IRS Rules 23andMe’s Home DNA Kit Eligible for Partial FSA Reimbursement

In May, the IRS issued a private letter ruling to an individual taxpayer regarding the deductibility of 23andMe’s at-home DNA test kits under section 213(d) of the Code, which permits the deduction of medical expenses.  In the ruling, the IRS determined that an allocable portion of the purchase price may be treated as a deductible medical expense and the taxpayer may use a medical flexible spending account to purchase the kit.

23andMe provides a DNA collection kit that is used to collect a DNA sample from an individual and to send the sample to 23andMe for genetic testing.  The sample is then tested by a third-party laboratory.  The genetic information from the test is then analyzed by 23andMe and a report is provided to the individual with results from the laboratory and general information regarding genetic health risks, carrier status, wellness, and traits. The individual may then provide the information to a healthcare provider for additional testing, diagnosis, or treatment.

The IRS determined that the health services provided by 23andMe may be deductible medical expenses based on three revenue rulings, Revenue Ruling 54-457Revenue Ruling 71-282, and Revenue Ruling 2007-72.  Revenue Ruling 54-457 determined that an allocable share of a lump-sum fee charged by a university for medical care and other expenses is eligible for deduction under section 213(d). Revenue Ruling 71-282 holds that the fee paid for storage of medical information in a computer data bank is deductible under section 213(d). Revenue Ruling 2007-72 determined that full-body scans performed without a doctor’s recommendation and for an individual experiencing no symptoms falls within the broad definition of “diagnosis,” which encompasses determinations that a disease may or may not be present, and includes testing of changes to the function of the body that are unrelated to disease.

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California Bans Hairstyle Discrimination

Bolstering the state’s reputation for progressive employment legislation, California has become the first state to ban discrimination based on natural hair and protective hairstyles.  On July 3, 2019, California Governor Gavin Newsom signed into law SB 188, which amends the California Fair Employment and Housing Act (FEHA), specifying that “hair discrimination targeting hairstyles associated with race is racial discrimination.”  The Creating a Respectful and Open Workplace for Natural Hair (CROWN) Act, takes effect on January 1, 2020, and applies to California employers with five or more employees.

The new law amends the FEHA definition of “race” to include “traits historically associated with race, including, but not limited to, hair texture and protective hairstyles.”  Protective hairstyles include, for example, “braids, locks, and twists.”  As a result, California employers will be barred from maintaining dress code or grooming policies that prohibit natural hair or protective hairstyles, as these policies are more likely to deter Black applicants, and to burden or punish Black employees, than any other group.  The bill explains that “[p]rofessionalism was, and still is, closely linked to European features and mannerisms, which entails that those who do not naturally fall into Eurocentric norms must alter their appearances, sometimes drastically and permanently, in order to be deemed professional.”  The legislation also updates the California Education Code to prohibit similar discrimination in public education.

Although California is the first state to prohibit natural hairstyle discrimination, it trails New York City, which issued guidance in February 2019 explaining that policies banning natural hairstyles or hairstyles most closely associated with black people generally violate the New York City Human Rights Law.  The New York City guidance also explicitly prohibits grooming policies that require employees to change their hairstyle to conform to the company’s appearance standards, including having to straighten or relax hair.

Similar legislation, sponsored by the CROWN Coalition (Creating a Respectful and Open World for Natural Hair), is pending in New Jersey and was recently passed in New York state and is now awaiting the governor’s signature.

In light of these developments, employers should proactively review their grooming and appearance policies, even those that appear facially neutral, to ensure that they comply with the new prohibitions, are inclusive of all cultures and legally protected categories, and backed by legitimate, objective business needs.  Employers should also take measures to ensure that such policies are applied in a nondiscriminatory manner, including providing training to managers and others involved in the hiring process regarding the new law.

DOL Labels Gig Economy Company’s Workers as Independent Contractors

On April 29, 2019, the U.S. Department of Labor’s (DOL) Wage and Hour Division issued an opinion letter finding that “virtual marketplace company” workers (of an unnamed business) were independent contractors rather than employees.  While not binding, the opinion signals that DOL is taking a less aggressive approach than in recent years to the hot-button issue of worker classification in the online “gig economy.”  Companies with similar business models that link workers with consumers through technology platforms or “virtual marketplaces” — such as for transportation, delivery, moving, cleaning and household services — may be able to rely on the new opinion to establish a good-faith defense under the Fair Labor Standards Act (FLSA) of their classification of workers as independent contractors.

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DOL Publishes Proposal to Expand Overtime Protections

Following two years of anticipation, after a similar but more aggressive rule was proposed by President Obama’s administration and then squashed by federal courts in Texas, the Department of Labor (DOL) has issued the long-awaited Notice of Proposed Rulemaking that, if enacted, would expand access to overtime pay for certain employees under the Fair Labor Standards Act (FLSA).  DOL estimates that this change could expand overtime eligibility for over one million American workers, about 3.7 million fewer than would have been impacted under the Obama proposal.  The proposed rule is available here.

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Rulings Question the Enforceability of Employee Non-Solicitation Covenants in California

Over three decades ago, in Loral Corp. v. Moyes, a California Court of Appeal held that employee non-solicitation agreements, which bar former employees from soliciting the employer’s existing employees, could be enforceable.  In 2008, the California Supreme Court in Edwards v. Arthur Andersen LLP held that non-competition agreements are unlawful restraints on trade and void under California Business & Professions Code section 16600 (with limited statutory exceptions), but left open whether employee non-solicitation provisions amounted to unlawful restraints on trade.  But recently, in a span of just months, two different courts in California have ruled that employee non-solicitation provisions are invalid under section 16600.

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Court Reaffirms that Private Investment Funds Are Responsible for Portfolio Company’s Pension Liability

The most recent decision in the ongoing Sun Capital saga provides no relief from pension withdrawal liability for private equity funds.  The federal district court for the District of Massachusetts recently reaffirmed its 2016 ruling that two private equity funds were responsible for the unfunded pension liabilities of a bankrupt portfolio company.  Consequently, private equity funds should continue to carefully evaluate investments in companies with pension liabilities.

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Dynamex Alters the Employee Classification Landscape in California

Ten months ago the California Supreme Court rendered its unanimous decision in Dynamex Operations West, Inc. v. Superior Court, a case that articulated a new standard for classifying employees and independent contractors.  Given the importance of this decision, we provided analysis on this case when it was first decided.  However, once issued, this new Dynamex standard did not settle the issue of employee classification in California once and for all.  Rather, as we anticipated in our prior post, Dynamex has cast a long shadow, and the issues it raised have continued to gestate, giving rise to renewed focus on employee classification at the state (and federal) level.

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Proposed Changes to Hardship Distribution Rules Affect 401(k) Plans

On November 14, 2018, the Department of the Treasury and the Internal Revenue Service issued proposed regulations updating the 401(k) plan regulations for hardship distributions from section 401(k) plans.  In particular, these proposed amendments reflect statutory changes including recent changes made by the Bipartisan Budget Act of 2018.  Plan sponsors of 401(k) plans have been awaiting guidance as they make plan design choices for 2019.  While the proposed regulations do not explicitly say that plan sponsors can rely on the proposed regulations, we would not be surprised if the final regulations closely track the proposed regulations.  Comments are due January 14, 2019.  These proposed rules also affect 403(b) plans, but the rules are somewhat different – consult with legal counsel.

Key Takeaways

The proposed changes affecting 401(k) plans are summarized below, but the key takeaways from the proposed regulations include:

  • 401(k) plans must eliminate the 6-month suspension on participant contributions following a hardship withdrawal no later than January 1, 2020; plans will not be permitted to impose a suspension after that date.
  • 401(k) plans can lift the suspension on participant contributions beginning January 1, 2019, even for hardship withdrawals taken before January 1, 2019. For example, if a participant in a calendar year plan took a hardship distribution in the latter half of 2018, the plan could be amended to lift the suspension beginning January 1, 2019.
  • The proposed regulations replace the “facts and circumstances” test for determining whether a distribution is necessary to satisfy a financial need with a “general standard” that requires a representation by the participant that he or she has insufficient cash or other liquid assets to satisfy the financial need. 401(k) plans may apply the new “general standard” for distributions on and after January 1, 2019, or may continue to apply the “facts and circumstances” test through December 31, 2019.  Notably, if a plan elects to apply the new “general standard” beginning in 2019, plans are not obligated to require the participant representation until January 1, 2020.
  • Beginning January 1, 2019, safe harbor contributions may also be distributed on account of an employee’s hardship. The preamble explains this is because safe harbor contributions are subject to the same distribution limitations applicable to QNECs and QMACs, which are available for hardship distributions beginning January 1, 2019.

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New Rules for Noncompetition Agreements in Massachusetts

On October 1, 2018, the Massachusetts Noncompetition Agreement Act (the “Act”) came into effect, creating several new requirements for noncompetition agreements between employers and service providers based in Massachusetts. The new law does not impact agreements entered into before October 1; however, going forward, employers should evaluate when to seek a noncompetition agreement from a service provider and should update any form agreements to comply with the Act’s requirements. In this post, we highlight five considerations to help guide employers as they revisit their practices for Massachusetts workers.

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