Summer 2008

            Introduction:

           
You’ve got to ac-cent-tchu-ate the positive,
Eliminate the negative,
Latch on to the affirmative,
Don’t mess with Mr. In-Between.

            These lyrics, from the iconic tune “Accentuate the Positive,” were penned by the legendary song writing duo, Johnny Mercer and Harold Arlen, for the 1944 film “Here Comes the Waves” starring Bing Crosby and Betty Hutton. The song immediately captured the hearts of war weary Americans who were ready for a change. The song was nominated for an Academy Award in 1945; and, during January of that same year, competing versions of the song, recorded by Johnny Mercer and Bing Crosby, respectively occupied both the No. 1 and No. 2 peak positions on the Billboard Charts. “Accentuate the Positive” has remained an American standard into the 21st Century, having been recorded more than 200 times by artists as diverse as country crooner Willie Nelson (1978) and jazz great Al Jarreau (2005). Why has the song endured? Because, it posits a sound philosophy. How does that philosophy apply to your retirement plan? It’s simple. It’s time to restate your plan for EGTRRA. Where some providers will see this as a chore, the professionals at Pension Corporation of America (“PCA”) see the EGTRRA restatements as an opportunity: an opportunity to assist clients in reviewing and evaluating the terms of their plans, an opportunity to work with clients to “accentuate the positives” of their plans and to work toward “eliminating the negatives.” 

EGTRRA Restatements:

Ever since the enactment of the Employee Retirement Income Security Act of 1974 (“ERISA”), the Internal Revenue Service (“IRS”) has required that all employers periodically restate their retirement plan documents. The last required plan restatement was for the GUST amendments in 2001. Since the restatement of their plans for GUST, employers have been required to adopt a number of interim good faith amendments to their plans in order to comply with post-GUST changes to the tax laws. In addition, many of these employers have adopted discretionary amendments to their plans. These employers are now required to restate their plan documents to incorporate into a single plan document all post-GUST required interim good faith amendments and all post-GUST discretionary amendments. This newest plan restatement requirement is commonly referred to as the “EGTRRA Restatement.”

PCA has been preparing for the EGTRRA Restatements since January 2006. At that time, in accordance with IRS guidelines, PCA’s EGTRRA prototype plan documents were submitted to the IRS for approval. The IRS then had until 2008 to review all EGTRRA prototype document submissions. In March 2008 the IRS announced that it had completed its review process and would begin issuing opinion letters to those plans (such as PCA’s) that were timely submitted to the IRS for approval. PCA is proud to announce that it now has received approval letters for all prototype plan documents that it sponsors and will begin the EGTRRA restatement process. In order to add extra value to the restatement process, PCA will be contacting each of its clients to schedule a plan document review. This will afford each client an individualized opportunity to reevaluate the provisions of its plans, as currently drafted, to determine if the plan is still accomplishing its intended goals or whether changes need to be made to the plan as part of the restatement process. The professionals at PCA look forward to this additional opportunity to meet with our clients and to assist in making the EGTRRA restatement process as easy as possible for our clients.


Other Items in the News:


1. Fee Disclosure.

Since the enactment of the Pension Protection Act of 2006, much of the Department of Labor’s regulatory efforts have been focused on the education of Americans regarding their retirement plan accounts. This focus has resulted in numerous changes to employee notice requirements over the last few years, many of which have increased the amount of information that an employer must provide to plan participants. In furtherance of its goal of ensuring that Americans have access to information that is critical to making informed decisions regarding their retirement plan savings, the Department of Labor (“DOL”) published its much anticipated participant fee disclosure proposals on July 23, 2008. 

Upon final adoption, the DOL fee disclosure proposals would require participant directed individual account plans (for example, 401(k) plans that permit participant direction of investment) to disclose certain plan and investment related information, including fee and expense information (e.g. sales loads, deferred sales charges, redemption fees, service charges). Under the DOL regulations, as proposed, this information would have to be provided to a plan participant at the time he or she first becomes eligible to participate in the plan and then on an annual basis thereafter. Additionally, some fee and expense information would have to be provided to plan participants on a quarterly basis. 

As proposed, the new disclosure requirements would be effective for plan years beginning on or after January 1, 2009. However, due to the procedures that must be followed before the proposals can be published as final rules, some practitioners are predicting that the effective date will be later. Also, as with all proposals, it is likely that there will be some changes before the new fee disclosure requirements are finalized. The public has until September 8, 2008 to provide comments to the DOL regarding the proposed rules, and the DOL has specifically invited the public to comment on the earliest date on which the proposed rules should be made effective. PCA is currently in the process of developing procedures to address the new DOL fee disclosure requirements as proposed and will provide an update on the status of the finalization of the rules in its next newsletter.


2. The HEART Act.

The Heroes Earnings Assistance and Relief Tax Act (“HEART Act”), which is primarily designed to provide additional benefits to employees who are on active military duty, was signed into law by President Bush on June 17, 2008. Due to the timing of its enactment, the Heart Act is not addressed in the plan documents that the IRS has pre-approved to be used for EGTRRA restatements. This means that an employer will be required to adopt an interim snap on amendment to its plan in order to comply with the Heart Act legislation. Although the IRS has announced that an employer will have until the last day of its first plan year beginning on or after January 1, 2010 to adopt a snap on amendment for compliance with the HEART Act, it is important to note that some provisions of the HEART Act are effective and may need to be addressed well before the an employer’s required amendment deadline. 

To the extent that a provision of the HEART Act is mandatory, the employer must operate its plan in compliance with said mandatory provision as of the effective date of that provision. Additionally, there are provisions of the HEART Act that are permissive (rather than mandatory) that the employer may want to apply as of their initial effective dates. Bearing this in mind, there are two provisions of the HEART Act that employers will want to give consideration to immediately: (a) a mandatory provision addressing differential wage payments made to employees who have been called to active military duty and (b) a permissive provision addressing employees who have been called to active military duty and who die or become disabled before returning to work.

(a) The Mandatory Provision. The mandatory provision affecting differential wage payments is effective for payments made after December 31, 2008. The provision only applies to employees who are called to active military duty for a period of more than thirty days. A differential wage payment is one where the employer pays such employee the difference between the amount of his or her military wages and the amount of his or her normal work wages. The HEART Act does not require an employer to make differential wage payments. However, if the employer does make differential wage payments, the HEART Act requires the employer to treat the differential wage payments as wages for withholding purposes and for retirement plan purposes. Thus, under the HEART Act, differential wage payments are no longer a post-severance compensation issue. Instead, for purposes of the differential wage payments, the employee is treated as if he or she is still employed by the employer. (Under the Final 415 Regulations, differential wage payments were classified as a form of post-severance compensation and were only to be treated as compensation for plan purposes if the employer elected to include a provision in its plan document providing for such treatment.)

(b) The Permissive Provision. The permissive provision addressing employees who are called to active military duty and who die or become disabled before returning to work is effective as of January 1, 2007. This provision permits an employer to treat an employee who was called to active military duty and who died or became disabled before returning to work as if the employee returned to work the day before he or she died or became disabled. This treatment enables the employer to accrue additional benefits for the employee under the employer’s plan.


3. Small Plan Safe Harbor Transmittal Period for Elective Deferrals.

In what they have described as an effort to provide greater certainty to plan sponsors, the DOL has proposed a safe harbor transmittal period for “small plans” (defined below). Although the small plan safe harbor is currently designated as a safe harbor (as opposed to a mandatory rule) and is in fact a proposal and not a finalized rule, it is more likely than not that the DOL will challenge the timeliness of transmittals by small plans that do not meet the safe harbor.

Under the proposed safe harbor, a small plan (defined as a plan with fewer than one hundred participants at the beginning of the plan year) will be deemed to have satisfied the timely transmittal requirements imposed by the DOL regulations if the plan sponsor deposits a participant’s elective deferrals into a plan account within seven business days of the date the amount would have otherwise been payable to the employee as wages. In a revealing comment, the DOL safe harbor proposal notes that small plans typically need more time than larger plans to segregate an employee’s deferrals from the plan sponsor’s general assets. This is a further indication that the DOL’s position is likely to be that a large plan will not be in compliance with the DOL’s timely transmittal requirements unless elective deferrals are deposited into a plan account within two to three business days. (The DOL’s proposal also announced that the DOL intends to amend its regulations to bring plan loans payments within the scope of the timely transmittal rules.) 

A failure to timely deposit employee deferrals must be reported on a plan’s annual Form 5500. Plans that have reported late deferrals on a Form 5500 have come under closer scrutiny from the DOL. Reports have surfaced that the DOL is automatically generating a letter to any plan sponsor who reports a late transmittal of deferrals on its 5500 even where the plan sponsor has included an attachment describing the correction. 

Remember, a failure to send in contributions in a timely manner is considered both a fiduciary breach and a prohibited transaction. The least onerous consequence of late transmittals is a correction requirement with the attendant imposition of an excise tax penalty and an obligation to restore lost earnings to participants. Much more onerous consequences, such as a complete disqualification of the plan, are also a possibility.


4. Non-Qualified Deferred Compensation Plans and Section 409A.

In its Summer 2007 newsletter, PCA commented on the Internal Revenue Service’s issuance of the Final Regulations under Internal Revenue Code Section 409A. At that time, the IRS’s position was that all Section 409A plan documents had to be amended to comply with the final regulations no later than December 31, 2007. The IRS later announced an extension of the amendment deadline until the end of 2008. No further extensions of the amendment time deadline are anticipated. Therefore, it is crucial for employers to immediately address any remaining 409A issues they may have. While Section 409A does not apply to qualified plans such as your 401(k) plan, PCA feels it is important to notify its clients that they should be reviewing any and all types of compensation arrangements they may maintain to ensure compliance with these regulations while there is still time to take action. 

Rebekah H. Whitaker
General Legal Counsel for
Pension Corporation of America

IRS Circular 230 disclosure: The adoption of a retirement plan, its qualification by the IRS, and the related tax consequences are the responsibility of the employer and its independent tax and legal advisors. This Newsletter is intended to provide general information only. It does not constitute legal advice and should not be used as a substitute for legal advice. Notwithstanding, to ensure compliance with requirements imposed by the IRS, we inform you that any information contained in this communication (including any attachments) which may pertain to U.S. federal tax laws is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from an independent tax and legal advisor.

________________________

1 That same year additional competing versions of the song recorded by Artie Shaw and Kay Kyser also held the No. 5 and No. 12 peak positions on the Billboard Charts.

2 The acronym “GUST” stands for a whole series of laws that were enacted after the Tax Reform Act of 1986, including, but not limited to, GATT (the General Agreement on Tariffs and Trade), USERRA (the Uniformed Services Employment and Reemployment Rights Act of 1996), SBJPA (the Small Business Job Protection Act of 1996), and TRA ’97 (the Taxpayer Relief Act of 1997).

3 These required amendments have included the EGTRRA amendment, the Post-EGTRRA amendment, the Mandatory Distribution Amendment, the Final 401(k) Regulations Amendment and the Final 415 Regulations Amendment.

4 For example, an employer may have amended its plan document to add Roth deferrals as an option.

5 As noted in prior communications from PCA, there are some limited exceptions to this rule. For example, the required interim amendment for the Final 415 Regulations will not be incorporated into the EGTRRA restatement document but will instead remain a snap on amendment. 

6 Although the participant is still treated as employed by the employer with respect to the differential wage payments for purposes of withholding and making contributions, the participant will still be treated as having had a severance of employment for purposes of being able to elect to receive a distribution from the plan, including a distribution of deferrals. If the participant elects to receive a distribution of deferrals, the plan must prohibit the participant from making any additional deferrals during the 6-month period beginning on the date of the distribution of deferrals. In essence, the participant is treated as if he had received a hardship distribution.

            Did You Know

            What is the Ohio Healthy Families Act going to mean to your Company?

Private employers in Ohio are currently not required to provide paid sick leave to their employees. If passed, The Healthy Families Act will mandate such a requirement. This act is full of ambiguous language and gaps that will generate litigation as employers attempt to comply with it. This Act will impact nearly 2.2 million Ohio workers and financially affect all Ohio businesses. 
It is important that all Ohio employers understand the ramifications of the OHFA and consider steps to ensure compliance. If voters approve the initiative, the OHFA will take effect 30 days after the election (i.e., Dec. 4, 2008). Here are some FAQ’s and answers regarding the OHFA.

Are all employers covered by the OHFA? 

The OHFA requires all employers with 25 or more employees to provide paid sick leave. Unlike the federal Family and Medical Leave Act (FMLA), the OHFA does not limit its application to locations with large numbers of employees. The OHFA apparently applies even if an employer’s employees are dispersed throughout the United States and fewer than 25 employees are actually located in Ohio.

How much leave are employees entitled to receive? 

Employees working 30 or more hours per week are entitled to the full amount of paid sick leave (i.e., seven days per year). Employees working fewer than 30 hours per week receive a pro rata share of leave. Sick leave is accrued on a monthly basis, roughly 0.5 days per month. This does include all part time, temporary, seasonal and interns right now. Employers must wait until the Ohio Department of Commerce issues regulations before this issue will be resolved.

Is there a waiting period before OHFA leave can be taken? 

Yes, but only for new employees. An employer is permitted to institute a 90-day waiting period for new employees. Leave is accrued during the waiting period and can be taken immediately upon expiration of the waiting period.

Can an Ohio employer implement a “use it or lose it” requirement as to paid sick leave? 

No. The OHFA specifically permits employees to carry over unused sick leave. There is considerable debate as to whether employees can carry over sick leave indefinitely. An employee must be permitted to accrue seven days of sick leave each year. Some commentators suggest that an employer may limit total leave to seven days, even if the employee has carried over unused paid sick leave from a prior year. The statutory language does not provide clear guidance on this issue. Employers must wait until the Ohio Department of Commerce issues regulations before this issue will be resolved.

Are there minimum increments in which leave can be taken? 

Yes. Paid sick leave can be taken on a daily basis, an hourly basis or in the smallest increment that the employer’s payroll system uses to account for absences or use of other leave.

For what reasons may an employee take paid sick leave? 

Leave may be taken to obtain professional medical diagnosis or care, preventive medical care, to tend to any physical or mental illness, or for an injury or medical condition. These terms are undefined. Also an employee may take leave for the same conditions listed above to care for his or her child, parent, spouse or in-laws. The OHFA is broader than the FMLA in that it also permits an employee to take leave for an employee’s in-laws.

May an employee take leave to care for others? 

Yes, an employee may take leave for the same conditions listed above to care for his or her child, parent, spouse or in-laws. The OHFA is broader than the FMLA in that it also permits an employee to take leave for an employee’s in-laws.

What effect does the OHFA have on an employer’s existing leave/PTO/vacation policies? 

An employer whose leave policy provides paid sick leave equivalent to or more generous than the act’s requirements does not have to modify the policy. However, an employer cannot eliminate or reduce leave (regardless of whether that leave is characterized as PTO, vacation, sick or any other language) as of the OHFA’s enactment date (i.e., Dec. 4, 2008) in order to comply with the law. Any changes should be made prior to Dec. 4, 2008.

How does the OHFA affect Ohio’s pregnancy leave requirements? 

Ohio’s Pregnancy Discrimination Act requires Ohio employers to provide reasonable leave to female employees upon hire for pregnancy, childbirth and related conditions. The OHFA does not change this requirement. However, absences for these reasons would likely be considered qualifying events under the OHFA. The employer may require a female employee to use accrued OHFA paid sick leave concurrently with pregnancy or maternity leave. Employers who choose not to “loan” paid sick leave to employees prior to actually accruing the OHFA leave may face a situation where a female employee takes 12 weeks of pregnancy or maternity leave early in the calendar year and up to seven additional days of OHFA leave later in the year to care for a sick newborn or to take the baby to medical appointments.

How does the OHFA impact an employer with a unionized workforce and a collective bargaining agreement? 

The OHFA does not interfere with, impede or in any way diminish employees’ rights to collectively bargain with their employer to establish paid sick leave in excess of the minimum paid sick days established in the act. As sick leave is a term and condition of employment, employers must bargain with the union before changing leave offered to its bargaining unit employees.

What does the OHFA prohibit? 

An employer cannot interfere with, or restrain an employee who exercises rights under the OHFA. An employer cannot discharge, discriminate or retaliate against an employee for making a complaint that he or she has not been allowed to accrue or use sick leave. Finally, an employer may not use paid sick leave as a negative factor in any employment action, count the use of paid sick leave under a no-fault attendance policy, or provide accrued sick leave less than that required under the act.

What damages are available to an employee who institutes a civil lawsuit under the OHFA? 

Successful employees may receive equitable relief, including reinstatement or promotion and damages equal to wages or benefits denied or lost as a result of an OHFA violation. If there is no denial of wages or benefits, an employee may receive actual monetary loss up to 10 days of wages. Successful employees also may receive treble damages and attorney fees.

What should we do to prepare for the OHFA? 

Employers should consider revising their leave policies to be ready to comply with the OHFA prior to the act’s likely enactment on Dec. 4, 2008. Specifically, employers must determine whether they will operate a separate paid sick leave policy or include the sick leave under a PTO policy. Even if an employer currently offers paid sick days, the policy will need to be amended to include the expanded definition of qualifying events for which leave can be taken to allow employees to take leave to care for their children, spouses, parents and in-laws. As the requirements under the FMLA and OHFA differ, employers must establish two separate policies to cover leave under those laws. Unionized employers must bargain for these changes prior to implementing new policies.

Employers should also consider drafting a standard medical certification form for absences lasting longer than three days. Questions posed on the form must comply with the Americans with Disabilities Act and, for larger employers, the FMLA. Employers may also want to create OHFA tracking forms to comply with the initiative’s recordkeeping requirements and ensure that unused leave is carried over year to year. 

Do not implement any changes before November 4th (election date) but if the act passes, rescind current policies and implement modified policies before “the date of enactment” of the Act. If you have questions regarding the Ohio Healthy Families Act please call our HR Specialist, Mary Carol Parker, PHR at (513) 719-4179.