Category Archives: ERISA

November 6, 2017

Take Note: Benefit Plan Deadlines Approaching

By Molly Hobbs

At this time of year, important deadlines are quickly approaching for 401(k) plans and health and welfare plans. Here is a non-exhaustive list of significant employee benefit plan deadlines for the remainder of 2017 and early 2018. These deadlines are generally for calendar year plans, unless otherwise specified.

Retirement Plan Deadlines:

December 2

  • Distribute the following notices, as applicable, by December 2, 2017:
    • Traditional 401(k) Safe Harbor Notice
    • Qualified Automatic Contribution Arrangement (QACA) Notice
    • Eligible Automatic Contribution Arrangement (EACA) Notice
    • Non Safe-Harbor Automatic Contribution Arrangement Notice
    • Qualified Default Investment Alternatives (QDIA) Notice
  • Determine when the annual participant fee disclosure was last provided and timely provide the disclosure. The annual participant fee disclosure is required every 14 months. Many employers provide this disclosure on or before the end of the year along with other year end notices.

December 16

  • Provide summary annual report (SAR) to participants if the 2016 Form 5500 was filed by extension on or before October 16, 2017. For non-calendar year plans, the SAR must be provided two months after the Form 5500 was filed, including by approved extension.

December 31

  • Adopt any discretionary amendments implemented during the plan year.
  • Ensure all required minimum distributions have been paid to applicable participants.

January 2018

  • Provide non-discrimination testing census data to the record keeper or Third Party Administrator (TPA).

March 15, 2018

  • Make sure TPA has completed non-discrimination testing, and distribute any excess contributions, in order to avoid excise taxes.

April 16, 2018

  • Distribute any excess contributions and related earnings from prior year.
  • Make any employer contributions to retirement plan(s) in order to receive tax deduction (plus extensions).

Health and Welfare Plan Deadlines:

November 1

  • If the plan’s open enrollment is approaching, fix the starting and ending dates for open enrollment and prepare and distribute enrollment materials such as the Summary of Benefits and Coverage.
  • Marketplace/Exchange open enrollment begins.

November 15

  • If the plan is a self-funded health plan, submit the Transitional Reinsurance Program (TRP) Annual Enrollment and Contributions Submission Form, reporting the annual enrollment count and selecting a payment schedule. If the Plan elected in 2016 to pay the TRP fee in two installments, the second payment is also due by November 15, 2017.

December 15

  • Open enrollment for the Marketplace/Exchange coverage ends.

December 16

  • Provide summary annual report (SAR) to participants if the 2016 Form 5500 was filed by extension on or before October 16, 2017. For non-calendar year plans the SAR must be provided two months after the Form 5500 was filed, including by approved extension.

December 31

  • Provide the following annual notices, as applicable, by December 31, 2017:
    • Children’s Health Insurance Program (CHIP)
    • Women’s Health and Cancer Rights Act (WHCRA)
    • HIPAA Notice of Privacy Practices (at least every three years)
  • Many plan sponsors provide these notices with the annual open enrollment materials.

January 31, 2018

  • If the employer is subject to the ACA employer mandate, provide full-time employees with an IRS Form 1095-C documenting 2017 health coverage.

February 28 (March 31, if filing electronically)

  • If the employer is subject to the ACA employer mandate, file Form 1094-C and Forms 1095-C with the IRS.
Keep this deadline checklist handy to ensure that your plans remain compliant and as always, consult with your employee benefits counsel for additional information.

April 11, 2016

New Fiduciary Rule Applies Stricter Standard to Most Retirement Account Advisers

By Rebecca Hudson, Bret Busacker, and Molly Hobbs

In its long-awaited final fiduciary rule, the Department of Labor (DOL) establishes stricter fiduciary standards for investment advisers and consultants providing services to ERISA plans and IRAs. Intended to offer additional protection to ERISA plan participants and IRA owners, the final rule issued on April 7th broadens the application of the ERISA fiduciary standard to many investment professionals, consultants, and advisers who previously had no obligation to adhere to ERISA’s fiduciary standards or to the related prohibited transaction rules.

Final Fiduciary Rule Replaces Five-Part Test

Since 1975, ERISA and its implementing regulations have defined “fiduciary” and “investment advice” narrowly. Under ERISA Section 3(21)(A), a “fiduciary” is someone who has the authority and/or responsibility to provide investment advice under a retirement savings plan and is compensated for doing so. Investment advisers and consultants who are a fiduciary with respect to an ERISA plan or IRA engage in a prohibited transaction if they receive “conflicted compensation” (e.g., commissions, trailing commissions, sales loads, 12b-1 fees, and revenue-sharing payments) from third parties with respect to the investments they recommend to these ERISA plans and IRAs. 

In 1975, the DOL created a five-part test to identify an ERISA fiduciary. An adviser or consultant who does not acknowledge his or her fiduciary status with respect to a plan will nonetheless be a fiduciary with respect to the plan if the adviser enters into an agreement to regularly provide individualized investment advice that will serve as the primary basis upon which the advice recipient will make investment decisions (the “five-part test”). 

Believing that the retirement landscape has changed significantly since 1975, including the prevalence of participant-directed 401(k) plans and the extensive use of individual retirement accounts (IRAs), in 2010, the DOL proposed to broaden the definition of investment advice. The DOL subsequently withdrew the 2010 proposed rule in response to significant push back from various stakeholders. In 2015, a new proposed rule was published that eliminated the five-part test and extended fiduciary status to those advisers who provide advice that is individualized or specifically directed to the advice recipient. In response to the wide range of comments it received on the 2015 proposed rule, the DOL made significant changes to the final fiduciary rule, but kept much of the expansive nature of the 2015 proposed rule.

General Structure of the Final Fiduciary Rule

In today’s marketplace, many investment professionals, consultants and advisers have no obligation to adhere to ERISA’s higher fiduciary standards or to the prohibited transaction rules because they do not satisfy each prong of the five-part test. The DOL expects that broader application of the fiduciary standard under the final fiduciary rule will more closely align the advisers’ interests with those of their customers, while reducing conflicts of interest, disloyalty, and imprudence.

Under the final rule, an investment adviser or consultant that makes a “recommendation” to a plan or IRA for a fee or other compensation that is customized for or specifically directed at the plan or IRA may be a fiduciary. For purposes of the final fiduciary rule, a “recommendation” includes providing advice with respect to:

  • buying, holding, selling, exchanging, or rolling over securities or other investment property, or
  • management of securities or other investment property, investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or services, selection of investment account arrangements, and recommendations with respect to rollovers, distributions, or transfers from a plan or IRA.

Accordingly, an investment adviser or consultant who makes an investment recommendation (as defined above) and receives conflicted compensation in connection with the advice provided to the plan or IRA will engage in a prohibited transaction unless one of the enumerated carve-outs from the rule applies or the adviser/consultant complies with the “Best Interest Contract Exemption” requirement.

What You Need to Know

Plans, their affected financial advisers, and other service providers have until April 10, 2017 to prepare for any change from non-fiduciary to fiduciary status. Notably, there are also two exceptions to the effective date, which will provide more time for certain service providers to adapt to the new standards. In particular, the Best Interest Contract Exemption and rules regulating advice with respect to the advisers proprietary funds will have a transition period during which fewer conditions apply, from April 2017 to January 1, 2018, at which time the rule will be fully implemented.

ERISA plans should begin now to review their relationship with their current investment adviser/consultant. Some things plans should consider include:

  • Determine if an adviser or consultant is currently a fiduciary under the new fiduciary rule.
  • Determine if one of the rule carve-outs applies to the services provided by adviser or consultant.
  • Discuss the Best Interest Contract Exemption with any adviser that is a fiduciary and determine the best way to document and comply with that exemption.

In conducting this review, plans should interpret the general fiduciary rule broadly and interpret any of the enumerated carve-outs narrowly. Fiduciaries should expect that advisers will provide written documentation of their role and their satisfaction of any carve-out. Plans should require advisers to indemnify the plan from any prohibited transaction that arises as a result of its failure to comply with any carve-out or exemption.

For more information about this rule, its carve-outs and the Best Interest Contract Exemption, please read our full summary.

May 18, 2015

Plan Fiduciaries Beware: Your Ongoing Duty to Monitor Investments Allows Beneficiaries To Claim Breach Within Six-Year Statute of Limitations

Beaver_MBy Mike Beaver 

In a ruling that will likely raise the anxiety level of plan fiduciaries, the U.S. Supreme Court unanimously ruled today that beneficiaries of a 401(k) plan could pursue their claim against the plan’s fiduciaries related to mutual funds that were added to the plan eight years before the complaint was filed, despite the six-year statute of limitations normally applying to ERISA breach of fiduciary duty claims. The Court concluded that because fiduciaries have a continuing duty to monitor investments and remove those that are imprudent, a claim for breach of that duty is timely so long as the alleged failure to monitor occurred within six years of the filing of the complaint. Tibble v. Edison Int’l, 575 U.S. ___ (2015). 

Higher Administrative Fees Prompted Lawsuit 

In 2007, several beneficiaries of the Edison International 401(k) Savings Plan (Plan) filed a class action lawsuit against the Plan fiduciaries to recover alleged losses incurred as a result of excessive mutual fund fees. According to the beneficiaries, in selecting the investment choices available to Plan participants, the Plan fiduciaries had chosen six “retail-class” mutual funds, instead of identical “institutional class” funds. The retail-class funds carried higher administrative and management fees than the institutional-class offerings. Three of the funds were chosen in 1999, and the others in 2002. 

As to the funds selected in 2002, the lower courts found that the Plan fiduciaries offered “no credible explanation” for selecting the higher-cost retail funds. However, as to the 1999 funds, the Plan fiduciaries argued that the ERISA statute of limitations applicable to fiduciary breaches would bar the beneficiaries’ claims involving the 1999 funds, because they were selected more than six years before the lawsuit was commenced. The statute, 29 U.S.C. § 1113, bars a fiduciary breach claim brought more than six years “after the date of the last action which constituted part of the breach or violation,” or “in the case of an omission the latest date on which the fiduciary could have cured the breach or violation” (emphasis added). The Ninth Circuit Court of Appeals agreed with the fiduciaries, and dismissed all claims relating to the 1999 funds. 

A unanimous Supreme Court, however, reinstated the beneficiaries’ claims pertaining to the 1999 funds. The Court found that, although the funds may have been chosen previous to the fiduciaries’ action in selecting the 1999 funds, the statute did not bar claims relating to the fiduciaries’ alleged omissions since that time. Specifically, the Court held that ERISA fiduciaries have a “continuing duty to monitor trust investments and remove imprudent ones.” This duty imposes a “continuing responsibility for oversight of the suitability of the investments already made.” Since such continuing reviews by the Plan fiduciaries might have been required within the six-year limitation period, a claim that the fiduciaries breached their oversight and review responsibilities could not be summarily dismissed. 

No Guidance on Oversight Duty 

Having held that Plan fiduciaries have a duty to oversee and monitor investment decisions previously made, the Court provided little guidance as to what that duty entails. The Court articulated the fiduciaries’ oversight and monitoring responsibilities only in a broad, theoretical way, holding that “a fiduciary normally has a continuing duty of some kind to monitor investments, and that “the nature and timing of the review [are] contingent on the circumstances.” Because these circumstances had not been fully developed by the lower courts, the Supreme Court remanded the case for further consideration, noting that it did not necessarily find that the Plan fiduciaries had violated any of their duties. 

Lesson for Fiduciaries 

The Supreme Court has made clear that benefit plan fiduciaries have a continuing responsibility to monitor the suitability and prudence of a plan’s investment choices, and that the six-year statute of limitations runs from the alleged breach of this ongoing responsibility, not from the date a particular investment was initially selected. However, the Court provided essentially no guidance concerning how fiduciaries can fulfill this ongoing responsibility. The parameters of a fiduciaries’ ongoing responsibility to monitor and evaluate investment choices will, in all likelihood, be developed only by extensive future litigation. 

Because the Court provided little specific guidance concerning the ongoing duty to monitor investment choices, plan fiduciaries will need to increase their focus on what little regulatory guidance is provided by the U.S. Department of Labor, and many fiduciaries will likely increase their reliance on objective, professional investment advisors. Of course, the choice of an investment advisor is, itself, a fiduciary act, and under the guidance of the Tibble decision, it is likely the fiduciaries’ ongoing responsibility to monitor the suitability and performance of advisors as well. In short, the Tibble decision expands the potential for fiduciary liability without providing much guidance on how that liability might be minimized.

April 28, 2015

Retirement Plans: Proposed Changes to the Fiduciary Rules Offer An Opportunity For Introspection

Busacker_BBy Bret Busacker

The Department of Labor (DOL) recently published long-promised revisions to the rules regulating investment advisers to retirement plans and their fiduciaries, participants and beneficiaries, as well as IRAs and their owners and beneficiaries (Advice Recipients). The new proposed fiduciary regulations (2015 Proposed Rule) are the DOL’s most recent attempt to modernize long-standing labor rules that predate the creation of the 401(k) plan and the widespread use of IRAs. In 2010, the DOL attempted to revise these same regulations, but withdrew the proposed changes after receiving significant pushback from stakeholders. We’ll have to see if its second effort is more successful.

Role of Investment Advisors Are At Issue

The crux of the issue is that plan fiduciaries must act in the best interest of their Advice Recipients. Under ERISA and the Internal Revenue Code, if a fiduciary uses plan or IRA assets for their own advantage, it is a prohibited transaction. For example, a fiduciary adviser who receives compensation from a third party (i.e., the plan recordkeeper or platform provider) to recommend a particular investment to an Advice Recipient may be engaging in a prohibited transaction. Fiduciaries who are a party to a prohibited transaction may be subject to penalties and lawsuits from plan participants. 

In the past, investment advisers have navigated around this issue by serving in a non-fiduciary consulting capacity with respect to their Advice Recipients. The current long-standing regulations generally treat an adviser as a fiduciary only if the adviser enters into an agreement with an Advice Recipient to regularly provide individualized investment advice that will serve as the primary basis upon which the Advice Recipient will make investment decisions. (This is generally referred to as the “five-part test.”) Each element of the five-part test must be satisfied in order for an adviser to be considered a fiduciary. 

Investment consultants take the position that they are not fiduciaries under the five-part test because they either do not provide regular advice to the Advice Recipient or the advice they provide is not the primary basis of the Advice Recipient’s investment decision. Plans that use investment consultants who do not assume fiduciary responsibility should be aware that the 2015 Proposed Rule may ultimately characterize these consultants as fiduciaries. 

Expanded Fiduciary Activity

Under the 2015 Proposed Rule, an adviser will be a fiduciary to an Advice Recipient even if the adviser does not regularly provide investment advice to the Advice Recipient and even if the advice is not the primary basis for the Advice Recipient’s investment decision. Instead, under the 2015 Proposed Rule, an adviser may become a fiduciary if the adviser receives a fee for the advice and the adviser either (i) represents or acknowledges that he or she is acting as a fiduciary with respect to the Advice Recipient or (ii) agrees in writing or verbally to provide the Advice Recipient with advice that is individualized or specifically directed to the Advice Recipient. 

Under the 2015 Proposed Rule, investment advice generally includes:

  • a recommendation to acquire, hold, dispose or exchange an investment, including in connection with a participant’s distribution or rollover from a plan or IRA;
  • a recommendation with respect to the management of an investment, including in connection with a participant’s distribution or rollover from a plan or IRA;
  • an appraisal, fairness opinion, or similar oral or written statement concerning the value of an investment in connection with a transaction involving a plan or IRA; or
  • a recommendation to hire another service provider who will provide investment advice.

Under the 2015 Proposed Rule, a “recommendation” includes an adviser’s suggestion for the Advice Recipient to take a particular course of action with respect to an investment under the Advice Recipient’s control. 

Common Plan Administration Carve-Outs 

Notwithstanding the apparent breadth of the 2015 Proposed Rule, the rule contains a number of helpful carve-outs that identify common situations in which an adviser will not be considered a plan fiduciary, as summarized below. 

  • Providing a plan or IRA with an investment platform, provided that the recordkeeper or platform provider notifies the Advice Recipient that it is not providing investment advice or serving as a fiduciary.
  • Identifying investment options that satisfy the pre-established investment criteria of an independent plan fiduciary (e.g., expense ratios, size of fund, type of asset, etc.) and/or providing benchmarking information to the independent plan fiduciary.
  • Providing basic investment information that assists a plan in complying with reporting and disclosure requirements.
  • Providing investment education that is limited to investment concepts (e.g., risk and return, diversification and dollar-cost averaging) and objective questionnaires, worksheets and interactive software.
  • Selling investments to an Advice Recipient who has the requisite investment background and who is properly informed that the broker is not undertaking to impartially advise the plan. This carve-out generally only applies to larger retirement plans.

The 2015 Proposed Rule also provides a means by which an adviser who falls within the definition of a fiduciary may continue to receive conflict-of-interest compensation by satisfying certain safeguards and disclosure requirements.

Take Aways

The definition of a fiduciary under the 2015 Proposed Rule is quite broad and, if adopted, will certainly expand the number of advisers who are treated as adviser fiduciaries to retirement plans and IRAs. However, even if the 2015 Proposed Rule is not adopted, Advice Recipients should take this opportunity to review their relationship with their current investment adviser. If an adviser is not currently a fiduciary, but provides recommendations with respect to investments, consider asking the adviser whether he or she is able to be a fiduciary and whether changes will be required to the relationship if the rule is finalized. These questions may spark a helpful conversation that clarifies the adviser’s role and informs the Advice Recipient of whether changes to the relationship may be required (even if the rule is not finalized).

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January 14, 2015

How a Health Benefit Can Be a Wolf in Sheep’s Clothing

by Bret Busacker and Bret Clark (formerly of Holland & Hart)

Group health plans provided by employers to employees are subject to 40 years of federal regulation from ERISA, to COBRA, to HIPAA, to ACA. What many employers don’t realize is that the definition of group health plan is not limited to traditional major medical plans. These federal laws generally apply to any arrangement sponsored by an employer that directly or indirectly provides health-related benefits to employees.

In an effort to control health insurance costs, we have observed employers looking at unique ways to provide their employees with medical benefits outside of the standard group health plan structure. However, employers should be aware that virtually any arrangement that provides employees with medical benefits is subject to the often burdensome federal laws that regulate employer provided medical benefits.

Employers may be surprised to know that the arrangements described below are generally subject to a variety of restrictive federal benefits laws.

 

Account-Based Arrangements

Some employers (including many small businesses) would like to assist employees in purchasing health insurance but because of cost, risk and other factors cannot sponsor a traditional major medical plan. In the past, some of these employers provided employees an allowance that employees could use to purchase individual health insurance (in some cases, on a pre-tax basis). These types of arrangements are especially attractive now that the healthcare exchanges under the ACA have been established (where employees can sometimes get subsidized health insurance).

However, the ACA prohibits an employer from establishing an arrangement through which employees may purchase health insurance on an ACA exchange. Even employer-sponsored arrangements that help employees purchase non-exchange individual health insurance policies may run afoul of federal benefits laws. Employers may increase an employee’s taxable wages to help the employee purchase health insurance, but if the increase is conditioned on the employee purchasing health insurance, the arrangement may become subject to federal benefits laws.

Employers may continue to use traditional account-based arrangements to supplement employer-provided health insurance, such a Health Flexible Spending Account, Health Reimbursement Arrangement, or Health Savings Account. However, employers should examine closely any arrangement that permits (or requires) employees to purchase individual health insurance.

Discount Arrangements

We have also encountered employers that provide discounts to employees for medical services. These programs generally involve employers that are healthcare providers. They generally provide employee discounts or allowances that may be used for in-house healthcare services. These programs can also involve discounts negotiated between an employer and a third-party healthcare provider.

Because these employer-sponsored arrangements provide health-related benefits to employees, they are generally group health plans subject to federal regulation, including the ACA. To the extent such a program is offered to employees who are not concurrently enrolled in the employer’s group health plan, the programs must separately satisfy ERISA, COBRA, HIPAA and the ACA.

It some cases, these programs violate the ACA because they do not satisfy the ACA prohibition on annual and life-time limits, among other requirements. In other cases, it may be possible to structure these arrangements to comply with the ACA, but employers should be aware that the notice, disclosure and plan document requirements generally applicable to group health plans also apply to these arrangements.

Skinny Plans

Under the ACA, certain large employers must offer health coverage to their full-time employees or pay a penalty. The coverage must pay 60% or more of a participant’s healthcare expenses, determined on an actuarial basis (referred to as “minimum value”).

Employers and service providers have closely analyzed plan structures to determine how to minimize the cost of a plan and still provide minimum value. Service providers discovered that a plan may be structured to exclude in-patient hospitalization and/or physician services and still satisfy the minimum value requirement. Such plans are known as Skinny Plans.

Many employers found that excluding in-patient hospitalization and/or physician services significantly reduced the cost of coverage, and took significant steps to implement Skinny Plans for 2015. However, once the IRS became aware of this practice, it moved very quickly to prohibit it, and left many employers that were planning on offering Skinny Plans scrambling to find alternative coverage.

Skinny Plans are clearly group health plans and are designed to satisfy applicable federal regulations. However, they highlight the risk an employer takes on in exploring non-traditional coverage in this highly regulated area.

Conclusion

Employers and service providers have become creative in structuring benefit plans in order to minimize costs. In some cases, employers inadvertently provide benefits that do not fully comply with applicable requirements. In other cases, employers push the boundaries of current guidance and risk the IRS invalidating the arrangement with subsequent guidance. In either case, the employer may face significant penalties for noncompliance with applicable law. Accordingly, employers should ensure that their non-traditional health benefit arrangements fully comply with applicable federal requirements.

Bret Busacker and Bret Clark are attorneys in Holland & Hart’s Boise office, where they provide legal services to the firm’s employee-benefits and executive-compensation clients. Bret Busacker can be reached at bfbusacker@hollandhart.com; Bret Clark can be reached at sbclark@hollandhart.com

September 9, 2014

Employee Equity Purchase Programs: Ensuring a Great Idea Remains a Good Idea

Busacker_BBy Bret Busacker 

With the return of some prosperity in the economy, we have seen an uptick in employers granting or selling equity (stock or partnership interests) in their businesses to their employees.  In some cases, these grants are part of a broad-based employee stock purchase program.  In other cases, employers use equity to reward and incentivize key players in their business.  In all cases, these programs can be very successful in creating loyalty and incentivizing employees.  However, these arrangements are subject to a variety of regulatory requirements.  A few insights on some common issues that arise with respect to these arrangements: 

Sale of Equity to an Employee May be Compensation.  The transfer of equity to an employee (or other service provider) in connection with the performance of service to the employer is a compensatory transaction under Internal Revenue Code Section 83.  The amount of the compensation income to the employee is the difference between the fair market value of the equity at the time of grant and the amount the employee pays for the equity.  Depending on the situation, an independent valuation of the business may be necessary to establish the fair market value of the equity granted.  In all cases, the employer should document that a reasonable valuation method was followed in establishing the fair market value of the equity. 

Employees May Elect Early Taxation of Unvested Equity.  If an equity award requires the employee to continue to provide services after the date of grant in order for the employee to retain the right to the equity, the equity may be unvested.  Unvested equity is not taxable to the employee at the time of grant, but becomes taxable to the employee once the equity vests.  An employee who believes an equity award will increase in value and generate a larger tax hit on the vesting date rather than the grant date may elect to accelerate the taxation of the equity to the date of grant (and thus pay taxes when the equity is worth less).  This election is commonly referred to as an 83(b) election.  Employers should ensure that employees are aware of the 83(b) election option. 

Unvested Equity May Not Create Ownership.  The Internal Revenue Code provides that an employee is not treated as the owner of the equity granted to an employee unless the equity is fully vested or the employee files an 83(b) election with the IRS.  Further, employment agreements, operating agreements and shareholder agreements often contain provisions that create ambiguity as to whether an equity award is vested or unvested.  Accordingly, if the parties want to ensure that an employee receiving an equity grant is treated as an owner for tax purposes, including allocations, distributions and dividends, a protective Section 83(b) election could be filed to ensure the employee is treated as the owner of the equity.  

Equity Grants May Impact Employee Benefits.  Equity grants of partnership interests or stock in an S corporation may have a significant impact on the medical and fringe benefits of employees receiving those grants.  If the equity is vested or the employee files an 83(b) election, the employee may be treated as an owner for benefits purposes.  Partners in a partnership and owners of more than 2% of the stock of an S corporation are generally not eligible to participate on a pre-tax basis in the medical benefits and other fringe benefit programs otherwise available to employees.  In addition, employers should review their retirement plans when granting equity awards to employees to ensure that the compensatory value of the equity awards are accounted for in accordance with the terms of the plan document.  

Equity Grants Should Be Accomplished Through a Compensatory Plan.  In general, unless  securities exemptions exists at both the state and federal levels, the grant or sale of employer stock or partnership interests to employees must be registered under the Securities Act of 1933.  This rule applies to private non-publicly traded companies as well as publicly traded companies.  Many private companies may take advantage of a special federal securities exemption from the registration requirement by satisfying what is referred to as Rule 701.  However, Rule 701 and many state securities laws may only be relied upon if the grants were made pursuant to a written compensation contract or compensatory benefit plan for employees, consultants and/or directors.  Further, in some cases it may be required, but it is always a good practice, to provide the award recipients a summary of the material terms of the equity award, a risk of investment statement, and annual financial statements to minimize misunderstanding and the risk of legal claims.  

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September 2, 2014

Benefit Plans: Upcoming Compliance Deadlines and End of Year Planning

By Bret Busacker and Bret Clark (formerly of Holland & Hart)

Now that fall is in the air and school has started, we thought this would be a good time to summarize some of the key health and welfare benefit deadlines that are approaching this fall:Busacker_B

September 22

Updated Business Associate Agreements. New HIPAA privacy and security rules adopted last year require revisions to most HIPAA business associate agreements by September 22, 2014. Employer-sponsored health plans that are subject to HIPAA (generally including self-insured health plans and all health flexible spending arrangements (FSAs)) are required to have agreements with business associates, service providers dealing with participant health information on behalf of the plan, that require business associates to comply with the HIPAA privacy and security rules.  Your business associates may have already contacted you about revising your agreements. However, employers are ultimately responsible to identify all business associates and ensure that compliant business associate agreements are in place before the deadline.

September 30

Summary Annual Report for Calendar Year Plans. Plans (including retirement plans and welfare plans) that filed the 2013 Form 5500 by July 31, 2014 must provide the Summary Annual Report for the 2013 calendar year to plan participants no later than September 30, 2014. Plans that file the 2013 Form 5500 extension to file by October 15, 2014 must provide the Summary Annual Report by December 15, 2014.

October 14

Medicare Part D Notice of Creditable Coverage. Employers who offer prescription drug coverage to employees and retirees should provide a notice to plan participants and beneficiaries who are eligible for Medicare Part D (or to all participants) by October 14, 2014 stating whether the employer prescription drug coverage is creditable coverage.

November 5

Deadline to Obtain Health Plan Identifier. All self-insured larger group health plans (those with annual costs of $5 million or more) must obtain a unique group health plan identification number (HPID) from CMS by November 5, 2014. The HPID will be used in electronic communications involving plan-related health information. For this reason, third party administrators of self-insured plans will either obtain the HPID or will coordinate with the plan sponsor in obtaining the HPID. Employers should confirm with their TPA that the plan will have an HPID by the deadline. Please note that employers should obtain an HPID for each group health plan they maintain. Accordingly, employers who have established a single wrap-around group health plan that incorporates all of the group health plans of the employer may only need to obtain a single HPID. However, employers who maintain separate HRA, FSA, and/or medical/dental/vision plans may be required to obtain one HPID for each such group health plan. Smaller group health plans have until November 5, 2015 to obtain an HPID. Please go to this website for more information.

November 15

Transitional Reinsurance Fee Enrollment Information Due. Self-insured health plans must submit their enrollment information to HHS by November 15, 2014 for purposes of calculating the 2014 Transitional Reinsurance fee for 2014. Self-insured health plans that are self-administered are exempt from the Transitional Reinsurance Fee in 2015 and 2016, but must pay the fee for 2014. Based on the enrollment information provided to HHS in 2014, self-insured plans will pay the fee beginning in January 2015.

General Fall Planning (no specific deadline)

ACA Shared Responsibility Planning. The Affordable Care Act employer shared responsibility penalties will begin to be imposed on employers with 100 or more full-time or full-time equivalent employees beginning January 1, 2015. Employers should start now to establish a policy for purposes of determining whether the employer will be subject to the ACA employer shared responsibility penalties and whether the employer is covering those full-time employees that must be offered coverage in order to avoid the shared responsibility penalty.

Summary of Benefits and Coverage, Women’s Health and Cancer Rights Act Notice, Medicaid/CHIP Premium Assistance Notice, HIPPA Notice of Privacy Practices, and Exchange Notice. Employers should confirm that these notices are included with the enrollment materials provided to participants during open enrollment and to participants at the time of any mid-year enrollment due to becoming newly eligible for the plan. If these notices are not included with enrollment materials prepared by your provider, consider supplementing the enrollment materials with these notices. Employers should also confirm that their COBRA notices have been updated to reflect recent changes to the model COBRA notice to reflect the establishment of the Health Marketplace Exchanges.

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June 30, 2014

Hobby Lobby Decision: Closely Held Corporations Not Required to Provide Contraceptive Methods that Violate Owners’ Sincere Religious Beliefs

Hudson_RBy Rebecca Hudson 

In a 5-4 decision, the U.S. Supreme Court ruled today that the contraceptive mandate under the Affordable Care Act (ACA) substantially burdens the exercise of religion and violates the Religious Freedom Restoration Act (RFRA) as applied to closely held for-profit corporations, such as Hobby Lobby.  Burwell v. Hobby Lobby Stores, Inc., 573 U.S. ___ (2014).  The Court found that even if guaranteeing cost-free access to contraceptive methods is a compelling governmental interest, the Government failed to show that the contraceptive mandate is the least restrictive means of achieving that interest.  To narrow the effect of its decision, the Court states that its holding should not be read as invalidating all insurance-coverage mandates or as giving employers authority to illegally discriminate against individuals as a religious practice. 

ACA Contraception Coverage At Issue 

Under the ACA, employers’ group health plans must furnish no-cost preventive care and screenings for women.  The Department of Health and Human Services (HHS) was tasked with specifying which types of preventive care must be covered under that provision.  In its regulations, the HHS generally requires nonexempt employers to provide coverage for 20 contraceptive methods that are approved by the Food and Drug Administration.  Religious employers, such as churches and religious nonprofit organizations with religious objections to providing contraceptive coverage are exempt from the contraceptive mandate.  For such entities, the insurance issuer must exclude contraceptive coverage from the employer’s group health plan and instead, pay plan participants separately for contraceptive coverage. 

The owners of Hobby Lobby Stores, Inc., a closely held for-profit corporation, sued HHS and other federal officials and agencies on grounds that providing four contraceptive methods under its health plan violates its sincere religious beliefs that life begins at conception.  They, as well as the owners of two other closely held for-profit corporations, sought an injunction that would prevent them from having to comply with the regulations mandating they provide those four contraceptive methods to participants through their group health plan.  In particular, they alleged that the HHS mandate violated the RFRA, which prohibits the federal government from placing a substantial burden on the exercise of religion unless its action constitutes the least restrictive means of serving a compelling government interest, and the Free Exercise Clause.  After lower courts denied each company a preliminary injunction, the companies appealed in their respective jurisdictions.  In one case, the Third Circuit affirmed the denial of the injunction while in the Hobby Lobby case, the Tenth Circuit reversed.  The Supreme Court agreed to hear the combined cases to resolve the disputed results. 

RFRA Applies to Closely Held For-Profit Corporations 

HHS argued that a for-profit corporation could not “engage in religious exercise” and therefore, was not protected by the RFRA or the Free Exercise Clause.  The majority of the Supreme Court disagreed.  It ruled that the RFRA provides broad protection for religious liberty and that owners of closely held companies do not lose that protection when they choose to organize their businesses as corporations rather than sole proprietorships or general partnerships.  The RFRA’s definition of “persons” covered by the Act includes corporations.  The majority stated that protecting the free exercise rights of corporations like Hobby Lobby protects the religious freedom of the people who own and control such companies.  

The Court declined to decide whether the RFRA would apply to publicly traded corporations, such as IBM or General Electric.  It stated that the cases before the Court involved only closely held corporations, each of which was owned and controlled by members of a single family with undisputed religious beliefs.  The majority discussed, however, that it seemed unlikely that corporate giants would assert RFRA claims as it was unlikely that unrelated shareholders would agree to run a corporation under one set of religious beliefs. 

Contraceptive Mandate “Substantially Burdens” the Exercise of Religion 

After determining that the RFRA applied to closely held for-profit corporations, the Court examined whether the HHS contraceptive mandate “substantially burdens” the exercise of religion.  The majority had “little trouble concluding that it does.”  The Court found that the HHS mandate forces these companies to provide methods of birth control that may result in the destruction of an embryo, in violation of the owners’ sincere religious beliefs.  The companies would face millions in fines if they offered group health plans that did not comply with the contraceptive mandate and dropping coverage altogether could subject them to severe penalties as well.  Consequently, the mandate imposes a substantial burden on the owners’ exercise of religion.  

Mandate Is Not Least Restrictive Means of Guaranteeing Cost-Free Contraception 

The Court assumed that the government’s interest in guaranteeing cost-free access to the four challenged contraceptive methods was a compelling government interest but it ruled that the government failed to show that the contraceptive mandate was the least restrictive means of achieving that goal.  The Court pointed to alternative means of accomplishing the goal, such as the government paying the cost of providing the four contraceptive methods to women who were unable to obtain coverage due to their employers’ religious objections, or extending the HHS accommodation that already applies to employees of non-profit employers with religious objections to the contraceptive mandate.  Given other options that might meet the governmental interest with less restrictions on religious freedoms, the Court held that the HHS mandate violated the RFRA.  In so ruling, the Court did not need to reach the Free Exercise Clause argument. 

Will This Decision Open the Door to Discrimination As a Religious Practice? 

The principal dissenting opinion, written by Justice Ginsburg, argued that the majority’s ruling would open the flood gates to employers seeking to avoid other insurance-coverage mandates or would result in discrimination against individuals on the basis of religious objections to existing laws.  The majority, however, countered that argument by writing that its decision “provides no such shield” to employers who cloak discrimination as a religious practice” to escape legal sanction.”  It also made clear that the decision concerned only the contraceptive mandate and “should not be understood to hold that an insurance-coverage mandate must necessarily fall if it conflicts with an employer’s religious beliefs.”  Coverage for vaccines or blood transfusions, for example, may be supported by different compelling interests and involve different arguments related to the least restrictive means of meeting such interests.  Therefore, the majority believes that fears of a wholesale objection to legal obligations on religious grounds is unfounded. Although it is unclear how the decision will extend to entities dissimilar to the closely held corporations, an employer must show it has a sincere religious belief in order to avail itself of the HHS contraceptive mandate.   Further guidance is welcome to determine the manner in which employers can claim such an accommodation.

The majority opinion was written by Justice Alito who was joined by Chief Justice Roberts and Justices Scalia, Kennedy and Thomas.  Justice Ginsburg was joined in her principal dissent by Justice Sotomayor and in most part, by Justices Breyer and Kagan, who also filed a separate dissent.

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June 27, 2014

U.S. Supreme Court Eliminates Fiduciary Protection for Employer Stock Investment

By Brenda Berg

On June 25, 2014, the U.S. Supreme Court issued its unanimous opinion that retirement plan fiduciaries are not entitled to a presumption of prudence with respect to the plan's investment in employer stock. Fifth Third Bancorp v. Dudenhoeffer, U.S., No. 12-751, 6/25/14. Instead, the fiduciaries are subject to the same duty of prudence that applies to all investment decisions made by ERISA fiduciaries. The rejection of the presumption of prudence might result in an increase in litigation involving employer stock. However, the Court also ruled that the ERISA duty of prudence does not require violating securities laws by disclosing insider information or otherwise taking action that could be in violation of securities laws, and the Court articulated a high pleadings standard for overcoming a motion to dismiss on that point.

Presumption of Prudence

Retirement plan fiduciaries have a duty to act prudently: with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity would act. Many federal circuit courts had adopted a rule that if the governing plan document requires an employer stock investment option, especially where such portion of the plan is designated as an ESOP, then there is a presumption that the fiduciary duty of prudence is met. This presumption is often referred to as the Moench presumption, after the case that first articulated it.

Fiduciaries also have a duty to follow the terms of the plan documents, unless doing so would be contrary to ERISA. The Moench presumption of prudence was an attempt to balance the duty or prudence with the duty to follow plan documents, considering Congress's intent to encourage employee ownership through ESOPs. Under the presumption, fiduciaries have a duty to follow plan documents that require an employer stock investment option, unless the employer is in such "dire" circumstances, such as an employer's bankruptcy, that would likely make the employer go out of business.

In the Dudenhoeffer case, the plaintiffs, who were participants in the plan, alleged that the fiduciaries had violated the duty of prudence by permitting participants to invest in employer stock, and that in July 2007, the fiduciaries knew or should have known that the stock was overvalued. From July 2007 to September 2009, when the complaint was filed, the Fifth Third stock price fell 74%. Although the District Court had dismissed the case based on the presumption of prudence, the Sixth Circuit Court of Appeals reversed and held that the presumption of prudence did not apply at the pleading stage, but only at the evidentiary stage. The U.S. Supreme Court rejected that as well, since the Court held the presumption of prudence does not apply at all. The Court found the presumption was not supported by the statutory language, which provides an ESOP exception from ERISA's duty to diversify but not from the duty of prudence – and Congress's intent to encourage ESOP investments does not override that. In addition, even where the plan document requires an employer stock investment, the regular duty of prudence applies rather than a requirement that only "dire" circumstances can override the plan language.

Conflict with Insider Trading Laws

The Court acknowledged that potential for conflict with the insider trading laws is a legitimate concern. In publicly traded companies, plan fiduciaries are often corporate insiders as well. However, the Court held that a presumption of prudence "is an ill-fitting means" of addressing the concern. The Court also recognized that lack of a presumption may put the fiduciary between a rock and a hard place, in that the fiduciary could be sued for failing to divest the stock, or could be sued for failing to allow the stock as an investment option where the plan documents require it. Again, though, the Court held that the presumption of prudence is not the proper way to address this concern; rather, a motion to dismiss for failure to state a claim is the proper mechanism.

Ultimately, the Court vacated the judgment of the Court of Appeals and remanded the case to consider whether the pleadings were sufficient to overcome a motion to dismiss. The Court referred to its previous guidance of considerations on the insider trading issue. As a general rule, where a stock is publicly traded, it would not be sufficient to claim that the fiduciary should have recognized the stock was overvalued based on publicly available information unless the plaintiffs could point to special circumstances affecting the reliability of the market price. With respect to nonpublic information available to the fiduciaries as company insiders, the Court said the plaintiffs must allege an alternative action that the fiduciaries could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund (for example, by driving the price down in a sell-off) than to help it.

Note that the case involved publicly traded employer stock, and does not provide much guidance for fiduciaries of ESOPs with non-publicly traded stock.

Next Steps for Plan Fiduciaries

In light of the Court's Dudenhoeffer decision, fiduciaries of retirement plans that allow investments in employer stock should reevaluate whether employer stock is a prudent plan investment. Fiduciaries can no longer rely on the Moench presumption that the investment would be prudent as long as the documents required the employer stock and the employer was not experiencing "dire" or other extreme circumstances. Instead, fiduciaries must evaluate all of the circumstances of the employer, within the confines of securities laws, and determine on that basis whether employer stock is a prudent investment under the plan. In other words, fiduciaries must treat an employer stock investment just like every other investment offered under the plan. If the fiduciaries determine that employer stock should no longer be offered under the plan, the removal of the stock should be undertaken carefully in order to best protect fiduciaries from participant claims for the removal of the stock.

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December 26, 2013

ERISA Plan’s Limitation Period Is Enforceable, Says U.S. Supreme Court

By Elizabeth Nedrow 

The U.S. Supreme Court recently issued a decision that provides some welcome guidance to insurers and employers sponsoring ERISA employee benefit plans.  The Court upheld a three-year limitations period in a long term disability plan.  The terms of the plan required participants to file a lawsuit to recover benefits within three years after “proof of loss.”  Heimeshoff v. Hartford Life & Accident Ins. Co.,No. 12-729, 571 U.S.  ___ (Dec. 16, 2013).  The Court ruled that because ERISA itself does not specify a limitations period, the plan’s three year deadline was reasonable and therefore enforceable.  

Benefit Plan Participant Filed Lawsuit After Benefits Were Denied 

Julie Heimeshoff, a senior public relations manager for Wal-Mart Stores, was a participant in a long term disability plan administered by Hartford Life & Accident Insurance Company (Hartford).  In 2005, she filed a claim for disability benefits following a diagnosis of lupus and fibromyalgia.   On her claim form, her rheumatologist listed her symptoms as extreme fatigue, significant pain and difficulty in concentration.  Hartford denied her claim after her rheumatologist failed to respond to its requests for more information.  In 2006, Heimeshoff provided Hartford with an evaluation from another physician who also determined that she was disabled.  Hartford retained a physician to review Heimeshoff’s records who concluded that she was able to perform the activities of her sedentary job.  Hartford again denied her disability claim.  

After granting Heimeshoff an extension to the appeal deadline to provide additional evidence and retaining two additional physicians to review her claim, Hartford issued its final denial of benefits on November 26, 2007.  On November 18, 2010, Heimeshoff filed suit in district court seeking review of her denied claim under ERISA’s judicial review provision, known as ERISA Section 502.  Hartford and Wal-Mart asked the court to dismiss her suit because she did not file the case within the limitations period provided for in the plan, namely within three years after the time that written proof of loss is required to be furnished to Hartford.  The district court agreed that the lawsuit was untimely and dismissed her case.  On appeal, the Second Circuit affirmed.  The U.S. Supreme Court agreed to hear the case in order to resolve a split among the Courts of Appeal on the enforceability of an ERISA plan’s contractual limitations period. 

ERISA Contractual Limitations Provisions Should Be Enforced As Written 

The long-term disability plan at issue stated that legal action against Hartford could not be taken more than three years after the time that written proof of loss is required to be furnished according to the terms of the policy.  Written proof of loss is necessarily due before Hartford and the participant complete the internal review process and before a plan participant is notified of a final denial of benefits which is necessary before filing a lawsuit in court.  The result of this contractual limitations period is that a participant has less than three years to file a lawsuit in court after learning that their benefit claim has been finally denied. 

In reviewing whether to enforce this limitations period, the Supreme Court relied on well-established precedent which states that in the absence of a limitations period provided by a controlling statute, a provision in a contract may validly limit the time for parties to bring an action on such contract to a period less than that prescribed in the general statute of limitations as long as the shorter period is reasonable.  The Court noted that ERISA does not specify a statute of limitations.  Consequently, the Court ruled that a participant and a plan may agree by contract to a particular limitations period as long as it is reasonable.  

Heimeshoff argued that the contractual limitations period at issue was not reasonable because it began to run before a claimant could exhaust the internal review process which is required before seeking judicial review.  The Court unanimously disagreed, concluding that the three-year limitations period from the date that proof of loss is due was not unreasonably short and therefore, was enforceable.  Although Hartford’s administrative review process took longer than usual, Heimeshoff still had approximately one year to file suit before the limitations period was up.  Because Heimeshoff filed her lawsuit more than three years after her proof of loss was due, as required contractually by the plan, her complaint was time barred.  Therefore, the Court upheld the dismissal of Heimeshoff’s suit. 

Significance for Employee Benefit Plans 

The Court’s decision is welcome news for insurers and employers who want efficient resolution of ERISA claims disputes.  Plan documentation should be reviewed, and where appropriate, language should be added or clarified to provide a reasonable limit on the time a participant has to bring a lawsuit to challenge a denied claim for benefits. 


Disclaimer: This article is designed to provide general information on pertinent legal topics. The statements made are provided for educational purposes only. They do not constitute legal advice and are not intended to create an attorney-client relationship between you and Holland & Hart LLP. If you have specific questions as to the application of the law to your activities, you should seek the advice of your legal counsel.


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