KEYWORD:

EMPLOYEE BENEFITS MEMORANDUM

Date:	January 31, 1997
Re:	Employee Benefits Update

This is to alert you to several legal developments in the employee benefits area that may be of interest to you.

First, effective as of February 3, 1997, the latest date on which employee 401(k) contributions must deposited with the plan is the 15th business day of the month following the month in which employee 401(k) contributions are withheld from employees' paychecks. If employee 401(k) contributions can be reasonably segregated from your company's general assets sooner than this 15 day time frame, then you have to deposit those contributions before the 15 day time frame is up. If the 15 day time frame is too quick for you to comply with, you have the option of delaying the effective date of the new rule (and staying under the old 90 day rule) until May 5, 1997, but only if you (i) notify employees on or before February 3 of your decision, (ii) obtain a bond in favor of the plan, (iii) notify the Department of Labor, and (iv) send notices to your plan's participants telling them when you deposited their money into the 401(k) plan.
There are some grace periods for late contributions, but they are fairly restrictive and not of much help.

Second, as you may recall from our memorandum last fall, the required minimum distribution rules changed as of the first of this year to provide that -- with the exception of 5% owners -- required minimum distributions do not need to begin until an employee's retirement. Several consequences flow from this:

Most plans currently provide that distributions must begin as of April 1 of the year following the employee's attainment of age 701/2. Since such distributions are no longer required to begin until retirement (except in the case of 5% owners), you need to decide whether you wish to amend your qualified plans to permit employees to defer the receipt of required minimum distributions until retirement.

If you are currently making required minimum distributions to active employees you need to decide whether to offer those employees the option to stop receiving distributions during the remainder of their period of employment with you.

If you decide to allow active employees to postpone the receipt of required minimum distributions, be aware that defined benefit pensions will need to be actuarially increased to include the value of benefits that would otherwise have been paid during employment.

You do not have the option -- at least as the law currently stands -- of amending your plan to prohibit employees from taking their accrued-to-date benefits as of April 1 of the year following their attainment of age 701/2. An employee's right to begin taking benefits as of this magic date is considered a protected benefit with respect to currently accrued benefits.
We realize that what we are saying here about the required minimum distribution rules is complicated. Nonetheless, it is an area that you should devote your attention to early this year, if possible, in order to minimize misunderstanding among your staff and employees.

Third, we want to bring to your attention the whole issue of benefits for contract labor and leased employees. You may have read about the Microsoft ruling that the United States Court of Appeals for the Ninth Circuit issued last October. The court held that Microsoft had to pay full benefits to the employees Microsoft had classified as contract employees. In fact, a retirement plan that provides benefits to independent contractors does not satisfy the qualification requirements (although the IRS has stated that it is considering changing its position on this question). Where Microsoft got into trouble was its improper characterization of common law employees as contract labor.
You may also have noticed an article in the Wall Street Journal on Thursday, January 16, about a ruling by the United States Court of Appeals for the Sixth Circuit in favor of DuPont on a similar -- but not identical -- issue. The DuPont case involved leased employees rather than contract labor (the difference being that a leasing organization was involved in the DuPont case but not in the Microsoft case). To further complicate legal developments in this area, the statutory definition of "leased employee" changed as of the first of this year to include persons who perform services "under the primary direction or control by the recipient" on a substantially full-time basis for a period of one year.
We bring all of this to your attention because careful plan drafting can be used to exclude your contract work force from participation in your employee benefit programs on a basis that is independent of the question whether your contract employees are, in fact, common law employees. If you have contract employees and it's your intent to exclude them from participation in your employee benefit programs you may want to take a look at the plan documents and see (i) if the plan documents exclude contract labor at all and (ii), if they do, whether the exclusion should perhaps be stated in a way that is not directly dependent on the distinction between contract labor vs. common law employee. If the plan documents do not give you the comfort or support you need to exclude your contract work force then you may want to consider amending your plans. Note, however, that any excluded workers that are considered common-law employees in the eyes of the IRS will have to be counted as nonbenefiting employees when you do your nondiscrimination testing, regardless of how you classify those workers yourself. Similarly, individuals that meet the IRS definition of "leased employees" also have to be taken into account for nondiscrimination testing.

Fourth, the IRS recently issued two notices intended to help (yes, help) employers comply with the Qualified Domestic Relations Order (QDRO) rules and the Qualified Joint and Survivor Annuity (QJSA) rules. Both notices are written in question and answer format and contain sample language to use in QDROs and QJSAs. We think that the quality of both notices is pretty high, and you may want to take the time to study the notices and see how they compare to the forms that you are currently using. Please let us know if you would like a copy of the IRS notices. We would be happy to send them to you.

Fifth, just a brief mention of something called the IRS Administrative Policy Regarding Self-Correction, which was issued on January 7 of this year.
A touchy area of plan administration has often been what to do when errors are discovered with respect to the administration of a qualified plan. Technically, all administrative errors -- no matter how small -- will disqualify a plan. For some time now the IRS has encouraged plan sponsors to disclose these administrative errors to the IRS and to fix them pursuant to a "closing agreement" with the IRS. Most employers are not keen on going to the IRS.
The new policy approves of what has been a common practice all along -- simply fixing the problem and getting on with life. There are of course a lot of technical aspects to the new program, but the gist of it is that, if an employer discovers administrative errors -- no matter how serious -- and is able to correct them by the end of the plan year following the year in which the errors occurred, the plan will not lose its qualified status. Note that "correct" in this context means restoring the plan and its participants to the position they would have been in had the errors not occurred.
As you can see, the IRS has created a significant incentive for plan sponsors to self-audit their plans every year. Our sense is that in many cases such self-audits will make sense and provide plan sponsors with a fairly high degree of comfort that the plan will not be disqualified on account of operational defects.