Iic DW Legal-Reg Update q2 Apr - June 2014

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Quarterly Employee Benefits Legal and Regulatory Update

April J une 2014

This update was prepared for Institutional Investment Consulting and its clients by David Weiner Legal. Current developments
in the areas of employee benefits and executive compensation are reported regularly at www.davidweinerlegal.com.

This document is intended as general information on the issues that could impact plan sponsors and is not a substitute for legal,
accounting, actuarial or other professional advice.

INSTITUTIONAL
INVESTMENT
CONSULTING
We provide our customary summary of developments in the retirement, executive
compensation and health and welfare areas.
The most significant developments occurred at the very end of the quarter, when the
Supreme Court handed down two decisions that resolved major questions affecting employee
benefits. In addition, several developments continued trends that we have covered in prior
reports.
For this report, our organization will change slightly. Because of the level of activity
related to ERISAs fiduciary duties and the Affordable Care Act, those topics will be covered in
dedicated sections.

RETIREMENT
IRS Makes it Easier for Plans to Receive Rollover Contributions
In Revenue Ruling 2014-9, the IRS outlined situations in which a plan administrator
receiving a rollover contribution could reasonably conclude that the rollover comes from a
qualified plan.
In the first fact pattern, the employee delivers a check from the distributing plan that is
payable to the receiving plan. According to the Revenue Ruling, the check and stub identify the
distributing plan as the source of funds and the employee confirms the identity of the prior
employer and certifies that the check does not include after-tax contributions or amounts
attributable to designated Roth contributions. The plan administrator accesses the Department of
Labors EFAST2 database and finds the latest Form 5500, which does not identify the plan as
being nonqualified.
The second fact pattern is similar, except that the distributing plan is an IRA. Again, the
trustee of the IRA issues a check payable to the trustee of the receiving plan and the check and
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check stub identify the IRA as the source of funds. The employee certifies that the distribution
includes no after-tax amounts and also certifies that the employee will not have attained age 70
by the end of the year in which the check was issued.
In both situations, the Revenue Ruling concludes that the trustee of the receiving plan is
permitted to reasonably conclude that the contribution by the employee is a valid rollover
contribution.
This new Revenue Ruling is another example of regulatory activity designed to facilitate
retirement savings by individuals. By giving a new employee an easier path to aggregating all of
his or her retirement amounts in the employer plan (where, presumably they will benefit from the
fiduciary oversight of the employer plan, lower administrative fees and institutional rates for
investment fees), the ruling guards against retirement savings leakage and supports the enhanced
growth of already existing retirement funds.
IRS Issues Further Guidance on Same-Sex Spouses
In Notice 2014-19, the Internal Revenue Service attempted to answer some of the
outstanding questions left in the wake of the Windsor decision, where the Supreme Court found
that the Defense of Marriage Act (DOMA) definition of marriage for federal law purposes was
unconstitutional. For qualified plan purposes, the significance is that plan approaches to defining
marriage must now yield to state law and, in the IRSs view, a marriage that is valid in the state
in which it is conducted must be recognized, even if the parties to the marriage reside in a
different state.
The Notice makes it clear that, for qualification purposes, a plan did not have to
recognize a same-sex spouse as a spouse for plan purposes before September 16, 2013 (a date
previously designated, in Revenue Ruling 2013-17). The Notice also makes it clear that a plan
could treat a same-sex spouses as the spouse for periods prior to June 26, 2013 (the date of the
Windsor decision) without losing its qualified status. On this point, the Notice recognizes that
some of the requirements may be difficult to apply retroactively.
The Notice discusses whether plans need to be amended to reflect the decision. That need
will follow from the existing provision. For example, if the spouse definition was consistent
with the DOMA provision, it will need to be amended. In contrast, if spouse can be read to
recognize a same-sex marriage, no amendment is necessary. Under the Notice, needed
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amendments must be adopted no later than the end of 2014 (provided that plan administration is
consistent with the new rules from and after September 16, 2013).
The IRS subsequently confirmed that mid-year amendments addressing these Windsor
requirements may be made to safe harbor 401(k) and (m) plans (ordinarily, mid-year
amendments to safe harbor plans may be made in only limited circumstances).
Church Plan Cases Continue Trend Against Church-Related Plan Sponsors
The multiple lawsuits challenging the church plan status of pension plans sponsored by
religiously-affiliated corporations continued to work through the courts, with most activity being
adverse to the employers.
In Kaplan v. Saint Peters Healthcare System, a federal district court in New Jersey ruled
that the pension plan at issue was not a church plan, despite the IRSs determination (in a private
letter ruling) that the plan did qualify as one. This decision followed a similar ruling in a
California case (Rollins v. Dignity Health).
These cases reflect the prevailing view in the courts (two decisions in July, after the
period covered by this report, reached the same conclusion). Only one decision has upheld the
church plan status of a healthcare systems plan. The federal district court in Michigan, in
Overall v. Ascension Health, concluded that the plan at issue was a church plan, based on a
different reading of the applicable statute (and a recognition that church plan status had been
found in these circumstances for decades, before the current challenges).
The significance of church plan status is that church plans are exempt from ERISA and
the plans at issue in these cases, therefore, did not satisfy many requirements that would lead to
significant liability for the sponsors. It is possible that the decision in Overall could be the
beginning of a conflict that would lead to a Supreme Court resolution. It is also possible that the
overwhelming rejection of what was thought to be settled law (which was relied upon by church-
affiliated employers) could prompt legislative action to protect the employers, at least for prior
activities in reliance on the settled law.

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IRS Issues Guidance on Qualified Longevity Annuity Contracts (QLACs)
On July 1, the IRS issued final rules on QLACs. These are annuity contracts that can be
purchased with defined contribution plan balances. The major advantage of the contracts is that
they permit a greatly deferred distribution of a portion of a participant's account, in recognition
of the fact that defined contribution balances will be needed to provide retirement income over a
significant period of time due to increases in life expectancy.
The final rules follow the proposed QLAC rules in most respects. The significant
changes are that the dollar limit (what can be used to purchase a QLAC) was expanded by
$25,000 (to the lesser of 25% or $125,000) and QLACs can now have a "return of premium"
feature, which permits the contract to provide that, if a participant or participant and beneficiary
die before they have received a return of the premium they paid, the contract may refund the
remainder of the premium amount. The final rules also provide for a cure period, in the event the
limits are exceeded; under the cure rules, the contract will still qualify if the excess amounts are
returned to the participant's account by the end of the calendar year following the year in which
the contract is purchased.
To be a QLAC:
Premiums can't exceed the above amounts
Distributions can't begin later than the first of the month following the
participant's 85th birthday (note that the amounts paid as premiums on the QLAC
are excluded from the 70 1/2 minimum distribution rule calculation)
Death benefits have to follow specified requirements (which differ, depending on
whether the beneficiary is the spouse of the participant and whether the
participant dies before or after the annuity starting date)
The contract must state that it is a QLAC and the issuer must comply with annual
reporting requirements
The rules were effective July 2, 2014

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PBGC Changes Support Rollovers to DB Plans
The IRS action reported in the previous entry reflects an understanding of the important
role of defined contribution balances in providing lifetime retirement income. In many cases, that
objective is carried out by participants rolling over defined contribution balances into a defined
benefit plan, where distribution options may better support the lifetime goal, because of the
availability of broader annuity options.
The rollover strategy introduces a risk for participants that would not occur if they left
their money in the defined contribution arrangement. If the defined benefit plan is underfunded
and terminates under the supervision of the PBGC, some of the benefits that participants were
expecting may not be paid. This risk is a result of both the statutory maximum on guaranteed
benefits and the five-year phase-in on the protection for newly accrued benefits.
The PBGC proposed changes to its rules to address this risk. Under the proposal, rollover
amounts would be treated as if they were mandatory employee contributions, which gives
them the second highest priority level in a PBGC takeover. They generally would be exempted
from the statutory maximum and the five-year phase-in that applies to other increases in benefits.
As a result, defined contribution balances that are rolled into a defined benefit plan would be
almost fully protected in the event of a PBGC takeover.
These changes would not eliminate all risks, but, in most cases would have that effect.
Although, in the event of a PBGC takeover, the rolled over amounts wouldnt be available to
participants in a lump sum, the proposed rule goes a long way toward supporting the use of the
defined benefit facility for a participant who wishes to choose an annuity payout that is not
available in the defined contribution plan.
De-Risking Trends Continue
Several developments during the quarter related to growing interest in de-risking
transactions being undertaken by defined benefit plans.
A survey prepared by CFO Research and Prudential Financial concluded that significant
percentages of companies consider themselves very likely to offer lump sums (24%) or
transfer liabilities to a third-party insurer (9%) in the next two years. Those are the most
sweeping and controversial de-risking approaches.
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Also during the quarter, the Internal Revenue Service issued five private letter rulings
affirming the viability of a lump sum offer.
Finally, in Lee v. Verizon Communications, Inc., a federal district court in Texas
dismissed a lawsuit filed by retirees alleging that it was a breach of fiduciary duty for the plan to
purchase a group annuity contract to pay the benefits of the retirees. Even though the plan only
annuitized a portion of the benefits under the plan, the court viewed the activity as settlor and not
fiduciary in nature and did not find a basis for the claim that treating retirees differently from
other participants in this fashion violated any law.
Final Regulations Support Disability Insurance in DC Plans
Final regulations issued by the Internal Revenue Service address the tax treatment of
payments by a qualified plan for accident or health insurance. For the most part, the rules
confirm that the amounts paid for that insurance constitute taxable distribution. However, the
regulations provide an exception for the payment of disability insurance premiums. If the
disability benefits are paid in the event of an employees inability to continue employment
because of disability and the amount of the benefit does not exceed the reasonable expectation of
annual contributions that would have been made on the employees behalf while disabled, then
the premium amounts used to pay premiums are not taxable and the disability benefits, when
contributed to the plan, will also not be taxable.
We are aware of limited situations in which arrangements like these have been included
in defined contribution plans. They are designed to address one of the disadvantages between
having retirement income provided in a defined contribution plan and defined benefit plan
(because defined benefit plans traditionally have a disability pension benefit that ensures a
participants retirement payments are not adversely affected by the disability). The existence of
the final regulations will make it easier for defined contribution plans to provide this kind of
equivalent coverage.
Court Limits Long-Lost Participants Claim
During a recent conference, an overwhelming majority of plan sponsors in attendance
had encountered claims from long-ago terminated employees. In many cases, these claims cause
problems because records related to old benefits have been lost or purposely destroyed. (We
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know from other conversations that the Social Security Administration is causing these claims by
notifying former employees that they "may have" or "probably have" benefits from their old
companies.)
The Sixth Circuit, in an unpublished opinion, held that a claim of this type may be barred
as untimely because of the statute of limitations. In that case, Watkins v. JP Morgan Chase U.S.
Benefits Executive, the participant said that she had asked for a distribution in 1998, but didn't
follow up on the request until 2006 (there was evidence that the check had been issued but, in
analyzing the statute of limitations issue, the court treated the check as not having been sent).
The court reasoned that, in the year that the distribution was requested, the participant
needed to treat the failure to issue a check as a "clear repudiation" of her claim. Thus, the statute
began to run then and had run out by the time the participant followed up.
This case wont always help, as in many cases, the long-lost participant never requested a
distribution. This is probably just the beginning of courts' trying to resolve some tricky issues in
the area.

FIDUCIARY DUTIES
Supreme Court Says There is No Presumption of Prudence for Stock Fund Fiduciaries
The Supreme Court, in Fifth Third Bancorp v. Dudenhoeffer, disagreed with many lower
courts and held that fiduciaries of an ESOP (which includes most company stock funds in
defined contribution plans, because they are designated as being ESOPs) do not get the benefit of
a presumption that they are acting prudently, just because the plan says that it has to be invested
primarily in company stock. (The Court did recognize one difference in the standard for ESOP
fiduciaries, because it's recognized in the statute--the ERISA diversification requirement doesn't
apply to them and the evaluation of their prudence won't depend on whether the ESOP is
diversified.)
The decision will likely fuel the already increasing trend of cases challenging company
stock funds. Although the Court offered some guidance on how a court should analyze a motion
to dismiss, it remains to be seen how the courts will use that guidance, as, in some ways it creates
a different presumption for them to work with. In the Courts view, the market has already
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factored into the value of the stock all publicly available information about the company. So,
claims that the stock is an imprudent investment would seem to face some headwind.
Another area of uncertainty is how the decision affects the viability of "hard
coding" fiduciary decisions in a plan document. This practice has been viewed by many of us as
a way to lower the standard for fiduciaries because it involves having the plan sponsor
incorporate the decision into the plan document. For example, if a plan document says that one
of the investment funds available under the plan is Manager A's Large Cap Equity Fund, then
(the analysis goes) fiduciaries aren't subject to the same level of scrutiny with regard to the
prudence of that Fund as they would be if they selected the Fund themselves. Because that
analysis is similar to the "if the Plan says invest in stock then fiduciaries aren't subject to the
same level of scrutiny analysis that was rejected in Fifth Third Bancorp, we should question
whether hard coding works like we thought it did.
Missing from the opinion is any discussion of the scope of the administrator's duty; all we
have is a discussion of the level of that duty when it exists. What we need to know is whether a
plan can dictate whether the administrator has any duty with respect to company
stock. Specifically, can we have a provision that says: "the administrator shall have no
authority to eliminate company stock as an investment unless the ongoing viability of the
company is uncertain?"
It will probably take a while for the implications of Fifth Third Bancorp to
develop. That's not a good situation for in-house fiduciaries, who would benefit from greater
certainty.
Court Concludes That Third-Party Administrator is a Plan Fiduciary
The courts have not been uniform on the subject of whether a 401(k) administrator can
attain fiduciary status through its authority or activities. A federal district court in Massachusetts
joined the courts concluding that an administrator is a fiduciary in a decision affecting Mass
Mutual. While the court concluded that fiduciary status did not follow from Mass Mutual's
ability to change investment options (because it hadn't exercised that authority), the court
concluded that Mass Mutual's ability to increase its separate investment account management
fees DID make it a fiduciary.
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In-house fiduciaries need to evaluate whether terms in their contracts with administrators
can lead to fiduciary status. If they do, the in-house fiduciaries may need to heighten their level
of oversight of the administrators to ensure that the fiduciary activities of the administrators do
not lead to co-fiduciary liability for the in-house fiduciaries.
On a practical note, this risk can be handled by adding a section to the fiduciary
compliance checklist that all in-house fiduciaries should consider having. A checklist provides a
roadmap for fiduciary compliance and a record that the fiduciaries are being prudent in their
activities.
Leeway to Consider Additional Information on Claim
Although a Supreme Courts decision not to review a lower court opinion is not itself
precedent, a recent refusal by the court is of interest to employers, because of the decision by the
court below.
In Truitt v. Unum Life Ins. Co., the Fifth Circuit had held that Unum had not abused its
discretion by relying on emails and documentation provided by an acquaintance of the
participant when it denied the participants claim for long-term disability benefits. There was
evidence that the acquaintance was adverse to the participant.
The Fifth Circuit had concluded that Unum did not have a duty to investigate the
materials provided. Instead, the participant had a duty to discredit the information.
It is still a good idea for a fiduciary to show its prudence when relying and not relying on
information provided in connection with a claim. However, this decision can help a fiduciary
whose activity in relying on evidence is questioned.
Case Cautions Communications Efforts in Transactions
It is becoming less and less shocking when a court finds that a participant can sue
fiduciaries alleging that they provided inadequate information to the participant, resulting in a
loss of benefits. But, continuing the recent trend, in Jump v. Speedway, the federal district court
in Minnesota held that a participant who lost retiree health coverage because he transferred to the
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company that had acquired his employer instead of retiring at the time of the transaction could
sue for an alleged fiduciary duty breach.
Because the decision relates to a motion to dismiss, the actual facts remain to be
developed as the case proceeds. However, the opinion makes it look like the mix of information
(FAQs and employee meetings) reflected the customary mix for an employer engaged in a
transaction. Decisions like this underscore the extreme care that needs to be exercised when
preparing employee-transition materials and the need to control safe sources for additional
information.
Courts Analyze Whether Satisfactory to Us Grants FirestoneDiscretion
Firestone language is important to have in plan documents because it is the basis for a
deferential standard of review for fiduciary decision by the courts. In order to receive the
treatment, a plan must make a clear grant of discretionary authority to the fiduciary.
Because most of us are acutely aware of this standard (and recognize the greatly
decreased odds of winning litigation against a participant under a courts de novo review), our
plans generally have good language making it clear that the fiduciary has the discretionary
authority to determine rights and benefits under a plan and to construe plan language.
But, sometimes, we do not have complete control over plan language, such as when
relevant language is provided by an insurance company. In one set of cases, the courts have had
to address whether language in a plan requiring that evidence of disability satisfactory to [the
insurance company] was sufficient to grant discretionary authority.
In the past year, Courts of Appeals in the First Circuit and the Fourth Circuit found that
such language was not sufficient to grant discretionary authority, disagreeing with prior
decisions concluding that it was sufficient. In Prezioso v. Prudential Ins. Co., the Eighth Circuit
disagreed with the new trend and continued to apply the deferential standard.
Despite the favorable outcome in Prezioso, employers should recognize the shift in this
area. Although it is usually impossible to change language of this kind, the court decisions are an
additional reason that employers should wrap insurance company provided documents, so that
the employers best-practice language in this and other areas can be made part of the plan
documentation.
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Courts Address Whether FirestoneDeference Applies to Fiduciary Claims
A concept related to the preceding entry is whether any deference should be given in a
case challenging fiduciaries activity as violating the terms of the plan.
The question may be resolved by the Supreme Court in the next term. When it returns
from recess, the Court will decide whether to grant review in the Tibble case, in which the Ninth
Circuit did apply the deferential standard. (four other Circuits have ruled in the same manner.)
In Futral v. Chestant, the Fifth Circuit disagreed. Although this decision nonetheless
found in favor of the fiduciary, the court made it clear in a footnote that the deferential standard
only applied to benefit claims and not to fiduciary duty litigation. The Second Circuit is the only
other part of the country that has addressed the question and concluded that the deferential
standard did not apply.
DOLs Fiduciary Definition Delayed Again
The revised definition of fiduciary that the Department of Labor has had in the works is
being further delayed. The rule is now being promised in January of 2015.
The rule is extremely controversial, as it will broaden the scope of the definition to cover
many individuals who give advice to participants in connection with plan distributions and
rollovers. As a result, the financial industry has been attempting to influence the DOLs activity.
The latest delay is one of several that have affected the revision, which was first proposed in
2010 and subsequently withdrawn.
Court Uses Equitable Relief to Make Beneficiaries Whole
In Weaver Brothers Insurance Associates v. Braunstein, out of Pennsylvania, life
insurance beneficiaries were able to recover the amount of insurance proceeds, not because they
were entitled to benefits, but because the fiduciary conduct of the plan (didn't provide an SPD;
wrongly told the disabled worker who had died that her insurance remained in force) supported
an equitable remedy (called "surcharge").
As the cost of "getting it wrong" increases, we need to make sure that only certain people
can give advice about what a plan provides and doesn't provide and we need to make sure that
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those people have adequate training to "get it right." And, while we need to process claims
according to the ERISA Section 503 requirements, we also need to make a litigation risk
assessment earlier in the process than we would have in the past. All courts aren't going to use
this theory, but the number is growing and, if we think that may happen in a given case, we
should think about settling the claim early, before the costs of litigation (which may include both
the plaintiff's and the plan's attorneys' fees) are incurred.
Lawsuit Against Principal Stable Value Fund
A lawsuit filed against Principal and the investment adviser and trustee for its stable
value fund (SVF) alleges that fund performance was substandard and that the fees that the
defendants realized were excessive. The investment adviser (Morley Capital Management) and
the trustee (Union Bond & Trust) are owned by Principal. The suit was filed on behalf of
participants in plans that include the Principal fund in their line-ups.
The case, Austin v. Union Bond & Trust, was filed in the federal district court in Oregon.
The complaint contends that all three of the entities are fiduciaries. It describes activities that the
entities undertook that increased the compensation that they received.
The suit should be watched by plans that are invested in the Principal SVF. Because the
arrangement that Principal structured is not unique, all plans should determine the extent to
which funds in their line-ups have similar characteristics. We will update readers in future
reports and will provide interim updates to any reader who contacts us.

EXECUTIVE COMPENSATION
Activity during the quarter involved 409A audits, a novel approach to limiting CEO pay
and litigation that underscores the importance of maintaining unfunded top-hat status.
A Limited Number of Very Comprehensive 409A Audits Are Coming
The Section 409A rules that apply to nonqualified deferred compensation plans and the
very broad definition of such plans has increased the effort that many employers pour into this
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element of executive compensation. This use of resources has often seemed questionable when
we consider the limited amount of audit activity that, historically, has been seen in this area. The
IRS has announced an initiative to review activity in the nonqualified plan area. The review
activity will focus on deferral elections and distributions and will involve companies that are
already subject to employment tax audits. Fifty companies will be targeted.
The IRS has also announced that it will use the company tax review in this area as a
means to review the tax treatment by participants in 409A arrangements. To the extent that
issues arise on the employer side, the top ten highest-paid employees will be scrutinized. As the
tax focus in 409A (i.e., the party hurt by penalties if there is a failure to comply) is the employee,
this is an anticipated next-step.
While the odds of any company and its employees being reviewed are slim, this audit
activity is a reason to consider a self-audit of deferred compensation administration. The IRS
self-correction procedures are available in most situations and can be used to remedy
noncompliance before the IRS finds a problem.
A New Approach to Limiting CEO Pay
Proposed legislation in California attempted to take a different tack toward limiting
executive pay. Under the bill, the state income tax rate for a publicly traded corporation would
vary based on the disparity between CEO pay and average employee pay. The tax rate could be
as low as 7% (down from the current 8.84%,) or as high as 13%. The lower end of the tax rate
scale would apply to companies with a CEO pay ratio (CEO pay divided by average employee
pay) of 25 or less. So, if the CEO made $1 million, average pay would need to be $40,000 or
more to qualify for the lowest rate. The top end of the tax rate scale would apply if the ratio
exceeded 400. This would be the outcome if CEO pay was $16 million and the same average
pay--$40,000--existed.
The proposed legislation made it out of committee but failed narrowly in a vote of the full
state Senate. As this report was published, the sponsor of the bill was considering revising the
bill and making another attempt at passage.
No ERISA Fiduciary Duty Claim Under Top-Hat Plan
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A federal court in Michigan confirmed why it is so important for employers to maintain
unfunded top-hat status for their supplemental retirement plans. In Collins v. Frank Rewold &
Son, the company terminated its supplemental plan, resulting in a loss of future anticipated
accruals for the employee. As a result of the termination, the accelerated and discounted present
value of the participants benefit was paid to him in a lump sum.
The participant alleged that the termination and distribution constituted a breach of
fiduciary duties resulting in damages to him. He contended that because the plan had been
funded through the purchase of life insurance policies, the plan lost top-hat protection and
became subject to ERISAs fiduciary duties.
The court disagreed. Because the plan specified that participants had no interest in
insurance purchased by the plan, it remained unfunded. As a result, the fiduciary claim failed.
The supplemental plan was still subject to ERISA to a limited extent and the claims and
enforcement provisions applied. As a result, the court reviewed the employers action on an
arbitrary and capricious basis. It concluded that the termination and distribution had a valid
business purpose and passed muster under this standard.

AFFORDABLE CARE ACT
Supreme Court Concludes that Contraceptive Mandate Violates Religious Rights of
Closely-Held Corporations
In Burwell v. Hobby Lobby Stores, the Supreme Court held that part of the contraception
mandates was invalid for a closely-held corporation (Hobby Lobby and some other plaintiffs)
whose religious rights were violated by the mandate.
The opinions followed the Court's 5-4 ideological split. Here's a summary:

The Court held that closely-held for-profit corporations have protected religious
beliefs. Actually, the Court concluded that a Federal law (the Religious Freedom
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Restoration Act) applied to the activities of closely-held corporations where
the religious beliefs of the corporations' owners were implicated.
Applying the required RFRA analysis (if the religious beliefs of a person are
substantially burdened by a law, the law must be supported by a compelling
government interest and must use the least restrictive means to carry out the
government interest), the Court concluded that (1) the plaintiffs' religious beliefs
were substantially burdened because of the approximately half billion dollar
annual penalty that would be incurred for failure to comply, and (2) while there is
(or is assumed to be) a compelling government interest, there were less restrictive
means to address that interest. Specifically, the government could either pay for
the contraception methods at issue (there were four of them--two IUDs and two
"emergency" contraceptives, all referred to as "abortifacients") or could arrange
for insurance companies to pay for those methods in the same manner that the
government had arranged for not-for-profit religious institutions.
There was a very strong dissent by Justice Ginsburg. She essentially disagreed
with every point made by the majority. Her dissent was joined by the other three
"liberal" Justices, although two of them did not join the "corporation is not a
person" analysis; they didn't think that question needed to be reached because
they agreed that the mandate passed muster even if a closely-held corporation is
protected by the RFRA.
Progress, But no Future for 40-Hour Week
The House of Representatives approved a change to the definition of full-time
employee that would change the threshold to 40 hours per week from the 30-hour-per-week
standard contained in the ACA. Changes to this definition are favored by many industry groups.
In particular, retail and restaurant employers would benefit, as many of them do not currently
provide health care coverage to employees generally and have a large number of employees in
the 30-40 hour range.
Although a companion bill was introduced in the Senate about the same time that the
House bill was proposed, there is little chance of passage in the Senate currently. In addition, the
President has threatened to veto legislation changing the definition.
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Final Rules Issued on Orientation Periods
When the government issued final rules related to the ACAs 90-day waiting period
maximum, it proposed the recognition of an orientation period, which is a period of time that
would run before the waiting period. The concept recognizes that, in many situations, an
employee must work for a limited period before the employee and employer decide to move
forward with full job duties.
Final rules were issued in this area. As proposed, a bona fide orientation period not in
excess of one month may be required before the 90-day waiting period begins.

HEALTH AND WELFARE
EEOC Working on Wellness Plan Guidance
The Equal Employment Opportunity Commission updated its regulatory agenda--the
report that tells us what projects the EEOC is working on--and signaled a potentially significant
project is about to be released. The project that is getting a lot of publicity is a Notice of
Proposed Rulemaking that was scheduled for June of 2014, although it was not issued during the
quarter. The proposed regulation would contain the EEOC's formal position on wellness
programs--the arrangements that, typically, incentivize or penalize an employee who does things
or fails to do things that are thought to be tied to whether he or she improves a health condition
or maintains good health. As we know, a lot of health plans contain wellness program
provisions.
The reason that we need guidance from the EEOC is that a lot of laws (specifically,
HIPAA, GINA and the Americans with Disabilities Act, or ADA) affect how we design wellness
programs, but the EEOC, which administers the ADA, has never formally ruled on the
programs. Instead, it has made its very restrictive position on the programs known
through correspondence that it releases (ranging from internal correspondence and manuals to
letters directed to specific employers) and through speeches. So, while we know exactly how to
design a program to satisfy HIPAA and GINA, we don't know how to satisfy the ADA and have
a pretty good idea that the EEOC wouldn't agree that the same approach used to satisfy those
other laws would satisfy the ADA.
Qu

April J une 2014


17
INSTITUTIONAL
INVESTMENT
CONSULTING
New COBRA Form Proposed
EBSA has proposed revised regulations and model notices that take into account that
COBRA will exist side-by-side with the insurance "marketplaces." The comment period closed
July 1 and, presumably, we'll have final notices available shortly thereafter.
Participant Unsuccessful In Covering Same-Sex Spouse
The Supreme Court in Windsor didn't make coverage of same-sex spouses mandatory; it
said that the question of "who is a spouse?" is answered by the states, not the federal
government. Since then, the IRS and DOL have made it clear in the retirement plan context that
"spouse" includes all persons who are married in a state that recognizes the marriage. As a
result, certain mandatory equivalent treatment of same-sex spouses exists in retirement plans
(e.g. qualified annuities and QDROs). Many of us think that the question for health plans will be
answered by state and federal nondiscrimination laws (i.e., they may bar discrimination against
same-sex spouses). But, a participant's attempt to get the same result under ERISA recently
failed. In Roe v. Empire Blue Cross Blue Shield, the federal district court in New York rejected
claims that the exclusion of same-sex spouses was a "benefit interference" that violated Section
510 or a breach of ERISA's fiduciary duties. We don't read this decision as one that upholds an
exclusion of same-sex spouses; it is more likely that the court is saying, "if an exclusion like this
is wrong, this isn't why it's wrong."
Court upholds plan limitation period
The case law following the Supreme Courts decision in Heimeshoff has uniformly
supported in-plan statutes of limitations. The only question in a given situation is whether the
plans period is reasonable. In Torpey v. Anthem Blue Cross Blue Shield of California, the
federal district court in New Jersey upheld a one-year limitation period.
Plan sponsors should continue to follow the rulings and incorporate appropriately short
limitation periods in their documents.
New HSA Limits
Qu

April J une 2014


18
INSTITUTIONAL
INVESTMENT
CONSULTING
The IRS issued the 2015 inflation-adjusted limits related to health savings accounts. In
Revenue Procedure 2014-30, the annual contribution limits were set at $3,350 for self-only
coverage and $6,650 for an individual with family coverage. The Revenue Procedure also set the
deductible minimums for high deductible health plans ($1,300 for self-only and $2,600 for
family coverage) and the out-of-pocket limits for such plans ($6,450 for self-only and $12,900
for family coverage).
Supreme Court will Consider Vesting Inference for Collectively-Bargained Retiree Health
Plans; Congress Also Getting into It
Under the Yardman doctrine, collectively-bargained retiree health benefits are presumed
to be vested, absent evidence to the contrary. In M&G Polymers v. Tackett, the Supreme Court
will consider whether that presumption is appropriate. Although the Court decided to hear the
appeal during the recently-completed term, arguments and a decision will not occur until late this
year or next year, during the next term.
Meanwhile, a Bill introduced in the Senate would (if it became law) pre-empt the
Supreme Courts action in the case. Under the Bankruptcy Fairness and Employee Benefits
Protection Act, such retiree benefits would be presumed to be vested. In addition, procedural
requirements (plan language; disclosures; etc.) would be imposed that would be a pre-requisite
for rebuttal of the presumption. Congressional activity in employee benefits is a longshot, but
we will follow any progress on the Bill.

Iic DW Legal-Reg Update q2 Apr - June 2014

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Quarterly Employee Benefits Legal and Regulatory Update

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