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Employee Benefits Legal Blog

Employee Benefits Related to Labor & Employment Matters

Department of Labor Proposes New Fiduciary Rules: Expanding the Definition of Fiduciary

Posted in Plan Administration, Retirement Plans

Yesterday the Department of Labor issued a number of proposed rules related to retirement plans, conflict of interest, providing investment advice and the definition of “fiduciary.”  Since the original proposed rule was submitted, back in 2010, there has been extensive debate over the impact of the proposed rule, who it might affect and whether it is actually necessary.  The proposed rules, which are more than 120 pages long and have to be fully digested an evaluated, but it is worthwhile to consider what the says the new rules will entail and what they will accomplish.

The DOL asserts that the primary purpose of the proposed rule is to ultimately save billions of dollars over the next 10 years.  To do this, the DOL contends that the proposed regulations:

  1. Expand the types of retirement advice covered by fiduciary protections by including within the definition of fiduciary any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor or plan participant for consideration in making a retirement investment decision;
  2. Carve out from fiduciary status investment advice provided as general education on retirement savings;
  3. Carve out “order taking” as a fiduciary activity, meaning that merely executing a transaction without rendering advice would not be a fiduciary activity; and.
  4. Carve out sales pitches to plan fiduciaries with financial expertise, meaning that, under certain circumstances, the providing of advice under point 1 above would not be considered a fiduciary activity.

One long standing complaint from the DOL is that investment advisors seem to have an inherent conflict of interest in that they are compensated for their advice and may also receive compensation from the providers of the investment products the advisor recommends.  The proposed regulations appear to create a concept called a “best interest contract exemption” which the DOL says will allow firms that would otherwise have this conflict to resolve by affirmatively committing to putting the client’s best interests first and disclosing all conflict of interest.  By doing so, it appears that the ERISA fiduciary prudence standard would then apply to the determination of whether they have acted in their client’s best interests.  The proposed regulations also have a component that specifically requires disclose of conflicts and hidden fees.

Collectively, there are 7 separate proposed rules, each dealing with specific components of the fiduciary definitions:

As with any set of proposed rules, there will be much debate, comment and analysis before anything is finalized.  But the proposed changes are significant and anyone involved in the administration of retirement plans, fiduciaries of these plans and advisors to retirement plans should watch these rules as the develop.  Fox Rothschild will continue to monitor these proposed rules and will provide updates as needed to further consider the impact they have on current fiduciaries, as well as those who may yet be defined as fiduciaries in the future.

Is it a Perk or a Plan? Big “B” or Little “b”

Posted in Plan Administration, Retirement Plans, Welfare Plans

Earlier this week, Starbucks announced that it is expanding its tuition reimbursement program to include more employees.  One article I read actually referred to as it as a “tuition plan.”  I don’t pretend to understand the details of their arrangement, but in discussing the concept with another attorney, it reminded me that there can sometimes be considerable confusion over what constitutes a benefit plan as opposed to just a general “benefit” to employees.  I refer to this as the “Big B, little b” conundrum.  Big B benefit plans are usually subject to ERISA and require specific administration.  Little B “benefits” are those perk and extras we offer to employees to be competitive in the market or to improve employee morale.

One of the most commonly debated (and litigated) benefits is severance pay.  Numerous cases have been brought over whether employer severance is a “plan” or merely a “policy.”  ERISA provides for the existence of “scholarship plans” as an employee welfare benefit plan, but tuition reimbursement programs are not typically considered to be “plans” subject to ERISA.  Things like adoption assistance and transit reimbursement are commonly referred to as “plans” but they are generally not the types of “plans” envisioned by ERISA.

ERISA Section 3(1) defines a welfare plan as possibly being for medical, surgical or hospital case, sickness, accident, disability or death benefits, unemployment vacation, training, day care or even legal services.  ERISA Section 3 includes a number of definitions of retirement plans that provide future benefits to employees.  There are also a number of what might be called “non-qualified” plans like deferred compensation plans or stock plans.  But remember that just because an arrangement provides something akin to what a benefit plan would provide, the arrangement does not automatically become an ERISA plan.

The point is that referring to something a “plan” does not automatically make it an ERISA plan.  And calling something a “policy or program” does not automatically mean it is not a benefit plan subject to ERISA.  What you are providing and how you are providing it generally dictates whether you have an ERISA plan not what you call it.  If you want it to be a benefit plan, follow the rules and make it one.  If you want it to be something else, like maybe a perk, make sure you implement it in a fashion that does not by default create a benefit plan.  And if you need help with the distinction, make sure to consult with your attorneys at Fox Rothschild.

When the Intranet is Not Enough: Rules for Electronic Disclosure of Plan Documents

Posted in Court Cases, Plan Administration, Retirement Plans, Welfare Plans

It seems that everyone has a smart phone or a tablet and I can’t think of anyone I know who does not have internet access at home.  Consequently, plan sponsors ask all the time if they can just e-mail plan documents to employees to satisfy the notice requirements, or maybe just post new plan documents on the company intranet.  Well, the recent decision in Thomas v. CIGNA (E.D.N.Y.) serves as a reminder that the short answer to that question is no.

Factually, the case involves an on a claim for benefits.  A plan participant had life insurance through her employer’s ERISA plan.  She ultimately became disabled and stopped working or paying premiums.  When she passed away, her beneficiaries made a claim for life insurance benefits which the insurer denied because, although the coverage allowed premium waivers for disability, the participant had not timely requested a premium waiver and thus was not covered when she died.   Of course the beneficiaries sued, claiming that the premium waiver requirements had not been appropriately communicated to the participant due to inadequate summary plan description (SPD) distribution.   Guess what?  The court held that there was no evidence that the plan administrator had provided the participant with an SPD.  While the new SPD was available electronically, the company never sent notices out that the document was available.  Plus, there was no evidence that new SPDs were furnished in any manner other than intranet posting.

There are actually rules that govern electronic disclosure of plan documents.  If employees have work-related computer access, ERISA disclosures may be delivered electronically, or posted on the intranet, if the employees have the ability to effectively access documents furnished in electronic form at any location where the employee is reasonably expected to perform his duties, and are expected to have access to the employer’s electronic information as an integral part of those duties.  It is not enough that they have access somewhere at work or have access at a common location (like a break room).  Accessing the computer has to be an actual requirement for their job function.

Documents can still be sent to employees and beneficiaries without work-related access to a computer as long as additional requirements are met.  The employer or plan administrator must first obtain a consent form signed by the employee or beneficiary that specifically states the following:

  • The names or types of documents to which the consent applies
  • A sentence stating that consent can be withdrawn at any time without charge
  • An e-mail address where the employee will be able to receive future announcements and/or documents if sent by e-mail
  • The procedures for updating the e-mail address used for receipt of electronically furnished documents
  • The procedures for withdrawing consent
  • The right to request and obtain a printed version of an electronically furnished document and, if there is a charge for the printed document, how much it will cost.
  • The computer hardware or software needed to access and download the electronically delivered documents.
  • If the plan administrator changes the hardware or software requirements, it must provide a new notice and obtain a new consent.

Without this consent, electronically providing documents is not sufficient.  Hard copies have to be provided.

But don’t forget this case.  Even if documents are provided electronically, notifications must be sent either in electronic or paper form to each employee or beneficiary at the time a document is provided electronically explaining the significance of the document and that the participant’s right to request a paper copy.  You can’t just send an e-mail and say “here it is.”  Likewise, you can’t just post a document on the intranet and not alert everyone.  And unless you have consents, you can’t say that you satisfied the delivery obligation to employees who don’t have regular access to a computer at work.

So if you want to distribute plan documents electronically you can.  But you have to follow the rules.  Don’t assume intranet posting is enough because it is not.

Finding a Needle in a Stack of Needles: DOL Makes Hay on Bad Plans

Posted in Plan Administration, Retirement Plans, Welfare Plans

The DOL fiscal year facts sheet for 2014 has some real interesting (and scary) facts.  The DOL claims that the Employee Benefits Security Administration (EBSA) oversees the administration of 684,000 retirement plans, 2.4 million health plans and probably as many other welfare plans like disability and life insurance plans.  That’s a lot of benefit plans.  Of course it also touts more than $832 million in monetary recoveries that the agency collected of which about $600 million went back to plan participants.  Those are some pretty heady figures.

Back in 2013, I made mention of the fact that the DOL was hiring some 1000 new investigators to help in the audit and enforcement process.  You can imagine with millions of plans and an army of investigators, it’s not difficult for the EBSA to find plans that are deficient, improperly administered or subject to some corrective process.  That means restoring plan assets, maybe additional benefits, and probably fines and penalties.  All of which mean added costs to plan sponsors.

Tucked in the middle of the fact sheet is a figure that is worth noting.  The DOL reports that it received 1,643 Voluntary Fiduciary Correction Program (VFCP) applications and 25,060 applications under the Delinquent Filer Voluntary Compliance Program (DFVCP).  The VFCP process is available to anyone who may be liable for fiduciary violations under ERISA, including employee benefit plan sponsors, officials, and parties in interest, may voluntarily apply for relief from enforcement actions, while the DFVCP program allows for plan administrators to pay reduced civil penalties if the required filings are made prior to the date on which the administrator is notified in writing by the DOL of a failure to file a timely annual report.  Why is that so important?

Well, for fiduciaries and plan administrators, the VFCP process and the DFVCP process present them with the opportunity to avoid becoming one of the “bad” statistics.  In many ways, it is better to confess and correct instead of being discovered and penalized.  Chances are pretty good that if your plan is the subject of an EBSA investigation, things are going to turn up that have to be corrected.  Self-policing, self-reporting and self-correcting before there is an investigation presents plan sponsors and administrators with a better opportunity to control the costs and mechanisms of the corrective process.  It’s certainly not a guarantee that everything will come out rosy, but it is better than having mistakes pointed out by the government’s auditing team.

So we know that the EBSA has a lot of investigators that take pride in reporting annually all of the money they recover on behalf of participants.  And we know from practical experiences that with all of the rules and regulations governing benefit plans, chance are pretty good that we have made a mistake somewhere.  Thus, it is not a bad idea to take a serious look at the plans we sponsor and see if there are errors that we should self-correct.  Your plan professionals should be able to help guide you through that process.  Your attorneys at Fox Rothschild can help get you started on the road toward self-correction if you ask.

As a side note, the DOL also reports that 106 individuals were criminally indicted in 2014.  You definitely don’t want to be someone who falls into that statistic if you can avoid it.

What Makes An Average Defined Contribution Plan?

Posted in Plan Administration, Retirement Plans

When I am meeting with plan sponsors to review the specifics of their defined contribution retirement plans, I am routinely asked about how they compare to other plans.  Notwithstanding the variety of sizes of plans, it’s not necessarily a bad question to ask.  Section 404 of ERISA generally defines prudence as acting in accordance with how a reasonable person in like circumstances would act.  However, decisions on how to structure a plan are settlor functions, not necessarily fiduciary functions so what is “reasonable” in the fiduciary sense may not apply in the framework of a settlor function.  But since settlors should still act reasonably in discharging their roles, it does not hurt to consider what others might be doing.

I was surprised by the amount of data and surveys available from a variety of sources on the issue of defined contribution plans.  I was also surprised by the variety of results of these surveys, which certainly suggests that sample size and respondent selection has a lot to do with formulating conclusions.  The statistics I cite are a good faith effort to aggregate the various responses I considered and should by no means be taken as absolute fact, only an effort to summarize my complied data relating to plans generally.

That said, it seems that somewhere around 94% of private employers report that they offer some form of a defined contribution plan.  Of those private employers, offering plans, the average eligibility appears to be about 88% of their full-time employee population with about 65% active participation of eligible employees.  Of the companies that sponsor defined contribution plans, about 90% offer more than 10 investment options to employees, and 56% offer more than 15 choices.  For their part, employees selected target date (or life cycle fund) most frequently (almost 70% of the time), with domestic equities a close second (67%)  Around 56% employers offer automatic enrollment of some form and around 92% of employer with plans had employer matching of some kind.

When deciding on investment options to provide, sponsors report that their top three considerations are fees (74%), historical and expected returns (63%) and diversification of plan options (52%).  56% of companies provide some form of investment advice to employees and of those that do, 65% report that they provide this counseling through someone independent of the plan’s investment manager.  79% reported that they have concerns about the lack of employee participation and the three most common ways they try to improve participation is through simplifying the enrollment process, including life cycle funds into the plan as an investment option and providing participant education.

So there may not really be an “average” defined contribution plan.  But there are certain consistencies that seem to make up a typical defined contribution plan, and certain typical considerations that plan sponsors consider when forming and administering their plans.  There is not one right answer to what a plan should look like, but when considering how to administer your plan, there is no harm in asking around to see what others might consider reasonable.

ERISA Equitable Relief: Reversing Rochow

Posted in Court Cases, Plan Administration, Retirement Plans

Previously I had written about the 6th Circuit’s expansion of what constitutes appropriate remedies under ERISA, when it affirmed a judgment directing a disability insurer to pay not just benefits due, but also $2.8 million in earnings.  As a refresher, the original case, Rochow v. Life Ins. Co. of N. America, dealt with an executive who fell seriously ill and applied for long-term disability benefits, which were denied.  His estate sought disgorgement of profits in addition to benefits, and the Court awarded $3.78 million award that consisted of $910,629 in denied benefits and $2.8 million more in earnings based LINA’s rate of return on equity, which ranges between 11% and 39% per year.

The court ruled that ERISA permitted a participant to recover both the benefits payable under the plan (502(a)(1)(B)) plus additional equitable relief (502(a)(3)).   Thus, the majority concluded that their remedy was a “logical extension” of the remedies available under ERISA and prior case law.  According to the majority, merely awarding benefits was not adequate relief, so more relief was required.  There was a dissent, which pointed out that there is a need for a distinct injury to the plaintiff or the plan to support a claim for equitable relief on top of a claim for benefits, but the majority ignored this position.  The dissent was also concerned with the potential a ruling like this might allow plaintiffs to expand every abuse-of-discretion claim into a claim for returns on investments or profits which could create serious problems for plans that were self-insured.

Last week, the Sixth Circuit reversed that opinion in an en banc opinion.  The new decision determined that unless there is a showing that that the remedy for denial of benefits under 502(a)(1)(B) is inadequate to make plaintiff whole, equitable relief under Section 502(a)(3) is unavailable.  Simply put, the en banc decision found it inappropriate to provide equitable relied when the actual remedy of providing benefits was available.  Allowing outsized damages awards based on perceived equitable remedies would be inconsistent with ERISA’s purpose.  Instead, the remedy would be more akin to whether prejudgment interest was due rather than a windfall on company profits.  Consequently, the case was remanded to the lower court to determine a remedy consistent with this finding.

Ultimately, what probably held the most sway was that Rochow’s claim for breach of fiduciary duty was perceived as nothing more than a repackaged claim for a wrongful denial of benefits.  In a case where the remedy of providing benefits is available, the relief for an alleged breach of duty is not always limited to providing benefits.  But this decision seems to suggest that the place to look first for relief is the satisfaction of the 502(a)(1)(B) claim.

New FMLA Rules Recognize Celebration Rule: Managing Benefits

Posted in Plan Administration, Retirement Plans, Welfare Plans

Although the Family and Medical Leave Act of 1993 (“FMLA”) is not something I usually address, the DOL final regulations issued last week did address an issue I have previously written about and that is recognition of same-sex spouses.  The FMLA generally provides that eligible employees can take leaves of absence for certain family- and medical-related reasons, including caring for a spouse.  The new regulations redefine the term “spouse” for FMLA purposes to include same-sex couples who have been legally married in any jurisdiction, regardless of whether the state in which they reside or work recognizes their marriage.  The new regulatory definition of “spouse” under the FMLA goes into effect on March 27, 2015.

This is somewhat significant in the employee benefits arena in that health benefits are generally continued during a qualified leave.  More often than not, the request for FMLA leave is handled through the HR department, which also happens to be handling benefit plan administration.  Consequently, the question can come up as to whether FMLA leave is available, and if so, is it the type of leave that permits continuation of health coverage.  More importantly, though, I think it is further clarification that, from a federal perspective, the “celebration” rule is becoming the accepted norm.  In short, if the jurisdiction where the marriage was performed recognizes the marriage, it would be recognized anywhere else.

Tucked within the FMLA final rules is a little further clarification for marriages outside of the United States.  The Final Rule provides that in these cases, if the marriage is valid in the place where it was entered into and could have been entered into in at least one state, it will be recognized for FMLA purposes and the definition of “spouse.”  This is also helpful to some extent in understanding benefit plan administration because it gives at least some insight into how the DOL might look at a benefit plan trying to determine whether a foreign same-sex marriage should be recognized. It is not definitive, but it does add a layer to help understand the verification of dependent status for enrollment in US plans.

The point being is that as we fine tune plan administration, employers and plan sponsors can get additional insight from this type of indirect revision to rules.  Employers subject to the FMLA clearly have to abide by this new rule, but benefit plans can also use it as a sounding board to ensure proper compliance.  If the employer has to recognize the spouse for FMLA purposes, it seems to suggest that the employer should also recognize the spouse for benefit plan purposes.  In any event, employers who start revising their FMLA policies to reflect this change should also use it as an opportunity to review their benefit plan language to make sure it accurate reflects the definition of “spouse.”

Medical Premium Reimbursement: Limited Relief for Some Employers

Posted in Plan Administration, Welfare Plans

Back in November of 2014, the DOL issued FAQ Part 22, which directly addresses some recent efforts by employers to reimburse employees for participation in the exchange through Code Section 105, or through some type of other arrangement.  The gist of the FAQs, consistent with Notice 2013-54, was that employers could not offer employees cash to reimburse the purchase of an individual market policy.  This type of arrangement would fail to comply with the market reforms and would subject the employer to a penalty.

Fortunately, some additional guidance has been issued that provides some transitional relief for employers who have been using such an arrangement.  IRS Notice 2015-17 still adheres to the proposition that giving employees money to pay for coverage in the individual market or on a health insurance exchange will not be considered to be an employer plan satisfying ACA’s employer mandate.  But it also gives some transitional relief that allows for some avoidance of the $100 a day penalty that these arrangements would create for employers.

Transitional relief is available only to those who are not “applicable large employers” meaning 50 or fewer FTEs.  It also applies if the arrangement is sponsored by an S-corporation for 2-percent shareholder-employees, is a Medicare premium reimbursement arrangement or a TRICARE-related health reimbursement arrangement.  The stay on enforcement is in effect until June 30, 2015.  After July 1, 2015, penalties may apply to a reimbursement arrangement of this nature unless the relief is extended further.  So the effect is that the $100 per day excise tax will not be asserted for (and no reporting obligations will apply to) arrangements if they meet one of the 4 criteria identified above.

Warning: this relief does not apply to stand-alone health reimbursement arrangements or other arrangements that reimburse employees for medical expenses other than insurance premiums, and employers who are applicable large employers.

By way of additional clarification, this new guidance provides that if an employer increases an employee’s compensation, but does not condition the payment of the additional compensation on the purchase of health coverage, the arrangement is not an employer payment plan that would be subject to the excise taxes described above.

So if you currently “reimburse” your employees for the cost of premiums for individual medical insurance policies, Medicare or TRICARE, make sure you meet the standards for transitional relief and be prepared to eliminate these arrangements if no additional relief is granted.  If you have an arrangement that reimburses for premiums and you do not get relief, you have to look at reporting non-compliance for the first part of this year and also how to eliminate it.

IRS Releases “Final” Versions and Instructions for Forms 1094 and 1095: Start Collecting Data

Posted in Plan Administration, Welfare Plans

At last, the forms are upon us.  Last week, the IRS issued its “final” versions of the forms 1094-B, 1094-C, 1095-B and 1095-C along with instructions for the “B” forms and instructions for the “C” forms.  The good news is that the forms are pretty much the same.  What has changed is that the instructions have filled in some gaps about reporting, some of which I highlight below:

  1. Employers with 50-99 FTEs who were exempt from compliance in 2015 must still file these forms for the 2015 tax year.
  2. For employers that cover non-employees (COBRA beneficiaries or retirees being most common), they can use forms 1094-B and 1095-B instead of filing out 1095-C Part III to report for those individuals.
  3. With respect to reporting for employees who work for more than one employer member of a controlled group aggregated ALE”), the employee may receive a report from each separate employer.   However, the employer for whom he or she works the most hours in a given month should report for that month.
  4. Under the final instructions, a full-time employee of a self-insured employer that accepts a qualifying offer and enrolls in coverage, the employer must provide that employee a 1095-C. The previous draft indicated that it would be enough to simply provide an employee a statement about the offer rather than an actual form
  5. For plans that exclude spouses covered or offered health coverage through their own employers, the definition of “offer of health coverage” now provides that an offer to a spouse subject to a reasonable, objective condition is treated as an offer of coverage for reporting purposes.
  6. There are some changes with respect to what days can be used to measure the “count” for reporting purposes.  Employers are allowed to use the first day of the first payroll period of each month or the last day of the first payroll period of each month, as long as the last day is in the same month as when the payroll period starts.  Also, an employer can report offering coverage for a month only if the employer offers coverage for every day of that month.  Mid-month eligibilities would presumably be counted as being covered on the first day of the next month.  However, in the case of terminations of employment mid-month, the coverage can be treated as offered for the entire month if, but for the termination, the coverage would have continued for the full month.

Now as a refresher about what needs to be filed:

  • Each ALE member may satisfy the requirement by filing a Form 1094-C (transmittal) and, for each full-time employee, a Form 1095-C (employee statement).
  • Non-ALE members (meaning employers not subject to the employer shared responsibility provisions) that sponsor self-insured plans will file Forms 1094-B and 1095-B to satisfy the reporting requirements.
  • An employer must furnish a Form 1095-C to each of its full-time employees by January 31 of the year following the year to which the Form 1095-C relates. Filers of Form 1095-B must furnish a copy to the person identified as the responsible individual named on the form.

Bear in mind that there is a considerable amount of time between now and the final filing obligation so there may be additional revisions to these instructions, or at least some further clarification. But in the meantime, read the instructions and familiarize yourself with the reporting obligations.

Benefits for “Domestic Partners”: What Does Your Plan Actually Say?

Posted in Plan Administration, Retirement Plans, Welfare Plans

Recently I was working with a client updating some of the plan documents and we ran into an interesting issue.  The plan provides for eligibility for same-sex partners under a provision defining them as “domestic partners.”  The plan sponsor asked “since all of our employees reside in a state that recognizes same-sex marriage, do we still need this?”  Great question.  Since they asked, I have been doing a fair bit of research and have come to the following conclusion: it depends on what you want to do, but make sure you know you are doing it.

At the outset, this is not about whether or not same-sex marriage is a positive or a negative.  I am only concerned with appropriate plan administration.  And one considerable difficulty with plan administration is that some terms and provisions become “legacy” provisions that just continue to show up, restatement after restatement, without any clear understanding of why they are in there.  So as a starting point, you should really be reviewing your plan documents with an eye toward making sure you know what eligibility and benefits provisions are included.  Many a plan sponsor has been frustrated in finding “surprise participants” based on plan language that was just carried over year after year.  Don’t let plan provisions stick around just because they are already in there.  Make sure they are actually doing what you want them to do.

That said, the definition of “domestic partner” can be part of the problem.  Many plans started by defining domestic partners as same-sex couples who legally could not get married.  37 states now recognize same-sex marriage, so in many ways, the necessity for this type of eligibility may be falling away.  Legally speaking, there is little rationale for treating opposite sex couples differently from same-sex couples if both can marry so the plan can certainly limit the definition of “spouse” to those legally married.  Further, recall that the IRS recognizes same-sex marriages if they are performed in a jurisdiction that recognizes them, so even out-of-state marriages would create a “spouse” if your plan includes a provisions defining a spouse as being anyone legally married in a jurisdiction recognizing the marriage.

So there is certainly ample justification for considering limiting the definition of “spouse” to people legally married and doing away with domestic partners.  However, there is also some support for keeping the definition in.  Some plans want to provide coverage for domestic partners regardless of the gender of the employee.  Yes, some plans offer benefits to opposite sex domestic partners, provided certain plan requirements are met.  There might be tax issues to consider, but the point is you can include such a provision in your plan.

The point is that whether you decide to leave “domestic partners” in, or decide to take them out, make sure you know how you have defined them, how you verify the status and how you apply the plan terms.  If you decide to take them out, make sure you provide proper notice to plan participants and properly amend the plan documents, including any summaries that explain eligibility.  And while you are at, give the other plan terms a once-over to see if there is anything else in there that might need to be updated to reflect current practices.