Aiken & Aiken

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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Michele Aiken May 29th, 2008

The Employee Retirement Income Security Act was enacted in 1974.  Since then, more than 75 laws have been passed that affect employee benefit plans and the protections afforded them by ERISA.  Many of these subsequent laws have mandated extensive changes to benefit plans.

The following are some of the major laws passed along with a very brief description of a few of the provisions contained within the statute:

• National Defense Authorization Act (NDAA) - amends the Family and Medical Leave Act (FMLA) to create 2 new FMLA leave entitlements and modifies some Department of Defense contracting requirements.
• Pension Protection Act of 2006 (PPA) -  makes several modifications to retirement plans including funding requirements for defined benefit plans, authorizing the use of cash balance and hybrid pension plans and requiring more disclosure to plan participants.
• American Jobs Creation Act of 2004 (AJCA) - provides significant new rules for non-qualified deferred compensation plans, including the enactment of Internal Revenue Code Section 409A.
• Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) - expands the Medicare program including prescription drug coverage for post-65 and disabled Medicare beneficiaries and provides for a Medicare subsidy, which is excludable from income, payable to employers who provide retiree health coverage that is at least actuarially equivalent to the Medicare drug benefit.
• Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) - provides significant changes to retirement plans including increasing the allowable participant elective deferrals, allowing “catch-up” contributions, increasing compensation limits for some pension plans and changing the definition of compensation for deduction purposes.
• Health Insurance Portability and Accountability Act of 1996 (HIPAA) -  limits restrictions that a health plan can place on benefits for preexisting conditions, defines numerous offenses relating to health care and sets civil and criminal penalties for them and establishes regulations for the use and disclosure of Protected Health Information (PHI).
• Older Workers Benefit Protection Act of 1990 (OWBPA) - allows retirement plans to continue to have minimum age for eligibility and to have subsidized early retirement benefits provided it is voluntary.
• Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) -  requires specified employers to offer continuation of group health plan coverage to beneficiaries who no longer qualify for coverage due to certain events.
• Pregnancy Discrimination Act of 1978 (PDA) - requires employers to cover costs of pregnancy, childbirth and related medical conditions under the same terms as other medical conditions.

The above information is just a small portion of what is required by these laws as applied to benefit plans.  Additionally, there are many more laws that impact employee benefits plans then those few described above.  For example, the PPA, in addition to the brief overview already provided, requires additional extensive compliance for retirement plans and makes some of the other changes under previous laws mandatory.

Benefit plans and operational policies and procedures that have not remained current with new requirements are at risk for being non-compliant and subject to fines and penalties.  All employers should review their ERISA plans, including retirement and heath and welfare plans, as well as their operational policies and procedures, to verify that their plans, policies and procedures have been updated and amended for all applicable changes in the law.

Once plans, policies and procedures are current, employers need to remain vigilant to ensure continued compliance with changing laws.  Employment and benefits counsel can assist employers in reviewing and updating their existing plans to ensure compliance with all applicable laws, as well as assisting employers to proactively update their policies, plans and procedures as required for future changes.

• Benefits , COBRA , ERISA , Health Care , Pension , Retirement
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Sheila Aiken May 28th, 2008

President Bush signed the Genetic Information Nondiscrimination Act (GINA) of 2008 on May 21^st.  GINA is designed to protect against discrimination in health insurance and employment based on genetic information.

This new law makes changes to the Health Insurance Portability and Accountability Act (HIPPA), the Public Health Service Act (PHSA) and the Internal Revenue Code (Code).  The provisions relating to health plans are effective as of May 8, 2009 and those relating to employment are effective November 8, 2009.  Additionally, the law provides that where states have more restrictive protection in place, the state law will continue to apply and employers will need to comply with the state law in addition to GINA.

This law prohibits health plan sponsors and health insurers from restricting enrollment or adjusting premiums based on genetic information.  It also restricts them from requesting or requiring genetic testing.  There are a few limited exceptions to these requirements and genetic information may be used by health plans for payment determinations.  However, the information must be handled in the same manner that other HIPAA-protected information is handled. 

Additionally under GINA, federal anti-discrimination laws such as Title VII of the Civil Rights Act (Title VII) and the American with Disabilities Act (ADA) are broadened.  Employers are prohibited from discriminating based on genetic information.  This includes discriminating in hiring, training and retraining, compensation and/or other terms and conditions or employment.  Employers may not segregate or classify employees based on genetic information in any manner that would deprive them of employment opportunities and they may not request, require or purchase genetic information.  Further, employers are prohibited from disclosing personal genetic information.

Under the new law, genetic information includes an individual’s or family member’s genetic tests, diseases and disorders and any request for or receipt of genetic services.   This includes genetic test results and participation in genetic research as well as the manifestation of a particular disease or disorder.  It does not include information such as a person’s gender or age.  However, there are some limited circumstances under which an employer may acquire genetic information. 

The Department of Labor (DOL) has been tasked with issuing final regulations on the health insurance provisions by May 21, 2009.  Additionally, the DOL will enforce the new law and has the authority to assess penalties.

Civil penalties of up to $100 per day per individual for violations may be imposed.  Additionally, if violations are not corrected, a minimum penalty of $2,500 for de minimis violations or $15,000 for material violations may be imposed.  There is a cap on penalties of the lesser of 10% of the amount paid by the plan sponsor during the preceding taxable year or $500,000.  However, under certain circumstances the DOL may waive penalties.

Employers, health plan sponsors and insurers will need to become familiar with the new requirements under the law.  They will need to ensure their practices are compliant with the new requirements and make certain that any genetic information they have about employees is treated with strict confidentiality, as required.  Employers should seek the advice of their benefits counsel to fully understand the law and its impact on their current and future practices and procedures.

• ADA , Benefits , ERISA , Employment , HIPAA , Health Care , Title VII
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Sheila Aiken May 21st, 2008

The IRS released Revenue Procedure 2008-29 on May 13^th.  This Revenue Procedure details the 2009 inflation adjusted amounts allowed for Health Savings Accounts under Internal Revenue (Code) Section 223(g).  

For calendar year 2009, the annual limitation on deductions is:

• $3,000 for self-only coverage, or
• $5,950 for family coverage

HSAs are used in conjunction with High Deductible Health Plans (HDHPs) which are defined under Code Section 223(c)(2)(A).  For the 2009 calendar year, a HDHP is defined as a health plan with:

• An annual deductible that is not less than:
  • $1,150 for self-only coverage, or
  • $2,300 for family coverage, and
• Annual out-of-pocket expenses (including deductibles, co-payments and other amounts not including premiums) that do not exceed:
  • $5,800 for self-only coverage, or
  • $11,600 for family coverage

Additionally, the catch-up contribution for those individuals over age 55 is $1,000.  If both spouses are over 55 the catch-up contribution is $2,000.

HSAs have become increasingly popular for individuals and employers as a way to plan for and control healthcare costs.  The numbers of individuals covered under these health plans - High Deductible Health Plans with Health Reimbursement Arrangements - has rapidly increased.  The Government Accountability Office in Washington estimates that 4.5 million people were covered under HSAs in 2007 as opposed to an estimate of a little over 400,000 in 2004. 

• Benefits , ERISA , Health Care , Health Savings Accounts (HSAs)
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