Employee Benefits Legal Blog : Employee Benefits Lawyer & Attorney : Fox Rothschild Law Firm : Health Care, Retirement, ERISA : Philadelphia, New York, Northeast

The Pension Protection Act ("PPA") created a number of notice and reporting requirements, and plan sponsors are starting to send out various notices to participants.  The Department of Labor ("DOL") is starting the process of issuing guidance and coming into its own compliance obligations.  But I think there is one provision that might have been overlooked because of the timing of the requirement.

The PPA requires that defined benefit plans must disclose actuarial information related to the funding status of the plans.  The PPA provides that this information must be posted on the employer’s intranet for all plan years beginning after December 31, 2007.  This would mean that the 2008 5500, normally due by October 15, 2009, should be posted now (assuming it was filed).  Employers that sponsor calendar-year defined benefit pension plans are now required to post the actuarial information included on the 2008 Form 5500.  Of course, this requirement only applies to employers who maintain an intranet site for employee communications and does not obligate employers to create such an intranet site.  So if you have a company intranet website, and a defined benefit plan, this requirement applies to you. 

The new rules provide that the information that must be posted is the identification, basic plan information and actuarial information included in the annual report.  It must be filed with the DOL (electronically) and must be available on the employer’s intranet site.  It does not appear that the statute obligates employers to post the entire 5500 including all schedules.  Rather it appears to be limited to the identification information in Part 1, basic plan information from Part 2, and the actuarial information in Schedule SB.  So while it would seem that service provider information on Schedule C might be relevant, it is not required to be disclosed.

Unfortunately the DOL has provided no guidance with respect to when employers must post the plan information, or in what format it must be posted.  However, the DOL has 90 days to post their version of the filing under the new rules, so it is probably reasonable to infer the same 90 days would apply to an employer.  Most likely, an employer can post the filing as a .pdf document and would be in compliance but there is nothing formal on that issue. 

The PPA also made some other changes to participant disclosure requirements for defined benefit plans.   One significant change is that it eliminated the obligation to provide summary annual reports.  However, it replaced that obligation with the 5500 posting requirement outlined above, and an annual funding notice requirement that describes the funding status of the plan.  So for employers, not only do we have to send notices regarding funding status, but we have to post the 5500.  Remember, this is for defined benefit plans, not defined contribution plans.

Granted, this posting requirement is not an epic change in comparison to some of the other requirements of the PPA.  But for plan sponsors committed to full statutory compliance, this is one that should not be overlooked.

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Whenever I consider trying a new restaurant, I check to see about reservations.  Some places list them as "preferred," "required," "suggested" or "not taken."  Even establishments that require reservations may not really require them, but the thought of having to plan in advance sort of kills the adventure of changing plans.  Well, when it comes to administration of benefit plans, reservations are not only a good thing, they are absolutely required.

In this case, I am referring to reservation provisions in plans that allow the plan administrator to suspend, modify, amend or terminate any particular plan or benefit provided thereunder.  A well-drafted plan document (and corresponding summary plan description) will include plain language reserving the right of the sponsor to change the plan and modify benefits which then allows for a defense to claims that a particular benefit is guaranteed to participants.  The general rule is that for a plan to be able to change things, it has to tell participants that it has the ability to make changes.

Recently, the U.S. District Court for the Southern District of Iowa looked at a case where a class of retirees claimed that their former employer violated ERISA by amending their health insurance plan to eliminate certain medical benefits.  The retirees claimed that their right to the benefits was "vested" because they believed it was promised they would never lose benefits.  After trial, the Court ruled that the existence of a provision in the company plan providing that it could be amended or terminated at any time acted as a bar to any claim that the benefits could never be modified.  If a plan specifically reserves the right to change, then it can't be denied the ability to change.  See Brubaker v. Deere & Co., 08-CV-00113.

A reservation provision does not automatically provide an unfettered ability to modify plans.  Certainly there are numerous cases providing that separately bargained agreements or contracts can provide a specific limitation to the ability of a sponsor to amend a plan (like collective bargaining agreements or supplemental retirement programs).  But reservations provisions do provide some measure of protection to plan sponsors from general claims that amendment is prohibited.  At a time when many employers are looking at changing benefit plan structures to control costs, I would certainly recommend checking first to see if the plan has reserved the right to make the changes in advance of any decision to cut benefits.  And if your plan does not include such a provision, it should be amended to protect the sponsor going forward.

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Theresa Borzelli, a partner in our Roseland office, provides the following update on Medicare Part D notice requirements:

The November 15 deadline for providing the Medicare Part D creditable coverage notice is fast approaching. This annual Notice must be provided by an employer who sponsors a health plan with prescription drug coverage. The Notice explains the benefits provided under the prescription drug plan and whether the employer's plan is at least equal to the prescription drug benefits offered under Medicare Part D so the participant can make an informed decision as to whether to enroll in Medicare Part D. This November 15 deadline coordinates with the start of the annual Medicare Part D open enrollment.

This Notice of Creditable Coverage must be provided

--- at least annually before November 15;
--- whenever a Medicare-eligible employee enrolls in the employer's health plan;
--- whenever there is a change in the creditable or non-creditable status of the employer's health plan's prescription drug benefit coverage;
--- whenever an individual requests the Notice.

Employers who establish their own Part D comparable plan or who contract for such a plan do not have to provide the Notice.

The Centers for Medicare and Medicaid Services (CMS) includes sample Notices and guidance on its website.

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Interesting economic times create interesting problems for plan administrators.  Consider the possibility that a couple may get divorced solely for the purpose of withdrawing pension benefits from a pension plan.  Seem far fetched?  Well, not really.

In Brown v. Continental Airlines, the Court in the Southern District of Texas considered a case where pilots, concerned about the health of their pension plan, got divorced and had QDROs submitted that called for distribution of their pensions to their ex-spouses.  The plan administrator became concerned that the pilots were continuing to live with their ex-spouses as if no divorce had occurred or even remarried their ex-spouses after the distribution was made.  The plan administrator sought to have the distributions returned to the plan because it believed the divorces were "sham transactions."

The good news for plan administrators and sponsors is that the Court confirmed that the administrator could rely on the QDRO.  Orders have to be obeyed unless they fail under the specific terms of the statute. 

What information must a domestic relations order contain to qualify as a QDRO under ERISA?  QDROs must contain the following information:

1. The name and last known mailing address of the participant and each alternate payee
2. The name of each plan to which the order applies
3. The dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee
4. The number of payments or time period to which the order applies

And there are certain provisions that a QDRO must not contain:

1. The order must not require a plan to provide an alternate payee or participant with any type or form of benefit, or any option, not otherwise provided under the plan
2. The order must not require a plan to provide for increased benefits (determined on the basis of actuarial value)
3. The order must not require a plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO
4. The order must not require a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and his or her subsequent spouse

But the administrator is not required to (nor apparently allowed to) divine the intent of the parties when creating the QDRO.  If the requirements are met, it must be treated as valid. 

So while the plan administrator in this case did not get the money back, for the rest of us it affirms that following your statutory duties and confirming that the QDRO meets the requirements of the law is enough.  Plan administrators do not have to evaluate whether the purpose of the QDRO (or the divorce) is to circumvent the other requirements of the plan.

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In light of New York's recent adoption of coverage for individuals up to age-29, I thought it would be worthwhile to consider what other states have passed similar laws.  This is by no means intended to cover all of the specifics of each state, but I thought it was interesting to see the number of states that provide some insurance extension options to adult children.

1. Colorado: Adult can be eligible until the 25th birthday
2. Connecticut: Coverage up to age 26
3. Delaware: until they turn 24
4. Florida: up to age 25
5. Idaho: also until age 25
6. Illinois: until age 26, unless they are veterans and then to age 30
7. Indiana: until age 24
8. Iowa: under age 25
9. Maine: up to age 25
10. Maryland: also up to age 25
11. Massachusetts: age 25 again
12. Minnesota: unmarried children up to age 25
13. Montana: age 25
14. New Hampshire: until age 26
15. New Jersey: until age 30
16. New Mexico: age 25
17. Oregon: age 23
18. Pennsylvania: Age 29
19. Rhode Island: age 25
20. South Dakota: until their 29th birthday
21. Texas: up to their 25th birthday
22. Utah: until their 26th birthday
23. Virginia: under 25
24. Washington: up until age 25

Each of these states have specific rules for eligibility and age is not the only requirements.  Most require children to be unmarried, and some do have residency restrictions.  However, it does appear that all of these rules apply to insured policies issued specifically in those states, so self-insured or self-funded plans would not be impacted.  State rules vary with respect to whether an employer is required to provide the extension, has an option, or if it is strictly a requirement on the part of the insurance company.

So, in sum, don't assume that children automatically age off of the plan if they are "of age" and not a full time student.  Check with your benefit professional (or your attorney) to confirm that you are offering appropriate coverage to adult children.

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In conjunction with the 2008 amendments to the Americans with Disabilities Act, the Equal Employment Opportunity Commission is proposing certain changes to its rules and regulations governing disability issues under the ADA.  While these proposed changes may not have a direct impact on administration of disability plans, they certainly will add a level of confusion over what is and is not a "disability" when dealing with employees and plan participants.

The proposed rules impact the way disability is defined for purposes of determining whether an impairment exists.  A disability is traditionally defined as something impairing major life activities.  The rules somewhat broaden the definition of disability to include major bodily functions (e.g., "functions of the immune system, normal cell growth, digestive, bowel, bladder, neurological, brain, respiratory, circulatory, endocrine, and reproductive functions") as part of major life activities.  The new rules will also provide that an employee no longer has to show that the employer perceived the individual to be substantially limited in a major life activity, and instead says that an applicant or employee is "regarded as" disabled if he or she is subject to an action prohibited by the ADA (e.g., failure to hire or termination) based on an impairment that is not transitory and minor.  This will have substantial impact on considerations for reasonable accommodation.

I say that this should not have a significant impact on disability plans because the definition of "disabled" under most disability plans requires some showing that the participant is unable to perform the material and substantial requirements of their primary job function.  Plans generally anticipate an individual becoming disabled rather that being disabled at the time of enrollment.  However, I do believe that the broadening of the ADA definition of disability will require disability plan administrators to be more cognizant of how impairments of major life functions (now not necessarily purely physical in nature) can raise to the level of a complete disability under a plan definition.

For example, a cognitive impairment does not typically manifest itself in outward ways.  As a result of a neurological condition, an employee/participant may develop memory loss or difficulty with fact retention.  Under the new ADA definition, this cognitive impairment would appear to be a disability affecting a major life function (that of communication and neurological difficulty).  The impairment alone may not trigger a claim for disability benefits, but it might require an employer accommodation under the ADA.  If the impairment progress to the point where the employee can no longer function in their job, it would arguably give rise to a claim as a disability under the disability benefits plan.

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I recently read a couple articles that suggest that employers are more inclined to institute layoffs and salary freezes than they are to cut retirement benefits.  I also read an article that suggested that employers are more inclined to decrease or eliminate health benefits rather than institute layoffs.  It seems to me that in these troubled economic times, there is no clear answer as to what is the appropriate solution or the correct way (or the most effective way) to bring down personnel costs.

However, I have a seen a number of articles and press releases from various sources that criticize companies that use cost-control measures like reducing staff or benefit levels as unfair.  Particularly if the company is perceived as a large employer or is viewed as still being "profitable" while taking advantage of the workers.  Executive compensation is obviously in the news and highly paid executives with generous benefits packages make for good villains when employee benefits are generally being cut to make budget. 

It strikes me that in addition to having a sound fiscal plan for taking steps to adjust benefits packages (or to reduce payroll or staff), employers and plan sponsors would do well to prepare a game plan to deal with the public and negative press.  I read an excellent blog post by Alan Metrick of Alan Metrick Communications that can be read here.  He suggests (and I tend to agree) that any good plan for reduction of force or benefits also includes a prepared public message that the employer controls.  It makes sense to me that a plan sponsor should also consider being prepared to answer public questions about plan adjustments (like reduction or elimination of benefits) if challenged by an active media.

So when considering changes to benefit plans that have a negative connotation (like eliminating employer matches to 401(k) plans or terminating life insurance benefits), I encourage plan sponsors to also make a plan to respond to concerns both from employee and the public in advance of these changes.  You might not be able to make everyone happy with your decision, but you will at least be prepared to defend it.

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Because I have previously made reference to certain required or notices for welfare plans, I would be remiss in not bringing up some requirements for retirement plans. 

First the notices.  Retirement plans have a number of annual notice requirements, so this should service simply as a reminder of what notices are due.  The annual Safe Harbor 401(k) Plan Notice is due not later than 30 days prior to the beginning of the next plan year.  So for calendar year plans, that would be by December 1, 2009.  Also due in that same time period is the Qualified Default Investment Alternative Notices that would apply to plans that have provided for default elections.  Finally, don't forget the 401(k) Plan Annual Automatic Enrollment Notices, also due 30 days prior to the beginning of the next plan year. 

If you have a defined benefit plan, you have to send a Defined Benefit Plan Annual Funding Notice within 120 days of the end of the plan year (or by April 30, 2010 for a plan year ending 12/31/09).  Participant Benefit Statements are due every three years or annually (depending on the election of the plan administrator), so you need to prepare those by December 31, 2009, if required.  Participant Benefit Statements for Defined Contribution Plans are due quarterly, and are timely if provided within 45 days of the end of the quarter.  For calendar year plans, they would be due February 15, 2010.

In addition to these notices, there are several required and optional plan amendments for defined benefit and defined contribution plans that may be applicable to your plan (or that you may have adopted).  If the plans were amended during the last plan year, don't forget to send a Summary of Material Modifications to participants to alert them to the changes.  If you have questions about what amendments were available or concerns about making sure you have adopted all appropriate amendments, contact your plan professional of your attorney at Fox Rothschild to set up a review of your retirement plan.

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By now most plan administrators should be aware that there is something called the HITECH Act and that the ARRA of 2009 made some changes to HIPAA with respect to medical privacy and security regulations.  In my August 24, 2009 entry about plan compliance items, I make reference to the HITECH Act and the new "security breach" requirements and the need to update business associate agreements.  But as a follow up, I wanted to dig a little deeper into what this security breach component is and what it means and take a look at the creation of a class of information called "unsecured protected health information."

Often when I am having discussions about HIPAA, questions are are raised about what constitutes PHI.  Technically it is individually identifiable information about past, present or future medical care or diagnosis.  So while the medical care or diagnosis part was protected, the individual identifiers themselves were NOT protected by HIPAA privacy.  Now I believe that changes.

ARRA creates a class of information called “Unsecured Protected Health Information” which is protected health information (PHI) that is not secured through the use of a technology or methodology specified by HHS as one that renders the PHI as unusable, unreadable or indecipherable to unauthorized individuals.  In other words, if it is not encrypted under the technology requirements, it is unsecured.  And that may be all there is too it.  But I actually think unsecured PHI might go a little deeper. 

I think that unsecured PHI might also be that that information that is part of the PHI records, but not necessarily PHI that is specifically secured and protected by HIPAA.  So I think we might  now have "secured PHI" like a medical diagnosis, and "unsecured PHI" which would be the social security number of the patient who received the diagnosis.

The Department of Health and Human Services is required to issue guidance specifying the technologies and methodologies that render PHI as unusable, unreadable or indecipherable to unauthorized individuals within 60 days of the enactment date (i.e., April 18, 2009) and annually thereafter.  Until the guidance is issued, covered entities may rely on a technology or methodology which is developed or endorsed for this purpose by a standards developing organization accredited by the American National Standards.  That would appear to cover the technological component but I think it overlooks the fact that PHI does not exist only in electronic format.  You can't encrypt a piece of paper, but you still have to protect what is on it.

So I think that, at least in some respects, the purpose of the ARRA changes is that while technically all PHI is protected, not all ancillary information contained within the PHI is necessarily subject to the current protections.  If secure PHI is improperly released, there are corrective mechanisms in place under the original regulations.  But what to do about that ancillary information that was part of the PHI that is not necessarily protected but should still be secured?  Maybe it is now defined as unsecured PHI and new standards apply to it.

The ARRA creates a new notice obligation when the security of an individual’s unsecured PHI is breached. In other words, if unsecured PHI (like social security numbers) gets out, the entity that let it escape has breached this new obligation to protect it. The security of that information is compromised. If the security of this PHI is breached or believed to have been breached, then the covered entity that becomes aware of the breach must notify each impacted individual of the breach, in writing, without unreasonable delay but no later than 60 calendar days after discovery of the breach. Business associates are subject to the same requirement except that the business associate must notify the covered entity of the breach.

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By this time, all health plan administrators should be aware of the required annual notices like the Women's Health and Cancer Rights Act notice and the Medicare Part D notice.  Plus we have updated our COBRA notices to comply with the COBRA subsidy requirements of the ARRA.  So now let's take stock of what changes are in store for 2010.

1. Mental Health Parity Act.  For plan years after 10/3/09, a group health plan that provides mental health and substance abuse benefits cannot have special caps for benefits related to treatment for these disorders.  Co-pays, deductibles, limits and out-of-pocket expenses cannot be more restrictive for these treatments than for medical or surgical benefits under the plan.

2. COBRA Subsidies under the ARRA.  Remember that the COBRA subsidy is currently set to end as of December 31, 2009, meaning that for qualifying events occurring after 1/1/2010, COBRA notice and election forms will NOT contain information about eligibility for the subsidy.  So plan administrators should be prepared to go back to standard COBRA notices (unless the subsidy is extended).

3. Children's Health Insurance Program Re-authorization (CHIP).  As of April 1, 2009, all plan must provide for the special 60 day enrollment period for employees and dependents who become eligible or cease being eligible for premiums assistance under Medicaid or state children's health insurance programs.  Plans have to be updated to include this special enrollment period.  There is also an annual notice requirement beginning 1/1/2010.

4. Michelle's Law.  For plan years after 10/9/09, a group health plan cannot terminate coverage for a dependent college student because of a loss of full-time student status where the loss of status is due to a medically necessary leave of absence.  Information about Michelle's Law must be provided with any notice explaining eligibility for coverage as a dependent student.

5.  Genetic Information Non-Discrimination Act.  For plan years after 5/21/09, the plan must provide that genetic information cannot be requested, required or purchased for underwriting purposes and will not be used for enrollment.  Also, participants cannot be required to undergo a genetic test and genetic information cannot be used to set contribution rates or premiums. 

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In an era where we all like to see statistic and trends, the Internal Revenue Service has obliged by publishing a list of common recurring mistakes it sees in large case audits of qualified retirement plans.  The mistakes were identified through submissions under the Voluntary Correction Program.  While this list mainly identifies concerns with qualified retirement plans, it also provides a pretty fair checklist of concerns for welfare plan administrators looking to ensure compliance. 

Common Mistakes Across All Retirement Plan Types.  This first list covers the general common problems associated with  both defined contribution and defined benefit retirement plans.  Note that many would apply to welfare plans generally:

1. Failure to timely amend the plan document for changes in the law;
2. Failure to follow the plan's definition of and limits on compensation for contribution purposes;
3. Failure to enroll eligible employees and/or to exclude ineligible employees;
4. Failure to meet the legally-required minimum distribution provisions in the plan;
5. Failure to follow the in-service distribution provisions in the plan;
6. Failure to use correct distribution forms, make timely distributions and file correct tax reporting on distributions;
7. Failure to follow the plan's vesting schedule;
8. Failure to retain records and maintain internal controls regarding administration of the plan;
9. Failure to follow the terms of a qualified domestic relations order (QDRO); and
10. Exceeding the legal maximums on contributions and benefits under the plan.

Common Mistakes for 401(k) Plans in particular.  A more detailed list is provided specific to  401(k) plans:

1. Failure to pass ADP/ACP nondiscrimination testing
2. Failure to to provide for minimum top heavy benefit contributions
3. Failure to Satisfy IRC 415 limits

Common Mistakes for Defined Benefit Plans.  For defined benefit plan, the list includes:

1. Benefit calculations based on inaccurate data;
2. Failure to provide the required notice when benefits are suspended; and
3. Premature or delinquent commencement of benefits.

To access the EPTA Audit Team Compliance Trends and Tips click here.  What is interesting about this link is that it also provides a link to the "Correcting Plan Errors" main page which has guides for identifying and correcting plan errors, including a 41 page guide to identifying and fixing common 401(k) errors.  Bear in mind that the IRS specifically disclaims providing legal advice and reliance on the guide is not a justification for avoidance of penalties and interest if a subsequent audit does reveal problems with the plan.  But as a starting point, plan administrators should at least consider this summary a checklist of useful things to look at and discuss with their plan professionals.

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A partner of mine recently came to me with this question: if any employee is out on leave, when does the employer send the COBRA notice?  "Good question" I said, "what type of leave and what does the company's leave policy provide?"  Well, it got me to thinking (and researching) COBRA and leaves and when the "qualifying event" is triggered.

I came across an article about a case called Jennings v. Crane, out of the Western District of Kentucky where an employee was terminated while out on leave.  The company wanted the COBRA to qualifying event to be when the leave started.  The employee said it started when he was fired.  In the end, the Court sided with the employee, but did so after looking at the company leave policy and what the health plan said about leaves of absence.  In other word, what did the plan sponsor tell the participants about COBRA and leaves of absence.

The DOL is very specific about what happens while an employee is out on FMLA leave.  An FMLA leave is not a qualifying event, but a qualifying event may occur when the employee notifies the employer of the intent not to return to work.  The DOL is much less specific about COBRA when someone is out on some other type of leave.  The employer has to define how leave will apply.

Hypothetically, think of an employee who goes out on a leave for 6 weeks.  At the end of 6 weeks, the employee does not return to work and the employer has no idea if he will ever return.  Is that a qualifying event under COBRA?  Is the employee treated as losing coverage in the day he does not return to work?  Can he extend the leave indefinitely and never trigger COBRA?  All are possible if the employer is not paying attention and does not take the time to the following:

1.  When you design your group health plan, decide how a leave of absence will be treated and when the leave will trigger COBRA continuation.  A plan sponsor can clearly define when the loss of coverage will occur under various leave situations.

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A copy of the FTC guidance can be found at: http://www.ftc.gov/bcp/edu/microsites/redflagsrule/faqs.shtm.

 

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Sometimes the hardest thing to interpret in benefit plans is when a disability occurs.  Most questions about disability focus on short term and long term disability plans, but retirement plans and other welfare plans can have benefit levels that are triggered or impacted by a disability determination.  Ultimately, the plan administrator is obligated to apply the terms of the plan to make a determination if a participant is "disabled" under the terms of the plan.

In Hobson v. Met Life, 2nd Cir., 7/29/09, the Court looked at a situation where a participant claimed complete disability which was denied by the plan administrator.  After applying the now required Glenn analysis to the determination, the Court also had to look at a situation where the Social Security Administration made a determination that the participant was disabled.  The plan administrator disagreed, applying the plan definition of disability to determine that the participant was not unable to work and was therefore not entitled to long term disability benefits.  The Court agreed with the plan administrator, but issued a warning that if an administrator is going to disagree with SSA, it should make sure the basis for its determination, and ultimately the basis for its disagreement, be very carefully and completely explained.  An SSA determination is not binding on a plan, but the plan had better explain WHY it disagrees in such a way that a meaningful appeal can be made.

This decision continues the long line of cases that gives deference to decisions made by plans that retain discretion.  But I believe it also should serve as a reminder to plan administrators to be very thoughtful in the application of "determinations."  Met Life was very thorough and collected a lot of medical information on its own.  It had detailed notes and records about all of the steps it took in evaluating each stage of the claim and was meticulous in its record-keeping as to how the decision was ultimately made.  It did not simply rely on an outside determination but did the hard legwork itself.

So from this case, it appears that SSA determinations are not the defining definition of "disability," but plans should be prepared to explain in detail how an alternative conclusion was reached.  And be prepared to prove HOW the conclusion was reached.

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Except in very limited circumstances, Section 204(g) of ERISA provides that the accrued benefit of a participant under a plan may not be decreased.  This is generally referred to as ERISA's "anti-cutback" provision.  I happened to be looking at this provision recently because of discussions I ma having with employers about eliminating certain benefits as a cost saving mechanism.  Of course the question asked is what constitutes an improper cutback.

On July 17, 2009, the Tenth Circuit Court of Appeals issued a decision in Karber v. Qwest Pension Plan that considered the elimination of a Pensioner Death Benefit component of its Death Benefit Plan.  Although not all employers have "death benefit plans," this decision did take the time to explain some of the issues facing employers when considering reduction of benefits.

The Court decided that a death benefit was not a "retirement type benefit" or retirement subsidy that would be part of a pension plan.  This is significant because retirement-type benefits are subject to vesting requirements, giving rise to an argument that the benefit had "accrued."  The benefit was not impacted by years of service and the participant did not earn portions of the benefit for each year of service.  Generally non-retirement benefits, such as welfare plans, do not vest.  This lack of vesting makes it difficult to argue that the benefit has "accrued," meaning that, generally, it is easier to reduce them.  Notice I said generally.

The Court also had to consider the issue of "contract vesting" which was essentially an argument that the language of the plan itself precluded reduction of benefits.  The Court also had to contend with an argument that some other contractual promise existed to preclude the reduction.  While the Court ruled that contract vesting did not apply, the fact that the Court considered this component serves as a reminder that a simple reduction of benefits could give rise to a cause of action based on prior representations.

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Though not technically an "employee benefits" topic, it is important to note that the federal minimum wage is set to increase to $7.25 pr hour on July 24, 2009.  For benefit plan structures that are impacted by wage rates, this may have an immediate impact that will have to be addressed.

For the US Department of Labor list of minimum wage rates per state, click here.

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In recent months, we have seen an increase in severed employees filing claims for wrongful discharge under a variety of theories.  It is easy to forget that ERISA also contains a possible remedy under Section 510.  Section 510 provides that it unlawful for an employer to discharge an
ERISA plan participant for the purpose of interfering with the attainment of any right
to which such participant may become entitled under the plan.

Such was the case in Pendelton v. QuikTrip, decided by the 8th Circuit on June 9, 2009.  Pendelton told his employer that he was leaving but agreed to postpone his departure while transitioning his work.  During the transition, he disparaged a co-worker and was terminated by his employer.  He sued for wrongful discharge, alleging that his termination was a 510 violation because he was terminated to avoid certain benefits under the severance plan, including stock option benefits.  The Court disagreed, reasoning that he was not entitled to the benefits claimed in the first place, so his termination could not have been to avoid payment of benefits to which he was entitled.

I think this case is important because it reminds us of the standard that has to be set in section 510 claims.  The common view is that a claim under this section is viable if the plaintiff can allege simply they were fire because they made a claim for benefits.  They tend to overlook that for claim to survive, there had to first be a right to obtain the benefits.  It is not enough to say "I was terminated because I asked."  It must be "I was terminated because I asked for what I was entitled to."

I also think that it is very important for employers and plan sponsors who are downsizing to evaluate the benefits severed employees are entitled to upon termination and provide those benefits correctly.  If employees have made a claim for benefits to which they were entitled in the past, the employer should make sure that these benefits were provided.  If they have made a claim for benefits to which they were not entitled, make sure proper notice and appeal rights are provided.  But don't assume the claim will simply go away if the employee is terminated. 

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In previous entries on this topic, I have noted that we should be continuing to receive guidance from the Department of Labor and the IRS on how to administer the subsidies.  Once employers got past the notice period, the task of administration becomes the main focus and the IRS has given some additional explanation of the administrative process by adding 19 new questions and answers to their website on subsidy compliance.

Some highlights:

(1)  As long as an employer's determination that an employee's termination was involuntary is consistent with a "reasonable" interpretation of the statutory provisions defining "involuntary termination," the IRS will not challenge the employers determination when considering whether an employer is entitled to a payroll tax credit for a terminated employee.  I believe this creates a "reasonableness" standard of review in future audits that will allow protections for "good faith" efforts to comply.  So a mistake will not result in a penalty if it was based on a reasonable interpretation of the rules.

(2)  An employer must retain appropriate documentation of its determinations that includes a statement by the former employee or employer that the employee was involuntarily terminated. Forms requesting treatment as an assistance-eligible individual may be used for this purpose.  I have also been considering, at least initially, keeping copies of  of any termination letters or resignation letters with the subsidy request forms as verification of the termination process.

(3) In a nod to employer concerns regarding treatment of control groups, In situations where one employer maintains a plan on behalf of related employers in the same controlled group, each of the employers will be viewed as a separate employer for payroll tax purposes.  In these cases, the payroll tax credit must be appropriately allocated among them, presumably based on the EIN numbers of each employing entity.  It also appears that, in certain circumstances, one state agency that maintains a plan can claim the credit for other state and local government agencies that participate in the plan.

(4) And finally, some additional good news.  No information reporting of the COBRA premium subsidy is required to be provided to an assistance-eligible individual or to the IRS by an employer, multiemployer plan or insurer.  However, any person claiming a payroll tax credit for the COBRA premium on Form 941, Employer's Quarterly Tax Return (or other applicable form) must keep records of the individual payments and other documentation to support the credit claimed.

For more answers provided by the IRS to multiple questions, please click here.

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Since COBRA is a very hot topic right now, I also thought this case might be of interest. 

In Laselva v. Schmidt, the District Court for the Northern District of New York affirmed that there is no qualifying event when health insurance coverage is canceled due to an employer's non-payment of premiums.  An employee sued in state court alleging that his employer breached his employment agreement by terminating health coverage and that COBRA was violated because no continuation coverage was offered.  The employer terminated the coverage by ceasing to pay premiums for the coverage. 

The case was removed to federal court and the federal court found that the COBRA claim was merit-less, remanding the case to state court.  But in doing so, the Court found that in order for COBRA to apply, the basic rule is that there has to be a "qualifying event."  A loss of coverage due to the employers termination of the health coverage, or failure to pay the premiums so that the coverage is terminated, does not create a qualifying event.

While not discussed in the decision, I believe that it is worth mentioning that the new COBRA subsidy rules have a similar restriction.  A former employee can only get COBRA, and can only receive the subsidy, so long as there is a plan in which to continue.  So if the employer terminates the coverage, the plan and the subsidy both disappear.

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Although not thrilling to the general public, the issue of discretionary authority in interpretation of plan provisions ha always been one of significant concern for ERISA practitioners.  The general standard of review of the determination of a plan administrator's decisions regarding implementation of plan provisions was originally defined in Firestone v. Bruch, a 1989 Supreme Court case the held that if plan language provides that the plan administrator has "discretionary authority" in interpreting plan provisions, a court will give deference to the plan administrator's decision when reviewing the case.  If no discretionary authority is granted, the court applies a "de novo" standard of review.

Various cases have looked at how to measure that standard and then in June of 2008, the Supreme Court, in Metropolitan Life v. Glenn, made a somewhat significant modification to that standard of review.  The Court found that while discretionary authority still applied (and thus a decision would only be overturned if it was "arbitrary and capricious"), an appropriate factor to consider would be whether the plan administrator had a conflict of interest in making the claim determination.  Specifically, if the plan administrator would also be the entity responsible for funding the payment of benefits, the court could consider that factor when making its review.  In Glenn, the Court said since the insurance company making the claim determination would also be the entity paying the claim, that inherent conflict has to be considered.

Now, the states have gotten involved and several states have passed laws providing that insurance policies written in their states cannot retain discretionary authority in determining benefits decisions.  Last month, in Am. Counsel of Life Insurers v. Ross, the 6th Circuit Court of Appeals held that such a state law is not preempted by ERISA, meaning that a state law can do away with discretionary review altogether.

in Ross, the Court was considering a Michigan state law that precludes insurance policies from containing language that gives them discretion in interpreting benefits denials, thereby taking away the "arbitrary and capricious" standard of review given in Firestone.  Thus any review of a claim determination for these insured plans would be "de novo."  The 6th Circuit found that this type of regulation was "saved" from preemption as the regulation of insurance.  Thus, the level of deference provided previously would be gone, and every review would be done without considering what the plan administrator thought.  This would also eliminate the need for any conflict of interest determination suggested in the Glenn case.

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In conjunction with the COBRA subsidy application (the Request for Treatment as a Subsidy Eligible Individual), there is a mechanism that was created to appeal the denial of the subsidy directly to the United States Department of Labor.  The link for DOL website for making an appeal is here.

The appeal can be made on-line, or can be submitted via paper to the DOL.  the notice included with the application confirms that to be eligible for the subsidy, an employee must (1) be eligible for COBRA between 9/1/08 and 12/31/09, (2) elect coverage and (3) have a qualifying event involving an involuntary termination.  While the statutory creation of the appeal process seems to require a ruling within 15 days, nothing in this form references that specific time frame.

From an employers perspective, nothing in the notice defines how the appeal review will be conducted.  The employee seeking to appeal the determination is asked to submit documentation that will be reviewed, but there is no commitment that the DOL will contact the employer or plan administrator for further clarification.  It remains to be seen how they will be contacted, but it is safe to assume they will be contacted to verify the information submitted by the employee on appeal.

I think that initially, employers should work with their legal counsel if they are notified of an appeal (or receive an inquiry about a denial of the subsidy) simply to control the process so that it does not broaden in scope into a deeper "employee benefits" audit by the DOL.  I believe it is likely that this type of appeal and investigation will give the DOL the opportunity to identify potential problem employers or plans to conduct a more thorough investigation of their plan administration.  Employers will also want to be very careful about their responses to an investigation as they could be considered admissions to the DOL of faulty employment practices that could give rise to a DOL or EEOC investigation.  In sum, employers should not assume the DOL is just interested in dealing with the appeal and should be very careful about how they respond.  I am not suggesting the DOL is the "enemy,"  but employers should be careful if contacted. 

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The IFEBP reports that for 2008, 20.7% of multiemployer pension funds were in safe status (more than 80% funded), 41.4% were in endangered status (65-85% funded) and a whopping 37.9% of surveyed plans were in critical status (less than 65% funded).  That's an awful lot of unfunded liability waiting to strike employers and potentially a big 2010 budget concern because these figures make it very likely that required contributions to these pension funds are going to skyrocket.

If an employer is participating in a multiemployer pension plan by way of a collective bargaining agreement, there are two things that have to be considered about budgeting for 2010 employee benefit cost concerns.  The Pension Protection Act ("PPA") of 2006 provides that plans certified as critical or endangered have to develop rehabilitation plans to correct their underfunding.  While the plan can limit benefit accruals and eliminate some types of benefits, the most likely target to improve funding is to increase employer contributions.  After the plan has been certified as critical, the actuary is going to recommend to the plan administrator a "required contribution level" that will be part of the rehabilitation plan and that recommendation is likely going to be made in 2009. 

Under the PPA, the employer and the union have to agree to adopt the new contribution as part of their bargaining agreement.  If no agreement is made, there is a 10% surcharge that the employer has to pay to the fund over and above the current contribution level.  This is a very broad summary of the impact and more detail is available in earlier posts, but generally employers should be anticipating that, if they are in a critical or endangered plan, the contributions for the remainder of 2009 are going to go up at least for the amount of the surcharge.  Plus, if your collective bargaining agreement expires before the end of 2009, or even in 2010, you can anticipate a higher required contribution.

This last paragraph is the true purpose behind this post.  In dealing with clients who are preparing their 2010 budget and trying to anticipate increased labor costs, I find that they could be overlooking this potential cost increase: the added expense of being in an underfunded multiemployer pension fund.  At the bare minimum, the cost associated with being in a critical plan is going to be 10% higher based on the surcharge.  Plus the surcharge is mandatory so there is not even room to negotiate it downward.  Add that to the uncertainty of the increased amount of the contributions due under the rehabilitation plan, and you have a potential time bomb of expense waiting to explode.

What should you do?  If you are contributing to a multiemployer pension fund, first find out what status it is.  Ask the plan administrator for verification of the funding levels.  If you have not received a notice with this information, ask for one.  If you have received a notice, ask your counsel what it means.  Second, find out what the time frame is for that plan to adopt a rehabilitation plan.  Ask if they trustees have started the process.  Ask if the actuary has made any recommendations with respect to increased contributions.  Third, if you are headed into negotiations with the union, make sure this issue is clearly discussed and get commitments about how funding increases will be treated against other costs.  Consider making wage increases contingent upon the impact of increased pension costs, or building in other concessions depending on required contribution levels.  Make sure you negotiate with the understanding that your pension costs will be going up (unless you are in that rare 20.7% of safe plans).

Above all, budget accordingly.  Don't let this cost increase come as a surprise.  There is no easy solution to this nationwide problem of underfunded plans.  But knowing what to expect can make dealing with it easier.

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Imagine this scenario: plan participant calls plan administrator and ask about benefit entitlements under the terms of the plan. Plan administrator gives information and it is wrong or participant either misunderstands what he is told. When participant does not receive the full benefit, he files a lawsuit saying he is entitled to the full benefit because of the representation.

These types of claims tend to give rise to a debate over estoppel as it applies to ERISA plans. In sum, the argument is that the plan is "stopped" from denying the benefit because the participant relied on the statements. While it is generally recognized that a claim for estoppel may be a viable cause of action under ERISA, it is equally clear that an estoppel claim cannot apply where the terms of the plan are clear and unambiguous.

In Regency Hospital v. Blue Cross of Tennessee (2009 US Dist. LEXIS 37111), the Southern District of Ohio looked at a claim by a medical provider alleging that a plan was estopped from denying payment of a claim that was pre-approved. The result of the case was not as significant to me as how they got there. The Court rejected the provider's claim, in part, because the alleged misrepresentation contradicted the clear terms of the plan and refused to allow an estoppel claim to survive. The Court articulated that for an estoppel claim to survive, 5 factors must be met: (1) a representation of fact made with gross negligence or fraudulent intent, (2) made by a party aware of the true facts, (3) intended to induce reliance by the person requesting the information, (4) who is unaware of the true facts and (5) the person reasonably or justifiably relies on the statement to his detriment.

This last factor is the most important because the Court further articulated that a person cannot reasonably or justifiably rely on a statement that counters clear, unambiguous terms of the plan. If the plan terms are correct and thee is no ambiguity subjecting those terms to interpretation, it would appear to be unreasonable to rely on the misrepresentation. In other words, participants are to some extent charged with going and looking up the answer themselves in the plan document rather than simply calling an administrator and asking for an answer.

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Previously I wrote about the efforts of congress to provide requirements for additional disclosure of 401(k) fees.  They are at it again, this time through introduction of H.R. 1984, The 401(k) Fair Disclosure for Retirement Security Act.  Introduced on April 21, 2009, the Act requires additional disclosure of fees charged to 401(k) accounts.  This is not something that I think plan sponsors should fear, but there are some specific provisions of the Act that they should pay attention to.

First, the Act creates an affirmative obligation to disclose fees even where fee information is generally available from other sources.  Financial service providers would be required to disclose all costs and fees associated with each investment to both plan sponsors and participants.  A quarterly statement to participants will be issued listing the total contributions, earnings, returns and all fees subtracted from an account.  Before enrollment, participants would receive a statement listing the investment options including historical returns and fees assessed for each option.  In addition, financial service provides would have to disclose any financial relationship or potential conflict of interest with the plan sponsor.

Second, the Act requires that plan sponsors offer at least 1 low-cost index fund that tracks a broad market index.  Because index funds are not actively managed, it is assumed they would have lower costs and fees associated with their investment.  Some advisors have expressed concerns that this provision will be tantamount to a government seal of approval of index funds as an acceptable investment option.  However, this requirement does fit squarely in line with prior discussions over qualified default investment option which many plans have adopted.

Even if this Act does not eventually become law, I believe it illustrates how important it is for plan sponsors to be actively aware of the administration costs associated with their plans, and particularly the fees charged by service providers.  Sponsors should always be looking for the best service provider, but lower costs have to be a concern.  Plan sponsors would be wise to take this opportunity to review their plans and fees charged to make sure they are adequately disclosed, that they are being properly charged and that they are not excessive.

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Unfortunately, these difficult economic times increase the likelihood that employees will be moved to part-time employment.  From an employee benefits perspective, moving someone to part-time can have an impact on things like eligibility and vesting so employers and plan administrators have to be aware of the various requirements in the regulations and how they define "part-time."

First, there is the 1000 hours per year requirement in IRS Code Sections 410(a)(3)(A) and 411(a)(5)(A).  For retirement plans, this means that eligibility and vesting for a "year of service" are satisfied when someone works 1000 hours in the plan year.  So going to "part time" for retirement plan purposes would really be governed by the 1000 hours measurement and working more than 1000 hours in a year would still constitute a full year of service even if it was not a 40-hour work week.

On the other hand, not all benefit plans are under that same requirement.  Major medical plans are governed in part by the eligibility requirements of 105(h), and 105(h)(3)(B) permits exclusion for part-time employees without specifically defining "part-time."  The 1000 hours does not apply to these plans, but IRS commentary provides that part-time means someone who has customary employment of less than 25 hours per week.  So eligibility to continue to participate in those plans may be protected by working an average of 25 hours per week, which is more than the 1000 hours for retirement plans.

Add to that the confusion over Section 125 plan and Section 129 Dependent Care Assistance plans.  Like retirement plans, they are subject to discrimination testing, which would seem to require the 1000 hour measurement (Section 129 actually references 410(a) and the 10000 hours).  However, Section 79 life insurance plans follow the same definition as Section 105(h), which means they permit exclusion for part-time employees without considering the 1000 hours of service.  Add to this the new requirement for Section 403(b) plans (a type of retirement plan, unusually for non-profit institutions) that retains the 1000 hours but provides that the plan generally does not have to be offered to employees expected to work fewer than 20 hours per week and you can see where there would be some considerable confusion over what it means to be "part-time."

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I recently received a question about the obligations of a plan administrator to provide specific notices to plan participants and whether model notices existed for each required participant distribution.  Unfortunately the short answer to that question is "no" there are not that many model notices available.  While the new model COBRA notices are available for plan administrators and employers to modify and distribute, most disclosures are simply left open to interpretation.

The Department of Labor has issued a Reporting and Disclosure Guide for Employee Benefit Plans that sets out what notices, disclosures and reports are required of plan administrators for various plans.  They are broken down primarily between required documentation for all plans, welfare plans and retirement plans.  Obviously plan documents and summary plan descriptions are required and there are multiple requirements for contents to those documents.  But on top of these, there are multiple required notices and disclosures that plan administrators have to provide.  Sometimes these are on an annual basis, or they can be "as needed."  Either way, it is incumbent upon the plan administrator to know what it is they have to distribute and when.

Rather than simply repeat everything in the DOL guide, I recommend that plan administrators and sponsors read through this guide to make themselves aware of all the required documentation.  If you are missing a particular notice or document, or are unfamiliar with what is required, please contact your legal counsel or plan service provider to obtain an explanation of what is required and get them to assist in the preparation of required notices.  I firmly believe that this new COBRA notice and reporting will cause more plan audits because there will be more participant complaints.  So use this new flurry of activity to bring your plans completely into compliance.

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On February 5, the US Department of Labor issued a Statement of Employee Benefits Security Administration "Duties of Fiduciaries in Light of Recent Events Regarding Bernard L. Madoff Investment Securities LLC."  The purpose of the statement is ostensibly to provide instruction to plan fiduciaries on how to address getting caught in the Madoff scandal.  The relevant text of the notice as is follows:

"Where plan fiduciaries determine that plan assets were invested with Madoff entities and material losses are likely, appropriate steps should be taken to assess and protect the interests of the plan and its participants and beneficiaries.  Such steps may include (1) requesting disclosures from investment managers, fund managers, and other investment intermediaries regarding the plan's potential exposure to Madoff-related losses; (2) seeking advice regarding the likelihood of losses due to investments that may be at risk; (3) making appropriate disclosures to other plan fiduciaries and plan participants and plan beneficiaries; and (4) considering whether the plan has claims that are reasonably likely to lead to recovery of Madoff-related losses that should be asserted against responsible fiduciaries or other intermediaries who placed assets with Madoff entities, as well as claims against the Madoff bankruptcy estate.  Fiduciaries must ensure that claims are filed in accordance with the applicable filing deadlines such as those applicable to bankruptcy claims and for coverage by the Securities Investor Protection Corporation."

Essentially, the DOL is saying that fiduciaries have to take action, without specifying what the appropriate action would be.  Plan fiduciaries should definitely investigate filing a claim by going to www.madofftrustee.com, and also consult with advisers and counsel over appropriate courses of action.  Also, plan participants should be notified of losses associated with the devaluation of the Madoff accounts.

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It is generally accepted that multiemployer ("union sponsored") benefit funds have plan counsel.  They should and it is always important for Trustees to seek competent legal advice.  However, depending on the nature of the fund and the issues presented, it is more common and more effective for plans to have co-counsel, one retained to consult for the union trustees, and one consult with the management trustees.

Clearly I am not suggesting that the Trustees are necessarily in conflict.  But in the time of Pension Protection Act compliance and differing opinions between employers and unions as to how Funds should be administered, conflicts inevitably will arise.  In those cases, whose side is the Fund lawyer on?  What happens in matters that require arbitration between the Trustees?  With whom can management Trustees consult without concern over having their views communicated to the other side?  In many instances, I have seen Fund counsel be the same attorney representing the union in collective bargaining negotiations.  There has to be real concern for management Trustees when Fund counsel is so closely aligned with the union.

I consistently recommend that employers serving as management Trustees on multiemployer funds press for the addition of co-counsel.  There can be a clear delegation of duties between the respective counsel that prevents excessive expenses to the Fund and also allows for a cleaner administration of Fund issues.  There is also a certain measure of confidence for a management Trustee to know that the advice or counsel being given to his or her "side of the table" is not colored by loyalties to the other side.  My experience is that a freer flow of information results when management trustees can caucus with their own counsel and discuss their concerns with someone who understands their concerns.

If you are in a fund without management co-counsel, or are serving as a management trustee on a fund that does not have management co-counsel, you should give serious consideration to getting co-counsel for the fund.  It increases the legal knowledge in the room and it gives management trustees security in their own voice.

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Everyone who sponsors a plan should be aware of ERISA Section 104(b)(4) that obligates plan administrators (usually the plan sponsor) to provide certain information to plan participants upon written request.  Section 502 of ERISA generally provides that there are civil penalties including a possible penalty of up to $100 for every day information is not provided.  On December 31, 2008, the DOL gave some final regulations dealing with some specific civil penalties for failing to provide certain retirement plan documentation and notices.

Under Section 101(j) of ERISA, a plan administrator of a single employer defined benefit pension plan is required to give notice to participants about funding-based limitations on benefits and accruals if the plan falls below prescribed funding levels.  Section 101(k) makes the same application to multi-employer plans and their participants, and Section 101(l) extends that to employers contributing to the plan as well.  The Pension Protection Act also provided guidance about these required notices.

Now for the penalties: The DOL will assess penalties based on the "degree of willfulness of the failure or refusal to furnish" these notices and apply maximum penalties of $1,000 per day per violation.  There does not appear to be a specific cap applied, so if a plan fails to distribute a required notice to 100 participants for 100 days, the potential penalty could be $10,000,000.  That's a pretty hefty penalty.  Adding to the danger is that plan assets may not be used to fund the penalty.  It is assessed against the plan administrator directly.  So if the company is both a plan sponsor and administrator, the company alone would be responsible for paying the penalty.

There is a requirement that the DOL send the notice of the penalties and also an appeal process for reasonable cause, but it is best to never get in that situation.  So plan sponsors and administrators should double check with their services providers right now to find out what notices they are required to send and make sure they have been properly sent.

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I am working on a presentation with an employment attorney here in the firm that addresses discrimination under Title VII of the Civil Rights Act in an employment setting.  The question came up about how discrimination impacts employee benefit plans and administration of these plans.  As I was explaining the difference it struck me that this might be a good topic to review with employers in general.  Discrimination in employee benefits is not just about compensation levels.

Employment discrimination laws generally preclude discrimination based on status in a protected class, such as race, gender, national origin and religion.  Several states have adopted laws that preclude discrimination based on sexual orientation and marital status.  While ERISA does not include a specific provision preventing discrimination in employment benefits, the application of other federal laws to plan sponsors has the impact of preventing discrimination in fringe benefits.  Fox example, a plan cannot not exclude from participation all female employees.  Not because of ERISA, but because it would be a violation of federal discrimination laws for an employer to exclude from a benefit a member of a protected class.

The Equal Employment Opportunity Commission manual has about 70 pages in its enforcement guidelines to evaluate whether there is discrimination in providing fringe benefits.  The EEOC looks to see if the administration of the benefits plans is such that a protected class is denied access to the benefit, or that the benefit is such that no member of a particular class receives the benefit and considers that discriminatory.  For example, a life insurance benefit offered only to senior executives might be flagged as discriminatory if all of your executives receiving the benefits are white males under 50.  You might recall I previously discussed the Age Discrimination in Employment Act and its impact on retirement plans, so you can see that these federal employment laws do have some overlap as it relates to you employee base.

This "discrimination" term is not the same as the discrimination testing that retirement plans go through annually.  Discrimination in this sense applies to highly compensated versus non-highly compensated employees.  A plan can be disqualified if it provides too much benefit to highly compensated employees as related to non-highly compensated employees, regardless of any protected class consideration.  So to truly understand "discrimination" in employee benefits, you have to consider not only the class of employees receiving the benefit as it relates to protected status, but also as it relates to compensation status within the company. 

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On November 25, 2008, the Employee Benefit Security Administration issued Field Assistance Bulletin 2008-04 addressing the bond requirements for ERISA "plan officials."  It includes clarification as to who must be bonded, responsibilities for bonding and exemptions from the bonding requirements.

Generally, every person who handles funds or property of an employee benefit plan must be bonded.  Fiduciaries who handle funds are "plan officials" who must be bonded up to 10% of the amount of the funds he or she handles, up to a maximum of $500,000 per plan (or up to $1,000,000 per plan if the plan holds employer securities other than through a pooled investment vehicle).  The DOL can impose a higher bond than the maximum but only after a required hearing.  Plan officials are responsible for insuring that they are properly bonded, as are plan fiduciaries (which are also plan officials) who are responsible for making sure non-fiduciary plan officials are properly bonded.

Plan officials include the plan administrator and any employee of the plan sponsor who handles plan assets or makes directions with respect to the use of plan assets.  The required bond is a fidelity bond that insures against losses due to fraud or dishonesty.  Plans may also carry fiduciary liability insurance which may insure against breach of fiduciary duty, but ERISA does not require this.  However, fiduciary liability insurance does not satisfy the fidelity bonding requirement.  The plan itself purchases the bond.

Plans that are not subject to Title 1 of ERISA, such as church and governmental plans, are exempt, as are unfunded plans such as when benefits are paid exclusively through the general assets of the employer.  Insured plans are still subject to the bonding requirement, as are any plans that require or receive employee contributions.  An exception is made for Section 125 Plans that only receive contributions for the purpose of paying premiums for insurance benefits. 

So please look over the guidance and make sure you have the right bonds in place and that the bonds you have cover the right people.  And also check to make sure all of your plans that require bonding of plan officials have appropriate bonds.  In light of the recent shenanigans on Wall Street, you have to protect your plans.

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There are certain requirements in ERISA that employees be provided with documents like summary plan descriptions.  There is also a requirement under ERISA Section 104(b)(4) that a plan administrator must, upon written request from a participant, furnish a copy of the latest updated summary plan description, latest annual report, trust agreement, collective bargaining agreement or any other instrument under which the plan is established or operated.  Of course there are penalties for not providing this information.

This brings me to the case of Strom v. Siegel, Fenchel & Puddy (2nd circuit, 2007).  In this case, an attorney with the firm was making a claim that she was a "partner" in the firm and thus entitled to participate in the retirement plan.  She asked for a copy of the summary plan description to confirm whether she qualified as a participant.  The firm refused to provide it to her because she did not qualify as a participant so they had no obligation to provide the plan documents.  The Court determined that she was entitled to receive the document.  Why?  Because how could she appeal whether or not she was a participant without first seeing the document that governed the right to make a claim.

The case seems sort of silly, but it does remind us that participants (or people claiming to be participants) have a right to see the plan documents.  Also, ERISA requires that the plan provide them upon request.  There should be nothing secretive about what is contained in those documents.  You are not obligated to provide more than what the law requires, but my recommendation is always provide what the law requires when asked.  That way you don't subject your self to claims like the one in Strom.

Special side note: ERISA obligates plan administrators to provide notices of plan changes, summaries of material modifications and updated summary plan descriptions to participants.  When sending these documents to participants, make sure that they also go to participants who may be out on short or long term disability, COBRA, general leave or family medical leave.  They are still participants and still entitled to receive the information.

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I recently read an interesting article in the Business Law Magazine 2008 for the Northern Nevada Business Weekly written by Craig Denney, a noted criminal attorney.  Unfortunately I cannot figure out how to link it here, but the article summarizes some "dumb" decisions that businesses can make in these troubled times that could lead to criminal concerns.  One of the points he makes is the criminal concerns about taking money out of the company 401(k) plan to pay bills.

Mr. Denney opines that under Title 18 of the United States Code, Section 664, taking money from the plan would be a criminal offense.  I agree with him.  I also think that taking money from the 401(k) plan to satisfy the financial needs of the plan sponsor would constitute a significant breach of fiduciary duty.  That would subject the plan sponsor to ERISA penalties for misuse of plan assets.  Plus it would be a prohibited transaction.  But let's take it one step further.  What about using employee deferrals for company activity without putting them into the plan in a timely manner?

Typically employee elective deferrals come out of the employee paycheck and are held in a company account until the employer submits the contributions to the plan administrator for investment.  The employer has a "reasonable" period of time to submit those contributions.  However, when those funds are in the control of the employer, they are still considered "plan" funds for the purposes of identification.  They absolutely cannot be used for any employer purposes.  They must be put into the plan, or more specifically, the individual account of the participant.

Notwithstanding the breach of fiduciary duty issues that would arise if an employer uses those employee deferrals, Mr. Denney's analysis leads me to believe that using employee deferrals for company purposes would likely be criminal as well.  I had previously written an entry about US v. Jackson where the court upheld a 7-10 year criminal sentence for company executives who failed to make required EMPLOYER contributions to the plans.  I can only imagine what would be the sentence for failing to put the EMPLOYEE money into the plans.

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Each year the U.S. Government adjusts the limits for certain plans.  These limits deal with compensation, contributions and other components of benefit plan administration.  Here are the limits for 2009:

For Retirement Plans:

1. Basic Annual Compensation Limit; $145,000
2. Defined Benefit Basic Limit: $195,000
3. Defined Contribution Basic Limit: $49,000
4. 401(k) and 403(b) Elective Deferrals: $16,500
5. 457(b) Elective Deferrals: $16,500
6. 415 Compensation Limit Adjustment Factor: 1.0530
7. Catchup Contribution Limit: $5,500
8. Definition of Highly Compensated: $110,000
9. Officer for Key Employee Definition: $160,000
10. SIMPLE Plans, Elective Deferral Limit: $11,500
11. SIMPLE Plans, Catch-up Limit: $2,500

For certain Welfare Plans:

1. Dependent Care Limit: $5,000
2. Parking Fringe Limit: $230
3. Transit Pass Limit: $120
4. HSA Contribution, Single: $3,000
5. HSA Contribution, Family: $5,950
6. HSA Minimum Deductible, Single: $1,150
7. HSA Minimum Deductible, Family: $2,300
8. HSA Maximum Out-of-pocket, Single: $5,800
9. HSA Maximum Out-of-pocket, Family: $11,600

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On May 21, 2008, the Genetic Information Nondiscrimination Act was signed into law.  Generally, this new law prohibits genetic discrimination in employment and health insurance benefits.  It does so by amending several laws, including HIPAA, ERISA, the Public Health Service Act and Medicare.  Clearly it will have an impact on employers and what follows is a general summary of the Act.  With the increasing ability to test for genetic causes for health conditions, there is rising concern that people with adverse genetic makeup will be the victim of discrimination.  To protect against that eventuality, the Act is designed to not just protect information, but preclude the misuse of information.  The Act is not clear on how an employer might get the information, but if it does, then the Act applies. 

Title One of the act prohibits group health plans from discriminating on the basis of genetic information with respect to eligibility, premiums and contributions.  So genetic makeup cannot be a consideration when setting rate, contribution levels or eligibility.  However, the Act does not preclude an increase in group rates for the manifestation of a disease or disorder commonly linked to genetic makeup, though manifestation of a disease or disorder cannot be used as "genetic information" to further increase rates for specific family members or dependents.  There are also certain prohibitions on the ability of health insurers to request genetic information or require testing.  Obviously HIPAA medical privacy rights also apply to information a plan obtains regarding genetic information.

"Genetic Information" is defined as information about an individual's genetic tests, information about genetic tests of family members and the manifestation of a disease or disorder linked to genetic information.  a "genetic test" is an analysis of an individuals DNA, RNA, chromosomes, proteins or metabolites that detect genotypes, mutations and chromosomal changes. 

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In an article published today on CNN.com, the National Federation of Independent Business' reports that the monthly index of Small Business Optimism fell one point to 88.2, which shows a continued decline.  One particular cost concern area was the increasing costs of health care.  This is consistent with other articles I have read about the concerns small businesses have with providing benefits to employees.  Of course I have also read a variety of article and surveys about employees and their concerns over dwindling benefits and wages, so there is uniform frustration on the topic.

Recently I have written about the importance of auditing 401(k) fees, but the same holds true for other benefits offered.  Too often I see employers overlook the importance of developing a welfare benefits package tailored to their employee base, and they overlook the wide variety of cost control options that can be used to provide benefits.  There is an assumption that the old standards, like premium purchased insurance, is the best way to go and the only thing employees are interested in.  Potential long term savings are forfeited in favor of avoiding the short term costs of a benefit plan review and audit.

Take high deductible health plans.  Depending on who you speak to, they are either a boon or a bust.  But an HDHP can certainly reduce health care costs.  There are more retirement plan options then an off-the-shelf 401(k) plan purchased from an institution.  Life insurance and disability insurance can be structured in increasing more cost-effective ways.  But employers AND employee have to buy into the options.  In this economy, I think it is even more important for employer to undertake a critical analysis of the benefits packages they offer and find ways to not only control costs, but also to tailor those packages to their employee base.

Attorneys can be good source of counseling on these issues because they work with a variety of service providers that offer a wider variety of options.  I personally work with benefit plans that use all types of structures and my job is to make sure what the employer and the benefit professional put together is legal.  Consider your lawyer as a benefits "counselor," a logical starting point for the discussion of managing benefits costs.  The long term results should prove to be worth it.

 

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The Heroes Earnings and Assistance and Relief Tax Act of 2008 (HEART Act) essentially picks up where the Uniformed Services Employment and Reemployment Rights Act (USERRA) left off, providing enhanced benefits for those in military service.  Some of the interesting highlights are as follows:

Retirement Plans (Tax-qualified retirement plans, including 403(b) and 457 plans) must treat participants who die while performing USERRA-qualified military service as if they had died while actively employed for purposes of applying plan provisions relating to survivorship benefits (e.g., full vesting and ancillary death benefits).  Plans may treat individuals who die or become disabled while performing USERRA-qualified military service as if their death or disability had occurred immediately after reemployment.  For example, this would enable a plan to credit the individual’s plan account with the retroactive benefit accruals he or she would have received under USERRA upon a qualifying reemployment .  These requirements apply to deaths and disabilities occurring on or after January 1, 2007.

In addition, effective for years beginning after December 31, 2008, a tax-qualified plan may permit a participant who is on active military duty for more than 30 days to receive a distribution of his or her elective deferrals.  The individual is treated as if his or her employment had been terminated.  As with safe harbor hardship distributions, the participant’s right to make on going elective deferrals will be suspended for six months following the distribution. 

Effective June 17, 2008, a cafeteria plan may permit a reservist called to active duty to receive a distribution of unused health FSA amounts.  The purpose of this provision is to prevent a reservist called to active duty from forfeiting his or her unused balance under the “use it or lose it” rule.  The distribution must constitute a “qualified reservist distribution.”  A qualified reservist distribution is specifically defined as a distribution (a) to an individual who is a member of a military service unit ordered or called to active duty for a period in excess of 179 days or for an indefinite period (b) that is made between the date of the order or call to active duty and the last date that reimbursements from the health FSA could otherwise be made for the plan year that includes the date of the order or call to active duty (i.e., the last day of the claims submission period following the end of the plan year).

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I have been away on vacation and when I returned, I had an opportunity to discuss IRS Code Section 409A compliance with one of my partners. His concerns over the looming December 31, 2008 compliance deadline prompted me to revisit this topic a little bit.

First, let's recall what 409A is intended to do. It is designed to provide a framework for making taxable deferred or executive compensation at the time it loses it forfeitability. Unless certain requirements are satisfied, amounts deferred under a nonqualified deferred compensation plan (as defined in the regulations) currently are includible in gross income unless such amounts are subject to a substantial risk of forfeiture. In addition, such deferred amounts are subject to an additional 20 percent federal income tax, interest, and penalties.

Second, let's recall some of the things that 409A applies to: Traditional nonqualified deferred compensation plans, Employment agreements, Reimbursement arrangements, Severance arrangements, Bonus/incentive plans, Stock options, Equity incentive plans and award agreements, Post-retirement benefits, Tax equalization agreements, Phantom stock arrangements, Restricted stock units, Change in control agreements, Split-dollar life insurance arrangements, Supplemental executive retirement plans ("SERPs"), Excess benefit plans, Section 457(f ) plans.

Third, what needs to be done before December 31, 2008. All of the following should be completed: 1. Identify all arrangements, agreements or plans (including insurance policies) that may constitute deferred compensation. A "deferred" compensation arrangement will generally be one under which an employee or other service provider has a legally binding right during a taxable year to receive compensation that is or may be payable in a later taxable year. This includes arrangements entered into before January 1, 2005 and still in existence, such an employment agreement.

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I happen to be working with a matter that involves an acquisition of a company that occurred several years ago and the crux of the debate involves liability for administration of the retirement plan of the acquired company.  As I read the purchase agreement, it struck me that it was virtually silent as to benefit plans and what would happen after the acquisition took place.  I have previously written here about COBRA in an entry titled Buyer Beware, and I have also written an article about withdrawal liability, Withdrawal Liability: a Hidden Hazard, both talking about concerns in acquisitions.  But I really believe benefit plan due diligence is an overlooked afterthought to many acquisition transactions.

It is important to remember that those representations and warranties in an agreement actually mean something.  If a representation is made about the status of a benefit plan being in compliance, that is not the end of it.  The parties must include in the contract how they intend to deal with the various benefits plans once the transaction is completed.  For example, will there be a need to terminate a plan?  Will there be a need to merge plans?  Who takes responsibility for funding?  What about multiemployer plan obligations?  The simple truth is that benefit plans don't just simply cease to exist.  They are living entities that likely survive beyond the transaction and can cause real problems for the buyer and the seller both if not properly handled.

It is commonplace in asset purchases for the buyer to immediately hire the employees of the acquired company and make them employees of the buyer.  But the acquired company's retirement plan still exists.  What will happen to it?  Is the buyer going to take the plan and merge it into its own 401(k) plan or is the seller terminating the plan?  If the seller ceases to exist, this could create an "orphan" plan where the plan sponsor no longer exists.  From a seller's perspective, the Department of Labor and IRS will not look favorably on someone simply walking away from fiduciary duties.  From the buyer's side, you would not want to get caught up in the search for someone to take over the responsibilities of plan administration.

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On May 14, the Governor of New York issued a directive instructing state agencies that gay couples married outside of New York (in states such as California and Vermont) should "be afforded the same recognition as any other legally performed union."  It is important to understand that this directive does not fully recognize same-sex marriage in New York, but it will have an impact on benefits provided through state benefit plans.

The directive is for all state agencies to review all rules and regulations for their respective agencies to determine if they conflict with recognition of same-sex marriages report to the governor by June 30. State agencies will be expected to provide full faith and credit to same-sex marriages. The agencies will also report a list of state regulations and statutes that will likely need to be changed, such as state laws governing state pension and public housing. It affects the executive branch only and not the legislative or judicial branch. For example, it does not change tax laws and will not likely change laws governing child custody and welfare (but may be adopted by judges in court rulings).

The anticipated end result is that the State as an employer and provider of services will recognize same-sex unions, while the "State" as one of the 50 "states in the union" will not require general recognition and authorization of same-sex marriages.   State-run benefits programs will likely be impacted and I anticipate that the state health benefits funds and state retirement plans will be amended or revised in light of this directive to recognize same-sex spouses.  However, there should not presently be an impact on private employer sponsored plans.  As more information comes out, I will certainly share it with you.

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Since I have previously addressed the issues of same-sex marriage and domestic partnerships in this blog, I would totally remiss not to provide some commentary on the recent decision of the California Supreme Court that resulted in the recognition of "gay marriage" in that state.  California already had a very strong domestic partnership law in place, but for plan administrators, this change to "marriage" might cause some problems that have to be addressed.  Not the least of which is preemption of federal law.

First, let's review retirement plan concerns.  Qualified retirement plans are generally governed by ERISA and various corresponding tax regulations.  All of these regulations are subject to the impact of the federal Defense of Marriage Act.  The net effect is that when considering the term "spouse" in your qualified plans, it does count include a same-sex partner, married or otherwise.  So any provision in a plan that provide for benefit to a "spouse" would not apply to a same-sex spouse even when married under state law.  For example, consider a defined benefit plan distribution that requires spousal consent for distribution.  A partner in a same-sex marriage is not required to obtain spousal consent because in the eyes of the plan, he or she has no spouse.  Similarly, any spousal rights that may accrue as a result of the death of the participant under the terms of the plan would not accrue to the same-sex partner. 

Second, when we look at welfare plans, all of the dependent coverage definitions in the plan referring to "spouse" would not automatically include the same-sex spouse.  Certainly a plan can add coverage for same-sex partners, but doing so does not grant them the federal protections of things like COBRA (which would not apply since the dependent would not be recognized as a spouse under federal law).  Cafeteria plans cannot provide benefits to same-sex partners, which (as we have discussed here previously) means that employees cannot pay that portion of their health coverage attributable to same-sex partners with pre-tax dollars.

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When one company purchases another, there can be significant implications to the obligation to provide health benefits. Former employees of the seller company are typically entitled to continue health benefits under COBRA if they lose coverage as a result of the transaction. The traditional view is that the seller company has the obligation to provide COBRA coverage. But what happens when the seller company ceases operation and terminates its health plan? How do these displaced employees get continuation coverage.

It is not uncommon, in an asset purchase transaction, for the buyer to assume a substantial portion of the operations of the selling company. In many instances, the buyer also agrees to take on and hire former employees of the seller. These types of arrangements give rise to special considerations for employee benefit plans, the continuation of health coverage being one of them.

The COBRA regulations contain a number of regulations explaining what happens to qualified beneficiaries in the event of an asset purchase transaction. 26 CFR 54.4980B-9 includes provisions that deal specifically with continuation rights and obligations in an asset purchase transaction. Included in these regulations is an explanation of instances where the buyer is obligated to provide the continuation coverage under its own plan, even though it may not have ever employed the individual employees.

In the context of a business reorganization, the regulations recognize the existence of a “M&A qualified beneficiary.” In an asset sale, this is someone who has a COBRA qualifying event prior to or in connection with the sale and whose last employment prior to the qualifying event was associated with the assets being sold. Under this definition, an employee working for the seller company who loses coverage as a result of the asset sale (typically through termination of employment) would be an “M&A qualified beneficiary.” Continue Reading...

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I happen to be working on a matter regarding the status of an entity as a "fiduciary" for a plan and it has caused me to revisit some basic principles of ERISA that reminded me of the importance of understanding fiduciary status.

ERISA defines fiduciary status as (i) exercising discretionary authority or discretionary control respecting management of such plan or control of the disposition or management of plan assets, (ii) rendering investment advice for a fee with respect to money or property of the plan, or (iii) having discretionary authority or responsibility for administration of the plan.  It is this third one that caused me to look a little deeper into the issue.  What types of things would qualify as having discretion in plan administration?

In 29 CFR 2509.75-8, the Department of Labor looked at some purely administrative functions and decided the following:

"Q: Are persons who have no power to make any decisions as to plan policy, interpretations, practices or procedures, but who perform the following administrative functions for an employee benefit plan, within a framework of policies, interpretations, rules, practices and procedures made by other persons, fiduciaries with respect to the plan:

(1) Application of rules determining eligibility for participation or benefits;
(2) Calculation of services and compensation credits for benefits;
(3) Preparation of employee communications material;
(4) Maintenance of participants' service and employment records;
(5) Preparation of reports required by government agencies;
(6) Calculation of benefits;
(7) Orientation of new participants and advising participants of their rights and options under the plan;
(8) Collection of contributions and application of contributions as provided in the plan;
(9) Preparation of reports concerning participants' benefits;
(10) Processing of claims; and
(11) Making recommendations to others for decisions with respect to plan administration?

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I was looking at my 401(k) balance this week and it struck me that I have no idea how fees and costs are allocated to our plan.  My first reaction was that this seems to be a confirmation that lawyers are their own worst clients.  But as I thought about it more, it struck me that, after LaRue (which is still the hot topic in benefits' circles), someone might be interested in 401(k) fees.

The Employee Benefits Security Administration has a site called "A Look at 401(k) Fees."  It provides a nice summary of the fees and costs associated with plan administration and also an explanation of how the various fees and expenses are calculated and how participants could compare fees and expenses.  What is missing is an explanation of how those fees and costs are set and how they are monitored.  There is also no clear cut statement of how expenses can or should be shared by the participants and the plan sponsor.

In 1998, a document titled "Study of 401(k) Plan Fees and Expenses," the Pension and Welfare Benefit Administration concluded that fees and expenses were being increasingly born by participants.  In December of 2006, the Department of Labor issued rules detailing the information plan sponsors must share with participants about how fees are calculated and allocated.  Today, I suspect that more and more of the total cost of plan administration is being allocated to participants.  And therein lies the rub.

Participants don't have the ability to negotiate fees with service providers, cannot monitor fees and expenses on an ongoing basis and very likely could not understand how costs would be attributed to their individual accounts.   They would also not have the ability to conduct audits of service providers without assistance from plan sponsor.  On the other had, the plan sponsor gets to make all the decisions about how costs will be allocated, what service provider to retain, what level of monitoring is appropriate and when an audit might be appropriate.  In other words, the sponsor holds all the card. 

So how long before participants start making claims against plan sponsors for not protecting them against excessive fees and costs?  How long before participants start making claims for breaches of fiduciary duty against plan sponsors for retaining service providers that charge too much?  How long before participants can bring claims against employers for not bearing 100% of the costs of plan administration instead of sharing it with participants?  As it turns out, not long at all.

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I recently came across a situation that reminded me about the importance of knowing the definitions contained in each plan separate from each other.  In this particular case, a disability plan and a life insurance plan had two separate definitions for "actively at work" that actually were not in agreement and created a significant conflict. 

The disability policy defined "actively at work" as being regularly schedule to work or receiving payroll from the company.  The life insurance coverage defined "actively at work" as being actually working and performing a job function.  Factually, the company had an employee who went out as a result of an illness in October of 2006, but stayed on the payroll.  In March of 2007, he applied for and received long term disability and came off the payroll.  Unfortunately he passed away in December of 2007.

From the disability carrier's point of view, he had ceased employment in March of 2007, when he ceased receiving payroll.  But from the life insurance carrier's point of view, he ceased being actively at work in October of 2006, when he actually stopped performing his job function.  Both coverages used the same term, and both coverages had a different way of defining it. 

It is important for employers as plan sponsors to review and identify inconsistencies in plan (and insurance coverage) definitions so that they can adequately administer benefits.  There may not be any way to make all providers use the same definition so it is essential that the employer understand how each coverage defines not only eligibility, but also its own terms.

 

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Using Section 125 plans and their various components have become almost standard for any company offering employee benefits packages.  The use of pre-tax dollars for payment of premiums, flexible spending account and dependent care accounts seems almost common place.  However, the ease of use and implementation of these plans has also caused many plan sponsors to forget one of the basics of benefit plan administration: they have to have appropriate documentation.

Cafeteria plans generally meet the definition of "employee benefit plans" under ERISA that requires them to have appropriate documentation, such as summary plan description, that identify the plan sponsor, its obligations and the rights of the participants.  Frequently sponsors use "off the self" documentation received from plan service providers without making sure the documentation is sufficient to satisfy ERISA obligations.  Documentation is particularly important when considering making changes to plan administration because the law assumes the documents will be properly amended and appropriate notices will be sent to plan participants. 

Our recommendation is that every employer that sponsors a Section 125 plan take the necessary step of having documentation created and maintained, regardless of the nature of the benefits available under plan.  Otherwise, there is no reference source available to answer questions.

 

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