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Compliance Requirements & Eligibility and Imputed Income Concerns
Peter J. Marathas, Jr. BAN Compliance Director
Partner - Proskauer Rose LLP617.526.9704
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Compliance Requirements & Eligibility and Imputed Income Concerns
Today’s Agenda:
Review of “ERISA Welfare Plan” for Compliance Purposes
Brief Overview of Main Compliance Concerns
Plan Documentation: Specific Focus on Dependent Definition Imposed by States
Discussion of Imputed Income Concerns
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The Employee Retirement Income Security Act of 1974 (“ERISA”)
Federal law that governs all retirement and welfare plans sponsored, maintained or contributed to by employers or employee organizations
Welfare plans is defined in section 3(1) of Title I of ERISA to include any plan, fund, or program established or maintained by an employer or by an employee organization, or by both, for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise:
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Medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or
Severance plans.
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Established or Maintained by Employer or Employee Organization:
An ERISA welfare plan does not include a group or group-type insurance program offered by an insurer to employees or members of an employee organization, under which—
No contributions are made by an employer or employee organization;
Participation in the program is completely voluntary for employees or members;
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The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.
The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and
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Medical, surgical, or hospital care or benefits, or benefits in the event of sickness or accident
Obviously includes:
Group health insurance plans
Retiree health insurance plans
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Not-So-Obviously includes:
Agreement to pay for individual insurance
Wellness Programs (some times)
Health Reimbursement Accounts
These are simply self-insured health insurance plans funded by the employer
Health Care Flexible Spending Accounts
These are simply self-insured health insurance plans funded by the employee
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Not-So-Obviously includes:
Health Reimbursement Accounts
These are simply self-insured health insurance plans funded by the employer
Health Care Flexible Spending Accounts
These are simply self-insured health insurance plans funded by the employee
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Employee Assistance Programs
Department of Labor (“DOL”) has consistently held that benefits related to substance and alcohol abuse, anxiety, depression, stress and similar mental health issues are welfare benefits covered by ERISA (see DOL Opinion Letter, 91-26A (the “Publix Letter”))
A program purely and solely established as a “referral service” is not a welfare benefit plan (see Publix Letter)
A program that provides actual services is an ERISA plan (see In re General Motors Corp. (1993, CA6) 3 F3d 980).
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Benefits in the event of disability
Long-Term Disability – Clearly
Short-Term Disability – Not Always – ERISA’s “payroll practice” exception may apply. Some examples:
An unfunded and uninsured sick leave benefit plan under which the employer paid benefits at a level equal to an employee's full weekly salary for a certain maximum number of weeks (based on years of service), and payments for additional weeks were paid at one-half of the weekly base salary. ERISA Opinion Letter 80-44A, 1980.
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A policy of continuing the salary of employees of a corporation during periods of inability to work as a result of illness or accident up to a maximum of 25 weeks. ERISA Opinion Letter 81-71A, 1981.
A short-term disability plan that provided for continuation of full salary for 26 weeks. ERISA Opinion Letter 83-37A, 1983.
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The payroll practice exception to ERISA coverage.
Payment by an employer of compensation on account of work performed by an employee is excluded from consideration as an employee welfare benefit plan subject to ERISA.
Also, an employee's normal compensation on account of periods of time during which the employee is physically or mentally unable to perform his duties, or otherwise is absent for medical reasons (such as pregnancy, a physical examination, or psychiatric treatment); and compensation on account of periods of time
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during which the employee, although physically and mentally able to perform his duties and not absent for medical reasons (such as pregnancy, a physical examination, or psychiatric treatment) performs no duties, including pay:
(Including premium pay to induce an employee to take absence at a particular time) during vacations or holidays;
During a military leave of absence;
During jury service or while giving testimony in official proceedings;
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During in-service training during which time an employee performs little or no productive work while engaged in training (whether or not subsidized in whole or in part by federal, state or local government funds); and
To an employee who is relieved of duties while on sabbatical leave or while pursuing further education.
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Severance Plans – Reduction In Force Arrangements (RIFs)
One-off Agreements – Probably Not
A severance pay arrangement is subject to ERISA if it is a “plan, fund, or program.”
If severance plan exists, is it a welfare plan or pension plan?
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A severance pay arrangement is covered by ERISA when:
An employer establishes an administrative system that entails individual payments to employees based on eligibility.
Administrative system or scheme:
Courts not predictable
ERISA plan has been found if meetings held to explain terms
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Plans with eligibility criteria (e.g., years of service, age) found to be administrative scheme because someone has to make determination
The severance arrangement provides that the employee is entitled to benefits only if a “triggering event” (such as termination of the employee without cause or good reason, or satisfying established criteria).
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Pension or Welfare Severance Pay Plan? An employer establishes an administrative system that entails individual payments to employees based on eligibility.
Severance plans resemble pension plans in that they both provide cash payments to workers after termination of employment.
Thus, a severance plan occasionally may acquire more of the attributes of a pension plan than a welfare plan and will be considered to be providing retirement benefits.
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Why is this important?
A severance plan categorized as a pension plan will be subject to ERISA's minimum participation and vesting standards, as well as minimum funding requirements and the requirement that plan assets be held in trust.
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Welfare Severance Pay Plan Safe Harbor:
The total amount of payments does not exceed twice the employee's annual pay during the year immediately preceding the employee's termination and
All payments are completed within 24 months of termination.
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So What?
If these arrangements are ERISA arrangements, they must comply with ERISA
Main areas of concern: Plan Documentation, Plan Reporting, Fiduciary Duties & Claims Procedures
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Plan Documentation Requirements
Written Plan Document
ERISA requires that every employee benefit plan be established and maintained pursuant to a written plan document that describes the benefit structure and guides the plan’s day-to-day operations
Plans must reflect current law and plan operation must be in accordance with the terms of the plan
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The document must list one or more named fiduciaries for the plan
Can be identified by office or by name
May be an administrative committee or a company’s board of directors
The plan document must be provided to participants and beneficiaries no later than 30 days after a written request
Should reflect right to terminate/amend
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Plan Documentation Requirements
Summary Plan Description (SPD)
SPD must be consistent with plan terms
Copy of SPD must be provided to each participant and beneficiary—demonstrated procedures
SPD can be provided to employees with enrollment materials
SPD must be provided within 120 days after a plan first becomes subject to ERISA
SPD must be provided within 90 days after an individual becomes a participant
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Plan Documentation Requirements
Summary Plan Description
SPD must be provided every five years if there have been any changes to the plan during the five-year period
Should reflect clearly right to amend/terminate
Should include Firestone language
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Plan Documentation Requirements
Summary Annual Report (SAR):
Prescribed format
SAR must be provided by the end of the ninth month after the close of the plan year (September 30 for calendar year plans)
Extension of two months granted if Form 5558 completed and submitted with Form 5500
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Plan Documentation Requirements
Document Retention Basic Rule: employee benefit plan documents
and documents required by ERISA must be retained for six years after the date of filing, resolution, or amendment
Materials should be preserved in a manner and format that permits ready retrieval
All records including annual reports, disclosures, amendments and resolutions should be retained
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This includes:
Original signed plan documents and amendments
Corporate resolutions/committee actions related to the plan
Plan disclosures and communications to participants--Form 5500s, SARs, SPDs, SMMs, etc.
Plan Documentation Requirements
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Form 5500’s
Form 5500 must be filed by the end of the seventh month after the close of the plan year (July 31 for calendar year plans)
Extension of 2½ months if Form 5558 timely filed
Required for Welfare Plans With 100+ Participants
For health, life, disability, this is employees participating
For severance plans, this is all potential participants
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ERISA Claims Procedures
Required by Title I of ERISA
Present in most health insurance SPDs
Absent in many HRA’s and Severance Plans
Critically important – to be compliant with ERISA and to preserve important plan sponsor/fiduciary rights.
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Dependent Definitions – A brief update and reminder
Young adults 19 – 29 account for a significant percentage of un-insured
State Response: Require Health Insurance Carriers to Revise “Dependent Definition”
Federal definition: coverage ends at 19, unless disabled or full-time student (in which case until 24), if other conditions are met
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Dependent Definitions – A brief update and reminder
State definitions – differ from state-to-state
NY (January 2009) latest to announce it is increasing the age of dependent
Why doesn’t ERISA Preempt these state laws?
Savings clause
Deemer clause
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Plans and SPDs must be revised to include an eligibility provision to permit domestic partner Need definition to define clear eligibility Definition should be specific and consistent
with applicable state law Self-insured SPDs need to be checked to
ensure that they do not inadvertently refer to state law
Consider impact on workforce if your insured contract is written in a foreign jurisdiction
Dependent Definitions – A brief update and reminder
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Code Section 105 exempts from an employee’s income the value of the benefit provided to employees, their spouses and dependents under an employer’s group health plan
Code Section 106 exempts from an employee’s income the value of the premium paid on his or her behalf for individual coverage or coverage of a spouse or dependent under an employer’s group health plan
Tax Implications
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Federal law dictates tax determination for federal purposes
Therefore, bifurcated tax treatment in states where extended definition exists
Tax Implications
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Imputing IncomeHow to impute?
The IRS has provided no formal guidance for calculating imputed income under these or similar circumstances.
Therefore, a reasonable methodology should work.
The IRS has said, informally, that it disapproves of an “incremental value” approach—likely because two different taxpayers receiving the same benefit will have different values assigned to the benefit.
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Examples of Incremental Approach: For an employee with family coverage who covers himself, his
spouse and three children, (one an ED but not CD), where GHP family premium is $9,600, incremental approachincremental approach: $9,600 / 5 X 1 = $1,920.
For an employee with family coverage who covers himself, his spouse and two children, (one an ED but not the CD), where GHP premium is $9,600, incremental approachincremental approach: $9,600 / 4 X 1 = $2,400.
In each case the value to the employee is the coverage of one child—how can imputed income be different?
IRS Likely to Say: IT CAN’T.
Imputing Income
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The IRS has not formally spoken, so any reasonable approach should be respected.
One approach: Use the COBRA Rate (minus the 2% administrative fee).
Many practitioners locally like this approach.
It results in a constant number, based solely on the number of EDs and not the number of total dependents.
Imputing Income
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The entire COBRA amount is includible in income, but employee still pays for his share of the coverage on a pre-tax basis.
The Rationale: Imputing the entire COBRA cost back to the employee offsets the tax advantage of paying premium on a pre-tax basis for the extended age dependent.
Note: any reasonable approach should work, but no lawyer can guarantee his client that any one approach is the right approach—because of the absence of formal guidance.
Imputing Income
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Examples of COBRA Approach: For an employee with family coverage who covers
himself, his spouse and three children, (one an ED but Not CD), where GHP annual family premium is $9,600 and individual total premium is $6,000, COBRACOBRA approach: $6,000.
For an employee with family coverage who covers himself, his spouse and two children, (one an ED but Not CD), where GHP annual family premium is $9,600 and individual total premium is $6,000, COBRACOBRA approach: $6,000.
In each case the value to the employee is the coverage of one child—imputed income is the same?
Imputing Income
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Provide Letter and Affidavit of Tax Dependent Status to All New Employees As Hired
Recertify Annually at Open Enrollment
Determine how to impute income and work with payroll provider
Watch for “dental issue”
What to do?
