The Benefits News You Need in 60 Minutes or Less Tuesday, October - PDF document

“The Benefits News You Need in 60 Minutes or Less” Tuesday, October 21, 2008 12:00 p.m. – 1:00 p.m. CST 1

Housekeeping Issues • Call 866.493.2825 for technology assistance • Dial *0 (star/zero) for audio assistance • Ample time for live Q & A will be allotted at the end of the formal presentation – Pull Down Q&A Menu • We encourage you to Maximize the PowerPoint to Full Screen Usage: – Hit F5 on your keyboard Introductions Moderator for today’s Broadcast. Leigh C. Riley 2

Today’s Topics • Headline News: Year End Deadline Fast Approaching For 409A Compliance • Mark Your Calendars: Upcoming Deadlines and Recent Developments that Require Attention • In The Spotlight: FICA Tax on Nonqualified Deferred Compensation • Cram Session: Using EPCRS To Correct Retirement Plan Errors • Fiduciary Fundamentals: Receipt of Gifts and Entertainment Presents New Perils • Vexing Verdicts: Scrivener’s Error - Young v. Verizon’s Bell Atlantic Cash Balance Plan - N.D. Illinois, August 28, 2008 Year End Deadline Fast Approaching For 409A Compliance Michael H. Woolever 3

409A • Most employers have at least one and in some cases many deferred compensation arrangements subject to 409A. • Full documentary compliance with 409A is required by December 31, 2008. – Extension of the deadline not likely. • Most arrangement will not comply without formal, written amendments. 409A • Failure to amend 409A arrangements prior to year end will cause existing deferrals to be ineffective. • Employees will be subject to immediate tax on the deferred amounts. • Employees will also have to pay an additional tax of 20% of the amount deferred and an interest penalty from the date of deferral. 4

409A • 409A imposes reporting obligations (W-2 and 1099 Misc.) on employers. – Must report all deferrals; – Must report all violations which cause deferrals to become taxable; – Must withhold when deferrals become taxable. • Employers will need to identify all 409A arrangements for reporting purposes. 409A • 409A adds objective statutory requirements to the prior rules governing non-qualified deferred compensation arrangements. – These requirements must be incorporated into the documents governing the arrangement. • 409A’s definition of non-qualified deferred compensation arrangements is very broad 5

409A • 409A Covers most arrangements where payment for services is delayed to a future tax year, including – Employment agreements, change in control agreements, and other agreements providing post-employment payments or benefits; – Non-qualified supplemental retirement benefits, including 401(k) wrap plans and defined benefit SERPS; – Short-term and long-term incentive compensation plans; – Golden parachute payments; – Elective deferral arrangements. 409A • 409A applies to – HCEs; – Non-HCEs; – Directors; and – Some independent contractors. 6

409A • 409A requires that all covered arrangements: – Be in writing; – Include all required provisions and not contain any non-compliant provision; – Require timely deferral elections; – Specify the time and form of payment; – Limit when payments may be accelerated; – Limit how and when payments may be deferred beyond the original payment date. 409A • 409A prohibits several common practices. – Employer or employee discretion to change time and form of payment; – “hair cut” provisions; – Payment triggered by declining financial condition; – Off-shore rabbi trusts. 7

409A • Key next steps: – Identify all arrangements potentially subject to 409A; – Evaluate availability of pre-year end changes allowed under IRS transition rules; – Draft and get formal approval of required amendments prior to January 1, 2009. – Set up procedures for complying with 409A reporting requirements. 409A • What if you miss the deadline? – Ultimately, there likely will be some form of IRS correction program, but it is not clear when it will be issued and how helpful it will be. • May be limited to non-HCEs • Will involve some economic cost – Employers will face difficult decisions on reporting and withholding during 2009. – Employers will face significant HR issues with employees faced with accelerated taxes and additional taxes and penalties. 8

409A • More information on 409A: – There are links on my Foley webpage to several articles I have written on 409A; – From the website, you can also listen to a two hour presentation on 409A I gave for clients in May of this year; – Finally, I have written an article on year end compliance issues that will be published in Corporate Board Magazine in November. Contact me by email if you would like a copy of the article. Upcoming Deadlines and Recent Developments that Require Attention Sarah B. Krause 9

Topics • Qualified Retirement Plans – Defined Benefit Pension Plans – 401(k) Plans • 403(b) Plans • Executive and Equity Compensation Plans • Health and Welfare Plans Qualified Retirement Plans • Cycle C for IRS determination letter applications ends January 31, 2009 (applies to employers whose EIN ends in “3” or “8”). • Plan amendments for final Code Section 415 regulations – The final regulations became effective on the first day of the plan year beginning on or after July 1, 2007. – A plan must be amended by the due date (including extensions) for filing the income tax return for the sponsoring employer’s taxable year that includes the date the amendment is effective. • Plan amendments for discretionary changes must be adopted before the end of the plan year in which the amendment is effective. 10

Qualified Retirement Plans: What about Amendments for the Pension Protection Act? • Most PPA changes became effective in 2006, 2007, and 2008. This means you had to comply with the changes in operation of a plan. – Exception: PPA changes may become effective in 2009 for plans maintained pursuant to a collective bargaining agreement. • All PPA amendments must be formally adopted by the last day of the plan year beginning on or after January 1, 2009. Qualified Retirement Plans: The Heroes Earnings Assistance and Relief Tax Act of 2008 • Some changes became effective in 2007 (retroactively): – A plan must provide that if a participant dies while performing military service, his/her survivors are entitled to any additional benefits that would have been provided had the participant resumed employment and then terminated on account of death. – A plan may provide that a participant who leaves for military service and cannot resume employment due to death or disability will be treated as if he/she resumed employment on the day before the death or disability for benefit accrual purposes. • Changes that become effective January 1, 2009: – Differential wage payments are treated as wages for federal income tax withholding purposes. – Individuals receiving differential wage payments are treated as employed by the employer and the differential wage payments must be treated as compensation under a plan. – Participants on active duty for at least 30 days are treated as having terminated employment for purposes of receiving a distribution of pre-tax contributions. A participant cannot resume pre-tax contributions until 6 months after the distribution. • Amendments must be formally adopted by the last day of the plan year beginning on or after January 1, 2010. 11

Qualified Retirement Plans: Notices, Notices, and More Notices • Defined Benefit Pension Plan Annual Funding Notice – Created by the PPA and replaces the Summary Annual Report (SAR) – Includes information regarding the plan’s funding status, including the plan’s funding target attainment percentage, total assets and liabilities, number of participants, funding policy, and amendments that increased or decreased benefits (if any) – Effective for plan years beginning on or after January 1, 2008 – Deadline = 120 days after the end of the plan year • 401(k) Plan: – Qualified Default Investment Alternative (“QDIA”) Notice • For plans that allow participants to direct the investment of their account, this notice is necessary to obtain ERISA 404(c) protection with respect to a default investment of a participant’s account. • Deadline = 30 days before each plan year – Safe Harbor Notice • Only applicable to safe harbor plans. • Deadline = 30 days before each plan year – Automatic Enrollment Notice • Only applicable to plans that use an automatic enrollment arrangement. • Deadline = a reasonable time before each plan year 403(b) Plans • Final Code Section 403(b) regulations will become effective January 1, 2009. – The regulations require that all Section 403(b) contracts and custodial accounts be maintained pursuant to a written plan (although it does not have to be a single document). – If you already have a written plan, it should be amended to bring it into compliance with the final regulations. – Information Sharing Agreements must be in place by January 1, 2009 for plans that allow participants to exchange contracts for a contract issued by a vendor that is not a payroll slot vendor since September 24, 2007. • Heroes Act changes also apply to 403(b) plans. 12