2010 has seen a number of new developments concerning employee benefit plans and also marks the deadline for amending plan documents to come into compliance with certain developments from recent years. Below is a brief list of some significant plan issues from 2010 that may require prompt action. Items discussed in this update are only general descriptions of the required amendments and the actions that may be necessary. For more information on any topics discussed here, contact an attorney in our Employee Benefits and Executive Compensation practice group.

New Developments

In-Plan Roth Conversions: The Small Business Jobs Act of 2010 permits 401(k) and 403(b) plans to allow participants to roll over their non-Roth plan savings to a Roth account under the same plan. Prior to enactment, a participant could only accomplish such a transfer by rolling his or her non-Roth plan assets into a Roth IRA.  The in-plan transfer may be made only (1) from amounts that are eligible rollover distributions after September 27, 2010, (2) as a result of an event that triggers an eligible rollover distribution from the plan, and (3) if the rollover otherwise meets the rollover requirements. The previously untaxed portion of the transferred amount is subject to income tax but not subject to the additional 10% early withdrawal tax. It is anticipated, but not certain, that the Internal Revenue Service ("IRS") will provide a remedial amendment period so that employers may offer this option in 2010 and then have sufficient time to amend their plans to reflect this feature, but employers should review this topic closer to the end of 2010 in order to confirm the amendment position of the IRS.

PPACA: Health care reform, consisting of the Patient Protection and Affordable Care Act ("PPACA") and the Health Care and Education Reconciliation Act ("HCERA"), requires many changes to health and welfare plans effective the first plan year after September 23, 2010, or January 1, 2011 for calendar year plans. Below is a brief list of the changes for 2011. All plans, including those that are grandfathered under PPACA, must be amended for compliance with the following health care reform provisions:

• Plans that provide dependent health coverage must provide coverage to children up to age 26. Grandfathered plans may require that the child not be eligible for coverage under another employer’s plan.
• Plans must be amended to eliminate any preexisting condition exclusions for children under age 19. The prohibition on preexisting condition exclusions will become mandatory for all participants in 2014.
• Lifetime limits must be eliminated from plans, and certain annual limits must be changed to comply with new limits under PPACA. 
• Rescissions of coverage must be eliminated, except in cases of intentional misrepresentation of a material fact or fraud.
• Plans may no longer reimburse participants for the purchase of over-the-counter drugs that are not purchased with a valid prescription.

Plans that are not grandfathered are subject to additional changes and requirements:

• Plans must comply with new internal and external claims and appeals processes.
• Specified preventive services must be covered, and all cost-sharing for those services must be eliminated, with certain exceptions. 
• Certain patient protections must be offered, including the ability to select primary care providers and obtain OB/GYN services without prior authorization and the ability to receive emergency services at any hospital without prior authorization and at in-network rates.
• Rules against discrimination in favor of highly compensated employees (similar to those currently in place for self-insured plans) must be implemented for fully insured plans.

Mental Health Parity and Addiction Equity Act: Group health plans must provide mental health and substance abuse benefits that are on par with medical and surgical benefits. The required parity includes treatment limitations and financial requirements. Compliance is required for plan years beginning on or after July 1, 2010 (January 1, 2011 for calendar year plans). 

Code Section 409A Corrections: IRS Notice 2010-6 created a correction program for documentary failures of nonqualified deferred compensation plans subject to Code Section 409A. Notice 2010-6 included transition relief from penalties under the correction program for document failures that are corrected before January 1, 2011. After the period of transition relief ends, document corrections under the program can be very costly to employees. 

Code Section 436 Funding-Based Restrictions: Under the PPA, a defined benefit plan that does not meet specified funding targets must require certain restrictions on benefit payments and accruals. As plans fall below various funding level percentages, the PPA requires prohibitions on amending the plan to increase benefits, using more than half of a participant’s lump sum benefit to pay an accelerated benefit or to purchase an annuity, and making any lump sum or other accelerated payments. The IRS recently announced an extension of the deadline to adopt amendments for these funding-based restrictions until the last day of the first plan year that begins on or after January 1, 2011 (December 31, 2011 for calendar year plans).

Form 5500 Requirements for 403(b) Plans: 403(b) plans subject to ERISA must follow the same Form 5500 filing requirements as 401(k) and other qualified plans. These increased reporting requirements were effective for plan years beginning on or after January 1, 2009, and the first standard Form 5500 filing would occur in 2010.

2010 Deadlines for Plan Amendments

Recent changes and developments require amendment or updating of plan documents. The following is a list of changes that require plan documents for calendar year plans to be amended by the end of 2010. Many plans will have already been amended in response to these changes, but 2010 marks the deadline for amendments.

Cash Balance and Hybrid Plan Amendments: The IRS published final and proposed regulations for cash balance and hybrid defined benefit pension plans on October 18, 2010. These regulations extended the deadline for implementing certain hybrid plan provisions first introduced by the Pension Protection Act ("PPA") and the Worker, Retiree and Employer Recovery Act, but some provisions, such as a maximum three-year cliff vesting schedule and provisions prohibiting age discrimination, require plan amendments by the end of the 2010 plan year.

Diversification Amendments: Code Section 401(a)(35) and applicable regulations require defined contribution plans to allow participants to designate alternative investments for the portion of their account that is invested in publicly traded employer securities. Participants must be permitted to shift elective deferrals and employee contributions invested in publicly traded securities to alternative investments at least quarterly. The same opportunity must be provided with respect to employer contributions invested in publicly traded securities for all participants with at least three years of service, alternate payees and beneficiaries of deceased employees. Plan documents must be amended to comply by the end of the 2010 plan year (December 31, 2010 for calendar year plans).

Automatic Contribution Arrangements: Defined contribution plans that include qualified automatic contribution arrangements ("QACAs") must be amended to provide that employee deferrals must be based on a Code Section 414(s) definition of compensation. Plans with eligible automatic contribution arrangements ("EACAs") must be amended to comply with the final regulations issued February 24, 2009, including requirements for forfeitures and suspensions, permissible withdrawals and excise taxes on certain excess contributions. These plans must be amended by the later of the last day of the 2010 plan year (December 31, 2010 for calendar year plans) or the due date of the employer’s tax return that includes the first day of the 2010 plan year.

HEART Act Amendments: The Heroes Earnings Assistance and Relief Tax Act ("HEART Act") included certain required and optional changes to qualified plans, including 401(k) and defined benefit plans and 403(b) and 457(b) plans. Plans must be amended to treat participants who die during qualified military service as though they had returned to employment with the employer just before dying for purposes of death benefits under the plan. Other amendments may also be needed. These changes must be adopted by the last day of the 2010 plan year (December 31, 2010 for calendar year plans).

Rollovers by Nonspouse Beneficiaries: Qualified plans, 403(b) plans and 457(b) plans must permit nonspouse beneficiaries who receive distributions under the plan to directly roll over those distributions to an inherited individual retirement account. Amendments providing for these rollovers must be adopted by the later of the end of the plan year beginning after December 31, 2009 (December 31, 2010 for calendar year plans) or the due date of the employer’s tax return that includes the first day of that plan year.

Cycle E Determination Letter Applications: Qualified plans maintained by employers with employer identification numbers that end with either 0 or 5 are in "Cycle E" for purposes of the IRS cyclical determination letter program. Plans in Cycle E must be amended to comply with the IRS 2009 Cumulative List of Changes, which can be found in IRS Notice 2009-98, and then submitted to the IRS with a determination letter request. Cycle E applications must be filed by January 31, 2011, but many of the amendments on the 2009 Cumulative List must be adopted by the end of the 2010 plan year.

© 2010 Perkins Coie LLP