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The Biggest Employee Benefit Legal Risks to Your Company and How to Protect Against Them Association of Corporate Counsel January 2012 John L. Utz

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Presentation on theme: "The Biggest Employee Benefit Legal Risks to Your Company and How to Protect Against Them Association of Corporate Counsel January 2012 John L. Utz"— Presentation transcript:

1 The Biggest Employee Benefit Legal Risks to Your Company and How to Protect Against Them Association of Corporate Counsel January 2012 John L. Utz

2 Big Risks  Big money  Unhappy people  Government agency initiatives  Conflicts of interest (whether conflicts of fiduciaries or those of vendors or other “parties in interest”)  Prohibited transactions

3 Biggest Employee Benefit Risks  Other Notable Risks  Don’t understand investments (including fees, which plan fiduciaries should review, monitor, and understand)  Don’t understand issues  Failure to follow plan terms

4 Employer Stock in Plan  Big Retirement Plan Risks  Employer stock as plan investment Special risks for publicly-traded companies, particularly for C-level executives serving as plan fiduciaries

5 401(k) Investment options  Big money (particularly as relates to plan investments) 401(k) plan investment options –Fees, including “revenue sharing” »Tibble v. Edison Int’l, 2010 U.S. Dist. LEXIS 69119, 49 EBC 1725 (C.D. Cal. 2010)

6 401(k) Investment Options  Picking the “right” 401(k) share class Let’s consider a plan where some, but not all, of the investment options share revenue with the plan At least arguably, participants choosing to invest in the revenue sharing vehicles effectively subsidize the recordkeeping (or other administrative) costs for other plan participants

7 401(k) Investment Options  Picking the “right” 401(k) share class Despite this “inequity” between groups of participants, it may make sense to offer an investment alternative that shares revenue with the plan (for example, where it is a good fund and the “cheapest” available share class, and the plan is simply attempting to recoup, for the benefit of participants, as much as possible in the way of the fees its participants pay)

8 401(k) Investment Options  Picking the “right” 401(k) share class Is there an alternative vehicle, such as a commingled trust managed by the same fund company, with no revenue sharing but a lower investment management fee? If not, should anything be done to mitigate the arguably inequitable treatment of participants investing in revenue sharing vehicles?

9 401(k) Investment Options  Picking the “right” 401(k) share class One possibility, at least theoretically, would be for revenue sharing dollars to be applied directly to increase the accounts of those participants investing in the vehicles generating the dollars Presumably, then, other dollars would need to be found to pay plan administrative costs, either from the employer or other plan sponsor, or through the introduction of a per participant per year administrative charge (or an increase in an existing such charge)

10 401(k) Investment Options  Picking the “right” 401(k) share class Where administrative difficulty, cost, or other considerations make directing revenue sharing dollars only to the accounts of participants who invested in the vehicle generating the dollars, or where a mutual fund, for example, is unwilling to share dollars, but is instead only willing to make available an “ERISA spending account,” some fee inequity may be inevitable if fiduciaries are to offer the funds they think appropriate, without turning the plan’s back on revenue sharing that might otherwise be available to it

11 Investment Decisions  Consider the possibility of retaining a single investment manager (for defined benefit pension plans) with exclusive responsibility for investing all plan assets (largely limiting the committee’s responsibility to appropriately retaining the manager and monitoring its performance)  Consider the possibility of retaining a single outside investment fiduciary (for defined contribution participant-directed plans) to select the investment alternatives to be offered

12 Late Contributions  Delinquent deposit of employee contributions, particularly to 401(k) plans  Remittance of employee contributions “earliest date on which... can reasonably be segregated” small plan (< 100 participants) safe harbor: 7 th business day

13 Failure to Follow Plan  Failure to follow terms of qualified retirement plan (such as 401(k) or defined benefit plan)  EPCRS Incorrectly identifying “compensation” Inadvertent exclusion of employees 401(k) matching “true-ups” (see Tab 5 (pp ) and Tab 6 (pp )) Loans

14 Biggest Employee Benefit Risks  Withdrawal liability (multiemployer defined benefit pension plans for bargaining unit employees)  Asset Sale Surprises: Benefit Liabilities of Seller  Einhorn v. M.L. Ruberton Construction Co., 632 F.3d 89, 50 EBC 1813 (3d Cir. 2011)  Feinberg v. RM Acquisition, LLC, 629 F.3d 671, 50 EBC 1682 (7 th Cir. 2011)

15 Health Reform  Health Plans  Health reform (see Tabs 8 and 9) Employer mandate to provide coverage

16 Health Coverage After 2013  Beginning in 2014, large employers must offer coverage to all full-time employees or run risk of paying nondeductible excise tax  Large employers are generally those with at least 50 full-time equivalent employees (employed an average of at least 30 hours per week)

17 Health Coverage After 2013  Employer liability may arise in either of two ways  First, fail to offer full-time employees (and their dependents) “minimum essential coverage,” and at least one full-time employee is eligible for premium tax credit or cost-sharing reduction

18 Health Coverage After 2013 Penalty is product of (1) $2,000, and (2) number of full-time employees, reduced by 30 employees

19 Health Coverage After 2013  Example: Employer does not offer full- time employees coverage  100 full-time employees, 10 of whom receive tax credit for enrolling in state exchange-offered health plan  Penalty would be $140,000, which is $2,000, multiplied by 70 employees (100-30)

20 Health Coverage After 2013  Second, an employer is liable if it does offer full-time employees (and their dependents) minimum essential coverage, but one or more full-time employees is eligible for premium tax credit or cost- sharing reduction

21 Health Coverage After 2013 Penalty is product of (1) number of full-time employees entitled to premium tax credit or cost-sharing reduction, and (2) $3,000 Cap on liability: product of (1) $2,000 and (2) number of full-time employees, reduced by 30 employees

22 Health Coverage After 2013  Example: Employer offers full-time employees and their dependents coverage  100 full-time employees, 20 of whom receive tax credit for enrolling in state exchanged-offered plan  The penalty would be $60,000 ($3,000 multiplied by 20 employees )

23 Health Coverage After 2013  To be sure to avoid penalty, must consider how employees can become eligible for premium tax credit or reduced cost-sharing  To be certain to avoid penalty, employer must offer “affordable” health coverage to all full-time employees (and their dependents), and plan must be structured so participants do not pay more than 40 percent (that is, the plan must pay at least 60 percent) of the cost of covered claims

24 Health Coverage After 2013  Affordable only if employee’s premium is no more than 9.5 percent of employee’s household income  If fail to offer affordable coverage under plan bearing at least 60 percent of the cost of covered claims, employer will likely have to pay at least some excise tax

25 Health Coverage After 2013  Individuals typically eligible for premium tax credit or cost-sharing reduction if household income is between 100 and 400 percent of the federal poverty level FPL for 2011 Family of one$10,890 Family of four$22,350

26 Health Coverage After 2013 Remember, individuals with household incomes as high as 400 percent of these numbers may be eligible for premium tax credit or cost-sharing reduction

27 Health Coverage After 2013  Note that an employee is not entitled to premium tax credit (or cost-sharing reduction) if employer offers affordable coverage, and plan’s share of total cost of benefits is at least 60 percent

28 Health Coverage After 2013  Because employer is not responsible for any excise tax unless one of its full-time employees receives such government assistance, if employer offers such coverage to all full-time employees it cannot owe any penalty  This will be true even if some full-time employees decline coverage and instead purchase coverage through an exchange

29 Health Coverage After 2013 Their doing so would not hurt employer because they would not be eligible for premium tax credit or cost-sharing reduction

30 Health Coverage After 2013 Employee Contribution as a Percent of Income Household IncomeFederal Poverty Level (FPL) 0% to 9.5%9.5% + Single: > $43,560 Family of 4: > $89,400 Tier 3: 401% + [18% of population?] No premium subsidy Single: $15,028 - $43,560 Family of 4: $30,843 – $89,400 Tier 2: 139% - 400% [72%?] Premium subsidy if plan does not meet “minimum value” (60%) requirement; no subsidy if plan meets 60% requirement Eligible for premium subsidy Single: ≤ $15,028 Family of 4: ≤ $30,843 Tier 1: 0% - 138% [9%?] Medicaid eligible: No premium subsidy

31 Health Coverage After 2013  If you drop your health plan, will you, as a practical matter, be able to do so without providing employees with additional compensation to assist them in purchasing coverage from an exchange?  If a large portion of your workforce is low paid (and the workers’ household income is low), it may not be necessary to provide much in the way of additional cash compensation to make the employees “whole” for the loss of employer-provided coverage This is because these employees may be eligible for Medicaid or a federal premium subsidy

32 Health Coverage After 2013 There is, of course, a good chance you will not know your employees’ household income, so you may not be able to precisely target additional compensation to your employees’ needs –Possible IRS relief in determining household income

33 Health Coverage After 2013  If, by contrast, most of your workforce has household income above 400 percent of the federal poverty level (FPL), the cost of making employees “whole” may be surprisingly hig h

34 Health Coverage After 2013  Consider an example:  Let’s say your company pays 75 percent of the cost of coverage  Assume family coverage costs $14,000 per year (of which an employee pays 25 percent, or $3,500)  Assume an employee could purchase coverage under an exchange at the same cost as under your company’s plan ($14,000 per year)  The employee would, therefore, need to have, after taxes, $14,000 to pay his or her premium to the exchange

35 Health Coverage After 2013  Assume the employee is in a combined marginal tax bracket (federal, state, city, and perhaps FICA, taxes) of 35 percent  The employee would need to receive an additional $18,038 above his or her current compensation to have the after-tax dollars necessary to purchase coverage This $18,038 figure is the $21,538 an employee would need before taxes to have $14,000 after taxes ($14,000/0.65), reduced by the $3,500 the employee was previously paying for coverage and that the employee will now receive instead in taxable cash

36 Health Coverage After 2013  The company would also pay at least an additional $312 in FICA taxes (1.45 percent of $21,538, which is the additional $18,038 plus the $3,500 not previously subject to FICA tax)  If the employee has not already hit the Social Security wage base this additional FICA could be as high as $1,651 (7.65 percent of $21,538)  And, of course, the company would pay the $2,000 health reform penalty for not offering coverage (which would be nondeductible)

37 Health Coverage After 2013  The upshot is that the employer would spend $10,500 to subsidize coverage for the employee under the employer’s own plan  If the employer were instead to make this employee whole for purchasing coverage on an exchange (having the same cost as the employer’s plan), the employer would spend $20,038 (the additional cash compensation paid to the employee, plus the $2,000 health reform penalty), $2,000 of which would not be tax-deductible by the employer  The employer would also have additional FICA taxes to pay (at least 1.45 percent of the additional compensation ($312) and maybe as much as 7.65 percent of the additional compensation ($1,651))  Assuming only the minimum FICA cost ($312), this would be an increase in cost for the company for this particular employee of 94 percent

38 Biggest Employee Benefit Risks  Health plans  HIPAA privacy and security audits by HHS

39 Executive Compensation  Executive Compensation  409A traps (see Tabs 10 and 11) Acceleration of payment Substitution of amounts for deferred compensation Extending health coverage for terminated executives

40 Executive Compensation “Severance from employment” standard: paying too soon or too late because “severance from employment” confused with termination of employment (also, six month wait issue for “specified employees” of publicly-traded companies) Release/waiver timing

41 Conflicts of Interest  Prohibited transactions (see Tab 4, pp. 6-7)  Prohibit conflicts of interest  Apply even if transaction is beneficial to plan  Prohibit most transactions with a “party in interest”

42 Conflicts of Interest  In addition, a fiduciary may not:  Deal with assets in his or her own interest  Act on behalf of a party whose interests are adverse  Receive consideration for his own personal account from a party dealing with the plan  Criminal Provisions

43 Biggest Employee Benefit Risks  Follow claims and appeals procedures faithfully  Timely respond to requests for document disclosures

44 30-Day Response to Information Requests  ERISA Section 104(b)(4) provides, in part: The administrator shall, upon written request of any participant or beneficiary, furnish a copy of the latest updated summary plan description, and the latest annual report, any terminal report, the bargaining agreement, trust agreement, contract, or other instruments under which the plan is established or operated. (Emphasis added.)

45 30-Day Response to Information Requests  ERISA Section 502(c)(1) provides, in part: Any administrator... who fails or refuses to comply with the request for any information which such administrator is required by this title to furnish to a participant or beneficiary (unless such failure or refusal results from matters reasonably beyond the control of the administrator) by mailing the material requested to the last known address of the requesting participant or beneficiary within 30 days after such request may in the court’s discretion be personally liable to such participant or beneficiary in the amount of $100 a day from the date of such failure or refusal, and the court may in its discretion order such other relief as it deems proper. For purposes of this paragraph, each violation... with respect to any single participant or beneficiary, shall be treated as a separate violation. (Emphasis added.)

46 30-Day Response to Information Requests  Vendor can get plan administrator in trouble: Mondry v. American Family Mutual Ins. Co. (7 th Cir. 2009)  May wish to provide in vendor contract indemnification of plan administrator where vendor is the reason a required disclosure is not made

47 Plan Amendment Process  Plan Amendment Process is Important (see also Tab 7, pp. 4-6)  Overby v. Nat’l Ass’n. of Letter Carriers, 595 F.3d 1290, 48 EBC 2255 (D.C. Cir. 2010)  Baker v. Pennsylvania Economy League Inc. Retirement Income Plan, 2011 U.S. Dist. LEXIS (E.D. Pa. 2011)

48 Scrivener’s Errors  Scrivener’s Errors  Split in Courts  Contrast, e.g., Young v. Verizon’s Bell Atlantic Cash Balance Plan, 615 F.3d 808 (7 th Cir. 2010) with Cross v. Bragg, 47 EBC 1784 (4 th Cir. 2009) (unpub.)

49 Plan Expenses  Plan expenses paid from plan assets (see Tab 12)  Must be type of expense payable from plan assets (fiduciary, not settlor)  Payment must be consistent with plan documents  Must not result in prohibited transaction

50 Attorney-Client Privilege  Attorney-Client Privilege (see Tab 13, pp )  Fiduciary exception  Waiver

51 Attorney-Client Privilege  Attorney-Client privilege (cont.)  Fiduciary exception: Attorney advises: A fiduciary About a matter dealing with administration of plan  Clients are trust’s beneficiaries, not fiduciary personally (Washington Baltimore Newspaper Guild Local 35 v. Washington Star Co. (D. D.C. 1992))

52  Attorney-Client privilege (cont.)  Nonfiduciary matters: client not acting in fiduciary capacity, but instead in settlor capacity In re Unisys Corp. Retiree Medical Benefits ERISA Litigation (communication relating to decision to amend or terminate plan) In re Long Island Lighting Co. (2d Cir. 1997) (privilege applied to communications concerning nonfiduciary matters, even though communications with same attorney relating to plan administration may not be privileged) Attorney-Client Privilege

53  Attorney-Client privilege (cont.)  Personal advice or liability United States v. Mett (9 th Cir. 1999) (advice relating to fiduciaries’ personal liability, rather than ongoing plan administration, was privileged)

54 Attorney-Client Privilege  Attorney-Client privilege (cont.)  So, privilege can attach if either Advice not relating to plan administration (and not relating to a fiduciary act or decision), or Advice to a fiduciary about personal advice or liability

55 Attorney-Client Privilege  Attorney-Client privilege (cont.)  Benefit Appeals Some courts say advice provided prior to fiduciary’s denying claim is not privileged, but advice provided after denial is privileged Other courts say the analysis is more complex, depending on the level of threat of personal liability and when it arises

56 Attorney-Client Privilege  Attorney-Client privilege (cont.)  Waiver: disclosure Lewis v. UNUM Corp. Severance Plan (D. Kan. 2001) (privilege waived by sending documents to plan administrator)

57 ERISA Fiduciary Rules  ERISA Fiduciary Rules (see Tab 4, pp. 2-5)  Act prudently  Act solely in the interest of participants and beneficiaries for the exclusive purpose of Providing benefits Defraying reasonable plan administration expenses

58 ERISA Fiduciary Rules  ERISA Fiduciary Rules (cont.)  Follow plan documents  Diversify investments

59 ERISA Fiduciary Rules  Importance of Procedural Prudence  Value of independent outside experts  Regular meetings  Treating process seriously  Don’t disengage when frustrated

60 Forms 5500 and Audits  Late or deficient Form 5500 (Annual Report) filing  Inadequate plan audit

61 Improving Plan Administration  Improving Plan Administration  Always look at plan (or trust) document and summary  Make sure contracts and agreements are consistent with governing plan documents  Read and negotiate vendor contracts; do not accede to boilerplate simply because the contract is lengthy  Peer review  Record of prior decisions for consistency in claims and appeals context

62 Improving Plan Administration  Regular staff training, including by outsiders, such as legal counsel (who have not established a regular routine or practice that may be embedded incorrectly)  Communications – one consistent voice and source

63 Improving Plan Administration  Compliance audits  U.S. v. Kovel

64 Our Firm  Employee benefits and executive compensation work Utz, Miller & Eickman, LLC 7285 W. 132 nd St., Suite 320 Overland Park, KS Skokie Blvd., Suite 213 Skokie, IL

65 Our Firm John L. UtzEric N. Miller Matthew J. EickmanKatherine Utz Hunter

66 Our Firm  Seminars  Newsletters  Would you allow us to learn from you?

67 Utz, Miller & Eickman, LLC John L. UtzEric N. Miller Matthew J. EickmanKatherine Utz Hunter

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