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Employee Benefits Update


Articles in this issue:

While so much of the national focus has been on the pending healthcare reform legislation being discussed in Congress and by President Obama, other important developments in the employee benefits field have recently occurred or are likely to occur in the near term. These developments occupy six distinct areas of continuing concern in the employee benefits field: (1) executive branch initiatives to increase and protect retirement savings; (2) Supreme Court cases involving plan administration and compensation issues; (3) proposals to limit executive compensation; (4) mental health parity regulations; (5) continuing efforts by Congress and the Department of Labor (“DOL”) to require disclosure of fees paid by plans; and (6) further federal and state actions regarding COBRA subsidies. These matters, described in detail below, bear close attention because they will in most cases require immediate action on the part of employers, plan sponsors and insurance companies once they become effective.

In his weekly radio address on September 5, 2009, President Obama announced several initiatives designed to promote workplace retirement savings. The guidance is embodied in several Treasury Department and Internal Revenue Service (“IRS”) rulings and notices, and covers the following items:

* Automatic Enrollment: One of the main points emphasized by President Obama was his administration’s intention to lower the barriers to workplace retirement savings by making automatic enrollment in workplace retirement plans easier and more streamlined. This is addressed in IRS Notice 2009-65, which contains two sample plan amendments to facilitate the use of automatic enrollment, and in two companion documents, IRS Notice 2009-66 and IRS Notice 2009-67, which contain, respectively, guidance and a sample amendment for including an automatic contribution arrangement in SIMPLE IRA plans. According to IRS statements, these notices – and the pre-approved automatic enrollment language contained therein – are intended to help employers add an automatic enrollment feature by allowing them to amend their plans more quickly, without the need for case-by-case approval from the IRS. In an additional step to lower barriers to automatic enrollment, Revenue Ruling 2009-30 allows plans to use an “escalator” feature under which employee contributions are automatically increased each year (assuming no affirmative election to the contrary by the employee) based on increases in the employee’s pay. According to administrations officials, this Ruling will streamline a process that would enable employers and employees to gradually and automatically increase their contributions to Section 401(k) plans over time.

* Contributing Unused Paid Time Off to Retirement Plans: President Obama also addressed the need to permit employees to contribute their unused accrued vacation leave or other unused paid time off (PTO) to their retirement plan. In line with this goal, Revenue Ruling 2009-31 describes two situations in which the dollar equivalent of unused PTO can be contributed to an employer’s plan without affecting the plan’s tax qualification. The IRS concluded in this Revenue Ruling that PTO contributions that were made as described in the Ruling and which satisfied the applicable nondiscrimination requirements would not be included in an employee’s income until distributed. The Ruling did note, however, that any amounts paid in cash instead of being contributed to the plan would be income in the year the cash was paid. Similarly, Revenue Ruling 2009-32 (a companion ruling to Revenue Ruling 2009-31) addresses four situations involving amendments to qualified plans to allow for the mandatory or elective contribution of an employee’s unused PTO upon the employee’s termination of employment. The IRS concluded that the amendments described in the Ruling would not cause the plans to lose their tax qualification – provided that all other tax-qualification rules (such as the nondiscrimination requirements) were met – and the amounts contributed pursuant to these amendments would not be taxable to the plan participants until they were distributed by the plan.

* Rollovers: Also issued as part of the President’s initiative, IRS Notice 2009-68 contains two updated safe-harbor explanations dealing with eligible rollover distributions. One of the explanations applies to eligible rollover distributions from a Roth account, while the other applies to all other types of eligible rollover distributions. Both are written in “plain English” and are intended to provide clearer notification to participants of the tax consequences of the distribution, including notice of the right to elect a direct rollover from the plan.

* Using Tax Refunds to Purchase Savings Bonds: President Obama also used his September 5 radio address to announce a new Treasury Department policy of allowing taxpayers to funnel tax refunds directly into U.S. Savings Bonds. Beginning with the 2010 filing season (i.e., for returns filed for 2009), taxpayers will be able to direct the IRS to use their tax refunds to buy Series I U.S. Savings Bonds in their own names (and, beginning in the 2011 filing season, this option may be used to buy bonds in the taxpayer’s name and a co-owner’s name (i.e., child or grandchild)). The bonds will be mailed directly to the taxpayer and the refund option will not require taxpayers to have previously set up an account with Treasury.

This wave of guidance is likely only the first phase of many changes sought by this administration in the area of workplace retirement savings. Indeed, administration officials, in discussing this guidance, noted that it complements proposals in the president’s current budget to expand and modify the existing Saver’s Credit and to create automatic payroll-deduction IRAs for workers who do not have workplace retirement plans. We will continue to monitor this area and will update you as further changes to workplace retirement plans and savings rules occur.

If you have any questions about this workplace retirement savings guidance, or about any other employee benefits matter, please contact those listed at the bottom or your usual Crowell & Moring contact.

Supreme Court 2008-2009 Term Went Out Like a Lamb, But 2009-2010 Term May Come In Like a Lion

On May 18, 2009, the U.S. Supreme Court issued its last decision of the 2008-2009 term in an employee-benefits related case in AT&T Corp. v. Hulteen et. al., a 7-2 decision holding that AT&T did not violate the Pregnancy Discrimination Act (“PDA”) by paying pension benefits calculated in part under an accrual rule, applied only pre-PDA, that gave less retirement credit for pregnancy leave than for medical leave generally. Despite the argument, supported by Justice Ginsburg’s dissent, that the current calculation and payment of pension benefits relying in part on the pre-PDA accrual rule constituted a current violation of the PDA, the Court found that AT&T’s system provided a future benefit based on past, completed events that were entirely lawful at the time they occurred. Specifically, the Court found that the accrual rule was only applied to the pre-PDA time period, the rule was not considered to be gender-based discrimination prior to the enactment of the PDA, and there is no indication that Congress intended for the PDA to have general retroactive effect.

The Hulteen decision is unlikely to have much impact outside of certain very fact-specific situations. However, although the end of the Supreme Court’s 2008-2009 term passed without significant developments in the area of employee benefits, the Court’s term beginning in October 2009 could prove to be far more eventful:

* Plan Standards of Review: The Supreme Court will review an appeal of the July 2008 ruling of the U.S. Court of Appeals for the Second Circuit in Frommert v. Conkright, 535 F.3d 111 (2 nd Cir. 2008). In Conkright, the Second Circuit held that, even though a qualified plan may grant the plan administrator complete discretion to interpret the terms and conditions of the plan, if the administrator’s interpretation was not rendered or applied during a decision on a claim for benefits, it was merely an “opinion” by the plan administrator and not entitled to any deference. The Supreme Court agreed to consider, among other issues, whether the Second Circuit erred in ruling that the district court had no obligation to defer to a plan administrator’s reasonable interpretation of the terms of the plan if the administrator arrived at its interpretation outside the context of an administrative benefits claim. The Conkright case has the potential to have far-reaching consequences on ERISA plan administration, in that plan administrators are frequently called upon to provide interpretations of plan terms in contexts other than the administrative benefits claims process.

* Excessive Fees and Executive Compensation: On November 2, the Supreme Court will hear an appeal of the decision of the U.S. Court of Appeals for the Seventh Circuit in Jones v. Harris Associates, L.P., 527 F.3d 627 (7 th Cir. 2008). The case involves a challenge under the Investment Advisers Act to the size of the fees paid by a mutual fund to its investment advisers. While not directly involving employee benefit plans, the ultimate decision in this case may have significant ramifications in the employee benefits area for two reasons. First, both Congress and the Department of Labor are currently considering the reasonableness of investment advisory fees charged to employee benefit plans either directly or indirectly as a result of investments by plans and their participants in mutual funds. Second, in an opinion dissenting from the denial of a motion for rehearing en banc, Judge Richard Posner suggested that excessive investment advisory fees or executive compensation could constitute a breach of fiduciary duty. In his dissent, Judge Posner, who is widely known as an enthusiastic supporter of free markets, noted that the court’s decision in this case was “ripe for reexamination on the basis of growing indications that executive compensation in large publicly traded firms often is excessive because of feeble incentives of boards of directors to police compensation.” Judge Posner indicated that competition could not be counted on to solve the problem of excessive executive compensation, and expressed the view that “unreasonable compensation can be evidence of a breach of fiduciary duty.” Judge Posner suggested that the following test could be used to decide both the specific investment-advisor issue in this case as well as any judicial review of executive compensation: “whether the fee is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.” Because of this analysis, it is possible that the Supreme Court’s decision in this case could open the door to judicial review of executive compensation, including challenges to such compensation as being excessively large.

* Health Care Reform: As noted in our December 10, 2008 and April 6, 2009 Client Alerts, the San Francisco Health Care Security Ordinance (“Ordinance”) has been, and continues to be, the subject of fierce court challenges. The Ordinance both establishes a city-administered health care program that prioritizes services for low and moderate income persons and requires covered employers to contribute a specific amount per employee to either their own health-care programs or, failing that, directly to the city program. In September 2008, the U.S. Court of Appeals for the Ninth Circuit held that the Ordinance is not preempted by ERISA, overturning a District Court decision that found that ERISA preemption applied and that enjoined enforcement of a portion of the Ordinance. After the Ninth Circuit rejected a call for full-court review, U.S. Supreme Court Justice Anthony Kennedy then refused an emergency request to stop enforcement of the Ordinance. However, still pending before the Supreme Court is a petition for a writ of certiorari. Many experts believe that review will be granted by the Court, especially given that the Ninth Circuit’s decision appears to conflict with an earlier Fourth Circuit decision that found similar health-care legislation to be preempted by ERISA. Furthermore, the case involves an area of the law in which Congress and the courts have recognized a desire for national uniformity. However, a complicating factor could be the current push in Congress and by the president for comprehensive healthcare reform. Any such reform could impact, or perhaps even render moot, the issues under consideration in this case. Despite these complicating factors, the Supreme Court, at the opening of the new Court term on October 5, issued an order inviting the solicitor general to file a brief in the case expressing the views of the United States, a move which suggests that Court review may be imminent. We could learn soon whether the Supreme Court will agree to review this case and this important matter.

* Patenting of Employee Benefit Strategies: Even patent law is not free from entanglement with the employee benefits field. In the term beginning in October, the U.S. Supreme Court will review the case of In re Bilski, 545 F.3d 943 (Fed. Cir. 2008), in which the U.S. Court of Appeals for the Federal Circuit ruled that a “business process” could be patented only if it is tied to a particular machine or if it transforms an article to a different state or thing. To date, numerous patent applications have been filed seeking to patent business methods and tax strategies, including employee benefit strategies such as a specific system for providing benefits, a method for financing welfare benefits trusts, and a method for enhancing group benefit plans and other entities via life insurance funding and administration structures. Unless the Bilski decision calls into question or invalidates the practice of patenting a “business process” such as an employee benefit strategy, a close eye will need to be kept on the practice of patenting employee benefit strategies. If this practice becomes even more prevalent, then employers, especially employers utilizing complex retirement plans and/or plan-related systems, may need to check patent records or ensure that they have reliable plan vendors who respect patent rights, prior to implementing their benefit plans and strategies. In any case, Bilski bears watching for its potential to impact this burgeoning area of employee benefits practice.

We will continue to monitor the above cases and any other employee-benefits related cases that may appear before the Supreme Court and will update you as developments occur.

If you have any questions about any of the above cases, or about any other employee benefits matter, please contact those listed at the bottom or your usual Crowell & Moring contact.

Executive Compensation Reforms

In the wake of the global economic recession, the Obama administration, Congress and the Securities and Exchange Commission (“SEC”) have all moved quickly to address the issue of executive compensation reform. The general approach appears to be, as Treasury Secretary Timothy Geithner has stated, “bringing compensation practices more tightly in line with the interests of shareholders and reinforcing the stability of firms and the financial system.” The process in this area is currently still unfolding, and although no final actions have been taken, we expect that executive compensation reform will occur and will include many of the points currently being addressed by Congress, the Obama administration and the SEC, as summarized below.

* Obama Administration’s Five Guiding Principles for Executive Compensation Reform: On June 10, 2009, Treasury Secretary Geithner issued a statement on executive compensation in which he indicated the Administration’s belief that executive compensation practices were a contributing factor to the recent financial crisis. The statement also indicated that Secretary Geithner, in consultation with SEC Chairman Mary Schapiro, Federal Reserve Governor Dan Tatullo, and other top experts, had developed the following set of broad-based principles on executive compensation:

  1. Compensation plans should properly measure and reward performance.
  2. Compensation should be structured to account for the time horizon of risks.
  3. Compensation practices should be aligned with sound risk management.
  4. Golden parachutes and supplemental retirement packages should be reexamined to determine if they align the interests of executives and shareholders.
  5. Transparency and accountability should govern the process of setting compensation.

Although these principles themselves do not constitute legal authority, they illustrate the concerns that will drive the Obama administration’s executive compensation reforms. In line with this, Secretary Geithner’s June 10 statement also indicated that the Obama administration would work with Congress to pass legislation in two specific areas: (1) “say on pay” legislation, which would give the SEC authority to require companies to give shareholders a nonbinding vote on executive compensation practices; and (2) legislation to give the SEC the power to ensure that compensation committees are more independent, adhering to standards similar to those in place for audit committee as part of the Sarbanes-Oxley Act.

* Fairness Act: One piece of proposed executive-compensation-reform legislation that has been expressly supported by the Obama administration is the Corporate and Financial Institution Fairness Act of 2009 (“Fairness Act”). The Fairness Act was introduced in the House of Representatives on July 21, 2009, and was approved on July 31. Currently, the Fairness Act is pending in the Senate. The Fairness Act would require the SEC to direct the national securities exchanges and national securities associations to prohibit the listing of any securities of an issuer not in compliance with the Fairness Act’s requirements relating to compensation committees and their advisors. Among the Fairness Act’s provisions are the following:

  • A “say on pay” requirement which includes an annual nonbinding shareholder vote on the compensation paid to the named executive officers and a nonbinding shareholder vote regarding golden parachutes disclosed in any proxy prepared relating to a merger, acquisition or other transaction that may involve a change of control of the company.
  • Measures to enhance the independence of compensation committees by requiring that each member of the committee be “independent.”
  • Measures to require that any compensation consultant or other similar advisor to the compensation committee meet the independence standards established by the SEC.
  • A requirement that, within nine months after the enactment of the Fairness Act, federal regulators would be required to develop regulations that would prohibit any incentive-based payment arrangement that regulators determine encourages inappropriate risks by a covered financial institution, provided certain conditions are met.

* SEC Proposed Rule Changes: On July 10, 2009, the SEC released proposed rules regarding proxy disclosures and solicitation. These new proposed rules are intended to advance the Obama administration’s principles for reforming executive compensation. Examples of the measures included in these proposed rules are a new disclosure requirement for information about how a company’s overall compensation policies for employees create incentives that can materially affect the company’s risk and management of that risk; a requirement that the Summary Compensation Table in the Director Compensation Table disclose the aggregate grant date fair value of stock and option awards in accordance with FAS 123R; and a requirement that companies with compensation consultants who played a role in determining or recommending the amount or form of executive and director compensation must disclose the nature and extent of all additional services (including a breakout of fees). If adopted, the SEC generally intends for these proposed rules to apply beginning in the 2010 proxy season.

Executive compensation reform is and likely will remain an important objective of the current administration and its supporters in Congress, and, given current attitudes about bonuses and other forms of executive compensation in the wake of the economic crisis, it seems apparent that changes to executive compensation will definitely be in the offing. As just a sampling of some recent efforts, it was recently reported that the Federal Reserve is considering establishing its own executive compensation rules for the entities it regulates, and, in addition, a senior Treasury Department attorney was quoted as saying that executive compensation principles established under the Troubled Asset Relief Program (TARP) could be extended to all financial institutions. We will continue to monitor this area and will report any significant developments to you.

If you have any questions about these executive compensation developments, or about any other employee benefits matter, please contact those listed at the bottom or your usual Crowell & Moring contact.

Mental Health Parity Regulations

As discussed in our December 10, 2008 Client Alert, the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (“MHPAEA”), which, among other things, amended the mental health parity provisions in ERISA, the Public Health Service Act and the Internal Revenue Code to add new requirements regarding mental health and substance use disorder benefits, is effective in most cases for plan years beginning after October 3, 2009. For plans with a calendar-year plan year, this means that the MHPAEA will be effective as of January 1, 2010. Despite the explicit requirement in the MHPAEA that mental health parity regulations be issued no later than October 3, 2009, to date, no regulations or further guidance on the MHPAEA have been issued. On April 28, the Internal Revenue Service, the DOL and the Department of Health and Human Services jointly published a request for information in which they asked for public comment on several questions in anticipation of issuing regulations under the new law. Among the hundreds of responses to this request, many commentators urged the departments to include a delayed effective date in the regulations, or else to include a good-faith compliance period during which the plans can bring their design into compliance. By contrast, on August 6, a group of Senators wrote a letter urging the departments to release the regulations quickly, stating that without timely issuance of the regulations, health plans likely would set their own rules. On October 2, Health and Human Services (“HHS”) Secretary Sebelius sent a letter to Senator Franken, in response to the August 6 letter, in which she stated that “it is our goal to issue regulations by January 2010.” Although nothing was said in that letter about compliance efforts before these regulations are issued, an HHS spokesman has informally stated that, in the absence of regulations, plans should make reasonable, good-faith efforts to adhere to the law’s intent. We will continue to monitor the situation and will update you as soon as the regulations are issued.

Fee Disclosure and Investment Advice - Status of Guidance

The DOL’s long-pending regulatory projects regarding fee disclosure and investment advice, presumed dead after the change in administration, have recently shown some signs of life. The investment advice regulations, published on January 21, 2009 and originally effective as of March 23, have had their effective date pushed back first to May 22, and now to November 18, with the possibility left open that they will be withdrawn or modified before that date. The fee-disclosure regulations, proposed but never finalized by the Department of Labor during the Bush Administration, are being actively reviewed by the Obama Administration, and Phyllis Borzi, the new assistant secretary of the DOL’s Employee Benefits Security Administration (“EBSA”), has promised a “fresh look at these issues” and noted that the EBSA’s action on these issues “may not be the same approach as the prior administration.” However, it appears possible that any DOL action on these issues may be partially or totally eclipsed by Congressional action. At least 5 different bills (4 in the House of Representatives, 1 in the Senate) have been proposed to tackle the issues of fee disclosure and investment advice in 401(k) plans and other defined contribution plans. One of these bills, The 401(k) Fair Disclosure and Pension Security Act of 2009 (H.R. 2989), has been reported out of committee and is under consideration in the full House. Sponsors of the bill have stated that the likelihood of enactment of the bill is “very high.” This bill, which would have an effective date with respect to plan years beginning one year after the date of enactment, would, among other things, require defined-contribution service providers to reveal the “total expected annual charges for services,” broken down into four categories: administration and recordkeeping, transaction-based fees, investment management fees and “any charges not included” in the first three categories. Interestingly, these bills address the issue of fee disclosure only in the pension plan context, whereas the DOL regulatory project would govern both pension and welfare benefit plans (including health plans). We will continue to monitor the developments in this area and will update you whenever definitive action is taken.

Recent COBRA Developments

As discussed in our February 18, 2009 Special Employee Benefits Alert, the Stimulus Bill, also known as the American Recovery and Reinvestment Act of 2009 (“ARRA”), provides a temporary COBRA subsidy intended to help unemployed workers and their families afford continuation health coverage. Since its enactment as part of the ARRA, the COBRA subsidy has spawned a raft of guidance on the administration of the subsidy, and seems to have spurred several significant developments in and changes to state law “mini-COBRAs.” Among the highlights of these developments are the following:

* Model Notices and Appeal Forms: The Department of Labor (“DOL”) has posted on their website model COBRA notices that include mandatory language regarding the COBRA subsidy, with different notices applicable to different factual situations involving the date and type of the qualifying event. In addition, the DOL has also posted on their website applications and supporting material to allow individuals to appeal to the DOL an employer’s decision to deny an individual a reduction in the COBRA premium under the ARRA’s subsidy provisions. The Department of Health and Human Services (“HHS”) has also provided guidance and an application form for denials of the COBRA subsidy by plans over which the ARRA gives HHS jurisdiction (i.e., governmental plans, plans under state mini-COBRAs, etc.).

* COBRA Subsidy Guidance: Beginning in the first few days after the enactment of the ARRA and continuing to today, the DOL, HHS and the Internal Revenue Service (“IRS”) have been issuing various pieces of formal and informal guidance on and have been making public statements about the COBRA subsidy. Perhaps the most significant piece of guidance to date, at least for employers and other administering the COBRA subsidy program, is IRS Notice 2009-27, which contains 58 questions and answers regarding the COBRA subsidy program. In addition, the IRS has posted on its website a series of questions and answers about various aspects of the COBRA subsidy, and is continually updating these questions and answers (with the latest update occurring on September 2). The IRS has also posted on its website a notice reminding individuals who are receiving the COBRA subsidy and have become eligible for other group coverage that they are required, subject to a penalty of 110 percent of the subsidy amount, to notify the COBRA plan in writing that they are no longer eligible for the subsidy, and pointing out that the DOL has already provided a model form for this purpose.

* Proposed Expansions of COBRA: Among the legislative proposals in the current health-care debate is a bill (H.R. 3200), now before the full House of Representatives, that would allow qualified beneficiaries to continue COBRA coverage until becoming eligible under a new employer’s health care plan or though a federal or state-based health insurance exchange. This change, if it finds its way into the final health-care legislation or is separately enacted, would allow COBRA qualified beneficiaries, in many cases, to obtain years of additional COBRA coverage from their former employers.

* Changes to State mini-COBRA Laws: State mini-COBRA laws, i.e., state laws that mandate health care continuation coverage similar to COBRA but affecting those plans that are not subject to the federal COBRA provisions (including plans for small employers), have undergone some significant changes since the enactment of the ARRA. Among the most significant of such changes are the following:

New York: Two significant new health care and continuation coverage laws were passed in New York. Under the first bill, New York’s mini-COBRA statute will now extend coverage from 18 to up to 36 months following the loss of employer-sponsored coverage due to job loss. In addition, if federal COBRA coverage is exhausted under an insured group health plan maintained by a large employer (i.e., 20 or more employees), this bill also allows qualified beneficiaries to extend coverage under New York law for an additional 18-month period, for up to a total of 36 months following the date federal COBRA continuation coverage began. Under the second bill, insurers and HMOs must offer group health plan policyholders the option to cover dependents through age 29, and if the employer does not elect to extend coverage through age 29, the insurer is required to offer “COBRA-like” continuation coverage for dependents through age 29. For purposes of this bill, a dependent child is any child of an employee who is unmarried and is under age 30.

California: California has enacted a new law that is designed to ensure that California’s mini-COBRA law, CAL-COBRA, is in line with and allows participants to qualify for the subsidy under the ARRA. In addition, the California law requires insurers and covered health plans to notify Californians who lose their jobs with small employers (i.e., under 20 employees) of their potential eligibility for the COBRA premium reduction under the ARRA.

Ohio: Ohio has enacted a new law under which insurers, public employee benefit plans and HMOs will be required to offer parents the ability to cover their unmarried dependent children under their employer’s health plan until at least age 28, provided that the employer’s plan already offers dependent coverage. Furthermore, another Ohio law has permanently extended the period of continuation coverage under the state mini-COBRA law from 6 to 12 months; this period had been temporarily extended earlier in 2009 in order to allow residents to take full advantage of the COBRA subsidy.

Minnesota: A new Minnesota law provides for a separate state-level COBRA subsidy for certain individuals who are eligible both under the ARRA’s provisions and under a Minnesota general medical assistance statute. Notably, the new law requires employers with employees in Minnesota to provide those employees with notice of the Minnesota subsidy.

In addition, the White House has indicated that President Obama is analyzing whether the COBRA subsidy should be extended in order to provide subsidy coverage for individuals who were terminated on dates later than December 31, 2009, which is the deadline contained in the Stimulus Bill for involuntary terminations to be eligible for the COBRA subsidy. There are also indications that the Democratic leadership of the House of Representatives is also considering whether the subsidy should be extended.

The changes in the area of COBRA and other health care continuation coverage laws are, as demonstrated above, complex and are occurring rapidly. We will continue to monitor this area and will report any significant developments to you.

If you have any questions about these COBRA developments, or about any other employee benefits matter, please contact those listed below or your usual Crowell & Moring contact.

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For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.