Understanding Employee Benefits and key developments in the employee benefits field and items of interest to our clients. MORE

Beginning in 2014, the Affordable Care Act will require employers employing 50 or more full-time equivalent employees to offer full-time employees affordable, minimum essential health coverage. If such health coverage is not offered, and if at least one employee receives a premium tax credit on a state or federal exchange, the employer will be assessed a penalty. You may see this referred to as the employer mandate, employer shared responsibility, or the employer pay-or-play mandate.

Some definitions:

50 or more full-time equivalent employees – part-time employees’ hours are considered for the purpose of determining whether a company is above or below 50 employees. Calculating this number can be complex – IRS Notice 2012-58 explains in great detail the safe harbor methods, administrative periods, and look-back measurement periods, as well as how to count ongoing employees, new employees, and variable hour and seasonal employees.

Affordable – An employee’s share of the health plan premium for employee-only coverage does not exceed 9.5% of the employee’s household income.

Minimum essential coverage (also referred to as minimum value) – The health plan is designed to pay at least 60% of the covered health expenses for a typical person.

Premium tax credit – The Affordable Care Act creates subsidies for people with incomes of up to 400% of the federal poverty limit. For 2012, individuals whose adjusted gross income is less than $45,000 and families of 4 whose adjusted gross income is less than $92,000 would be eligible for these subsidies. The premium tax credit can be used on an exchange to purchase health coverage.

Employers are NOT required to offer health coverage to part-time employees (those working fewer than 30 hours/week). Employers with fewer than 50 full time equivalent employees are not subject to the employer mandate but still must provide certain notices to their employees and may need to comply with other specified requirements that will be detailed in additional guidance.

Options in 2014 for employers with 50 or more full time equivalent employees

Employers have choices to make before 2014. They can offer health coverage, or not offer coverage and pay the penalty.  Employers need to be aware that simply offering a health plan does not satisfy the employer mandate – as mentioned above, the health plan must be affordable and offer minimum essential coverage.  Employers can choose one of these four options:

Offer no health coverage.  If at least one full-time employee uses a premium tax credit to access coverage on the exchange (which means the employee has an income of less than 400% of the federal poverty level), the employer will be subject to a penalty of $2,000/year/full time employee, excluding the first 30 employees.

Offer minimum essential health coverage that is not affordable.  If any employee is required to pay more than 9.5% of his or her household income for health coverage, and if at least one full-time employee uses a premium tax credit to access coverage on the exchange, the employer will be subject to a penalty of $3,000/year for each full-time employee who accesses coverage through the exchange. The maximum penalty cannot be greater than what employer would be liable for if it did not offer coverage at all ($2,000/year/full time employee excluding the first 30 employees).

Offer affordable health coverage that doesn’t meet the minimum essential coverage definition.  If an employer’s health plan doesn’t pay at least 60% of the covered health expenses for a typical person, and if least one full-time employee uses a premium tax credit to access coverage on the exchange, the employer will be subject to a penalty of $3000/year for each full time employee who accesses health coverage through the exchange, up to a maximum amount of $2,000/year/full time employee excluding the first 30 employees.

Offer health coverage that is affordable and meets the minimum essential coverage definition. An employer meets its obligation under the Affordable Care Act, and no penalty will be assessed.

Controlled group rules. If an employer has multiple companies, each may or may not be considered separate employers under the Affordable Care Act. For purposes of health care reform, a single employer is defined by the “common control” test under Internal Revenue Code sections 414(b), (c), (m) and (o). In general, this test focuses on direct or overlapping ownership rather than actual control.  If a parent owns 80% or more of the equity in a subsidiary, or if the same 5 or fewer persons own 80% or more of the equity in another company or collectively own more than 50% of both companies, the companies will be considered controlled groups and all employees of the controlled group must be combined together for purposes of calculating whether an employer is above or below the 50 full-time equivalent employee threshold discussed earlier.

Employers need to determine if health coverage is a part of their organization’s value proposition – is offering health coverage important to the employer?  Does the employer need to offer a group health plan to attract and retain productive employees? Employers with 50 or more full-time equivalent employees must decide whether to continue offering group health coverage to their employees, or pay the penalty and have employees purchase coverage through the state or federal exchange. In addition to the penalty the employer would pay, employees might pay more on the exchange than they would for the employer’s group health coverage…if this is the case, will employers cover this additional cost by increasing their employees’ pay? 

I’ll be posting a timeline soon that should assist employers in understanding the due dates of upcoming health care reform requirements.

Many employers know that one benefit to an ERISA plan is the standard of review available when the participant brings a lawsuit for benefits under the plan. If the plan documents give the plan administrator discretion to decide claims, then the court will review the exercise of the plan administrator’s discretion under an arbitrary and capricious standard. Under that standard, the plan administrator’s decision will be upheld if the decision is supported by any reasonable interpretation of the plan. If the review standard is not arbitrary and capricious, then the court can determine for itself the most reasonable interpretation of the plan in deciding the claim. Because of that deference, plan administrators who can take advantage of the arbitrary and capricious standard are more likely to win lawsuits challenging their decisions.

Unlike the situation with retirement plans where employers typically have formal plan documents, the documentation associated with an employer’s health and welfare plan is often less formal. Employers may rely on their insurance company or third party administrator to provide the documents describing the welfare plan, such as medical, dental, life insurance or long term disability. If the plan is provided under an insurance contract, the insurer will often prepare a certificate of coverage. That certificate of coverage frequently does not contain all the provisions that an employer might like a plan document to contain. Among the missing provisions is sometimes a statement of the arbitrary and capricious standard of review.

Employers will sometimes adopt a “wrap” plan document, which is a plan document that wraps around underlying contracts and policies from an insurance company or third party administrator. Sometimes the wrap document applies to multiple benefits, creating a single plan with a single plan number that allows the employer to file a single Form 5500. Sometimes it is a document that wraps only around a single benefit.

A recent district court decision in Ohio considered the situation of a denial of accidental death and dismemberment (AD&D) benefits to beneficiaries of an employee who had died following a single car accident. Toxicology reports had shown a blood alcohol level in the driver well above the legal limit, and the insurance carrier denied AD&D coverage based on an exclusion for accidents occurring while operating a motor vehicle involving the illegal use of alcohol or controlled substances. The AD&D plan booklet did not grant discretion to the plan administrator or the insurance carrier to decide claims. However, the employer had adopted a wrap document that did contain such discretion. In addition, the summary plan description noted that the employer had discretion to decide claims.

The court concluded that the wrap document and the plan booklet together constituted the plan document so the grant of discretion applied to the AD&D claim denial. The court also said that because a summary plan description is supposed to describe the plan, the statement in the SPD about the grant of discretion was not sufficient to provide the discretion.  The court then upheld the decision denying the AD&D benefits, finding that the insurance company’s interpretation of the alcohol exclusion was reasonable.

The case highlights the importance of the abuse of discretion standard and reminds employers that it should check its plan documents to make sure they contain the appropriate discretionary language. If the documents provided by the insurance company do not contain that language, the employer should consider adopting a wrap plan document to add that provision and any other appropriate provisions missing from the insurance company documents.

Employers are generally aware that medical plans are subject to continuation coverage under the federal law known as COBRA.  They may forget that COBRA extends to all group health plans, including dental, vision and medical flexible spending account plans. A recent federal district court decision highlighted the risk to employers who forget those facts.

The case, Evans v. Books-A-Million, from the Northern District of Alabama involves an employee who at the time she terminated employment was covered by the group dental plan, but not the group medical plan. She obtained new employment about five months later that provided her with dental coverage and during the time she did not have dental coverage, she did not incur any dental claims.

Sometime after her termination, the former employee called the employer to say that she had not yet received her COBRA notice. The employer’s COBRA processes were complicated and the employer’s explanations and excuses for failure to provide the COBRA notice were inconsistent. The employer could not prove that the notice was ever sent. The case went to trial, presumably because other issues besides the COBRA notice for dental coverage were at stake. With respect to the COBRA notice, however, the court concluded that the plaintiff was entitled to a statutory penalty for the employer’s failure to provide the notice from the 45th day following her termination of employment (because the plan administrator had 44 days to generate and mail a COBRA notice) to the end of the 18 month COBRA continuation period, a total of 506 days. The penalty can be as much as $110 a day; the court determined to impose a penalty of $75 a day in order to penalize the employer and to deter both it and other employers from similar conduct. The penalty to the employer: $37,950 for failure to give a dental COBRA notice. On top of this, the plaintiff was awarded $42,192.50 for attorney’s fees and $2,910.87 for costs for an aggregate of $83,063.45. Those amounts would have been even higher had the plaintiff not changed her position regarding the proper length of the penalty period between the beginning of trial and the end of trial, a change in position not supported by a change in law and which the judge viewed as an inappropriate gaming of the system.

The lesson for employers: Monitor COBRA processes because a failure to provide appropriate COBRA notices can be quite expensive, even if it is just for dental coverage.

Small employers (those who normally employ fewer than 20 full-time equivalent employees during the preceding year) are not subject to health care continuation requirements under the law known as “COBRA.” (Some states have their own “mini-COBRA” laws; this post is speaking only about the federal requirements.) A recent district court decision from Ohio considered the situation of a small employer that issued a COBRA notice to a former employee who then elected and paid for COBRA coverage. After the former employee had been covered under COBRA for at least 12 months, the former employee filed a complaint with the U.S. Department of Labor (DOL) on some issue relating to the COBRA coverage. The DOL informed the employer that it was not subject to federal COBRA law because of its small size. The employer at that point terminated the COBRA coverage retroactively and refunded the premiums to the former employee who, not surprisingly, sued to be reinstated to the coverage. The district court determined that the employer had superior knowledge of whether the employer was covered by COBRA and so was equitably estopped from now denying COBRA coverage to the former employee. The former employee had clearly relied on the offer of COBRA coverage and it was unfair for the employer to decide more than a year later that it did not have to provide the coverage.

Employers should pay attention  to COBRA requirements and to the provisions of their health insurance contracts to make sure that they are following the terms of the contracts and providing accurate information about those requirements to plan participants. Employers who make errors in that regard may be held to the information that they gave the employees.

Employers should also note that under the Affordable Care Act, the new healthcare reform law, the retroactive termination of coverage in this situation would likely not be permitted.

I blogged earlier in the year about a decision in which a district court concluded that various related companies were part of a controlled group of trades or businesses and therefore liable for the withdrawal liability of one of the companies. In that case, the court noted that to be a trade or business the taxpayer’s activities had to be different from “investment activities or hobbies.” Now comes a different district court opinion that reaches a contrary conclusion. The case is Sun Capital Partners III L.P. v. New England Teamsters and Trucking Industry Pension Fund from the District of Massachusetts.

The Sun Capital case involves a private equity fund that had made an investment in a company that participated in a multiemployer pension plan. When that business withdrew from the pension fund and was unable to pay the withdrawal liability, the pension fund sued seeking to hold the private equity fund and its other investments liable for the withdrawal liability. The district court rejected the pension fund’s contention and held that the private equity fund’s investment in a trade or business did not cause the fund’s activities to constitute a trade or business. Therefore, there was no controlled group of trades or businesses and the equity fund was not liable for the unpaid withdrawal liability.

In reaching this conclusion, the district court rejected as unpersuasive a Pension Benefit Guaranty Corporation (PBGC) Advisory Opinion from 2007 that had concluded that a private equity fund that invested in other businesses was itself conducting a trade or business.

This new case provides support to hedge funds and other private equity funds that their portfolio companies are not part of a controlled group of trades or businesses for withdrawal liability and possibly other controlled group testing purposes. It will be interesting to see how these cases play out at the appeals court level.

A standard part of an executive compensation package can be participation in a nonqualified deferred compensation plan. This is a plan not subject to tax code limitations on qualified retirement plans and not subject to many provisions of ERISA, including the requirement that plan assets be set aside in a trust, protected from company creditors. To be exempt from ERISA requirements a nonqualified deferred compensation plan must be unfunded and maintained “primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.” This group of higher level employees is sometimes called the “top hat” group.

Unfortunately, ERISA does not contain a definition of “select group of management or highly compensated employees.” There have been court cases over the years defining the term. A recent decision from the federal district court for the Eastern District of Kentucky considered the percentage of the total workforce invited to join the plan (less than 1%) and the nature of the plan members’ employment duties (generally high ranking management personnel) to determine that the plan constituted a top hat plan.

What was interesting about the decision was the court’s consideration of an argument that the plan did not qualify as a top hat plan because a few plan participants were not “high ranking management personnel.” The court rejected that argument, holding that so long as the plan was maintained “primarily” for the purpose of providing the deferred compensation for the top hat group, the plan met the “top hat” group requirement.

Although the better practice is to limit participation in nonqualified plans to those who are clearly within the top hat group, this case provides support for an employer who, for whatever reason, finds that a few of the plan’s participants might not meet the top hat requirements.

Pactiv Corporation sponsored a severance plan subject to ERISA. The plan required an employee to sign a separation agreement and release in a “form acceptable to the company” in order for the employee to be entitled to a payment under the plan. The severance plan itself did not contain a no compete provision. When an employee terminated employment, the employee was presented with a separation agreement that contained a no compete provision. The employee refused to sign and sued instead for the severance payment of $99,676. The court found in favor of the employee. Even though the employer had some discretion with respect to the form of separation agreement, the court would not permit the employer to condition the severance payment on compliance with a no compete. To add such a requirement, the employer should have amended the severance plan; the proposed separation agreement was not itself such an amendment.

Employers wishing to impose a no compete as a condition for an employee to receive severance pay should make sure that the no compete is part of the severance plan. Of course, the employer should also make sure that the no compete is consistent with applicable state laws (to the extent those state laws are not preempted by ERISA – which is another whole topic).

Although our main office is in Minneapolis, Minnesota, we have clients located in other parts of the country, and ourselves have an office in Washington, D.C. Some of our clients have employees who have been hard hit by Hurricane Sandy. Employers want to help their employees, and employees not affected by the hurricane want to help their colleagues.

Section 139 of the Internal Revenue Code allows employers to give aid and assistance to employees and others adversely affected by a presidentially declared disaster. Hurricane Sandy is a presidentially declared disaster. Under Section 139, an employer can pay or reimburse employees or other individuals for unreimbursed reasonable and necessary personal, family, living or funeral expenses, such as medical, temporary housing, or transportation expenses, that they incur as a result of the disaster. The amounts so reimbursed are excluded from gross income of the employees and the employees do not have to account to the employer for how the amounts were spent.

We would be happy to assist employers in establishing programs to help employees struggling in the aftermath of Hurricane Sandy.

A recent tax court decision considered the impact on a highly compensated participant of an ESOP that was disqualified retroactively for the period 2000-2004. The highly compensated participant was fully vested in the ESOP from its inception to its disqualification. The highly compensated participant argued that only the portion of the benefit that accrued during 2004, which was the only year for which the statute of limitations was still open, could be included in his income. The IRS argued that under Section 402(b)(4)(A) of the Internal Revenue Code the entire vested accrued benefit should be included in the participant’s income in the year that the plan was disqualified. In other words, even though the benefits had accrued over a number of years, according to the IRS, the participant should be taxed on the entire vested benefit in the year the plan was disqualified. The court agreed with the IRS: Because the participant had never paid tax on any of the accrued benefit, the entire vested benefit was included in income in that year. The case highlights the fact that plan disqualification can result in adverse tax consequences to highly compensated plan participants, in addition to the adverse tax consequences experienced by the plan sponsor.

The Pension Protection Act of 2006 added Section 401(a)(35) to the Internal Revenue Code generally effective for plan years beginning after December 31, 2006. That section provides in general that defined contribution retirement plans that hold employer securities that are publicly traded must give plan participants the right to diversify their amounts out of the employer securities. There are exceptions to that rule for stand alone employee stock ownership plans and one participant plans. This Code section applies to the plan of an employer whose own shares are ”publicly traded”. It also applies to a plan if any member of the employer’s controlled group of corporations has issued a class of stock which is publicly traded.

In a recent private letter ruling, the IRS considered the situation of a company that had a class of preferred stock traded on the over-the-counter bulletin board. The IRS ruled that this stock was not publicly traded because the regulations under Section 401(a)(35) require that the employer security be traded on an exchange registered under Section 6(a) of the Securities Exchange Act of 1934 or under certain foreign exchanges. Under that Act, the New York Stock Exchange and NASDAQ, among others, are registered. However, the over-the-counter bulletin board and the so called “pink sheets” trading systems are not listed exchanges. Therefore, although shares of the employer were traded on the over-the-counter bulletin board, the shares were not treated as “publicly traded” and the plan was not required to meet the diversification requirements of Section 401(a)(35).

Private letter rulings cannot be relied upon by other employers. In addition, employers must be careful about relying on interpretations of a phrase under one tax code section when figuring out what another code section means.  For example, the regulations under Section 409A of the tax code, under which key employees of publicly traded companies must defer payment of deferred compensation for at least six months after separation from service, use a different definition of publicly traded securities that includes over the counter markets.  Nevertheless, this ruling gives an indication of the IRS’s thinking with respect to the definition of publicly traded securities for purposes of the diversification requirement. Employers whose only publicly traded stock is traded on the over-the-counter market or the pink sheets and whose stock is also held in the employer’s qualified defined contribution plan may be able to avoid the diversification requirement.