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Copyright © 2010 by K&L Gates LLP. All rights reserved.
Benefits Best Practices for 2010
Michel P. Vanesse, PartnerLynne S. Wakefield, PartnerApril 20, 2010
Copyright © 2010 by K&L Gates LLP. All rights reserved.
3
Presenters
Michel P. Vanesse, PartnerCharlotte Office [email protected]
704.331.7464
Lynne Shore Wakefield, PartnerCharlotte Office [email protected]
Copyright © 2010 by K&L Gates LLP. All rights reserved.
TRENDS IN EXECUTIVE COMPENSATION
Michel P. VanessePartner – Charlotte, NCApril 20, 2010
5
Executive Compensation Under Scrutiny
Sources Institutional Shareholders Riskmetrics Media Federal Agencies Legislators
Reasons Pay Differential Disproportionate Risk-taking Continued Lack of Alignment with Shareholders’
Interests
6
Compensation and Benefits Review
Current environment requires a comprehensive understanding of compensation and benefits structures
Due diligence should not be limited to levels of compensation and benefits
Good documentation is critical
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Pay Practices That May Cause Concern
Employment contracts Nonperformance-based compensation Guaranteed salary increases Severance Change-in-control provisions and related parachute
payments Make-whole provisions
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Pay Practices That May Cause Concern (cont’d)
Benefits and Perquisites SERPs Tax gross-ups and other reimbursements Severance
Equity-based compensation Types of awards (options have inherent issues) Dividend equivalents (may not be appropriate on
unvested awards) Repricing
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Risk Management
Identify pay practices and provisions that may encourage excessive risk taking
Understand global business plan and related risks
Analyze compensation and benefits plans to determine if they will help implement the business plan or trigger unwanted behaviors (e.g., excessive risk-taking)
10
Legal Environment
Current legal environment gives additional reasons for due diligence
SEC disclosures IRS focus on compensation and benefits
practices 409A Reasonable compensation
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Adequate Documentation
Contradictory trends Employment agreements Benefit plans
Adequate documentation means more than performance metrics Eligibility Form and time of payment Vesting/Forfeiture Governance Boiler plate
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Adequate Documentation (cont’d)
409A mandates comprehensive documentation “Deferred compensation” is a broad concept (may
include not only retirement-type benefits, but also severance, some equity-based arrangements, bonus plans, LTIPs, tax reimbursement, health reimbursements, earn-outs, etc.)
Documentation requirements are similar to those applicable to traditional ERISA plans
IRS Correction Program Operation must reflect plan documents
Potential cultural change for HR IRS Correction Program
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162(m) Update
Compensation is NOT performance-based for purposes of 162(m) if it is payable upon the occurrence of certain events, irrespective of whether performance goals are met Termination without cause Termination for good reason Retirement
Transition relief is available in 2010 only if: Performance period started on or before 1/1/09; or Contract was in effect on 2/21/08
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Design Trends
Multiple performance metrics per program Multiple parameters used to determine payouts Objective and subjective approach Blended benchmarks (company-wide, line of
business, individual) Layered Structure
Annual and long-term Maximum payouts Medium of payment
Clawbacks
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Design Trends - Equity
Traditional forms of awards are criticized Options (pricing, exercise, underwater options) Restricted stock or RSUs with time-based vesting (not
an proper incentive, 162(m)) Increased prevalence of performance-based
awards Need for repricing for outstanding awards
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Repricing Considerations
Plan document Procedure to follow Consent requirement Potential prohibition
Tax Issues New grant Fair market value 409A
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Repricing Considerations (cont’d)
Accounting Modification of existing award Impact on fair value
SEC considerations Investment decision and tender offer rules Unilateral repricing Option exchange Available exemptions
18
Repricing Considerations (cont’d)
Structuring One-to-one ratio or value-for-value Eligibility Procedure (unilateral repricing, exchange) Other forms of awards
Employee communication
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Questions?
Copyright © 2010 by K&L Gates LLP. All rights reserved.
BENEFITS BEST PRACTICES FOR 2010
Lynne S. WakefieldPartner – Charlotte, NCApril 20, 2010
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Introduction
Health Care Reform – Immediate and Near Term Impacts on Employer Plans
Health and Welfare Plan Best Practices and Trends Legal Update/Other Emerging Issues
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Health Care Reform – Immediate and Near Term Impacts on Employer Plans
Two-Part Health Care Reform Legislation Patient Protection and Affordable Care Act
signed into law March 23, 2010
Health Care and Education Reconciliation Act of 2010 signed into law on March 30, 2010
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Health Care Reform – Immediate and Near Term Impacts on Employer Plans
Major Components of Health Care Reform Individual Mandate – Individuals will be subject to
tax for not purchasing coverage (government subsidies will assist those with lower incomes)
Employer Obligation – Employers must provide coverage or pay penalty – referred to as “pay or play” or “freerider surcharge”
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Health Care Reform – Immediate and Near Term Impacts on Employer Plans
Major Components of Health Care Reform (cont’d) Insurance Reform – Guaranteed issue and
underwriting, prohibition on pre-existing condition exclusions
Creation of state–level health insurance clearinghouses or “exchanges” where individuals and employers can purchase coverage
Tax-Based Funding Mechanisms
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Health Care Reform – Immediate and Near Term Impacts on Employer Plans
Effective Dates There are several immediate 2010 impacts of
Health Care Reform that need to be considered There are also a number of reforms and plan
design changes required for plan years beginning on or after September 23, 2010, which for calendar year plans is January 1, 2011 Plan design changes must be considered soon so that
they can be communicated during annual enrollment and implemented for 2011
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Health Care Reform – Immediate and Near Term Impacts on Employer Plans
Effective Dates (cont’d) Later Health Care Reform provisions become
effective from 2013 to 2018 Individual and employer pay or play mandates are
effective in 2014
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Health Care Reform – Immediate and Near Term Impacts on Employer Plans
Immediate 2010 Impacts of Health Care Reform Early Retiree Reinsurance Program
Beginning in June 2010, the government will launch a temporary reinsurance program which provides for reimbursement of certain employer costs in connection with employer-provided retiree health coverage
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Health Care Reform – Immediate and Near Term Impacts on Employer Plans
Immediate 2010 Impacts of Health Care Reform (cont’d) Change in Employer Tax Treatment of Medicare Part
D Retiree Drug Subsidy Employers whose drug expenses are reimbursed under the
Medicare Part D retiree drug subsidy program will lose their tax deduction in 2013
Although the change does not take effect until 2013, employers participating in the retiree drug subsidy program will be required to recognize the full accounting impact of the loss of this federal tax deduction on current financial statements
29
Health Care Reform – Immediate and Near Term Impacts on Employer Plans
Immediate 2010 Impacts of Health Care Reform (cont’d) Small Employer Tax Credit
New tax credit for eligible small employers equal to a portion of the employer’s cost to provide health insurance
Creation of state high risk pool for individuals with pre-existing conditions
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Health Care Reform – Immediate and Near Term Impacts on Employer Plans
Near Term Impacts of Health Care Reform Three Primary Categories of Health Care Reform
Changes for 2011 Plan Design Changes Reporting and Disclosure Changes Nondiscrimination Changes
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Health Care Reform – Immediate and Near Term Impacts on Employer Plans
Near Term Impacts of Health Care Reform “Grandfathered Plans” are exempt from certain
aspects of Health Care Reform A “Grandfathered Plan” is a plan that was in effect on
March 23, 2010 A “Grandfathered Plan” does not lose its status when new
employees are hired and enrolled or when dependents are added to the plan under provisions in effect on March 23
There is no current guidance on what could cause a plan to lose grandfathered status
Unless otherwise indicated, Grandfathered Plans are subject to the requirements in the following slides
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Health Care Reform – Immediate and Near Term Impacts on Employer Plans
2011 Plan Design Changes Plans that cover dependent children must provide
coverage for adult children up to age 26, regardless of marital or student status Prior to 2014, Grandfathered Plans only have to cover
such dependents who are not eligible under another employer’s plan
Prohibition on imposing lifetime and annual limits on the dollar value of essential health benefits
33
Health Care Reform – Immediate and Near Term Impacts on Employer Plans
2011 Plan Design Changes (cont’d) Plans must provide 100% coverage for preventive
care and certain immunizations (e.g., no deductible, copayment or other cost-sharing) Grandfathered Plans are exempt from this requirement
Prohibition on imposing pre-existing condition exclusions on children under age 19
Over-the-counter medicine and drugs are not eligible for reimbursement under a Health FSA, HSA or HRA without a doctor’s prescription
34
Health Care Reform – Immediate and Near Term Impacts on Employer Plans
2011 Plan Design Changes (cont’d) Excise tax for non-qualified distributions from HSAs
increases from 10% to 20% No rescission of coverage is permitted except in
cases of fraud or intentional misrepresentation New appeals process
Grandfathered Plans are exempt from this requirement Simple cafeteria plans for small employers
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Health Care Reform – Immediate and Near Term Impacts on Employer Plans
Action Required to Implement 2011 Plan Design Changes Coordinate with third party administrators (self-
insured plans) or insurers (fully insured plans) to implement changes
Determine impact of cost changes Amend plan documents and update benefits
booklets and SPDs to reflect changes Describe changes to participants in annual
enrollment materials
36
Health Care Reform – Immediate and Near Term Impacts on Employer Plans 2011 Reporting and Disclosure Changes Employers will be required to include the value of
employee health coverage on employees’ Form W-2 beginning with the 2011 tax year
37
Health Care Reform – Immediate and Near Term Impacts on Employer Plans
2011 Nondiscrimination Changes Nondiscrimination rules under Section 105 of the
Internal Revenue Code previously were applicable only to self-insured plans
These nondiscrimination rules also apply to fully-insured plans effective January 1, 2011
May impact fully-insured medical plan products offered solely to executives
Grandfathered Plans are exempt from this requirement
38
Health Care Reform – Immediate and Near Term Impacts on Employer Plans
Other Considerations There are a number of other reforms and plan
design changes that go into effect in 2013 and 2014
As Health Care Reform goes into full effect in 2014, employers will be making strategic changes in their overall program and determining whether to pay or play
39
Benefits Best Practices and Trends
Compliance Audits Dependent Eligibility Audits Wellness Programs
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Benefits Best Practices and Trends
Compliance Audits Plan Document/Summary Plan Description Audits
Ensure compliance with applicable legal requirements Minimize risk and exposure with respect to participant
claims
41
Benefits Best Practices and Trends
Compliance Audits (cont’d) Legislative Audits (e.g., COBRA, HIPAA, CHIPRA)
Ensure compliance with applicable legal requirements, particularly with respect to the required content and timing of notices
Minimize risk of violation of applicable requirements and associated penalties, as well as assessment of penalties on audit
42
Benefits Best Practices and Trends
Compliance Audits (cont’d) Medical/Prescription Drug Claims Administration
Audits Reduce costs by identifying ineligible claims being
processed under plans Improve administration by identifying issues and gaps
with respect to processing of claims
43
Benefits Best Practices and Trends
Compliance Audits (cont’d) Increased stakes due to new group health plan
excise tax reporting requirements on Form 8928 Provides mechanism and new requirement to self report
excise taxes on violations of COBRA, HIPAA, mental health parity, Newborns’ and Mothers’ Health Protection Act, GINA and Michelle’s Law
Excise taxes can be avoided if violation is corrected within 30 days of when it became known and affected individuals are placed in the same position they would have been in if failure had not occurred
44
Benefits Best Practices and Trends
Dependent Eligibility Audits Purpose
Reduce costs by identifying ineligible participants and removing them from coverage
Ensure compliance with applicable ERISA fiduciary requirements, as ERISA plans must be maintained solely for the benefit of eligible employees and beneficiaries
Improve administration through development of clear and concise eligibility requirements that can be consistently enforced
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Benefits Best Practices and Trends
Dependent Eligibility Audits (cont’d) Keys
Ensure that dependent eligibility criteria are clear and accurate before the audit starts
Communicate the audit early and often Be precise about the documentation which must be
submitted to verify eligibility Consider impact of Health Care Reform
46
Benefits Best Practices and Trends
Wellness Programs Most Common Wellness Initiatives
Employee Assistance Programs Immunizations and Flu Shots Health Risk Assessments Nurse Line Health Portal/Website
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Benefits Best Practices and Trends
Wellness Programs (cont’d) Other Wellness Initiatives
Personal Health Coaches and Advocates Tobacco Cessation Programs Health Fairs Workplace Health Challenges Biometric Health Screenings Obesity Management Onsite Clinics
48
Benefits Best Practices and Trends
Wellness Programs (cont’d) Traps for the Unwary
HIPAA compliance obligations vary depending on whether the wellness incentive/reward is standards-based or participation-based
GINA regulations impact the content of health risk assessments – no family history questions permitted
Purpose Improve employee health and productivity Reduce costs of medical plan claims
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Legal Update/Other Emerging Issues
COBRA Subsidy Extension Mental Health Parity and Addiction Equity Act
Compliance Children’s Health Insurance Program Notifications Final Cafeteria Plan Regulations
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Questions ?