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Qualified Plan Amendments Deadline, Exec Comp Legislation, Cafeteria Plan Rules

Focus On Employee Benefits

Qualified Plans: Plan Amendment Deadlines Are Fast Approaching

Gary Quintiere, Elizabeth Drake

When the Pension Protection Act of 2006 became law, and when the final regulations under Internal Revenue Code section 415 were issued, they imposed generous plan amendment deadlines that postponed action until well into the future. Now, these deadlines are fast-approaching. Generally, if both the plan and the plan sponsor have a December 31 tax year, the 415 amendments are required by the due date of the sponsor’s 2008 tax return. For many companies, this deadline is September 15, 2009 -- just a few months away. The PPA amendments must be in place by December 31, 2009 for calendar-year plans.

Plan sponsors who have not started the amendment process need to begin now. Because the required plan amendments must reflect the past several years of plan administration, in most cases, the amendment process will require conversations with plan administrators, recordkeepers, and actuaries before productive drafting can take place. In our experience, the need for these conversations can significantly lengthen the amendment process.

Plan sponsors who have already adopted compliance amendments would be wise to review them now. Amendments that were adopted early may be incomplete because, for example, certain decisions were tabled for further review or pending IRS guidance.

One Final Note: The IRS has been demonstrating an ever-increasing focus on the plan amendment process itself. That is, in addition to determining whether an amendment complies with relevant guidance and plan operations, the IRS will also demand evidence that the amendment was timely adopted and that the adoption procedures were consistent with those set forth in the plan. The IRS is likely to take issue, for example, with a board resolution that generally approves certain compliance amendments if there is no evidence that the updated plan language was approved by the board, or adopted by an authorized person in a signed and dated plan amendment, by the applicable amendment deadline. Plan sponsors should be aware that more and more, “getting the plan language right” is only one requirement for IRS approval of the plan.


Exec Comp: Executive Compensation Provisions May Be Tapped To Help Fund Health Care Reform

Anne Batter, Fred Oliphant

As health care reform legislation makes its way through Congress this summer, companies should be aware that legislative changes to various executive compensation provisions may be added to the legislation as a source of funding for health care reform. When Congress is looking for revenue, it is easy to pull from prior proposals. In particular, we expect that Congress may revive past proposals to amend Code section 162(m), as well as a past proposal to impose a $1 million cap on deferred compensation, as a source of funding for health care reform.

Any section 162(m) proposals likely will tinker with the definition of covered employees who are subject to section 162(m) and the application of the exception from section 162(m) for performance-based compensation. A relatively noncontroversial change that could be made to the covered employee definition would be an alignment of the section 162(m) definition to the relatively new SEC disclosure rules, so that Notice 2007-49’s exclusion of the CFO from the covered employee group would no longer be necessary, and the CFO would again be a covered employee. Congress also could change the covered employee definition so that it depends on an employee’s status at any time during the year, rather than the employee’s status as of the end of the year. Further, we expect any changes to the covered employee definition would also make it so a covered employee retains his or her status as a covered employee even after he or she terminates employment, so that compensation paid to the employee in the years after termination would continue to be non-deductible to the extent it exceeds $1 million per year.

Congress could also do away with, or limit, the exceptions from section 162(m) for performance-based compensation, commissions, and/or stock options. Each of these exceptions has been proposed to be severely limited by Congress in recent years. Of these possibilities, it seems most likely that Congress will tighten the exception for performance-based compensation. Clearly, any changes to the covered employee definition, as outlined above, or the performance-based compensation exception, will be costly to companies.

Another potential source of revenue for funding health care reform is the $1 million cap on deferred compensation. Such a provision was proposed in 2007 and was the subject of a House Ways and Means Committee hearing in March 2007. Although it was at the time scored as raising $806 million in revenue, it is not clear how much it would score now that section 457A has been enacted. At the time, it was thought that a $1 million cap on deferred compensation would be difficult to administer, in part because it would be difficult to measure annual deferrals (especially for supplemental retirement plans and RSUs). These issues were never fully worked out and it is unclear whether there will be time to work out these kinds of issues if the provision is dropped into the health care reform legislation late in the process. We will continue to be monitoring developments in this area as the health care reform legislation moves forward.


Health & Welfare: Outlook for Cafeteria Plan Rules

Susan Relland

The Internal Revenue Service and Department of Treasury published proposed cafeteria plan regulations in August, 2007. 72 FR 43938 (Aug. 6, 2007). Final regulations were anticipated by the end of 2008, and then again by the end of June, 2009. Agency personnel had previously informally advised that, if the regulations were published by June, 2009, they would take effect for plan years beginning on or after January 1, 2010; if they were published after June, 2009, they would take effect for plan years beginning on or after January 1, 2011. Despite the act that the IRS’s May 11, 2009 regulatory agenda still shows a target publication date of June, 2009, rumors have begun to circulate that no regulations governing health plans are likely to be released during this period of intense Congressional activity to enact health reform.

The rumors might be explained by the following: One of the financing options for health reform currently under discussion by the Senate Finance Committee is a cap on the amount of health benefits that may be provided by employers on a tax-free basis. Any amounts that employees contribute toward the cost of their benefits on a pre-tax basis via a cafeteria plan would also be subject to the cap. Therefore, it may make sense to wait to publish the final cafeteria plan regulations until the agency knows whether cafeteria plan rules are likely to be affected by possible health reform legislation.

For additional information, please contact any of the following lawyers:

Gary Quintiere,, 202-626-1491

Frederick Oliphant,, 202-626-5834

Elizabeth Drake*

*Former Miller & Chevalier attorney

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