Several settlements and judgments for Fair Labor Standards Act violations were announced last week, with Toys ‘R’ Us topping the list at $4 million. The payment will resolve a collective actions alleging that the employer forced employees to submit to off-the-clock security checks and maintained an unlawful break policy, among other things. A federal court also ordered a cleaning contractor to pay more than $1 million to its workers after a U.S. Department of Labor investigation revealed that the company was willfully denying workers overtime pay and falsifying records. Two others — a restaurant and a painting company — agreed to settle DOL allegations for more than $196,000 and $25,000, respectively. And a federal jury in Michigan determined that Sara Lee willfully violated the FLSA when it forced workers to don and doff safety gear off the clock.
Toys ‘R’ Us Pays $4M to Settle Wage, Break Claims
Toys ‘R’ Us has agreed to pay $4 million to settle claims it violated the FLSA and California’s meal and rest break requirements.
The class, which includes 38,528 current and former employees, said that the company required them to submit to off-the-clock security checks, maintained an illegal rest break policy, did not allow workers to report breaks that were interrupted, did not pay wages in a timely manner and implemented an unlawful meal break waiver. They also alleged minimum wage and overtime violations under FLSA. (Zia Hicks, et al., v. Toys ‘R’ Us-Delaware, Inc., et al., No. 2:13-cv-01302-DSF-JCG (C.D. Calif. March 3, 2014))
Since the suit was filed, Toys ‘R’ Us has modified its break policy and now conducts security checks while employees are on the clock. The employer also trained managers on its new policies, according to the motion for settlement.
Cleaning Contractor Must Pay More Than $1M for Willful FLSA Violations
A federal court has ordered a Massachusetts cleaning contractor to pay $1,033,877 in unpaid wages and liquidated damages for willful FLSA violations.
Ward’s Cleaning Service, Inc., and its owner must pay the million to 149 employees and another $163,900 in civil penalties. During an investigation, DOL’s Wage and Hour Division determined that the employer violated FLSA’s overtime and recordkeeping requirements. It had employees use multiple timecards with different names to conceal the fact that they were working more than 40 hours per week. It also altered time cards and paid employees in cash.
In addition to the monetary settlement, Ward’s must implement a new payroll system and file reports with DOL.
China Town Super Buffet Settles FLSA Claims for $196,000
China Town Super Buffet in Kansas City will pay $196,971 to settle claims that it violated FLSA’s minimum wage, overtime and recordkeeping provisions.
A DOL investigations revealed that the company paid kitchen staff a fixed salary that did not amount to minimum wage for all hours worked. This also resulted in overtime violations. In addition, the restaurant failed to keep records of employee’s hours worked and payment received.
The company also has agreed to fix its recordkeeping and pay practices and train managers on FLSA compliance.
Painting Company Will Pay $25K After DOL Investigation
A painting company has agreed to pay $25,468 in back wages and liquidated damages after a DOL investigation revealed several FLSA violations.
The department determined that 26 painters worked for QSC Contracting LLC of Pittsburgh for a straight-time wage, regardless of any overtime hours worked. The company also failed to keep accurate records of employees’ hours worked.
Denying workers overtime “harms not only employees and their families, but employers that violate the law have an unfair, competitive advantage,” said John DuMont, director of WHD’s Pittsburgh District Office, in a press release. “The FLSA provides that employers that violate the law are, as a general rule, liable to employees for back wages and an equal amount in liquidated damages.”
Sara Lee Must Pay Workers for Time Spent Donning, Doffing Gear
Sara Lee must pay its workers for the time they spent donning and doffing required protective gear, a federal jury has ruled.
The employees were required to put the safety gear on before the start of their shifts and remove it after their shifts had ended. The same was required before and after meal and rest breaks, cutting into employee’s mandatory unpaid breaks.
The workers were able to show that donning and doffing their personal protective equipment before and after their shifts was the first and last “principal activity” of their workday. The jury also determined that they showed that their employer willfully violated the FLSA by not paying the workers for the time spent donning and doffing. The wages due will be calculated later. (Duran v. Sara Lee Corp., et al., No. 1:11-cv-00313-RJJ (W.D. Mich. March 4, 2014))
Last year, the company settled a similar, decade-old suit for $1.4 million. In a suit that began in 2003, 231 Sara Lee factory workers alleged that the company failed to properly compensate them for time spent waiting for uniforms, donning and doffing uniforms, sanitizing protective clothing and walking to and from the production area at its Tarboro, N.C. bakery facility. (Anderson et al. v. Sara Lee Corp., No. 4:03-cv-00031 (E.D. N.C. April 23, 2013))
The majority of employers recognize that health coverage is a major factor in retaining a strong work force, however, they also are very aware that providing such benefits is becoming an increasing expense, according to a recent survey. The 2014 19th Annual Towers Watson/National Business Group on Health Employer Survey on Purchasing Value in Health Care shows that health care costs for employees is at the forefront of employers’ minds, and they are increasingly looking for better ways to manage this cost.
According to the survey, total health care costs, which include both employer and employee contributions, have increased from $11,938 in 2013 to an expected $12,535 for 2014, although employer costs after plan changes are at a 15-year low of 4.1 percent. However, employee costs are increasing, with their share of premium costs growing from $2,782 in 2013 to $2,975 in 2014. Similarly, the total employee cost share, which includes premiums and out-of-pocket expenses, has grown from 34.4 percent in 2011 to 37 percent three years later.
With the enactment of the Patient Protection and Affordable Care Act, the health care industry is changing, which affects employer-sponsored plans. According to the survey, 48 percent of employers expect a significant change in employer-sponsored health plans, and 44 percent expect at least a modest change.
Some of these changes include employers turning to account-based health plans, which have proven a cost-effective measure for employers. According to those companies participating in the survey, nearly three-fourths have already adopted such plans, with nine percent planning on adding them in 2015. Towers Watson said that such plans “show promise for helping organizations avoid the 2018 PPACA excise tax on high-cost plans.”
Retiree Benefits Changing
In trying to cut health care costs, employers also are looking to adjust retiree benefits. According to the survey, 39 percent of employers have already taken cost-saving measures, making changes to plan contributions for 2014, such as cost sharing; 8 percent are planning changes for 2015 and 11 percent are considering it for 2016 or later. Thirty percent of plans have already converted their contribution to a retiree medical savings account in 2014, while 9 percent are considering this for 2015 and 16 percent are considering it for 2016 or later. The greatest change that employers are considering, or have already enacted, are private Medicare exchanges for their retirees. As of 2014, 32 percent of employers have shifted to this, 16 percent are planning it for 2015 and 23 percent are considering this change for 2016 or later.
Employers Using New Methods for a Healthy Workplace
The survey pointed to increases in employers looking at new methods to create healthy work environments, such as wellness activities and telemedicine. According to the survey, nearly one-third of companies have begun to use telemedicine, which is remote diagnosis and treatment of patients using telecommunications, and 30 percent more companies plan on adopting it next year.
Similarly, 22 percent of companies have an outcome-based incentive for wellness, and this number should increase to 46 percent for 2015, according to the survey. Sixty-six percent of companies are also using financial incentives for wellness programs, while 22 percent actually have penalties for employees who are not using wellness programs. Towers Watson said that “companies are taking steps to link employees’ health and well-being, and their broader experience in the organization … in order to get the most out of their investments in health and to sustain good health behaviors.”
Best Performers’ Strategies
Towers Watson looked to “best performers” to find what employers should do to have health plans that will remain viable for the long term. It recommended focusing on five areas: (1) improving self-managed programs; (2) introducing new plan options and benefit designs, and creating a link between health savings accounts and retiree health accounts; (3) reducing unit costs and improving efficiency, quality and outcomes; (4) population health management, especially for risk-factor reduction and chronic conditions; and (5) employee accountability and engagement, which would include account-based strategies and incentive approaches.
A county government in Washington state agreed to pay $215,000 in a settlement with the U.S. Department of Health and Human Services, after its report of a minor breach led to an HHS investigation that found “general and widespread noncompliance” with HIPAA.
The incident originally reported by Skagit County, Wash., in 2011 involved money receipts from the county’s Public Health Department, which had been inadvertently moved to a publicly accessible server maintained by the county. The county reported that just seven individuals had been affected, but when HHS’ Office for Civil Rights investigated, it found that in fact 1,581 recipients had had their electronic protected health information exposed, including sensitive information like “the testing and treatment of infectious diseases.”
OCR alleged not only that this breach itself violated HIPAA’s privacy rules — and that Skagit County should have notified all 1,581 affected individuals rather than just the seven — but also that since the original security rules’ 2005 compliance deadline the county had failed to implement, maintain or train on compliant security policies and procedures (see the Guide to HIPAA Privacy Requirements, ¶1031).
“This case marks the first settlement with a county government and sends a strong message about the importance of HIPAA compliance to local and county governments, regardless of size,” Susan McAndrew, OCR deputy director of health information privacy, said March 7 in announcing the settlement. “These agencies need to adopt a meaningful compliance program to ensure the privacy and security of patients’ information,” she said.
Like most “resolution agreements” to date (see ¶610), the settlement includes a corrective action plan. Skagit County must provide substitute notification of the breach to affected individuals not previously notified, ensure that the breach is included in any accounting of disclosures and document its health care components and their business associates. The county also must conduct, document and submit the general risk analysis and management steps required by the security rules, along with the related policies, procedures and training.
In a statement, Skagit County indicated that it acted aggressively to remove the receipts from public exposure, and had invested “significant resources” to step up PHI security since then. These receipts did not contain full credit card numbers, Social Security numbers, birth dates or addresses, the county added.
“Skagit County understands the importance of safeguarding our patients’ personal information and takes this responsibility very seriously,” said Donnie LaPlante, the county’s privacy officer. “We regret that this incident occurred, and are committed to preventing any future occurrences.”
Year-end financial statement adjustments by several large U.S. companies that offer defined benefit retirement plans widened February’s gap between pension funding and potential obligations, said human resources consulting firm Mercer.
Mercer’s monthly indicator of pension funding levels for Standard & Poor’s 1500 companies fell 2 percentage points to 87 percent for February, recording a total deficit of $276 billion, $43 billion more than January’s funding gap. The firm said the new data that was released by about one-quarter of the S&P plan sponsors it monitors — covering roughly half of the total pension obligations for these plans — reduced the aggregate funded ratio by approximately 3 percent, but positive equities market returns in February helped lessen the effect.
The newly reported numbers from 2013 annual report filings to the U.S. Securities and Exchange Commission indicate that asset values were slightly lower than previous estimates as a result of a broad market trend toward higher fixed-income allocations throughout 2013 as many plan sponsors locked in gains from their equity returns, Mercer said in a news release March 4. In addition, the plan sponsors’ liabilities were somewhat higher than estimated, as many have begun to adopt more conservative assumptions regarding how long retirees live, resulting in increased liabilities.
For companies with calendar fiscal years, the year-end pension funding deficit is particularly important because it affects their reported balance-sheet liabilities and subsequent-year accounting expense, as well as the required cash contributions to the pension plan. Employers with underfunded plans, whose liabilities exceed 80 percent of potential obligations, often contribute cash from reserves to stabilize their pensions, which can be costly.
Allowing for changes in financial markets through Feb. 28, alterations to the S&P 1500 constituents and newly released financial disclosures, at the end of February the estimated aggregate assets in DB plans monitored by Mercer were $1.86 trillion, compared with the estimated aggregate liabilities of $2.13 trillion.
Another measurement of “typical” U.S. corporate pension funding, from BNY Mellon’s Investment Strategy & Solutions Group, rose to 92.6 percent, up 1.7 percentage points on gains in most asset classes held by the funds. Although pension liabilities are on the rise now because of declining interest rates and bond yields, strong asset values prevailed in February, according to a release March 5 from BNY Mellon’s ISSG.
Assets in the plans tracked by ISSG rose 3.3 percent while their liabilities gained 1.4 in February, with assets recovering ground lost in January.
Small employers will have a choice as to whether charge separate rates or an average rate to all plan participants, under final rules issued in pre-publication form March 5, by the U.S. Department of Health and Human Services. The rules also cover health care reform’s expensive transitional risk reinsurance fees that health plans and insurers have to pay in order to support insurers in the individual market.
The “HHS Notice of Benefit and Payment Parameters” rule (see an HHS fact sheet here) was based on proposed rules issued about three months ago. The final rules are to be published in the March 11 Federal Register.
Transitional Reinsurance Program
The transitional reinsurance program is controversial because the fee will be assessed against all major medical insurance, including self-insured plans and their third-party administrators. Self-insured health plans must pay into the fund but they cannot draw from it. Meanwhile, only insurers in the individual market — inside and outside the exchanges — can draw payments from it. It was originally $63 per year ($5.25 per month) per participant.
Employers will be allowed to pay the fee in two installments. The first upfront payment, the larger of the two ($52.50 per year per covered life), would be payable soon after the contributing entity submits an enrollment count. The second payment ($10.50 per year per covered life) would be payable during the fourth quarter, about nine months later.
A piece of good news for employers is the 2015 annual reinsurance contribution rate drops down to $44 per enrollee; that will be split into a $33 first installment, and an $11 second installment nine months later for the 2015 benefit year. Those amounts would be payable in January 2016 and late in the fourth quarter of 2016.
The rule also excluded employers that self-insure health claims while also self-administering its claim services without a TPA, from making reinsurance contributions for 2015 and 2016.
For more information on health reform’s fees on self-funded plans, see Section 795 of The New Health Care Reform Law: What Employers Need to Know.
Small employers purchasing group coverage from “small business health options” exchanges can choose whether to use composite rating or per-member ratings.
Rates in the small group market are based on the rating factors of each person enrolled in the plan. Each person’s age and tobacco use is factored in to determine the group’s premium amount. The insurer may sum the premiums of each (age and tobacco-rated) individual in the group to get the total premium. Or it may offer composite premiums, by dividing the total premium by the total number of enrollees to get an average premium per enrollee.
If an insurer offers composite premiums, it must use the same average per employee that it had at the beginning of the plan year, for the entire year, and would recalculate the average enrollee premium amount only on renewal. This ensures stability, and prevents the insurer from hiking premiums in response to an adversely rated individual joining the plan mid-season.
However, tobacco-rating penalties must not be included in the composite premium, but instead must be applied on a per-member basis.
The rule tells insurers to adopt tiered-composite premiums: one average premium for adults and one for children under age 21. Children are charged lower premium rates than adults, and no employee can be charged for more than three children. This fixes a system that would have overcharged families, the final rule states.
Lower Attachment Point for Insurers in 2014
Under the final rule, the government will make it easier for insurers to qualify for risk payments in 2014. Under the rule, the government will pay insurers 80 percent (the coinsurance rate) of claims greater than $45,000 in 2014. The previous attachment point was $60,000.
The attachment point would jump back up to $70,000 in 2015; there will be a $250,000 reinsurance cap; and the coinsurance rate will drop to 50 percent in 2015, under the rule.
Also, if transitional reinsurance fees levied exceed the amount of claims, the government will increase its coinsurance rate “up to 100 percent” in 2014 (and more than 50 percent in 2015) to ensure that all contributions collected are spent on insurers’ claims that year. Unspent amounts will be rolled over into the next year, the agency said.
Delaying 2015 Open Enrollment
Perhaps in response to 2014’s embarrassing website problems, the rule delayed the 2015 open enrollment season so that it starts on Nov. 15, 2014 and ends on Feb. 15, 2015. Coverage effective dates for enrollments between Jan. 15 and Feb. 15 are March 1, 2015. Exchanges will revert to the Oct. 15 through Dec. 7 open enrollment period in subsequent benefit years.
Premium Adjustment Percentage
The agency decided that the premium adjustment percentage — which mandates that policies on exchanges should not increase year over year by more than a certain percentage determined by market data — will be 4.2 percent.
The premium adjustment percentage sets the rate of increase for four health care reform parameters: annual limits on cost sharing; annual limits on deductibles for small-group plans; employer penalties for no coverage; and employer penalties for inadequate or unaffordable coverage.
Using the 4.2-percent multiplier, the 2015 maximum annual limitation on cost sharing becomes $6,600 for self-only coverage and $13,200 for other than self-only coverage, up from $6,350 for self-only, and $12,700 for other than self-only, coverage in 2014. HHS is still open to more perfect methods of calculating this percentage change factor.
A company's policy of requesting a doctor's note for each intermittent absence under the Family and Medical Leave Act violates FMLA because the policy directly conflicts with FMLA's recertification procedure. So ruled a federal district court in a consolidation of cases that presented an issue of first impression in the jurisdiction of the 9th U.S. Circuit Court of Appeals. The case is Oak Harbor Freight Lines, Inc. v. Antti, 2014 U.S. Dist. LEXIS 20203 (D. Or. Feb. 19, 2014).
The U.S. District Court for the District of Oregon, Portland Division denied Oak Harbor's motion for a declaratory judgment that its policy requiring employees to obtain a short note from a medical provider is not a violation of FMLA or the Oregon FMLA.
Oak Harbor Freight Lines believed a few employees were disproportionately taking time off on Mondays and Fridays, or just before a holiday. In an effort to address these apparent FMLA abuses, Oak Harbor started uniformly requiring a note from a medical provider for employees taking intermittent FMLA leave.
Two Employees Reprimanded for Intermittent FMLA Leave Abuse
Oak Harbor employee Robert Argyle requested leave under FMLA and OFLA several times for various reasons. In November 2010 Argyle's medical certification indicated his need for intermittent leave and part-time leave, noting ongoing monthly office visits.
In 2011 Argyle received approval for intermittent leave for his daughter's serious health condition and again in 2012 for his own medical condition.
During the summer of 2012 Argyle had treatment scheduled on Fridays. He offered to provide at least one week advance notice of the appointments, but Oak Harbor insisted on a doctor's note as well. In the span of approximately three months, Argyle provided 11 doctors' notes establishing the reasons for his absences. At one point, according to Argyle, his physician refused to write any more doctor's notes.
Oak Harbor's attorney calculated the frequency of Argyle's use of intermittent leave and discovered his absences fell adjacent to a holiday or weekend nearly 90 percent of the time, over a six-year period. Argyle attended water therapy on Fridays; the sessions lasted a half-hour to one hour. He possibly could have attended therapy on Saturdays or Sundays. Argyle provided notes from a physician's assistant on some occasions, and the company accepted them. On other occasions, he did not submit a note and received an "occurrence."
Oak Harbor put Argyle on indefinite suspension on Oct.11, 2012 for incurring 13 occurrences.
Long-time Oak Harbor employee Chad Antti was diagnosed with a peptic ulcer with a gastrointestinal bleed in January 2008 and was approved for intermittent leave beginning in February 2008. He submitted a new medical certification in August 2010 because he had a change in insurance coverage, and was reviewed and diagnosed by a new doctor.
When Antti contacted his doctor to obtain a note, his doctor required a visit and a $20 copayment. Antti's doctor did not understand why a note was required when both he and Antti knew what was wrong with Antti and what was needed to treat the medical problem.
Oak Harbor's attorney calculated Antti's use of intermittent leave fell adjacent to a holiday or weekend 94 percent of the time. Antti has received three verbal warnings, five written warnings, seven notices of intent to suspend, seven notices of suspension, and three notices of intent to terminate because he failed to provide a medical provider's note to Oak Harbor.
Oak Harbor's Attendance Policy
Oak Harbor treats any absence (or tardiness), other than a previously approved vacation day or legally-protected FMLA absence, as grounds for charging an employee with an "occurrence" (or half an occurrence point). After nine months, an occurrence point (or fraction of a point) will roll off an employee's personnel record. If an employee accrues five or more occurrence points, the employee will be subject to unpaid suspension. Six or more occurrence points may result in termination.
When an employee is approved for intermittent medical leave, Oak Harbor sends a letter to the employee containing language along the following lines:
In order for me to know when to apply FMLA to an absence, a medical note will be required from your provider for that absence. The note will need to indicate you were seen by a provider during the absence and how the absence relates to the FMLA qualifying condition. Without this information, I would be unable to apply FMLA to any specific absence.
Problems with the Policy
Whether Antti or Argyle gave Oak Harbor reason to suspect improper use of intermittent leave was not at issue in this case as much as the facial validity of Oak Harbor's attendance policy.
Although the letter to the employee seeking intermittent leave contains no time limit (an oversight by the human resources department, it appears), Oak Harbor said in court that it interprets the policy to require a note within 15 days of the absence or tardiness.
"Reasonable basis" for recertification under FMLA is "no more often than every 30 days and only in connection with an absence by the employee" unless an exception applies. An employer may request recertification in less than 30 days only in the case of changed circumstances or when the employer doubts the continuing validity of the certification. See 29 C.F.R. §825.308(a)(c)
Court Weighs in
Oak Harbor has no statutory or regulatory authority to require its employees taking approved intermittent leave to get a doctor's note for each absence. "[Oak Park's] requirement that its employees on intermittent leave provide a doctor's note for each absence is tantamount to requesting a medical certification for each absence," wrote District Judge Garr M. King.
The court explained that Oak Harbor's attendance policy was in effect treating each absence as a separate period of FMLA leave and essentially requiring employees to reestablish eligibility for each absence. "Such a policy or practice directly conflicts with FMLA's explicit recertification procedure specifically intended to ferret out abuse," wrote Judge King.
King cited case law examples to support his decision. The statute and regulations "show an intent to limit medical verification to certification and recertification as delineated. Neither the FMLA nor its regulations provide for any other means by which an employer can require documentation from an employee's medical provider." See Jackson v. Jernberg Indust., Inc., 677 F. Supp. 2d 1042, 1051 (N.D. Ill. 2010).
Because Judge King said he failed to see how either individual's disability would have prohibited him from obtaining doctor's notes, the court dismissed the disability counterclaims brought by Argyle and Antti under the Americans with Disabilities Act and Oregon Revised Statutes 659A as they relate to the doctor's note requirement.
Neither Argyle or Anti presented evidence that he was treated differently than other employees, Judge King wrote, and Antti failed to raise an issue of fact on his leave as reasonable accommodation theory.
Intermittent leave can impose an administrative and tracking burden. FMLA's recertification process intends to protect the potential for leave abuse.
The employer may require the completion of a medical certification, which must be deemed sufficient if it includes, in the case of intermittent leave: (1) the dates of expected treatment; (2) the medical necessity of intermittent leave; and (3) the expected duration of the intermittent leave. If an employer disagrees with the initial medical certification, FMLA authorizes an employer to request second and third opinions, and to require the employee to obtain a subsequent recertification "on a reasonable basis."
The IRS has updated two of its fringe benefit manuals, and the General Services Administration — the federal agency that oversees all federal travel policy — has been busy fine-tuning its travel regulations and other documents, mostly with an eye toward saving money. Why does this matter? The federal government, the nation’s largest employer, influences how many public- and private-sector employers form their own travel policies. Some private-sector companies must adopt the federal travel policies for their own employees who are working on federal government contracts. The GSA has been under pressure to rein in travel costs. Here is a rundown of recent federal agency activities affecting fringe benefits.
IRS Updates Fringe Benefit Guide for Government Employers
Public-sector employers can now access the latest edition of the IRS Fringe Benefit Guide, a 95-page general reference published by the agency’s Office of Federal, State and Local Governments, which provides rules for determining whether a given benefit is taxable, how to compute taxes on it, and what the inflation-indexed limits are for each, among other general guidance on fringe benefits.
The publication uses the term “’fringe benefit’ broadly to refer to all remuneration other than stated pay for which special tax treatment is available.” That said, the list of chapters in the guide includes most of the benefit categories that employers would recognize as fringes — for example, reimbursements for using a personal vehicle for government business; payment of moving and relocation expenses; qualified transportation fringes — plus a few others like dependent care programs and health insurance.
updated rules on benefits provided to employees and dependents who are part of a same-gender marriage and a reference to new guidance on that topic in Revenue Ruling 2013-17; and
reference to guidance in Notice 2013-61, which provides special administrative procedures for employers to file a claim for refunds or adjustments of overpayments of employment taxes on certain same-gender spouse benefits before expiration of the period of limitations.
GSA Updates Reimbursement Rate for Use of Privately owned Vehicles in a Relocation
The U.S. General Services Administration on Jan. 28 announced the 2014 standard mileage rate for moving purposes will be $0.235 for the 12-month period ending on Dec. 31, 2014, in GSA Bulletin FTR 14-04. The GSA has been using the rates that the IRS sets for the same purposes (see ¶105 for current IRS mileage reimbursement rates), since 2007. The GSA said it would publish a bulletin every time the IRS changed the mileage rate.
GSA Offering Cash Prize for Best Travel Cost-savings Tool Idea
The GSA, looking for ways to lower travel costs for the federal government, took an unusual approach to the job when it announced in the Feb. 18 Federal Register that it would pay a member of the public up to $35,000 for a data tool idea that would lead to savings across the government. Federal agencies or employees are not eligible.
The contest is called the “travel data challenge competition,” and the GSA said the initiative’s goal is “to ask the public to develop a smart technology solution that has the capability to provide agencies with key insights and recommendations for cost savings behaviors related to travel.” For example, the agency is asking prospective contestants to think of ways to harness data that would answer questions like:
Are travelers booking airline reservations far in advance to secure low cost airfare?
How many days in advance are travelers booking their trips?
Are travelers using the official “Fedrooms” program to reserve hotel accommodations for business travel?
The GSA says it does not want an analysis tool that tells it what it already knows. “This should be a forward-thinking tool that enhances transparency and helps to hold agencies accountable for what they are spending on travel, while also providing agencies with recommendations for how to reduce costs,” the agency says in the Federal Register announcement. The resulting tool would be replicated across all agencies, the GSA says.
The challenge, which the GSA calls the “first of its kind,” is explained in more detail on the GSA’s blog. The competition is scheduled to close April 11.
GSA Reminds Agencies About Car Rental Policies
The GSA reminded federal agencies Feb. 12, in Federal Travel Bulletin 14-05, that they should be administering their car-rental policies in accordance with the Federal Travel Regulation requirement that “all rental passenger vehicles must be authorized only when in the best interest of the Government.” Federal travelers are required by FTR 301-10.450(a) to get authorization for car rentals and must use the Defense Travel Management Office rental car agreement
Complying with the Fair Labor Standards Act can be a challenge, particularly because even the vocabulary can be confusing. The law throws out terms such as “Exempt,” “nonexempt,” “regular rate,” “working time” — and the list goes on. “Working time,” for example, is time that the employee is “suffered or permitted” to work (29 C.F.R. § 785.11). When you look at the legal definitions of these terms it seems as if you need a dictionary (maybe one from the Middle Ages) or concordance to decipher what they really mean — and that still might not help.
What may help is a little more common sense, and the U.S. Supreme Court seemingly wants to use such an approach, based upon two decisions issued in the last year-and-a-half.
Defining ‘Clothes’ and ‘Changing Clothes’?
Many employers don’t realize that employees and unions cannot waive or bargain away most FLSA rights. An employee cannot, for example, “volunteer” to work overtime without proper compensation. One of the few exceptions is found in section 3(o) of the FLSA (29 U.S.C. §203(o)), which states:
In determining for the purposes of sections 206 [minimum wage] and 207 [overtime] of this title the hours for which an employee is employed, there shall be excluded any time spent in changing clothes or washing at the beginning or end of each workday which was excluded from measured working time during the week involved by the express terms of or by custom or practice under a bona fide collective-bargaining agreement applicable to the particular employee.
Thus, a union and an employer are permitted to agree that certain clothes-changing time will not be compensable as hours worked.
Sounds simple, at least until you see what kind of gear is required in some workplaces. What exactly are “clothes”? Is an employee wearing “clothes” when he suits up like Darth Vader to enter a contaminated nuclear facility? What about the somewhat more mundane protective gear worn in food processing plants or steel mills; is that “clothes”? Different courts have answered these questions differently.
Into this fray the Supreme Court has jumped armed with … a dictionary and some common sense (Sandifer v. United States Steel Corp., No. 12-417 (Jan. 27, 2014). Actually, the decision cites two dictionaries — the 1950 edition of Websters and 1933 edition of the Oxford English Dictionary — because, explains the Supreme Court, the words in the FLSA must be given the “common meaning” they had when the law was written. (The FLSA was enacted in 1938, and section 3(o) was added in 1949.)
“Clothes,” it turns out according to those dictionaries, are: “coverings for the human body,” “coverings for the person,” “wearing apparel,” “dress” or “vestments.” In essence, says the Court, the word “clothes” denotes “items that are both designed and used to cover the body and are commonly regarded as articles of dress.”
What about “changing clothes”? The employees in Sandifer argued that changing clothes means taking off one article of clothing and substituting a different one, while putting something on top of an employee’s street clothes does not involve “changing.” The Court, however, rejected that definition as impractical, since one employee might put a given garment over his own shirt, while another might remove his shirt to put on the same garment.
Applying these definitions, the Supreme Court concludes that “clothes” includes the steelworkers’: flame retardant jacket, pants and hood; hardhat; snood (a type of hood, similar to a skier’s balaclava); wristlets; work gloves; leggings; and steel-toed boots. On the other hand, safety glasses, earplugs, and a respirator are not clothes, according to the Court.
Even so, the time spent donning the glasses, earplugs and respirator was found by the Supreme Court to be non-compensable because those items were put on at the same time the employee was “changing clothes.” Section 3(o), the Court noted, says that: “In determining … the hours for which an employee is employed, there shall be excluded any time spent in changing clothes” (emphasis added). A very practical, common sense ruling.
Is This Part of a Trend?
The Supreme Court’s approach in Sandifer is, in some ways, reminiscent of the Court’s June 2012 decision in Christopher v. SmithKline Beecham, Inc., where it was called upon to define “sales” for purposes of qualifying for the FLSA’s “outside sales” exemption. There, too, the Court resorted to dictionaries. And, said the Court, interpreting the FLSA requires “a functional, rather than a formal, inquiry, one that views an employee’s responsibilities in the context of the particular industry in which the employee works,” rather than giving a word (in that case, “sales”) too literal a meaning. The Court in Christopher also applied common sense in determining that it would be completely impractical to treat the employees in that case as nonexempt.
Christopher was a 5-4 decision by the Supreme Court. In contrast, the decision in Sandifer was unanimous (except that Justice Sotomayor took exception to one footnote). Are we seeing a trend toward a simpler, more common sense way of interpreting and applying the FLSA — a trend that started, perhaps, 10 years ago, when the U.S. Department of Labor looked to the dictionary for a new definition of “primary duty” to replace the old percentage-of-time test (see 69 Fed. Reg. 22,185, April 23, 2004; 29 C.F.R. §541.700)?
Only time will tell.
Shlomo D. Katz, counsel in the Washington, D.C., office ofBrown Rudnick LLP, practices wage and hour law and advises clients on employee classification and salary test issues. Mr. Katz represents clients in connection with minimum wage, working time and overtime issues under the federal FLSA, Service Contract Act, Davis-Bacon Act and state wage payment and prevailing wage laws. Mr. Katz has successfully litigated before federal, state and local courts, the U.S. Government Accountability Office and the U.S. Boards of Contract Appeals. Mr. Katz is a co-author of Thompson’s various FLSA publications.
Recently, the IRS issued much-anticipated guidance that delays enforcement of the pay-or-play rules in the Patient Protection and Affordable Care Act. First, in January IRS released Notice 2013-45, which extended the enforcement date of the rules from 2014 to 2015. Then on Feb. 10, 2014, the Treasury Department issued final pay-or-play regulations, as well as a fact sheet and questions and answers that clarify key provisions of the rules. Most key, the regulations further delay and modify enforcement for certain employers in 2015. These delays do not mean that employers should rest easy, however. The rules are complicated and employers should be taking at least four steps now to ensure they will be ready for full compliance.
Employer Pay-or-play Requirements
Under the Patient Protection and Affordable Care Act, “large” employers will be required to provide health coverage for all full-time employees. However, employers with at least 50 full-time employees will have a delayed enforcement of the “pay or play” rules under Code Section 4980H from the original effective date of Jan. 1, 2014 until Jan. 1, 2015The final regulations, issued Feb. 10, 2014, delay and modify the enforcement of these rules for certain employers.
Generally, Section 4980H of the Internal Revenue Code requires a large employer to offer health coverage to its full-time employees that both is affordable and provides minimum value, or risk being subject to tax penalties. A “large employer” is an employer that employed an average of at least 50 full-time equivalent employees (FTEs) during the prior year. Large employer status is determined on a controlled group basis. However, whether an employer is subject to any tax penalties under Section 4980H is determined separately for each member of the controlled group. For an employer that was not in existence in the prior calendar year, determining whether it is a large employer during its first calendar year is based on the employer’s reasonable expectations at the time the business comes into existence. The preamble clarifies that a new employer will not be recharacterized as a large employer if subsequent events cause the actual number of FTEs to exceed that reasonable expectation. The final regulations clarify that an employer is treated as not having been in existence in the prior calendar year only if the employer was not in existence on any business day in the prior calendar year.
Penalties under the Code — Section 4980H(a)
A large employer may be subject to penalties under the pay-or-play rules under Section 4980H(a) if it does not offer minimum essential coverage to at least 95 percent of its full-time employees, and their dependent children, and at least one employee receives a cost-sharing reduction or premium tax credit (collectively, an exchange subsidy) for coverage purchased under a state or federally facilitated marketplace created by PPACA. For each month that a large employer does not offer coverage or offers coverage to less than 95 percent of its full-time employees and their dependent children, it will owe a Section 4980H(a) penalty equal to the number of full-time employees it employed for that month, minus 30, multiplied by 1/12 of $2,000.
Penalties under the Code — Section 4980H(b)
A large employer may be subject to pay-or-play penalties under Section 4980H(b) if it offers MEC to at least 95 percent of its full-time employees and their dependent children, but the coverage is either unaffordable or does not provide minimum value, and at least one full-time employee receives an exchange subsidy. If the employer offers MEC to at least 95 percent but less than 100 percent of its full-time employees and their dependent children, the Section 4980H(b) penalty also applies to any full-time employee who is not offered coverage and receives an exchange subsidy. The Section 4980H(b) penalty is equal to the number of full-time employees who receive an exchange subsidy for that month, multiplied by 1/12 of $3,000.
The final pay-or-play rules provide the following transition relief for 2015:
Reduced Coverage Requirement for 2015. A large employer that offers coverage to at least 70 percent of its full-time employees for the 2015 plan year will not be subject to penalties under Section 4980H(a) of the Code for 2015. However, even if a large employer meets the 70-percent threshold, it still faces the potential for the $3,000 Section 4980H(b) penalty for every full-time employee who isn’t offered affordable, minimum value coverage and receives an subsidy for insurance through the marketplace. Starting with the 2016 plan year, a large employer must offer coverage to at least 95 percent of its full-time employees in order to avoid the $2,000 Section 4980H(a) penalty.
Non-Calendar Year Plans. Employers with non-calendar year plans that were in effect as of Dec. 27, 2012, and have not since modified the plan year to begin at a later calendar date will generally not have to comply with the pay-or-play rules until the first day of the plan year that begins after Jan. 1, 2015.
Relief until 2016 for Employers with Fewer Than 100 Employees. Compliance with the pay-or-play rules generally is not required until the 2016 plan year for employers with at least 50 but fewer than 100 FTEs in the controlled group that provide appropriate certification (as part of the informational filing that the employer will be required to make with the IRS under Section 6056).
Transition Rule for Determining Large Employer Status. For the 2015 calendar year, an employer may determine its status as a large employer by determining whether it employed an average of at least 50 full-time employees during any consecutive period of at least six calendar months during the 2014 calendar year (rather than the entire 2014 calendar year). Starting in 2016, an employer must determine its status for the calendar year by averaging the total number of FTEs for each of the 12 months in the preceding calendar year.
Revised Section 4980H(a) Penalty Calculation for 2015. For the 2015 plan year, an employer may exclude the first 80 full-time employees from penalty calculations under Section 4980H(a). This amount will decrease to 30 employees in 2016.
Dependents. Solely for purposes of the penalties under Code Section 4980H, employers are not required to offer dependent coverage to foster children and stepchildren; employers must offer coverage only for employees’ biological and adopted children. Additionally, for purposes of Section 4980H penalties, a child must be offered coverage for the entire calendar month during which he or she attains age 26. Penalties will not apply for the 2015 plan year for certain employers that have taken steps toward satisfying the pay-or-play rule requirement to offer dependent coverage. The guidance confirms that employers are not required to offer spousal coverage.
Defining Full-time Employee and Counting Hours of Service
A full-time employee is one who is employed on average at least 30 hours per week. This standard has been the subject of much debate. Legislation has been introduced in both the House and Senate to increase the number of hours required to be considered a full-time employee, such as to 40 hours of service per week. However, because the 30-hour standard was written into the PPACA, Treasury has no authority to change the hours requirement.
Large employers must track all hours of service worked for which payment is made or due in order to determine an employee’s full-time status. As under the proposed regulations, this includes any payment made or due for vacation, holiday, illness, incapacity, layoff, jury duty, military duty or leave of absence. The final regulations provide that hours of service do not include:
any hours worked by a volunteer who does not receive compensation for his or her services or who is a “bona fide volunteer” of a government entity or 501(c) tax-exempt organization whose only compensation consists of reimbursement of reasonable expenses and certain reasonable benefits and nominal fees;
any hours worked for income that is taxed as income from sources outside of the United States; and
hours attributable to a student participating under a federal or state-sponsored work-study program. Importantly, this exception does not include other student employees, such as students in a paid internship or externship program.
Employers that have employees whose hours of service are difficult to track, such as employees who are on call or who are travelling salespeople compensated on a commission basis, must use a reasonable method of crediting hours of service.
Two Measurement Methods
The final regulations provide two measurement methods for an employer to determine whether an employee is a full-time employee: the monthly measurement method and the look-back measurement method.
Under the monthly measurement method, an employer determines whether each employee is a full-time employee by counting the employee’s hours of service for each month. An employer will not be subject to a pay-or-play penalty as long as an employee is offered affordable, minimum value coverage no later than the day after the end of the three-month period that begins with the first full calendar month in which the employee meets the plan’s eligibility requirements (other than a waiting period). The final regulations include rules for counting hours of service under the monthly measurement method.
Under the look-back measurement method, an employer determines an employee’s full-time status during a future period known as the “stability period” based upon the employee’s hours of service in a prior period referred to as the “measurement period.” For ongoing employees, employers determine full-time employee status by reference to hours worked during a “standard measurement period” that is between three and 12 months long. Each ongoing employee who works an average of 30 hours per week during the standard measurement period is treated as a full-time employee during the subsequent stability period.
Employers may use different standard measurement periods and stability periods, as long as the periods selected are consistent for all employees in the same category. Additionally, different employer members of the same large employer may use measurement periods and stability periods that differ either in length or in their starting or ending dates. Employers may choose to use an administrative period of up to 90 days between the standard measurement period and stability period to determine full-time employee eligibility and to enroll employees in health coverage.
Transition Rule for 2015 Stability Period
Employers that wish to use a 12-month stability period for 2015 may use a shorter look-back period for purposes of identifying full-time employees. The short measurement period must be at least six consecutive months; must begin no later than July 1, 2014; and must end no later than 90 days before the first day of the plan year beginning on or after Jan. 1, 2015. Starting with stability periods starting in 2016, employers must use a 12-month look-back period in order to use a 12-month stability period.
The final regulations continue to apply special rules to determine continuing employee hours during periods of special unpaid leave. Special unpaid leave means periods of unpaid leave subject to the Family and Medical Leave Act or the Uniformed Services Employment and Reemployment Rights Act, or on account of jury duty. To compute an employee’s average hours for special unpaid leave during the standard measurement period, the employer will need to either ignore periods where no hours were worked or credit hours to the employee based on the average number of hours worked by the employee during the remainder of the measurement period (the result is the same under either method).
An employer may treat a rehired employee or an employee resuming service as a new employee rather than a continuing employee after a break in service in two situations. The first situation is when the employee had no hours of service for at least 13 weeks (previously, 26 weeks under the proposed regulations). Second, under the “rule of parity,” an employer may treat a rehired employee who has had a break of at least four weeks as a new employee if that break with no credited hours of service is longer than his or her period of service immediately preceding the service break.
As with the proposed regulations, the final regulations provide that a new employee who is reasonably expected to be full time (and who is not a seasonal employee) when he or she is hired must be provided health coverage by the first day of the month immediately following the employee’s initial three months of employment in order to avoid potential tax penalties for that three-month period. Full-time employee status for such an employee is determined based on that employee’s hours of service for each calendar month.
Employees who are not expected to work an average of 30 hours per week are referred to as variable hour employees. A new employee is a variable hour employee if the employer cannot reasonably determine if the employee will work an average of 30 hours per week using certain factors in the final regulations. An employer cannot take into account the likelihood that an employee will not continue employment through the entire initial measurement period in determining variable hour status. The final regulations describe factors an employer should consider in determining whether an employee is reasonably expected to be a variable hour employee; that is:
whether the employee is replacing an employee who was a full-time employee or a variable hour employee;
the extent to which the hours of service of employees in the same or comparable positions have actually varied above and below an average of 30 hours of service per week during recent measurement periods; and
whether the job was advertised or otherwise communicated to the new employee as full time).
The same rules that apply to variable hour employees apply to part-time employees, defined as employees who are reasonably expected to average less than 30 hours of service per week. Seasonal employees also can be treated like variable hour employees subject to the look-back rules, even if they are hired to work a full-time schedule. The final regulations clarify that seasonal employees are those employees in a position for which the customary annual employment period is six months or less, and which starts in approximately the same part of the year.
Full-time employee status for a variable hour or seasonal employee is determined using a three-to-12-month look-back period called an “initial measurement period” and is generally consistent with the determination for ongoing employees. The final regulations clarify that the initial measurement period for a new variable hour or seasonal employee may begin at any time from the employee’s start date, up to and including the first day of the first calendar month following the employee’s start date. If the employer determines that the variable hour or seasonal employee is not a full-time employee, then it will not need to treat that employee as full-time during the stability period unless the employee is determined to be a full-time employee during the standard measurement period applicable to ongoing employees, and the stability periods overlap. Variable hour or seasonal employees who experience a change in status, such that they would have reasonably been expected to be employed on a non-seasonal basis on average at least 30 hours of service per week if initially hired into that position, must be provided health coverage by the first day of the fourth calendar month following the change in employment status (or, if earlier, the first day of the first month following the end of the initial measurement period (plus any applicable administrative period) if they averaged 30 hours of service or more per week during the initial measurement period.
Affordable Coverage Safe Harbors
Under the pay-or-play rules, even an employer that offers MEC to 95 percent (or 70 percent for 2015) or more of its full-time employees still may be subject to a penalty if that coverage is either unaffordable or does not provide minimum value. Health coverage is generally affordable if the employee’s portion of the self-only premium for the employer’s lowest cost coverage that provides minimum value does not exceed 9.5 percent of the employee’s annual household income.
Because it may be difficult for an employer to determine an employee’s annual household income, the pay-or-play rules provide three safe harbors under which an employer may treat coverage as affordable.
Under the Form W-2 safe harbor, an offer of coverage is affordable if the employee’s health premium does not exceed 9.5 percent of that employee’s Form W-2 wages, reported in box 1 of the Form W-2, for the calendar year.
Under the rate-of-pay safe harbor, an offer of coverage is affordable if the employee’s applicable health premium does not exceed 9.5 percent of the employee’s monthly wages equal to 130 hours multiplied by the lower of the employee’s applicable hourly rate of pay on the first day of the coverage period or the lowest hourly rate of pay during the calendar month. The final regulations permit use of the rate-of-pay safe harbor even if an employee’s rate of pay is reduced during the year, contrary to the proposed regulations.
Under the federal poverty level safe harbor, coverage is affordable if the employee’s applicable care premium does not exceed 9.5 percent of the monthly equivalent of the federal poverty line. The final regulations permit an employer to use the federal poverty line in effect six months prior to the beginning of the plan year.
The IRS, and not the employer, will calculate any penalty due on an annual basis through a combination of employer and individual reporting, and will inform the employer of the assessed tax penalty. Treasury has indicated that final guidance on the employer reporting requirements under the PPACA will be issued shortly.
Employers should review plan procedures and payroll practices to ensure that they have an effective strategy in place to prepare and plan for compliance with the pay-or-play rules. Specifically, employers should:
identify and categorize employees;
decide whether to adopt a monthly measurement method or look-back measurement method for identifying full-time employees;
identify look-back and stability periods for measuring hours of service; and
ensure that appropriate procedures are in place to track employee status and hours.
The rules are complex and may require employers to amend plan documents and revise summary plan descriptions and enrollment materials. Employers should not delay in preparing for compliance with the pay-or-play rules.
Based on several of my recent plan reviews, the continued fragile economy has caused loans and loan defaults to spiral out of control in many retirement plans. Of particular concern is the rise of so-called serial borrowers. It is no longer unusual to see retirement plan participants who have borrowed 10, 20 or even 30 times in the course of their working careers.
The problem of overuse is twofold. Loans reduce retirement savings, which means that an employee may need to work longer at his or her employer than planned; this is a disadvantageous situation for both the employee and the employer. Additionally, loans are among the most difficult of recordkeeping transactions. More loans (and defaults) mean a greater potential, upon audit, for IRS to discover errors relating to loan administration. This article will examine the problem of excess loan utilization and attempt to offer practical solutions for plan sponsors.
Scope of Problem and Possible Causes
In my experience, I have not reviewed a plan yet that does not have either more outstanding/defaulted loans than it should or a relatively small number of individuals responsible for a significant number of outstanding/defaulted loans in the plan (the “serial borrowers”), or both.
The scope of the issue can be broader for plans with multiple vendors, as it is not unusual for participants to take out several loans with each vendor. This, of course, must be aggregated for the purposes of the loan limits, a cumbersome task.
Plan sponsors should obtain a loan report from their plan’s vendor(s). If a plan sponsor does not have access to all plan vendors, typically reviewing even one report from a vendor that permits loans will be eye-opening.
Upon review of the loan utilization reporting, plan sponsors then can work with their vendor(s) and adviser(s) to establish possible causes for loan overutilization issues.
Does the plan or vendor have a loan policy in place?
What does the loan policy state?
Many vendor policies allow for unlimited loans, or place no restriction on the number of loans that may be initiated within a given period.
Also, vendor communications to participants often serve as marketing pieces for loans, rather than an honest assessment of the advantages and disadvantages of borrowing against one’s 401(k) plan.
I have seen countless situations where employees were permitted to borrow again after defaulting on a loan. Per the 2002 final loan regulations under IRS Code Section 72(p), reborrowing after default is only permitted when the loan is:
repaid by payroll deduction; or
secured by outside collateral (and I have yet to come across a vendor that will accept outside collateral).
However, most of the plans I work with do not have payroll deduction for loans. Why, then, is a participant permitted to borrow? The most likely answer is that the contract from which loans are being made was in effect before Jan. 1, 2004. A grandfathering provision in the regulations allows such contracts to continue to permit reborrowing after loan defaults without the payroll deduction requirement.
Some vendors have implemented a policy that will prohibit such reborrowing regardless of contract, but others have not. Again, this is a situation that may not be desirable for a plan sponsor.
The most obvious solution is to eliminate loans entirely, but, not surprisingly, this approach has not been adopted by many plan sponsors. The loan feature has been accepted by many participants as a fundamental feature of the plan, whether or not they use it.
If it were taken away, no doubt participant satisfaction with their retirement plan would diminish to the point where some might even consider no longer participating in such plans.
Fortunately, plan sponsors can take a number of actions to address loan utilization and loan defaults without eliminating loans entirely:
Improve communication of the loan provision to participants. Loans are highlighted in vendor communications as a desirable plan feature, with little emphasis on the disadvantages of borrowing. Plan sponsors should work with their vendor/adviser to provide loan communication materials to participants that balance the advantages and disadvantages of borrowing.
Participants should be aware of the tax consequences of the loan, as well as the impact on their retirement plan balance and ultimately their ability to retire in a timely fashion. They should also understand that taking out multiple loans exacerbate these concerns.
Consider the implementation of payroll deduction or automatic checking account deductions for loan repayments; both methods should dramatically reduce the number of loan defaults.
Consider limiting the number of outstanding loans to three or fewer.
Consider limiting to one the number of loans that may be taken in a 12-month period. to one.
Consider restricting borrowing to a certain contribution type, such as employee elective deferrals only.
Considering altering the fee structure for loans. Some vendors, for example, may have fee structures that promote borrowing, either by charging a below-market fee or a fee that is not transparent.
Consider implementing a plan-level provision that prohibits borrowing after loan defaults if a vendor currently uses contracts that permit such borrowing.
If a plan uses multiple vendors, consider limiting the loan provision to a select group of vendors, or even a single vendor. Note, however, that such a restriction may result in participants selecting a vendor based solely on the ability to borrow. Of course, some vendor contracts prohibit loans at any rate.
Any restrictions on loans should be articulated in a loan policy, either at the plan level, vendor level or both, so that all parties are clear on what is and is not permitted.
If vendor communications regarding loans do not meet the goals of the plan sponsor, an adviser can add value by drafting a loan communication. Also, advisers can be of valuable assistance in finalizing a plan/vendor loan policy that addresses use issues.
By implementing some or all these suggested actions, plan sponsors can keep the number of loans in their retirement plans from mushrooming. Of course, plan sponsors should work with their advisers/vendors to ensure that new loan provisions can be implemented successfully on the plan’s recordkeeping platform.
As with all initiatives, an infrastructure should be in place to measure results. In this case, hopefully, the outcome will be a reduced number of both loans and defaults.
Mike Webb joined Cammack Retirement Group, then known as Cammack LaRhette Consulting, in 1991, where he has provided retirement plan consulting services spanning several tax-exempt industries for more than 20 years. Webb’s expertise covers health-care organizations, colleges and universities, cultural institutions and social service organizations.
Employers offer 401(k) plans to provide a vehicle through which their employees may save for retirement. While most employees take advantage of this savings opportunity, fewer participants contribute the maximum amount allowed by IRS and plan rules.
One way to encourage participants to contribute more and have a better-funded retirement nest egg is to give them limited access to their assets in a 401(k) plan account through plan loans and hardship withdrawals. The availability of plan assets for near-term use, however, can be a barrier to reaching long-term retirement savings goals.
When you need money for a wedding, a bathroom or kitchen renovation or to pay off credit cards because your holiday shopping went over budget, where do you go?
If available, it’s best to look first to a rainy-day savings account. But when such a savings account is not sufficient, some look to their retirement savings to cover the debt. It is important for participants to know that when the impact of “leakage” from retirement savings and possible tax implications are factored in, one’s 401(k) plan may not be the best place to look.
Savings vs. Covering Expenses
The costs associated with weddings and home renovations may be covered with a general-purpose 401(k) plan loan, where available. The participant may take a plan loan for the amount needed — up to 50 percent of the vested balance — and repay the borrowed amount to the plan through payroll deductions over five years.
However, when a participant is faced with a so-called immediate and heavy financial need, already has taken a plan loan and has exhausted other financial resources, a hardship withdrawal may be necessary.
The plan rules set the reasons for which a participant may take a hardship withdrawal. Plan sponsors must apply them consistently for any participant requesting a hardship withdrawal. The participant has to provide proper documentation of the financial need, and the hardship withdrawal is limited to the amount necessary to satisfy the demonstrated financial need, plus applicable taxes and penalties that may result from the distribution.
Generally, the participant is required to take any available distributions from the plan, including plan loans, once approved, and will be suspended from making any contributions to the defined contribution plan, or any plan sponsored by the employer, for six months following the hardship withdrawal.
There is usually an exception ensuring that a participant is not forced to take a counterproductive action. For example, if the repayments would exacerbate the participant’s financial hardship, then the plan loan need not be taken. Similarly, if the participant is looking to purchase a house and taking the plan loan would disqualify him from obtaining necessary financing, the exception also applies.
While plan sponsors are permitted to make a fact-and-circumstances determination about a participant’s hardship request, many opt to use the IRS safe harbor reasons. IRS has taken the position that a need may be immediate and heavy even when it was reasonably foreseeable or voluntarily incurred by the employee. The safe harbor reasons for hardship withdrawals include:
medical expenses incurred by a participant or his dependents;
closing costs and the down payment necessary to purchase a primary residence;
tuition payment, educational fees and room and board for post-secondary education for a participant or his dependents;
prevention of eviction or the foreclosure of a participant’s mortgage on a primary residence;
expenses incurred for the funeral or burial of a parent, spouse, child or dependent;
repair of damage to a principal residence, if the expenses qualify as a casualty deduction; and
other reasons promulgated by the U.S. Treasury Secretary.
Occasionally, when a hurricane or other natural disaster is especially devastating, legislation is passed that provides for special plan distributions and loans that would not otherwise be available to employees. For example, in 2012 an IRS announcement provided guidance on helping individuals and businesses affected by Hurricane Sandy.
Some retirement plan service providers make electronic distributions available that allow participants to request a hardship withdrawal online and to self-certify their hardship reason. However, plan administrators that use this service should not forgo collection of the supporting financial hardship documents. IRS regulations make clear that a plan sponsor must verify that the participant has an immediate and heavy financial need and that the amount of the hardship withdrawal is limited to the amount necessary to satisfy such need. (See August 2013 story.)
It is important that your plan have clear procedures for receiving, reviewing and maintaining (for IRS audit purposes) supporting documents for hardship withdrawals. The procedures should establish the acceptable documents, state whether the statements and receipts must be on applicable letterhead and note whether a notarized signature is required. The hardship withdrawal procedures should confirm that a copy is sufficient, and describe any date and language restrictions, such as a receipt in Spanish requiring an English translation.
As a best practice, the plan sponsor may list examples of acceptable supporting documents for each type of hardship recognized by the plan. The following table is a good starting point for acceptable documents:
Medical and dental expenses deductible under Section 213(d) of the federal tax Code
Itemized medical/dental bills
Explanation of benefits that list uncovered expenses
Receipts on treating physician’s letterhead
Excludes liposuction and other cosmetic surgery
Tuition and post-secondary educational expenses
Receipts for tuition, room and board
School-issued, itemized bills
Proof of dependent and relationship with dependent
Excludes school loans and the costs for continuing education
Payments to prevent eviction or foreclosure
Notice of eviction, including the amount in arrears
Documents must show the address, which is the participant’s principal residence, and due date
Down payment, closing costs for home purchase
Agreement of sale
A notarized letter with good-faith estimates of settlement and closing costs
Excludes mortgage payments; documents must show the address, which is the participant’s principal residence
Funeral and burial expenses
temized bills, receipts for amounts paid on funeral director, cemetery letterhead
Proof of dependent and relationship with dependent
Excludes prepaid burial plans
Repair of principal residence that qualifies for casualty deduction under Section 165 of the Code
Itemized bills, receipts for repair of damages
Police report itemizing losses
Explanation of insurance benefits that lists costs not covered
Documents must be for the participant’s principal residence and accompanied by an insurance claim
A hardship withdrawal is a taxable distribution to the participant, and the withdrawal amount will be included in taxable income for the year of distribution. Because hardship amounts are not eligible for rollover, the mandatory 20-percent withholding does not apply.
However, the 10-percent early-withdrawal tax may apply, unless the participant satisfies one of the exceptions. The good news is that the participant may have the amount of taxes included in the hardship withdrawal amount.
For more information about offering plan loans, see ¶442; for hardship withdrawal administration tips see ¶420 in The 401(k) Handbook.
Arris Reddick Murphy is an attorney with experience in the employee benefits and executive compensation practice area, and she is senior counsel with FedEx Corp.’s Tax & Employee Benefits Law group. Before joining FedEx, she held the position of associate with the law firm of Potter Anderson & Corroon, LLP, and worked in-house with The Vanguard Group and the City of Philadelphia as counsel to its Board of Pensions and Retirement.The views expressed in this column are strictly Ms. Murphy’s, and are not those of FedEx Corp.,any of its operating companies or affiliates. She is contributing editor of The 401(k) Handbook.
Is it just a matter of time before your company’s retirement plan is audited?
IRS and the U.S. Department of Labor have improved their data-mining techniques, which is enabling them to conduct more targeted audits. This column will focus on DOL audits and how plan sponsors can best prepare for them (see the November 2013 column for information on IRS audits).
What DOL Is Auditing
Many DOL audits are now being conducted at a variety of employer-sponsored plans. Over the past few months, for example, my benefits consulting practice has participated in several such audits, spanning both health and welfare and 401(k) plans, and we have consulted on audits of insured health and welfare plans with fewer than 100 participants.
In addition, DOL’s Office of the Chief Accountant recently contacted by form letter a sample of plan sponsors that filed retirement plan Forms 5500 annual reports but did not file a health-plan Form 5500. The OCA is also auditing independent accounting firms that perform ERISA financial audits, focusing primarily on the 2011 plan year and those firms that do not perform a significant volume of ERISA audits, according to a September 2013 member alert from the American Institute of Certified Public Accountants’ Employee Benefit Plan Audit Quality Center.
Why Do Plans Get Selected for a DOL Audit?
Primary reasons a plan is selected for audit include:
a participant complaint;
a Form 5500 issue; or
How an Audit Works
The DOL audit process generally begins with a data request letter. Do not hesitate to ask for more time to gather the information the agency seeks; DOL investigators are generally very understanding. It’s possible that the auditor will ask for the information in electronic format.
Be prepared to wait (even a few months) before DOL contacts you regarding the submitted information; your plan is but one of many in the DOL investigator's caseload.
It is critical that you respond to each of the data items requested; incomplete information or irrelevant answers could raise warning signs to DOL that the plan sponsor doesn't really know what is going on with its plan. One example of this might be providing proof of fiduciary liability insurance in response to a request for proof of a fidelity bond.
In most cases, the next step will be an on-site meeting with the DOL investigator. Decide in advance who will attend; don't hesitate to involve external advisers such as your plan’s attorney, accountant or other consultants. Your advisers can be present in the room or available by phone as needed. Don't be startled when the DOL investigator presents his or her identification and informs you that if a violation relevant to another federal agency (such as IRS) is discovered, the DOL investigator will notify the other agency.
Determine who will answer what question, for example, payroll-related queries should be answered by the person most familiar with the process. Questions regarding the administrative process should be handled by the person who serves as the primary service-provider contact. DOL investigators not only will ask questions about the information provided, they also will be assessing the level of plan knowledge of the responsible parties.
The more you are able to answer questions without hesitation and demonstrate knowledge of the plan and how it operates, the more the investigator’s comfort level will rise. In turn, the greater the comfort level of the investigator, the smoother the audit should be.
A word of caution: Always answer the questions honestly; if there was a problem and you fixed it, chances are DOL will discover it. Be prepared to discuss how you found the problem, what you did to correct it and what you did to prevent it from happening again. In the case of late 401(k) contributions, for one, be prepared to provide your lost-interest calculations.
What Is DOL Looking For?
DOL is concerned with protecting the rights of retirement plan participants. In a nutshell, DOL wants to make sure that participants:
are receiving information that accurately reflects the plan terms.
In the case of health benefits, DOL wants to ensure that participants:
know when they are eligible to join the plan;
understand what their benefits are;
know how to file a claim; and
know how to appeal a claim.
The investigator will carefully review insurance contracts, certificates of coverage and wrap plan documents to ensure consistency. You can expect that DOL will note some language that must be fine-tuned. DOL also is interested in COBRA procedures, as well as the various required health and welfare plan disclosures. Affordable Care Act provisions such as waiting periods, annual limits and grandfathering will be examined. The investigator will review the often-voluminous medical plan "booklet" provided to participants; it is not unusual for such self-insured plan document to approach or exceed 100 pages. Make sure you read the document carefully and question your third-party administrator about anything not clear to you, in anticipation of DOL questioning you on anything in the booklet.
In the case of retirement benefits, DOL's overarching focus listed above sounds simple but the detail needed to support basic questions in those areas is enormous. DOL continues to focus on timely deposit of 401(k) contributions(see ¶316 in The 401(k) Handbook); if you have ever been late, the documentation you provide will show it, as mentioned previously, so be prepared to explain what you did to correct the problem.
DOL will ask for participant communications. In the case of a 401(k) plan, that can mean hundreds and thousands of pieces (depending on the number of plan participants). You should consider allowing DOL access to certain areas of your recordkeeper's portal; it is probably the most efficient way to handle such a request, and your recordkeeper should be familiar with such queries.
DOL will ask for investment committee meeting minutes and question your understanding of fees charged for services. As DOL becomes more familiar with the material elicited by recently mandated fee disclosures, this area of questioning will become more precise. You also should be prepared to answer questions about "ERISA accounts" in 401(k) plans, your handling of lost participants and uncashed checks sent to lost participants.
If you have a large hourly employee population, be prepared to answer questions on how hours are recorded. Don't be surprised with questions relating to independent contractor employee status determination.
Cooperation Is Key
We strongly recommend that you cooperate with your DOL investigator. (See ¶120 in the Pension Plan Fix-It Handbook for more information about how, when and why to talk to the government.) Always remember that his or her mission is to protect the plan participant by ensuring that the rules are followed. Plan sponsors generally want the same thing. Also keep in mind:
The DOL investigator may or may not tell you the reason for the audit.
Be prepared for follow-up questions after the on-site visit; answer promptly even if your answer is "we must contact the service provider" (such as the plan’s recordkeeper or insurance company).
You may have to wait for a final letter closing the audit. There may be only a few people at a particular DOL office assigned to review investigators’ findings. The results of your review will go into a pile and wait their turn. You could wait six months to a year for closure.
Other Sources of Information
Meanwhile, the IRS website provides a tremendous amount of information, including findings of recent IRS projects as well as the agency’s areas of current and future focus. The DOL website also contains information about the agency’s enforcement activities, as well as useful self-compliance tools. The Self-Compliance Tool for Part 7 of ERISA: HIPAA and Other Health Care-Related Provisions and Self-Compliance Tool for Part 7 of ERISA: Affordable Care Act Provisions are very useful tools for health and welfare plans.
The following is an excerpt from a recent DOL audit request for a 401(k) plan. Note: We have excluded requests for basic plan documents, Forms 5500, etc. and highlighted items illustrating the volume of data requested.
Statements showing date of remittance of contributions for plan years under review.
Payroll deduction registers, summarized by pay period, for the period under review.
Statements from the company that maintains the plan showing the date contributions were received for the period under review.
All documents relating to communication to the plan, from the plan or concerning the plan.
All documents relating to plan trustee meetings, administrative or other plan committee meetings or presentations.
All documents relating to the Board of Directors meetings, administrative or other company meetings or presentation in which the plan was discussed.
Mary B. Andersen is president and founder of ERISAdiagnostics Inc.,an employee benefits consulting firm that provides services related to Forms 5500, plan documents,summary plan descriptions and compliance/operational reviews. Andersen has more than 25 years of benefits consulting and administration experience. Andersen is a CEBS fellow and member of the charter class. She also has achieved the enrolled retirement plan agent designation. Andersen is the contributing editor of the Pension Plan Fix-It Handbook.
One of the latest marketplace trends these days is for single-employer defined benefit pension plans to consider offering terminated vested participants a one-time lump-sum offer in lieu of a future monthly benefit. The primary reason for this recent trend is that plan sponsors are trying to “derisk” by eliminating potentially volatile pension liabilities. Settling terminated vested participants with a lump-sum payout now means the plan sponsor no longer has any future risk associated with those liabilities.
In having various water cooler discussions over the past year, I have always wondered: If it is such a great idea to have a lump-sum window now, then why not make it a permanent plan feature?
Here are two major reasons why making the lump-sum feature permanent makes sense:
Once a terminated vested participant is cashed out, the plan sponsor is no longer required to pay U.S. Pension Benefit Guaranty Corp. premiums on his or her behalf. By making a lump-sum feature permanent, a plan can continue to reduce its PBGC premiums beyond a lump-sum window period. With PBGC premium rates scheduled to increase over the next several years due to recent legislative changes, it will be more expensive for a plan sponsor to maintain its terminated vested liability.
Once a terminated vested participant is cashed out, there is no longer any concern about having to locate the participant at a future date. This is especially important if a plan sponsor is considering a plan termination, in which it is required to make a serious effort to find all terminated vested participants. By making a lump-sum feature permanent, a plan sponsor has the opportunity soon after participants terminate employment to offer to cash them out, which eliminates the possibility they will ever become a missing participant.
One downside to making a lump-sum feature permanent: In a plan termination, insurance carriers will require that a lump-sum option be reflected in its annuity purchase pricing. This will increase the cost of plan-termination annuity purchases for those participants not electing an immediate lump-sum payout at plan termination.
In both cases, these issues need to be considered before amending a plan to add a lump-sum feature:
Plan administration will need to be modified to offer terminated vested participants an immediate monthly benefit (even if the participant is younger than the plan’s regular early retirement age) in lieu of the offered lump-sum distribution. The plan then also will need to communicate to the participant the “relative value” of the lump-sum payout compared with the immediate monthly benefit. Depending on whether early retirement subsidies are included in the lump-sum calculation, the relative value could be well below 100 percent.
The plan will need to be monitored for compliance with benefit restriction rules in conjunction with offering a lump-sum distribution. In general, a plan will need to be at least 80-percent funded to be able to offer a full lump-sum distribution. In addition, the 25 highest-compensated employees may have to wait until greater funding thresholds are attained or the plan is terminated to receive a full lump-sum distribution.
The plan sponsor will need to monitor the possible need to do special settlement pension accounting calculations. This type of calculation is more likely to be required in a lump-sum window situation because of the greater likelihood of a large number of lump-sum payouts in a given fiscal year.
Plan sponsors that are considering embarking on a derisking strategy by offering a lump-sum option to terminated vested participants may wish to consider making the option permanent in order to further reduce future PBGC premiums and possible later headaches arising from trying to find missing participants.
Jeffrey Kamenir is a principal and consulting actuary with the Midwest Employee Benefits practice of Milliman, with offices in Chicago, Minneapolis and Omaha. He joined the firm in 1993.
Now that the federal definition of spouse includes lawfully wedded same-gender spouses as a result of U.S. v. Windsor, 133 S. Ct. 2675 (June 26, 2013), one may be asking if this change really matters in COBRA administration. The answer is definitely yes. Following is an explanation of some situations to consider regarding same-gender spouses when a qualifying event causing a loss of coverage occurs.
What Constitutes a Valid Same-gender Marriage?
A same-gender marriage exists if the marriage occurred in a state that recognizes same-gender marriages.
As of this writing, same-gender marriages are permitted in: California, Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Rhode Island, Vermont, Washington and the District of Columbia. A District Court decision invalidated Utah’s same-gender marriage prohibition, but that decision has been stayed by the U.S. Supreme Court, and courts are reevaluating same-gender marriage bans in other states.
Windsor does not apply to domestic partners or civil union partners. Windsor made provisions only for a legal marriage between two same-gender spouses in a state that recognizes and permits same-gender marriages regardless of where the couple resides.
For COBRA purposes, it is important now to know who is considered a qualified beneficiary and the reasons why.
Who Is Considered a QB?
A QB is any of the following:
Covered employees if they were covered under one of the benefits provided by the employer the day before the qualifying event occurs
Federally recognized spouses and dependent children of the covered employee
Children born to, placed for adoption or adopted by a covered employee
A legal marriage between same-gender spouses provides QB status for the spouse if the marriage occurred in one of the states that recognize and permit same-gender marriage. Therefore, the same-gender spouse QB would be allowed the following:
Independent election rights
QB rights during an open enrollment period
Rights to an extension of COBRA if a secondary event occurred
Rights to an extension up to 29 months if a family member QB was deemed disabled by the Social Security Administration
What Are Some Likely Scenarios?
Following are situations that could occur and why QB status is crucial for same-gender marriages.
Marriage. A marriage occurs for an active employee who then adds the spouse under the group health plan. A few months later, the employee is terminated causing a loss of coverage. The employee and spouse should be offered COBRA for an 18-month period. The spouse could elect COBRA coverage and receive the full 18-month time frame even if the former employee does not go on COBRA.
Divorce. During the 18-month COBRA period, things just don’t work out in the marriage and a divorce occurs. The spouse should be offered an additional 18 months of COBRA coverage, giving a total of 36 months from the first qualifying event date (termination of employment).
Death. If the death of a covered employee occurs, the spouse and dependents (if any) who were covered under the group health plan would need to be offered COBRA for 36 months. This could even be an extension under COBRA. Let’s go back to the example of termination from employment. If the covered employee were to die during the first 18-month period, the spouse and dependents would receive an additional 18 months of COBRA coverage. The additional time frame would start from the original qualifying event date (termination of employment).
Disability. Both the former employee and spouse are on COBRA and the spouse is deemed disabled by the SSA during the first 60 days of COBRA. Do the employee, spouse and dependent(s) receive the additional 11 months of COBRA? Yes, they receive an additional 11 months, resulting in a total of 29 months of federal COBRA coverage. Why? QBs receive an extension of COBRA coverage due to a second qualifying event or disability extension.
Addition of spouse. If the covered employee marries a same-gender spouse during the 18-month COBRA period, can the covered employee add the spouse? Yes, assuming the plan offers spouse coverage. The employee is a QB who has the same rights as a similarly situated active employee. However, the twist to this scenario is that the spouse would be a covered individual who can only do what the covered employee (QB) does. If the QB stops making the COBRA premiums, the covered individual spouse could not remain on COBRA. This holds true even if the spouse wants to pay for single coverage. Why? The spouse was not covered under the group health plan the day before the qualifying event occurred and is a covered individual, not a QB.
Effect on domestic partnerships and civil unions. Domestic and civil union partners did not gain anything under Windsor. The couples in those arrangements are not considered to be spouses and therefore are not QBs.
State-law Issues That Need to Be Considered
If the couple moves to a state that does not recognize same-gender marriage, they may not be able to get a divorce. Since the marriage is not recognized a divorce cannot occur. Some states require residency for a divorce (some up to 90 days or longer). This can make the divorce unrealistic in the state where the couple was married.
Under ERISA preemption, self-insured group health plans are not subject to state laws. Also, these plans are exempt from state nondiscrimination laws or coverage rules. Therefore, if an employer has a self-insured plan, it may not be required to provide coverage to the same-gender spouse.
Fully insured plans are subject to state laws where the policy is issued or in some states where the policy is to provide coverage. If a state recognizes same-gender marriages, the insurer will more than likely extend coverage to the same-gender spouse regardless if he or she were previously covered.
Windsor does not require an employer to offer coverage to a same-gender spouse under an insured health plan governed by the laws of a state that does not recognize same-gender marriages. Therefore, insured plans should review their coverage mandates regarding the applicable state-law requirements of the insurer and their products.
What may have appeared as an easy fix may not be the case. Employers need to consider all the federal and state requirements when it comes to this issue.
Constance Gilchrest is the research and compliance specialist for Infinisource, Inc., a provider of Workforce Management, COBRA and flexible benefits administrative services to more than 63,000 employers nationwide. She has more than 19 years of experience with COBRA and is certified for Advanced Flexible Compensation Instruction through the Employers Council of Flexible Compensation, is a certified COBRA Administration Specialist.