April 28, 2015

Executive Compensation-IRS Finalizes Amendments To The Regulations Under Section 162(m)


On June 24, 2011, the Treasury Department and the IRS published a notice of proposed rulemaking (the "Proposed Regulations") under section 162(m) of the Internal Revenue Code (the "Code"). The existing regulations for section 162(m) are found in Treas. Reg. § 1.162-27. The Treasury Department and the IRS have now adopted the Proposed Regulations, with modifications, as final regulations (the "Final Regulations").


Maximum Number of Shares With Respect To Which Options or Rights May Be Granted to Each Individual Employee. Section 162(m)(1) precludes a tax deduction by any publicly held corporation for compensation paid to any covered employee (the CEO and three other highest paid officers other than the CFO), to the extent that the employee's compensation for the taxable year exceeds $1,000,000. Section 162(m)(4)(C) provides that the deduction limitation does not apply to qualified performance-based compensation. Treas. Reg. § 1.162-27(e)(1) provides that qualified performance-based compensation is remuneration that meets all of the requirements of § 1.162-27(e)(2) through (e)(5).

The Final Regulations modify § 1.162-27(e)(2)(vi)(A) to provide that a plan providing options, rights or awards satisfies a per-employee limitation requirement imposed by the regulations, if the plan specifies an aggregate maximum number of shares with respect to which stock options, stock appreciation rights, restricted stock, restricted stock units and other equity-based awards may be granted to any individual [emphasis added] employee during a specified period under a plan approved by shareholders in accordance with § 1.162-27(e)(4).

This clarification is not intended as a substantive change, but to clarify that plans cannot satisfy this per-employee limitation requirement merely by providing an aggregate maximum number of shares that may be granted to everyone covered under the plan. Instead, the plan must separately specify a maximum per individual employee on the number of options, rights or awards that may be granted in a specified period.

The Final Regulations further provide that the clarification to § 1.162-27(e)(2)(vi)(A) applies to compensation attributable to stock options and stock appreciation rights that are granted on or after June 24, 2011 (the date of publication of the Proposed Regulations).

Compensation Payable Under Restricted Stock Units Paid by Companies That Become Publicly Held. In general, § 1.162-27(f)(1) provides that when a corporation becomes publicly held, the section 162(m) deduction limitation does not apply to any remuneration paid pursuant to a compensation plan or agreement that existed during the period in which the corporation was not publicly held. Pursuant to § 1.162-27(f)(2), a corporation may rely on § 1.162-27(f)(1) until the earliest of: (i) the expiration of or a material modification of the plan or agreement; (ii) the issuance of all employer stock and other compensation that has been allocated under the plan or agreement; or (iii) the first meeting of shareholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which an initial public offering (IPO) occurs or, in the case of a privately held corporation that becomes publicly held without an IPO, the first calendar year following the calendar year in which the corporation becomes publicly held. Section 1.162-27(f)(3) provides that the relief provided under § 1.162-27(f)(1) applies to any compensation received pursuant to the exercise of a stock option or stock appreciation right, or the substantial vesting of restricted property, granted under a plan or agreement described in § 1.162-27(f)(1) if the grant occurs on or before the earliest of the events specified in § 1.162-27(f)(2) (the "Earliest Event Date").

The Proposed Regulations clarified the transition rule in § 1.162-27(f)(1), by providing that it applies to all compensation, other than compensation specifically identified in § 1.162-27(f)(3). Specifically, the Proposed Regulations identified compensation payable under a restricted stock unit arrangement (an "RSU") or a phantom stock arrangement as being ineligible for the transition relief in § 1.162-27(f)(3). Therefore, the effect of the Proposed Regulations is that compensation payable under a RSU or a phantom stock arrangement is eligible for transition relief only if it is paid, and not merely granted, before the Earliest Event Date. The Final Regulations adopt the Proposed Regulations.

The Final Regulations provide that the clarification described above applies to remuneration that is otherwise deductible resulting from a stock option, stock appreciation right, restricted stock (or other property), RSU, or any other form of equity-based remuneration that is granted on or after April 1, 2015.

April 27, 2015

ERISA-Ninth Circuit Holds That An SPD Cannot Grant A Plan Administrator Discretionary Authority, To Justify An Abuse Of Discretion Review, When The Plan Itself Does Not Grant Such Authority

In Prichard v. Metropolitan Life Insurance Company, No. 12-17355 (9th Cir. 2015), Matthew Prichard appeals from the district court's judgment affirming Metropolitan Life Insurance Company's ("MetLife") decision, as plan administrator, to deny him long-term disability benefits under the long- term disability plan of his employer, IBM (the "Plan"). The district court had reviewed MetLife's decision to deny the benefits for abuse of discretion. The Ninth Circuit Court of Appeals (the "Court") ruled that the district court should have reviewed MetLife's decision de novo, and not for an abuse of discretion. Therefore, the Court vacated the district court's judgment, and remanded the case back to the district court to review MetLife's denial of benefits de novo.

In analyzing the case, the Court said that the district court must review a plan administrator's denial of benefits de novo, unless the benefit plan gives the administrator fiduciary discretionary authority to determine eligibility for benefits. Here, it is undisputed that the only document in the record that confers discretionary authority upon MetLife is the Plan's summary plan description (the "SPD"). Prichard argues that after the Supreme Court's decision in Amara, a grant of discretion located only within an SPD (as opposed to a formal plan document) is insufficient to warrant discretionary review. However, MetLife argues that Prichard misapprehends the scope of the Plan. According to MetLife, the SPD is the Plan (i.e., it is the only formal Plan document), and therefore the SPD's terms warrant discretionary review.

In this case, noted the Court, the Plan has a separate document, in the form of an insurance certificate which contains the terms of the Plan, so the Plan and the SPD are not one and the same. The Plan document does not grant discretion to the plan administrator. The Court said that, although the SPD in this case does indicate that MetLife has discretionary authority, the Supreme Court has made clear in Amara that statements made in SPDs do not themselves constitute the terms of the plan. Because the official insurance certificate contains no discretion-granting terms, the Court held, consistent with Amara, that the SPD's grant of discretion constitutes an additional term of the Plan and therefore cannot be applied. Consequently, the Court concluded that the district court erred in applying the abuse of discretion standard of review.

April 24, 2015

Employee Benefits-EEOC Issues Proposed Regulations On Wellness Programs

The Equal Employment Opportunity Commission (the "EEOC") has issued a notice of proposed rulemaking (the "NPRM", which includes proposed regulations) on how Title I of the Americans with Disabilities Act (ADA) applies to employer wellness programs that are part of a group health plan. The NPRM proposes changes both to the text of the EEOC's ADA regulations and to interpretive guidance explaining the regulations that will be published along with the final rule. The EEOC has also issued questions and answers ("Q&As") which describe what the NPRM says and what will happen now that the proposed rule has been issued.

One question raised: What should employers do until a final rule is published to make sure their wellness programs comply with the ADA? Here is what the Q&As say:

While employers do not have to comply with the proposed rule, they may certainly do so. It is unlikely that a court or the EEOC would find that an employer violated the ADA if the employer complied with the NPRM until a final rule is issued. Moreover, many of the requirements explicitly set forth in the proposed rule are already requirements under the law. For example, employers should make sure they:
o do not require employees to participate in a wellness program;
o do not deny health insurance to employees who do not participate; and
o do not take any adverse employment action or retaliate against, interfere with, coerce, or intimidate employees who do not participate in wellness programs or who do not achieve certain health outcomes.
Additionally, employers must provide reasonable accommodations that allow employees with disabilities to participate in wellness programs and obtain any incentives offered. For example, if attending a nutrition class is part of a wellness program, an employer must provide a sign language interpreter, absent undue hardship, to enable an employee who is deaf to participate in the class. Employers also must ensure that they maintain any medical information they obtain from employees in a confidential manner.

April 23, 2015

Employee Benefits-DOL Provides Guidance On Wellness Programs

In FAQs About Affordable Care Act Implementation (Part XXV), the U.S. Department of Labor (the "DOL") provides guidance on wellness programs. Here is what the DOL said.

Wellness Programs

Under PHS Act section 2705 , ERISA section 702, and Internal Revenue Code (the "Code") section 9802 and the implementing regulations of the governing departments (the DOL, the Department of Health and Human Services and the Treasury, together the "Departments"), group health plans are generally prohibited from discriminating against participants, beneficiaries, and individuals in eligibility, benefits, or premiums based on a health factor. An exception to this general prohibition allows premium discounts, rebates, or modification of otherwise applicable cost sharing (including copayments, deductibles, or coinsurance) in return for adherence to certain programs of health promotion and disease prevention, commonly referred to as wellness programs. The wellness program exception applies to group health coverage.

On June 3, 2013, the Departments issued final regulations under PHS Act section 2705 and the related provisions of ERISA and the Code that address the requirements for wellness programs provided in connection with group health coverage. Among other things, these regulations set the maximum permissible reward under a health-contingent wellness program that is part of a group health plan at 30 percent of the cost of coverage (or 50 percent for wellness programs designed to prevent or reduce tobacco use). The wellness program regulations also address the reasonable design of health-contingent wellness programs and the reasonable alternatives that must be offered in order to avoid prohibited discrimination. In the preamble to the wellness program regulations, the Departments stated that they anticipated issuing future sub-regulatory guidance as necessary. The following FAQs address several issues that have been raised since the publication of the wellness program regulations.

A Reasonably Designed Program

Under section 2705 of the PHS Act and the wellness program regulations, a health-contingent wellness program must be reasonably designed to promote health or prevent disease. A program complies with this requirement if it: (1) has a reasonable chance of improving the health of, or preventing disease in, participating individuals; (2) is not overly burdensome; (3) is not a subterfuge for discrimination based on a health factor; and (4) is not highly suspect in the method chosen to promote health or prevent disease.

The determination of whether a health-contingent wellness program is reasonably designed is based on all the relevant facts and circumstances. The wellness program regulations are intended to allow experimentation in diverse and innovative ways for promoting wellness. While programs are not required to be accredited or based on particular evidence-based clinical standards, practices such as those found in the Guide to Community Preventive Services or the United States Preventive Services Task Force's Guide to Clinical Preventive Services, may increase the likelihood of wellness program success and are encouraged.

Wellness programs designed to dissuade or discourage enrollment in the plan or program by individuals who are sick or potentially have high claims experience will not be considered reasonably designed under the Departments' wellness program regulations. A program that collects a substantial level of sensitive personal health information without assisting individuals to make behavioral changes such as stopping smoking, managing diabetes, or losing weight, may fail to meet the requirement that the wellness program must have a reasonable chance of improving the health of, or preventing disease in, participating individuals. Programs that require unreasonable time commitments or travel may be considered overly burdensome. Such programs will be scrutinized and may be subject to enforcement action by the Departments.
The wellness program regulations also state that, in order to be reasonably designed, an outcome-based wellness program must provide a reasonable alternative standard to qualify for the reward, for all individuals who do not meet the initial standard that is related to a health factor. This approach is intended to ensure that outcome-based wellness programs are more than mere rewards in return for results in biometric screenings or responses to a health risk assessment, and are instead part of a larger wellness program designed to promote health and prevent disease, ensuring the program is not a subterfuge for discrimination or underwriting based on a health factor.

Compliance With Other Laws

The fact that a wellness program complies with the Departments' wellness program regulations does not necessarily mean it complies with any other provision of the PHS Act, the Code, ERISA, (including the COBRA continuation provisions), or any other State or Federal law, such as the Americans with Disabilities Act or the privacy and security obligations of the Health Insurance Portability and Accountability Act of 1996, where applicable. Satisfying the rules for wellness programs also does not determine the tax treatment of rewards provided by the wellness program. The Federal tax treatment is governed by the Code. For example, reimbursement for fitness center fees is generally considered an expense for general good health. Thus payment of the fee by the employer is not excluded from income as the reimbursement of a medical expense and should generally be added to the employee wages reported on the Form W-2, Wage and Tax Statement. In addition, although the Departments' wellness program regulations generally do not impose new disclosure obligations on plans and issuers, compliance with the wellness program regulations is not determinative of compliance with any other disclosure laws, including those that require accurate disclosures and prohibit intentional misrepresentation.

April 22, 2015

ERISA-Sixth Circuit Rules That Defendants Breached Fiduciary Duty By Providing A Summary Plan Description Which Led Plaintiff To Believe He Is Entitled To A Benefit Increase

In Stiso v. International Steel Group, No. 13-3503 (6th Circuit 2015) (Unpublished Opinion), Plaintiff Michael Stiso, an employee of defendant International Steel Group and a beneficiary under its long-term disability insurance plan, brought this action, under sections 502(a)(1)(B) (claim for benefits) and 502(a)(3) (claim based on estoppel and breach of fiduciary duty), to enforce a 7% per year cost-of-living increase to his long-term disability benefits. He sought the increase in benefits based on language from the long-term disability plan and from the summary plan description. The language in both the disability plan and in the summary of the disability plan distributed to employees refers to a 7% increase in predisability earnings. The district court ruled against Stiso, and he appealed.

In analyzing the case, the Sixth Circuit Court of Appeals (the "Court") said that by providing plaintiff with a summary plan description that led plaintiff reasonably to understand that he would receive a 7% yearly increase in benefits and then denying his claim despite the explicit language in the summary plan description, both International Steel and defendant Metropolitan Life Insurance Company breached their fiduciary responsibilities to plaintiff. Therefore, the Court reversed the district court's judgment and remanded the case with instructions to grant an increase in benefits to Stiso. The Court said further that, on remand, Stiso may seek the appropriate equitable remedy, including make-whole relief in the form of money damages referred to by the Supreme Court in its Amara decision.

April 21, 2015

Employee Benefits-IRS Reminds Us To Follow Up On VCP Corrections That We Agreed To

In Employee Plans News Issue No. 2015-4, April 1, 2015, the IRS reminds us to follow up on corrections we agreed to in a Voluntary Correction Program (VCP) compliance statement. The reminder is here.

April 20, 2015

Employment-Second Circuit Rules That New York State Wage Parity Law Is Not Unconstitutional Or Preempted By Federal Law

In Employ Concerned Home Care Providers, Inc. v. Cuomo, No. 13-3790-cv (Second Cir.2015), the Second Circuit Court of Appeals (the "Court") faced the following matter. A section of the New York Public Health Law known as the "Wage Parity Law" sets the minimum amount of total compensation that employers must pay home care aides in order to receive Medicaid reimbursements for reimbursable care provided in New York City and Westchester, Suffolk, and Nassau Counties (the "surrounding Counties"). N.Y. Pub. Health Law § 3614-c. The questions presented on to the Court on appeal are whether the Wage Parity Law is preempted by the National Labor Relations Act ("NLRA"), or the Employee Retirement Income Security Act of 1974 ("ERISA"), or is unconstitutional under the Fourteenth Amendment's Due Process and Equal Protection Clauses. The Court ruled that the Wage Parity Law is neither preempted nor unconstitutional.

April 16, 2015

ERISA-First Circuit Upholds Termination Of Disability Benefits Due To A 24 Month Limitation In The Plan For Disabilities Relating To Mental Health Conditions

In Dutkewych v. Standard Insurance Company, No. 14-1450 (1st Cir. 2015), the First Circuit Court of Appeals (the "Court") faced the following matter. Plaintiff Mark Dutkewych is a participant in a disability plan (the "Plan"), insured and administered by Defendant Standard Insurance Company under ERISA. The Plan limits long-term disability ("LTD") benefits to 24 months for "a Disability caused or contributed to by . . .: (1) Mental Disorders; (2) Substance Abuse; or (3) Other Limited Conditions." Applying this Limited Conditions Provision, Standard terminated Dutkewych's benefits after 24 months, on June 1, 2011. After Dutkewych's administrative appeal failed, he brought this lawsuit against Standard for unpaid benefits. The district court entered summary judgment against Dutkewych's claims, and Dutkewych appealed.

In reviewing the case, the Court said that Dutkewych contests Standard's decision to limit his LTD benefits to 24 months, saying he has been diagnosed with chronic Lyme disease, "a physical illness that is not limited under the terms of the Plan." Despite the hot dispute between the parties on this issue, this case does not turn on the insurer's doubts about the validity of Dutkewych's diagnosis with chronic Lyme disease. Instead, this case turns on the insurer's application of a different provision of the Plan, the subset of the Limited Conditions Provision related to mental disorders ("Mental Disorder Limitation").Standard maintains that, even if Dutkewych was disabled as a result of chronic Lyme disease in June 2011, the Mental Disorder Limitation nonetheless applies because his mental disorders, regardless of their cause, contributed to his disability as of June 2011. The Court ruled that Standard's interpretation of the Mental Disorder Limitation is reasonable and its application to Dutkewych's case is supported by substantial evidence. Accordingly, the Court affirmed the entry of summary judgment to Standard.

April 15, 2015

ERISA-DOL Proposes New Rule Defining A Fiduciary For Certain Purposes of ERISA And Providing Guidance On A Fiduciary's Conflict of Interest.

The U.S. Department of Labor (the "DOL") has issued a new proposed rule providing a new definition of fiduciary for certain ERISA purposes and pertaining to an ERISA fiduciary's conflict of interest. Here is what the DOL about the proposed rule:

This proposal contains a proposed regulation defining who is a "fiduciary" of an employee benefit plan under ERISA as a result of giving investment advice to a plan or its participants or beneficiaries. The proposal also applies to the definition of a "fiduciary" of a plan (including an individual retirement account (IRA)) under section 4975 of the Internal Revenue Code of 1986 (the "Code"). If adopted, the proposal would treat persons who provide investment advice or recommendations to an employee benefit plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner as fiduciaries under ERISA and the Code in a wider array of advice relationships than the existing ERISA and Code regulations, which would be replaced. The proposed rule, and related exemptions, would increase consumer protection for plan sponsors, fiduciaries, participants, beneficiaries and IRA owners.

This proposal also withdraws a prior proposed regulation published in 2010 (2010 Proposal) concerning this same subject matter. In connection with this proposal, elsewhere in the same issue of the Federal Register, the DOL is proposing new exemptions and amendments to existing exemptions from the prohibited transaction rules applicable to fiduciaries under ERISA and the Code that would allow certain broker-dealers, insurance agents and others that act as investment advice fiduciaries to continue to receive a variety of common forms of compensation that otherwise would be prohibited as conflicts of interest.

April 14, 2015

Employee Plans-IRS Discusses Keeping Records For Hardship Withdrawals And Plan Loans

In Retirement News for Employers, April 2, 2015 Edition, the IRS provides guidance on keeping records for hardship withdrawals and plan loans. The guidance is here.

April 10, 2015

Employee Plans-IRS Discusses IRA Contribution Limits

As appropriate for this time of year, in Retirement News for Employers, April 2, 2015 Edition, the IRS discusses IRA contribution limits. This discussion is here.

April 9, 2015

Employee Plans-IRS Discusses How A Self-Employed Individual Should Calculate His Or Her Retirement Plan Contribution And Deduction

In Retirement News for Employers, April 2, 2015 Edition, the IRS discusses how a self-employed individual should calculate his or her retirement plan contribution and deduction. This discussion is here.

April 8, 2015

Employee Plans-IRS Discusses Correction Of A Violation Of The Universal Available Rule For 403(b) Plans

In Retirement News for Employers, April 2, 2015 Edition, the IRS discusses how you may correct the mistake of excluding eligible employees from your 403(b) plan, that is, correction of a violation of the universal available rule that applies to 403(b) plans. This discussion is here.

April 1, 2015

Employee Benefits-EBSA Discusses Intention To Finalize Changes Relating To SBCs

In FAQs about Affordable Care Act Implementation (Part XXIV), the Employee Benefits Security Administration (the "EBSA") discusses the intention of the Departments (namely, the Department of Labor, the Department of Health and Human Services, and the Treasury), who are responsible for the rules governing the summary of benefits and coverage (the "SBC"), to finalize certain changes relating to the SBCs. Here is what the EBSA said:

SBC Guidance In General. Public Health Service ("PHS") Act section 2715, as added by the Affordable Care Act and incorporated by reference into ERISA and the Internal Revenue Code, directs the Departments to develop standards for use by a group health plan in compiling and providing an SBC that "accurately describes the benefits and coverage under the applicable plan or coverage." On February 14, 2012, the Departments published joint final regulations to implement the disclosure requirements under PHS Act section 2715 and an accompanying document announcing the availability of templates, instructions, and related materials. After the 2012 final regulations were published, the Departments released six sets of FAQs regarding implementation of the SBC requirements. After consideration of the comments and feedback from interested stakeholders, on December 30, 2014, the Departments published a notice of proposed rulemaking, as well as a new set of proposed SBC templates, instructions, an updated uniform glossary, and other materials.

Upcoming Changes. The Departments intend to finalize changes to the regulations in the near future, which are intended to apply in connection with coverage that would renew or begin on the first day of the first plan year that begins on or after January 1, 2016 (including open season periods that occur in the Fall of 2015 for coverage beginning on or after January 1, 2016).

The Departments also intend to utilize consumer testing and offer an opportunity for the public, including the National Association of Insurance Commissioners, to provide further input before finalizing revisions to the SBC template and associated documents. The Departments anticipate the new template and associated documents will be finalized by January 2016 and will apply to coverage that would renew or begin on the first day of the first plan year that begins on or after January 1, 2017 (including open season periods that occur in the Fall of 2016 for coverage beginning on or after January 1, 2017).

The Departments are fully committed to updating the template and associated documents (including the uniform glossary) to better meet consumers' needs as quickly as possible.

March 30, 2015

ERISA- Fifth Circuit Holds That An Out-Of-Network Hospital Has Standing To Sue A Health Plan Under ERISA For Unpaid Benefits, When Plan Participants Assigned To The Hospital Their Right To Benefits From The Plan

In North Cypress Medical Center Operating Company, Limited v. Cigna Healthcare, No. 12-20695 (5th Cir. 2015), the Fifth Circuit Court of Appeals (the "Court") ruled that an out-of-network hospital has standing-as a matter of both the constitutional minimum standing requirement and statutory standing needed under ERISA-to sue a health plan for payment of benefits, when plan participants had expressly assigned to the hospital their right to benefits from the plan.

In so ruling, the Court took into account the fact that hospital patients covered by a health plan generally assign their claims to the hospital in the admissions process well before their presentment to the plan's insurer or administrator. The Court then looks to the rights of the patient at the time of assignment. The fact that the patient assigned her rights elsewhere does not cause them to disappear. Further, as a fact to be taken into account, a patient suffers a concrete injury if money that she is allegedly owed contractually is not paid, regardless of whether she has directed the money be paid to a third party for her convenience. The patients contracted for coverage at out-of-network providers under their health plans. The patients allegedly incurred charges for medical care, and directed that the payments be made to the provider, but, here, the contracted-for payments have not been made. The patients have thus allegedly been deprived of what they contracted for, a concrete injury.