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EMPLOYEE BENEFITS BLOG
Insights on Employee Benefits and Executive Compensation
EMPLOYEE BENEFITS BLOG
Insights on Employee Benefits and Executive Compensation
Benefit Controversies
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Conflicting Developments in Same-Sex Marriage Laws Add Complexity for Benefit Plan Sponsors

by | Mar 15, 2012 |

by Joe Adams, Brett Johnson, Todd Solomon and Brian Tiemann

Developments in state same-sex marriage laws have added complexity to the options and obligations of employers providing benefits for employees’ same-sex spouses and partners.  These conflicting developments—some legalizing same-sex marriage and others restricting marriage to an opposite-sex union—are occurring at an increasingly rapid pace.  Further complicating the issue is that changes are occurring by judicial action, legislative action and voter referendums.

Judicial Actions
The U.S. Court of Appeals for the Ninth Circuit ruled in February 2012 that California’s state constitutional ban on same-sex marriage violates the Equal Protection Clause of the U.S. Constitution.  Same-sex marriage was legalized in California in 2008, but was banned a few months later after state voters approved Proposition 8, an amendment to the state constitution that defines marriage as a union between a man and a woman.  Despite the court ruling, same-sex marriage remains on hold in California pending the expected appeal of the decision.

Legislative Actions
Washington and Maryland are the most recent states to legalize same-sex marriage under laws enacted by their respective state legislatures earlier this year (although voters in these states may ultimately decide whether the new laws will take effect, if opponents of the laws are able to collect enough signatures to support a voter referendum in each state).  The Illinois legislature is also currently considering a bill to legalize same-sex marriage.  Meanwhile, a bill to repeal New Hampshire’s 2009 same-sex marriage law has been introduced in the state’s legislature.  If passed, New Hampshire would be the first state in which the legislature has reversed itself on the issue of same-sex marriage.

Voter Referendums
This year voters in Maine will consider whether to legalize same-sex marriage.  Same-sex marriage was legalized by the Maine legislature in 2009, but was repealed by a previous voter referendum before the law took effect.  Meanwhile, voters in Minnesota and North Carolina will consider whether to amend their respective state constitutions to define marriage as an opposite-sex union (both states already have laws banning same-sex marriage).  Twenty-nine states have amended their constitutions to limit marriage to opposite-sex couples; an additional 12 states have enacted state laws banning same-sex marriage.

Next Steps for Employers
The rapid developments in state laws regarding marriage and other forms of same-sex unions makes providing benefits to employees’ same-sex spouses and partners an evolving challenge.  Employers should consider whether their benefit plans and procedures need to be updated to address varying state law approaches to the recognition of marriages and/or other forms of same-sex unions.  In addition, employers need to ensure their payroll systems are structured to reflect the differing federal and state tax treatment of benefits provided to employee’s same-sex spouses and partners.



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California Same-Sex Marriage Ban Found Unconstitutional

by | Feb 9, 2012 |

by Joseph S. Adams, Brett R. Johnson and Todd A. Solomon

On February 7, 2012, the U.S. Court of Appeals for the Ninth Circuit found California’s Proposition 8, which amended the California Constitution to ban same-sex marriage, to be unconstitutional because it violated the Equal Protection Clause of the U.S. Constitution.  Supporters of Proposition 8 have vowed to appeal the ruling to the Supreme Court of the United States, and it is unclear whether the entire Ninth Circuit might agree to hear the case en banc.

The lower court had previously held Proposition 8 unconstitutional for two separate reasons: (1) it impermissibly deprived same-sex couples of the fundamental right to marry guaranteed by the Due Process Clause of the U.S. Constitution, and (2) it violated the Equal Protection Clause of the U.S. Constitution because it excluded same-sex couples from state-sponsored marriage while allowing opposite-sex couples to marry.  The Ninth Circuit affirmed the lower court, but narrowly tailored its decision to facts specific to California.  Because same-sex couples had previously been granted the right to marry and Proposition 8 eliminated that right, the Ninth Circuit limited the question before it to whether California had a legitimate reason to take away same-sex couples’ right to the official status of “marriage,” rather than the substitute label of “domestic partnership.”  The Ninth Circuit found no such legitimate reason, stating “Proposition 8 serves no purpose, and has no effect, other than to lessen the status and human dignity of gays and lesbians in California, and to officially reclassify their relationships and families as inferior to those of opposite-sex couples.”

Because the Ninth Circuit’s decision was focused on facts specific to California, the ultimate legal effect of the ruling is likely to be limited to California.

For now, same-sex marriage in California continues to be on hold because the Ninth Circuit affirmed the lower court’s stay pending further appeal.  By keeping the stay in place, same-sex marriages will not resume in California until the appeal process runs its course (or until a court lifts the stay).  As a result, the immediate effect of the decision on employee benefits is to maintain the status quo.  While additional same-sex marriages cannot yet take place, California does recognize the approximately 18,000 same-sex marriages performed in 2008 before Proposition 8 was passed.  Further, couples in California can still enter into spousal-equivalent domestic partnerships, meaning employers may have several different types of same-sex relationships to address in their employee benefit arrangements.  Employers should keep an eye on further developments in California as litigation surrounding Proposition 8 winds its way through the appeal process.  If and when same-sex marriages resume in California, employers will need to carefully review their employee benefit plans and programs to determine what changes are necessary or desirable.



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Not Just a Tax Issue: Lawsuits Crop Up over IRS 162(m)

by | Jan 26, 2012 | ,

by Andrew Liazos

Proxy season is now upon us, and a key task is to evaluate whether shareholder approval is needed for any executive compensation plan. One of the typical reasons to seek shareholder approval is to qualify for tax-deduction relief under Section 162(m) of the Internal Revenue Code. By and large, seeking shareholder approval for that purpose has been viewed as a relatively routine task. However, recent shareholder derivative lawsuits suggest that public companies should take a careful look at disclosures that solicit Section 162(m) shareholder approval. 

Read the full article on CFO.com.



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New Guidelines Issued on Preventive Services for Women, Including Religious Employer Exception

by | Aug 2, 2011 | ,

by Amy M. Gordon, Susan M. Nash and Jamie A. Weyeneth

The U.S. Departments of Treasury, Labor, and Health and Human Services recently released joint guidance regarding mandatory coverage of contraceptive services for women under the preventive services requirements of health care reform.  The new guidance coincides with the issuance of expanded preventive care coverage requirements for women released by the Health Resources and Services Administration (HRSA).

Health care reform requires non-grandfathered group health plans and health insurance issuers to provide first-dollar coverage of certain preventive services furnished by in-network providers.  The preventive services coverage requirements are based on recommendations of the U.S. Preventive Services Task Force, the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention, and HRSA.  In addition, HRSA was charged with developing additional preventive care and screening guidelines for women.  HRSA commissioned the Institute of Medicine (IOM) to help to identify gaps in preventive care services already required under health care reform.

When the IOM released its recommendations in mid-July 2011, concerns about the inclusion of contraceptive services were raised by religious organizations.  The regulators determined it would be appropriate to take into account the religious beliefs of religious employers and issued guidance providing for limited religious accommodation.  Specifically, the interim final regulations on mandatory preventive care were revised to permit HRSA to create an exception for group health plans established or maintained by religious employers with respect to any requirement to cover contraceptive services.  A religious employer is one that has the inculcation of religious values as its purpose; primarily employs persons who share its religious tenets; primarily serves persons who share its religious tenets; and is a nonprofit organization under Section 6033(a)(1) and Section 6033(a)(3)(A)(i) or (iii) of the Internal Revenue Code.  The regulators noted this approach is consistent with most states that require coverage of contraceptive services under state insurance laws.  The final guidelines released by HRSA on August 1, 2011, include this exception for religious employers.

Click here to view the new women’s preventive services guidelines issued by HRSA.  Recommended preventive services issued after September 23, 2009, are effective as of the first day of the first plan year/policy year beginning on or after the one-year anniversary of the date the recommendation is issued.  Therefore, these new guidelines (including the religious employer exception) will apply for plan years/policy years beginning on or after August 1, 2012.



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Employee Benefits Blog Recognized as a Top 10 Compensation and Benefits Blog by HR Daily Advisor

by | Jun 14, 2011 | , , ,

McDermott’s Employee Benefits Blog was recently recognized as one of the Top 10 Compensation and Benefits Blogs by HR Daily Advisor.  Thank you to those who follow our blog on a regular basis.  We appreciate your support and please contact our editors if you have suggestions on trending topics you’d like to hear more about.

To read the HR Daily Advisor article, click here.



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No Seventh Circuit Rehearing in Kraft ERISA “Excessive Fees” Case

by | Jun 9, 2011 | , , ,

by Chris C. Scheithauer and Joseph S. Adams

As previously described in this blog earlier this year, a divided Seventh Circuit panel reversed summary judgment in favor of Kraft Foods Global, Inc. in a class action involving allegedly excessive fees in the Kraft 401(k) plan.  Shortly thereafter, Kraft petitioned for rehearing of the case by the entire Seventh Circuit Court of Appeals en banc.  Further, a “friend of the court” brief submitted jointly by The ERISA Industry Committee (ERIC), the American Benefits Council (ABC), the Profit Sharing/401k Council of America (PSCA), and U.S. Chamber of Commerce urged the Seventh Circuit to rehear the case en banc.

However, on May 26, 2011, in a single page opinion, the Seventh Circuit denied Kraft’s motion, noting that no judge in active service for the Seventh Circuit requested a vote on the petition for rehearing en banc and that the original three judge panel voted 2-1 against rehearing the case – the same split as in the panel’s original order reversing summary judgment. 

As a result, the Seventh Circuit’s original order reversing summary judgment will likely be the “go-to” cite for plaintiffs’ attorneys seeking to escape summary judgment on excessive fee claims.  However, as noted by the dissent in that order, the Seventh Circuit’s decision “will only serve to steer [fiduciaries’] attention toward avoiding litigation instead of managing employee wealth.”



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PBGC Publishes Preliminary Plan for Regulatory Review; Will Re-Examine Reportable Event and 4062(e) Guidance

by | Jun 7, 2011 |

by Maureen O’Brien and Joseph S. Adams

In response to an Executive Order from the White House to identify opportunities to make government regulations less burdensome and more effective, the Pension Benefit Guaranty Corporation (PBGC) recently published its Preliminary Plan for Regulatory Review.  Most notably, PBGC noted that it had begun implementing the Executive Order by reconsidering several rules it has recently proposed:

  • Reportable Events: PBGC announced it was already planning to re-propose regulations regarding reportable events under Section 4043 of the Employment Retirement Income Security Act (ERISA).
  • ERISA Section 4062(e): PBGC announced it will also reconsider its proposed rule regarding the substantial cessation of operations by employers that maintain defined benefit pension plans in light of public comments.  As previously noted by our Firm and several industry groups, the proposed rule had the potential to impose unexpected and extensive liability for employers who undertake routine corporate actions.

In addition, according to the Preliminary Plan, PBGC intends to review the following rules:

  • Voluntary Correction Programs: PBGC will consider whether to expand its current voluntary correction program for errors related to filings and other requirements.
  • Premiums: PBGC will review the premium payment requirements for small plans to determine whether changes could be made that would enable small plans to streamline their premium and funding valuation procedures.
  • ERISA Section 4010: PBGC will review ERISA Section 4010 (Annual Financial and Actuarial Information Reporting) and the filing application to determine whether the burden on employers can be reduced.

PBGC also intends to review various other sections of Title IV of ERISA to delete obsolete regulations or incorrect references, fill-in gaps where additional guidance would be helpful and simplify language.

President Obama’s Executive Order called for an "open exchange" of information among government officials, experts, stakeholders and the public.  Accordingly, the PBGC is accepting public comments on its Preliminary Plan.  For more information regarding submitting comments, click here.



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Developments for Employers that Sponsor Wellness Programs

by | Apr 15, 2011 |

by Amy Gordon, Susan Nash and Jamie Weyeneth

On April 11, 2011, the U.S. District Court for the Southern District of Florida found in favor of the defendant’s (Broward County) motion for summary judgment in Seff v. Broward County.  The plaintiff, which is made up of a class of present and former employees of Broward County, brought suit against Broward County based on its wellness program (administered by its insurer Coventry) claiming that the $20 charge assessed on each bi-weekly paycheck for each employee who participated in the group health plan and who did not complete the wellness questionnaire and undergo biometric screening violated the Americans with Disabilities Act (ADA).  Broward County maintained that it did not violate the ADA since its actions are covered by the ADA’s safe harbor rules which covers entities involved in insurance plans.  The court agreed with the defendant, Broward County, and held that the wellness program is permissible as it falls within the ADA’s safe harbor provision.

Click here for more detailed information.



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Seventh Circuit Reverses Summary Judgment In Kraft ERISA “Excessive Fees” Case

by | Apr 14, 2011 | ,

by Nancy Ross and Chris Scheithauer

On April 11, 2011, a divided Seventh Circuit panel reversed summary judgment in favor of Kraft Foods Global, Inc. in a class action ERISA breach of fiduciary duty case involving “excessive fees” claims in connection with Kraft’s 401(k) plan. The main take away from the decision is that fiduciaries must continue to be diligent and thoroughly consider plan administration issues and document why decisions were made or not made or practices followed, even on decisions and practices once thought to be routine or common industry standards. By following such a prudent practice, fiduciaries will substantially increase their ability to defend challenges concerning fiduciary conduct.

In Kraft, plaintiffs alleged three primary claims considered on appeal: that the use of a unitized company stock fund as an investment option was improper; that the plan’s recordkeeping fees were too high and imprudently monitored; and that the fiduciaries imprudently allowed the plan trustee to retain interest income from “float.” 

In a 2-1 decision, the panel ruled that the plaintiffs could proceed to trial on their theory that the unitized company stock fund was imprudently designed because of “investment drag” and “transaction drag” that is inherent with the widely popular unitized funds. Like most company stock funds, Kraft plan participants held units of the fund rather than directly holding shares of company stock. The plaintiffs alleged that the fiduciaries should have considered the “drag” that unitized funds cause on gains (and losses). The Seventh Circuit ruled that there was no evidence that the fiduciaries ever consciously decided in favor of a unitized plan finding that the benefits of a unitized fund outweighed the downsides, or whether they just ignored the issue. According to the majority, that was sufficient to proceed to trial. In a strongly worded dissent, Judge Cudahy called the plaintiffs’ theories on this, and others in the case, an “implausible class action based on nitpicking with respect to perfectly legitimate practices of fiduciaries.”

The majority further reversed summary judgment for the defendants on whether the recordkeeping fees were too high. The plaintiffs argued that the fiduciaries should have solicited competitive bids from other recordkeepers about every three years. Kraft had used the same recordkeeper since 1995, without a competitive bid, although Kraft received advice from several third-party independent consultants that the fees were reasonable. The plaintiffs submitted an opinion from an expert finding that the fees were excessive. In a decision with potentially wide-sweeping ramifications, the Seventh Circuit held that while the defendants’ reliance on the contemporaneous opinions of outside independent consultants that the fees were reasonable may be enough to prevail at trial, it was not enough to overcome the plaintiffs’ contrary admissible expert opinion at summary judgment which created a genuine issue of fact. The use of a consultant cannot “whitewash” otherwise unreasonable fees and a trier of fact could conclude that the defendants did not satisfy their duty solely through the use of independent consultants to ensure that the recordkeeping fees were reasonable. [...]

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