ERISA Exchange

ERISA Exchange

Practical Solutions for Compensation & Benefits Issues

When is a State-Law Claim Preempted By ERISA?

By Jennifer Faucett on Posted in Compensation Planning, ERISA Litigation, Executive Compensation, Non-Qualified Deferred Compensation

Parties often try to take advantage of the protection provided by ERISA’s preemption provisions when faced with a state-law claim involving a plan governed by ERISA.  However, the involvement of an ERISA plan does not necessarily mean the claim is preempted.  In Gardner v. Heartland Industrial Partners, LP, (2013, CA6) (2013 WL 1920875), the Sixth Circuit Court of Appeals considered this issue when faced with a claim for tortious interference with a contract that just happened to be an ERISA-regulated plan.  In an opinion decided and filed on May 10, 2013, the Sixth Circuit set out the framework for analyzing the issue before finding that the claim was not preempted by ERISA.

Setting the Stage.  In August 2006, defendant Heartland Industrial Partners, LP, agreed to sell its ownership interest in Metaldyne Corporation to Ripplewood Holdings.  The deal would have triggered a $13 million obligation to some former executives of Metaldyne under the change-in-control provision of Metaldyne’s supplemental executive retirement plan, or SERP. Ripplewood threatened to back out of the deal upon learning of the SERP obligation.  To keep the deal from falling apart, Metaldyne’s CEO convinced Metaldyne’s board to declare the SERP invalid.

After being notified that the SERP had been invalidated and they would not receive any benefits under the SERP, the former Metaldyne executives filed a state law claim against Heartland, Metaldyne’s CEO, and one of the Metaldyne board members for tortious interference with contractual relations based on the invalidation of the SERP.  Defendants removed the case to federal court on the basis that it was completely preempted by ERISA, and filed a motion to dismiss the case on that ground.  The district court agreed with Defendants and dismissed the case.  Plaintiffs appealed.

Two-Prong Test.  Section 502(a)(1) of ERISA provides for civil actions by a participant or beneficiary to recover benefits due under the terms of a plan subject to ERISA.  The Supreme Court has said a state-law claim that, by its nature, is within ERISA Section 502(a)(1) is deemed to be a federal claim (for purposes of removal) and is completely preempted. A claim is within ERISA Section 502(a)(1) if (1) the plaintiff complains about being denied benefits to which he is entitled only because of the terms of an ERISA-regulated plan; and (2) the plaintiff does not allege the violation of any state or federal legal duty independent of ERISA or the plan.  (See Aetna Health Inc. v. Davila, 542 U.S. 200 (2004)).

The Sixth Circuit focused on whether the former Metaldyne executives’ state-law claim was “independent” of ERISA or the SERP.  Because their claim was based on the Defendants’ duty to not interfere with Plantiffs’ contract (the SERP agreement) with Metaldyne, the Sixth Circuit held that it was indeed independent.  The court noted that a determination of the Defendants’ liability did not require interpretation of the SERP’s terms and that any damages would be paid from the Defendants’ assets, not the SERPs. Since the second prong of the test was not met ERISA did not completely preempt the claim.  The district court’s dismissal of the Plaintiffs’ claim was reversed and the case was remanded with instructions for the district court to return the case to state court.

Agencies Issue Final Wellness Program Regulations under Affordable Care Act

By Shannon Goff Kukulka on Posted in Affordable Care Act, Enforcement, Health and Welfare Plans, Wellness Programs

On May 29, 2013, the IRS, DOL and HHS issued final regulations on employer wellness programs under PPACA. The final rules are largely consistent with, but reorganize the content of, the proposed rules issued in November 2012 (on which the agencies received approximately 5,000 comments).  Effective for plan years beginning on or after January 1, 2014, the final rules apply to insured and self-funded health plans, regardless of grandfathered status.  Certain provisions of the final rules:

  • increase the maximum permissible reward or penalty under a health-contingent wellness program offered in connection with a group health plan to 30% of the total cost of coverage, and 50% for components designed to prevent or reduce tobacco use
  • clarify the reasonable design of health-contingent wellness programs (now subdivided into “activity-only programs” and “outcome-based programs”) and the reasonable alternatives they must offer to avoid prohibited discrimination
  • establish criteria for an affirmative defense against a claim that the plan discriminated based on health status in violation of HIPAA

The final regulations take effect 60 days after the June 3, 2013 publication in the Federal Register.

The DOL has also posted on its website the Workplace Wellness Programs Study: Final Report, a study commissioned by the DOL and HHS that investigates the impact of workplace wellness programs on health and medical cost, facilitators of their success, and the role of incentives.

 

Company Stock Fund Litigation – the SPD and Prospectus

By James Bristol on Posted in ERISA Litigation, Fiduciary Duties, Tax-Qualified Retirement Plans

401(k) Plans Not Exempt. Normally, retirement and 401(k) plans are exempt from the rules governing the sale of securities. But when the plan allows participants to direct contributions into a company stock fund, the company must comply with ERISA as well as the laws governing the sale of securities. SEC rules require the employer to “register” the securities offered through the plan unless an exemption is available. SEC Rule 701 is available for companies with privately held stock. Employers with publicly traded stock can usually register the stock sold through the plan on SEC Form S-8. In either event, the company is obligated to provide a “prospectus” to plan participants describing the investment opportunity.

Conveniently, much of the information that must be included in the prospectus is already provided by employers through the summary plan description, or SPD, under ERISA. Historically, many companies have combined these into a single document due to the overlapping information. Both the SPD and prospectus must describe how an employee becomes eligible to participate, contributions that can be made to the plan, distribution rights and information on vesting and general administration. In addition, a prospectus must provide current and historical financial information of the company, risk factors for investing in company stock and a description of investment funds that are available other than company stock. Rules for eligibility, distribution and the like seldom change. Current financial information of course changes constantly. Mercifully, a company can “incorporate by reference” the financial information that is disclosed to the public through the normal SEC disclosure process.

Dual Legal Standards. The issue that courts have tackled is whether the employer in acting as the plan administrator – a fiduciary – has separate ERISA obligations when providing the financial disclosures required by federal securities law. When a company offers its stock for sale, it is normally engaged in an arms-length relationship with investors. It must provide all information that an investor would deem “material” to the investment decision. The prospectus that includes this information is subject to SEC standards for accuracy. A company may be liable to investors if it knew or “should have known” that the financial information reported was inaccurate or incomplete. In contrast, an ERISA fiduciary cannot act towards plan participants in such an arms-length manner. There are many other distinctions between SEC and ERISA duties. For example, if the company becomes aware of information that could be material but is not public, under SEC rules the company may not and, at times, should not disclose that information to the public. Corporate issuers develop “insider trading policies” to avoid misuse of material, non-public information. An ERISA fiduciary may be obligated to handle such “inside” information differently.

The Conflict. A recent decision in the Sixth Circuit Court of Appeals shows how this conflict in duties can lead to surprising results. The company’s stock value had dropped precipitously and the 401(k) retirement plan lost significant value in the stock fund. Participants had received a combined SPD/prospectus with financial information as well as normal information about plan administration. This meant the prospectus information was a fiduciary communication. The company as plan administrator might then be responsible as a fiduciary if the financial information in the combined SPD/prospectus proved to be inaccurate. The court would not allow the fiduciary to simply pass along in the SPD the information that was furnished to all other investors under SEC rules. This standard could lead to absurd results.

Financial information about a company that is scrutinized in “stock drop” litigation is almost never included in the physical SPD delivered to participants. Instead, there is usually little more than a reference to a website where SEC filings are available to the public. The plan administrator cannot control the content of the financial disclosures. Other courts have reached a different result, although all seem to agree that the combined document is a fiduciary communication. The Second Circuit Court of Appeals, for example, has ruled that the plan administrator could pass along the SEC disclosures as long the fiduciary believed in good faith that the information was accurate.

A Tale of Two Hats. Employers need a practical solution that is more reliable than hoping that lawsuits will all be filed in the Second Circuit. Keep in mind that ERISA does not itself require the financial disclosures. The problem is that the plan administrator is wearing the “fiduciary hat” when it delivers financial information in a combined SPD/prospectus. Rather than gratuitously convert financial disclosures into a fiduciary communication, companies should be able to separate the prospectus information into a second document that is delivered while wearing only the non-fiduciary “company hat.” Informal surveys suggest that most companies that offer a company stock fund in the retirement plan either have adopted or will adopt a two-instead-of-one approach to the delivery of SPD and prospectus information.

Careful coordination between securities and ERISA counsel is needed so that the company truly wears only its “company hat” when issuing the separate prospectus. A best practice that is related is to exclude executive officers and directors from participation on the retirement committee when a plan has a company stock fund. These individuals are frequently in possession of material, nonpublic information. Their duties to shareholders in general can, in those instances, come into conflict with their ERISA duties. Providing a prospectus that is separate from the SPD will not cure this type of conflict.

New Rules on 90-Day Waiting Period Limitation, Certificates of Creditable Coverage

By Susan K. Bilbro on Posted in Affordable Care Act, Health and Welfare Plans

Recent proposed regulations explain implementation of the 90-day waiting period limitation included in the Affordable Care Act for employer-sponsored group health plans, beginning January 1, 2014. Under the Affordable Care Act, a group health plan or health insurance issuer offering group health insurance coverage cannot apply any waiting period that exceeds 90 calendar days (including weekends and holidays). Under the proposed regulations, and consistent with earlier HIPAA regulations, a “waiting period” is the period that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of a group health plan can become effective. Being “otherwise eligible to enroll” in a plan means having met the plan’s substantive eligibility conditions (such as being in an eligible job classification or achieving job-related licensure requirements specified in the plan’s terms). These rules apply to both grandfathered and non-grandfathered fully-insured and self-funded group health plans. Failure to comply with these rules will subject a non-governmental group health plan to a penalty of $100 per day per individual to whom the failure relates.

Under the proposed regulations, eligibility conditions based solely on the lapse of a time period are permissible for no more than 90 calendar days. Other conditions for eligibility are generally permissible, as long as the condition is not designed to avoid compliance with the waiting period limitation. For example, a plan provision that bases eligibility on whether an employee is meeting certain sales goals or earning a certain level of commission would generally be considered an acceptable substantive eligibility provision.  In addition, a group health plan may condition eligibility on an employee’s having completed a number of cumulative hours of service without causing a violation of the limitation, so long as the service requirement does not exceed 1,200 hours, and the 90-day waiting period begins as soon as the employee satisfies the service requirement. Keep in mind, however, that while a cumulative hours of service eligibility requirement of up to 1,200 hours may be permissible under the 90-day waiting period rules, it may give rise to a penalty under the “pay or play” regulations, so employers will need to carefully consider both regulations if they wish to use an hours of service eligibility requirement.

In any event, under these proposed regulations, if, under the terms of the plan, an employee is able to elect coverage that becomes effective on a date that does not exceed the 90-day waiting period limitation, the coverage will comply with the waiting period rules, even if an individual is late in completing or submitting the required forms and thus actually elects coverage beyond the end of the 90-day waiting period. Note that the waiting period limitation provision does not require an employer to offer coverage to any particular employee or class of employees; it merely prevents an otherwise eligible employee (or dependent) from being required to wait more than 90 days before coverage becomes effective.

One final, important note about these proposed regulations is that they announce that certificates of creditable coverage will be phased out by 2015. Because the Affordable Care Act’s prohibition on exclusions from coverage due to pre-existing conditions will apply to all individuals effective with plan or policy years beginning on or after January 1, 2014, plans will no longer be required to issue certificates of creditable coverage to avoid any preexisting condition exclusions beginning as of December 31, 2014.

Class Action Lawsuits Target Hospital Church Plans

By M. Sean Sullivan on Posted in Church Plans, ERISA Litigation, Pension Plans

A number of class-action lawsuits were recently filed against non-profit hospital companies over the status of their retirement plans.  The hospital companies are affiliated with the Catholic Church and have designated their retirement plans as “church plans.”  Church plans are usually exempt from the requirements of ERISA.

The class-action lawsuits challenge the status of these plans as church plans on several grounds.  First, plaintiffs argue that the plan sponsors are not sufficiently affiliated with the Catholic Church to meet the church plan exception.  In support of this argument, plaintiffs note that the non-profit hospitals hire employees regardless of their religious convictions, enter into joint ventures with partners that do not share religious convictions common to the Catholic Church, perform medical procedures such as elective sterilizations, and encourage patients to reach out to their own spiritual advisors (whether Catholic or not) for guidance.

Plaintiffs also argue that the Internal Revenue Service and U.S. Department of Labor have consistently misread and misapplied ERISA’s church plan exemption.  Further, plaintiffs contend that the extension of the church plan exemption to a non-profit hospital is a violation of the Establishment Clause of the U.S. Constitution.

The financial stakes in these cases and similar litigation are very high. If these retirement plans were determined not to be church plans, the plan sponsors would have to comply with ERISA.  ERISA compliance would include paying PBGC premiums for the pension plans, funding the pension plans to the levels required by ERISA and providing additional disclosures to plan participants.  Based on the plaintiffs’ filings, ERISA funding requirements could involve hundreds of millions of dollars of additional contributions.  Clearly, this could be financially devastating to a plan sponsor.  Such high stakes could cause a church plan sponsor to settle a lawsuit even when the sponsor has an otherwise strong legal position.

Church plan sponsors, particularly in the non-profit healthcare arena, should take cases like this very seriously.  Steps that church plan sponsors can take now include:

  • Consult with legal counsel about the church plan exception and the strengths and weaknesses of its position as a church plan sponsor
  • Establish a process for identifying and following church plan litigation involving similar plan sponsors
  • Ensure that inquiries about the plan’s status as a church plan are handled at the appropriate level.  Such inquiries, especially from plan participants, may be precursors to a class-action lawsuit.

Federal Budget Proposal Would Cap Retirement Accounts

By Shannon Goff Kukulka on Posted in Compensation Planning, Federal Tax, IRS, Pension Plans, Tax-Qualified Retirement Plans

The Obama administration’s fiscal 2014 budget proposal released on Wednesday endorses the idea of revamping both the individual and business-tax systems, including using money from closing loopholes to reduce corporate rates.  The budget proposal contemplates a $1 billion increase over 2013 for the Internal Revenue Service — a large portion of which would go to tax enforcement. But Congress has rebuffed similar requests in the past and the president’s proposal will not help the IRS cause this year, as it copes with the effects from sequestration.

The retirement fund industry is riled about a new proposal in the budget: a complex formula to limit the size of tax-favored retirement accounts that would, effective next year, set a ceiling of $3.4 million for people age 62.  The proposed cap would apply not only to individual accounts such as IRAs and 401(k) plans but to defined benefit pension accruals, as well. According to a study by the Employee Benefits Research Institute, 1.4% of workers currently ages 26–35 with five to nine years of tenure would be affected, while 5.2% of workers in that age and tenure cohort would be affected by a $2.2 million cap (adjusted for inflation). The ERISA Industry Committee, a nonpartisan research institute, released a statement criticizing the proposal as “short-sighted” and “confusing.” According to the statement, the burden of calculating whether a participant exceeds the cap “would only add an additional layer of complexity in retirement planning and would unfairly burden participants, as well as plan sponsors.”

The budget proposal also provides for automatic enrollment of workers in retirement savings accounts, addresses corporate tax shelters and toughens tax penalties by indexing them to inflation.

Plan Administrator Uses “Shorthand Jargon” in Explaining the Definition of Disability and Divides a Sixth Circuit Panel

By Jeb Gerth on Posted in ERISA Litigation

On March 25, 2013, in a case called Judge v. Metropolitan Life Insurance Company, No. 12-1092, the Sixth Circuit Court of Appeals affirmed a Michigan district court’s ruling that MetLife’s denial of a claim for disability benefits under a MetLife-insured group insurance policy was not arbitrary or capricious.  While there’s nothing particularly remarkable about that holding, the Sixth Circuit panel divided sharply on the effect of the way MetLife explained and applied the plan definition of disability, with one of the three judges concluding that MetLife’s application of the definition was arbitrary and capricious – even though the final denial letter quoted the definition verbatim.

Thomas Judge worked for Delta Airlines as a baggage handler.  Through his employment, he participated in a MetLife administered and insured term life insurance policy that that provided for early payment of benefits in the event of “total and permanent disability,” defined to mean “you are expected never again to be able to do … your job, and … any other job for which You are fit by education, training or experience.”  In 2010, Judge learned that he had a heart condition requiring the replacement of a heart valve, and underwent surgery in March 2010.  Later that year, he filed a claim for a lump-sum disability benefit under the plan.

The medical documentation was not entirely clear as to what Judge could or could not do following his surgery, or what his ultimate prognosis was regarding his ability to work in some capacity.

In January 2011, MetLife denied Judge’s claim, however, it admittedly misstated the definition of disability, requiring that Judge be “expected never again to be able to do any work at all for wage or profit.”  Judge administratively appealed, and on April 2011, MetLife upheld its denial, this time beginning its denial letter with the correct plan definition of disability.  The April denial letter analyzed the medical documentation in the record, concluding that it did not establish the plan definition of disability.

The district court, and ultimately the Sixth Circuit, upheld MetLife’s determination.  That said, MetLife’s explanation and application of the definition of disability stuck in the craw of one of the Sixth Circuit judges to the point she would have remanded.  Why?

Even though the final denial letter included the right definition, the dissent said that MetLife’s analysis showed that it still applied the wrong definition stated in the initial letter.  While the majority concluded that the language used in MetLife’s analysis was “shorthand jargon” consistent with the plan definition, the dissent felt that the language of the analysis sounded too much like the initial denial letter.  The dissent even went back through MetLife’s internal processing notes, and asserted that those contemporaneous notes showed that the wrong definition had effectively been applied, even though the right definition appeared in the final denial letter.

So what are some of the takeaways from this case?

  • If there’s an initial mix-up, avoid recycling language in subsequent determinations.  A significant amount of the dissent’s concern focused on the fact that big chunks of language were lifted from the initial denial letter and pasted into the new letter.  While this normally wouldn’t be much of a concern, given the mix-up with the definition, a cleaner break from the initial letter – with minimal to no recycling of language – might have reduced the dissent’s concern that the initial mix-up didn’t impact the final denial letter.
  • Don’t forget the other information in the record that reflects the plan administrator’s analysis.  The dissent also focused on MetLife’s internal processing notes, which the dissent claimed showed that the wrong definition was being applied throughout, regardless of what ultimately showed up in the final denial letter.  This case serves as a reminder that everything in the record is available on judicial review, so all documents reflecting how a claim was administered – even internal processing notes – need to reflect an understanding of the plan terms and definitions being applied.

QDIA Elections and Investments

By James Bristol on Posted in ERISA Litigation, Fiduciary Duties, Tax-Qualified Retirement Plans

Bidwell v. University Medical Center

The Sixth Circuit Court of Appeals has issued ruling that has enhanced protections for fiduciaries under the Qualified Default Investment Alternative (QDIA) regulations. The plan in this case had historically used a stable value fund as the “default” investment for non-electing participants. Although stable value funds are designed to protect principal, investment returns are modest. Following the issuance of the QDIA rules, the plan administrator decided to abandon the stable value fund as its default investment and instead rely on a fund that qualified as a QDIA in order to provide a more prudent long-term investment strategy. The plan administrator then transferred all “default” investments from the stable value fund into the QDIA.

The question in this case was which participants in the stable value fund were “default” investors and which had affirmatively elected that fund. The QDIA regulations protect an administrator from fiduciary liability but only with respect to participants who do not make an affirmative investment election. The third-party administrator for the plan could not distinguish between affirmative and default elections in the fund. Essentially all participants in the stable value fund were transferred to the new QDIA. Unfortunately, the QDIA fund experienced an investment loss after the change while the stable value fund retained its value for the same period.

The plaintiffs claimed the plan administrator was not entitled to the protection of the QDIA safe harbor because they had affirmatively elected the stable value fund. The employer had attempted to cure the situation by notifying all participants of the change in the default investment fund and provided a 30-day window for participants to elect to stay in stable value. The participants who brought the suit claimed they did not receive the 30 day notice and the employer had no evidence of receipt. Nonetheless, the court ruled that the QDIA regulations provided fiduciary protection to the plan administrator. Even if the plaintiffs had initially elected the stable value fund, the court ruled that the failure to respond to the 30-day notice changed their status to non-electing.

The result seems friendly to employers and plan sponsors. It seemed to help the administrator that the plaintiffs first brought a claim for benefits under the plan’s administrative claims procedures. The court gave significant deference to the administrator’s finding that the participants had received the notice.

It is often very difficult to determine which participants have affirmatively elected certain investments and which have not. Many participants will initially direct investments but seldom if ever change that initial investment strategy. This decision offers some good news when fiduciaries determine it is prudent to make investment changes on behalf of participants after a long period of inactivity. However, it would also seem prudent to employ a more robust notification procedure that tracks delivery to participants and responses.

Transitional Reinsurance Fee Means More Money Out of Employers’ Pockets

By Susan K. Bilbro on Posted in Affordable Care Act, Health and Welfare Plans

Last week, we discussed the PCORI fee. This week, we wanted to update you on yet another fee – the “transitional reinsurance program fee” – that could represent a significant cost to employers, to the tune of an estimated $63 per covered life in the first year, beginning in 2014.

On December 7, 2012, the Department of Health and Human Services (HHS) issued proposed regulations regarding the “transitional reinsurance program” under the Affordable Care Act. This program was established to help stabilize premiums in the individual health insurance market from 2014 to 2016. Essentially, it is designed to provide funding to insurance companies, to discourage them from increasing their premiums to cover the risk of insuring new high-risk enrollees in the individual market.

The total amount to be collected over three years is $25 billion, with $20 billion earmarked for the reinsurance program (i.e., to be distributed to insurers) and $5 billion to the federal government. This amount will be collected from health insurance issuers and from third party administrators on behalf of self-insured plans (or paid directly by a self-funded, self-administered plan), and is heavily front-loaded, so that the fee will be the highest in 2014 and reduced in the next two years. Although the proposed regulations do not provide the amount of the fee, the preamble to the regulations estimates it to be $63 per covered life in 2014.

HHS will collect the reinsurance fees on an annual basis. By November 15 of each benefit year 2014, 2015, or 2016, the contributing entity (the health insurance issuer or third party administrator) is required to submit to HHS the number of covered lives subject to the fee for that calendar year, and then, by the later of December 15 or 15 days after the submission, HHS will notify the contributing entity of the total fee. The contributing entity then must remit its payment to HHS within 30 days of receiving the bill with the amount due.  Accordingly, the first payment of the transitional reinsurance fee generally will be due on or before January 14, 2015.

Finally, although it may be cold comfort to employers facing yet another fee in 2014, in a “Frequently Asked Questions” document issued in conjunction with the proposed regulations, the IRS confirmed that these fees are tax deductible by plan sponsors as ordinary and necessary business expenses.

First PCORI Fees Due July 31, 2013 for Most Health Plans

By M. Sean Sullivan on Posted in Affordable Care Act, Health and Welfare Plans

As part of healthcare reform, the Affordable Care Act established a private, nonprofit corporation called the Patient-Centered Outcomes Research Institute (“PCORI”).  PCORI is intended to assist patients, clinicians, purchasers and policy-makers in making informed health decisions by conducting and publicizing comparative clinical research findings.  PCORI’s website can be viewed at www.pcori.org.

Of course, nothing is free, and PCORI is no exception to this rule.  To fund the corporation, Congress established the Patient-Centered Outcomes Research Trust Fund.  This trust fund is financed, in part, by fees to be paid by issuers of health insurance policies and sponsors of self-insured health plans.   The first of those fees will be due July 31, 2013.

The U.S. Department of the Treasury recently published final regulations implementing the PCORI fees.  Important takeways for plan sponsors include the following:

  • The fee applies to medical plans, prescription drug plans, self-insured dental or vision plans (if provided without a separate election or premium charge), health reimbursement arrangements and retiree-only health plans
  • The fee applies to all plan years ending on or after October 1, 2012, and before October 1, 2019
  • Health insurance issuers and plan sponsors of self-funded plans must report and pay the PCORI fee for a plan year no later than July 31 of the year following the last year of the plan year.  The PCORI fee is reported and paid on Form 720, “Quarterly Federal Excise Tax Return”
  • The fee is $2 ($1 in the case of plan years ending before October 1, 2013) multiplied by the average number of lives covered under the plan.  For plan years ending on or after October 1, 2014, the fee is increased based on increases in the per capita amount of national healthcare expenditures
  • For the first year the fee is in effect, a plan sponsor may use any reasonable method to determine the average number of covered lives.  Thereafter, the plan sponsor must use one of three methods:  (i) the actual count method, (ii) the snapshot method or (iii) the Form 5500 method
  • COBRA coverage must be taken into account in determining the fee
  • Two or more arrangements established or maintained by the same plan sponsor that provide health coverage (other than an insurance policy) that that have the same plan year may be treated as a single self-insured plan in determining the fee.  Note, however, that an employer that sponsors a fully insured health plan paired with a self-funded health reimbursement arrangement generally will be required to pay the fee twice on the same lives

Sequestration May Siphon $600 Million from IRS; Will Healthcare Reform Enforcement Be Affected?

By Shannon Goff Kukulka on Posted in Affordable Care Act, Enforcement, Federal Tax, IRS

As we are all painfully aware by now, due to the failure of Congress and President Obama to reach the budget-cutting goals they set back in 2011 when the debt ceiling was raised, a budget sequester went into effect on March 1, 2013.

An Office of Management and Budget report to Congress has estimated that budget sequestration will take nearly $600 million from four major functions of the Internal Revenue Service in fiscal year 2013 (among its other unprecedented disruptions), including $436 million from IRS enforcement efforts.

While the IRS has offered assurances that tax refunds should not be delayed because it will wait to furlough workers until summer, other IRS services may be affected, such as staffing of IRS call centers and taxpayer assistance centers. The cuts would likely also delay IRS responses to taxpayer letters and reduce the number of tax returns reviewed, impacting the agency’s ability to detect and prevent fraud and resulting in significant lost revenue.

In addition to a variety of other cuts at the IRS, sequestration also will reduce awards to whistleblowers by 8.7%, according to a notice from the IRS Whistleblower Office.  (One wonders if a constitutionality test of this stance is inevitable.)

The IRS may have warned about agency cutbacks due to sequestration, but in the end, the more than 40 tax changes stemming from the Affordable Care Act appear to be moving forward, on target and on schedule.  The recent silence of IRS and Treasury officials on this point would seem to indicate that sequestration will not impede or even slow ACA implementation.

On March 6, the House of Representatives passed a budget bill that would set federal spending at fiscal year 2012 levels for the Treasury Department, IRS and other government agencies through September, while fully funding the Department of Defense for a year. Later this week, Senate Democratic leaders are expected to consider their own short-term budget.

Necessary Shareholder Approval of Certain Employee Compensation

By Jennifer Faucett on Posted in Compensation Planning, Equity Incentives, Executive Compensation

With the 2013 Proxy Season almost upon us, “shareholder approval” is on the minds of many at both public and private companies.  Certain components of a company’s executive compensation program are not immune to shareholder approval requirements.  This includes “qualified performance-based compensation” under Code Section 162(m) and incentive stock options under Code Section 422.

Qualified Performance-Based Compensation

Shareholder approval of the material terms of applicable performance goals is necessary for certain compensation paid by a publicly-traded company to be considered “qualified performance-based compensation” under Code Section 162(m).  The material terms that must be approved by shareholders include:

  • The employees eligible to receive qualified performance-based compensation;
  • A description of the business criteria on which the performance goal is based (but not specific targets); and
  • Either the maximum amount of compensation that can be paid in a year to any employee as qualified performance-based compensation, or the formula used to calculate the amount of qualified performance-based compensation to be paid if the performance goals are met.

A majority of shareholder votes cast on the issue  is needed for approval (including abstentions, if abstentions are counted under applicable state law).  Shareholder approval is necessary for any changes to the material terms listed above.  Shareholder approval is also necessary every five years if the compensation committee can change the targets under a performance goal, even if there are no changes to the material terms of the performance goals.

Incentive Stock Options

Incentive stock options must be granted pursuant to a plan that has been approved by shareholders.  The plan must be resubmitted for shareholder approval if there is a change to:

  • The maximum aggregate number of shares that may be issued under the plan;
  • The employees (or class of employees) who are eligible to receive incentive stock options under the plan;
  • The corporation granting the options; or
  • The stock available for issuance under the plan.

Unless applicable state law provides otherwise, a majority of votes cast at a duly called shareholder meeting where a majority of all shareholders is present and voting (either in person or by proxy) is needed for shareholder approval.

 

How Does an Employer Apply Both a Child Support Order and Qualified Medical Child Support Order Against One Employee?

By Susan K. Bilbro on Posted in Fringe Benefits, Withholding

To determine whether or not it can apply a qualified medical child support order (QMCSO) issued against an employee when that employee is also subject to an outstanding child support order, a company will need to look to both federal and state law and pull out its calculator.

According to guidance from the Department of Labor and the Department of Health & Human Services, the total amount to be withheld for both child support and medical support – the amount of cash child support plus the amount of health insurance premium or an amount ordered for medical support – must fall within the Consumer Credit Protection Act (“CCPA”) limits.  Thus, a company should calculate the total maximum amount that can be withheld for both cash and medical support, and then determine whether both obligations can be met out of this total amount.  If the total amount to be withheld for both child and medical support purposes exceeds the amount allowed after applying the limits, the company must follow certain prioritization rules under the applicable state law to determine if cash or medical support should be paid first.

The CCPA limits are as follows:

  • 50% – supports a second family, with no arrearage or less than 12 weeks in arrears
  • 55% – supports a second family, and more than 12 weeks in arrears
  • 60% – does not support a second family, with no arrearage or less than 12 weeks in arrears
  • 65% – does not support a second family, and is more than 12 weeks in arrears

For purposes of the CCPA limits, a “second family” means there is a spouse and/or child for whom the employee has responsibility. “In arrears” means there is past due, unpaid support owed by the noncustodial parent.  Note that some states have exceptions to the federal CCPA limits that place a cap on the maximum amount of an employee’s earnings that can be withheld to satisfy support orders, so it is important to check the state laws regarding withholding when making support order calculations for an employee.

The two basic steps to determine the maximum amount that can be withheld under the CCPA limits are:

1. Determine the employee’s aggregate disposable weekly earnings (“ADWE”).  Under CCPA, an employee’s ADWE is the employee’s gross pay less any mandatory deductions.  Each state has its own rules and regulations regarding what is considered a “mandatory deduction,” so the law of the state where the employee works determines which deductions are mandatory.  It is important to note that ADWE does not necessarily mean the same thing as net pay, because there may be other voluntary deductions taken out of an employee’s pay to determine net pay.  There are also additional calculations to use when an employee has pre-tax deductions and/or imputed income.  Pre-tax deductions, such as 401(k) plan contributions, must be added back in to the employee’s taxable wages before determining the obligated employee’s ADWE.  In contrast, imputed income, for things such as personal use of a company car, or non-deductible moving expense reimbursements, must be subtracted from the employee’s gross pay before determining the employee’s ADWE.

2. Multiply the ADWE by the CCPA limit (or applicable state maximum limit) in order to determine the maximum amount that may be withheld.  This maximum amount is generally referred to as the “allowable disposable income.”  If the “allowable disposable income” is enough to satisfy the employee’s cash child support obligations and his medical support obligations, both should be paid up to that limit.  However, if the total amount to be withheld for both child and medical support purposes exceeds the amount allowed after applying the limits, the company must follow the prioritization rules under state law to determine if cash or medical support should be paid first.  If the cash child support order must be paid first, and the remaining balance cannot satisfy the medical child support order, the company may need to respond to the issuing agency and inform it that State or Federal withholding limitations and/or prioritization prevent the withholding from the employee’s income of the amount required to obtain coverage under the terms of the plan, as permitted on item 5 of the Employer’s Response on the National Medical Support Notice.

 

Give Your ERISA Fidelity Bond a Checkup

By M. Sean Sullivan on Posted in Tax-Qualified Retirement Plans

ERISA generally requires that persons handling retirement plan funds be bonded to protect the plan from loss due to fraud or dishonesty.  Because this is one of the most common areas of noncompliance, it is a good idea to give your fidelity bonds a checkup every few years.  A good place to start is by asking the following questions:

  • Is a fidelity bond required for this plan?  Although fidelity bonds are mandated for nearly every ERISA retirement plan, there are a few narrow exceptions.  In particular, no fidelity bond is required for “unfunded” plans (those that pay benefits only from the general assets of a union or employer).  Another exception is a fiduciary that is a bank or insurance company and which, among other criteria, complies with its own regulatory bonding requirements.
  • Does our fidelity bond provide enough coverage?  Each plan official must be bonded in an amount equal to the lesser of (i) 10% of the amount of funds in the plan (subject to a $1,000 minimum) and (ii) $500,000. This $500,000 limit is increased to $1,000,000 for plans that hold employer securities.  Of course, bonds can be higher than these minimum amounts.
  • Does the fidelity bond protect the correct entity?  The ERISA retirement plan should be the named insured of the bond.  A common problem is fidelity bonds that erroneously name the plan sponsor as the insured.
  • Are the correct persons covered by the bond?  Persons who should be covered by the bond are those who handle funds or other property of the insured plan.  Some fidelity bonds are structured very narrowly to cover only limited individuals, while other bonds are much broader and cover both the plan sponsor’s employees and third-party vendors.
  • Is the issuer of the fidelity bond an approved company?  Only sureties and reinsurers named on the Department of Treasury’s Listing of Approved Sureties, Department Circular 570 (available at http://www.fms.treas.gov/c570/c570.html), may issue adequate fidelity bonds.  In addition, neither the plan nor a party-in-interest with respect to the plan may have any control or significant financial interest in the surety or reinsurer.
  • Are all of our ERISA retirement plans covered?  For companies that sponsor more than one ERISA retirement plan, plan officials must have fidelity bonds for each plan.  Fortunately, a bond can insure more than one plan as long as a claim by one plan does not reduce the amount of coverage available to other plans insured on the bond.  Fidelity bonds can use an “omnibus clause” to name multiple plans as insured.  For example, an omnibus clause might name as insured “all employee benefit plans sponsored by ABC company.”

What Does Lance Armstrong Have to Do with My Postman’s Pension?

By Shannon Goff Kukulka on Posted in Compensation Planning, Health and Welfare Plans, Pension Plans, Tax-Qualified Retirement Plans

According to reports, disgraced cyclist Lance Armstrong is in discussions with the United States Postal Service to return some of the sponsorship monies earned during his tenure on the team.  It remains unclear how much Armstrong, who in recent months was stripped of his seven Tour de France titles and banned from cycling for his role in team-organized doping, might return or even how much the USPS paid him and his teammates during its sponsorship.  During the team’s peak years of 2001 to 2004, however, the USPS likely spent at least $30 million to underwrite the team.

Whatever the amounts that Armstrong may ultimately return, they pale in comparison with the $15.9 billion loss suffered by the USPS in its last fiscal year and the estimated $42 million it loses per day.  Part of the problem is that, in 2006, Congress passed legislation requiring the USPS – unlike any other government agency or corporation – to pre-pay its future pension and retiree medical obligations to the tune of approximately $5.5 billion per year.  So, while some actuaries predict the demise of the USPS by the end of 2013, it is worth noting that at least the USPS pension funds are currently overfunded by around $11 billion.

UPDATE (4/24/13):  On April 23, 2013, the Department of Justice formally filed suit against Lance Armstrong and his company Tailwind Sports for millions of dollars that the U.S.P.S. spent to sponsor the cycling team.  The government is seeking to recover triple the amount of the sponsorship funds under the False Claims Act, which could bring damages to a total of more than $100 million.