Precept Standard: Health Care Reform – Guidance on Health FSAs and Summary of Benefits and Coverage; Participant-Level Fee Disclosures; Workplace Health & Safety Tip of the Month

June 2012

IRS Provides Much Needed Guidance for Health FSAs

Employers are getting some welcome relief in the form of IRS guidance that provides helpful details and clarity on how to implement the upcoming $2,500 limit on salary reduction contributions to health flexible spending accounts (FSAs) set by the Patient Protection and Affordable Care Act (PPACA).

Notice 2012-40, which was issued by the IRS on May 30, 2012, also provides a generous deadline for amending cafeteria plans to reflect this new limit – before year-end 2014 – and indicates that the Treasury Department and IRS are considering modifying the “use it or lose it” rule that has long troubled health FSA participants.

Background

The PPACA affects health FSAs in several ways. For example, it adds Internal Revenue Code Section 125(i), which imposes a $2,500 limit on salary reduction contributions to health FSAs effective for “taxable years” beginning after December 31, 2012. The $2,500 limit will be indexed for inflation in future years (beginning December 31, 2013).

The PPACA requirements sometimes overlap with proposed cafeteria plan regulations that the IRS issued in 2007. These proposed regulations contain very explicit and detailed requirements as to what must be included in a written cafeteria plan document. One requirement is to specify the maximum amount of salary reduction contributions that may be made to a health FSA. The proposed regulations generally require plan amendments to be adopted prior to the date when they become effective. The proposed regulations also contain the use-it-or-lose-it rule, which generally prohibits contributions under a health FSA from being used in a subsequent plan year or period of coverage. Failure to satisfy these rules would trigger disqualification of the entire arrangement, resulting in significant tax consequences. The issuance of final regulations is on the Treasury agenda, and plan sponsors must be aware of the impact they will have on their cafeteria plans and health FSAs.

The $2,500 Limit – Plan Year

The Notice clarifies how the new $2,500 limit will operate. The Notice specifies that the “taxable year” described under the PPACA provision means the plan year for the relevant cafeteria plan. This interpretation is easier for employers to administer than alternatives would have been. The $2,500 limit on health FSA salary reduction contributions will apply on a plan-year basis effective with plan years beginning after December 31, 2012. 

Operational Issues

The Notice addresses a few operational issues in dealing with the $2,500 limit, all in ways that appear favorable to employers. First, if a plan provides a grace period (i.e., participants in a calendar-year health FSA have until March 15th of the following plan year to incur expenses and get reimbursements), unused salary reduction contributions carried over into the next year would not count against the $2,500 limit for that subsequent year.

Second, the Notice provides guidance as to how employer non-elective contributions (i.e., flex credits) are to be accounted for in dealing with the $2,500 limit. If such flex credits must be used for a qualified benefit, such as a health FSA, the participant may still elect to make a salary reduction contribution of $2,500. However, if the flex credit may be used for the qualified benefit or cashed out, those flex credits will be treated as a salary reduction contribution and, as a result, will impact the amount of salary reduction contribution that a participant may make.

Third, the Notice provides relief and the opportunity for correction in the event that salary reduction contributions exceed the $2,500 limit, and if it was the result of a reasonable mistake and not due to the employer’s willful neglect.

Request for Comments – Use-It-or-Lose-It Rule

The IRS specifically requests comments in the Notice on the use-it-or-lose-it rule under the proposed regulations. The IRS and Treasury state that given the new limit, they are considering modification of the use-it-or-lose-it rule.

Conclusion

The Notice provided much needed guidance in dealing with the new $2,500 limit for health FSAs. In light of the delayed plan amendment requirement and outstanding final cafeteria plan regulation, plan sponsors may want to consider waiting before taking action with respect to their plan documents. Notwithstanding this plan document consideration, plan sponsors must be ready to comply from an operational perspective in 2013. Because many cafeteria plans are operated on a plan-year basis, this will require action in late 2012 to ensure that plan participants are notified of the changes and plan operations are updated accordingly. 

Should you have any questions about this decision or its impact on your workplace, contact your Precept account representative or benefits counsel.

Author: Jason A. Rothman, Shareholder, Benefits Practice Group

Note: This article was drafted by the attorneys of Ogletree Deakins, a national labor and employment law firm that represents management. This information should not be relied upon as legal advice. Ogletree Deakins is a national full-service law firm with over 600 attorneys located in offices across the United States and the U.S. Virgin Islands. The information in this article is not intended as legal advice nor is it intended to provide a comprehensive review of the legal matters discussed. For more information about Ogletree Deakins, please contact Betsy Johnson at (213) 438-1297 or  betsy.johnson@ogletreedeakins.com . ©2012 Ogletree, Deakins, Nash, Smoak & Stewart, P.C. All rights reserved. Used with permission.

Health Care Reform: Additional Guidance on the Summary of Benefits and Coverage

The Departments of Labor, Health and Human Services, and Treasury (the "Departments") recently released the ninth in their series of answers to frequently asked questions on implementation issues associated with the Affordable Care Act. The recent FAQ provides clarification on the summary of benefits and coverage ("SBC"), which is required to be provided by group health plans and health insurers starting with the first open enrollment or plan year beginning on or after September 23, 2012.

The Affordable Care Act's SBC rules are generally designed to create a standardized written description of health insurance policies and coverage so that participants and consumers can better understand their health coverage and evaluate it in comparison to other health insurance options in the market. To this end, the SBC must be provided in a consistent four-double-sided-page format with 12-point font. It must also be written in a "culturally and linguistically" appropriate manner and use language that is understandable to the average plan participant and beneficiary. The SBC must address a total of 12 specific required content elements (e.g., descriptions of coverage, cost sharing, limitations or restrictions of coverage, renewability and continuation of coverage provisions, a coverage facts label that includes examples of coverage and related cost sharing, a disclosure statement regarding whether the plan provides minimum essential coverage, etc.) and be provided free of charge.

What Plans Are Subject to the SBC Requirement?

The SBC rules apply to all fully insured and self-insured health plans, including certain health flexible spending arrangements (FSAs) and stand-alone health reimbursement arrangements (HRAs), regardless of grandfathered status. The SBC rules do not apply to health savings accounts (HSAs) or HIPAA-excepted benefits, which include "retiree-only" plans, stand-alone dental or vision plans, and most FSAs.[1] If an HRA is integrated with other major medical coverage, then it does not have to separately satisfy the SBC rules; the effects of employer allocations to an HRA account can be denoted in the SBC for the other major medical plan. Although an HSA is not subject to the SBC rules, an SBC prepared for a high deductible health plan associated with an HSA can mention the effects of the employer contributions to such an HSA.

When Are the SBC Rules Effective?

For participants and beneficiaries who enroll (or re-enroll) at open enrollment, the SBC requirement is effective starting with the first day of open enrollment beginning on or after September 23, 2012. For participants who enroll other than through open enrollment (including newly eligible participants or those subject to a special enrollment opportunity), the requirement to provide an SBC starts on the first day of the plan year beginning on or after September 23, 2012.

Which Participants in a Group Health Plan Must Receive an SBC?

An SBC must be provided to each participant or beneficiary who is enrolled in a group health plan. However, the SBC may be provided to the participant on behalf of the beneficiary (including by furnishing the SBC to the participant in electronic form), unless the plan or insurer has knowledge of a separate address for a beneficiary (e.g., a spouse or adult dependent).

May the SBC be Delivered Electronically?

Yes, the rules permit plans to electronically deliver the SBC to participants and beneficiaries in accordance with ERISA's electronic disclosure requirements with one modification. In this regard, a distinction is made between a participant or beneficiary who is already covered under the group health plan, and a participant or beneficiary who is eligible for coverage, but not enrolled in a group health plan. With regard to the latter group, plans may send a paper postcard electronically or through regular mail to provide instructions for accessing the SBC online, provided the format is readily accessible through an Internet posting and a paper copy is provided free of charge upon request.

The FAQs add an additional safe harbor, under which SBCs may be provided electronically to participants and beneficiaries in connection with their online enrollment or online renewal of coverage under the plan. SBCs also may be provided electronically to participants and beneficiaries who request an SBC online. In either case, the individual must have the option to receive a paper copy upon request. Note that these rules differ from ERISA's electronic disclosure requirements, so consideration should be given if the SBC is intended to suffice as a summary of material modification (SMM) under ERISA. In other words, if a plan chooses to communicate material modifications via the SBC, their distribution must comply with ERISA's electronic disclosure requirements or a separate SMM may be required.

As noted above, plans may provide the SBC to an employee on behalf of a beneficiary, and may do so electronically, unless the plan has knowledge of a separate address for the beneficiary.

When Must an SBC be Provided to Participants in a Group Health Plan?

• Upon application . If a plan distributes an enrollment application, the SBC must be provided as part of those materials. If the plan does not distribute an enrollment application, the SBC must be provided no later than the first date on which the participant is eligible to enroll in coverage.
• Within 90 days of a "special enrollment." An SBC must be provided to special enrollees no later than the date on which a summary plan description is required to be provided, which is 90 days from enrollment.
• Upon renewal . If a plan requires participants to affirmatively elect to maintain coverage during open enrollment, or provides them with the opportunity to change coverage options during open enrollment, the plan must provide the SBC at the same time it distributes open enrollment material. If elections automatically renew and there is no opportunity to change coverage options, the SBC must be provided no later than 30 days prior to the first day of the new plan year (or, if coverage has not yet been renewed, as soon as practicable, but in no event later than seven business days after issuance of the new insurance contract, or upon confirmation of intent to renew, whichever is earlier).
• Upon request . The SBC must be provided as soon as practicable to participants and beneficiaries upon their request, and in no event later than seven business days from the date of such request.

Who is Responsible for Developing the SBC?

For fully insured plans, health insurers are responsible for developing the SBC. For self-insured plans, the plan sponsor (or designated administrator) is responsible for developing the SBC. A plan administrator that uses two or more insurers or service providers with respect to a single group health plan may synthesize the information into a single SBC, or may contract with one of its insurers or service providers to perform that function.

What is the Penalty for Failure to Provide an SBC?

A group health plan or insurer that willfully fails to provide an SBC is subject to a fine of not more than $1,000 per enrollee (or beneficiary if they reside at a known address that is different than the participant) per failure.

The FAQs clarify that the Departments' basic approach to implementation of the Affordable Care Act is to assist (rather than impose penalties on) plans that are working diligently and in good faith to understand and come into compliance with the new law. Accordingly, during this first year of applicability, the Departments will not impose penalties on plans that are working diligently and in good faith to comply. Informal discussions with the Department of Labor have confirmed this approach.

Must Plans Provide Advance Notice of Changes?

Plans must notify participants no later than 60 days prior to the effective date of any material modification that would affect the content of the most recently provided SBC, unless the change is made in connection with a renewal or reissuance of coverage. This is a change from the rules under ERISA, which provide that notice of a material reduction in group health plan benefits must be communicated to participants within 60 days of being adopted by the plan, and that a material modification (other than a reduction) be communicated within 210 days after the end of the plan year in which the change is adopted.

Must the SBC be Provided on a Stand-Alone Basis?

The SBC may be provided as either a stand-alone document or in combination with other documents, as long as the SBC is prominently displayed at the beginning of such other documents.

How Should the SBC be Drafted if the Plan Design Does Not Fit the SBC Template?

The SBC instructions provide that to the extent a required SBC element cannot be reasonably described consistent with the template and the instructions, the plan is required to accurately describe the plan's terms while using its best efforts in a manner that is still consistent with the instructions and template.

What is the Foreign Language Requirement?

Plans must include, in the English versions of SBCs sent to an address in a county in which 10% or more of the population is literate only in a non-English language, a statement prominently displayed in the applicable non-English language clearly indicating how to access the language services provided by the plan or insurer. Sample language is available on the model notice of adverse benefit determination at http://www.dol.gov/ebsa/IABDModelNotice2.doc. Current county-by-county data can be accessed at http://www.cciio.cms.gov/resources/factsheets/clas-data.html. A plan can voluntarily include the statement in the SBC for use in counties that do not meet the 10% non-English language threshold.

Are Group Health Plans Primarily for Expatriates Required to Provide an SBC?

Yes, although in lieu of providing an SBC, a plan may provide an Internet address (or similar contact information) for obtaining information about benefits and coverage provided outside the United States. The Departments will not take any enforcement action against a plan for failing to provide an SBC with respect to expatriate coverage during the first year that the rules apply. Note that to the extent coverage or benefits are available within the United States, the plan is still required to provide a compliant SBC.

Next Steps

Sponsors of fully insured group health plans should check with their insurance carriers and prepare to begin distributing SBCs in accordance with the requirements described above starting with the first open enrollment or plan year beginning on or after September 23, 2012. Also, since an insurance carrier generally satisfies its obligations by providing the form to the plan sponsor, sponsors should confirm with the carrier whether it is delivering the notice directly to participants.
Sponsors of self-funded group health plans should consult with benefits counsel and their plan administrators to develop an SBC that meets the content requirements described above with ample time to distribute it by the applicable compliance deadline. Also, considering that SBC was designed primarily for use by health insurance carriers, plan sponsors may need to modify the template to accommodate various types of plan and coverage designs, to provide additional information to individuals, or to improve the efficacy of the recommended disclosures.

The templates and related materials are accessible via hyperlink from http://ccio.coms.gov and www.dol.gov/ebsa/healthreform. The Departments posted versions of the SBC template and sample completed SBC that were updated as of May 11, 2012, which replace the prior versions issued contemporaneously with the final regulations that were released in February 2012.

Please contact your Precept account team or your benefits counsel should you have any questions regarding this or any other aspect of health care reform.

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IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

This publication is a service to our clients and friends. It is designed only to give general information on the developments actually covered. It is not intended to be a comprehensive summary of recent developments in the law, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.

[1] HIPAA-excepted benefits include, but are not limited to, certain limited-scope dental or vision benefits, coverage for on-site medical clinics, certain benefits for long-term care and certain accident benefits. In addition, benefits provided under a health flexible spending account (FSA) are HIPAA-excepted benefits to the extent that: (i) the maximum benefit payable for the employee under the health FSA for a plan year does not exceed two times the employee's salary reduction election (or, if greater, the amount of the employee's salary reduction election, plus $500); (ii) the employee has other coverage available under a group health plan of the employer for the year; and (iii) the other coverage is not limited to benefits that are excepted benefits. A "retiree-only" health plan is HIPAA-excepted if it has fewer than two participants who are current employees on the first day of the plan year.

Note: The information in this Alert was provided to Precept by Proskauer Rose LLP. Proskauer is an international full-service law firm with over 60 employee benefits attorneys located in offices across the United States. The information in this article is not intended as legal advice nor is it intended to provide a comprehensive review of the legal matters discussed. For more information about Proskauer, please contact Peter Marathas at (617) 526-9704 or pmarathas@proskauer.com. ©2012 Proskauer Rose LLP. All rights reserved. Used with permission.

U.S. Department of Labor Releases FAQs on Implementation of Participant-Level Fee Disclosures

On May 7, 2012, the U.S. Department of Labor ("DOL") published guidance in the form of frequently asked questions ("FAQs") relating to the participant-level fee disclosure requirements contained in the final regulations issued under Sections 404(a) and 404(c) of the Employee Retirement Income Security Act of 1974 ("ERISA") (the "Participant Disclosure Regulation"). 

Background

On October 20, 2010, the DOL issued the Participant Disclosure Regulation, which established new fiduciary requirements for disclosures to participants and beneficiaries in participant-directed individual account plans, such as section 401(k) plans. The Participant Disclosure Regulation generally requires administrators to disclose to plan participants and beneficiaries who have the right to direct the investment of assets held in their plan accounts various plan-related and investment-related information, including fees and expenses that may be charged against their plan accounts. (See our client alert on the Participant Disclosure Regulation here). 

In addition, on February 3, 2012, the DOL published final regulations under section 408(b)(2) of ERISA requiring certain covered service providers to furnish specific fee information to plan administrators that will facilitate their compliance with the Participant Disclosure Regulation. Accordingly, the DOL's FAQs also serve as guidance concerning the fee disclosure requirements under 408(b)(2). (See our client alert on the 408(b)(2) fee disclosure rules here).

The following discussion summarizes the guidance provided by the DOL, organized by topic.

Scope: Covered Individual Account Plans

The FAQs clarify that plans with both participant-directed and trustee-directed investments must satisfy the plan-related and investment-related disclosure requirements for the participant-directed investments, but need not provide investment-related information for the trustee-directed investments.

The FAQs also explain that, while the Participant Disclosure Regulation applies to ERISA-covered tax-sheltered annuity programs under Internal Revenue Code Section 403(b), there is a limited exception if the following conditions are satisfied: (i) the contract or account was issued to a current or former employee before 2009; (ii) the employer ceased to contribute to the contract or account (or to have any obligation to make contributions) before 2009; (iii) all of the rights and benefits of the contract or account are legally enforceable by the individual owner of the contract without employer involvement; and (iv) the individual owner is fully vested in the contract or account. In that case, the DOL will not take enforcement action against plan administrators who reasonably determine that obtaining the information necessary to meet the investment-related disclosure requirements with respect to any designated investment alternative that is an annuity contract or custodial account described in Section 403(b) would be impracticable or impossible.

Disclosure of Plan-Related Information: General

The FAQs provide that plan administrators choosing to furnish plan-related and investment-related information together in a single document do not need to duplicate the identification of the designated investment alternatives under each disclosure. Such duplication is only required if the plan separately discloses plan-related and investment-related information.

The FAQs also clarify that the requirement under the regulation that a "designated investment manager" be identified refers to an ERISA Section 3(38) investment manager designated by a plan fiduciary and made available to participants and beneficiaries to manage all or a portion of their individual accounts.

Disclosure of Plan-Related Information: Administrative Expenses

The FAQs make clear that the sufficiency of the fee and expense disclosures (i.e., whether they are described in sufficient detail to be understood by the average plan participant) depends on the particular facts and circumstances, including whether the fees and related services are known at the time of disclosure. When fees are known at the time of disclosure, the plan administrator must disclose the cost of the service to each participant and the plan's allocation method (e.g., pro rata or per capita). When the services or fees are not known at the time of the disclosure, the explanation must convey the known facts and circumstances, such as how fees and expenses will be paid for any services the plan administrator reasonably expects the plan to use. In that case, it is permissible (but not necessary) for the administrator to estimate the expense amount based on the plan's fees for the prior year if the administrator has no reason to believe they will be substantially different.

Further, when certain service provider fees are offset by any revenue-sharing payments received from the plan's designated investment alternatives, the plan administrator should state the possibility and likely effect of any fee reduction in the disclosures, but should still treat the situation as if the fees are known at the time of disclosure (i.e., the fees and method of allocation must still be disclosed, even where fees will likely be reduced or eliminated by the fee-sharing arrangement). The FAQs also explain that any administrative expenses paid from the general assets of the sponsoring employer, or paid from plan assets that have been forfeited, need not be disclosed because such expenses are not charged against the individual accounts of participants. Disclosure would not be necessary even if the plan document permits participant accounts to be charged for expenses, but the plan has never historically done so.

The FAQs further provide that fees and expenses charged against individual accounts, whether by liquidating shares of the account or by deducting dollars, must be disclosed as plan-related information (i.e., as administrative expenses or individual expenses). A plan administrator does not have the discretion to disclose the charges as part of the total annual operating expenses of the designated investment alternative.

The Participant Disclosure Regulation requires that, where applicable, disclosures include a statement that some of the plan's administrative expenses for the preceding quarter were paid from the total annual operating expenses of one or more of the plan's designated investment alternatives (for example, pursuant to a revenue-sharing arrangement). The regulation does not require identification of the specific plan administrative expenses paid or the specific designated investment alternative making the payment. However, the FAQs note that the required statement of quarterly payments applies even if all administrative expenses were paid from a revenue-sharing or other arrangement and no fees were charged against participants' individual accounts. Also, the plan may include the revenue-sharing explanation in each quarterly statement, even if revenue-sharing payments from a designated investment alternative are made on a semiannual and not a quarterly basis.

Disclosure of Plan-Related Information: Brokerage Windows

The FAQs provide important information about the level of detail needed to satisfy the disclosure requirements with respect to "brokerage windows," "self-directed brokerage accounts," and other similar arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan. While the FAQs do not explain how detailed the disclosure needs to be, they do provide the following guidelines:

1. At a minimum, the description must provide sufficient information to enable participants and beneficiaries to understand how the window, account, or arrangement works, including how and to whom instructions should be given, any account balance requirements, any restrictions or limitations on trading, how the arrangement differs from the plan's designated investment alternatives, and whom to contact with questions.
2. The plan administrator must also explain any fees and expenses that may be charged against a participant's account on an individual (rather than a plan-wide) basis in connection with the window, account, or arrangement, including any fees needed to open or access the account or to stop or cancel the account, any ongoing expenses necessary to maintain the account (including inactivity and minimum balance fees), and any commissions or fees charged in connection with the purchase or sale of a security. Where fees charged on an individual basis are unknown or variable, the requirements of the Participant Disclosure Regulation should be satisfied by a general statement that such fees exist and may be charged against the individual account of a purchasing or selling participant, and directions as to how the participant can obtain information about such fees. Further, the statement should advise participants to ask the provider of the window, account, or arrangement about such fees before purchasing or selling such security.
3. The plan administrator must disclose to participants the dollar amount of expenses actually charged against their individual accounts, and a description of the services to which they relate, during the preceding quarter in connection with any window, account, or arrangement.

The FAQs also clarify that plans providing brokerage windows, self-directed brokerage accounts, or similar arrangements must disclose the required annual fee and expense information to all participants and beneficiaries and not just those who have affirmatively elected to use such arrangements, even if only a small percentage of the plan's participants have so elected. Similarly, participants are not required to take a loan in order to receive disclosures about the fees and expenses associated with plan loans.

Investment-Related Disclosures for Closed Investments

The FAQs provide that investment-related disclosures are required for designated investment alternatives that are closed to new investments, but in which participants maintain prior investments. However, the plan administrator may choose to provide the disclosures only to those participants and beneficiaries that remain invested in the closed investment alternative.

Investment-Related Disclosure of Benchmark Information

The DOL has previously recognized a plan administrator's ability to furnish blended benchmark returns for designated investment alternatives that are balanced funds. The FAQs reiterate the permissibility of blending more than one broad-based securities market index and provide that the plan administrator may use the target asset allocation of the designated investment alternative (e.g., 50% stocks, 50% bonds) to determine the weightings of the indexes used in creating the additional benchmark, provided that the target is representative of the actual holdings of the investment alternative.

Investment-Related Website Disclosures

The FAQs address various alternative options available to plan administrators in complying with the website address requirement, including contracting with a third party administrator or recordkeeper to establish and maintain a website, or using website addresses provided by issuers of its designated investment alternatives. In so doing, the administrator may reasonably and in good faith rely on the information provided by a plan service provider or issuer in meeting the website requirement.

In addition, the FAQs clarify that (i) the website landing page need not include all of the required supplemental investment-related information regarding a designated investment alternative, but must be sufficiently specific to lead the participant to such information; and (ii) the website must provide return information for a plan's designated investment alternatives updated on at least a quarterly basis; this requirement includes performance data, such as the average annual total return for 1-, 5-, and 10-year periods ending on the date of the most recently completed calendar quarter.
The FAQs emphasize that information made available on the website must be accurate and updated as soon as reasonably possible following a change.

Glossary Requirement

As clarified in the FAQs, the DOL currently has no intention of publishing a sample glossary. However, the FAQs list two examples of glossaries submitted by industry groups: one developed by the American Bankers Association (which can be accessed here), and one developed by the SPARK Institute and the Investment Company Institute and endorsed by the American Benefits Council, among other groups (which can be accessed here).

Disclosure Through Comparative Format

The FAQs confirm that the Participant Disclosure Regulation does not require plan administrators to provide a unified comparative chart; instead, they may choose to furnish multiple comparative charts as supplied by the plan's various service providers. However, the charts must be supplied at a single time in a single mailing or transmission to facilitate a comparison among investment alternatives under the plan.

Further, the FAQs state that the Participant Disclosure Regulation does not require the plan administrator to furnish more than one comparative chart annually, even if there is a change to a designated investment alternative's fee and expense information after the disclosure.

For designated investment alternatives with variable rates of return, a plan administrator may provide more recent average annual total return information on the comparative chart than the end of the most recently completed calendar year (such as the most recently completed calendar month or quarter), but must use the same ending date for all designated investment alternatives and associated benchmark information.

In addition, although the model comparative chart furnished by the DOL as part of the final Participant Disclosure Regulation includes "since inception" performance and benchmark information for designated investment alternatives, the FAQs explain that a plan administrator is only required to furnish such performance data for investment alternatives that have been in existence for less than 10 years.

Disclosure of Investment-Related Information Upon Request

For designated investment alternatives that are not registered under the Securities Act of 1933 or the Investment Company Act of 1940, the Participant Disclosure Regulation requires the plan administrator to furnish copies of prospectuses or, alternatively, the administrator may provide short-form or summary prospectuses, which must reflect the latest information available to the plan administrator.

The regulations also require "similar" documents to be provided for all other designated investment alternatives under the plan. Whether or not a document is "similar" will depend on the facts and circumstances. The FAQs note, for example, that in connection with a bank collective investment fund, bank fund facts sheets ordinarily may be used to satisfy the "short-form or summary prospectus" disclosure requirement. In cases where such documents do not exist, copies of the materials used by a plan fiduciary to prudently select and monitor designated investment alternatives ordinarily would satisfy the disclosure requirement.

Form of Disclosure

The FAQs clarify that plan administrators are permitted to furnish the required disclosures along with, or as part of, other documents, rather than as stand-alone documents.

Definitions

Designated Investment Alternatives: Managed Accounts and Brokerage Windows

The FAQs explain that a "designated investment alternative" does not include the option for participants to appoint a designated investment manager to allocate the assets in their individual accounts among the plan's designated investment alternatives based on a particular investment strategy. However, the plan must still identify the designated investment manager and all information regarding the fees associated with the service.

The FAQs also note that for plans with model portfolios that merely allocate account assets among specific investment alternatives (and in which the participants do not acquire an equity or similar interest in an entity that invests in the designated investments), the portfolios themselves will ordinarily not be treated as a "designated investment alternative," although the plan administrator must still explain how the model portfolio functions and how it differs from the plan's designated investment alternatives.[1]

Brokerage windows, self-directed brokerage accounts, and other similar plan arrangements are not considered "designated investment alternatives" themselves. Accordingly, while plan administrators are required to disclose plan-related information regarding these arrangements, the investment-related disclosures do not apply to them.

However, while a "designated investment alternative" will only exist where the plan has specifically identified certain investment alternatives as available under the plan, the FAQs also warn that a failure to designate a "manageable number of investment alternatives" under the plan raises questions about whether the plan fiduciary has satisfied its obligations under Section 404 of ERISA.

If a plan offers non-designated investment alternatives through a brokerage window or similar arrangement and a "significant number" of participants and beneficiaries select these alternatives, the plan fiduciary has an affirmativeobligation to examine these alternatives and determine whether one or more should be treated as designated for purposes of the regulation.

The FAQs further explain that, pending further guidance, the DOL will not require plans with platforms holding more than 25 investment alternatives to treat all investment alternatives as "designated investment alternatives" for purposes of the Participant Disclosure Regulation, as long as the plan administrator: (1) makes the required disclosures for at least three of the investment alternatives on the platform that collectively meet the "broad range requirements" in the ERISA Section 404(c) regulations; and (2) makes the required disclosures with respect to all other investment alternatives on the platform in which at least five participants and beneficiaries, or, in the case of a plan with more than 500 participants and beneficiaries, at least one percent of all participants and beneficiaries, are invested on a date that is not more than 90 days preceding each annual disclosure.

Total Annual Operating Expenses

The FAQs offer several points of clarification to assist plan administrators in calculating the total annual operating expenses for both registered and unregistered investment alternatives.

They explain that a plan offering a registered fund-of-funds as a designated investment alternative must include, in its calculation of the annual operating expenses, the acquiring fund's total annual operating expenses (proportionately reflecting the annual operating expenses of all funds in which it invests), in accordance with the required Securities and Exchange Commission Form N-1A. The same principles apply to unregistered investment alternatives that invest in acquired funds or trusts. While the Participant Disclosure Regulation offers no specific requirement for how often such alternatives must calculate their net asset values in order to determine their average annual net asset value, an unregistered designated investment alternative ordinarily will be in compliance with the regulation if it calculates its net asset value at least monthly in order to determine its average net asset value for the year.[2]

Paragraph (h) of the Participant Disclosure Regulation sets forth two methodologies for calculating the total annual operating expenses of an investment alternative, depending on whether it is registered or unregistered. The FAQs clarify that a designated investment alternative is not "registered" even though it invests solely in a mutual fund that itself is registered under the Investment Company Act of 1940. It therefore must use the methodology for unregistered investment alternatives, which requires the plan's general administrative expenses charged to the designated investment alternative to be reflected in the alternative's total annual operating expenses, and consequently the alternative's average annual total return.

Finally, the FAQs provide that where a fund expense that is paid from the assets of a designated investment alternative reduces the alternative's rate of return, the expense must be disclosed by including it in the total annual operating expenses of the designated investment alternative. The FAQs offer the following example: a plan offers a stable value fund as one of its designated investment alternatives. The fund manager purchases an insurance contract designed to smooth the rate of return of the alternative's underlying fixed income investments and pays the expense from the assets of the fund, reducing the alternative's rate of return. The cost of the insurance must be disclosed as part of the total annual operating expenses of the investment alternative.

Dates: Transitional Rules

As previously set forth in the Participant Disclosure Regulation, administrators must furnish the initial disclosures to participants and beneficiaries by August 30, 2012 (60 days after the July 1, 2012, effective date of the Section 408(b)(2) fee disclosure regulations). However, if the first day of the first plan year beginning after November 1, 2011, is later than July 1, 2012, then initial disclosures must be provided no later than 60 days after the first day of the plan year.
The first quarterly disclosures are required for most plans no later than November 14, 2012 (45 days after the end of the third quarter in which the disclosure is required). The initial quarterly statement must only reflect the fees and expenses deducted for the calendar or plan-year quarter covered by the statement and not fees and expenses deducted prior to the third quarter.

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IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

This publication is a service to our clients and friends. It is designed only to give general information on the developments actually covered. It is not intended to be a comprehensive summary of recent developments in the law, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.

[1] Note that a plan administrator has the option to include additional information in the comparative chart and may treat model portfolios as designated investment alternatives, as long as the information is not inaccurate or misleading.
[2] Designated investment alternatives registered under the Investment Company Act of 1940 must value their net assets at least monthly in order to calculate their average net assets for the year in Form N-1A.

Note: The information in this Alert was provided to Precept by Proskauer Rose LLP. Proskauer is an international full-service law firm with over 60 employee benefits attorneys located in offices across the United States. The information in this article is not intended as legal advice nor is it intended to provide a comprehensive review of the legal matters discussed. For more information about Proskauer, please contact Peter Marathas at (617) 526-9704 or pmarathas@proskauer.com. ©2012 Proskauer Rose LLP. All rights reserved. Used with permission.

Protect Against CO Poisoning at Work and at Home

Carbon monoxide is colorless, odorless, tasteless, and potentially deadly. And it’s the leading cause of accidental poisoning deaths in the United States.

Carbon monoxide, or CO, prevents oxygen from being absorbed into the bloodstream. Without oxygen, of course, the body stops functioning properly, causing damage to tissues and the brain that can lead to disability and death. CO is produced by many common household and workplace appliances: gas water heaters, kerosene space heaters, gasoline and diesel power generators, and others; cigarette smoke, spray paint, and paint removers are also possible sources.

Because you can’t see it or smell it, be on the lookout for these symptoms:

1. Shortness of breath
2. Headache
3. Dizziness
4. Nausea/vomiting
5. Mental confusion
6. Impairment of vision and/or hearing
7. Loss of consciousness
8. Feeling chilled

Your first and best line of defense is a reliable CO detector. Check and change its batteries regularly, or install detectors that plug into a standard AC outlet. In addition, have your heating/air conditioning appliances serviced yearly to make sure they’re not leaking CO into your home or office. Avoid using any kind of fuel-burning appliance indoors.

Victims of CO exposure should seek medical attention immediately.

THE CONTENTS OF THIS COMMUNICATION DO NOT CONSTITUTE LEGAL OR TAX ADVICE. We have provided this communication for general informational purposes only, and it is not intended to dispense legal or tax advice. Employers should consult their own legal and tax counsel to determine if there are legal issues that need to be addressed as part of the ongoing administration of their employee benefit plans and human resources policies.