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Employee Benefits Related to Labor & Employment Matters

Is it Time for Checkup for Your 401(k) Plan?

Posted in Plan Administration, Retirement Plans

As we approach the end of the plan year for most plans, now is a good time for plan administrators and plan sponsors to give their 401(k) plans a quick once over to see if everything is properly in place.  The IRS even provides a 401(k) plan checklist with some suggested corrective mechanisms that can be taken to bring plans into compliance.

A good starting place for a compliance tune up is to see if you can answer some basic questions about your plan:

  1.         Who are the trustees?
  2.         Who is the plan administrator?
  3.         Who are the outside service providers and how often are they contacted?
  4.         What are the plan’s eligibility rules and who is responsible for verifying them?
  5.         How are participants notified of eligibility?
  6.         How is plan documentation distributed?
  7.         Where are the plan records kept?
  8.         Who is responsible for preparing and filing the form 5500?

After you get past these, some basic questions about plan administration come into play:

  1.            Who keeps track of contributions and limits?
  2.            How does the plan define “Compensation”?
  3.            What is the vesting schedule?
  4.            Are there required contributions from the employer?
  5.            Who is responsible for the discrimination testing?
  6.            Does the plan permit loans and how are they tracked?
  7.            Who is responsible for reporting to participants?
  8.            How are distributions made and who is the contact person?

The reason I bring this topic up is that I was recently working with a client who had one person who was solely responsible for benefit administration.  Unfortunately that person passed away suddenly and no other person in the organization could answer any questions about the 401(k) plan.  Although it seems like the above information is simple to collect, the company still spent hours and hours recreating the plan history because they neglected to keep a record of how the answers to these questions had changed over the years.

Think of your 401(k) plan as a well maintained car.  It needs a check up on a regular basis to keep running smoothly.  You have to keep records of what was done and you have to know where the important information is if you need it.  Just like your car, you hope your 401(k) plan never breaks down.  But in anticipation of a future problem, it is worthwhile to stop and make a record of the responsibility for plan administration and the current status of the plan.  That way it will be easier to make repairs if they ever become needed.

The Case of the Accidental Fiduciary: When a Signature is More Than Just a Name

Posted in Court Cases, Plan Administration

The issue of fiduciary status is often cumbersome because while a fiduciary can be directly named by a plan, someone can also be deemed to be a fiduciary by virtue of having discretionary authority, or even by exercising some discretionary authority through plan administration.  Consider the case of Perez v. Geopharma, a case from the Middle District of Florida brought by the US Department of Labor.

Before reading further, consider that this decision is only on a motion to dismiss; this is hardly a definitive decision relating to what it takes to become a fiduciary.  However, the ruling from the Court does seem to suggest that at least some argument can be made that company officers could be liable for fiduciary breaches unless they can demonstrate that they did not control plan assets.  Therefore, it might be worthwhile for employers as plan sponsors to actually formally separating plan assets limit the signatory authority on those accounts to people actually intended to be plan fiduciaries.  Here is why:

In bringing the case, the DOL is looking to hold the company and three corporate officers, including the CEO jointly and severally liable for alleged breaches of fiduciary duty.  The nature of the breaches is not as important as the fact that the DOL is arguing that the officers of the company are co-fiduciaries and thus liable for each other’s actions under 29 U.S.C. § 1105.  The CEO brought a motion to dismiss the Complaint arguing that he was not named as a plan fiduciary and that his general signature authority over the company’s bank accounts was not enough to trigger ERISA’s fiduciary responsibilities because he did not really exercise discretionary authority. The DOL countered that because the officers were signatory to the company’s bank accounts, they had a fiduciary duty to monitor the plan’s other fiduciaries, as well as the company’s management and administration of the plan.  Since there was not a bank account segregated for plan assets, signing authority on the company account was enough.

The Court denied the motion to dismiss, finding that signature authority made him a plan fiduciary because ERISA provides, in part, that someone can become a fiduciary by exercising ANY authority or control over the management or disposition of plan assets, even without having “discretion.”  At this stage (the Motion to Dismiss), the Court declined to consider whether discretion was an ERISA fiduciary requirement at this stage, but suggest that at least one other court (the 11th Circuit) for the proposition that actual discretionary authority was required to obtain fiduciary status.  So for now, check signing authority was enough to state a claim.

Since this decision is only a motion to dismiss, this is hardly a definitive decision relating to what it takes to become a fiduciary.  However, it does suggest that at least some argument can be made that company officers could be liable for fiduciary breaches unless they can demonstrate that they did not control plan assets.  Therefore, it might be worthwhile for employers as plan sponsors to actually formally separating plan assets limit the signatory authority on those accounts to people actually intended to be plan fiduciaries.

So are separate accounts and separate signing authority required?  Maybe and maybe not.  But if the DOL used the single signatory theory as a basis to bring the case, companies that sponsor plans should consider the possibility that separate accounts might be worthwhile for litigation avoidance.

Draft Instructions for PPACA Reporting Requirements: Get Ready for 2015

Posted in Plan Administration, Welfare Plans

They promised they would be coming and now they have.  On August 28, 2014, the IRS issued draft instructions for Forms 1094-C and 1095-C and Forms 1094-B and 1095-B, which I provided in my July 31, 2014 entry.  These forms were provided in draft format and they are used to satisfy PPACA’s “information reporting requirements.” We also got draft instructions for Form 1095-A that relates to the statement about the Health Insurance Exchange Marketplace.  The IRS has indicated that it will finalize the forms and instructions in 2014.  On top of that, they issued some FAQs that address the reporting requirements.

NOTE: Reporting for the 2015 year is due in 2016, so the instructions and guidance should help employers and plan sponsors put together a framework to following in 2015 so that they can properly report.

As a starting point, the FAQs provide that some short-term penalty relief will be available for incomplete or incorrect information returns that are filed (or employee statements provided to employees) in 2016 for coverage offered, or not offered, in 2015. Under this relief, the IRS will not impose penalties on employers that can demonstrate that they made good faith efforts to comply with the information reporting requirements. This relief applies to returns and statements filed and furnished in 2016 to report offers of coverage in 2015 for incorrect or incomplete information reported on the return or statement, but the relief is not available if you fail to file. You have to show a good faith effort to comply so you cannot simply not file anything an expect relief.

With respect to the instructions themselves, to say that they are lengthy is an understatement.  Employers should read them in detail to understand their obligations.  However, some key provisions that help in compliance include:

  • Clarification that employers must file Forms 1095-C and 1094-C with the IRS, and provide a copy of Form 1095-C to employees.
  • A statement that, as noted above, forms 1095-C and 1094-C information returns are not required for 2014. Actual filings are not required until 2016 for the 2015 calendar year but employers may voluntarily file these forms in 2015 for 2014.  If by chance an employer does choose to voluntarily files in 2015 for the 2014 year, penalties for the employer mandate payments will not be assessed for 2014.
  • Establishment of specific dues dates for Forms 1095-C and 1094-C information returns.  They must be filed by February 28 (for paper filings), or March 31 (for electronic filings) of the year following the calendar year to which the return relates.
  • Clarification that a Form 1094-C must be attached to any Forms 1095-C filed by an employer. Each employer must file one 1094-C that reports aggregate employer-level data for all the employer’s full-time employees, which is referred to as the “authoritative transmittal” (and denoted accordingly on Line 19 of the Form 1094-C). Only one authoritative transmittal may be filed for each employer.
  • Employers also must provide a Form 1095-C to each full-time employee by January 31 of the year after the year to which the form relates (so that would be January 31, 2016 for the 2015 reporting year).  Incidentally, employee statements must be furnished to individuals in paper format by mail, unless the individual affirmatively consents to receiving the statement electronically

As with the forms, the instructions are in draft format and subject to change and finalization.  However, between the draft forms and the draft instructions, employers should now be able to ascertain generally what is required of them in reporting.  Even though the mandatory reporting requirement does not completely kick in until after 2015, employers should spend some time reviewing these requirements with their plan professionals, preferably sooner rather than later, to get a sense of what data they will have to collect and how who has responsibility for making sure the information is accurate.

Withdrawn Employers Don’t Have Standing: Why Employers Can’t Sue Trustees

Posted in Court Cases, Retirement Plans, Withdrawal Liability

For employers who cease to contribute to a multiemployer defined benefit pension plan, withdrawal liability is becoming more and more common.  When a pension fund is underfunded, the cessation of the contribution obligation can trigger the obligation to pay off the allocated portion of that unfunded liability which can be substantial.  When I am working with employers who are addressing withdrawal liability, I am frequently asked whether the employer can sue the fund or the trustee for causing the unfunded liability.  The short answer is no, but a recent case lays out very clearly why that answer is no.

In DiGeronimo Aggregates, LLC v. Zelma, the Sixth Circuit Court of Appeals recently considered a case where a withdrawing employer filed a complaint against the trustees of the multiemployer pension fund for negligent management of the plan that caused the underfunding.  The District Court dismissed the complaint and the Sixth Circuit affirmed.  The employer sued using ERISA Section 4301, which provides that persons, including employers, can bring a cause of action for appropriate legal or equitable relief.  However, the Sixth circuit found that this section confers no actual substantive rights.  It only provides who may potentially enforce the sections of ERISA.

The Court went on to determine that causes of action for “negligent management” of plan assets already have a specified remedy in ERISA.  When it comes to bringing claims of this nature, ERISA specifies that claims can be brought by participants and beneficiaries, but makes no mention of employers.  The Court reasoned that had Congress intended to give employers this right, they could have easily included them as parties capable of bringing an action.  Since they are not included, they must be assumed to be specifically excluded.  Since Congress did not include them, contributing employers must not have standing to bring a claim for mismanagement of plan assets.

This decision is not new or novel.  It merely reaffirms a long-held rationale that contributing employers lack standing to argue out of withdrawal liability claims by suing plan trustees.  A more effective way of dealing with withdrawal liability is to plan for it before it occurs.  If an employer is considering any transaction, be it a sale, merger, decertification or closing of a facility that will potentially halt contributions to a multiemployer pension fund, withdrawal liability must be a priority concern.  Dealing with withdrawal liability BEFORE a withdrawal is much easier than defending withdrawal liability claims after a withdrawal occurs.  Make sure to ask your professionals about withdrawal liability in advance and avoid the surprise.

The Trouble With Exceptions: Be Careful with Plan Rules

Posted in Plan Administration, Retirement Plans, Welfare Plans

Recently I was working with a client who had an appeal from an individual seeking to get additional benefits under a health plan.  In a nutshell, the issue was an annual limit on visits and the participant wanted the plan to pay for extra visits to a therapist.  The client was stuck between applying the plan language and wanting to grant the exception.  For plan administrators and sponsors, this type of situation is all too common and can cause real problems.

First, plans should always be administered in accordance with the plan terms.  A limit is a limit and, absent a plan amendment that changes the limit, it should be followed to the letter.  But applying plan provisions necessarily requires application of plan terms which requires interpretation which is within the discretion of the plan administrator.  By its nature, “interpretation” has a certain component of subjectivity that allows for the plan administrator to grant appeals based on its interpretation of plan language.  However, this does not give the administrator the ability to disregard the terms and apply anything other than their plain meaning.  In other words, the plan says what it says.  If you want to have exceptions, consider a plan amendment.

Second, plans have to follow rules.  There are regulations, IRS Code sections and statutes that dictate how things should be done.  Granting things like extra benefits, hardship withdrawals and special enrollment rights might be specifically prohibited depending on the circumstances and the dictates of applicable law.  Third, there is always the risk of discrimination.  Once an exception is granted, what happens for the next request and the request after that?  Who gets the special privilege and why?  Can someone denied the exception claim some type of discriminatory act by the administrator?  Exceptions can create a very slippery slope.

That said if the ultimate purpose of a benefit plan is to provide benefits to participants, plan administrators and sponsors should look at possible exceptions as a means of tweaking and improving their plan to really provide benefits.  A proposed exception might suggest a logical amendment to a plan that makes the exception the new rule.  It is also possible that a requested exception can actually be justified because of ambiguities or silence in the actual plan itself.  But remember that exceptions are just that, they are not the rule.

The point being that in reality, plan administrators and plan sponsors are regularly asked to consider exceptions and have to make a decision on whether or not to grant those exceptions.  It’s up to the administrator to make a determination.  Denying exceptions is one possible answer, but so is granting limited exceptions based on a diligent review of the options.  In either event, before making any determination on a request for an exception from a participant some type of flexibility in interpretation of the plan, administrators and sponsors should consider these three things: plan language, rules and regulations and possible future impact of the decision.  Having that consultation with plan counsel is probably a good idea to show due diligence.

So when it comes to requested exceptions, plans don’t have to consider them but can.  It’s all in how you approach it.

COBRA Notice Penalties: Employer Pays Even Though They Also Paid Bills

Posted in Court Cases, Plan Administration, Welfare Plans

The issue of COBRA notices and penalties can create problems when considering who is entitled to the notice and when they have to be issued.  When claims are brought for alleged violations of the provision of COBRA notices, some employers assume that they can just avoid penalties if there are not actual damages, say for example the employer agrees to pay any medical expenses.  This case illustrates that this assumption can be a costly mistake.

In Honey v. Dignity Health, the Court for the District of Nevada looked at a case where the employer, acting as its own plan administrator, failed to issue a timely COBRA notice.  The employee repeatedly asked about COBRA but was not provided with a notice.  It so happened that the employee also sought to return to work and, through her employer agreed to reinstate her and even reimburse her for her uncovered medical expenses.  She filed suit to for her employer’s failure to provider COBRA notices to her, her husband and her two children.

First, the court dismissed the husband’s claim because he was not married to the employee at the time of her COBRA qualifying event.  But the Court did award damages to the employee and her children at the rate of $110 a day for the employee and $20 a day for each of her children.  Even though the employee’s bills were paid, the Court reasoned that payment of the expenses did not actually cure the failure.  The notice obligation is separate from the coverage.  Since the children had no actual harm (that is no medical expenses), they received the lower award, but still receive some recovery.  All told, the employer was ordered to pay more than $25,000 in penalties.

This case should serve as a warning that the obligation to provide COBRA notices is not simply about providing coverage or making coverage available.  Simply paying unreimbursed expenses does not cure the statutorily defined harm.  The notice requirement exists to make sure the notices are timely issued and not tied to any actual loss.  So employers should not assume that the remedy for COBRA violations is limited to simply covering unpaid expenses.  The notice requirements carry their own risk and should be strictly followed to avoid those separate penalties.

New Rates for “Affordable Coverage” for 2015: Rev. Proc. 2014-37

Posted in Plan Administration, Welfare Plans

Under the terms of the ACA, large employers are required to provide affordable coverage beginning in 2015 or potentially face penalties.  For 2014, the definition of affordability was set at 9.5% of the employee’s income.  Within the definition of affordability, there is also a provision that provides for adjustment of that figure in the future and the IRS has issued its first adjustment for the 2015 plan year.

For plan year beginning in 2015, Rev. Proc. 2014-37 sets the new limit at 9.56% of employee income.  Revenue Procedure 2014-37 also adjusts the affordability percentage for the exemption from the individual mandate for individuals who lack access to affordable minimum essential coverage.  For plan years beginning in 2015, coverage is unaffordable for purposes of the individual mandate if it exceeds 8.05% of household income (as opposed to 8% originally).

This change stems from the requirement that the IRS must adjust the affordability percentage to reflect the excess of the rate of premium growth over the rate of income growth for the preceding calendar year, with each subsequent plan year being adjust accordingly.  Admittedly, this is hardly a monumental change for 2015, but it does serve as a reminder to employers that the definition of “affordable” can change.  So a key component of building a solid ACA compliance plan includes checking to see if the various limits and percentages have changed prior to a plan year.  Don’t assume things remain static because the act clearly provides for change.

ACA Reporting for Employers: IRS Releases Draft Forms

Posted in Plan Administration, Welfare Plans

Under the ACA, there are two unique reporting requirements.  The first is the “individual mandate reporting” requirement under Section 6055 of the Code.  The second is the “pay or play reporting” requirement under Section 6056.  Many employers have been wondering about how onerous these reporting requirements may be and while not finalized, the IRS did release draft forms that will apply to these requirements.  There have not been any instructions issued (although they are expected in August) and they are not “final” and probably will not be until sometime later this year.  But for now, they provide some insight into what information employers will have to collect.

Under Section 6055, health insurers and employers sponsoring self-funded group health plans must annually report to the IRS and participants whether the group health plan coverage constitutes minimum essential coverage under Health Care Reform.   The IRS forms used for Section 6055 reporting will vary depending on whether the reporting entity is an employer or an insurer.  Large employers that sponsor self-insured plans will report on IRS Forms 1095-C and 1094-C (transmittal form), completing both sections of Form 1095-C, under a combined reporting approach, to report the information required under Section 6055 and Section 6056, discussed below.  Entities that are not reporting as large employers (for example, health insurers and sponsors of multiemployer plans) will report on IRS Forms 1095-B and 1094-B (transmittal form).

Under Section 6056, employers have to demonstrate they have satisfied the obligation to offer coverage to employees under the “pay or play” rules.  To report this, employers are going to use Form 1095-C, with form 1094-C as the transmittal.  Note that even though they don’t have to comply until 2016, mid-size employers (between 50 and 99 full-time employees) are still required to comply with the reporting requirements if the mid-size employer sponsors a self-funded group health plan.

Now remember that these forms are drafts and the instructions are not written yet.  Certainly we hope that the instructions will provide an even clearer understanding of how and when to report and who gets copies.  But for now, employers should take a look at these drafts just to get a feel for what information they will have to provide and develop a system for making sure that information is collected in a timely manner.

Subsidies in the Federal Marketplace: A Definite Maybe

Posted in Court Cases, Plan Administration, Welfare Plans

Amidst all of the other issues surrounding implementation of the ACA, there is an underlying issue about whether or not subsidies (in the form of tax credits) are available for individuals who obtain coverage through the federal exchange marketplace as opposed to the state exchanges.  Many states have determined not to offer exchanges, which means exchange coverage in those states would be through the federal exchange.  The challenge (or argument as the case may be) is that the law specifically limits subsidies to participants participating in “state” exchange not the federal one.  So people in those states would not get subsidies.

Two federal appeals courts have now ruled on the issue and they promptly contradicted each other.  In Halbig v. Burwell, the D.C. Circuit Court of Appeals ruled that subsidies are not available to those in the federal exchange.  In King v. Burwell, the Fourth Circuit Court of Appeals ruled exactly the opposite, that subsidies are available because the law is ambiguous.  Because of the conflict between the Circuits, this would seem logically to be a case for the Supreme Court to take up, but that will take time so the conflict will likely remain for some time.

For employers, this split may have some significant impact on their ACA compliance planning.  I have heard on many occasions that employers are making decisions regarding offering coverage based on the assumption that it will be cheaper for employees to get subsidized coverage through the exchange.  But if the subsidy is not available because there is no state exchange, that assumption may not be correct.  Absent subsidies, exchange coverage may not be less expense than employer-sponsored coverage.  So before finalizing compliance based on this assumption, employers should check to see if there state offers an exchange.

According to the CMS, the following states are participating in the federal marketplace, either directly or through a partnership arrangement:

Alabama, Alaska, Arizona, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Michigan, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, West Virginia, Wisconsin and Wyoming.

Disclosures with Respect to Preventative Care: DOL Notice Requirement post-Hobby Lobby

Posted in Court Cases, Plan Administration, Welfare Plans

It seems like one of the hardest parts of ACA compliance is waiting for guidance on specific issues.  However, after the decision in Hobby Lobby, the DOL promptly issued FAQ Part XX that addresses the notice requirements for employers who cease providing contraceptive services.  The FAQ has a single question and is reprinted below in its entirety:

“Q: My closely held for-profit corporation’s health plan will cease providing coverage for some or all contraceptive services mid-plan year. Does this reduction in coverage trigger any notice requirements to plan participants and beneficiaries?

Yes. For plans subject to the Employee Retirement Income Security Act (ERISA), ERISA requires disclosure of information relevant to coverage of preventive services, including contraceptive coverage. Specifically, the Department of Labor’s longstanding regulations at 29 CFR 2520.102-3(j)(3) provide that, the summary plan description (SPD) shall include a description of the extent to which preventive services (which includes contraceptive services) are covered under the plan. Accordingly, if an ERISA plan excludes all or a subset of contraceptive services from coverage under its group health plan, the plan’s SPD must describe the extent of the limitation or exclusion of coverage. For plans that reduce or eliminate coverage of contraceptive services after having provided such coverage, expedited disclosure requirements for material reductions in covered services or benefits apply. See ERISA section 104(b)(1) and 29 CFR 2520.104b-3(d)(1), which generally require disclosure not later than 60 days after the date of adoption of a modification or change to the plan that is a material reduction in covered services or benefits. Other disclosure requirements may apply, for example, under State insurance law applicable to health insurance issuers.”

First, for reasons I laid out in a prior entry, I am not suggesting companies immediately take this step.  But a couple of things about this FAQ that are worth noting if a plan sponsor is considering eliminating contraceptive coverage.  One, the question references a “closely held for-profit company” which pretty clearly indicates that the DOL is applying a very narrow reading of the Court’s decision and non-closely held companies would be in for a fight later.  Second, if the company is eliminating contraceptive coverage, it has to follow the ACA and ERISA notice requirements for plan changes.  The change is not immediate and can only be completed after the appropriate notification time periods.  Simply eliminating the coverage will not do.

Second, this FAQ demonstrates how court decisions, particularly Supreme Court decisions, will continue to impact ACA compliance going forward.  That is why it is important for plan sponsors to continue to watch for change and guidance to increase the possibility of proper implementation of an ACA compliant plan.  Be informed, be flexible and be prepared.