What goes around comes around in the retirement plan world, again.
As you may have heard, as of the first of the year, the only retirement plan offered to new IBM employees is the IBM 401(k) plan. IBM is doing a remarkable job of infusing its 401(k) plan with features intended to approach the security of a traditional defined benefit program, and we think you may find some of these ideas interesting and appealing for your own programs. The new IBM 401(k) incorporates, for example, automatic enrollment, automatic rebalancing of investment accounts, disability insurance, and an annuity income option that allows retirees to receive guaranteed payments over the course of their lives. The company matches up to 6% of pay and is considering automatic "step-ups," which would increase employees' contributions periodically, and a managed account feature, in which the company would contract with a financial adviser to manage the assets of an employee's account for an additional fee. In fact, IBM reports that it is considering making managed accounts the default investment option.The annuity option is set up in a way that minimizes fiduciary and administrative concerns for the IBM plan over the long-term and provides excellent value to participants. Participants shop for their own retirement annuities with professional assistance and purchase them at "institutional" rates (far cheaper than individual annuities) and the annuities are actually purchased in the form of an IRA rollover annuity account, so the annuity is no longer associated with the IBM plan when payments commence.
All of this is being accomplished by IBM with a keen eye on holding down costs to participants. Most of these features are readily accessible now to 401(k) plans far smaller than the IBM plan. We encourage you to contact us if you are interested in exploring some or all of these plan design innovations.
EMPLOYEE WELFARE BENEFIT PLANS: JUNE 2005 DEVELOPMENTS
Medicare Part D imposes a new notice requirement on employers.
Medicare Part D, the new prescription drug program that becomes effective January 1, 2006, imposes a notice requirement on employers that provide prescription drug coverage under their group health plans. The first notice is required to be provided prior to November 15, 2005, which is the first day of the initial enrollment period for Medicare Part D coverage for all Medicare-eligible individuals.The purpose of the notice is to inform Medicare-eligible individuals whether their employer-provided prescription drug benefit is "creditable coverage." This is critically important because individuals who do not enroll in Medicare Part D during their initial enrollment period will be charged a late enrollment penalty for their Medicare Part D coverage when they enroll in a subsequent enrollment period if there has been a continuous period of 63 days or longer at any time after the end of the individual's initial enrollment period during which the individual was not covered under any creditable prescription drug coverage. The late enrollment penalty takes the form of a permanent premium increase of at least 1% of the year's base Part D premium for each uncovered month.
"Creditable coverage" is coverage that is equal in value to the basic Medicare Part D prescription drug program. According to guidance published by the Medicare administrative agency, the Centers for Medicare and Medicaid Services (or "CMS"), employers can determine whether their prescription drug coverage is creditable coverage using a safe harbor method or by performing an actuarial analysis. The link that follows takes you to the CMS website containing more information about how to determine whether a particular program is creditable coverage: http://www.cms.hhs.gov/medicarereform/CCguidances.asp.
The required notice of creditable coverage must be provided to any individual, whether an employee or retiree, COBRA qualified beneficiary, or spouse or dependent of any of the foregoing, who:
- is entitled to Medicare Part A and/or enrolled in Medicare Part B, whether as a result of age, disability or end-stage renal disease;
- is enrolled in, or eligible to enroll in, coverage under the employer's prescription drug coverage, and
- resides in the service area of a Medicare Part D prescription drug plan.
It may make sense to provide the notice to all Medicare-eligible individuals covered by the employer-provided prescription drug coverage because it may be difficult to determine whether an area is covered by a Medicare Part D prescription drug plan. Similarly, the employer may prefer to provide the notice to all plan participants and to all non-participating individuals who are eligible to enroll in the employer's prescription drug coverage but have not done so as a means of satisfying the notice requirement. There does not appear to be a penalty in the law or rules for employers that fail to provide the required notice.
Employers must provide the notice at the following times:
- Each year prior to the Medicare Part D annual open enrollment period, which begins November 15th;
- Prior to the date an individual first becomes eligible for Medicare Part D;
- Prior to the effective date of coverage under the employer's prescription drug coverage for any Medicare-eligible individual who enrolls in the plan;
- Whenever the prescription drug coverage changes so that it is no longer creditable coverage, or becomes creditable coverage; or
- Upon an individual's request.
The "prior to" requirement under the first three events is satisfied if the notice is provided within 12 months preceding the event. Therefore, an annual notice will meet these three requirements.
The notice may be provided as a separate mailing or may be included in other participant information, such as with open enrollment materials, in a newsletter or in a summary plan description. The notice may be provided electronically, but only if the individual has shown that he or she is able to receive the information electronically. Other requirements also apply to the provision of an electronic notice.
The CMS has provided two model forms of this notice – one if the employer's coverage is creditable coverage and one if it is not. These model notices can be found at http://www.cms.hhs.gov/medicarereform/CCguidances.asp. These model forms are only good for the initial enrollment period that begins November 15, 2005. The CMS will provide additional guidance in the future regarding modifications that will need to be made to the model notice beyond November 15, 2005.
Employers are also required to provide a notice of creditable co. The CMS will provide information about the content and method of providing this notice in later guidance.
Last month the IRS issued Notice 2005-42, allowing an additional 2 ½ month grace period for cafeteria plan participants to use their salary reduction amounts before they would have to be forfeited.
Now, the IRS has noted that a plan amendment adding this grace period could mean that participants eligible for the grace period would not be eligible to make contributions to an HSA account for the plan year that includes the 2 ½ month period. IRS intends to fix this problem, but employers may want to delay adopting the grace period until the "fix" is announced.EXECUTIVE COMPENSATION: JUNE 2005 DEVELOPMENTS
The second round of regulatory guidance under tax code Section 409A "may be out by August 2005" according to Daniel Hogans, an attorney-adviser in the Treasury Department's Office of Tax Policy.
Mr. Hogans said that the second round of material will cover drafting and operational concerns and may be issued as proposed and/or temporary regulations. According to Mr. Hogans, the guidance is under review at the top levels of the IRS and the Treasury Department, and this may "push back" the release until September. He also said to "wait to revise things" until more definitive guidance is available. The probable delay in issuance of the guidance until sometime in September suggests that the 2005 year end may be as fraught with uncertainty as the 2004 year end with respect to nonqualified deferred compensation issues and elections. The delay also raises the possibility that the deadline for initial compliance may be deferred past December 31.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.
