© 2011 Winston & Strawn LLP...Nov 17, 2011 · The amended regulation reverts to the original rule...

E d f th Y B fit Pl iEnd of the Year Benefits Planning

Brought to you by Winston & Strawn’s Employee Benefits

and Executive Compensation Practice Group

© 2011 Winston & Strawn LLP 2

Today's eLunch PresentersToday s eLunch Presenters

Michael MelbingerEmployee Benefits and Executive Compensation

Alexis BacksEmployee Benefits and Executive Compensation

Steve FloresEmployee Benefits and Executive Compensation Compensation

Chicago

[email protected]

Compensation Chicago

[email protected]

Compensation Chicago

[email protected]


Presentation OverviewPresentation Overview

I. Qualified Pension and 401(k) Plan Matters Q ( )

II. Health and Welfare Plan Matters

III. Executive Compensation Matters


I Q lifi d P i d 401(k)I. Qualified Pension and 401(k) Plan Matters


Qualified Pension and 401(k) PlansQualified Pension and 401(k) Plans

End of the Year Amendments (Required Minimum Distributions, ( q ,Funding‐Based Restrictions)

New Fee Disclosure Requirements

Final Investment Advice Regulations

Oversight of Third‐Party Service Providers

Employee Plan Enforcement Activities Employee Plan Enforcement Activities

Fiduciary Training

Recent Cases of Note Recent Cases of Note

Determination Letter Application Deadline Reminder



End of the Year Amendments Required Minimum Distribution Waiver—Worker, Retiree, and Employer

Recovery Act waived 2009 required minimum distribution payments Amendment required by last day of 2011 plan year (for calendar‐year plans, Amendment required by last day of 2011 plan year (for calendar year plans, December 31, 2011)

Benefit Restrictions for Underfunded Plans—added by PPA, and became effective for plan years beginning on or after January 1, 2008p y g g y , Amendment required by last day of 2011 plan year (for calendar‐year plans, December 31, 2011)



New Fee Disclosure Requirements Disclosure of fee and investment information to participants and

beneficiaries in participant‐directed individual account plans Plan administrator must provide each participant and beneficiary an initial

disclosure on or before the date of plan eligibility and annually thereafter Disclose general information about plan investments, plan‐wide administrative

expenses, and individual expenses

Initial compliance deadline is May 31 2012 Initial compliance deadline is May 31, 2012

Plan administrator must also provide each participant and beneficiary with quarterly disclosures Include total cost charged to participant’s account for administrative services and other g p p

charges

Initial compliance deadline is August 14, 2012

Service provider disclosure rules go into effect April 1, 2012



Final Investment Advice Regulationsg Final Regulations implement the statutory exemption for investment

advice under PPA. Intended to allow investment advice providers to offer their services to plan participants and beneficiaries who are responsible p p p pfor investment of assets in their individual accounts

Under the Final Regulations, the requirements of the exemption are met only if the investment advice is provided by a fiduciary adviser under an y p y y“eligible investment advice arrangement.” There are two types of eligible investment advice arrangements: fee‐leveling arrangements

arrangements that use computer models

Regulations become effective December 27, 2011



Oversight of Third‐Party Service Providersg y The Court of Appeals for the Seventh Circuit’s opinion in George v. Kraft

Foods Global, Inc. calls into question common plan practice of relying on consultants to determine if service provider fees are reasonablep Possible that plan sponsors may need to conduct frequent RFPs with service providers to demonstrate prudence

Reliance on consultants may not be enough

Decision could increase litigation with respect to

service provider fees

DOL Emphasizes Duty to Monitor DOL Emphasizes Duty to Monitor DOL institutes suit against the owners of

Clark Graphics for failure to monitor third‐party

l


plan administrator


Employee Plan Enforcement Activities Employee Plans’ Compliance Unit Compliance Checks

Detailed questionnaire sent to 401(k) plan sponsors

Partial termination compliance checks triggered by Form 5500 informationp gg y

Enforcement Actions Documentary compliance

Coverage and participation Coverage and participation

Vesting

Contributions and accruals

Top‐heavy requirements Top heavy requirements

ADP and ACP testing



Fiduciary Trainingy g Plan fiduciaries should undergo periodic training to ensure understanding

of the plans they oversee, responsibilities under the law, and administrative practices and proceduresp p

Fiduciaries also are responsible for oversight of service providers

Periodic training for fiduciaries and staff (and especially upon first being appointed to a fiduciary position) promotes aappointed to a fiduciary position) promotes a

good understanding of obligations and may prevent

errors that can lead to litigation

I li i i i d d i It litigation arises, a documented commitment to

fiduciary training can assist in convincing a court

that the plan has appropriate safeguards in place



Recent Cases of Note (CIGNA v Amara)( ) Case deals with CIGNA’s conversion of a final average formula defined

benefit plan to a cash balance plan Plaintiffs claimed CIGNA failed to give appropriate notice of changes Plaintiffs claimed CIGNA failed to give appropriate notice of changes

District Court held CIGNA violated ERISA’s notice and disclosure requirements because SPD did not explain that benefits would be subject to “wear away"

District Court found the SPD was a plan document and ordered reformation pof the plan to provide better benefits

Supreme Court rejected assertion that the terms of the SPD may be enforced as plan terms

However, majority indicated that conflicts between an SPD and plan may give rise to claims for "other appropriate equitable relief" including a “surcharge” that might effectively authorize money damages



Determination Letter Application Deadline Reminderpp Applications for Cycle A plan sponsors are due January 1, 2012

You are a Cycle A plan sponsor if your EIN ends in 1 or 6

Your plan may also be subject to Cycle A if you Your plan may also be subject to Cycle A if you

are a member of a controlled group or affiliated

service group that has elected to use Cycle A

Note the filing fee for a determination letter

application has increased from $1,000 to $2,500


II H lth d W lf Pl M ttII. Health and Welfare Plan Matters


Health and Welfare PlansHealth and Welfare Plans

As we head in to 2012, the majority of changes affecting health and welfare plans are attributable to the Patient Protection and Affordable Care Act (“PPACA”). For this reason, we are focusing this discussion on the key changes PPACA has in store for us in 2012:

Maintaining Grandfathered Status

New Internal Appeal and External Review Procedures

Summaries of Benefit and Coverage (“SBCs”)

60 Day Advance Notice of Mid Year Changes 60‐Day Advance Notice of Mid‐Year Changes

W‐2 Reporting

Comparative Effectiveness Fee

Quality of Care Reporting

Individual Mandate Updates

Oth R l t (N )U d t


Other Regulatory (Non‐)Updates


Maintaining Grandfathered Statusg A plan intending to maintain grandfathered status under PPACA must

include a prominent, affirmative status of intent on all plan materials it provides to participants that reflect plan benefit or coverage information.p p p p g SPDs, rate sheets, SBCs, open enrollment materials, etc.

The DOL has expressly excepted EOBs from this requirement.

Grandfathered plans must also not make any of the following six Grandfathered plans must also not make any of the following six prohibited plan changes: 1) Eliminate all or substantially all benefits to diagnose or treat a particular condition

2) Increase a percentage cost‐sharing requirement, such as a participant’s coinsurance, above the amount that the plan had in effect on March 23, 2010



Maintaining Grandfathered Statusg 3) Increase a fixed‐amount cost‐sharing requirement that the plan had in effect on March 23, 2010, other than a copayment (for example, a deductible or out‐of‐pocket maximum) by a total percentage that is more than the medical inflation rate (which is currently about 4% annually) plus 15%

4) An increase in a fixed‐amount copayment in effect on March 23, 2010, by more than the greater of $5 (increased annually for medical inflation) or the medical inflation rate (again currently about 4%) plus 15%medical inflation rate (again, currently about 4%) plus 15%

5) Decrease an employer’s contribution rate towards the cost of any tier of coverage for any class of similarly situated individuals by more than 5% below the employer's contribution rate for the coverage period that included March p y g p23, 2010

6) Impose a new overall annual limit or a decrease in the amount of an existing annual limit on the dollar value of benefits (note: all annual limits will b h d b 2014 f df h d l )


be phased out by 2014 even for grandfathered plans)


New Internal Appeal and External Review Procedurespp Proposed regulations published in July 2010 originally provided that

PPACA’s internal claim and appeal and external review requirements would take effect for plan years beginning on or after September 23, p y g g p ,2010 (i.e., January 1, 2011, for calendar‐year plans); however, two subsequent releases have delayed the effective dates of certain requirements and have further revised certain requirements. Some of the delayed provisions are now effective for plan years beginning on or after July 1, 2011, while others are delayed until plan years beginning on or after January 1, 2012.

ll f l d l ll f ’ d l l d Essentially, for calendar year plans, all of PPACA’s revised internal claim and appeal and external review requirements will be effective January 1, 2012.



New Internal Appeal and External Review Procedurespp So what’s changing? Let’s take a look at six key reforms in claims and appeals:

1. Urgent claim review period

The proposed regulations provided that a plan must provide a claimant The proposed regulations provided that a plan must provide a claimant with an urgent care claim with a final benefit determination as soon as possible but no later than 24 hours after the plan received the claim.

The amended regulation reverts to the original rule (i.e. the DOL's existing ERISA claim procedure regulation) and requires that final benefit determinations of urgent care claims still be made as soon as possible, but no later than 72 hours after the plan receives the claim.

However the amended regulation added that the plan or issuer must However, the amended regulation added that the plan or issuer must defer to the attending provider with respect to whether the claim involves a matter of "urgent care."



New Internal Appeal and External Review Procedurespp So what’s changing?

2. Inclusion of diagnosis and treatment codes in adverse benefit determinations

The proposed regulations required that any notice of adverse benefit determination must automatically include certain additional information (specifically, diagnosis and treatment codes).

The amended regulation eliminates the requirement to automaticallyprovide this additional information; however, it implements a new requirement that the plan or issuer must notify the claimant of the opportunity to request the additional information in all adverse benefitopportunity to request the additional information in all adverse benefit determination notices.




3. Deemed exhaustion and strict compliance

The proposed regulations permitted claimants to immediately seek The proposed regulations permitted claimants to immediately seek external review by an Independent Review Organization (“IRO”) of their claim if the plan or issuer failed to "strictly adhere" to all of the requirements of its internal claims and appeals process. A plan sponsor’s

” ff"substantial compliance” was not sufficient.

The amended regulation does not completely retract this approach, but it adds an exception to the strict compliance standard for minor errors that were (i) de minimis (ii) not likely to cause prejudice or harm to thethat were (i) de minimis, (ii) not likely to cause prejudice or harm to the claimant, (iii) attributable to good cause or matters beyond the plan's control, (iv) in the context of an ongoing good‐faith exchange of information between the plan and the claimant, and (v) not reflective of


a pattern or practice of noncompliance.



4. Notices provided in a culturally and linguistically appropriate manner The proposed regulations required group health plans and health insurance issuers to p p g q g p p

provide participant notices in a culturally and linguistically appropriate manner and established a requirement to provide notices in an appropriate non‐English language based on the number of people literate in the same non‐English language.

The amended regulation establishes a straightforward 10% threshold with respect to the l i idi i h l i ' d li l i h E li hpopulation residing in the claimant's county and literate only in the same non‐English

language.

Where the 10% threshold is satisfied, the amended regulations require plans or issuers to (i) provide oral language services (such as a telephone customer assistance hotline) with representatives who speak the applicable non‐English language(s) and provide assistancerepresentatives who speak the applicable non English language(s) and provide assistance with filing claims and appeals, (ii) provide, upon request, a notice in the applicable non‐English language(s) and (iii) include in the English versions of all participant notices a prominently displayed statement in the applicable non‐English language(s) stating how plan participants may access language services provided by the plan or issuer.




5. Scope of claims eligible for external review

The proposed regulations stated that any adverse benefit determination The proposed regulations stated that any adverse benefit determination could be subject to external review by an IRO, unless it related to a participant's or beneficiary's failure to meet the requirements for eligibility under the terms of a group health plan.

» This was a very onerous requirement on health plan sponsors.

The amended regulations provide some relief and narrow the scope of claims eligible for external review to claims that involve (i) medical j d t d t i d b th t l i (ii) i i fjudgment, as determined by the external reviewer, or (ii) a rescission of coverage. Claims that involve only a contractual or legal interpretation of the terms of the plan document or SPD, without any use of medical judgment, are not eligible for external review.




6. Clarification on whether IRO external review decisions are 100% binding

The proposed regulations provided that a final benefit determination The proposed regulations provided that a final benefit determination rendered by an IRO would be 100% binding on the plan, health insurer, and claimant except to the extent that other remedies are available under federal or state law.

The amended regulation clarifies that the IRO’s determination does not prohibit the plan or issuer from paying the claim after a final benefit determination has been rendered if it chooses to do so.

» Thi i i th i it f th l» This is in the spirit of the law.



Summaries of Benefit and Coverage (“SBCs”) Effective March 23, 2012, all group health plans, including grandfathered plans

and non‐ERISA group health plans, will be required to provide participants with a four‐page (front and back) document that clearly and concisely describes the b fi d h l (i l di if l f ) Thi i i ddi ibenefits under the plan (including a uniform glossary of terms). This is in addition to the SPD or certificate of coverage that plans are already required to provide. The DOL fine for willful non‐compliance is $1,000 per participant per failure. In

calculating the amount of the penalty, each failure with respect to an individual g p y, pparticipant or beneficiary is considered a separate offense.

In addition, IRS excise taxes equal to $100 per day per affected individual may also be imposed for willful noncompliance.

The proposed regulations (published on August 22 2011) did not delay the The proposed regulations (published on August 22, 2011) did not delay the effective date of this provision but did seek comment on the feasibility of the effective date, so we may still see this provision pushed back beyond 2012.



60‐Day Advance Notice of Mid‐Year Changesy g Effective March 23, 2012, all group health plans, including grandfathered

plans and non‐ERISA group health plans, will be required to provide participants with 60 days’ advance notice of any plan change that affects p p y y p gthe SBC that is not made in connection with renewal or reissuance of coverage. This requirement applies to material modifications in plan terms or coverage that are not reflected in the most recent SBC. We are still awaiting further guidance to understand whether this provision will include benefit enhancements as well as cutbacks.

Pl h d i i i h l i f Plan changes made in connection with renewal or reissuance of coverage are excepted from this requirement.



W‐2 Reportingp g Beginning with W‐2s provided to employees in January 2013 (for fiscal year 2012), all group

health plans, including grandfathered plans, must report the value of employer‐paid health coverage.

According to IRS Notice 2010 69 employers must report the aggregate cost of “applicable According to IRS Notice 2010‐69, employers must report the aggregate cost of applicable employer‐sponsored coverage.” This includes medical and prescription drug coverage, health reimbursement arrangements, and employee assistance plans, but excludes stand‐alone dental and vision plans, salary reduction contributions to medical FSAs, and contributions to HSAs. However, the determination of “value” is still very complex, and employers are awaiting further guidance, including how COBRA continuation premiums will be calculated.

Plan sponsors should start reaching out to their health care and payroll providers now to implement any system changes that may be necessary to properly capture this data beginning in 2012.

Per IRS Notice 2010‐69, an employee who terminates employment after January 1, 2012 may request a W‐2 at any time during 2012, and the former employer is required to provide the former employee with such W‐2 within 30 days (which must, of course, include the value of employer‐paid health coverage). Employers should be prepared to comply with this


p y p g ) p y p p p ynew reporting requirement in early 2012.


Comparative Effectiveness Feep For plan years ending after September 30, 2012, and before October 1,

2013, self‐insured group health plans will be required to pay a federal tax of $1 ($2 after September 30, 2013, and adjusted thereafter for inflation) $ ($ p , , j )multiplied by the number of “covered lives” under the plan. The determination of the number of “covered lives” is likely to be complex and we’re still awaiting further guidance on this issue.

Revenue from this federal tax will fund a trust to be used by the Patient‐Centered Outcomes Research Institute, which assists patients, clinicians, purchasers, and policy‐makers in making informed health decisions by advancing comparative clinical effectiveness research.

The federal tax is scheduled to end for plan years ending after September 30, 2019.



Quality of Care ReportingQ y p g Not later than March 23, 2012, HHS is expected to publish rules on the

new quality of care reporting procedures applicable to all non‐grandfathered group health plans.g g p p

This will require non‐grandfathered group health plans to submit an annual report to HHS regarding all plan benefits and reimbursement structures that affect the quality of care of participants.q y p p Although it’s not yet entirely clear what all this will encompass, plan sponsors should expect it will include wellness programs above all else.

This annual report will also be provided to participants at open p p p p penrollment and is expected to be made publicly available, allowing participants to compare their plan coverage to that of other employers. The idea is that this will incentivize employers to be more competitive with


their benefits offerings.


Individual Mandate Updatesp Plan sponsors are tracking the debate between Circuit Courts over the

constitutionality of PPACA’s Minimum Essential Coverage Requirement (aka “individual mandate”), which, if effective, would require all ( ), , , qindividuals to obtain health insurance or else pay a penalty.

On June 29, 2011, the Sixth Circuit upheld the individual mandate as a constitutional exercise of congressional authority under the Commerce g yClause. Although the Court’s decision was unanimous, each judge wrote a separate opinion and recognized that the Court’s opinion was, in one judge’s words, “utterly non‐final.”



Individual Mandate Updatesp On August 12, 2011, in a 2‐to‐1 opinion, the Eleventh Circuit struck down

the individual mandate, finding Congress exceeded its powers under the Commerce Clause (although it found the remainder of the law ( g“severable” and therefore still valid). In the majority opinion, two judges expressed that although Congress could do many things through the Commerce Clause, one thing it could not do was “mandate that individuals enter into contracts with private insurance companies for the purchase of an expensive product from the time they are born until the time they die.”

With th El th Ci it fi di th i di id l d t With the Eleventh Circuit finding the individual mandate unconstitutional, there is now a circuit split, and many plan sponsors are anxiously awaiting another Circuit Court ruling to break the tie or, better yet a final ruling from the Supreme Court


yet, a final ruling from the Supreme Court.


Individual Mandate Updatesp On September 8, 2011, the Fourth Circuit refused to hear two lower‐

court cases challenging PPACA’s constitutionality based on a lack of standing and essentially refusing to break the tie among the Circuit g y g gCourts.

However, in a 2‐to‐1 opinion just released on November 8, 2011, the Circuit Court of Appeals for the District of Columbia upheld the pp pconstitutionality of PPACA, including its individual mandate. D.C. Circuit Judge Laurence Silberman held that the individual mandate was a constitutional exercise of Congressional authority.

It’s also important to note that Silberman is a Reagan appointee and a significant conservative judge.



Individual Mandate Updatesp Then, just this past Monday, November 14, SCOTUS finally announced

that it will review the Eleventh Circuit’s decision rejecting the constitutionality of the individual mandate.y

Perhaps more importantly, SCOTUS will also consider whether the individual mandate, if found unconstitutional, can be severed from the rest of PPACA.

SCOTUS will also hear Anti‐Injunction Act arguments regarding whether any federal court, including the Supreme Court, has the power to hear and decide challenges to the individual mandate before 2014, which g ,means we may not receive an answer on the constitutionality issue until 2014.



Individual Mandate Updatesp Oral arguments (which have been allotted a record‐breaking 5½ hours!)

are expected to begin in March 2012, with a ruling expected to be handed down sometime next June. SCOTUS will also rule on whether the federal government has the power to impose increased Medicaid costs on the states or a mandatory level of health insurance coverage on state employees.

However, SCOTUS will not review the challenges to PPACA’s employer mandate that, beginning in 2014, requires large employers to provide certain minimum health care coverage for their employees or else pay a hefty penalty which 26 states claimed would violate state sovereignty if applied topenalty, which 26 states claimed would violate state sovereignty if applied to state‐provided health care for state employees.

This is a sizeable setback for large employers as the fees for noncompliance are significant.


p g


Other Regulatory (Non‐)Updatesg y ( ) p Nondiscrimination testing of fully insured plans (extension of 105(h))

Plan sponsors of fully insured plans are still anxiously awaiting proposed regulations on how exactly to implement the extension of 105(h). g y p ( )

In March 2011, the American Benefits Council wrote the IRS and specifically requested that the transition relief period provided in Notice 2011‐1 (extending 105(h) to fully insured plans) be extended at least through plan years beginning in 2013, but the IRS has yet to issue a response.



Other Regulatory (Non‐)Updatesg y ( ) p Definition of “essential benefits” for purposes of lifetime/annual limits

The prohibition on lifetime limits and caps on annual limits on “essential benefits” are already in effect, and plan sponsors still do not have clear guidance defining “essential benefits.”

b h f d d h h f bl h d However, on October 7, 2011, the Institute of Medicine, under the authority of HHS, published a report outlining how the determination of “essential benefits” should be made by HHS. This report outlines 10 basics categories to be considered by plan sponsors as essential benefits:

ambulatory patient services;

emergency services;g y

hospitalization;

maternity and newborn care;

mental health and substance use disorder services, including behavioral health treatment;

prescription drugs;

rehabilitative and habilitative services and devices; rehabilitative and habilitative services and devices;

laboratory services;

preventive and wellness services;

chronic disease management; and

pediatric services, including oral and vision care.

Nevertheless plan sponsors are still anxiously awaiting further guidance from HHS on this key


Nevertheless, plan sponsors are still anxiously awaiting further guidance from HHS on this key definition.

III E ti C ti M ttIII. Executive Compensation Matters


Executive CompensationExecutive Compensation

Say on Pay Reporting and Best Practicesy y p g

Annual Bonus Deductibility

Code Section 162(m) Review

Compensation Risk Review

Independent Counsel Provisions of the Dodd‐Frank Act


Questions?


Thank You.


Contact Information

Alexis BacksEmployee Benefits and Executive Compensation

Chicago

Steve FloresEmployee Benefits and Executive Compensation

Chicago

Mike MelbingerEmployee Benefits and Executive Compensation

Chicago g(312) 558‐3211

[email protected]

Chicago(312) 558‐6458

[email protected]

Chicago(312) 558‐7588

[email protected]


© 2011 Winston & Strawn LLP...Nov 17, 2011 · The amended regulation reverts to the original rule...

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Transcript of © 2011 Winston & Strawn LLP...Nov 17, 2011 · The amended regulation reverts to the original rule...