As we wrap up the inaugural year of InsideCompensation, we look back on 2012’s most significant developments in employee benefits and executive compensation, both in the U.S. and internationally.

 Retirement Plans 

  • Many employers have frozen their traditional defined benefit pension plans and are now considering ways to eliminate the financial volatility of these frozen plans (often referred to as “de-risking” the plans).  Three large multi-national employers – Verizon, Ford, and General Motors – announced significant pension de-risking transactions this year.  Verizon is transferring U.S. $7.5 billion in pension liabilities to an insurance company to pay pensions to 41,000 retirees; Ford is offering lump sum payments to 90,000 retirees; and General Motors is offering lump sum payments to certain retirees and transferring U.S. $25 billion in other pension liabilities to an insurance company.  See InsideCompensation’s posts on these de-risking transactions. 
  • Congress passed pension funding relief as part of the “Moving Ahead for Progress in the 21st Century Act” (known as “MAP-21”).  MAP-21 provided some funding relief for employers who continue to sponsor defined benefit plans.  However, MAP-21 also raised pension insurance premiums – thus increasing the cost to employers who hold on to their pension liabilities.  See Covington Memorandum, Funding Relief Bill Affects Pension Settlement Strategies (July 5, 2012)
  • The Treasury Department and the Internal Revenue Service issued guidance intended to encourage defined contribution plans to offer lifetime income payment options.  Typically, defined contribution plans pay only lump sums, and, legally, defined contribution plans cannot pay guaranteed lifetime income annuities directly from the plan.  The new guidance is intended to make it easier and more attractive for employers to offer, and employees to elect, annuity payment options from defined contribution plans.  See Covington Memorandum, New Guidance on Lifetime Income Payment Options (February 9, 2012)
  • The Department of Labor issued final guidance on information that a service provider to a retirement plan must disclose with respect to fees and compensation.  Under ERISA, an arrangement to provide services to a retirement plan constitutes a prohibited transaction unless it meets certain requirements.  Service arrangements that fail to comply with the new fee disclosure requirements will not be deemed “reasonable.”  See Covington Memorandum, DOL Releases Final Fee Disclosure Requirements for Service Arrangements (February 13, 2012) for more details on the information that certain covered service providers must disclose to plan fiduciaries. 
  • Policy-makers and practitioners in the United States are examining new types of defined benefit plans that share risk among employees and employers.  Defined benefit plans traditionally allocate investment and longevity risks to employers, while defined contribution plans traditionally allocate these risks to each employee individually.  Shared-risk plans would allocate risks more evenly.  A legislative proposal for a shared-risk plan has been introduced in the United States Senate – the proposal draws heavily on ideas developed in a conference co-sponsored earlier this year by Covington & Burling LLP. 

Health and Welfare Plans 

  • Some of the biggest developments in employee benefits this year were, of course, the Supreme Court’s decision upholding the key provisions of the Patient Protection and Affordable Care Act (“ACA”) and the re-election of President Obama, which all but ensure that health care reform is here to stay.
  • A number of ACA’s requirements became effective in 2012, including the following:
    • Starting with open enrollment in 2012 for the 2013 plan year, employers, including state and local governments, who sponsor group health plans and health insurers were required to provide uniform summaries of benefits and coverage to participants and beneficiaries.
    • ACA requires employers to report the aggregate cost of certain employer-sponsor health coverage on employees’ Form W-2.  Under current guidance, large employers (i.e., employers that are required to file 250 or more Forms W-2) must comply with this requirement for the 2012 calendar year (i.e., for Forms W-2 provided to employees in January 2013).
  • The responsible agencies issued ACA guidance this year that will become effective in subsequent years, including the following:
    • The Department of Health and Human Services (“HHS”) issued proposed rules on the definition of “essential health benefits.”  ACA  requires non-grandfathered insurance policies sold in the individual and small group markets to include essential health benefits.  ACA also does not permit any health plans (including employer-sponsored plans), whether insured or self-insured, grandfathered or not, to set annual or lifetime limits on essential health benefits.  Under ACA, these requirements are effective in 2014 and HHS is responsible for defining an essential health benefit package.  
    • HHS and the Departments of Labor and Treasury issued proposed rules on wellness programs, which distinguish between participatory wellness programs and health-contingent wellness programs.  Health-contingent wellness programs are subject to significantly more stringent requirements than participatory wellness programs.  The proposed rules would be effective in 2014. 
  • Visit Covington’s website on the Patient Protection and Affordable Care Act for a comprehensive overview of guidance and developments under ACA and related resources.

Executive Compensation 

  • The New York Stock Exchange and NASDAQ filed rule proposals with the SEC setting forth standards to determine the independence of compensation committees and the factors that compensation committees should consider in evaluating the independence of the advisers they hire.  See InsideCompensation’s post on this development. 
  • Public companies continued to deal with the impact of the Dodd-Frank “say on pay” and “say when on pay” votes that began following the adoption of the Dodd-Frank Act.  Shareholder support of company executive compensation, as disclosed in the proxy, continued to be fairly high with companies receiving more than 90% support on average. 
  • Executive compensation-related litigation continued in 2012, with nearly two dozen cases brought over the past two years in response to failed “say on pay” votes.     

Employment Tax 

  • The Sixth Circuit held that certain severance payments that qualify as supplemental unemployment compensation benefit payments (or “SUB” payments) for federal income tax purposes are not subject to FICA taxes.  In light of this decision, employers might want to consider filing refund claims for FICA taxes paid on past severance payments that qualify as SUB payments.  See Covington Memorandum, Sixth Circuit Holds Severance Pay for Layoffs Not Subject to FICA Taxes (September 7, 2012) for more details on this case and how it might impact employers.  The government has appealed to the Sixth Circuit for en banc review of the decision, and the taxpayers recently submitted a response opposing the government’s request for a rehearing.  We will keep readers of InsideCompensation apprised of significant developments in this case. 

International Developments 

  • Click here to read Covington’s International Employment Law Update, which includes a summary of significant recent developments across the globe, including in Australia, Brazil, France, Germany, Italy, Netherlands, People’s Republic of China, Russia, Singapore, Spain, United Arab Emirates, and the United Kingdom.