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The Final “Play or Pay” Regulations Have Arrived!

The Final “Play or Pay” Regulations Have Arrived!

February 18, 2014

Authored by: Denise Erwin and Lisa Van Fleet

The long awaited final regulations regarding the employer shared responsibility provisions of the Affordable Care Act were released on February 10, 2014.  They offer new transition relief and provide much needed guidance in several areas including how to determine which employees are “full-time” for purposes of the mandate.  Although the 59 pages of regulations will surely provide ample fodder for numerous future posts, we’ll start with a rundown of some of the most notable provisions:

New Transition Relief

Employers with 50-99 full time employees have an additional year to comply

    The new compliance date for these employers is January 1, 2016 (or the first day of new plan year beginning in 2016 for non-calendar year plans).  In order to avail themselves of the transition relief, these employers must certify  that they satisfy the following eligibility conditions:

  • The employer must employ on average at least 50 full-time employees but fewer than 100 full-time employees on business days during 2014.
  • The employer must not reduce the size of its workforce or the overall hours of service of its employees in order to satisfy the workforce size condition.  A reduction for a bona fide business reason such as a sale of a division, a change in the economic marketplace in which the employer operates or a termination of employment for poor performance will not affect eligibility for the transition relief.
  • The employer must not eliminate

Don’t Miss the April 15th Deadline to File a Protective Refund Claim for 2010 FICA Tax!

As you may recall from our earlier post, the 6th Circuit held in U.S. v. Quality Stores, that severance payments made to employees in connection with an involuntary reduction in force were not “wages” subject to FICA taxes. This decision was contrary to published IRS guidance and created a split in the courts. In October of last year, the United States Supreme Court agreed to review the case and on January 14th, it heard oral arguments. The Supreme Court is expected to issue a ruling by the end of June.

Taxpayers may be entitled to a FICA tax refund if the decision is upheld by the Supreme Court on appeal. In order to preserve the right to a refund, taxpayers must file a protective claim before the applicable statute of limitations runs. As we previously reported in a post last year, the deadline to file a protective order for severance payments made in 2009 was April 15, 2013. At this time, the deadline to file a protective claim for 2010 severance payments is quickly approaching on April 15, 2014. We encourage any employer who made involuntary severance payments in 2010 to consider filing a protective claim now on Form 941-x in order to preserve the right to a refund if the 6th Circuit decision is upheld.


The Second Circuit Considers Attorney’s Fee Award under ERISA in Settlement Context

In Hardt v Reliance Standard Life Ins. Co., 130 S. Ct. 2149 (2010) , the United States Supreme Court rejected the “prevailing party” standard for awarding attorney’s fees under ERISA.  Instead, a party moving for an attorney’s fee award must demonstrate “some degree of success on the merits.”   But what exactly does this standard mean?  Although not required, a favorable court judgment will qualify while a “trivial success” or a  “purely procedural victory” will not pass muster.  But how will these terms be interpreted and how will the standard be applied to the myriad of potential litigation outcomes which fall somewhere in the gray area in between?

The Second Circuit Court of Appeals recently applied this standard in the context of a voluntary settlement in Scarangella v. Group Health, Inc.  This case involved a claim for medical benefits under an ERISA plan which was insured by Group Health Insurance, Inc. (“GHI”) and administered by Village Fuel.  After substantial medical expenses were incurred by the wife of Nicholas Scarangella, a Village Fuel employee, GHI made a determination that Scarangella and his family did not satisfy the eligibility requirements.  GHI denied reimbursement and purported to retroactively rescind the policy.  Scarangella filed an action for benefits under ERISA against Village Fuel and GHI.  The two defendants filed cross claims for restitution which were dismissed by the District Court on the grounds that money damages are not available under ERISA because they are not equitable in

Correcting 401(k) Plan Loans Under EPCRS

Correcting 401(k) Plan Loans Under EPCRS

July 2, 2013

Authored by: Denise Erwin and Chris Rylands

Participant loans from 401(k) plans must satisfy certain rules under section 72(p) of the Internal Revenue Code (the “Code”) to prevent the loan from being treated as a taxable distribution (sometimes called a “deemed distribution”).  The amount of the loan generally cannot exceed 50% of the participant’s vested account balance up to a maximum of $50,000 (with reductions for certain previous outstanding loans), the participant must be required to make level amortized payments at least quarterly, and the loan term may not exceed five years from the date the loan is funded unless the participant uses the loan to purchase his or her primary residence (in which case a longer period from the date of funding is allowed).

It is not uncommon for plan sponsors to discover that one or more of these rules have not been followed in administering the plan.  Failures to follow the terms of the plan document and the requirements of Code section 72(p) can result in the loan being treated as a taxable distribution to the participant as well as resulting in the potential disqualification of the plan.

When such a mistake is discovered, what can be done?  Under certain circumstances, the Internal Revenue Service (“IRS”) permits this type of plan loan failure to be corrected under the Employee Plan Compliance Resolution System (“EPCRS”).  To obtain relief from the negative tax treatment under Code section 72(p), a submission under the Voluntary Correction Program (“VCP”) is required.  Such relief cannot

Are You Smarter Than a Plan Administrator?

Are You Smarter Than a Plan Administrator?

February 26, 2013

Authored by: Denise Erwin and Jennifer Stokes

We want our employees to make healthy choices so that they will have long and healthy lives (and also to decrease the cost of health benefits).  We also want our employees to participate in the 401(k) plan so that they can build a nest egg for retirement and enjoy those long, healthy lives (and maybe also so that we don’t have to refund deferrals to our  HCEs).  Whatever our motivations, it seems that the latest trend in encouraging desired behavior in the employee benefits arena is gamification.  Think “Farmville” except the “crops” that your employees will be growing are their dreams that they want to harvest in retirement (travel, a vacation home, or just being able to continue to pay the bills).  Imagine those crops wilting unless they are “watered” and “fed” by employees who earn “plant food” and “water” by correctly answering retirement-related questions.  Maybe the game could even show the field of dreams wilting at current deferral levels but encourage employees to use a retirement cost calculator to determine what level of deferrals might lead to a successful harvest in retirement.   For your employees who are not particularly motivated by watching crops grow, think “Angry Birds” as part of your wellness program except employees may be able to earn “birds” to fling at the infuriating “pigs” in their lives (smoking, obesity, you name it) by correctly answering health-related questions.  These particular game examples would, of course, be rife with intellectual property concerns,

Potential Refund Claim for FICA Taxes on Severance Payments Made in a Reduction in Force

On September 7th, 2012, the 6th Circuit upheld the District Court’s decision in U.S. v. Quality Stores, holding that severance payments made to employees in connection with an involuntary reduction in force were not “wages” subject to FICA taxes.  United States v. Quality Stores, Inc. (In re Quality Stores, Inc.), 424 B.R. 237 (W.D. Mich. 2010), aff’d, 10-1563, 2012 U.S. App. LEXIS 18820 (6th Cir. September 7, 2012).   In so holding, the 6th Circuit reasoned that such severance payments were supplemental unemployment compensation benefits (“SUB Pay”) within the meaning of § 3402(o)(2) of the Internal Revenue Code (the “Code”) exempt from FICA taxes.

This holding is directly at odds with the position of the Internal Revenue Service (“IRS”), set forth in Revenue Ruling 90-72, that such severance payments are wages for FICA purposes and not SUB Pay.  According to the IRS, the definition of SUB Pay in § 3402(o)(2) of the Code is not applicable for FICA purposes.  The IRS has defined SUB Pay for FICA purposes through a series of revenue rulings.   Under the IRS definition, SUB Pay must be linked to the receipt of state unemployment compensation and must not be received in a lump sum in order to be excludable from wages for FICA purposes.  The 6th Circuit rejected the IRS definition reasoning that Congress intended the same definition to apply for both FICA and income tax withholding purposes and that, to the extent that Congress has permitted the IRS to

Limitation of Letter Forwarding Program May Affect VCP Submissions and Plan Terminations

In Revenue Procedure 2012-35, the Internal Revenue Service limited the use of its letter forwarding program to “humane purposes,” such as emergency situations, and specifically indicated that it will not be available to locate missing participants who may be entitled to a retirement benefit.  The new limitation applies to letter forwarding requests postmarked on and after August 31, 2012.

One of the practical implications of that was discussed by IRS officials in a recent phone forum.  The correction of certain operational failures under the Voluntary Correction Program (“VCP”) may affect former participants by, for example, requiring corrective allocations or distributions.  In those cases, the VCP submission must indicate the method that will be used to locate and notify those individuals of the failure and the correction.  Many submissions designate the IRS letter forwarding program as one or more methods that will be used for that purpose.  As a result, an IRS agent may contact the plan administrator to revise the proposed correction method in a pending VCP submission, particularly if no alternative method of locating former participants has been proposed.  Alternative methods will have to be proposed in all new VCP submissions.

One IRS official indicated that several acceptable alternative methods are described in the Department of Labor’s Field Assistance Bulletin 2004-02, which discussed fiduciary obligations with respect to locating missing participants in defined contribution plan terminations.  The alternative methods described in FAB 2004-02 include the Social Security Administration letter forwarding service and the use of Internet search tools, commercial locator services, and

Data Security Breaches – Are you Prepared?

Data Security Breaches – Are you Prepared?

March 16, 2012

Authored by: Denise Erwin

In the event of a data security breach, evaluating the situation and taking action right away is important. One type of data security breach that employers need to be aware of and that has been receiving attention lately relates to the privacy and security of health information. Over the past year, enforcement of the HIPAA Privacy and Security Rules has become a priority for the Department of Health and Human Services (“HHS”) Office of Civil Rights (“OCR”), as seen by the amount of settlement fines related to violations and the recent flurry of HIPAA compliance audits. For example, last year, Massachusetts General Hospital was fined $1 million to settle potential HIPAA violations related to patient information left on a train by an employee commuting to work. Just this week, HHS announced that Blue Cross Blue Shield of Tennessee agreed to pay $1.5 million to settle possible violations of the HIPAA privacy and security rules, which was the first enforcement action which resulted from a breach report required by the Health Information Technology for Economic and Clinical Health (“HITECH”) Act Breach Notification Rule.

This increased activity in HIPAA enforcement is the result of provisions in the HITECH Act, which introduced new breach notification standards and requires OCR to develop procedures for auditing compliance with HIPAA.

HITECH Requirements

The HITECH Act, enacted in 2009, addresses the privacy and security concerns associated with the electronic transmission of health information, in part, through several provisions that

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