The National Law Forum

USCIS issued Draft Requests for Evidence Template for L-1B Petitions

USCIS In recent years, the USCIS has issued an increasing number of denials and Requests for Evidence (RFE) for L-1B specialized knowledge employees. As defined by regulations, specialized knowledge is special knowledge possessed by an individual of the petitioning organization’s product, service, research, equipment, techniques, management, or other interests and its application in international markets, or an advanced level of knowledge or expertise in the organization’s processes and procedures. The RFEs were extensive and appeared to be “boiler-plate,” sometimes with no indication in the request issued that the examiner had reviewed the evidence that was submitted with the initial filing. The trend added burden to employers with the extra time and cost associated with responding to the extensive RFEs, which could result in unforeseen delays severely affecting projects and impeding on U.S. employer’s ability to conduct business or fulfill projects, contracts, and deadlines.

Currently, there is no standardized L-1B template for RFEs. In March 2015, USCIS issued guidance on the adjudication process for L-1B petitions in an L-1B Adjudications Policy Memorandum, PM-602-0111 (hereinafter L-1B Policy Memo). The March L-1B Policy Memo itself is a draft and is not set to go into effect until Aug. 31, 2015. Despite the fact that the L-1B Policy Memo is not yet finalized, USCIS subsequently requested comments (which were due on July 31, 2015) on the draft RFE Template for L-1B petitions. The draft RFE Template reflects changes outlined in the March L-1B Policy Memo and includes a list of evidence that could be used to established that the beneficiary has gained specialized knowledge as well as other threshold criteria for L-1B petitions including evidence that the beneficiary has met the one year of qualifying employment abroad; both the U.S. and foreign entities have a qualifying relationship and are actively doing business; and guidance on how to determine whether a beneficiary assigned to an off-site worksite with an unaffiliated employer remains eligible for L-1 classification.

The RFE Template indicates that merely stating the beneficiary’s knowledge is not as strong as providing documentary evidence to establish the beneficiary possesses specialized knowledge. The employer has the burden of providing documentary evidence to show that the beneficiary attained the specialized knowledge through prior education, training, and employment and comparing the beneficiary’s knowledge to that of other employees and workers in the same field. The list of “other evidence” as outlined in the RFE Template includes:

· An explanation of the beneficiary’s knowledge or expertise. Please identify the beneficiary’s knowledge as either “special” and/or “advanced.”

· Documentation of training, work experience, or education establishing the number of years the individual has been utilizing or developing the claimed specialized knowledge as an employee of the organization or in the industry;

· Evidence of the impact, if any, the transfer of the individual would have on the organization’s U.S. operations;

· Evidence that the alien is qualified to contribute to the U.S. operation’s knowledge of foreign operating conditions as a result of knowledge not generally found in the industry or the petitioning organization’s U.S. operations;

· Contracts, statements of work, or other documentation that shows that the beneficiary possesses knowledge that is particularly beneficial to the organization’s competitiveness in the marketplace;

· Evidence, such as correspondence or reports, establishing that the beneficiary has been employed abroad in a capacity involving assignments that have significantly enhanced the organization’s productivity, competitiveness, image, or financial position;

· Personnel or in-house training records that establish that the beneficiary’s claimed specialized knowledge normally can be gained only through prior experience or training with that employer;

· Curricula and training manuals for internal training courses, financial documents, or other evidence that may demonstrate that the beneficiary possesses knowledge of a product or process that cannot be transferred or taught to another individual without significant economic cost or inconvenience;

· Evidence of patents, trademarks, licenses, or contracts awarded to the organization based on the beneficiary’s work, or similar evidence that the beneficiary has knowledge of a process or a product that either is sophisticated or complex, or of a highly technical nature, although not necessarily proprietary or unique to the petitioning organization;

· Payroll documents, federal or state wage statements, resumes, organizational charts, or similar evidence documenting the positions held and the wages paid to the beneficiary and parallel employees in the organization; and

· Any other evidence that shows the beneficiary has specialized knowledge.

ARTICLE BY Kristin Bolayir & Ian R. Macdonald of Greenberg Traurig, LLP

New Joint Employer Doctrine and Hybrid Test Increase Possible Liability Under Title VII in Fourth Circuit

Over the last several years, there has been quite a push to broaden who is considered an employee – as well as who is considered an employer – under relevant federal (and even state) laws. For instance, the Department of Labor has stepped up its efforts in singling out employers who misclassify workers as independent contractors. Their recent memo on this subject – which we wrote about here – is the most recent evidence of that. The National Labor Relations Board has also been active in this general area, issuing complaints against McDonald’s arguing that a number of its franchisors have as much control over employees as the franchisees do, and therefore are just as legally responsible for ensuring compliance with certain employment laws. These arguments have been advanced by more than just government agencies, however. They have been made by private plaintiffs under anti-discrimination law, too.

In a recent Fourth Circuit opinion, Butler v. Drive Automotive Industries of America, Inc., No. 14-1348, 2015 WL 4269615 (4th Cir. 2015), the court found that two parties can be considered joint employers under Title VII. In reaching that conclusion, the Fourth Circuit adopted a new employee-friendly “hybrid test” to determine whether a company qualifies as an employer. Employers everywhere – but especially those in the Fourth Circuit, including in West Virginia – should pay particular attention to this decision because it increases potential liability for them. This is especially true for employers who use contract or temporary employees through staffing agencies. Let’s take a deeper look at the case.

In Butler, the Plaintiff, Brenda Butler, was hired by ResourceMFG, a temporary employment agency, to work at Drive Automotive in Piedmont, South Carolina. Butler sued ResourceMFG and Drive Automotive alleging sexual harassment under Title VII of the Civil Rights Act of 1964. She alleged that her supervisor made constant, inappropriate comments about her body. Additionally, she alleged that after she reported an altercation in which Butler’s supervisor called her an inappropriate name and told her to go home, she was referred to ResourceMFG for termination. Further, Butler alleged that her supervisor called before she was terminated and suggested that he could save her job if she performed sexual favors for him. Soon thereafter, she was terminated by ResourceMFG. The key issue in the case was not whether the temp agency, ResourceMFG, was Butler’s employer – that was undisputed – but was whether Drive Automotive also was considered her employer.

The District Court for the District of South Carolina, where the case was originally filed, dismissed Butler’s claims against Drive Automotive, finding that Drive Automotive was not Butler’s “employer” under Title VII because it did not “exercise sufficient control over Butler’s employment.”

On appeal, the Fourth Circuit formally adopted the joint employer doctrine for Title VII claims. The Fourth Circuit stated that two parties can be considered joint employers and therefore both be liable under Title VII if they “share or co-determine those matters governing the essential terms and conditions of employment” over the same employees. Additionally, the Fourth Circuit adopted a nine-factor “hybrid test” to determine who qualifies as an “employer” for Title VII. The test is based on traditional common-law elements of control, as well as an “economic realities” test which has long been a factor used by the Department of Labor in issuing determinations in this area. The nine factors are as follows:

(1) Authority to hire and fire the individual;

(2) Day-to-day supervision of the individual, including employee discipline;

(3) Whether the potential employer furnishes the equipment used and the place of work;

(4) Possession of and responsibility over the individual’s employment records, including payroll, insurance, and taxes;

(5) The length of time the individual has worked for the potential employer;

(6) Whether the potential employer provides the individual with formal or informal training;

(7) Whether the individual’s duties are similar to a regular employee’s duties;

(8) Whether the individual is assigned solely to the potential employer; and

(9) Whether the individual and potential employer intended to enter into an employment relationship.

According to the Fourth Circuit, the first three factors are most important. However, the Court added that no one factor is determinative and courts can alter the test to fit specific industry contexts. In doing so, the Court said, the amount of control over the individual remains the principal guidepost in the analysis, with the first factor – the ability to hire and fire – being the most important to determine ultimate control. In a footnote, the Court observed that the use of a form which disclaims an employment relationship will not defeat a finding of a joint employer relationship.

After setting out the new test, the Fourth Circuit concluded in Butler’s case that, while control remained the most important factor in the analysis, Drive Automotive was also Butler’s employer despite not having authority to hire, fire, discipline, or pay Butler. In so concluding, the Fourth Circuit considered the aggregate circumstances, and found important the fact that Drive Automotive was responsible for determining Butler’s work schedule, training Butler, and supervising Butler’s work.

While these situations are always examined on a case-by-case basis, it’s hard to dispute that, in applying its new “hybrid test” and reaching the conclusion it did in Butler, the Fourth Circuit essentially created a very low threshold to qualify as an employer. That, in turn, will make more entities – particularly in contracting and temporary relationships – more likely to be considered employers, including in discrimination claims under Title VII.

With another employee-friendly ruling from the Fourth Circuit court, businesses need to be especially vigilant about their employment practices in this area, which is why consulting competent counsel on the subject is becoming increasingly important. At minimum, review your contracts and your policies to ensure that the practices you apply to your workers truly demonstrate and maintain the legal relationships which you wish to use.

ARTICLE BY Joseph U. Leonoro of Steptoe & Johnson PLLC

Neiman Marcus Asks Full 7th Circuit to Consider Standing Ruling in Breach Suit

A Seventh Circuit panel that allowed a data breach suit against Neiman Marcus to proceed misapplied the Supreme Court’s precedents on standing and, “if allowed to stand, will impose wasteful litigation burdens on retailers and the federal courts,” the retailer argues in a petition filed yesterday asking the full Seventh Circuit to rehear the case.

Last month, a Seventh Circuit panel ruled that Neiman Marcus customers whose credit card information potentially was exposed in a 2013 breach of the retailer’s computer systems could proceed with their proposed class action lawsuit against the retailer. The panel found that the plaintiffs alleged sufficient “injuries associated with resolving fraudulent charges and protecting oneself against future identity theft” to establish their standing to sue in federal court, and that affected customers “should not have to wait until hackers commit identity theft or credit‐card fraud in order to give the class standing, because there is an ‘objectively reasonable likelihood’ that such an injury will occur.” The panel also found it “telling” that the retailer offered affected customers a year of free credit monitoring and identity-theft protection, and appeared to interpret this as a tacit acknowledgment that the risk to customers was more than “ephemeral.”

Neiman Marcus’s rehearing petition argues, among other things, that the panel’s reliance on the “objectively reasonable likelihood” standard for determining if a plaintiff has standing based on a potential future injury directly conflicts with a 2013 Supreme Court ruling, Clapper v. Amnesty International USA. In Clapper, the Supreme Court said plaintiffs seeking to establish standing based on a risk of future injury must show that the threatened injury is “certainly impending,” and the high court held that “the Second Circuit’s ‘objectively reasonable likelihood’ standard is inconsistent” with that requirement.

“By using an obviously wrong and overly lenient standard to determine whether the plaintiffs’ alleged future injuries provided standing, the panel committed a critical error,” Neiman Marcus’s petition argues.

In addition, Neiman Marcus argues that “there was no risk … that [plaintiffs] would be financially responsible for any fraudulent credit card charges,” and that breaches like that experienced by Neiman Marcus — which involved only payment card data and did not expose sensitive data such as Social Security numbers — “create no meaningful risk of identity theft.” Neiman Marcus’s petition also criticizes the panel for using the retailer’s offer of a year of free credit monitoring and identity-theft insurance to a broad group of customers — including customers whose data could not “conceivably” have been compromised in the breach — as evidence that the risk of injury to customers was sufficiently concrete. Such a holding “creates an unfortunate disincentive for companies to do so in the future,” Neiman Marcus wrote.

A rehearing is especially important in this case, the petition argues, because although the panel’s decision conflicts with rulings by the Third Circuit and “numerous district court decisions,” Neiman Marcus’s case is “the only appellate decision squarely considering a retail data breach in which only payment card data is stolen,” and thus “the opinion could well shape the law of standing in such cases for years to come.”

ARTICLE BY Michael Beder of Covington & Burling LLP

H-1B Update – New Petition Required When Work Location Changes – the World is Global, but U.S. Immigration is Local

While the 21st Century is a time of globalization, a time where with telecommuting and virtual offices there is a re-examination of whether there is still significance to your geographical location, United States Citizenship and Immigration Services (USCIS) is decidedly “retro” in firmly planting its feet in the 20th Century, pursuant to an AAO decision (Matter of Simeio Solutions, LLC) published April 9, 2015, which declares that any worksite change which triggers the requirement to obtain a labor condition attestation requires an employer to amend the underlying H-1B petition.

The real irony is that this was never USCIS or former INS policy, even during such times when geographical location was more meaningful than it is now.

USCIS initially intended to apply this policy retroactively. However, it backed off and in guidance published on July 21, 2015, coyly announced that it would “generally not take adverse action against employers that failed to file amended petitions”, so you as an employer are now left to decide what “generally” means. The guidance provides a new deadline of January 15, 2016 for those that decide to file amended petitions and for those where the geographical location change occurs between April 9, 2015 to August 19, 2015.

I guess those companies that have a high volume of geographical changes will do the cost benefit analysis and rely on “generally” and not amend. Other companies where volume of change is much more modest may likely choose to play it safe and file amended petitions.

This is a sorry state of affairs where a government agency relies on “ambiguity” as a tool of enforcement. USCIS has always had a hard time finding a way to deal with change and what constitutes a material change and it is understandable that as an agency, it feels that the difficulty in tracking where an H-1B employee undercuts its enforcement prerogatives, such as its FDNS “site visit” program.

The Simeio case itself involved an FDNS site visit where the H-1B beneficiary was not found at the designated site, accidentally discovered, only because of the site visit.

However, distorting the H-1B program by requiring the filing of an amended petition every time an employee moves from one location to the other seems to be a clumsy, cumbersome and inefficient way to notify USCIS of a geographical change in light of the burden of this process, including filing fees, legal fees, and document preparation. All this just to notify USCIS of a relatively simple, routine change in the course of business!

The AR-11 Model

Ironically, USCIS already has a program in place, which requires nonimmigrants in the United States to notify the agency when they change geographic locations via a simple form completed on paper or online, Form AR-11. The program works quite well. I see no reason why this very same concept cannot be adopted to a notification requirement for an H-1 job location change, avoiding the disproportionate burden placed upon all by insisting on an H-1B amendment every time a there is a change in job locations .

Maybe then, USCIS can protect its enforcement prerogative while still remaining a citizen of the 21st Century!

ARTICLE BY David Grunblatt of Proskauer Rose LLP

To Apple, Love Taylor: Apple Responds with Royalties

“To Apple, Love Taylor” has been the tweet heard ‘round the music world. With more than 61 million followers, Taylor Swift has become the “loudest” voice for emerging and independent artists in the music-streaming realm. As copyright lawsuits from record companies continue to crop up across the industry, music-streaming service providers have become far more sensitive to the demands of artists and the trend for higher royalty payments. Case in point: when Taylor “streams” for royalties, Apple responds.

Taylor’s tweet to Apple explained, “with all due respect,” why she was planning to withhold her mega best-selling album 1989 from Apple’s new music-streaming service, Apple Music. Apparently, Apple’s plan to withhold royalty payments from musicians during the service’s initial, free three-month trial period did not sit well with Swift. Speaking primarily on behalf of emerging and independent artists, Swift deemed three months “a long time to go unpaid.” Taylor’s stance followed a long line of objections from songwriters, artists, and labels over allegedly unfair payment by music-streaming services. Recently, the Turtles and other performers brought suit against Sirius XM to collect royalty payments that had not been paid for songs produced before 1972. Previously, big streamers like Sirius XM and Pandora were not paying royalties for songs launched before 1972 because they were not protected by federal copyright law. In the wake of the Turtles suit, Apple was swift to respond to Swift’s plea. Eddy Cue, Apple’s senior vice-president of internet software and services, tweeted “we hear you @taylorswift13 and indie artists” and called Taylor to deliver the news personally. Apple had reconsidered its plan and will now be paying artists royalties at the outset of its Apple Music launch.

Clearly, Taylor’s attempt at flattery, saying that the initial decision to withhold royalty payments was surprising in light of Apple’s reputation as a “historically progressive and generous company,” got her everywhere. Taylor claimed that her complaints were not the rantings of a “spoiled, petulant child,” but rather “echoed sentiments of every artist, writer, and producer in [her] social circles who [we]re afraid to speak up publicly because [they] admire and respect Apple so much.” As she pointed out, Apple’s plan to offer royalty-free streaming during its initial start-up period could have had disastrous effects on artists planning to release new albums during that time. While the cost of these royalties may not be relatively significant to Apple, the goodwill and favor fostered among artists, labels, and consumers is invaluable. Apple’s move indicates that artists are finally succeeding in shifting royalty payments more toward their favor via lawsuits, negotiations, and now very public Twitter exchanges. The power of public opinion is not only strong but, these days, instantaneously widespread, and Apple was smart to respond.

It seems that Sirius heard Apple too. Just days after Eddy Cue’s public response to Taylor Swift, Sirius settled its lawsuit with the Turtles to the tune, no pun intended, of $210 million for its broadcast of songs produced before 1972. Under the settlement, Sirius will continue to play the older songs until 2017, at which time it will strike new licensing deals with affected artists. With this settlement in place and with the established prospect for older performers to collect royalties in the future, the Turtles and Sirius are once again “Happy Together.”

This public discourse over streamed music, copyrights, and royalty payments illustrates the fast-paced evolution of the industry since the introduction of digital music files in the Napster heyday. Streaming services have been forced to anticipate and address the demands of artists, particularly that of the growing request for greater royalties. While a voice as “loud” as that of Taylor Swift may warrant an immediate, calculated response, it is likely we will see more music royalties and other digital copyright litigation in the years to come.

ARTICLE BY

Annie Dike

IMS ExpertServices

IRS Announces Major Changes to its Determination Letter Program for Individually Designed Retirement Plans

On July 21, 2015, the Internal Revenue Service (IRS) issued Announcement 2015-19 (the Announcement), which ends the five year remedial amendment cycles for individually designed plans effective January 1, 2017. For remedial amendment cycles beginning after 2016, plan sponsors will no longer be able to apply for determination letters on their individually designed defined contribution and defined benefit plans, except for initial qualification and qualification upon termination. Effective on the Announcement date, off-cycle requests for determination letters will no longer be accepted. The IRS intends to publish additional guidance periodically, and seeks comments on the upcoming changes.

Background

The determination letter program allows retirement plan sponsors to request an IRS determination that the “form” of a plan (but not its operation) meets the requirements for favorable tax treatment under the Internal Revenue Code (Code). A determination letter is an IRS opinion that the terms of a retirement plan satisfy the complex requirements of Section 401(a) of the Code. It is standard practice to seek a favorable determination letter for an individually designed retirement plan. Plan sponsors, auditors, fiduciaries and others customarily rely on a favorable determination letter to establish that a plan’s terms comply with Code requirements.

Under the determination letter program, the sponsor of an individually designed plan generally applies for a determination once every five years according to staggered application cycles (Cycles A to E) based on the last digit of the plan sponsor’s employer identification number (EIN).

IRS Announcement 2015-19

The Announcement leaves unchanged the current remedial amendment period, Cycle E, ending January 31, 2016 for individually designed plans sponsored by employers with EINs ending in zero or five. Also unchanged is the next remedial amendment period, Cycle A, from February 1, 2016, through January 31, 2017, for EINs ending in one or six. Sponsors of Cycle A plans may submit determination applications until January 31, 2017. The Announcement ends the five year remedial amendment cycles for individually designed plans effective January 1, 2017. The end of the remedial amendment cycles will mean that required amendments generally must be adopted on or before the extended due date for filing the plan sponsor’s tax return for the year of a plan change. However, because the rules are changing, the IRS expects that a remedial amendment period will extend at least until December 31, 2017.

Future Compliance

The IRS and the Department of Treasury are considering ways to make it easier for sponsors to ensure that their plan documents satisfy the qualification requirements of the Code. This may include, in appropriate circumstances: (i) providing model amendments (safe harbor language), (ii) not requiring certain amendments to be adopted if they are not relevant for a particular plan (for example, because of the type of plan, employer, or benefits offered), or (iii) expanding plan sponsors’ options to document qualification requirements through “incorporation by reference.”

At a recent American Bar Association meeting, IRS officials informally discussed other possible compliance methods for plan sponsors including: (i) allowing plans sponsors to make minor changes to model amendments, (ii) making it easier to correct plan document failures under the Employee Plans Compliance Resolution System (EPCRS), and (iii) expanding the determination letter program for pre-approved plans.

In the Announcement, the IRS requests comments on the upcoming changes and specifically these issues: (i) changes to the remedial amendment period for individually designed plans, (ii) requirements for adoption of interim amendments, (iii) guidance to assist the conversion of individually designed plans to pre-approved plans and (iv) any modification of the EPCRS.

Observations

Cycle E and Cycle A plan sponsors should still submit timely determination letter requests for those plans. The Announcement on July 21, 2015, is likely just a first step, to be followed by other IRS guidance which may make it easier for plan sponsors to comply with documentary requirements. Questions and comments on the Announcement will probably be addressed later by the IRS. Plan sponsors with individually designed plans should consider the Announcement and subsequent IRS guidance in deciding on a course of action. When determination letters are no longer effective, sponsors of individually designed plans may decide to seek expert opinions that plan terms comply with Section 401(a) of the Code. Some sponsors of individually designed plans will consider transitioning those plans to a pre-approved format (Master and Prototype, or Volume Submitter), to take advantage of IRS opinion letters issued to pre-approved plans.

ARTICLE BY David Diaz, Alan D. Nesburg, PC & Stephen Pavlick, PC of McDermott Will & Emery

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New IRS Guidance on 40% Excise Tax Previews Future Regulatory Complexity

Although public opposition to the 40% excise tax on high-cost health care is rapidly growing, the IRS continued to develop a regulatory framework for administration of the excise tax through its issuance of Notice 2015-52 on July 30, 2015. Similar to the first notice on this topic, Notice 2015-52 merely identifies various administrative challenges without providing concrete guidance. If nothing else, the new guidance provides another preview into what will undoubtedly be a complex regulatory environment.

By way of background, the Affordable Care Act (or “ACA”) added Section 4980I to the Internal Revenue Code (the “Code”), which imposes a 40% excise tax (the “40% Excise Tax”) on the excess, if any, of the aggregate cost of applicable coverage provided to an employee over a set dollar limit (the applicable dollar limits will be adjusted for inflation and are subject to additional increases based on age and gender or for certain individuals in high risk professions). The 40% Excise Tax is imposed on the “coverage provider,” which is the health insurance carrier in the case of an insured group health plan, the employer with respect to a health savings account or Archer medical savings account, or in all other cases, the “person that administers the plan benefits.”

In February 2015, the IRS released the first notice, Notice 2015-16 (discussedhere), which was intended to initiate the process of developing regulatory guidance under Code Section 4980I. Notice 2015-16 described potential approaches related to the definition of applicable coverage, the calculation of the cost of applicable coverage and the applicable dollar limit.

The new IRS guidance proposes additional approaches related to (1) identification of the person or entity responsible for paying the tax, (2) determining the cost of applicable coverage, (3) age and gender adjustments to the applicable dollar limit and (4) notice and payment of the 40% Excise Tax. Although many of the approaches described by the IRS could work in the single-employer plan context, the approaches create a number of issues for multiemployer plans and the employers that contribute to them. These issues will be addressed in a future blog. Below is a summary of the key approaches described by the IRS in Notice 2015-52.

Identification of the Coverage Provider

As noted above, Code Section 4980I imposes a tax on the “coverage provider.” The coverage provider is easily identified in the case of an insured plan or a health savings account. However, in all other cases, the coverage provider is the “person that administers the plan benefits.” Because neither the ACA nor ERISA contains guidance on identifying the person or entity that administers plan benefits, the IRS has proposed two approaches to assist in identifying the coverage provider.

Under the first approach, the coverage provider would be the person or entity responsible for performing day-to-day functions related to administration of the plan (e.g., processing claims or handing participant inquiries). In many cases, this would be a third-party benefits administrator. Under the second approach, the coverage provider would be the person or entity that has the ultimate authority or responsibility with respect to administration. Usually, this would be the plan administrator that is defined in the plan, such as a benefits administration committee that has been delegated administrative duties.

Either approach will present challenges for employers. For example, a single third-party rarely administers all benefits considered “applicable coverage” under Code Section 4980I. It is not uncommon to have separate administrators for medical benefits, pharmacy benefits, mental health and substance abuse benefits and flexible spending benefits. Employers would need to determine which portion of the 40% Excise Tax should be allocated to each administrator.

Calculation of the Cost of Applicable Coverage

Similar to the first notice, much of the guidance in Notice 2015-52 focuses on issues related to determining the cost of applicable coverage. Below are the key proposals.

Timing Issues. In order to timely pay the 40% Excise Tax, coverage providers must determine the cost of applicable coverage shortly after the taxable period (which the IRS indicated will likely be the calendar year for all taxpayers, regardless of plan year). This presents challenges for self-insured plans that cannot determine the cost of coverage until claims incurred prior to the end of the taxable period are submitted. Therefore, the IRS requested comments on whether a claims run-out period would be appropriate. Additionally, experience-rated insurance policies often provide payments or discounts following a policy year. The IRS has requested comments on how these payments or discounts should be applied to the cost of applicable coverage.
Excluding Income Tax Reimbursements from the Cost of Applicable Coverage. If an entity other than the plan sponsor is responsible for paying the 40% Excise Tax, that entity will likely pass the cost of the tax through to the plan sponsor in the form of increased service fees. Code Section 4980I provides that the cost of applicable coverage does not include amounts attributable to the 40% Excise Tax. However, Code Section 4980I does not address what happens when the same parties that pass on the cost of the 40% Excise Tax also seek reimbursement of income taxes incurred due to the receipt of additional service fees. This raises an important question – should the amount passed-through in the form of increased service fees to reimburse for income taxes (in addition to the 40% Excise Tax reimbursement) be excluded from the cost of applicable coverage? The IRS has requested comments on administrable methods for excluding income tax reimbursements, including what tax rate to use. The IRS anticipates that excise tax and income tax reimbursements will be excludable from the cost of applicable coverage only if separately billed and identified.
Annual Contributions to Account-Based Plans. The cost of applicable coverage includes employer and employee contributions to account-based plans, such as health savings accounts. The IRS recognized that annual contributions (as opposed to contributions made monthly or per pay period) could trigger a 40% Excise Tax in the month of contribution because the cost of applicable coverage is determined on a monthly basis. To avoid this result, the IRS indicated that it is considering an approach that would allow employers to apply annual contributions on a pro rata basis over the course of the taxable period when determining the cost of applicable coverage.
Flex-Credits and Carry-Overs under Flexible Spending Arrangements. The cost of applicable coverage for benefits provided through a flexible spending arrangement (FSA) is the greater of the employee’s contribution to the FSA or the total reimbursements made from the FSA. The IRS stated that when an employer contributes non-elective flex credits to an FSA on behalf of an employee, the cost of applicable coverage includes (1) the employee’s contributions, and (2) the amount of non-elective flex credits actually used for reimbursements. This would prevent unused non-elective flex credits from being included in the cost of applicable coverage. The IRS also stated that it is considering a safe harbor approach for amounts carried-over from prior years to prevent double counting. Under this safe harbor, amounts carried-over from previous years will not be included in the cost of applicable coverage. The IRS plans to restrict the availability of this safe harbor if non-elective flex credits are available.
Inclusion of Amounts Taxable under Code Section 105(h). Code Section 105(h) provides that the value of a discriminatory self-insured benefit provided to a highly compensated employee must be included in the employee’s income. However, under 2012 guidance related to disclosing the cost of coverage for Form W-2 purposes, the IRS provided that the amount included in income should be excluded. Addressing this discrepancy, the IRS stated that it is the “coverage,” not the resulting tax benefit that constitutes “applicable coverage” under Code Section 4980I. In other words, although a highly-compensated employee is taxed on the value of the discriminatory coverage, that coverage must be included in the cost of applicable coverage under Code Section 4980I.

Other Proposed Approaches

The IRS also described potential regulatory approaches related to the following:

Age and Gender Adjustments to the Applicable Dollar Limit. The applicable dollar limits used to determine whether there is an excess benefit may be increased upward based on the age and gender characteristics of all employees of an employer. The IRS is considering rules allowing employers to determine these characteristics based on a “snapshot” on the first day of the plan year. The IRS also indicated that it is developing age and gender adjustment tables to assist employers in applying the adjustment.
Notice and Payment of the 40% Excise Tax. Under Code Section 4980I, employers are required to calculate the 40% Excise Tax and notify the coverage provider and the Treasury of the amount of the tax, if any. The IRS has not yet determined the form of this notice, but has indicated that coverage providers will likely pay the 40% Excise Tax using Form 720. Form 720 is a quarterly-filed form, but similar to payment of the PCORI fee, the 40% Excise Tax will only be paid once per year.

The IRS set October 1, 2015 as the due date for comments on the latest notice. Given that late date, it is not likely that proposed regulations would be completed before 2016. Employers considering filing comments on IRS Notice 2015-52 should begin to consider those comments now so they can be filed by the due date.

ARTICLE BY Damian A Myers & Douglas W Dahl, II of Proskauer Rose LLP

Four Ways Medicare and Medicaid Have Changed the Health Care Industry

It’s a bizarre program that is absolutely essential to American healthcare.

That is the opinion of Theodore Marmor, professor of public policy at Yale and author of the book, The Politics of Medicare. Whether you agree with him or not, it is difficult to deny the influence of Medicare and Medicaid on the health care industry. To mark the 50^th anniversary of Medicare and Medicaid, signed into law by President Lyndon Johnson on July 30, 1965, we have identified four ways these programs have shaped the health care industry.

There is no stopping the health care juggernaut. In a March 2014 presentation during the conference of National Health Care Journalists, Rosemary Gibson (senior advisor with The Hastings Center) brought the point home with this statistic: In 1965, there were no health care companies listed in the Fortune 100. By 2013, there were 15.
The federal government is now the largest purchaser of health care in the United States. In its Primer on Medicare, The Kaiser Family Foundation estimates that 14% of the $3.5 trillion spent by the federal government in 2014 was spent on Medicare (approximately $505 billion total), making it the largest purchaser of health care in the United States. Its spending power means CMS and Medicare will continue to hold sway in the industry.
Medicare and Medicaid is driving innovation, but have they run out of gas? US News & World Report estimates that today, one in three Americans is covered by Medicare or Medicaid, and it is that extension of coverage to a larger population that is driving innovation. In the article, “America’s Health Care Elixir,” Kimberly Leonard states, “Because the government covered more people, and eventually extended that coverage to include drugs and medical devices, industries knew they could invest in research because they would eventually recoup the costs of their work through sales of new products.” However, innovation is beginning to outstrip the programs’ ability to keep pace. For example, Leonard states, “Pharmaceuticals also are moving toward developing more expensive biologic drugs, which could be a challenge for Medicare and Medicaid to afford.” More important, the programs’ outdated structure, developed during a different business environment, serving a different population, is making it difficult for them to keep pace with technology.
Medicare and Medicaid helped end segregation in health care facilities. One lesser-known positive effect on the industry is that these programs helped end segregation, at least at health care facilities. The programs required that health care facilities could not be racially segregated if they wanted to receive Medicare and Medicaid payments, which meant facilities had to start accepting African-American patients.

With the changes introduced with the Affordable Care Act, it is clear that the government is keen on keeping these programs going for another 50 years or more, and their legacy of influence in the health care industry continues to evolve. Where they will be in 50 years remains to be seen.

ARTICLE BY Health Care Practice Group of Foley & Lardner LLP

NFL vs. Brady: NFL Wins Initial Venue Battle

Round One of Deflategate has concluded…it’s now time for Round Two.

The initial battle over judicial forums between the National Football League and the National Football League Players Association (NFLPA) to find the most favorable venue to support their legal position has ended with U.S. District Court Judge Richard Kyle ordering the NFLPA’s Petition To Vacate The Arbitration Award rendered by Commissioner Roger Goodell(Goodell) to be transferred to the United States District Court for the Southern District of New York.

Within hours after Goodell upheld the four-game suspension of New England Patriots quarterback Tom Brady, the League’s Management Council had launched a preemptive strike against the NFLPA by filing a complaint in the U.S. District Court for the Southern District of New York, where the NFL is headquartered, seeking to confirm Goodell’s “Final Decision on Article 46 Appeal of Tom Brady.” (Article 46 of the NFL-NFLPA collective bargaining contract allows discipline of a player for conduct “detrimental to the integrity of, or public confidence in, the game of professional football.”) . The case has been assigned to Judge Richard Berman and he already has ordered the NFLPA to respond to the NFL’s filing by August 13^th, well before the standard period to answer a complaint.

Brady and the NFLPA attempted an end run around the New York action in the historically player-friendly federal district court in Minnesota. They filed a Petition To Vacate Goodell’s Arbitration Award. Relying on a history of success in this venue, Brady and the NFLPA sought to vacate Goodell’s award. They were blocked, however, on July 30th when the Minnesota court said the Brady and his union must do battle with the NFL in New York in light of the league’s earlier, first-filed suit.

Absent any change in the NFPLA’s litigation, Brady and the NFLPA may be expected to respond to the NFL action directly, contending (as they attempted to do in Minnesota) that Goodell:

disregarded the “law of the shop” which requires NFL players to have advance notice of potential discipline,
disregarded the “law of the shop” that conduct detrimental discipline be fair and consistent,
denied Brady access to evidence and witnesses central to his appeal and his rights to a fundamentally fair hearing, and
was incapable of serving as an impartial arbitrator as a result of his handling Brady’s initial discipline and appeal.

Specifically, the NFLPA asserts that there was no direct evidence of Brady’s culpability cited in the report prepared by NFL-appointed investigator, attorney Ted Wells, and his investigative team, and that Goodell’s discipline was based on a “general awareness” standard created by the Commissioner to justify an “absurd and unprecedented punishment”. The NFLPA also asserts that no NFL player has ever served a suspension for “non-cooperation” or “obstruction,” as Goodell has imposed upon Brady.

The NFLPA had hoped that its action would be heard before U.S. District Judge David S. Doty, in Minneapolis. In February, Judge Doty vacated an award in the Adrian Peterson child abuse disciplinary matter when he determined that the discipline issued to Peterson was inappropriate for lack of notice and that the discipline imposed was based upon a policy that didn’t exist at the time of the Peterson’s alleged rule violation. But Brady’s case was assigned to Judge Richard Kyle, instead, who “perceive[d] no reason for this action to proceed in Minnesota.”

Here, based on its previous Minnesota claims, the NFLPA had hoped to reprise a similar argument on behalf of Brady. Now the union will be forced to assert those arguments in the NFL’s selected venue. The union will assert similar arguments to U.S. District Court Judge Richard Berman and allege that Brady was never informed he could be punished for his refusal to turn over his cellphone to Wells and his team. It may also ask the New York court to vacate the Goodell arbitration decision before the Patriots’ regular-season opener against the Pittsburgh Steelers — or issue an injunction that allows Brady to play.

The dual filings of the NFL and NFLPA presented an interesting legal issue: which lawsuit has priority? Typically, when federal judges are faced with the issue of deciding which of twocompetinglawsuits filed in separate federal jurisdictions has priority, they usually invoke the first-to-file rule. While this rule is not codified, the rule is generally considered an appropriate case management mechanism within the federal system. In general, the first-to-file rule gives priority to the first action filed over the subsequent action. The general judicial interpretation of the rule gives the decision making authority of the precedence of the first filed action to the district court judge assigned to that suit.

Federal courts have applied exceptions to the first-to-file rule if its application would create an injustice upon the party that filed the second action. One such exception that presents a strong argument against giving the first filed suit priority is the “anticipatory suit” exception. The purpose of this exception is to discourage procedurally unfair suits filed to frustrate settlement discussions, or to engage in brinkmanship, or to transform a party from defendant to plaintiff not to pursue a claim or right.

One specific rationale that supports the application of “anticipatory suit” exception is the court’s pursuit of procedural fairness. This specific rationale reflects the general judicial concern that a plaintiff should not lose its choice of the forum because the defendant anticipated the impending suit and preemptively struck by filing suit first in a different court.

Here, Judge Kyle specifically acknowledged that the NFL’s filing of the New York action “triggered application of the first-filed rule.” Judge Kyle acknowledged that the rule recognizes “comity between coequal federal courts and promotes the efficient use of judicial resources by authorizing a later-filed, substantially similar action’s transfer, stay or dismissal in deference to an earlier case”.

Judge Kyle concluded that the actions filed in Minnesota by the NFLPA and the NFL’s action filed in New York were almost duplicative and that the two cases and the issues presented in both were “flip-sides of the same coin.” In conclusion, Judge Kyle stated that the “cases are part and parcel of the same whole and should be heard together in the most appropriate forum: the Southern District of New York, where the arbitration occurred, the Award issued, and the first action concerning the Award was commenced.”

While acknowledging the order that the case should be heard in New York, NFLPA attorney Jeffrey Kessler stated, “We are happy in any federal court, which unlike the arbitration before Goodell provides a neutral forum, and we will now seek our injunction in the New York court.”

ARTICLE BY Gregg E. Clifton of Jackson Lewis P.C.

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