How safe is your retirement nest egg from creditors?

So, you’ve transferred your 401(k) retirement nest egg into an individual retirement account (IRA). This gives you more control over management and distribution of IRA assets. But, you may have concerns about creditors and their ability to attack your retirement assets, which are now conveniently consolidated from several employer plans into one convenient IRA. Will those IRA assets be protected from creditors regardless of what happens to you?

Employer Plans in Bankruptcy

Employer sponsored retirement plans, such as 401(k) plans, are protected from creditors by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “Act”) as well as a specific ERISA statutory provision. The Act also protects other “retirement funds” like IRAs, in an aggregate amount of up to $1,000,000 (indexed for cost of living increases and now set at $1,245,475). The protection from creditors is implemented through an exemption from the assets available to creditors in bankruptcy, and this protection is available on a nation-wide basis (individual states can elect alternative exemptions).

Inherited IRAs as “Retirement Funds”

Do “inherited” IRAs set up on the death of an IRA holder for a named beneficiary fall within the category of “retirement funds” protected by the Act? The U.S. Supreme Court recently considered this issue in Clark v. Rameker, a case involving the assets of a mother’s IRA inherited by the named beneficiary (her daughter) upon the mother’s death. The daughter subsequently filed for bankruptcy and the IRA assets were claimed to be part of the daughter’s bankruptcy estate to be shared by her creditors.

The Supreme Court concluded that such inherited IRAs are not retirement funds in the hands of the beneficiary (in this case, a non-spouse beneficiary) who may be a younger family member many years from retirement, and so such inherited IRAs are not protected from creditors by the Act. Left undecided by the Supreme Court is the status of inherited IRAs benefiting surviving spouses (favorable language in the lower court opinion in Clark suggests that inherited IRAs in the hands of a surviving spouse continue to be retirement funds).

IRAs and State Bankruptcy Exemptions

The Supreme Court’s decision does not deal with bankruptcy protection of retirement funds like IRAs in those states which have bankruptcy exemptions that are not based on federal law. For example, Illinois law provides an exemption for assets of “retirement plans” in bankruptcy. Although inherited IRAs with non-spouse beneficiaries are generally regarded as not protected by the Illinois statutory exemption, the status of inherited IRAs in the hands of surviving spouses remains an open question.

Inherited IRAs and Beneficiaries

When an IRA owner dies, an inherited IRA is created by simply changing the title to the existing IRA. For example, if a family trust is the beneficiary, the inherited IRA might be retitled the “Individual’s Family Trust as Beneficiary of the Individual’s Inherited IRA.” Funds do not have to be transferred from the IRA to the beneficiary except as otherwise required by the required minimum distribution (RMD) rules. Bear in mind that if the deceased IRA owner had attained age 70 ½ and had been taking required minimum distributions, any distributions not yet made for the year of the owner’s death will still have to be made to the designated beneficiary by the end of that year.

An inherited IRA is not like the beneficiary’s personal IRA unless the beneficiary is a surviving spouse. A surviving spouse can roll over funds into and out of an inherited IRA. A non-spouse beneficiary cannot although non-spouse beneficiaries can make direct trustee-to-trustee transfers to a different IRA custodian (but be careful – it’s still an inherited IRA, not your IRA, and a non-spouse beneficiary cannot make any additional contributions to it).


Overall, IRA funds dwarf the amount of retirement assets held in employer sponsored retirement plans. Those IRAs will offer tempting targets to creditors when they pass on death to beneficiaries other than a surviving spouse.

  1. Consider leaving retirement assets in your employer sponsored plans, where protection from creditors is assured, as long as possible.
  2. Alternatively, for assets currently held in an IRA, consider retaining the spouse as the primary beneficiary (that appears to be safe for now) and naming only a spendthrift trust as the alternative beneficiary (this can get complicated, so proceed with caution – and professional advice).

Other asset protection strategies may make sense for assets held outside retirement accounts, but carefully consider those options with advice from an experienced tax or benefits advisor.

The above material is intended for general information purposes and should not be relied on or construed as professional advice. Under the applicable Illinois Rules of Professional Conduct, the contents of this article may be considered to be advertising material. The transmission of this information is not intended to create, and receipt of it does not create a lawyer-client relationship.

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U.S. Supreme Court and Department of Labor Provide New Guidelines for ESOP Trustees

canstockphoto19117592 Best Practice
A recent court decisions and the Settlement Agreement in a Department of Labor (DOL) enforcement action against an institutional ESOP trustee provide new guidelines for trustees and other ESOP fiduciaries involved in the purchase or sale of company stock.

Bear in mind that all employee stock ownership plans (ESOPs) are set up to invest primarily in the stock of the sponsoring corporation. This requirement overrides the customary duty of plan trustees to diversify plan investments, but does it also affect the duty of ESOP trustees to exercise prudence in the purchase or sale of company stock?

Supreme Court Ruling

The United States Supreme Court recently considered this issue in Fifth Third Bancorp v. Dudenhoffer. ESOP fiduciaries had previously been protected by a judicial presumption that their transactions in company stock were prudent absent evidence of extreme circumstances to the contrary, such as the company’s imminent financial collapse. The Supreme Court in Dudenhoffer determined that, contrary to prior court holdings, ESOP fiduciaries are not generally subject to a presumption of reasonableness in their dealings with company stock.

The case was remanded to the trial court in order to allow the plaintiffs, plan participants who were adversely affected by a dramatic loss in value of their company stock accounts in the Fifth Third Bancorp ESOP and 401(k) plan, to amend their complaint. Because the plaintiffs’ lawyers failed to identify specific steps plan fiduciaries should have taken in oral argument before the Supreme Court, preparing an amended complaint that passes muster under the new ruling could still pose a problem for the plaintiffs (see HERE for a discussion of the plaintiffs’ dilemma in their presentation before the Supreme Court).

Department of Labor Settlement Agreement

The recent Settlement Agreement with the DOL in Perez v. GreatBanc Trust Co. et al. also provides guidance to ESOP trustees on the purchase of company stock from controlling shareholders and other insiders. The Settlement Agreement requires a $5.25 million payment from GreatBanc and its insurers for allegedly allowing the company’s ESOP to purchase stock from the company’s co-founder and top executives for a price in excess of the stock’s fair market value.

Although the price paid for company stock by the ESOP was justified by a valuation report from an outside valuation firm, the DOL attacked the validity of the valuation report as based on overly optimistic projections of the company’s future profitability and unjustified assumptions.

The Settlement Agreement also requires GreatBanc to follow certain procedures (“Process Requirements”) when it is involved in the purchase or sale of the stock of private companies. The Process Requirements include standards for determining the independence of the ESOP’s valuation firm, a requirement of a written opinion of the ESOP trustee as to the reasonableness of any financial projection relied on in the ESOP valuation report, and documentation of the ESOP trustee’s independent analysis of the valuation report.

Although these requirements apply only to GreatBanc and do not impose any formal legal requirements on other ESOP trustees, it is clear that, while the DOL wants to promote employee stock ownership, it does not want to allow ESOPs to be used, in the words of a DOL spokesperson, as “a way to create big cash-outs for owners and top executives.”


ESOP fiduciaries need to proceed with due care in the sale or purchase of company stock. If the company’s stock is publicly traded, investment decisions involving company stock should be placed in the hands of independent fiduciaries, not company insiders. This same approach makes sense for fiduciaries of 401(k) plans that offer company stock as an investment option.

For ESOP trustees responsible for the purchase and sale of the stock of privately owned companies, the GreatBanc Settlement Agreement and a number of other DOL enforcement actions make it clear that ESOP trustees cannot accept appraisal reports as the definitive determination of the stock’s fair market value until they independently review the valuation report and verify that its projections and assumptions are reasonable.

ESOP fiduciaries may want to engage an independent valuation firm to assist with this process. And, once again, these recent ESOP fiduciary cases underscore the need for fiduciaries not only to carefully consider valuation reports but also to document their deliberations.

Fiduciary decisions do not have to be perfect but they do have to reflect suitable deliberation by plan fiduciaries – and those deliberations should be documented.

Does everyone want to be an owner?

In theory, employee ownership through an Employee Stock Ownership Plan (ESOP) is an almost perfect idea, since it benefits employees and businesses equally and simultaneously.

Shares are allocated to, rather than purchased by, the employees, which puts ownership within the grasp of many who might never own a business otherwise. Employees have a strong incentive to work hard and effectively, since they will reap the reward.

Thinking like an owner helps employees to understand how their business is run, and encourages them to innovate and improve both day-to-day and long-term operations. Although an ESOP is no more a democracy than a conventional corporation is, employees often have more opportunities to be involved in corporate-level discussions, if not actual decision-making. During tough times, these informed and empowered employee-owners have a strong interest in helping the company pull through, rather than jumping ship.

Annual share allocations, along with vesting rules, also promote employee retention and minimize costly turnover. And when an employee leaves, the company “repurchases” his or her shares at the current share value (through a distribution similar to that of other pre-tax retirement plans)—and those shares are then reallocated to current employees.

So far, so good. But the theory behind ESOPs makes one assumption that is often overlooked and can cause problems in even the most well-intentioned ESOP. That assumption is that, given the opportunity, all employees would like to be (part) owners of the firm they work for. The idea of ownership as an ultimate goal and good is deeply ingrained in American society. However, like most assumptions, it is worthwhile to revisit it occasionally.

Why might a person not want to be an owner? Perhaps the most obvious reason is that ownership comes with responsibilities as well as rights. It is reasonable to expect that many people — from highly-trained senior staff to entry-level employees — feel that their responsibility to their company extends to doing their job well, and no further.

They may consider opportunities to provide input into bigger-picture company issues as incursions on their time that take away from their primary job. Similarly they might feel that the time spent in ownership education — learning to read and understand the company’s financial report, for instance — would be better spent doing the work they were hired to do.

Another reason is that an employee — again, at any level — might feel that he or she lacks the training, experience, or expertise necessary to be an effective owner, and is either uninterested in acquiring the additional skills, or lacks confidence in the ability to do so.

Finally, group ownership may not seem like “real” ownership, since it generally doesn’t include individual control over decision-making. So, even a person who does aspire to own a business might not see employee-ownership as equivalent, or even as a stepping stone, to a more autonomous model of ownership.

As those experienced in employee ownership know, these (and other) barriers to employee ownership can be surmounted or accommodated, in most cases, by training and clear communication about expectations for employee involvement, both at the initial interview/hiring stage and on an ongoing basis. But in order for such training and communication to be effective, every employee-owned company needs to recognize that not all employees, or potential employees, are equally or automatically interested in ownership.

Keeping this possibility in mind will allow an ESOP to take whatever steps are needed to bring reluctant owners into full and productive partnership; simply assuming they are already on board may result in losing them altogether.

Editor’s Note: This post originally appeared as an Op-Ed in the Deseret News. Frances Laskey, Mr. Hoffmire’s colleague at Progress Through Business, did the research. 

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DB(k) Plans: A Good Idea at the Time

Remember DB(k) plans?

If you were in the retirement plan business back in 2006, you probably do. If you’re new in the business, you may not know about them at all.

A DB(k) Plan, formally called an “Eligible Combined Plan”, is a hybrid retirement plan that was created by Congress as part of the Pension Protection Act of 2006 under Section 414(x) of the Internal Revenue Code.

The idea behind DB(k) was simple. By combining a defined benefit plan and a defined contribution plan, a “small employer” (at least two but less than 500 employees) could potentially reduce the cost and administration requirements of maintaining two separate plans. The two components of the DB(k) have to be generally structured as follows:

1. Defined Benefit Component

  • An employee must receive at least 1% of pay for each year of service, not to exceed 20 years.
  • Benefits must be fully vested after 3 years of service.

2. 401(k) Component

  • There must be an auto-enrollment provision with a 4% contribution rate unless the employee elects to reduce this rate or opt-out.
  • The employer must match 50% of the employee’s 401(k) contributions, up to 4% of compensation, or a 2% maximum match.
  • Employees must be fully vested in the matching contribution when made.

There are still certain general non-discrimination requirements that have to be met, but the plan automatically satisfies the 401(k) and top-heavy requirements.

Sounds intriguing, yes? An employer could have streamlined plan administration with the plan being treated as a single plan for annual Form 5500 reporting.

But after the January 1, 2010 effective date for Section 414(x), DB(k)s didn’t take off. Since then, there have been very few DB(k) sightings.

It wasn’t a case of DB(k)s being a bad idea. Rather, right from the start, DB(k)s had to overcome some difficult hurdles.

First, the Internal Service in Revenue Procedure 2011-6 announced it would issue determination letters for DB(k) Plans under the following conditions. Even if one or both components utilized pre-approved plan documents, the IRS considered the DB(k)Plan to be an individually designed plan. This meant that in order to receive a Determination Letter as a qualified plan, the employer would have to submit the DB(k) Plan with two Form 5300s, one for each component, and 2 user fees.

Second, for many small employers, the math simply didn’t work. Using existing tax law, two separate plans, a traditional defined benefit or cash balance plan paired with the 401(k)plan, could provide larger benefits and contributions to the owners and highly compensated employees.

Third, the expectant reduction in administration expenses didn’t materialize in many cases. As noted above, only one Form 5500 has to be filed for the DB(k), but the two components still have to be administered separately. An actuarial valuation still had to be done for the defined benefit component, and administration still had to be done for the 401(k) component.

Let’s not consider DB(k) plans a failure. They were an innovate attempt to address the critical problem of adequate retirement income for employees. We should encourage more innovation with that objective.

Image: CanStockPhoto

Fidelity reports average 401(k) balance up 12.9% in last 12 months. But let’s not live in the moment.

It’s a clunker of a headline, but there’s an important point to make.

Yes, it’s good news that Fidelity reported last Friday. The average account balance for participants in 401(k) plans they administered rose to $91,000 for the quarter ended June 30, 2014, an increase of 12.9% in the last 12 months.

But let’s not live in the moment. The issue of retirement readiness is still a big problem in this country. Those of us in the retirement plan business must continue to work hard with employers to encourage their employees to increase their rate of saving.

Retirement savings is not just an issue in this country. Some individuals see the issue on a worldwide basis. Dawid Konotey-Ahulu, for example is the founder and co-chief executive of Mallowstreet, a London-based social media platform that connects the pensions and insurance industries. He takes a grim global view of the situation.

Writing in Workplace Pensions, he warns that unless we deal with five great challenges, we will face dire consequences for generations to come. The first four, he says, are

  1. Global security
  2. Sustainable living
  3. Global health
  4. The economy

The fifth global challenge he says is

… inadequate retirement resources – the pensions crisis. We are living much longer than our parents and grandparents. Some 40 per cent of girls born today will live to be 100. And, by 2060, the UK expects to have half a million centenarians. But we’re also contracting chronic illnesses in old age, and the cost of being elderly is high and climbing.

Like many of us, he believes that government is unlikely to provide much assistance in the future. The government he is talking about, of course, is his own in the U.K. It’s much the same here in the U.S. In other words, employees are on their own to supplement Social Security.

But there’s a big difference.  The U.K. has a much different attitude about retirement savings than we have. Auto-Enrollment in the U.K. is the law.

Image: The Wiley Life Science Blog reporting on University of Pittsburgh  research Why Living in the Moment Is Impossible.

What’s a fiduciary to do?

what to do
Admit it: Your company, as a 401(k) sponsor, and company decision makers who direct plan operations (including in-house trustees), are ERISA fiduciaries. Don’t quibble about this but take a step back and figure out what to do about it.

Some Basic Steps

You’ve read about investment advisors who can assist in performing investment duties and fiduciary insurance for claim protection (this insurance should not to be confused with the required ERISA fidelity bond that protects the plan, not the fiduciaries). Those options may make sense for you, and may not. But, whether or not you use an investment advisor or purchase fiduciary insurance, there are other more basic steps to take.

Bear in mind that retirement plan fiduciaries do not have to make perfect decisions. For example, they don’t necessarily have to select the cheapest mutual funds in the market for their plan’s investment array. But they do need to deliberate on their investment decisions including the periodic review of investment results.

This follows because cases which question fiduciary investment decisions frequently turn on the nature of the process followed by plan fiduciaries rather than the substance of the resulting decision. In other words, a “correct” investment decision reached in a flawed decision making process is still subject to question.

So, fiduciaries need to deliberate and make considered decisions. And the best way to prove such deliberation is documentation of the decision making process. Such documentation can take the form of meeting minutes, memos or committee resolutions. There are no hard and fast rules on how to do this. The bottom line is that any reasonable written record of how and why the fiduciaries made their decision will work to protect them from breach of duty claims.

Fee Disclosure Questions to Answer

Also consider the Section 408(b)(2) fee disclosure rules that have been in effect since August 2012. The specific matters that plan fiduciaries must consider have been expanded by the new fee disclosure rules. “Responsible plan fiduciaries” have to evaluate each provider’s fee disclosure statement to determine

  1. Are provider fees reasonable?
  2. Has the provider’s fee disclosure document itself meets all of the requirements of the fee disclosure rules?
  3. Have your plan fiduciaries done this?
  4. Have those fiduciaries made a written record of their evaluation of the provider fee disclosures?
  5. Do your plan fiduciaries meet regularly to review the plan’s investment performance and provider fees?

A “no” answer to any of these questions is a red flag.

Need help with any of this? Plan service providers can provide invaluable assistance. Third party administrators (TPAs) can help benchmark provider fees so fiduciaries have some guidelines on “reasonable” fees. Investment advisors can assist in selecting investments for the plan and in monitoring investment results. And they can help with documentation of fiduciary decisions. But the ultimate responsibility for these matters likely falls on the shoulders of your in-house fiduciaries.

Helpful Guidelines for Recent Court Cases

You may have seen commentary on recent court decisions and settlements that involve multi-million dollar recoveries against retirement plans and their fiduciaries. These court decisions get the headlines but some less publicized decisions provide helpful guidelines.

Consider the U.S. Supreme Court case that can help control plan liabilities and related fiduciary exposure.  The Supreme Court’s 2013 decisions in Heimeshoff v. Hartford Life & Accident Insurance Co. demonstrates the effectiveness of the most important provision that probably is not in your plan.

Heimeshoff upheld the validity under ERISA of a plan provision which required any suit to recover plan benefits to be filed within a three (3) year period after a proof of loss is due under Wal-Mart’s insured disability plan. So, even a valid benefit claim by a plan participant cannot be pursued in court after the expiration of a claim limitation period provided in the plan document (that’s if the period is reasonable in length and there is no controlling statute to the contrary).

For states like Illinois, which provides a “borrowed” ten (10) year statute of limitations for ERISA suits to collect benefits, the imposition of a two or three year limitation period through the plan document can provide considerable additional protection.

The bottom line is that there is no downside to this kind of provision. It should be in your 401(k) plan document and summary plan description, and it should be there now.


Fiduciaries do need to deal with expanded liabilities from the changing regulatory and judicial landscape. Employers, plan administrators, HR staff and plan service providers should make sure that plan fiduciaries meet regularly to discuss plan business and document their deliberations. If you have any concerns about the prior conduct of plan fiduciaries, make sure you consult top notch plan service providers – and keep their advice confidential by dealing through independent legal counsel and not your company’s regular corporate or benefits lawyer.

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IRS opens window for Pension Protection Act Restatements

If you’re an employer who sponsors a 401(k) or profit sharing plan, it’s time to amend and restate your plan.

Qualified retirement plans must operate in accordance with their plan documents. Ongoing legal and regulatory changes in retirement plan rules frequently require plan sponsors to amend and restate their plans to keep their documents compliant with the IRS.

As a result, there are frequent changes in the laws and regulations that require changes to plan documents. In most cases, these changes are not major ones and can be handled by “snap-on” or interim amendments. Periodically, however, the plan must be rewritten in its entirety because of the number and complexity of the changes which is referred to as a “Restatement”.

The IRS requires that prototype documents and volume submitter plans must be rewritten, reviewed and approved by the IRS, and readopted by employers once every six years to conform with tax law changes.  The IRS has now directed 401(k) plans to begin a new restatement cycle that started on May 1, 2014 and ends April 30, 2016.

It’s important that you understand why your plan document must be restated. What follows is a non-technical explanation in Question and Answer format.

Why do I need to keep amending my plan?

Qualified plans are governed by a set of Federal laws enacted by Congress and regulated by various agencies. The IRS is responsible for oversight of the tax aspects of retirement plans, and the DOL is responsible for reporting, disclosure and fiduciary aspects of retirement plans.  The result is a continual change in the laws due to changing legislation and regulations issued to oversee compliance with the laws. As a result, there are frequent changes in the law but in most cases they are not major ones. A requirement to have a qualified retirement plan is that it must be in writing. This means that as the laws change, your plan must generally be amended to reflect the changes.

Why do I have to restate my plan now?

On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006 (“PPA”) which is the most comprehensive pension reform legislation since ERISA was enacted in 1974. The PPA, which comprises approximately 400 pages, significantly affects plans in many ways including:

  • Strengthening plan reporting and participant disclosure rules.
  • Requiring stricter funding rules for single-employer and multiemployer defined benefit pension plans.
  • Resolving legal uncertainty surrounding cash balance and other hybrid defined benefit plans.
  • Allowing plan fiduciaries to give investment advice to participants.
  • Making permanent significant tax retirement savings incentives enacted under prior law.

When must our plan be restated?

All retirement plans were required to comply with the PPA in operation according to the effective date of each provision beginning in 2006. Employers were required to adopt interim EGTRRA amendments covering these provisions over the past several years which your retirement plan adopted. Employers must now amend and restate their written plan documents to conform to the way the plan has been operated, by incorporating the changes made by the PPA.

The IRS issued a Revenue Procedure that implemented a formal (and complicated) system under which all plan documents are required to be restated by specified dates depending upon the type of plan document and the employer EIN. This Revenue Procedure does, however permit Plan Sponsors who use pre-approved plans, i.e., prototype and volume submitter, to extend the due date to April 30, 2016.

Why does the restatement consist of?

Once the plan has been reviewed, additional requested changes have been made (if any) and the restated documents are drafted, they should be read very carefully. The final signature-ready documents may consist of the following:

  1.  A restated Plan Document or Adoption Agreement;
  2.  A resolution adopting the restated document;
  3. A separate trust document in some cases; and
  4. A restated Summary Plan Description that must be distributed to all participants and beneficiaries.

 Are there any special considerations when replacing one plan document with another?

Special care must be taken to ensure that certain benefits called “protected benefits” are not unintentionally eliminated or reduced. Protected benefits include forms of distributions such as lump sums and annuities and timing of distributions such as an early retirement provision.

Should my restated plan be filed with the IRS for a Determination Letter?

An employer may apply for a Determination Letter, a document issued by the IRS formally recognizing that the plan meets the qualifications for tax-advantaged treatment. The IRS has already reviewed the language used in the pre-approved plans mentioned above, prototype and volume submitter.

Those employers using pre-approved plans automatically have assurance that the language used in their plan satisfies the IRS requirements (assuming no changes are made to what was approved).

Employers who adopt pre-approved plans that have coverage or nondiscrimination issues or have made modifications to the document will generally want to apply for a Determination Letter.

Can we rely on the Determination Letter?

Yes. The Determination Letter can be viewed as a type of insurance policy. If you follow the approved terms of the plan and the operational processes that were submitted for review (if such processes were submitted), then the IRS will not disqualify your plan. This is true even if the IRS made a mistake in approving a particular plan provision or process (as long as the Determination Letter application was accurate).

Does the IRS charge a fee for a Determination Letter?

The IRS generally charges a User Fee to review a “Determination Letter” application. This fee is between $200 and $ 1,800, depending on the plan’s design and the type of plan document. However, this fee may be waived for certain small employers that establish new plans.

 What does it cost for the plan restatement?

The cost of restating a plan will vary, depending primarily on the type of plan. Factors that affect the plan restatement cost include:

  1.  Plan design
  2. Plan sponsor demographics
  3.  Number of contribution types;
  4.  Type of plan document structure
  5.  Preparation of IRS Determination Letter submission, if applicable

No two plans or companies are exactly alike so an appropriate fee is based on the specific facts and circumstances. The cost to restate the plan for IRS compliance may be paid from the plan assets if permitted by the plan document.

What happens if I fail to amend or restate my plan on a timely basis?

If you miss the deadline for amending or restating your plan, then you can avoid plan disqualification by using an IRS correction program. Under this program, the IRS will require that you pay a sanction and submit an updated plan. The sanction can vary depending on the circumstances.  However, it is significantly higher if the IRS discovers the missed deadline than if you voluntarily go to the IRS when you discover the missed deadline. In addition, there would be the cost associated for our services to update the plan and prepare the application to the IRS.

 Should I consider making any plan design changes now?

Yes. You should review your plan as part of the restatement process. Plan design changes can be more efficiently done as part of the restatement process.


It is the responsibility of the plan fiduciary to ensure that the plan is updated and signed by the  April 30, 2016 deadline. Because the restatement process can be time consuming it is important that this task is included in the planning process to ensure the restatement deadline is met.

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The Deluge of Affordable Care Act Regulations: What Employers Need to Know

paper falling from sky
There has been a deluge of regulatory activity involving the Affordable Care Act (“Obamacare”), or the ACA. Some developments, such as the general postponement of the employer mandate until 2015 (and the recent postponement until 2016 for employers with 50-99 full time equivalent employees), have received significant press attention. Others involve details of interest primarily to lawyers and insurance companies.

The most recent ACA regulatory developments that may be of interest to employers and HR professionals include

  1. Wellness Programs
  2. The Mini-Med Plan Lives On?
  3. Discrimination Ban

Here are the details.

Wellness Programs

Recently issued regulatory FAQs deal with a number of topics including wellness programs that punish tobacco users with higher premiums. The expanded rules provide details on how employers can offer a reward of up to 50 percent of the cost of group health plan coverage for tobacco non-users or, alternatively to smokers who participate in programs that are directed at preventing or reducing tobacco use. The highlights of the new FAQs include:

A compliant wellness plan that charges tobacco users a premium “surcharge” (that is, it offers a premium reduction for non-use) must also make the premium reduction available for employees who complete tobacco cessation education program that is offered at the time of initial enrollment or annual reenrollment.

For smokers who do not undertake the cessation education program, the premium surcharge can remain in place for the balance of the plan year. This is because the plan is not required (but is permitted) to provide another opportunity to enroll in the program later in the plan year.

Wellness programs which condition any premium “reward” on attaining a particular standard (such as obtaining a stated weight reduction or cholesterol level) must offer a reasonable compliance alternative to those who cannot attain the standard because it is medically inappropriate.

The FAQs make it clear that the participants’ doctor (not a physician working for the program) should recommend an alternative compliance activity, such as participation in a weight reduction program for a participant who cannot attain a stated weight reduction for medical reasons.

The wellness program, not the individual’s doctor, can then select a specific compliance activity (such as a particular weight loss program) but cannot be involved in the determination of whether that program should be offered to any particular participant for medical reasons.

For now, older smokers in particular may have a reprieve from the maximum premium penalties permitted under ACA rules. This is because of the ACA enrollment system that restricts the disparity in premiums between younger and older workers. This “glitch” will restrict enforcement of the maximum premium penalty at least until June, 2014 in accordance with a White House announcement. Market forces and state-imposed limits may also restrict smoker surcharges, which now average around 15 percent of premiums.

The Mini-Med Plan Lives On?

For larger employers, the prospect of covering their employees with a “fixed-indemnity” plan is still alive under the ACA.

A recent Wall Street Journal article reports that AlliedBarton Security Services is offering its employees a low cost, non-compliant fixed indemnity plan as an alternative to a plan that meets ACA requirements. It expects that many of its security guard employees will elect the inexpensive coverage (say $80 per month) that pays a fixed amount for specific services regardless of actual cost. This would include plans that, for example, pay a flat $70 for a doctor visit and $20 towards each prescription. Catastrophic coverage is not included and the plan can carve out areas from coverage such as hospitalization and mental health services.

This type of coverage has been criticized as substandard but still be may popular with younger, low paid workers who can spend less on cheaper coverage and even incur a penalty for not having ACA-compliant coverage for less cost than the cost of their employer’s more expensive plan.

The bottom line for employers is that, if they offer at least one plan that meets ACA requirements, they may not be penalized by failing to offer “affordable coverage” to their employees. Regulators are aware of this situation and do not view it favorably.

Recent guidance provides different requirements for fixed-indemnity group and individual policies, and it is unclear how these rules will impact group health plans when the employer mandate kicks in for larger employers in 2015.

Discrimination Ban

The ACA extended a ban on discrimination in health care benefits that has applied to self-insured plans for years to fully insured plans. The ban prohibits group health insurance plans from favoring highly compensated employees in terms of eligibility for such benefits or the value of such benefits.

The general intent is to prohibit employers from offering enhanced or subsidized health care benefits to highly compensated management employees while at the same time not providing equivalent health benefits to rank and file employees.

Enforcement of the new ACA provisions, which contain severe financial penalties for non-compliance, was formally postponed until publication of new IRS regulations which were expected to be in place by 2014.

Recently, Treasury officials have advised that there will be further delay while the IRS wrestles with related regulatory concerns including the thorny issue of whether an employer violates the ACA non-discrimination rules if it offers the same coverage to all employees and rank and file employees choose to obtain coverage elsewhere, such as through a government sponsored health insurance exchange. While the IRS sorts this out, no enforcement action will be taken.

However, it is still advisable for employers with fully insured plans to avoid obvious mistakes, such as offering executives free or subsidized health coverage, providing health coverage only to management employees, and making benefits available to dependents of highly paid executives that are not available on equivalent terms to dependents of other covered employees.

Employers should avoid offering extended group health coverage (other than as required by COBRA) to departing executives as part of a severance package. This practice not only violates the ACA non-discrimination rules that the IRS is likely to finalize, but also ignores the terms of the group health plan, which typically extend coverage only to employees who satisfy an active employment requirement.

Image: Can Stock Photo, Inc.