Monthly Archives: October 2013
Thursday, October 24, 2013

Looking Ahead – ISS 2014 Draft Policies and Proxy Survey Results

Institutional Shareholder Services (ISS) conducts an annual survey to obtain input on corporate governance issues.  The survey results are considered by ISS in preparing annual updates to its proxy voting policies.  The survey often provides insight into potential ISS policy changes for the upcoming proxy season.

A few weeks ago, ISS released the results of its 2014 proxy voting survey.  ISS received more than 500 responses from institutional investors and corporate issuers located within and outside of the United States.   The 2013-2014 Policy Survey Summary of Results can be accessed here.  This week ISS posted draft 2014 policies for comment here.  The draft policies include proposed changes for U.S. companies to Board Response to Majority-Supported Shareholder Proposals and the ISS Pay for Performance Quantitative Screen.  The comment period will close on November 4, 2013 and ISS anticipates releasing its final 2014 policy updates in November.

Below are highlights of the survey findings and draft policies covering board decision making and executive compensation matters:

1. Board Responsiveness

Last year ISS announced changes to its policy on board responsiveness to majority-supported non-binding shareholder proposals.  The 2014 survey included questions eliciting views on board responsiveness to shareholder mandates and what is a reasonable time-frame for the board’s response.  The survey results included mixed views from investors and issuers as to whether the board should implement a specific action to address the shareholder mandate or should be free to exercise its discretion and disclose the rationale for any action it takes.

The draft 2014 policies released this week include clarifications of the ISS change in approach and a request for comments.  Generally ISS will evaluate the board’s responsiveness in 2014 to majority-supported shareholder proposals appearing on companies’ ballots in 2013.  As part of this evaluation, ISS proposes to consider the board’s responsiveness in making its vote recommendations on director elections.  The director vote recommendations will be on a case-by-case basis and will consider the board’s rationale (as disclosed in the proxy statement) as a factor in the analysis.  ISS requests comments on what factors should be considered in evaluating board responsiveness if a board does not fully implement a majority-supported shareholder proposal and what points should a board’s rationale include in explaining its responsiveness to shareholders.

2. Director Tenure and Director Rotation

The 2014 survey included five questions on director tenure and rotation of director leadership positions.  Investor respondents indicated that long director tenure is problematic and can diminish a director’s independence and the board’s opportunity to refresh its membership.  In contrast, a significant majority of issuer respondents indicated that a director’s tenure should not be presumed to indicate anything problematic.  The length of board service that could cause concern included in the responses was generally more than 10-15 years.  Responses of investors and issuers were split as to whether ISS should consider a policy that takes into account director rotation with respect to the board chair, lead director, or chairs of key board committees.

3. Director Assessment

The survey requested feedback on how a director’s current or prior service on boards of other public companies is considered in assessing director performance.  Both investors and issuers agreed that a director’s current or prior public company board service should be a focal point in the assessment and listed some specific factors for consideration.

4. Equity Plan Evaluation

ISS has applied a case-by-case approach on recommendations for equity based compensation plan proposals.  Generally ISS recommends a vote against plans with high cost/dilution, problematic features, or lack of compliance on best practices in certain markets.  In the 2014 survey, ISS asked for input in the event ISS moves to a more holistic approach as to the factors and weights that should be considered (positively or negatively) in equity plan evaluations.  Investors weighed performance conditions on awards the highest, then cost of the plan and other plan features including burn rate/historical usage of shares and prior history of repricing.  Issuers focused on the cost of the plan, other plan features and plan administration.

5. Pay-for-Performance Quantitative Screen

The 2014 draft policy updates includes a potential change to the ISS quantitative pay-for-performance screen.  ISS uses the measure as a screen to identify companies with a potential pay-for-performance misalignment that would trigger a deeper qualitative analysis of the pay program.  The proposed changes simplify the methodology for calculating the relative degree of alignment and use a single 3-year measure.  The proposed method would calculate the difference between the company’s total shareholder return (TSR) rank and the CEO’s total pay rank within a peer group, as measured over a three-year period.  ISS requests feedback on the proposed change.

Action Items

In preparation for final year-end board meetings and the upcoming 2014 proxy season:

  • Be aware of ISS current focus areas – directors and boardroom decision-making in addition to alignment of executive pay and company performance;
  • Consider the 2014 survey results and the difference in views among investors and issuers;
  • Consider commenting on the ISS draft 2014 policies on board responsiveness and changes to the pay-for-performance quantitative screen; and
  • Monitor the final 2014 policy updates and the potential impact to the company.
Thursday, October 17, 2013

It’s time to ensure year-end qualified plan deadlines are satisfied. Below is a checklist designed to help employers with this process, including information regarding the U.S. Supreme Court’s recent decision in U.S. v. Windsor regarding the Defense of Marriage Act (“DOMA”) and the impact of this decision on qualified retirement plans.  This checklist addresses both year-end deadlines and January 2014 deadlines which sponsors of qualified retirement plans may wish to begin preparing for now.


  • Cycle C Sponsors.  Individually designed plans are on five-year cycles for renewing their determination letters with the IRS.  For most Cycle C sponsors (i.e., those sponsors with an employer identification number ending in either 3 or 8), the five-year cycle will end on January 31, 2014.  Generally, governmental plans are assigned to Cycle C.  However, governmental plan sponsors may elect Cycle E (i.e., February 1, 2015 to January 31, 2016) by filing their determination letter application in Cycle E rather than in Cycle C.  No election form or notice to the IRS is required if a governmental plan sponsor plans to make this Cycle E election.

Non-governmental Cycle C sponsors (and governmental sponsors who do not plan to elect Cycle E) who have not already renewed their determination letter this cycle should be prepared to submit their amended and restated plans to the IRS by no later than January 31, 2014.  Additional information on timing cycles and determination letters can be found here.

  • 403(b) Plans and IRS Voluntary Correction Program.  IRS regulations applicable to 403(b) plans required that the plans be maintained pursuant to a written plan document adopted no later than December 31, 2009.  Under guidance issued this year (Rev. Proc. 2013-12), the IRS updated the correction programs available under its Employee Plans Compliance Resolution System (“EPCRS”) to address, among other things, the failure of a 403(b) plan to adopt a written document before the 2009 deadline.

Under the EPCRS, the standard fee for a voluntary correction submission ranges from $750 for a 403(b) plan with 20 or fewer participants to $25,000 for a 403(b) plan with over 10,000 participants. However, the IRS has provided certain relief for voluntary submissions where (i) the voluntary submissions are made on or before December 31, 2013 and (ii) the only failure of the 403(b) plans is the failure to timely adopt a written plan document.  If both of these requirements are met, the fee is reduced by 50%.

Sponsors of 403(b) plans may wish to consult with their employee benefits advisors to determine whether a submission to the EPCRS is necessary and how to proceed with the voluntary compliance submission, taking into account the fee reduction for 2013.

  • Cash Balance and Hybrid Plans. The Pension Protection Act of 2006 made several changes affecting cash balance and hybrid pension plans, including requiring three-year vesting and prohibiting interest credits at an interest crediting rate that exceeds a market rate of return. The IRS issued guidance in late 2012 (Notice 2012-61) that extended the deadline for adopting amendments implementing the above-referenced interest crediting and market rate of return requirements. The extended deadline is the last day of the plan year before the plan year when regulations implementing the interest rate requirements become effective. We are still awaiting guidance from the IRS as to this requirement. Check back to for any updates to this requirement before year-end.
  • Funding Level Restrictions for Defined Benefit Plans. Code Section 436 imposes certain restrictions on distributions and limitations on benefit accruals if a defined benefit plan’s funding level dips below certain thresholds. While most plans have already been amended to comply with these rules, the deadline for doing so for most calendar year plans is December 31, 2013.


In Windsor, the U.S. Supreme Court held that Section 3 of DOMA (which required that, for federal law purposes, a marriage be treated as only a marriage between a man and a woman) was unconstitutional.  In Rev. Rul. 2013-17, the Internal Revenue Service (“IRS”) took the position that, following Windsor, a couple in a valid same-sex marriage entered into in a state recognizing such marriage, would be treated as “married” for federal tax purposes, regardless of whether the couple stayed in that state or moved to a state which does not recognize same-sex marriage (i.e., a “place of celebration” approach).

For qualified retirement plans, this means that the plans must ensure that they treat a same-sex spouse as a “spouse” for purposes of satisfying federal tax laws relating to qualified retirement plans.  The IRS guidance states that qualified retirement plans needed to be in operational compliance with its requirements by September 16, 2013.  However, the IRS also stated that it expects to issue further guidance on compliance, including guidance on plan amendment requirements (including the timing of any required amendments), any necessary corrections relating to plan operations for periods before future guidance is issued and the retroactive effect of Windsor for federal tax purposes.

The Department of Labor (“DOL”) announced on September 18, 2013 that it would take a “place of celebration” approach with respect to ERISA, similar to that of the IRS.  The DOL stated that it intends to issue future guidance addressing the impact of this approach on specific provisions of ERISA and its regulations.

Check for updates regarding future guidance from the IRS and DOL.


Plan sponsors should ensure that the required annual notices, if applicable, are sent to participants and beneficiaries on a timely basis.

  • Section 401(k) Safe Harbor Notice.  All participants in a safe harbor 401(k) plan must receive an annual notice that describes the safe harbor contribution and certain other plan features.  The notice must be given by December 1 for calendar year plans and for non-calendar year plans not fewer than 30, and not more than 90, days before the first day of the plan year.
  • Section 401(k) Automatic Enrollment Notice.  If the plan provides that employees will be automatically enrolled, the plan administrator must give eligible employees an annual notice that describes the circumstances in which eligible employees are automatically enrolled and pay will be automatically contributed to the plan.  The notice must be given by December 1 for calendar year plans and for non-calendar year plans not fewer than 30 days before the first day of the plan year.
  • Qualified Default Investment Notice.  A defined contribution plan that permits participants to direct the investment of their account balances may provide that if the participant does not give an affirmative investment direction, the portion of the account balance for which affirmative investment direction was not given will be invested in a qualified default investment.  Plan sponsors must give the annual notice by December 1 for calendar year plans and for non-calendar year plans at least 30 days prior to the beginning of the plan year.

NOTE:  A safe harbor 401(k) plan can incorporate two or more of the notices described above, as applicable, in a single notice.

  • Defined Benefit Plan Funding Notice.  An annual notice describing the plan’s funded status for the past two years, a statement of the plan’s assets and liabilities and certain other information relating to the plan’s funded status must be furnished to participants within 120 days after the end of the plan year.  For calendar year plans, the deadline is April 30.  The deadline for small plans that cover fewer than 100 participants is the due date for the plan’s Form 5500.
Tuesday, October 15, 2013

Among the many reforms under the Affordable Care Act (“ACA”) is the prohibition on imposing annual dollar limits on essential health benefits (“Annual Dollar Limit Prohibition”).  In addition, non-grandfathered group health plans must provide certain preventive services without any cost-sharing requirements (“Preventive Services Requirement”).  There has been wide-spread speculation as to how these market reforms would affect health reimbursement arrangements (“HRAs”), health flexible spending accounts (“FSAs”) and other employer reimbursement arrangements.

Health Reimbursement Arrangements

In the preamble to 2010 interim final regulations, Treasury and the Departments of Labor and Health and Human Services (“Departments”) stated that an HRA that is integrated with a group health plan that complies with the Annual Dollar Limit Prohibition, would be acceptable (despite the HRA having an annual dollar limit) since the combined benefit satisfies the Annual Dollar Limit Prohibition.

In 2013 FAQs, the Departments explained that an HRA will not be considered to be integrated with a primary group health plan offered by an employer unless the HRA is available only to employees who are covered under the primary group plan and such group plan satisfies the Annual Dollar Limitation Prohibition.

Notice 2013-54 (“Notice”) provides additional guidance and imposes new requirements on the integration of HRAs with major medical plans. According to the IRS, an employer-sponsored HRA cannot be integrated with individual market coverage. Therefore, an HRA used to purchase coverage on the individual market will violate the Annual Dollar Limit Prohibition.  Not only an HRA but any other type of group health plan used to purchase coverage on the individual market is not integrated with that individual market coverage. A similar analysis applies to the Preventive Services Requirement. An HRA that is integrated with a group health plan will comply with the Preventive Services Requirement to the extent the group health plan with which the HRA is integrated complies with the Preventive Services Requirement.  Consequently, a group health, including an HRA, used to purchase coverage on the individual market will also fail the Preventive Services Requirement.

An HRA can be integrated with a group health plan only according to one of two integration methods ― one that requires minimum value or one that does not require minimum value.

Under the integration method in which minimum value is not required, an HRA will be considered integrated with another group health plan if:

  • The employer offers a group health plan (other than the HRA or excepted benefits);
  • The employee receiving the HRA is actually enrolled in the non-HRA group health plan;
  • The HRA is available only to employees who are enrolled in the non-HRA group health plan (regardless of whether the employer sponsors the non-HRA group health plan);
  • The HRA is limited to reimbursement of copayments, coinsurance, deductibles and premiums under the non-HRA group coverage, as well as medical care that does not constitute essential health benefits.

Alternatively, if the HRA provides for a broader range of reimbursements, the HRA will be integrated with a group health plan if:

  • The employer offers a group health plan that provides minimum value;
  • The employee receiving the HRA is actually enrolled in the group health plan providing minimum value (regardless of whether the employer sponsors the plan); and
  • The HRA is available only to employees who are actually enrolled in the non-HRA minimum value group coverage.

Under either integration method, the terms of the HRA must permit an employee (current or former) to permanently opt out of and waive future reimbursement for the HRA at least annually and upon termination of employment, either the remaining HRA amounts are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA. This opt-out feature is needed so as not to preclude the former employee’s ability to claim a premium tax credit through the Exchange.

Nonetheless, upon a loss of coverage under a group health plan, an employee may continue to use the amounts remaining in the integrated HRA for reimbursement of eligible medical expenses in accordance with the terms of the HRA without triggering a failure under the market reforms.

In order to comply with the new HRA integration rules, plan amendments may be required before the start of plan years beginning on or after January 1, 2014, when the Notice generally takes effect.

Health Flexible Spending Accounts

Interim final regulations include an exemption from the Annual Dollar Limit Prohibition for health FSAs.  The Notice clarifies that the exemption applies only if the health FSA is offered through a cafeteria plan.  Consequently, any health FSA that is not offered through a cafeteria plan will be subject to the Annual Dollar Limit Prohibition and by its design will fail to comply.  However, a health FSA will still be subject to the Preventive Services Requirement unless the health FSA is an excepted benefit (i.e., the maximum benefits cannot exceed two times the participant’s salary reduction election, and the employer also makes major group health coverage available).  An employer health FSA that does not qualify as excepted benefits is not considered integrated with a group health plan and will fail the Preventive Services Requirement by design.  The Departments are considering whether an HRA may be treated as a health FSA for purposes of exclusion from the Annual Dollar Limit Prohibition but even such treatment would not relieve the HRA from other ACA requirements, namely the Preventive Services Requirement, which the HRA would fail if not already integrated with a group health plan.  This same analysis applies even if the HRA reimburses only premiums.

Employee Assistance Programs

Benefits under an employee assistance program (“EAP”)  will be considered excepted benefits only if the EAP does not provide significant benefits in the nature of medical care or treatment. Until final rulemaking, employers can use a reasonable, good faith interpretation as to what constitutes significant medical benefits.

Bottom Line

This guidance essentially puts an end to stand-alone HRAs and to health FSAs offered outside of a cafeteria plan.  Although an HRA with fewer than two participants who are current employees on the first day of the plan year (i.e., retiree-only HRA) is an excepted benefit and exempt from the ACA market reforms, retiree-participants are not left unscathed.  The Notice confirms that a stand-alone HRA reimbursing retirees for the purchase of individual health insurance coverage would still be considered minimum essential coverage.  Consequently, a retiree covered under the stand-alone HRA would not be eligible for a premium tax credit on the Exchange for any month in which funds are retained in the HRA (even during periods of time after the employer has ceased making contributions).


Monday, October 14, 2013

This is cross-posted from our recent client alert.

With 2014 just around the corner, numerous mandates under the Patient Protection and Affordable Care Act, as amended (“PPACA”) are about to become effective.  Below is a checklist of upcoming PPACA mandates that employers must implement in 2014, as well as a list of existing enrollment and annual notice requirements that group health plan sponsors should consider during open enrollment.

Additionally, with the recent decision of the U.S. Supreme Court in U.S. v. Windsor overturning part of the Defense of Marriage Act (“DOMA”), group health plan sponsors should take into account the impact of this decision on their plans.  As such, a brief summary of relevant DOMA considerations are provided below.

For a refresher on the PPACA mandates which became effective this year, please see our 2013 group health plan checklist here.

I. Requirements That Apply to All Group Health Plans (Whether Grandfathered or Not)

Beginning with the dates specified below, a group health plan subject to PPACA must comply with the following requirements, regardless of its status as a “grandfathered health plan”:

  • Annual limits will no longer be permitted on essential health benefits.

Currently, annual limits on “essential health benefits” cannot exceed $2 million.  Effective for plan years beginning on or after January 1, 2014, group health plans may not establish annual dollar limits on such benefits for any participant or beneficiary.  However, this prohibition does not prevent a group health plan from excluding all benefits for a particular condition (but if any benefits are provided for a condition, the prohibition may apply depending on the benefits provided).  Other legal requirements may restrict a plan’s ability to eliminate certain benefits.

Essential health benefits include those benefits that fall into one or more of the following categories:  (i) Ambulatory patient services; (ii) Emergency services; (iii) Hospitalization; (iv) Maternity and newborn care; (v) Mental health and substance use disorder services (including behavioral health treatment); (vi) Prescription drugs; (vii) Rehabilitative and habilitative services and devices; (viii) Laboratory services; (ix) Preventative and wellness services and chronic disease management; and (x) Pediatric services (including oral and vision care).  The exact items and services that are considered essential health benefits are generally determined by reference to a benchmark insured plan in each state.  The Department of Health and Human Services (“HHS”) considers self-insured and large group insured plans to have used a permissible definition of essential health benefits if they use any benchmark plan.  For more details, see our blog post here.

  • All pre-existing condition exclusion provisions will be prohibited.

For plan years beginning on or after September 23, 2010, group health plans were prohibited from imposing any pre-existing condition exclusions ( “PCEs”) on any individuals enrolled in such plan who were under 19 years of age.  Effective for plan years beginning on or after January 1, 2014, this prohibition becomes a general prohibition on PCEs (i.e., group plans will be required to remove any restrictions on plan entry and exclusions from coverage based on preexisting conditions).

  • Reinsurance payments will be assessed and need to be made.

Open enrollment under the Health Benefit Exchanges (each more commonly referred to as an “Exchange” or “Marketplace”) began October 1, 2013, with coverage effective as of January 1, 2014 for any qualified individuals whose selections are received by December 15, 2013.   While this does not directly impact group health plans (outside of the notice requirements, discussed below), the cost of operating such Exchanges following January 1, 2014 will impact group health plans.  Each State that operates an Exchange is also required to establish a reinsurance program, which is intended to reduce the uncertainty of insurance risk in the individual market by partially offsetting risk for high-cost enrollees.  Such reinsurance programs will require contributions from both health insurance insurers and group health plans for 2014 through 2016.

The determination of the amount owed by any group health plan is the product of the average number of covered lives of “reinsurance contribution enrollees” (i.e., employees enrolled in such plan and their dependents) multiplied by the contribution rate prescribed by HHS for such benefit year.

A group health plan will be required to provide to HHS by November 15 certain enrollment data for the plan, which HHS will then use to determine such plan’s contribution amount.  HHS is then required to notify the plan within thirty days of receiving the data (or December 15, if later) of the amount of reinsurance contribution payments required by that plan for the year.  Any payment owed by a plan is due no later than 30 days after notification.  For 2014, the contribution amount is $63 per enrollee.  The contribution should go down in future years.  This amount will be paid by insurers for insured plans. With respect to self-funded plans, the plan is liable, but it may contract with  its third party administrator to transfer the contribution payments to HHS.

States that elect to operate their own reinsurance programs may require supplemental contributions and administrative cost payments above the contributions which would otherwise be calculated by HHS.  However, such supplemental contributions may only be collected on insured products in the state in order to cover the administrative expenses of the state.

  • Marketplace notices must be sent to existing employees by October 1, 2013, and thereafter to new employees upon hire. 

Employers are required to distribute notices to employees informing them of the availability of health insurance through the Marketplace and employer-offered health coverage.  The Department of Labor (“DOL”) has provided employers with two sample form notices which can be used to comply with this requirement:   one for employers who sponsor a group health plan (here) and one for employers who do not (here).  Additional information on the notice can be found on our blog.

  • The “individual mandate” begins in 2014 (even though the employer mandate has been delayed).

Although it does not directly affect group health plans, beginning in 2014, individuals who do not (or whose spouses or dependents do not) have “minimum essential coverage” for any month will generally be assessed what is referred to as a “shared responsibility penalty.”    This should not be confused with the potential penalty for certain large employers who do not offer minimum essential coverage for all full-time employees, which has been delayed until 2015.

The Internal Revenue Service (“IRS”) recently issued final regulations on the “individual mandate” which we discussed here.  This requirement may cause some employees who previously declined coverage to enroll in their employer’s plan, although we expect the effect will not be that significant given the relatively small penalty involved.

II. Additional Requirements That Apply to Non-Grandfathered Plans

Group health plans that are not grandfathered for PPACA purposes must comply with the following additional requirements.  Each such requirement is effective for plan years beginning on or after January 1, 2014 (unless otherwise noted):

  • Plans cannot impose certain limitations on participation and reimbursement of costs incurred in connection with participation in certain approved clinical trials for life-threatening diseases.

Where a group health plan covers an individual who is eligible to participate in an “approved clinical trial” (as determined by a referring health care professional or participant-provided medical information), then the plan will be prohibited from denying that individual participation in such a clinical trial.  Applicable clinical trials are phase I, II, III or IV clinical trials that are conducted in relation to the prevention, detection and treatment of cancer or other life-threatening diseases or conditions where the underlying study or investigation is (i) approved or funded by certain federal organizations, (ii) conducted under an investigational new drug application reviewed by the Food and Drug Administration or (iii) a drug trial that is exempt from having such an investigational new drug application.

Additionally, such plans generally will be prohibited from denying, limiting or imposing additional conditions on the coverage of “routine patient costs” for items and services furnished in connection with participation in such a trial, although the plan does not have to cover the cost of the trial itself.  Routine patient costs include any items and services consistent with the coverage provided in the plan that is typically covered for an individual who is not enrolled in a clinical trial.  Investigational items, devices or services, data collection and analysis items or services not used in the direct clinical management of the patient and any services clearly inconsistent with widely accepted and established standard of care for a particular diagnosis are specifically excluded from such costs.

Finally, a group health plan will be prohibited from discriminating against an individual who participates in such a clinical trial on the basis of that individual’s participation.

If an individual described above is accepted by an in-network provider for a clinical trial, the plan may require that the individual use that in-network provider.  However, these provisions also apply to an individual participating in an approved clinic trial outside of the plan’s health care provider network if the plan provides out-of-network coverage for routine patient costs, as discussed above.

  • Cost-sharing limitations may not be above certain ceiling amounts.

Cost-sharing generally includes deductibles, co-insurance, co-payments, and similar charges and any other expenditure required of a covered individual which is a “qualified medical expense” for any essential health benefit covered under the plan.  For plan years beginning in 2014, cost-sharing amounts will not be permitted to exceed $6,350 for self-only coverage and $12,700 for family coverage, which are the 2014 maximums for high-deductible health plan coverage that allows an individual to contribute to a health savings account.  Such amounts are also referred to as “out-of-pocket maximums.”  While some out-of-pocket maximums have excluded co-payments in the past, they must be included for this purpose.  The cost-sharing limit may be applied solely to cost-sharing incurred for in-network services; out-of-network may have a higher cap.  For plan years beginning in 2015 and after, the self-only coverage amount will be increased by the Secretary of the DOL in accordance with applicable regulations, although these increases will not be tied to the high deductible health plan maximums and may be different.  After 2014, the family coverage amount will be twice the self-only amount for the applicable year.

If a group health plan uses more than one provider to administer benefits that are subject to these out-of-pocket maximums, the requirement will be considered met if: (i) the major medical coverage portion of the plan (which excludes prescription drug coverage) complies with the annual limitation; and (ii) an out-of-pocket maximum on coverage which does not consist solely of major medical coverage separately does not exceed the annual limitation.  However, such relief is transitional and applies only for the first plan year beginning in 2014.  Small employer insured plans (generally, those plans for employers with less than 100 employees in the preceding year) are also subject to limits on deductibles.

Employers, whether small or large, should confirm that their plan designs comply with these requirements.

  • Certain non-discrimination rules will apply to non-grandfathered group health plans. 

PPACA provides for the following non-discrimination requirements in relation to plan participants and health care providers:

1. Individual’s Health Status

A group health plan is prohibited from establishing rules for enrollment eligibility (either new or continued eligibility) under such plan based on certain health status-related factors.  This discrimination prohibition includes applying a premium or contribution requirement to any individual (either as a condition of enrollment or continued enrollment) that is greater than such requirements placed on similarly situated individuals enrolled in the plan on the basis of certain health-status related factors.  However, a group health plan is not prohibited from establishing premium discounts or rebates or otherwise modifying applicable co-payments or deductibles in return for an individual’s adherence to a program designed to promote health or prevent disease (e.g. a wellness program).

For plan years beginning on or after January 1, 2014, recently finalized IRS regulations apply to such wellness programs.  A plan considering implementing (or which currently operates) such a program may wish to consult with its employee benefits counsel to ensure that such program is compliant with current guidelines.  For a more in-depth discussion of these IRS regulations, see our prior posts and client alert on this topic.

2. Health Care Providers

A group health plan may not discriminate with respect to participation in the plan against any health care provider acting within the scope of that provider’s license or certification under the applicable state law.  To the extent an item or service is covered, and consistent with reasonable medical management techniques specified under the plan with respect to the frequency, method, treatment or setting for an item or service, the plan must not discriminate based on a provider’s license or certification.  However, this does not mean that a group health plan must contract with any health care provider willing to abide by the terms and conditions for participation established by the plan.  It also does not prevent a group health plan from establishing varied reimbursement rates based on quality or performance measures.  Employers should be aware of this requirement, although most plans will rely on the insurer or third party administrator with regard to provider selection.

  • Excessive enrollment waiting periods are also prohibited. 

Group health plans will be prohibited from applying a waiting period (i.e., the period that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of the plan can become effective) which exceeds 90 days.

However, a group health plan that requires an employee regularly work a specified number of hours per period (e.g. 30 hours per week) does not have to abide by the 90-day requirement for certain newly hired employees.  Specifically, if the employer cannot determine whether the employee will meet the hours requirement on date of hire (e.g., in the case of a variable-hour employee), the plan is permitted to take a reasonable period of time to determine whether the employee meets the hours requirement.  The measurement period must be consistent with the employer mandate rules.  The measurement period will not be counted against the 90-day requirement and will not violate this rule as long as (i) any waiting period after the measurement period does not exceed 90 days and (ii) the coverage is made effective no later than 13 months from the employee’s start date.

 III. Existing Notice and Filing Requirements

Below is a list of enrollment and annual notices that group health plan sponsors should consider during open enrollment in addition to the Marketplace Notice described above.

  • Enrollment Notices.

1) COBRA Notice.

Plan administrators must provide an initial written notice of rights under the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”) to each employee and his or her spouse when group health plan coverage first commences.  Additionally, plan administrators must provide a COBRA election notice to each qualified beneficiary of his or her right to elect continuing coverage under the plan upon the occurrence of a qualifying event.  Each of these notices must contain specific information, and the DOL has issued model notices.  The model election notice was updated this year to include a discussion of Marketplace coverage options, as discussed here.

2) HIPAA Privacy Notice.

If the group health plan is required to maintain a notice of privacy practices under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the notice must be distributed upon an individual’s enrollment in the plan.  Notice of availability to receive another copy must be given every three years. Plan sponsors should confirm that the notices of privacy practices for their group health plans have been revised to reflect the requirements under Subtitle D of the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”) and the final omnibus rule released earlier this year.  Following a material modification, which includes any change required pursuant to HITECH or the omnibus rule, the revised notice of privacy practices must be distributed to plan participants within 60 days after the change to the notice.  However, if a group health plan posted a revised notice on any website dedicated to the health plan by September 23, 2013, the plan sponsor is permitted to send the revised notice with its next annual mailing to participants.

3) Special Enrollment Rights.

A group health plan must provide each employee who is eligible to enroll with a notice of his or her HIPAA special enrollment rights at or prior to the time of enrollment.  Among other information, this notice must describe the rights afforded under the Children’s Health Insurance Program Reauthorization Act.

4) Pre-existing Condition Exclusion Notice.

If the plan contains pre-existing condition exclusions, subject to the PPACA limitations discussed above, a notice describing the exclusions and how prior creditable coverage can reduce the exclusion period must be provided to participants as part of any written enrollment materials.  If there are no written enrollment materials, the notice must be provided as soon as possible after a participant’s request for enrollment.

5) Summary of Benefits and Coverage.

A Summary of Benefits and Coverage (“SBC”) must be provided to participants and beneficiaries prior to enrollment or re-enrollment.  At open enrollment, an SBC must be provided for each benefit package offered for which the participant or beneficiary is eligible.  Upon renewal, only the summary for the benefit package in which the participant is enrolled needs to be furnished no later than 30 days prior to the first day of the new plan year, unless the participant or beneficiary requests a summary for another benefit package.  The SBC must also be furnished to special enrollees within 90 days after enrollment pursuant to a special enrollment right.  Finally, PPACA requires that a plan sponsor provide 60 days advance notice to participants before the effective date of any material modifications to its plan.  Such notice must be given only where the material modification(s) would affect the information required to be included in the SBC.  The advance notice may be either in the form of an updated SBC or a separate document describing the material modification(s).

  • Annual Notice Requirements.

The following notices must be provided to participants and beneficiaries each year.  An employer may choose to include these notices in the plan’s annual open enrollment materials.

1. Women’s Health and Cancer Rights Act Notice.

The Women’s Health and Cancer Rights Act requires that a notice be sent to all participants describing required benefits for mastectomy-related reconstructive surgery, prostheses, and treatment of physical complications of mastectomy.  This notice must be given to plan participants upon enrollment and then annually thereafter.  The DOL has developed model language to fulfill this requirement.

2. Medicare Part D Notice.

Group health plans providing prescription drug coverage must provide a notice to any individual covered by or eligible for the group health plan who is eligible covered under Medicare Part A or for Medicare Part B (an “eligible individual”).  The notice must explain whether the plan’s prescription drug coverage is creditable.  Coverage is creditable if it is actuarially equivalent to coverage available under the standard Medicare Part D program.  To satisfy the distribution timing requirements, the notice is generally distributed upon an individual’s enrollment in the plan, each year during open enrollment (before the new enrollment commencement date of October 15), and during the plan year if the status of the coverage changes (either for the plan as a whole or for the individual).  Model notices are available from the Centers for Medicare and Medicaid here.

3. CHIP Premium Assistance Notice.

Employers must also provide notices annually to employees regarding available state premium assistance programs that can help pay for coverage under the plan and how to apply for it.  A model notice from the DOL is available here.

  • IRS Form W-2 Reporting Obligation.

Beginning with the 2012 tax year, employers have been required to report the aggregate cost of applicable employer-sponsored coverage on an employee’s Form W-2.  The reporting requirement is informational only and does not affect the amount includible in income.  Helpful FAQs with respect to the W-2 reporting requirements can be found on the IRS website here. See also our blog post regarding whether the cost of EAPs and wellness programs should be included in the Form W-2 reporting.

  • ERISA’s General Notice Requirements.

It is important to keep current with ERISA’s general notice requirements, as to both timing and content.  For example, changes in plan design must be reflected in Summaries of Material Modifications (“SMMs”) or updated summary plan descriptions (“SPDs”) timely distributed to eligible employees.  If a plan change involves a material reduction in covered services or benefits, an SMM or an updated SPD must be furnished within 60 days after adoption of the change.  Note that this obligation is independent of the PPACA requirement to issue a revised SBC or notification of material modification at least 60 days before a material modification to a SBC becomes effective (as discussed above); however, satisfaction of the PPACA requirement will satisfy this requirement with respect to such changes.  Restated SPDs must be furnished every five years if the plan has been amended within five years of publication of the most recent SPD, and every ten years if the information has not been changed.  Open enrollment may present the best time to distribute these materials.

IV. DOMA Considerations

On June 26, 2013, the U.S. Supreme Court overturned part of DOMA in its ruling in U.S. v. Windsor.  In particular, Windsor overturned Section 3 of DOMA, which required that for federal law purposes only opposite sex couples could be treated as married.  Following Windsor, federal government agencies have generally taken one of two approaches with respect to employee benefits:  (1) treating a same-sex couple validly married in a state that recognizes same-sex marriage as “married”, even if such couple moves to a state which does not recognize same-sex marriage (a “place of celebration” approach) or (2) treating a same-sex couple validly married in a state that recognizes same-sex marriage as “married” only when such couple resides in a state that recognizes same-sex marriage (a “place of domicile” approach).  Currently, thirteen states and the District of Columbia allow same-sex marriage.

Following Windsor, group health plan sponsors should review their plans to determine what impact the decision has on their plan and whether any revisions may be required to properly express the intent of the group health plan sponsor and comply with applicable law.

  • General Points for Group Health Plan Sponsors to Consider.

In certain instances, the definitions of “spouse” and “married” under a plan must comply with federal and/or state law requirements.  However, in those instances where a plan is given discretion as to how to define such terms, such as in a self-funded group health plan, the plan documents as currently drafted may not accurately reflect the company’s position in offering spousal benefits following the Windsor decision.  As such, plan sponsors should (i) determine the company’s position and (ii) review and amend, if necessary, the eligibility provisions.  Changes will likely also affect open enrollment materials, plan highlights, and summary plan descriptions.

  • Family Medical Leave Act.

On August 9, 2013, the DOL revised previously issued guidance regarding qualifying reasons for leave under the Family Medical Leave Act (“FMLA”).   Such revised guidance provides that a “spouse” is “a husband or wife as defined or recognized under state law for purposes of marriage in the state where the employee resides, including…same-sex marriage.”

Following this guidance, qualifying reasons for an employee to take FMLA leave in relation to their same-sex spouse include:

    1. To provide care for such spouse’s serious health condition;
    2. To care for a covered service member spouse with a serious injury or illness; and
    3. Certain situations arising from the military deployment of such spouse.

Employers should ensure that the language of their policies is compliant with such guidance.  A copy of the guidance can be found here.

As of the date of this posting, FMLA takes a “place of domicile” approach.

  • Federal Tax Implications.

The Internal Revenue Service has also issued guidance as to treatment of same sex couples under the Internal Revenue Code.  Under Rev. Rul. 2013-17 (effective September 16, 2013), same sex couples who are validly married under the laws of a State are considered to be in a “marriage” for federal tax purposes.  If a validly married same-sex couple moves to a State which does not recognize same sex marriage, the couple will continue to be considered to be in a “marriage” for federal tax purposes.  Therefore, the terms “spouse,” “husband and wife,” “husband,” and “wife” as used in the Internal Revenue Code each apply to a validly married same sex couple, regardless of where they reside.  However, such treatment only applies to validly married couples, and does not include domestic partnerships or civil unions (whether same sex or opposite sex).

If a plan provided domestic partner or same-sex spousal coverage during 2013 or prior years, the plan sponsor may be entitled to file an employment tax refund for any employment taxes withheld from the affected employee’s pay and paid by the plan sponsor.  In Notice 2013-61, the IRS issued streamlined procedures for an employer to use to claim these refunds.  In order to determine the proper tax treatment for an employee who enrolls a same-sex spouse in group health plan coverage, plan sponsors should communicate to employees that they should indicate that their dependent is a same-sex spouse.

The IRS plans to issue additional guidance to provide more detail on how to apply these new rules to employee benefit plans.  Keep checking here for updates regarding future guidance from the IRS.

  • ERISA Implications.

The DOL announced on September 18, 2013 that it would take a “place of celebration” approach with respect to ERISA, similar to that of the IRS.  The DOL stated that it intends to issue future guidance addressing the impact of such approach on specific provisions of ERISA and its regulations.   Check for updates regarding future guidance from the DOL.


Wednesday, October 9, 2013

In Hardt v Reliance Standard Life Ins. Co., 130 S. Ct. 2149 (2010) , the United States Supreme Court rejected the “prevailing party” standard for awarding attorney’s fees under ERISA.  Instead, a party moving for an attorney’s fee award must demonstrate “some degree of success on the merits.”   But what exactly does this standard mean?  Although not required, a favorable court judgment will qualify while a “trivial success” or a  “purely procedural victory” will not pass muster.  But how will these terms be interpreted and how will the standard be applied to the myriad of potential litigation outcomes which fall somewhere in the gray area in between?

The Second Circuit Court of Appeals recently applied this standard in the context of a voluntary settlement in Scarangella v. Group Health, Inc.  This case involved a claim for medical benefits under an ERISA plan which was insured by Group Health Insurance, Inc. (“GHI”) and administered by Village Fuel.  After substantial medical expenses were incurred by the wife of Nicholas Scarangella, a Village Fuel employee, GHI made a determination that Scarangella and his family did not satisfy the eligibility requirements.  GHI denied reimbursement and purported to retroactively rescind the policy.  Scarangella filed an action for benefits under ERISA against Village Fuel and GHI.  The two defendants filed cross claims for restitution which were dismissed by the District Court on the grounds that money damages are not available under ERISA because they are not equitable in nature.  GHI also asserted claims for rescission and reformation of its policy.  The District Court denied Village Fuel’s motion for summary judgment with respect to these claims because material facts were still in dispute.  In so doing, the District Court expressed some skepticism and concerns regarding GHI’s remaining claims.  Thereafter, GHI and Scarangella reached a settlement and voluntarily dismissed all remaining claims, including those against Village Fuel.  Village Fuel moved for attorney’s fees but the District Court found that the plan administrator was ineligible because the dismissal of GHI’s restitution claim was procedural in nature and the voluntary dismissal of the remaining claims against Village Fuel lacked the “judicial imprimatur” necessary to qualify as a litigation success.

On appeal, the Second Circuit determined that the District Court erred in interpreting the standard set forth by the Supreme Court in Hardt.  The Second Circuit found that Village Fuel obtained at least “some degree of success on the merits” through the dismissal of GHI’s restitution claim and it found that the District Court erred in classifying this success as merely a procedural victory.  The Second Circuit further found that a favorable court judgment is not required to satisfy the threshold for awarding attorney’s fees under ERISA.  Instead, the Court stated that “the catalyst theory remains a viable means of showing that  judicial action in some way spurred one party to provide another party with relief, potentially amounting to success on the merits.”  As a result, where parties “have received a tentative analysis of their legal claims within the context of summary judgment, a party may be able to show the court’s discussion of the pending claims resulted in the party obtaining relief.”  The Circuit Court found that a question of fact existed as to the reason for GHI’s dismissal of the remaining causes of action against Village Fuel and remanded to the District Court to make a determination regarding this question and to determine a reasonable amount of attorney’s fees, if any, to be awarded to Village Fuel.

This case provides guidance regarding how this standard will be applied in the context of voluntary settlements between the parties.  In evaluating if and when to settle a case, one factor that the parties should be aware of is the potential for an award of attorney’s fees under ERISA when a settlement and voluntary dismissal of  claims occurs following a summary judgment or other decision on the merits.

Written by in: General
Thursday, October 3, 2013

Over the last two years, the Bryan Cave Employee Benefits & Executive Compensation Group has been focusing on how to best communicate with you – our valued clients and friends. In addition to our traditional Client Alerts, we’re now reaching out in other ways by sending monthly compliance reminder emails, maintaining this active and vibrant blog ( and utilizing a variety of social media platforms including Twitter and LinkedIn, to bolster our visibility and connect with more people.

We’d like to hear from you about what you like, don’t like and what mediums you think serve you the best in keeping up in today’s highly regulated environment. To that end, we’ve prepared a quick survey (it should take no more than 5 minutes to complete) where you can provide us feedback on our group’s communication platform. We sincerely value your opinion and hope that you’ll take a few minutes to give us your thoughts.

To access the anonymous survey, please click here.

If you have questions, please contact us. Thanks very much for your input!


Wednesday, October 2, 2013

Yesterday, the IRS released guidance giving employers two additional methods to correct overpayments of employment taxes for 2013 and prior years. [Note: This guidance only pertains to the overpayment of FICA taxes; employees will have to file a claim directly with the IRS for income tax refunds].

This guidance follows on the tail of Revenue Ruling 2013-17, released Aug. 29, which provided that the IRS would recognize all legally married same-sex couples (using a “state of celebration” approach). Now, since the IRS recognizes these marriages retroactively, same-sex spouses may file refund claims for prior open tax years (e.g. 2010, 2011, 2012). Additional discussion on this guidance may be found here.

In the past, if an employer provided health coverage or fringe benefits to a same-sex spouse, the benefits were taxable to the employee and employers had to withhold and pay employment taxes with respect to these benefits because the marriage was not recognized by the IRS. If these benefits would have been excluded from tax had the IRS recognized same-sex marriages, any tax overpayments may now be refunded.

Under the general correction method for FICA tax overpayments, the error may be corrected during the reporting period by simply reimbursing the employee (i.e. no additional IRS forms need to be filed). However, for quarters in which employers have already submitted Form 941, employers must (i) repay or reimburse the employee in the amount of the overcollection, (ii) get confirmation that the employee has not made (or will not make) a claim for refund, and (iii) file Form 941-X to correct overreported taxes on a previously filed Form 941 (generally requiring a separate form for each taxable quarter).

Now, Notice 2013-61 provides two additional methods for correcting these overpayments (both optional):

  1. Employers may use the 2013 fourth quarter Form 941 to correct the overpayment of employment taxes during the first three quarters of 2013.
  2. If the employer does not correct overpayments during 2013, employers may file one Form 941-X for the fourth quarter of 2013 to correct overpayments for all quarters of 2013. For open tax years prior to 2013, employers may also file just one Form 941-X for the fourth quarter of the year to make corrections for all quarters of the year. Make sure you mark the Form 941-X on the top of the first page with “WINDSOR” (yes, the IRS specified this should be bold and all-caps).

If you choose to move forward with a refund claim, the Notice contains additional detail regarding how the form chosen to claim the refund should be completed.