Archive for February, 2008

Beware Benefit Issues With Boomerang Employees

February 27th, 2008

With the difficulties employers are having with attraction of qualified workers, more and more employers are solving their problems by re-hiring former employees (called “boomerang employees”).  These employees encompass the ex-employee who had previously retired and is now looking to return to the work force, as well as the ex-employee who left employment and is now regretting that decision.  Employers who re-hire these boomerang employees can experience numerous advantages, including a decreased learning curve and a greater assurance of corporate-culture fit. 

However, this trend is not without its pitfalls, and employers would do well to consider how these employees will fall within the company’s employee benefits plans.  Several laws (such as ERISA, the Internal Revenue Code, the Pension Protection Act, and 409A) can impact employer-sponsored employee benefit plans, and how employers must treat the benefit plans applicable to the re-hired employees.  For instance, employers should take into account:

  • Section 125 Cafeteria plans have regulations applicable to separation from service and a subsequent return to service
  • ERISA has provisions governing vesting and forfeiture that have specific guidelines on how to treat “breaks-in-service” for benefit calculation and re-entry dates
  • The Pension Protection Act made changes to vesting schedules and created the ability for employers to begin to pay pension plan benefits at the earlier of age 62 or the plan’s normal retirement age
  • Section 409A applies to non-qualified deferred compensation plans and contains regulations about payment of deferred compensation due to a separation from service and re-hiring the employee

There is a large amount of case law which deals with re-hired employees and their rights to access various employee benefits plans.  The over-riding theme behind the case law is to ensure that all similarly situated employees are being treated in the same manner under the plan.

Boomerang employees can be of great benefit to employers in many ways.  The potential issues surrounding their right to access benefits under employer-sponsored plans shouldn’t be used as a reason not to retain these workers.  Employers simply need to ensure that all potential benefits issues are addressed before the situation arises.  Having all the benefits plans reviewed by benefits counsel in light of possible boomerang employees can provide a list of dos and don’ts to guide the employer when the situation arises.

Employers Liability For Employee’s Negligence When Using Cell Phones

February 26th, 2008

Cell phones have become almost indispensable in today’s society. Frequently, employers provide their employees with cell phones as a part of their job. Even if the cell phone is not employer-provided, many jobs today necessitate the use of a cell phone. Employers need to be wary of the complications that can arise from their employees’ use of cell phones.

More and more claims are being asserted against employers by plaintiffs who have been injured by an employee/driver who was using a cell phone at or near the time of injury. Under the doctrine of vicarious liability, employers may be held legally liable for its employee’s negligent acts committed in the course of employment. It is not even a requirement that an employee be on company business, or that the phone call in question be a business call in order for employers to be held liable.

Some recent cases that were brought against employers under the doctrine of vicarious liability due to employee cell phone usage include:

  • In Pennsylvania, a stockbroker, making sales calls on his cell phone while driving, hit and killed a motorcyclist. While the cell phone was not provided by the employer, individuals in the stockbroker’s position were routinely expected to make sales calls outside of business hours. The employer settled the suit against it for $500,000 before the case went to trial.
  • In Arkansas, an employee was talking on a cell phone at the time that the employee was involved in a car accident. Suit was brought against the employer for the injuries sustained by another individual involved in the accident. The employer was found liable and was assessed damages of over $20 million.
  • In Virginia, a law firm was sued for $30 million when their employee, who was taking a business call on a cell phone while driving, struck and killed a teenager with the car.
  • In Hawaii, a state employee, while driving and talking on a cell phone, struck and severely injured a tourist. The state was found to be partially liable for the injuries the tourist sustained, and the state settled for $2.5 million.
  • In Georgia, an employee of a construction company caused a multi-car accident while attempting to access voice mail on a company-provided cell phone, causing serious injuries to another individual involved in the accident. The company settled in the suit brought against it for over $4 million.
  • Also in Georgia, an employee, while using a company-provided cell phone, rear-ended another car and caused an accident that ended in the other driver losing an arm. In December 2007, the employee’s company settled the suit for over $5 million.

In addition to the vicarious liability issues employers face, OSHA (and numerous other state statutes) mandates that employers have an affirmative duty to ensure worker’s safety by establishing appropriate policies. In light of the recent case law, this duty may encompass procedures for the safe use of cell phones.

Because of the litigation activity in this area and the affirmative duty under OSHA, employers should implement a cell phone policy for their employees. While such a policy will not absolve employers from all liability, the policy, and the strict adherence to it, can be used as an affirmative defense if a lawsuit is brought against the company. Employers should consult with counsel before implementing a cell phone policy to ensure that the policy provides as much protection as is possible.

DOL Updates QDRO Administrative Guidelines

February 21st, 2008

The Pension Protection Act of 2006 (PPA), Section 1001, required the Department of Labor (DOL) to issue regulations clarifying:

  • Whether a domestic relations order (DRO) which is issued after a Qualified Domestic Relations Order (QDRO) or revises a QDRO, will be deemed a QDRO, and
  • Whether a QDRO will not be treated as a QDRO due to timely issuance.

On March 6, 2007, the DOL released interim final regulations addressing these issues.  The regulations were effective April 6, 2007, and provide that a DRO will not fail to qualify as a QDRO solely due to the fact that:

  • It modifies a prior QDRO,
  • It revises another QDRO, or
  • It is issued after the participant’s death, divorce, or annuity start date

The regulations do make clear that a DRO that falls into one of the above categories must still otherwise satisfy all of the Internal Revenue Code (IRC) QDRO requirements.  In other words, a DRO that complies with all of the requirements of a QDRO may not fail as a QDRO only on the basis that it modifies or revises a previous QDRO, or that it was not issued prior to death, divorce or the beginning of an annuity.

The DOL final interim regulations give various example situations to illustrate the new rules:

Timing Guidance

  • DROs issued after a participant’s death:

o Situation: A plan administrator receives a DRO and deems it deficient. Shortly after this decision, the participant dies while actively employed.

o Regulation: A second DRO that corrects the deficiencies of the first DRO may be considered by the plan administrator for QDRO status even though the participant has died.

  • DROs issued after a participant’s divorce:

o Situation: A former spouse submits a DRO which, for purposes of receiving the plan’s death benefit payable, requires that the former spouse to be treated as the participant’s surviving spouse.

o Regulation: If the DRO meets all IRC requirements for QDROs, it does not fail to be treated as a QDRO only on the basis that the ex-spouse no longer meets the definition of a surviving spouse.

  • DROs issued after a participant’s annuity start date:

o Situation: A participant and spouse divorce after the participant has begun receiving single life annuity on which the spouse had waived surviving spousal rights.

o Regulation: A DRO which provides that the spouse is to receive ½ of the participant’s single life annuity payments at a future date may be considered for treatment as a QDRO.

Order of Issuance Guidance

  • DROs issued subsequent between the same parties:

o Situation: A DRO between a participant and a former spouse is issued that reduces benefits previously awarded via a QDRO to the former spouse.

o Regulation: The second DRO may be a considered a QDRO.

  • DROs issued subsequent between different parties:

o Situation: A DRO is issued between a participant and former spouse #1. Participant remarries and another DRO is issued between the participant and former spouse #2.

o Regulation: The second DRO may be a QDRO, but only if the benefits assigned to former spouse #2 are not already assigned to former spouse #1.

Employers need to ensure that their QDRO policy and procedures are updated to reflect these regulations, and that operations have been adjusted as well.  Benefits counsel should be consulted to review and recommend adjustments to the existing procedures to ensure full compliance with the new regulations.

Top 10 Reasons Retirement Plans Fail an IRS Plan Examination

February 19th, 2008

According to EP Examinations at the IRS, most mistakes that will cause a retirement plan to fail a plan examination are mistakes that could be identified and fixed relatively quickly by a plan sponsor.  However, most plan errors are not found until an agent conducts an examination of the plan.  The top 10 reasons for retirement plan failure found during examinations are:

  1. Failure to amend plans for tax law changes within the time required by law
  2. Failure to determine contributions using the plan’s definition of compensation
  3. Failure to either include eligible employees in the plan or exclude ineligible employees from the plan
  4. Failure to satisfy plan loan provisions
  5. Allowing impermissible in-service withdrawals
  6. Failure to satisfy the minimum distribution rules
  7. Adoption of a plan which the employer is not legally permitted to adopt
  8. Failure to pass the ADP/ACP nondiscrimination tests
  9. Failure to properly provide the minimum top-heavy benefit/contribution to non-key employees
  10. Failure to adhere to the contribution limits of IRC 415

Employers should have their plan documents and their plan operations regularly reviewed and analyzed to ensure ongoing compliance and avoid possible future problems.  Problems with plans are easier – and less expensive – to correct when they are caught early.  However, without regular review, catching little problems before they grow into big problems is much more difficult, if not almost impossible.

As an added benefit, an independent outside review of the plan and its operations may not only identify existing problems, but may also assist in spotting opportunities for changes to the plan that will improve benefits for participants or decrease the costs of plan administration.

Errors in retirement plan design or operations almost never get resolved on their own. They usually persist year after year until they’re found and fixed, possibly compounding the original problem with each year that passes.  The IRS has several programs in place that allow employers to correct problems that they self-identify before an examination becomes necessary.  Employers should consult with their benefits counsel to arrange for an independent review of their retirement plans for compliance with recent legal changes and to ensure the plan is operating in accordance with its governing documents.  If an error is found, your benefits counsel can also assist you in working with the IRS to correct the plan before an examination becomes necessary.

409A Impact on Employment Agreement Compensation

February 14th, 2008

There has been a lot of information released recently about the impact of Section 409A on traditional nonqualified deferred compensation plans.  However, what most employers don’t realize is that the 409A rules can also impact some of the common provisions relating to compensation arrangements contained within individual employment agreements.  Because Section 409A defines deferred compensation extremely broadly, some types of compensation that an employer might view as current may actually fall within the expansive scope of Section 409A.

A non-discretionary bonus which is paid in the year following the year in which it is earned may be encompassed within the 409A definition of deferred compensation.  However, a short-term deferral exception exists which removes these types of bonuses from the deferred compensation arena.  Generally, this exception provides that if the bonus is payable no later than March 15th of the year following the year in which services were performed then the bonus program is exempt from Section 409A.  However, if the bonus is paid by the employer after March 15th, the exception will no longer apply and 409A rules come into play.

Individual employment agreements may contain a provision that allows the employee to receive compensation in the event of a change in control.  While these types of payments are allowed by Section 409A, the change in control event defined in the employment agreement must match the definition for a change in control as given in the regulations.

Severance plans are usually considered deferred compensation, and are subject to Section 409A compliance unless a specific exception exists.  Under Section 409A, severance payments include cash, continuation of benefits, tax gross-ups, and any other kind of post-employment benefit or payment.  Most existing severance agreements will probably either already comply with 409A requirements or fall within an allowable exception.  However, frequently severance agreements are negotiated at the time of separation.  The problem then becomes that Section 409A does not allow for the restructure or renegotiation of severance agreements at the time of termination if the severance agreement is to fall within the 409A rules.  Additionally, with regard to severance plans, voluntary termination and involuntary termination are looked at and treated differently under 409A.

Taxable post-termination reimbursements and in-kind benefits are considered by the IRS to be deferred compensation, and, as such, would be subject to 409A regulation.  If an employer has employment agreements with individuals that contain provisions for post-termination reimbursements and/or in-king benefits, these types of arrangements can be restructured to comply with the final regulations.

The application of 409A rules to employment agreements means that employers will have to change their procedures for negotiating and implementing employment agreements.  The new rules require more specificity in employment agreements, the use of a greater level of pre-established rules and procedures in the agreements, and a decreased ability to make subsequent changes to the agreement provisions.  Employers would be well-served to engage benefits counsel to assist them in identifying, analyzing, and amending all written and unwritten employment agreements that might contain any deferred compensation provisions under 409A.

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