Aiken & Aiken

Sheila Aiken August 20th, 2008

The Employee Retirement Income Security Act of 1974 (ERISA) governs the majority of employee benefits plans and includes penalty provisions .  The criminal penalties under ERISA are contained in § 501 of the Act. Originally under ERISA, criminal fines for individuals were $5,000 and potential imprisonment of up to one year.

However, the Sarbanes-Oxley Act (SOX) of 2002 dramatically increased these penalties.  Under SOX, the penalties for individuals were increased to a maximum of $100,000 and with potential imprisonment of up to ten years.  Criminal fines for entities other than individuals went from a maximum of $100,000 to a maximum of $500,000.  These increased penalties apply not only to black-out notices, but also to ERISA’s other plain-vanilla reporting and disclosure requirements.

While it is hard to picture the term “criminal penalties” in conjunction with mundane things like SPDs, SARs, Form 5500 filings and other run-of-the-mill benefit plan documents, there is potential liability when fiduciaries fail in their duties under the plan.

When the Department of Labor (DOL) uncovers egregious behavior involving benefit plans, they have historically brought criminal charges under three sections of ERISA and three sections of the United States Criminal Code.  ERISA’s three most common criminal provisions are aimed at the following:

• Preventing Criminals from Overseeing Benefit Plans. This provision is aimed at preventing those convicted of certain crimes (robbery, bribery, extortion, embezzlement, perjury, murder, certain drug offenses, labor union violations, and other ERISA offenses) from serving as a fiduciary or service provider of an employee benefit plan.

• Preventing Violations of Reporting and Disclosure Requirements.  This provision punishes those who commit willful violations of ERISA’s reporting and disclosure requirements in Part 1 of Title 1.  These reporting and disclosure requirements are designed to disclose significant information about the plan and its transactions, provide rights and benefits data to participants and detail the responsibilities for fiduciaries.

• Preventing the Coercive Interference with Rights to Benefits. This provision is designed to keep employers from terminating or harassing employees to prevent them from getting their vested pension rights.  Criminal sanctions are available where such interference involves willful use of actual or threatened fraud, force, or violence.

In the past, the DOL has taken action and convicted plan administrators and others for failure to file the Form 5500, Annual Return/Reports, or to provide participants with summary plan descriptions, summary annual reports and accrued benefits statements.  Additionally, they have aggressively pursued those fiduciaries that have violated the prohibited transactions rules.

With the new higher criminal penalties which are available, the DOL may become even more aggressive in seeking criminal penalties.  Those that may be fiduciaries of a plan - plan sponsors, plan administrators, service providers and their advisors - need to understand these potential criminal penalties and should consider them when taking action.

Plan sponsors need to ensure they exercise care in the appointment of fiduciaries and ensure there are checks and balances put in place in operating and maintaining a plan.  Additionally, third-party administrators, advisors and other service providers need to be vigilant regarding the actions of their clients and the clients’ plans to which they provide service.

Benefits counsel can assist by discussing potential risks in current plan administration, reviewing compliance with respect to ERISA requirements, and providing training for plan fiduciaries.  Please contact our office for more information on fiduciary liability or other ERISA questions.

• Benefits , ERISA
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Michele Aiken August 14th, 2008

The Pension Protection Act of 2006 (PPA) was originally created to effect change to defined benefit plans.  However, the final version of the more than 900 page statute also contains provisions that significantly impact defined contribution (DC) plans.

Among the provisions of the PPA that affect DC plans, some of the most significant changes are effective for the 2008 plan year.  Highlights of a few of the PPA provisions effective for the 2008 plan year include:

Testing Changes

• Prior to the PPA, employers were required to calculate interest on the gap period for average deferral percentage (ADP) and annual contribution percentage (ACP) test failures. This requirement has been eliminated for ADP and ACP test failures, but is still required for excess deferrals.

Safe Harbor for Automatic Enrollment

• The PPA provides a safe harbor which allows employers to avoid ADP, ACP and top-heavy testing through an automatic deferral provision and employer match.

Rollovers to Roth IRA

• Prior to the PPA, Roth IRAs could only accept rollovers from a designated Roth account, a different Roth IRA or a non-Roth IRA (i.e. qualified rollover contributions). The PPA amended the definition of a qualified rollover contribution to Roth IRAs to include amounts distributed from other qualified plans under §401(a), §457(b), and §403(a) and (b) annuities.

Returned Contributions

• If an employer chooses to institute an automatic enrollment provision, under certain circumstances an automatically enrolled participant may withdraw from participation by requesting withdrawal from the plan within 90 days of the first contribution. The normal penalty for early withdrawal (10% tax) would not be applicable to these withdrawals.

While some of the PPA changes are mandatory, a number of them are discretionary. Employers that sponsor DC plans need to review their plan documents to determine which, if any, of the mandatory changes are applicable and have their plan documents updated accordingly.  Additionally, employers should assess the discretionary provisions of the PPA to determine whether they wish to implement any of the allowed changes.  Benefits counsel can assist you by detailing the allowed and mandatory changes, reviewing plan documents to determine which apply to your specific situation, and preparing any necessary amendments to the plan.  Please contact our office for more information.

• Benefits , ERISA
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Sheila Aiken July 23rd, 2008

Employers today are constantly searching for new and effective methods to decrease the amount spent for employee health care.  Consumer driven health plans, HSAs, HRAs, and wellness programs are a few of the strategies that are being used.  However, a number of employers are not adequately using a tool that their plan already contains in the fight against rising health care costs - reimbursement through subrogation.

Subrogation, in one form or another, has been around for a long time (some of the earliest recorded cases involving subrogation are from England in the 1700s).  YourDictionary.com (www.yourdictionary.com) defines subrogation as “the substitution of one creditor for another, along with a transference of the claims and rights of the old creditor”.  It goes on to describe the subrogation process as a legal procedure where an insurance company pays for a claimed loss, then attempts to recover the paid claims from another, legally responsible party (e.g., the person who caused the loss, another insurance company, etc.).  Subrogation was originally applicable almost exclusively to property insurance claims.  However, the concept has expanded over time, and now encompasses a large variety of insured areas, including health insurance.

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that governs most employee benefit plans, such as retirement plans and group health plans.  ERISA does not require employers to provide employee benefit plans, but if an employer chooses to offer benefits, the plans must comply with the rules and regulations contained in ERISA (and its amendments). 

ERISA allows employers the right of subrogation, so many group health plans contain what is commonly called “subrogation” provisions.  Generally, these provisions state that the plan is entitled to reimbursement from the participant of any medical expenses the plan previously paid that the participant later recovers from another party responsible for those expenses.  For example, if a plan participant is in an auto accident and sustains injuries, his/her health benefit plan would pay for the medical expenses (per the plan’s provisions).  However, if the participant that was injured in the auto accident has a claim against another party (such as the driver who was at fault, or an auto insurance company), and receives a settlement or judgment under the claim, the participant may be required to reimburse the health plan for the medical claims it paid related to the auto accident.  This requirement for reimbursement would be based upon the health plan’s subrogation provisions.

According to the U.S. Supreme Court (see Great-West Life v. Knudson), subrogation relief for employers under ERISA can only be determined by the characterization and mechanics of the plan’s subrogation provision.  Essentially, this means that the ability of an employer to recover benefits under a subrogation provision depends on how the provision is written and whether the action brought by the plan to recover is legal or equitable.  ERISA allows plans to bring suit for “appropriate equitable relief”.  However, monetary damages are considered legal rather than equitable relief, and therefore are not usually permitted under ERISA.  These restrictions mean that the subrogation language contained in the plan document as well as the operational procedures for subrogating claims becomes vital to an employer’s success in pursuing subrogation.

While a subrogation provision may be present in most health plan documents, employers frequently do not utilize their rights under the provision to the fullest.  Subrogation provisions should be reviewed to ensure that the provision’s language and operations are structured to provide the greatest benefit to the plan.  Provisions should include items such as: clearly identifying recoverable claims, providing for attachment of equitable liens, providing for attorney’s fees to be paid outside of recovery, and requiring segregation of recovered claim amounts before distribution to participants.  Plans should have procedures in place to routinely audit and investigate claims for potential subrogation rights. 

Actively investigating and pursuing subrogation on all appropriate claims can be a strong weapon in the fight to reduce health care costs.  Please contact our office for additional information.

• Benefits , ERISA , Health Care
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Michele Aiken July 17th, 2008

On April 5, 2007, the IRS released final regulations related to Section 415 of the Internal Revenue Code (Code).  The final regulations closely follow the proposed regulations that were issued in 2005, with some changes, including changes that were made by the Pension Protection Act of 2006 (PPA).

Section 415 was originally added to the Code by the Employee Retirement Income Security Act of 1974(ERISA), and the initial regulations were issued in 1981.  In general, Section 415 sets limits on annual contributions allowed to qualified defined contribution (DC) plans and annual benefits provided under qualified defined benefit (DB) plans.  Included in Section 415 is a definition for compensation (§415(c)(3)) that is also used in a number of other instances for qualified plans, such as determining highly compensated employees and nondiscriminatory compensation for testing purposes.  One of the most significant provisions of the Section 415 final regulations involves post-employment compensation or severance pay.

The proposed regulations generally did not allow post-employment compensation to be considered compensation under Section 415 with 2 exceptions: (i) if the payments would have been paid if employment had been continued (such as overtime or commissions); or (ii) if the payments were due to accrued bona fide leave (such as vacation or sick leave) that would have been available if employment had been continued.  These exceptions would only apply if the compensation was paid out no later than 2 ½ months after termination of employment. 

With regard to the post-employment compensation, the final regulations adopted the proposed regulations with one adjustment.  The final regulations extend the time period for severance compensation payout.  Instead of requiring payment within 2 ½ months after termination of employment, payment of post-employment compensation (as allowed by the exceptions) must be made by the later of 2 ½ months after severance or the end of the limitation year that includes the participant’s termination date.

In addition, the final rules addressed areas such as:

• Post-termination payments from non-qualified deferred compensation plans as compensation
• Compensation paid to permanently and totally disabled participants
• Calculation of average compensation under a qualified defined benefit plan
• Combined contribution limits for participants in both a qualified DB plan and a qualified DC plan
• Required modifications due to the PPA

With certain exceptions, the final regulations are applicable to limitation years beginning on or after July 1, 2007.  For most plans, this means that the final regulations took effect as of January 1, 2008.  Generally, plans are required to be amended to comply with the Section 415 final regulations.  The plan amendments must be made by the employer’s deadline for filing its income tax return (including extensions) for tax year 2008 (sometime in 2009).  With 2008 already half gone, employers are encouraged to contact their benefits counsel to have their plans reviewed and amended for Section 415 changes as soon as possible.  For further questions about Section 415 changes, please contact our attorneys.

• Benefits , ERISA , Pension , Retirement
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Sheila Aiken July 10th, 2008

In October 2004, the American Jobs Creation Act enacted Section 409A of the Internal Revenue Code (Code).  This Code Section made significant changes to how nonqualified deferred compensation (NQDC) plans must be structured.  In October 2007, the IRS extended the deadline for 409A compliance to December 31, 2008.  Employers with NQDC plans must have their NQDC plans amended to be compliant in design, administration and operation by this date.

Section 409A defines NQDC plans very broadly.  According to the final regulations, “nonqualified deferred compensation plan means any plan … that provides for the deferral of compensation”.  This definition means that Section 409A potentially impacts any arrangement that provides an employee with an enforceable right in one tax year to compensation that is payable in a subsequent tax year.  Examples of plans that could be impacted include:

Bonus plans with deferred payments

• Employment agreements
• Supplemental Executive Retirement Plans (SERPs)
• Incentive pay plans
• Stock appreciation rights (SARs)/Discounted stock options
• Phantom stock plans
• Severance arrangements
• Change-in-control agreements
• Excess benefit plans

Section 409A provides numerous requirements for NQDC plans, including:

• Plans must be in writing
• Plans must set deadlines for election of deferrals
• Plans must require that the time and form of payment be designated at the time of the deferral
• Plans must restrict the ability to make changes to designated time and form of payment
• Plans must define the permitted distribution events
• Plans may not provide for the acceleration of payments

The cost for non-compliance with Section 409A can be very high.  NQDC plans that do not comply with Section 409A are subject to the immediate taxation of all vested amounts deferred, including earnings, for all years in all similar plans plus interest plus a 20% penalty tax.  Additionally, Section 409A does not provide any exceptions to this penalty calculation for de minimus violations.

Employers should audit all of their compensation arrangements to identify any written or unwritten agreements, arrangements or programs that may fall under the Section 409A definition of a NQDC plan and then review them with benefits counsel to determine whether any need to be amended to comply with Section 409A.  Please contact our office for additional information on Section 409A compliance.

• ERISA , Non-qualified Deferred Compensation
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