COBRA strikes with revised set of guidelines: Deferred compensation plans also subject to changes

Human resource workers may have little time to ease into the new year as they prepare for legal changes that erase some deferred-compensation loopholes and clarify COBRA notification.

Last spring, the U.S. Department of Labor issued new guidelines for health care coverage obtained under the Consolidated Omnibus Budget Reconciliation Act. In the fall, Congress took aim at deferred compensation.

HR people not familiar with changes to both could stumble into problems, according to some Indianapolis attorneys.

The Department of Labor set minimum standards for the timing and contents of COBRA notices when it announced changes that took effect Jan. 1. These changes essentially fall into the “employee friendly” category, according to Mike Paton, an attorney with Barnes & Thornburg.

COBRA provides employees and people related to them the right to the temporary continuation of health coverage at group rates, according to the Labor Department. This opportunity kicks in only when coverage is lost in certain circumstances, like a divorce, death or an employee’s quitting his or her job.

The final rules implemented by the Labor Department in 2004 aim to ensure that employers provide consistent information upfront about COBRA when someone enters a health care plan, according to Chris Sears, a partner at the Indianapolis law firm of Ice Miller.

“These regulations just clarify exactly what needs to be in these notices, exactly what you have to tell employees,” Sears said.

The regulations help ensure that an employee knows how and when to notify his employer of an event that might trigger COBRA coverage. They also help ensure an employer clearly defines what an employee is entitled to and that the employer sends out a paper notice telling someone when his or her COBRA benefit ends. The Department of Labor offers examples of COBRA model notices at its Web site, www.dol.gov/ebsa. The new rules make sure employees understand their rights and employers meet their notice obligations, according to Labor Department officials. They also make some benefits experts sleepy.

“Honestly, it’s not a huge deal,” Paton said. “We’re kind of yawning.”

The real excitement lies in changes to non-qualified d e f e r r e d – c o m p e n s a t i o n plans, according to Paton. These plans, normally used by high-paid executives, allow someone to defer certain compensation to a future year to put off taxes on the money. Non-qualified plans allow for greater contributions than the average 401(k).

In October, Congress established more guidelines that closed some commonly used loopholes for these plans. New rules, for instance, prevent people from accelerating the payment after they decide the age at which they want to receive it.

“There was no real consensus on what worked and avoided current taxation and what didn’t work,” Paton said.

The changes became effective Jan. 1, but employers have a year to adjust their plans. After that, the person who has the plan, not the employer, will be penalized for a rule violation. That penalty can include an additional 20-percent income tax assessment plus interest.

That provides plenty of motivation for plan administrators, some of whom are scrambling to understand what Congress wants and how to protect their executives.

“It’s significant,” Paton said. “There is a strong incentive for the employee to make sure it’s done right.”