits the assets of church plans, retirement accounts, and administrative organizations to be invested in a group trust.
  • Protecting older, longer service participants in defined benefit plans. The bill amends Code section 401(a)(4) generally to provide that a plan will not fail to satisfy the nondiscrimination requirements of that section because of the composition of a closed class of participants or the benefits, rights, or features provided to such closed class, provided that after the date the class is closed, any plan amendments regarding the closed class satisfy section 401(a)(4).
  • Reporting and disclosure requirements. The Secretaries of Labor and the Treasury and the PBGC are directed to review plan reporting and disclosure requirements and to make recommendations to the appropriate committees of the Congress on how to simplify and improve such requirements.
  • Consolidation of defined contribution plan notices. Under the bill, the Secretaries of Labor and the Treasury are directed to adopt regulations providing that a plan may, but is not required to, consolidate two or more of the notices required by various provisions of ERISA and the Code into a single notice, or consolidate such notices with the summary plan description or summary of material modifications In addition, the bill would amend provisions of ERISA and the Code to provide that 401(k) plan safe harbor, automatic enrollment, and qualified default investment alternative (QDIA) notices are to be provided annually, without regard to plan year.


Information Reporting: The Obama Administration's Information Reporting and Worker Classification Proposals under Its Fiscal Year 2012 Budget

Michael Lloyd

The Administration's current revenue proposals include several that are intended to expand information reporting and improve compliance by business. Some of these proposals which may be of interest to employers are summarized briefly below:

  • Businesses would be required to file information returns for payments for services or for determinable gains aggregating $600 or more in a calendar year to a corporation (except a tax-exempt corporation). Regulatory authority would be provided to the Treasury to make exceptions when reporting would be especially burdensome. Information returns would not be required for payments for property.
  • Independent contractors providing services and receiving payments of $600 or more in a calendar year from a particular business would be required to furnish the business with a signed Form W-9 to certify the contractor's TIN. The business would then be required to verify the contractor's TIN under the IRS TIN Matching Program to validate the name/TIN combination provided. If a contractor fails to furnish the correct TIN, the business would be required to impose backup withholding. In an attempt to expand the scope of taxes collected through withholding, contractors receiving payments of $600 or more annually from a particular business could require the business to withhold a flat percentage (15, 25, 30, or 35 percent) identified by the contractor.
  • The IRS would be empowered to require prospective reclassification of workers who are misclassified as independent contractors in situations currently subject to relief under section 530 of the Revenue Act of 1978 (aka "section 530 relief"). Reduced penalties for misclassified workers would apply only if the putative employer voluntarily reclassifies its workers before the IRS or other enforcement agency initiates contact regarding the misclassified workers and if the putative employer filed all required Forms 1099.
  • Employee leasing companies would be jointly and severally liable with their clients for Federal employment taxes. Under certain circumstances, employee leasing companies would be solely liable for such taxes.
  • The Service's powers would be expanded to require employers to report additional information regarding the tax requirements of employee benefit plans in electronically filed Forms 5500. The expansion of the Service's powers would be comparable to that of the Department of Labor with respect to information relevant to Title I of ERISA.


1 The final regulations provide separate rules for SBCs required to be furnished (1) by a group health insurer to a fully-insured group health plan or plan sponsor, (2) by a group health insurer, group health plan, or plan administrator to participants and beneficiaries, and (3) by an individual health insurer to an enrollee (or prospective enrollee) or dependent. This alert focuses on the second category of rules only.

2 A material modification includes any modification to coverage that, itself, or in conjunction with other contemporaneous changes, "would be considered by an average plan participant…to be an important change in covered benefits or other terms of coverage under the plan or policy," and could include, for example, enhancements of covered benefits or services as well as reductions in covered benefits or services.

3 Last spring, the DOL issued a Request for Information (76 Fed. Reg. 19285 (Apr. 7, 2011)), in which it indicated that it was reviewing these general electronic disclosure rules. See our May 5, 2011 Employee Benefits Alert. Because the SBC regulations adopt the electronic distribution rules by cross-reference, any future changes that the DOL may make to those rules will also apply to the SBC provisions.

4 A health FSA is considered HIPAA-excepted for a class of participants if (1) other employer-sponsored, non-HIPAA excepted health coverage is made available to those participants, and (2) where the health FSA provides for employer contributions (e.g., matching contributions) in addition to salary reduction contributions, the maximum benefit payable under the health FSA for the year does not exceed the greater of (a) two times the participant's salary reduction election for the year, or (b) the participant's salary reduction election for the year plus $500.

5 An HRA is a wholly-employer-funded arrangement that reimburses some or all of a participant's qualified medical expenses, and may allow the participant to carry forward unused amounts from year-to-year (i.e., HRAs are not subject to the "use it or lose it" rule applicable to health FSAs). See IRS Notice 2002-45, 2002-2 C.B. 93, and Rev. Rul. 2002-41, 2002-2 C.B. 75.

6 The IRS previously has indicated that it is contemplating an approach whereby an employee will be deemed to work at least 30 hours per week, for this purpose, if he or she works an average of at least 130 hours in a calendar month. Notice 2011-36, Section III.C, V (May 3, 2011). 

For more information, please contact:

Fred Oliphant,, 202-626-5834

Elizabeth Drake*

Marianna Dyson*

Michael Lloyd*

Anthony Provenzano*

*Former Miller & Chevalier attorney

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

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