November 12, 2008Client Alert

Congressional Bailout Bill Creates New Obligations and Opportunities for Employee Benefit Plans

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization, Energy Improvement and Extension, and Tax Extenders and AMT Relief Acts of 2008 (the "Act"). The Act’s predominant focus is the subprime mortgage crisis. However, the Act also incorporates several provisions that affect the operation of certain employee benefit plans. This client alert provides a high level summary of those provisions.

Plans Must Cover Dependents Enrolled In Post-Secondary Schools Who Take A Leave Of Absence Due To A Serious Health Condition

The Act adopts, on a federal level, a law which has been gaining popularity among several states known as "Michelle's Law.” Michelle's Law requires group health plans to continue to cover dependent students enrolled in post-secondary schools who take medically necessary leaves of absence causing them to lose student status for purposes of plan coverage. Coverage must last for one year, or until the date the dependent would otherwise have lost coverage under the plan, whichever event occurs earlier. The plan’s obligation to continue coverage only applies when the plan has received certification of the need for leave from the child’s physician.

As stated, Michelle’s law already applies to many insured plans based on state insurance law. The Act’s incorporation of the law amends the Employee Retirement Income Security Act of 1974 (“ERISA”) such that the law will now apply to self-insured plans and insured plans which were not already subject to the law. The provision is effective for plan years beginning on or after October 9, 2009.

A plan must provide notice of the dependent’s rights under Michelle’s law with any notice regarding a requirement for certification of student status that the plan requires for continued coverage. In addition, Michelle’s law will require plans to amend their eligibility sections and summary plan descriptions. Further, although Michelle’s law leave does not appear to run concurrently with COBRA, an employer’s COBRA notice should be amended to include references to Michelle’s Law.

Mental Health Parity Act Made Permanent

The Mental Health Parity Act of 1996 (“MHPA”) requires certain group health plans which provide both medical and surgical benefits and mental health benefits to provide such mental health benefits at the same aggregate lifetime or annual dollar limits for which it provides medical and surgical benefits. When passed, the law was meant to be temporary. As a result, Congress has had to periodically extend its expiration date. The MHPA was last extended in the Heroes Earnings Assistance Relief Tax Act of 2008 to continue through December 31, 2008.

The Act amends the MHPA in several ways. First, the Act makes the MHPA permanent. Second, the Act extends the MHPA’s coverage requirements. The law now requires that plans that offer substance abuse benefits must offer these benefits at the same levels it offers medical and surgical benefits. Third, plan benefits for mental health or substance abuse cannot be subject to payment requirements that are generally more restrictive than the most common payment requirements for medical or surgical benefits, e.g., deductible levels, co-payments, and out-of-pocket expenses. A plan must also ensure that the most common treatment limitations, like the number of days, visits, or frequency of treatment are the same. Fourth, if the plan covers medical and surgical procedures on an out-of-network basis it must provide mental health and substance abuse benefits on an out-of-network basis too. Fifth, the plan must disclose to participants the criteria it uses for a medical necessity determination for mental health and substance abuse benefits. The plan must also disclose, upon the participant’s request (or as otherwise required), the reason for any denial of reimbursement or payment for mental health and substance abuse benefits.Certain exceptions still apply to this law for small employers and for coverage obligations where the law increases certain plan costs beyond a certain level. Further, the Department of Labor is now responsible for monitoring compliance with this cost exemption provision. Thus, we expect to see new plan reporting obligations arise (perhaps under Form 5500) within the next two years.

Generally, the MHPA amendments take effect for plan years beginning on or after October 4, 2009. However, special rules apply to plans maintained pursuant to one or more collective bargaining agreements ratified before October 3, 2008. For these plans, the MHPA amendments take effect for plan years beginning on or after the later of January 1, 2009 or the date on which the last of the collective bargaining agreements relating to the plan terminates (without regard to extensions negotiated after October 3, 2008).

Employers will need to review their group health plans and collective bargaining agreements to determine whether the plan arrangements comply with the current state of the law. If not, then the employer will need to amend the plan and summary plan description. Further, the provisions of the MHPA must be considered for in future union negotiations.

Plan Distributions for Disaster Relief Following 2008 Midwest Storms

The Act permits certain qualified retirement plans (such as 401(k)s) to allow individuals living in the 2008 Midwest federal disaster areas of Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Wisconsin to take distributions and loans from certain qualified plans due to a participant’s hardship caused by the storms. This provision operates much like the 2005 Gulf Opportunity Act which assisted those affected by Hurricanes Katrina, Wilma, and Rita.

For these individuals, the Act permits certain qualified plans to raise the limits on, and extend the due date for, repayment of loans from the plan. Moreover, the Act eliminates early distribution penalties for participants. Finally, the Act allows such affected participants to repay the distribution from a plan back into the plan or to another plan and treat the amount as a rollover, thus avoiding the tax. Please note, the plan must allow a distribution on account of the Midwest storms for these provisions to apply. Whether a plan chooses to do so is in the plan’s discretion. The Act permits the plan sponsor to retroactively amend the plan to permit these distribution events. The plan sponsor must adopt the amendment by the end of the 2010 plan year.

Restriction of Certain Golden Parachutes

The Act limits the deduction that an employer may take for a covered executive’s golden parachute payment to no more than $500,000 for an applicable tax year when the employer has sold at least $300,000,000 in troubled assets to the Secretary of the Treasury. This limitation applies through December 31, 2009, but may be extended if the Congress determines the bailout program must be extended.

Covered executives are defined as the Chief Executive Officer (CEO), the Chief Financial Officer (CFO), and the top three highly compensated employees in the Company who are not a CEO or CFO. An employee who is designated a covered executive in a tax-year will remain a covered executive under the Act even if demoted or terminated. Thus, it seems this provision can cover more than the five individuals it appears to cover.

Bicycle Commuter Fringe Benefit

The Act permits an employer to provide a qualified transportation fringe benefit to employees for commuting to work by bicycle. Under the Act, employees who commute to and from work through the use of a bicycle may receive certain reimbursement for the purchase of a bicycle, bicycle improvements, repair and storage. The reimbursement may not exceed an amount equal to $20 times the number of months in the calendar year in which the employee engaged in "qualified bicycle commuting." A "qualified bicycle commuting month" is a month in which the employee: (1) regularly uses a bike for a substantial portion of the travel between his residence and his place of employment; and (2) does not receive any benefits for commuter highway vehicle transportation, transit passes, or parking (i.e., another qualified transportation fringe benefit). Note, unlike the other qualified transportation fringe benefits, the bicycle commuter benefit may not be combined with another qualified transportation fringe benefit. This program may be offered by employers beginning on January 1, 2009.

Non-Qualified Deferred Compensation Arrangement Limitations

Finally, the Act seeks to rein in certain perceived abuses by non-qualified deferred compensation arrangements run by foreign entities for U.S. taxpayer employees. The law now seeks to require individuals participating in non-qualified deferred compensation plans of foreign employers to recognize income sooner rather than later. The foreign arrangement is slightly different than that which exists in the U.S. because the foreign employer is not able to deduct the employee’s compensation from its taxes because it pays no U.S. taxes. The foreign entity’s indifference to when the U.S. employee recognized the income had fostered a situation where the taxpayer essentially enjoyed a tax haven.

To eliminate this haven, Congress will now require the U.S. taxpayer employee of “non-qualified” entities to pay tax on the deferred compensation as soon as it is no longer subject to a substantial risk of forfeiture. The law defines a non-qualified entity as:

(1) any foreign corporation unless substantially all its income is either (a) effectively connected with the conduct of a trade or business in the U.S. or (b) subject to a comprehensive foreign tax (i.e., generally the foreigner’s country is a party to a treaty with the U.S.); or

(2) a partnership (foreign or domestic), unless substantially all of its income is allocated to persons other than (a) foreign persons for whom that income is not subject to a comprehensive foreign income tax and (b) organizations that are exempt from U.S. income tax.

Amounts are subject to a substantial risk of forfeiture if entitlement to the compensation is conditioned on the individual’s performance of substantial future services.

Congress recognizes that certain non-qualified deferred compensation plans contain assets for which a value will not be readily ascertainable at the time the amount is no longer subject to a substantial risk of forfeiture. The Act penalizes this arrangement by providing that the amount will be taxed at the time it becomes determinable. In addition, the amount will be subject to an interest charge and another 20% excise tax.

Although the provisions of this law take effect for services performed after December 31, 2008, amounts earned prior to January 1, 2009 are not exempt from the Act's reach. Rather, such amounts must be included in gross income in the later of (1) the tax year in which there is no longer a substantial risk of forfeiture or (2) the last tax year beginning before January 1, 2018.

Also, the deferred compensation plan is still subject to the other requirements of Code Section 409A. Consequently, the failure to have a plan document, etc., may trigger an additional 20% excise tax on the amounts. Transitional guidance to deal with these amounts of pre-2009 service is forthcoming to assist employees with section 409A compliance for these specific foreign situations.



   Michelle’s Law

Plan years beginning on or after October 9, 2009 

   Mental Health Parity Amendments

Plan years beginning on or after October 4, 2009* 

   Bicycle Qualified Transportation Fringe Benefit

Calendar years beginning on January 1, 2009 

   2008 Midwestern Storm Relief

Employers must adopt amendment by end of 2010 plan year 

   Golden Parachute Limitations

Applies only to employers who sell certain amount of troubled assets to Dept. of Treasury 

   Foreign Company Non-Qualified
   Deferred Compensation Provisions

Services performed on or after January 1, 2009

*different rules apply for plans maintained through a collective bargaining agreement.

If you have any questions about any of the employee benefit provisions or other provisions of the Act, please contact John L. Barlament at 414.225.2793, or, Charles P. Stevens at 414.225.8268, or, Kirk A. Pelikan at 414.223.2529, or, or your Michael Best attorney.

back to top