2013 Year-End U.S. Retirement and Welfare Plan Update: Action Items for Plan Sponsors

November 19, 2013

As 2013 draws to a close, sponsors of tax qualified retirement plans and welfare benefit plans should be aware of the following plan amendments and other action items that may need to be made or taken in the next few weeks or months. 

Tax Qualified Retirement Plans

Discretionary Amendments

Tax qualified retirement plans generally must adopt any discretionary plan amendments no later than the end of the plan year in which the amendment became effective (except that amendments modifying eligibility or decreasing benefits generally must be adopted before they become effective).  Thus, for a calendar year plan, all discretionary amendments implemented in 2013 (e.g., the addition of an automatic contribution arrangement, the addition of an in-plan Roth conversion feature, changes in plan distribution rules, etc.) must be formally adopted by December 31, 2013.

Note that if a plan had participants who were adversely affected by Hurricane Sandy and the plan waived restrictions on hardship distributions during the period from October 26, 2012 through February 1, 2013 in accordance with IRS Notice 2012-44, the plan must be amended by the end of the 2013 plan year to reflect this change.

Non-Discretionary Amendments

One amendment required by the Pension Protection Act of 2006 must be adopted by December 31, 2013 for single-employer, defined benefit pension plans.  Specifically, the distribution and benefit accrual restrictions under sections 401(a)(19) and 436 of the Internal Revenue Code ("Code") based on plan funding levels must be adopted by the last day of the 2013 plan year.  Plan sponsors should promptly review their plan documents to ensure that this amendment has been adopted (or adopt if it has not been).

Amendments to Reflect the Windsor Case

One of the effects of the Supreme Court’s Windsor decision last June is that same-sex spouses are treated as "spouses" for purposes of the qualified plan rules (as well as for "COBRA" and various other employee benefits purposes).  The IRS has promised more specific guidance on the effect of Windsor on tax-qualified plans, and no plan amendments are required at this time.  However, at a minimum, plans should begin treating same-sex spouses the same as opposite-sex spouses for purposes of beneficiary designations, age 70 ½ required minimum distributions, rollover rights, and other statutory requirements.

IRS Determination Letter Applications

Plan sponsors of "Cycle C" tax qualified retirement plans must submit their applications for IRS determination letters by January 31, 2014. Governmental plans and single-employer plans maintained by a plan sponsor with an employer identification number (EIN) that ends in a 3 or an 8 are generally considered "Cycle C" plans.  In connection with the determination letter application, such plans will generally need to be restated and reviewed to confirm compliance with the IRS’s annual Cumulative List of Changes in Plan Qualification Requirements (currently set forth in IRS Notice 2012-76; a new Cumulative List is expected by year-end).

Provision of Required Notices

  • Defined contribution retirement plans must send updated participant fee disclosures no later than 18 months following the date that the plan’s 2012 disclosure was issued.

  • Defined contribution retirement plans that provide a qualified default investment alternative ("QDIA") must provide annual notice to participants at least 30 days prior to the beginning of the plan year (i.e., by December 1, 2013 for calendar year plans).

  • Defined contribution retirement plans with an eligible automatic contribution arrangement or qualified automatic contribution arrangement must provide an annual notice to all participants on whose behalf contributions may be automatically made to the plan at least 30 days prior to the beginning of the plan year (i.e., by December 1, 2013 for calendar year plans).

  • Safe harbor "401(k)" plans must provide an annual safe harbor notice describing the plan’s contribution features at least 30 days prior to the beginning of the plan year (i.e., by December 1, 2013 for calendar year plans).

Welfare Benefit Plans

Modification to Healthcare Flexible Spending Arrangement "Use-It-Or-Lose-It" Rule

On October 31, 2013, the U.S. Department of Treasury released a notice modifying the longstanding "use-it-or-lose-it" rule applicable to healthcare flexible spending accounts.  Pursuant to Notice 2013-71, sponsors of Code Section 125 cafeteria plans with a healthcare flexible spending account feature may amend their plans to permit participants to roll over up to $500 in unused account balances remaining at the end of a plan year.  The rolled over amounts may be used for qualifying medical expenses incurred at any time during the following plan year.  Any rolled over amounts will have no effect on the maximum amount that participants can contribute to the plan each year, which is currently capped at $2,500.  Thus, if permitted by the plan, participants may hold up to $3,000 ($2,500 contribution and $500 rollover) in their healthcare flexible spending account for 2014 qualified medical expenses.

The rollover feature may not be included in any plan with a "grace period" feature that authorizes participants to utilize unused account balances for qualified medical expenses incurred up to 2 ½ months following the end of a plan year.  Thus, plan sponsors must determine whether their plan will implement either the rollover feature or the 2 ½-month grace period (or neither).  If a plan currently offers a grace period, but would like to offer the rollover feature on a prospective basis, the plan must be amended to eliminate the grace period.  Unlike the grace period restrictions, a plan adding the rollover feature is permitted to offer a run-out period following the end of the plan year during which participants may seek reimbursement from unused account balances for qualified medical expenses incurred in the prior plan year. Plans may currently add the rollover feature such that it applies to account balances remaining at the end of the 2013 plan year.  However, a plan amendment is required to implement this change. If implementing the feature for the 2013 plan year, the cafeteria plan must be amended by the end of the 2014 plan year.  Similarly, although the new $2,500 limit on healthcare flexible spending account annual contributions took effect in 2013, plan sponsors have until December 31, 2014 to amend their plans to reflect this change.

Patient Protection and Affordable Care Act (PPACA) Changes

Several changes implemented by the PPACA will take effect for plan years beginning on January 1, 2014.  Plans and summary plan descriptions (SPDs) will need to be amended to reflect these new requirements. 

  • Plans may not generally impose any annual limits on essential health benefits.  Restricted annual limits, which have been permitted for the past three years, are no longer permitted. 

  • Plans may no longer impose any pre-existing condition exclusions.  Previously plans were not permitted to impose pre-existing condition exclusions on participants under age 19.  This requirement will be extended to all plan participants.

  • "Grandfathered" health plans that currently restrict their coverage of adult children (up to age 26) who have other employer-sponsored coverage must be amended to eliminate this restriction.

  • Non-grandfathered plans must also be amended to provide coverage for certain clinical trials and to ensure that any in-network out-of-pocket maximums comply with the 2014 limit ($6,350 per person/$12,700 per family).

Provision of Required Notices

  • An updated Summary of Benefits and Coverage (SBC) that complies with the Department of Labor’s revised template and reflects any benefit changes must be provided with open enrollment materials or, if the plan has evergreen coverage, must be provided 30 days in advance of the start of the 2014 plan year (i.e., by December 1, 2013 for calendar year plans).

  • Employers who were required to file 250 or more Form W-2s for 2012 must report the aggregate cost of applicable employer-sponsored coverage on employees’ 2013 W-2s.

Gibson, Dunn & Crutcher LLP 

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, or the following:

Stephen W. Fackler – Palo Alto and New York (650-849-5385 and 212-351-2392, [email protected])
Michael J. Collins – Washington, D.C. (202-887-3551, [email protected])
Sean C. Feller – Los Angeles (213-229-7579, [email protected])
Krista Hanvey – Dallas (214-698-3425; [email protected]   

© 2013 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.