Monthly Archives: February 2013
Thursday, February 28, 2013

As discussed in our prior post, the Department of Treasury/IRS, Department of Labor, and the Department of Health and Human Services (the “Departments”) recently issued its twelfth set of Frequently Asked Questions addressing cost-sharing limitations and a slew of preventive services issues.  The cost-sharing rules are covered in our prior post; here, we’ll discuss the preventive care rules.  By way of reminder, non-grandfathered group health plans are required to cover specified preventive services.  The FAQs address some open questions that were not addressed in the regulations.

Out-of-Network Services.  A plan with a network is generally not required to cover preventive services out-of-network without cost-sharing.  However, if a preventive service is not available from any in-network provider, then the FAQs say a plan cannot impose cost-sharing when it is obtained from an out-of-network provider.

Over-the-Counter Medications. The FAQs make clear that plans do have to cover OTC items and services that are part of the preventive care recommendations (e.g. aspirin for those at risk for heart disease), unless those items or services are prescribed by a health care provider.

Polyps. The FAQs state that if a polyp is removed as part of a colonoscopy, the plan may not impose cost-sharing for the polyp removal.  The Departments based their determination on clinical practice and comments from various professional medical associations indicating that polyp removal is an integral part of a colonoscopy.

In contrast, plans can impose cost-sharing for a treatment that is not a specified preventive service, even if it results from a preventive service.  Presumably, this means that if the results of the colonoscopy, for example, led to a diagnosis of cancer and subsequent treatment, that those treatments could be subject to cost-sharing.

BRCA/Breast Cancer Genetic Testing. Among the specified preventive services are those given an A or B rating by the US Preventive Services Task Force (the “USPSTF”).  The USPSTF requires a referral for genetic counseling and “evaluation for” BRCA testing for women who have a family history of breast cancer.  However, it was unclear whether the actual genetic test itself was required to be covered without cost-sharing.  The FAQs confirm that it is.

Services for “High-Risk” Individuals. If an individual is determined to be at a “high-risk” for a particular disease by his or her provider, plans must cover the preventive services that the USPSTF recommends for those high-risk individuals.

Vaccinations. Another category of preventive services is vaccines recommended by the Advisory Committee on Immunization Practices (ACIP).  The ACIP’s recommendations are not always general; they could apply to particular age groups or individuals with underlying medical conditions.  The bottom line here, as with the high-risk individuals, is that if the provider says they meet the criteria for the ACIP’s recommendation, the plan must cover it in-network without cost-sharing.

Well-Woman Visits. The FAQs do not provide much additional detail on what constitutes a “well-woman” visit, other than to say that it includes preventive services approved by the Health Resources and Services Administration (HRSA).  However, the FAQs do state that if a provider believes multiple visits are required, then the plan/policy must cover all visits without cost-sharing.

Contraceptives.  The FAQs confirm that plans/policies may not limit contraceptive coverage only to oral contraceptives.  Plans/policies have to cover the full range of FDA-approved contraceptive methods (barrier, hormonal, and implanted devise, as well as patient education and counseling, as prescribed by a health care provider).  Over-the-counter contraceptives only have to be covered if they are FDA-approved and prescribed by a physician.

The FAQs provide that plans may cover a generic or specified brand contraceptive without cost-sharing and impose cost-sharing for other brand name contraceptives.  However, if a woman cannot take the generic or preferred brand name drug because it is medically inappropriate (as determined by the health care provider), then the plan/policy must cover the non-preferred brand name drug without cost sharing. This is consistent with the earlier FAQs on value-based insurance design, and one we always felt was a reasonable position based on existing guidance, but it is a welcome clarification.

The FAQs also state that the contraceptive coverage requirement also extends to services related to follow-up and management of side effects, counseling for continued adherence, and device removal for those types of contraceptives.

Breastfeeding counseling. In addition, the FAQs confirm that plans/policies are required to cover interventions during pregnancy and after birth to promote and support breastfeeding.  The Departments declined to state how certified lactation consultants could be reimbursed stating that reimbursement policy is “outside the scope” of the guidelines or the regulations.  The FAQs require coverage for lactation support, counseling, and costs of renting or purchasing breastfeeding equipment for the duration of breastfeeding.  However, plans may use reasonable medical management techniques, as with other preventive services.

Bottom Line.  The FAQs illustrate the somewhat uncomfortable fit between some of the guidelines and the workings of health plans/policies.  The guidelines are mostly directed at providers, not at plans and policies.  Therefore, applying them to plans and policies results in providers having a lot of power to determine what a plan/policy has to cover without cost-sharing.

In addressing these preventive services in plan documents, plan sponsors should be careful not to simply refer to the preventive care regulations or regurgitate the statute.  It is important to preserve the right to impose reasonable medical management techniques (which the insurer or TPA should be equipped to handle).  In addition, for plan sponsors who chose to cover only certain types of contraceptives, they should be sure the plan provides them the flexibility to do that as well.

Wednesday, February 27, 2013

The Department of Treasury/IRS, Department of Labor, and the Department of Health and Human Services (the “Departments”) recently issued its twelfth set of Frequently Asked Questions. As Kevin Knopf, Special Counsel at the U.S. Treasury Department, once observed, the FAQs are numbered using Roman numerals, “like all important things…such as the Superbowl.”  The latest FAQs (which, by number, correspond to the 1978 showdown between the Dallas Cowboys and Denver Broncos) address cost-sharing limitations and a slew of preventive services issues.  This post will address the cost-sharing limitations.

Cost-Sharing Limits Generally. Health care reform imposes two cost-sharing limitations on non-grandfathered group health plans for plan years beginning in 2014:

  • First, for any group health plan (including self-funded plans) the out-of-pocket maximum cannot exceed a specified dollar amount.  For plan years beginning in 2014, the maximum will equal the combined annual out-of-pocket and deductible limits that a high-deductible health plan (“HDHP”) may impose.  This amount is adjusted annually for cost-of living increases, so it is not yet known what it will be in 2014, but for 2013 the HDHP limit is $6,250 for self-only coverage and $12,500 for coverage that is not self-only coverage (i.e. “family” coverage).  However, after 2014, this amount will be indexed separately from the HDHP maximums based on increases in premium costs in the United States as measured by HHS.  (The choice of premium costs is odd since premiums do not factor into the out-of-pocket maximum, but that is what the statute says.)
  • Second, insured plans in the small group market (i.e., offered to employers with 100 employees or less) are subject to deductible limits.  Specifically, deductibles for those plans may not be higher than $2,000 for individual coverage and $4,000 for “family” coverage.  These amounts are also adjusted based on increases in premium costs in the U.S. as measured by HHS.

Because of what is most likely a statutory drafting error, it was unclear whether both provisions applied only to plans in the small group market, but the Departments reiterated their position that only the second requirement applies to small group plans.

Most plan sponsors likely already had out-of-pocket maximums or deductibles that fit within the limits of the statute.  To the extent they do not, they will need to revisit their plan designs to make sure they comply.  However, these limitations may have implications for the affordability of coverage under the play or pay rules.  Specifically, these rules limit a plan sponsor’s ability to reduce the premium costs by increasing cost-sharing amounts.  Whether this will have much practical impact will depend on the kinds of adjustments HHS makes to these limits in future years.

Plans with Multiple Providers. With regard to the out-of-pocket maximum limitation, the Departments also recognized that some plans use multiple service providers.  For example, a plan may have one third-party administrator for major medical coverage, a separate pharmacy benefit manager, and a separate managed behavior health organization.  As a result, they may have trouble coordinating their providers to make sure that, in the aggregate, their out-of-pocket maximum does not exceed the dollar limit.  Therefore, the Departments said that for the first plan year beginning on or after January 1, 2014, they will treat a plan as in compliance with the out-of-pocket maximum rules if:

  1. The major medical coverage meets the out-of-pocket maximum limits, and
  2. For any benefits that do not consist solely of major medical coverage, the out-of-pocket maximum does not exceed the dollar limit.

Basically, for this first year, such plans can impose the out-of-pocket maximum on each separately-managed benefit under the plan.

Mental Health Parity Implications. However, the Departments noted that the Mental Health Parity and Addiction Equity Act of 2008 does not allow for a separate out-of-pocket maximum on behavioral health benefits.  The upshot of that is that if you use a separate TPA for managed mental health and/or substance abuse benefits, that TPA will need to coordinate with your major medical TPA on the out-of-pocket maximum.  This is not a new requirement, though, so plan sponsors/administrators should already be aware of it and have systems in place to address this, to the extent necessary.  To the extent these arrangements exist, plan sponsors should make sure the providers are coordinating (if they haven’t already).

Tuesday, February 26, 2013

We want our employees to make healthy choices so that they will have long and healthy lives (and also to decrease the cost of health benefits).  We also want our employees to participate in the 401(k) plan so that they can build a nest egg for retirement and enjoy those long, healthy lives (and maybe also so that we don’t have to refund deferrals to our  HCEs).  Whatever our motivations, it seems that the latest trend in encouraging desired behavior in the employee benefits arena is gamification.  Think “Farmville” except the “crops” that your employees will be growing are their dreams that they want to harvest in retirement (travel, a vacation home, or just being able to continue to pay the bills).  Imagine those crops wilting unless they are “watered” and “fed” by employees who earn “plant food” and “water” by correctly answering retirement-related questions.  Maybe the game could even show the field of dreams wilting at current deferral levels but encourage employees to use a retirement cost calculator to determine what level of deferrals might lead to a successful harvest in retirement.   For your employees who are not particularly motivated by watching crops grow, think “Angry Birds” as part of your wellness program except employees may be able to earn “birds” to fling at the infuriating “pigs” in their lives (smoking, obesity, you name it) by correctly answering health-related questions.  These particular game examples would, of course, be rife with intellectual property concerns, but you get the picture.

Happy Guy Playing Game

Imagine your employee this excited about hitting his wellness goal!

Recent articles describe how benefit consultants and wellness plan providers have begun to design “serious games” that utilize gamification and game mechanics to help employers to educate and motivate their work force with respect to retirement benefits and wellness programs. Some of the games described in these articles provide intrinsic motivation while others allow employees to win prizes and compare scores online. Other games send employees searching through HR communications searching for embedded codes to earn points that will hopefully be found while diligently reading an SPD or other ERISA disclosure document.  You may think that these strategies would be aimed primarily at the younger members of your work force but according to Adam Wootton, director of social media and games at Towers Watson in New York, the fastest-growing segment of social gamers is women over the age of 45.

Although this may well be the wave of the future and an effective way to encourage employees to become more educated and involved with their employee benefits we think that there are questions that should be answered by employers before implementing this sort of program.  For example, will game play be permitted at work?  What if an employee does not have computer access or a smart phone?  Will that employee be given some other way of competing for prizes, discounts or other rewards that may be offered?  Rules applicable to wellness programs should be considered.  In addition, employers should also be sure that they are not inadvertently providing “investment advice” that could jeopardize ERISA 404(c) relief for plan fiduciaries or otherwise result in fiduciary liability.  Finally, these games should, of course supplement required ERISA disclosure documents and not try to replace them.

If you think that these strategies will appeal to your workforce and you have considered and resolved potential issues, then let the games begin!

What do you think?  Could serious gaming be a missing link in curbing the obesity epidemic in our country or helping employees to prepare for retirement?  Or is it for the birds? (angry or otherwise)

Related LinksEarth Invaders

Human Resource Executive Online | ‘Serious Games’ Help HR Explain Retirement Benefits

Bloomberg BNA – What’s Gamification Got to Do With a Healthy Workforce? (Subscription Required)

Disclaimer/IRS Circular 230 Notice

Monday, February 25, 2013

Continuing our series of posts reporting on the recent TE/GE meetings, today we focus on the audit trends and issues that the IRS officials in attendance identified.  In addition to providing insight on the IRS’s focus, the list serves as a good compliance checklist for plan sponsors.  Are you making these errors?  If so, you can (and should) fix them now before the IRS comes knocking.

Areas of Focus. At the outset, it’s helpful to know where the IRS is looking for trouble, so you can have some idea where agents are coming from when you get the dreaded audit letter.  The officials at TE/GE gave these insights:

  • Most audits are focused on 3 or 4 particular issues depending on the market segment (i.e., the business of the employer) and the size of the plan (generally less than 100 participants is a small plan while other plans are considered large).  The IRS did not give examples of the issues on which they are focusing, but to the extent you or your advisors are aware of other IRS audits in your market segment and for plans of your size, you may be able to identify them.
  • There is no current targeted audit project for governmental plans.
  • 403(b) plans will be an area of focus going forward.
  • With regard to 401(k) audits, there will be a heavy emphasis on internal controls.  They mentioned this multiple times, so it’s a good idea to review and document your internal controls now so that you are prepared when the IRS audits.
  • For defined benefit plans, they said they will focus on “issues around [the Pension Protection Act].”  They did not elaborate, but presumably this will involve a focus on operational compliance with PPA changes.

Audit Trends.  The IRS also identified a few common audit trends.  Most of these are unsurprising, but again, serve as a good checklist for plan sponsors.

  • First, they identified the following general trends:
    • Failure to timely amend documents for law changes
    • Failure to follow plan terms
    • Using the incorrect definition of compensation for contribution, benefit calculation, or testing purposes
    • Eligibility compliance issues, such as failing to exclude ineligible employees or include eligible ones
  • On a more specific note, they identified the following as issues that were particularly prevalent in 401(k) plans:
    • Failing to have internal controls (did we mention that they thought this was important?)
    • Increases in plan loan defaults due to administrative errors (see our prior post about doing a quarterly checkup)
    • Failing to make the top heavy minimum contribution in a top heavy plan (this is a bigger issue for smaller plans)
  • In the 403(b) area, they reported that the following issues were common:
    • Deferrals exceeding the 402(g) limit ($17,500 for 2013)
    • Failure to comply with the universal availability rules
    • Contributions in excess of the maximum limits under 415 ($51,000 for 2013)
    • Plan loans that violate the loan rules on maximum loan amounts or maximum repayment periods (and, in some cases, have no documentation at all for the loan)
    • Hardship distributions where insufficient documentation is obtained to demonstrate the hardship.

Disclaimer/IRS Circular 230 Notice

Friday, February 22, 2013

One of the sadder tasks encountered by a plan administrator is sorting out who is the appropriate recipient of benefits when a participant has been murdered by the intended beneficiary of such benefits.  Over time, we have advised many plan administrators in handling situations like this one dealing with their pension, 401(k), life insurance and accidental death plans and, in doing so, have developed a variety of alternatives each with varying levels of cost and risk.   These alternatives, each of which is summarized in more detail below, include: (1) commencing an interpleader action, (2) securing a receipt, release, and refunding agreement, and (3) obtaining an affidavit of status (e.g., heirship).

In arriving at these alternatives, we have considered applicable law, including state statutes and ERISA preemption.  Most individual states have enacted so-called “slayer” statutes, which generally provide that an individual who kills the decedent cannot benefit from his or her crime and, therefore, forfeits all benefit rights he or she possessed as the primary beneficiary.  While some courts have held that these state slayer laws may be preempted under ERISA’s broad preemption doctrine, a similar result is likely to be reached through applicable federal common law principles.  In fact, an Eastern District of Pennsylvania court recently addressed this situation in In re Estate of Burklund (January 28, 2013). The Burklund court declined to decide the ERISA preemption issue since the Pennsylvania state law and the federal common law that would apply if ERISA preempted Pennsylvania’s slayer’s act are essentially the same in a “slayer” situation and further noting that several district courts have taken this approach.  In this case, the court ruled that the wife (also the primary beneficiary of her husband’s employer-sponsored life insurance and accidental death policy) was barred from receiving any benefits from her husband’s insurance policy following her first-degree murder conviction for the husband’s death.  The son was, instead, deemed to be the appropriate beneficiary since he had been designated as the contingent beneficiary named under such policies.


When a substantial amount of benefits are involved and/or a plan administrator is aware of multiple parties who will potentially assert a claim on the benefits, an interpleader action may be the most appropriate course of action. In essence, an interpleader action involves the plan administrator paying the entire benefits into the court and having the potential claimants become parties to the litigation.  The claimants proceed against each other and the court determines which of the claimants is legally entitled to the benefits.  While an interpleader may be prohibitively expensive (and burdensome from a time and cost perspective) for a plan administrator if a small amount of benefit is involved, it is one of the only manners in which a plan administrator can gain certainty that it will not have to pay out the dispute benefits to more than one party making such a claim.  Thus, the time and money invested may be worthwhile.

Receipt and Refunding Agreement

In situations where a plan administrator chooses not to proceed with an interpleader action (perhaps on account of the cost or time involved with such an action), obtaining a receipt, release, and refunding agreement may serve as an attractive alternative.  By securing such an agreement, the signing payee/beneficiary acknowledges that he/she has received the proceeds, and further agrees to immediately refund to the plan(s) the amount of any excess or improper distribution.  A receipt, release, and refunding agreement may be used in conjunction with an affidavit of the party’s relationship with the participant (discussed below) to minimize the chance the recipient would need to refund any amount that was initially distributed.  However, unless the signing payee/beneficiary voluntarily agrees to repay the inappropriately distributed amounts, a plan administrator may have to commence litigation to enforce the agreement.  Even if that litigation is successful, there is a possibility that a plan administrator may not be able to secure repayment if the  signing payee/beneficiary is “judgment proof.”  Thus, this alternative is not without risk.

Affidavit of Status

Where a plan administrator is paying out benefits to a party on account of their relationship to the decedent/participant, a plan administrator may choose to secure an affidavit from the payee/beneficiary as to that relationship.  For example, if (1) a participant in a 401(k) plan dies without a designated (i.e., named) beneficiary, (2) his spouse murdered him and, (3) the plan provides that the surviving children of the participant would be the appropriate beneficiary, then it might make sense to secure an “affidavit of heirship” from a surviving child stepping forward affirming that such child is and ever was the only known child of the decedent/participant.  As suggested above, by using this type of affidavit in conjunction with a receipt, release, and refunding agreement, the plan administrator preserves an “undo” feature to the initial distribution in case another beneficiary is subsequently discovered.

In no way do the enumerated alternatives described above constitute an exhaustive list.  We are constantly seeking more creative and effective methods to ensure that the proceeds are paid to the appropriate recipient.  In addition, the appropriate strategy to undertake largely depends on the factual circumstances facing the plan administrator.  Do you have any other alternatives that you’d like to share?

Disclaimer/IRS Circular 230 Notice

Thursday, February 21, 2013

In one brief session at the recent TE/GE meetings, we heard from some of the IRS drafters of the PPACA shared responsibility/play or pay regulations under 4980H of the Internal Revenue Code.  They provided a few insights on upcoming guidance and raised one issue with which we disagree.

Employer Reporting. First, they said they are working on guidance on the employer reporting of health coverage to the IRS on Form 6056.  This is relevant to play or pay because they advised that the IRS intends to collect that information and compare it with who received premium tax credits and cost sharing reductions after the fact. (See our earlier discussion of the play or pay regulations to understand the interaction.)  Once they make that comparison, they will then pursue penalties.   This means that any play or pay penalties will not be assessed until 2015, at the earliest.

Special Employment Situations. Additionally, they advised that future guidance will address special employment situations.  In particular, they said to “stay tuned” for rules on adjunct professors, which will likely be out soon.

Mini-Med Plans and Transition Relief.  Finally, they noted that mini-med plans that have received a waiver from HHS/CCIIO generally should be eligible for the special transition relief for fiscal year plans, if they can survive into 2014 (more on that below).  For those unfamiliar, the regulations provided a special transition rule for plans that had a non-calendar plan year as of December 27, 2012 that, if all the conditions were met (we will describe the conditions in a future post), would allow the employer to not become subject to the play or pay penalty until the first day of the non-calendar plan year beginning in 2014.

However, one official questioned whether those mini-med plans could continue to exist after January 1, 2014.  Essentially, his view was that the HHS waiver expired at that time.  If so, then the plan would not be eligible for the special transition relief under the regulations.

At the outset, it is worth noting that the waiver guidance is not within the IRS’s purview.  And, as we have noted previously, all statements by government officials at these events are informal and non-binding, and thus cannot be relied upon as official guidance.  That said, there is a statement in the HHS guidance on waivers that could possibly be read, if read in isolation, to suggest the waivers may expire on January 1, 2014.

Even so, however, we believe there are good legal arguments, based on existing guidance, why the waivers should be effective for the entire plan year that crosses January 1, 2014.  First, the position that the waivers expire January 1, 2014 seems inconsistent with the application of the restricted annual limits that are detailed in the regulations setting forth the restricted annual limits ($2 million, for plan years beginning after September 23, 2013 and before January 1, 2014).  Under those regulations, a plan with a fiscal plan year that did not receive a waiver could have a $2 million annual limit for the fiscal plan year ending in 2014.

Additionally, when the regulations gave the Secretary of HHS the authority to grant waivers, they said the waivers could be “For plan years beginning before January 1, 2014” (emphasis supplied).

Finally, the waiver process is designed to allow plans with lower annual limits to continue in effect “if compliance with [the restricted annual limits, including the $2 million limit]…would result in a significant decrease in access to benefits under the plan…or would significantly increase premiums….”  In our view, for the waiver to provide appropriate relief from the restricted annual limits, it should apply during the same periods that the restricted annual limits apply.

As a result, we believe the better reading of the HHS guidance is that a waiver given to a plan with a non-calendar fiscal year plan year should afford relief through the end of the last fiscal plan year that begins before January 1, 2014.  Hopefully HHS will issue a clarification along those lines soon.

Disclaimer/IRS Circular 230 Notice

Wednesday, February 20, 2013

TexasTexas state Rep. Jonathan Stickland is trying to help companies that refuse to comply with the Affordable Care Act’s (ACA) contraceptive mandate, which took effect January 1 for most companies.  This freshman representative is protesting “ObamaCare” by introducing a bill (TX H.B. 649) that would grant companies a tax break if they offer healthcare to their employees (as required by ACA) but refuse to include emergency contraceptive coverage because of the religious convictions of their owners.

This bill attempts to neutralize any federal fines by giving a business a tax break equal to the amount paid in federal penalties, up to the total amount the company pays in state taxes.  Fines for violating ACA’s contraceptive mandate are $100 per employee per day, which can add up quickly for large employers.  For example, Oklahoma-based Hobby Lobby recently announced it would not comply with the mandate and faces a fine of approximately $1.3M per day.  The Texas bill, if passed, could mean huge reductions in Texas state tax income.

However, the reach of the contraceptive mandate seems to be narrowing.  On February 1, the federal government proposed updated guidelines that would expand the exemption allowing certain religious-based nonprofits a means to opt out of the contraceptive mandate.  Instead, employees would be permitted to obtain contraceptive coverage through separate health policies.  In addition, numerous religious-based businesses have sued over this hot-button issue.  Adding fuel to the fire, at least two circuit courts have issued injunctions to stop the government from enforcing the contraceptive mandate against for-profit secular employers pending the outcome of their appeals.  See Grote v. Sebelius (7th Cir) and Annex Medical Inc. v. Sebelius (8th Cir).

One looming question (at least for benefits practitioners) is whether this type of law would be preempted by ERISA. Generally, ERISA preempts any state law to the extent it “relates to” an employer-sponsored benefit plan.  However, if the ACA’s contraceptive mandate merely imposes a federal tax for non-compliance and is not really a federal “mandate,” similar to the Supreme Court’s holding that the ACA’s individual coverage mandate is merely a tax and not a federal mandate, ERISA may not preempt these types of laws.  What do you think?

Tuesday, February 19, 2013

Weights of money and health insThis article in the LA Times describes how H&R Block is already helping its patrons identify how much of a tax credit they may be eligible to receive under health care reform.  Most of the patrons who are quoted in the article are surprised to learn just how little the insurance will cost them.

H&R Block seems to think that 2012 income is somehow going to be key to determining if someone is eligible for the credit.  While the IRS may very well look at that, it’s worth pointing out that the actual eligibility for the credit will be finally determined after-the-fact based on the individual’s income for the year in which the credit is received.  Therefore, while 2012 income is informative, it is far from dispositive.

Furthermore, employers should be aware that these information efforts are taking place.  Employees may already start contacting HR departments to ask about the information they are receiving and asking how the employer’s plan compares.  One concern with this is that, to the extent an employer has many low-paid workers who are healthy, they may opt to go to the exchange rather than take the employer’s plan.  If the employer desires to keep those individuals enrolled in its plan to help with its experience rating, the employer may need to be proactive in advertising the benefits of its offerings to those employees.

What do you think?  Is it a good idea for H&R Block to provide this type of information?

Related Link

Washington Post – How H&R Block plans to capitalize on Obamacare

Disclaimer/IRS Circular 230 Notice

Friday, February 15, 2013

In this second post in our series of reflections from the recent Tax Exempt/Government Entities meeting with IRS and DoL officials, we’ll focus on the areas the DoL officials identified as enforcement priorities and some of the specific items they highlighted.

Health Plans.  As we previously posted, the DoL is starting to look at health plans and compliance with health care reform specifically.  They have also discovered that many plans lack what they consider to be a formal plan document.  They are starting to ask not just for proof of the plan document’s existence, but also proof of when it was adopted, going back to January 1, 2010.  Plan sponsors who have not adopted wrap plan documents for their health plans may want to consider implementing those soon.

ESOPs. ESOP enforcement continues to be a priority.  The officials stated that they believe appraisers are arguably already fiduciaries on the theory that they are providing investment advice (although, in our view, that position is not without its flaws).  They noted that trustees still have a duty to prudently select the appraisers and that, even if the appraiser is prudently selected, the trustee still has an obligation to make sure the assumptions on which the valuation is based are reasonable under the circumstances.   They also said that trustees should be wary of a seller’s role in selecting the appraiser.  Oh, and trustees should also read the appraisal.

Officials identified the following more egregious practices that they see (which serves as a good list of  “watch-outs” when reviewing valuations):

  • No discount applied for lack of marketability;
  • Failure to take into account the risk associated with having only a single supplier or customer;
  • Inflated projections;
  • Inconsistencies between the narrative of the valuation and the math in the appendices;
  • Use of out of date financial information;
  • Improper discount rates;
  • Incomparable comparable companies – for example using a large public company as a comparable to a small private company; and
  • Failure to test the underlying assumptions.

ERISA Accounts/Budgets. While not an enforcement area, officials expressed the view that excess revenue sharing, 12b-1, and other investment fees that are held in ERISA Accounts or ERISA Budgets should be used to pay proper plan expenses.  If there are excesses, they should ideally be allocated to the individuals whose investments generated the fees.  However, they acknowledged that this is an area where “rough justice” may be necessary, especially if the excess revenue sharing, 12b-1, and other investment fees are small.

Other Areas.  Other areas of focus include:

  • Direct investigations of consultants and advisors to plans and plan administrators
  • Bankruptcies of plan sponsors – particularly with regard to employee contributions which the Bankruptcy Code expressly states are not part of the Bankruptcy estate and may not be used to satisfy creditors
  • Appellate & Amicus participation – The DoL has been very active filing Amicus briefs in employee benefits litigation as part of an effort to influence the court’s outcome.  The official from the DoL Solicitor’s office said that one practitioner referred to them as “officious intermeddlers” to which he (jokingly) replied, “That’s what we’re shooting for.”

As we have said before, these statements, the statements are informal and non-binding, and thus cannot be relied upon as official guidance.

Disclaimer/IRS Circular 230 Notice

Thursday, February 14, 2013

Last week I (Chris) had the good fortune to travel on Lisa’s behalf to Baltimore to attend an annual meeting of benefits practitioners with government representatives from the DoL and IRS national offices.  It served as a great opportunity to hear what guidance may be in the pipeline and what enforcement issues are catching the government’s attention.  Plan sponsors should take heed because those items getting the government’s regulatory or enforcement attention tend to (1) be very common and (2) serve as a good compliance check.  Over the next week or so, we’ll cover what they said and what you should be looking for coming down the pike.  First up: the Department of Labor’s regulatory agenda.  Based on statements from DoL officials:

  • No additional guidance is planned on the ERISA 408(b)(2) service provider fee disclosures at this time.  They talked with many service providers and felt that, in general, where there was ambiguity, the providers made reasonable interpretations.
  • Regarding the reproposal of the definition of “fiduciary,” they are looking to draw a bright-line distinction between investment education (non-fiduciary) and investment advice (fiduciary).  They may also include a prohibited transaction exemption for individuals who accidentally cross the line.
  • On lifetime income options in DC plans, there are three areas of focus:
    • Showing the income stream the participant’s account balance could generate (this will likely be the first area on which guidance will be issued).
    • Including education about retirement planning (e.g., whether to select an annuity).
    • Guidance for plan administrators on selecting annuity providers.
  • For target date funds, they said they hope to have a final rule on required disclosures in November.  They also are hoping to release tips for plan sponsors on selecting TDFs.
  • Finally, on the advisory opinion front, they are considering whether to release an advisory opinion on whether so-called “ERISA Accounts” or “ERISA Budgets” are considered plan assets and how they should be handled.  These are accounts that contain rebates of revenue sharing and other fees from mutual funds and have been a regulatory gray area ever since they first appeared on scene.  (The DoL representative also alluded to an opinion on the clearing of swaps under Dodd-Frank, which has already been released.)

As with all statements by government representatives, the statements are informal and non-binding, and thus cannot be relied upon as binding.  However, in the absence of any other information, the DoL’s comments should give plan sponsors some idea of the developments they can expect to see from the DoL in the weeks and months to come.

Disclaimer/IRS Circular 230 Notice