Employee Benefits Legal Blog

2013 Limits for HDHPs and HSAs

Keith R. McMurdy — Tue, 15 May 2012 08:42:25 -0500

The IRS recently released Rev. Pro. 2012-26 that gives us the limits for 2013 minimums and maximums for HSA and HDHP plan contributions.

Maximum Annual HSA contribution: $3,3250 for single, $6,450 for family
Minimum HDHP Deductible: $1,250 for single, $2,500 for family
Maximum HDHP Out-of-Pocket: $6,250 single, $12,500 family

Remember that as a plan sponsor, it is not enough to simply change your numbers. You have to revise or amend plan documents that have specific reference to these limits and make sure they are distributed to participants.

Don't Sign that Contract: Owners Should be Wary of Language in Bargaining Agreements

Keith R. McMurdy — Mon, 14 May 2012 11:17:45 -0500

Owners of companies should avoid signing collective bargaining agreements themselves. Maybe that is too broad of a statement, but I present it because over the last couple of years, a series of cases have been decided that put personal liability on the owners of companies for withdrawal liability and delinquent contributions because they personally signed the agreement obligating the company to make contributions to a multiemployer fund.

The theory from the fund side goes something like this: unpaid contributions to ERISA funds constitute plan assets when they are due. A person who exercises discretionary authority over plan assets is a fiduciary, so if your company is obligated to make contributions to a fund and the company does not do it, you have breached a fiduciary duty and are personally liable for the deficiency. Lots of individual owners are now being sued for "breach of fiduciary duty" and, in many instances, have been found to be personally liable for the delinquent contributions.

What typically happens is that the fund trust agreement provides that contributions are assets of the plan when due. Then the collective bargaining agreement contains a very innocuous provision that, in addition to creating a contribution obligation, incorporates all of the trust provisions into the contract. So by signing the contract, you acknowledge and agree to be bound to the proposition that contributions are plan assets when due. So if the company does not pay, you as the owner are personally liable because it is assumed you exercised the authority by deciding not to pay.

The counter to this position is that ERISA fiduciary status does not attach to someone unless they know they are a fiduciary and surprising liability on owners and corporate officers is not favored. If the owner of the company does not sign the bargaining agreement, he or she is not agreeing to be bound by the terms of the trust and fiduciary status does not personally attach to them. In short, if you personally do not sign the agreement that requires contributions, you are not personally bound by the trust provisions. Now, having said this, it is still possible to have some claim for fiduciary obligation associated with a decision to not make contributions. But it certainly helps in defending a claim for personal liability if you have not signed the document creating the contribution obligation.

If you are the owner of a company and don't have the luxury of having someone else sign, perhaps a good fall back position is to actually get a copy of the trust agreement for the funds and read it as well as the bargaining agreement to see if a "springing" fiduciary status is being created. But don't just sign and assume. Read and understand because personal liability for delinquent contributions, and even withdrawal liability, is something you definitely want to avoid.

A Quick Look at Withdrawal Liability for Employers in the Building and Construction Industry

Keith R. McMurdy — Thu, 10 May 2012 12:30:05 -0500

Employers who contribute to multiemployer pension funds are more and more concerned with unfunded liability and potential withdrawal liability. That exposure can be substantial and it is important to prepare to deal with it before taking any actions that trigger liability. But within the concept of withdrawal liability generally, there is a special consideration for employers in the building and construction industry generally that merits a closer. It provides an exception to withdrawal liability in certain circumstances involving the building and construction industry.

ERISA generally provides that an employer who ceases to have a contribution obligation to a plan has a withdrawal. Then it has a special section that provides that in the case of (1) an employer that has an obligation to contribute under a plan for work performed in the building and construction industry, a complete withdrawal occurs when (2) substantially all the employees with respect to whom the employer has an obligation to contribute under the plan perform work in the building and construction industry, UNLESS (3) the plan primarily covers employees in the building and construction industry, or is amended to provide that this subsection applies to employers described in this paragraph, and then ONLY IF (4) the employer continues to perform work in the jurisdiction of the collective bargaining agreement of the type for which contributions were previously required, or resumes such work within 5 years after the date on which the obligation to contribute under the plan ceases, and does not renew the obligation at the time of the resumption.

Each step is important. (1) are you an employer in the building and construction industry? The term "building and construction industry" is not defined in MPPAA but it is under 8(f) of the Taft-Hartley Act, 29 U.S.C. Sec. 158(f), which contains the same term. Section 8(f) is applicable to employers "engaged primarily in the building and construction industry, defined as "subsuming the provision of labor whereby materials and constituent parts may be combined on the building site to form, make or build a structure." It takes a case by case review of your business, but you don't get the exception unless you are in the building and construction industry.

Step (2), substantially all of your employees have to perform work in the building and construction industry. Not all of them, but substantially all. So you have to determine how many using the same criteria to determine if the company itself is in the industry. Step (3) requires you to contribute to a plan that primarily covers employees in the industry, or has specifically been amended to state the exception applies. So you have to review the plan and know who it covers and what it says before knowing if you get the exception. Finally, step (4). If you don't continue to perform covered work in the jurisdiction and don't resume performing covered work for at least 5 years, then there is no withdrawal.

So why bring it up? Because this 4 step analysis is something that should be done BEFORE a withdrawal occurs. Don't withdraw and assume you are exempt under this exception. Research each step carefully to make sure the exception really applies or the results could be disastrous. And of curse, make sure to consult with your attorney at Fox Rothschild for assistance.

Defined Benefit Plan Investment Options: The Never-ending Review

Keith R. McMurdy — Mon, 07 May 2012 10:36:42 -0500

As I have discussed here before, the new fee disclosure regulations are going to obligate plan sponsors to provide information to participants about what it costs to maintain the plan. This is certainly going to require sponsors to be more active in their review of fees and more active in their pursuant of controlling those fees. But because participants are now going to have access to information about fees, we are also likely to see more inquiries about investment choices and options available because some investment options simply cost more to choose. So that challenges sponsors to review plan investment options.

We know from prior cases the importance of not only having an investment policy statement, but in following the terms of that statement. There are also numerous cases that remind us the importance of providing a diverse pool of investment options (although not an unlimited pool). The plan sponsor is charged with making investment options available in a manner consistent with their investment policy statements. So simply making more options available to participants is not enough if it runs afoul of the policy statement. Likewise, not following the dictates of your policy statement when making investment options available creates its own set of problems.

Then, consider default investment elections and whether your plan provides for them and are they memorialized in your policy statement. Your default election should be a reasonable one (meaning not too risky or too conservative). Plus, your default investment option has to be reviewed to see if the fees and costs associated with that option are reasonable. So you have to watch performance as well as fees to make sure you have a reasonable selection.

To recap, plan sponsors have to look at investment options to see if they are reasonable and if you have enough options, whether they fit within your investment policy statement and whether the fees and expenses are reasonable for those options. And you have to do it with regularity because now you have an annual reporting requirement to participants. A new age of review is upon us ad it pays to be diligent to avoid future litigation. But you can always ask for assistance from your attorneys at Fox Rothschild.

A Late COBRA Notice is Not Retaliation

Keith R. McMurdy — Fri, 27 Apr 2012 09:07:37 -0500

Sometimes displaced employees try to co-mingle law to suggest a variety of nasty acts by their employer. Sometimes employment law and benefits law can overlap, and sometimes they don't. Such was the case in Thompson v. Morris Heights Health Center, recently decided by the U.S. District Court for the S.D. of New York.

Thompson was terminated as an employee from the medical center and filed a claim with the EEOC, claiming that her employer had retaliated against her in violation of Title VII of the Civil Rights Act for filing a previous EEOC charge. In her latest EEOC charge, she alleged, in part, that the medical center retaliated against her by failing to provide a timely COBRA notice and election form. The late part was correct. The employer did send it four months late, but when it finally did send it, it offered coverage retroactive to the original qualifying event date. The EEOC dismissed her claim and she filed a federal court action alleging that her former employer (1) did not timely issue her information regarding benefits under COBRA, and (2) failed to expeditiously provide her with a statement of benefits and a disbursement under the Pension Plan.

The Court quickly disposed of the pension plan claim because it so happened that the plan was not a calendar year plan (the year ended 6/30), and since her request was mid-year, it was not unreasonable to have to wait until after the end of the plan year to receive a statement. On the COBRA issue, the court ruled that Thompson failed to demonstrate that the late COBRA notice was "post-employment retaliation in violation of Title VII." The Court reasoned that because Title VII is limited to to prohibit only actions that affect current employment or the ability to secure future employment, she would have had to prove that the delay in furnishing her COBRA election notice had hindered her ability to search for or procure future employment. She could not show that she had suffered "any prejudice from this delay of the sort cognizable under Title VII." So her claim was dismissed.

It is important for employers to note that even though Thompson could not make a case under Title VII for post-employment retaliation, she still could have tried to assert a claim for COBRA penalties for the late election notice (although why she chose not to is not reported). So this decision does not say there could not be any remedy, just not a remedy under Title VII. But it does serve as a reminder that the actions taken by the plan, and the employer as plan sponsor, are distinct from the actions taken by the employer as employer. Sometimes that works in the employer's favor.

For assistance in distinguishing actions taken as an employer or as a plan sponsor, please do not hesitate to call you attorney at Fox Rothschild.

Failure to Monitor Fees is a Breach of Fiduciary Duty

Keith R. McMurdy — Thu, 19 Apr 2012 11:02:23 -0500

In prior entries, I have talked about the new fee disclosure rules and also how they would impact plan sponsors. Coupled with these disclosures is the underlying issue of whether a plan sponsor breaches a fiduciary duty by failing to monitor fees and actively pursue the opportunity to reduce fees to plan participants. Well, now we have a court decision that pretty well clears that up.

In Tussey v. ABB, Inc., which recently came out of the Western District of Missouri, the Court found that a plan sponsor breached its fiduciary duty to plan participants because it failed to monitor record keeping fees and revenue-sharing payments and paid record keeping fees in excess of the market cost to subsidize other record keeping services. Factually, ABB sponsored two 401(k) plans that offered Fidelity Investments mutual funds as investment options. Fidelity was also the investment adviser and the record keeper. Fidelity then used some of those fees to offset losses it was taking on other services provided to ABB. There were other issues related to investment options as well, but the key consideration here was the excessive fee issue.

While revenue sharing can be used to pay for plan record keeping services, the Court felt that by not actually calculating the amount that was generated by revenue sharing for Fidelity, ABB could not properly analyze how revenue sharing would benefit the plans and could not use the relative size of the plan as leverage to offset or reduce record keeping costs. So by failing to make a "meaningful effort" to monitor revenue sharing payments and insure that revenue sharing payments were actually being used to reduce record keeping costs, ABB breached it's duty to defray expenses. Plus, using the revenue sharing arrangement to offset other costs was completely inappropriate because it resulted in the plans paying above market rate for the record keeping services generally. All told, the liability was more than $13 million, which is a pretty hefty penalty.

Certainly the facts of this case suggest there was something fishy about the arrangement. However, it was not a development that occurred overnight and you can imagine how, over time, minor decisions related to costs and fees can compound into major problems for plan sponsors. Plan sponsors should make themselves keenly aware of what fees and expenses can and cannot be charged to the plan and also make inquiries about the reasonableness of fees. This case also serves as a reminder that regular review of fees (monitoring) is an important component of satisfying that fiduciary obligation and your plan should be reviewed on a regular basis to see if (1) you are being charged the correct amounts under your agreements, (2) those amounts are reasonable and (3) there are ways to reduces those fees. Otherwise, you might end up paying back the plan.

For assistance in evaluating your plan, contact your attorney at Fox Rothschild.

PPACA and "Linguistically Appropriate Services"

Keith R. McMurdy — Fri, 13 Apr 2012 12:40:16 -0500

Under ERISA, there are come requirements for plan administrators to provide documents or notices in languages other than English. If a plan has participants who are literate only in a particular foreign language, the plan administrator may be required to provide the SPD or required notices written in that language, along with the SPD, stating that assistance in understanding the SPD or notice is available. Generally for plans with fewer than 100 participants as of the beginning of the plan year, the requirement applies if 25% or more of participants are literate only in a particular foreign language. For plans with 100 or more participants as of the beginning of the plan year, the requirement applies if the lesser of 500 participants or 10% of the total number of participants are literate only in a particular language.

Under PPACA, which incorporated Section 2719 of the Public Health Service Act, group health plans and health insurance issuers offering health insurance coverage have to provide relevant notices in a "culturally and linguistically appropriate manner." The idea is that plans will make certain accommodations for notices sent to an address in a county where 10% of people who reside in that county are are literate only in the same non-English language. CMS recently published its "Culturally and Linguistically Appropriate Services County Data" which lays out which counties are affected.

What this means is that the notices regarding enhanced internal and external appeals and also the summary of benefits coverage have to be distributed with a statement, prominently displayed, in any applicable non-English language, clearly indicating how to obtain assistance in understanding the notices. If requested, the notices also have to be provided in the applicable non-English language. In short, plan sponsors have to be prepared to include non-English directions on their notice and also to have non-English notices available,

A quick review of the county list provides some real-world examples. Notices mailed to addresses in Bronx County, New York, have to include statements in Spanish. This is also the case for Union County, New Jersey and Los Angeles County, California. San Francisco County has to have the notice in Chinese, but not Spanish. So first, review to find our where you are sending notices BY COUNTY in each state where you have covered participants. Second, check to see if the county you are sending the notices to requires special non-English notice. Third, prepare appropriate notices in that language and make arrangement for translation services to make sure participants can obtain assistance in understanding the notices.

Obviously PPACA's status with the Supreme Court remains up in the air. But it might be worthwhile for plan sponsors to check this list out and see what they might have to prepare for if it is upheld.

401(k) Loans: Avoid Problems for Your Plan

Keith R. McMurdy — Mon, 09 Apr 2012 10:11:20 -0500

Last week I read two interesting articles about 401(k) plan participant loans. One article suggested that in a struggling economy, plan participants were better off borrowing from themselves through a plan loan. Another article reported that 80% of terminated employees who had outstanding loans from their previous employer's 401(k) plan defaulted on those loans. It also reported that nearly 20% of 401(k) plan participants maintained an outstanding loan. For plan sponsors, this can create a real problem because dealing with plan loans is not always as simple as it sounds.

IRC Code §72 generally sets out restrictions on plan loans but it does not restrict the number of loans a plan participant can take. §72(p)(2) provides that a loan to a plan participant will not be treated as a distribution to the participant as long as the loan is limited in accordance with the terms of the Code. If a loan does not satisfy the Code’s requirements, then the loan is deemed to be a taxable distribution to the participant. This can happen if the participant does not make the payments required under the terms of the loan. Because the plan sponsor (usually the employer) has and obligation to properly report and treat loans as taxable or non-taxable based on these rules, administering outstanding loans can be a problem hidden away waiting to jump out at you if you are ever audited.

The IRS has a couple of useful "Fix-it" statements relating to 401(k) loans. One discusses how to treat defaults in payment. The second addresses non-conforming loans. Both look at how to fix the problems, which means they are problems that have to be fixed by the sponsor. They also suggest some possible ways to avoid mistakes in loan administration, like permitting cure periods for missed payments, requiring transmittal of loan information to payroll before loans are permitted, reviewing plan documents regarding loan requirements and actually creating a written loan policies that should be followed every time a loan is requested.

On top of that, consider a couple other suggestions. Maybe your plan should only permit one loan at a time or there should be a limit on the size and scope of the loans. You should also consider your procedures for monitoring and collecting loans from participants after they have terminated employment and establish a procedure for keeping track of whether those loans have been satisfied. Since non-conforming loans are clearly a component of the IRS's audit package for 401(k) plans, it pays to know more about loans, better manage them and accurately report them before you face an audit. So don't simply assume plan loans are being handled properly. Look into them now and fix your mistakes. If you need assistance, your attorney at Fox Rothschild can help you sort it out..

PPACA March Madness: The Arguments in Brief

Keith R. McMurdy — Tue, 03 Apr 2012 09:36:10 -0500

Last week, the United States Supreme Court heard oral arguments on the constitutionality of the Patient Protection and Affordable Care Act (PPACA). Call it an employee benefits version of "March Madness." The arguments were heard over 3 days and while the media generally reported that the "individual mandate" was the key argument, there were actually 4 separate issues being argued. I will attempt to summarize them below, but without betting on the outcome of any particular argument.

"Does the Anti-Injunction Act Bar the Challenge?"

The Anti-Injunction Act precludes the court from hearing challenges to assessments or collection of taxes before they actually go into effect. The Court itself was concerned about whether or not it even had the ability to hear this case before the 2014 penalties and assessments went into effect. Since both the White House and opponents of PPACA are anxious to have this case decided, both sides argued that the Anti-Injunction Act does not apply. The Supreme Court actually appointed an independent lawyer to argue that the Act did apply so that the Court could be certain it heard full argument on the issue. So day one involved an argument about whether or not the case was "ripe" for consideration before the mandate and tax go into effect.

"Is the Individual Mandate Constitutional?"

Day two saw the challenge and defense of the individual mandate. The White House argued that the individual mandate regulates the national health insurance market which is permitted because the Constitution gives Congress the power to regulate interstate commerce, because Congress can tax under the "General Welfare Clause," and Congress can do what is "Necessary and Proper" to carry out its ability to regulate interstate commerce. Opponents argued that the mandate does not actually regulate commerce but instead forces buyers into the commerce stream. Therefore, PPACA does not regulate commerce but rather forces people to engage in commerce.

"Is the Individual Mandate Severable?"

Day three saw arguments related to whether the individual mandate could be separated from the other provisions of PPACA. To hear this argument, the Court had to presume the mandate was unconstitutional and then looked to see what, if any, part of PPACA might survive. Opponents argued that if the mandate falls, the whole act must fall, while the White House argued that many other new rules should remain. Day three also brought arguments related to the constitutionality of the expansion of Medicaid, with states arguing the required expansion (which makes them extend Medicaid to more participants in order to get federal funding) was unconstitutional "coercion" by the Federal government. The White House argued that the "Spending Clause" of the constitution means Washington can set whatever rules it wants for states to get federal funds.

Despite everyone saying they know, nobody really knows how the Court will rule. It is anticipated that a decision will be issued before the end of the current Court term, which is in June of this year. Regardless of the outcome, the decision will have significant impact on employers, insurers and plans. However, because compliance is still required until a ruling is issued, and may still be required after a decision is issued, employers and plan sponsors should continue to prepare for compliance and not gamble on the outcome.

Don't Forget About Spouses (Participants' Spouses, That Is)

Keith R. McMurdy — Wed, 28 Mar 2012 12:21:52 -0500

Late last year I reviewed the case of Milgram v. Orthopedic Associates which dealt with a plan having to essentially pay twice because it gave too much money to an ex-spouse in a QDRO distribution. Now consider the other side of the coin, where a plan makes a distribution to a participant without protecting the rights of the spouse. They are beneficiaries just like participants and it is important to make sure you know they are out there so you can address their claims.

For most defined benefit pension plans, these plans generally have to provide a Qualified Joint and Survivor Annuity (QJSA), or a Qualified Preretirement Survivor Annuity (QPSA) if the participants dies before retirement payments are made. Generally, if a married participant in a retirement plan with survivor annuity benefits wants to receive a distribution in a different form, the spouse must provide written consent and the consent must be witnessed by a plan representative or notary public. As a general rule, most profit sharing and 401(k) plans are safe harbored from the QJSA rules but they still require spousal consent to designate a beneficiary other than a spouse.

So what happens if someone gets married AFTER they have already enrolled in your plan and forgets to tell you? Depending on the terms of the plan, their status as a "spouse" may create claims by a beneficiary even if you are not aware of it. Call it Milgram in reverse...the spouse makes a claim after the distribution is made to secondary beneficiaries or the participant. How can you protect your plan against "springing" spouses who appear without your knowledge? Or maybe people who are not spouses that you don't find out about the divorce until after the participant dies and forgot to remove the ex-spouse from the designation form? Lots of potential pitfalls relating to spouses as beneficiaries.

While I don't have an absolute answer to dealing with these issues, consider the open-enrollment period for your health plan as an opportunity to take stock of your retirement plan participants and their beneficiary designations. If you are giving participants the opportunity to change their investment elections (and you should be), you should also remind them to update their beneficiary designations and their marital status. Your duties as a fiduciary mean more than just assuming your participants will tell you about changes. Sometimes you have to remind them to tell you.

More on Summary of Benefits Coverage: FAQ Part 8

Keith R. McMurdy — Fri, 23 Mar 2012 10:04:51 -0500

In case you missed it, the Supreme Court is hearing arguments next week on the constitutional challenges to health care reform. But government soldier's on, so Monday the EBSA release is FAQ Part 8 relating to implementation of PPACA. Here are some highlights:

We know that the Summary of Benefits Coverage (SBC) must be delivered to the employee and beneficiaries at initial application or enrollment, upon a change after enrollment and before the plan year, at renewal, at a special enrollment and upon request. FAQ 8 specifies that the “upon application” delivery requirement applies whenever a person completes materials to enroll even if no application is required. So a good safe harbor option may be to provide the SBC any time you are generally providing any plan documentation to participants or potential participants.

For a timing perspective, the obligation to provide the SBC is based on your plan year. If your open enrollment period commences prior to September 23, 2012, you will not have to comply with the SBC rules and you don't have to provide an SBC until January 1, 2013. If your open enrollment period starts on or after September 23, 2012, you must comply with all of the new SBC rules. Otherwise, assume that after 1/1/13, everyone gets and SBC. Like COBRA notices, the SBC must be delivered to the participant AND to the beneficiaries. If you fail to provide an SBC, a penalty of $100 per day per person (capped at $200 per day per family) applies.

FAQ 8 actually includes model language for an e-card or postcard for use with an evergreen website posting and there is also a requirement that the SBC must be culturally and "linguistically appropriate." This means non-English versions of the SBC must be available and several templates are available on the DOL website. The SBC must be sent to persons who are COBRA qualified beneficiaries and who are on COBRA continuation coverage. It is also important to note that the SBC can be included in the summary plan description as long as it is prominently displayed right after the table of contents. The SBC must be sent to a participant or beneficiary within 7 business days of a request. Finally, an SBC can be provided electronically if the format is readily accessible (such as in an html, MS Word, or pdf format), it is provided in paper form free of charge upon request, and if it is provided via an Internet posting (including on the HHS web portal), the issuer timely advises the plan (or the plan or issuer timely advises the participants and beneficiaries) that the SBC is available on the Internet and provides the Internet address.

Since it is not clear that there will be a final decision on PPACA's status before the 9/23/12 deadline, and we certainly can't predict what part or parts will stand (if at all), it is wise for plan administrators to continue on in their preparation from compliance with the SBC distribution requirements. The good news is that FAQ 8 concludes with a statement that SBC requirements are not expected to change for 2014, so we can take some comfort in that. For compliance assistance, please contact your attorney at Fox Rothschild.

Unions CAN Indemnify Employers If It's In the Contract

Keith R. McMurdy — Wed, 21 Mar 2012 13:00:40 -0500

Back in 2009, we looked at a Third Circuit case called Pittsburgh Mack Sales v. IUOE, Local No. 66 that found that it was not against public policy to require a union to reimburse an employer for withdrawal liability. Well, the Sixth Circuit agrees. In Shelter Distribution v. General Drivers, Warehousemen & Helpers Local Union No. 86, the Sixth Circuit Court of Appeals considered a situation where an employer was assessed withdrawal liability because of a termination of a collective bargaining agreement.

The collective bargaining agreement that expired contained the following provision: "The Union and the members of the Bargaining Unit have agreed that only the liability of the Company to the Pension Benefit Plan are, have been and shall be limited to the actual contributions it makes during the course of the past, present and future Contracts and the Company shall not be liable for any other obligation or contingent obligation of any kind or nature whatsoever. The Union shall indemnify the Company for any contingent liability which may be imposed under MEPPAA." Sure enough, it happened and the company went looking for indemnification from the union.

The union argued that it was against public policy because it shifts the liability Congress imposed on employers and would defeat the statute. But the Court disagreed, noting that since ERISA allows fiduciaries to insure against risk, there must be a way to shift potential liability, including indemnification contracts. So it was not a frustration of the statute and not against public policy.

So when undertaking future bargaining with your unions, consider adding this indemnification language that has now been twice confirmed. Of course, it will be part of collective bargaining and it may cost you something, but it might be worth it in the long run. If you need assistance in dealing with multiemployer plans, or in collective bargaining, please contact your attorney at Fox Rothschild.

HHS Issues Rules on PPACA Exchanges

Keith R. McMurdy — Thu, 15 Mar 2012 10:35:03 -0500

While not directly impacting employers, it is important to note that the latest stage of implementation of PPACA involves defining health insurance exchanges. The Department of Health and Human Services (HHS) has issued "implementing regulations" that finalize some of the proposed rules addressing the creation and operation of these exchanges.

These final regulations address the creation and eligibility for the state exchanges. By way of background, the exchanges are ideally the marketplaces that provide the "qualified health plans" that satisfy the minimum benefit standards. These plans would then be open to employers and individuals.

Some of the key components of the final rules:

Exchanges must provide and maintain a website that contains information about available qualified health plans. This includes displaying a summary of benefits coverage for each qualified health plan offered..
The regulations include requirements about the content, form and timing requirements for notices sent by an exchange to individuals and employers. They must be in writing and provided electronically when possible and include the date the notice was sent and the reason for any intended action.
Exchanges must determine and articulate the eligibility for enrollment in a qualified health plan. Exchanges must allow individuals to enroll in or change from one qualified health plan to another, even outside of the open enrollment period if certain things occur, such as marriage, birth or adoption,
For dental plans, they must allow limited scope dental benefit plans that satisfy certain coverage requirements to be offered through the exchange. A dental plan can be offered as a stand-alone dental plan or in conjunction with a qualified health plan. Cost-sharing limits and restrictions on annual and lifetime limits defined under PPACA apply to stand-alone dental plans for coverage of pediatric dental essential health benefits.

The rules are designed to provide some initial explanation of how the exchanges will be formed and how they will work. Ideally, employers could review these rules to find out what they should offer as a competitive plan and how it might be measured against an exchange. However, the real impact may be simply to give insurance companies a clearer framework for developing their qualified health plan offerings. Certainly more guidance is anticipated but at least we do know that the exchanges are moving forward in case employers choose that as an option.

Know Your Role: Am I a "Settlor" or a "Fiduciary"?

Keith R. McMurdy — Thu, 08 Mar 2012 13:14:17 -0500

When making decisions about benefit plans, plan sponsors should at least take some time to consider what role they are playing. I am working with a company that is terminating its health plan and the distinction between "settlor" functions and "fiduciary" functions became very significant. So I thought I might share some thoughts on the topic.

Settlor functions are those typically related to plan design, such as establishment of a plan, determination of who the plan will cover and designing the benefit offerings. The creation or termination (or even amendment) of a plan is a settlor function. This is important because settlor functions are not subject to the same fiduciary status when making these decisions. For instances, the decision to amend or terminate a plan is a settlor function that does not give rise to a claim for breach of fiduciary duty. Similarly, the decision about what class of employees to make eligible for coverage would be a settlor function. You might have qualification issues and have to comply with IRS regulations, but the decision about design is not necessarily a fiduciary one.

Fiduciary functions tend to be the "administrative" aspects of the plan. Fiduciaries exercise control or management over plan assets and have discretionary authority over the plan operation. So while the decision to terminate the plan may not be a fiduciary function, the way that you administer the termination would be. Likewise, while a decision to offer coverage to a specific group of employees may not be a fiduciary function, denying eligibility to an employee who thinks they are eligible would be. Fiduciary actions are governed by ERISA standards, while settlor activities are generally not. I say "generally" because often times the decisions can be a mix of both settlor and fiduciary functions and it is important to know which hat you are wearing for each decision.

And it is the "mix" that is important. When making decisions related to creating a plan, amending a plan or terminating a plan, it is important to separate those decisions made or actions taken in a settlor capacity from those decisions made or actions taken in a fiduciary capacity. That way there is a clear delineation of what role you were playing at each point. When you are acting as both a fiduciary and a settlor, your actions will be given very close scrutiny by a court if they are challenged, so give them that same close scrutiny before you make them. It saves grief in the long run.

Financial Disclosure: 408(b)(2) and 404(a)(5) in a Little Detail

Keith R. McMurdy — Fri, 02 Mar 2012 11:08:01 -0500

Although I have commented on the new financial disclosure rules before, I thought it would be good to actually reference the code sections involved to give a little deeper explanation of the compliance rules. Plus, as we get closer to the compliance deadline, you may see more reference to these sections so it is good to know that they are there.

408(b)(2) requires that most service providers to retirement plans have to provide written disclosure of their services, fiduciary status and total compensation to the plan sponsors on an annual basis. The deadline for this disclosure to the plan sponsor is July 1, 2012. They have to include a description of the services provided and a description of the fee arrangement. The information can be delivered electronically and while there is no specific format required, the information provider must be in a format that is "sufficient to meet the guidelines." Service providers are continuing to work out the details of what that means. Plan sponsors are required to terminate any service provider who fails to information relating to future services. So 408(b)(2) covers the service provider to plan reporting obligation.

404(a)(5) covers the plan to participant reporting requirement. That information includes general information about the structure and operation of the plan, as well as investment options, Plan sponsors must also provide an explanation of fees and expenses that are charge or deducted from participant accounts, including loans and other transactional fees. This statement is due the later of 60 days after the July 1, 2012 disclosure to the plan sponsor, or 60 days after the the first day of the plan year beginning on or after November 1, 2011. While the final rules have a sample chart to use for disclosures, no specific format is required.

Since the first step is the 408(b)(2) exchange of information, plan sponsors should consider reaching out to their various services providers now to (1) make sure they will be sending the information and (2) ask for a sample or draft of what their disclosure information will look like to begin preparing from the individual reports under 404(a)(5). Don't wait until the last minute.

For assistance or more information, please contact your attorney at Fox Rothschild.

More Information about W-2s and Health Plan Reporting

Keith R. McMurdy — Mon, 27 Feb 2012 14:55:28 -0500

Questions about W-2 reporting requirements for health plans to comply with PPACA? As we continue to prepare for the 2012 reporting requirements, I thought it would be beneficial to provide a link to the sites that the IRS has published to give guidance. The most recent "Question and Answer" is available here with links to all previously published notices. They have also prepared a nifty chart based on the content of Notice 2012-9 available here.

While the 2011 reporting requirements was option, that does not mean it went away altogether so you should be looking at what is required for the 2012 year now so you can begin collecting the correct information. For assistance, please contact your attorney at Fox Rothschild.

SEC Advises on Say-on-Pay Presentation on Proxy Card

Keith R. McMurdy — Thu, 23 Feb 2012 11:04:58 -0500

While I don't normally get an opportunity to include matters relating to executive compensation, it is an important component of employee benefit package in many companies. Robert Fields and Sarah Ivy, two of our executive compensation attorneys here at the firm, have shared the following with me, so I am passing it on:

In 2010, the Securities and Exchange Commission adopted final rules regarding shareholder advisory (“say-on-pay”) votes on executive compensation and “golden parachute” compensation arrangements required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). As you may know, these votes are now required to be included in a proxy statement relating to an annual meeting of stockholders or, in the case of “say-on-parachute” votes, in a merger or related proxy.

On February 13, 2012, the SEC’s Division of Corporation Finance issued the following Compliance and Disclosure Interpretation regarding a say-on-pay vote and its presentation on proxy cards:

Question: On its proxy card and voting instruction form, how should a company describe the advisory vote to approve executive compensation that is required by Exchange Act Rule 14a-21?

Answer: The following are examples of advisory vote descriptions that would be consistent with Rule 14a-21's requirement for shareholders to be given an advisory vote to approve the compensation paid to a company's named executive officers, as disclosed pursuant to Item 402 of Regulation S-K.

To approve the company's executive compensation
Advisory approval of the company's executive compensation
Advisory resolution to approve executive compensation
Advisory vote to approve named executive officer compensation

The following is an example of an advisory vote description that would not be consistent with Rule 14a-21 because it is not clear from the description as to what shareholders are being asked to vote on. Shareholders could interpret this example as asking them to vote on whether or not the company should hold an advisory vote on executive compensation, rather than asking shareholders to actually approve, on an advisory basis, the compensation paid to the company’s named executive officers.

To hold an advisory vote on executive compensation

Compliance Steps: Public companies should review their proxy cards to determine if their presentation of the say-on-pay vote is in a form that has been endorsed by the SEC and, if not, whether the presentation is misleading in contravention of the requirements of Rule 14a-21.

For more information about this topic, please contact Sarah or Robert, or your attorney at Fox Rothschild.

Fiduciary Found Liable for Not Timely Honoring Rollover Request

Keith R. McMurdy — Wed, 15 Feb 2012 10:31:08 -0500

Plan fiduciaries are frequently faced with difficult decisions regarding plan administration and it is important for them to know not only what the plan says, but also what the potential penalties are for not following the plan. And sometimes, strict adherence to "form over substance" can create a fiduciary breach. Such was the case in Klepeis v. J&R Equipment, recently decided in the Southern District of New York.

Klepeis left employment in January of 2005 and was entitled to have his 401(k) account balance rolled over as of December 31, 2005. Klepeis made a rollover request, but it was not on the correct form. The plan administrator testified that to make a rollover, the form provided by the participant was not required, only authorization from the plan trustee (who happened to be the owner of the company). The defendants argued a variety of defense, claiming the request was untimely and that the funds in the plan were frozen pending an IRS approval of the plan's termination.

The Court found that though the SPD provided that upon termination, plan assets would be distributed as soon as practicable, that did not allow a fiduciary to withhold assets until the actual termination occurred, particularly where the participant had no notice of the termination. Moreover, because the fiduciary was aware of the request and only need to authorize the distribution, it was a breach of fiduciary duty to delay the approval. When the plan terminated, Klepeis' account was transferred to an IRA, but he lost almost $7,000 between the time he should have received his distribution and the actual rollover date. The Court awarded this as damages, plus interest and attorneys fees.

I think this case illustrates what I consider to be an ongoing warning to fiduciaries. To satisfy their obligations as fiduciaries, they are charged with acting reasonably and in the best interests of the plan. Strict adherence to the law is one thing but requiring strict adherence to form requirements or ignoring participant's reasonable requests can be a breach of duty. So fiduciaries should comply with the law, seek to know the requirements of the law and the plan and administer the plan accordingly. But being a draconian administrator can be as problematic as being too lax. Satisfying your fiduciary obligations requires a balance of both. Your plan professionals should be consulted to help you figure out what is "reasonable" to avoid these problems.

Final Rules Issued on Summary of Coverage Document: Start Your Compliance

Keith R. McMurdy — Fri, 10 Feb 2012 14:51:18 -0500

You may recall that, under PPACA, plans were to start providing uniform "summaries of coverage" and uniform definitions by March 23, 2012. This compliance date was delayed pending publication of final rules. Well now they are here. The final rule and guidance documents are now available. Under the final rule, plans with plan years that start September 23, 2012 or later will have to supply SBCs in their next open enrollment.

Rather than try to summarize each document, I suggest you look at them first. As more opinions and guidance are release, I will be providing additional commentary for each. But for now please check out the following official publications to help start your compliance process:

And as a sort of a catch all page, use this HHS Site for Simulating Coverage which has all the resources.

As we get closer to September 23, there will likely be some modifications. But plan sponsors should start preparing now for compliance for their 2012-2013 open enrollment.

It's OK to Ask: Same-Sex Benefits and Taxes

Keith R. McMurdy — Tue, 07 Feb 2012 11:13:24 -0500

Its tax time again and I tend to get questions this time of year about reporting of benefits. Health plans that provide coverage to same-sex couples and domestic partners require some special consideration for tax purposes so let's review some of the key issues.

The first is verification of status. Some employers voice to me concerns over asking for marital status for fear that requiring enrollees to identify potential same-sex partners is tantamount to discrimination. But it is OK to ask (and in many instances, you are required to). You just can't treat enrollees differently once they are determined to be eligible for coverage. As more states define their respective positions with regard to same-sex marriage or domestic partnerships, plan sponsors are under specific tax rules that require that benefits to these spouses and partners be properly taxed at a federal and state level. So the employer must, as a function of tax law, inquire about status and an employee who enrolls a same-sex spouse in a state that recognizes same sex marriage can be asked to differentiate between "marriage" and "same-sex marriage" for plan enrollment and tax purposes.

However, a plan sponsor cannot require different verifications standards. If someone enrolls their same-sex married partner, they cannot be required to produce a marriage certificate unless you are prepared to require all married couples to produce a certificate. So it is not the asking that creates the issue, it is the verification process.

Domestic partners can create a slightly different scenario in that some states recognize both same-sex and opposite-sex domestic partnerships. Moreover, some plans actually provide for coverage for unmarried opposite sex partners with verification of some type of long term arrangement. Plans seeking verification of domestic partnership status would need to require all domestic partners to verify that status, regardless of gender, but making that a requirement for domestic partners might also trigger an obligation to verify marital status for married partners as well. Remember, marital status can be a protected class. Essentially plans have to balance the obligation to verify eligibility and properly report income against the obligation to treat participants equally, regardless of marital status and sexual orientation.

A lot of plans simply require the employee to sign an affirmation of accuracy at the time of enrollment confirming they are making true statements. This might eliminate the need for actual verification and certainly there can be stated penalties for fraud. How a plan verifies eligibility is a process the plan administrator has to develop and administer so there is no automatic answer for every situation. But when it comes to enrollment, plans have to ask so that benefits are treated properly for tax purposes. Just make sure you ask properly.