Pension legislation is reported out of the Senate Finance Committee and the House Education and the Workforce Committee. The pension reform legislation working its way through Congress in recent years is called the National Employee Savings and Trust Equity Guarantee Act ("NESTEG") in the Senate and the Pension Protection Act in the House. It is too soon to speculate on any details of the eventual legislation, although some version of these bills may be enacted later this year. The House bill is the more comprehensive legislation. It seeks to accomplish the following:
- Simplify the funding rules for defined benefit plans and make employers achieve 100% funding more rapidly;
- Prohibit employers and unions from increasing benefits or paying lump sums if a plan is less than 80% funded;
- Increase PBGC premiums for single employer plans from $19 to $30, with the increases phased in over several years; and
- Ensure that cash balance plans continue to be viable under the law by ending the legal uncertainty surrounding them in a way that permits them to operate, generally, as currently in effect.
Revenue Ruling 2005-55 holds that a profit sharing plan fails to be a qualified retirement plan if it provides a medical reimbursement account
with part of each participant's account.
The hoped for advantage for the participants in such a program is that payments received by a participant from a medical reimbursement account are not included in taxable income. In this Ruling, the Service held that a profit sharing plan that tries to administer part of each participant's account as a medical reimbursement plan does not qualify. Plans with such provisions in them need to be amended for plan years beginning after August 15, 2005. Any claimed exclusions from income of reimbursement amounts paid out before the first day of the plan year beginning after August 15, 2005, may still be excluded from income under a special transitional rule.IRS has proposed regulations to coordinate the Code's various notice requirements for benefit plan participants with the electronic media provisions of the Electronic Signatures in Global and National Commerce Act (the "E-Sign" statute).
ESIGN became effective October 1, 2000. It differed from previously released IRS guidance on use of electronic media for benefit plan administration (primarily Notice 99-1) by requiring that the participant receiving an electronic communication which the tax Code requires to be "in writing" must first have affirmatively consented (and has not withdrawn the consent) to using an electronic record of the requirement. In the proposed IRS regulations, which will become effective when they are finalized, the IRS sets forth the exclusive rules relating to the use of electronic media to satisfy any tax Code requirement that a communication to, or from, a participant, with respect to the participant's rights under the benefit plan be in writing, or in written form. The standards in the proposed regulations will also serve as a safe harbor when an electronic medium is used for any form of communication that is not required to be in writing or in written form.According to the proposed regulation (Proposed Treas. Reg. Section 1.401(a)-21), any electronic form of communication must also satisfy all the otherwise applicable requirements for that communication, including the content and timing requirements. In addition, the content of the notice and the medium through which it is transmitted would have to be reasonably designed to provide the information to the participant in a manner that is no less understandable to the participant than if provided on a written paper document. When the notice is provided, it must also tell the participant the significance of the notice and provide any instructions needed to access the notice.
The proposed regulations also provide that before a plan may provide an electronic notice, the participant must consent to receive it electronically. The consent would have to demonstrate that the participant can access the notice in electronic form. Consent may be provided in written form, but is effective only if the paper consent is confirmed in a way that reasonably demonstrates that the participant can access the notice in the electronic form to be provided. Before consenting, the participant must be provided a disclosure statement that outlines the scope of the consent, the right of the participant to withdraw the consent, and the right to receive the communication using paper. The disclosure would have to specify the hardware and software requirements for accessing the electronic communication and the procedures for updating information to contact the participant electronically. An example in the proposed regulations make it clear that this disclosure statement may be provided electronically.
The proposed regulations extend for the first time the use of electronic medium to the notice and election rules applicable to plans subject to the Qualified Joint and Survivor Annuity rules. These rules require spousal consent to be in writing and witnessed by a notary public or a plan representative. The proposed regulations would permit the use of an electronic acknowledgement or notarization of a signature. The signature of the individual would still be required to be witnessed in the physical presence of the plan representative or notary public, whether or not the signature is provided on paper or electronically.
EMPLOYEE WELFARE BENEFIT PLANS: JULY 2005 DEVELOPMENTS
Fifth Circuit U. S. Court of Appeals sounds a warning to group health plan sponsors regarding the time period for the election of COBRA continuation coverage.
The fight in the matter of Lifecare Hospitals, Inc. v. Health Plus of La., Inc., 5th Cir. No. 04-30422 (7/20/2005) was over $250,000 of hospital expenses incurred by a former employee of a company that had its health insurance through Health Plus in Louisiana. The employee became gravely ill in July 2001 and was terminated from his employment in August. His group health coverage ended on the last day of August, subject to an election of COBRA continuation coverage. The employee completed and submitted a COBRA continuation coverage election form on December 17, 2001, and tendered monthly premiums for the period of September through December 2001. Health Plus refused to pay the former employee's expenses during these months, arguing that his COBRA election was not timely because it was not made within 60 days of the later of the date notice was given (Health Plus argued that this date was July 24, 2001) or the date of the qualifying event (August 31, 2001).The court held that the 60-day election period was only the minimum allowable period, citing the COBRA statutory language that requires an election period that "is of at least 60 days'. Duration." The court pointed out that, in this case, the group health plan documents do not limit the COBRA election period so a COBRA continuation election by the employee would have been timely if it was made at any time during the 18-month period of COBRA continuation coverage availability.
Plan administrators will want to make sure that their plan documents specifically limit the COBRA election period to 60 days in order to avoid similar problems.
As of June 21, 2005, nine States still needed to enact legislation to give State tax breaks to HSAs (Health Savings Accounts), which are available for use in conjunction with high deductible health care plans.
On July 25th, Wisconsin.s governor vetoed legislation that would have provided Wisconsin tax breaks to HSAs (making the individual.s contributions deductible and employer contributions exempt from Wisconsin taxable income). So HSA contributions by employees remain nondeductible and employer contributions to HSAs for employees remain taxable income under Wisconsin state income tax laws.EXECUTIVE COMPENSATION: JULY 2005 DEVELOPMENTS
IRS has released audit technique guides on executive fringe benefits.
It includes guidance to IRS auditors on the treatment of payments and perks often provided to departing or retiring executives for such things as club memberships, qualified employee discounts, home improvements, personal use of the company's aircraft, and qualified retirement planning. (Executive Compensation – Fringe Benefits Audit Techniques Guide (02-2005)).The guide indicates that the IRS is aware of a variety of techniques that may be used by employers to treat as a business expense amounts that the IRS feels should be considered to be compensation. It directs auditors to scrutinize SEC filings (Form 10K items 10, 11, and 12) and Form 4, and to look closely at the following items on the corporate return: Other Deductions, Cost of Goods Sold, Depreciation, Employee Benefits, Schedule M-1, Travel and Entertainment, and Rent. The guides suggest that auditors pick a representative group of executives for in-depth examination, which, at a minimum, should include the Section 16b executives for public companies (the CEO and four other highest paid).
The Blue Book on new nonqualified deferred compensation rules (Code Section 409A) is out and warns of a technical correction the Joint Committee on Taxation anticipates will be adopted, extending the new rules to pre-2005 transfers to offshore rabbi trusts and financial triggers.
The new statute specifically included an effective date of January 1, 2005, so it seemed that assets transferred to offshore rabbi trusts before that date would be unaffected by new Code Section 409A(b). For the same reason, it seemed that nonqualified deferred compensation plans with financial health triggers in place before January 1, 2005, would be exempt from the new rules (unless the trigger is "pulled" and assets become restricted after December 31, 2004).But, as stated in the Blue Book, deferred compensation amounts set aside in offshore trusts before January 1, 2005, and financial health triggers adopted before January 1, 2005, are intended to be subject to the new law, and this will be addressed in technical corrections legislation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
