Category: Administrative & Regulatory

Compensation & Benefits Law Update

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Department of Labor Guidance on Required Notice to Employees Regarding Health Insurance Exchanges

Under the Patient Protection and Affordable Care Act (the “ACA“), individuals will be allowed to purchase health insurance coverage on exchanges, referred to as the Health Insurance Marketplace (the “Marketplace”). Certain lower income individuals may also qualify for premium tax credits if they do not have affordable, minimum value health coverage available through their employers. The Marketplace and the low income tax credits will be available beginning January 1, 2014.

Under the ACA, employers subject to the Fair Labor Standards Act (the “FLSA”) must provide a notice to their employees regarding the coverage available on the Marketplace. Although this notice was originally required to be distributed by March 1, 2013, the Department of Labor (“DOL“) postponed the notice requirement.

The DOL recently issued Technical Release 2013-02, which provides guidance regarding the Marketplace notice requirement as well as a model Marketplace notice. In addition, the DOL revised its model COBRA notice to address the availability of the Marketplace. The following are some key points from the Technical Release:

  • No later than October 1, 2013, an employer subject to the FLSA is required to provide the Marketplace notice to each current employee who was hired before that date.
  • Beginning October 1, 2013, an employer subject to the FLSA is required to provide the Marketplace notice to each new employee at the time of hiring. For 2014, the DOL will consider a notice to be provided at the time of hiring if the notice is provided within 14 days of an employee’s start date.
  • An employer must provide the Marketplace notice to employees even if the employer does not provide health plan coverage.
  • An employer must provide a Marketplace notice to each employee, regardless of whether the employee is eligible to enroll in the employer’s health plan and regardless of whether the employee is part-time or full-time.
  • An employer is not required to provide a separate Marketplace notice to dependents or other individuals who are eligible for coverage under the employer’s health plan but who are not employees.
  • The Marketplace notice must inform the employee regarding the existence of the Marketplace, provide the employee Marketplace contact information to request assistance, and provide a description of the services provided by the Marketplace. The notice must also inform the employee that the employee may be eligible for a premium tax credit if the employee purchases a qualified health plan through the Marketplace. The notice must include a statement informing the employee that, if the employee purchases a qualified health plan through the Marketplace, the employee may lose the employer contribution (if any) to any health plan offered by the employer and that all or a portion of that employer contribution may be excludable from income for Federal income tax purposes.
  • The notice must be provided in writing in a manner calculated to be understood by the average employee. It may be provided by first-class mail. Alternatively, it may be provided electronically if the requirements of the DOL’s electronic disclosure safe harbor are met.

A model Marketplace notice is available on the DOL’s website www.dol.gov/ebsa/healthreform. There is one model for employers who do not offer a health plan and another model for employers who offer a health plan to some or all employees. Employers may use one of these models, as applicable, or a modified version, provided the notice meets the content requirements. The model Marketplace notice includes sections to be completed by an employer offering health coverage to its employees related to whether the coverage is affordable and provides minimum value (as defined under the ACA).

Each employer should review the model Marketplace notice in view of the provisions of its group health plan. The notice may need to be tailored to particular groups of employees if the employer’s plan has differing design features for various employee groups (e.g., eligibility, waiting period, employer contribution, etc.).

In addition, an employer should update its COBRA notice in view of the changes to the DOL model COBRA notice.

Our Compensation & Benefits attorneys are available to assist you in preparing your Marketplace notice and your updated COBRA notice and to assist with all of your ACA compliance efforts.

IRS Announces 2014 Inflation Adjustments for Health Savings Accounts and High Deductible Health Plans

The IRS announced the 2014 inflation adjusted amounts for Health Savings Accounts (“HSAs”) and for High Deductible Health Plans (“HDHPs”).

  • For calendar year 2014, the annual limit on deductions for contributions to an HSA for an individual with self-only coverage under an HDHP will be $3,300 and the annual limit on deductions for contributions to an HSA for an individual with family coverage under an HDHP will be $6,550.
  • For calendar year 2014, an HDHP is defined as a health plan under which:
    • the annual deductible is not less than $1,250 for self-only coverage and not less than $2,500 for family coverage; and
    • annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,350 for self-only coverage and $12,700 for family coverage.

IRS to Review 457(b) Plans

The IRS will be instituting a compliance check program for nongovernmental 457(b) plans. The IRS will be sending questionnaires to approximately 200 nongovernmental, tax-exempt employers that have indicated on their Form 990s that they have 457(b) plans.

A 457(b) plan (or “eligible deferred compensation plan”) is a popular form of nonqualified deferred compensation plan available to tax-exempt organizations and government employers. Amounts contributed to a 457(b) plan for the benefit of an eligible employee are not subject to income tax until distributed from that plan. 457(b) plans are subject to annual contribution limits. Under a 457(b) plan of a nongovernmental tax-exempt employer, total contributions (i.e., employee salary reduction contributions and employer contributions) of up to $17,500 can be made for 2013. This annual limit is periodically adjusted by the IRS to reflect increases in the cost of living.

Although 457(b) plans are not subject to the often complex tax rules of Internal Revenue Code (“Code”) section 409A or 457(f), a 457(b) plan must satisfy certain plan document requirements and be operated in accordance with the terms of the plan and Code section 457(b). With respect to salary reduction contributions, 457(b) plans are subject to special rules regarding the timing of salary reduction elections. 457(b) plans are also subject to rules that can be complex with respect to the required timing of distributions. In addition, the fact that the rules applicable to the 457(b) plans of government and nongovernmental entities differ (e.g., age 50 catch-up contributions are not permitted under the 457(b) plan of a nongovernmental entity) can create confusion. Finally, for employers who are subject to ERISA, participation in a Code section 457(b) plan must be limited to a select group of management or highly compensated employees.

The IRS anticipates that it will find problems with funding arrangements, improper loans, improper catch-up contributions, and employer eligibility. In reviewing 457(b) plans in recent months, we have also found plan documents in need of revision.

If your organization has a 457(b) plan, it would be a good time to review the plan document, salary reduction contribution election forms, and the plan’s operation generally.

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FATCA Implementation Summit – June 17, 2013

The National Law Review is pleased to bring you information about the upcoming FATCA Implementation Summit.

FACTA

When:

June 17 – 18, 2013

Where:

The Princeton Club
15 West 43rd Street
New York, NY 10036
212-596-1200

The final regulations are out and FATCA implementation dates are closer than ever! The compliance ball is rolling and funds should have their implementation plans already underway. The FATCA Implementation Summit will examine what funds should have done so far, what is next on the list, and what is still unknown. Our expert speaking faculty is prepared to answer all of your FATCA-related questions – including significant changes revealed in the final regulations, timelines, best practices and procedural benchmarks, new and updated forms, and so much more!

This is the ONLY industry event that addresses the unique challenges alternative funds face under the sweeping FATCA regime. We’ll dig deep into questions about how FATCA is playing out in practice – operational challenges, due diligence and on-boarding requirements, responsible parties, outsourcing– and more!

You can’t afford to miss this essential event!

This event is part of a two-day compliance intensive. For information on day two, Preparing for the AIMFD, click here. Register for both events to receive a discounted rate.

Topics at a Glance –

  • FATCA Today: Overview and Timeline of the Final Regulations
  • Who is Affected by FATCA? – Update on Definitions and Classifications
  • Entering into the FFI Agreement: Registering as an FFI with the IRS
  • Managing Your Clients: Due Diligence in Identifying Existing Investors and Developing On-Boarding Processes for New Investors
  • Reporting and Withholding Obligations Under the FATCA Regime
  • Determining FATCA Compliance with IGA Countries
  • Practical Implementation – Putting it all Together
  • Outsourcing – The Risks and the Rewards

The Stockton Saga Continues: Untouchable Pensions on the Chopping Block?

Sheppard Mullin 2012

Judge Christopher M. Klein’s decision to accept the City of Stockton’s petition for bankruptcy on April 1, 2013 set the stage for a battle over whether public workers’ pensions can be reduced through municipal reorganization.

Stockton’s public revenues tumbled dramatically when the recession hit, leaving Stockton unable to meet its day-to-day obligations. Stockton slashed its police and fire departments, eliminated many city services, cut public employee benefits and suspended payments on municipal bonds it had used to finance various projects and close projected budget gaps. Stockton continues to pay its obligations to California Public Employees’ Retirement System (“CalPERS”) for its public workers’ pensions. Pension obligations are particularly high because during the years prior to the recession, city workers could “spike” their pensions—by augmenting their final year of compensation with unlimited accrued vacation and sick leave—in order to receive pension payments that grossly exceeded their annual salaries.

When Judge Klein accepted Stockton’s petition April 1, 2013, he reasoned that Stockton could not perform its basic functions “without the ability to have the muscle of the contract impairing power of federal bankruptcy law.” Judge Klein noted that his decision to “grant an order for relief … is merely the opening round in a much more complicated analysis.” The question looming is whether the contract-impairing power of federal bankruptcy law is strong enough to adjust state pension obligations.

Stockton will have the opportunity to present a plan of adjustment, which must be approved through the confirmation process. No plan of adjustment can be confirmed over rejection by a particular class of creditors unless the plan (1) does not discriminate unfairly, and (2) is fair and equitable with respect to each class of claims that is impaired under or has not accepted a plan. Judge Klein said that if Stockton “makes inappropriate compromises, the day of reckoning will be the day of plan confirmation.”

Stockton’s plan of adjustment will likely propose periods of debt service relief and interest-only payments for some municipal bonds, followed by amortization. Stockton intends to actually impair other municipal bonds, potentially paying only cents on the dollar. However, Stockton does not intend to reduce its pension obligations to CalPERS under the plan. Provisions of the California Constitution and state statutes prohibit the reduction of public workers’ pensions, even in bankruptcy proceedings. These California state law provisions were thought to make public pensions virtually untouchable. Yet, the plan may not be confirmable if it impairs Stockton’s obligations to bondholders but not its obligations to CalPERS. Bondholders and insurers will surely vote against and object to the plan, claiming it unfairly discriminates against them, and Judge Klein will have to decide whether the treatment constitutes unfair discrimination. The unfair discrimination claim may have merit, because an overarching goal of federal bankruptcy law is to equitably allocate losses among competing creditors. Federal bankruptcy law often trumps state laws, but there is no precedent for how federal bankruptcy law applies to California’s pension provisions.

For now, cash-strapped municipalities around the country—and their creditors—are watching to see just how Stockton will restructure its obligations.

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Patent Exhaustion Rejected: Patented Seed Purchaser Has No Right to Make Copies

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The Supreme Court in Bowman v. Monsanto Co. ruled unanimously that a farmer’s replanting of harvested seeds constituted making new infringing articles.  While the case is important for agricultural industries, the Supreme Court cautioned that its decision is limited to the facts of the Bowman case and is not a pronouncement regarding all self-replicating products.

In a narrow ruling that reaffirms the scope of patent protection over seeds, and possibly over other self-replicating technologies, the Supreme Court of the United States held that a purchaser of patented seeds may not reproduce them through planting and harvesting without the patent holder’s permission.  Bowman v. Monsanto Co., Case No. 11-796 (Supreme Court May 13, 2013).

In this case, Monsanto had asserted two of its patents that cover genetically modified soybean seeds that are resistant to herbicide (Roundup Ready® seeds).  Monsanto broadly licenses its Roundup Ready® soybean seeds under agreements that specify that the farmer “may not save any of the harvested seeds for replanting, nor may he supply them to anyone else for that purpose.”  Vernon Hugh Bowman is a farmer who purchased soybean seeds from a grain elevator.  Bowman replanted Roundup Ready® seeds in multiple years without Monsanto’s permission.  The district court granted summary judgment of patent infringement against Bowman, and the U.S. Court of Appeals for the Federal Circuit affirmed.  Bowman appealed to the Supreme Court, which granted certiorari.

On appeal, Bowman heavily relied on the “patent exhaustion” doctrine, which provides that the authorized sale of a patented article gives the purchaser or any subsequent owner a right to use or resell that article.  Bowman argued that the authorized sale of the Roundup Ready® seeds exhausted Monsanto’s patent rights in the seeds, because “right to use” in the context of seeds includes planting the seeds and reproducing new seeds.

Patent Implications

Speaking through Justice Kagan, the Supreme Court unanimously affirmed the Federal Circuit’s decision that Bowman’s activities amounted to making new infringing articles.  The Supreme Court held that “the exhaustion doctrine does not enable Bowman to make additional patented soybeans without Monsanto’s permission.”  Specifically, the exhaustion doctrine restricts a patentee’s rights only as to the particular article sold, but “leaves untouched the patentee’s ability to prevent a buyer from making new copies of the patented item.”  The Supreme Court noted that if Bowman’s replanting activities were exempted under the exhaustion doctrine, Monsanto’s patent would provide scant benefit.  After Monsanto sold its first seed, other seed companies could produce the patented seed to compete with Monsanto, and farmers would need to buy seed only once.

In rebuffing Bowman’s argument that he was using the seed he purchased in the manner it was intended to be used, and that therefore exhaustion should apply, the Supreme Court explained that its ruling would not prevent farmers from making appropriate use of the seed they purchase—i.e., to grow a crop of soybeans consistent with the license to do so granted by Monsanto.  However, as the Supreme Court explained “[A]pplying our usual rule in this context . . . will allow farmers to benefit from Roundup Ready, even as it rewards Monsanto for its innovation.”

Tying the Supreme Court’s decision in this case narrowly to seed (as opposed to other self-replicating technologies), Justice Kagan noted that the decision is consistent with the Supreme Court’s 2001 decision in J.E.M. Ag. Supply, Inc. v. Pioneer Hi-Bred Int’l, Inc., in which the Supreme Court concluded that seeds (as well as plants) may simultaneously be subject to patent protection and to the narrower protection available under the Plant Variety Protection Act (PVPA).  PVPA protection permits farmers who legally purchase protected seed to save harvested seed for replanting.  However, reconciling the two forms of protection, Justice Kagan explained, “[I]f a sale [i.e., of a patented seed] cut off the right to control a patented seed’s progeny, then (contrary to J.E.M.) the patentee could not prevent the buyer from saving harvested seed.”

Other Self-Replicating Technologies

The Supreme Court’s decision in Monsanto is, of course, important for agricultural industries.  If extended to other self-replicating technologies, it may also prove important for biotechnology companies and others  that rely on self-replicating technologies, including, for example, companies that own patent rights over viral strains, cell lines, and self-replicating DNA or RNA molecules.  If subsequent cases extend the “no exhaustion” holding of Monsanto to these technologies, patent protection would extend to copies made from the “first generation” product that is obtained through an authorized sale.

However, the Supreme Court cautioned that its decision is limited to “the situation before us” and is not an overarching pronouncement regarding all self-replicating products.  The Supreme Court suggested that its “no exhaustion” ruling might not apply where an article’s self-replication “occur[s] outside the purchaser’s control” or is “a necessary but incidental step in using the item for another purpose,” citing computer software (and a provision of the Copyright Act) as a possible example.  As explained by Justice Kagan, “We need not address here whether or how the doctrine of patent exhaustion would apply in such circumstances.”  In this regard, the Supreme Court particularly noted that “Bowman was not a passive observer of his soybeans’ multiplication.”  Instead, Bowman “controlled the reproduction” of seeds by repeated planting and harvesting.  Thus, the Supreme Court suggests that a purchaser’s “control” over the reproduction process likely will be a key inquiry in considering the patent exhaustion doctrine as it relates to other self-replicating technologies.  Of course, it remains to be seen how broadly lower courts will interpret the Supreme Court’s ruling.

Antitrust Implications

By holding that Monsanto’s restriction on replanting was within the scope of its patent rights, the Supreme Court effectively immunized that restriction from antitrust scrutiny.  Other court decisions have called into question other license restrictions viewed as going beyond the scope of patent protection as being potentially susceptible to an antitrust or patent misuse challenge.

The Supreme Court highlighted its application of the exhaustion doctrine last addressed in Quanta, which held that “the initial authorized sale of a patented item terminates all patent rights in that article.”  This boundary line conventionally demarcated the end of a patent’s protection and the beginning of a potential antitrust minefield.  Some commentators may interpret the Monsanto decision to push that line further out.  Importantly, however, the Supreme Court deemed the seeds at issue to be a “new product.”  So construed, Monsanto’s restriction on replanting did not affect the product’s use, as in Quanta and Univis Lens, but rather came within the well-settled principle that “the exhaustion doctrine does not extend to the right to ‘make’ a new product.”

The Supreme Court not only was doctrinally conservative in its Monsanto decision, it was also careful to explain that its holding is a narrow one.  Monsanto never exhausted its patent rights in the “new” seeds; indeed, it never truly “sold” them.  Rather, Bowman created new seed from seeds that Monsanto had sold.  The decision therefore may not portend a more general inclination to construe the scope of patent protection more broadly.  In fact, the Supreme Court went so far as to clarify that it could reach a different outcome were it presented with a different technology.

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IRS, Treasury Department Issue Proposed Rules Governing Minimum Value, Affordability, and Wellness Programs

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A key policy goal of the Patient Protection and Affordable Care Act (the “Act”) is the expansion of health insurance coverage to all Americans. The concepts of “minimum value” and its correlate “actuarial value” speak to the generosity of that coverage. What constitutes minimum value is important both for employers that sponsor group health plans and for low-income individuals seeking government subsidies to help pay for coverage through newly established public insurance exchanges. Recently issued proposed regulations provide important clarifications on how employers determine minimum value, and how those determinations impact their compliance with the Act. The proposed rule also clarifies the relationships among minimum value and affordability, on the one hand, and wellness programs, Health Reimbursement Accounts and Health Savings Accounts, on the other. This advisory explains these and other features of the proposed regulations.

Overview

Beginning in 2014, the Act requires most U.S. citizens and green card holders to maintain health insurance coverage, which the Act refers to as “minimum essential coverage.” The phrase minimum essential coverage refers not to the content but to the source of coverage, which can include Medicare, Medicaid, or an “eligible employer-sponsored plan,” among others. Low income individuals may qualify for premium tax credits and cost sharing reductions (collectively, “premium assistance”) to assist with the purchase of coverage through public insurance exchanges. Where an individual is eligible for coverage under an eligible employer-sponsored group health plan that is both affordable and provides minimum value, however, that individual is ineligible for premium assistance.

Beginning in 2014, the Act also imposes certain obligations on “applicable large employers” — i.e., employers with 50 or more full-time and full-time equivalent employees — under which these employers must either offer group health plan coverage or face the prospect of a penalty. These “employer shared responsibility” (or “pay-or-play”) rules include two options:

  • The “no-coverage” prong:
    The employer fails to offer to at least 95% of its full-time employees (and their dependents) the opportunity to enroll in a group health plan of the employer, and any full-time employee qualifies for premium assistance, or

  • The “coverage” prong
    The employer offers to at least 95% of its full-time employees (and their dependents) the opportunity to enroll in a group health plan of the employer that is either unaffordable or fails to provideminimum value, and one or more full-time employees qualifies for premium assistance.

These rules are set out in new Internal Revenue Code section 4980H. The no-coverage prong is referred to more formally in proposed regulations as the “4980H(a) penalty,” and the coverage prong, the “4908H(b) penalty.” Both penalties are determined monthly, but they are easiest to understand when expressed as an annual amount. The no-coverage penalty is determined by multiplying the number of the employer’s full-time employees (excluding the first 30) by $2,000. In contrast, the coverage penalty (i.e., the penalty for offering coverage that is either unaffordable or fails to provide minimum value) is determined by multiplying the number of the employer’s full-time employees who qualify for premium assistance by $3,000. This latter penalty can never exceed the 4980H(a) penalty. Where an employer makes an offer of coverage that is both affordable and provides minimum value, there is no penalty.

Coverage is affordable if the employee premium for self-only coverage does not exceed 9.5% of an employee’s household income. Recognizing the difficulty with obtaining household income data, proposed regulations under Code section 4980H provide three proxies or safe harbors for determining affordability: W-2 income, rate-of-pay, and (lowest) Federal Poverty Limit.

Minimum value

A plan fails to provide minimum value if the plan’s “share of the total allowed costs of benefits provided under the plan is less than 60 percent of the costs.” A plan with a minimum value of 100% would cover all benefit costs with no cost-sharing. Anything below 100% simply means that the covered employee or family member will pay a portion of the costs for covered services. The lower the value, the more the employee will need to pay by way of co-pays, deductibles, co-insurance and other cost sharing requirements.

The terms “minimum value” and “actuarial value” both describe the percentage of expected health care costs a health plan will cover for a “standard population.” In the case of minimum value, it’s a population that reflects typical self-insured group health plans. In the case of actuarial value, the standard population is a population that reflects the average health risk of the individual and/or small group health markets.

When determining actuarial value for individual and small group coverage, the services that must be covered include “essential health benefits.”1 For minimum value determinations involving large and self-funded groups, the standards are less clear. Should minimum value be based on the plan’s share of the cost of coverage for all essential health benefits? Or should it be based on the plan’s share of the costs of only those benefits that the plan actually covers? Both prior guidance (i.e., IRS Notice 2012-31) and the proposed regulations concede that there is no support under the Act for the former approach, and both reject the latter. In Notice 2012-31, the Treasury Department and the IRS charted a middle path, noting that the Act directs that the statutory phrase “percentage of the total allowed costs of benefits provided under a group health plan” is determined under rules contained in the regulations to be promulgated by HHS relating to actuarial value, and that the determination of whether an employer-sponsored plan provides minimum value “will be based on the actuarial value rules with appropriate modifications.” Notice 2012-31 proposed that, for an employer-sponsored plan to provide minimum value, it would be required to cover four core categories of benefits: physician and mid-level practitioner care, hospital and emergency room services, pharmacy benefits, and laboratory and imaging services.

HHS has since published a final rule defining the “percentage of the total allowed costs of benefits provided under a group health plan” as

  1. The anticipated covered medical spending for essential health benefits (EHB) coverage … paid by a health plan for a standard population,

  2. Computed in accordance with the plan’s cost-sharing, and

  3. Divided by the total anticipated allowed charges for EHB coverage provided to a standard population.

HHS provided employers with three ways to determine actuarial and minimum value:

  • AV and MV calculators. Employer-sponsored plans may determine their actuarial or minimum value by entering information about the cost-sharing features of the plan for different categories of benefits into an online calculator made available by HHS.

  • Design-based safe harbor checklists. Employers will be able to use safe harbor checklists. If the employer-sponsored plan’s terms are consistent with or more generous than any one of the safe harbor checklists, the plan would be treated as providing minimum value.

  • Actuarial certification. For plans with nonstandard features that preclude the use of the AV calculator, or the MV calculator, actuarial value or minimum value is determined based on the AV or MV calculator with adjustments as certified to an actuary.

The proposed regulations include a fourth option: For small groups, plans that satisfy any of the metal tiers (platinum, gold, silver, and bronze) specified for coverage under a public insurance exchange are deemed to provide minimum value.

The minimum value proposed regulation coordinates with and builds on the HHS final regulation. The proposed regulations refer to the proportion of the total allowed costs of benefits provided to an employee that are paid by the plan as the plan’s “MV percentage.” According to the proposed regulation,

“The MV percentage is determined by dividing the cost of certain benefits the plan would pay for a standard population by the total cost of certain benefits for the standard population, including amounts the plan pays and amounts the employee pays through cost-sharing, and then converting the result to a percentage.” (Emphasis added).

A plan with an MV percentage of 60% or more is deemed to provide minimum value. Anything less, and a plan fails to provide minimum value.

The proposed regulations do not require an employer to provide coverage for all EHB categories. Instead, minimum value is measured with reference to “benefits covered by the employer that also are covered in any one of the EHB benchmark plans.” Or, put another way, a plan’s anticipated spending for benefits provided under any particular EHB-benchmark plan for any state “counts towards” that plan’s MV. Thus, while large groups are not required to offer EHBs, their minimum value percentage is tested against an EHB benchmark plan. The categories of EHB provided in the IRS/HHS calculator include:

  • Emergency Room Services

  • All Inpatient Hospital Services (including mental health and substance use disorder services)

  • Primary Care Visit to Treat an Injury or Illness (except Preventive Well Baby, Preventive, and X-rays) Specialist Visit

  • Mental/Behavioral Health and Substance Abuse Disorder Outpatient Services

  • Imaging (CT/PET Scans, MRIs)

  • Rehabilitative Speech Therapy

  • Rehabilitative Occupational and Rehabilitative Physical Therapy

  • Preventive Care/Screening/Immunization

  • Laboratory Outpatient and Professional Services

  • X-rays and Diagnostic Imaging

  • Skilled Nursing Facility

  • Outpatient Facility Fee (e.g., Ambulatory Surgery Center)

  • Outpatient Surgery Physician/Surgical Services

  • Drug Categories

    • Generics

    • Preferred Brand Drugs

    • Non-Preferred Brand Drugs

    • Specialty Drugs

Safe harbor minimum value plans

The proposed regulations establish the following safe harbor plan designs for plans that cover all of the benefits included in the minimum value calculator:

  • A plan with a $3,500 integrated medical and drug deductible, 80% plan cost sharing, and a $6,000 maximum out-of-pocket limit for employee cost-sharing;

  • A plan with a $4,500 integrated medical and drug deductible, 70% plan cost sharing, a $6,400 maximum out-of-pocket limit, and a $500 employer contribution to an HSA; and

  • A plan with a $3,500 medical deductible, $0 drug deductible, 60% plan medical expense cost-sharing, 75% plan drug cost-sharing, a $6,400 maximum out-of-pocket limit, and drug co-pays of $10/$20/$50 for the first, second and third prescription drug tiers, with 75% coinsurance for specialty drugs.

HSAs, HRAs, and wellness programs — Impact on minimum value

The proposed regulations provide that current year employer contributions to a health savings account (HSA) and amounts newly made available under a health reimbursement arrangement (HRA) that is integrated with an eligible employer-sponsored plan and that are limited to the payment or reimbursement of medical expenses count toward the plan’s share of costs included in calculating minimum value. But if the HRA can be applied toward both the reimbursement of medical expenses and the payment of premiums, employer HRA credits may not be used in the minimum value determination. An integrated HRA is an HRA that coordinates with an employer’s group health plan.

The proposed regulations also provide that a plan’s share of costs for minimum value purposes is generally determined without regard to reduced cost-sharing available under a nondiscriminatory wellness program. But in the case of nondiscriminatory wellness programs designed to prevent or reduce tobacco use, minimum value may be calculated assuming that every eligible individual satisfies the terms of the program. These rules apply to wellness program incentives that affect deductibles, co-payments, or other cost-sharing.

HSAs, HRAs, and wellness programs — Impact on affordability

Because HSAs cannot be used to pay premiums, they don’t affect affordability.

Amounts newly made available under an integrated HRA for the current plan year are taken into account in determining affordability if the employee may use the amounts only for premiums or if he or she may choose to use the amounts for either premiums or cost-sharing. According to the preamble to the proposed regulation, treating amounts that may be used either for premiums or cost-sharing towards affordability prevents double counting the HRA amounts when assessing minimum value.

Tracking the rules for determining minimum value, after 2014, wellness incentives may not be included as either additions to, or deletions from, an individual’s plan premium for purposes of calculating affordability unless the incentive is related to a tobacco cessation program. Thus, the affordability of a plan that charges a higher initial premium for tobacco users will be determined based on the premium that is charged to non-tobacco users, or tobacco users who complete the related wellness program, such as attending smoking cessation classes.

2014 Transition Rule

For purposes of applying the employer shared responsibility rules, for plan years beginning before January 1, 2015, an employer will not incur a penalty under the coverage prong where an employee qualifies for premium assistance if the offer of coverage would have been affordable or would have satisfied minimum value based on the required employee premium and cost-sharing determined as if the employee satisfied the requirements of any such wellness program (including a wellness program relating to tobacco use). This rule applies only to wellness plan terms and incentives in effect as of May 3, 2013, and only to employees who are in a category of employees eligible for the program as of that date.

The following table summarizes the rules governing wellness programs, HSAs and HRAs:

Health Savings Accounts, Health Reimbursement Accounts, and Non-discriminatory Wellness Programs: Summary of Impact on Affordability and Minimum Value

 

Affordability

Minimum Value

Current-year contributions to Heath Savings Accounts

Does not apply, since HSAs can’t be used to pay premiums

Amounts contributed by an employer for the current plan year to an HSA are taken into account in determining the plan’s share of costs for MV purposes.

Current-year contributions to integrated Heath Reimbursement Accounts—premiums and payment/reimbursement of medical expenses

Applies for purposes of the affordability determinations

Amounts newly made available under an integrated HRA for the current plan year are not taken into account for MV purposes.

Current-year contributions to integrated Heath Reimbursement Accounts—Limited to payment/reimbursement of medical expenses

Applies for purposes of the affordability determinations

Amounts newly made available under an integrated HRA for the current plan year are taken into account for MV purposes.

Non-discriminatory wellness programs for 2014

For purposes of applying the employer shared responsibility rules (i.e., Code § 4980H), affordability is determined by assuming that each employee satisfies the requirements of a wellness program (including a wellness program relating to tobacco use).

For purposes of applying the employer shared responsibility rules (i.e., Code § 4980H), MV is determined by assuming that each employee satisfies the requirements of a wellness program (including a wellness program relating to tobacco use).

Non-discriminatory wellness programs—other than tobacco cessation for 2015 and later years

Affordability is determined by assuming that each employee fails to satisfy the requirements of a wellness program.

A plan’s share of costs is determined without regard to reduced cost-sharing available under a nondiscriminatory wellness program.

Non-discriminatory wellness programs—tobacco cessation for 2015 and later

Affordability is based on the premium charged to non-tobacco users (or tobacco users who complete the alternative standard).

A plan’s share of costs is determined assuming every eligible individual satisfies the terms of a nondiscriminatory wellness program.

Modified Rule for Retirees

The proposed regulations provide that a pre-Medicare retiree who declines to enroll in available retiree coverage may qualify for premium assistance. This is similar to the rule adopted in final regulations under Code section 36B, under which an individual who may enroll in continuation coverage required under federal law or a state law is eligible for minimum essential coverage only for months that the individual is enrolled in the coverage. Under this proposed rule, a low-income retiree who declines to enroll in an employer’s retiree health plan may still qualify for premium assistance despite that employer’s coverage is both affordable and provides minimum value.

U.S. Customs and Border Patrol Expands Reconciliation Opportunities

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In the May 13, 2013 Federal Register, United States Customs and Border Protection (CBP) announced the expansion of its Reconciliation Prototype program to include post-importation duty preference claims under the U.S.-Oman Free Trade Agreement, the U.S.-Peru Trade Promotion Agreement, the U.S.-Korea Free Trade Agreement, the U.S.-Colombia Trade Promotion Agreement, and the U.S.-Panama Trade Promotion Agreement.  CBP announced this expansion will take effect for post-importation duty preference claims filed on or after August 12, 2013.

The expansion will enable importers to file post-entry duty preference claims under the above-referenced free trade agreements (FTAs) where they are unable to confirm qualification at the time of entry.  Using the Reconciliation program, importers will electronically flag as-yet-unqualified imports at the time of entry.  Presuming the requisite supporting information becomes available within 12 months of the date of entry, importers can then file a Reconciliation entry to make their duty preference claim and receive corresponding duty refunds.  Importers who are not yet part of the Reconciliation program, but would like to take advantage of these expanded opportunities, must apply to participate by submitting the requisite application to CBP Headquarters.

CBP has been utilizing the Reconciliation Prototype program since 1998 as part of its National Customs Automation Program Reconciliation provides importers an automated mechanism to identify at the time of entry certain undeterminable information (that does not affect admissibility), and provide that information at a later date through an entry-by-entry or aggregate filing. Importers identify this provisional information by placing an electronic “flag” at the time the entry summary is filed.  Prior to expansion to allow for various post-entry FTA claims, importers could only flag information relating to: 1) value issues other than claims based on manufacturing defects; 2) classification issues, on a limited basis; 3) issues concerning value aspects of entries filed under heading 9802, Harmonized Tariff Schedule of the United States (HTSUS); and 4) issues concerning merchandise entered under the North American Free Trade Agreement (NAFTA).

The expansion of the Reconciliation program to these additional FTAs is consistent with the original opportunities to file post-entry NAFTA claims, as well as previous expansion of the Reconciliation program to include the U.S.-Chile Free Trade Agreement and the Dominican Republic-Central America-U.S. Free Trade Agreement. As importers have experienced with Reconciliation for NAFTA, allowing for post-importation duty claims under these new trade agreements allows for a streamlined mechanism for filing post-entry refund claims, and allows importers to file potentially thousands of post-entry claims under a single Reconciliation entry and receive a single duty refund check from CBP in response.

Importers may elect not to file their post-entry duty preference claims via the Reconciliation prototype, and expansion of the program does not prohibit importers from continuing to file post-entry claims using traditional processes in accordance with 19 U.S.C § 1520(d).However, once an importer flags an entry summary indicating that it may pursue post-importation duty preference claims via the Reconciliation process, the importer locks itself into the process and waives its rights to file a traditional paper filing pursuant to 19 U.S.C.§ 1520(d). If, after having flagged the entry, an importer fails to file a post-entry Reconciliation claim under one of the approved FTAs, the importer will not be assessed liquidated damages for a late file or no file Reconciliation (which can happen for post-entry valuation adjustments that are flagged but not reconciled). Rather, the flagged FTA entry will simply liquidate at the end of the 12-month period as entered, i.e., with the payment of duties and fees.

Reconciliation can be an effective trade compliance and risk management tool. Among other things, it allows importers to streamline multiple post-entry FTA claims, and can also serve as a compliance vehicle to flag undetermined or provisional values at the time of entry – providing an automated method to make entry corrections or adjustments once the relevant information has been finally determined. The extension of the Reconciliation Prototype to these additional FTAs provides importers with additional tools to manage their duty preference programs.

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Travel Alert: Students and H-1B Visa Cap

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Now that the stress and anxiety of H-1B cap is over, F-1 students whose H-1B petitions have been selected and are pending (or even approved) are likely wondering if they can travel this summer. It appears that the answer to that question is ‘no’ for F-1 students who are relying on the cap-gap provision. The cap-gap provision automatically extends F-1 status and employment authorization until October 1, 2013 for those F-1 students whose H-1B cap petition was filed before their F-1 status expired.

Current USCIS guidance indicates that F-1 students will lose cap-gap benefits if they travel internationally during the cap-gap period. This means that if an F-1 student travels outside the United States during the cap-gap extension period, he or she will not be able to return to the United States in valid F-1 status and will need to wait until September 2013 to re-enter the United States in H-1B status.

Because an H-1B beneficiary may enter the United States up to 10 days prior to the start date of their approved H-1B visa period, F-1 visa holders who wish to travel may take a trip in September so that they can apply for the H-1B visa at a U.S. consular post abroad and return to the United States on or after September 20. However, it should also be noted that the earliest that the foreign national can start employment in H-1B status is October 1, 2013.

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Department of Labor (DOL) Issues Model Notices to Employees Describing Health Insurance Exchanges

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Deadline to Provide Notices is October 1, 2013

The Patient Protection and Affordable Care Act (PPACA), the new health care reform law passed in 2010, requires many employers to notify their employees of the availability of health coverage under the new health insurance exchanges that are required to be operational effective January 1, 2014. All employers subject to the federal Fair Labor Standards Act must provide this notice, regardless of whether the employer currently offers health coverage to its employees. Employers must provide the notice to all full and part-time employees (but not to dependents).

On May 8, 2013, the Department of Labor (DOL) issued model notices for employers to use in satisfying these requirements. A copy of the notice for employers that offer health coverage is available here and a copy of the notice for employers that do not offer health coverage is available here.

Employers are free to modify the model notices provided that the notices, as modified, continue to satisfy the content requirements set forth in the PPACA. Employers must provide the notices to their existing employees no later than October 1, 2013. Employees hired on or after October 1, 2013 must receive the notice no later than 14 days after their hire date.

The notices may be provided by first class mail or electronically if the DOL’s electronic disclosure rules are met.

Model COBRA Notice

Additionally, the DOL updated its model COBRA notice for use by employers in notifying employees of their rights to continue (after certain losses of coverage) coverage under the employer’s health plan. The updated model notice contains information about the new health insurance exchanges. A copy of the updated model notice is available here.

Is Environmental Protection Agency (EPA) Setting Its Sights on Hydraulic Fracturing Compounds?

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Agency implements rule requiring companies to disclose information regarding the use of certain industrial chemical substances commonly used in natural gas and oil well drilling.

On May 9, the U.S. Environmental Protection Agency (EPA) issued a Direct Final Rule[1] identifying 15 chemical substances[2] that will require notice prior to manufacturing, importing, or processing for an activity designated as a significant new use. These chemicals were flagged pursuant to the Toxic Substances Control Act (TSCA) significant new use rules (SNURs). The notices, referred to as Significant New Use Notices (SNUNs), must be submitted to EPA 90 days before a listed chemical is manufactured, imported, or processed for an activity designated as a significant new use. EPA states that this will provide the agency with an opportunity to evaluate the intended use and determine whether it is necessary under TSCA to prohibit or limit the activity before it occurs.

While chemicals in the rule include those that can be employed in a broad range of uses, of particular interest is the listing of one compound[3] used in natural gas and oil well drilling and hydraulic fracturing to eliminate bacteria in the water that produce corrosive by-products. EPA included this compound due to its potential toxicity to aquatic life at concentrations above 11 parts per billion (ppb). Pursuant to the Direct Final Rule, 40 C.F.R. Part 721, Subpart E [Significant New Uses for Specific Chemical Substances] is expected to be amended to include section 721.10666, which would require reporting and associated recordkeeping obligations for the following significant new uses of this compound:

  • Industrial, commercial, and consumer activities other than as described in the original premanufacture notice (PMN) for this substance (PMN P-12-437)
  • Release to water resulting in surface water concentrations exceeding 11 ppb

EPA also recommended additional testing to help characterize the fate and environmental effects of the substance.

This is in line with EPA’s declared intent to use TSCA to require companies to disclose information regarding chemical substances and mixtures used in hydraulic fracturing. However, it has been nearly two years since the agency, partly in response to a petition filed by Earthjustice, stated that it would propose rules to require certain reporting requirements for chemicals used in hydraulic fracturing.

Under TSCA, SNUNs must contain the following:

  • Common or trade name of the chemical substance
  • The chemical identity and molecular structure of the chemical substance
  • The categories or proposed categories of use
  • The total amount of each chemical substance manufactured or processed per category or use
  • A description of by-products resulting from the manufacture, processing, use, or disposal of each such chemical substance or mixture
  • All existing data concerning the environmental and health effects of the substance
  • Estimates of the number of people exposed in their places of employment and the duration of such exposure
  • Changes in disposal methods
  • Any test data in the possession or control of the person giving the notice that is prescribed by EPA

Accordingly, while this rule does not implement a broad reporting requirement for hydraulic fracturing chemicals, it points to the likelihood of increased reporting for these substances. What is unclear, for the moment, is whether this new rule is a stopgap measure or a preview to a comprehensive proposal for TSCA reporting requirements for hydraulic fracturing chemicals.

The rule is effective on July 8, 2013, unless written “adverse or critical” comments on any of the SNURs, including potential alternatives and likely financial burdens, are received on or before June 10, 2013. Those chemical substance(s) and new use that receive comments or notice of intent to comment will be withdrawn before the effective date and a proposed SNUR for the specific chemical substance will be issued with a 30-day comment period. For purposes of judicial review, the rule is promulgated on May 23, 2013.

The rule highlights the need for firms using TSCA-listed chemicals for new and innovative technologies to bear in mind the PMN and SNUR implications for their applications. Additionally, the hydraulic fracturing industry should carefully watch for potential regulation of additional substances used in fracturing fluids.

[1]. View the Direct Final Rule here.

[2]. The chemical substances and associated PMNs subject to this Direct Final Rule are as follows:

  • Methylenebis[isocyanatobenzene], polymer with alkanedoic acid, alkylene glycols, alkoxylated alkanepolyol, and substituted trialkoxysilane (generic). PMN No. P-11-60.
  • Acetaldehyde, substituted-, reaction products with 2- butyne-1, 4-diol (generic). PMN No. P-11-204.
  • Functionalized multi-walled carbon nanotubes (generic). PMN No. P-12-44.
  • Alkenedioic acid dialkyl ester, reaction products with alkenoic acid alkyl esters and diamine (generic). PMN Nos. P-12-408, P-12-409, P-12-410, P-12-411, P-12-412, and P-12-413.
  • 2-Propenoic acid, (2- ethyl-2-methyl-1,3-dioxolan-4-yl)methyl ester. PMN No. P-12-414.
  • Quaternary ammonium compounds, bis(fattyalkyl) dimethyl, salts with tannins (generic). PMN No. P-12-437.
  • Slimes and sludges, aluminum and iron casting, wastewater treatment, and solid waste. PMN No. P-12-560.
  • Trisodium diethylene triaminepolycarboxylate (generic). PMN No. P-13-18
  • Tertiary amine alkyl ether (generic). PMN No. P-13-78.
  • Bromine, manufacture of, by-products from, distillation residues. PMN No. P-13-108.

A generic name was provided if the specific chemical substance named was claimed as confidential business information.

[3]. The “quaternary ammonium compounds, bis(fattyalkyl)dimethyl, salts with tannins (generic).”

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California Requires Many Foreign Corporations To Send Annual Financial Statements To Shareholders

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California is a net exporter of corporate charters, but it remains home to many corporations. As a result, the California Corporations Code has a preternatural concern with foreign corporations.

One example is Section 1501(a) which requires the board to cause an annual report to be sent to shareholders.  This report must include a balance sheet as of year end and an income statement and statement of cash flows for the year.  The statute doesn’t require that the statements be audited, but if an independent accountant has issued a report, then that report must be sent along as well.  If there is no report, then the report must include a certificate of an authorized officer that the statements were prepared without audit from the books and records of the corporation.  If the corporation has fewer than 100 holders of record (determined in accordance with Section 605), the financial statements need not be prepared in conformity with generally accepted accounting principles if the statements reasonably set forth the assets and liabilities and income and expense of the corporation and disclose the accounting basis used in their preparation.

The report must be sent not later than 120 days after the close of the fiscal year and must be sent at least 15 days (or, if sent by third class mail, 35 days) prior to the annual meeting of shareholders held during the following fiscal year.  Cal. Corp. § 1501(a)(1) & (2).

This requirement applies to domestic corporations, a term that embraces any corporation formed under the laws of California.  Cal. Corp. § 1501(g).  Thus, it includes corporations not formed under the General Corporation Law. See Cal. Corp. Code § 167.  However, a corporation with less than 100 holders of record (determined in accordance with Section 605) may include a bylaw provision that waives the annual report requirement.

The statute also applies to any foreign corporation if the corporation has its principal executive offices in California or it customarily holds meetings of its board in California.  Cal. Corp. § 1501(g).

Publicly traded companies are not exempted per se from this requirement.  However, corporations with an outstanding class of securities registered under Section 12 of the Securities and Exchange Act of 1934 will satisfy the annual report requirement if they comply with Rule 14a-16 (17 C.F.R. § 240.14a-16).  Cal. Corp. § 1501(a)(4).  [Note that this statute purports to include future amendments and this may give rise to a constitutional problem, see Why Incorporation May Be Unconstitutional.]

Here is a flow-chart describing the application of the statute.  This is probably a good time to remind readers that this blog does not provide legal advice.  There are other requirements in Section 1501 (including possible quarterly reporting requirements) that are not covered in today’s post.  Moreover, there are other nuances that I’ve not mentioned.

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