403(b) and FMLA Updates

Coverage From the 2008 CUPA-HR National Conference & Expo

SESSION: 403(b)—Top 20 Compliance Concerns

Author’s Note: With the issuance of Notice 2009-3 released Dec. 11, 2008, public schools, colleges, and universities and other tax-exempt organizations received an extension until Dec. 31, 2009, to complete written 403(b) retirement plan documents. This does not delay compliance with rules and requirements that an employer monitor contribution limits, loans, and distributions. The extension merely postpones the requirement that a plan document be signed as of Jan. 1, 2009—extending that deadline until the end of 2009.

For more than four decades, changes to pension and tax laws have dealt primarily with 401(k) retirement plans. For years, public institutions have been offering employees 403(b) retirement plans without much guidance from the Internal Revenue Service (IRS). Legislation such as the Employee Retirement Income Security Act (ERISA) and the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) changed the rules for many retirement savings programs, but the legislation had little impact on public institutions. Subsequently, confusion surfaced among plan employers and, over time, many
403(b) programs fell out of compliance. After conducting numerous audits, the IRS recognized it was time to provide guidance to make sure that 403(b) programs operate in compliance with these laws. As of Jan. 1, 2009, new 403(b) provisions went into effect.

The new regulations offer insight into the shifting views of the IRS and Treasury Department. Essentially, these changes intend to align the rules governing
403(b) plans more closely with those governing salary reduction arrangements such as 401(k) or 457(b) plans. (See a previous January 2008 HR Horizons article on this topic.)

During the 2008 CUPA-HR National Conference in St. Louis, Richard Turner, vice president and deputy chief counsel for AIG Retirement, offered a complete review of the changes and offered a step-by-step look at what your institution should do to comply with the new regulations. While your institution’s compliance efforts should already be in place, you can use the following checklist to ensure your institution has not overlooked critical 403(b) regulatory concerns.

In general:

1. Establish a written plan that covers required elements and any optional features (e.g., loans, transfers, or hardships) that your institution may want to offer.
2. Provide to all eligible employees annual notice of the opportunity to participate in the 403(b) program and the rules for doing so.
3. Review the hours worked by your part-time employees and substitute teachers. If they are expected to work at least 1,000 hours within the coming 12 months, remind them that they can participate in the 403(b) program.
4. Review your 403(b) program administrative procedures. Identify those areas (e.g., eligibility, hardships, transfers, loans, and qualified domestic relations orders) that may need to adapt to the new IRS rules.

Checklist of Top 20 403(b) Compliance Concerns
Many of the following tasks can be delegated to the party(ies) that your institution has selected to perform the list of functions. This checklist is a general source of information. Consult with legal counsel and/or a tax advisor to determine the action plan and time line that fits your institution’s specific needs.

1. Identify all investment providers that your institution currently sends contributions to under the 403(b) plan and all investment providers that do not receive contributions but do receive contract exchanges as of Sept. 24, 2007.
2. Determine if your institution will follow a centralized, decentralized, or hybrid compliance approach.
3. Identify the types of 403(b) service provider(s) (e.g., investment provider, third-party administrator, common or volume remitter service, investment consultant, legal counsel, etc.) with whom your institution would like to work, and send out letters to request information or requests for procurement (RFPs) to obtain information and service-agreement provisions of such service providers.
4. Identify the current features of your institution’s 403(b) plan and determine how you would like the 403(b) plan to operate going forward. Decide which optional features you will include in your plan. (You may want to include employee union representatives in this process if there are fewer features than previously available to their members.)
   
   • Who is eligible to participate in the 403(b) plan (e.g., all employees, those working less than 20 hours per week, etc.)? Remember that all common-law employees should be designated as eligible to participate if you wish to avoid the tracking of hours.
   • What types of contributions will go into the 403(b) plan (e.g., employee salary deferrals, employer contributions, post-retirement employer contributions, Roth 403(b) contributions)?
   • Will you require automatic enrollment in the 403(b) plan for all new employees? (Determine whether the statutes in your state will permit automatic enrollment.)
   • Will you allow participants to roll amounts into your institution’s
     403(b) plan from a previous employer’s 403(b) plan or from other eligible retirement plans or from IRAs? If yes, will you require separate accounting of those rollover amounts? Can your vendors accommodate separate accounting?
   • Will you permit participant loans from 403(b) plan assets?
   • Will you permit participant hardship withdrawals from 403(b) plan assets?
   • Will you permit contract exchanges to investment providers who do not receive 403(b) plan contributions?
   • What is your 403(b) plan year?
   • Who will make administrative decisions about your institution’s
     403(b) Plan?
5. Select 403(b) service provider(s) with whom your institution will work and negotiate service agreements with such service provider(s).
6. Consider board adoption of policy for selection of investment providers (subject to state law requirements).
7. Review collective bargaining agreements for any provisions related to
   403(b) plan and consider renegotiation of such provisions (if applicable).
8. Draft 403(b) plan document.
9. Draft standard 403(b) salary reduction agreement.
10. Negotiate service agreement with each investment provider who receives contributions from 403(b) plan. (Determine whether each of the providers you wish to offer to receive contributions under the 403(b) plan will share information with the institution for purposes of inclusion in your written plan.)
11. Negotiate information-sharing agreement with each investment provider who does not receive contributions from 403(b) plan but will receive contract exchanges from 403(b) plan. (Determine whether each of the providers you wish to offer to receive contract exchanges under 403(b) plan will share information with the institution for purposes of permitting contract exchanges under your written plan.)
12. Obtain copies and review specimens of all annuity contracts and custodial account agreements offered under 403(b) plan. Alternatively, be sure that written plan language properly references those underlying contracts and agreements.
13. Identify all employees eligible for 403(b) participation.
14. Prepare communication that advises employees of the investment providers who may receive contributions and/or contract exchanges under your written plan, any limits on contract exchanges under your written plan, and your institution’s policy for adding or eliminating investment providers.
15. Prepare employee 403(b) enrollment packages and annual meaningful notice of eligibility.
16. Conduct 403(b) enrollment meeting and investment provider meeting for eligible employees. During meeting, describe employees’ rights and responsibilities under new 403(b) rules, and educate employees about availability of 403(b) plan.
17. Develop 403(b) plan document file that includes:
    • 403(b) plan document.
    • Salary-reduction agreements.
    • Copies of annuity contracts and custodial agreements (if applicable).
    • Investment provider service agreements and information-sharing agreements.
    • Third-party administrator service agreement and any other service provider agreements (if applicable).
18. Implement ongoing administrative procedures for reviewing and monitoring 403(b) plan operations regarding eligibility determination, contributions, distributions, contract exchanges, and so forth.
19. Implement annual process to review and amend, as needed, all documents and materials in 403(b) plan document file.
20. Implement process to select and deselect 403(b) investment providers subject to board policy (if applicable).

Coverage From October 2008 United Educators Webcast

SESSION: FMLA Final Regulations Revisions

On Nov. 17, 2008, the Department of Labor (DOL) released final regulations on revisions to the Family and Medial Leave Act (FMLA), effective Jan. 16, 2009. The rules clarify the rights and the responsibilities of employers and employees and address issues such as the numerous definitions of “serious health conditions,” requirements on medical certification forms, new FMLA military leave entitlements, and use of accrued paid leave. Higher education administrators are tasked with a difficult job of not only becoming familiar with the new regulations but also understanding how the Americans with Disabilities (ADA) and Workers’ Compensation laws interact with the new rules in order to protect their institutions from costly lawsuits. This task is complicated by the fact that the ADA, Workers’ Compensation, and FMLA laws overlap and in some instances contradict each other and state-based programs in terms of their requirements.

An October 2008 webinar hosted by United Educators (UE) offered guidance and detailed explanations of key definitions in each law. Participants heard from Caroline Hendel, associate general counsel at Yale University; Amy Schmidt Jones, UE select counsel and a partner in the Milwaukee office of Michael Best & Friedrich; and moderator Frank Vinik, UE senior risk analyst.

Rules to Remember
“Many call the intersection of these three statutes the Bermuda Triangle laws, because it is so easy to get lost and confused,” Vinik explained. Although administrators may be faced with one situation, each law has to be evaluated separately. Unfortunately there is no legislative guidance on how to coordinate the three statutes. Each law has different definitions, rules, and time frames. State laws must also be considered.

Jones emphasized three rules of thumb when analyzing a situation for which these laws might apply.

1. Evaluate the situation under each law separately. No matter which law is applied first, each law must be applied separately to determine the outcome under that statute.

2. Determine which law provides the most benefit to the employee. In some situations, one of the laws may dictate that an employer has no obligation to an employee, while another law may require a significant obligation. As a general rule, the law that is most favorable to the employee must be followed.

3. Reevaluate the situation under each law every time the employer receives new information on the employee’s condition or a deadline passes under one of the laws. This task requires excellent coordination. Supervisors are usually the first to receive new information about an employee’s condition, while the office of human resources typically monitors deadlines under laws such as the FMLA. In addition, legal counsel may need to review proposed actions before a supervisor can proceed.

According to Hendel, understanding the differences between the laws is critical. In general: 1) the ADA prohibits discrimination against employees with a disability; 2) the FMLA sets minimum leave standards for workers; and 3) workers’ compensation provides for payment of compensation and rehabilitation to workers injured on the job. Jones emphasized the importance of “starting the FMLA clock as soon as possible, and reevaluating the law each time the employee’s health changes or time deadline passes.” She also reminded employers/institutions of their right to request recertification of a health condition if a suspicious pattern of absences occurs.

The New Revisions to FMLA
The final rule updating the DOL’s regulation is designed to speed the implementation of a new law that expands FMLA coverage for military family members. For the first time, this final rule “gives America’s military families special job-protected leave rights to care for service men and women who are wounded or injured and also helps families of members of the National Guard and Reserves manage their affairs when their service member is called up for active duty,” says Jones. Military caregiver leave provides family members of injured service members with up to 26 weeks of leave in a single 12-month period. Qualifying exigency leave allows military family members to use the normal 12 weeks of FMLA leave to manage the affairs of the service member while he or she is on active duty or called to active duty. The rules also expand the definition of “next of kin” to include grandparents, aunts, uncles, first cousins, and any relative so designated by the service member (not only spouses, parents, and children).

Developing a Useful Program
Speakers were emphatic about developing a proactive return-to-work program that is right for your institution, your employees, and for workers’ compensation cases. The program should be in writing and be consistent and enforceable. Items to address in the program include:

• How the institution will assess whether the employee is able to return to work and can be reasonably accommodated in his or her current position.
• The process for finding other available positions on campus if the employee cannot be reasonably accommodated.
• Required fit-for-duty certification from appropriate health-care providers.
• Time limitations for the employee to remain on a light-duty position.
• How long it is reasonable for the institution to keep the employee on leave of absence if reasonable accommodation cannot be provided and no alternative positions are available.

Any return-to-work program must take into account applicable ADA, FMLA, and workers’ compensation stipulations. “Be mindful that FMLA statutes, where applicable, may interfere with the institution’s attempt to return an injured employee on workers’ compensation to work if the employee refuses a light-duty offer and chooses to stay off for the full 12-week FMLA period,” warns Hendel. If the employee is unable, at the conclusion of FMLA leave, to perform the essential functions of his or her former position or of an equivalent position, the employee has no right to restoration to another position under FMLA. “However,” Hendel continues, “if the employee returning from a work-related injury is a ‘qualified individual with a disability’ under the ADA, your responsibilities as an employer are then governed by the ADA’s requirement that the employer make a reasonable accommodation, barring undue hardship.” This means that as an employer, you have an obligation to attempt to return an injured employee to work beyond the 12-week FMLA period.

Tadu Yimam is a policy analyst at NACUBO. E-mail: tadu.yimam@nacubo.org.