2010 New Benefit Rules

The Benefits Game: Year End Edition

It has been a busy year for benefit professionals. During 2009 numerous new rules have been issued and/or gone into effect that may impact your benefit programs. Other rules require compliance by the end of 2009 or in 2010. Legislation ranging from a complete overhaul of our health care system to additional pension funding relief is pending The following alert is intended to provide an overview of some of the employee benefit issues you should consider before year-end.

Notice Deadlines

Medicare Part D Notice – This is a notice that must go to any active employee who is eligible for Medicare and has prescription drug coverage under your health care plan. Revised notices have been published on the CMS website. This annual notice should have been distributed by November 15, 2009.

401(k) Plan Safe Harbor Notice –If your 401(k) Plan contains a non-elective or matching safe harbor contribution, the annual safe harbor notice for 2010 (as well as notices for the non-elective “maybe” contribution for 2009) should be made on or before December 1, 2009

Decision before November 30, 2009 about 2009 70-1/2 Distributions

The so-called “age 70 ½ “ distribution rules have been modified for 2009 and permit defined contribution plans (but not defined benefit plans) to make these minimum required distributions as scheduled, skip them altogether, or allow plan participants to elect whether or not to take the distribution for 2009. A decision to permit participants to make a distribution election must be made no later than the end of November in order to provide time for election notices to be mailed and distribution elections to be returned before year-end. Amendments do not have to be made until the end of 2011.

Plan Document Deadlines – December 31, 2009

Cafeteria Plan Document – Under proposed regulations issued by the Department of Treasury, if you offer employees the right to pay for benefits with pre-tax dollars and/or have flexible spending accounts (medical and/or dependent care), you must adopt a written “cafeteria plan” document no later than December 31, 2009.

403(b) Plan Document Requirement – All plan sponsors of tax deferred annuities and/or custodial accounts under Code Section 403(b) are required to adopt a plan document by the end of 2009. This includes plans that are not subject to the Employee Retirement Income Security Plan of 1974, as amended (“ERISA”) maintained by both tax-exempt entities and governmental entities, and ERISA-covered plans maintained by tax-exempt entities. Tax-exempt 403(b) plan sponsors should determine whether their program is subject to ERISA since additional compliance may be required, including the filing of a Form 5500.

Qualified Plans – 2009 Year End Amendment Deadline

Pension Protection Act Amendments– Your tax-qualified plans must be amended by the end of 2009 for compliance with the Pension Protection Act (“PPA”) and certain other legislation (Technical Corrections to the PPA, Heart Act). You may have already adopted some or all of these amendments. However, absent some extension of time (that has yet to be announced), the deadline for the adoption of these Interim Amendments is December 31, 2009

Qualified Plans – New Tax Notices for 2010

New Rollover Notices – The IRS has issued new “model” distribution/rollover notices for distributions beginning in 2010. These notices are required under Code Section 402(f) and will replace the old rollover notices plan sponsors have been using. There are two model notices: one for plans with Roth 401(k) accounts and one for plans that do not contain Roth 401(k) contributions.

Qualified Plans – IRS Determination Letter Filing Deadline January 30, 2010

IRS Filings for Cycle D Filers – If your company’s EIN ends in 4 or 9, then your tax-qualified plans, together with all amendments adopted since GUST{1} must be submitted (in amendment and restatement form) to the Internal Revenue Service (“Service”) no later than January 31, 2009. In accordance with the Service’s “staggered” submission procedures, this is your filing deadline if you want to obtain a favorable determination letter that your plan(s) comply with EGTRRA[2] and certain other tax-qualification requirements set forth in the Service’s 2009 Cumulative List of Changes in Plan Qualification Requirements. Be prepared to produce signed copies of all “Interim Amendments” you were required to adopt since GUST determination letters were issued. These will include (but may not be limited to): Good Faith EGTRRA Amendment, Amendment for compliance with Final Code Section 401(a)(9) Regulations (the 70 ½ rules), Amendment for compliance with the Automatic Rollover Requirements of Code Section 401(a)(31), Amendments for compliance with Final Code Section 401(k) and 401(m) Regulations (only cash or deferred arrangements), and Amendment for compliance with Final Code Section 415 Regulations. You may have other “discretionary” amendments (that is, amendments not required to maintain the plan’s tax-qualified status, but made to reflect an optional provision in the law, revise a benefit formula, etc.), that will need to be incorporated into your amended and restated document.

Health and Welfare Plans – New Rules for 2010

Mental Health Parity – Under mental health parity rules, group health plans that provide both medical/surgical benefits and mental health benefits cannot impose aggregate lifetime or annual dollar limitations on mental health benefits that are not imposed on medical/surgical benefits. In 2008, Congress passed the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008, which expanded these rules. Effective generally for plan years beginning after October 3, 2009 (January 1, 2010 for calendar year plans), a health care plan that provides mental health benefits and substance abuse benefits can no longer impose treatment limitations or financial requirements on those benefits that do not apply to other medical/surgical benefits provided under the plan. Small employer plans (generally not more than 50 employees, determined on a controlled group basis) will not have to comply, and employers who can show a 2% increase in plan costs as a result of the parity rules (the first year) or a 1% increase in years thereafter may claim a cost increase exemption. (We are waiting on further regulatory guidance on this exemption).

Michelle’s Law – Health care plans that cover dependent children (over a specified age) that are enrolled as full-time students must be amended to comply with “Michelle’s Law.” This law requires your health care plan to provide coverage for up to one year if the dependent child is unable to attend school or attend school full-time for medical reasons. The compliance effective date for Michelle’s Law is plan years beginning on or after October 6, 2009. (January 1, 2010 for calendar year plans.)

Genetic Information and Non-Discrimination Act (GINA) – Effective for plan years beginning on or after December 7, 2009 (January 1, 2010 for calendar year plans), the term “PHI” (see below) now will include “genetic information,” which is very broadly defined to include a family medical history. Under GINA, group health plans cannot increase a premium or contributions based on genetic information, request or require a participant to undergo genetic testing, or request, require or purchase genetic information prior to or in connection with enrollment or at any time for underwriting purposes. These rules also impact Health Risk Assessments (HRA) under wellness programs. While there are ways to use Health Risk Assessments that do not violate GINA, you can no longer offer a “reward” for the completion of a HRA in connection with open enrollment if the questionnaire asks about the employee’s family medical history.

Other provisions in GINA impact the general employment relationship, and are beyond the scope of this communiqué.

Excise Tax Self Reporting – Effective January 1, 2010, you are required to self-report and pay the applicable excise tax for failure to satisfy certain group health plan requirements (COBRA, HIPAA nondiscrimination and portability, GINA, Michelle’s Law, Newborns’ and Mothers’ Health Protection Act, Health Savings Accounts comparable contribution rules, and Mental Health Parity). This is a significant new rule. Unlike the self-reporting obligations for prohibited transactions, there has never before been a method to self report these excise taxes, nor has IRS historically included these excise taxes as part of an audit.

New ERISA Reporting Rules for 2009 Plan Years

Form 5500 – Schedule C Fee Reporting – In November 2007, the DOL finalized a new Schedule C to the Form 5500 which imposed new requirements for reporting service provider fees. Beginning with the 2009 Form 5500 (which for calendar year plans will be filed in 2010), any direct or indirect compensation in amounts of $5,000 or more paid to any service provider for plan services must be reported. You will need to start working now with your providers to obtain this information.

Form 5500 Annual Report – Electronic filing through EFAST –On January 1, 2010, the Department of Labor is rolling out its new EFAST2 system for 5500 electronic filings. You should check with your Form 5500 vendor to make sure your plan will be ready to file electronically.

Audit Requirement – 403(b) Plans subject to ERISA must file an annual report on Form 5500. If your plan has more than 100 participants, a plan audit and financial statements must be attached to the Form 5500 for 2009. In Field Assistance Bulletin No. 2009-02, the Department of Labor has issued some transitional reporting relief for certain contracts and/or custodial accounts issued before January 1, 2009.

Deferred Compensation Plans/Executive Compensation

409A Audits. The IRS has recently announced that it will start auditing “plans” for compliance with Code Section 409A. This is the Code Section that significantly expanded the rules relating to both elective deferral programs as well as non-elective programs such as severance plans and supplemental executive retirement plans. Under final regulations, “plans” were required to be amended to comply with the requirements of 409A by the end of 2008.

Performance Based Incentive Compensation – In 2008, the IRS ruled that the payment of incentive compensation does not qualify for the performance-based exception under Code Section 162(m) if the executive’s agreement allows for a payment upon the executive’s involuntary termination without cause or voluntary termination for good reason or retirement (other than for the executive’s death, disability, or change in control) even if the performance goals are not met. Because many believed this was a change in the IRS’s position, the IRS applied the rule prospectively by grandfathering contracts in effect on February 21, 2008 and performance periods that began on January 1, 2009. Companies may need to amend their Section 162(m) agreements for performance periods that begin on or after January 1, 2010 in order to comply with this new rule.

Revisiting Some Rules from the 2009 Play Book

COBRA Subsidy – During 2009, COBRA election notices were modified to reflect the COBRA premium subsidy for individuals who were involuntarily terminated from employment. This subsidy continues to apply to anyone whose involuntary termination of employment occurs in 2009. On October 26, 2009, H.R. 3930 was introduced in the House of Representatives that, if enacted, would extend the maximum COBRA period from 18 to 24 months for individuals involuntarily terminated between April 1, 2008 and December 31, 2009, and would extend the COBRA subsidy period from 9 to 15 months. S. 2730 was introduced in the Senate that would extend the COBRA subsidy period to 15 months, raise the subsidy from 65% to 75% and apply to involuntary terminations through June 30, 2010. STAY TUNED. If the COBRA subsidy rules are changed, new notices will undoubtedly be required.

HIPAA Special Enrollment for Children’s Health Insurance Program – Effective April 1, 2009, employees or dependents must be permitted to change their enrollment elections mid-year, if they lose or gain coverage under a State Children’s Health Insurance Program or Medicaid. Under this new special enrollment provision, an employee must be given 60 days to request a change in coverage rather than the 30 days that generally apply to other special enrollment events. Your plan documents and summary plan descriptions should be updated for this new special enrollment right.

Family and Medical Leave Act (FMLA) – Changes to the FMLA provide new leave options for individuals on military deployment and their caregivers. Employees can request up to 12 weeks of “exigency leave” to tend to the urgent needs of family members due to a call to active service from the reserves or National Guard. This “exigency leave” was recently expanded to include active duty service members. In addition, employees may request up to 26 weeks of unpaid “caregiver leave” in order to care for a family member (spouse, child, parent or next of kin) who was injured while on active duty in the military. You may need to amend your benefit plans and leave policies to reflect these FMLA requirements.

HIPAA – New breach notification requirements are now in effect under the new HIPAA rules imposed by HITECH .[3] These change the obligations of both “covered entities” (health care plans) and “business associates” (third party administrators and other vendors) when the security of private health information or “PHI” is breached. The new breach notification rules became effective September 23, 2009. HITECH also amended HIPAA to strengthen its enforcement provisions and modified the penalties for any violation of HIPAA that occurs on or after February 18, 2009. Interim Final Regulations relating to the new penalty structure were issued on October 30, 2009 by the Department of Health and Human Services. Other modifications to HIPAA by HITECH impose additional compliance requirements which may require you to amend your health care plans, business associate agreements and HIPAA policies and procedures.

Medicare Secondary Payer Reporting to CMS – Beginning in 2009, group health plans are required to furnish certain information regarding Medicare eligible beneficiaries to the Centers for Medicare and Medicaid Services (“CMS”). If your plan is fully insured, then your insurer should be providing the required information to CMS. If your plan is self-insured, then your third party administrator should be providing CMS with the required information. You may wish to contact your vendor to ensure that all CMS reporting is being done properly.

Final Regulations – Investment Advice. The Pension Protection Act of 2006 added provisions relating to the provision of investment advice to participants in individual account plans (such as 401(k) plans). Final rules were published on January 21, 2009, but the effective date was delayed until November 18, 2009. The effective date was delayed again until May 17, 2010, and these rules have now been withdrawn altogether. These rules contained a statutory exemption from the prohibited transaction rules in ERISA and the Code as well as relief under a class exemption. Representatives from the Department of Labor had previously indicated that these rules would be withdrawn and new rules proposed. Again, STAY TUNED.

For more information, please contact:

Sarah Lockwood Church 412 394 7731 schurch@thorpreed.com

Kristen Belz Ornato 412 394 7749 kornato@thorpreed.com

Paul A. Kasicky 412 394 2441 pkasicky@thorpreed.com

This Thorp Reed & Armstrong, LLP Communiqué is prepared in summary form and should not be construed as legal advice or opinion on any specific fact or circumstance. We do not assume any responsibility to revise this communiqué if there are subsequent changes in the law.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

#1062726 November 2009

[1] GUST is an acronym which stands for a series of four recent tax laws that made changes to how retirement plans operate. GUST stands for GATT (General Agreement on Tariffs and Trades), USERRA (Uniformed Services Employment and Reemployment Rights Act of 1996), SBJPA (Small Business and Jobs Protection Act of 1996), TRA’97(Taxpayer relief act of 1997), RRA’98 (IRS Restructuring and Reform Act of 1998) and CRA (Community Renewal Tax Relief Act of 1997).

[2] EGTRRA stands for the Economic Growth and Tax Relief Reconciliation Act of 2001.

[3] HITECH which stands for “Health In-formation Technology for Economic and Clinical Health Act” was passed as part of the recent Stimulus Act legislation.