It is not news that Americans aren’t saving enough for retirement. But, what is news, is that this Administration seems to be bent on making some meaningful change on that front with the enactment of one particular solution – state-based retirement plans. After hearing the marching orders of the President to clear the path for state-based retirement savings initiatives (including legislation that automatically enrolls employees in IRAs), the Department of Labor has declared VICTORY!
But let’s take a closer look. What did the Department actually do? And will it withstand public commentary, let alone judicial scrutiny?
Last week, the Department issued two pieces of guidance: an Interpretive Bulletin and a Proposed Regulation. Each attempts to tackle a different element of the state-based IRA arena:
- ERISA-Covered Plans, But No Preemption?
Performing a little fancy footwork, the Department issued an “Interpretive Bulletin” (which is, in effect, an interpretation of the Department’s reading of ERISA) in which it describes three specific platforms which purport to allow voluntary employee savings in IRAs. While the Department admits that ERISA will apply in these situations, it rather boldly asserts that the broad preemption provision embedded in the ERISA statute will not preempt these platforms.
Let’s set the scene: ERISA Section 514(a) outlines a sweeping preemption clause claim that ERISA “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan”. Guided by its desired result (allowing state laws which help employers establish ERISA-covered plans for their employees), the Department interprets ERISA as “leav[ing]room for states to sponsor or facilitate ERISA-based retirement savings options for private sector employees, provided employers participate voluntarily and ERISA’s requirements, liability provisions, and remedies fully apply to the state programs.”
The only three approaches that the Department avails this special treatment are:
- The Marketplace: Borrowing language from the ACA, the private savings marketplace approach contemplates a state establishing centralized location where private sector employers could “shop” from a menu of savings arrangements. The marketplace would not itself be an ERISA-covered plan, and the arrangements available to employers through the marketplace could include both ERISA-covered plans and other non-ERISA savings arrangements.
- The Prototype: Again borrowing from another employee benefit concept, the Department describes the “prototype” approach in which a state would make available a “prototype plan” that individual employers could choose to adopt. Under this approach, any employer that adopts the prototype would sponsor an ERISA plan for its employees, and the state or a designated third-party could assume responsibility for most administrative and asset management functions of an employer’s prototype plan.
- The MEP: The final approach described in the interpretive bulletin is the statement’s establishment of a “multiple-employer plan” or MEP. Eligible employers could, at their election, join the State MEP rather than establish their own separate plan. The MEP would be run by the state or a designated third-party.
The Department’s described reasoning for finding that these three approaches will not be swept up by ERISA’s preemptive principles is that these approaches, and the involved state activity, do not “undermine” ERISA’s exclusive federal regulation of covered employee benefit plans. These approaches do not mandate employers to adopt or participate in ERISA plans, nor do they mandate any particular benefit structure. The key for the Department is that these programs will remain fully subject to ERISA’s regulations, obligations, and remedies.
- State-Required Payroll Deduction IRAs are NOT ERISA Plans?
The DOL issued proposed rules “clarifying” the definition of “employee pension benefit plan” to carve-out payroll deduction programs required by state law. Since these plans purportedly will not qualify as employee benefit plans, they therefore should not be preempted by ERISA. This new “safe harbor” builds off the 1975 “safe harbor” regulation the Department issued to clarify the circumstances under which IRAs funded by payroll deductions would not be treated as ERISA plans.
The new safe harbor regulation attempts to follow the structure of laws implemented or proposed to date in certain states (including Oregon, Illinois, and California) and hinges on the existence of the central role played by the state contrary to the limited role played by the employer. In order to qualify for the safe harbor exemption from ERISA, the following program requirements must be met:
- The program must be established by a State pursuant to State law
- It must be administered by the State that established the program, or by a governmental agency or instrumentality of the State (Note, however, that one or more service or investment providers may be engaged to help operate and administer the program, provided that the State (or its agency/instrumentality) retains full responsibility for the operation and administration of the program)
- The State (or its agency/instrumentality) must be responsible for investing the employee savings or for selecting investment alternatives from which employees may choose
- The State must assume responsibility for the security of payroll deductions and employee savings
- The State must adopt measures to notify employees of their rights under the program and must create an enforcement of rights mechanism
- Participation in the program must be voluntary for employees (Note, however, since the requirement is not “completely voluntary,” both the automatic enrollment with opt out and automatic increase contribution features continue to be allowed)
- The program cannot require that employees keep any portion of contributions or earnings in his/her IRA
- The program cannot impose any restrictions on withdrawals or impose any cost or penalty on transfers or rollovers permitted under the Internal Revenue Code
- All rights under the program are enforceable only by the employee, former employee, beneficiary, an authorized representative of such a person, or by the State (or its agency/instrumentality)
- An employer’s participation in the program must be required by State law
- A participating employer must have no discretionary authority, control or responsibility under the program
- A participating employer can receive no direct or indirect consideration other than the reimbursement of the actual costs of facilitating the program
- The involvement of the employer is limited in certain specific ways
Employer involvement is limited to ministerial tasks, which include the following: (i) collecting employee contributions through payroll deductions and remitting them to the program; (ii) providing notice to the employees (and maintaining records) regarding the employer’s collection and remittance of payments under the program; (iii) providing information to the State (or its agency/instrumentality) necessary to facilitate the operation of the program; (iv) distributing program information to employees from the State (or its agency/instrumentality); and (v) permitting the State or such entity to publicize the program to employees.
Employers are expressly prohibited from contributing employer funds (other than payroll deduction) to the program. Employers call cannot provide any “bonus” or other monetary incentive to employees for participating.
The proposed regulation has a 60-day comment period which is set to expire January 19, 2016. Commentary has already started in the industry, with stark criticism of the proposal which gives state-run programs an “unfair” advantage over private sector products aimed at achieving the same goals.
So, what’s your assessment? Did the Department pave the way for more saving for retirement? If so, did it do so within its legal boundaries. Only time will tell how the public and judicial branch view this guidance. And, if we have a change in political parties in the Oval Office come next November… One thing is safe to say; this is not the last word on state-based retirement savings.
After the change in securities disclosure laws back in 2006, it was a common statement that the CFO of a public company was no longer covered by the $1 million deduction limit on non-performance based compensation under 162(m) of the tax code. This was (and is) because of a disconnect between the securities laws and the tax code.
The tax code says that the chief executive officer and each of the next four most highly compensated officers whose compensation is required to be disclosed pursuant to the securities rules are “covered employees” for purposes of the $1 million limit. The 2006 changes in the securities rules changed the disclosure rules to require disclosure of compensation of the principal executive officer (usually the CEO), the principal financial officer (usually the CFO), and the three most highly compensated executive officers other than the principal executive officer and the principal financial officer and up to two additional individuals in certain circumstances). The IRS said that lack of a reference to the “principal financial officer” in the tax code meant that CFOs, by and large, were exempt from 162(m).
However, when legal regimes cross, it’s not always as simple as it seems. For smaller reporting companies (generally those with less than a $75 million in public float), the securities rules only require disclosure of the compensation of the principal executive officer (usually the CEO) and the next two most highly compensated executive officers (other than the principal executive officer). There is no reference to the principal financial officer (by title) in these rules.
In recent guidance (a Chief Counsel memo, to be specific), the IRS stated that, for a smaller reporting company, a CFO can be subject to 162(m) if he or she is among the two most highly compensated executive officers (other than the principal executive officer). Given the interaction of the tax code and the securities rules, this makes sense, and smaller reporting companies were likely already observing this rule. However, it serves as an important reminder to confirm any conclusion that involves the interaction of two different legal regimes.
Last month the U.S. Departments of Labor, Health and Human Services and Treasury published FAQs offering a veritable potpourri of guidance addressing preventive services, wellness programs and mental health parity. Some potpourris offer a pleasing aroma – other not so much. Decide for yourself whether this potpourri of guidance is pleasing based on the following summary.
PREVENTIVE SERVICES – New guidance expands coverage obligations.
Non-grandfathered health plan must cover certain preventive services without the imposition of any cost sharing.
Lactation Counseling/Equipment. Among the preventive services that a non-grandfathered health plan must cover in-network without cost-sharing is comprehensive prenatal and postnatal lactation support, counseling, and equipment rental. The Departments provided the following clarifications with respect to such preventive service:
- If participants do not have access to lactation counseling in-network, the plan must cover such services received from out-of-network provider at no-cost as preventive services.
- The list of network providers as required to be disclosed or made available to participants under ERISA must include in-network lactation counseling providers.
- A plan must cover lactation counseling services performed by any provider acting within the scope of his or her state license or certification (g., registered nurse), subject to reasonable medical management techniques.
- A plan cannot limit coverage for lactation counseling to inpatient services.
- Coverage for lactation support services must extent for the duration of the breastfeeding (assuming the individual remains covered under the plan).
- Coverage for the rental or purchase of breastfeeding equipment generally cannot be restricted to a specific time period (g., within 6 months after delivery); but rather, must be available for the duration of the breastfeeding (assuming the individual remains covered under the plan).
Weight Management Services. Current recommendations for adults include screening for obesity as well as intensive, multicomponent behavioral interventions for weight management. Consequently, a non-grandfathered health plan cannot include a general exclusion for weight management services for adult obesity.
Colonoscopies. In situations in which a colonoscopy is scheduled and performed as a screening procedure, a non-grandfathered health plan cannot impose any cost-sharing on any required pre-procedure consultations or pathology exams on polyp biopsies. Recognizing that prior guidance may reasonably have been interpreted in good faith as not requiring coverage without cost-sharing for such services, the Departments provided that this clarifying guidance would apply for plan years beginning 60 days after the publication of the FAQs (i.e., January 1, 2016 for calendar year plans).
Religious Accommodations for Contraceptive Coverage. A qualifying nonprofit or closely held for-profit company can seek a religious accommodation to the contraceptive coverage mandate using one of the following methods:
- Provide a completed EBSA Form 700 to the plan’s third party administrator.
- Provide appropriate notice of objection to HHS.
The Form 700 or notice of objection will serve as the plan instrument relieving the entity from any obligation to contract, arrange, or pay for contraceptive services to which it objects and the plan’s third party administrator will be designated as the ERISA plan administrator responsible for separately providing payments for the contraceptive services.
BRCA Screening and Genetic Counseling and Testing. The current preventive services recommendations include screening women who have family members with certain cancers to identify a family history that may be associated with an increased risk for potentially harmful BRCA mutations. The Departments clarify that genetic counseling and, if indicated, BRCA testing must be covered as preventive services for a woman who has been screened and found to be at increased risk of having a potential harmful gene mutation, even if she has previously been diagnosed with cancer, so long as she is not currently symptomatic of or receiving active treatment for breast, ovarian, tubal, or peritoneal cancer.
WELLNESS PROGRAMS – Don’t forget those water bottles!
The 2013 final wellness regulations set the maximum permissible reward under a health-contingent wellness program that is part of a group health plan at 30% of the total cost of coverage under the plan (or 50% for wellness programs designed to prevent or reduce tobacco use). The Departments provided a reminder that a reward may be financial, non-financial or in-kind. Consequently non-financial (or in-kind) incentives (e.g., gift cards, water bottles and sports gear) provided by a group health plan to participants satisfying a standard related to a health factor are rewards subject to the 2013 regulations.
MENTAL HEALTH PARITY – No easy outs on medical necessity disclosures.
The Mental Health Parity and Addiction Equity Act requires the plan administrator to make the criteria for medical necessity determinations with respect to mental health and substance use disorder benefits available to any current or potential participant, beneficiary, or contracting provider upon request. The reason for any denial of reimbursement or payment for services with respect to mental health and substance use disorder benefits also must be made available to participants and beneficiaries.
The Departments had previously expressed their opinion that such documents as well as the processes, strategies, evidentiary standards, and other factors used to apply a nonquantitative treatment limitation with respect to medical/surgical benefits and mental health/substance use disorder benefits also fall within the disclosure obligations under ERISA Section 104(b) (i.e., instrument under which the plan is established or operated) and the DOL claims regulations (i.e., all documents, records, and other information relevant to the claimant’s claim for benefits).
Under the FAQs, the Departments clarified that a health plan cannot refuse to disclose such information on the grounds that it is “proprietary” or has “commercial value.” A plan is not required to, but may, provide a summary description of the medical necessity criteria in layperson’s terms. However, any such summary description cannot serve as a substitute for the actual underlying medical necessity criteria, if requested.
With all the rulemaking required under the Dodd-Frank Act, it can sometimes be hard to keep up with the status of the various rules. Below is a handy chart that details the current status of the various executive compensation rulemakings. We plan to update this periodically for additional rulemakings, so be sure to come back and visit from time to time.
Last Updated: November 2, 2015
|Provision||Summary||Status of SEC Rulemaking|
|Say on Pay; Say on Golden Parachutes
|Requires advisory vote of shareholders on executive compensation and golden parachutes; advisory vote on frequency of say on pay||
|Compensation Committee Independence
§ 952(includes comp consultant conflicts)
|Requires stock exchanges to adopt listing standards that require:
Requires disclosure of whether the committee obtained advice of a comp consultant, and whether the work raised a conflict of interest and how it was addressed
|Requires the company to develop, implement and disclose its policy for recovery of excess incentive-based compensation||
|Pay versus Performance
|Requires disclosure of the relationship between executive compensation “actually paid” and the company’s financial performance||
|Pay Ratio – Internal Pay Equity
|Requires disclosure of: (1) the median of the annual total compensation of all employees (except the CEO); (2) the annual total compensation of the CEO; and (3) the ratio of the amount in (1) to the amount in (2).For purposes of the ratio, the amount in (1) equals one (1:450), or, the ratio may be expressed as a narrative (the CEO’s annual total compensation is 450 times that of the median annual total compensation of all employees)||
|Requires disclosure of whether any employee or director may hedge or offset any decrease in the fair market value of company stock||
|Chair and CEO positions
|Requires disclosure of chairman and CEO structure||