Copyright © 2010 by K&L Gates LLP. All rights reserved.

Benefits Best Practices for 2010

Michel P. Vanesse, PartnerLynne S. Wakefield, PartnerApril 20, 2010

Copyright © 2010 by K&L Gates LLP. All rights reserved.

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Presenters

Michel P. Vanesse, PartnerCharlotte Office michel.vanesse@klgates.com

704.331.7464

Lynne Shore Wakefield, PartnerCharlotte Office lynne.wakefield@klgates.com704.331.7578

Copyright © 2010 by K&L Gates LLP. All rights reserved.

TRENDS IN EXECUTIVE COMPENSATION

Michel P. VanessePartner – Charlotte, NCApril 20, 2010

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Executive Compensation Under Scrutiny

Sources Institutional Shareholders Riskmetrics Media Federal Agencies Legislators

Reasons Pay Differential Disproportionate Risk-taking Continued Lack of Alignment with Shareholders’

Interests

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Compensation and Benefits Review

Current environment requires a comprehensive understanding of compensation and benefits structures

Due diligence should not be limited to levels of compensation and benefits

Good documentation is critical

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Pay Practices That May Cause Concern

Employment contracts Nonperformance-based compensation Guaranteed salary increases Severance Change-in-control provisions and related parachute

payments Make-whole provisions

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Pay Practices That May Cause Concern (cont’d)

Benefits and Perquisites SERPs Tax gross-ups and other reimbursements Severance

Equity-based compensation Types of awards (options have inherent issues) Dividend equivalents (may not be appropriate on

unvested awards) Repricing

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Risk Management

Identify pay practices and provisions that may encourage excessive risk taking

Understand global business plan and related risks

Analyze compensation and benefits plans to determine if they will help implement the business plan or trigger unwanted behaviors (e.g., excessive risk-taking)

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Legal Environment

Current legal environment gives additional reasons for due diligence

SEC disclosures IRS focus on compensation and benefits

practices 409A Reasonable compensation

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Adequate Documentation

Contradictory trends Employment agreements Benefit plans

Adequate documentation means more than performance metrics Eligibility Form and time of payment Vesting/Forfeiture Governance Boiler plate

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Adequate Documentation (cont’d)

409A mandates comprehensive documentation “Deferred compensation” is a broad concept (may

include not only retirement-type benefits, but also severance, some equity-based arrangements, bonus plans, LTIPs, tax reimbursement, health reimbursements, earn-outs, etc.)

Documentation requirements are similar to those applicable to traditional ERISA plans

IRS Correction Program Operation must reflect plan documents

Potential cultural change for HR IRS Correction Program

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162(m) Update

Compensation is NOT performance-based for purposes of 162(m) if it is payable upon the occurrence of certain events, irrespective of whether performance goals are met Termination without cause Termination for good reason Retirement

Transition relief is available in 2010 only if: Performance period started on or before 1/1/09; or Contract was in effect on 2/21/08

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Design Trends

Multiple performance metrics per program Multiple parameters used to determine payouts Objective and subjective approach Blended benchmarks (company-wide, line of

business, individual) Layered Structure

Annual and long-term Maximum payouts Medium of payment

Clawbacks

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Design Trends - Equity

Traditional forms of awards are criticized Options (pricing, exercise, underwater options) Restricted stock or RSUs with time-based vesting (not

an proper incentive, 162(m)) Increased prevalence of performance-based

awards Need for repricing for outstanding awards

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Repricing Considerations

Plan document Procedure to follow Consent requirement Potential prohibition

Tax Issues New grant Fair market value 409A

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Repricing Considerations (cont’d)

Accounting Modification of existing award Impact on fair value

SEC considerations Investment decision and tender offer rules Unilateral repricing Option exchange Available exemptions

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Repricing Considerations (cont’d)

Structuring One-to-one ratio or value-for-value Eligibility Procedure (unilateral repricing, exchange) Other forms of awards

Employee communication

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Questions?

Copyright © 2010 by K&L Gates LLP. All rights reserved.

BENEFITS BEST PRACTICES FOR 2010

Lynne S. WakefieldPartner – Charlotte, NCApril 20, 2010

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Introduction

Health Care Reform – Immediate and Near Term Impacts on Employer Plans

Health and Welfare Plan Best Practices and Trends Legal Update/Other Emerging Issues

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans

Two-Part Health Care Reform Legislation Patient Protection and Affordable Care Act

signed into law March 23, 2010

Health Care and Education Reconciliation Act of 2010 signed into law on March 30, 2010

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans

Major Components of Health Care Reform Individual Mandate – Individuals will be subject to

tax for not purchasing coverage (government subsidies will assist those with lower incomes)

Employer Obligation – Employers must provide coverage or pay penalty – referred to as “pay or play” or “freerider surcharge”

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans

Major Components of Health Care Reform (cont’d) Insurance Reform – Guaranteed issue and

underwriting, prohibition on pre-existing condition exclusions

Creation of state–level health insurance clearinghouses or “exchanges” where individuals and employers can purchase coverage

Tax-Based Funding Mechanisms

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans

Effective Dates There are several immediate 2010 impacts of

Health Care Reform that need to be considered There are also a number of reforms and plan

design changes required for plan years beginning on or after September 23, 2010, which for calendar year plans is January 1, 2011 Plan design changes must be considered soon so that

they can be communicated during annual enrollment and implemented for 2011

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans

Effective Dates (cont’d) Later Health Care Reform provisions become

effective from 2013 to 2018 Individual and employer pay or play mandates are

effective in 2014

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans

Immediate 2010 Impacts of Health Care Reform Early Retiree Reinsurance Program

Beginning in June 2010, the government will launch a temporary reinsurance program which provides for reimbursement of certain employer costs in connection with employer-provided retiree health coverage

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans

Immediate 2010 Impacts of Health Care Reform (cont’d) Change in Employer Tax Treatment of Medicare Part

D Retiree Drug Subsidy Employers whose drug expenses are reimbursed under the

Medicare Part D retiree drug subsidy program will lose their tax deduction in 2013

Although the change does not take effect until 2013, employers participating in the retiree drug subsidy program will be required to recognize the full accounting impact of the loss of this federal tax deduction on current financial statements

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans

Immediate 2010 Impacts of Health Care Reform (cont’d) Small Employer Tax Credit

New tax credit for eligible small employers equal to a portion of the employer’s cost to provide health insurance

Creation of state high risk pool for individuals with pre-existing conditions

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans

Near Term Impacts of Health Care Reform Three Primary Categories of Health Care Reform

Changes for 2011 Plan Design Changes Reporting and Disclosure Changes Nondiscrimination Changes

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans

Near Term Impacts of Health Care Reform “Grandfathered Plans” are exempt from certain

aspects of Health Care Reform A “Grandfathered Plan” is a plan that was in effect on

March 23, 2010 A “Grandfathered Plan” does not lose its status when new

employees are hired and enrolled or when dependents are added to the plan under provisions in effect on March 23

There is no current guidance on what could cause a plan to lose grandfathered status

Unless otherwise indicated, Grandfathered Plans are subject to the requirements in the following slides

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans

2011 Plan Design Changes Plans that cover dependent children must provide

coverage for adult children up to age 26, regardless of marital or student status Prior to 2014, Grandfathered Plans only have to cover

such dependents who are not eligible under another employer’s plan

Prohibition on imposing lifetime and annual limits on the dollar value of essential health benefits

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans

2011 Plan Design Changes (cont’d) Plans must provide 100% coverage for preventive

care and certain immunizations (e.g., no deductible, copayment or other cost-sharing) Grandfathered Plans are exempt from this requirement

Prohibition on imposing pre-existing condition exclusions on children under age 19

Over-the-counter medicine and drugs are not eligible for reimbursement under a Health FSA, HSA or HRA without a doctor’s prescription

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans

2011 Plan Design Changes (cont’d) Excise tax for non-qualified distributions from HSAs

increases from 10% to 20% No rescission of coverage is permitted except in

cases of fraud or intentional misrepresentation New appeals process

Grandfathered Plans are exempt from this requirement Simple cafeteria plans for small employers

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans

Action Required to Implement 2011 Plan Design Changes Coordinate with third party administrators (self-

insured plans) or insurers (fully insured plans) to implement changes

Determine impact of cost changes Amend plan documents and update benefits

booklets and SPDs to reflect changes Describe changes to participants in annual

enrollment materials

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans 2011 Reporting and Disclosure Changes Employers will be required to include the value of

employee health coverage on employees’ Form W-2 beginning with the 2011 tax year

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans

2011 Nondiscrimination Changes Nondiscrimination rules under Section 105 of the

Internal Revenue Code previously were applicable only to self-insured plans

These nondiscrimination rules also apply to fully-insured plans effective January 1, 2011

May impact fully-insured medical plan products offered solely to executives

Grandfathered Plans are exempt from this requirement

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Health Care Reform – Immediate and Near Term Impacts on Employer Plans

Other Considerations There are a number of other reforms and plan

design changes that go into effect in 2013 and 2014

As Health Care Reform goes into full effect in 2014, employers will be making strategic changes in their overall program and determining whether to pay or play

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Benefits Best Practices and Trends

Compliance Audits Dependent Eligibility Audits Wellness Programs

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Benefits Best Practices and Trends

Compliance Audits Plan Document/Summary Plan Description Audits

Ensure compliance with applicable legal requirements Minimize risk and exposure with respect to participant

claims

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Benefits Best Practices and Trends

Compliance Audits (cont’d) Legislative Audits (e.g., COBRA, HIPAA, CHIPRA)

Ensure compliance with applicable legal requirements, particularly with respect to the required content and timing of notices

Minimize risk of violation of applicable requirements and associated penalties, as well as assessment of penalties on audit

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Benefits Best Practices and Trends

Compliance Audits (cont’d) Medical/Prescription Drug Claims Administration

Audits Reduce costs by identifying ineligible claims being

processed under plans Improve administration by identifying issues and gaps

with respect to processing of claims

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Benefits Best Practices and Trends

Compliance Audits (cont’d) Increased stakes due to new group health plan

excise tax reporting requirements on Form 8928 Provides mechanism and new requirement to self report

excise taxes on violations of COBRA, HIPAA, mental health parity, Newborns’ and Mothers’ Health Protection Act, GINA and Michelle’s Law

Excise taxes can be avoided if violation is corrected within 30 days of when it became known and affected individuals are placed in the same position they would have been in if failure had not occurred

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Benefits Best Practices and Trends

Dependent Eligibility Audits Purpose

Reduce costs by identifying ineligible participants and removing them from coverage

Ensure compliance with applicable ERISA fiduciary requirements, as ERISA plans must be maintained solely for the benefit of eligible employees and beneficiaries

Improve administration through development of clear and concise eligibility requirements that can be consistently enforced

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Benefits Best Practices and Trends

Dependent Eligibility Audits (cont’d) Keys

Ensure that dependent eligibility criteria are clear and accurate before the audit starts

Communicate the audit early and often Be precise about the documentation which must be

submitted to verify eligibility Consider impact of Health Care Reform

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Benefits Best Practices and Trends

Wellness Programs Most Common Wellness Initiatives

Employee Assistance Programs Immunizations and Flu Shots Health Risk Assessments Nurse Line Health Portal/Website

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Benefits Best Practices and Trends

Wellness Programs (cont’d) Other Wellness Initiatives

Personal Health Coaches and Advocates Tobacco Cessation Programs Health Fairs Workplace Health Challenges Biometric Health Screenings Obesity Management Onsite Clinics

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Benefits Best Practices and Trends

Wellness Programs (cont’d) Traps for the Unwary

HIPAA compliance obligations vary depending on whether the wellness incentive/reward is standards-based or participation-based

GINA regulations impact the content of health risk assessments – no family history questions permitted

Purpose Improve employee health and productivity Reduce costs of medical plan claims

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Legal Update/Other Emerging Issues

COBRA Subsidy Extension Mental Health Parity and Addiction Equity Act

Compliance Children’s Health Insurance Program Notifications Final Cafeteria Plan Regulations

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Questions ?