The IRS recently issued a reminder that plans that allow for mandatory (cash-out) distributions of account balances of $5,000 or less must be amended to include the new provisions for automatic rollovers to an IRA. The IRS has provided a sample amendment for plan sponsors, and the deadline for the amendment is the end of the first plan year ending on or after March 28, 2005. Although calendar year plans, for example, have until the end of 2005 to be amended, the new rules apply for mandatory distributions beginning on March 28, 2005, except for governmental plans and certain non-electing church plans. Some employers are considering amending their plans to provide for mandatory distributions only when the account balance is less than $1,000 to avoid the automatic rollover requirement; however, such amendment must also be made before the end of the first plan year ending on or after March 28, 2005.
The American Jobs Creation Act of 2004 made fundamental changes to the taxation of nonqualified deferred compensation plans. New Code Section 409A contains a number of detailed requirements for such plans. At the end of last year and earlier this year, the IRS issued guidance on deferred compensation plans, although many questions remain unanswered. Nonqualified deferred compensation plans cover a broad range of plans including excess plans, SERPs, phantom stock plans, certain restricted stock units, discounted stock options, and certain stock appreciation rights. If you have not already reviewed your deferred compensation arrangements, you should do so, although existing plans do not have to be amended until December 31st. If you have an existing plan but have been waiting to decide how you want to proceed with deferrals, you only have until March 15th under a special transition rule to get the deferral elections in place.
Health Savings Accounts
In its continuing efforts to provide guidance on health savings accounts or HSAs, the Department of Treasury has issued a new series of frequently asked questions for its web site: http://www.ustreas.gov/offices/public-affairs/hsa/faq1.shtml. The new FAQs do not provide new interpretations of HSA requirements but rather offer some additional clarification. Although they do not constitute formal guidance, the FAQs do provide insight into the practical application of the HSA requirements. The FAQs consist of 43 items covered in previous releases and rulings and 26 new ones. If you have an HSA or are considering one for your next plan year, you may want to review the FAQs.
The President's 2001 tax act added several new deferral options for 401(k) plans including designated Roth contributions, which will first be available in 2006. Plan sponsors can decide whether to offer Roth contributions as an option. If they do, employees will make an irrevocable election to designate all or part of their deferrals as Roth contributions. Such contributions will be taxed in the year of deferral. If a distribution of Roth contributions (together with earnings) meets certain requirements, the distribution will be excludable from income like a Roth IRA contribution. The IRS has issued proposed regulations that examine the separate accounting requirements, vesting, and distribution rules. The regulations should be finalized to allow implementation beginning in 2006.
HIPAA Security Rule
Like the HIPAA Privacy Rule, which was effective for all group health plans as of April 14, 2004, the HIPAA Security Rule will require group health plans to put into place numerous safeguards to protect the health information of plan participants as early as April 20, 2005. Specifically, the HIPAA Security Rule requires plans to implement administrative, physical, and technical safeguards to protect the confidentiality, integrity, and availability of individually identifiable health information that is stored or transmitted in electronic media (referred to as "EPHI"). Examples of electronic media include hard drives, magnetic or optical disks, and the Internet. The kinds of safeguards that plans must implement to protect EPHI may include encryption, workstations that automatically log off after a period of inactivity, access audit mechanisms, and restrictions on physical access to information systems. Compliance with the HIPAA Security Rule will be required for "large" plans, i.e., group health plans with annual receipts in excess of $5 million, by April 20, 2005. All group health plans must comply with the HIPAA Security Rule by April 20, 2006.