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Practical Strategies for Managing Labor, Employment and Benefits Issues

Benefits

Supreme Court Strikes Down Contraceptive Mandate for Closely-Held Companies

Posted in Benefits

On June 30, 2014, the United States Supreme Court held, in a 5-4 decision, that the contraceptive mandate included under the Patient Protection and Affordable Care Act (“PPACA”) violates federal law. The Court’s holding in Burwell v. Hobby Lobby Stores, Inc., et. al., provides limited relief to closely-held companies whose owners have religious objections to the requirement to provide contraceptives, without cost-sharing, to female participants in their health plans.

Under PPACA, group health plans and health insurers are required to provide preventive health services without cost-sharing, including but not limited to, coverage for contraceptive care.  A regulatory exception to the contraceptive mandate exists, however, for plans or policies maintained by certain religious employers and religious nonprofit organizations with religious objections to the mandate.  No exception was provided under the regulations to for-profit companies that had similar objections.

It was this lack of regulatory relief that sparked a number of lawsuits around the country by several companies, including Hobby Lobby.  In general, these companies claimed that the contraceptive mandate violated the Religious Freedom Restoration Act of ’93 (“RFRA”), which prohibits the government from substantially burdening a person’s exercise of religion even if the burden results from a rule of general applicability unless the government “demonstrates that application of the burden to that person is (a) in furtherance of a compelling governmental interest and (b) the least restrictive means of furthering that compelling governmental interest.”  At the crux of the case, was the issue of whether a for-profit company constituted a “person” under the RFRA.

The majority concluded that the RFRA applied to for-profit closely-held companies.  The Court warned, however, that the holding is limited to the contraceptive mandate and is not intended to be broadly applied to other provisions of PPACA that conflict with the religious beliefs of business owners.  Further, it is applicable only to companies owned by a single family, and does not provide relief to public companies or companies with unrelated shareholders.

It is important to remember that the exemption from the contraceptive mandate is not automatic.  A company that seeks to rely on this exemption is currently required to file a form with the government in order to claim the exemption.  For female participants in an “exempt plan”, such coverage will be indirectly available through the insurer.

Benefits

One, Two Punch for Moench – Supreme Court Eliminates Presumption for Employer Stock Investments

Posted in Benefits

The United States Supreme Court issued a unanimous opinion on June 25, 2014 in the case of Fifth Third Bancorp v. Dudenhoeffer. While the Supreme Court’s holding substantially affects the fiduciaries of all employee stock ownership plans (ESOPs), as well as fiduciaries of other individual account plans (such as 401(k) plans) that invest in employer stock, it does not signal the end of employer stock investments in qualified plans.  In fact, the Court provided a brief outline of defenses for fiduciaries of certain plans investing in employer stock.

Under the Employee Retirement Income Security Act of 1974 (ERISA), each fiduciary of a retirement plan is required to discharge his or her duties in a prudent manner and solely in the interests of the participants and beneficiaries.  Generally, plan fiduciaries are also required to diversify the plan’s asset to prevent large losses; however, a specific exception is provided from the diversification requirement for certain plans that are invested in employer stock.

Many courts of appeals, however, have given ESOP fiduciaries a “presumption of prudence” for their decisions to hold or buy employer stock.  This presumption, often referred to as the “Moench presumption” (named after the infamous Third Circuit case in which it was initially created) was deemed necessary to further the corporate financing and investment goals of ESOPs.

The Supreme Court agreed to hear this case as a result of a conflict between the circuit courts on whether the Moench presumption should be applied at the pleading stage (in support of a motion to dismiss) or as a defense in the substantive case. Noteably, the circuit courts were not in disagreement as to whether the Moench presumption existed, only as to which stage of litigation it applied.

In a surprising twist, the Supreme Court concluded that the Moench presumption did not exist at all because it was not supported by the statutory language under ERISA.  As a result, fiduciaries of plans that permit or require the investment in employer stock will have to defend their actions to invest or continue to invest in the stock of a company whose value has decreased.  The Supreme Court did provide some comfort, however, that the fiduciary’s responsibilities under ERISA do not require it to violate securities laws (such as insider trading laws).  Of course, this defense is of little assistance to fiduciaries of plans sponsored by privately held companies, as is the case for many ESOPs.  It remains to be to seen as to whether Congress will step in and provide explicit relief in these situations.  Until then, all plan fiduciaries should be diligent in periodicially reviewing plan investments in employer stock and adequately documenting their decisions to make or retain such investments – regardless of whether the plan document requires such investment.

Benefits

Fifth Circuit Denies Deferential Review for Fiduciary Actions

Posted in Benefits

Many employee benefit professionals are aware of the deferential standard of review provided to plan fiduciaries in accordance with the 1989 United States Supreme Court ruling in Firestone Tire & Rubber Co. v. Bruch.  That is, a court will not question the decisions of a fiduciary of an ERISA plan to whom discretionary authority to interpret the plan’s terms has been delegated, unless there is evidence of an abuse of discretion by the plan fiduciary.  Hence, where a plan confers on plan fiduciaries such discretionary authority, the court will not review the underlying facts of the claim unless the claimant submits sufficient evidence to support a finding that the fiduciary abused his or her discretion.

Questions remain, however, on the scope of the Firestone standard.  Is the standard limited to benefit denials under an ERISA plan? Does it extend to a fiduciary’s actions in accordance with the plan’s terms?  In Futral v. Chastant, the Fifth Circuit joined the Second Circuit in concluding that that Firestone standard does not apply to breach of fiduciary duty claims.  On the contrary, the Third, Sixth, Seventh, Eighth and Ninth Circuits have concluded that deferential review should be applied to both benefit denial and breach of fiduciary duty claims.  Interestingly, this issue was raised in the Tibble v. Edison Int’l case that is currently in front of the United States Supreme Court and could be settled in the next couple months.  Limiting the Firestone standard to benefit denial claims could result in increased liability to fiduciaries, as well as increased litigation costs for plan sponsors.

Benefits

IRS Announces Deadline to Amend Retirement Plans for Same-Sex Benefits

Posted in Benefits

On April 4, 2014, the Internal Revenue Service (the “Service”) published Notice 2014-19, in which it describes amendments required to be made to retirement plans qualified under Section 401(a) of the Internal Revenue Code of 1986 (the “Code”) to reflect the application of the decision in United States v. Windsor and the subsequent holdings of Revenue Ruling 2013-17. Recall, prior to the Windsor decision, the term “spouse” (or similar terms) for Federal tax purposes referred only to a person of the opposite sex.  As a result, same-sex spouses were not recognized for purposes of the Code – including, for purposes of qualified retirement plans.  Following the Windsor decision and subsequent IRS guidance, however, the term “spouse” (or similar terms) includes same-sex individuals who have validly entered into a marriage in a state that recognizes such marriage even if the married couple is domiciled in a state that does not recognize such marriage (e.g. such as Texas).

In Notice 2014-19, the IRS reiterated the requirement explained in Revenue Ruling 2013-17 that qualified retirement plans recognize same-sex marriage as of June 26, 2013; however, the sponsor is permitted to limit this application until September 16, 2013 to married same-sex couples who reside in a state that recognizes the marriage.  As of September 16, 2013, all qualified retirement plans must recognize same-sex spouses, even if the couple resides in a state that does not recognize the marriage.  The Service indicated that sponsors are permitted to recognize same-sex marriage for any or all purposes prior to June 26, 2013, but cautions that such an amendment to a single employer defined benefit plan could affect the sponsor’s funding obligations under the plan.

Notwithstanding the required application of the Windsor decision in 2013, the Service has provided an extended deadline to amend plan documents to reflect this operation.  Specifically, sponsors have until the later of the otherwise applicable deadline for required amendments (i.e. tax return filing deadline for the sponsor) or December 31, 2014.  For governmental plans, this deadline is further extended to the close of the first regular legislative session of the legislative body with the authority to amend the plan that ends after December 31, 2014.

Note, however, an amendment may not be required in all cases.  For example, if the plan document refers generally to the term “spouse” as defined under the Code, no amendment would be necessary.  On the other hand, if the plan document defined “spouse” as an individual of the opposite sex (or with respect to similar restrictions) or if the sponsor has recognized same-sex marriages for any period prior to June 26, 2013, a plan amendment is required to be adopted by the applicable deadline.  This is a good time to review your plan documents to determine if an amendment is, in fact, required to be adopted this year.

NLRB’s Decision Allowing Northwestern University Football Players to Unionize May Have Significant, and Perhaps Unintended, Consequences

Posted in NLRB

On March 26, 2014, Region 13 of the National Labor Relations Board (Chicago) held that Northwestern University football players are employees of the university and have the right to unionize.  Relying on the broad common law definition of “employee,” the NLRB ruled that football players that receive scholarships are employees because of the university’s right to control the players, the significant time the players devote to football, and the fact that they receive “compensation” in the form of scholarships.  Northwestern University has already stated that it intends to appeal this decision to the Seventh Circuit.  If the decision is affirmed, not only will the players have the right to unionize, but collegiate athletic programs will likely be the next target of the NLRB’s aggressive attacks on employer workplace rules.

Technically, this decision impacts only Northwestern University football players, but it has the potential to have significant consequences for collegiate sports.  First, this creates a precedent on which other student athletes at private universities could rely in their efforts to unionize.  In addition, the NLRB’s broad definition of “employee” (if applied by other government agencies or courts) could raise a number of significant questions, some of which include:

  • Will the NLRB’s determination that scholarships are “compensation” impact the IRS’s analysis of whether scholarships are subject to FICA, social security, Medicare and other taxes? And if so, will those withholding obligations apply in prior years that are still open resulting in universities having a springing liability for failure to withhold and remit those taxes?
  • Can an athlete’s on-the-field injury be a basis for a workers’ compensation claim?
  • Will athletes that are cut from the team be eligible for unemployment benefits?
  • Will athletes who do not receive scholarships or who receive more limited scholarship funds have a claim under the Fair Labor Standards Act or state wage and hour laws for unpaid wages failure to comply with minimum wage laws?
  • Will athletes be entitled to participate in employee benefit plans if they are employees of the university?

Right now, there appear to be more questions than answers regarding this decision, so it is an issue that is worth monitoring.

A copy of the NLRB’s decision can be found at  http://mynlrb.nlrb.gov/link/document.aspx/09031d4581667b6f.

Benefits

Texas Ban on Same-Sex Marriage Determined Unconstitutional

Posted in Benefits

The State of Texas is the latest jurisdiction under scrutiny for its ban on same-sex marriage.  On Wednesday, February 26, 2014, U.S. District Judge Orlando Garcia ruled that the state law banning same-sex marriage results in a violation of the equal protection and due process clauses of the U.S. Constitution.  Notwithstanding the holding, however, the judge stayed the effect of his ruling to permit an appeal to the Fifth Circuit Court of Appeals (located in New Orleans, Louisiana) and, possibly, to the U.S. Supreme Court.  Accordingly, there is no immediate effect of the ruling on the existing ban on same-sex marriages in Texas.

This ruling falls on the heels of similar challenges in Kentucky, Oklahoma, Ohio, Utah and Virginia following the U.S. Supreme Court’s decision in U.S. v. Windsor in June 2013.  Recall the Windsor court held that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional and, thereby, required the federal government to recognize same-sex marriage for purposes of a number of federal laws.

The effect for employee benefit plans, generally, is that a same-sex couple that is married in a state that recognizes same-sex marriage will be treated as “married” for purposes of the Internal Revenue Code and the Employee Retirement Income Security Act.  Nonetheless, the Windsor decision does not require employers located in states that do not recognize same-sex marriage to provide health or other coverage to such couples.  This is not to say, however, that same-sex couples may be denied mandatory federal rights – e.g., spousal rights under a qualified retirement plan – or that the exclusion of same-sex coverage could not implicate other laws, such as nondiscrimination requirements applicable to health plans or rights under Title VII of the Civil Rights Act of 1964.  If, however, the Texas ban on same-sex marriage is ultimately determined to be unconstitutional, employers located in Texas will no longer be permitted to exclude same-sex couples from coverage under their employee benefit plans.

 

Benefits

How Do I Correct Failure to Provide a Safe Harbor 401(k) Plan Notice? It Depends!

Posted in Benefits

In the “IRS Retirement News” published by the Internal Revenue Service (the “Service”) on February 24, 2014, the Service reminds us that the failure of a safe harbor 401(k) plan to provide an annual notice to participants constitutes a failure to operate the plan in accordance with its provisions.  In order to protect the qualified status of the plan, it is imperative that the plan sponsor take appropriate steps to correct this operational failure.  The method of correction, however, will depend on how the failure affects the participants.

The safe harbor 401(k) plan notice informs the eligible employees of their rights and obligations under the plan, including, if applicable, the fact that the plan sponsor intends to make a matching contribution with respect to salary deferral elections made under the plan.  Such notices are required to be sent within a reasonable period before the beginning of each plan year (generally, at least 30 days but no more than 90 days before such plan year) and, with respect to newly eligible employees, within the 90-day period ending on the date of such employee’s eligibility to participate in the plan.

With respect to a participant who has received a prior year’s safe harbor notice and, based on the facts and circumstances, is considered by the plan sponsor to be informed of the plan’s features, the failure to provide the notice may be treated as an administrative error that would be corrected by revising procedures to ensure that future notices are provided to employees in a timely manner.  On the contrary, if the missing notice results in an employee not being able to make elective deferrals to the plan (either because he was not informed about the plan, or informed about how to make deferrals to the plan), then the employer may need to make a corrective contribution that is similar to what might be required to correct an erroneous exclusion of an eligible employee under the Employee Plans Compliance Resolution System (Rev. Proc. 2013-4). That is, the employer must contribute 50% of the excluded employee’s missed deferral, which is calculated as the greater of 3% of compensation or the maximum deferral percentage for which the employer matches at a rate at least as favorable as 100% of the elective deferral made by the employee, plus 100% of the missed matching contribution (adjusted for earnings). Under no circumstance, however, can a plan sponsor correct this failure merely by “opting-out” of safe-harbor status (i.e. by satisfying the actual deferral percentage (ADP) and/or actual contribution percentage (ACP) tests for the plan year of the failure).

Benefits

Healthcare Reform Mandate Delayed (Again) for Some Employers

Posted in Benefits

On Monday, February 9, 2014, the Agencies issued regulations that provide additional guidance regarding the employer mandate (i.e. the “play or pay” penalty) under Healthcare Reform.  But, the most surprising aspect of the guidance was the delay on the implementation of the mandate for certain employers to provide health coverage to their full-time employees.

Under Healthcare Reform, applicable large employers (i.e. businesses that normally employ at least 50 full-time employees or full-time equivalents each year) are required to offer their full-time employees minimum essential coverage that satisfies certain criteria, or face a penalty if a full-time employee receives coverage from the Marketplace and is eligible for a subsidy for such coverage.  Initially, this mandate was supposed to go into effect as of the first plan year beginning on or after January 1, 2014.  In July, 2013, however, the Agencies issued a notice that delayed the implementation of the employer mandate until the first plan year that begins on or after January 1, 2015.  The purpose of that delay was to allow the government more time to finalize its guidance on the reporting requirements for applicable large employers.  No similar delay was provided to individuals.  As a result, individuals are generally required to have minimum essential coverage as of January 1, 2014 or pay a penalty.

According to the regulations issued yesterday, employers with less than 100 full-time employees and full-time equivalents will now have until the first plan year that begins on or after January 1, 2016 to comply with the employer mandate.  The purpose cited for this delay was to allow employers more time to transition to a 30-hour workweek (which is the threshold for an employee to be considered “full-time” for purposes of healthcare reform).  Notably, this transition relief is NOT automatic.

An employer that intends to rely on this transition relief will be required to certify to the Internal Revenue Service that it has not reduced the size of its workforce or the overall hours of service of its employees during the period commencing on February 9, 2014 and ending on December 31, 2014, other than for bona fide business purposes (such as a sale of a division or changes in the economy), and, further has not otherwise eliminated or materially reduced its health coverage during such period.  An employer that fails to satisfy these conditions will not be entitled to rely on this transition relief and, therefore, will be subject to the employer mandate as of the first plan year beginning on or after January 1, 2015.

In addition, employers with 100 or more full-time employees and full-time equivalents will have a phase-in period for compliance with the mandate.  The mandate for this group remains effective as of the first plan year beginning on or after January 1, 2015.  However, an employer in this group will be treated as complying with the mandate in the 2015 plan year if the employer covers at least 70% of its full-time employees (which, ironically, is a threshold that currently applies for determining whether a self-insured health plan is discriminatory under Section 105(h) of the Internal Revenue Code) and will be treated as complying with the mandate in the 2016 plan year and thereafter if the employer covers at least 95% of its full-time employees.  Recall, the “substantial compliance” threshold of 95% was provided for in regulations issued by the Agencies in early 2013 and is not new.

While the delay may be appreciated by those employers eligible to take advantage of it, it is limited in nature.  Employers with less than 100 full-time employees (and full-time equivalents) will need to weigh the advantages of making changes to their employee population and health coverage against the usefulness of the transition relief.  Interestingly, an employer in this group that fails to satisfy the conditions for transition relief will be entitled to rely on the reduced compliance standards that are otherwise provided for employers with larger employee populations (i.e. provide coverage to at least 70% of the full-time employee population in the 2015 plan year).

Benefits

Welcomed Guidance on Wellness Programs

Posted in Benefits

On June 3, 2013, the Departments of Treasury, Labor and Health and Human Services (Agencies) issued final regulations regarding nondiscriminatory wellness programs in group health coverage under the Affordable Care Act and applicable provisions of ERISA and the Code.  The final regulations specifically addressed the reasonable design of health-contingent wellness programs and the reasonable alternatives that must be offered in order to avoid prohibited discrimination. On January 9, 2014, the Agencies issued subregulatory guidance that addressed three (3) points discussed in the final regulations.

  1. In order to satisfy the reasonable design standard for any wellness program, the employer is required to provide an opportunity to obtain the award (or avoid the surcharge) at least once annually.  The agencies have confirmed that, with respect to a tobacco cessation wellness program, the requirement to provide an annual opportunity to receive the award does not mean that the plan is required to provide the award to a participant who is a tobacco user and who initially refused to participate in the tobacco cessation program (e.g. during the annual enrollment period).  Under such circumstances, the plan may, but is not required to, allow such individual to earn the reward in the event that he enrolls in the tobacco cessation program in the middle of the year.
  2. In order to satisfy the reasonable alternative standard for an outcomes based wellness program, the employer is required to accommodate the recommendations of the participant’s physician in providing an alternative standard to obtain the reward (or avoid the surcharge), where the initial standard is determined by the physician to be medically inappropriate for the participant.  However, the Agencies have indicated that this mandate does not mean that the plan is required to utilize the exact program suggested by the physician.  For example, if the physician recommends a weight loss program as an alternative to the initial standard(s) otherwise specified under the wellness program, the wellness program can approve that weight loss program or offer a different weight loss program to satisfy the alternative.
  3. The employer is required to provide notice of the availability of a reasonable alternative standard to the participants in the wellness program.  Sample language was included in the final regulations.  The Agencies confirmed that plans are permitted to modify this language to better fit the design of their programs, provided that the revised notice includes all of the required content described in the final regulations.
Benefits

Agencies Share Guidance on Cost-Sharing

Posted in Benefits

Earlier this month, the Departments of Treasury, Labor and Health and Human Services (Agencies) jointly issued additional guidance on the application of the cost-sharing limitations imposed under the Affordable Care Act.  It is helpful that the guidance was issued early enough in the year to allow plan sponsors an opportunity to review their alternatives in making design decisions for 2015.

Under the Affordable Care Act, non-grandfathered group health plans may not impose out-of-pocket (OOP) maximums in excess of prescribed limitations.  The annual limit applies to all non-grandfathered plans (whether small, large, insured or self-insured).  The applicable limits for 2014 are set forth in the table below.

Maximum   annual out-of-pocket $6,350   for self-only coverage$12,700   for family coverage

The Agencies previously issued guidance on how to apply the annual OOP limit where a plan utilizes more than one service provider (i.e. separate medical and prescription drug administrators) to administer benefits under the plan. That guidance generally provided that, for the first plan year beginning on or after January 1, 2014 only, a plan will satisfy the limitation if (a) the plan complies with the limitation with respect to its major medical coverage; and (b) to the extent that the plan includes an OOP maximum on coverage that does not consist solely of major medical coverage, that the OOP maximum for such benefit does not exceed the dollar limits set forth above.

Additional guidance issued by the Agencies on January 9, 2014 confirms that, with respect to plan years beginning on or after January 1, 2015, non-grandfathered group health plans must apply the OOP maximum to all essential health benefits (EHB) provided under the plan. Certain expenses, however, are not required to be counted toward the OOP maximum.

  • If the plan uses a network of providers, the expenses for out-of-network items and services need not be included.
  • The cost of items or services that do not constitute EHBs need not be included.  For a list of authorized plans to determine EHB for large insured plans and self-insured plans, see www.cms.gov/CCIIO/Resources/Files/Downloads/ehb-faq-508.pdf.
  • The costs for items or services not covered by the plan need not be included.

Notwithstanding the foregoing, the Agencies indicated that plans with separate service providers may apply separate OOP maximums to such benefits, provided that the aggregate OOP maximum applicable to all EHBs under the plan does not exceed the annual limitation then in effect.