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Proskauer's ERISA Practice Center Blog

The View from Proskauer on Developments in the World of Employee Benefits, Executive Compensation & ERISA Litigation

Of Mice and Elephants: Halbig and King and The Struggle of Two Federal Appeals Courts to Find Meaning in Words That May or May Not Be There

Posted in ACA, Affordable Care Act

At issue in Halbig v. Burwell and King v. Burwell is whether or not subsidies to buy insurance on an exchange are available in both state and federal exchanges.  On its face the Affordable Care Act (“ACA”) provides for subsidies only in state exchanges.  The Treasury Department wrote regulations in 2012, however, confirming that subsidies are available in both state and federal exchanges.  Not so fast, said plaintiffs like those in Halbig and King:   Treasury’s clarification looked a lot like legislating, which Treasury cannot do.

In Halbig, as has been widely reported, a three-judge panel of the D.C. Circuit Appeals Court determined that the absence of plain language in the ACA authorizing subsidies to individuals covered on federal exchanges meant no subsidies were available.  In King, the Fourth Circuit Court of Appeals, while recognizing that there is no ACA language that explicitly authorizes the subsidies, found that that the “context” of the statute permitted subsidies in federal exchanges.

Who’s right and who’s wrong?  I’ll leave that for a future court to decide.  What’s interesting to me is how both courts allude to the same judicial doctrine to identify a weakness in the losing side’s case.

In Halbig, the majority notes that relying on a contextual reading of a defintional provision in an ancillary subsection of a major “operational” provision of the ACA would essentially transform the ancillary subsection into the “proverbial elephant in the mousehole.”  In other words, it would be strange for Congress to hide an elephant (a key provision of the law) in a mousehole (an important but nonetheless ancillary provision of the law).

In King, a concurring judge wrote that the absence of a reference to the federal exchanges in the very same ancillary provision on which the Halbig court relied “bespeaks a deeply flawed effort to squeeze the proverbial elephant into the proverbial mousehole.”  In other words it would be strange for Congress to override the intent of the statute by hiding a key provision (the elephant) in an ancillary subsection (the mousehole).

At the end of the day the use of the doctrine by both judges for different purposes bespeaks nothing more than the creative linguistics lawyers, judges and regulators use to justify different positions.  The real elephant here is the elephant in the room:  the fate of subsidies in over 30 states across the country.  For employers, it’s an important elephant, since it is the subsidies (the mice?) that trip the penalties (the elephants?) under the ACA.  Without subsidies there are no penalties.  Should employers doing business in the states (including Washington, D.C.) operating state exchanges move to a federal exchange state?    Of course not.  In fact, the best course of action is to simply wait and see what develops and remember:  with a resolute heart, a mouse can lift an elephant. I have no idea what that means in this context so I’ll leave it to each of you to apply it any way you see fit.

More Post-Windsor Tax Guidance: IRS Issues Letter Outlining Steps for Individuals to Obtain Tax Refunds for Same-Sex Spousal Health Coverage

Posted in DOMA

July 21, 2014

On June 27, 2014, the IRS published a letter outlining the steps taxpayers should take in order to obtain a refund for taxes paid on the value of employer-sponsored health coverage provided to an employee’s same-sex spouse.  The letter, originally dated February 24, 2014, is in response to an inquiry from Rep. Peter Welch of Vermont, who had requested guidance on the issue on behalf of a constituent.

The IRS addressed a fact pattern in which a taxpayer’s employer issued the taxpayer a Form W-2 that reports the value of spousal health coverage as taxable wages.  Following the Supreme Court’s decision in United States v. Windsor, the IRS announced in Rev. Rul. 2013-17 and Notice 2014-1 that a same-sex spouse will be treated as a spouse for federal tax purposes, provided the couple is lawfully married under state law.  Therefore, as is the case with opposite-sex spouses, the value of employer-sponsored health coverage provided to an employee’s same-sex spouse is excludable from an employee’s income for federal tax purposes.  The Form W-2 issued to the taxpayer by the employer was therefore inaccurate.

The IRS instructs that the taxpayer should contact her employer and request a corrected Form W-2, which the taxpayer can then use to complete her tax return.  If the employer does not issue a corrected Form W-2, the taxpayer should file her tax return using the original Form W-2 and file a Form 4852 (Substitute for Form W-2 or Form 1099-R) reporting the correct amount of her taxable wages (subtracting the value of excludable spousal health coverage).  Where Form 4852 asks to describe how the taxpayer determined the corrected amounts, she should explain that the amounts reported on Form W-2 included the value of excludable spousal health coverage and that these amounts have been excluded on Form 4852 as permitted by Rev. Rul. 2013-17 and Notice 2014-1.  The taxpayer should also explain how she determined the value of the excludable spousal health coverage.  The taxpayer should then complete her tax return using the amounts in Form 4852 instead of the incorrect Form W-2.

The IRS also notes that the taxpayer may be entitled to a refund of federal employment taxes paid on the value of the spousal health coverage, and suggests that the taxpayer contact her employer to determine whether the employer is seeking a refund on her behalf.  If the employer is not seeking a refund, the taxpayer may file Form 843 (Claim for Refund and Request for Abatement).

The letter confirms what many believed to be the case – employers are not obligated to automatically furnish corrected Forms W-2 to employees who had imputed income in years pre-Windsor for the value of employer-sponsored health coverage provided to same-same spouses.  However, it serves as a good reminder that employers should be prepared to respond to such requests as employees continue to seek refunds.

Fourth Circuit Rejects Widow’s Claim for Equitable Relief

Posted in Remedies

The Fourth Circuit recently rejected fiduciary breach and equitable estoppel claims for life insurance coverage by Leslie Moon, the widow of a deceased employee, who claimed that the employer’s actions resulted in Mr. Moon’s failure to convert his life insurance to an individual policy following the onset of his disability.  In so ruling, the Court determined that Leslie Moon failed to establish that the employer was a fiduciary of the life insurance plan because:  (i) the employer’s alleged failure to alert Mr. Moon that he was no longer covered under the plan and its continued acceptance of Mr. Moon’s premium payments (when such payments should have been made directly to the insurer) constituted administrative, not fiduciary, functions; and (ii) the plan was administered by third party.  The case is Moon v. BWX Techs., Inc., No. 13-cv-1888, 2014 U.S. App. LEXIS 12525 (4th Cir. July 2, 2014).

Hobby Lobby: The Supreme Court’s View and Its Impact

Posted in ACA, Affordable Care Act

For the second time in two years the United States Supreme Court (the “Court”) has ruled against the Obama Administration with respect to elements of the Affordable Care Act (the “ACA”).  In a 5-4 decision announced today in Burwell v. Hobby Lobby Stores, Inc.  (“Hobby Lobby”) (f/k/a Sebelius v. Hobby Lobby Stores, Inc.), the Court ruled that the federal government, acting through Health and Human Services (“HHS”), overstepped its bounds by requiring faith-based private, for-profit employers to pay for certain forms of birth control that those employers argued contradicted their religious beliefs, in violation of the Religious Freedom Restoration Act of 1993 (“RFRA”).

In Hobby Lobby, the Court found that for-profit employers are “persons” for purposes of the RFRA.  The Court, assuming that the government could show a compelling interest in its desire to provide women with access to birth control, ultimately held that the government could have met this interest in a less burdensome way. Continue Reading

DOL Proposes Change to FMLA Definition of Spouse to Accommodate Same-Sex Marriage

Posted in DOL, Family and Medical Leave Act, Same-Sex Marriage, Same-Sex Spouse

As was expected, the U.S. Department of Labor has issued a proposed regulation changing the definition of “spouse” for FMLA purposes in order to protect the FMLA rights of employees with same-sex spouses.

The proposed regulation adopts a “place of celebration” rule, consistent with the current DOL interpretation in the context of other federal laws.   Under this “celebration” rule, an employee may take FMLA leave to care for an ill same-sex spouse even if they couple resides in a state that does not permit or recognize their marriage, as long as they were married in a jurisdiction that allowed their marriage.

This change was necessary to accommodate employees with same-sex spouses because the current FMLA definition refers to the state of an employee’s residence when determining whether the employee is married.  Under that definition, an employee technically is entitled to take FMLA leave to care for an ill same-sex spouse only if they actually reside in a state that recognizes same sex marriage.

The DOL issued Frequently Asked Questions and a Fact Sheet along with the proposed regulation.

Fifth Third Bancorp v. Dudenhoeffer – An Analysis of the U.S. Supreme Court’s Decision

Posted in ESOP, Moench, Presumption of Prudence, U.S. Supreme Court

For over two decades, federal courts have embraced the so-called Moench presumption of prudence in ERISA stock-drop cases. Pursuant to that presumption, courts have routinely dismissed such claims absent allegations in a complaint that a company’s situation was dire, or that the company was on the brink of collapse. On June 25,2014, the U.S. Supreme Court issued its decision in the highly anticipated case, Fifth Third Bancorp v. Dudenhoeffer, wherein it concluded by unanimous decision that the presumption of prudence could not be supported by the text of ERISA. As discussed below, that may be at most only mixed victory for the plaintiffs’ bar.

Factual Background

Participants in Fifth Third Bancorp’s (Fifth Third’s) defined contribution retirement plan (Plan) brought a putative class action against the Plan’s fiduciary committee, among others, alleging that defendants breached their fiduciary duties in violation of ERISA.

Under the Plan, participants made contributions into an individual account and directed the Plan to invest those contributions in a menu of options pre-selected by Fifth Third. Of the twenty options available to participants during the relevant period, one was the Fifth Third stock fund, which had been designated an employee stock ownership plan (ESOP). Fifth Third matched the first 4% of a participant’s contributions with company stock, after which participants could move such contributions to any other investment option.

Plaintiffs’ complaint alleged that Fifth Third shifted from a conservative to a subprime lender and, consequently, Fifth Third’s loan portfolio became increasingly exposed to defaults. It further alleged that Fifth Third either failed to disclose the resulting damage to the company and its stock or provided misleading disclosures. During the relevant period, Fifth Third’s stock price declined 74%, resulting in the ESOP losing tens of millions of dollars.

Plaintiffs commenced a putative class action lawsuit, alleging, among other things, that defendants breached their fiduciary duties under ERISA by: (i) imprudently maintaining significant investment in Fifth Third stock and continuing to offer it as an authorized investment option; and (ii) by failing to provide Plan participants with accurate and complete information about Fifth Third and the risks of investment in Fifth Third stock. Continue Reading

SCOTUS Says No Presumption of Prudence In ERISA Stock Drop Cases

Posted in ESOP, Moench, Presumption of Prudence, U.S. Supreme Court

Earlier today, in Fifth Third Bancorp v. Dudenhoeffer, the U.S. Supreme Court declined to adopt the so-called Moench presumption of prudence pursuant to which many circuit courts had dismissed ERISA stock drop claims unless plan participants had pled allegations that the company’s economic situation was dire or the company was on the brink of collapse. The Court, however, made it clear that, to withstand a motion to dismiss, a participant would have to plead facts and circumstances that could plausibly lead to the conclusion that the plan fiduciaries acted imprudently, taking into account the unique circumstances presented by ESOPs. The Court stated that, absent “special circumstances,” allegations that plan fiduciaries should have recognized from publicly available information that a company stock fund was under- or overvalued are “implausible as a general rule.” Where a claim of imprudence is premised on nonpublic information, “a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”

Watch for our in-depth analysis of the Court’s decision, and tune into Proskauer’s Webinar tomorrow, June 26, 2014, to hear our views on the decision and its implications for plan sponsors and fiduciaries. Please follow these steps to register for the webinar or webinars you would like to attend:

  • Go to: https://university2.learnlive.com/?ReturnUrl=%2funiversity%2fproskaueronlineevents.
  • If you are a first time user, create a new account by clicking the “New User Registration” button and completing the New User Registration fields. The Company Pass Code is 9736529. If you are a returning user, login with your existing account information.
  • Click the “Submit” button.
  • This will bring you to the Catalog page.
  • Click the “Enroll” button for the session titled: Fifth Third Bancorp v. Dudenhoeffer – An Analysis of the Supreme Court’s Decision

Final Regulations on Orientation Periods Released

Posted in ACA, Affordable Care Act, Department of Labor, DOL

On June 20, the Federal regulatory agencies in charge of health care reform guidance (the Departments of Labor, Treasury, and Health and Human Services) released final regulations (“Final Regulations”) clarifying the relationship between a group health plan’s eligibility criteria and the Affordable Care Act’s (ACA) 90-day limit on waiting periods. Specifically, the Final Regulations (published in the June 25 Federal Register) address an employer’s ability to require new employees to satisfy a “reasonable and bona fide employment-based orientation period” before starting a group health plan’s waiting period.

The Final Regulations on orientation periods are effective for plan years beginning in 2015. (For the remainder of 2014, employers may rely on the proposed regulations on orientation periods that were released in February 2014 and which are substantively identical to the Final Regulations.)

90-Day Limit on Waiting Periods

Starting with plan years beginning in 2014, the ACA prohibits group health plans from requiring otherwise eligible employees to wait longer than 90 days for coverage to be effective once an employee is eligible to enroll under the terms of the plan. Being “otherwise eligible” to enroll means having met the plan’s substantive eligibility conditions (such as being in an eligible job classification or achieving job-related licensure requirements specified in the plan’s terms). Thus, under the waiting period rules, once an individual is determined to be otherwise eligible for coverage under a group health plan’s terms, any waiting period for coverage may not extend beyond 90 days. All calendar days are counted, including weekends and holidays. In other words, coverage must be effective no later than the start of the 91st day after the employee becomes eligible.

Final regulations on the 90-day waiting period limit were issued February 24, 2014. At the same time, the Federal agencies issued proposed regulations that allowed plans to use “orientation periods” of up to one month in addition to a 90-day waiting period as long as the period was a reasonable and bona fide employment-based orientation period.

Final Regulations Orientation Periods

The most recent Final Regulations clarify that orientation periods are “reasonable” and “bona fide” based on all relevant facts and circumstances. The Final Regulations provide little explanation or guidance as to the circumstances under which an orientation period might satisfy these requirements; however, they clarify that the one month limit on orientation periods is determined by adding one calendar month and subtracting one calendar day, measured from an employee’s start date in a position that is otherwise eligible for coverage.

For example, if an employee’s start date in an otherwise eligible position is May 3, the last permitted day of the orientation period is June 2. Similarly, if an employee’s start date in an otherwise eligible position is October 1, the last permitted day of the orientation period is October 31. If there is not a corresponding date in the next calendar month upon adding a calendar month, the last permitted day of the orientation period is the last day of the next calendar month. For example, if the employee’s start date is January 30, the last permitted day of the orientation period is February 28 (or February 29 in a leap year). Similarly, if the employee’s start date is August 31, the last permitted day of the orientation period is September 30.

Compliance with the Employer Mandate

The Final Regulations note that compliance with the orientation period and waiting period rules is not determinative of whether an employer has complied with the ACA’s “pay-or-play” employer mandate. An employer subject to the mandate may be exposed to tax penalties if it fails to offer affordable minimum value coverage to certain newly-hired full-time employees by the first day of the fourth full calendar month of employment.

For example, an employer that has a one-month orientation period may comply with both the waiting period rules and the employer mandate by offering coverage no later than the first day of the fourth full calendar month of employment. However, the employer would not be able to impose the full one-month orientation period and the full 90-day waiting period without potential exposure to a penalty under the employer mandate. For example, if an employee is hired as a full-time employee on January 6, a plan may offer coverage May 1 (first day of the fourth full month of employment) and comply with both the orientation period and waiting period provisions. However, if the employer starts coverage May 6, which is one month plus 90 days after date of hire, the employer may be exposed to a penalty under the employer mandate.

Employer Action Steps

Now that the 90-day waiting period regulations are finalized in full, employers should review the terms of their group health plans and work with qualified ERISA counsel to ensure that any orientation period is reasonable, bona fide and employment-based, and not merely a subterfuge for the passage of time. In addition, employers should consider application of the pay-or-play mandate when structuring eligibility and waiting periods to ensure that coverage is offered to new full-time employees no later than the first day of the fourth full calendar month of employment.


IRS Issues Revenue Ruling on Applicability of Section 457A to Options and Stock Appreciation Rights

Posted in Code Section 457A, Executive Compensation, Stock Rights

On June 10, 2014, the IRS issued Revenue Ruling 2014-18, which holds that nonqualified stock options, as well as stock-settled stock appreciation rights (SARs), do not constitute nonqualified deferred compensation subject to taxation under Code Section 457A as long as they are exempt from the requirements of Code Section 409A. This ruling reaffirms interim guidance issued by the IRS in January 2009 in Notice 2009-8. (For more information on Section 457A and Notice 2009-8, please refer to our Client Alert, available here.)

Under Section 457A, compensation that is payable under nonqualified deferred compensation plans of certain foreign corporations and partnerships that are “nonqualified entities” is includible in gross income when the compensation is not subject to a substantial risk of forfeiture. For this purpose, a substantial risk of forfeiture exists only to the extent that a person’s right to the compensation is conditioned on the performance of substantial services by any individual. Where an amount of deferred compensation is not determinable at the time it ceases to be subject to a substantial risk of forfeiture (such as amounts which vest prior to the end of a performance period when the underlying performance measurements are still variable), the amount must be included in gross income when it becomes determinable and at such time, will be subject to an additional penalty tax of 20% plus interest at the underpayment rate plus 1% from the later of the time of deferral and the date when the substantial risk of forfeiture lapses.

Section 457A generally uses the same definition of “nonqualified deferred compensation plan” as is used for Section 409A purposes. Under Section 409A, nonqualified stock options and SARs are generally not considered deferrals of compensation, as long they meet certain specific requirements, including, most notably: (1) having an exercise price not less than fair market value on the date of grant; (2) being in respect of service recipient stock; and (3) not having any feature providing for the deferral of compensation. Continue Reading

Yet Another Decision On The Availability of Equitable Surcharge

Posted in Breach of Fiduciary Duty, Equitable Surcharge, Life Insurance Benefits

A district court in Pennsylvania concluded that a decedent’s life insurance plan beneficiaries were entitled to equitable surcharge where the plan administrator failed to, among other things, inform the decedent about the need to convert her group policy to an individual policy. Weaver Brothers Insurance Associates, Inc. v. Braunstein, 2014 WL 2599929 (E.D. Pa. June 9, 2014). This ruling and others like it (as reported on here) stand in contrast to a ruling in the Ninth Circuit (as reported on here) that surcharge was not an appropriate remedy where a plan stopped paying a participant pension benefits that it had mistakenly advised him that he was entitled to, based on a narrower construction of the scope of surcharge relief following the Supreme Court’s decision in Amara v. Cigna. As the number of post Amara claims for equitable surcharge make their way through the courts, we are likely to see an uptick in the number of decisions on this issue.