The Affordable Care Act created two new taxes for individuals whose income exceeds $200,000 ($250,000 for married couples filing joint returns). Employees must pay an additional 0.9% Medicare tax on wages in excess of these dollar thresholds. Individuals whose adjusted gross income exceeds the dollar thresholds also must pay a 3.8% tax on their net investment income.
Both taxes became effective in 2013, but high-income employees will pay the taxes for the first time next year, when they file their 2013 tax returns. Employers are required to withhold the 0.9% additional Medicare tax, and are liable for any amount they fail to withhold.
The IRS recently published a final regulation and an updated set of FAQs interpreting the additional Medicare tax. The IRS also published a final regulation, a new proposed regulation, and updated FAQs interpreting the tax on net investment income. Continue Reading
The Obama administration recently issued final regulations implementing the Paul Wellstone and Pete Domenici Mental Health Parity and Addition Equity Act of 2008 (the “MHPAEA”). The regulations implement the MHPAEA’s prohibition against imposing limits on mental health and substance use disorder benefits that are more restrictive than the limits on medical and surgical benefits. The final regulations largely preserve interim final regulations that have been in effect since July 1, 2010, with some clarifications that were announced previously in less formal guidance.
The final regulations, not surprisingly, require parity between medical/surgical benefits, on the one hand, and mental health/substance use disorder benefits, on the other, when both are provided under an employer’s major medical plan. However, in determining whether the parity is achieved, employers will need to consider separate arrangements, such as employee assistance plans and wellness programs. The failure to consider plans other than the major medical plan could result in noncompliance with the mental health parity rules.
The penalty for failing to comply with the new requirements is an excise tax of $100 per day per affected participant. In frequently asked questions that were issued with the final regulations, the Departments indicated that ensuring compliance through audits and other mechanisms is a high priority. Continue Reading
SPX Corporation recently announced it would transfer pension liabilities for 16,000 retirees to Massachusetts Mutual. The amount of these liabilities is reported to be $625 million. In addition, SPX will offer 7,500 former employees the option of taking a lump sum distribution from the SPX pension plan. SPX expects that the two actions together will reduce its pension liabilities by $800 million. SPX stated that a $250 million contribution to its plan earlier this year enabled the company to take these steps.
The SPX pension transfer follows two larger transfers last year: Verizon transferred $7.5 billion of pension liabilities to Prudential, and General Motors, in connection with a plan termination, transferred liabilities to Prudential and offered lump sums to retirees to reduce its pension liabilities by approximately $26 billion.
Favorable stock market returns and recent increases in interest rates may make transfers of liabilities to insurance companies more attractive. As funding levels improve, plans have greater ability to purchase annuity contracts. In addition, plan sponsors may take comfort in certain legal developments. For example, although Verizon’s pension transfer was challenged in court, Verizon has obtained favorable rulings recognizing a plan sponsor’s broad authority to transfer pension benefits from an ERISA-covered plan to an insurance company. In addition, the ERISA Advisory Council held hearings earlier this year examining pension settlements. Despite some calls for a moratorium on pension settlements, the Council’s primary recommendation regarding pension transfers focused only on the standard for selecting an insurance company. The SPX transaction (like the Verizon and GM transactions before it) is therefore likely to continue to be replicated.
In the wake of the financial crisis and the so-called ‘shareholder-spring’ of 2012 (a period during which many shareholders refused to endorse directors’ remuneration policies), the government has introduced new rules on directors’ remuneration reporting. The new rules: (i) increase the compliance burdens regarding the reporting of directors’ remuneration policies; (ii) increase shareholder control over remuneration and termination packages; and (iii) introduce potential personal liability for directors who authorise payments in violation of an approved policy.
These changes bound certain UK-incorporated quoted companies with effect from 1 October 2013. The government estimates that around 900 companies have been affected. Continue Reading
Who is most influential in shaping the future of the nation’s pensions? Institutional Investor names the top 40 for 2013. The list includes politicians (such as Rahm Emanuel and two U.S. senators), actuaries, hedge fund managers, government officials, academics − and two lawyers in private practice, David Boies (for his work defending Rhode Island’s pension changes) and Covington’s own Richard Shea. This is the first year Institutional Investor has compiled this list, which it describes as “the 40 most important people in the fight for − and against − defined benefit pensions.”
Richard Shea undoubtedly was selected as being on the side of defined benefit pension plans. Institutional Investor recognized him for “working tirelessly to advance the evolution of defined benefit and hybrid pensions.” One example, cited by Institutional Investor, is the 2012 conference Re-Imagining Pensions, which Mr. Shea organized with co-sponsors the Pension Rights Center and the Urban Institute. The conference, which was hosted on Capitol Hill by the Senate Committee on Health, Education, Labor and Pensions, explored potential new plan designs as solutions to much of what ails the nation’s retirement system. These designs included proposals that reduce or eliminate the risk and volatility employers typically experience with traditional defined benefits plans, while providing minimum investment guarantees and lifetime income options that are not readily available in defined contribution plans. The designs presented at the conference include the “Portfolio Cash Balance Plan,” the “Adjustable Pension Plan,” and “Retirement Security Funds” − each of which adjust benefits in response to market forces.
A recent Seventh Circuit case, Killian v. Concert Health Plan (Nov. 7, 2013), highlights two important principles for any plan sponsor or fiduciary:
- If a plan document or summary plan description leaves out information and says to call a phone number for details, plan fiduciaries can be responsible for call center representatives’ oral statements and omissions.
- A call center representative might have a responsibility to provide more information than a caller specifically requests, if the caller’s questions indicate that additional information would be important to the caller under the circumstances.
The Killian case involved unfortunate circumstances. An employee was admitted to a hospital for emergency cancer surgery. The insurance certificate for the employee’s health plan cautioned participants to call a phone number to confirm that their health provider was in-network. The employee’s husband followed this suggestion and called the number.
The husband explained to the call center representative that his wife needed immediate treatment, and was seeking admission to St. Luke’s Hospital. The representative could not find St. Luke’s Hospital in her database (possibly because St. Luke’s had changed its name to Rush several years earlier), but told the caller to “go ahead with whatever had to be done.” The caller never asked whether the hospital’s services would be covered, and the representative did not address that question. She told him to call back later. Continue Reading
A recent GAO Report offers interesting insight into the Department of Labor’s thinking on electronic disclosure.
For the better part of the last ten years, many plan sponsors and service providers have been pushing for more flexibility to provide required disclosures electronically. In particular, they have asked the Labor and Treasury Departments to replace an existing “opt in” regime with an “opt out” regime. Instead of requiring affirmative consent to distribute communications electronically, many plan sponsors and service providers would like the default to be electronic disclosure–with an opportunity to elect to receive paper.
In 2011, the Department of Labor issued a public request for information regarding electronic disclosures. The responses included thoughtful suggestions for moving toward an “opt out” regime while still ensuring that important communications are actually received. The Department has not formally taken action in response to the RFI, but comments included in the GAO report offer insight into the Department’s thinking.
The GAO report summarizes the existing Labor and Treasury rules on electronic disclosure, and offers three suggestions for improvement: Continue Reading
The IRS issued a notice on October 31 modifying the long-standing “use-or-lose” rule that applies to health flexible spending arrangements (“Health FSAs”). The new rule permits participants to apply up to $500 of unused Health FSA contributions to pay for expenses incurred in the next plan year, if the employer amends its Health FSA to permit such carryovers. Although plan sponsors are not required to offer the carryover, for the first time in 30 years, they have the option to do so.
Participants in Health FSAs may contribute up to $2,500 per year (indexed) to a Health FSA on a pre-tax basis to pay for medical expenses not otherwise covered by an employer’s health plan. Health FSAs come at a price, however — generally, unused amounts contributed to a Health FSAs must be forfeited at the end of the year and cannot be carried over to a future year or cashed out. The IRS modified this rule in 2005, permitting plans to adopt a “grace period” that allows a participant to use contributions made in one year to pay for medical expenses incurred during the first 2 ½ months of the next year.
In response to public comments, and in particular the concern that the forfeiture requirement was discouraging lower paid employees from making Health FSA contributions, the IRS has now added another option for employers — they may amend their Health FSA plans to permit employees to carry over $500 in contributions from year 1 to pay year 2 medical expenses. Employers are not required to permit carryovers, and may specify a carryover amount of less than $500.
By now, employers who sponsor self-insured medical plans are familiar with the fees they must pay to fund Patient-Centered Outcomes Research (“PCORI”) and the Transitional Reinsurance Program. This post describes a detail that can have a significant effect on the amount that each sponsor must pay.
Both fees are calculated as a dollar amount per covered life. The implementing regulations describe three ways to determine the number of covered lives:
- Actual count (averaging), where you count the number of covered lives on each day of a period (a year for the PCORI fee and 9 months for the Reinsurance fee), and then divide by the number of days;
- Snapshot, where you count the number of covered lives on one or more days per calendar quarter and then divide by the number of days; and
- Form 5500, where the number of covered lives is based on the number of participants reported on the plan’s Form 5500.
There are minor differences in the calculations for the PCORI fee and the Reinsurance fee. Those differences and other details are not discussed in this post.
Whereas the actual count and snapshot methods require counting every person in the plan–including employees, spouses, and dependents–the Form 5500 method offers a shortcut that can produce significant savings for large employers. Instead of actually counting covered lives, the plan sponsor simply deems the number of covered lives to be the number of participants at the beginning of the year plus the number of participants at the end of the year.
The reason for this shortcut is that a Form 5500 reports only the number of participants, and not spouses or dependents. The shortcut assumes an average of one spouse or dependent per participant. For plans that have an average of more than one spouse or dependent per participant, this shortcut will result in savings. Continue Reading
The Department of Labor’s Office of Inspector General recently issued a report detailing concerns with the valuation of alternative investments (such as private equity funds, hedge funds, and real estate) held by ERISA plans. ERISA requires plan sponsors and fiduciaries to value investments for several purposes, including to determine funding obligations, select investments, monitor investment performance, and file accurate financial statements. The report notes that many plan fiduciaries rely on valuations provided by managers of alternative investments without analyzing the basis for the valuation or seeking independent review. The report suggests that this practice poses substantial risks to the retirement system and urges the Labor Department to require more rigorous valuation methodology.