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Healthcare Reform Deadlines and Effective Dates; Plan Amendment and Disclosure Deadlines; Deadline for Correcting Noncompliant 409A Arrangements

Focus On Employee Benefits

Health and Welfare: Upcoming Healthcare Reform Deadlines and Effective Dates

Garrett Fenton* and Fred Oliphant

Some commentators have described 2013 as a "bridge year" under the Patient Protection and Affordable Care Act (PPACA), insofar as many of the more highly-publicized provisions of the healthcare reform law (such as the individual mandate and employer "pay or play" provisions) take effect beginning in 2014. However, employers need to be aware of the following provisions that generally are scheduled to take effect before 2014:

  • Summary of Benefits and Coverage (SBC) and Uniform Glossary. The SBC and Uniform Glossary requirements under PPACA apply to group health plans as of (1) the first day of the first open enrollment period beginning on or after September 23, 2012, with respect to participants and beneficiaries who enroll or re-enroll through an open enrollment period, and (2) the first day of the first plan year beginning on or after September 23, 2012 (i.e., January 1, 2013 for calendar-year plans), with respect to participants and beneficiaries who enroll outside the open enrollment period. See our March 29, 2012 Focus On Employee Benefits.
  • $2,500 Health FSA limit. Under PPACA, employers must limit employee salary reduction contributions to a health flexible spending arrangement to $2,500, generally beginning January 1, 2013. Employers have until December 31, 2014 to amend their plans to reflect the limit, but plan operations must reflect the limit beginning in 2013. See our June 27, 2012 Focus On Employee Benefits
  • Additional 0.9% Medicare tax on higher income employees. Beginning in 2013, employers must withhold an additional 0.9% payroll tax with the employee portion of Medicare FICA taxes for certain higher income employees. Although the additional tax is imposed on wages in excess of $200,000 for single filers ($125,000 for married individuals filing separately and $250,000 for joint filers), employers must nevertheless 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. Employers should confirm that their payroll systems have been updated to implement the new payroll tax. Employers should also be prepared for questions regarding the possibility for over-withholding or under-withholding of the tax, depending on the employee's marital or tax return filing status. The IRS has published FAQs (available at 
  • Form W-2 reporting of the cost of employer-sponsored health coverage. The cost of employer-sponsored health coverage must be reported on an employee's Form W-2, beginning with the 2012 Form W-2 issued in January 2013. See our January 11, 2012 Employee Benefits Alert
  • Comparative Effectiveness Research Fee. Beginning in 2012 and through 2018, a "comparative effectiveness research" fee will be imposed on employers that sponsor self-funded group health plans and on the insurers of fully-insured group health plans. The amount of the fee is $1 per covered individual for the first plan year ending on or after September 30, 2012, $2 per covered individual for the following plan year, and an amount increased for inflation thereafter. For self-funded plans, employers will need to pay the fee using IRS Form 720 by the July 31 coinciding with or next following the end of each plan year. For most plans, this means that the first fee will need to be paid by July 31, 2013. While insurers of fully-insured group health plans are expected to pass the fee along to employers, the insurers remain responsible for paying the fee to the IRS. Employers also should be aware that the current IRS regulations implementing the fee are in proposed form, and are subject to change when they are finalized. 
  • Elimination of employer tax deduction for the federally subsidized portion of retiree prescription drug expenses. Currently, an employer sponsoring retiree prescription drug coverage may be entitled to the tax-free treatment of the Medicare Part D subsidy received by the employer for a portion of its expenses incurred in sponsoring the coverage, as well as a tax deduction for the full amount of those expenses. Beginning in 2013, employers may no longer claim a tax deduction for the federally subsidized portion of its retiree prescription drug expenses. 
  • $500,000 annual limit on the deductibility of compensation paid by a "covered health insurance provider." Most health insurers that provide major medical coverage will be subject to a $500,000 deduction limit for compensation paid to an officer, director, employee, or service provider. The limitation applies to current (non-deferred) compensation – as well as deferred compensation for services that were performed in taxable years beginning in 2010 – paid in taxable years 2013 and later. 
  • Notice to employees about health insurance exchanges. PPACA requires employers to notify employees about the health insurance exchanges and the availability of federal tax credits to purchase health insurance coverage. This notice requirement is effective March 1, 2013 (or the date of hire for new employees), but the federal government has yet to issue any guidance. Employers should be prepared to provide the required notice in early 2013 and look for any guidance that may be issued in the meantime.

In addition, employers should begin reviewing their plan designs now, if they have not already done so, to determine whether and how they may need (or want) to make changes in preparation for 2014.

* * *

While PPACA is garnering a good deal of attention and resources, employers should be mindful of their other disclosure obligations. In particular, employers should ensure that they timely provide the various notices that must be furnished to group health plan participants and beneficiaries, such as (1) the Medicare Part D notice of creditable or non-creditable coverage, for plans that offer prescription drug coverage to individuals who are or may be eligible for Medicare, (2) the Women's Health Cancer Rights Act (WHCRA) annual notice, (3) the Children's Health Insurance Program Reauthorization Act of 2009 (CHIPRA) annual notice, and (4) a reminder of the plan's HIPAA notice of privacy practices (this must be furnished at least once every three years, but many employers provide it each year, along with the various other annual notices).

Qualified Plans: Upcoming Amendment and Disclosure Deadlines

Mike Chittenden* and Elizabeth Drake

It is time again for plan sponsors of tax-qualified retirement plans with calendar plan years to review their plans to determine whether any year-end amendments are required and to provide necessary participant disclosures. The following should be helpful in guiding that review:

Tax-Qualification Amendments 

  • Section 436 funding-based limits on accelerated payments and benefit accruals (applicable to all single-employer defined benefit pension plans). In Notice 2011-96, the IRS set a new deadline for adopting Code Section 436 amendments – the last day of the first plan year beginning in 2012 (i.e., December 31, 2012, for calendar plan years). Employers should review their defined benefit plans to ensure they have been properly amended for Section 436, particularly in light of the recent IRS guidance and sample amendment in Notice 2011-96. 
  • Section 411(b)(5) interest crediting and market rate of return and Section 411(a)(13) three-year vesting rule (applicable to all cash balance and other hybrid defined benefit pension plans). In Notice 2011-85, the IRS set a new deadline for adopting Code Section 411(b)(5) and Section 411(a)(13) amendments – the last day of the first plan year before the plan year for which the proposed market rate hybrid plan regulations, when finalized, become effective. In Notice 2012-61, the IRS stated that the hybrid plan regulations will not become effective earlier than January 1, 2014. As a result, plan amendments for calendar year plans will not be required until December 31, 2013.

Discretionary Amendments 

  • Changes in plan design and plan administration. Employers generally need to amend their plans to reflect changes in plan design and plan administration by the end of the first plan year in which they become effective. It is important to remember, however, that certain changes (e.g., the reduction of future benefit accruals, certain changes to 401(k) safe harbor plans) must be adopted in advance pursuant to specific statutory and regulatory requirements. 
  • Changes to IRS letter forwarding program for missing participants. In Rev. Proc. 2012-35, the IRS announced that it will no longer make its letter forwarding program (set forth in Rev. Proc. 94-22) available to plans seeking to locate missing participants. Many plans have provisions that specifically require the use of the IRS letter forwarding program. Employers should amend their plans to update the procedures for locating missing participants, and ensure that the procedures utilized by their service providers are updated as well.

Extended Remedial Plan Amendment Period – Cycle B Filers 

  • Deadline for determination letter applications. 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 amended retroactively to correct qualification errors in the plan's provisions. The current five-year cycle for Cycle B plans – those plans sponsored by employers with tax identification numbers ending in 2 or 7 and multiple employer plans – ends on January 31, 2013. IRS Notice 2011-97 sets forth a cumulative list of provisions that the IRS will review in connection with Cycle B submissions.

Note: Before filing for a determination letter, employers should review their plans to ensure that all amendments since the last determination letter have been timely adopted. If any amendment was not timely adopted, or if there is a lack of clear documentation showing when an amendment was adopted, the employer should consider an IRS voluntary correction program (VCP) filing. IRS sanctions are significantly lower in VCP (as low as $375) than when the IRS discovers the failure during the determination letter process.

Participant Notices 

  • Qualified Default Investment Alternative (QDIA) Notice. Employers utilizing a QDIA for participants who do not make affirmative investment elections must provide an annual notice to participants with investments in the QDIA at least 30 days before the end of each plan year. The notice must include a description of the circumstances under which funds will be invested in the QDIA, a description of the QDIA, and an explanation of participants' rights to direct their investments. 
  • 401(k) Automatic Enrollment Notice. Employers with 401(k) plans that utilize automatic enrollment and automatic increase features must provide an annual notice to covered employees at least 30 days before the end of each plan year. The notice must inform participants how automatic deferrals will be invested in the absence of an affirmative investment direction, and how to opt out of or change the level of contributions. 
  • 401(k) Safe Harbor Notice. Employers with 401(k) plans that utilize a non-elective or matching contribution safe harbor alternative to ADP and ACP nondiscrimination testing must provide an annual notice to all eligible employees at least 30 days before the end of each plan year. Among other things, the notice must describe the safe harbor contribution, any other contributions, withdrawal and vesting provisions applicable to contributions, and how to make deferral elections. 
  • Quarterly Fee Disclosures. Employers with participant-directed 401(k) or other defined contribution plans must provide the first quarterly disclosure of plan fees to all participants by November 14, 2012. The disclosure must describe the actual expenses paid from a participant's account during the preceding calendar quarter. 
  • Summary Annual Report. Employers with defined contribution plans are required to provide a summary annual report to all participants no later than two months after the Form 5500 due date (i.e., by December 15 for plans that filed their Form 5500 with an extension through October 15). Employers with defined benefit plans with more than 100 participants need not provide a summary annual report, instead they must provide an annual funding notice generally within 120 days after the close of each plan year (i.e., by April 30 for calendar year plans). 

Executive Compensation: Section 409A: Relief Period for Release-Contingent Payments Coming to a Close

Mike Chittenden* and Fred Oliphant

Employers should review their severance, deferred compensation, and other arrangements that condition payment on the execution of a release or other employment-related document by the payee to ensure they are compliant with Code Section 409A. In Notice 2010-80, the IRS updated its Section 409A correction program to allow employers (and other service recipients) additional transition relief to bring noncompliant agreements with such conditions into compliance. The deadline for correcting the terms of any such noncompliant arrangement under this relief is December 31, 2012. The requirements for such relief are spelled out in the Notice and in Notice 2010-6, but the highlights are as follows:

If a payment arrangement subject to Section 409A designates a permissible period following the employee's (or other service provider's) separation from service for payment and conditions the payment on an employee executing a release or other employment-related document, the arrangement must be amended (1) to designate the last day of such period as the payment date or (2) for payment to be made in the second taxable year if the designated period overlaps two taxable years. If the payment arrangement does not specify a period for payment, but only conditions payment on the execution of a release or other document, the amendment must provide for payment to be made (or begin) either (1) on a fixed date, either 60 or 90 days, after the permissible payment event, e.g., separation from service, or (2) during a specified period of no longer than 90 days after the permissible payment event, but if the period spans two taxable years, the payment will be made in the second taxable year. The amendment is required regardless of the form in which payment is made, e.g., lump sum payments or installment payments. 

Note that if no permissible payment event subject to the defective provision has occurred, the plan may be amended after December 31, 2012, provided that it is amended before a payment event occurs and the notification requirements are satisfied (see below). However, if a payment has been made under the defective provision since March 31, 2011, and there continue to be deferrals subject to such a defective provision, the defective provision (and all similar provisions) should be amended before December 31, 2012, to ensure the availability of the transition relief provided for such payment. Under certain circumstances, the transition relief may also require payments that have been made to be further corrected under the operational failure correction program in Notice 2008-113.

Employers taking advantage of the document form correction program are required to provide notice to the IRS of the changes made. No notice is required to employees (or by the employees to the IRS) if the defective release-contingent provision is timely corrected (i.e., if the employer timely amends the noncompliant arrangement by December 31, 2012), but certain types of arrangements, e.g., individual employment agreements or severance agreements, could require the employee's consent. Given the harsh tax penalties that fall on the employee for non-compliance, employee consent should not be difficult to obtain. If a correction of a defective release-contingent provision is made after the end of 2012 under the general correction rules, the employee must be provided notice of the correction and attach a statement to his or her tax return. Employers should take steps to make any necessary amendments now to ensure the year-end deadline is met if they wish to avoid potential penalties on prior payments and avoid the need to comply with the employee notification rules described above.

For more information, please contact:

Fred Oliphant,, 202-626-5834

Elizabeth Drake*

Mike Chittenden*

Garrett Fenton*

*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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