COBRA Subsidy Is Extended 

Eligibility for the 65% COBRA subsidy was to have expired at the end of 2009.  The Department of Defense Appropriation Act of 2010 (P.L. 111-118) extends the duration of the subsidy to 15 months, from nine months, and extends the eligibility period to employees laid off as of February 28, 2010.  The law also makes other changes to the COBRA subsidy. 

Transition Rules And Notification Duties 

The law provides transition rules for assistance-eligible individuals who have exhausted their subsidized COBRA benefits.  Under these rules, individuals who have paid the full COBRA premium must be refunded the difference or have the difference credited to their accounts.  In addition, individuals who let their COBRA coverage lapse may make retroactive payments at the subsidized rate.  Payment is due by is the later of February 17, 2010, or 30 days after notice of the extension of the subsidy is provided.

Assistance-eligible individuals who have exhausted their subsidized COBRA benefits and who failed to pay the full COBRA premium, or those who paid the full premium, must be provided with a notice of these extensions.  Notice must be provided within 60 days of the date their subsidy ended.  The notice must include information on making retroactive payments and reimbursements or credits.

Group health plan administrators (or other entities that were originally required to provide notice of the COBRA subsidy) must provide notice of these extensions to individuals who were assistance-eligible individuals on or after October 31, 2009.  Notice must also be provided to employees who experience a COBRA qualifying event (i.e., a voluntary or involuntary termination of employment) after October 31, 2009.  Notice must be provided by February 17, 2010.  For employees who become eligible for the subsidy after December 19, 2009, the regular COBRA subsidy notification rules apply.  The Department of Labor will revise subsidy-related notices.

Originally, employees had to be involuntarily terminated and eligible for COBRA by the eligibility cut-off date to receive the subsidy.  The law clarifies that employees only need to be involuntarily terminated by February 28, 2010, to be eligible for the subsidy.  Impact: Employers could pick up a portion of employees' COBRA premiums without employees losing eligibility for the full 15 months of subsidized premiums.

 CMS Updates Medicare-As-Secondary-Payer Guidance

Plan sponsors that don't comply with COBRA and other health-related laws may be liable for a self-assessed daily excise tax of $100 per affected individual.  But what good is a self-assessed excise tax if there isn't any tax form to report it and pay it?  The IRS has taken care of this little quirk by creating Form 8928, Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code.  These new reporting and payment requirements apply beginning this year. 

So Many Requirements 

In addition to COBRA, the tax code contains many provisions with which group health plans must comply.  Since insurers likely will have amended their policies to account for many of these provisions, you should focus your attention on compliance duties that may not be handled by your insurer — COBRA notifications, for example.

• Employees and their spouses must receive a COBRA notice when employees become covered under the plan.
  
  

• The employer must notify the plan administrator within 30 days of a qualifying event (e.g., an employee's termination or reduction in hours).
  
  

• Within 14 days of the date the administrator is notified that a qualifying event occurred, the plan administrator must provide applicable COBRA notices to qualified beneficiaries.

To be on the safe side, you should contact your insurer or agent to confirm that your health plan meets each requirement of the following laws.

• The Health Insurance Portability and Accountablity Act, which generally requires plans to provide certificates of creditable coverage, to include special enrollment periods, and to limit preexisting condition periods.
  
  

• The Newborns' and Mothers' Health Protection Act, which generally requires group health plans to allow 48 hours of hospitalization to a mother who delivers her baby vaginally, and 96 hours if the delivery is by cesarean section. The law also prohibits plans from interfering with decisions made by health care providers and mothers. 
  
  

• Michelle's Law, which generally requires that plans continue to cover full-time college students who take medically necessary leaves of absence until the earlier of up to one year after the first day of the leave of absence, or the date on which dependent coverage would otherwise terminate under the terms of the plan. 
  
  

• The Genetic Information Nondiscrimination Act, which generally prohibits plans from requesting genetic information or adjusting premiums or contributions for the plan or for a group of similarly situated individuals on the basis of genetic information.  Wellness programs are impacted, to the extent that they reward employees for completing health risk assessments that request genetic information prior to enrollment.
  
  

• The Mental Health Parity and Addiction Equity Act, which generally requires that plans that provide both medical/surgical benefits and mental health/substance abuse benefits offer mental health/substance abuse benefits on an even par with medical/surgical benefits.
  
  

• The comparability provisions for health savings accounts (HSAs), which generally require that if an employer contributes into the HSA of any eligible employee, it must contribute a comparable cash amount or percentage of the high-deductible health plan's deductible into the HSAs of all comparable participating employees as of the first day of the month.  Reminder: These rules don't apply if HSAs are run through cafeteria plans. 

Excise taxes are due with the return.  Returns will be due by the due date for filing federal income tax returns; for corporations, this is usually the due date of their 1120 forms.  Exception: Returns filed for making non-comparable contributions into employees' HSAs are due by the 15th day of the fourth month following the calendar year in which non-comparable contributions were made.  Important: Excise taxes don't apply when the violation is corrected, or when employers didn't know, or by exercising reasonable diligence wouldn't have known, that a violation occurred.

 Cycle E Remedial Amendment Period Opens For 401(k) Plans

To maintain their tax-qualified status, plan sponsors should submit their 401(k) plans to the IRS for a favorable determination, opinion, or advisory letter, depending on the type of plan (i.e., individually designed or pre-approved).  The IRS has announced that the 12-month submission cycle for Cycle E filers — sponsors of individually designed 401(k) plans whose Employer Identification Numbers (EINs) end in a 5 or a 0 — will open February 1, 2010, and will close January 31, 2011.  By the same token, the 12-month submission cycle for Cycle D filers — sponsors whose EINs end in a 4 or a 9 — closes at the end of January.

2009 Cumulative List 

The amendments plan sponsors must make are identified each year in a Cumulative List.  The IRS warned, however, that plans must comply with all relevant qualification requirements, not just those on the 2009 Cumulative List.  Specifically, the 2009 Cumulative List reflects changes to the 401(k) rules made by these laws.

• The Economic Growth and Tax Relief Reconciliation Act of 2001 (with technical amendments made by the Job Creation and Worker Assistance Act of 2002).
  
  

• The Pension Funding Equity Act of 2004.
  
  

• The American Jobs Creation Act of 2004.
  
  

• The Gulf Opportunity Zone Act of 2005.
  
  

• The Katrina Emergency Tax Relief Act of 2005.
  
  

• The Pension Protection Act of 2006.
  
  

• The U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007.
  
  

• The Heroes Earnings Assistance and Relief Tax Act of 2008.
  
  

• The Emergency Economic Stabilization Act of 2008.
  
  

• The Worker, Retiree, and Employer Recovery Act of 2008.

With respect to processing Cycle E determination letter applications, the IRS stressed that it won't consider the following:

• guidance it publishes after October 1, 2009;
  
  

• statutes enacted after October 1, 2009;
  
  

• qualification requirements first effective in 2011 or later; or
  
  

• statutory provisions that are first effective in 2010 for which it has yet to issue guidance.

Plans submitted in Cycle E can be amended, at the option of the plan sponsors, to include the provisions related to the suspension of required minimum distributions for 2009, which were included in the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA).  Plan amendments may be effective retroactively if the amendments are made by the last day of the plan year beginning on or after January 1, 2011, and other requirements are met.  Warning: The IRS won't consider these WRERA amendments in issuing determination letters for Cycle E plans, and determination letters can't be relied upon with respect to the requirements of these WRERA amendments.

Click here to obtain the 2009 Cumulative List.

 Employee's No-Smoking-At-Home Case Ends In Ashes

Employees who smoke cost companies more in health benefits than employees who don't.  So how far can you go to make employees live smoke-free lives?  Perhaps very far.  A federal trial court has ruled that an employer's mandatory no-smoking policy, which included no smoking at home, wasn't an invasion of privacy under state law, and that the terminated employee also couldn't make a case for ERISA violations.  This case is far from over, however, since the employee has appealed.  (Rodrigues v. EG Systems, Inc., d/b/a Scotts Lawnservice, D.C. Mass., No. 07-10104-GAO, 2009)

Got A Match? 

To save money on medical insurance and to promote healthy lifestyles among its employees, a company's policy prohibited smoking on or off the job.  All new hires were tested for nicotine, and those who failed were dismissed.  Under the company's benefits plans, new hires became eligible for benefits after 60 days of continuous full-time employment. 

A new hire worked for two weeks, pending the outcome of the nicotine test.  He was fired after he failed the test.  He sued under state law, alleging that the no-smoking policy invaded his privacy.  He also sued under ERISA, alleging that his termination interfered with his participation in the company's ERISA-covered benefits plans for which he would have become eligible had his employment continued.  The company asked a federal trial court to summarily dismiss the case.  Employer: ERISA applies to employees, not to hiring policies, and the new hire never became an employee because he failed the nicotine test. 

The court ruled for the employer.  Court: Invasion of privacy claims require courts to balance an employer's legitimate business interest against the employee's private information.  Here there was no private information, since the employee never attempted to keep private the fact that he smoked.  As for the ERISA claim, the employee was not yet hired, since permanent employment was contingent upon passing the nicotine test; while ERISA forbids discrimination by a variety of employment-related actions, it doesn't forbid discrimination by means of a decision not to hire. 

Smoke Gets In Your Eyes 

It's important to note that some states have laws that forbid discrimination against smokers.  Massachusetts, where this case was brought, does not have such a law.  Even so, you can still set the stage for a universally smoke-free workforce.  You can, for example, charge smokers health benefit premium surcharges every month.  This is legal under the Health Insurance Portability and Accountability Act (HIPAA), provided you have a wellness program that covers smoking cessation.  Regulations covering HIPAA's wellness provisions specifically cite an example of an employer imposing a 20% premium surcharge on employees who don't certify as part of the open enrollment process that they don't smoke.  At the outset, there's nothing voluntary about this process — employees must certify that they either do or don't smoke. 

What wouldn't be legal under HIPAA would be to slap surcharges on smokers without offering them a wellness program.  Under HIPAA's non-discrimination provisions, plans must sort employees into groups and treat similarly situated individuals within groups the same.  Plans have latitude in making groups, but they must base distinctions between or among groups on bona fide employment-based classifications consistent with the employer's usual business practices.  Allowable distinctions: full-time vs. part-time status, geographic location, union membership, date of hire, length of service, current vs. former employee, and occupation.  Smoking and non-smoking aren't among the factors employers can use to make groups.

 Investment Advice Regs Finally Canceled 

Final regulations would have allowed, but wouldn't have required, 401(k) plans to arrange for outside financial advisors to provide in-person or computer-modeled advice to plan participants.  Plan sponsors who exercised prudence in selecting outside advisors would not have been liable to participants if the advice fell short or if the outside advisor didn't comply with the standards those regs set.

The twisted road to implementing these final regs came to an end on November 20, 2009, when the Department of Labor (DOL) took a much anticipated action and withdrew them before they became effective.  The regs had been delayed three times, the last time coming just three days before the DOL took this final step.  The DOL commented that it intended to soon propose a revised rule on this subject.

 Ask The Experts 

Q. An employee who recently terminated informed us that she wanted to roll over her 401(k) assets into a traditional IRA, so we took all the necessary steps and cashed her out. She has now informed us that she changed her mind and wants to roll over her 401(k) assets into a Roth IRA. How do we handle this?

A. This employee may be able to convert a traditional IRA into a Roth IRA herself, if she qualifies — i.e., her modified adjusted gross income is $100,000 or less and, if she's married, she files jointly with her husband. You will need to provide this employee with the proper Form 1099-R by February 1, 2010. To be correct, the form must show that income taxes are due, since previously untaxed amounts will become taxable upon the conversion. Note that beginning next year, the income and filing restrictions on Roth IRAs disappear completely and forever.