DOL Expects to Focus on Health Care and Fiduciary Issues in Coming Months

Co-authored Christopher K. Buch.

On January 20, the United States Department of Labor (DOL) made its semiannual regulatory agenda and regulatory plan statement available on its website. The regulatory agenda is the DOL’s list of regulations it expects to have under active consideration for promulgation, proposal, or review during the next six to 12 months. The Employee Benefits Security Administration (EBSA) is the DOL agency that is responsible for administering and enforcing much of the Employee Retirement Income Security Act of 1974, as amended (ERISA).

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DOL Issues Final Service Provider Disclosures Regulation

Co-authored Christopher K. Buch.

On February 2, the Employee Benefits Security Administration (EBSA) of the United States Department of Labor (DOL) issued its final rule under the Employee Retirement Income Security Act of 1974, as amended (ERISA) Section 408(b)(2) relating to service provider disclosures.

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Victory for Board of Directors in Executive Pay Lawsuit

Plaintiffs’ lawyers have recently attempted to convert a negative shareholder advisory “say on pay” vote under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) into a breach of fiduciary duty where the board of directors implements a compensation program and awards thereunder. A U.S. district court in Oregon has rejected such a claim on procedural grounds, applying Delaware corporate law in affirming the business judgment presumption for the directors’ vote. Plumbers Local No. 137 Pension Fund v. Davis.

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HHS Issues Final Regulations Addressing Electronic Funds Transfers by Health Plans

Co-authored by Evan A. Belosa.

On January 10, the Department of Health and Human Services (HHS) issued interim final regulations regarding the standards applicable to electronic funds transfers (EFTs) made by health plans to health care providers. The regulations were prompted by Section 1104(b)(2)(A) of the Patient Protection and Affordance Care Act, which amended the earlier Health Insurance Portability and Accountability Act (HIPAA) by adding EFTs to the list of transactions for which HHS must adopt a standard under HIPAA. The goal of the new regulation is to make EFTs a more efficient method for the receipt of health claim payments. Comments regarding the regulations are due before March 12. Compliance will be required effective January 1, 2014.

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Retirement Plan Fee Disclosure Rules Expected to Be Effective April 1, 2012

Despite a delay in the issuance of the final rule, the Department of Labor (DOL) expects service provider fee disclosure obligations to go into effect April 1. The final rule, which is expected to be very similar to the interim final rule issued in July, 2010, will likely require retirement plan service provider to disclose to plan fiduciaries certain information about the fees they collect from the plan. While certain industry professionals have been requesting a delay in the effective date, the DOL has not yet indicated that such a delay will be forthcoming.

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IRS Updates Guidance on Reporting Employer-Sponsored Healthcare Coverage

Co-authored by Michael R. Durnwald.

In the December 16, 2011, edition of Corporate and Financial Weekly Digest, we reported on Internal Revenue Service guidance regarding informational reporting to employees, via form W-2, of the cost of their employer-sponsored health coverage.

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Begin Preparing for W-2 Reporting of Employer-Sponsored Health Coverage

Co-authored by Michael R. Durnwald

One of the many changes brought by health care reform requires employers to report the value of employer-sponsored health coverage on employees’ W-2s.

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New York Employers Must Comply with the Annual Notice Requirements of the Wage Theft Prevention Act by February 1

Co-authored by Ann N. Kim and Hannah C. Amoah.

The New York Wage Theft Prevention Act (WTPA), effective on April 9, imposes more stringent pay notice and record keeping requirements on all employers.

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DOL Warns on Indemnification of Brokers for IRA Trading Losses

Co-authored by Kevin M. Foley.

In Advisory Opinion 2011-09A, the U.S. Department of Labor (DOL) indicated that a personal indemnification of a broker by the holder of an individual retirement account (IRA), for losses in excess of the value of the assets in a futures trading account established for the IRA, raises prohibited transaction issues under section 4975 of the Internal Revenue Code of 1986 (the Code). Further, the DOL said that Prohibited Transaction Class Exemption 80-26 (PTE 80-26) does not provide an exemption for such a prohibited transaction. Previously, the DOL has advised practitioners informally of this position, but the Advisory Opinion formalizes it.

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IRS Reverses Position and Timing of Bonus Deductions

In Revenue Ruling 2011-29 (the Ruling), the Internal Revenue Service (IRS) reversed a long-held position to now permit accrual-basis employers to accrue employee bonuses for federal income tax deduction purposes, even though the amount to be paid to specific employees is not known at the end of the year. Previously, the IRS had held that the deduction could not be claimed until both the identity of the bonus recipient and the specific amount of that bonus are both known.

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DOL Finalizes Investment Advice Guidance for 401(k) Type Plans

Co-authored by Ann M. Kim

The Department of Labor (the DOL) recently issued guidance that clarifies how advisers can provide investment advice to retirement plan participants in a manner that protects both the participant and the provider. The final rule, released by the DOL on October 24, allows investment advisers to provide individualized investment advice to participants in account balance plans, (401(k) plans, profit-sharing plans, and IRAs) if either (i) the advice is provided pursuant to a computer model certified as unbiased and as applying generally accepted investment theories, or (ii) the adviser is compensated on a “level-fee” basis (i.e., fees do not vary based on investments selected by participants).

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IRS Establishes a Voluntary Classification Settlement Program for Employers Who Have Misclassified Workers

On September 21, the Internal Revenue Service announced the launch of the Voluntary Classification Settlement Program (VCSP), a new voluntary and low cost program to allow employers to reclassify as employees for future tax periods workers who had been misclassified as independent contractors.

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DOL to Revise Definition of Benefit Plan "Fiduciary"

Co-authored by Hannah C. Amoah

On September 19, the Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor (DOL) announced its intention to revise and re-propose amendments to its definition of “fiduciary.” The new proposal is expected to be issued in early 2012.

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Failure to Provide COBRA Notice Tolls Statute of Limitations

Co-authored by Christopher Buch

Under the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA), an employer that sponsors a group health plan is generally required to provide an employee with a right to continue healthcare coverage after the employee’s termination of employment. The employer (or its healthcare administrator) must also notify terminated employees of their COBRA rights. This notice must be given within 44 days from the date of the employee’s termination of employment. Although COBRA does not provide a limitations period for improper-notice claims (i.e., the statute of limitations), courts “borrow” the most analogous limitations period from the forum state. On August 22, the United States Court of Appeals for the Eleventh Circuit ruled on the timing of that notice and the statute of limitations for improper-notice claims.

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Details Released Regarding New "Summary of Benefits and Coverage" For Group Health Plans

On August 22, federal government agencies (the Department of Health and Human Services, Department of Labor, and U.S. Treasury Department) published proposed regulations concerning the new mandated “summary of benefits and coverage” (SBC). Beginning March 23, 2012, group health plans (and health insurance issuers) must provide plan participants and beneficiaries with plan information in the form of the new SBC.

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HHS Issues Proposed Rule for Employer Participation in State Heath Care Exchanges

Co-authored by: Evan Belosa

Pursuant to the Patient Protection and Affordable Care Act, beginning in 2014 individuals and small businesses will have access to the purchase of private health insurance through insurance exchanges. States are required to set up health insurance exchange markets, both for small businesses (the Small Business Health Option Program, or SHOP) and for individuals, or a single exchange that combines both. Forty-nine states have applied for grants to help plan and operate exchanges.

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Pending Legislation Could Affect Employee Benefit Plans

Co-authored by Michael R. Durnwald

Since the 112th Congress commenced at the beginning of this year, multiple bills have been introduced that, if enacted, would affect employee benefit plans and executive compensation. Some of this proposed legislation, which is currently in committee, is highlighted below.

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DOL Sets Coordinated Effective Dates for Service Provider, Participant Fee Disclosures

Co-authored by Greg Brown and Ann Kim.

On July 19, the Employee Benefits Security Administration of the U.S. Department of Labor issued a final rule (the Final Rule) on the applicability dates of two related disclosure requirements under Employee Retirement Income Security Act:

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IRS Proposes Regulations Clarifying 162(m) Compensation Deduction Rules

Co-authored by Michael R. Durnwald

The Internal Revenue Service recently issued proposed changes to the compensation deduction rules under Section 162(m) of the federal tax code. Section 162(m) generally limits a public company's compensation deduction with respect to its top executives to $1 million per executive per tax year. If adopted, the proposed changes would clarify two details related to certain exceptions to the Section 162(m) deduction limit discussed below.

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Agencies Clarify Requirements for Health Plan Claims Procedures

Co-authored by Ann M. Kim

The Patient Protection and Affordable Care Act (PPACA) mandates certain requirements for claims and appeals procedures that must be followed by all health insurers and group health plans, including employer-provided plans that are subject to the Employee Retirement Income Security Act (ERISA). PPACA was originally enacted in 2010, and initially required compliance only with ERISA's claims and appeals rules. However, through prior guidance issued jointly by the Departments of Treasury, Labor and Health and Human Services (the Departments), the claims and appeals rules have been expanded. In guidance issued on June 22 (the Guidance), the Departments have clarified the new claims and appeals requirements.

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Department of Labor Extends Specified Applicability Dates

Co-authored by Evan A. Belosa

The U.S. Department of Labor's Employee Benefit Security Administration (EBSA) published a notice in the Federal Register on June 1 that proposed to extend the applicability dates for fiduciary-level fee disclosure regulations (29 CFR 2550.408(b)-2(c)) and related participant-level disclosures ( 29 CFR 2550.404a-5) under the Employee Retirement Income Security Act to January 1, 2012, and April 30, 2012, respectively.

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June 30 Deadline to Amend Cafeteria Plans

The Patient Protection and Affordable Care Act (PPACA) cuts back on which drugs may be reimbursed from flexible spending accounts, health reimbursement arrangements, health savings accounts and Archer medical savings accounts. Such plans are prohibited from reimbursing for medicine or drug expenses incurred after December 31, 2010, unless the item requires a prescription, the item is available over-the-counter but the individual obtained a prescription, or the drug is insulin.

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Supreme Court Rules Summary Plan Descriptions Are Not "Terms" Under ERISA

Co-authored by Christopher K. Buch

On May 16, the U.S. Supreme Court issued its long-awaited opinion in the case of Cigna Corp. v. Amara. This decision will have a substantial impact on plan sponsors, both with respect to how a sponsor is to design its plan and disclose terms in its summary plan description, as well as what relief may be available for plan participants and beneficiaries for plan violations.

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DOL May Modernize Electronic Disclosure Rules

Co-authored by Ann M. Kim

The U.S. Department of Labor (DOL) recently indicated that it may update the rules governing electronic disclosure of benefit plan information (e.g., summary plan descriptions, benefit statements, administrative forms, annual notices, etc.). DOL rules generally require disclosure procedures that are reasonably intended to ensure actual receipt of the relevant documents by plan participants and beneficiaries. In 2002, the DOL adopted a safe harbor rule that allowed for electronic disclosure—usually through a website or email. If the safe harbor rule is followed, the plan sponsor/administrator will be deemed to have satisfied the disclosure requirements.

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DOL Proposes Rule Defining "Fiduciaries" of Employee Benefit Plans

Co-authored by Hannah C. Amoah

The Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor has proposed a rule to define more broadly the term “fiduciary.” The proposed rule would amend 29 CFR 2510.3-21(c), which was issued in 1975 following the enactment of the Employee Retirement Income Security Act (ERISA), and defines when a person who renders investment advice becomes a fiduciary under ERISA. The amendment is based on findings that indicate that the 1975 rule’s approach to fiduciary status may inappropriately limit its ability to protect plans, participants and beneficiaries in the current marketplace.

The proposed amendment takes account of changes in the expectations of plan officials and participants who receive investment advice, and details added circumstances where providing investment advice is subject to ERISA’s fiduciary duties. It also takes account of industry changes, including, among other things, the variety of complex fee practices currently in use and the conflicts of interest that may arise from these practices. If enacted, the amendment could result in an increased number of service providers being classified as fiduciaries of the plans to which they provide services. Classification as a fiduciary could result in higher costs of doing business due to increased exposure to liability.

“We believe that this proposal more closely reflects the statutory language of ERISA and the realities of the current investment marketplace, and therefore will ensure those who provide investment advice are held accountable as fiduciaries under the law,” said Phyllis Borzi, Assistant Secretary of Labor for EBSA.

Click here for the DOL release.

Second Circuit to Consider Employer's Discretion in Connection with LTIP

Co-authored by Aimee S. Lin

The U.S. Court of Appeals for the Second Circuit is considering the district court’s decision in Fishoff v. Coty Inc., which held that the Coty Board’s broad discretion under its Long Term Incentive Compensation Plan (LTIP) did not include attributing two different fair market values to its stock for the same day.

Michael Fishoff, the former Chief Financial Officer of Coty Inc., a privately held corporation, was a participant in the company’s LTIP. Upon exercise, the LTIP entitles a participant to a cash payment in an amount equal to the difference between the fair market value of Coty shares underlying the participant’s options and the exercise price.

On November 30, 2008, when Mr. Fishoff exercised his options, the most recent valuation of Coty’s stock, in September 2008, had been $58 per share.

On December 5, 2008, the Coty Board met and decided that in light of deteriorating market conditions, the next valuation of its options needed to be conducted as soon as possible. An independent investment bank valued the Coty shares at $31 per share as of November 30, 2008. On December 11, 2008, Coty terminated Mr. Fishoff’s employment without cause. Coty took the position that the $31 value applied to Mr. Fishoff’s option shares even though the shares had been valued at $58 when he exercised. The difference between the $58 valuation and the $31 valuation of his 200,000 options was $7,612,000.

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DOL Issues 401(k) Plan Participant Fee Disclosure Rules

Co-authored by Gary W. Howell and Michael R. Durnwald

On October 20, the U.S. Department of Labor (DOL) issued final regulations that will require certain Employee Retirement Income Security Act retirement plan sponsors to disclose to plan participants information about plan fees and expenses, as well as other information about available investment alternatives. The regulations go into effect for plan years beginning on or after November 1, 2011.

Compliance with the regulations’ disclosure requirements will be required for plan sponsors of individual account retirement plans which allow for participant-directed investment of plan accounts, a typical feature for 401(k) and profit-sharing plans. Failure by a plan sponsor to provide the information required by the regulations will allow a plan participant or beneficiary to allege a breach of fiduciary duty—possibly making the plan sponsor liable for losses incurred by plan participants.

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Employers Permitted to Allow Conversion of Retirement Plan Accounts to In-Plan Roth Accounts

Co-authored by Ann M. Kim

Employers that sponsor defined contribution retirement plans, such as 401(k), 403(b) plans and governmental 457(b) plans, can now allow certain participants to convert their retirement plan accounts into “Roth” accounts within the plan, through an “in-plan Roth conversion.” In-plan Roth conversions are permitted under the Small Business Jobs Act of 2010, which was signed by President Obama on September 27. The chief tax advantage of a Roth account is that, when distributions are made from it, they are entirely tax-free, in the same manner as a Roth IRA.

An in-plan Roth conversion is an in-plan rollover of any or all of a plan participant’s account (other than amounts made as Roth contributions to the plan) to a designated Roth account in the plan. The plan must permit Roth contributions and be amended to permit the in-plan Roth conversions. In addition, the participant must be at least age 59½ to make the in-plan Roth conversion. If the plan does not now permit in-service distributions at age 59½, it must be amended to do so, and the amendment can limit such distributions to amounts used in an in-plan Roth conversion.

Prior to this legislation, a participant who was eligible for an in-service distribution could achieve the same result by making a direct transfer to a Roth IRA, but this feature allows the money to stay in the plan, where it can remain invested in the plan’s investment options.

A participant who elects an in-plan Roth conversion has taxable income to the same extent as if he or she simply took a distribution from the plan. Participants who elect a Roth conversion during 2010 recognize the income evenly in 2011 and 2012, unless an election is made to recognize it in 2010. After 2010, the participant recognizes taxable income for the year of the in-plan Roth conversion. There is no income limitation above which one cannot make an in-plan Roth conversion, either in 2010 or in subsequent years.

Employers who would like to offer the in-plan Roth conversion feature should begin the process as soon as possible, so that participants who wish to can take advantage of the spreading of income from the conversion over two years. The explanation of these provisions issued by the Joint Committee on Taxation states that it is intended that employers can offer the in-house Roth conversion in 2010, and that the IRS will provide a “remedial amendment period” sufficient for later amendment of plans to reflect these changes.

The Small Business Jobs Act of 2010 can be found here.
The Joint Committee on Taxation explanation of the Small Business Jobs Act of 2010 can be found here.

New Rules Published for External Claims Appeals Procedures

The Internal Revenue Service, Department of Labor and Department of Health and Human Services published new rules in the Federal Register on August 26 regarding the new requirements for external claims appeals procedures for group health plans. These rules, under section 2719 of the Public Health Service Act, were enacted as part of Health Care Reform. The rules apply to group health plans which are NOT considered “grandfathered” under Health Care Reform.

The rules are contained in Employee Retirement Income Security Act (ERISA) Technical Release No. 2010-01. They are in the form of an “interim enforcement safe harbor,” meaning that compliance with the safe harbor will protect the plan (and insurer) from violation of the statute. The safe harbor rules apply for plan years starting after September 23 until superseded by future guidance (which is to be published by July 1, 2011).

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Seventh Circuit Permits Retroactive Correction to Benefit Plan

The U.S. Court of Appeals for the Seventh Circuit has recently allowed Verizon Communications, Inc. to correct a mistake in the drafting of its cash balance plan that could save Verizon over $1 billion in pension benefits.

The decision is one of first impression in the Seventh Circuit. The decision is remarkable because it is reported to conflict with the case law in a number of the other federal circuits dealing with a plan sponsor’s ability to unilaterally correct retroactively a drafting error (a so-called “scrivener’s error”) in qualified retirement plan documents. The decision is also contrary to the IRS’s consistently stated opinion that employers may not unilaterally correct retroactively drafting errors in plan documents.

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SEC Proposes New Marketing Rules for Target Date Retirement Funds

Co-authored by Michael R. Durnwald

The Securities and Exchange Commission has proposed amendments to multiple rules under the Securities Act of 1933 and the Investment Company Act of 1940 regarding the marketing of target date retirement funds. In general, a target date retirement fund is a fund designed to hold a diversified portfolio of assets that is automatically rebalanced among asset classes over time without the need for the investor to rebalance the assets.

Since their inception during the 1990s, target date retirement funds have exploded in popularity and are frequently an investment option offered under 401(k) retirement plans. This increased popularity, combined with market losses in 2008, has caused federal regulatory agencies to examine target date retirement funds more closely. For example, the Department of Labor and the SEC held a joint hearing in June 2009 regarding target date retirement funds. As part of its scrutiny, the SEC identified concerns with how such funds are marketed to investors and learned that investors often misunderstand how such funds operate. Consequently, the SEC has proposed rule changes to help alleviate misunderstandings and prevent misleading marketing materials.

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Interim Final Rules Impose New Requirements for Internal Claims/Appeals and External Review

Internal Claims/Appeals

Effective for plan years beginning on or after September 23 (January 1, 2011, for calendar year plans and policies), non-grandfathered group health plans (including non-Employee Retirement Income Security Act plans such as governmental and church plans) and health insurance issuers will be required under the Patient Protection and Affordable Care Act (PPACA) to comply with federal rules for administering health plan claims and appeals. ERISA plans already are required to adhere to existing Department of Labor (DOL) claim and appeal regulations, but interim final regulations issued jointly by the Department of the Treasury, the DOL and the Department of Health and Human Services (75 Fed. Reg. 43330) extend those requirements to non-ERISA group health plans and health insurance policies and also impose new requirements for all group health plans and insurers.

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DOL Adopts Amendment to Class Exemption for QPAMs

On July 6, the Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor (DOL) adopted an amendment to Prohibited Transaction Exemption (PTE) 84-14 that permits qualified professional asset managers (QPAMs) to act as QPAMs for their own employee benefit plans, or the plans of an affiliate, if certain additional conditions are met. PTE 84-14 is a class exemption that allows parties related to employee benefit plans to engage in transactions otherwise prohibited by the Employee Retirement Income Security Act of 1974, as amended, if the assets are managed by a QPAM and if certain other conditions are met. PTE 84-14 requires a QPAM managing the assets of a plan it sponsors to adopt policies and procedures designed to ensure compliance with its conditions. The exemption also requires that an independent auditor conduct an annual exemption audit, which is designed to ensure that the conditions of the class exemption have been met. The amendment to PTE 84-14 affects plan participants, beneficiaries, sponsors and persons engaging in the transactions described above. The amendment was published in the July 6 edition of the Federal Register and is effective November 3.

For the DOL release, click here.

DOL Issues New Rules Regarding Service Provider Fee Disclosures

Co-authored by Andrew Bridgman and Daniel Lange.

On July 16, the U.S. Department of Labor (DOL) issued interim final regulations that will require certain Employee Retirement Income Security Act (ERISA) retirement plan service providers to disclose information about services performed and fees received from such plans. While the current regulations do not apply to welfare plans, the DOL has indicated that it intends to publish separate regulations requiring welfare plan disclosures at a later date.

Compliance with the regulations’ disclosure requirements will be required for contractual agreements between service providers and retirement plans in order to qualify for an exemption from the prohibited transaction rules under ERISA and the Internal Revenue Code of 1986, as amended. In other words, noncompliance with the regulation would mean that the statutory exemption is not available for an agreement if a service provider is a party in interest with respect to the plan, thus making the service provider liable for taxes and penalties related to prohibited transactions. Certain plan fiduciaries may also incur liability if a prohibited transaction occurs, but the regulations contain a special provision to help diligent plan fiduciaries avoid liability.

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Congress Provides Pension Funding Relief

Co-authored by Michael Durnwald

On June 25, President Obama signed legislation that provides short-term funding relief to sponsors of underfunded defined benefit pension plans. The new law, known as the Preservations of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (the Relief Act), permits temporary modification of existing pension funding rules by allowing plan sponsors of single-employer plans to elect one of two methods for delaying payments to pension plans. By delaying those payments, sponsors should have more cash available in the short term to help fund ongoing operations—a result which is likely to be seen as a benefit to many plan sponsors given recent economic turmoil. However, because the delay methods do not decrease the net amount that must eventually be contributed to a pension plan, use of the Relief Act provisions will likely result in contributions for later years being larger than they otherwise would have been. Sponsors should keep in mind the probable effect of increased contributions in later years when deciding how to satisfy their plan funding obligations.

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New Regulations Released Regarding Health Care Reform

On June 22, interim final regulations were issued regarding the “Patient’s Bill of Rights” requirements of the Patient Protection and Affordable Care Act of 2010 (PPACA), Pub. L. No. 111-148. These regulations were released jointly by the Departments of Health and Human Services, Labor (DOL) and Treasury. The regulations provide examples, safe harbors and other provisions helpful to the implementation of PPACA.

These rules are generally applicable to all group health plans for plan years starting on or after September 23, 2010, including “grandfathered” plans. This includes the annual dollar limits, the lifetime dollar limits, prohibition on preexisting condition exclusions and prohibition on coverage rescissions. However, the “patient protection” provisions do NOT apply to grandfathered plans.

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DOL Expands Employees Who May Qualify for FMLA Leave

Co-authored by Aimee S. Lin

The Family Medical Leave Act (FMLA) allows qualified employees to take up to 12 weeks of unpaid, job-protected leave in order, among other things, to care for a child postpartum, to bond with a child after adoption, or to care for a child with a serious illness. In a recent Administrator’s Interpretation, the U.S. Department of Labor (DOL) expanded the category of people who may qualify for leave in this context.

The FMLA entitles an employee to leave in certain childcare situations where the employee is standing in loco parentis, or in the place of the parent. In such a case, a legal or biological relationship between the child and the caregiver is not required. A previously promulgated FMLA regulation defined being in loco parentis as both providing day-to-day care of the child and financially supporting the child.

However, the Interpretation requires only one or the other in order to qualify for leave under the FMLA. Converting what was formally a two-part test to a one-part test will lead to more people qualifying for leave in an in loco parentis backdrop.

Such an Interpretation by the DOL is not binding on courts, but it is entitled to deference. While it remains to be seen how the courts will deal with this Interpretation, which, on its face, seems inconsistent with the regulation, employers should be mindful of it for a few reasons.

For instance, an employer should consider more carefully whether an employee who requests leave, but who is not a part of a traditional parent-child circumstance, is entitled to the leave. Along these lines, the Interpretation permits an employer to “require the employee to provide reasonable documentation or statement of the family relationship.” Note that only a “simple statement” is required and employers should be cautious not to be too rigorous in their requirements lest they find themselves accused of putting a chilling effect on requests for leave, or worse, harassment.

Employers should also be mindful that the recent Interpretation may lead to a considerable increase in requests for FMLA leave.

The full text of the Interpretation, which provides a few helpful examples, is available here.

Health Care Reform: Guidance Issued Regarding "Grandfathered" Plan Status

Co-authored by Daniel B. Lange and Michael R. Durnwald

Certain provisions of the Patient Protection and Affordable Care Act (PPACA), as amended by the Health Care and Education Reconciliation Act of 2010, do not apply to “grandfathered” group health plans, or have a delayed effective date for such plans. A grandfathered group plan is generally a plan in which an individual was enrolled on March 23, 2010 (the date of PPACA’s enactment). However, PPACA did not offer any insight on what would cause a plan to lose its grandfathered status, leading many employers to be hesitant to make any changes to their plans for fear of losing such status.

On June 14, the federal government issued guidance (Guidance) on grandfathered plan status, which, among other things, provides the reasons a plan in existence on March 23, 2010, will nonetheless lose its grandfathered status. Specifically, this status may be lost if:

  • the plan eliminates all or substantially all benefits to diagnose or treat a particular condition;
  • the plan increases a percentage cost-sharing requirement (e.g., coinsurance requirement);
  • the plan increases a fixed-amount cost sharing requirement (e.g., deductible, out-of-pocket limit) other than a co-pay more than 15 percentage points over the medical inflation rate (e.g., a 36% deductible increase if medical inflation is 20%); 
  • the plan increases a fixed-amount co-pay more than certain thresholds over the medical inflation rate;
  • the employer decreases its contribution rate more than five percentage points below its contribution rate as of March 23, 2010;
  • the plan adds or decreases certain annual or lifetime limits; or
  • the plan is not a collectively-bargained plan and enters into a new insurance policy, even if the new policy provides the same coverage and cost-sharing as the old insurance policy (policy renewal is not considered entering into a new policy).

Because the changes above are the only changes that may cause a plan to lose its grandfathered status, a grandfathered plan may generally modify its provisions to comply with federal/state law or voluntarily comply with PPACA, or change its third-party administrator.

In addition, the Guidance imposes disclosure and recordkeeping requirements on a plan in order to maintain its grandfathered status. All plan materials provided to plan participants describing the plan’s benefits must include a statement that the plan is grandfathered and list contact information for questions and complaints (the Guidance provides model language). To comply with the recordkeeping requirement, the plan must maintain records documenting the terms of the plan’s coverage as of March 23, 2010 (as well as any other supporting documentation) and make those records available for examination upon request.

The Guidance can be found here.

Senate Bill Proposes SEC Whistleblower Law

Co-authored by Steven G. Eckhaus and Evan A. Belosa

Among the myriad provisions of the pending financial reform bill is the creation of a viable whistleblower system under which informants who report securities laws violations to the Securities and Exchange Commission will be provided with monetary rewards. The plan is based in part on the success of the Internal Revenue Service’s similar whistleblower program.

Under proposed Section 922 of the Restoring American Financial Stability Act of 2010 (the Senate Bill), the SEC will be required to pay a reward to individuals who provide “original information” to the SEC that results in monetary sanctions to the violating party exceeding $1 million. The award can range from 10% to 30% of the amount that is recouped, with the actual amount of the award at the discretion of the SEC. Section 922 prohibits the SEC from providing an award to a whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower provided information; who gains the information from a government investigation, report or audit; who fails to submit information to the SEC as required by an SEC rule; or who is an employee of the U.S. Department of Justice or a regulatory agency, a self-regulatory organization, the Public Company Accounting Oversight Board or a law enforcement organization.

The Senate Bill would explicitly provide for whistleblower retaliation protection, so as to prevent employers from firing or otherwise discriminating against those taking advantage of this law. Section 922 creates a prohibition against retaliation and a private right of action for employees who have suffered retaliation.

Section 922 of the Senate Bill closely resembles Section 7203 of the House of Representatives’ earlier Wall Street Reform and Consumer Protection Act of 2009, H.R. 4173 (the House Bill). The key difference, however, is that the Senate Bill provides for a 10% floor on whistleblowing awards, while the House Bill provides for no floor.

Reconciliation of the House and Senate Bills is underway, with debate on these sections scheduled for next week.

The Senate Bill can be accessed here.
HR 4173 can be accessed here.

IRS Finalizes Public Employer Stock Fund Diversification Requirements

Co-authored by Ann M. Kim

On May 19, the Internal Revenue Service issued final regulations that clarify when public companies must allow plan participants to voluntarily divest employer stock allocated to their retirement plan accounts. The regulations only apply to public companies that maintain defined contributions plans (typically referred to as 401(k) plans or profit-sharing plans) where employer stock is an available investment alternative. The regulations require that, subject to certain limited exceptions, participants must always be able to move their own contributions (including rollover contributions) out of employer stock funds. In addition, employer contributions must be eligible for movement from the employer stock fund once the participant has provided three years of service to the company.

The regulations finalize rules first enacted by Congress in 2006. The Pension Protection Act of 2006 required greater diversification rights for public employer stock funds in order to address situations where a company’s stock was falling but retirement plan participants were powerless to diversify their accounts and minimize their losses. While the increased flexibility helps participants who will no longer be locked in to one, undiversified investment, the new rules can also help plan fiduciaries avoid liability for maintaining the stock fund in times when the value is declining.

In order to comply with the final regulations, retirement plans must have at least three other diverse investment alternatives available under the plan (although, plans typically have many more alternatives). In addition, the plan cannot impose any direct or indirect conditions on investment in, or divestment of, employer stock that do not apply to other plan investment alternatives. For example, with limited exception, the final regulations would not permit a restriction that permanently prohibits amounts from being reinvested in employer stock if it was previously divested from employer stock.

While interim diversification guidance is currently in effect, the final regulations become effective for plan years beginning on and after January 1, 2011.

The final regulations can be found here.

Department of Labor Drafts Unemployment Compensation Integrity Act of 2010

Co-authored by J. Bradley Clair

On May 17, the U.S. Department of Labor delivered a draft of the Unemployment Compensation Act of 2010 to Congress. The Act is designed to help states fight employer fraud that results in payments of excess unemployment benefits. The Act would permit states to deposit up to 5% of recovered unemployment compensation overpayments in a fund from which money may be withdrawn to “deter, detect and collect” erroneous payments to individuals, the misclassification of employees as independent contactors, or other violations of state law relating to employer fraud or evasion of contributions. States would also be required to assess a penalty of at least 15% of the amount of the erroneous payment that resulted from claimant fraud. When announcing the draft, Secretary of Labor Hilda Solis stated, “The Unemployment Compensation Integrity Act would give states the additional resources and tools they need to guarantee that only those who are eligible for benefits receive them and employers who defraud the system pay their fair share of taxes.”

To read the text of the draft, click here.

First Wave of Health Care Reform About to Hit Group Health Plans

Co-authored by Gary W. Howell

Employers sponsoring group health plans should begin to focus on plan amendments that may be required in the “near term” under the recently adopted health care reform act, known as the Patient Protection and Affordable Care Act, as amended (PPACA).

Unlike PPACA’s numerous and complicated rules, incentives, subsidies, penalties and effective dates applicable to the health care industry, insurers, employers and individual citizens, the requirements for making near-term amendments to employer-sponsored group health plans are limited in number and easily understood.

Here is a list of the most important requirements that become effective with respect to group health plans (both insured and self-insured) for plan years beginning on and after September 23 (section numbers below refer to applicable sections of PPACA):

  1. the elimination of pre-existing condition limitations for participants under age 19 (section 1255);
  2. the elimination of lifetime limits on the dollar value of “essential health benefits” (section 2711);
  3. regulated annual limitations on the dollar value of essential health benefits (section 2711);
  4. no rescission or cancellation of coverage, except for fraud or misrepresentation (section 2712);
  5. designated preventive care services and immunizations must be provided, with no cost-sharing with participants (section 2713);
  6. dependent coverage must be extended to adult children until age 26 (section 2714);
  7. participants must be notified of material changes in a group health plan at least 60 days prior to the effective date of the change (section 2715);
  8. rules restricting discrimination in eligibility and coverage in favor of “highly compensated employees”, currently applicable only to self-insured plans, are to be extended to insured plans (section 2716);
  9. new procedures for appealing denied claims will provide for an external review process (section 2719);
  10. a patient’s “bill of rights” will remove certain restrictions on access to primary care providers, emergency services, pediatric specialists and obstetrical and gynecological care (section 2719A);
  11. W-2s for 2011 must show the cost of health coverage (section 1514); and
  12. over-the-counter medicines cannot be reimbursed by a flexible spending account unless prescribed by a doctor (section 9003).

Some of the above changes are optional for “grandfathered” plans (i.e., plans in existence on March 23) (section 1251).

The list is finite, but so is the time period for making these changes. Plan Administrators should begin to review their plan documents, noting where changes will be required, and then begin discussions with their insurers, third party administrators and counsel to ensure a timely and coordinated implementation of these changes.

PPACA may be found here.