HIPAA Interim Enforcement Rule on Civil Monetary Penalties. On April 17, the Department of Health and Human Services (HHS) published the first installment of planned guidance on enforcement of the medical privacy standards established under the Health Insurance Portability and Accountability Act (HIPAA). Publication of the guidance takes on special significance with the arrival of the April 14, 2003 deadline for most covered entities to comply with the federal privacy rule. Small group health plans have until April 14, 2004 to comply and are not subject to civil monetary penalties under HIPAA before that date. The interim final rule, which becomes effective May 19, 2003 and expires in 16 months, sets forth HHS procedures for imposing civil monetary penalties under the administrative simplification rules of HIPAA. Acknowledging its intention to promote voluntary compliance with the rules, HHS revealed it used the civil money penalty procedures of the Office of Inspector General as the model for the interim enforcement rule, in part because both the regulators and much of the health care industry already are familiar with the rules. For more information and the full text of the rule, visit the HHS Web site at www.hhs.gov/ocr/hipaa. (68 Fed. Reg. 18895, April 17, 2003.)

Final 204(h) Notice Regulations Issued. Final regulations issued April 8 govern when and how participants must be notified of plan amendments that significantly reduce future benefit accruals. Closely resembling proposed regulations issued last year (67 Fed. Reg. 19713, April 23, 2002), the final regulations address the requirement that a plan administrator of a money purchase pension plan or defined benefit plan must provide a written notice, the so-called “204(h) notice,” to certain participants and alternate payees whenever a plan amendment is expected to significantly reduce future benefit accrual rates or eliminate or significantly reduce an early retirement benefit or retirement-type subsidy. The regulations retain both the general 45-day notice rule for most plan changes and the special timing rules that apply to small plans and certain business transactions. A new provision allows multiemployer plans to give notice only 15 days before a benefit-reducing amendment. The final rules also clarify a number of provisions, including several issues relating to the notice content requirements. For example, the rules clarify that the notice must permit the recipient to determine the approximate magnitude of the reduction applicable to himself or herself and that this requirement can be satisfied either by providing illustrative examples that satisfy certain conditions or by providing individualized benefit statements if the statements include the same information as the illustrative examples. (68 Fed. Reg. 17277, April 9, 2003.)

Caught up in SOX? It’s Okay to Deny Plan Loans to Officers and Directors. Plan loans to officers and directors of publicly traded companies subject to the Sarbanes-Oxley Act of 2002 (SOX) may be illegal. (SOX § 402, adding new subsection (k) to Section 13 of the Securities Exchange Act of 1934.) If you’re not sure, don’t worry, neither is the Department of Labor (DOL). At the same time, ERISA § 408(b)(1) requires plan loans, if they’re offered under a plan, to be available to all participants. What’s a plan sponsor to do? The DOL, in a field assistance bulletin, stated the plan sponsor may deny a loan to this type of participant without violating ERISA because the disallowance of this loan is “based on a reasonable question concerning the legality of the loan.” (DOL Field Assistance Bulletin 2003-1, April 15, 2003.)

U.S. Taxpayers with Canadian RRSPs Get U.S. Reporting Relief. New filing requirements for individuals with foreign trusts have swept in Canadian registered retirement savings plans (RRSPs) (similar to IRAs) and their custodians, many of whom continue to be unaware of the requirements. Code § 6048 requires the filing of Forms 3520 (Annual Return to Report Transactions with Foreign Trusts…), due by the U.S. owner or beneficiary’s U.S. income tax due date, and 3520-A (Annual Information Return of Foreign Trust with a U.S. Owner), due March 15 for a calendar year trust. The Internal Revenue Service (IRS) announced it is waiving the requirements for years prior to 2002 and granting an automatic extension to August 15, 2003 for 2002. Extensions of additional time also can be obtained. A beneficiary who has made an election to defer tax on income of an RRSP is relieved of filing Form 3520-A for any year in which he or she meets the election requirements of Rev. Proc. 2002-23. There is no form for this election; Hodgson Russ has developed a form for client use. (IRS Notice 2003-25, April 11, 2003.)

Cash Balance Wars Continue. The IRS withdrew the part of its controversial cash balance plan regulations dealing with discrimination in favor of highly compensated employees. The IRS concluded this proposal could preclude some reasonable approaches to cash balance plans, such as grandfathering certain employees. At the same time, the IRS left in place its proposal dealing with age discrimination. The withdrawal of a portion of the proposed regulations came two days before lawmakers, lobbyists, benefits consultants, employee advocates, and employers turned out April 9 and 10 for a highly charged two days of hearings on the proposed regulations. (IRS Ann. 2003-22 (April 7, 2003, withdrawing part of the proposed regulations REG-209500-86); for a fact sheet issued by the IRS, see treasury.gov/press/releases/js172.html.)

VEBAs, Sham Unions, and More: DOL and IRS on the Offensive. The Treasury and IRS in a notice moved to shut down tax shelters established through “sham” labor negotiations. The Treasury and IRS state unscrupulous marketers are selling employers on devices to obtain tax deductions for excessive contributions to VEBAs. The Notice also lists some of these activities under the tax shelter registration and list maintenance rules under the regulations under Code §§ 6011 and 6111, which can result in relatively high penalties and tax evasion charges. Lessons here? If it sounds too good to be true, it likely is. And Treasury and IRS are more than willing to use their arsenal for attacking tax shelters in the employee benefit arena. (IRS Notice 2003-24, April 11, 2003.)

In the past two weeks, the DOL also issued five sets of regulations addressing legitimate and sham approaches to multiple employer welfare arrangements (MEWAs). (68 Fed. Reg. 17493, 17503, 17506, 17471 and 17484, April 9, 2003.)

CASES

Two-Year Statute of Limitations for ERISA Retaliatory Discharge Claim. Acknowledging ERISA does not provide for a statute of limitations, a New York District Court nevertheless ruled a claim for retaliatory discharge under ERISA § 510 brought by a member services representative for a collectively bargained pension plan was barred because the fired employee filed her complaint more than two years after the date the pension fund informed her of the decision to terminate her. Citing Second Circuit precedent establishing a two-year statute of limitations for ERISA § 510 actions, the court held the statute of limitations starts when an employer decides to discharge an employee and communicates that decision to the employee. (Geaney v. McCarron, __ F. Supp.2d __, 2003 WL 1701975 (S.D.N.Y., 2003).)

No ERISA Preemption for Sickness and Accident Income Plan. ERISA preemption cases are notoriously difficult to predict. In a reversal of a recent district court decision, the Eleventh Circuit held an employee’s state law action for benefits under IBM’s Sickness and Accident Income Plan was not preempted by ERISA, because the plan falls under the payroll practice exemption to ERISA. IBM successfully had the case removed to federal court, where it was determined IBM had not violated ERISA when it discontinued paying benefits to employee Robert Stern under the plan. On appeal, the appeals court remanded the case with an instruction to return it to state court (where punitive damages may be available), holding that where an employer pays an employee’s normal compensation for periods of mental or physical disability entirely from its general assets, the program constitutes an exempted payroll practice and not an ERISA plan. Addressing IBM’s assertion that it identified the program as an ERISA plan in annual filings with the IRS and the DOL, the court added the company’s mere labeling of the plan should not determine whether ERISA applies. (Stern v. International Business Machines, __ F. 3d __, 2003 WL 187032 (11th Cir., 2003).)

Finally Score One for Employers in COLI Dispute with IRS. A company established its broad-based corporate-owned life insurance (COLI) policies had economic substance in a federal district court case. Dow Chemical Co. bucked the trend of other “janitor COLI” cases with this heavily fact-based case. The IRS is expected to appeal the decision holding it improperly disallowed Dow’s $22 million in interest and expenses. (Dow Chemical Co. v. U.S., __ F. Supp.2d __, 2003 WL 1701524 (E.D. Mich., 2003).)

Plan Participants Who Trade “Excessively” May Be Stopped. The Prudential Employee Savings Plan Committee suspended the trading activity of 10 current and former employees of the Prudential Insurance Co. of America after they engaged in “excessive trading.” In this win for fiduciaries who limit participants’ trading behavior, the federal district court dismissed the participants’ suit for a preliminary injunction to stop the plan and its fiduciaries from enforcing policies restricting frequent trading. The committee’s summary plan description (SPD) and other communications were clear, assisting the committee’s side of this case. Lessons here include that courts look closely at plan and SPD language and well-drafted language can help a fiduciary support its actions. Also, fiduciaries may want to consider whether “market timing” or other unusual trading activity should be addressed in their plans. (Straus v. Prudential Employee Savings Plan, __ F. Supp.2d __, 2003 WL 1571865 (E.D.N.Y., 2003).)

Between Doctor Being Fired and Being Ethical, New York’s Highest Court Votes for Fired. The New York Times lawfully fired an in-house physician for refusing to disclose employee health information, according to a 5:1 decision by New York’s highest court. Dr. Sheila Horn, an employee-at-will whose duties included examining employees who sought workers’ compensation, was fired for refusing to turn over employee medical records without employee knowledge or consent. The NYS Department of Health had advised Dr. Horn that turning over the records would be illegal and unethical. The Court of Appeals’ reasoning in part focused on the very limited exceptions available to employment-at-will. Query if the result in this case would be different post HIPAA, where Dr. Horn’s choice might be between violating federal law or being fired. (Horn v. New York Times, __ N.Y.2d __, 2003 WL 443259 (N.Y. Ct. App., 2003).)

PENDING LEGISLATION

Portman-Cardin: Just When You Thought It Was Safe to Restate Your Plan. Congress’s most famous duo in retirement legislation already weighed in this session with a more than 200-page bill addressing pension legislation. Samples from H.R. 1776, The Pension Preservation and Savings Expansion Act of 2003, include: needed funding relief for defined benefit plans (replacing the 30-year Treasury bond interest rate for funding and for lump sum determinations), accelerating the 2001 Tax Act increases in IRA and 401(k) permitted contributions, raising the age for minimum distributions from 70-1/2 to 75, and providing some tax relief to those earning less than $90,000 annually in retirement. (For a description by the Congressmen published through the American Benefits Council, go to www.benefitslink.com/links/200304110-021817.shtml.) (Although we normally don’t clutter Developments with legislation, most of which won’t go anywhere, the track record of Portman’s and Cardin’s bipartisan bills is good enough that much of this stands a chance of being enacted this session. Stay tuned.)