Aiken & Aiken

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 June 24th, 2008

On June 17, 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act.  This bill includes a number of changes that may impact certain employee benefits plans.  For more details on the Heart Act, see our blog posted on June 2, 2008.

• Benefits , Health Care , Pension , Retirement
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Sheila Aiken June 19th, 2008

In recent years, the news has been filled with stories of large companies terminating or freezing their DB (pension) plans.  IBM, Sears, Verizon, and United Airlines are just a few of the companies that recently either closed their DB plans to newly hired employees, froze the benefit accumulation for existing participants, or outright terminated the plan. 

The well-publicized problems that some companies have experienced with their pension plans gives the impression that DB plans are no longer viable alternatives as employer-sponsored retirement vehicles.  However, that is not necessarily true.  In the right circumstances, DB plans could be the best option for some companies. 

A DB plan is a qualified retirement plan that is structured to provide a predetermined benefit to plan participants, usually defined in the plan as a specific amount or as a percentage of annual compensation.  Employer contributions to a DB plan are determined annually by an actuary and are non-discretionary.  Generally, the limitation on the annual benefit under a DB plan is the lesser of $185,000 in 2008 or 100% of the participant’s average compensation (limited to $230,000 in 2008) for the three highest consecutive years.  In comparison, the annual limitation for defined contribution (DC) plan contributions for 2008 is $46,000.  DB plans offer the opportunity for small business owners to possibly double or triple the maximum DC contribution limit applicable to 401(k) and profit sharing plans.

DB plans are making a resurgence for certain companies.  DB plans can be wonderful retirement vehicles for small business owners looking to maximize retirement savings in a relatively short time period, while minimizing the company’s tax burden.  Companies that have a predictable earning stream over a long period of time, with significant profits in excess of the owner’s salaries, should look at DB plans when considering their retirement planning strategy.  For example, a physician’s office, a law firm, a small CPA firm, or an investment advisor partnership may find a DB plan to be the best option for them.

A word of caution - while DB plans have many advantages, some of which are detailed above, they are not for every company.  DB plans tend to be more administratively expensive and burdensome than other qualified retirement vehicles, and they have less flexibility when it comes to annual contributions.  However, these drawbacks can be more than offset by the increased annual contribution amounts allowed and the accompanying significant tax savings for the right company. 

Employers interested in establishing a DB plan should consult with professional advisors before making any decisions.  Each employer’s situation is unique and should be objectively reviewed to determine what the best course of action is based on the employer’s own circumstances.  Some of the factors that will need to be considered are:  the company’s employee demographics, the company’s short and long-term growth projections, and the company’s historical revenue stream.  These and other factors can significantly impact whether a DB plan is right for a business.

Please contact our office for more information about whether establishing a DB plan is right for your business.

• Benefits , ERISA , Pension , Retirement
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Michele Aiken June 10th, 2008

In today’s competitive business environment, employers and HR personnel are all too often put in the position of having to pay insufficient attention to employment and employee benefits legal compliance until problems arise - resulting in dire and costly consequences.  Failure to comply with the complex and ever-changing laws in these areas often results in one or a combination of: substantial penalties, steep fines, governmental agency audits, and / or litigation.  Unfortunately, all of these options usually have a very expensive price tag attached.

Consider the following:

Employment Practices

• 67% of all employment cases that litigate result in a judgment for the plaintiff
• 1/3 of employment case verdicts award punitive damages
• 75% or more of the total judgment amount awarded in an employment case is usually for punitive damages
• Based on 2000 data, median compensatory awards for employment cases were:
  • $268, 926 for age discrimination
  • $120,951 for race discrimination
  • $100,000 for gender discrimination
• Median compensatory awards rose from $78,592 to $218,000 between 1994 and 2000

Employee Benefits Plans

• From 2000 to 2001 the number of ERISA civil suits filed increased from 9,124 to 10,292 (almost 13%)
• In 2001, the Department of Labor investigated 4,862 businesses and recovered $648 million in penalties and damages
• In 2000, the average defense cost of a fiduciary liability claim was $124,000
• In 2000, 47% of fiduciary liability claims were based on benefits disputes (including denial of benefits)

How can an employer protect itself:

Self-Audits are reviews that companies usually undertake with the assistance of benefits counsel to identify legal compliance gaps in their plans, policies and/or operational procedures.  The audit focuses on areas that could place the company at risk for governmental fines and penalties, as well as expose the company to an increased risk of lawsuits.  These audits can be done for either or both a company’s employment practices and employee benefits plans. 

The scope of an audit can vary from a basic overview of plans, policies and procedures with identification of possible compliance gaps, to a comprehensive assessment and analysis with specific recommendations for methods of correction of any identified gaps and drafting and/or updating any needed plans, policies and procedures.  By conducting these voluntary self-audits, a company can significantly reduce the costs of future problems - costs that can have a huge impact on the company’s bottom line.

Employers should consider performing self-audits at least annually.  Additionally, when there are major changes to the law or major changes to the business, a self-audit should be done.  Employers should work with professionals with experience conducting these audits.  Employment and benefits lawyers can assist employers in auditing their policies, practices and plans.  Proactively identifying and addressing issues can be the best protection from legal action for an employer.

• Benefits , ERISA , Employment , General
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