BENEFITS BYTE

October 4, 2004
BB 04—102

In this issue:

  • Nonqualified Deferred Comp Provisions Included in Tax Bill — Conferees Meeting October 4, 2004
  • Council Files Second Comment Letter on Proposed Medicare Regulations
  • IRS Releases Large Plan Audit "Top 10" List
  • Bush Expected to Sign Tax Extenders Bill that Changes Definition of Dependent
  • Missing Participant Guidance for Terminating DC Plans

Nonqualified Deferred Comp Provisions Included in Tax Bill — Conferees Meeting October 4

Conferees to the tax bill (the American Jobs Creation Act (H.R. 4520) from the House and the Jumpstart Our Business Strength (JOBS) Act (S. 1637) from the Senate) are meeting October 4 to begin reconciling the two bills. Deferred compensation provisions are included among the proposed revenue-raising measures.

A discussion draft, which should be available shortly, is expected to reflect a number of significant changes regarding the deferred compensation provisions. A summary of these provisions, as addressed in the discussion draft, is now available. Several amendments have been filed with respect to these provisions, including one by Representative Sam Johnson (R-TX), that address most of our concerns. For more information, contact Lynn Dudley, Council vice president and senior counsel, at (202) 289-6700.

Council Files Second Comment Letter on Proposed Medicare Regulations

The Council and the U.S. Chamber of Commerce (the Chamber) have filed a second joint comment letter on the proposed regulations to implement the new Medicare prescription drug benefit under the Medicare Modernization Act of 2003 (MMA) issued by the Centers for Medicare & Medicaid Services (CMS). On September 28 the Council and Chamber filed a letter addressing priority employer issues related to the new drug benefit. The second letter provides further comments and recommendations on other operational and technical concerns for employers under the proposed rules. For more information, contact Susan Relland, Council health policy legal counsel, at (202) 289-6700.

IRS Releases Large Plan Audit "Top 10" List

The Council has obtained copies of the Internal Revenue Service's (IRS) Top 10 audit issues list prepared in conjunction with the IRS's new Employee Plans Team Audit (EPTA) program as well as a PowerPoint presentation used by the IRS to describe the program. The PowerPoint presentation contains, among other things, selection criteria for plans to be audited. As reported by the Council in our June 2, 2004 Benefits Byte, the Internal Revenue Service (IRS) is preparing to perform team audits — comprehensive official reviews — on large qualified plans (more than 2,500 participants) and their operations.

Council staff discussed the EPTA program with IRS officials who shared the documents mentioned above with the Council. Further details on the program can be accessed on a specially-prepared page on the IRS's Web site. For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

Bush Expected to Sign Tax Extenders Bill that Changes Definition of Dependent

On October 4, President Bush signed into law the Working Families Tax Relief Act of 2004 (H.R. 1308) which extends several expiring tax provisions. In addition, the bill changes the definition of "dependent" for many tax purposes in order to make the definition more uniform. The bill has sometimes been referred to as the "tax extenders" bill.

The tax extenders bill contains changes to Section 152 of the Internal Revenue Code and other sections designed to unify the definition of dependent for various statutory purposes. For the first time, non-child dependents as defined in section 152 will be subject to a gross income limitation ($3,100 for 2004). If the person makes more than that amount, they cannot be a dependent.

The technical and conforming amendments eliminate the gross income limitation for non-child dependents for a number of code sections including many benefits-related code sections. For example, other code section changes eliminate the gross income limitation for purposes of tax-free benefits from health plans and cafeteria plans. However, the legislation does not address treatment of regulatory sections (including hardship regulations under Section 401(k)) that incorporate Section 152 by reference. This will cause problems, for example, for plans that want to allow hardship distributions for the medical expenses of the same-sex partner of an employee.

Some of the expiring (or scheduled to be reduced) tax credits, deductions or brackets that will be reinstated by the legislation (or at least extended by another year) include the (1) child tax credit, (2) marriage penalty relief, (3) reduction in 10 percent rate bracket, and (4) alternative minimum tax relief. For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

Missing Participant Guidance for Terminating DC Plans

On September 30, the Department of Labor (DOL) issued Field Assistance Bulletin 2004-02 providing guidance on actions to take when participants are "missing" from a terminating defined contribution plan. The guidance details four steps that every plan fiduciary should take before distributing a missing participant's account balance and other steps that it may be prudent to take depending on the facts and circumstances. If the steps are taken without finding the participant, the bulletin also provides distribution options for the missing participant's benefit.

The bulletin provides much-needed clarification for the missing participant issue in the terminating plan context, structured as information on what the plan fiduciary must do in order to fulfill its fiduciary obligations. Failure to do so results in a breach of fiduciary duty and resulting liability. The DOL had previously issued similar guidance to fiduciaries of terminating defined benefit plans. The bulletin does not provide an effective date, which presumably means the requirements would apply to any money not yet distributed from defined contribution plans.

Under the guidance, a plan fiduciary cannot distribute a missing participant's benefit until the following methods have been exhausted:

  • Use certified mail.
  • Check related plan and employer records (medical plans, etc.) for current address information.
  • Identify and contact any designated plan beneficiaries.
  • Use either the Internal Revenue Service's (IRS) or Social Security Administration's (SSA) letter forwarding services.

If the plan fiduciary does not locate the missing participant after using all four of the methods listed above, the fiduciary should consider the use of Internet search tools, commercial locator services and credit reporting agencies. Reasonable expenses for locating the missing participant may be charged to the participant's account providing the method of allocation is consistent with the terms of the plan and the plan's fiduciary duties under the Employee Retirement Income Security Act (ERISA). However, if the cost of using these services will be charged to the missing participant's account, plan fiduciaries will need to consider the size of the participant's account balance in relation to the cost of the services when deciding whether the use of the services is appropriate.

If the plan fiduciary is still unable to find the missing participant, the plan fiduciary can roll the money into an individual retirement arrangement (IRA) set up under the regulatory guidance for mandatory distributions regardless of the amount of the distribution. If the plan fiduciary is unable to locate an IRA provider willing to accept the rollover distribution, plan fiduciaries may consider either establishing an interest-bearing federally insured bank account in the name of the missing participant or transferring the missing participant's account to state unclaimed property funds (state escheat laws). Plan fiduciaries may not use 100 percent income tax withholding as a means to distribute benefits to missing participants. For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

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The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.