April 2010 Archives

April 29, 2010

Employee Benefits-IRS Provides Guidance On Tax Treatment Of Health Care Benefits Provided To Children Under Age 27

The recent health care reform legislation, found in the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, signed into law by the President on March 23 and 30, 2010, respectively (for convenience, the "Act"), provides a tax exclusion for health care coverage provided to an employee's child who is under age 27. In Notice 2010-38, the Internal Revenue Service (the "IRS") provides guidance on this new tax exclusion. Here is what the Notice says:

Section 105(b) of the Internal Revenue Code (the "Code") generally excludes from an employee's gross income employer-provided reimbursements for medical care expenses of the employee, the employee's spouse or the employee's dependents. The Act amends section 105(b), effective as of March 30, 2010, so that this exclusion from gross income is extended to employer-provided reimbursements for the medical care expenses of the employee's child who has not attained age 27 as of the end of employee's taxable year in which the reimbursement is made. The exclusion is available without regard to whether the child is a "dependent", within the meaning of section 152 of the Code. For this purpose, "child" is defined under section 152(f)(1).

Section 106 of the Code excludes the cost of coverage under an employer-provided accident or health plan from an employee's gross income. Although the Act does not amend section 106, the IRS intends to amend the regulations under section 106, retroactively to March 30, 2010, to provide that the cost of coverage for an employee's child under age 27 is excluded from gross income.

Section 125 of the Code allows employees to elect between cash and certain qualified benefits, including accident or health plan coverage (described in section 106) and health flexible spending arrangements (health FSAs) (described in section 105(b)). A "qualified benefit" is generally any benefit which (with the application of section 125) is not includible in the employee's gross income. Accordingly, on and after March 30, 2010, a benefit will not fail to be a "qualified benefit" under a cafeteria plan (including a health FSA), merely because it provides coverage or reimbursements that are excludible under sections 106 and 105(b) for a child who has not attained age 27 as of the end of the employee's taxable year.

A cafeteria plan may permit an employee to revoke an election during a period of coverage, and to make a new election, only in limited circumstances, such as a change in status event. The IRS intends to amend the cafeteria plan regulations, effective retroactively to March 30, 2010, to include change in status events affecting children under age 27, including becoming newly eligible for coverage or eligible
for coverage beyond the date on which the child otherwise would have lost
coverage. The Notice contains a transitional rule for amending cafeteria plans to reflect the new rules.

In general, a health reimbursement arrangement (an "HRA") is an arrangement which is paid for solely by an employer (and not through a section 125 cafeteria plan), and which reimburses an employee for medical care expenses up to a maximum dollar amount for a coverage period. The same rules that apply to an employee's child under age 27 for purposes of sections 106 and 105(b), as described above, apply to an HRA.

Coverage and reimbursements under an employer-provided accident and health plan for employees and their dependents are generally excluded from wages for Federal Insurance Contributions Act ("FICA") and Federal Unemployment Tax Act ("FUTA"). For this purpose, any child of the employee (as defined under section 152(f)(1)) is a dependent. Thus, coverage and reimbursements under a plan for an employee's child under age 27 are not wages for FICA or FUTA purposes. Such coverage and reimbursements are also exempt from income tax withholding.

The Notice also provides guidance on payments made by VEBAs, 401(h) accounts in pension plans and self-employed individuals.

April 28, 2010

Employee Benefits-EBSA Updates Its COBRA Page To Reflect The COBRA Subsidy Extension Under The Continuing Extension Act of 2010

The recently passed Continuing Extension Act of 2010 has extended the 15-month, 65% COBRA subsidy, originally provided by the American Recovery and Reinvestment Act of 2009. Under this extension, an individual may qualify for the subsidy if he or she experiences a COBRA qualifying event, which is the involuntary termination of a covered employee's employment, at any time from September 1, 2008 through May 31, 2010. For this purpose, an involuntary termination of employment which occurs on or after March 2, 2010 but by May 31, 2010, and which follows a qualifying event that was a reduction of hours occurring at any time from September 1, 2008 through May 31, 2010, is also a qualifying event for purposes of an individual being eligible for the COBRA subsidy.

To help with the administration of the COBRA subsidy, the Employee Benefits Security Administration (the "EBSA") COBRA page now has available updated Model Notices, Application for Expedited Review of Denial of COBRA Premium Reduction, Fact Sheet, and Frequently Asked Questions (FAQs) that reflect the provisions of the Continuing Extension Act of 2010. The EBSA's COBRA page is here.

April 26, 2010

Employee Benefits -IRS Reminds Us That The April 30, 2010 Deadline For Adopting And Filing Pre-Approved Defined Contribution Plan Is Approaching

Here is what the Internal Revenue Service ("IRS") had to say (in the Winter 2010 edition of Retirement News for Employers) on this deadline for employers using pre-approved defined contribution plans:

The IRS wants to remind employers entitled to use the pre-approved plan six-year cycle
of an upcoming April 30, 2010, deadline to adopt the final approved version of the defined
contribution pre-approved plan and submit applications for determination letters, if applicable. Employers entitled to use the six-year remedial amendment cycle described in Revenue Procedure 2007-44 must generally adopt either a master and prototype (M&P) or volume submitter (VS) defined contribution plan approved by the IRS for EGTRRA and other plan qualification requirements on the 2004 Cumulative List by April 30, 2010, for the plan's restatement to be eligible for retroactive correction and reliance.

April 30, 2010, is also the filing deadline for employers who have adopted an M&P or VS defined contribution plan and need to file a determination letter request for reliance (in
other words, where the employer makes certain changes to the document) or otherwise
wish to file a request for a determination letter.

The IRS continues by providing some tips on filing for a determination letter when the employer has made changes to a pre-approved document for an M&P plan or a VS plan. This edition of Retirement News for Employers is here.

April 22, 2010

ERISA-Supreme Court Rules That Deferential Standard Of Review Applies To A Plan Administrator's Interpretation of the Plan, Even If An Earlier Interpretation Violated ERISA.

In Conkright v. Frommert, No. 08-810 (S. Ct. 2010), the United States Supreme Court faced the issue of when discretion must be given under ERISA to the decision made by a plan administrator.

In this case, the defendants are Xerox Corporation's pension plan (the "Plan") and the Plan's current and former administrators (the "Plan Administrator"). The plaintiffs are employees who left Xerox in the 1980's, received lump-sum distributions of their benefits under the Plan earned up to that point, and were later rehired. To account for the past distributions when calculating the plaintiffs' current benefits under the Plan, the Plan Administrator had first interpreted the Plan to apply the "phantom account" method (which generally calculates the hypothetical growth that an employee's past distributions would have experienced if the money paid out had remained invested in the Plan). After the Second Circuit Court of Appeals disagreed with that interpretation, the Plan Administrator changed its interpretation to account for the time value of money (using an interest rate fixed at the time of distribution as opposed to hypothetical investment). The Second Circuit again disagreed with the Plan Administrator's interpretation, failing to give it any deference, and the defendants appealed.

The Supreme Court ruled that, in this case, the Plan Administrator's second interpretation of the Plan-accounting for the time value of money- is subject to a deferential standard of review under ERISA. Under Firestone Tire & Rubber Co. v. Bruch, 489 U. S. 101 (1989), Metropolitan Life Ins. Co. v. Glenn, 554 U. S. ___ (2008) and the Plan's terms, the Plan Administrator here would normally be entitled to deference when interpreting the Plan. The Court of Appeals, however, crafted an exception to this deference, holding that a court need not apply a deferential standard when a plan administrator's first construction of the same plan terms was found to violate ERISA. The Supreme Court found no basis in prior cases or otherwise for this exception, rejecting this "one-strike-and-you're-out" approach. As such, it overturned the Second Circuits' decision and remanded the case.

April 19, 2010

Employee Benefits-COBRA Subsidy Extended Again!

Congress has passed, and the President has signed, the Continuing Extension Act of 2010 (the "2010 Extension Act"). This new Act once again extends the COBRA subsidy to individuals having an involuntary termination of employment on or before May 31, 2009. According to the Department of Labor's website (which has a link to the 2010 Extension Act), the subsidy is now available as follows:

The American Recovery and Reinvestment Act of 2009 (the "ARRA"), as amended by various acts including the 2010 Extension Act, provides for premium reductions, i.e., a subsidy, for health benefits under COBRA. Due to the subsidy, eligible individuals pay only 35 percent of their COBRA premiums and the remaining 65 percent is reimbursed to the coverage provider through a tax credit. To qualify for the subsidy, individuals must experience a COBRA qualifying event that is the involuntary termination of a covered employee's employment. The involuntary termination must generally occur during the period that began September 1, 2008 and ends on May 31, 2010. (An involuntary termination of employment that occurs on or after March 2, 2010 but by May 31, 2010 and follows a qualifying event that was a reduction of hours that occurred at any time from September 1, 2008 through May 31, 2010 is also a qualifying event for purposes of ARRA.) The subsidy applies to periods of health coverage that began on or after February 17, 2009 and lasts for up to 15 months.

April 14, 2010

Employment-Third Circuit Rules That Employers Could Be Required To Accommodate A Disabled Employee's Commuting Difficulties Under The ADA

In Colwell v. Rite Aid Corporation, No. 08-4675 (3rd Circuit 2010), the plaintiff, Jeanette Colwell, a former part-time retail clerk at a Rite Aid store in Pennsylvania, appealed the district court's summary judgment against her in her suit claiming disability discrimination.

The plaintiff had been diagnosed with "retinal vein occlusion and glaucoma in her left eye," and eventually became blind in that eye. Due to her blindness, the plaintiff asked to be assigned to the day shift, so she would not have to drive to or from work at night. However, Rite Aid continued to schedule the plaintiff for a mixture of day and night shifts. The plaintiff then resigned, and filed this lawsuit against Rite Aid, listing, among other claims, a violation of the Americans with Disabilities Act (the "ADA") for failure to accommodate the plaintiff's partial blindness.

In addressing the plaintiff's ADA claim, the Court found that the plaintiff was "disabled", within the meaning of the ADA. The question then became whether Rite Aid had a duty to accommodate her shift request. Rite Aid's the position (accepted by the district court) was that employers are not required to accommodate the inability to commute to work independently, because commuting falls outside the work environment. However, the Court disagreed, and held that, as a matter of law, changing the plaintiff's working schedule to day shifts in order to alleviate her disability-related difficulties in getting to work is a type of accommodation that the ADA contemplates. A jury must decide whether a shift change was a reasonable accommodation, and does not impose undue hardship in this particular case. As such, the Court reversed the district court's grant of summary judgment against the plaintiff as to Rite Aid's failure to accommodate plaintiff's disability, and remanded the case for further proceedings.

April 12, 2010

Employee Benefits/Tax-Still Time (3 Days) To Make IRA Contributions

IRA contributions aren't due until April 15. You can make contributions for 2009 to your traditional or Roth IRA, including "catch-up" contributions, up to the due date of your tax return (without extensions), normally April 15. The regular IRA contribution limit is $5,000 for 2009. You may also make a "catch-up" contribution to an IRA for 2009, up to $1,000, if you are age 50 or older by the end of 2009. Note that whether or not you are able to deduct all or a portion of your contributions (including a "catch-up" contribution) to a traditional IRA depends on your tax filing status, your income level and whether you or your spouse participate in an employer-sponsored, tax-favored retirement plan. Also, to be entitled to make any contribution to a Roth IRA (including a "catch-up" contribution), you must meet certain requirements. See the discussion in the Winter 2010 edition of Retirement News for Employers.

April 9, 2010

Employment-Seventh Circuit Upholds Termination Under Employer's "No-Fault Attendance Policy" Against Claim Of Retaliation Under The FMLA

Bailey v. Pregis Innovative Packaging, Inc., No. 09-3539 (7th Circuit 2010), presents some interesting matters under the Family and Medical Leave Act of 1993 (the "FMLA").

In this case, the defendant had fired the plaintiff because she had received more than 8 "points" for absenteeism during a 12-month period--a firing offense under the defendant's "no-fault attendance policy." The plaintiff claimed that she would not have received so many points had she not taken two absences in July 2006. She contends that these two absences were leaves that she was entitled to take under the FMLA, and if so, the defendant could not penalize her for taking them without violating the FMLA. The Court found that, in fact, she was not entitled to those leaves under the FMLA, since she had not worked enough hours before the leaves started (the FMLA requires at least 1,250 hours of service with the employer during the previous 12-month period, which the Court found that the plaintiff did not have). Nevertheless, the Court addressed the plaintiff's claim that her firing-due to the 8 point no-fault attendance policy-was proscribed retaliation for taking FMLA leave.

In reviewing this claim, the Court noted that a "point" under the employer's policy, which jeopardizes a worker's employment with the employer, is removed 12 months after it is imposed. The employer here does not count time on leave, including FMLA leave, toward the 12 months, that is, taking the FMLA leave tolls the 12 month period. Under the FMLA, taking FMLA leave cannot result in the loss of any employment benefit accrued prior to the date on which the leave commenced. The Court ruled that the removal of absenteeism points is an employment benefit, which the FMLA protects. However, the Court held that this does not help the plaintiff in the instant case, since the benefit did not accrue by the time the plaintiff's (claimed) FMLA leave started. Rather the benefit would accrue-if at all-12 months after the FMLA leave started (not counting the time on FMLA leave); until the end of this 12-month period, an employee would have no right to have any points removed. Thus, the plaintiff's retaliation claim fails.


April 8, 2010

Employment/Tax- IRS Provides Help For Claiming Special Payroll Tax Exemption For New Hires

According to IR-2010-43, dated April 7, 2010 (the "Announcement"), the Internal Revenue Service (the "IRS") has released a new form that will help employers claim the special payroll tax exemption that applies to many newly-hired workers during 2010. This exemption was created by the Hiring Incentives to Restore Employment ("HIRE") Act signed by President Obama on March 18.

The Announcement says that New Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, is now posted on IRS.gov, along with answers to frequently-asked questions about the payroll tax exemption and the related new hire retention credit. The new law requires that employers get a statement from each eligible new hire, certifying under penalties of perjury, that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for anyone during the 60-day period. Employers can use Form W-11 to meet this requirement.

Most eligible employers then use Form 941, Employer's Quarterly Federal Tax Return, to claim the payroll tax exemption for eligible new hires. This form, revised for use beginning with the second calendar quarter of 2010, is currently posted as a draft form on IRS.gov and will be released next month as a final along with the form's instructions. Though employers need the statement from the eligible new hire to claim both the payroll tax exemption and the new hire retention credit, employers do not file these statements with the IRS. Instead, they must retain them along with other payroll and income tax records.

The Announcement summarizes the provisions of the HIRE Act as follows. The HIRE Act created two new tax benefits designed to encourage employers to hire and retain new workers. As a result, employers who hire unemployed workers this year (after Feb. 3, 2010, and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from the employer's share of social security tax on wages paid to these workers after March 18. This reduction will have no effect on the employee's future Social Security benefits, and employers would still need to withhold the employee's 6.2-percent share of Social Security taxes, as well as income taxes. In addition, for each unemployed worker retained for at least a year, businesses may claim a new hire retention credit of up to $1,000 per worker when they file their 2011 income tax returns.

The Announcement says that these two tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives do not qualify for either of these tax incentives. Businesses, agricultural employers, tax-exempt organizations, tribal governments and public colleges and universities all qualify to claim the payroll tax exemption for eligible newly-hired employees. Household employers and federal, state and local government employers, other than public colleges and universities, are not eligible. IRS.gov has more details.

April 7, 2010

ERISA-Eleventh Circuit Rules That Employer's Absence Of Knowledge Causes Employee's Claims of FMLA Retaliation And Interference and ERISA Inteference To Fail

In Krutzig v. Pulte Home Corporation, No. 09-12512 (11th Circuit 2010), the plaintiff had been terminated from employment with her employer, the defendant, and had claimed that the termination was an act of retaliation and interference with her rights under the Family and Medical Leave Act ("FMLA") to take FMLA leave, and an act of interference with her request under ERISA for short-term disability benefits. The district court had entered summary judgment on those claims in favor of the defendant.

In analyzing the case, the Court said that a prima facie case of retaliation under the FMLA requires a showing that: (1) the employee engaged in statutorily protected conduct, (2) the employee suffered an adverse employment action, and (3) there is a causal connection between the two. The causal connection is established if a plaintiff shows that the protected activity and adverse action were not wholly unrelated, such as by showing that the decision maker was aware of the protected conduct at the time of the adverse employment action. Temporal proximity alone, however, is not sufficient to establish a causal connection, when there is unrebutted evidence that the decision maker was not aware of the protected activity. For this purpose, knowledge on the part of persons, e.g., supervisors, cannot be imputed to the decision maker. A prima facie case of an ERISA interference claim requires a similar showing.

The Court then said that the only issue presented in this case, with respect to the plaintiff's prima facie case of FMLA retaliation and ERISA interference, is whether the plaintiff created a question of material fact as to whether the decision maker was aware of her request for FMLA leave or short-term disability benefits before deciding to terminate her employment. Here, the employer/defendant offered affirmative, unrebutted evidence that the decision makers in question were not aware of these requests at the time of the termination. Thus, the Court ruled that the plaintiff failed to establish her prima facie cases of FMLA retaliation and ERISA interference, and upheld the summary judgment against her on those matters.

As to the plaintiff's claim of interference with her FMLA rights, the Court said that the right to take an FMLA leave is not absolute. An employee can be dismissed, preventing her from exercising her right to take FMLA leave, without thereby violating the FMLA, if the employee would have been dismissed regardless of any request for FMLA leave. In this case, the unrebutted evidence that the decision maker was not aware, at the time of the decision to terminate the plaintiff, of her request to take FMLA leave establishes as a matter of law that the plaintiff's termination was for reasons other than her requested leave. As such, the Court ruled that the plaintiff's FMLA interference claim fails, and upheld the summary judgment against her on that claim.

April 6, 2010

Employee Benefits/Tax-IRS Provides One Page On Its Webiste To Provide Information On The Small Business Health Care Tax Credit

As a follow-up to my blog of Friday, April 2, the IRS now provides on its website one page with information (with some provided by links) on the new health care tax credit for small employers. The information includes eligibility and qualification rules, amount of the credit, examples of how the credit applies and FAQs on the credit. The IRS's page with the health care tax credit information is here.

April 2, 2010

Employee Benefits/Tax: IRS Says That Tax Credit Helps Small Employers Provide Health Insurance Coverage

In IR-2010-38 (published April 1, 2010), the Internal Revenue Service (the "IRS") discusses the new tax credit available to small employers who provide health care coverage. Here is what the IRS said:

Many small businesses and tax-exempt organizations that provide health insurance coverage to their employees now qualify for a special tax credit. Included in the health care reform legislation, the Patient Protection and Affordable Care Act, approved by Congress and signed by President Obama on March 23, the credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.

The maximum credit is 35 percent of premiums paid in 2010 by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations. In 2014, this maximum credit increases to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible employers that are tax-exempt organizations.

The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low and moderate income workers. It is generally available to employers that have fewer than 25 full-time equivalent ("FTE") employees paying wages averaging less than $50,000 per employee per year. Because the eligibility formula is based in part on the number of FTEs, not the number of employees, many businesses will qualify even if they employ more than 25 individual workers.

The maximum credit goes to smaller employers -- those with 10 or fewer FTEs -- paying annual average wages of $25,000 or less. Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt employers, the IRS will provide further information on how to claim the credit. More information about the credit, including tax tips, guides and answers to frequently answered questions, is available on the IRS Web site, IRS.gov.