Flurry of New Developments for Plan Sponsors: What Are the Next Steps?

The last few weeks have witnessed several important developments for plan sponsors. We want to summarize each development and suggest some practical next steps to consider.

1. COBRA Notices – New Regulations. The Department of Labor proposed regulations describing in more detail the COBRA notice rules. The regulations go into effect for plan years beginning in 2004, but may be used now.

The regulations finally provide guidance on the timing and content of four notices: the general notice of COBRA rights given to employees (and their spouses) when coverage begins; the employer’s notice to the plan administrator of a "qualifying event"; the plan’s notice to a qualified beneficiary of the right to elect COBRA; and the plan’s notice of early termination of a COBRA election (this is a new notice requirement). The DOL provides samples for certain of these notices.

Practical steps:

• Stop using any old DOL model notices.
• Use the next couple months to become familiar with the new rules.
• Review the COBRA procedures described in the plan’s SPD to be sure that they are consistent with the new rules (and revise as necessary before the next open enrollment).
• Update internal plan administration procedures to be sure that the timing, content and responsible party for each step in the COBRA process are clearly described, or be sure that the service contract with a COBRA vendor clearly covers these evolving responsibilities.

2. Black & Decker Disability Plan v. Nord. The U.S. Supreme Court ruled that the plan administrator of an ERISA-governed disability plan is not required to give special weight to the opinion of the participant’s treating physician. The plan administrator may require an independent medical examination and, if the administrator rejects the opinion of the participant’s treating physician, need not meet any special burden of providing evidence supporting its decision. However, the plan administrator may not arbitrarily refuse to give credit to reliable evidence provided by the participant (including the opinion of the treating physician). Practical steps:

• Make sure disability plan includes broadest possible discretion for review of claims, and gives authority to require independent medical review.
• Determine whether you have internal claims review procedures (however informal they may be), and examine those procedures to be sure that they provide maximum discretion. Also, be sure that internal procedures do not encourage the administrator to reject arbitrarily any reliable evidence presented by the claimant.
• Tell participants about any revised procedures, particularly the plan’s right to require independent medical review.

3. Updated IRS Correction Program. The IRS recently updated the procedures under which sponsors of retirement plans may voluntarily correct problems that could (if uncorrected) lead to plan disqualification. The new procedures go into effect on October 1, but may be used now.

The updated procedures reduce the fees for submitting proposed corrections to the IRS, explain how to correct a greater array of problems (such as plan loans or the failure to secure the spouse’s consent to a distribution), make more allowances for the difficulty in correction due to imprecise or unavailable data, and further streamline the procedures for communicating with the IRS. It is important to bear in mind that a large part of this program is devoted to educating plan sponsors on how to self-correct problems without going to the IRS.

Practical steps:

• Have a working familiarity with the revised correction program. We have prepared summaries for a recent client briefing; please let us know if you would like to receive copies of these materials.
• Be familiar with the types of problems and Form 5500 disclosures that are most likely to trigger an audit.
• Conduct regular self-assessment of the potential problem areas of greatest concern to the IRS (and DOL).
• Realize that an anonymous conversation with the IRS is often successful in identifying the most efficient way to correct a potentially disqualifying problem.

4. Audits on Plan Payment of Expenses. It has come to our attention that the DOL is focusing its resources in looking at the payment of plan-related expenses out of plan assets. This audit push is aimed equally at defined benefit plans and defined contribution plans. The DOL is concerned that plans are paying for expenses that, under DOL guidance, should be classified as sponsor expenses and paid by the employer instead of by the plan.

Practical steps:

• Be completely familiar with precisely what expenses are being paid out of plan assets.
• Have at your fingertips a good summary of what types of expenses may be paid out of plan assets, as well as what types of expenses must be paid by the employer.
• Make sure that each plan is charged only with expenses that relate solely to that plan.
• Have data available that will demonstrate your diligence in making sure that plans pay only permissible expenses under DOL guidance.
• If necessary, seek advice on whether certain expenses should be treated as "settlor" expenses (payable only by the employer) or as plan administration expenses (payable by the plan).

Copyright 2003 Gardner Carton & Douglas

This article is not intended as legal advice, which may often turn on specific facts. Readers should seek specific legal advice before acting with regard to the subjects mentioned here.