Aiken & Aiken

Sheila Aiken November 18th, 2008

Generally, there are two different ways that companies can grow their existing businesses - 1) obtaining new customers (organic growth) or 2) merging with or acquiring another company.  Many companies attempt to grow through mergers and acquisitions (”M&A”) as it can allow for the rapid growth of a company’s client base and/or business capabilities.  However, M&As can pose numerous legal challenges to businesses.  One of the most often overlooked area in any M&A deal is employee benefits plans.

During a M&A deal, companies generally perform due diligence across all areas of the target company to identify issues that need to be addressed during the negotiation phase of the deal.  If employee benefits plans are not included in this due diligence, an acquiring company can discover that it has inadvertently become the owner of significant employee benefits plan problems.  While problems that arise in the area of employee benefits plans do not generally become “deal breakers”, ensuring that any and all benefits issues are identified and addressed before the final agreement is signed can avoid major headaches in the future.

Benefit plan issues can vary depending on the type of deal that is being contemplated - either an asset purchase or a stock purchase.  In an asset purchase, the due diligence required for employee benefits plans could be reduced if the agreement does not include the buyer assuming liability for employee benefit plans.  However, even in that situation, due diligence on the benefit plans should still be conducted to ensure that the buyer has a complete picture of the seller’s business.

In a stock purchase deal, or in an asset purchase deal where the buyer is assuming liability for benefit plans, the buyer needs to ensure that significant due diligence is conducted on the existing benefit plans.  Generally, this due diligence should include:

• Identifying all employee benefit plans, programs and practices currently in existence - both formal written plans and informal, unwritten plans.
• Obtaining all pertinent documents for each plan identified (e.g., plan documents, summary plan descriptions, Form 5500s, annual nondiscrimination testing and audits, determination letters, third party administrator contracts).
• Reviewing all documentation to ensure the plans are currently compliant with applicable laws and looking for potential problem areas (e.g., accelerated vesting on change of control, unfunded liabilities, funding arrangements for nonqualified deferred compensation plans).
• Requesting disclosure on currently pending or threatened claims based on benefit plans and on whether any governmental audits have been commenced or are pending.
• Identifying potential problems to be addressed during negotiation of the deal.

As stated earlier, issues identified during the due diligence process for employee benefits plans are generally not severe enough to stop a deal from closing.  However, if properly addressed during the negotiation phase, they can be factored in with all the other components in the decision making process.  Where these issues are not properly addressed, they can become a significant concern for the buyer after the deal has completed. 

Benefits counsel can assist in completing comprehensive due diligence of a target company’s benefit plans to ensure that the acquiring company does not get blind-sided by benefit issues in the future.  Please contact our office for additional information or to talk to an attorney about your particular situation.

• Benefits , ERISA , General , Health Care , Health Savings Accounts (HSAs) , Non-qualified Deferred Compensation , Pension
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Sheila Aiken October 27th, 2008

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (EESA).  While most people are familiar with the “bailout” provisions applicable to the financial industry that are contained in the statute, many are not aware that it also contained numerous other provisions unrelated to the economic bailout.  Several of those other provisions are applicable to various employee benefit plans.

One of the most significant benefit provisions contained in the EESA is the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008.  Effective January 1, 2009, this act makes permanent the 1996 mental health parity provisions.  Additionally, it also makes certain enhancements to existing mental health parity provisions, including:

• Requiring plans that provide mental health benefits to extend those benefits to substance abuse-related problems.
• Mandating that the cost-sharing requirements for mental health and substance abuse benefits (such as deductibles, co-insurance, and out-of-pocket costs) may not be more restrictive than the cost-sharing requirements applicable to medical and surgical benefits.
• Mandating that the benefits limitations requirements for mental health and substance abuse benefits (such as number of visits and maximum days covered) may not be more restrictive than the cost-sharing requirements applicable to medical and surgical benefits and there may not be separate limits for treatment applicable only to mental health and substance abuse benefits.
• Mandating that participants can receive benefits for mental health and substance abuse treatments received out-of-network if out-of-network treatment is allowed for medical and surgical benefits under the plan.
• Requiring Plan’s to furnish participants with the criteria used to determine medical necessity and the reason for denial of benefits for mental health and substance abuse claims.

The enhancements are generally effective for plan years beginning one year after October 3, 2009.  However, small employers (less than 50 employees) are excluded from the enhanced provisions.

Other provisions contained in the EESA that can impact employee benefit plans are detailed below:

• The statute requires that any financial institution that directly sells troubled assets under the EESA, the financial institution must meet certain standards for executive compensation and corporate governance, including limits on compensation, recovery of bonus or incentive compensation, and prohibitions on certain “golden parachute” payments.
• The statute details for applicable employers that participate in the Troubled Assets Relief Program (TARP), an amendment of the Internal Revenue Code (IRC) §162(m) and a denial of a tax deduction for the payment of compensation or other benefits in excess of $500,000 to executives or other highly compensated employees. The EESA also amends IRC §280G to apply the tax penalties for excess parachute payments to certain employers and their executives who participate in TARP.
• The statute updates IRC §132(f) to allow employees to exclude employer reimbursements for bicycle commuting expenses from gross income.
• The statute requires that “nonqualified entities” include in gross income for income tax purposes the employee compensation deferred under a nonqualified deferred compensation plan when there is no substantial risk of forfeiture of the rights to such compensation. A “nonqualified entity” is defined as any foreign corporation unless substantially all of its income is: (1) effectively connected with a trade or business in the U.S.; or (2) subject to a comprehensive foreign income tax.

Employers should consult with benefits counsel to decide whether any of the benefit-related provisions contained in EESA are applicable to their benefits programs.  Please contact our office for more information on the EESA and its benefit plan implications.

Tags: Emergency Economic Stabilization Act of 2008

• ERISA
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Sheila Aiken October 13th, 2008

Most employers are aware of the common “discrimination” claims brought by employees or former employees like gender, race, disability, and age.  However, there is another not so well-known anti-discrimination/retaliation claim under the Employee Retirement Income Security Act (ERISA) that is becoming more and more prevalent.

ERISA §510 states that “It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan . . . or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan”.  This provision provides protection to employees from adverse action by an employer in order to interfere with the attainment of rights under ERISA or in order to stop a participant from availing himself/herself of rights under ERISA.

Historically, ERISA §510 claims have been most often asserted in relation to retirement/pension plans.  However, recent cases have been brought under ERISA §510 in relation to health and welfare plans.  Claims for ERISA §510 violations occur most often when an employer has terminated an employee, and the employee claims that the termination was in anticipation of the employee making a claim under a benefit plan or becoming eligible for benefits under a benefits plan.

A recent case, Rodrigues v. The Scotts Co., LLC., involved an employer who had a company policy that prohibited its employees from smoking at any time.  One employee was terminated shortly after being hired after he tested positive for nicotine.  The employee brought several causes of action against the employer, one of which was a claim of an ERISA §510 violation.  The employer moved to dismiss the claim, but the district court denied the motion and allowed the case to proceed, stating that the key inquiry is whether the employment action was taken with the specific intent of interference with the right to a benefit.

In order for an employee to prevail under a claim of an ERISA §510 violation, he/she must prove that the employer’s adverse employment action was taken with the specific intent to interfere with the employee’s rights or benefits under an ERISA plan.  This means that the loss of benefits was the motivating factor behind the adverse employment action, not merely a consequence of the action.  As with other employment discrimination causes of action, if the employee can make an initial showing of a prima facie case for intentional interference, then the employer must prove that there was a legitimate, non-discriminatory basis for their action.  If the employer succeeds, then the employee is then required to offer proof that the employer’s legitimate, non-discriminatory reason is a mere pretext.  Because the requirements to maintain an ERISA §510 action mirror many other employment discrimination causes of action, they are often brought in conjunction with other causes of action.

As companies continue to explore ways to decrease their operational expenses, benefit costs may seem to be an easy area in which to realize cost savings.  However, employers need to be cautious in the criteria used for making benefit reduction decisions.  ERISA § 510 claims seem to go hand-in-hand with employment discrimination claims such as age discrimination.  Before making any decisions about reducing benefits costs, employer should consult with benefits counsel to ensure that any actions taken aren’t in violation of ERISA.

Tags: Discrimination

• ERISA
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Sheila Aiken September 22nd, 2008

Both the Internal Revenue Service (IRS) and Department of Labor (DOL) require that employee contributions are remitted in a timely manner.  Current IRS regulations mandate that employee 401(k) contributions must be remitted to the employer sponsored plan as soon as they can be reasonably segregated from the plan sponsor assets.  The regulations specify that they must be made no later than 15th business day of the month following the month in which the amounts are withheld from wages or received by the employer.  Additionally, the IRS has proposed a safe harbor for small plans - those with less than 100 participants - that these plans can comply with currently.

While some may interpret the regulation as a safe harbor limit, in practice, the key words in the regulation are that the monies must be remitted “as soon as they can reasonably be segregated”.  This means that if the funds can be segregated within a shorter period than the outside limit - for example, within a few days of the date of payroll - the funds must be remitted by this shorter time.

If contributions are not remitted in a timely manner, the failure could be held to be a prohibited transaction, a fiduciary breach or both.  There are significant penalties for both of these violations and, if there is a breach of fiduciary duty, then the plan’s fiduciary could be held personally liable.  Prohibited transactions, which can include a delay in the deposit of employee deferrals, continue until corrected by the plan sponsor.

Both the IRS and DOL have self-correction programs which can be followed to correct many qualification and fiduciary violations, including violations associated with the late remittance of retirement contributions.  In order to correct an issue with timely remittance of employee contributions, the voluntary compliance programs generally require that the plan sponsor make the participant whole by depositing the outstanding contributions as well as any lost earnings/interest or restoration of profit applicable during the time the employer held the participants’ funds.

The DOL has an online calculator that can be used to assist with this process.  An employer enters the required information into the calculator, which then performs the interest calculations and provides the plan sponsor with the amount of interest and/or lost profit due based on the greater of the two options. The online calculator uses the Internal Revenue Code (IRC) 6621(a)(2) underpayment rate for calculating interest owed and the IRC 6621(c)(1) underpayment rate for calculating restoration of profits.  The IRC underpayment rate is the sum of the federal short-term rate plus 3 percentage points.  The federal short-term rate changes quarterly, so the interest percentage used under this method will probably change every quarter contributions are delayed.

The IRS has recently indicated that, although full restoration is generally required, reasonable estimates of restoration amounts may be used when it is not feasible to obtain actual investment results.  If it is either (1) possible to precisely calculate the actual investment results but the difference between the estimate and the actual is insignificant and the administrative cost to determine the actual investment results would significant exceed the probable difference; or (2) it is not possible to determine actual investment results, then the DOL’s online calculator rates will be accepted by the IRS as a reasonable interest estimate.

Timely remittance of employee 401(k) funds is a process of which every fiduciary should be aware.  Additionally, fiduciaries and employers who use the 15th business day of the month following pay dates as a safe harbor need to take a close look at how payroll deductions are transmitted to determine reasonable segregation dates for their particular circumstances and take action to deposit the deferrals into plans on a more timely basis.

Where there have been violations, employers should consult with benefits counsel to understand the steps that will need to be taken to analyze which self-correction program is right for their individual situation and to ensure that all necessary steps of the program are taken.  Please contact our office for more information.

• ERISA , Pension , Retirement
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Michele Aiken September 15th, 2008

Most employers who sponsor a qualified retirement plan are aware of the requirement that the plan must have a written plan document.  However, just having that document is not enough.  ERISA plan qualification rules also require that the plan be administered according to provisions contained in the governing plan document.  If the plan’s operational administration does not follow the plan document, then the plan is not in compliance and is subject to fines and sanctions, up to plan disqualification.

Unfortunately, just hoping that your retirement plan operations are working correctly is not enough.  In the ERISA retirement plan world, some of the biggest mistakes made by employers are operational errors rather than errors in the actual structure or documents of the plan.  Because not all operational mistakes are “bad” or harmful to employees, many employers do not feel there is an issue if they make an operational error, provided it is to the benefit of the employee.  However, even errors that result in favor of the employee cause a plan operation issue.

For example, a plan document provides that employees are eligible to participate only after 1 year of service, but the employer generously allows newly hired employees to participate immediately upon employment.  This generosity on the part of the employer, while beneficial rather than harmful to employees, is a failure to follow the terms of the plan and would constitute an operational failure that could create problems for the plan’s qualification if not corrected.

According to the IRS, some of the reasons employers give to explain why their plans are not operationally compliant include:

• Not knowing how to identify and fix any errors.
• Not wanting to have any unnecessary contact with the IRS.
• Assuming that the required annual financial audit identifies any errors that need to be addressed.
• Assuming that auditing the plan for operational compliance would be too expensive.

Employers should routinely self-audit their retirement plans for operational compliance.  This self-audit should be performed at least annually or more often if there are any significant change in demographics or if the employer is involved in a merger or acquisition.  Unfortunately, the annual financial audit performed by your CPA won’t necessarily catch all operational issues that might exist.

If operational mistakes are found, employers need to use the tools available to them to correct the errors quickly and with the minimum of expense.  The IRS recently released the “401(k) Fix-It Guide”, available on the IRS’ website, which provides employers with a list of the most common plan errors and advice on how to fix mistakes for 401(k) plans.

Additionally, one of the best tools available to employers in their quest to correct operational plan errors is the IRS’ Employee Plans Compliance Resolution System (EPCRS).  The EPCRS is a comprehensive system of correction programs offered by the IRS to employers who offer qualified retirement plans.  This program allows employers/plan sponsors to correct plan failures through three separate components:

• The Self-Correction Program (SCP),
• The Voluntary Correction Program (VCP), and
• The Audit Closing Agreement Program (Audit Cap).

The EPCRS was recently updated to assist employers in their voluntary compliance efforts.  The changes are effective as of September 2, 2008 and include:

• Standardized application forms,
• Reduced filing fee for some plan loan failures, and
• Expanded situations where waiver of income and excise taxes are allowed.

Everyone knows that mistakes happen.  Under ERISA, the trick is to identify and correct those mistakes quickly and cost-effectively.  Contrary to popular opinion, the IRS is more interested in ensuring plans are compliant than in “catching” employers doing something wrong.  Benefits counsel can assist your organization in self-auditing your plan to help identify any errors and working with you and any necessary governmental agency to resolve issues.  Please contact our office with any questions or for more information.

• Benefits , ERISA , Health Care , Pension , Retirement
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