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Employee Benefits Developments July 2013

Hodgson Russ Newsletter
July 31, 2013


DOL Allows Ability to Reset Timing of Delivery of Annual Fee Disclosure to Participants

Under ERISA Section 404(a), a plan administrator must disclose fee and investment performance information to participants in directed individual account plans. The regulations under ERISA Section 404(a)provided that the first deadline for a calendar-year plan to furnish the information was no later than August 2012. The regulations also require this information to be provided at least on an annual basis thereafter. Plan sponsors and service providers were concerned that this annual timing requirement does not correspond with timing for delivery of other notices related to individual account plans and that under current regulations, the only way to change the timing of the delivery of notices would require that an additional notice be provided sooner than 12 months from providing a prior notice. In response to these concerns, the Department of Labor issued Field Assistance Bulletin No. 2013-02, which provides the opportunity to reset the date by which the annual notice may be given, provided the plan administrator reasonably determines that resetting the timing for the notice will benefit participants and beneficiaries (e.g., by reducing plan administrative costs associated with a separate mailing or increasing the likelihood that the notice will be read by participants and beneficiaries by providing the notice with other year-end plan materials). The first level of relief is that the plan administrator may furnish the information required to be provided in 2013 no later than 18 months after the information was initially distributed in 2012. For example, if the administrator furnished a notice on August 25, 2012, under the general rule, the 2013 notice would be due no later than August 25, 2013. Under the relief in the Bulletin, the Department of Labor will allow the notice to be treated as given timely if it is given by February 25, 2014 (18 months after the initial 2012 notice). Of course, some administrators have already furnished the 2013 notice. In the second part of the relief, the Bulletin allows the 2014 notice to be given no later than 18 months after the notice was provided in 2013. Under the same example, if the plan sponsor intends to give the 2013 notice on August 25, 2013, and if given on that date, the 2014 notice could be given as late as February 25, 2015 (18 months after the 2013 notice). The Bulletin also indicates that the department is considering whether to allow a 30-45 day window in which subsequent notices can be given to avoid the issues of an exact 12 month date requirement. (DOL FAB No. 2013-2)

New Obamacare Guidance

The Departments of Labor, Health and Human Services, and the Treasury have issued more Frequently Asked Questions (FAQs) regarding implementation of various provisions of the Affordable Care Act (ACA). A complete set of the FAQs is available here. Below is a summary of the recently issued guidance.

Summary of Benefits and Coverage. Summaries of Benefits and Coverage (SBCs) must be amended to indicate whether or not the sponsor’s medical plan qualifies as an eligible medical plan (i.e., provides “minimum essential coverage”) for purposes of satisfying the individual mandate and meeting the “play-or-pay” requirement and to indicate whether the plan provides minimum value. Updated SBC templates are available at and These documents may be used for plan years beginning on or after January 1, 2014, and before January 1, 2015. Plan sponsors that have already prepared (or are in the process of preparing) SBCs for the new year may use the prior template without fear of enforcement action if it would be an administrative burden to modify the SBC to accommodate these new requirements. If the prior SBC is used, the sponsor must include a cover letter or similar disclosure stating whether the plan provides minimum essential coverage and whether the plan provides minimum value.

Health Reimbursement Account Waivers. The ACA prohibits insured and self-insured group health plans, such as Health Reimbursement Accounts (HRAs), from imposing lifetime or annual dollar limits on essential health benefits but allows ‘’restricted annual limits’’ with respect to essential health benefits for plan years beginning before January 1, 2014. Prior guidance provided a waiver process for eligible plans that would postpone compliance with these requirements through the end of the plan year that ends in 2014. Click here for a listing of relevant guidance regarding waivers. The FAQs warn sponsors that changing the plan year does not change the waiver expiration date. For example, if a waiver is granted for a plan year that begins January 1, 2013, the waiver will expire on December 31, 2014, regardless of whether the plan sponsor later amends its plan year.

Provider Non-Discrimination. Effective January 1, 2014, insured and self-insured medical plans may not discriminate against any health care provider that is acting within the scope of its license under applicable state law with respect to both participation and coverage. This provision does not require plans or health insurance issuers to accept all types of providers into a network and does not govern provider reimbursement rates, which may be subject to quality, performance, or market standards and considerations. The Departments of Labor, Health and Human Services, and the Treasury will not issue regulations prior to the effective date. Until regulations are issued, group health plans and health insurance issuers are expected to implement the requirements of this provision using a good faith, reasonable interpretation of the law.

Coverage for Individuals Participating in Approved Clinical Trials. Effective for plan years beginning on or after January 1, 2014, non-grandfathered insured and self-insured medical plans that provide coverage to “qualified individuals” may not (a) deny the qualified individual participation in an approved clinical trial with respect to the treatment of cancer or another life-threatening disease or condition, (b) deny (or limit or impose additional conditions on) the coverage of routine patient costs for items and services furnished in connection with participation in the trial, or (c) discriminate against the individual on the basis of the individual’s participation in the trial. A participant or beneficiary is a “qualified individual” if the participant or beneficiary meets the criteria for participation in the clinical trial and either (a) the referring health care professional is a participating provider and has concluded that the individual’s participation in such trial would be appropriate or (b) the participant or beneficiary provides medical and scientific information establishing that the individual’s participation in such trial would be appropriate. The departments will not issue regulations addressing this provision prior to its effective date. Until regulations are issued, group health plans and health insurance issuers are expected to implement the requirements of this provision using a good faith, reasonable interpretation of the law.

Departments Issue Wellness Program Final Regulations

The Departments of Health and Human Services, Labor, and Treasury issued final wellness program regulations. These final rules are applicable to both grandfathered and non-grandfathered group health plans for plan years beginning on or after January 1, 2014. Consistent with the proposed regulations issued late last year, these final rules increase the maximum permissible reward under a health-contingent wellness program from 20 percent to 30 percent of the cost of coverage. Also consistent with the proposed regulations, the maximum permissible reward is further increased to 50 percent for wellness programs designed to prevent or reduce tobacco use. However, the final regulations restructure the analysis of participatory and health-contingent wellness programs by subdividing health-contingent wellness programs into activity-only wellness programs and out-come-based wellness programs. As described below, this reorganization is significant because it affects how the reasonable alternative standard is applied and communicated.

Consistent with prior guidance, these final regulations continue to divide wellness programs into two main categories: participatory wellness programs and health-contingent wellness programs. Participatory wellness programs are defined as programs that either do not provide a reward or do not include any conditions for obtaining a reward that are based on an individual satisfying a standard that is related to a health factor. Examples of participatory wellness programs include a program that reimburses employees for the cost of membership in a fitness center or a diagnostic testing program that provides a reward for participation and does not base any part of the reward on outcomes. As long as a participatory wellness program is made available to all similarly situated individuals, the program will comply with HIPAA’s nondiscrimination rules without having to satisfy any additional standards.

In contrast, health-contingent wellness programs require an individual to satisfy a standard related to a health factor to obtain a reward. Health-contingent wellness programs must meet five requirements:

1) Individuals must be given the opportunity to qualify at least once per year.
2) The maximum reward cannot exceed a specific percentage of the annual cost of coverage.
3) The program must allow for a reasonable alternative standard (or waive the otherwise applicable standard) for obtaining a reward for any individual for whom it is either unreasonably difficult due to a medical condition or medically inadvisable to attempt to meet the otherwise-applicable standard.
4) The program must be reasonably designed to promote health or prevent disease.
5) All plan materials that describe the terms of the program must disclose the availability of other means of qualifying for the reward or the possibility of a waiver of the otherwise applicable standard.

Activity-only wellness programs are a new subcategory of health-contingent wellness programs. Under an activity-only wellness program, an individual is required to perform an activity related to a health factor in order to obtain a reward. Activity-only wellness programs do not require an individual to attain a specific health outcome. Examples of activity-only wellness programs include walking, diet, or exercise programs. Some individuals participating in an activity-only wellness program may be unable to participate in the program’s prescribed activity due to a health factor. For example, an individual may be unable to participate in a walking program due to a recent surgery. To avoid violating HIPAA non-discrimination rules, an activity-only wellness program must meet the five requirements outlined above.

Outcome-based wellness programs are the other subcategory of health-contingent wellness programs. Under an outcome-based wellness program, an individual must attain a specific health outcome (such as not smoking or attaining certain results on biometric screenings) in order to obtain a reward. An outcome-based wellness program typically has two tiers. That is, for individuals who do not attain the specific health outcome (tier 1), compliance with an educational program or an activity (tier 2) may be offered as an alternative to achieve the same reward. This alternative pathway, however, does not mean that the overall program, which has an outcome-based component, is not an outcome-based wellness program. That is, if a measurement, test, or screening is used as part of an initial standard, and individuals who meet the standard are granted the reward, the program is considered an outcome-based wellness program.

Like the activity-only wellness program, the outcome-based wellness program is required to meet the five additional requirements. However, the reasonable alternative standard requirement is applied differently to the first tier of the outcome-based programs. Under an activity-only health-contingent wellness program, the alternative standard must be available only for individuals for whom the activity is medically inadvisable and the program may request physician verification. In contrast, an outcome-based program must make the alternative standard available to any individual who does not meet the initial standard (the first tier) regardless of whether it is medically inadvisable, and the program may not require physician verification.

Employers who sponsor wellness programs should review them to ensure that the programs comply with these new regulations before they become effective next year. However, employers should be aware that compliance with the wellness program final regulations is not determinative of compliance with the many other laws that regulate wellness programs, including the Americans with Disabilities Act, Title VII of the Civil Rights Act, the Genetic Information Nondiscrimination Act, the Family and Medical Leave Act, ERISA’s fiduciary provisions, Internal Revenue Code, and state law.

2014 Limitations for Health Savings Accounts Announced

The IRS has released the inflation-adjusted limitation amounts for health savings accounts (HSA) for 2014. The limitation on deductions for contributions to an HSA for an individual with individual-only coverage increases from $3,250 to $3,300. For individuals with family coverage, the limitation increases from $6,450 to $6,550. In determining whether a plan is a high-deductible health plan for 2014, the limits remain the same; an annual deductible of not less than $1,250 for individual-only coverage and $2,500 for family coverage. (IRS Rev. Proc. 2013-25)


Employer Stock Drop Fiduciary Breach Claim Does Not Overcome Presumption of Prudence

Marshall & Ilsley Corp. (M&I) sponsored a 401(k) plan. Among one of more than 20 different investment funds was the M&I stock fund (M&I Fund), which was also an employee stock ownership plan (ESOP). Matching contributions in the plan were automatically invested in the M&I Fund, and participants were not permitted to invest more than 30 percent of their plan assets in the M&I Fund. The plan document required that the M&I Fund be offered and provided that M&I, as “…the settlor of the Plan and Trust, intends and declares that neither the Committee nor any other Plan fiduciary shall have any authority or ability to cause the M&I Fund to be invested in anything but M&I stock...”

Between 2008 and 2009, the value of M&I stock dropped by over 50 percent. Certain participants filed a class action alleging a breach of the fiduciary duty of prudence by maintaining the M&I Fund as an investment option. The district court granted a motion to dismiss on the basis that the plaintiffs failed to state a claim for relief because they did not overcome the presumption of prudence applicable in the matter. The plaintiffs appealed to the Seventh Circuit Court, which upheld the dismissal of the action. The Seventh Circuit Court found that the circumstances involved did not overcome the presumption of prudence given when plan documents require that an employer stock fund be included as an investment option, commonly referred to as the Moench presumption. The court did not find that the requirement to provide for the M&I Fund required under plan documents rose to the level of being inconsistent with ERISA. While this case is consistent with others we have recently reported in upholding the Moench presumption of prudence, the documents in this case have very strong language to support the presumption and to require the plan fiduciaries to maintain the stock fund. Other employers offering stock funds may wish to consider whether language found in their plan documents contain as strong a direction as in this case. (White v. Marshall & Ilsley Corp., 7th Cir., 2013)

Multiemployer Plans Pose Risk of Personal Liability for Withdrawal Liability

In the recently decided case of Central States, Southeast and Southwest Areas Pension Fund v. Nagy (7th Cir. 2013), an individual was determined to be personally liable for approximately $3.6 million of withdrawal liability owed to a multiemployer pension plan by a contributing corporation owned by that same individual. The question of personal liability was dependent on whether the individual was engaged in unincorporated “trades or businesses.” Affiliated companies under common control, including unincorporated trades of businesses, are jointly and severally liable for the assessment of withdrawal liability. If the individual who owned the contributing corporation was found to be engaged in unincorporated trades or businesses, that could render the owner personally liable for the assessed withdrawal liability. In this case, the Court of Appeals for the Seventh Circuit found there were two unincorporated businesses that formed the basis for personal liability. First, the individual owned the property on which the contributing employer operated and leased that property back to the contributing employer. The court found the leasing activity to be an active trade or business rather than a passive investment. Second, the individual provided and was compensated for management services to a country club as an independent contractor and not as an employee. These two unincorporated business activities were sufficient to render the individual personally liable for the contributing employer’s withdrawal liability.

There was a similar outcome in the recent case of Sheet Metals Workers’ National Pension Fund v. Delaware Valley Sign Corp. (E.D. Va. 2013), where the court ruled that an individual who owned 100 percent of a corporation that contributed to a multiemployer pension plan was personally liable for more than $1.2 million of withdrawal liability. The individual owned the property that served as the principal place of business for the contributing employer and leased that property to the contributing employer. As in the Nagy case, the court ruled that the owner’s leasing activity qualified as a trade or business under common control that rendered the owner of contributing employer personally liable for withdrawal liability.

The results in both these cases serve as a reminder that individuals who own a business contributing to multiemployer pension plans and have other active businesses run a risk of personal liability if they are the sole proprietor or a general partner in those other businesses. Structuring those other business activities in a different form (corporation, limited liability company, etc.) may be helpful in averting risk of personal liability.

Guarantees of Loans to Company Owned by IRAs Constitute Prohibited Transactions

An individual retirement account (IRA) is exempt from tax unless the IRA ceases to be considered an IRA. One way an IRA ceases to be considered an IRA is if its owner engages in a prohibited transaction with respect to the IRA. The direct or indirect extension of credit between a disqualified person and an IRA constitutes a prohibited transaction. For this purpose, a “disqualified person” includes any person who exercises any authority or control over the management or disposition of IRA assets.

In 2001, two taxpayers, Fleck and Peek, established self-directed traditional individual retirement accounts (IRAs) by rolling amounts into those IRAs. Shortly thereafter, Fleck and Peek organized FP Company, Inc. for the purpose of acquiring the assets of Abbott Fire & Safety, Inc. (AFS), a company specializing in fire protection products and government-mandated compliance testing related to fire suppression and safety. Fleck and Peek each caused his traditional IRA to purchase 5,000 shares of the newly issued stock in FP Company for $309,000. FP Company then purchased the assets of AFS. A portion of the purchase price was evidenced by a promissory note from FP Company to AFS, with that promissory note guaranteed by Fleck and Peek (the “guaranty”).

In 2003 and 2004, both Fleck and Peek converted their traditional IRAs to Roth IRAs. The FP Company stock was the sole asset of the traditional IRA in both instances. Fleck and Peek each reported the fair market value of the converted portions of their accounts as taxable income in 2003 and 2004. In 2006, the Fleck and Peek Roth IRAs each sold the shares of FP Company owned by it in an installment sale, under which payments were to be received in 2006 and 2007.
The IRS examined Fleck and Peek’s 2006 and 2007 income tax returns and challenged the guaranty as causing the IRAs (both the traditional and Roth IRAs) to cease to be treated as IRAs. While conceding that a guaranty constitutes an extension of credit and that they constituted disqualified persons, Fleck and Peek countered that the extension of credit (i.e., the guaranty) was not between the IRAs and themselves, but involved FP Company and AFS.

The tax court agreed with the IRS that the prohibited transaction rules would be too easily sidestepped if a disqualified person were able to extend credit to a corporation wholly owned by his own IRA, as opposed to lending the money to the IRA itself. Accordingly, the court held that Congress’s use of the term “indirect” was broad enough to cover the guaranty and, thus, the IRAs ceased to be considered IRAs. The result of the court’s holding was that Fleck and Peek were liable for capital gains tax in 2006 and 2007. The court also sustained the IRS’s imposition of a 20-percent accuracy-related penalty. (Peek v. Commissioner, 140 T.C. No. 12)

Employee Benefits Practice Group

Peter K. Bradley
Anita Costello Greer
Michael J. Flanagan
Richard W. Kaiser
Arthur A. Marrapese, III
Ryan M.