In addition to amendments and notifications necessitated by the recent health care reforms, existing laws such as the Pension Protection Act of 2006 (“PPA”) and the Worker, Retiree and Employee Recovery Act of 2008 (“WRERA”) will require amendments to plan documents and related materials, as well as new notifications, all of which must be made before the end of the year. This article highlights the various changes that employers and plan sponsors will need to make to their qualified and non-qualified retirement and health & welfare plans on or before December 31, 2010.

Healthcare Reform - Related Changes

Coverage of Dependents to Age 26. Effective for plan years beginning on or after September 23, 2010 (or January 1, 2011 for calendar year plans), group health plans and health insurance issuers that provide dependent coverage must now cover dependent children up to age 26. The availability of coverage for dependent children cannot be conditioned on any factor other than the familial relationship with the employee: thus, a plan cannot restrict or deny coverage based on factors such as financial dependency, residency with employee, student status, employment status, marital status, or eligibility for other coverage. However, grandfathered plans may continue to exclude dependent children if such children are eligible to receive employer-sponsored coverage other than under a group health plan of his or her parent (e.g., where an adult child is eligible for coverage offered by his or her employer), until December 31, 2013 for calendar year plans. (Click here to learn more about this new requirement.) Plan sponsors should:

  • Amend the group health plan document’s eligibility provisions to reflect coverage of dependents to age 26 (as described above), by January 1, 2011 (for calendar year plans);
  • Amend accompanying cafeteria plans, health Flexible Spending Accounts (“health FSAs”) and Health Reimbursement Arrangements (“HRAS”) to allow coverage and reimbursements for dependent children who have not attained age 27 by the end of the taxable year, by December 31, 2010;
  • Amend the group health plan document, summary plan description (“SPD”) and open enrollment materials to provide a special enrollment right and a corresponding 30-day enrollment window to children who lost coverage, or who were not eligible for coverage, because the availability of coverage ended prior to attaining age 26, by January 1, 2011 (for calendar year plans);
  • Draft and provide written notice to employees regarding the special enrollment right (either as a stand-alone notice or as part of the 2011 open enrollment materials, provided that such materials prominently display the dependent child’s special enrollment right), prior to January 1, 2011 (for calendar year plans); and
  • Work with third-party vendors to ensure compliance with new coverage requirements.

Insight. Because the required extension of dependent coverage to age 26 will likely result in increased plan costs, employers may wish to consider changes to the plan’s premium cost arrangements to help absorb additional costs (e.g., move from an “employee+family” structure to an “employee+1,” “employee +2,” etc. structure).

Preexisting Condition Exclusions for Children Under Age 19. Effective for plan years beginning on or after September 23, 2010 (or January 1, 2011 for calendar year plans), group health plans and individual health insurance policies may no longer impose any preexisting condition exclusions on covered dependents under age 19. This prohibition on preexisting conditions applies to all group health plans (whether or not grandfathered), as well as to non-grandfathered individual health insurance coverage. (Click here to learn more about the prohibition on preexisting condition exclusions.) Plan sponsors should:

  • Amend the group health plan document, SPD and open enrollment materials to remove any preexisting condition exclusions for children under age 19, by January 1, 2011 (for calendar year plans); and
  • Work with third-party vendors to ensure compliance with new requirements, and revise stop-loss coverage, if necessary.

General Prohibition on Rescissions. Effective for plan years beginning on or after September 23, 2010 (or January 1, 2011 for calendar year plans), group health plans and health insurance issuers offering group or individual health insurance coverage cannot rescind coverage except in the case of fraud (including an omission that constitutes fraud) or an intentional misrepresentation of a material fact. (Click here to learn more about the prohibition on rescissions.) Plan sponsors should:

  • Amend the group health plan document, SPD and open enrollment materials so that rescissions of coverage are limited to cases of fraud or intentional misrepresentation of a material fact, by January 1, 2011 (for calendar year plans);
  • Amend the group health plan document, SPD, and plan procedures to require 30 calendar days’ advance notice to an individual before their coverage is rescinded, by January 1, 2011 (for calendar year plans); and
  • Work with third-party vendors to ensure compliance with new coverage requirements.

Prohibition on Lifetime & Annual Limits. Effective for plan years beginning on or after September 23, 2010 (or January 1, 2011 for calendar year plans), group health plans and health insurance issuers offering group or individual health insurance coverage may no longer impose lifetime limits on the dollar value of “essential health benefits.” Effective for plan years beginning on or after September 23, 2010, but before September 23, 2011 (the 2011 calendar plan year), such plans and issuers may not impose an annual limit on the dollar value of “essential health benefits” less than $750,000 per individual. (Click here to learn more about the prohibitions and “essential health benefits.”) Plan sponsors should:

  • Amend the group health plan document, SPD and open enrollment materials to remove all lifetime limits on the dollar value of “essential health benefits,” by January 1, 2011 (for calendar year plans);
  • Amend the group health plan document, SPD and open enrollment materials to provide an annual limit on the dollar value of “essential health benefits” of $750,000 or more per individual, by January 1, 2011 (for calendar year plans);
  • Amend the group health plan document, SPD and open enrollment materials to provide a compliant definition of “essential health benefits,” by January 1, 2011 (for calendar year plans);
  • Amend the group health plan document, SPD and open enrollment materials to provide a special enrollment right to individuals who had previously become ineligible due to lifetime limits, by January 1, 2011 (for calendar year plans);
  • Draft and provide written notice to such individuals of their special enrollment right, by January 1, 2011 (for calendar year plans) (either as a stand-alone notice or as part of the 2011 open enrollment materials); and
  • Work with third-party vendors to ensure compliance with new coverage requirements, and revise stop-loss coverage, if necessary.

Over-the-Counter Drug Reimbursements. Effective for claims incurred on or after January 1, 2011 (or January 15, 2011, with regard to health debit card purchases), group health plans (including Health FSAs, HRAs, HSAs and Archer MSAs) may no longer reimburse over-the-counter medicines, other than insulin, without a prescription. This new prohibition on reimbursement applies to claims incurred on or after January 1, 2011 (or January 15, 2011, for purchases made with health debit cards), even if such claims are incurred in connection with a 2010 plan year’s “grace period.” Plan sponsors should:

  • Communicate the new OTC rule to participants prior to 2011 enrollment to ensure that participants take the new OTC rule into consideration when making their elections for the 2011 plan year;
  • Amend the group health plan document, SPD and open enrollment materials to explain the new rules regarding over-the-counter drug reimbursements, by January 1, 2011;
  • Amend cafeteria plan documents to reflect that qualified medical expenses no longer include non-prescribed drugs or medicines, by June 30, 2011 (amendments will be effective retroactively to Jan. 1, 2011, or Jan. 15, 2011 for debit-card reimbursements); and
  • Confirm that third-party administrators (including health debit card processors) are taking the necessary steps to implement the new rules.

Additional Taxes on HSA and Archer MSA Withdrawals. Effective January 1, 2011, withdrawals from HSAs that are not used for qualified medical expenses will be subject to an additional 20% tax (an increase from the current additional 10% tax), in addition to being subject to ordinary income tax, unless such withdrawals are made after the account beneficiary’s death or disability. A similar increase from an additional 15% tax to an additional 20% tax is effective January 1, 2011 for withdrawals from Archer MSAs that are not used for qualified medical expenses. Plan sponsors should:

  • •Amend the HSA/Archer MSA SPD, open enrollment materials and related documentation, as necessary, to reflect the increased additional tax, by January 1, 2011 (for calendar year plans).

Internal and External Appeals Process. Effective for plan years beginning on or after September 23, 2010 (or January 1, 2011 for calendar year plans), non-grandfathered group health plans must have an internal claims and appeals process that meets new requirements imposed by the healthcare reform laws and related Department of

Labor regulations, including additional notice requirements, and must implement an external review process that meets either Federal or state standards. Plan sponsors should:

  • Amend the group health plan document, SPD and open enrollment materials to comply with the new internal claims and appeals requirements, by January 1, 2011 (for calendar year plans); and
  • Amend the group health plan document, SPD and accompanying materials to establish an external review process that complies with the applicable Federal or state standards, by January 1, 2011 (for calendar year plans);
  • Revise existing internal claims and appeals notices and administrative procedures to reflect new requirements, such as the 24-hour time limit for urgent care claims, by January 1, 2011 (for calendar year plans); and
  • Confirm that third-party administrators are taking the necessary steps to comply with the new regulations.

Patient Protections. Effective for plan years beginning on or after September 23, 2010 (or January 1, 2011 for calendar year plans), non-grandfathered group health plans are required to permit the designation of any participating primary care provider and/or pediatrician who is accepting new patients, if such plan requires or permits a participant to designate a primary care provider and/or pediatrician; are prohibited from requiring authorization or referral for OB/GYN care provided by an in-network OB/GYN provider; and are required to inform participants of these rights. Further, non-grandfathered health plans that cover emergency services are now required to cover out-of-network emergency services, subject to additional guidelines. (Click here to learn more about these patient protections.) Plan sponsors should:

  • Amend the group health plan document, SPD and open enrollment materials to provide the additional patient protections and comply with the new requirements, by January 1, 2011 (for calendar year plans);
  • Provide notice to participants of the additional patient protections; and
  • Confirm that third-party administrators are taking the necessary steps to comply with the new regulations.

Preventive Services. Effective for plan years beginning on or after September 23, 2010 (or January 1, 2011 for calendar year plans), non-grandfathered group health plans must cover certain preventive services without imposing copayments, deductibles or other cost-sharing requirements on such preventive services. (Click here to learn more about the rules regarding coverage of preventive services.) Plan sponsors should:

  • •Work with vendors to identify required changes to in-network preventive coverage and cost-sharing requirements, and determine whether other changes may be beneficial or necessary; and
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  • •Amend the group health plan document, SPD, open enrollment materials and other employee communications to reflect such changes, by January 1, 2011 (for calendar year plans).

Nondiscrimination Rules. Effective for plan years beginning on or after September 23, 2010 (or January 1, 2011 for calendar year plans), non-grandfathered, fully-insured group health plans are prohibited from discriminating in favor of highly-compensated employees (both with regard to plan eligibility and benefit entitlement, including cost), similar to the nondiscrimination rules already imposed by Code Section 105(h) on self-insured plans. Plan sponsors should:

  • •Amend the group health plan document, SPD and open enrollment materials to ensure that the plan does not limit eligibility for coverage or continued coverage on the basis of the total hourly or annual salary of any full-time employees, and does not otherwise limit eligibility in a way that would discriminate in favor of highly-compensated employees, by January 1, 2011 (for calendar year plans).

Insight. Plan sponsors should also review existing employment and severance agreements with executives to determine whether such agreements provide for post-severance health benefits (e.g., non-COBRA company-paid premiums), and consider amending such agreements to remove such benefits. Because such benefits discriminate in favor of highly-compensated employees, the group health plan under which they are offered would be discriminatory, subjecting the plan sponsor to a $100 per day, per participant excise tax.

W-2 Tax Reporting. Effective for tax years beginning after December 31, 2011, plan sponsors are required to report the aggregate cost of employer-sponsored health coverage (determined on a basis similar to that under COBRA) provided to an employee on their Form W-2. FSAs, HRAs, and Archer MSAs are excluded from the cost analysis. Originally, compliance with this reporting rule was required for the 2011 tax year as well; however, recent IRS guidance has made reporting optional for the 2011 tax year. Accordingly, plan sponsors should:

  • •Begin to coordinate compliance efforts with payroll and third-party administrators.

NOTE: PPACA incorporates most of the new requirements on plan design, described above, into the HIPAA provisions of ERISA and the Code; therefore, employers that maintain group health plans that are not in compliance with the new provisions will be subject to an excise tax equal to $100/participant/day during the period of noncompliance (up to an annual cap of the lesser of $500,000 or 10% of the employer’s group health plan expenses for the prior year).

Other Qualified Health & Welfare Benefit Plan Required Changes

Mental Health Parity. Group health plans are required to comply with interim final regulations implementing the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (“MHPAEA”) beginning with the first plan year on or after July 1, 2010 (or January 1, 2011 for calendar year plans). The interim final regulations provided additional guidance on how to establish “parity” between medical and surgical benefits and mental health and substance use disorder benefits. Plan sponsors should:

  • Amend the group health plan document, SPD, open enrollment materials and other employee communications to comply with the additional guidance provided by the interim final regulations, by January 1, 2011 (for calendar year plans); and
  • Confirm that third-party administrators are also in compliance with the new regulations.

CHIPRA. The Children’s Health Insurance Program Reauthorization Act of 2009 (“CHIPRA”) required group health plans to offer two additional special enrollment rights related to an individual’s eligibility for coverage or a premium assistance subsidy under Medicaid or a state Children’s Health Insurance Program. CHIPRA also requires plan sponsors to provide all employees (not just plan participants) living in states providing a premium assistance subsidy with a notice informing them of the existence of such subsidies. Such notices are required to be provided on an annual basis, beginning with the later of May 1, 2010 and the beginning of the next plan year thereafter (or January 1, 2011 for calendar year plans). Plan sponsors should:

  • Amend the group health plan document, SPD, open enrollment materials and other employee communications to provide the additional special enrollment rights, if they have not already done so; and
  • Provide the CHIPRA-required notice regarding premium assistance, either as a stand-alone notice, or as part of the plan’s open enrollment materials (as a stand-alone document), by January 1, 2011 (for calendar year plans).

Qualified Retirement Plan Changes

HEART Act. The Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”) requires, among other things, that qualified retirement plans (i) provide for continued vesting credit during a period of qualified military leave for individuals who die while in military service, (ii) make any death benefit payable to the survivor of an active employee (such as ancillary life insurance benefits or subsidized preretirement survivor annuities) available to survivors of participants who die during or after 2007 while performing qualified military service, and (iii) include military wage differential payments (if offered) in the plan’s definition of compensation, for purposes of the Code Section 415 limits. Plan amendments required by the HEART Act must be made by the last day of the first plan year beginning on or after January 1, 2010 (or December 31, 2010, for calendar year plans). Plan sponsors should:

  • Amend the qualified retirement plan document, SPD and other employee communications to comply with the HEART Act’s new required benefits by December 31, 2010 (for calendar year plans).

2009 RMD Suspension. The Worker, Retiree, and Employer Recovery Act of 2008 (“WRERA”) allowed qualified defined contribution plans (as well as §457 governmental plans, §403(a) plans, §403(b) plans, and individual retirement accounts) to suspend required minimum distributions (RMDs) for the 2009 plan year. Plans that suspended RMDs for the 2009 plan year must amend their plan to reflect operational compliance by the last day of the first plan year that begins on or after January 1, 2011 (or January 1, 2012, for governmental plans), provided that the plan operates as if the amendment were in effect from its effective date. Plan sponsors should:

  • Amend the plan document, SPD and other employee communications to reflect the 2009 RMD suspension, if the plan did not require participants to take RMDs that year, by December 31, 2011 (for calendar year plans). Roth IRA Rollovers. As of January 1, 2010, income and filing status requirements no longer apply to amounts rolled over from a qualified retirement plan to a Roth IRA. Additionally, recent law changes now permit plans to allow in-plan Roth conversions (as discussed in Mark’s article, available here). Plan sponsors should:
  • Amend the plan document, SPD and other employee communications, as necessary, to remove the $100,000 income cap on Roth IRA rollovers. Insight. Although plan sponsors may wish to consider amending their plan documents, SPDs and administrative materials to permit in-plan Roth conversions, as allowed under the new law, officials at the Treasury Department have suggested that plan sponsors wait to make such amendments until forthcoming IRS regulations are issued, as such regulations may clarify outstanding questions regarding the implementation of the new law.

PPA-Related Amendments. Although the deadline for most amendments under PPA was the last day of the first plan year that began on or after January 1, 2009 (December 31, 2009 for calendar year plans), in Notice 2009-97, the IRS extended the deadline to the last day of the first plan year that begins on or after January 1, 2010 (December 31, 2010 for calendar year plans) for amendments related to certain funding-based benefit limits, certain diversification requirements, and certain rollovers by nonspouse beneficiaries, as described below:

Funding-Based Benefit Limits. Under PPA, defined benefit plans are required to be amended to meet the requirements of Code Sections 401(a)(29) and 436, relating to funding-based limits on benefits and benefit accruals. IRS Notice 2009-97 extended the deadline for documentary compliance with the required amendments to the last day of the first plan year beginning on or after January 1, 2010 (or December 31, 2010, for calendar year plans). Plan sponsors should:

  • Amend the plan document, SPD and other employee communications to comply with the requirements of Code Sections 401(a)(29) and 436, by December 31, 2010 (for calendar year plans).

Diversification Requirements. Under PPA, defined contribution plans that invest employer contributions and/or employee elective contributions in publicly-traded employer securities of the plan sponsor are required to be amended to meet the requirements of Code Section 401(a)(35), relating to diversification requirements. IRS Notice 2009-97 extended the deadline for documentary compliance with the required amendments to the last day of the first plan year beginning on or after January 1, 2010 (or December 31, 2010, for calendar year plans). Plan sponsors should:

  • Amend the plan document, SPD and other employee communications to comply with the requirements of Code Section 401(a)(35), by December 31, 2010 (for calendar year plans).

Rollovers of Death Benefits by Nonspouse Beneficiaries. Under PPA, qualified retirement plans must permit nonspouse beneficiaries to transfer eligible rollover distributions into an individual retirement account (an “IRA”) or a Roth IRA, where certain requirements are met, beginning with the first plan year on or after January 1, 2010. Although operational compliance was required by the start of the January 1, 2010 plan year, plans must amend their plan document to reflect the now-permitted rollovers by the end of the 2010 plan year (or December 31, 2010, for calendar year plans). Plan sponsors should:

  • Amend the plan document, SPD and other employee communications to permit direct rollovers into an IRA or a Roth IRA by nonspouse beneficiaries, by December 31, 2010 (for calendar year plans).

Non-Qualified Deferred Compensation Plan Changes

409A Document Correction. Transition relief provided by Notice 2010-6 eliminates penalties for certain documentary failures of compliance with Code Section 409A, so long as such failures are corrected before January 1, 2011. Plan sponsors should:

  • Review nonqualified deferred compensation plans and other agreements and arrangements providing for deferred compensation subject to Code Section 409A for documentary noncompliance; and
  • Amend such plans, agreements and arrangements to comply with Code Section 409A, by December 31, 2010.

The year-end required amendments listed above are generally applicable to most qualified and non-qualified retirement and health & welfare plans; however, each plan should be reviewed to determine if additional amendments are required or advisable. King & Spalding would be happy to assist you in implementing the amendments discussed in this article, as well as in determining whether other amendments should be considered.