Fiduciary Oversight:A Process & Approach to Best Practices
Charles A. Bruder, Esq.
Scott Rappoport
The material provided herein is for informational purposes only and is not intended as legal advice or counsel.
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Please help yourself to food and drinksPlease let us know if the room temperature is too hot or coldBathrooms are located past the reception desk on the rightPlease turn OFF your cell phonesPlease complete and return surveys at the end of the seminar
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Fiduciary Oversight In The Spotlight
LaRue v. DeWolff (Supreme Court 10/2007) ERISA litigation up 25%/year (past 4 years) Pension Protection Act (2006) DOL disclosure initiatives (2008) Changes to Form 5500
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Who is a Fiduciary?Any person who:
Exercises any discretionary authority or discretionary control in managing the plan or who has any authority or control in managing or disposing of its assets;
Has any discretionary authority or responsibility in administrating the plan; or
Renders investment advice for a fee or compensation with respect to any monies or other property belonging to the plan.
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Responsibilities Of a Fiduciary Under ERISA
Fiduciaries are required to perform their duties solely in the interest of the plan participants and their beneficiaries.
Fiduciaries must exercise the care, skill, prudence, and the diligence of a prudent person who is acting in a like capacity and is familiar with such matters.
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What are Fiduciaries’ Exposures Under ERISA?
Fiduciary liability is personal, absolute and unlimited. ERISA
holds fiduciaries personally liable for their actions.
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Safe Harbors
Voluntary
May insulate from liability
Must demonstrate compliance with requirements: Prudent selection Prudent Monitoring Acknowledgement of fiduciary status
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404(a) Safe Harbor Provisions
Investment decision delegated to “prudent expert” Experts selected by due diligence process Experts exercise discretion over assets Expert acknowledges co-fiduciary status in writing Fiduciary must ensure that experts perform the
agreed upon tasks using agreed upon criteria
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404(c) Safe Harbor Provisions
Requires notification in writing of intent to comply with 404(c) safe harbor
Three different investment options with differing risk/return profiles
Information and education on the different investment options
Opportunity to change investments with appropriate frequency.
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Fiduciary Adviser Safe Harbor Provisions
Select a qualified fiduciary adviser who:
Acknowledges fiduciary status in writing
Discloses all conflicts of interest Discloses all forms of compensation
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Qualified Default Investment Alternative (QDIA)
Plan sponsor can avoid liability for participant investment decisions by offering QDIA
Age-based funds or models Risk-based funds or models Age-based managed accounts Money market accounts for 90-120 days
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Fiduciary Oversight Benefit Sources & Solutions Best Practices
Creation of the Investment Policy Statement/Governing Body Document
Creation of the Investment Committee Designation of qualified professional investment
counsel Ongoing monitoring & reporting
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Monitoring & ReportingBenefit Sources & Solutions Best Practices
Review actual Portfolio for MPT Statistics Appropriate Index Peer group
Compare investment expenses for risk & reward Create a quarterly correlation matrix Review operational quality of investment managers Disclose plan expenses and revenue sharing Create “plain English” quarterly “minutes” for plan
sponsor tied to an annual IPS review Standards defined in the IPS
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Monitoring & Reporting
Investment Committee Meeting Minutes
Information that is provided must be evaluated andactions that are considered must be documented
Watch list procedures must be followed
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How Can Benefit Sources & Solutions Help
Fiduciary Review Checklist Mutual Fund Review Source of technical information 888-560-5171
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ARRA COBRA Subsidy
Became Law February 17, 2009 Involuntary Terminees from 9/1/2008-12/31-2009 Effective March 1, 2009 65% Premium Subsidy COBRA Beneficiary remits 35% of 102% Difference is offset by payroll tax credit Employer is not responsible for determining income
eligibility
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ARRA Notice Requirements
By April 18, 2009, notice of new COBRA eligibility enrollment option to eligible beneficiaries who did not elect COBRA
9 Month Subsidy period
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Children’s Health Insurance Program (CHIP)
Effective April 1, 2009 Applies to all plans including self insured Children eligible for premium assistance under state
programs can elect employer sponsored plans This necessitates new eligibility period for those
choosing the employer sponsored plans. SPD’s for Medical and Cafeteria plans require
updated language.
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Do These Things Keep You Awake at Night?
Controlling Expenses Employee Retention Leveraging Resources Human Capital Challenges Lack of Control Regulatory Burden
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Why Benchmarking
Does the “annual train wreck” work for you? Do you have a benefits and comp philosophy? Desire to be a competitive employer Turnover Issues Morale Issues Communications
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About the SurveyConducted Q1 & Q2 2008
Joint effort of 142 UBA Members
12,680 Employers Survey
168,019 Health Plans
National In Scope
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Who is United Benefit Advisors?
Consortium of 140 of the Nation’s Premiere Benefits Firms
Community of peers learning, sharing & focusing on better serving their clients
Leverage our connections, experience & wisdom to enhance the client experience
Work in tandem to maximize the impact technology has on improving business processes
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Full-Time Eligibility Requirements
4.9%
8.3%
53.5%
7.1%4.6%
17.6%
3.9%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
20 Hrs. 25 Hrs. 30 Hrs. 32 Hrs. 35 Hrs. 40 Hrs. Other
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Full-Time Employee Waiting Period
8.0%
5.3%
2.1%
8.6%
0.8%
11.9%
19.8%
7.3%
30.5%
3.3%2.3%
0%
5%
10%
15%
20%
25%
30%
35%
0 Days 30 Days 60 Days 90 Days 180+Days
0 Days 30 Days 60 Days 90 Days 180+Days
Other
Immediately Following First of Month Following
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54.2%
21.3%
10.2%12.6%
1.1% 0.6%
0%
10%
20%
30%
40%
50%
60%
PPO HMO POS CDHP EPO FFS
Type of Plan Offered
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Annual Cost Per Employee - Total Cost
$7,597
$6,736
$8,060
$6,456
$7,252
$9,960
$7,327
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
PPO HMO POS CDHP EPO FFS ALL
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$281$351
$433
$370
$691
$859
$1,065
$901
$0
$200
$400
$600
$800
$1,000
$1,200
Single Family
Total Monthly Premiums
25th Percentile Median 75th Percentile Average
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6.3%
12.0%
18.0%
12.9%
1.5%
8.0%
13.0%
7.4%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Initial Offer - Last Plan Anniversary Final Change - Last Plan Anniversary
Changes to Total Premiums
25th Percentile Median 75th Percentile Average
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15.0%
25.0%
40.0%
27.7%25.0%
48.6%
60.5%
46.0%
0%
10%
20%
30%
40%
50%
60%
70%
Single Family
Monthly Employee Share –% of Premium
25th Percentile Median 75th Percentile Average
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$21 $27$44
$100
$416
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
PCP SCP Urgent Care Center Emergency Room Per Admission CoPayor Deductible
Average CoPays
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$500
$1,000
$1,500
$1,105$1,000
$2,000
$3,000
$2,554
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
Single Family
In-Network Deductibles
25th Percentile Median 75th Percentile Average
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$500
$1,000
$2,250$1,768
$1,200
$3,000
$6,000
$4,131
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
Single Family
Out-of-Network Deductibles
25th Percentile Median 75th Percentile Average
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9.8%
28.8%
5.6%
55.6%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
% Offering WellnessProgram
Cash to Premium, 401(k),FSA, etc.
Extra Paid Time Off Gift Certificates or HealthClub Dues
Incentives Included
Wellness Programs and Incentives
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Wellness Programs & Components
78.7%
34.5%
40.2% 39.1%
51.0%
12.5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Health RiskAssessment
Seminars /Workshops
Physical Exam orBlood Draw
Coaching Incentives /Rewards
Other
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HRA And HSA Plans
4.5% 5.8%
71.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
% Offered % Enrolled % With FirstDollar Preventive
8.3%5.4%
85.4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
% Offered % Enrolled % With FirstDollar Preventive
HRAs HSAs
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Annual HRA Funding Levels
$1,000
$1,209
$2,000
$2,274
$0
$500
$1,000
$1,500
$2,000
$2,500
Median Single Average Single Median Family Average Family
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Type(s) of employee communication tools utilized:
41.9%
83.5%
91.1%Employeemeetings
Non-personalizedhandout materials
Individuallypersonalized
handout materials
(Note: More than one response could be selected, so the percentage of the total responses exceeds 100%)
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Type(s) of employee communication tools utilized:
30.7%
23.1%
6.1%
3.0%
Dedicated website for all company-provided employee benefits(employee benefits portal)
Personalized employee total pay andbenefits cost statements (hidden
paycheck)
Telephonic call center
Interactive Voice Response (IVR)communications
(Note: More than one response could be selected, so the percentage of the total responses exceeds 100%)
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Employer-Paid group benefit programs:
51.8%
67.2%
72.9%
84.2%
15.4%
10.8%
10.0%
4.3%
6.9%
5.4%
3.5%
2.8%Group Term Life
Group Dental
Group LongTerm Disability
Group ShortTerm Disability
In Place / Likely Next Year Would Like Someday More Info
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19.5%
43.5%
50.5%
64.7%
No
Yes, via phone-basedconsultations
Yes, via in-person consultations
Yes, via printed material frominvestment vendors
Employee access to financial advice regarding retirement plan savings and investment options:
(Note: More than one response could be selected, so the percentage of the total responses exceeds 100%)
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Employee programs or services in place or planned:
33.2%
55.4%
78.9%
19.5%
16.2%
4.4%
9.2%
8.3%
1.3%Casual dress day
Flexible hours
Work-at-home(telecommuting)
policy
In Place / Likely Next Year Would Like Someday More Info
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Participate in the 2009 Benefit Sources & Solutions/UBA Survey and Receive Custom Benchmarking Report Results
Go to www.benefitsource.com and see National Health Plan Survey
Fiduciary Oversight:A Process & Approach to Best Practices
Charles A. Bruder, Esq.Norris McLaughlin & Marcus, P.A.
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Fiduciary Duties and Corrective Action – A Practical Approach
• Several available options– Do nothing, and hope that the problem is not discovered– “Self correct” the potential fiduciary breach– Disclose the breach to the appropriate government
agency/program
• The key to addressing a breach of a fiduciary duty is identifying the available correction methods and determining the appropriate course of action
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The “Do Nothing” Approach
• Pros– No action or cost involved– Does not require disclosure to any government
agency/plan participant– May result in cost savings to the plan sponsor – Permits the plan sponsor to continue with its
current form of plan administration
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The “Do Nothing” Approach
• Cons– The “ticking time bomb”– Raises the potential costs associated with
corrective action– Failure to address a fiduciary breach may be a
further breach of fiduciary duty– Audit Lottery – Are you feeling lucky?
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Fiduciary Duties and Corrective Action – A Practical Approach
Available Corrective Programs1. Employee Plans Compliance Resolution System
(“EPCRS”)
2. Voluntary Fiduciary Correction Program (“VFCP”)
3. Internal Revenue Service (“IRS”) Notice 2008-113
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Employee Plans Compliance Resolution System
• EPCRS contains three correction programs:– Self-Correction Program (SCP)– Voluntary Correction Program (VCP)– Audit Closing Agreement Program (Audit CAP)
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Employee Plans Compliance Resolution System
Qualification Failures• Plan Document Failure
– Plan provision (or absence of provision) that violates the Code
• Operational Failure– Plan document complies with the Code but plan
doesn’t operate in accordance with its provisions
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Employee Plans Compliance Resolution System
Principles and Correction Methods• Full correction required for all plan years• Acceptable correction methods & retroactive plan
amendments– Expanded definition of “reasonable and appropriate”
• Model correction methods provided in Appendices A & B of Rev. Proc. 2008-50
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Employee Plans Compliance Resolution System
SCP – Self Correction Program• No disclosure to IRS, no fee, no sanctions• Can only correct operational failures• Must have a favorable IRS Determination
Letter• Must have established practices &
procedures to assure ongoing compliance• Corrective action requires documentation
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Employee Plans Compliance Resolution System
SCP – Self Correction Program• Insignificant vs. significant failures
– Applicable corrective period – choosing the right one
– Factors in determining the type of failure which may be self-corrected
• What if the failure cannot be self-corrected?
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Employee Plans Compliance Resolution System
VCP – Voluntary Compliance Program• Single program and single-admission process• Submission procedures• Ends with a compliance statement – Don’t
need to sign statement• Determination Letter/Retroactive Plan
Amendment may result in Determination Letter if plan on-cycle
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Employee Plans Compliance Resolution System
SCP versus VCP• Distinction between insignificant and significant errors• List of Factors to Consider
– whether failure occurred during period of exam– % of assets/contributions involved– # of years involved– % of participants affected– % of participants who could have been affected– correction within reasonable period– reason for the failure
• Uncertainty for plan sponsor
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Employee Plans Compliance Resolution System
Rev. Proc. 2008-50: New Fee Schedule• VCP fee unchanged• Compliance fee for §401(a)(9) failures reduced to
$500• Fee for failure to amend for EGTRRA good-faith
amendments, §401(a)(9) interim amendments, and amendments required to implement optional law changes: flat $375
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Employee Plans Compliance Resolution System
Audit CAP• Higher sanction• Factors used in determining sanction:
– Practices in place to identify and prevent plan failures
– Steps taken to correct failures– Reason for the failures
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Employee Plans Compliance Resolution System
Audit CAP• Length of time that failures occurred• Number of NHCEs affected if plan is disqualified • Existence of a favorable Determination Letter• Whether the error involves a demographic failure• Whether the only failure is an employer eligibility
failure
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Employee Plans Compliance Resolution System
EPCRS – What is Not Covered• Form 5500 filing delinquencies
– DFVC Program
• Prohibited transactions• Funding deficiencies
– Certain limited relief available under the Worker, Retiree and Employer Recovery Act of 2008
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Fiduciary Duties and Corrective Action – A Practical Approach
Voluntary Fiduciary Corrective Program• Corrective program sponsored by the U.S.
Department of Labor– Certain enumerated transactions which may be
corrected• Prohibited purchases• Sales and exchanges• Improper loans• Delinquent contributions• Improper plan expenditures
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Fiduciary Duties and Corrective Action – A Practical Approach
Why VFCP?• Type of corrective action required• Avoidance of civil penalties imposed by the IRS• Obtain a DOL “no action” letter• Avoidance of the imposition of excise taxes if the
class exemption provisions are met• Processing/corrective costs• Forum shopping
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Voluntary Fiduciary Correction Program
VFCP – Class Exemptions • Six classes of prohibited transactions covered
– Failure to transmit contributions/loan payments in a timely manner
– Loans made to parties in interest– Sales of property with parties in interest– Sales of real property to a plan with a leaseback to the
employer– Purchase of an illiquid asset by a plan– Certain plan expense issues
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EPCRS or VFCP?
• Which program is appropriate for correction of a fiduciary breach?– Type of action (or inaction) which resulted in the
breach of fiduciary duty– Appropriate correction method
• Crossover issues
– Cost/benefit analysis– Processing time
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Fiduciary Duties and Corrective Action – A Practical Approach
Code Section 409A• Although not technically a “fiduciary duty,” a
potential source of financial woe for an employer• Code section has broad application to a variety of
arrangements• IRS Notice 2008-113 provides a model correction
program– Expands the program established under IRS Notice
2007-100
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IRS Notice 2008-113• Program scope
– No relief for documentary compliance failures• Includes required amendments
– Limited relief available for “insiders”– Applicable to “inadvertent and unintentional” errors– “Full” correction is required– Avoidance of excise taxes
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IRS Notice 2008-113Eligibility Provisions
• “Inadvertent and unintentional” operational errors– Impermissible payments made to an employee
• Demonstrable steps must be taken to avoid future errors
• Recipient’s income tax return for the year in which the error occurred cannot be under IRS audit
• The error has been fully corrected– IRS guidelines for full correction
• The company cannot be in financial distress– Significant risk of non-payment?
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IRS Notice 2008-113
Same Year Corrective Method• Early payments must be returned to the
company• Late payments must be to the employee
- Non-insiders may take up to 24 months from income tax return due date to repay
- Requires immediate and heavy financial need
• Interest payments may be required• Avoidance of Code Section 409A penalties
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IRS Notice 2008-113
Post Year Corrective Method• Non-insiders• Corrective methods are similar to the “same
year” correction guidelines• Employee may be required to make interest
payments• Avoidance of Code Section 409A penalties
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IRS Notice 2008-113Other Key Features
• Correction of impermissible stock right grants– “Reset” feature
• Limited corrective opportunity for other operational errors– $16,500 ceiling in 2008
• Other corrections permitted but will not avoid the 20% excise tax
• Employer notice requirements
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Code Section 125 New Proposed Treasury Regulations
• Effective for plan years commencing on or after January 1, 2009
• Apply to all arrangements which qualify for beneficial income tax treatment under Code Section 125– Group Medical Insurance Plans (“Flex Plans”)– Premium Only Plans– Medical Flexible Spending Accounts– Dependant Care Flexible Spending Accounts
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• Treasury Regulations clarify that Code Section 125 is the exclusive means under which nontaxable group health benefits may be provided to employees– If your company plans do not satisfy the provisions
of the new proposed Treasury Regulations, benefits paid under these plans will be taxable to the participants.
Code Section 125 New Proposed Treasury Regulations
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Code Section 125 Proposed Treasury Regulations –
What Has Changed?Written Plan Requirement
– Plans must include the following items:• Specific details concerning all benefits available under the
plan• Eligibility provisions for participation (employees only)• Rules governing benefits elections, maximum elective
contribution limits• Rules governing the irrevocability of elections• Details concerning employer contributions• Definition of plan year
– Plans must be operated in accordance with stated terms
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Code Section 125 Proposed Treasury Regulations -
What Has Changed?Nondiscrimination Testing Required
– Cafeteria plans cannot discriminate in favor of highly compensated employees
– Similarly situated employees must have a uniform opportunity to elect to receive benefits
– Objective nondiscrimination testing formula is provided in the Treasury Regulations
– “Safe Harbor” for premium-only cafeteria plans
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Code Section 125 Proposed Treasury Regulations –
What Should Employers Do?• Treasury Regulations apply to plan years
commencing on or after January 1, 2009• Need to carefully review plan documents
– Summary plan descriptions– Intranet/employee communications– Cafeteria plan forms brochures
• Amend plan documents currently (if necessary)• Create a compliance manual
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COBRA Subsidy – Notice Requirements
• By April 18, 2009, group health plans subject to COBRA must issue to “assistance eligible individuals” notice of the extended election period of COBRA coverage and the COBRA subsidy provisions.– A model notice is to be issued by the Secretary of Labor by March
19, 2009.– 60 day election period
• The notice must include specific information including:– The forms necessary to establish eligibility for the premium
reduction; – Contact information for the plan administrator regarding the
premium reduction;– A description of the extended election period;– A description of the individual’s obligation to notify the plan
administrator of eligibility for subsequent group health plan coverage; and
– A description of the eligible individual’s right to a coverage.
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COBRA Subsidy -Notice Requirements
• Notices must be provided to assistance eligible individuals who became entitled to elect COBRA continuation coverage during the period September 1, 2008 through December 31, 2009
• Notice regarding the special election provisions must be provided to all persons who terminated employment (for reasons other than gross misconduct) from September 1, 2008 through December 21, 2009.