401(k) News: 2009 COLAs Released 

Employees who want to increase their pre-tax contributions into their 401(k) accounts next year will be able to defer an additional $1,000. Inflation adjustments announced by the IRS peg the 401(k) pre-tax contribution amount at $16,500. The IRS also announced other cost-of-living adjustments (COLAs).

Pension COLAs That Refresh

In addition to the increase in the 401(k) pre-tax contribution amount, the maximum pre-tax catch-up contribution increases $500, to $5,500, for employees who are 50 or older during 2009. Other inflation-adjusted amounts are as follows.

• The maximum annual defined benefit pension increases $10,000, to $195,000.
  
  
• The overall pre-tax contribution, after-tax contribution, and employer matching contribution limit for 401(k) plans (also known as the 415 limitation) increases $3,000, to the lesser of 100% of compensation or $49,000.
  
  
• The annual salary limit for figuring contributions into 401(k) plans increases $15,000, to $245,000.
  
  
• The dollar limitation used to define a key employee in a top-heavy plan increases $10,000, to $160,000.
  
  
• The dollar limitation used to define a highly-compensated employee increases $5,000, to $110,000.
  
  
• The dollar amount for determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period increases $50,000, to $985,000; the dollar amount used to determine the lengthening of the five-year distribution period increases $10,000, to $195,000.
  
  
• The minimum compensation amount for employees participating in simplified employee pensions (SEPs) increases $50, to $550.
  
  
• The maximum amount employees can defer on a pre-tax basis into a SIMPLE retirement account increases $1,000, to $11,500.

 Reminder: Medicare Part D Notices Due Soon

Plan sponsors that provide prescription drug coverage are reminded that they must provide active and retired Medicare-eligible employees; Medicare beneficiaries who are disabled or on COBRA; and Medicare beneficiaries who are covered as spouses or dependents (including spouses and dependents who are disabled or covered under COBRA) with the annual Medicare Part D notice of creditable/non-creditable coverage prior to November 15, 2008. These notices are extremely important to Medicare Part D-eligible employees who don't enroll in Part D when first eligible, since they may have to pay more for Medicare drug coverage if they can't produce a certificate of creditable coverage. While only Medicare-eligible employees must receive notice, sponsors may find it easier to distribute notices to all employees and their beneficiaries, regardless of Medicare-eligibility status.

E-Delivery OK

Sponsors have flexibility in how notices are delivered. Electronic delivery that meets the Department of Labor's standards for electronic communication is fine. Under these rules, notice may be provided electronically to plan participants who consent to electronic delivery, and who can access the sponsor's electronic communications system on a daily basis as part of their work duties. Reminder: Sponsors must inform participants that they're responsible for providing a copy of the electronic notice to their Medicare-eligible dependents covered under the health plan.

The Centers for Medicare and Medicaid Services has updated the Model Creditable, Non-Creditable, and Personalized Individual Disclosure Notices Medicare-eligible employees must receive. The updated model notices must be used on or after June 15, 2008.

Click here for the model certificates.

 Rules Set For Reservist Withdrawals From Health FSAs    

Under the Heroes Earnings Assistance and Relief Tax Act, health flexible spending accounts (FSAs) may allow employees who are called to active military duty for a period of at least 180 days or indefinitely to avoid the use-it-or-lose-it rule and withdraw amounts in their FSAs. The IRS has now clarified many open questions regarding these qualified reservist distributions, or QRDs.

Plan Amendments Required

Cafeteria plans and FSAs don't have to allow QRDs. But for those that do, plan amendments are necessary before QRDs may be made. However, under a special transition rule, plans may be amended retroactively to permit QRDs that employees request on or before December 31, 2009. Retroactive amendments must be made by December 31, 2009, and must be effective retroactively to the date the first QRD was made, but not before June 18, 2008.

Who's Eligible

Only employees who are called to active military duty may request a QRD; employees whose spouses are in the military aren't eligible. Prior to any QRD, employers must receive a copy of employees' military orders. Eligibility for QRDs is restricted to employees who receive active duty calls for 180 days or for an indefinite period after June 18, 2008. Employees called to active duty prior to June 18 are eligible for QRDs if their tours extend beyond that date, and they meet the 180-day or indefinitely-away requirement. Employees remain eligible if they're called for at least 180 days, but are actually away for a shorter period of time. Employees who are called for fewer than 180 days become eligible if their tours extend to at least 180 days.

QRD Mechanics

Plans must specify the process by which employees can request QRDs, how many QRDs they may receive during a plan year, and whether their FSAs will continue to reimburse them after they receive their QRDs. QRDs must be paid to employees within a reasonable time, but not later than 60 days after a request. Key: Whatever plans decide to do must apply to all employees who are eligible for QRDs.

Plans may designate how QRDs will be calculated. If they don't, QRDs must consist of the amounts employees contributed as of the date they request a QRD, less reimbursements received as of that date. There are two other choices.

• QRDs may consist of the entire amount employees elected to defer for the plan year, less reimbursements employees received as of the date of the QRD request.
  
  
• QRDs may consist of some other amount, not exceeding the entire amount employees elected to defer, less reimbursements.

QRDs And Taxes

QRDs will be taxable income to employees. This may influence employees' decisions to take a QRD. Since they're fully taxable, QRDs should probably move through the Payroll department. Therefore, it's essential that Benefits work with any third-party administrator, and the HR and Payroll departments, to ensure that the QRD process runs as smoothly as possible.

Click here to read the IRS's notice.

 Final Regs Address 401(k) Distributions

The Department of Labor (DOL) has issued a pair of final regulations regarding 401(k) distributions. One covers situations where a plan fiduciary selects an annuity provider. The other pertains to distributions to non-spouse beneficiaries from terminated and abandoned plans.

Choosing Annuity Providers

Employees receiving 401(k) distributions can take them in periodic payments or lump sums, roll them over into IRAs, or, if the plan chooses, purchase annuities from an annuity provider that's selected by the plan. However, selecting an annuity provider is a fiduciary act. The final regs establish a safe harbor for fiduciaries who select annuity providers. The safe harbor isn't the only means by which fiduciaries can satisfy this fiduciary duty, however. Under the safe harbor, fiduciaries must meet these criteria.

• They must engage in an objective, thorough, and analytical search to identify and select the annuity provider. The DOL noted that considering an annuity provider's insurance rating could be helpful.
  
  
• They must avoid self dealing, conflicts of interest, or other improper influence.
  
  
• They should consider competing annuity providers.
  
  
• They must consider information sufficient to assess the ability of the annuity provider to make all future payments under the annuity contract.
  
  
• They must consider the costs of the annuity contract, including fees and commissions, in relation to the benefits and administrative services to be provided under the contract.
  
  
• They must conclude that, at the time of the selection, the annuity provider is financially able to make all future payments under the annuity contract, and that the cost is reasonable in relation to the benefits and services to be provided under the contract.
  
  
• If necessary, fiduciaries should consult with experts.

The final regs are effective December 8, 2008.

Click here to read the final regs.

Distributions To Non-Spouse Beneficiaries

Not everyone wants their 401(k) accounts to be distributed to their spouse or children if they die before distributions commence. Employees, however, may not be so conscientious about keeping track of their nieces, nephews, or other non-spouse beneficiaries. And, worse, if an employee dies and a non-spouse beneficiary is designated but can't be found, the money may end up with the state under escheat laws. The problem of missing non-spouse beneficiaries is compounded when a plan is terminating or is abandoned.

The final regs set up a safe harbor under which a terminating plan, including an abandoned plan, must directly roll over the proceeds of a 401(k) account into a tax-qualified inherited IRA that's established to receive the distribution on behalf of the missing, designated non-spouse beneficiary.

Plans must provide notice of their intent to terminate. Appendix A to the final regs contains a model notice that plans may use, including an optional paragraph referring to distributions to non-spouse beneficiaries. Appendix C to the final regs contains a model notice for abandoned plans, which also includes an optional paragraph (Option 2) referring to distributions to non-spouse beneficiaries.

The final regs are effective November 6, 2008.

Click here to read the final regs, including the model notices.

 Ask The Experts 

Q. In order for employees to maintain their group health benefits for the next calendar year, our company policy requires that they work at least 1,500 hours during the current year. An employee with health benefits has taken leave under the Family and Medical Leave Act (FMLA), so he won't meet the 1,500 hours-of-work requirement for next year. Must his FMLA leave be counted toward next year's benefits, or can we legally deny him benefits?

A. The employee doesn't qualify for health benefits for next year. According to FMLA regulations, employees taking FMLA leave are entitled to maintain benefits that accrued prior to the date their leave begins. But the regs also clarify that an employee who returns to work isn't entitled to the accrual of any benefits during any period of leave. The regs further specify that if a benefits plan is predicated on a pre-established number of hours worked each year, and the employee doesn't have sufficient hours as a result of taking FMLA leave, the benefit is lost.