The Employee Benefits Practice is pleased to present the Employee Benefits Developments Newsletter for the month of February 2020. Click on the links below for more information on each specific development or case.
Proposed Regulations Provides Further Guidance on Amended Section 162(m)
IRS: Sponsors Must Retain Copies of Signed Retirement Plan Documents
Updates to Group Health Plan Service Agreements May be Required to Comply with Final Rule Regarding Confidentiality of Substance Use Disorder Patient Records
Document Mailing of COBRA Notices
Proposed Regulations Provides Further Guidance on Amended Section 162(m)
The Internal Revenue Service has issued Proposed Regulations under Internal Revenue Code Section 162(m). Section 162(m) limits the compensation deduction available to publicly traded companies to $1.0 million for covered employees. In large part, the Proposed Regulations follow the guidance issued by the Internal Revenue Service in Notice 2018-68 (see coverage here).
There are some areas where the Proposed Regulations extend the guidance or cover periods not previously discussed in the Notice. Highlights of the Proposed Regulations include:
- Guidance where an affiliated group of companies contains two or more companies that are public companies
- Application of the rules with respect to a corporation that has issued American depository receipts
- Clarification of the definition of “predecessor corporation” for determining if someone was a principal executive officer, a principal financial officer, or one of the three executive officers with the greatest amount of compensation
- Further guidance on the application of the written binding contract exception to the application of amended Section 162(m)
The Proposed Regulations are highly complex. While generally the effective date of the Proposed Regulations will be for taxable years beginning after the date of publication of the Final Regulation, there are many exceptions. Most importantly:
- The definitions of what constitutes a written binding contract and what is a material modification generally applies to taxable years ending on or after September 18, 2018.
- The rules applicable to corporations that become publically traded apply for periods after December 20, 2019.
- The definition of covered employee generally applies to taxable years ending on or after September 10, 2018.
As part of the effective date rules, taxpayers are not permitted to selectively choose whether or not to apply any of the guidance in the Proposed Regulations. A taxpayer that relies on part of the Proposed Regulations for a position must be consistent and follow all the other provisions contained in the Proposed Regulations. (Proposed Rule: Certain Employee Remuneration in Excess of $1,000,000 Under Internal Revenue Code Section 162(m) https://www.federalregister.gov/documents/2019/12/20/2019-26116/certain-employee-remuneration-in-excess-of-1000000-under-internal-revenue-code-section-162m )
IRS: Sponsors Must Retain Copies of Signed Retirement Plan Documents
Adoption and maintenance of a compliant plan document by a sponsor of a qualified retirement plan has been and remains important to establishing and keeping the plan’s tax qualified status and preserving the special tax benefits provided by the plan. A recent generic legal advice memorandum written by the Office of Chief Counsel for the Internal Revenue Service (AM 2019-002) serves as a strong reminder that a sponsor of a retirement plan that comes under IRS examination must be able to produce copies of signed and dated documents and amendments that demonstrate the timely adoption of required plan documentation. In the absence of evidence of timely signed and adopted plan documentation, the memorandum indicates that it would not be inappropriate for the exam agent to pursue plan disqualification.
The memorandum addresses the fundamental question of whether a plan sponsor must retain a validly executed plan document. The memorandum’s ultimate advice is clear, and reiterates the IRS position on the issue:
“A plan is considered adopted only if proof of adoption of the plan is provided. A validly executed plan document should be retained and upon audit given to the exam agent to support the qualified status of the plan. Upon failure to produce an executed plan, the employer has the burden of proof that it executed a plan document as required.”
The memorandum points to Internal Revenue Service (IRS) regulations under Section 6001 for its position that a signed copy of the plan document must be retained by the plan sponsor and made available for inspection by exam agents. The memorandum, however, acknowledges that there are certain and specific circumstances in which a plan sponsor might be able to meet its burden of proof that a plan document or amendment had been signed without producing that actual signed document. The memorandum references a recent case (see Val Lanes Recreation Center v. Commissioner (2018)) where the court found, despite the lack of a signed restated plan, there was credible evidence the plan and amendments were adopted. Nonetheless, the memorandum signals the IRS’s expectation that a plan sponsor, “in normal circumstances,” is unlikely to be able to meet that burden of proof.
Prudent operation of a qualified retirement plan should include establishing and adhering to procedures for the approval, execution and retention of their retirement plan documents and amendments, including earlier versions of the plan documentation.
Updates to Group Health Plan Service Agreements May be Required to Comply with Final Rule Regarding Confidentiality of Substance Use Disorder Patient Records
Patient substance use disorder (SUD) records received by group health plans from federally funded treatment programs are subject to the restrictions of 42 CFR Part 2 (Part 2). The federal Substance Abuse and Mental Health Services Administration (SAMHSA) issued final regulations on January 3, 2018, updating the provisions of Part 2 related to the confidentiality of SUD records. The disclosure restrictions of the final rule are applicable to group health plans (and other third-party payers) and plan service providers that receive SUD patient-identifying records directly from a Part 2 provider or from a group health plan to perform their services.
When a patient consents to the release of their SUD records for payment or health care operations, a “lawful holder” such as a group health plan may re-disclose the information to a third-party vendor providing services to the plan only “as may be necessary” to carry out the payment or health care operations of the plan. In such cases, the group health plan’s service provider is wholly subject to the restrictions of Part 2 upon receipt and may not re-disclose the SUD records.
In addition, the final rule requires that the written agreement between the group health plan and the service provider must conform to the following requirements:
- Contain a statement that “42 CFR part 2 prohibits unauthorized disclosure of these records”;
- Require the plan service provider to implement appropriate safeguards to prevent unauthorized uses and disclosures; and
- Obligate the plan service provider to report to the group health plan any unauthorized use, disclosure or breach of patient SUD records.
Those group health plans currently sharing SUD records with plan service providers for claims administration or other purposes are past the deadline – February 2, 2020 – for bringing their service agreements into compliance. Where Part 2 is applicable to a group health plan, amending existing business associate agreements with third-party vendors to include the required Part 2 provisions may be the most straightforward method for satisfying the Part 2 mandate. Plan sponsors of group health plans potentially receiving SUD records subject to Part 2 should work with legal counsel to thoroughly review their agreements to ensure compliance.
Federal Register, Vol. 83, No. 2, Wednesday, January 3, 2018, Final Rule: 42 CFR Part 2, “Confidentiality of Substance Use Disorder Patient Records.”
Document Mailing of COBRA NoticesA recent district court case out of Louisiana highlights the importance for employers to document their COBRA notice mailing procedures. In this case, a terminated employee claimed that her employer failed to give her timely notice of her COBRA continuation coverage rights. COBRA is a federal law that allows a beneficiary to elect to continue coverage under an employer’s group health plan following a “qualifying event” such as a termination of employment. The former employee claimed that she did not receive a COBRA notice and that the first time she became aware that her coverage ended was when she went to a doctor’s appointment and was advised that her health insurance had been cancelled. Although the employer maintained that, upon termination of employment, COBRA notices are automatically generated and mailed to employees, the only evidence of such a mailing was the declaration from the Supervisor of Payroll and Benefits. The court held that in this situation the declaration by itself did not meet the standard to dismiss the claim on summary judgment. Because employers bear the burden of proof regarding the timely distribution of a COBRA notice, employers should take steps to document this process, such as making a copy of the actual notice and obtaining a certificate of mailing. (Randolph v. E. Baton Rouge Parish Sch. Bd., (M.D. LA, 2019))
