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.
Last week, at the Western Benefits Conference, IRS Commissioner of the Tax Exempt and Government Entities Division, Sunita B. Lough, addressed the conference minutes after the IRS released Ann. 2015-19, 2015-32 IRB. This is the announcement reforming the determination letter process primarily for individually designed plans.
Commissioner Lough explained the rationale for elimination of the determination letter process for individually designed plans other than on plan adoption and termination. She stated that the average time a reviewer takes to determine that a plan is compliant is three hours. This limited time results from the significant number of applications and the shortage of qualified IRS personnel due to budget limitations. Based on a three hour review, the IRS has been issuing, in her view, an opinion letter that would take a law firm tens of hours to review and re-review before a partner’s signature was applied. She finds it to be inappropriate for the IRS to be on the absolute risk when it is hamstrung in this fashion. In other words, the demise of the determination letter program results from a cost/benefit analysis where the Service has determined that it is best to shift the risk of having a compliant plan document to the plan sponsor.
To lessen the risk for the plan sponsor, Commissioner Lough stated that the Service will promulgate model language for all needed qualification amendments. The IRS will also consider amendment by reference as a risk-diminisher for plan sponsors. This latter point is potentially very significant. The IRS has historically taken the position that a plan can only incorporate a provision by reference if the regulations or other guidance specifically allows for it, and the number of provisions that allow for this has been very small. Of course, incorporation by reference only goes so far. If a regulation or other guidance has optional provisions, those will still need to be specified.
Lastly, EPCRS will be available for corrections, but the Commissioner warned that plan sponsors will not be permitted to end-run the lack of a determination letter process by using EPCRS. Since the use of VCP today requires a determination letter, the Commissioner anticipates complying amendments to the Revenue Procedure.
When questioned about the long-standing concerns over interim amendments and how to address those, the Commissioner admitted she was unfamiliar with the issue and promised to look into it.
What does this mean for sponsors of individually designed plans? It means the burden is on them to make sure that plan documents are compliant. The risk of having a non-compliant document will probably be greater than before although it is difficult to anticipate the consequences should a plan fail. Apparently, a good faith effort to comply will go a long way to avoiding disqualification. This will be especially important with interim amendments.
It also probably means that IRS audits will be longer, more expensive, affairs. Auditors will now likely spend significant time reviewing a document for legal compliance since they can no longer rely on their colleagues in the determination letter division to have done that for them. The debates that used to happen on determination letter reviews will now occur on audit, which will only increase the potential stakes of the audit itself. It will also make it more difficult for the auditors to distinguish between the compliance-minded sponsors (who made efforts to obtain determination letters) and those who were not.
What does this mean for drafters of individually designed plans? Without the benefit of a determination letter, the law firms that draft plans are likely litigation targets should the IRS penalize a plan sponsor or, worse yet, disqualify a plan that is not properly drafted. We would expect to see the cost of drafting and restating an individually designed plan to go up to cover the risk that has been shifted from the IRS to the plan sponsors and their law firms.
All in all, this is a bad deal for sponsors of individually designed plans and their document providers. It will likely tend to shift toward greater use of prototype and volume submitter plans which could limit flexibility in plan design. It will increase compliance costs and lead to greater scrutiny on plan audits.
Today’s economy presents numerous challenges to community bank profitability—compressed net interest margins, increased regulation, and management teams fatigued by the crisis. In response to these obstacles, many boards of directors are exploring new ways to reduce expenses, retain qualified management teams, and offer opportunities for liquidity to current shareholders short of a sale or merger of the institution.
For many family-owned banks, their deep roots in the community and a desire to see their banks thrive under continued family ownership into future generations can cause these challenges to be felt even more acutely. In particular, recruiting and retaining the “next generation” of management can be difficult. Cash compensation is often not competitive with the compensatory packages offered by publicly-traded institutions, and equity awards for management officials are unattractive given the limited liquidity of the underlying stock. All the while, these institutions should ensure that their owners have reasonable assurances of liquidity as needs arise or as investment preferences change. In combination, these challenges can often overwhelm a family-owned bank’s desire to remain independent.
Depending on the condition of the institution, implementing an employee stock ownership plan, or ESOP, may help a board address many of these challenges. While the ESOP is first a means of extending stock ownership to the institution’s employees, an ESOP can have other applications for family-owned banks.
Recruitment and Retention
An obvious benefit of an ESOP is to provide management and employees the ability to participate in an increase in the value of the bank, aligning their interests with those of shareholders. An equity interest provides economic incentives to join or stay with the bank and the ownership interest provided by ESOPs to employees has been shown to improve workforce productivity and morale.
Source of Liquidity for Shareholders
Without significant trading activity in their stock, shareholders of a closely-held institution may seek a liquidity event, which can include the sale of their shares to a third party or a merger with another bank. For these institutions, using the ESOP as part of a stock repurchase plan or to buy out selected shareholders can provide a buyer for large blocks of stock at a reasonable price.
For family-owned institutions, the tax benefits associated with a sale of a family’s interest in the institution to management via an ESOP are considerable. Most individual sellers of stock to an ESOP (and some trusts) qualify for a tax-free rollover of the proceeds of that sale into domestic stocks and bonds of U.S. corporations which meet certain limits on passive income. Under certain circumstances, this tax-free rollover opportunity avoids all federal income and capital gain taxes on the sale of shares to an ESOP.
In order to fund large purchases, the ESOP can take on a limited amount of leverage in order to acquire more shares in a particular year than can otherwise be allocated to plan participants. Before taking on this leverage, the bank should carefully consider how much leverage it can actually handle relative to the contributions that are expected to be made to the ESOP.
Special Benefits for S Corporations
ESOPs can also reduce shareholder numbers to facilitate a company’s conversion to an S corporation, which can help significant shareholders avoid the double taxation of dividends that apply to C corporations. Under the Internal Revenue Code, an ESOP counts as only a single shareholder for purposes of S corporation limitations, no matter how many employees have shares allocated to their accounts in the ESOP. Upon a plan participant’s separation from service from the institution, the participant may be entitled to only the cash value of the shares, rather than the shares themselves.
ESOPs also benefit from the S corporation status given their exemption from federal and most state income taxes. Since ESOPs are tax-exempt entities, they do not pay income taxes on their share of the institutions’ income like other shareholders do. When S corporations make distributions to their shareholders, ESOPs can retain that distribution, giving a better return to the ESOP participants. Additionally the cash reserves held in the ESOP from these distributions can be used to pay down ESOP debt incurred to buy shares for the ESOP, fund additional stock purchases by the ESOP, or to fund employee withdrawals from the ESOP.
For a variety of reasons, ESOPs can help family-owned financial institutions better manage the challenges of today’s market by providing a more liquid market for the institution’s shares and an exit strategy for some significant investors short of a sale or merger. ESOPs can also improve employee and senior management engagement and retention at a relatively low cost, which can improve the institution’s bottom line. With careful implementation and board oversight of compliance efforts, ESOPs can be a powerful tool for many community banks.
This post is a reprint of an article that originally appeared here on BankDirector.com.
In Roger Miller’s 1964 hit by the above name, he tells the tale of “a man of means by no means,” a man just scraping to get by. While he may not have a phone, a pool, pets, or cigarettes (and really, what does he need that last item for anyway?), after the Supreme Court’s 6-3 decision on June 25, however, such a man might be able to secure a premium tax credit to help pay for health insurance (yes, we realize he’d probably be Medicaid eligible, but just work with us here).
But what does the ruling mean for employers? At first, it might appear that it doesn’t mean very much; life under the Affordable Care Act will continue to move along much as it has for the last few years. That’s basically true, but there are some points to consider:
- This solidifies that the employer “play or pay” mandate is now effective nationwide. Because an employee must receive a premium tax credit to trigger the penalty, a decision the other way would have rendered the mandate ineffective in states with federal exchanges.
- For employers perhaps continuing to adopt a “wait and see” (or “ostrich,” depending on your point of view) approach to ACA implementation, the truth is that you’re already late. But given this decision, now is the time to start, if you haven’t already, getting your offers of coverage and reporting requirements in a row.
- This isn’t changing without legislation from Congress (and, really, what’s the likelihood of that in this political climate?). The Supreme Court’s decision basically said that Congress clearly intended for subsidies to be available for policies purchased through federal exchanges (more on that below). The Supreme Court could have followed the reasoning of one of the lower courts and said that the statute was ambiguous and the IRS’s interpretation was reasonable so it would be upheld. However, had they followed that analysis, it could have theoretically left the door open for the next administration to change the rule and say that subsidies were only available through State-run exchanges (the likelihood of that is another matter). By ruling the way they did, the Court basically left it up to Congress to change the law, if they want it changed.
That last piece of the analysis is interesting because, despite ruling for the government, the Chief Justice, in the majority opinion, took Congress to task on how the law was written. Specifically, the opinion says, “The Affordable Care Act contains more than a few examples of inartful drafting” and, “the Act does not reflect the type of care and deliberation that one might expect of such significant legislation.” For those of us who deal with this law frequently, neither of those statements is a surprise. And yet, despite this apparent lack of artful, thoughtful drafting, the Court nevertheless was able to discern a clear enough Congressional intent to reach its result. To us, it seems like an argument only a lawyer could love.
As has now been widely reported, the Supreme Court ruled on June 26 (the second anniversary of the Windsor decision) that same-sex couples have a right to marry in any part of the United States. Despite being hailed as a victory for marriage equality, as this New York Times article points out, it may not be such happy news for currently unwed domestic partners. Specifically, there is a concern, as the article points out, that employers who previously extended coverage to domestic partners out of a sense of equity may now decide not to since both opposite-sex and same-sex couples can now marry.
As the article mentions, there was a concern at one time that domestic partnership rules would be used by some employees to cover individuals with whom they are not really in a committed relationship. Given that not all states have registration requirements or clear standards, it was largely up to employers to set the standards for what constituted enough of a commitment for a domestic partner to warrant coverage. The difficulty was that employers had to balance not covering individuals who really were not in committed relationships with setting a standard low enough that those who really were in such relationships could qualify. The article says that it does not appear that this was really a problem, but of course, the validity of such relationships are more difficult to verify than a marriage.
What the article also fails to point out is that there are some valid reasons why employers may want to eliminate coverage for unmarried domestic partners. Health coverage provided to a spouse is generally nontaxable under federal and state laws. However, domestic partnerships, by contrast, are subject to a patchwork of various rules ranging from essentially marriage equivalence in some states to complete non-recognition in others. This means that, in many cases, domestic partner health coverage results in imputed (that is, non-cash) income to employees for federal and some state purposes. The calculation of that imputed income is not 100% clear and the administration of those benefits can be complex.
Many employers who saw extending coverage to same-sex couples as important were willing to suffer those difficulties and take on that risk of the IRS or state agencies second-guessing their calculations when marriage was not uniformly available to those couples. Now that it is, those employers have to engage in a cost-benefit analysis to determine if the complexity and risk are worth it on a going-forward basis.
Additionally, it is unclear what the effect of state domestic partner and civil union laws will be after the Obergefell decision. Even though marriage is now available to same-sex couples, the decision did not remove those laws from the states’ books. What movement, if any, states make in this regard will likely influence what employers do going forward as well.
The talent recruitment marketplace will eventually sort this out, but in the interim, employers should at least consider evaluating whether offering unmarried domestic partner benefits continues to be important as part of their recruitment and retention strategy.
For many years, medical plan drafting was viewed as a commodity. Insurance companies, third-party administrators and brokers often prepared summary plan descriptions and plan documents for self-insured medical plans using form documents. With the passage of the Affordable Care Act and other health-care related laws, however, medical claims, appeals and litigation have increased exponentially. In many instances, the terms of the plan documents have been outcome-determinative with respect to these disputes. There never has been a better time for an employer to step back and take a comprehensive review of the terms of the employer’s self-insured medical plan document and summary plan description, not only for compliance reasons but also to put the employer in the best position in the event of any dispute. The following are three drafting tips which might be considered during such a review.
Avoiding the “Kitchen Sink” Appeal. Increasingly, our clients have been receiving lengthy appeals of denied claims for benefits. We refer to these epistles as “kitchen sink appeals” because the authors of the letters seemingly throw in everything but the kitchen sink. A typical kitchen sink appeal is prepared on behalf of an out-of-network provider who claims standing to appeal based on an assignment of benefits by a plan participant. A kitchen sink appeal is often a “cut-and paste” compilation of 25 pages or more, usually containing long passages and references to cases which appear to have no bearing whatsoever on the appeal. Usually, only one or two pages of a kitchen sink appeal contain any marginally relevant point, and yet the claims administrator must respond to the appeal in compliance with the strict requirements of the ERISA claims procedures.
One manner of dealing with these nuisance appeals is to draft the medical plan document to prohibit the assignment of claims to third parties. Courts have uniformly recognized the enforceability of anti-assignment clauses, which are particularly effective in preventing kitchen sink appeals made by out-of-network providers who seek through litigation higher reimbursement amounts than they could negotiate with the plan directly.
Subrogation Provisions. Medical plans should include carefully drafted subrogation provisions which are informed by Supreme Court precedent in Sereboff v. Mid Atlantic Medical Services, Inc. and U.S. Airways v. McCutchen. For example, a well-drafted subrogation provision will expressly state that the common law “make-whole doctrine” does not apply and will require plan participants to do nothing to prejudice the plan’s subrogation rights.
On March 30, the Supreme Court announced it would review the Eleventh Circuit’s decision in Board of Trustees of the National Elevator Industrial Health Benefit Plan v. Montanile, another medical plan case involving subrogation. The Supreme Court’s decision in Montanile may further inform best practices in drafting medical plan subrogation provisions in self-funded plans.
Plan Limitation Periods. The period of time during which a plan participant may bring a lawsuit in connection with a claim for medical benefits is typically governed by the most analogous state statute of limitations, which may be as long as ten years. A medical plan may be drafted, however, to shorten the limitations period for bringing such a lawsuit. Recent cases have upheld such provisions, provided they are reasonable and afford a long enough period of time to file a lawsuit after the administrative appeals process has been completed.
Time flies when you’re having fun… or something like that?! Next month will mark the fifth year anniversary of the enactment of the Patient Protection and Affordable Care Act (as amended by the Health Care and Education Reconciliation Act). This is a law of many names including the ACA, PPACA, health care reform, Obamacare (amongst others that we can’t in good conscience commit to writing – especially in a professional publication) and a law of many facets. As we approach the five year mark of living with this law, many questions have been answered (at least in part, right?). After all, numerous reports have recounted the staggering number of pages of guidance issued in connection with the ACA – remember Rep. Richard Hudson’s exaggeration that we have 33,000 pages of guidance and Senator Mitch McConnell’s estimate at 22,000 pages? And both these figures were announced in the first half of 2013.
Theatrics and dramatic page-counting aside, there is no doubt that many government agencies having been working on
all many cylinders to make sense of this transformative law. Even so, employers are only two months into the official employer mandate and there are countess questions still left unanswered on many ACA fronts.
The Republican-controlled Congress is hard-charging to repeal – or, more accurately, to repeal and replace – the law. If any version of the modification law makes it through the Senate and avoids a veto, that would inevitably undo much of our work (and most swiftly, perhaps, change the “full-time” definition as hinging on a 30-hour work week to a 40-hour week). Disregarding, for the moment, the political jockeying going on in Washington, for purposes of this check-in, we’ll discuss the law as it stands currently.
Since most large employers have (hopefully) worked through the kinks of the employer mandate and put systems in place to “pay or play” for 2015, we thought we’d step back and catalog some of the ACA issues that, five years after the law’s adoption, are still on the horizon for employers. Here is a partial list of the “biggies” we have on our radars:
- Information reporting (Code §§ 6055 and 6056) – requiring certain information reporting for insurers, sponsors of self-insured plans and other entities that provide “minimum essential coverage” and additional “large employer” information reporting. Mandatory reporting for applicable entities will be due Q1 2016.
- Nondiscrimination (PHSA §2716; Code §9815) – prohibiting insured group health plans from discriminating in favor of highly compensated individuals. While we expect some enforcement/compliance lag following this issuance of these rules, we expect the impact on current practices to be significant.
- Cadillac plan tax (Code §4980I) – imposing an excise tax on high cost employer-provided coverage. Effective in 2018, rich plans may trigger large excise tax penalties under the forthcoming regulations.
- Large plan automatic enrollment (FLSA §18A) – requiring an employer with more than 200 full-time employees to automatically enroll new full-time employees in one of the employer’s health benefits plans (subject to any waiting period authorized by law). This aspect of the law has been shoved aside and received little attention; however, once guidance is issued, this rule will impact how many large employers administer health plan enrollment. Implementation may be trickier than initially expected as the question will become whether the employer will (can?) require automatic enrollment in other health and welfare benefits aside from the mandatory group health plan.
- Final minimum value regulations (Code §36B) – regarding minimum value of eligible employer-sponsored coverage and other provisions relating to the health insurance premium tax credit. [Proposed regulations were published on May 3, 2013.] While this is unlikely to be an issue for insured plans since their insurers will have to make this determination, self-insured plans may be forced to tweak their assessments to ensure their plan provides MV.
Moral of the story? Whether it is the version of the law enacted by the Obama administration or some new replacement law adopted by the current Congress, employers are not “out of the woods” in terms of health care reform compliance. There’s more on the horizon, so stay tuned.
While we can’t profess to have read through all of the President’s recently released budget proposal (we are practicing lawyers, after all), much of the discussion on its retirement policies focuses on only a few select provisions. While many of them are unlikely to see the legislative light of day in a Republican-controlled Congress, it is interesting to note the parallels in some of these proposals to the Affordable Care Act and their perhaps unintended effects.
Below, we have set out a chart that lists a few of the items from the budget, compares them to similar provisions in the ACA, and gives a brief note on the likely effect (more…)
Happy New Year!
As part of our annual tradition in helping retirement plan fiduciaries get started down the right path in the new year, we’re pleased to present our Top Ten New Year’s Countdown. But, wait, what’s better than a Top Ten Countdown list to kickoff 2015? How about a Top Ten list set to Pop Culture themes that dominated 2014? Well, here goes nothing…. Because we’re happy (clap along if you feel like a fiduciary without a roof):
1. It’s all About The Fees, about the Fees, No trouble. Another year, another reminder (thank you, Meghan Trainor) that fees should be closely scrutinized by plan fiduciaries. Participant fee disclosures are not the new kid on the block anymore; however, fiduciaries should still ensure that all required fee disclosures are complete, accurate and made timely. Plan fiduciaries should also periodically monitor all fees charged against the plan’s assets to ensure reasonableness.
2. The DOL Ice Bucket Challenge – I challenge you, within 24 hours – to get your payroll remittances in…. The DOL has not receded from its firm position that employee deferrals segregated from corporate assets should be paid into the plan “as soon as reasonably practicable”. So, now is as good a time as any to visit with payroll and/or HR to make sure an air-tight process is in place for timely transmitting employee contributions and loan repayments to the plan. Sure, 24 hours may not be a feasible deadline, but remember that the 15th business day of the following month is not a safe harbor for transmissions.
3. “Game of Thrones” is our new “Sopranos”, “Orange Is the New Black” and “IPS is the new Plan Document”. With heightened scrutiny of plan fiduciaries flowing in part from the so-called 401(k) fee litigation, retirement plan fiduciaries should pay particular attention to the contents of the plan’s investment policy statement (IPS) – or adopt one if it is missing. The review should be focused on ensuring that the IPS is consistent with the fiduciaries’ intent, the other governing plan documents and actual practice (e.g., do we actually use a watch list for 1-year before removing an underperforming manager?).
4. ‘Cause the players gonna play, play, play, play, play; And the haters gonna hate, hate, hate, hate, hate; Baby, I’m just gonna delegate, gate, gate gate. Delegate it all…. It all?? Being an ERISA fiduciary is hard and delegating certain responsibilities may seem attractive. Retirement plan fiduciaries are well-served to consider retaining professionals and service providers to help perform certain fiduciary tasks. Keep in mind, however, that the act of delegating is a fiduciary act – and even after delegating responsibilities, fiduciaries still have a duty to monitor plan service providers. Also, delegation needs to be permitted by the governing plan documents.
5. Justin Bieber went to jail again, but this doesn’t have to happen to you. Get fiduciary liability insurance. Okay, so ERISA fiduciary jail is unlikely, but personal liability for restoring to the plan amounts lost due to a breach of ERISA’s complex rules is a real possibility. Remember, that ERISA fiduciary liability insurance serves as a first line of defense for potential breach of fiduciary duties. These policies often come as riders to D&O coverage; consider getting your company’s risk manager or counsel engaged to review the scope and amount of the coverage to assess its appropriateness. Remember that a fiduciary liability insurance is not the same as a fidelity bond. As discussed here, a fidelity bond is separate and distinct from fiduciary liability insurance – and bond coverage is specifically required by law.
6. It’s not just for Actors at the Oscars, Take a “Group Selfie” when your committee next meets (Yes, that’s a thing now – and a real word according to the Oxford Dictionary). Sure, it may not be as exciting as the red carpet or post-Academy Awards parties, but holding regular plan fiduciary/committee meetings can be a grand ole’ time. Plan fiduciaries should meet periodically (we generally recommend at least quarterly) to consider information regarding performance, selection, and oversight of plan investments, investment managers, service providers, and other plan administrative matters. Minutes of the meetings should be kept to help demonstrate that the fiduciaries have engaged in a prudent process of analyzing and assessing relevant issues.
7. Avoid “Scandals” and Having to Call Olivia Pope’s Crisis Management Firm…. Provide fiduciary education and training to plan fiduciaries. It is another one of our favorite taglines – the simple act of providing fiduciary training to your organization’s ERISA fiduciaries is a major step in minimizing fiduciary liability. Training will educate fiduciaries as to their responsibilities and help establish a record of procedural prudence. There are some really nifty fiduciary training programs which can be easily customized for any group of plan fiduciaries.
8. I’m so fancy, You already know… I’ve reviewed my plan docs, and I’m good to go. Since fiduciaries should make decisions by following the applicable plan documents (e.g., plan, summary plan description, IPS, trust, committee charters, delegations, etc.), fiduciaries should make sure plan documents are consistent with intended plan design, with one another and with actual practice. This can be an arduous undertaking, but can pay huge dividends down the road in the event of litigation or an in-depth plan audit by the IRS or DOL.
9. “How I Met Your Mother” ends, but fee litigation continues. The list of 401(k) fee cases left on the docket is dwindling, but the Supreme Court has agreed to weigh in on a standard of review issue in the Tibble case. Moral of the story??? Stay tuned, pay close attention to items 1-7 above, pay really close attention to item 10 below and, when in doubt, get the help of retirement plan experts.
10. Let it Go, Let it Go, Can’t Let ERISA Concerns Hold you Back anymore…. If we’ve said it once, we’ve said it a thousand times – being a good fiduciary is all about having a procedurally prudent process. For each fiduciary decision you should: inquire; analyze; consider alternatives; get help and advice if needed; and document the process, actions and basis for the decision. Completing these tasks will help establish and demonstrate procedural prudence, and ERISA stress will melt away. Pop the bubbly once more!
This week, the EEOC filed its third, and perhaps most significant, complaint in a wellness-related case. The complaint alleges that the wellness program, which involved biometric screening and a surcharge for tobacco users, violates the Americans with Disabilities Act (ADA) and Genetic Information Nondiscrimination Act (GINA). The ADA complaint is that the program requires a medical examination that is not job-related or consistent with business necessity. The GINA complaint is that the employer is providing a prohibited inducement to receive genetic information. The maximum penalty under the program is $4,000 per year.
While the details of the program are not fully fleshed out in the complaint, this appears to be an escalation of the EEOC’s focus on wellness programs. While $4,000 is a significant sum of money, this appears to us to be a typical wellness program.
The frustrating aspect of these wellness program lawsuits is that it appears to be a case of the EEOC foregoing the rulemaking process in favor of litigation. The HIPAA wellness regulations have been in effect since 2006 and people have been asking for guidance from the EEOC since then. Until these lawsuits, it has largely been crickets, other than a few informal letters that didn’t help much.
Additionally, the Affordable Care Act basically took those rules and made them part of the ACA statutory framework back in 2010. This shows a clear Congressional intent to encourage these programs. When all we had were the 2006 HIPAA rules, the EEOC could have cogently argued that it owed no real deference to those rules. That argument loses much of its steam with these rules being embodied in the U.S. Code.
Finally, in 2012, the Eleventh Circuit Court of Appeals dealt a significant blow to the positions the EEOC is taking in these cases with respect to the ADA. It ruled that the terms of the wellness program in that case were a term of a bona fide benefit plan, which at least under the ADA, made any medical examinations exempt from the ADA’s prohibition on involuntary medical examinations that are not job-related and necessary. Additionally, if the program is a term of a plan, it would arguably fall under a separate section of GINA over which the EEOC does not have enforcement authority. That could effectively nullify the EEOC’s GINA complaint.
Between the Eleventh Circuit case and the clear Congressional intent in the ACA, it is disappointing for the EEOC to pursue these cases rather than try to address them through traditional rulemaking. Employers with wellness programs should review this new complaint carefully. Curbing existing wellness programs may or may not be warranted based on the EEOC’s recent spate of lawsuits, depending on the nature of the employer’s program. Employers would also be well-advised to review the EEOC’s positions prior to taking steps to implement new or expand existing wellness programs.