Employers Seek New Path to Savings with Dependant Eligibility Audits

More employers are scrutinizing employees' health-insurance dependents in order to weed out ineligible beneficiaries.

Employers are looking to cut costs amid a sputtering economy and worries that health-care reform will accelerate rising corporate health-care expenses.

So some companies are conducting audits to verify dependents' eligibility, to make sure they aren't paying for people they shouldn't be.

Benefits-consulting companies say interest in dependent audits has been growing for the past few years, but has ticked up more recently. ConSova Corp., whose business is mostly dependent audits, says sales have increased 150% this year over last year, and that it has already booked four times as many dependent audits for 2011 than it did in 2010.

Budco's Budco Health Service Solutions, another firm that conducts dependent audits, says it expects to perform 25% to 30% more such audits in the first quarter of 2011 over the year-earlier period.

These companies aim to verify the relationships of dependents such as spouses and children, soliciting documents including marriage and birth certificates. In many cases, employers haven't previously asked employees to verify dependents' eligibility.

"Historically it's been the honor system," says Michael Smith, chief executive of ConSova, of Lakewood, Colo. "If you say that's your spouse, they believe you," he says.

Employers next year will pay an estimated $7,612 in health-care premiums on average per employee, a 7.8% increase over this year, according to Aon Hewitt. Employers paid an average of $2,100 annually per dependent in 2009, the most recent year available, according to human-resources consulting firm Mercer.

In most cases where an audit finds ineligible dependents, employees appear to have made honest mistakes. Some have enrolled non-immediate family members without realizing coverage shouldn't extend to them, or they forgot to remove children who graduate from college or got too old.

Other times, employees are cheating. Budco says one third of the ineligible dependents it finds are the result of fraud, mostly in divorces when spouses try to keep their exes on their plans, says Dave Chojnacki, executive vice president of Budco Health Service Solutions.

In many minor cases, companies remove the dependent without penalty. For more serious offenses, employers sometimes ask workers for repayment or fire them, says Mr. Chojnacki.

It can violate federal law if an employee knowingly provides false information in writing to an employee benefits plan. But employees rarely get sued for this, partly because the amounts at stake are generally small, says Tom Christina, an attorney at Ogletree, Deakins, Nash, Smoak & Stewart.

Government contractor Science Applications International Corp. began an audit this month. It had done spot audits before, but never a full-scale one. Now, the McClean, Va., based company is asking 30,000 of its employees to verify dependents.

"We wanted to make sure we weren't spending more than we should have and wanted to position ourselves well for upcoming changes in health-care legislation," says Brian Keenan, executive vice president of human resources at SAIC.

The company has seen health-care costs rise over the last several years. Mr. Keenan expects the audit to save the company between $3 million and $4 million next year. He expects the impact of health-care reform to cost the company between $2 million and $3 million in 2011.

He says the company will deal with offenders on a case by case basis. At the very least, it will drop ineligible dependents. If it finds fraud, it will take more serious action, he says.

Defense contractor DynCorp International LLC is completing its first dependent audit of its 8,000 U.S. employees and expects to save more than $800,000 next year, says Don Platt, director of corporate benefits. So far, the audit has discovered 160 deceased dependents and more than 90 ineligible children, says Mr. Platt.

DynCorp considered making employees repay the company, but decided not to because it was complicated to determine how much each employee would owe, says Mr. Platt.

New employees now have to verify dependents with documents, says Mr. Platt. They also have to sign a form saying that the information they are providing is accurate and if found to be untrue they will be terminated.

National Semiconductor Corp. is currently doing a health-care dependent audit through XeroxCorp.'s ACS. The Santa Clara, Calif., based analog-chip maker is asking 1,400 employees with dependents to attest that their dependent information complies with National's rules. The audit will be completed at the end of November.Typically companies find that between 3% and 8% of employees are ineligible. National expects to be in the lower range of that percentage, says a spokeswoman. "In light of U.S. health-care reform, the audit provides an opportunity for us to evaluate everything and clean-up our data," the spokeswoman says.

Grandfathered Health Plans Can Change Insurers

WASHINGTON—Employers are allowed to change insurers without their health care plans automatically losing grandfathered status under the health care reform law, federal regulators said Monday.

In a reversal of their previous position, the Departments of Labor, Treasury and Health and Human Services said forcing an employer to stay with an insurer to keep a health plan’s grandfathered status would give that insurer an unfair advantage.

“If an employer has to stay with the same insurance company to keep the benefits of having a grandfathered plan, the insurance company has undue and unfair leverage in negotiating the price of coverage renewals,” according to an HHS fact sheet.

In addition, “allowing employers to shop around can help keep costs down while ensuring individuals can keep the coverage they have,” HHS said.

Like the original rule, self-funded employers also will be able to change plan administrators without losing grandfathered status for their plans.

Grandfathered plans are shielded from certain health care reform law requirements, such as providing full coverage of preventive services.

The agencies noted that they received many comments on the initial rule that would have stripped grandfathered status for plans that changed insurers. The change in position was in response to those comments, HHS said.

Monday’s action came after federal regulators signaled in September that they intended to modify the original rule.

Timeline for Health Insurance Reform

By Callan Carter (San Francisco)

The effect of the recent healthcare legislation is beginning to be felt. Several changes (including pool coverage for high-risk people, extension of tax-dependent status of children to age 26, and a 10% excise tax on tanning salon services) have already been implemented and are not included on the chart below. A huge number of other changes are now scheduled to phase in over the next several years.

To help give you an idea of the scope of requirements heading your way over the next few years, we’ve developed a timeline chart setting out the most significant aspects of the law, through 2011 and 2012. A more extensive version of this timeline can be found on our website under “publications” and then “resource materials.”

A full and complete explanation of each of these changes isn’t possible in an article such as this one. To discuss how these changes could affect your business please contact us.

Reform Effective Date
Increase the age of a dependent child for health plan coverage to 26 First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans)

Grandfathered Plans: before Plan Year beginning on and after 1/1/14, only have to enroll older child if they are not eligible to enroll in their own employer’s plan

No lifetime limits on dollar value of health plan coverage First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans)
Coverage of preventive services by non-grandfathered plans First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans)
No prior authorizations and same cost sharing in and out of network for non-grandfathered plans First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans)
Participants may choose any primary care provider, may designate a pediatrician as primary care provider of child and no referral needed for OB/GYN for non-grandfathered plans First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans)
Nondiscrimination rules of Code section 105(h) apply to fully-insured non-grandfathered plans First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans)
External claims review process for non-grandfathered plans First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans)
Elimination of all pre-existing condition limitations or exclusions for all children under 19 First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans)
No rescission of coverage unless fraud or intentional misrepresentation of material fact. Advance notice of rescission required. First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans)
Prohibition of certain annual limits First Plan Year beginning on or after 9/23/10 (1/1/11 for calendar year plans)
Minimum medical loss ratios limited to 85% for large plans and 80% for plans with less than 100 employees or rebates required Plan Years beginning on or after 3/23/10, but rebates begin 1/1/11
Excise tax on nonqualified distributions from a Health Savings Account increased from 10% to 20% 1/1/11
Prohibition of over-the-counter drugs as an eligible expense in HSAs, HRAs and FSAs unless prescribed or insulin 1/1/11
Grants awarded to small employers (less than 100 employees who work 25+ hours/week) to provide access to wellness initiatives if no wellness program in place on 3/23/10 1/11/11
W-2 reporting of cost of employer-sponsored health coverage Optional for 2011 Forms W-2; mandatory thereafter.
New standardized benefits summary/explanation of coverage. 60-day advance notice of any material change. No later than 3/23/12
Group plans must report annually to HHS and plan participants about plan benefits designed to improve the quality of care Regulations to be issued no later than 3/23/12
Self-funded health plans must pay comparative effectiveness fee of $1 in 2013 (then increased to $2) per participant. Insurance carriers pay fee for fully-insured policies/plans. Scheduled to end 2020. Plan Years/Policy Years ending after 9/30/12
Elimination of employer deduction for subsidy under Medicare Part D (immediate impact on employers’ liability and income statements) ER Tax Years beginning after 12/31/12

Experts: Don’t Expect Reform Changes Yet

Source: PR Newswire
[via insurancenewsnet.com]

HR and benefits managers--and perhaps a lot of CEOs and CFOs -- who in recent weeks had begun thinking seriously about the impact of federal health care reform on their profitability, workforce structure and health plan viability, may have awoken Nov. 3 asking, "What now?"

What now, indeed.  As Republican candidates in federal, state and local races swept into office in historic numbers, promising a change in the course of government, attention has centered on the impact of the election results and on the future of the federal health reform law. The answer is:  Don't expect much in the way of change. At least not yet.

There was a never a chance that Republican midterm victories, under the most optimistic of projections, would or could unravel the health care reform law. Even had Republicans managed to capture control of the Senate in addition to their reclamation of the House, the law was in no danger of repeal.  Any attempt by Congress to do that would be vetoed by President Barack Obama, and the Republicans lack the 67 Senate votes necessary to override a Presidential veto. Any serious attempt at repeal must await the results of the 2012 elections. Repeal will require the complete reversal of 2008: Republican control of the White House and both chambers of Congress.

If the GOP cannot now outright behead the law, can they strangle it by denying it funding? To be sure, the funding issue is the law's weak underbelly. The law requires federal funding of more than 100 key components of the bill, most notably grants to states to establish insurance exchanges by 2014, and of course the $500 billion necessary to provide subsidies toward individuals' purchases of insurance in the exchanges. Federal taxpayers are also picking up, for the first several years, all or nearly all of the additional Medicaid expenses associated with the expansion of Medicaid eligibility.

Risky Business

But holding up the federal budget - threatening the shutdown of the government - is risky business. Many voters are weary of partisanship and are looking for Congress to make something good happen.  Republicans must remember that according to a number of exit polls, voters identified the economy as their main concern, by a wide margin (about 62% of voters picked the economy as their primary issue; only 18% cited the health reform law). The American electorate wants results.

The new makeup of the Congress doesn't bode well in that regard.  Among the many Democrats swept out of the House are a significant number of self-styled moderates, known as "Blue Dogs." This purging of Democratic moderates means we'll now have in the Congress, particularly on the Democratic side of the aisle, a caucus whose center of gravity is a fair bit farther left than before. Throw in a Republican majority infused with new blood drawn from the mid- to far-right, and you have all the makings of political gridlock.

What's in Store?

So what will happen, then? Our best guess, for the short term, is that Republicans in the House will pass a symbolic bill repealing the health reform law, a bill that will go nowhere in the Senate. Again, here the Republicans must be prudent. Voters, particularly those in the all-important political center, are likely to have little tolerance for symbolic gestures while the nation's economy festers. For the same reason, if Republicans allow themselves to become bogged down over fringe issues, they will have misread the lessons of the election results.

Some nibbling around the soft edges of the health reform bill is likely. The business community is rightly aghast at the new Form 1099 reporting requirement appended to the law.  The requirement compels businesses to issue a Form 1099 to every vendor - from copy repairmen to bartenders - to whom the company pays $600 or more during a year. House Republicans will move swiftly to repeal that provision, and will likely attract enough Senate Democrats - spooked by the election bloodletting - to get it done.

There is talk of attempting to do even more, perhaps repealing the "Individual Mandate" (the provision that compels nearly all Americans to have minimum health coverage by 2014 or face a modest penalty) or the "Free Rider Surcharge"(the penalty employers will pay beginning in 2014 if they fail to offer affordable coverage to full-time employees who instead obtain subsidized coverage in the insurance exchanges).

Such actions, like the health reform bill itself, may have unintended consequences. The health reform law requires insurers to issue policies to all applicants, without pre-existing condition restrictions. That works only if the nation gets everyone in the risk pool.  Otherwise, people will simply wait to buy insurance until they get sick. Removing the individual mandate without relieving carriers of the obligation to issue a policy to all applicants, without restrictions, makes it even more difficult for private insurance companies to survive.

Business has many reasons to oppose the Free Rider Surcharge. But if the insurance exchange concept survives until 2014, and employers find then that their employees have another, taxpayer-subsidized option for health coverage available, and no surcharge binding the employers to their existing group health plans, a great many more employers may simply terminate their group coverage. That will improve employers' bottom lines (although many employees will fare worse in the exchanges), but not the nation's.

The Congressional Budget Office, when estimating the first decade's cost of the bill at $1 trillion, assumed only about 4-5 million Americans (net) who have group insurance today will lose it by 2019, as a result of the health reform law. A recent study suggests that the cost of federal subsidies in the insurance exchanges rises about $300 billion for every additional six million Americans who seek exchange-based coverage. If the 4-5 million estimate balloons to 40-50 million, the first decade's cost of the program leaps to $2.5 - $3 trillion, a number that is simply not sustainable.

Stay the Course

So we shall see. Experienced political pundits say that prognostications based on mid-term election results are almost always wrong. In other words, we should not read too much into the results, although there is still much to make of them. Our advice to employers who are beginning to assess the impact of health reform and chart a course to address the issues it poses, is to "stay the course." There is still much to do, and health reform isn't going anywhere, at least not for a while.

US watching Mass. fight on health costs

By Robert WeismanGlobe Staff / November 5, 2010

While the White House seems destined to spend the next two years fending off attacks on President Obama’s health care law, the administration of Governor Deval Patrick of Massachusetts will push forward with the next stage of health care overhaul: trying to contain the escalating costs of medical care.

That is likely to thrust the state back into the forefront of the national health care debate even as chastened Democrats skirmish with resurgent Republicans in Washington over implementing steps already taken here to expand access to health care.

“Just as Massachusetts has been several years ahead of the country in health care reform, we are several years ahead in the problems of health care reform,’’ said John L. Sullivan, research director for health care investment bank Leerink Swann in Boston. “Now Deval Patrick is going to have to figure out how to pay for it.’’

The task will be difficult, the stakes will be high, and the country will be watching. “If he succeeds,’’ said Sullivan, “he’s a hero.’’

As the governor’s lieutenants draft a bill on payment overhaul to submit to the Legislature in January, representatives of medical care providers, insurers, employers, and consumers met yesterday to try to craft a workable cost-control plan. The group was convened by JudyAnn Bigby, state secretary of health and human services, even before Patrick was reelected to a second term Tuesday.

Bigby said yesterday that the stakeholders group has yet to reach consensus on issues such as whether a board is needed to oversee a new payment system, what authority such a panel would have, and what outcomes it would monitor. The group is also debating a regulatory framework for how health care providers can form alliances, called accountable care organizations, under a new system.

“The biggest area of concern is over whether to regulate the price of health care,’’ Bigby said. The disagreement on the payment committee, she said, is “between those who don’t want the price of health care to be regulated and those who say you can’t make sure health costs are controlled unless you regulate the price.’’

Bigby said she plans to host a public hearing on recommendations next month before introducing the bill.

Medical spending in Massachusetts has climbed about 7.5 percent annually in recent years, far outstripping the rate of inflation. One reason for the increases is that a large share of care is provided in Boston’s academic medical centers rather than less expensive community hospitals. But the annual increases have placed a burden on businesses and individuals trying to cope with the severe economic downturn and slow recovery.

“Massachusetts is in the best position of any state to take the next step,’’ said Boston health care consultant Jon Kingsdale, former executive director of the Commonwealth Health Insurance Connector Authority, the online insurance exchange created by the state’s 2006 universal health care law to help people obtain coverage. “There’s still a lot of pride in the Massachusetts achievement of increasing access, and a recognition that the only way to preserve it is to deal with the costs."

But in Washington, the tone is sharply different. Incoming House Speaker John Boehner pledged yesterday to “lay the groundwork’’ for repeal of the health care bill signed into law by Obama in March. One lesson to be drawn from Tuesday’s midterm elections across the nation, Boehner said, was that “the American people were concerned about the government takeover of health care.’’

Few congressional watchers believe Republicans, who won control of the House of Representatives on Tuesday, will have enough leverage to repeal the law. But they may spend the next couple of years sniping at it in hearings and challenging its constitutionality in the courts, forcing the legislation’s supporters to defend the landmark overhaul in the run-up to the 2012 presidential election.

“There will be a lot of heated rhetoric,’’ said Arthur A. Daemmrich, faculty member at the Harvard Business School Healthcare Initiative. “But I would be surprised if Republicans in the House would be able to roll it back. The Senate has blocking power.’’

Daemmrich noted that while lawmakers have the means to defund government programs, most provisions in the federal health care law that take effect in the next two years — like allowing children up to 26 years old to remain on their parents’ insurance — don’t require government funding. Many measures that do require public funding, such as setting up Massachusetts-style insurance exchanges in other states, won’t be implemented until after the 2012 election, he said.

Still, with Republicans challenging every element of the new law, the Obama administration is likely to be handcuffed in its efforts to expand the revamping of the health care system. That will leave it to the states, especially Massachusetts, to pioneer new ways of delivering health care services without driving up costs. Patrick capped health insurance rates for individuals and small businesses earlier this year — a move that sparked months of acrimony — but said it was a temporary measure to give customers relief until a long-term plan could be readied.

After defeating Republican gubernatorial candidate Charles D. Baker, a former chief executive of insurer Harvard Pilgrim Health Care, Patrick is ready to move forward with a “global payment’’ plan that is supported in principle by most of the state’s health care companies, though they have yet to agree on the elements.

The plan, in broad form, would put hospitals and doctors on an annual budget for each patient’s care. Providers would be expected to assemble into partnerships — known as accountable care organizations — to coordinate care and distribute payments. It would replace the current “fee for service’’ system in which providers are paid negotiated fees for each visit and procedure.

James Roosevelt Jr., chief executive of Tufts Health Plan in Watertown and a member of the panel weighing payment overhauls, said Massachusetts has the chance to be a leader in reining in costs.

“The big question about the national bill, just like ours, is how we’re going to be able to afford it,’’ Roosevelt said. “And while they’re bickering about it in Washington, we’re doing something about it.’’

Medicare Notice Deadline is Nov. 15

Source: Warner Norcross & Judd LLP
[via BenefitsLink]

Norbert F. Kugele

Just a reminder that the deadline is Nov. 15, 2010 to distribute the annual Notice of Creditable Coverage required under Medicare Part D. The notice informs participants whether the prescription drug coverage offered under your health plan constitutes creditable or noncreditable coverage.

The Centers for Medicare and Medicaid Services (CMS) has posted forms and instructions for providing this notice. The forms have not changed since last year. They are available, both in English and Spanish, though the following links:

Employers who sponsor a health plan offering prescription drug benefits must provide an annual notice to all Medicare-eligible participants that explains whether the prescription drug benefits offered under the plan are at least as good as the benefits offered under the Medicare Part D plan. The only employers exempt from this notice requirement are those that establish their own Part D plan or that contract with a Part D plan.

The Notice of Creditable Coverage must be provided:

  • At least once a year before Nov. 15 (the start of the annual Medicare Part D enrollment period).
  • Whenever a Medicare-eligible employee, spouse or dependent enrolls in your health plan.
  • Whenever there is a change in the creditable or non-creditable status of your health plan's prescription drug coverage.
  • Whenever an individual requests the notice.

Because it is difficult to keep track of which employees (and their spouses or dependents) are eligible for Medicare benefits, we recommend that you make the Notice a part of your new-hire enrollment materials and your annual open enrollment materials. If distributed before November 15, this should take care of the first two bullet points above.

Remember that you must also submit a Disclosure to CMS Form each year, reporting whether your prescription drug coverage is creditable or non-creditable coverage. This form must be submitted electronically within 60 days of the beginning of each plan year. Thus, if you are on a calendar year, you must submit the form by March 1, 2011. The form is available on the CMS Creditable Coverage web site.

With New Majority in House, Republicans Vow to Attempt to Repeal Reform Law


WASHINGTON -(Dow Jones)- House Republicans plan a vote early in 2011 to repeal the health-care law, before settling in for a longer battle with the Obama administration targeting unpopular pieces of the law, GOP aides and lawmakers say.

Legislation to repeal the bill is expected to bog down in the Senate, where the GOP will still be well short of the votes needed to block it. But an early vote will be a thank you to the party's political supporters who helped make repeal of the bill a top-tier issue in this fall's House campaigns.

Buoyed by opposition to the law, Republicans are expected to wrest control of the U.S. House from Democrats in nationwide elections Tuesday.

"I believe we'll see a vote very quickly," said Rep. Charles Boustany (R., La.). "Whether or not there's a willingness of the Senate to move in that direction, it's important to have the vote. The American public supports" repeal, Boustany said.

Some GOP aides cautioned that a final decision has not been made, and will depend on input from the full House GOP conference following Tuesday's elections.

The real battle will unfold over weeks and months following that vote, as Republicans seek to block implementation of aspects of the bill.

While they'll have to contend with U.S. President Barack Obama's veto pen, the GOP may seek victories on some low-hanging fruit like a $10 billion grant program for preventive care, or funding for research on the relativecost- effectiveness of treatments.

"The legislation doesn't stand or fall on things like that. If they attempt to de-fund things that are more fundamental, the president will be forced to veto," said Neera Tanden, a healthcare expert at the left-leaning Center for American Progress.

House Republican committee chairmen will use hearings to highlight alleged flaws in the design of the bill, GOP aides said. They are expected to call Health and Human Services Secretary Kathleen Sebelius and Medicaid and Medicare director Donald Berwick to testify early in 2011.

Oversight hearings could also feature state officials who must work with the federal government to set up insurance exchanges under the law.

Congressional Republicans may also seek to prevent new industry taxes that will be coming on-line, including a fee on drug manufacturers that takes effect in 2012, and a tax on medical devices that will be triggered in 2013.

A 3.8% tax on investment income to fund Medicare, to take effect in 2013, will also be a prime GOP target.

DOL Expands Definition of ‘Fiduciary’


By Judy Ward

For the first time in a generation, the Labor Department has taken another crack at the definition of a fiduciary under the Employee Retirement Income Security Act (ERISA).

The proposed rule was unveiled today by the Department of Labor (DoL), which noted that its adoption “would protect beneficiaries of pension plans and individual retirement accounts by more broadly defining the circumstances under which a person is considered to be a ‘fiduciary’ by reason of giving investment advice to an employee benefit plan or a plan’s participants.”

The proposed rule is designed to “take account of significant changes” in both the financial industry and what was described as “the expectations of plan officials and participants who receive investment advice,” as well as to protect participants from “conflicts of interest and self-dealing.”

Testing, Tested

In explaining the proposal, the Labor Department noted that while Section 3(21)(A) of ERISA provided a “simple two-part test for determining fiduciary status,” a subsequent (1975) regulation served to “significantly narrow” the “plain language” of the legislation; effectively replacing the two-part test that would impose fiduciary status when a person renders investment advice with respect to any moneys or other property of a plan, or has any authority or responsibility to do so and receives payment (direct or indirect) for that advice, with a 5-part test that included conditions that: the advice regarding plan investments be rendered “on a regular basis,” that the advice would serve as a primary basis for investment decisions with respect to plan assets, that the recommendations are individualized for the plan, that the party making the recommendations receives a fee for such advice, and that it be pursuant to a mutual understanding of the parties.  Moreover, the Labor Department noted that it further limited the definition of “investment advice” in a 1976 advisory opinion, when it concluded that the valuation of closely-held employer securities in an employee stock ownership plan (ESOP) relied on in purchasing those securities would not constitute investment advice.

Well, that was then—and this is now, and the Labor Department noted that the financial marketplace and the types and complexity of services have expanded dramatically.  The proposal notes that although professionals such as consultants, advisers, and appraisers “…significantly influence the decisions of plan fiduciaries, and have a considerable impact on plan investments,” if they are not deemed fiduciaries under ERISA “…they may operate with conflicts of interest that they need not disclose to the plan fiduciaries who expect impartiality and often must rely on their expertise, and have limited liability under ERISA for the advice they provide.”

In essence, the Labor Department now says that ERISA does not compel it to apply its own five-part test, and that new facts and circumstances mean it is now time to update the investment advice definition.  Specifically cited is that the proposal no longer requires that the advice be provided on a “regular” basis, not does it require that there be a mutual understanding that the advice will serve as a primary basis for plan investment decisions.

Advice Description

As for what constitutes advice, the proposal now includes the provision of appraisals and fairness opinions as a type of advice, noting that the incorrect valuation of employer securities was a “common problem” identified in the DoL’s recent national enforcement project, including cases where plan fiduciaries have “reasonably relied on faulty valuations prepared by professional appraisers.”  The proposal also makes specific reference to advice and recommendations as to the management of securities and other property, including such things as voting proxies or recommendations regarding the selection of persons to manage plan investments.

Finally, in what was described as reflecting “the Department’s longstanding interpretation of the current regulation,” the proposal makes clear that fiduciary status “may result from the provision of advice or recommendations not only to a plan fiduciary, but also to a plan participant or beneficiary.”

CDC: 1 in 3 May Have Diabetes by 2050


Source: USA Today
[via BenefitsLink]

By Marry Brophy Marcus

The future of diabetes in America looks bleak, according to a new Centers for Disease Control and Prevention report out today, with cases projected to double, even triple, by 2050.

"There are some positive reasons why we see prevalence going up. People are living longer with diabetes due to good control of blood sugar and diabetes medications, and we're also diagnosing people earlier now," says Ann Albright, director of the CDC's Division of Diabetes Translation.

A more diverse America - including growing populations of minority groups such as African Americans and Hispanics, who are more at risk for the disease - factors into the increase as well, Albright says. But an increasing number of overweight Americans also is fueling the stark predictions for diabetes, which should be taken seriously, Albright says.

Diabetes is the No. 1 reason for adult blindness, kidney failure and limb amputation, and it's a large contributor to heart attacks and strokes, she says. "It's also now linked to a form of dementia, some forms of cancer and some forms of lung disease. Diabetes impacts so many systems in the body," Albright says.

Programs and policies to prevent obesity and diabetes need to be put in place at every level, says Duke University Medical Center endocrinologist Susan Spratt, who says schools are a good place to start. Healthful food options in schools and daily physical education classes should be a priority, she says.

"Vending machines should not sell sugar soda or candy bars. School fundraisers should not revolve around unhealthy food," says Spratt, who adds that cities need to be pedestrian-friendly, bike-friendly and safe.

A price will be paid if the projections go unheeded, experts say. The CDC estimates the current cost of diabetes at $174 billion annually, $116 billion of which is in direct medical costs.

Previous research has suggested that the financial burden may easily double in the next 20 years, says David Kendall, chief scientific and medical officer of the American Diabetes Association.

"The financial burden is potentially a very, very troublesome one," Kendall says.  "There's a dual message here: prevention where it's feasible, and critical and early intervention for those already diagnosed," he says.

Without Guidance, Firms Must Tread Lightly Around In-Plan Roth Conversions


Source: McKay Hochman
[via BenefitsLink]

The in-plan Roth conversion provision of the Small Business Jobs and Credit Act (H.R. 5297) became effective on September 27, 2010. The absence of IRS guidance leaves us with many questions regarding how to implement, administer and report such conversions.

As we stated in our October 1st e-mail alert article, we believe it is best to wait for formal IRS guidance before amending the plan to add in-plan Roth conversions. However, we have received numerous calls that represent the plan sponsors concerns about the tax consequences of not permitting the conversion in 2010. This coupled with the fact that the end of the year is so administratively close has reinforced the urgency to provide answers to our clients’ questions of how to make in-plan Roth conversions happen this year. This article is our response to those questions and some additional outstanding issues.

Service providers and employers who want to add this provision pending release of formal guidance must ensure appropriate steps are taken. This article discusses some of the operational requirements that are needed to implement in-plan Roth conversions, as well as providing our views on some of the unresolved issues impacting ongoing administration, disclosure and reporting. Keep in mind that prior to IRS guidance, this article is only able to be based on the new law and its joint committee report and that we will be updating our website once IRS issues its guidance.

An Alternative Approach
Most document providers will likely wait to draft model amendments until the IRS releases guidance. This is not expected to occur until later this year or in 2011.  In the interim, employers who want to add the in-plan Roth conversion feature should draft an enabling board resolution. A plan must allow for designated Roth contributions in order to add the in-plan Roth conversion feature.  If a plan does not permit Roth contributions currently, it must be so amended before or simultaneously with the addition for in-plan Roth conversions. Further, a plan that does not permit in-service withdrawals must be amended to add appropriate distributable events before or simultaneously with the addition of in-plan Roth conversions.  Lastly, if the employer wishes to take advantage of the joint committee option to limit in-service withdrawals to Roth conversions, that limitation must be included in the enabling board resolution since current plan documents do not have such a provision.

Keep in mind, that after SBJPA in the late 1990s until the GUST prototype circa 2002, prototype safe harbor 401(k) plans were documented only by a board resolution because preapproved plans did not have 401(k) safe harbor language (until the GUST prototype).

Participant Disclosures
Participant disclosure may be accomplished by issuing a Summary of Material Modification (SMM) that must be distributed to inform participants of this amendment.  Normally, SMMs  do not have to be issued until 210 days after the end of the plan year in which the plan was amended, but in this case earlier issuance will be most helpful. The SMM should also clarify when in-service withdrawals are limited to in-plan Roth conversions, if this option is adopted. It may be advisable to clearly state that a distributable event is necessary for conversion. Even more importantly, it is recommended that a conspicuous statement regarding the tax consequences of an in-plan Roth conversion be included in the SMM.

The distribution of a revised 2010 Safe Harbor Notice (and 2011, if already distributed) also will be required to disclose the new conversion option and it's impact on the plan’s in-service withdrawal options and the addition of Roth deferrals, if applicable.

Distribution Forms
An in-plan Roth conversion option can be added to the forms, or participants may simply write in their election if an “Other” section is available as a distribution reason option on the current distribution form.

Form 1099-R
As described in the joint committee report, the transaction is a direct rollover taxable distribution (only permitted for eligible rollover distributions) and a rollover into the designated Roth account. Even though the transaction is generally processed like a transfer within the plan (i.e. no check needs to be written or processed), it is a direct rollover. Thus, since there is a taxable event, a Form 1099-R would be the information return issued to report taxable events from retirement plans. The reason code to be utilized needs to be addressed by the IRS, it may be a Code G for direct rollover or it may be a new code designed to distinguish this transaction.

Additional Open Issues for Those Considering Adding In-Plan Roth Conversion Prior to IRS Guidance

Joint Committee 401(b) Amendment Deadline Suggestion
The Joint Committee report suggested that the IRS permit a remedial amendment period under Code Section 401(b). This permits amendments to be made as late as the end of the remedial amendment period (RAP) deadline. Since the RAP deadline under the six-year cycle for defined contribution plans just ended on April 30, 2010, theoretically, the next RAP will be in accordance with the next six-year cycle, which hypothetically could be in the year 2016.

Generally, under Revenue Procedure 2007-44, discretionary amendments must be made by the end of the plan year for which they are effective. However, due to the special tax circumstances surrounding making a conversion in 2010, if the IRS does not issue guidance in time for amendments to be drafted and signed by employers before year end, hopefully they will use 401(b) to provide some additional RAP beyond December 31, 2010 for any new model amendment and model language to be amended to a plan.
There Are No Designated Roth Ordering Rules

The under age 59½ early withdrawal 10% excise tax that is waived when the conversion was made will be applied as a “recapture tax” if the conversion funds are withdrawn within five years after the conversion. IRS guidance is required to create ordering rules or to provide another method of handling a partial distribution that occurs before age 59½ to a participant that has both Designated Roth deferrals and an in-plan conversion to a Designated Roth within 5 years of the conversion. Currently, nonqualified designated Roth distributions are required to be treated as pro-rata earnings and designated Roth contributions. Since there are no ordering rules, this would require guidance and likely a change to current designated Roth regulations. It may be wise to segregate Roth conversions from any designated Roth deferrals until the IRS issues guidance.