May 21, 2015

ERISA-Second Circuit Rules That Plan Administrator's Denial Of Benefits Claim Was Not Arbitrary Or Capricious

In Roganti v. Metropolitan Life Insurance Company, Nos. 13-4532-cv (L), 13-4684-cv (XAP) (2nd Cir. 2015), the plaintiff, Ronald Roganti ("Roganti"), was a successful executive with defendant Metropolitan Life Insurance Company ("MetLife") until 2005, when he resigned in the face of pay reductions that he claims were levied in retaliation for his opposition to unethical business practices. Roganti brought arbitration proceedings against MetLife before the Financial Industry Regulatory Authority ("FINRA"), seeking, among other things, wages that he would have been paid but for the retaliatory pay reductions, as well as compensation for the decreased value of his pension, which was tied to his wages. The FINRA panel awarded Roganti approximately $2.49 million in "compensatory damages," but its award did not clarify what that sum was compensation for. Roganti then filed a benefits claim with MetLife, arguing that the award represented back pay and that his pension benefits should be adjusted upward as if he had earned the money while he was still employed. MetLife denied the claim because the FINRA award did not say that it was, in fact, back pay. Roganti brought this lawsuit.

In analyzing the case, the Second Circuit Court of Appeals (the "Court") noted that ERISA creates a private right of action to enforce the terms of a benefit plan. ERISA section 502(a)(1)(B). The pension plans covering Roganti plans vest interpretive discretion in the plan administrator, which means that the plan administrator's benefits decision is conclusive unless it is arbitrary and capricious. MetLife is the plan administrator. After a summary bench trial on stipulated facts, the district court determined that MetLife's denial of Roganti's claim was arbitrary and capricious because it was clear from the arbitral record that the award did represent back pay. The Court said that it did not agree. Instead, the Court concluded that MetLife's denial of Roganti's claim was not arbitrary and capricious, and that MetLife is therefore entitled to judgment in its favor as to his benefits claim.

Why this conclusion? The Court found that MetLife's rationale for denying Roganti's claim--i.e., that it was impossible to determine whether, or the extent to which, the FINRA award represented back pay--was not, in fact, unreasonable, and therefore met the arbitrary and capricious standard.

May 20, 2015

ERISA-Fifth Circuit Rules That Administrator Is Not An ERISA Fiduciary

In Humana Health Plan, Incorporated v. Nguyen, No. 14-20358 (5th Cir. 2015), the defendant, Patrick Nguyen ("Nguyen"), was appealing from the district court's order granting summary judgment in favor of the plaintiff, Humana Health Plan, Inc. ("Humana").

In this case, Nguyen was a participant in the API Enterprises Employee Benefits Plan (the "Plan"), an ERISA-governed employee welfare plan established by API Enterprises, Inc. ("API"). API had entered into a Plan Management Agreement ("PMA") with Humana, through which Humana had agreed to serve as "Plan Manager" and to provide various administrative services to the Plan. Two of Humana's tasks for the Plan were subrogation and recovery services. One issue arising in the case: is Humana an ERISA fiduciary with respect to the Plan under section 3(21) of ERISA(if not, it can't sue Nguyen under ERISA section 502(a)(3))? The Fifth Circuit Court of Appeals (the "Court") determined that Humana is not an ERISA fiduciary. Why?

In analyzing the case, the Court focused on the specific role that Humana undertook regarding subrogation and recovery services for the Plan, and whether API provided a framework of policies and procedures to guide Humana, and supervised Humana as it executed its task. First, the relevant language of the PMA pertaining to these services merely defines the range of potential disputes covered by the contract; it says nothing about who has the right to finally decide whether to investigate or pursue a claim. This language does not show that Humana had discretion over the Plan or its assets. As such, the subrogation and recovery language in the PMA does not show that Humana is an ERISA fiduciary of the Plan. Second, even if the Court interpreted the PMA to give Humana broad power, there is no explanation as to why Humana is not a ministerial agent, and thus not a fiduciary, or why it how Humana exercised discretion as described in section 3(21)(A)(i) and (iii).

May 19, 2015

ERISA-Supreme Court Rules That Fiduciaries Have A Continuing Duty To Monitor Plan Investments For Purposes Of Determining Whether ERISA's Statute Of Limitations Has Expired

In Tibble v. Edison International, No. 13-550 (U.S. Supreme Court 2015), in 2007, the plaintiffs, beneficiaries of the Edison 401(k) Savings Plan (the "Plan"), sued Plan fiduciaries, defendants Edison International and others, to recover damages for alleged losses suffered by the Plan from alleged breaches of the defendants' fiduciary duties. The plaintiffs argued that the defendants violated their fiduciary duties with respect to three mutual funds added to the Plan in 1999 and three mutual funds added to the Plan in 2002. They argued that the defendants acted imprudently by offering these six higher priced retail-class mutual funds as Plan investments, when materially identical lower priced institutional-class mutual funds were available.

Because ERISA requires a breach of fiduciary duty complaint to be filed no more than six years after "the date of the last action which constitutes a part of the breach or violation" or "in the case of an omission the latest date on which the fiduciary could have cured the breach or violation," under section 413 of ERSA, the District Court held that the plaintiffs' complaint as to the 1999 funds was untimely because they were included in the Plan more than six years before the complaint was filed, and the circumstances had not changed enough within the 6- year statutory period to place the defendants under an obligation to review the mutual funds and to convert them to lower priced institutional-class funds. The Ninth Circuit affirmed, concluding that the plaintiffs had not established a change in circumstances that might trigger an obligation to conduct a full due diligence review of the 1999 funds within the 6-year statutory period.

Upon its review of the case, the U.S. Supreme Court held that the Ninth Circuit erred by applying section 413's statutory bar to a breach of fiduciary duty claim based on the initial selection of the investments without considering the contours of the alleged breach of fiduciary duty. ERISA's fiduciary duty is "derived from the common law of trusts, which provides that a trustee has a continuing duty--separate and apart from the duty to exercise prudence in selecting investments at the outset--to monitor, and remove imprudent, trust investments. So long as a plaintiff's claim alleging breach of the continuing duty of prudence occurred within six years of suit, the claim is timely.

As such, the Supreme Court remanded the case back to the Ninth Circuit to consider the plaintiffs' claims that the defendants breached their duties within the relevant 6-year statutory period under section 413, recognizing the importance of analogous trust law.

May 18, 2015

Employee Benefits-DOL Provides Guidance On Coverage Of Preventive Services

In FAQs about Affordable Care Act Implementation (Part XXVI), the U.S. Department of Labor, the Department of Health and Human Services and the Treasury (the "Departments") provide guidance on rules pertaining to coverage of preventive services under the Affordable Care Act.

Background. The FAQs provide the following background. Section 2713 of the Public Health Service Act (PHS Act) and its implementing regulations relating to coverage of preventive services require non-grandfathered group health plans to provide benefits for, and prohibit the imposition of cost-sharing requirements with respect to, the following:

• Evidenced-based items or services that have in effect a rating of "A" or "B" in the current recommendations of the United States Preventive Services Task Force ("USPSTF") with respect to the individual involved, except for the recommendations of the USPSTF regarding breast cancer screening, mammography, and prevention issued in or around November 2009;

• Immunizations for routine use in children, adolescents, and adults that have in effect a recommendation from the Advisory Committee on Immunization Practices ("ACIP") of the Centers for Disease Control and Prevention ("CDC") with respect to the individual involved;

• With respect to infants, children, and adolescents, evidence-informed preventive care and screenings provided for in comprehensive guidelines supported by the Health Resources and Services Administration (HRSA); and

• With respect to women, evidence-informed preventive care and screening provided for in comprehensive guidelines supported by HRSA, to the extent not included in certain recommendations of the USPSTF.

If a recommendation or guideline does not specify the frequency, method, treatment, or setting for the provision of a recommended preventive service, the plan may use reasonable medical management techniques to determine any such coverage limitations.

Topics Covered by the FAQs. In summary, the FAQs say the following:

--Coverage of breast cancer testing: A plan MUST cover, without cost sharing, recommended genetic counseling and BRCA testing (that is, testing for breast cancer susceptibility genes) for a woman who has not been diagnosed with BRCA-related cancer, but who previously had breast cancer, ovarian cancer, or other cancer.

--Coverage of Food and Drug Administration ("FDA")-approved contraceptives: Plans must cover, without cost sharing, at least one form of contraception in each of the methods (currently 18) that the FDA has identified for women in its current Birth Control Guide. This coverage must also include the clinical services, including patient education and counseling, needed for provision of the contraceptive method. The Departments will apply this guidance for plan years beginning on or after the date that is 60 days after publication of these FAQs.

Further, if a plan covers some forms of oral contraceptives, some types of IUDs, and some types of diaphragms without cost sharing, but excludes completely other forms of contraception, the plan does NOT comply with PHS Act section 2713 and its implementing regulations. Also, if a plan covers oral contraceptives (such as the extended/continuous use contraceptive pill), it may NOT impose cost sharing on all items and services within other FDA-identified hormonal contraceptive methods (such as the vaginal contraceptive ring or the contraceptive patch).

--Coverage of sex-specific recommended preventive services: A plan may NOT limit sex-specific recommended preventive services based on an individual's sex assigned at birth, gender identity or recorded gender.

--Coverage of well-woman preventive care for dependents: If a plan covers dependent children, the plan is NOT required to cover (without cost sharing) recommended women's preventive care services for dependent children, including services related to pregnancy, such as preconception and prenatal care.

--Coverage of colonscopies pursuant to USPTF recommendations: The plan may NOT impose cost sharing with respect to anesthesia services performed in connection with the preventive colonoscopy, if the attending provider determines that anesthesia would be medically appropriate for the individual.

May 13, 2015

Executive Compensation-IRS Provides Guidance On Correction of Section 409A Failures

In an IRS Memorandum, the IRS dealt with the following issue: Does the correction of a failure to comply with section 409A(a) of the Internal Revenue Code, which correction applies only to compensation subject to a substantial risk of forfeiture, avoid income inclusion under section 409A if the correction is made before the compensation vests but during the service provider's taxable year in which it vests? And the IRS concluded that income inclusion is NOT avoided. Why?

The IRS said in the Memorandum that section 409A(a)(1)(A)(i) provides that, if a nonqualified deferred compensation plan fails to comply, or fails to be operated in accordance, with section 409A(a)(2), (3) and (4) "at any time during a taxable year," compensation deferred under the plan that is not subject to a substantial risk of forfeiture and that has not previously been included in income is includible in the service provider's gross income for the taxable year. Deferred compensation, which is subject to a substantial risk of forfeiture, is subject to the requirements of section 409A(a)(2), (3), and (4) at all times during a taxable year, though a deferred amount is not includible in income under section 409A if it is subject to a substantial risk of forfeiture at all times during the taxable year.

In contrast, if the amount is not subject to a substantial risk of forfeiture at all times during the taxable year (generally meaning the amount is vested as of the end of the taxable year), the amount is includible in income. The correction of a failure to comply with section 409A(a) during a taxable year indicates that a failure existed during the taxable year in which the correction is made. In accordance with section 409A(a)(1)(A)(i), a failure applicable to deferred compensation subject to a substantial risk of forfeiture that lapses during the taxable year results in income inclusion of the deferred amount under section 409A, regardless of whether the failure is corrected during the same taxable year but before the substantial risk of forfeiture lapses.

May 12, 2015

ERISA-Seventh Circuit Reverses Decision Pertaining To Benefit Calculation For Imprecision

In Reilly v. Continental Casualty Co., No. 14-2888 (7th Cir. 2015), Michael Reilly ("Reilly") had participated in a pension plan offered by Continental Casualty Co. ("Continental"). Continental administers its own defined-benefit plan, which provides that the pension depends on the highest average compensation in any 60-month period of employment. "Compensation" is a defined term: regular salary, incentive compensation, and deferred compensation deposited in §401(k) plans are in (as are some other items), while educational bonuses, referral bonuses, overseas allowances, and some other items are out.

In this case, when Reilly left Continental's employ in 1999, he received a statement of his qualifying compensation that implied a monthly benefit of about $5,400 starting in 2012, when he would turn 65 and become eligible. Come 2012, however, Continental sent Reilly a different calculation, showing lower compensation and entitlement to roughly $4,200 a month. When internal appeals did not avail him, Reilly filed this suit under §502(a)(1)(B) of ERISA. The district judge concluded that Continental's decision was arbitrary and capricious (which the parties agree is the governing standard), and the court ordered it to pay monthly benefits at the $5,400 level. Continental appeals, contending in this court that its calculation should have been sustained, and if not that the district court should have remanded for a new calculation rather than ordering payment at the rate projected in 1999.

In analyzing the case, the Seventh Circuit Court of Appeals (the "Court") said that the district court's decision cannot stand, because Reilly has not tried to show that $5,400 is the only possible outcome of a proper calculation process. All that has been established to date is that Continental's 2012 decision is unreliable. By working through the original compensation numbers, the parties may be able to agree what the right pension is under the Plan's terms. If agreement is elusive, the district court must remand this matter to Continental so that the administrator can make a fresh calculation, which then could be subjected to another round of judicial review. Accordingly, the Court reversed the district court's decision, and remanded the case for further proceedings consistent with its opinion.

May 7, 2015

ERISA-Tenth Circuit Discusses Statute Of Limitations For Bringing A Claim Of Breach Of Fiduciary Duty Under Section 413 of ERISA

In Fulghum v. Embarq Corporation, No. 13-3230 (10th Cir. 2015), the plaintiffs represent a class of retirees formerly employed by Sprint-Nextel Corporation ("Sprint"), Embarq Corporation ("Embarq"), or a predecessor and/or subsidiary company of either Embarq or Sprint (such companies being the defendants). The plaintiffs brought this suit after the defendants altered or eliminated health and life insurance benefits for retirees. Plaintiffs claimed, among other things, that the defendants had breached their fiduciary duty by misrepresenting the terms of multiple welfare benefit plans. One issue faced by the Tenth Circuit Court of Appeals (the "Court") was whether the statute of limitations for bringing this claim had expired. Here is what the Court said on this issue:

This Court has previously held that section 413 of ERISA governs the time for filing a breach of fiduciary duty claim arising from an alleged violation of the duties imposed on ERISA plan fiduciaries by section 404(a)(1) of ERISA. Section 413 sets out the following six-year limitations period:

No action may be commenced under this subchapter with respect to a fiduciary's breach of any responsibility, duty, or obligation under this part, or with respect to a violation of this part, after the earlier of--
(1) six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation. . . .

That is, a plaintiff has six years to file his or her suit for breach of fiduciary duty--the six-year period being measured from (1) the date of the last action constituting a part of the breach or (2) the latest date on which the breach could have been cured by the fiduciary.

Section 413 has a separate three-year statute of limitations which is not applicable here. But section 413 also says that in the case of fraud or concealment, a civil enforcement action may be commenced not later than six years after the date of discovery of the breach or violation. When does the "fraud or concealment" provision apply? The Circuit Courts are split. This Court believes that this provision is a legislatively created exception to the general six-year rule, rather than being a separate statute of limitations. This exception generally applies when either: (1) the alleged breach of fiduciary duty involves a claim that the defendant made a false representation of a matter of fact which deceives, and is intended to deceive, another person that this person acts upon it to his legal injury or (2) the defendant conceals the alleged breach of fiduciary duty.

There remains the question here of whether the breach of fiduciary duty claims raised by Plaintiffs fall under the fraud or concealment exception to the general six-year rule. There is no concealment here. And the Court remanded the case back to the district court to determine if the plaintiffs' claims are based on a theory of fraud.

May 6, 2015

ERISA-Ninth Circuit Rules That Assets Held In A Savings Account May Be Considered To Be Held In Trust For Purposes Of ERISA

In Barboza v. California Professional Association of Firefighters, Nos. 11-15472, 11-16024, 11-16081, and 11-16082 (9th Cir. 2015), the Ninth Circuit Court of Appeals (the "Court") was required to interpret, among others, the requirement in section 403(a) of ERISA that all assets of an employee benefit plan shall be held in trust by one or more trustees (sometimes called the "hold in trust" requirement).

At issue is a long-term disability plan (the "Plan"), which is an employee welfare benefit plan governed by ERISA, and which receives its funding exclusively from participants and pays all benefits solely from its assets. The Plan functions as follows. First, each participant makes a monthly contribution to the Plan. These contributions are deposited into a Wells Fargo Bank checking account. The benefits are paid in the form of a check drawn on the Wells Fargo account for the appropriate amount. Plan expenses, including administrative service fees, are paid from the assets in the Wells Fargo account. The question: are the Plan assets being held in trust?

In analyzing the case, the Court said that ERISA requires, under section 403(a), that generally all assets of an employee benefit plan must be held in trust by one or more trustees. 29 U.S.C. § 1103(a). Further, such trustee or trustees must be either named in the trust instrument or in the plan instrument or appointed by a person who is a named fiduciary. The Court said further that, to meet these requirements, a person (legal or natural) must hold legal title to the assets of an employee benefit plan with the intent to deal with these assets solely for the benefit of the members of that plan. Such a person is the "trustee," and the resulting relationship between the trustee and the participants in the plan with respect to a plan's assets is a "trust" for purposes of section 403(a). The Court noted that Barboza, and the Department of Labor (as amicus curiae), argue, in effect, that compliance with section 403(a) requires a party to record its responsibilities with respect to the assets of an employee benefit plan in a document that is entitled "trust instrument," uses the terms "trust" and "trustee," and expressly states that the party is holding the assets "in trust." Further, the Department appears to interpret its regulation at 29 C.F.R. § 2550.403a-1 as requiring parties to use express words of trust to comply with section 403(a).

However, the Court said that it rejects the argument, and concluded that the Plan assets held in the Wells Fargo account here satisfies the held in trust requirement. The Plan instrument (i.e., the official plan document which sets forth the Plan's terms) requires the California Association of Professional Firefighters ("CAPF"), the Plan's manager, to hold legal title to all property, monies and contract rights as well as all of the funds maintained in connection with the Plan. CAPF holds these assets for the Plan on behalf of the participants. The Plan instrument thus establishes a fiduciary relationship between CAPF, as the trustee, and the participants, as beneficiaries, with respect to the property contributed to the Plan (the trust res); this constitutes a trust according to its common law definition. Because the Plan instrument here is a written instrument that establishes a trust relationship, it is a written trust instrument for purposes of section 403(a).

May 5, 2015

ERISA-Ninth Circuit Finds No Breach Of ERISA Fiduciary Duty Stemming From Failure To File Form 990 (TEO's Tax Return)

In Barboza v. Cal. Ass'n. of Prof. Firefighters, No. 11-15472 (9th Cir. Apr. 7, 2015), plaintiff David Barboza, seeking disability benefits, challenged (among other matters) the district court's grant of summary judgment to the defendants on Barboza's claim that they breached their fiduciary duties by failing to file Internal Revenue Service (IRS) Form 990 (a tax-exempt organization's tax return) on the advice of their counsel and accountant.

The Ninth Circuit Court of Appeals upheld the summary judgment, stating that Barboza has not provided any evidence that, when the defendants failed to file Form 990, the defendants did not: (1) investigate the expert's qualifications-the experts being defendant's legal counsel and accountant, (2) provide the experts with complete and accurate information, and (3) make certain that reliance on the expert's advice is reasonably justified under the circumstances, in violation of ERISAs prudent man standard of care.

April 30, 2015

ERISA-First Circuit Rules That Administrator's Decision To Deny Benefits From A "Top Hat" Plan (Subject To ERISA) May Be Entitled To Deferential Review

In Niebauer v. Crane & Co., Inc., No. 14-2059 (1st Cir. 2015), a case arising under ERISA, plaintiff Robert Niebauer alleges, among other things, that the administrator of his former employer's executive severance plan denied him severance benefits, after erroneously determining that he had retired voluntarily from his position. The district court granted the defendants summary judgment on this allegation, and Niebauer appeals. In analyzing the case, the First Circuit Court of Appeals (the "Court") found that the plan administrator's decision to deny Niebauer's claim for benefits was both supported by substantial evidence and procedurally proper. Accordingly, the Court affirmed the district court's summary judgment on the benefits claim.

In this case, the executive severance plan (the "Plan"), which is a welfare benefit plan subject to ERISA, provided severance benefits to designated employees who have been involuntarily terminated. Employees who voluntarily leave the employer are entitled to benefits only if they do so for "good reason," which the Plan defines as certain changes to an employee's position, such as relocation, significant reduction in salary, or substantial changes to the employee's job responsibilities. The Plan reserves to the administrator -- here, the compensation committee of the employer's board of directors -- "full discretionary power and authority to construe, interpret and administer the Plan [and] to make Benefit Eligibility determinations." As an executive, Niebauer was covered by the Plan. After leaving employment, Niebauer filed a claim for severance benefits under the Plan, on the grounds of involuntary termination. The administrator found that his leaving was voluntary, and not for good reason, and therefore denied the benefits claim. This suit followed.

In affirming the district court's summary judgment on the benefits claim, the Court noted that where, as here, an ERISA plan-even a welfare benefit plan and specifically a "top hat" plan for executives as here - delegates to the plan administrator the discretion to construe the plan and determine eligibility for benefits under its provisions, a decision made under the plan will be upheld unless it was arbitrary, capricious, or an abuse of discretion. And here-since the administrator's decision to deny Niebauer benefits claim was supported by substantial evidence and procedurally proper- the Court held that the decision is not arbitrary, capricious or an abuse of discretion, and therefore must be upheld.

April 29, 2015

ERISA-Fifth Circuit Rules That A Hospital May Have Standing To Sue An Insurer Under ERISA For Unpaid Benefits

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") faced the issue of whether a hospital, North Cypress, has standing to sue an insurer, CIGNA, under ERISA for benefits CIGNA has not paid under health plans which it insures. North Cypress is an out-of-network provider under the health plans at issue (the "Plans"). Bills to insured patients from North Cypress for hospital services have two parts: the part the patient pays and the insurer pays. North Cypress developed a practice, under which it would discount the amount due from the patient, but would not reduce the amount paid by the insurer. Upon learning about this practice, with respect to patients who participate in the Plans, CIGNA refused to pay the full amount of its part of the bills. North Cypress sued CIGNA under ERISA for the amounts it owes under the bills. The district court ruled that the hospital does not have standing to bring this ERISA claim, and the North Cypress appeals.

In analyzing the case, the Court said that healthcare providers, such as hospital, may not sue in their own right to collect benefits under an ERISA plan, but may bring ERISA suits standing in the shoes of their patients. In this case, the hospital had received express assignments of rights from at least some of its patients. Here, the insurer argues that there is no injury in fact to patients-a requisite for standing under the Constitution- because they were not billed for the amount allegedly due from the insurance plans. But the assignment, at the time made, is for all amounts due from the Plans. The patients have the right to have the benefits paid in full, and this right does not disappear because of the assignment, so that the insurer's failure to pay causes injury. As such, the Court concluded that North Cypress has standing-under both the Constitution's minimum requirements and ERISA's statutory rules-to bring its claims under ERISA.

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.