May 31, 2009
May 31, 2009
Barran Liebman LLP
1. IRS Relaxes Safe Harbor 401(k) Plan Restrictions
2. Union Pension Plans May Require Increased Employer Contributions
3. New Details on Obama’s Healthcare Proposal
Three important developments require attention by employers sponsoring retirement and health plans for their employees.
IRS Allows Employers with Safe Harbor 401(k) Plans to Suspend/Terminate Contributions
The IRS released proposed regulations allowing employers with Safe Harbor 401(k) plans to suspend/terminate plan contributions due to substantial business hardship. Employers providing discretionary matching/profit-sharing contributions and not under the available safe harbors may amend their contributions based on the terms of the plan document.
401(k) plans must normally pass nondiscrimination tests ensuring that non-highly compensated employees are offered an opportunity to defer wages into a 401(k) plan in the same ratio as highly compensated employees. To avoid these tests and the potential limitations associated with failing the tests, an employer may notify employees prior to the beginning of the Plan Year that it will provide a 100% vested contribution to non-highly compensated employees (“Safe Harbor Plan”). A Safe Harbor Plan can be offered in two alternative forms: 1) a basic/enhanced matching contribution, or 2) a non-elective 3% contribution.
The new proposed regulations provide an employer the opportunity to amend or terminate its Safe Harbor Plan if the employer experiences “substantial business hardship.” A substantial business hardship may occur when: the employer is operating at an economic loss; there is substantial unemployment in the trade or business; or the sales/profits of the industry are declining. The employer must provide the impacted employees 30 days notice and a reasonable opportunity to change their deferral election. The employer must also meet nondiscrimination testing limits for the impacted plan year as it will no longer be relying on the safe harbor.
These regulations provide a welcome opportunity for employers to react to economic hardship and not be locked into a retirement plan contributions due to IRS rules when the business conditions have dramatically changed.
Release of Annual Funding Notices and Red Zone Certification for Pension Plans
If your company employs union workers and you have been making contributions into a pension plan on behalf of those workers, you are probably receiving for the first time a notice entitled “Annual Funding Notice” and information regarding the Pension Plans to which you are required to contribute that are in the “Red Zone.” These notices will likely include a requirement that the employer pay a 5% surcharge, increasing by 5% per year, until a Rehabilitation Plan is adopted which increases contributions on a going forward basis.
The Pension Protection Act of 2006 requires pension plans to certify their funding status each year and, due to the rapid market declines in the 4th quarter of 2008, most calendar year pension plans are in the Red Zone for funding purposes indicating their “critical” funding status.
All employers contributing to multiemployer pension plans should be consistently reviewing the funding status of the plans, maintaining current information on the employer’s withdrawal liability and monitoring the adoption of any rehabilitation plan to ensure that such a plan has a reasonable chance of success while limiting benefit increases.
New Details Emerge on Obama Health Plan
President Obama has provided glimpses of his long promised universal health care plan over the past few months and last week new details emerged in conjunction with meetings between health care company executives and key congressional leaders.
Meetings this week indicate that the Senate and House are largely on the same page with regard to health reform indicating that differences in Congress will be relatively easy to work out on the macro elements of health care reform. There is likely be increased federal regulation of health insurance based on the Senate proposals released this week.
Key issues which are emerging include:
• A requirement that everyone carry health insurance similar to those laws requiring auto insurance;
• Employers will be required to provide insurance for at least full-time workers or pay a tax equal to the minimum value established for such insurance;
• Employers will have minimum standards for health insurance benefits, deductibles, copays, etc.;
• Insurance companies must provide at least four options of insurance: lowest, low, medium, and high;
• Federal government regulations will exist governing how insurance is marketed to employers and families;
• Federal government would establish a national insurance exchange for purchasing health insurance;
• The likely taxation of some health insurance benefits received by an employee from employers;
• Tax credits to assist low income individuals and small businesses in purchasing health insurance.
While the Senate appears to be ahead of the House in terms of details and drafting of its health insurance proposals, the House is not far behind and we believe that a comprehensive health care proposal will likely be introduced in June or July of this year and will pass.
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