This newsletter briefly discusses several recent developments in employee benefits and executive compensation that may be of interest. For more details on any item reported herein, please contact any member of Blank Rome's Employee Benefits and Executive Compensation group.

Interim Final Regulations Issued Under the Mental Health Parity and Addiction Equity Act of 2008

On February 2, 2010, the Departments of Treasury, Labor, and Health and Human Services issued interim final regulations providing guidance regarding the requirements of the Mental Health Parity and Addiction Equity Act of 2008 ("MHPAEA"). MHPAEA is generally effective for plan years beginning on or after October 3, 2009. The interim final regulations are effective for plan years beginning on or after July 1, 2010, with a delayed effective date for certain collectively bargained plans. Plan sponsors are required to comply in good faith with MHPAEA for plan years beginning between the effective dates of the law and the interim final regulations. However, plan sponsors may adopt the interim final regulations prior to the deadline.

Plans Subject to MHPAEA

The requirements of MHPAEA and the interim final regulations apply to any group health plan, including both fully-insured and self-insured plans, covering more than 50 employees. Although coverage for mental health and substance abuse is not mandated by MHPAEA, such coverage, if provided, must be provided on an equivalent basis as those for medical/surgical care offered by the group health plan.

A plan may eliminate coverage for mental health and substance abuse. However, in the event a plan does eliminate such coverage, the plan sponsor must provide notice of the reduction in benefits in addition to a summary of material modification, if required under the Employee Retirement Income Security Act of 1974 ("ERISA"), to all affected employees.

Definition of Major Terms under MHPAEA

MHPAEA prohibits a plan from imposing financial requirements and treatment limitations on mental health and substance abuse coverage that are different than those imposed on surgical and medical coverage. For purposes of applying the requirements of MHPAEA, the interim final regulations define "financial requirements," and treatment limitations is divided into two categories: "quantitative benefit limits," and "nonquantitative benefit limits."

"Financial requirements" are defined to include deductibles, co-payments, co-insurance and out-of-pocket maximums. Aggregate lifetime maximum and annual dollar limit are excluded from the definition of financial requirements because such limitations are subject to the requirements of the original Mental Health Parity Act, enacted in 1996.

Treatment limitations are divided into two types of limits-quantitative and nonquantitative benefit limits. The interim final regulations define "quantitative benefit limits" as those limits regarding such things as number of visits or days of inpatient treatment. "Nonquantitative benefit limits" is defined to include the scope or duration of the treatment, including medical management standards, standards for provider admission to participate in the network, determination of usual and customary charges, requirements for using lower cost therapy, and conditioning benefits on completion of treatment.

Measuring Benefit Equivalency

The interim final regulations specify that coverage on an equivalent basis will apply to six (6) categories of benefits:

  • In-patient in-network
  • In-patient out-of-network
  • Out-patient in-network
  • Out-patient out-of-network
  • Emergency case
  • Prescription drugs

MHPAEA and the interim final regulations require that for each benefit category the financial requirements and treatment limitations are equivalent to the same medical and surgical benefit category. If a group health plan does not have a network of providers for in-patient and out-patient coverage, all benefits are treated as out-of-network for determining the equivalency of coverage.

Comment: At the time of its original enactment, practioners noted that MHPAEA required group health plans eliminate caps on the number of visits per year and differences between co-payments and co-insurance for mental health or substance abuse treatment and medical or surgical benefits. The interim final regulations clarify that the equivalency requirement reaches further than originally expected to include using the same standard for admitting providers to the network. Plan sponsors should be mindful of the depth of the equivalency requirement in reviewing insurance and/or administrative services contracts, as applicable.

Exceptions to MHPAEA Coverage

In addition to the exemption for small employers, MHPAEA exempts a group health plan from complying with the requirements if:

  • the overall health care costs increase by 2% when these rules are implemented; and
  • a qualified actuary certifies the increase.

The exemption as currently written in the law applies for one year, after which an employer is required to comply with the law and reapply for the exemption after one year of compliance. The interim final regulations reserve that section of the guidance addressing the specifics of the cost-increase exemption.

Comment: A plan sponsor should be cautious about relying on the preamble to the interim final regulations relating to the cost-increase exemption. Without further guidance it is unclear what should or should not be considered in calculating the "overall health care cost" and what the qualified actuary will be certifying in that respect.

Implementing the Interim Final Regulations

All employers should review the design of their group health plan to determine whether such design complies with the interim final regulations. Failure to comply results in an excise tax payable by the employer.

Comment: The IRS has stepped up its requirements for self-reporting excise taxes related to welfare plans. An employer should act as soon as possible to comply with MHPAEA to avoid any excise tax.

Employers should also contact its insurer or third party administrator to ensure that the mental health and substance abuse coverage is equivalent to medical and surgical coverage with respect to nonquantitative benefit limits.

Comment: Although most administration contracts for self-funded plans will be based on an insurance contract approved by the state insurance department, the plans sponsor is still responsible for compliance with MHPAEA. In addition, state laws may impose different and/or additional requirements with respect to these benefits that must be reviewed before implementing the changes.

Finally, employers should make sure that the required disclosures are made available to employees. Employers must disclose the requirements for medical necessity and the reason for a denial of a claim available to participants under the ERISA rules governing such disclosures and claims procedures. Non-ERISA plans (non-federal government and church plans) are deemed to comply with these requirements if the employers follow those rules imposed by ERISA.

Temporary Extension of COBRA Subsidy

On March 2, 2010, President Obama signed into law a 31-day extension of the 65%, 15-month government provided COBRA subsidy. The COBRA subsidy had expired on February 28, 2010. The extension is retroactively effective to March 1, 2010 and expires on March 31, 2010. Unlike the original COBRA subsidy under the American Reinvestment and Recovery Act, the extension allows that employees who lose group health plan coverage due to a reduction of hours and who subsequently are subject to an involuntary termination of employment will qualify for the Federal COBRA subsidy under certain circumstances.

Sec Revises Executive Compensation Disclosure Rules

Companies subject to the Securities Exchange Commission ("SEC") executive compensation disclosure rules, such as U.S. companies with securities listed on an exchange, should be aware that the SEC recently revised these rules effective as of February 28, 2010.

Comment: For those currently preparing proxy statements for the 2010 proxy season, these rules should be carefully reviewed and the disclosures must comply with the revised requirements.

Background

In 2006, the SEC overhauled the executive compensation disclosure rules to require more comprehensive disclosure, including new tabular disclosure, related footnotes and narrative disclosures. These amendments were meant to shift the focus of disclosure from a rules-based analysis to a review of the principles underlying executive compensation and compensation-related decisions. Some of the changes adopted in 2006 include:

  • New compensation discussion and analysis section to explain and analyze better decisions related to all material elements of compensation paid to named executive officers ( "NEOs").
  • Determining NEOs based on total compensation, not just bonus and salary.
  • Increased disclosure and quantification of post-employment compensation, such as severance payments and change in control payments.
  • New required tabular disclosures with respect to specific grants of plan-based awards, outstanding awards at fiscal-year end, non-qualified deferred compensation, and director compensation
  • Required narrative disclosure relating to option grant practices, including those relating to the timing and pricing of options.

2009 Revisions to Executive Compensation Disclosure Rules

The changes to executive compensation disclosures made by the 2009 revisions focus primarily on (i) enhanced disclosure of compensation policies and practices as they relate to risk management, (ii) revisions to the summary and director compensation tables relating to the disclosure of stock and option awards; and (iii) new disclosure regarding compensation consultants. First, these revisions now require companies to disclose a company's policies and practices for all employees generally, if such policies and practices create risks that are "reasonably likely to have a material adverse effect" on the company. If a company determines that disclosure is required, it will need to provide appropriate disclosure in light of the particular circumstances. Illustrative disclosures may include, for example: the general design philosophy of the company's policies and practices relating to risk taking; any risk assessment or incentive considerations in structuring policies and practices or in paying compensation; how compensation practices relate to the realization of risks in the short-and long-term; policies that govern how compensation elements change relative to changes in risk profile, and any implementation of these policies; and the extent to which a company monitors compensation policies to determine whether risk management objectives are being met. For example, a bonus program created or maintained for a highly profitable division that carries a significant risk profile would need to be disclosed, together with an appropriate explanation of the attendant issues and circumstances.

Comment: Companies will need to consider what is "reasonably likely" to cause a "material adverse effect" based on the facts and circumstances. Compensation policies and practices that have the potential to create material risks to a company must be disclosed to alert shareholders (and the investing public) to those risks.

Second, the required summary and director compensation tables must disclose the aggregate grant date fair value of stock and option awards granted during the fiscal year. Under the prior rules, only the dollar amount recognized for financial statement reporting purposes for the fiscal year with respect to these awards was required to be included in these tables. With respect to equity incentive awards, a company is required to disclose information based on the probable outcome of the performance conditions as of the grant date. The maximum compensation payable under the incentive award assuming that achievement of the highest level of performance conditions is probable must be disclosed in a footnote.

Third, the new rules make changes to the already existing requirement to disclose the role of any compensation consultant in determining or recommending the amount of compensation. Under the new rules, such disclosure is not required if the consultant 's role is limited to consulting on a broad-based, non-discriminatory plan that is generally available to all salaried employees and does not discriminate in favor of executive officers or directors, or if the consultant is only providing generic data or customized data based on parameters not developed by the consultant, such as market survey data to be used by the compensation committee to make compensation determinations, so long as the consultant does not provide advice regarding such data. In addition, the fees paid to compensation consultants must generally be disclosed if the compensation committee engages a consultant and that consultant provides non-executive compensation consulting services to the company in excess of $120,000 or if the compensation committee did not engage a consultant and a compensation consultant is providing executive compensation and non-executive compensation related services in excess of $120,000 to the company. Similarly, no fee disclosure is required where a consultant's only role is in connection with a broad-based, non-discriminatory plan or in providing generic compensation or survey data.

Comment: The required disclosures relating to compensation consultants focus on the independence and objectivity of the consultant in providing consulting services to the compensation committee. Compensation committees should review the consulting agreement and ask questions regarding other compensation and non-compensation services that may be provided by the consultant to the company or its management.

  1. The adopting release also provided for enhanced director and nominee disclosures as well as new disclosure requirements regarding the board's leadership structure, the board's role in risk oversight, and real-time reporting of voting results on Form 8-K, which changes are not discussed in this article.

Agencies Issue Model Employer Chip Notice

Pursuant to the Children's Health Insurance Program Reauthorization Act of 2009 ("CHIPRA"), the Departments of Labor and Health and Human Services have issued a model notice to be used to notify all employees of the potential opportunities available for group health plan premium assistance under state Medicaid and the Children's Health Insurance Program ("CHIP").

CHIPRA requires that all employers provide notice to all employees who reside in a state with available premium assistance. Pennsylvania, New Jersey, New York and California are among the states currently providing premium assistance. There are approximately 40 states offering premium assistance.

In order for an individual to be eligible for premium assistance, the employee must live in the state offering premium assistance, be eligible for the program and be eligible for "qualified employer-sponsored coverage." Qualified employer-sponsored coverage is creditable coverage through a group health plan, including a fully-insured plan, where the employer contributes at least forty percent (40%) of the total cost or premium for coverage. To be eligible, coverage must be non-discriminatory and cannot be a health flexible spending account or high deductible health plan.

The required notice must be provided to all employees, whether currently participating or not, as of the later of the first day of the plan year beginning after February 4, 2010, or May 1, 2010. The notice is subject to the same rules governing other notices required under ERISA. Failure to provide the required notice is subject to a $100/day penalty to be imposed by the Department of Labor.

After the initial notice, notice should be provided as part of an employer's annual open enrollment package.

Comment: An employer should determine as soon as possible the applicable deadline for providing the notice and who should receive the notice. The residence of the employee, rather than work location, determines whether the required notice must be provided.

Department of Labor Issues Additional 403(B) Plan Guidance

On February 17, 2010, the Employee Benefits Security Administration ("EBSA") of the Department of Labor issued Field Assistance Bulletin No. 2010-01 ("FAB 2010-01") to clarify previously issued guidance relating to section 403(b) plans. The guidance addresses two areas of on going concern: (1) the application of the annual reporting requirements to section 403(b) plans and (2) the scope of the safe harbor regulations relating to section 403(b) plans.

Annual Reporting Requirements

Effective for plan years beginning on or after January 1, 2009, section 403(b) plans are no longer eligible for an exemption from full reporting requirements on Form 5500s. Previously, section 403(b) plans were only required to disclose limited information on the Form 5500 and were not subject to an annual audit.

In Field Assistance Bulletin No. 2009-02, EBSA provided limited relief from complete disclosure on the Form 5500 with respect to section 403(b) plan contracts or accounts that meet certain conditions. To the extent a contract or account meets all of these conditions, the assets are not included as part of the plan assets and the individual is not included in the participant count for purposes of determining whether an audit is required (i.e., for purposes of determining whether the plan covers more than 100 participants). The conditions for exclusion are:

  • A contract or account is excludable from disclosure only if the employer is not required to take any action with respect to the contract or account after January 1, 2009, including such actions as approving distributions in advance, forwarding loan repayments or approving contract exchanges.
  • Even if a contract or account is identifiable by the plan administrator, but otherwise meets the conditions set forth above, the contract or account may be excluded, but does not have to be excluded.
  • If a contract oraccount is excluded, such contract or account does not have to be treated as a plan asset for purposes of inclusion in the plan or plan assets.

For those contracts and accounts that are not excludable, but for which the plan administrator does not have information, the plan administrator is required to make a good faith effort to collect information from the applicable service provider. "Good faith" will be determined based on the facts and circumstances.

Finally, the FAB clarifies that EBSA will not reject a Form 5500 with a "qualified," "adverse" or "disclaimed" audit if the plan's independent qualified public accountant specifically states that the sole reason for the qualification is the exclusion of the pre-2009 contracts and annuities.

Comment: The relief offered by the FAB may not eliminate all of the reasons for a "qualified," "adverse," or "disclaimed" opinion. Plan administrators should consult with the plan auditors to determine what additional information may be necessary to avoid additional reasons for the qualification of the opinion.

Scope of Safe Harbor Regulations

A section 403(b) plan is not subject to ERISA, notwithstanding the Internal Revenue Code requirement to maintain a written plan document and increased oversight, under long-standing ERISA regulations that exempt 403(b) plans from ERISA coverage if the employer does not take any discretionary action with respect to the plan.

The ERISA regulations require that employees have access to a wide range of investment providers and investments in order for the section 403(b) plan to be exempt from ERISA. The FAB clarifies that there may be circumstances under which it is appropriate for a small employer to limit the availability of investment providers. Such a section 403(b) plan may still be exempt from ERISA so long as the employee has the ability to exchange or transfer contracts or accounts to other service providers. In addition, the fees and expenses associated with such exchange or transfer must be disclosed to the participant in advance.

Comment: To the extent a small employer has already limited the available investment providers, the employer should determine whether additional disclosure of fees and expenses is necessary. The FAB does not specifically state who is responsible for the disclosure and so employers should be very careful when providing additional information to participants.

Reminder-Did You Miss the Deadline for the Hitech Act?

The compliance deadline for the HITECH Act was February 17, 2010. The HITECH Act amended HIPAA so that business associates are now covered directly by certain provisions of HIPAA and are subject to penalties for failure to comply. Business Associates must comply directly with the HIPAA security regulations and put in place a breach notification procedure to timely notify covered entities of a security breach involving protected health information. If you have not taken the steps to comply with the HITECH Act, you should do so as soon as possible.

For more information regarding the requirements of the HITECH Act please review the following Blank Rome Alerts:

Court Considers Whether Severance Plan is Subject to ERISA

A recent case out of the Federal district court in New Hampshire, Sargent v. Verizon Services Corporation, illustrates the advantages of designing severance plans to be governed by ERISA, rather than state law. The Supreme Court held in 1987, in Fort Halifax Packing Co. v. Coyne, that only severance plans that include an "on going administrative scheme" are covered by ERISA. ERISA coverage of severance plans provides employers with significant advantages, including no jury trials, no punitive damages, and, most importantly, judicial deference to the reasonable decisions of the plan administrator. Severance plans that are not covered by ERISA may be subject to the vagaries of state law.

The facts of Sargent illustrate the ERISA advantage. In Sargent, in connection with a RIF Program undertaken as part of a sale of assets by Verizon, an employee was offered a lump sum severance benefit as part of a RIF program, conditioned on resignation within a certain time period and the signing of a release. Between the signing of the release and actual resignation, Verizon rescinded the RIF offer because it had identified Sargent as an employee who would be transferred to the buyer of the assets. Sargent resigned anyway and filed a claim for severance benefits, which was denied. He sued, alleging several state law causes of action, including breach of contract, negligent misrepresentation, unpaid wages, unfair business practices, "enhanced compensatory damages" and attorney's fees. Holding the Verizon severance plan to be covered by ERISA, the court dismissed all of the claims as pre-empted by ERISA. The court's holding was based on the following factors: (1) the obligation to provide severance was not subject to a single triggering event; (2) the plan administrator had discretion to make eligibility determinations; (3) the plan provided for an appeals process for employees who felt they had been wrongfully denied benefits; and (4) the formality of plan administration (SPD, Forms 5500 and other disclosures) would result in a reasonable employee's perceiving the plan as an on going commitment to provide the benefits.

As a practical matter, the only substantive requirement for ERISA coverage under Sargent is a plan document that evidences an on going severance program. Eligibility for the program and the amount of benefits thereunder may be completely at the discretion of the administrator. Indeed, the Sargent court is of the view that on going discretion proves ERISA coverage and more discretion seems to make the case even stronger. Once the employer concludes that ERISA applies, the other Sargent factors (appeals process and disclosure to employees and the government) are required by ERISA in any event, so it should come as no surprise that an employer seeking to be covered by ERISA would comply with those requirements.

Employers that pay severance benefits from time to time, even on an ad hoc basis, should carefully consider formalizing plans and processes in order to strengthen the argument of ERISA coverage.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.