John L. Utz jutz@utzmiller 913-685-7978

The Biggest Employee Benefit Legal Risksto Your Company and How to Protect

Against Them

Association of Corporate CounselJanuary 2012

John L. [email protected]

913-685-7978

Big Risks

Big moneyUnhappy peopleGovernment agency initiativesConflicts of interest (whether

conflicts of fiduciaries or those of vendors or other “parties in interest”) Prohibited transactions

Biggest Employee Benefit Risks

Other Notable Risks Don’t understand investments

(including fees, which plan fiduciaries should review, monitor, and understand)

Don’t understand issues Failure to follow plan terms

Employer Stock in Plan

Big Retirement Plan Risks Employer stock as plan investment

• Special risks for publicly-traded companies, particularly for C-level executives serving as plan fiduciaries

401(k) Investment options

Big money (particularly as relates to plan investments)• 401(k) plan investment options

–Fees, including “revenue sharing”»Tibble v. Edison Int’l, 2010 U.S. Dist. LEXIS 69119, 49 EBC 1725 (C.D. Cal. 2010)

401(k) Investment Options

Picking the “right” 401(k) share class• Let’s consider a plan where some, but

not all, of the investment options share revenue with the plan

• At least arguably, participants choosing to invest in the revenue sharing vehicles effectively subsidize the recordkeeping (or other administrative) costs for other plan participants


Picking the “right” 401(k) share class• Despite this “inequity” between groups of

participants, it may make sense to offer an investment alternative that shares revenue with the plan (for example, where it is a good fund and the “cheapest” available share class, and the plan is simply attempting to recoup, for the benefit of participants, as much as possible in the way of the fees its participants pay)


Picking the “right” 401(k) share class• Is there an alternative vehicle, such as a

commingled trust managed by the same fund company, with no revenue sharing but a lower investment management fee?

• If not, should anything be done to mitigate the arguably inequitable treatment of participants investing in revenue sharing vehicles?

401(k) Investment Options Picking the “right” 401(k) share class

• One possibility, at least theoretically, would be for revenue sharing dollars to be applied directly to increase the accounts of those participants investing in the vehicles generating the dollars

• Presumably, then, other dollars would need to be found to pay plan administrative costs, either from the employer or other plan sponsor, or through the introduction of a per participant per year administrative charge (or an increase in an existing such charge)

401(k) Investment Options Picking the “right” 401(k) share class

• Where administrative difficulty, cost, or other considerations make directing revenue sharing dollars only to the accounts of participants who invested in the vehicle generating the dollars, or where a mutual fund, for example, is unwilling to share dollars, but is instead only willing to make available an “ERISA spending account,” some fee inequity may be inevitable if fiduciaries are to offer the funds they think appropriate, without turning the plan’s back on revenue sharing that might otherwise be available to it

Investment Decisions Consider the possibility of retaining a single

investment manager (for defined benefit pension plans) with exclusive responsibility for investing all plan assets (largely limiting the committee’s responsibility to appropriately retaining the manager and monitoring its performance)

Consider the possibility of retaining a single outside investment fiduciary (for defined contribution participant-directed plans) to select the investment alternatives to be offered

Late Contributions

Delinquent deposit of employee contributions, particularly to 401(k) plans Remittance of employee contributions

• “earliest date on which . . . can reasonably be segregated”

• small plan (< 100 participants) safe harbor: 7th business day

Failure to Follow PlanFailure to follow terms of qualified

retirement plan (such as 401(k) or defined benefit plan) EPCRS

• Incorrectly identifying “compensation”• Inadvertent exclusion of employees• 401(k) matching “true-ups” (see Tab 5

(pp. 34-38) and Tab 6 (pp. 12-15))• Loans

Biggest Employee Benefit RisksWithdrawal liability (multiemployer

defined benefit pension plans for bargaining unit employees)

Asset Sale Surprises: Benefit Liabilities of Seller Einhorn v. M.L. Ruberton Construction Co.,

632 F.3d 89, 50 EBC 1813 (3d Cir. 2011) Feinberg v. RM Acquisition, LLC, 629 F.3d

671, 50 EBC 1682 (7th Cir. 2011)

Health Reform

Health Plans Health reform (see Tabs 8 and 9)

• Employer mandate to provide coverage

Health Coverage After 2013

Beginning in 2014, large employers must offer coverage to all full-time employees or run risk of paying nondeductible excise tax

Large employers are generally those with at least 50 full-time equivalent employees (employed an average of at least 30 hours per week)

Health Coverage After 2013Employer liability may arise in

either of two ways First, fail to offer full-time employees

(and their dependents) “minimum essential coverage,” and at least one full-time employee is eligible for premium tax credit or cost-sharing reduction


• Penalty is product of (1) $2,000, and (2) number of full-time employees, reduced by 30 employees

Health Coverage After 2013Example: Employer does not offer full-

time employees coverage100 full-time employees, 10 of whom

receive tax credit for enrolling in state exchange-offered health plan

Penalty would be $140,000, which is $2,000, multiplied by 70 employees (100-30)

Health Coverage After 2013Second, an employer is liable if it

does offer full-time employees (and their dependents) minimum essential coverage, but one or more full-time employees is eligible for premium tax credit or cost-sharing reduction

Health Coverage After 2013• Penalty is product of (1) number of full-time employees entitled to premium tax credit or cost-sharing reduction, and (2) $3,000

• Cap on liability: product of (1) $2,000 and (2) number of full-time employees, reduced by 30 employees

Health Coverage After 2013Example: Employer offers full-time

employees and their dependents coverage

100 full-time employees, 20 of whom receive tax credit for enrolling in state exchanged-offered plan

The penalty would be $60,000 ($3,000 multiplied by 20 employees)

Health Coverage After 2013To be sure to avoid penalty, must consider how

employees can become eligible for premium tax credit or reduced cost-sharing

To be certain to avoid penalty, employer must offer “affordable” health coverage to all full-time employees (and their dependents), and plan must be structured so participants do not pay more than 40 percent (that is, the plan must pay at least 60 percent) of the cost of covered claims

Health Coverage After 2013 Affordable only if employee’s

premium is no more than 9.5 percent of employee’s household income

If fail to offer affordable coverage under plan bearing at least 60 percent of the cost of covered claims, employer will likely have to pay at least some excise tax


Individuals typically eligible for premium tax credit or cost-sharing reduction if household income is between 100 and 400 percent of the federal poverty level• FPL for 2011Family of one $10,890

Family of four $22,350


• Remember, individuals with household incomes as high as 400 percent of these numbers may be eligible for premium tax credit or cost-sharing reduction


Note that an employee is not entitled to premium tax credit (or cost-sharing reduction) if employer offers affordable coverage, and plan’s share of total cost of benefits is at least 60 percent

Health Coverage After 2013 Because employer is not responsible for

any excise tax unless one of its full-time employees receives such government assistance, if employer offers such coverage to all full-time employees it cannot owe any penalty

This will be true even if some full-time employees decline coverage and instead purchase coverage through an exchange

Health Coverage After 2013• Their doing so would not hurt employer because they would not be eligible for premium tax credit or cost-sharing reduction

Health Coverage After 2013Employee Contribution as a Percent

of IncomeHousehold Income Federal Poverty

Level (FPL)0% to 9.5% 9.5% +

Single: > $43,560Family of 4: > $89,400

Tier 3: 401% + [18% of population?]

No premium subsidy No premium subsidy

Single: $15,028 - $43,560Family of 4: $30,843 – $89,400

Tier 2: 139% - 400% [72%?]

Premium subsidy if plan does not meet “minimum value”

(60%) requirement; no subsidy if plan meets

60% requirement

Eligible for premium subsidy

Single: ≤ $15,028Family of 4: ≤ $30,843

Tier 1: 0% - 138% [9%?]

Medicaid eligible: No premium subsidy

Medicaid eligible: No premium subsidy


If you drop your health plan, will you, as a practical matter, be able to do so without providing employees with additional compensation to assist them in purchasing coverage from an exchange? If a large portion of your workforce is low paid (and

the workers’ household income is low), it may not be necessary to provide much in the way of additional cash compensation to make the employees “whole” for the loss of employer-provided coverage• This is because these employees may be eligible

for Medicaid or a federal premium subsidy


• There is, of course, a good chance you will not know your employees’ household income, so you may not be able to precisely target additional compensation to your employees’ needs–Possible IRS relief in determining household income


If, by contrast, most of your workforce has household income above 400 percent of the federal poverty level (FPL), the cost of making employees “whole” may be surprisingly high


Consider an example: Let’s say your company pays 75 percent of the

cost of coverage Assume family coverage costs $14,000 per year

(of which an employee pays 25 percent, or $3,500) Assume an employee could purchase coverage

under an exchange at the same cost as under your company’s plan ($14,000 per year)

The employee would, therefore, need to have, after taxes, $14,000 to pay his or her premium to the exchange


Assume the employee is in a combined marginal tax bracket (federal, state, city, and perhaps FICA, taxes) of 35 percent

The employee would need to receive an additional $18,038 above his or her current compensation to have the after-tax dollars necessary to purchase coverage

• This $18,038 figure is the $21,538 an employee would need before taxes to have $14,000 after taxes ($14,000/0.65), reduced by the $3,500 the employee was previously paying for coverage and that the employee will now receive instead in taxable cash


The company would also pay at least an additional $312 in FICA taxes (1.45 percent of $21,538, which is the additional $18,038 plus the $3,500 not previously subject to FICA tax)

If the employee has not already hit the Social Security wage base this additional FICA could be as high as $1,651 (7.65 percent of $21,538)

And, of course, the company would pay the $2,000 health reform penalty for not offering coverage (which would be nondeductible)


The upshot is that the employer would spend $10,500 to subsidize coverage for the employee under the employer’s own plan

If the employer were instead to make this employee whole for purchasing coverage on an exchange (having the same cost as the employer’s plan), the employer would spend $20,038 (the additional cash compensation paid to the employee, plus the $2,000 health reform penalty), $2,000 of which would not be tax-deductible by the employer The employer would also have additional FICA taxes to pay (at least

1.45 percent of the additional compensation ($312) and maybe as much as 7.65 percent of the additional compensation ($1,651))

Assuming only the minimum FICA cost ($312), this would be an increase in cost for the company for this particular employee of 94 percent


Health plansHIPAA privacy and security audits

by HHS

Executive CompensationExecutive Compensation

409A traps (see Tabs 10 and 11)• Acceleration of payment • Substitution of amounts for deferred compensation

• Extending health coverage for terminated executives

Executive Compensation• “Severance from employment” standard: paying too soon or too late because “severance from employment” confused with termination of employment (also, six month wait issue for “specified employees” of publicly-traded companies)

• Release/waiver timing

Conflicts of Interest

Prohibited transactions (see Tab 4, pp. 6-7) Prohibit conflicts of interest Apply even if transaction is beneficial

to plan Prohibit most transactions with a

“party in interest”

Conflicts of Interest

In addition, a fiduciary may not: Deal with assets in his or her own interest Act on behalf of a party whose interests

are adverse Receive consideration for his own

personal account from a party dealing with the plan

Criminal Provisions


Follow claims and appeals procedures faithfully

Timely respond to requests for document disclosures

30-Day Response to Information Requests

ERISA Section 104(b)(4) provides, in part:

The administrator shall, upon written request of any participant or beneficiary, furnish a copy of the latest updated summary plan description, and the latest annual report, any terminal report, the bargaining agreement, trust agreement, contract, or other instruments under which the plan is established or operated. (Emphasis added.)


ERISA Section 502(c)(1) provides, in part:Any administrator . . . who fails or refuses to comply with the

request for any information which such administrator is required by this title to furnish to a participant or beneficiary (unless such failure or refusal results from matters reasonably beyond the control of the administrator) by mailing the material requested to the last known address of the requesting participant or beneficiary within 30 days after such request may in the court’s discretion be personally liable to such participant or beneficiary in the amount of $100 a day from the date of such failure or refusal, and the court may in its discretion order such other relief as it deems proper. For purposes of this paragraph, each violation . . . with respect to any single participant or beneficiary, shall be treated as a separate violation. (Emphasis added.)


Vendor can get plan administrator in trouble: Mondry v. American Family Mutual Ins. Co. (7th Cir. 2009) May wish to provide in vendor contract

indemnification of plan administrator where vendor is the reason a required disclosure is not made

Plan Amendment Process

Plan Amendment Process is Important (see also Tab 7, pp. 4-6) Overby v. Nat’l Ass’n. of Letter Carriers,

595 F.3d 1290, 48 EBC 2255 (D.C. Cir. 2010)

Baker v. Pennsylvania Economy League Inc. Retirement Income Plan, 2011 U.S. Dist. LEXIS 94119 (E.D. Pa. 2011)

Scrivener’s Errors

Scrivener’s Errors Split in Courts Contrast, e.g., Young v. Verizon’s

Bell Atlantic Cash Balance Plan, 615 F.3d 808 (7th Cir. 2010) with Cross v. Bragg, 47 EBC 1784 (4th Cir. 2009) (unpub.)

Plan Expenses

Plan expenses paid from plan assets (see Tab 12) Must be type of expense payable

from plan assets (fiduciary, not settlor)

Payment must be consistent with plan documents

Must not result in prohibited transaction

Attorney-Client PrivilegeAttorney-Client Privilege (see Tab

13, pp. 20-57) Fiduciary exception Waiver

Attorney-Client PrivilegeAttorney-Client privilege (cont.)

Fiduciary exception: Attorney advises: • A fiduciary• About a matter dealing with

administration of plan Clients are trust’s beneficiaries, not fiduciary

personally (Washington Baltimore Newspaper Guild Local 35 v. Washington Star Co. (D. D.C. 1992))

Attorney-Client privilege (cont.) Nonfiduciary matters: client not acting in

fiduciary capacity, but instead in settlor capacity • In re Unisys Corp. Retiree Medical Benefits

ERISA Litigation (communication relating to decision to amend or terminate plan)

• In re Long Island Lighting Co. (2d Cir. 1997) (privilege applied to communications concerning nonfiduciary matters, even though communications with same attorney relating to plan administration may not be privileged)

Attorney-Client Privilege


Attorney-Client privilege (cont.) Personal advice or liability

• United States v. Mett (9th Cir. 1999) (advice relating to fiduciaries’ personal liability, rather than ongoing plan administration, was privileged)


Attorney-Client privilege (cont.) So, privilege can attach if either

• Advice not relating to plan administration (and not relating to a fiduciary act or decision), or

• Advice to a fiduciary about personal advice or liability

Attorney-Client PrivilegeAttorney-Client privilege (cont.)

Benefit Appeals• Some courts say advice provided prior to fiduciary’s denying claim is not privileged, but advice provided after denial is privileged

• Other courts say the analysis is more complex, depending on the level of threat of personal liability and when it arises


Attorney-Client privilege (cont.)Waiver: disclosure

• Lewis v. UNUM Corp. Severance Plan (D. Kan. 2001) (privilege waived by sending documents to plan administrator)

ERISA Fiduciary Rules

ERISA Fiduciary Rules (see Tab 4, pp. 2-5) Act prudently Act solely in the interest of participants and

beneficiaries for the exclusive purpose of• Providing benefits • Defraying reasonable plan

administration expenses


ERISA Fiduciary Rules (cont.) Follow plan documents Diversify investments


Importance of Procedural Prudence Value of independent outside

experts Regular meetings Treating process seriously Don’t disengage when frustrated

Forms 5500 and Audits

Late or deficient Form 5500 (Annual Report) filing Inadequate plan audit

Improving Plan AdministrationImproving Plan Administration

Always look at plan (or trust) document and summary

Make sure contracts and agreements are consistent with governing plan documents

Read and negotiate vendor contracts; do not accede to boilerplate simply because the contract is lengthy

Peer review Record of prior decisions for consistency in

claims and appeals context

Improving Plan Administration

Regular staff training, including by outsiders, such as legal counsel (who have not established a regular routine or practice that may be embedded incorrectly)

Communications – one consistent voice and source

Improving Plan Administration

Compliance audits U.S. v. Kovel

Our FirmEmployee benefits and executive

compensation workUtz, Miller & Eickman, LLC

7285 W. 132nd St., Suite 320Overland Park, KS 66213-1164

10024 Skokie Blvd., Suite 213Skokie, IL 60077-9944

Our Firm

John L. Utz Eric N. [email protected] [email protected] 913-685-8150

Matthew J. Eickman Katherine Utz [email protected] [email protected] 224-233-1342

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Utz, Miller & Eickman, LLC John L. Utz Eric N. [email protected] emiller@ utzmiller.com913-685-7978 913-685-8150

Matthew J. Eickman Katherine Utz [email protected] [email protected] 224-233-1342

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John L. Utz jutz@utzmiller 913-685-7978