HR Alerts

November 2017 HR Alert

 

IRS Issues Employer Mandate Penalties

On November 2, the IRS issued Letter 226J to applicable large employers (ALEs) (generally, an ALE is any employer with 50 or more full-time employees and full-time equivalents) that the IRS believes are subject to the penalties related to the employer ‘Pay or Play’ mandate for the 2015 tax year (the “Employer Shared Responsibility Payment (ESRP) Penalty”). It is reported that ESRP Penalties for some employers will include seven figure assessments! ALEs in receipt of Letter 226J will generally have 30 days from the date of the letter to respond.

What Information is Included in Letter 226J?

Letter 226J includes information on the individual employees who, during 2015 and for at least one month in the year, were full-time employees, were allowed a premium tax credit, and for whom the ALE did not qualify for an affordability safe harbor or other relief. The letter contains a summary table itemizing the proposed payment by month and indicating for each month if the liability is either:

  • A penalty for failure to offer minimum essential coverage to “substantially all” of your full-time employees (and their dependents) and at least one of your full-time employees was certified as being eligible for the premium tax credit (Code Section 4980H(a) or “Sledgehammer Penalty”); or
  • A penalty for offering minimum essential coverage to “substantially all” of your full-time employees (and their dependents) but at least one of your full-time employees was certified as being allowed the premium tax credit because the coverage was unaffordable, did not provide minimum value, or the full-time employee was not offered coverage).

The IRS notes that it will be useful to have available, for reference, Form(s) 1094-C and 1095-C (the “Forms”) that the ALE filed with the IRS for the 2015 tax year. Letter 226J states that if an ALE believes there is an error on the Forms, it may make changes to the Employee Premium Tax Credit Listing using the applicable indicator codes described in in the Instructions for the Forms, and it provides instructions for inclusion of the new, accurate codes. The IRS states that ALEs should not file a corrected Form 1094-C. Instead, the ALE should include the updated codes as instructed in Letter 226J along with a statement summarizing these changes in its ESRP Penalty disagreement response (described in more detail below).

How Should an ALE Proceed if it Agrees with the Penalty Assessment in Letter 226J?

If an ALE agrees with the Letter 226J Penalty, it should complete the enclosed Form 14764, ESRP Response, and return it to the IRS by the response date listed in Letter 226J. Failure to respond to Letter 226J within the requisite 30-day time period may result in a significant IRS penalty assessment and possibly an IRS audit. For a copy of IRS Form 14764, click here.

How Should an ALE Proceed if it Disagrees with the Penalty Assessment in Letter 226J?

  • Contact ERISA counsel to discuss how you should proceed and develop a process for substantiating any disagreement with the IRS’s ESRP Penalty.
  • Respond to Letter 226J in writing either agreeing with the IRS’s employer mandate penalty assessment or disagreeing with part or all of such assessment. The response should include supporting documentation to justify your disagreement. Review payroll, time and attendance, and HR data that is required for IRS ACA filings to ensure there are no inaccuracy issues. If you discover errors, correct them and identify a process to ensure the inaccuracies are caught in the future.
  • Implement a process to maintain documentation for the 2016 and 2017 tax years. You should make certain that all documentation that may be required to respond to a future IRS inquiry or audit is readily available when needed.
  • If you disagree with the proposed or revised employer mandate penalty assessment, request a pre-assessment conference with the IRS. Following this conference with the IRS, if you still disagree with the assessment, you may also ask the IRS Office of Appeals to review the case.

The IRS will acknowledge an employer response to Letter 226J with a Letter 227. For a copy of Letter 226J, please click here.
DOL Delays Implementation of Updated Claims Procedures Regulations

On November 24, the Department of Labor announced a 90-day delay of the applicability of a final rule amending the claims procedure requirements applicable to ERISA-covered employee benefit plans that provide disability benefits (the “Final Disability Rule”). The Final Disability Rule was originally effective on January 18, 2017, and it was scheduled to become applicable on January 1, 2018. According to the DOL, the delay announced in this document is necessary to enable it to carefully consider comments and data as part of its effort, pursuant to Executive Order 13777 (Presidential Executive Order on Enforcing the Regulatory Reform Agenda), to examine regulatory alternatives that meet its objectives of ensuring the full and fair review of disability benefit claims while not imposing unnecessary costs and adverse consequences. This guidance is scheduled to be published in the Federal Register on November

 

Is an ESOP Right for Your Company?

Determining whether an ESOP is right for your company requires examination from a variety of perspectives. If you are an individual with a significant portion of your net worth tied up in your business, an ESOP is one way to transfer ownership to employees, serving as an attraction and retention tool. The ESOP acquires some or all of the company’s stock and provides employees tax benefits, through a qualified retirement plan, that are unavailable in a traditional buy-sell transaction. Additionally, companies may reap significant federal income tax breaks through an ESOP.

Meeting Corporate Objectives

Many corporate objectives can be met with an ESOP, such as:

Solving ownership succession issues

Refinancing existing debt

Borrowing at reduced after-tax cost

Eliminating federal income tax at both corporate and shareholder levels

Estate planning

Facilitating an acquisition or divestiture

Providing employees with incentives for productivity

ESOP Company Characteristics

ESOPs work well in companies that have the following characteristics:

Strong, consistent cash flow

Little to no permanent debt

Adequate capitalization in place to sustain future growth

Good management team to carry on after the owner has left

Relatively large payroll base

Alignment of shareholder and employees’ interests

Considerations

Before deciding to establish an ESOP, there are numerous considerations to ensure an ESOP is the most beneficial retirement plan tool. Consider the following questions:

What is the owner’s succession plan for the company?

What are the real goals and objections as far as company ownership and timing?

Will an ESOP best help achieve those goals, or will a profit sharing plan or stock bonus plan be a better fit?

Are there pre-existing retirement plans that must be taken into consideration in designing an ESOP?

Will an ESOP fit into your corporate culture, and are you willing to commit to communicating with the new employee-owners in the ESOP?

What is the company’s forecast of the future with the ESOP in place?

Will the ESOP have to obtain a loan to purchase the stock from the owner?

Business Succession

Do you worry about who will run your company when you leave or retire? ESOPs are often used as a tool in business succession planning as a way for an owner to sell his or her shares of stock to a retirement plan in a tax advantaged way and then allocate the purchased shares to plan participants. In an ESOP, even though the plan beneficiaries have some limited voting rights, the board of directors will still exist to run the company, and the officers and managers will continue to manage the company.

Borrowing

Because they can be used to refinance existing corporate debt to be repaid with pre-tax dollars, ESOPs can be used to lower the borrowing costs for corporate debts. This is achieved when the sponsoring company refinances its existing debt by issuing new shares of stock to the ESOP equal in value to the amount of debt assumed by the ESOP. Also, the company can make tax deductible contributions to repay the loan principal, up to 25% of the total plan participants’ payroll.

Tax Advantages

If your company is extremely profitable, there are numerous tax advantages and incentives that are unique to ESOPs. ESOPs do not pay federal income tax. Furthermore, employees do not pay taxes on the stock in their ESOP accounts until they take a distribution at retirement (or other, limited events), and even then those amounts can be rolled over to an IRA or other qualified plan to continue the tax deferral.

 

 

 

 

 

 

Copyright © 2017 Hall Benefits Law, All rights reserved.

This newsletter is intended to provide a Firm update to clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under rules of certain jurisdictions.

October 2017 HR Alert

October 2017

In order to avoid costly penalties and administratively burdensome correction procedures, plan sponsors must remain up-to-date with respect to applicable Health and Welfare plan limits. Yesterday,October 20, 2017, the IRS announced cost-of-living adjustments affecting 2018 dollar limitations for Health and Welfare plans and other related Health and Welfare Benefits items. We’ve included some of the most commonly used business benefits below. While some limits remain the same, there have been a number of adjustments.

An Employee Stock Ownership Plan (ESOP) is a type of employee benefit plan, similar to a profit sharing plan, that is designed to invest primarily in the stock of the employer.  ESOPs can be used by private or public companies in a variety of ways: as a vehicle for retirement for employees, a tax-advantaged method to raise new capital, an exit strategy to give owners an avenue to sell their shares, to create a subsidiary of the employer, or as an incentive to increase employee morale by sharing ownership of the company with its employees. ESOPs can own any percentage of the employer, including owning up to 100% of all the employer stock. Because the ESOP is often used as a financing tool for the employer, and because the qualified retirement plan is the shareholder for the employer, there are features unique to ESOPs that are not available for other qualified retirement plans.

Unlike a 401(k) plan, the ESOP typically consists solely of contributions from the employer rather than contributions from the employee, and an ESOP is specifically allowed to finance the purchase of employer stock. To contribute to the ESOP, the employer makes tax-deductible contributions in cash to repay a loan that was used to purchase shares, or the cash is used to purchase shares directly from the employer or owners without the use of a loan. The employer may also make tax-deductible contributions to the ESOP in the form of employer shares rather than cash, but this likely dilutes the value of the existing shares and is not the preferred method of contribution to an ESOP. Once the ESOP obtains additional shares of the employer, the employees then receive the employer shares in their ESOP account based on a formula that takes into consideration the employee’s compensation and years of service with the employer. All employees are eligible to participate in the ESOP after a certain period.

 

Health and Welfare Plan Inflation-Adjusted Limits for 2018
Item IRS Code Section 2018 Limit 2017 Limit Note
Unearned Income of Minor Children Taxed as if Parent’s Income 1(g) $1,050 $1,050 The child’s gross income must be greater than $1,050 but less than $10,500.
Adoption Credit 23 $13,840 $13,750 The credit begins to phase out for taxpayers with modified adjusted gross income more than $207,580.
Employee Health Insurance Expense of Small Employers 45R $26,700 $26,200 The limit of $26,700 is used in calculations to determine the actual credit for an employer.
Cafeteria Plans 125 $2,650 $2,500 Limit on voluntary employee salary reductions for contributions to health FSA.
Qualified Transportation Fringe Benefit 132(f) $260 limit on commuter highway vehicle

$260 limit on qualified parking

$255 limit on commuter highway vehicle

$255 limit on qualified parking

Monthly limit on the amount that may be excluded from an employee’s income for qualified transportation benefits.
Adoption Assistance Programs  137 $13,840 $13,570 The credit begins to phase out for taxpayers with modified adjusted gross income more than $207,580.

 

 

One of the most common compliance issues for employers and plan sponsors is failure to adhere to annual retirement plan limits. In order to avoid costly penalties and administratively burdensome correction procedures, plan sponsors must remain up-to-date with respect to applicable retirement plan limits. Today, October 19, 2017, the IRS announced cost-of-living adjustments affecting 2018 dollar limitations for retirement plans and other retirement-related items.  Please note that the chart below does not include all applicable retirement plan limits, just some of the common ones.

 

401k Plan Limits
2018 2017 2016 2015
Elective Deferrals $18,500 $18,000 $18,000 $18,000
Catch-Up Contributions $6,000 $6,000 $6,000 $6,000
Annual Defined Contribution Limit $55,000 $54,000 $53,000 $53,000
Annual Compensation Limit $275,000 $270,000 $265,000 $265,000
Highly Compensated Employee $120,000 $120,000 $120,000 $120,000
Non-401k Related Limits
Defined Benefit Plans $220,000 $215,000 $210,000 $210,000
403(b)/457 Elective Deferrals $18,500 $18,000 $18,000 $18,000
SIMPLE Employee Deferrals $12,500 $12,500 $12,500 $12,500
SIMPLE Catch-Up Contribution $3,000 $3,000 $3,000 $3,000
SEP Annual Compensation Limit $275,000 $270,000 $265,000 $265,000
Social Security Wage Base $128,700 $127,200 $118,500 $118,000

 

 

 

 

 

 

Copyright © 2017 Hall Benefits Law, All rights reserved.

This newsletter is intended to provide a Firm update to clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under rules of certain jurisdictions.

September 2017 HR Alert

ESOP: What is it?

An Employee Stock Ownership Plan (ESOP) is a type of employee benefit plan, similar to a profit sharing plan, that is designed to invest primarily in the stock of the employer.  ESOPs can be used by private or public companies in a variety of ways: as a vehicle for retirement for employees, a tax-advantaged method to raise new capital, an exit strategy to give owners an avenue to sell their shares, to create a subsidiary of the employer, or as an incentive to increase employee morale by sharing ownership of the company with its employees. ESOPs can own any percentage of the employer, including owning up to 100% of all the employer stock. Because the ESOP is often used as a financing tool for the employer, and because the qualified retirement plan is the shareholder for the employer, there are features unique to ESOPs that are not available for other qualified retirement plans.

Unlike a 401(k) plan, the ESOP typically consists solely of contributions from the employer rather than contributions from the employee, and an ESOP is specifically allowed to finance the purchase of employer stock. To contribute to the ESOP, the employer makes tax-deductible contributions in cash to repay a loan that was used to purchase shares, or the cash is used to purchase shares directly from the employer or owners without the use of a loan. The employer may also make tax-deductible contributions to the ESOP in the form of employer shares rather than cash, but this likely dilutes the value of the existing shares and is not the preferred method of contribution to an ESOP. Once the ESOP obtains additional shares of the employer, the employees then receive the employer shares in their ESOP account based on a formula that takes into consideration the employee’s compensation and years of service with the employer. All employees are eligible to participate in the ESOP after a certain period.

The employee’s stock in the ESOP is generally subject to a vesting period. Once vested, the employee receives his or her vested stock from the ESOP upon a termination of employment, retirement, death, or disability. When the employee receives a distribution of stock from the ESOP, the employer is then required to buy back the stock at its fair market value. The repurchase may occur in a lump sum or over a period of years.

ESOPs serve a variety of purposes other than providing a retirement benefit to employees. An ESOP may provide a market for the shares of a departing owner of a successful closely held employer, providing a motivation for employees to become a partial owner of the employer, and it may allow the employer to take advantages of tax incentives available only to ESOPs.

Several tax incentives are available only to plan sponsors of ESOPs or to the owners selling shares to an ESOPs:

  • Contributions of stock to the ESOP are tax deductible;
  • Cash contributions to the ESOP are tax deductible;
  • Contributions used for both the principal and the interest to repay a loan the ESOP takes out to buy employer shares are tax deductible;
  • In a S-Corporation, the percentage of ownership held by the ESOP is not subject to income tax;
  • Owners of a C-corporation who sell stock to an ESOP can defer tax on the gain; and
  • Dividends paid on the shares associated with the ESOP are tax deductible

Although S-corporations may sponsor an ESOP, there are some special considerations for S-corporations, including a prohibition of allocations to certain disqualified persons, dividends paid on employer securities, the rollover of stock from the S-corporation that is distributed from the ESOP, and other issues only applicable to ESOPs.

 

Leah Singleton Brings ESOP Experience to Hall Benefits Law

This month’s HR Alert comes compliments of Leah Singleton, HBL’s Director of Legal Operations, and it is the first in a series of HR Alerts covering Employee Stock Ownership Plans (ESOPs). Leah has extensive experience with ESOPs and benefits in mergers and acquisitions, significantly expanding Hall Benefits Law’s capabilities in both of these practice areas.

Leah will be sharing her extensive knowledge of ESOPs at this year’s Fall ESOP Forum this October 3-4 in Tampa, Florida. READ MORE ABOUT THIS EVENT.

 

 

 

 

 

 

 

Copyright © 2017 Hall Benefits Law, All rights reserved.

This newsletter is intended to provide a Firm update to clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under rules of certain jurisdictions.

August 2017 HR Alert

 

 

Plan Sponsors and Fiduciaries: Beware the High Costs of Prohibited Transactions

When a plan fiduciary permits certain statutorily forbidden transactions, participants in the transactions may be heavily taxed and penalized for the transaction, even years later. The Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), both aim to prevent certain financial transactions (“Prohibited Transactions”) between a qualified retirement plan and specified people with control or influence over the plan, such as plan fiduciaries. The IRC refers to these people as Disqualified Persons, while ERISA refers to them as Parties in Interest. For simplicity, we will refer to them here as Disqualified Persons.

The goal of the Prohibited Transaction provisions is to avoid use of plan assets to enrich Disqualified Persons. Such enrichment includes both self-dealing by a Disqualified Person and the plan lending or otherwise transferring plan assets to the Disqualified Person. The provisions generally apply to those transactions which carry a risk of Disqualified Persons receiving better treatment than disinterested parties would in the same situation. While penalties differ under IRC and ERISA, both sets of penalties apply to Prohibited Transactions. The Internal Revenue Service (IRS) may assess a 15 percent tax per year and a 100 percent tax if the Prohibited Transaction is not corrected prior to IRS discovery. Under ERISA, the Department of Labor (DOL) may issue penalties of between five percent and 100 percent of the amount involved. Additionally, ERISA requires the plan fiduciary to restore the plan for the benefit of the plan participants. Numerous statutory Prohibited Transaction Exemptions exist to prevent these rules from limiting otherwise legitimate transactions, and when applicable Prohibited Transaction Exemptions allow the underlying transaction without penalty to the Disqualified Person.

Disqualified Persons

Prohibited Transactions require participation by a Disqualified Person in a listed transaction; Disqualified Persons typically have a close relationship to the plan or to the employer sponsoring the plan, and they may include:

  • Fiduciaries;
  • Those providing services to the plan;
  • Plan sponsors and those owning significant interests in plan sponsors; and
  • Relatives of any of the previously mentioned people.

Prohibited Transactions

Most direct and indirect transactions between Disqualified Persons and the plan are Prohibited Transactions, and it is the plan fiduciary’s obligation to avoid them. Prohibited Transactions include the sale, lease, or transfer of any property between the Disqualified Person and the plan. Neither party can lend money or extend credit to the other. One party cannot provide goods, services, or facilities to the other. Most importantly, the plan cannot transfer plan assets for use by or on behalf of a Disqualified Person.

Certain Prohibited Transactions occur only when the plan fiduciary is dealing with the plan. The fiduciary cannot deal with plan assets for the fiduciary’s own interest. Additionally, the fiduciary cannot act on behalf of any party whose interests diverge from those of the plan. Finally, the fiduciary cannot receive any compensation from parties managing plan assets.

Prohibited Transaction Exemptions

As written, the Prohibited Transactions statutes are overly broad, and they stifle legitimate transactions occurring between Disqualified Persons and the plan. For example, the plan fiduciary is often a plan participant. Because the plan fiduciary is a Disqualified Person, the Prohibited Transaction rules prevent the plan from transferring any plan assets to the fiduciary, thus preventing the plan from paying retirement or health benefits to a legitimate plan participant. Prohibited Transaction Exemptions (PTEs) cover situations like this by allowing transactions that would otherwise be classified as Prohibited Transactions. The statutes contain over a dozen specific PTEs addressing a wide variety of specific situations. For example, one PTE allows Disqualified Persons to provide services required for plan operation, such as legal and accounting services, provided that no more than reasonable compensation is paid. Another PTE allows plan loans to be made to Disqualified Persons, provided that the loan is made according to the plan document and on terms available to other plan participants.

The DOL also allows for non-statutory exemptions known as administrative exemptions and class exemptions. Administrative exemptions are individual exemptions approved by the DOL. Administrative exemptions apply only to the person who requested the exemption, while class exemptions apply to any person who meets the class exemption requirements.

Penalties Associated with Prohibited Transactions

The IRC and ERISA each have their own set of penalties and excise taxes associated with Prohibited Transactions. The IRS has authority to enforce IRC penalties, and the DOL enforces ERISA penalties. Despite individually assessed penalties, the DOL and IRS are known to communicate with one another upon discovering Prohibited Transaction issues.

The IRS can assess a tax equal to 15 percent of the amount involved in the Prohibited Transaction for each year or part of a year until the Prohibited Transaction is corrected or draws certain action from the IRS. If the IRS discovers an uncorrected Prohibited Transaction, an additional 100 percent tax applies, making uncorrected Prohibited Transactions a costly liability.

Penalties assessed by the DOL are similarly harsh. The DOL may assess a five percent penalty for each year or part of a year in which a Prohibited Transaction continues to occur. Disqualified Persons have 90 days to correct a Prohibited Transaction after notice from the DOL. Failure to do so subjects the Disqualified Person to an additional penalty of up to 100 percent of the amount involved in the transaction. In addition to these penalties, ERISA permits recovery by the plan or plan participants of losses resulting from a breach of fiduciary liability, including all Prohibited Transactions. It is critical that Disqualified Persons and plan fiduciaries avoid the costly penalties, taxes, and liabilities related to Prohibited Transactions.

If your plan has uncorrected Prohibited Transactions or wishes to proactively avoid Prohibited Transactions, Hall Benefits Law encourages you to seek counsel from experienced ERISA attorneys.

UPDATE: In prior HR Alerts, we addressed the implementation of the DOL’s Fiduciary Rule. Previously, many parts of the Fiduciary Rule came into effect on June 9, 2017, but the DOL stated that it would not fully enforce the Rule until January 1, 2018. The DOL has indicated a proposed additional delay until July 1, 2019. The delay is not yet effective and must be approved by the Office of Management and Budget prior to changing the Fiduciary Rule implementation timeline.

 

Why Care About HIPAA Violations?

July’s HR Alert featured an article titled “We’re Under Cyberattack, What Do We Do Now?”  Most of that article focused on the new “Quick-Response Checklist” (“Checklist”) issued by the United States Department of Health and Human Services (“HHS”), Office of Civil Rights (OCR). OCR is responsible for investigating and enforcing HIPAA Privacy and Security Rules, and the Checklist provides guidance to covered entities and business associates responding to ransomware attacks or other cyber-related security incidents.  Understanding how to mitigate breaches of protected health information (PHI) under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) is critical in today’s global electronic society.

Mitigating the risk associated with potential breach of PHI is critically important because of the potential penalties that may be levied against covered entities and business associates for violations under HIPAA. For example, HHS issued a press release on February 16, 2017 announcing a settlement in the amount of $5.5 million with Memorial Healthcare System (MHS) for HIPAA violations. Details of this case include:

  • On April 12, 2012, MHS filed a breach report with OCR, advising that two unauthorized employees inappropriately accessed PHI;
  • MHS amended its breach report on July 11, 2012, advising that twelve additional unauthorized users accessed PHI;
  • The breach affected a total of 115,143 individuals; and
  • OCR’s investigation revealed the following:
  • A former employee’s log-in credentials were used to access PHI each day from April 1, 2011, through April 27, 2012, affecting 80,000 individuals; and
  • MHS failed to implement policies and procedures regarding workforce security and reviewing information system activity, as required under HIPAA.

In addition to the monetary settlement, MHS was also required to implement a robust corrective plan, vividly illustrating the importance of implementing, and reviewing with employees, HIPAA policies and procedures.

It would be a mistake to assume that HHS focuses exclusively on PHI breaches affecting 500 or more individuals.  On December 28, 2012, HHS entered into a settlement agreement with Hospice of North Idaho (HONI) in the amount of $50,000 for HIPAA violations affecting 441 individuals.  The settlement required HONI to enact a corrective action plan. The facts of the case are as follows:

  • HONI filed a breach report on February 16, 2011, regarding the theft of a laptop containing the electronic PHI of 441 individuals;
  • OCR’s investigation revealed the following:
  • HONI failed to conduct an analysis of the risk to the confidentiality of electronic PHI on an ongoing basis as required under HIPAA’s Security Rule from the date of required compliance to January 17, 2012;
  • HONI also failed to adopt or implement security measures for the electronic PHI using portable devices as required under HIPAA’s Security Rule from the date of the required compliance to May 1, 2011.

The HONI case emphasizes that all covered entities, regardless of size, must meet HIPAA regulations to avoid liability. Additionally, OCR announced on August 18, 2016, that it will step up investigation of breaches affecting fewer than 500 individuals.

Hall Benefits Law recommends all Covered Entities and Business Associates review their HIPAA Privacy and Security Procedures to ensure compliance under HIPAA. Having procedures in place is not enough; Covered Entities and Business Associates must ensure that said procedures are being followed to mitigate the risk associated with breach of PHI.  The HBL team is happy to assist you with any needs you may have regarding HIPAA compliance matters, including getting policies and procedures in place and providing team training.

 

 

 

 

 

Copyright © 2017 Hall Benefits Law, All rights reserved.

This newsletter is intended to provide a Firm update to clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under rules of certain jurisdictions.

July 2017 HR Alert

 Is the Fiduciary Rule’s Private Right of Action a Greater Threat than DOL Enforcement?

 

The Department of Labor (DOL) released a temporary enforcement policy ahead of its recently enacted Fiduciary Rule, which went into effect on June 9, 2017. This policy states that the DOL will not pursue claims against fiduciaries who make a diligent and good faith effort at compliance until the end of the Fiduciary Rule’s transition period on January 1, 2018.

Financial advisors who believe that good faith attempts at compliance will eliminate exposure associated with the Fiduciary Rule should be aware that most Fiduciary Rule provisions came into full effect on June 9, 2017. Moreover, the Fiduciary Rule includes a robust private right of action against financial advisors for compliance failures. Under this private right of action, retirement investors may sue immediately for breach of any Fiduciary Rule provisions currently in effect. Furthermore, liability for those breaches may begin accruing as of June 9, 2017, generating significant exposure for financial advisors who believe the DOL’s temporary enforcement policy limits their Fiduciary Rule liability. The private right of action will remain a significant source of liability even after the transition period, as it provides incentive for plaintiff’s attorneys to sue non-compliant advisors. Under the Fiduciary Rule, private suits will be a prominent enforcement driver.

Overview of the Fiduciary Rule Private Right of Action

 

The Fiduciary Rule’s individual private right of action builds on existing Employee Retirement Income Security Act (ERISA) rules governing fiduciary duties, fiduciary liability, and an individual’s right to sue. The Fiduciary Rule applies these basic ERISA concepts, but it expands the scope of individuals qualifying as fiduciaries. The Best Interest Contract Exemption (BICE), enacted with the Fiduciary Rule, further enhances the private right of action by forbidding investment advisory contracts that contain exculpatory clauses, limit the investor’s class action rights, or include unreasonable arbitration terms.

ERISA Fiduciary Provisions

 

The Fiduciary Rule only concerns those who render investment advice for a fee or other compensation. This applies to financial advisors who advise retirement plan participants regarding plan investments or offer advice on an overall investment strategy within the plan. The Fiduciary Rule requires the financial advisor to meet the Duty of Prudence and the Duty of Loyalty, ERISA’s two main fiduciary duties. The Duty of Prudence requires advisors to act with the “care, skill, prudence, and diligence” that a prudent advisor would display under similar circumstances. This calls for a careful and measured approach and requires advisors to consider investors’ individual financial circumstances, goals, and risk tolerance. The Duty of Loyalty directs the advisor to act for the exclusive purpose of benefiting the retirement investor. This requires advisors to act in the best interest of the retirement investor without considering potential benefit to the advisor, such as commission or payments offered from third parties. Additionally, transactions using retirement plan assets that financially benefit a fiduciary are considered Prohibited Transactions. ERISA forbids Prohibited Transactions unless the transaction satisfies one of the Prohibited Transaction Exemptions (PTE) listed within ERISA.

Financial advisors who breach their fiduciary duties are personally liable for resulting losses. The financial advisor must restore to the plan any profits the advisor earned through the inappropriate use of assets. In addition, the court has authority to impose any penalty or relief it deems appropriate. For financial advisors, this includes restoring earnings lost due to improper advice, and the court generally restores the retirement investor’s account at the financial advisor’s expense.

 

Fiduciary Rule Modifications to ERISA Fiduciary Liability

 

The DOL’s Fiduciary Rule expands the scope of ERISA rules by modifying what constitutes “investment advice.” Under the Fiduciary Rule, investment advice includes advice regarding assets of an employer-based retirement plan, assets housed within an IRA, and assets being considered for rollover into an IRA. By expanding the definition of investment advice, the Fiduciary Rule applies the ERISA fiduciary status to advisors rendering advice to IRA owners. This applies to other ERISA fiduciary provisions, including rules regarding fiduciary duties, liability for fiduciary breach, and who may sue for breaches. Under the Fiduciary Rule, an advisor paid for investment advice regarding IRA assets becomes a fiduciary with respect to those assets, and he or she must adhere to the Duty of Prudence and the Duty of Loyalty.

 

The Best Interest Contract Exemption

 

Financial advice regarding retirement assets that benefits the financial advisor, such as advice rendered for a fee, constitutes a Prohibited Transaction under ERISA rules unless a Prohibited Transaction Exemption applies. For financial advisors, the only PTE generally available is the Best Interest Contract Exemption. The DOL released the BICE at the same time as the Fiduciary Rule, and it is functionally a part of the Fiduciary Rule. The BICE provides an exemption for financial advisors rendering paid advice regarding IRA assets, but it requires financial advisors to adhere to rigorous disclosure and impartial conduct standards. If the advisor fails to meet the BICE standards, the advice constitutes a Prohibited Transaction. The BICE contains important standards for how the investment advisory contract between advisor and investor limits investors’ potential claims against the financial advisor. The contract may not limit the financial advisor’s liability for violations of the contract, waive the retirement investor’s right to participate in a class action suit, or unreasonably limit the retirement investor’s ability to bring claims through arbitration or mediation requirements.
The existing ERISA fiduciary structure, the Fiduciary Rule, and the BICE collectively define the investor’s private right of action against investment advisors who violate their fiduciary duties, and the private right of action could become the primary enforcement mechanism for the Fiduciary Rule. The Employee Benefit Security Administration (EBSA) is accepting comments relating to the Fiduciary Rule and BICE. Comments regarding extending the January 1, 2018 applicability date of certain BICE and other PTE provisions must be submitted to EBSA by July 21, 2017. Other comments regarding the Fiduciary Rule and PTE must be submitted by August 7, 2017.

If you have questions regarding compliance with the Fiduciary Rule, Hall Benefits Law encourages you to seek the advice of experienced ERISA counsel.

We’re Under Cyber Attack! What Do We Do Now?

On May 12, 2017, the WannaCry ransomware cryptoworm (“WannaCry cryptoworm”) attacked approximately 230,000 computers in over 150 countries. WannaCry cryptoworm locked computers and required users to pay a ransom to unlock the infected computer and restore the affected files. By May 15th, the global count of infected computers worldwide reached more than 300,000, despite being contained within four days of its initial discovery.

Recently, in response to the WannaCry cryptoworm, the United States department of Health and Human Services (HHS) Office of Civil Rights (OCR) issued a quick-response checklist (the “Checklist”) that explains and outlines the steps a covered entity or its business associate should take in response to a ransomware attack or other cyber-related security incident. According to HHS, in the event of a cyber-related security incident, the covered entity or business associate should:

  • Execute its response and mitigation procedures and contingency plans;
  • Report the crime to appropriate law enforcement agencies, including the Federal Bureau of Investigation and Secret Service;
  • Report all cyber threat indicators to federal and information-sharing and analysis organizations (ISAOs) – for example, the HHS Assistant Secretary for Preparedness and Response and the Department of Homeland Security; and
  • Report the breach to OCR as soon as possible, but no later than 60 days after the discovery of a breach affecting 500 or more individuals, and notify affected individuals (in accordance with the Breach Notification Rule) and the media unless a law enforcement official has requested a delay in the reporting.

Hall Benefits Law strongly recommends adherence to the Checklist because OCR presumes that a cyber-related security incident is a reportable breach unless the covered entity can demonstrate a low probability protected health information (PHI) was compromised through a multi-factor risk assessment based on factors outlined in the Breach Notification Rule. Furthermore, OCR has advised that during a breach investigation it will consider all the covered entity’s mitigation efforts, including the covered entity’s willingness to voluntarily share breach-related information with law enforcement agencies and other organizations identified on the Checklist.

Finally, the penalties assessed for violations under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) can be staggering. These penalties are based on a tiered structure that is contingent upon the covered entity’s knowledge of the HIPAA violation.

Hall Benefits Law recommends you seek the advice of ERISA counsel to ensure your HIPAA policies and procedures align with the requirements outlined above.

 

 

 

 

 

Copyright © 2017 Hall Benefits Law, All rights reserved.

This newsletter is intended to provide a Firm update to clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under rules of certain jurisdictions.

June 2017 HR Alert | Fiduciary Rule in Effect | Preventive Services Requirements | Upcoming Speaking Engagements

Upcoming Speaking Engagements


June 27th, The Benefit Company
July 27, Smith Communication Partners
August 17, Burnette Insurance
August 31, DOL Panel Discussion


What are the Requirements of Those Held to a Fiduciary Standard?

The Department of Labor (DOL) has implemented the first phase of its new Fiduciary Rule, extending the scope of retirement plan fiduciary duties. In part, the Fiduciary Rule aims to mitigate conflicts of interest that arise from financial advisors’ recommendations regarding retirement accounts. Because of the sweeping changes the Fiduciary Rule brings to the financial advice industry, it has been the subject of great controversy. The primary provisions of the Fiduciary Rule took effect on June 9, 2017, though certain exemption provisions will take effect on January 1, 2018.

Those held to a fiduciary standard are legally and ethically required to act in the best interest of another party. Before implementation of the Fiduciary Rule, fiduciary status only applied to employment-based retirement plans such as 401(k) and 403(b) plans. Under the Fiduciary Rule, any financial advisor providing advice regarding a tax deferred retirement account is held to the fiduciary standard. Individual retirement accounts like IRAs and Roth IRAs that were not covered under the previous standard now fall under the Fiduciary Rule.

Fiduciaries are legally required to act in the best interest of the advice recipient, and those who work with retirements accounts in any capacity must be aware of whether they are a fiduciary and how they might incur fiduciary status. Professionals working with retirement accounts can inadvertently incur fiduciary status by recommending investments or investment strategies. According to the Fiduciary Rule, a professional incurring fiduciary status can be held liable if his or her advice was imprudent or not in the best interest of the recipient.

Under the Fiduciary Rule, an individual becomes a fiduciary when he or she renders investment advice for a fee or other compensation. On its own this definition is overbroad and vague, so the Fiduciary Rule provides additional guidance as to what is and what is not investment advice. Under the new rule, investment advice includes recommendations regarding specific investments. Investment advice also includes higher level recommendations, such as those regarding investment policy, strategies, and portfolio composition. The definition of investment advice includes recommendations relating to assets within a retirement account. Examples include recommendations to distribute assets or roll over assets from an employer-based retirement plan to an IRA. These recommendations can be formal, such as advice rendered pursuant to a contract, or informal.

The Fiduciary Rule includes some specific exclusions, as well. Because the definition of investment advice includes communications directed at specific recipients regarding an investment or management decision, professionals who do not act in a direct advisory role may incur fiduciary status. Financial educators, investment journalists, and investment platform providers could be adversely affected, so the DOL includes numerous exceptions within the Fiduciary Rule that prevent fiduciary status from applying unintentionally. The most important exemptions included in the rule are highlighted below.

General Communications

The Fiduciary Rule states that communications are not investment advice if a reasonable person would not view the communication as investment advice. The rule provides numerous examples including talk shows, newspaper articles, and speeches. The DOL also specifies that general marketing materials and data describing market performance do not fall within the definition of investment advice.

Platform Providers

The Fiduciary Rule excludes financial service platform providers from fiduciary status, provided they meet certain requirements. Generally, to be excluded the platform provider must offer a neutral investing tool which does not favor certain financial products or investments over others. The platform provider must offer investment funds without regard to an individualized plan need. Financial service platform providers may identify investment options based on objective criteria and provide benchmark comparisons for each investment option. A platform provider’s financial interest in any identified investment options must be disclosed. In addition, those platform providers who are not providing impartial investment advice must disclose this fact in writing.

Investment Education

The most detailed exemption within the Fiduciary Rule concerns investor education. The rule attempts to discourage sales pitches disguised as educational seminars without disrupting neutral, even-handed investor education. Investor education broadly covers retirement plan information as well as general financial investment information. Plan information provided may describe the terms and operation of the plan, such as available distribution options and associated features, risks, and expenses, as well as the impact of increasing contributions and making early withdrawals. Providers of investment education may provide their services without the risk of incurring fiduciary status, provided the educator does not recommend specific investment products, investment alternatives, or other investment property.The substantial complexities, ambiguities, and implications of the Fiduciary Rule should not be taken lightly by plan sponsors or financial professionals. The rule and its exceptions include far greater nuance than can be addressed in a newsletter. Hall Benefits Law recommends that you seek the advice of ERISA counsel to determine how this rule will affect your company.


What Preventive Services Must Be Covered Under my Plan?

On March 13, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (the “ACA”). The ACA requires, in part, that non-grandfathered plans provide certain preventive services at no cost to plan participants when provided by a doctor or other provider in the plan’s network. The list of covered preventive services originates from recommendations made by four medical and scientific entities: (i) the U.S. Preventive Services Task Force (USPSTF), (ii) the Advisory Committee on Immunization Practices (ACIP), (iii) the Health Resources and Services Administration (HRSA) Bright Futures Project, and (iv) the Institute of Medicine (IOM) Committee on Preventive Services for Women.

New or revised preventive service recommendations made by the USPSTF, ACIP, HRSA, or IOM must be covered in the plan year beginning on or after the date the recommendation was made. The USPSTF and HRSA have recently revised recommendations with regards to the following:

Statin Recommendations
The USPSTF recommends that adults between the ages of 40 and 75, without a history of cardiovascular disease (CVD), use a low to moderate dose of Statin to prevent CVD, provided the individual has one or more CVD risk factors and a calculated 10-year risk of a cardiovascular event of 10% or greater. Screening for such risk may may require additional assessment. This recommendation is effective for plan years beginning on or after December 1, 2017.
Aspirin Use Recommendations
The USPSTF has revised its prior dosage recommendations regarding aspirin use, recommending initiating a low dosage of aspirin to prevent CVD and colorectal cancer in adults aged 50 to 59 years who: (i) have a 10% or greater 10-year CVD risk, (ii) are not at increased risk for bleeding, (iii) have a life expectancy of at least 10 years, and (iv) are willing to take the low-dose aspirin for at least 10 years. This recommendation is effective for plan years beginning on or after May 1, 2017.
Preventive Services for Women
On December 16, 2016, the HRSA announced nine recommendations in its 2016 Women’s Preventive Services Guidelines. Two noteworthy recommendations:
Cancer Screening
The HRSA recommends cancer screening as follows: (i) for women 21 to 29, a cervical cytology test once every three years, and (ii) for women 30 to 65, a cervical cytology test with Human papillomavirus test once every five years, or a cytology test once every three years.
Breast Cancer Screening for Average-Risk Women

For women in the average-risk category, mammography screening should begin no earlier than 40 and no later than 50 years old. The mammography should occur at least biennially and as frequently as annually, and it should continue through the age of 74 years old. Age should not be the sole basis to discontinue screenings.

These recommendations, along with the other seven included by the HRSA, are effective for plan years beginning on or after January 1, 2018.

Plan sponsors must ensure their health plans implement the new requirements. Penalties for failing to implement preventive service recommendations under the plan include an excise tax of $100 per day for every individual to whom the failure relates.

Hall Benefits Law recommends you seek the advice of ERISA counsel to ensure your plan complies with the new requirements outlined above.

Be in the know. You can find all of our previous HR Alerts and more on our website at www.hallbenefitslaw.com.

Anne Tyler is great at interpreting the law. Her research and easy to understand documents are professional, organized, thorough and delivered in a timely manner. We appreciate her accessibility and willingness to offer suggestions and meet with our clients in person or via phone for meaningful discussions and getting answers quickly.
Andy WeyenbergVP of Operations |Resource Alliance
Anne Tyler is an excellent advisor with a true command of ERISA and Benefits law.  She is an effective communicator and a favorite of clients and colleagues.
Anson AsburyPrincipal |Asbury Law Firm
Hall Benefits Law, LLC brings the unique qualities of availability and approachability, as well as thought provoking discussion that greatly assists us with our clients. Anne Tyler is always willing and available to bring her knowledge and expertise about health care law which eases any concerns about compliance. In a client meeting to discuss the Affordable Care Act, Anne Tyler’s unique way of presenting complex information in an easy to understand manner enabled the client to formulate an action plan. She is an absolute pleasure to work with.
Jeff KochDirector of Benefits & Marketing Communications |Resource Alliance
My overall experience with Hall Benefits Law, LLC was very pleasing and the service received from Anne Tyler was exemplary in every way. I required technical research in a number of different areas and Anne Tyler performed them above expectation. She was knowledgeable, responsive, cogent, and accessible. I will be happy to recommend her for similar issues.
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Hall Benefits Law, LLC assisted me with review, documentation, and a written opinion for a specific DOL situation. Anne Tyler is professional as well as personable, articulate, and knowledgeable on the subject for which I hired her. Working with someone who has personality and good communication skills is not necessarily a common attribute. Anne Tyler brings these attributes. The price for the work done, independent research as well as client presentation, was very fair and I would be happy to recommend Anne Tyler to any associate or colleague in need of her legal expertise.
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Anne Tyler is a true expert in her field, and I am honored to refer my clients to her. All that I have referred to her are always impressed with her knowledge, compassion, and ability to give her clients clarity and creative solutions. I highly recommend Anne Tyler to anyone who is looking for an employee benefits attorney; she knows how to get results.
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Anne Tyler is an energetic and conscientious attorney with experience in compliance issues for ERISA and Benefits matters, having worked at some of the most prestigious law firms in the Southeast. She is also very personable, which is a great combination.
Nancy PridgenAttorney |Patel Burkhalter Law Group