10/21/2014. Benefit Issues for Employees in Personal Crisis. Common Benefits Issues for Difficult Life Circumstances

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1 Benefit Issues for Employees in Personal Crisis Lori W. Jones, J.D., LL.M. HRMA Conference Common Benefits Issues for Difficult Life Circumstances Divorce Death Hardship Incapacity Bankruptcy COBRA Loss of Coverage in Anticipation of Divorce It s open enrollment. Katie comes to your office to discuss her health options and mentions she has appointment with divorce lawyer. She elects to drop her husband Tom s coverage under the Company s medical plan. 1

2 COBRA Loss of Coverage in Anticipation of Divorce If coverage is reduced or eliminated in anticipation of divorce or legal separation, the reduction or elimination is disregarded in determining whether the event causes a loss of coverage Upon subsequent divorce or legal separation, plan must offer COBRA If elected, COBRA coverage begins with the divorce COBRA Loss of Coverage in Anticipation of Divorce If Katie s divorce is finalized, COBRA must be extended to her ex-husband. The fact that he technically lost coverage before the divorce due to Katie s open enrollment election is ignored. COBRA Loss of Coverage in Anticipation of Divorce What if Katie drops Tom s coverage without talking to you? Describe anticipation of divorce rules in initial COBRA notice Automatic practice Send a letter to spouses and dependents who have been dropped (for any reason) Advise them no longer have coverage Remind them of COBRA rights Advise them to notify administrator of divorce or legal separation that has occurred or may occur Consult any insurance carrier in advance - avoids later disputes about COBRA for former spouse 2

3 Divorce & HSAs Demi s children are tax dependents of her ex-husband Ashton. She asks whether she can use her HSA to pay the children s medical expenses. Divorce & HSAs Yes. IRS guidance indicates that qualified medical expenses include medical expenses incurred by a child who is claimed as a dependent by former spouse. Divorce & Cafeteria Plan Status Change Consistency Rule Your medical plan offers employee only, employee plus 1, and family coverage. Sean elected family coverage for spouse Robin and their child. He divorces Robin mid-year and wants to drop all health coverage. 3

4 Divorce & Cafeteria Plan Status Change Consistency Rule Divorce is a change in status event Election change must be consistent with the change in status event Special consistency rule for divorce permits cancellation of coverage for ex-spouse only Divorce & Cafeteria Plan Status Change Consistency Rule Under the consistency rule, Sean can drop Robin s coverage due to divorce He cannot drop all coverage or elect employee-only coverage Sean can change his election to employee plus 1 coverage QDROs Eddie comes to you with a court-approved divorce decree which provides that his ex-wife Brenda receives 50% of any retirement benefits he accrued during the marriage. Eddie asks you to take any actions necessary to implement the divorce decree. 4

5 QDROs ERISA and Internal Revenue Code prohibit the assignment of benefits QDRO is an exception to the anti-assignment rule A violation of QDRO rules risks disqualification of plan and possible fiduciary liability Eddie s divorce decree may qualify as QDRO if requirements satisfied QDRO Requirements A court order under state domestic relations law Grants alternate payee right to some or all plan benefits Required information Name and address of participant and alternate payee Amount/percent to be paid to alternate payee Number of payments or payment period Each plan to which order applies QDRO Requirements (cont.) Forms of benefit/payment should conform to the plan Payments permitted at earliest retirement age, which is earlier of date participant is entitled to receive distribution from the plan, or the later of the date the participant reaches age 50 or the earliest date the participant could receive distribution if he were to separate from service 5

6 QDROs Eddie s divorce decree is not a QDRO Advise him to contact his attorney and to send you a draft of the QDRO for review and approval before it is submitted to the Court Offer copy of plan s QDRO procedures (and model QDRO) QMCSOs Eddie comes to your office with another court order requiring him to provide medical coverage to his child. Eddie is eligible for your health plan but declined coverage. Under the divorce settlement, Brenda has full child custody (Eddie got the paintings from Sears). QMCSO Requirements The order may be a Qualified Medical Child Support Order (QMCSO) Any judgment, decree, or order issued by court of competent jurisdiction or administrative agency authorized to issue child support orders Requirements: Name and address of the participant and each alternate recipient (may substitute the name address of a state or local official for A. R.) Description of type of coverage to be provided; and The period to which the order applies 6

7 QMCSOs Determine if the order is qualified. Eddie does not need to have custody. If so qualified, the child must be enrolled for coverage. If the plan does not provide coverage to dependents without the employee having coverage, then Eddie must be enrolled as well. Divorce & Loss of Coverage Under ACA Your employee Diana elected family coverage for spouse Charles and children William and Harry. Diana and Charles quietly and amicably divorce. Because Charles is unemployed, Diana thinks it is a good idea to keep Charles on your company s insurance. Neither informs you of the divorce. When Diana shows up to the holiday party with Dodi, you find out about the divorce. Divorce & Loss of Coverage Under ACA Your HR VP asks you to immediately and retroactively cancel coverage for Charles. You wisely remember that ACA has a prohibition against retroactively cancelling coverage. 7

8 Divorce & Loss of Coverage Under ACA ACA prohibits rescission of coverage, which is defined as a cancellation or discontinuance of coverage that has retroactive effect Exception: If a plan does not cover ex-spouses (except as required by COBRA), is not notified of a divorce, and the full COBRA premium is not paid, termination of coverage retroactive to the divorce is not considered a rescission Divorce & Loss of Coverage Under ACA Your plan properly provided the initial COBRA notice describing the requirements to notify the plan of divorces. You may retroactively cancel coverage for Charles. Because the plan was not timely notified of the divorce, the plan need not offer COBRA coverage to Charles. Beneficiary Issues Liz elects 100% J&S with husband Conrad as the beneficiary and commences her benefits. Liz divorces Conrad and marries Michael. Liz dies. Conrad sues Michael to resolve claims to death benefits. Conrad gets the house and Michael gets the plan death benefits Michael sends you a copy of the court-approved settlement letter and requests you to pay amount directly to him pursuant to the settlement 8

9 Beneficiary Issues A settlement can t alter the terms of the plan Form of payment can t be changed once benefits have commenced Plan must pay benefits to Conrad Conrad and Michael must work it out between them Beneficiary Issues Billy Bob names his wife, Angelina, as 401(k) plan beneficiary. He divorces Angelina and she waives her right to any benefits under the 401(k) plan as part of the divorce settlement. Billy Bob fails to change his beneficiary after the divorce. Upon his death, his daughter asks you to distribute the plan benefits to Billy Bob s estate (the default beneficiary). Beneficiary Issues This is the Kennedy v. Plan Administrator for DuPont Savings and Investment Plan case decided by the Supreme Court in 2009 Plan paid benefits to ex-wife and the estate sued the plan Court held that the QDRO rules don t apply to a waiver. She did not assign any benefit to any person Plan was correct to disregard the waiver because the terms of the plan required payment to the named beneficiary In order for waiver to be valid, the plan must permit the waiver 9

10 Beneficiary Issues After Kennedy, some plans were revised to provide that after a divorce, a beneficiary designation will automatically be deemed null and void unless the participant reaffirms the beneficiary designation after the divorce Some state laws provide for automatic revocation of ex-spouse s beneficiary status, but these rules are preempted for ERISA plans Life Insurance Impact of State Laws on Beneficiary Designation Tiger lives in Missouri. He divorces Elin. As part of a divorce settlement, Tiger agrees to keep Elin as the beneficiary of a life insurance policy. Tiger marries Lindsey and names her beneficiary under the policy. Lindsey divorces Tiger but continues to pay premiums after the divorce. Tiger dies. The estate claims that it must pay Elin the insurance benefits. Lindsey also claims the insurance benefits. Life Insurance - State Laws on Beneficiary Designation Insurance company interpleads the life insurance and asks court to figure it out , RSMo provides that if the owner of a life insurance policy divorces, any beneficiary designation in favor of the former spouse is revoked Exception applies if (i) beneficiary designation is irrevocable, (ii) the beneficiary designation is made after the divorce or (iii) the beneficiary designation or the policy states that divorce will not affect the beneficiary designation 10

11 Life Insurance - State Laws on Beneficiary Designation Is the policy part of an ERISA Plan? If so, ERISA preempts and plan will follow plan terms. If not part of an ERISA plan, Lindsey is not entitled to the insurance proceeds. The estate will pay Elin. Hardship Distributions Tim comes to your office in STL and requests a hardship withdrawal from his 401(k) plan in order to purchase a residence in Arizona. Tim admits that he will not be living there for at least a year. However, his wife and children will be living there due to a health condition. Hardship Distributions Most plans rely on the safe harbor definition of hardship events: Medical expenses for employee, spouse or dependents Purchase of employee s principal residence Tuition expenses employee, spouse, or dependents Prevent eviction from or foreclosure on employee s principal residence Burial or funeral expenses for employee s parent, spouse, children or dependents Repair of casualty damage to employee s principle residence 11

12 Hardship Distribution This is not a withdrawal for the "purchase of an employee's primary residence" per 2004 Q&A session with IRS at ABA conference. Emergency Withdrawals Boss Brad comes into your office at the end of his rope. He is financially overwhelmed by tuition bills for his college-attending son. He wants to access company retirement funds. Your company sponsors a 401(k) plan and a non-qualified executive deferred compensation program. Brad contributes to both of these plans. Emergency Withdrawals Available from: Non-qualified deferred compensation plans subject to 409A 457(b) plans sponsored by tax-exempt and government employers Difficult standard to apply 12

13 Emergency Withdrawals Defined A severe financial hardship resulting from: an illness or accident loss of property due to casualty loss (including need to rebuild a home following damage to home not otherwise covered by homeowner's insurance, e.g., as result of natural disaster), or any other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the individual's control No distribution if need can be relieved through reimbursement or compensation from insurance, liquidation of the participant's assets, or cessation of deferrals under the plan Emergency Withdrawals Complex Interaction Between 401(k) Hardship and 409A Emergency Withdrawal Safe harbor hardship standards require employee to receive all loans and other withdrawals (including deferred comp) After 401(k) loans exhausted, look to emergency withdrawal first Emergency Withdrawals If emergency withdrawal not available, apply 401(k) hardship standards Safe harbor hardship distribution standards require employee to suspend all deferrals under 401(k) and other plans for six months (includes non-qualified plans) 409A rules do allow cancellation of deferral election due to hardship withdrawal. Election must be cancelled. 13

14 Emergency Withdrawals Brad can t get an emergency withdrawal from the deferred comp plan - son attending college is foreseeable. Brad can get a hardship withdrawal from 401(k) plan. His 401(k) contributions are suspended for six months. His deferred compensation election is cancelled. He may be able to elect to defer for the next plan year. Incapacity of Spouse QJSA Waiver Pam s husband has been incapacitated by a stroke. She has power of attorney authorizing her to act on his behalf. She would like to exercise her authority to waive her husband s rights to a QJSA under your pension plan and name her daughter the beneficiary. Incapacity of Spouse QJSA Waiver Regulation 1.401(a)-20, Q&A 27: if spouse is legally incompetent, spouse s legal guardian, even if the participant, can give consent to waive the QJSA 14

15 Incapacity of Spouse QJSA Waiver Require proof that Pam is her husband s legal guardian. If she does so and the plan does not set other conditions, permit her to waive the benefit. Incapacity of Participant - Changing Beneficiaries Ann is in hospice care. Ann s daughter is her 401(k) plan beneficiary. Ann s son brings you a durable power of attorney authorizing him to act on her behalf with respect to financial matters, including matters relating to her retirement benefits. Son wants to name himself as beneficiary under the plan. The plan provides that a person named in a durable power of attorney which is valid and enforceable under state law may act on behalf of the participant. Incapacity of Participant - Changing Beneficiaries , RSMo provides that a power of attorney may grant the authority to designate or change the designation of beneficiaries only if the power of attorney specifically grants such power 15

16 Incapacity of Participant - Changing Beneficiaries Because pension plan requires that the power of attorney be valid and enforceable under state law, the son s request must be denied If no such plan provision, would be preempted by ERISA However, requiring the specific authorization under the power of attorney may avoid future issues with Ann s daughter Bankruptcy & 401(k) Loans Frank provides you with a Notice of his Chapter 7 bankruptcy case. He asks to stop his loan payments under the 401(k) plan. Bankruptcy & 401(k) Loans A Chapter 7 case does not change a participant s obligation to repay his loan under the 401(k) plan Your plan s loan policy and Frank s loan agreement requires payroll withholding 16

17 Bankruptcy & 401(k) Loans Frank s request must be denied. Bankruptcy court cannot order the repayments to stop. 17