Tag: Employment Law

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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Department of State Releases June 2013 Visa Bulletin

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EB-2 category for all chargeable areas other than China and India remains current, with considerable forward movement—but continued backlog—in the EB-3 category for a second month in a row.

The U.S. Department of State (DOS) has released its June 2013 Visa Bulletin. The Visa Bulletin sets out per country priority date cutoffs that regulate the flow of adjustment of status (AOS) and consular immigrant visa applications. Foreign nationals may file applications to adjust their status to that of permanent resident or to obtain approval of an immigrant visa at a U.S. embassy or consulate abroad, provided that their priority dates are prior to the respective cutoff dates specified by the DOS.

What Does the June 2013 Visa Bulletin Say?

EB-1: All EB-1 categories remain current.

EB-2: Foreign nationals in the EB-2 category from all countries other than China and India remain current. A cutoff date of July 15, 2008, reflecting minor forward movement, has been imposed for foreign nationals in the EB-2 category from China. A cutoff date of September 1, 2004 remains in effect for foreign nationals in the EB-2 category from India.

EB-3: There is continued backlog in the EB-3 category for all countries, with considerable forward movement for EB-3 individuals chargeable to countries other than India and the Philippines.

The relevant priority date cutoffs for foreign nationals in the EB-3 category are as follows:

China: September 1, 2008 (forward movement of 275 days)

India: January 8, 2003 (forward movement of 17 days)
Mexico: September 1, 2008 (forward movement of 275 days)

Philippines: September 22, 2006 (forward movement of 7 days)

Rest of the World: September 1, 2008 (forward movement of 275 days)

Developments Affecting the EB-2 Employment-Based Category

Mexico, the Philippines, and the Rest of the World

In November 2012, the EB-2 category for individuals chargeable to all countries other than China and India became current. This meant that EB-2 individuals chargeable to countries other than China and India could file an AOS application or have the application approved on or after November 1, 2012. The June Visa Bulletin indicates that the EB-2 category will continue to remain current for these individuals through June 2013.

China

The June Visa Bulletin indicates a cutoff date of July 15, 2008 for EB-2 individuals chargeable to China. This means that EB-2 individuals chargeable to China with a priority date prior to July 15, 2008 may file an AOS application or have the application approved on or after June 1, 2013.

India

Since October 2012, the cutoff date for EB-2 individuals chargeable to India has been September 1, 2004. The June Visa Bulletin indicates no movement of this cutoff date. This means that EB-2 individuals chargeable to India with a priority date prior to September 1, 2004 may file an AOS application or have the application approved through June 2013.

Developments Affecting the EB-3 Employment-Based Category

The May Visa Bulletin announced that the cutoff dates for EB-3 individuals chargeable to most countries had advanced significantly in an attempt to generate demand and fully utilize the annual numerical limits for the category. The June Visa Bulletin indicates that the cutoff dates for EB-3 individuals chargeable to most countries have advanced significantly for a second month in a row. The June Visa Bulletin notes that this forward movement is not indicative of what can be expected in the future, and that rapid forward movement in cutoff dates is often followed by a dramatic increase in demand for numbers within the following three to six months. If such demand materializes, such movement in cutoff dates may slow, or stop, for a period of time.

China

The May Visa Bulletin indicated a cutoff date of December 1, 2007 for EB-3 individuals chargeable to China. The June Visa Bulletin indicates a cutoff date of September 1, 2008 for these individuals, reflecting forward movement of 275 days. This means that EB-3 individuals chargeable to China with a priority date prior to September 1, 2008 may file an AOS application or have the application approved on or after June 1, 2013.

India

Additionally, the May Visa Bulletin indicated a cutoff date of December 22, 2002 for EB-3 individuals chargeable to India. The June Visa Bulletin indicates a cutoff date of January 8, 2003 for these individuals, reflecting forward movement of 17 days. This means that EB-3 individuals chargeable to India with a priority date prior to January 8, 2003 may file an AOS application or have the application approved on or after June 1, 2013.

Rest of the World

The May Visa Bulletin also indicated a cutoff date of December 1, 2007 for EB-3 individuals chargeable to the Rest of the World. The June Visa Bulletin indicates a cutoff date of September 1, 2008 for these individuals, reflecting forward movement of 275 days. This means that individuals chargeable to all countries other than China and India with a priority date prior to September 1, 2008 may file an AOS application or have the application approved on or after June 1, 2013.

How This Affects You

Priority date cutoffs are assessed on a monthly basis by the DOS, based on anticipated demand. Cutoff dates can move forward or backward or remain static. Employers and employees should take the immigrant visa backlogs into account in their long-term planning and take measures to mitigate their effects. To see the June 2013 Visa Bulletin in its entirety, please visit the DOS website here.

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The Jobs Act: Improving Access to Capital Markets for Smaller Companies

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On April 5, 2012, the Jumpstart Our Business Startups Act or “Jobs Act” was signed into law by President Obama with the stated purpose of increasing American job creation and economic growth by improving access to the public capital markets for emerging growth companies. Specifically, the Jobs Act:

  • creates a new category of “emerging growth company” under the securities laws and reduces certain financial reporting and disclosure obligations on these companies for up to 5 years after their initial public offering;
  • directs the Securities and Exchange Commission to eliminate the prohibition on general solicitations for private offerings under Rule 506 of Regulation D and resales under Rule 144A;
  • legalizes crowdfunding through brokers and “funding portals”;
  • authorizes the SEC to increase the maximum amount permitted to be raised in a Regulation A offering from $5 million to $50 million in any 12-month period; and
  • increases the number of shareholders of record that a company may have before it becomes obligated to file SEC reports.

Creation of the ‘Emerging Growth Company’ Designation

The Jobs Act creates the “emerging growth company” as a new category of issuer under both the Securities Act and the Securities Exchange Act.

Definition of “Emerging Growth Company”

An “emerging growth company” is an issuer that had total annual gross revenues of less than $1 billion during its most recently completed fiscal year. The issuer would continue to be an “emerging growth company” until the earlier of:

  • the last day of the fiscal year during which it had total annual gross revenues of $1 billion or more;
  • the last day of the fiscal year of the issuer following the fifth anniversary of its initial public offering;
  • the date on which the issuer has, during the previous 3-year period, issued more than $1 billion in non-convertible debt; and
  • the date on which it is deemed a “large accelerated filer.”

Notwithstanding the foregoing, an issuer that consummated an IPO on or prior to December 8, 2011 will not be eligible to be deemed an emerging growth company. The relief provided to emerging growth companies is available immediately.

Benefits for Emerging Growth Companies

Emerging growth companies will have more lenient disclosure and compliance obligations with respect to executive compensation, financial disclosures and certain new accounting rules. Specifically, an emerging growth company will not be required to:

  • comply with “say on pay” proposals or pay versus performance disclosures;
  • include more than two years of financial statements in the registration statement for its IPO;
  • include selected financial data for any period prior to the earliest audited period presented in connection with its IPO; or
  • comply with new or revised accounting standards that are only applicable to public reporting companies.

In addition, emerging growth companies will be exempt from the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, or SOX, and be given a longer transition period for compliance with new audit standards. Further, SOX has been amended to provide that any rules of the Public Company Accounting Oversight Board, or PCAOB, requiring mandatory audit firm rotation or auditor discussion and analysis will not apply to an emerging growth company. In addition, any future rules adopted by the PCAOB would not apply to audits of emerging growth companies unless the SEC determines otherwise.

The Jobs Act provides that emerging growth companies may start the IPO process by confidentially submitting draft registration statements to the SEC for nonpublic review. Confidentially submitted registration statements would need to be publicly available at least 21 days prior to beginning the road show for the IPO. Emerging growth companies would also be free to “test the waters” with qualified institutional buyers and institutional accredited investors before and during the registration process.

Analyst Reports for Initial Public Offerings of Emerging Growth Companies

The Jobs Act removes some of the restrictions on investment banks underwriting public offerings while simultaneously providing analyst research reports on a particular issuer that was designated as an “emerging growth company.”

Elimination of Prohibition on General Solicitation For Accredited Investors and Qualified Institutional Buyers

The Jobs Act directs the SEC to revise its rules to:

  • provide that the prohibition against general solicitation or general advertising will not apply to offers and sales of securities made pursuant to Rule 506, provided all purchasers of the securities are accredited investors, and
  • provide that the prohibition against general solicitation or general advertising will not apply to offers and sales made under Rule 144A, provided that the seller reasonably believes that all purchasers of the securities are qualified institutional buyers.

It is currently unclear whether these exemptions will apply to offerings exempt from registration under Section 4(2) of the Securities Act to the extent they do not satisfy all of the conditions of Rule 506. The SEC has 90 days from the date of enactment of the Jobs Act to promulgate rules to effect elimination of the specified prohibitions on general solicitation and general advertising.

Creation of a ‘Crowdfunding’ Exemption

Crowdfunding refers to the recent (often internet facilitated) technique of seeking financing for a business through small investments from a relatively large pool of individual investors. Under current securities laws, crowdfunding raises a number of problematic registration exemption issues. The Jobs Act attempts to remedy this by creating a new crowdfunding exemption from the registration requirements of the Securities Act for transactions involving the issuance of securities through a broker or SEC-registered “funding portal,” for which:

  • the aggregate amount of securities sold in the previous 12 months to all investors by the issuer is not more than $1 million; and
  • individual investments by any investor in the securities during any 12-month period are limited to:
    • the greater of $2,000 or 5 percent of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; and
    • 10 percent of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000.

Such securities would be considered restricted securities subject to a one-year holding period, with certain exceptions, such as sales to accredited investors or family members. The Jobs Act also provides express securities fraud remedies against the issuer of securities sold under the crowdfunding exemption, which includes extending liability to directors, partners and certain senior officers of the issuer.

Disclosure Requirements

The issuer must file with the SEC, provide to the broker or funding portal, and make available to potential investors at least 21 days prior to the first sale, certain information about the issuer. This information is similar to what many companies currently use in offering memoranda in private offerings and includes:

  • the name, legal status, physical address and website of the issuer;
  • the names of officers, directors and greater than 20% shareholders;
  • a description of the issuer’s current and anticipated business;
  • a description of the financial condition of the issuer, including, for offerings where the aggregate amounts sold under the crowdfunding exemption are:
    • $100,000 or less, income tax returns for the most recently completed fiscal year and financial statements, certified by the principal executive officer of the issuer;
    • more than $100,000, but less than $500,000, financial statements reviewed by an independent public accountant; or
    • more than $500,000, audited financial statements;
  • a description of the intended use of proceeds;
  • the target offering amount and the deadline to raise such amount;
  • the price to the public of the securities, or method to determine the price;
  • a description of the ownership and capital structure of the issuer, including the terms of the offered security and each other security of the issuer and how such terms may be modified, limited, diluted or qualified;
  • risks to purchasers of minority ownership and corporate actions, including issuances of shares, sales of the issuer or its assets or transactions with related parties; and
  • such other information as the SEC may prescribe.

The issuer must also annually file with the SEC and provide to investors its results of operations and financial statements.

‘Blue Sky’ Pre-emption

Securities sold pursuant to the crowdfunding exemption are “covered securities” for purposes of the National Securities Markets Improvement Act, or NSMIA, and, therefore, are exempt from state securities registration requirements, or “Blue Sky,” laws. This preemption does not prohibit state enforcement actions based on alleged fraud, deceit, or unlawful conduct.

Creation of ‘Funding Portals’

A person acting as an intermediary in an offer or sale of securities under this new crowdfunding exemption will have to register with the SEC as a broker or funding portal and will also need to register with any applicable self-regulatory organizations. Such intermediary will also have to comply with a number of requirements designed to ensure that investors are informed of the possible risks associated with a new venture, including conducting background checks on each officer, director and greater than 20% shareholders of the issuer. Additionally, the Jobs Act instructs the SEC to promulgate rules or regulations under which an issuer, broker or funding portal would not be eligible, based on its disciplinary history, to utilize the exemption.

SEC Rulemaking

The SEC is directed to issue rules as may be necessary or appropriate for the protection of investors to implement the crowdfunding exemption within 270 days after the enactment of the Jobs Act. In addition, the dollar amounts are to be indexed for inflation at least every five years for changes in the consumer price index.

Raising the Regulation A Limit to $50 million

The Jobs Act amends Section 3(b) of the Securities Act to direct the SEC to amend Regulation A so as to increase the aggregate offering amount that may be offered and sold within the prior 12-month period in reliance on Regulation A from $5 million to $50 million. The SEC is required to review the limit every two years and to increase the amount as it determines appropriate or explain to Congress its reasons for not increasing the limit on Regulation A offerings.

No ‘Blue Sky’ Pre-emption

Predecessor bills would have made the Regulation A exemption more appealing by making Regulation A offered securities exempt from “Blue Sky” laws. Although the Jobs Act does not provide that securities offered under Regulation A are explicitly exempt, it does have a provision requiring the Comptroller General to conduct a study on the impact of Blue Sky laws on offerings made under Regulation A. Securities offered and sold to “qualified purchasers,” to be defined under NSMIA, or on a national securities exchange would be “covered securities” and exempt from Blue Sky laws.

Modifying Registration Thresholds

Currently, Section 12(g) of the Exchange Act requires an issuer with assets in excess of $1 million and a class of security held by more than 500 shareholders of record to register such security with the SEC and, therefore, become subject to the reporting requirements of the Exchange Act. The Jobs Act amends the registration thresholds to require registration only when an issuer has:

  • either 2,000 or more shareholders of record, or 500 shareholders of record who are not accredited investors, and
  • assets in excess of $10 million.

Exceptions to “Held of Record” Definition

Further, the Jobs Act amends the definition of “held of record” to exclude securities held by persons who received the securities pursuant to an employee compensation plan in transactions exempted from the registration requirements of the Securities Act. It also directs the SEC to adopt rules providing that securities acquired under the crowdfunding exemption are similarly excluded.

Increased Thresholds for Community Banks

The Jobs Act amends Section 12(g) of the Exchange Act by increasing the shareholder registration threshold in the case of an issuer that is a bank or a bank holding company to 2,000 persons. The bill also makes it easier for banks and bank holding companies to deregister and cease public company compliance requirements by increasing the threshold for deregistration for those entities from 300 persons to 1,200 persons.

Implementation of the Jobs Act

SEC Rulemaking and Studies

The Jobs Act directs the SEC to adopt rules implementing certain provisions of the act as well as to conduct a number of studies and report back to Congress.

SEC Concerns

A number of SEC Commissioners, including Chairman Mary Schapiro, have publicly expressed concerns on the balance between enhancing capital formation and the reduction in investor protections. The Jobs Act does not affect Rule 10b-5 of the Securities Act and adds some additional securities fraud remedies, so issuers should continue to be scrupulous about compliance with their disclosure obligations.

Full Text of the Jobs Act

The Jobs Act was enacted on April 5, 2012. The text of the act is currently available at http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf.

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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.

Equal Employment Opportunity Commission (EEOC) Offers Updated Americans with Disabilities Act (ADA) Guidance Q&A’s Pertaining to Cancer, Diabetes, Epilepsy and Intellectual Disabilities

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In a measure to keep up with the changes made by the Americans with Disabilities Amendments Act (ADAAA) in relation to what employees and applicants must show to establish that they have a “disability,” the Equal Employment Opportunity Commission (EEOC) has revised its informal “Question and Answer” guidance forms pertaining to four categories of medical conditions – cancer, diabetes, epilepsy, and intellectual disabilities– to provide clarification as to how employers should address such conditions and to confirm that individuals having each of the types of conditions discussed “should easily be found to have a disability” within the ADA’s initial prong of the definition of a disability. These revised forms can be found by clicking on the links above.

The revised guidance materials include not only a general discussion of each type of condition and discuss prohibitions against discrimination, harassment, and retaliation against individuals with such conditions, they further discuss the means by which employers can obtain, use and disclose medical information relating to such conditions and possible accommodation scenarios for such conditions. In addition, the EEOC explicitly states its position as to why individuals with each type of medical condition at issue should be found to have a disability under the ADA/ADAAA:

1.    “[P]eople who currently have cancer, or have cancer that is in remission, should easily be found to have a disability within the meaning of the first part of the ADA’s definition of disability because they are substantially limited in the major life activity of normal cell growth or would be so limited if cancer currently in remission was to recur . . . Similarly, individuals with a history of cancer will be covered under the second part of the definition of disability because they will have a record of an impairment that substantially limited a major life activity in the past . . .  Finally, an individual is covered under the third (“regarded as”) prong of the definition of disability if an employer takes a prohibited action (for example, refuses to hire or terminates the individual) because of cancer or because the employer believes the individual has cancer.”

2.    “[I]ndividuals who have diabetes should easily be found to have a disability within the meaning of the first part of the ADA’s definition of disability because they are substantially limited in the major life activity of endocrine function . . . Additionally, because the determination of whether an impairment is a disability is made without regard to the ameliorative effects of mitigating measures, diabetes is a disability even if insulin, medication, or diet controls a person’s blood glucose levels. An individual with a past history of diabetes (for example, gestational diabetes) also has a disability within the meaning of the ADA . . . Finally, an individual is covered under the third (“regarded as”) prong of the definition of disability if an employer takes a prohibited action (for example, refuses to hire or terminates the individual) because of diabetes or because the employer believes the individual has diabetes.”

3.    “[I]ndividuals who have epilepsy should easily be found to have a disability within the meaning of the first part of the ADA’s definition of disability because they are substantially limited in neurological functions and other major life activities (for example, speaking or interacting with others) when seizures occur . . . Additionally, because the determination of whether an impairment is a disability is made without regard to the ameliorative effects of mitigating measures, epilepsy is a disability even if medication or surgery limits the frequency or severity of seizures or eliminates them altogether . . . An individual with a past history of epilepsy (including a misdiagnosis) also has a disability within the meaning of the ADA . . . Finally, an individual is covered under the third (“regarded as”) prong of the definition of disability if an employer takes a prohibited action (for example, refuses to hire or terminates the individual) because of epilepsy or because the employer believes the individual has epilepsy.”

4.    “[I]ndividuals who have an intellectual disability should easily be found to have a disability within the meaning of the first part of the ADA’s definition of disability because they are substantially limited in brain function and other major life activities (for example, learning, reading, and thinking) . . . An individual who was misdiagnosed as having an intellectual disability in the past also has a disability within the meaning of the ADA . . . Finally, an individual is covered under the third (“regarded as”) prong of the definition of disability if an employer takes a prohibited action (for example, refuses to hire or terminates the individual) because of an intellectual disability or because the employer believes the individual has an intellectual disability.”

The guidance provided by the EEOC also contains multiple examples and fact patterns for employers to consider in making decisions in their workplaces when faced with situations involving employees and applicants having the identified conditions.

Employee Shareholders: It’s Happening, but What Does it Mean?

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New Growth and Infrastructure Act introduces employee shareholder provisions that are expected to come into force later this year.

On 25 April, the Growth and Infrastructure Act 2013[1] came into effect and, among other things, introduced employee shareholder or “rights for shares” provisions that are expected to take effect this autumn in the UK. Broadly speaking, these provisions amend the Employment Rights Act 1996 (the ERA) to allow employees to give up some of their employment rights in exchange for shares in their employer company. However, in the absence of any additional guidance, the practical scope and impact of these changes remains unclear.

What We Do Know

Any company with share capital can enter into an agreement with an employee to allow them to become an “employee shareholder”. An employee shareholder will receive fully paid-up company shares that have a value of no less than £2,000 on the day of issue.

In exchange, the employee shareholder will give up the right to

•    request to undertake study or training;

•    request flexible working;

•    not be unfairly dismissed; and

•    a redundancy payment.

Further, the notice that employee shareholders will need to give before returning to work after maternity, parental, paternity, or adoption leave will be increased to 16 weeks.

Employee shareholders cannot waive their right to claim unfair dismissal where their dismissal breaches the Equality Act 2010 or health and safety legislation or is automatically unfair under the ERA. However, employers can make a job offer contingent on an applicant agreeing to become an employee shareholder. If an applicant refuses to do so, the employer can simply withdraw the job offer.

Before becoming an employee shareholder, each employee (or applicant to whom a job has been offered) must receive independent legal advice paid for by the employer (up to a “reasonable” level). The employer must pay these legal costs whether or not an employee elects to become an employee shareholder. Employees and applicants will then be given a seven-day cooling-off period in which they can withdraw their agreement.

For any acceptance to be valid, the employer must have provided the employee with a statement of particulars that sets out, among other things, the following:

•    The rights the employee shareholder gives up

•    The rights attached to the shares, e.g., voting, dividend, and ability to participate in the distribution of any surplus assets on winding up

•    Whether there are any restrictions on the transferability of the shares

•    Whether the employee shares are subject to drag-along rights or tag-along rights

Finally, an employee must not suffer a detriment for refusing to accept an offer to become an employee shareholder. Moreover, the dismissal of an employee for refusing to become an employee shareholder will be regarded as unfair.

What We Do Not Know

Transfer of Undertakings (Protection of Employment) Regulations (TUPE) Transfers.

If employee shareholders transfer across to an employer who does not operate an employee shareholder scheme or does not have any share capital, there is no guidance as to whether that employee shareholder automatically regains their rights or if they must surrender their shares first.

Share Schemes.

It is not clear whether companies that operate share schemes can make it a precondition of future participation in any company share scheme that an employee becomes an employee shareholder.

Termination.

On termination of the employment contract, a company can buy back shares from an employee shareholder. However, the conditions that must be satisfied before an employer buys back an employee’s shares are still unknown.

Potential Impact on UK Employers

•    £2,000 seems a relatively small amount when weighed against the potential value of rights that would be forfeited by employee shareholders. Employers can give shares worth more than £2,000, and it is therefore possible that, once the provisions are in force, along with salary, the sticking point in contractual negotiations will be the value of the shares given. That said, any deviation from the £2,000 figure may give rise to significant tax complications.

•    The provisions could create a two-tier workforce of employee shareholders and non-employee shareholders, with the former potentially subject to enforced contractual changes and other less favourable treatment that would normally result in potential constructive unfair dismissal claims.

•    In theory, an employer undertaking a redundancy exercise could simply select employee shareholders as redundant to avoid any unfair dismissal risk and/or any need to make redundancy payments.

By making both job offers and participation in employee share schemes conditional upon an employee’s accepting employee shareholder status, it is possible that some employers could significantly reduce and ultimately eradicate the risk of “pure” (i.e., non-discriminatory or non-whistleblowing related) unfair dismissal claims and the flexible working rights of their workforce.

[1]. View the Growth and Infrastructure Bill here.

Under Pressure: Unions Espouse New Organizing Models and Take Action

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Back in March, AFL-CIO President Richard Trumka summarized his view of the state of union representation in America: “To be blunt, our basic system of workplace representation is failing to meet the needs of America’s workers by every critical measure.” Last week in a Washington Post Op-Ed, this view was echoed by columnist and long-time advocate of big labor’s policies Harold Meyerson. Meyerson identified an “existential problem” facing unions, which are continuing to see membership numbers decline.

It is not difficult to understand the concern. Membership decline means one thing for unions: less dues. Measures that weakened public sector unions in Wisconsin and passage of right to work legislation in traditional union Midwest strongholds of Indiana and then Michigan, along with ever-shrinking private sector union membership, have forced labor into a place of critical self-evaluation. And what is emerging from this self-evaluation is a dedication to expanding the scope of union organizing.Union membership decline

In March, Trumka highlighted new targets of organizing that are being explored – non-traditional targets. Trumka noted home care workers, taxi drivers and others who don’t fit neatly into the traditional models of unionization will be targets. The point is: unions are increasingly setting their sights on individuals who “do not neatly fit the legal definition of an employee.” And businesses and employers who before may have not traditionally considered themselves targets for big labor should be paying attention.

Such efforts are not just anecdotal.  As we saw in Michigan with home health care unionization, these non-traditional unionization efforts can have a lot of upside for unions, even if they are not ultimately successful in keeping their representative status. SEIU collected $34 million in dues from more than 59,000 home health care workers in Michigan before it was ultimately forced to end its status as bargaining representative in 2012.

Meyerson also points out the recent one-day strikes of fast-food workers in New York and Chicago as evidence of a changing model. Workers in other cities, including St. Louis and then Detroit this past weekend, have followed suit. Employers will be mindful to pay attention to such trends.

Meyerson explains the AFL-CIO’s plan too. And, it starts with seeking more political power – not necessarily more dues paying members. As Meyerson explains: “The first part of this plan is to expand its Working America program, a door-to-door canvass that has mobilized nonunion members in swing-state working-class neighborhoods to back labor-endorsed candidates in elections in the past decade.”  Phase Two, according to Meyerson quoting Trumka, is “we’re asking academics, we’re asking our friends in other movements ‘What do we need to become?’” And Phase Three: “We’ll try a whole bunch of new forms of representation.  Some will work; some won’t, but we’ll be opening up the labor movement.”

Where all of this ends up is anyone’s guess – but this is clear: the model of unionization is changing.  Change means new challenges. The bottom line for employers: Be Prepared.

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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.

“Essential Functions” Under the Americans with Disabilities Act (ADA) Can Include Job Functions that are Infrequently Performed

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The Americans with Disabilities Act (ADA) requires covered employers generally to provide reasonable accommodations to qualified employees with disabilities. The ADA provides, however, that the employee must be able to perform the “essential functions” of the job with the accommodation, and that the accommodation cannot prove to be an “undue hardship” on the employer.

In the recent case of Knutson v. Schwan’s Home Service, the U.S. Court of Appeals for the Eighth Circuit held that a job requirement can be an “essential function,” even if the employee is not required to perform the function on a regular basis.

In this case, Mr. Knutson was a manager for Schwan’s Home Service, which delivers frozen food. Managers for Schwan’s are required to maintain DOT driving certification.  In March 2008, Mr. Knutson sustained an eye injury.  Because of the eye injury, Mr. Knutson was required to undergo a medical exam and be recertified.  In December 2008, an eye doctor refused to give Mr. Knutson a DOT certification or a waiver.  Schwan’s then gave Mr. Knutson 30 days to find a job within the company that did not require DOT driving certification.  Mr. Knutson was unable to find such a job within the company and was terminated by Schwan’s.

Following his termination, Mr. Knutson filed suit against Schwan’s pursuant to the ADA.  He argued that since he was able to successfully manage his terminal without driving a truck that maintaining the DOT certification was not an “essential function” of his position.  The evidence before the court showed that Mr. Knutson was DOT qualified at the time of his injury; he admitted to delivering product in his personal vehicle; and he testified that since November 2007 that he had driven a truck less than 50 times while working as a manager.

The court disagreed with Mr. Knutson and held that “essential functions” of a job are determined based on the written job description, the employer’s judgment, and the experience and expectations of all individuals working in the same position.  The Court of Appeals affirmed the trial court’s granting of summary judgment in favor of Schwan’s.

The court’s ruling in this case is good news for employers.  Employers should use this case as a reminder of the importance of having a carefully analyzed comprehensive written job description for all positions, clearly identifying essential functions of the position.  In addition, if essential functions of a position change over time, it is important to make appropriate revisions to the written job description for the position.

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National Labor Relations Board (NLRB) Issues Guidance on Lawful Confidentiality Language

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On July 30, 2012, the NLRB (“Board”) issued a decision in Banner Health System dba Estrella Medical Center, 358 NLRB No. 93 holding, among other things, that the employer violated Section 8(a)(1) (which prohibits employers from interfering, restraining or coercing employees in the exercise of their rights), by restricting employees from discussing any complaint that was then the subject of an ongoing internal investigation.

To minimize the impact of such a confidentiality mandate on employees’ Section 7 rights, the Board found that an employer must make an individualized determination in each case that its “legitimate business justification” outweighed the employee’s rights to protected concerted activity in discussing workplace issues.  In Banner Health, the employer did not carry its burden to show a legitimate business justification because it failed to make a particularized showing that:

  • Witnesses were in need of protection;
  • Evidence was in danger of being destroyed;
  • Testimony was in danger of being fabricated; or
  • A cover-up must be prevented.

The Board concluded that the employer’s one-size-fits-all rule, prohibiting employees from engaging in any discussion of ongoing internal investigations, clearly failed to meet these requirements.

More recently, the NLRB’s Office of the General Counsel clarified the limits of how such policies could be drafted without running afoul of Section 7 in an advice memorandum released on April 24, 2013 (dated January 29, 2013).   The Region had submitted Verso Paper, Case 30-CA-089350 (January 29, 2013) to the Office of the General Counsel for advice regarding the confidentiality rule at issue and whether it unlawfully interfered with employees’ Section 7 rights.  Specifically, the Verso Code of Conduct contained this provision prohibiting employees from discussing ongoing internal investigations:

Verso has a compelling interest in protecting the integrity of its investigations.  In every investigation, Verso has a strong desire to protect witnesses from harassment, intimidation and retaliation, to keep evidence from being destroyed, to ensure that testimony is not fabricated, and to prevent a cover-up.  To assist Verso in achieving these objectives, we must maintain the investigation and our role in it in strict confidence.  If we do not maintain such confidentiality, we may be subject to disciplinary action up to and including immediate termination.

Reiterating that employees have a Section 7 right to discuss disciplinary investigations of their co-workers, the General Counsel’s Office found that the Verso Paper provision did not allow for a case-by-case analysis of whether or not the employer’s business justification for the restriction outweighed the employees’ Section 7 rights as required by Banner Health.  According to the General Counsel’s Office, the employer may establish this by presenting facts specific to a given investigation that give rise to a legitimate and substantial business justification for imposing confidentiality restrictions.

However, in footnote 7 of its advice, the General Counsel’s Office, after noting that the first two sentences of the Verso Paper rule lawfully set forth the employer’s interest in protecting the integrity of its investigations, surprisingly put forward a modified version of the remainder of the Verso Paper provision that it said would pass muster under Banner Health:

Verso may decide in some circumstances that in order to achieve these objectives, we must maintain the investigation and our role in it in strict confidence.  If Verso reasonably imposes such a requirement and we do not maintain such confidentiality, we may be subject to disciplinary action up to and including immediate termination.

Although this guidance is not binding, combining this language above with the first two sentences of the Verso Paper provision could certainly strengthen an employer’s argument that its intent was not to violate an employee’s Section 7 rights, but rather, to lawfully put employees on notice that if the employer “reasonably” imposes a confidentiality requirement, they must abide by it or face discipline.  However, employers must remain mindful that using a provision like this suggested does not obviate the need for the employer to engage in the particularized case-by-case determination of its substantial and legitimate business need that would permit it to impose confidentiality restrictions on the investigation.

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