Monthly Archives: April 2015
Monday, April 20, 2015

On the eve of the March 27, 2015 effective date for the DOL’s final rule amending the definition of “spouse” under the federal Family and Medical Leave Act (“FMLA”), a Texas district court preliminarily enjoined the rule’s application to the states of Texas, Arkansas, Louisiana and Nebraska. The case is Texas v. U.S., No. 7:15-cv-0056 (N.D. Texas 2015) and the full opinion may be found here.

Under the final rule, employers must look to the state where the marriage was entered into (instead of the state in which the employee resides) to determine the employee’s spouse. The revised definition of spouse includes same-sex marriages, common law marriages, and same-sex marriages entered into abroad that could have been entered into legally in at least one state. The rule was enacted in response to the Supreme Court’s Windsor decision, which held that the definition of marriage (between one man and one woman as husband and wife) in Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional. However, Section 2 of DOMA, the Full Faith and Credit Statute, which allows states to refuse to recognize same-sex marriages from other jurisdictions, was unaffected by the ruling.

In their pleading, the states argued that the final rule should be enjoined because it contradicted the Full Faith and Credit Statute, the statutory definition of marriage in the FMLA, and their individual state laws – which do not recognize same-sex marriages. The district court found that in issuing the final rule, the DOL had exceeded its jurisdiction and had improperly preempted state law. The DOL filed a motion to reconsider the injunction, but the district court denied the request on April 10, 2015.

The final rule is in effect for all other states. However, the Supreme Court will hear arguments later this month regarding the issue of whether states which do not recognize same-sex marriages should be forced to recognize unions performed in other jurisdictions. The outcome of that case may affect the Texas ruling and/or the FMLA obligations of employers in other states. Stay tuned…

 

Friday, April 17, 2015

Who's Holding Your Piggy Bank?Acting on reaction to a proposed and subsequently withdrawn regulation from October 2010 and attempting to address concerns expressed by both interested parties to the initial proposed regulation and an economic analysis by the Council of Economic Advisors (that the Investment Company Institute considers flawed), the Department of Labor has issued a new proposed regulation expanding the definition of investment advice. The DOL’s stated purpose in doing so is to protect retirement plan and IRA investors from practices engaged in by some advisors whose interest in providing investment advice is conflicted and not in the best interest of the participant or IRA owner.

The proposed rule does not expand the definition of fiduciary per se, but instead it expands the areas of advice that are rendered by ERISA fiduciaries and covers most significantly investment recommendations, investment management recommendations and recommendations of parties who provide advice for a fee or manage plan assets. This has the effect of expanding the net to cover more advisors as fiduciaries. People who provide advice in these areas will fall under the ambit of “fiduciary” in the following situations:

  1. They represent that they are acting in a fiduciary capacity; or
  2. The advice they give is provided pursuant to an agreement, arrangement or understanding that the advice is individualized and directed to the plan participant or IRA owner for consideration in making investment or investment management decisions pertaining to the plan’s assets.

There are a number of specific and important carve-outs to the new rule generally intended to address the concerns expressed by the business and financial communities as well those expressed by a number of Members of Congress. We will address the carve-outs in follow-up posts.

The impact of the new rule is to cause brokers and insurance agents who render advice to plan participants and IRA owners to do so in compliance with ERISA’s fiduciary standard rather than the “suitability” standard under which they render advice today. The DOL’s position is that the suitability standard is not sufficient to prevent the rendering of conflicted advice that it believes costs retirees billions of dollars in inappropriate fees. The brokerage industry contends, in part, that the cost of compliance with the new rule, the enhanced risk of litigation, and the fact that fees must necessarily be higher to provide advice on an individual basis make the rule unworkable and that small plans and small investors will lose the ability to obtain investment advice and to continue to work with a trusted advisor. At a minimum, compliance with the new rule is expected to alter the way that brokerage houses do business.

Another concern that would impact all fiduciary advisors rendering advice to a plan on a fee basis that is not level is that they would engage in a prohibited transaction should they provide advice to a participant about rolling over her account to an IRA unless they enter into a complex Best Interest Contract to be discussed in a later blog. One contention is that this would tilt the playing field by giving advisors charging level fees to the plan an unfair business advantage.

There is now a 75-day comment period, and lines for and against the rule have generally been drawn. It’s possible that the new rule might be modified in response to comments, but the Administration is bound and determined to get the regulation finalized sooner rather than later.

Thursday, April 16, 2015

WellnessOn April 16, the Equal Employment Opportunity Commission (the “EEOC”) finally gave a peek into its thinking about what constitutes a “voluntary” wellness program under the Americans with Disabilities Act (the “ADA”). Recall that, while there are extensive wellness rules under HIPAA and ACA for these types of programs, there was always a gray area with regard to whether these programs were considered “voluntary” for ADA purposes. The EEOC recently started suing companies over their programs and was heavily criticized for doing so without issuing any guidance (aside from a couple of non-binding opinion letters). These proposed regulations are the beginnings of the guidance the critics have requested. While not binding, they are a good starting point for understanding where the EEOC may end up.

Under the proposed rules, a workplace wellness program will be “voluntary” if:

  1. It does not require employees to participate.
  2. It does not deny coverage under a plan or benefit package for non-participation. It also cannot limit benefits for employees who do not participate.
  3. The employer does not take an adverse employment action against employees (presumably for not participating).
  4. If the program is part of a group health plan, the employer must provide a notice in understandable language that describes the type of medical information that will be obtained, how it will be used, and the restrictions on the disclosure of that information. The notice also must describe the employer representatives and other parties to whom the information will be disclosed and the methods that the employer will use to ensure the information is not improperly disclosed.
  5. The incentive under the program, when combined with the reward for any other wellness program that is part of a group health plan, cannot exceed 30% of the total cost of employee-only coverage under the plan.

There are a few observations from a review of the proposed rule. First, under the HIPAA rules, the incentive can be up to 30% of the total cost of family coverage if spouses and dependents are eligible to participate in the wellness program. The EEOC’s proposed rules contain no such expansion. It is not clear whether the EEOC feels it does not have jurisdiction over non-employees participating in a health plan or if it is trying to reign in the possible incentives under wellness programs.

Also, under the ACA wellness rules, the incentive can swell to 50% of the cost of coverage if the program is related to tobacco use cessation. The EEOC noted that a program that merely asks individuals if they are tobacco users is not subject to the ADA because that information is not considered a disability-related inquiry or a medical examination. Therefore, the incentive for that type of program could still go as high as 50% of the cost of coverage. However, if biometric screening (like a blood test) is used to determine the presence of tobacco, then it would be subject to the EEOC’s requirements, when they are finalized.

Additionally, the second requirement that the program “cannot limit benefits for employees who do not participate” raises a concern for disease management type programs which may provide additional benefits for employees who choose to participate. Usually, those types of programs do not include a penalty for non-participation, but it would be helpful to see a carve-out for these types of programs.

Fourth, in the preamble, the EEOC takes issue with the opinion in Seff v. Broward County where the court ruled that a wellness program that is part of a group health plan does not have to comply with the “voluntariness” requirement under a separate ADA exception for bona fide benefit plans. The EEOC’s position is that Seff was wrongly decided because that logic would render the “voluntary” exception as irrelevant. However, the EEOC’s analysis fails to recognize that employers can (and do) offer wellness programs to their employee populations, regardless of health plan participation. Therefore, it would not be inconsistent to say that a wellness program that is part of a group health plan satisfies the separate “bona fide benefit plan” exception and one that is available to employees generally must satisfy the “voluntary” exception.

The EEOC also noted that employers are still required to give reasonable accommodations for employees with disabilities to earn the financial incentives. The EEOC stated that providing a reasonable alternative standard and notice, as required by HIPAA, would likely (although not conclusively) fulfill this obligation. The EEOC also said the ADA requires a reasonable accommodation for participation-only programs (i.e, programs which reward participation regardless of results), even though HIPAA would not require a reasonable alternative standard and notice for those programs. However, the examples include offering a sign language interpreter for a deaf employee who is attending one of the classes, so it is not clear that the EEOC necessarily requires an alternative standard for participation-only programs.

Comments to the proposed rule are due 60 days after it is published in the Federal Register (which is expected to happen on April 20).

Wednesday, April 15, 2015

In response to comments from the employee benefits community, the IRS has issued two updates in quick succession for the Employee Plans Compliance Resolution System (EPCRS). The new procedures – Rev. Proc. 2015-27 and Rev. Proc. 2015-28 – do not replace, but provide modifications and clarifications to Rev. Proc. 2013-12.

Rev. Proc. 2015-27

Issued on March 27, 2015, Rev. Proc. 2015-27 clarifies the methods that may be used to correct overpayment failures and makes changes to various provisions of Rev. Proc. 2013-12. For overpayment failure corrections, plan sponsors are no longer required to only recoup large overpayments from plan participants and beneficiaries, but may explore alternative methods of correction. A brief summary of the Rev. Proc. 2015-27 modifications is available here. The modifications are effective July 1, 2015, but plan sponsors may apply these provisions beginning on March 27, 2015.

The IRS will accept comments from the public until July 20, 2015.

Rev. Proc. 2015-28

Rev. Proc. 2015-28, issued on and effective April 2, 2015, modifies EPCRS by adding safe harbor correction methods for employee elective deferral failures in both 401(k) and 403(b) plans. A plan sponsor who discovers a failure quickly is either relieved of making a QNEC to restore missed elective deferrals or is required to make a lesser QNEC.

Rev. Proc. 2015-28 adds a new definition of “employee elective deferral failure” to EPCRS Appendix A, which includes

  • Affirmative elections, including the failure to inform of employees of eligibility and the failure to implement an affirmative election,
  • Auto enrollment (including an affirmative election intended to override an automatic enrollment), and
  • Auto escalation.

The new safe harbor correction methods do not apply to failures involving after-tax contributions.

Safe Harbor Correction Method for Automatic Enrollment Failures

If the failure is discovered by the extended due date for filing Form 5500 for the plan year of the failure, i.e., 9½ months after the close of the plan year or October 15 for calendar year plans, a QNEC to make up for the missed deferral opportunity is not required if:

  • Timing. Correct deferrals begin no later than the first paycheck on or after the last day of the 9½ month period; or if the plan sponsor had notice of the failure, on or after the last day of the month after the month of the notification
  • Notice. Notice of the failure is given to the affected employees within 45 days after the correct deferrals begin. The notice must include the information specified in the modified Appendix A of Rev. Proc. 2013-12.
  • Corrective Matching Contributions. Corrective matching contributions, adjusted for earnings, are made for the entire period of the failure based on missed deferrals that would have been made according to the terms of the plan. Earnings can be based on the plan’s default investment if the affected participant had not made an investment election. The contributions must be made by the last day of the second plan year following the plan year for which the failure occurred.

This correction method will not be available for plan failures that occur after December 31, 2020.

Safe Harbor Correction Methods to encourage Early Correction

Rev. Proc. 2015-28 also includes safe harbor correction methods to encourage the early correction of employee elective deferral failures depending on the length of the failure.

If the failure is discovered within 3 months, a QNEC to make up the missed deferrals is not required if:

  • Timing. Correct deferrals begin no later than the first paycheck on or after the last day of the three- month period; or if the plan sponsor had notice of the failure, on or after the last day of the month after the month of the notification.
  • Notice. Notice of the failure is given to the affected employees within 45 days after the correct deferrals begin. The notice must satisfy the requirements in the modified Appendix A of Rev. Proc. 2013-12.
  • Corrective Matching Contributions. Corrective matching contributions, adjusted for earnings, are made for the entire period of the failure based on missed deferrals that would have been made according to the terms of the plan. The contributions must be made by the last day of the second plan year following the plan year for which the failure occurred.

If the failure is discovered after 3 months, but before end of the second plan year after the plan year of the failure (the period for self-correcting a significant failure), the plan sponsor must make a QNEC equal to 25% of the missed elective deferral opportunity (instead of 50%) if:

  • Timing. Correct deferrals begin no later than the first paycheck on or after the last day of the second plan year following the plan year in which the failure occurred; or if the plan sponsor had notice of the failure, on or after the last day of the month after the month of the notification.
  • Notice. Notice of the failure is given to the affected employees within 45 days after the correct deferrals begin. The notice must satisfy the requirements in the modified Appendix A of Rev. Proc. 2013-12.
  • Corrective Matching Contributions. Corrective matching contributions, adjusted for earnings, are made for the entire period of the failure based on missed deferrals that would have been made according to the terms of the plan. The contributions must be made by the last day of the second plan year following the plan year for which the failure occurred.

The notice required for all 3 new safe harbors must include general information about the failure, a statement that the correct employee deferrals have commenced or will commence soon, an explanation that the affected employees can increase their deferral percentages to make up the missed deferrals, subject to the § 402(g) limit, and the name of plan and contact person.

The new safe harbor correction methods provided by Rev. Proc. 2015-28 allow plan sponsors to reduce the costs associated with correcting such failures.

Thursday, April 9, 2015

ChartCompanies should be aware that at least some major accounting firms are questioning whether discretionary aspects of clawback policies trigger variable accounting for compensatory equity awards granted by those companies. Existing accounting guidance (ASC 718-10-30-24) would seem to suggest that clawback features should not disrupt fixed accounting treatment because of their contingent nature.

Now, however, PricewaterhouseCoopers and KPGM, at least, are publicly expressing concerns about clawback policies focusing on their discretionary, rather than contingent, nature. A 2013 PricewaterhouseCoopers survey of 100 companies indicated that nearly 80% of those companies had clawback policies that had problematic discretionary provisions. A clawback policy could involve discretion as to what circumstances it may apply; whether it should be applied; and, if applied, how severely it should be applied. It seems that all aspects of discretion may be problematic. Companies adopting or modifying existing clawback policies should evaluate the potential risks of discretionary provisions and consider consulting with their independent accountants before adopting or revising those policies. This will be particularly true for public companies when it comes time to evaluate compliance with the much-anticipated SEC guidance on clawbacks that will finally implement the Dodd-Frank legislation of 2010.

Tuesday, April 7, 2015

For many years, medical plan drafting was viewed as a commodity. Insurance companies, third-party administrators and brokers often prepared summary plan descriptions and plan documents for self-insured medical plans using form documents. With the passage of the Affordable Care Act and other health-care related laws, however, medical claims, appeals and litigation have increased exponentially. In many instances, the terms of the plan documents have been outcome-determinative with respect to these disputes. There never has been a better time for an employer to step back and take a comprehensive review of the terms of the employer’s self-insured medical plan document and summary plan description, not only for compliance reasons but also to put the employer in the best position in the event of any dispute. The following are three drafting tips which might be considered during such a review.

Kitchen SinkAvoiding the “Kitchen Sink” Appeal. Increasingly, our clients have been receiving lengthy appeals of denied claims for benefits. We refer to these epistles as “kitchen sink appeals” because the authors of the letters seemingly throw in everything but the kitchen sink. A typical kitchen sink appeal is prepared on behalf of an out-of-network provider who claims standing to appeal based on an assignment of benefits by a plan participant. A kitchen sink appeal is often a “cut-and paste” compilation of 25 pages or more, usually containing long passages and references to cases which appear to have no bearing whatsoever on the appeal. Usually, only one or two pages of a kitchen sink appeal contain any marginally relevant point, and yet the claims administrator must respond to the appeal in compliance with the strict requirements of the ERISA claims procedures.

One manner of dealing with these nuisance appeals is to draft the medical plan document to prohibit the assignment of claims to third parties. Courts have uniformly recognized the enforceability of anti-assignment clauses, which are particularly effective in preventing kitchen sink appeals made by out-of-network providers who seek through litigation higher reimbursement amounts than they could negotiate with the plan directly.

Subrogation Provisions. Medical plans should include carefully drafted subrogation provisions which are informed by Supreme Court precedent in Sereboff v. Mid Atlantic Medical Services, Inc. and U.S. Airways v. McCutchen. For example, a well-drafted subrogation provision will expressly state that the common law “make-whole doctrine” does not apply and will require plan participants to do nothing to prejudice the plan’s subrogation rights.

On March 30, the Supreme Court announced it would review the Eleventh Circuit’s decision in Board of Trustees of the National Elevator Industrial Health Benefit Plan v. Montanile, another medical plan case involving subrogation. The Supreme Court’s decision in Montanile may further inform best practices in drafting medical plan subrogation provisions in self-funded plans.

Plan Limitation Periods. The period of time during which a plan participant may bring a lawsuit in connection with a claim for medical benefits is typically governed by the most analogous state statute of limitations, which may be as long as ten years. A medical plan may be drafted, however, to shorten the limitations period for bringing such a lawsuit. Recent cases have upheld such provisions, provided they are reasonable and afford a long enough period of time to file a lawsuit after the administrative appeals process has been completed.

Friday, April 3, 2015

BabyPreviously in this series of blog posts relating to the federal Family and Medical Leave Act (“FMLA”), we discussed which couples do not have FMLA rights under the definition of “spouse,” as well as the limitations that can be placed on couples’ leave rights when both spouses work for the same employer.

To wrap up this series, we ask a “couples” question that you may have been thinking but were afraid to ask: Do I have to let my employee take leave to care for a covered family member (such as a child or parent), when the employee has a stay-at-home spouse who may be available to provide the necessary care?

The bottom line: Yes.

The FMLA provides a right to eligible employees to take leave for qualifying reasons. In other words, if the employee is eligible for leave, the leave is needed for a reason covered by the FMLA, and the employee has leave time available, then the employee is entitled to take the leave.

There are no qualifiers on this right relating to whether the employee is the only person who can provide the necessary care. In fact, the DOL thought of this because the regulations expressly state that, “[t]he employee need not be the only individual or family member available to care for the family member or covered servicemember.”

Of course, if someone else is available to provide the care, an employee may choose not to take FMLA leave, especially when such leave will be unpaid. But that decision is the employee’s to make.

Wednesday, April 1, 2015

Risk BoggleIn the past few years, several large pension plan sponsors have sought to decrease the risk associated with their pension plans by purchasing group annuities to cover future payments or by offering a lump sum window during which eligible participants were permitted to elect a cash lump sum buyout. Many other plan sponsors are considering following suit. This trend has been accelerating in response to higher PBGC premiums, lower interests rates and updated mortality tables reflecting increased longevity.

The PBGC has an interest in tracking this activity because the decrease in the number of participants reduces the per-participant premiums collected by the PBGC making it more difficult for it to fulfill its role in protecting pension benefits. As a result, beginning with the PBGC premium filings for 2015, due for most plans on October 15th, the PBGC has added a new requirement that plan sponsors provide data regarding risk transfer activities.

The instructions for the 2015 PBGC filing require plan sponsors to report group annuities purchased and lump sum windows offered in 2014 and 2015. However, a plan sponsor can disregard annuities and lump sum windows offered under certain routine circumstances as well as annuities purchased and lump sum windows closed less than 60 days before the filing.

The information that must be filed includes the following:

  • Annuities – Plan sponsors must report (1) the number of persons in pay status for whom an annuity was purchased, and (2) the number of persons not in pay status for whom an annuity was purchased.
  • Lump sum windows – Plan sponsors must disclose separately for those in pay status and those not in pay status (1) the number of persons who were eligible for the window, and (2) the number who actually made the lump-sum election.

Reasonable estimates may be used for the 2015 filing but more exact counts may be required in future years. Plan sponsors should gather this data for the 2015 filing and also take steps to track this data for any future de-risking activities.

Plan sponsors should also be aware that concerns have been raised about the need for regulation in this area to protect participants by requiring adequate disclosures. For example, participants should consider: (1) whether they want the responsibility of investing the money on their own, (2) the potential challenge of generating a comparable income stream in the retail market, and (3) the fact that they could be leaving a potential early retirement subsidy on the table if their employer offered one in the future. On the other hand, it may be appropriate for some participants to accept the offer depending on their personal circumstances. Despite these concerns, no applicable guidance has been published to date. That said, plan sponsors should consider these issues carefully in designing an offer and also be sure to make adequate disclosures.