Wyatt Employment Law Report

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A False Sense of Complacency – Fiduciary Liability Insurance: Don’t Forget the Nonrecourse Rider

By Rachel K. Mulloy

401K StatementMany employers that sponsor an employee benefit plan opt to obtain fiduciary liability insurance in addition to a fidelity bond, though ERISA only requires the latter.  Not to be confused with the fidelity bond, which insures a plan against loss due to fraud or dishonesty by people who handle plan funds or other property, fiduciary liability insurance protects plan fiduciaries against breaches of fiduciary duty.  Under ERISA a fiduciary can be held personally liable for plan losses that result from a breach of fiduciary duty, and the duties ERISA imposes on a plan fiduciary have been referred to as “the highest known to the law.”  Moreover, fiduciary liability coverage is often not included in D&O, E&O, or other liability policies an employer may purchase.  As such, it is generally advisable to obtain fiduciary liability insurance to protect plan fiduciaries against any breaches of fiduciary duty.

However, fiduciaries shouldn’t relax into the protection offered by fiduciary liability insurance without either (1) ensuring the coverage includes a nonrecourse rider that was purchased with non-plan assets, or (2) ensuring the fiduciary liability insurance was purchased with non-plan assets.  ERISA includes a prohibition against a Continue reading

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The EEOC’s New Proposed Rule: Long-Awaited Workplace Wellness Regulations

By Leila G. O’Carra

Last year, the EEOC sued three different employers (Honeywell, Orion and Flambeau),1 claiming that the companies’ workplace wellness programs violated the Americans with Disabilities Act. Except for the EEOC’s court papers in these cases, employers have had little guidance on the ADA’s requirements for wellness programs. On April 20, 2015, the EEOC finally revealed its position.

worksite wellnessThe EEOC’s proposed rule applies to employers with 15 or more employees that offer workplace wellness programs that include disability-related inquiries or medical exams. According to the proposed rule, covered wellness programs must be reasonably designed to promote health or prevent disease. Further, covered wellness programs must be voluntary. That is, the employer: (1) may not require employees to participate; (2) may not deny coverage under any of its group health plans for non-participation (or limit benefits except as specifically allowed in the regulation); (3) may not take adverse employment action or retaliate against employees who do not participate; and (4) if the program is part of a group health plan, must provide a detailed notice with information about the program. The notice must be reasonably likely to be understood by Continue reading

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Supreme Court Approves of Contractual Limitation Period for Filing Suit Under ERISA

Supreme Court of the United States Seal

Supreme Court of the United States Seal (Photo credit: DonkeyHotey)

In a unanimous opinion issued December 16, 2013, and authored by Justice Thomas, the U.S. Supreme Court held in Heimeshoff v. Hartford Life & Accident Insurance Co.,  571 U.S. __ (2013), No. 12-729, that an appeal of a denial of disability benefits was untimely under the terms of the group long term disability plan.  The court noted that ERISA does not contain its own statute of limitations governing judicial review of plan determinations.  However, so long as the limitations provision in the plan is reasonable, and there is no controlling statute to the contrary, courts should enforce plan limitations periods. In this case, the limitations provision stated that any suit to recover benefits denied must be filed within three (3) years after the filing of the proof of loss. The plaintiff in this case filed suit well after the three (3) period.

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Medical Loss Rebates Received By Employer-Sponsors of Insured Health Care Plans

By Mark C. Blackwell

The medical loss ratio (“MLR”) rule under the Patient Protection and Affordable Care Act (the “ACA”) is now in effect and over the next few weeks many of our clients will be receiving rebate checks from their health insurers.  These checks will “come out of the blue” for many clients and will surely raise questions – – for example, what is this for, what can I do with the money, does any go to employees, is it taxable?  Guidance by the U.S. Department of Labor (DOL) and Internal Revenue Service (IRS) has been provided for employers, summarized below.

[Note that this summary applies primarily to private employers who provide health insurance to their employees through a policy with an insurer who is subject to the MLR   Plans of governmental employers, churches and non-ERISA plans are not included in this summary.]


Generally, the MLR rule requires health insurers to issue “rebates” to policyholders if the insurer’s MLR ratio exceeds 85 percent for the large group market, and 80 percent for the small group and individual market.  The MLR is basically the ratio of the insurer’s (i) claims and quality improvement expenses to (ii) total premium dollars earned (adjusted for certain taxes and fees).

An MLR rebate is required to be allocated by the sponsor of an applicable health care plan between the policyholder (usually the employer) and each enrollee covered by the policy insuring the employer health care plan (usually the employees participating in the plan) “in amounts proportionate to the amount of premium paid.”  DOL recently issued Technical Release 2011-4 which provides guidance for how such rebates may be used by sponsors of ERISA-covered plans, and the IRS subsequently issued FAQ’s that provide information on the federal tax consequences of rebate payments.

How Can the Sponsor of an ERISA Group Health Plan Use the Rebate?

DOL guidance provides generally that if the employer pays the entire cost of insurance coverage, the rebate may be retained by the employer.  If the employer and plan participants each contribute a portion of the premium, the employee share is treated as a plan asset and must be used within 3 months of receipt for a permitted purpose, which may include:

• Distribute rebate to participants;

• Enhance benefits provided by the applicable plan; or

• Reduce future participant premiums.

In deciding on how to apply the rebates to plan participants, the DOL guidance notes that a plan “may properly weigh the costs to the plan and the ultimate plan benefit as well as the competing interests of participants or classes of participants provided such method is reasonable, fair and objective.”  For example, if the cost of distributing the rebate to former participants approximates the amount of proceeds, the employer may decide to allocate the proceeds to current participants using a reasonable, fair and objective allocation method.  Or, again for example, if the payments would be de minimus in amount, the employer may use the rebate for other permissible purposes including applying the rebate to future participant premium payments or benefit enhancements.

 For plans that are exempt from ERISA’s trust and annual audit rules (i.e., unfunded group health plans that are insured), MLR rebates normally remain exempt from ERISA’s trust, annual audit and reporting requirements.

 Is a Rebate of Amounts Paid with Employee After-tax Dollars Taxable?

An employee is taxed on the rebate only to the extent the employee received a tax benefit from deducting the premiums.  Thus, if the employee did not deduct the premiums on his or her tax return, the rebate is not taxable.  And,  regardless of any prior deduction of premiums, no taxable income results (although any deduction for current year premiums is reduced) if the employer provides the rebate to all current employees participating in the health plan, without regard to who participated in the year the rebate relates.  In no event is the rebate allocated in this manner subject to employment taxes.

Is a Rebate on Amounts Paid with Employee Pre-Tax Dollars (e.g., 125 Plans) Taxable?

If the rebate is distributed as a premium reduction for the employee, then the amount paid for the coverage is less, resulting in increased taxable wages.  If the rebate is distributed in cash, then the rebate is treated as taxable wages, subject to income and employment taxes.

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401(k) Automatic Deferrals With a Safe Harbor Twist

By G. Alexander Hamilton

Memo to 401(k) Plan Sponsors —

Do you hate dealing with the ADP/ACP nondiscrimination tests each year?

Does your plan have trouble passing the tests?

Does the automatic enrollment/deferral feature that the government encourages interest you?

If the answer to any of these questions is “yes,” you may want to consider modifying your plan to make it a “Qualified Automatic Contribution Arrangement” or “QACA.” The QACA rules were enacted as part of the Pension Protection Act of 2006 (PPA) and are effective beginning in 2008. Final regulations were adopted in 2009. The QACA combines automatic enrollment/deferrals with certain minimum employer contributions — either across the board contributions or matching contributions — such that the annual ADP/ACP nondiscrimination rules are automatically satisfied and no testing is necessary. This is one of two “safe-harbor” design options that are available for 401(k) plan sponsors who want to avoid the annual ADP/ACP testing requirements. Continue reading

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“Some Degree of Success”: ERISA and Awards of Attorneys’ Fees

By Daniel E. Hancock

The general American rule is simply this: every party in an action is responsible for his or her own attorneys’ fees.  But there are statutes that provide for awards of attorneys’ fees in the context of specific actions.  Of course, the language of these provisions is far from uniform, though most only allow the prevailing party to recover such costs. 

The Employee Retirement Income Security Act, or ERISA, is not so specific.  ERISA provides that “the court in its discretion may allow a reasonable attorney’s fee and costs of action to either party.”  In Hardt v. Reliance Standard Life Insurance Co., issued May 24, 2010, the Supreme Court took up the issue of whether this statute means what it says, or whether it contains an implication that a party must prevail in order to receive such an award.  Continue reading

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The Genetic Information Nondiscrimination Act

By LaToi D. Mayo

GINA was first introduced in the House in 1995, finally passed in 2008 and signed into law by President G. W. Bush in May 2008.  GINA includes two titles. Title I amends portions of the Employee Retirement Income Security Act (ERISA), the Public Health Service Act, and the Internal Revenue Code, and addresses the use of genetic information in health insurance. Title II prohibits the use of genetic information in employment, prohibits the intentional acquisition of genetic information about applicants and employees, and imposes strict confidentiality requirements.

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