April 2013 Archives

April 30, 2013

Employee Benefits-IRS Provides Relief From The Anti-Cutback Requirements Of Section 411(d)(6) For Certain ESOP Amendments

In Notice 2013-17, the Internal Revenue Service (the "IRS") provides relief from the anti-cutback requirements of section 411(d)(6) of the Internal Revenue Code (the "Code") for plan amendments that eliminate a distribution option, described in section 401(a)(28)(B)(ii)(I) of the Code, from an employee stock ownership plan or "ESOP" which becomes subject to the investment diversification requirements of section 401(a)(35) of the Code.

By way of background, under section 401(a)(28)(B)(i), an ESOP must provide certain participants the opportunity to elect to direct the plan as to the investment of at least 25 percent of the participant's account. The election must be available to a participant during the 90-day period following the close of each plan year in the 6-plan-year period beginning with the first plan year in which the participant has both attained age 55 and completed 10 years of participation. Section 401(a)(28)(B)(ii)(I) allows an ESOP to satisfy the foregoing diversification requirements by distributing the portion of a participant's account that is covered by the election within 90 days after the period during which the election may be made. Section 401(a)(28)(B)(v) provides that the foregoing diversification requirements do not apply to plan which become subject to the diversification requirements, with respect to employer securities, of section 401(a)(35) of the Code.

Section 401(a)(35) was added to the Code by the Pension Protection Act of 2006. Unlike section 401(a)(28)(B), the section 401(a)(35) diversification requirements cannot be satisfied by distributing a portion of the participant's account. Section 401(a)(35) will apply to an ESOP if: (1) it holds employer securities that are readily tradable on an established securities market, and (2) either (i) it is not a separate plan for purposes of section 414(l) of the Code, but rather is a portion of a larger plan, or (ii) it holds contributions that are or were subject to section 401(k) or 401(m) of the Code. An ESOP described above must satisfy the diversification requirements of section 401(a)(35)) as of the section's effective date, that is, in plan years beginning after 2006 (or if later the first date on which section 401(a)(35) applies to the ESOP). If and when section 401(a)(35) becomes effective for and applies to an ESOP, the distribution option of section 401(a)(28)(B)(ii)(I) is no longer available. The issue becomes how to amend the ESOP to eliminate the option without violating the anti-cutback rules of section 411(d)(6). That is where Notice 2013-17 provides relief.

The Notice provides that the amendment to eliminate the section 401(a)(28)(B)(ii)(I) distribution option will not violate the anti-cutback rule, if: (1) the amendment is made effective no earlier than first day of the first plan year starting after 2006 (or if later the first date on which section 401(a)(35) applies to the ESOP), (2) the plan is operated as if the amendment was in effect as of the amendment's effective date and (3) the amendment is adopted by the last day of the first plan year beginning after 2012 (or if later by the deadline for adopting an "interim amendment" to reflect the requirements of section 401(a)(35)).



April 29, 2013

ERISA-Government Provides New Guidance On Summary Of Benefits And Coverage

The U.S. Department of Labor, the Department of Health and Human Services and the Treasury Department (together, the "Departments") have released FAQs about the Affordable Care Act Implementation Part XIV. These FAQs discuss the implementation of the Affordable Care Act. Here are some of the things that the FAQs said on the Summary of Benefits and Coverage (the "SBC").

The Templates For The SBCs And Uniform Glossary After The First Year Of Applicability. An updated SBC template (and sample completed SBC) are now available at cciio.cms.gov and www.dol.gov/ebsa/healthreform. These documents are authorized for use, with respect to group health plans, for SBCs provided with respect to coverage beginning on or after January 1, 2014, and before January 1, 2015 (referred to as "the second year of applicability"). The only changes to the SBC template and sample completed SBC from the previous templates are: (1) the addition of statements of whether the plan provides minimum essential coverage or "MEC" (as defined under section 5000A(f) of the Internal Revenue Code 1986) and (2) whether the plan meets the minimum value requirements or "MV Requirements" (such requirements being that the plan's share of the total allowed costs of benefits provided under the plan is not less than 60 percent of such costs). On page 4 of the SBC template (and illustrated on page 6 of the sample completed SBC), a plan should indicate in the designated entry on the SBC template that the plan "does" or "does not" provide MEC and whether the plan "does" or "does not" meet applicable MV requirements.

The Uniform Glossary has not changed-the current template may still be used.

Relief If It Is Burdensome To Make The Above Changes To An SBC. To the extent a plan is unable to modify the SBC template for disclosures required to be provided with respect to the second year of applicability, the Departments will not take any enforcement action against a plan for using the previous template, provided that the SBC is furnished with a cover letter or similar disclosure stating whether the plan does or does not provide MEC and whether the plan's share of the total allowed costs of benefits provided under the plan does or does not meet the MV requirement under the Affordable Care Act. The language for these statements is as follows:

Does this Coverage Provide Minimum Essential Coverage?

The Affordable Care Act requires most people to have health care coverage that qualifies as "minimum essential coverage." This plan or policy [does/does not] provide minimum essential coverage.

Does this Coverage Meet the Minimum Value Standard?

In order for certain types of health coverage (for example, job-based coverage) to qualify as minimum essential coverage, the plan must pay, on average, at least 60 percent of allowed charges for covered services. This is called the "minimum value standard." This health coverage [does/does not] meet the minimum value standard for the benefits it provides.

Annual Limits On Essential Health Benefits. No changes were made to the templates for the SBC (and sample completed SBC) to reflect the prohibition on annual limits on essential health benefits that becomes effective under the Affordable Care Act in 2014. Rather, plans should continue to complete the SBC template consistent with the Instructions for Completing the SBC for the Important Questions chart that appears on page 1 of the SBC:
• In the Answers column, the plan should respond "No," where the template asks, "Is there an overall annual limit on what the plan pays?", as plans are generally prohibited from imposing annual limits on the dollar value of essential health benefits for plan years beginning on or after January 1, 2014.
• In the Why This Matters column, the plan must show the following language: "The chart starting on page 2 describes any limits on what the plan will pay for specific covered services, such as office visits."

Additionally, as applicable, plans should continue to include information regarding annual or lifetime dollar limits on specific covered benefits as required in the chart starting on page 2 of the SBC (in the Limitations & Exceptions column, as described in the Instructions for Completing the SBC). To the extent a plan wishes to modify the SBC template for disclosures required to be provided for the second year of applicability to remove this information, the Departments will not take any enforcement action against a plan for removing the entire row in the Important Questions chart on page 1 of the SBC (with the question: "Is there an overall annual limit on what the plan pays?").

Other Information:

--There are no changes in the required coverage examples in the SBC.

--The use of certain safe harbors and other enforcement relief pertaining to the SBC and Uniform Glossary have been extended.
--The "anti-duplication" rule for SBCs (i.e., the SBCs need not be provided by both the plan and its insurer) is extended to student health insurance coverage.

April 26, 2013

Employment -Eighth Circuit Rules That An Injured Employee Who Could Not Obtain Required Medical Certification Could Not Perform An Essential Job Function

In Knutson v. Schwan's Home Service, Inc., No. 12-2240 (8th Cir. 2013), the plaintiff, Jeffrey D. Knutson ("Knutson"), had brought suit against the defendant , Schwan's Home Service, Inc.("Home Service"), alleging that Home Service had terminated his employment in violation of the Americans with Disabilities Act (the "ADA"). The district court had granted summary judgment to Home Service, and Knutson appealed.

In this case, Knutson had been manager at Home Service, who was sometimes required to drive a delivery truck. As to his truck driving responsibilities, Home Service's position description states that Knutson must meet the Federal Department of Transportation ("DOT") eligibility requirements, including obtaining an appropriate driver's license and a corresponding medical certification (an "MEC"). Knutson suffered a penetrating eye injury, and thereafter was unable to obtain an MEC or waiver thereof. Home Service later fired him. This suit ensued.

In analyzing the case, the Eighth Circuit Court of Appeals (the "Court") said that, to establish a prima facie case under the ADA, Knutson was required to show that he was disabled within the meaning of the ADA, was qualified to perform the essential functions of his job, and suffered an adverse employment action because of his disability. The Court determined that Knutson was not qualified to perform his job's essential functions. No genuine issue of material fact exists that being DOT qualified to drive a delivery truck is an essential function of Knutson's position. The Home Service position description indicates that such qualification is an essential job function. Since he could not obtain an MEC after the eye injury - and therefore was not DOT qualified after the injury - he was not qualified to perform an essential job function. As such, the Court affirmed the district court's summary judgment in Home Service's favor

April 24, 2013

ERISA-Seventh Circuit Affirms Dismissal Of Stock Drop Case

ERISA-Seventh Circuit Affirms Dismissal Of Stock Drop Case

In White v. Marshall & Ilsley Corporation, No.11-2660 (7th Cir. 2013), the Seventh Circuit Court of Appeals (the "Court") faced a "stock drop case", that is, a case in which the plaintiff alleged that the fiduciaries of an employee retirement savings plan acted imprudently-thereby violating ERISA's fiduciary requirements- by allowing participating employees to choose to buy and hold an employer's stock while it declined significantly in price.

The Court said of such cases: In the absence of allegations of misrepresentations or other wrongful conduct not alleged here, plaintiffs in such cases under ERISA must try to hit a very small and perhaps non-existent target. The theory -- that the employer and plan fiduciaries violated their duty of prudence under ERISA by continuing to offer employer stock as an investment option -- would require the employer and plan fiduciaries, in this case and many similar cases, to violate the retirement plan's governing documents, which employers and plan fiduciaries are also required to follow under ERISA. The theory also seems to be based often on the untenable premise that employers and plan fiduciaries have a fiduciary duty either to outsmart the stock market, which is groundless, or to use insider information for the benefit of employees, which would violate federal securities laws.

In this particular case, defendant Marshall & Ilsley Corporation ("M&I") offered its employees participation in an individual account retirement savings plan (the "Plan"). The Plan allowed employees to choose how to distribute their savings among twenty two investment funds with different risk and reward profiles. With one exception, the investment funds offered by the Plan were selected by the Plan's fiduciaries. One of the investment options in the Plan was the M&I Stock Fund which consisted of M&I stock. The Plan required the fiduciaries to offer this fund to the participants for investment. The portion of the Plan holding the M&I Stock Fund constitutes an employee stock ownership plan or "ESOP". During the housing market collapse and subsequent market crash in 2008 and 2009, M&I's stock price dropped by approximately 54 percent, as did the value of employees' investments in the M&I Stock Fund. This suit followed. Applying a presumption that the fiduciaries acted prudently, the district court dismissed the case. The plaintiffs appealed.

In reviewing the case, the Court agreed that the presumption of prudence-the so-called "Moench presumption"- applies. Plaintiffs in a case involving an ESOP may overcome this presumption by showing that no reasonable fiduciaries would have thought they were obligated to continue offering company stock as a Plan investment. For example, the plaintiffs could show that the company was facing dire circumstances or was nearing collapse, or that, given all relevant circumstances, continuing to offer company stock as a Plan investment imposed excessive risk on the plaintiffs. The Court ruled, however, that in this case the plaintiffs did not offer sufficient evidence to overcome the Moench presumption. The 54 percent drop in M&I's stock is not significantly worse than drops in stock prices in cases where the courts have found, as a matter of law, no violation of the duty of prudence. Also, the Plan permitted employees to choose from among twenty two options and allowed them to change their investments at any time, mitigating any excessive risk.

The Court said, further, that it agreed with the Second, Third, and Eleventh Circuits that a claim against ESOP fiduciaries alleging a violation of the duty of prudence may be dismissed at the pleading stage-the current stage of this case-if the plaintiffs do not make allegations sufficient to overcome the Moench presumption . Accordingly, the Court affirmed the district court's dismissal of the case.
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April 23, 2013

Employment-Third Circuit Holds That Termination Of Employment For Dishonesty On The Employment Application About History Of Dug Addiction Does Not Violate The ADA

In Reilly v. Lehigh Valley Hospital, No. 12-2078 (3rd Cir. 2013), the plaintiff, Robert Reilly ("Reilly"), was appealing the district court's grant of summary judgment in favor of the defendant, Lehigh Valley Hospital ("LVH"), on Reilly's disability discrimination claims under the Americans with Disabilities Act (the "ADA") and similar state law.

In this case, Reilly was employed by LVH as a part-time Security Officer from August 2006, until May 2, 2008. After receiving a conditional employment offer, Reilly completed and signed a six-page employee health information form (the "Employment Form") as part of LVH's hiring process. The final two questions on the Employment Form inquired as to whether Reilly had ever been recognized as having, or had ever been treated for, alcoholism or drug addiction. Reilly answered "no" to both questions. He signed the Employment Form, subject to the condition that falsifying of this information could result in withdrawal of the employment offer or if subsequently discovered termination of his employment.

Reilly subsequently disclosed to LVH that he has a history of narcotics use and is a recovering drug addict. On May 2, 2008, LVH terminated Reilly's employment, on the basis of his being untruthful about prior drug addiction on the Employment Form. Reilly subsequently brought this suit against LVH, alleging disability-based employment discrimination in violation of the ADA and similar state law. After reviewing the case, the Third Circuit Court of Appeals (the "Court") concluded LVH articulated a legitimate, nondiscriminatory reason for terminating Reilly - his dishonesty on the Employment Form - and Reilly failed to produce sufficient evidence to show that this reason was pretextual and a cover for discrimination. As such, the Court affirmed the district court's summary judgment in LTV's favor.

April 22, 2013

Employee Benefits-IRS Establishes A Program For Pre-Approved 403(b) Plans

The Internal Revenue Service ("IRS") has issued Revenue Procedure 2013-22. Under this Rev. Proc., a qualifying employer-generally a 501(c)(3) tax-exempt entity, public school or state or local government- may adopt a pre-approved document for its 403(b) plan. The employer may rely on this document to meet the "written plan requirement" for 403(b) plans and to otherwise have a document which complies with IRC Sec. 403(b) in form. Employers will still not be able to obtain IRS approval (i.e., a determination letter) for individually designed 403(b) plans.

The pre-approved 403(b) plan document will be either a prototype plan or a volume submitter plan. The plan sponsor who creates the document will be responsible for obtaining IRS approval. The approval will be in the form of an opinion letter for a prototype plan and an advisory letter for a volume submitter plan. Application for IRS approvals may be made from June 28, 2013 through April 30, 2014.

According to the IRS website, the Rev. Proc. establishes the new program of IRS approval and explains certain:
• requirements that pre-approved 403(b) plans must satisfy,
• responsibilities of pre-approved plan sponsors,
• procedures for applying for opinion and advisory letters, and
• conditions under which an eligible employer that adopts a pre-approved 403(b) plan has reliance that the form of the plan meets IRC section 403(b) and the final 403(b) regulations.

The Rev. Proc. also describes procedures for the retroactive remedial amendment of plans to satisfy the requirements of IRC Section 403(b) and the regulations. These procedures will permit the retroactive remedial amendment of 403(b) plans regardless of whether a plan is a pre-approved plan under the new program.

April 19, 2013

ERISA-Seventh Circuit Finds That Insurer Is Not An ERISA Fiduciary

In Leimkuehler v. American United Life Insurance Co., Nos. 12-1081, 12-1213 & 12-2536 (7th Cir. 2013), the plaintiffs brought suit against American United Life Insurance Company ("AUL"). AUL is an Indiana-based insurance company, which offers investment, record-keeping, and other administrative services to the Leimkuehler, Inc.Profit Sharing Plan (the "Plan"), in which the plaintiffs participate. The plaintiffs alleged that AUL had benefited, at the expense of the Plan, by participating in "revenue sharing", a practice by which mutual funds in which the Plan had invested were sharing a portion of the fees they collect from investors with AUL for the recordkeeping services AUL was performing. The plaintiffs claimed that this benefit violates ERISA. However, the district court ruled that AUL was not a fiduciary of the Plan, with respect to AUL's revenue-sharing participation, so that no ERISA violation had occurred. The plaintiffs appeal.

The Seventh Circuit Court of Appeals (the "Court") agreed with the district court that AUL was not an ERISA fiduciary of the Plan when it made decisions about, or engaged in, revenue sharing. Therefore, it affirmed the district court's ruling. In analyzing the case, the Court said that AUL is a fiduciary with respect to the Plan to the extent it: (i) exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or control respecting management or disposition of its assets, (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of the Plan, or has any authority or responsibility to do so, or (iii) has any discretionary authority or discretionary responsibility in the administration of the Plan (see section 3(21)(A) of ERSA).

In this case, only clause (i) is potentially applicable. The Court concluded that AUL is not a fiduciary under clause (i), at least with respect to the revenue sharing. AUL had selected the funds to be included in the Plan's investment menu. However, such selection, without more, does not give rise to a fiduciary responsibility, both because limiting the funds in the investment menu does not automatically create discretionary control sufficient for fiduciary status, and-here-another person had final say on fund selection. Other than limiting the funds, all AUL did was provide recordkeeping services for Plan accounts. Those services did not involve any exercise of authority or control over the revenue sharing.

April 18, 2013

ERISA-Supreme Court Rules That Health Plan May Obtain Reimbursement Of Expenses It Has Paid When Injured Employee Collects Amounts From A Third Party For The Injury , Despite Employee's Equitable Defenses To The Reimbursement

In US Airways, Inc. v. McCutchen, No. 11-1285 (U.S. Supreme Court 2013), the Supreme Court (the "Court") faced the following situation. The health benefits plan established by plaintiff US Airways had paid $66,866 in medical expenses for injuries suffered by defendant McCutchen, a US Airways employee, in a car accident caused by a third party. The plan entitled US Airways to reimbursement if McCutchen later recovered money from the third party. McCutchen's attorneys secured $110,000 in payments, and McCutchen received $66,000 after deducting the lawyers' 40% contingency fee. US Airways demanded reimbursement of the full $66,866 it had paid. When McCutchen did not comply, US Airways filed suit under §502(a)(3) of ERISA. That section authorizes health-plan administrators to bring a civil action "to obtain . . . appropriate equitable relief . . . to enforce . . . the terms of the plan."

The Court had ruled in an earlier case, Sereboff v. Mid Atlantic Medical Services, Inc., that a health-plan administrator- like US Airways- may enforce a reimbursement provision in a plan by filing suit under §502(a)(3). The question for the Court in this case: may the defendant raise equitable defenses? Here, the defendant has attempted to raise two such defenses, derived from the principles of unjust enrichment: (1) absent over recovery on McCutchen's part, US Airways' right to reimbursement did not kick in and (2) US Airways had to contribute its fair share to the costs McCutchen incurred to get his recovery, so any reimbursement had to be reduced by 40%, to cover the contingency fee.

As to defense (1), the Court said that in a §502(a)(3) action, based on an equitable lien by agreement created-as here- by a provision authorizing reimbursement in a plan subject to ERISA, the plan's terms govern. Neither general unjust enrichment principles nor specific doctrines reflecting those principles--such as the double-recovery (insurer reimbursement limited to amount of medical expenses incurred and covered by the insurance) or common-fund rules (reasonable attorney's fees may be paid out of funds collected)--can override the applicable contract. Thus defense (1) fails. As to defense (2), while equitable rules cannot trump a plan's reimbursement provision, they may aid in properly construing it. US Airways' plan is silent on the allocation of attorney's fees between the plan and participant, and the equitable common fund doctrine provides the appropriate default rule to fill that gap. The plan's reimbursement provision precludes looking to the equitable double-recovery rule, because it provides an allocation formula that expressly contradicts that rule. By contrast, the plan says nothing specific about how to pay for the costs of recovery. Given that contractual gap, the common-fund doctrine provides the best indication of the parties' intent. The Court remanded the case, for the lower court to determine exactly how to apply the plan's reimbursement provision in this case.

April 17, 2013

ERISA-Seventh Circuit Rules That The Fund's Interpretation Of The Term "Full-Time Employment" Is Reasonable, So That Its Decision To Terminate Disability Benefits Based On This Term Must Be Upheld

In Tompkins v. Central Laborer's Pension Fund, No. 12-1995 (7th Cir. 2013), the Central Laborers' Pension Fund (the "Fund") had terminated Donald J. Tompkins's disability benefits because he became employed full-time and, therefore, no longer had a "total and permanent disability." Tompkins had brought this suit under ERISA, challenging the Fund's interpretation of its definition of "total and permanent disability." The question for the Seventh Circuit Court of Appeals (the "Court"): Should the Fund's interpretation be upheld?

In this case, Tompkins had filed an application for a disability pension from the Fund based on chronic asthmatic bronchitis, which he attributed to working with cement dust for twenty-two years. His application was approved by the Fund. The plan document for the Fund defined "total and permanent disability" as follows:

A Total and Permanent Disability shall mean that the Employee is totally and permanently. . . unable to engage in further employment or gainful pursuit of non-Laborer . . . employment for which the employment is considered full-time and a primary source of income. For such non-Laborer . . . employment, . . . the Participant may earn up to $14,000 per calendar year in non-Laborer . . . employment and be considered totally and permanently disabled . . . .

Tompkins received monthly disability benefits from the Fund through May 2007. In June, the Fund sent him a letter suspending his disability pension. The letter stated that Tompkins's full-time employment at a company named Wilman Construction in 2005 and 2006 led the Fund to believe that he no longer met the Fund's definition of "total and permanent disability". According to the letter, the Fund found that Tompkins began working forty hours per week beginning in July 2005 and earned $10,550 that year and $22,100 in 2006. The letter informed Tompkins that he had been overpaid $48,654.89 in benefits from July 2005 through May 2007 and that the Fund would seek to recover that amount through its recovery process.

In analyzing the case, the Court noted that a court reviews the denial of ERISA benefits de novo, unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan. The Court ruled that the plan document for the Fund gave its trustees such discretionary authority, so that the Fund's interpretation of the term "total and permanent disability" must be reviewed under the arbitrary or capricious standard.

Next, the Court said that, according to the Fund, the definition of "totally and permanently disabled" -admittedly ambiguous-should be interpreted to prohibit a totally and permanently disabled participant from engaging in full-time non-laborer employment. The $14,000 threshold applies only in the case of part-time employment. Under this interpretation, since the Fund found that Tompkins had been working in non-laborer employment full time (the employment with Wilman Construction apparently being of this nature), the $14,000 threshold does not apply to him. This employment means that he has ceased to be totally and permanently disabled, justifying the suspension of his disability pension. The Court ruled that this interpretation of the Fund's terms was not arbitrary or capricious. It rests on a reasoned understanding of "total and permanent disability", in the face of the language's ambiguity: once a participant is engaged in full-time employment, regardless of how much he makes, he is no longer totally and permanently disabled. As such, the Court upheld the Fund's interpretation and its suspension of the benefits.

April 16, 2013

Thoughts For Today

No blog today. My thoughts and prayers go out to all affected by the Boston bombings.

April 15, 2013

Employee Benefits-IRS Discusses The Exclusive Plan Requirement As It Applies To The Establishment Of SIMPLE IRA Plans

In Employee Plans News, Issue 2013-1, February 13, 2013, the IRS faced the following question: Our company has a calendar-year profit-sharing plan that we are terminating. The contribution for 2012 to the profit-sharing plan will be allocated as of December 31, 2012, but won't be deposited until 2013. We set up a SIMPLE IRA plan effective January 1, 2013. Do we meet the exclusive-plan requirement for SIMPLE IRA plans? The IRS responded as follows:

Yes, your company may have a SIMPLE IRA plan for 2013 if you:

• met the other SIMPLE IRA plan requirements (for example, giving notice to your employees before their 60-day election period); and

• don't allocate any profit-sharing contribution to your employees for 2013. (Your profit-sharing contribution that will be allocated as of December 31, 2012, is a contribution for 2012, although it will be deposited in 2013.)

Exclusive-plan requirement. Generally, an employer can't make SIMPLE IRA plan contributions for a calendar year if the employer (or its predecessor) has a qualified plan (other than the SIMPLE IRA plan) under which any employee:

• receives an allocation of contributions in a defined contribution plan, or

• has an increase in a benefit accrued in a defined benefit plan,
for a plan year of the qualified plan that begins or ends in that calendar year.

Internal Revenue Code Section 408(p)(2)(D) contains both the exclusive-plan requirement and also exceptions for other plans in which:

• The only participants in the other plans are employees covered by a collective bargaining agreement (IRC Section 408(p)(2)(D))

• The other plans result from the employer's involvement in an acquisition, disposition or similar transaction (IRC Section 408(p)(10))

Examples.

Calendar-year plan made contributions for later year

If you make a contribution in 2013 to the profit-sharing plan that is based on employees' compensation for any part of 2013, then:

• your employees will receive an allocation of profit-sharing contributions for 2013, and

• you can't have a SIMPLE IRA plan for 2013.

Non-calendar-year plans

For non-calendar-year profit-sharing plans, you have to consider 2 years in determining whether employees receive an allocation of contributions. You can't have a SIMPLE IRA plan for either the 2012 or 2013 calendar year if:

• your profit-sharing plan year runs from July 1, 2012 - June 30, 2013, and

• any employee receives an allocation of contributions for the plan year ending June 30, 2013.

April 12, 2013

Employment-Sixth Circuit Rules That Performing Physical Restraint On Detained Juveniles Is An Essential Job Function Under the ADA

In Wardia v. Department of Juvenile Justice, No. 12-5337 (6th Cir. 2013) (Unpublished Opinion), the plaintiff, John Wardia ("Wardia"), had brought suit against the defendant, the Department of Juvenile Justice (the "Department"), for wrongful termination under the Americans with Disabilities Act (the "ADA"). The district court granted summary judgment to the Department, and Wardia appealed.

In this case, Wardia had been terminated from his position as a Youth Worker at the Campbell County Regional Juvenile Detention Center, after an injury prevented him from performing physical restraint on detained juveniles. Wardia had argued in the district court that physical restraint of juveniles, in practice, was not an essential function of the job, and that the Department had unreasonably refused to grant him the permanent accommodation of a job in the facility control room.

In analyzing the case, the Sixth Circuit Court of Appeals (the "Court") implicitly applied the rule that a former employee cannot prevail in a claim for wrongful termination under the ADA, if the employee's disability prevented him or her from performing an essential function of the job even with a reasonable accommodation. The Court said that official Department policy treats the ability to perform physical restraints of juveniles as an essential function of Youth Workers. The written job description specifically lists performing restraints as one of the essential functions of the job, and Youth Workers are required to undergo safe-physical-management-skills training for three months upon entry and on an ongoing monthly basis. Thus, without reasonable accommodation, Wardia cannot do one essential functions of his job.

Further, the Court said that Wardia did not identify any reasonable accomodation that would help him. Having other employees assist him whenever restraint is required is not a reasonable accommodation, since the ADA does not require employers to accommodate individuals by shifting an essential job function onto others. Also, assignment to the facility control room is not the type of accommodation that an employer is required to provide under the ADA-it is a light-duty, temporary or rotating position and employers cannot be required to convert either rotating or temporary positions into permanent positions under the ADA. Thus, the Court affirmed the district court's summary judgment in favor of the Department.


April 11, 2013

Employment-Seventh Circuit Rules That Liability For Overtime Pay Under the FLSA Is Transferred To Buyer In An Asset Sale

In Teed v. Thomas & Betts Power Solutions, L.C.C., Nos. 12-2440, 12-3029 (7th Cir. 2013), the defendant was Thomas & Betts Power Solutions, L.C.C. ("Thomas & Betts"). Its parent company, the Thomas & Betts Corporation, had bought the assets of the plaintiff's employer, and placed them in Thomas & Betts. Due to such activity, the plaintiffs brought this suit, seeking damages for the employer's alleged violations of their rights under the Fair Labor Standards Act (the "FSLA"). The question for the Seventh Circuit Court of Appeals (the "Court"): whether Thomas & Betts may be held liable, by virtue of the doctrine of successor liability, for the damages owed the plaintiffs under the FLSA.

In analyzing this question, this Court said that, when a company is sold in an asset sale as opposed to a stock sale, the buyer acquires the company's assets but not necessarily its liabilities; whether or not it acquires them is the issue of successor liability. Most states limit such liability, with exceptions irrelevant to this case, to sales in which a buyer (the successor) expressly or implicitly assumes the seller's liabilities. Wisconsin, the state whose law would apply if the underlying claim were based on state law, is such a state. But when liability is based on a violation of a federal statute relating to labor relations or employment, a federal common law standard of successor liability is applied that is more favorable to plaintiffs than most state-law standards to which the court might otherwise look. What happens, then, when the alleged liability is based on the FLSA.

The Court concluded that the successor liability rules transfer damages under the FLSA to the buyer in an asset sale. This obtains, the Court said, because successor liability is appropriate in suits to enforce federal labor or employment laws--even when, as here, the successor disclaimed liability when it acquired the assets in question--unless there are good reasons to withhold such liability. Lack of notice of potential liability or insolvency of the original employer are examples of such reasons. But there were no such reasons that factored into the instant case. As such, the Court ruled that Thomas & Betts may be held liability for the damages owed to the plaintiffs under the FLSA.

April 10, 2013

Executive Compensation-Court Of Federal Claims Confirms That IRC Sec. 409A Applies To The Exercise Of A Discounted Stock Option

In Sutardja v. United States, No. 11-724T (Court of Federal Claims 2013), the Internal Revenue Service (the "IRS") had determined that the exercise by Dr. Sehat Sutardja (" Dr. Sutardja") of nonqualified stock options granted by his company, Marvell Technology Group Limited, was subject to an additional tax and interest under IRC section 409A. Section 409A provides for a 20 percent surtax plus interest on amounts received under a nonqualified deferred compensation plan, if certain conditions exist. The IRS sought to apply the additional tax and interest on the grounds that stock option arrangement did not comply with section 409A.

In analyzing the case, the Court noted that, at the date of grant, the stock options did not have a readily ascertainable market value. As such, the stock options were not taxable at grant or upon vesting. Further, if the option exercise price was set at or above fair market value at the time of the grant, section 409A taxation would be inappropriate even upon exercise. But does section 409A apply to discounted stock options when exercised (the "discount" being an exercise price set below the fair market value on date of grant)? The Court concluded that the answer is yes, since:

--a nonqualified stock option constitutes deferred compensation, which is subject to section 409A (the FICA rules for defining deferred compensation do not apply);

--the taxpayer obtained a legally binding right (under applicable state law, here California) to the compensation at the time the stock options vested, thus creating the right to deferred compensation; and

-- the "short term deferral exception" to section 409A does not apply-at least not here- as nothing required the taxpayer to exercise the stock options within 2 and ½ months after the year of vesting.

The Court ordered a trial on the issue of whther the stock options had in fact been discounted.

April 9, 2013

Employment-Second Circuit Rules That The District Court Needs To Conduct A Factual Analysis To Determine If Timely Arrival At Work Is An Essential Job Function

In McMillan v. City of New York, Docket No. 11-3932 (2nd Cir. 2013), the plaintiff, Rodney McMillan, was appealing the district court's summary judgment in favor of the City of New York ("New York") on McMillan's disability discrimination and failure to accommodate claims under the Americans with Disabilities Act of 1990 (the "ADA").

In analyzing the case, the Second Circuit Court of Appeals (the "Court") said that it was undisputed that McMillan's severe disability- schizophrenia- required treatment that prevented him from arriving to work at a consistent time each day. In many, if not most, employment, a timely arrival is an essential function of the position, and a plaintiff's inability to arrive on time would result in his failure to establish a fundamental element of a prima facie case of employment discrimination.

Here, however, drawing all reasonable inferences in McMillan's favor--as the Court must at the summary judgment stage--it is not evident that a timely arrival at work is an essential function of McMillan's job, so long as he is able to offset the time missed due to tardiness with additional hours worked to complete the actual essential functions of his job. The problem according to the Court: the district court did not conduct a sufficiently detailed analysis of the facts that tend to undermine New York's claim that a specific arrival time is an essential function of McMillan's position before granting summary judgment. As such, the Court overturned the district court's summary judgment, and remanded the case back to the district court.

April 8, 2013

Executive Compensation-IRS Issues Proposed Regulations On IRC Section 162(m)(6) $500,000 Limit On The Annual Deduction For Compensation Paid To An Individual By A Health Insurance Company

The Internal Revenue Service (the "IRS") has issued proposed regulations on the $500,000 limit under IRC section 162(m)(6) on the annual deduction for compensation paid to an individual by a covered health insurance provider. A "covered health insurance provider" is, generally, an insurance company for which at least 25% of its gross premiums are for minimum essential health care coverage. An employer may rely on the proposed regulations until final regulations are issued. The proposed regulations are over 100 pages long. In sum, the proposed regulations provide the following:

In General. For taxable years beginning after 2012, section 162(m)(6) limits to $500,000 the allowable deduction for the aggregate individual remuneration and deferred deduction remuneration attributable to services performed by an individual for a covered health insurance provider in a taxable year beginning after 2012 which (but for section 162(m)(6)) is otherwise deductible for federal income tax purposes. "Individual remuneration" is pay for services that is not deferred deduction remuneration . "Deferred deduction remuneration" is pay for services that is deductible in a future taxable year.

Tax Years Starting Before 2013. Deferred deduction remuneration attributable to services performed in a taxable year beginning after 2009 and before 2013, which otherwise becomes deductible in a taxable year beginning after 2012, is also subject to the $500,000 deduction limit, determined as if the deduction limit applied to taxable years beginning after 2009.

How The Limit Works. If individual remuneration, deferred deduction remuneration, or a combination of the two that is attributable to services performed by an individual for a covered health insurance provider in a taxable year: (1) exceeds $500,000, the excess is not allowable as a deduction in any taxable year or (2) is less than $500,000, the remuneration generally may be deducted by the covered health insurance provider in the taxable year(s) in which the amount is otherwise deductible.

Example: In Year 1, a covered health insurance provider pays $400,000 in salary (individual remuneration) to an individual. It also credits $300,000 to an account for the individual under a nonqualified deferred compensation plan, which is payable in Year 5 (deferred deduction remuneration). The $300,000 credit is fully vested in Year 1 and is attributable to services provided by the individual in that year. In Year 1, the covered health insurance provider may deduct the $400,000 of individual remuneration, since this amount is less than the $500,000 deduction limit. In Year 5, the covered health insurance provider pays the $300,000 that was credited under the nonqualified deferred compensation plan for services provided by the individual in Year 1. Because the aggregated individual remuneration and deferred deduction remuneration attributable to services performed by the individual in Year 1 exceeds the $500,000 deduction limit by $200,000 ($400,000 + $300,000 = $700,000), the covered health insurance provider can deduct only $100,000 of the $300,000 payment in year 5, and the remaining $200,000 is not deductible by the covered health insurance provider in any year.

April 5, 2013

Employee Benefits-Play or Pay Requirements and Controlled or Affiliated Groups

Think about the Play or Pay Rules, which become effective in 2014. In determining whether a particular employer meets the 50 employee threshold for being subject to Play or Pay, all employers that belong to a "Controlled or Affiliated Group" are combined and treated as being a single employer. Of course, that raises the question of exactly what is a "Controlled or Affiliated Group". To provide some guidance, I have written a paper on this topic. Call or contact me if you would like a copy of this paper.

April 4, 2013

ERISA-Second Circuit Rules That Insurer Could Bring Claim For Restitution Of Overpaid Disability Benefits Under Section 502(a)(3) Of ERISA

In Thurber v. Aetna Life Ins. Co., Docket Nos. 12-370-cv (Lead), 12-521-cv (XAP) (2nd Cir. 2013), the plaintiff, Sharon Thurber ("Thurber") was appealing a decision of the district court granting summary judgment to the defendant, Aetna Life Insurance Company ("Aetna"), on Thurber's claim that Aetna had improperly denied her request for long-term disability ("LTD") benefits. Also, Aetna was appealing the district court's denial of its counterclaim against Thurber for equitable restitution of overpaid short-term disability ("STD") benefits.

In this case, Thurber had been covered at work by a disability benefits plan (the "Plan"), administered by Aetna. Under the Plan, Thurber was entitled to LTD benefits if a disabling condition rendered her unable to perform the material and substantial duties of her occupation. After being in two car accidents in which her legs were injured, Thurber left work and filed a claim for LTD benefits under the Plan on the grounds that she could no longer sit or walk as required by her job. Aetna denied the claim for LTD benefits, on the basis that she could still perform her job. Thurber brought this suit, seeking the LTD benefits under section 502(a)(1)(B) of ERISA. Although it had denied the claim for LTD benefits, Aetna had paid Thurber $7,213.92 in STD benefits under the Plan, when Thurber had also received this amount in no fault insurance benefits. Aetna asked the district court to order Thurber to repay the STD benefits, as equitable restitution, under section 502(a)(3) of ERISA.

In analyzing the case, the Second Circuit Court of Appeals (the "Court") noted that Aetna's decision to deny Thurber's claim for LTD benefits must be reviewed under an arbitrary and capricious standard, if the Plan gives Aetna discretionary authority to determine a participant's eligibility for benefits. Under this standard, Aetna's decision will be overturned only if it is without reason, unsupported by substantial evidence or erroneous as a matter of law. The Court found that both the Plan and its summary plan description (the "SPD") included language giving Aetna the discretion needed to entitle Aetna to the arbitrary and capricious review. For example, the Plan provides Aetna with "discretionary authority to: determine whether and to what extent employees and beneficiaries are entitled to benefits." The Court said that Aetna is entitled to the arbitrary and capricious standard of review, even if Thurber had not received a copy of the Plan or the SPD. The Court then said that, under this review standard, based on the case record, Aetna's denial of the claim for LTD benefits must be upheld. Accordingly, the Court affirmed the district court's summary judgment to Aetna on the denial of Thurber's claim for LTD benefits.

As to Aetna's counterclaim, the Court noted that section 502(a)(3) of ERISA allows a fiduciary-such as Aetna-to bring suit for "appropriate equitable relief". The Court said that, in this case, the nature of Aetna's claim is equitable, since it seeks specific funds (i.e., overpayments resulting from Thurber's simultaneous receipt of no-fault insurance benefits and the STD benefits) in a specific amount (the total overpayment, $7,213.92). The Plan authorizes this recovery, since the SPD provides that Aetna may reduce benefits if a beneficiary receives other income, and may require the beneficiary to return any benefits subsequently rendered overpayments. This language establishes an equitable lien by agreement. The funds constituting the STD benefit payments were entrusted to Thurber, even though these funds have been dissipated. As such, the Court concluded that Aetna presented a claim for "appropriate equitable relief" under section 502(a)(3) of ERISA, and the Court remanded the case back to the district court, with instructions to enter judgment in favor of Aetna on its counterclaim.

April 3, 2013

ERISA-Sixth Circuit Upholds Insurer/Administrator's Decision To Deny LTD Benefits

In Judge v. Metropolitan Life Insurance Company, No. 12-1092 (6th Cir. 2013), the plaintiff, Thomas Judge ("Judge"), was appealing a decision by the district court on the administrative record in favor of the defendant, Metropolitan Life Insurance Company ("MetLife"), who had denied Judge long-term disability ("LTD") benefits.

In this case, Judge had undergone surgery to repair an aortic valve and a dilated ascending aorta, and had applied for LTD benefits under a group insurance policy (the "Plan") issued and administered by MetLife. MetLife denied the LTD benefits, however, when it determined that Judge was not totally and permanently disabled under the terms of the Plan. After exhausting MetLife's internal administrative procedures, Judge brought suit under ERISA to recover the LTD benefits.

Judge argued on appeal that MetLife's denial of LTD benefits was arbitrary and capricious. Specifically, he contended that: (1) MetLife applied the wrong definition of "total disability" to Judge's claim, (2) MetLife erred in failing to obtain vocational evidence before concluding that Judge was not totally and permanently disabled, (3) MetLife erred in conducting a file review by a nurse in lieu of having Judge undergo an independent medical examination, and (4) there was a conflict of interest because MetLife both evaluates claims and pays benefits under the Plan. However, the Sixth Circuit Court of Appeals (the "Court") disagreed with these contentions, and ruled that MetLife's denial of the LTD benefits was not arbitrary and capricious. As such, the Court affirmed the district court's judgment in MetLife's favor.

April 2, 2013

Employee Benefits-Gov't Agencies Issue Proposed Regulations On 90-Day Waiting Period Limitation For Group Health Plans

Introduction. The responsible government agencies-namely the Internal Revenue Service, the Department of Labor and the Department of Health and Human Services-have jointly issued proposed regulations, which implement the 90-day waiting period limitation for group health plans. This limitation is found in section 2708 of the Public Health Service Act, as added by Affordable Care Act and as incorporated into ERISA and the Internal Revenue Code. The statutory limitation becomes effective for plan years beginning on or after January 1, 2014, so employers should start thinking about it now. The proposed regulations would likewise apply for plan years beginning on or after January 1, 2014. Employers may rely on the proposed regulations until at least the end of 2014. If final regulations or other guidance with respect to the 90-day waiting period limitation is more restrictive on group health plans than the proposed regulations, then the final regulations or other guidance will not be effective prior to January 1, 2015.

Rules in the Proposed Regulations.

In General. In sum, the regulations propose that a group health plan may not apply any waiting period that exceeds 90 days. A plan is not required to have any waiting period. If, under the terms of the plan, an employee can elect coverage that becomes effective on a date that does not exceed the 90-day waiting period limitation, the coverage complies with the waiting period rules, and a violation does not occur merely because individuals choose to elect coverage after the end of the 90-day waiting period.

Definition. Under the proposed regulations, "waiting period" would be defined as the period that must pass before coverage for an employee or dependent, who is otherwise eligible to enroll under the terms of a group health plan, can become effective. If an employee or dependent enrolls as a late enrollee or special enrollee, any period before such late or special enrollment is not a waiting period. Being "otherwise eligible to enroll in a plan" means having met the plan's substantive eligibility conditions (such as being in an eligible job classification or achieving job-related licensure requirements specified in the plan's terms).

Counting Days. Under the proposed regulations, the waiting period may not extend beyond 90 days, and all calendar days are counted beginning on the enrollment date, including weekends and holidays. The "enrollment date"' is the first day of the waiting period. That first day is generally the day on which the employee satisfies enrollment requirements. If the 91st day falls on a weekend or holiday, the plan may choose to permit coverage to be effective earlier than the 91st day, for administrative convenience, but the plan may not make the effective date of coverage later than the 91st day.

IMPORTANT POINT: 3 months are NOT the same as 90 days.

Certain Eligibility Conditions. Under these proposed regulations, eligibility conditions that are based solely on the lapse of a time period would be permissible for no more than 90 days. Other conditions for eligibility are permissible, unless the condition is designed to avoid compliance with the 90-day waiting period limitation. The proposed regulations have special rules for variable hour employees. If a group health plan conditions eligibility on any employee's (part-time or full-time) having completed a number of cumulative hours of service, the eligibility condition is not considered to be designed to avoid compliance with the 90-day waiting period limitation, if the cumulative hours-of-service requirement does not exceed 1,200 hours. The plan's waiting period must begin once a new employee satisfies the plan's cumulative hours-of-service requirement, and may not exceed 90 days. The proposed regulations do not prohibit plan procedures permitting self-payment (or buy-in), in lieu of actually working hours, to satisfy any otherwise permissible hours-of-service requirement.