Is EEOC Wellness Guidance Coming Out of the Deep Freeze?

Currently, guidance on permissible incentives (whether in the form of a reward or penalty) to participate in a wellness program is in a state of flux, but some clarity may be forthcoming sometime after July 1, 2022.

That is the date on which one of the five seats on the Equal Employment Opportunity Commission (EEOC), currently held by Republican Janet Dhillon, becomes available for President Biden to fill.  The Commission’s current roster of three Republicans and two Democrats has been blamed for delays, including two consecutive failures, in the fall of 2020 and spring of 2021, to publish the Commission’s regulatory agenda. President Biden’s pick for the slot, Cohen Milstein, et al. attorney Kalpana Kotagal, failed to secure confirmation upon initially appearing before the Senate in May of this year.  However Senate Majority Leader Chuck Schumer may bring Ms. Kotagal’s nomination to a full Senate Floor vote under rules that apply when there is no majority for either party in that house of Congress.

By way of background, the EEOC issued proposed regulations in January of 2021 that would have required that, to be considered “voluntary,” incentives for “participatory” wellness programs must be “de minimis,” such as a water bottle or t-shirt.  Voluntariness is a requirement under the Americans with Disabilities Act whenever an employer performs a medical examination – which would include biometric testing under a wellness program – or makes a disability-related inquiry, which could be part of a Health Risk Assessment under a wellness program.  Both biometric testing and HRAs are examples of participatory wellness programs in that they do not require any physical activity or health outcome, and these types of wellness programs are in wide use across the country.   (For more background information on the EEOC and wellness incentives, including removal of incentive provisions under 2016 EEOC regulations, check out our earlier post.) 

The Biden Administration required the EEOC to withdraw the 2021 wellness regulations before they were published in the Federal Register, as part of a regulatory freeze pending review.  It is possible that, if Biden’s nominee to the EEOC secures confirmation, the proposed regulations containing the de minimis rule may be revived in their original or a modified form.  Below is a brief summary of existing wellness incentive rules and some thoughts on what a de minimis incentive rule might look like, if enforced. 

  • If we ignore the EEOC withdrawn proposed regulations, what are the rules on wellness incentives?

Keep in mind that withdrawal of the 2021 EEOC proposed regulations followed withdrawal of the incentive provisions of 2016 EEOC final wellness regulations, which would have capped incentives even for participatory programs at 30% of the cost of self-only coverage if the program involved a physical examination or asked disability-related questions. Many employers are still using the 30% cap even for participatory wellness programs that involve biometric testing or HRAs.

In the absence of both sets of withdrawn EEOC guidance, the rules are set forth in HIPAA regulations and are as follows:

Participatory wellness programs (require no physical activity or health outcome) do not have any limit on incentives.

Health-contingent programs (require physical activity or health outcome) have a maximum incentive that is an amount equal to 30% of the individual premium under the most affordable group health plan option, or 50% if the program is designed to reduce or stop tobacco use.

Important Note:  the cap on financial incentives is just one aspect of wellness compliance; there are also design parameters, notification duties, and other criteria that apply under HIPAA wellness regulations.  One example of a required design criteria for a health-contingent wellness program is that an alternative means of earning a wellness incentive be made available to persons who are prevented from meeting (or attempting to meet) the original criteria due to medical conditions or issues.  Another is that a participatory wellness program be made available to all similarly situated individuals. 

  • If the de minimis incentive rule is revived, for participatory wellness programs that include physical exams/disability-related questions, what type of incentive might qualify as de minimis?

The withdrawn regulations give the example of a water bottle or gift card of modest value and indicate that premium surcharges of $50 per month ($600 per year), an annual gym membership, or airline tickets would be more than de minimis.  If a water bottle suffices, presumably other low-cost items – such as a t-shirt, towel, or stress ball – would also work.  “Modest value” gift cards probably mean $10 or $15 or less.  Note that these items may be taxable compensation.  Any gift card would be, but a water bottle, t-shirt or other small item may qualify as an excludible de minimis fringe benefit under Internal Revenue Code Section 132(a)(4).

Clearly, there is a good bit of daylight between the HIPAA rules for participatory programs (unlimited incentive) and the de minimum rule under withdrawn EEOC guidance.  And the voluntariness of incentives to take part in biometric testing is still being challenged in the courts, as evidenced by a recent court case from the Northern District of Illinois.  Hopefully changes in the EEOC will be followed by guidance that brings some clarity to an area that has been frustratingly confusing for employers for a number of years.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2022 Christine P. Roberts, all rights reserved.

Photo credit:  Dev Benjamin, Unsplash

The Slippery Slope of SEP and SIMPLE Notification Duties

As the June 30, 2022 CalSavers deadline bears down on employers with five or more California employees, many small employers may be giving thought to adopting a simplified retirement plan, whether a SEP or SIMPLE IRA.  Establishment of one of these types of plans is a permissible alternative to participating in CalSavers.  There are circumstances where these types of plans are a good fit.  However, each of these types of plans imposes participation notification duties that employers often overlook, and noncompliance can put the tax-sanctioned status of the whole arrangement at risk. Below we summarize the relevant rules.

Simplified Employee Pension (SEP) Notification Duties

IRS Form 5305 is often used to establish a SEP.  A plan set up via Form 5305 is considered adopted when eligible employees have been provided with:

  • a copy of the completed, signed, and dated Form 5305-SEP, including the Instructions to Employer and Information to Employee sections;
  • a statement to the effect that IRAs other than the IRA(s) into which employer contributions will be made may yield different rates of return and may have different terms concerning, among other things, transfers and withdrawals of funds from the IRA;
  • a statement that notice of any amendment to the SEP, a copy of the amendment and a written explanation of its effects, will be provided within 30 days of the effective date of any such amendment; and
  • a statement that the employer will provide written notice of contributions made to the plan, by the later of (a) January 31 of the year following the year in which the contribution is made, or (b) the date that is 30 days after the date the contribution is made.  This notice duty may be met by reporting the SEP contribution on eligible employees’ Form W-2 for a given year.  Failure to provide the notice of contribution may subject the employer to a $50 penalty per failure unless the failure is due to reasonable cause. 

This information must be provided thereafter to each new employee who becomes eligible under the SEP.

Additional disclosure duties apply if you are using a prototype SEP arrangement, rather than Form 5305-SEP, including special disclosures for plans under which contributions are integrated with Social Security.  Providing eligible employees with a copy of the SEP agreement will meet many of the disclosure requirements, but employers should check with the prototype SEP sponsor to confirm that they will timely supply your business with all necessary additional disclosures.  Annual contribution reporting through Form W-2 is the same. 

Savings Incentive Match Plan for Employees (SIMPLE IRAs)

Notification duties under a SIMPLE plan are more complicated than under a SEP due to the employee elective deferral feature.  Also, there are two model SIMPLE forms in use, Form 5304-SIMPLE and Form 5305-SIMPLEForm 5304-SIMPLE is used when all IRAs are established with a single designated financial institution, and Form 5305-SIMPLE is used when participants select their own IRA provider.

For an existing SIMPLE IRA plan, eligible employees must receive a Summary Description and Notification to Eligible Employees before the start of a 60-day election period.  Since all SIMPLE plans must be on a calendar plan year, including those set up using Forms 5304- or 5305-SIMPLE, the plan year must be the calendar year.  Therefore the 60-day election period runs from November 2 through December 31, and the notice must be provided before November 2 each year.   Provision of a current copy of the completed Form 5304-SIMPLE or 5305-SIMPLE, with instructions, will satisfy both disclosure duties if Article VI – Procedures for Withdrawals, is completed.  When Form 5304-SIMPLE is in use, the custodian or trustee may provide the Article VI information directly to the employees; employers should confirm that the custodian/trustee is timely meeting this disclosure duty, however. 

For a new SIMPLE IRA plan or for a new hire who becomes eligible, the Model Salary Reduction Agreement that comprises part of Forms 5304- and 5305-SIMPLE must be provided prior to the 60-day period that includes either the date the employee becomes eligible or the day before.  The employee must be able to commence elective deferrals as soon as they become eligible, regardless of whether the 60-day period has ended, but no earlier than the plan’s effective date.  Certain special notification and election period rules apply when an employee becomes an eligible employee other than at the beginning of a calendar year, including when an employee is rehired during a plan year. 

How to Deal with SEP and SIMPLE Mishaps

If you have not timely met your SEP notification duties as outlined above, you should consult an ERISA attorney.

If you have not timely met your SIMPLE-IRA plan notification duties as outlined above, you can fix the problem by following the steps outlined in the SIMPLE IRA Plan Fix-It Guide.  Self-correction may be an option if you had practices and procedures in place to timely provide the notice but failed to follow them, and other pre-requisites to self-correction have been met.  Otherwise, you may need to use the Voluntary Correction Program to fix the problem.  This will generally require the involvement of an ERISA attorney.

In addition to notification duties, SIMPLE plans are subject to rules regarding timing of deposit of employees’ elective deferrals.  Elective deferrals must be deposited with the IRA custodian or trustee within the 30-day period following the last day of the month in which the amounts otherwise would have been payable in cash to employees.

If elective deferrals are not timely deposited, the Department of Labor (DOL) may have to be contacted to correct the problem.  Why is this necessary?   To avoid potential employer liability for civil penalties, and in some cases involving missed or late elective deferrals, criminal penalties. 

Special rules, not addressed above, may apply to plan documents not established using the IRS forms mentioned in this post.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2022 Christine P. Roberts, all rights reserved.

Photo credit:  Nico Smit, Unsplash

Just Adopted a New 401(k) Plan?  Beware These Common Pitfalls

By June 30, 2022, businesses with 5 or more California employees must either enroll in CalSavers, a state-managed system of Roth IRA accounts, or establish their exemption from CalSavers by adopting 401(k) or other retirement plans of their own.  Other states have implemented or are rolling out similar auto-IRA programs.  Below are some potential pitfalls for new plan adopters that business owners should be aware of, and, where possible, take steps to avoid. 

  1. Immediate top-heavy status.  The “top-heavy” rules compare the combined plan account balances of certain owners and officers, called “key employees,” with the plan account balances of all other plan participants (non-key employees).  If the key employee account balances make up 60% or more of the combined plan account balances of all participants, the plan is top-heavy and the plan sponsor is required to make minimum contributions (generally equal to 3% of compensation) to the accounts of all non-key employees.  A plan can be top-heavy in its first year of operation, although it is more commonly a result of large account balances accumulated over time by long-term key employees, versus smaller accounts held by high-turnover, lower paid employees.   Top-heavy status is particularly likely to arise in a family-owned business, as family members of owners count as key employees, but the problem is not limited to this scenario.  Businesses that anticipate a potential top-heavy problem should consider adopting safe-harbor 401(k) plan designs, as a basic safe-harbor matching or non-elective contribution will satisfy minimum top-heavy contribution requirements.  A SIMPLE-IRA plan is also exempt from top-heavy requirements, provided you have 100 or fewer employees.
  2. ADP/ACP testing failure.     A similar and more common problem, failure of the Actual Deferral Percentage or ADP test, occurs when the average rate of elective deferrals made by Highly Compensated Employees exceeds the average rate of elective deferrals made by non-Highly Compensated Employees by more than a permitted amount.  (A related test, the Actual Contribution Percentage test, applies to matching contributions.)  Highly Compensated Employees (HCEs) are persons who own more than 5% of the company sponsoring the plan at any time during the current or prior year, or who, for the prior year, earned above a set dollar amount.  (For 2022, the amount is $135,000 and applies to 2021 earnings.)  Correcting testing failures will involve refunding amounts to HCEs, or making additional contributions to non-HCEs.  Fortunately there are a number of preventive measures to take, including using a safe harbor contribution formula, using a “top 20%” election to define HCEs, using automatic enrollment at a meaningful percentage of compensation (such as 5% or higher), and robust enrollment meetings and tools to engage employees with savings potentials under the plan. 
  3. Late deposit of elective deferrals.  When you run payroll and pull employee elective deferrals from pay, you have a deadline within which to invest them under your 401(k) plan, which is the point at which they are considered to be “plan assets” under ERISA.  Investment is generally is denoted as a “trade date” by your plan’s recordkeeper, whether Fidelity, Vanguard, or the like.   If you have under 100 participants as of the beginning of your plan year (counting those who are eligible to participate even if they don’t actively do so) you have seven business days to get from pay date, to trade date.  For larger plans, the normal deadline to invest is as soon as elective deferrals can reasonably be segregated from your general assets.  (An outside deadline of 15 business days after the end of the month following the month in which the elective deferrals would have been payable in cash applies in the event of extraordinary circumstances interrupting normal payroll functioning.)  If you fail to meet the seven business-day or “as soon as” deposit deadline, your retention of employee funds constitutes a “prohibited transaction” and an excise tax is payable to the IRS. Additionally, the Department of Labor views it as a fiduciary breach.  It is possible to seek relief from the excise tax and from potential fiduciary liability by participating in the Department of Labor’s Voluntary Fiduciary Compliance Program or VFCP.  Late deposits of employee elective deferrals (and loan repayments) must be disclosed each year on your Form 5500 Return/Report, which in turn could trigger further inquiry, so compliance with your applicable deposit deadline is important.
  4. Plan audit requirementAs we covered in an earlier post, a business sponsoring a brand new 401(k) plan may be required to obtain an audit report on the plan’s operations and finances, prepared by an independent qualified public accountant or IQPA, at an annual expense of $5,000 – $15,000 or more.  These reports generally are required for plans with 100 or more participants as of the first day of the plan year, counting those who are eligible to participate whether or not they actually do so.  Proposed regulations for Form 5500 might change that rule, to count only those with plan account balances, but they have yet to be finalized and put into effect.  Until that time, businesses sponsoring new plans that will cover 100 or more eligible participants need to prepare for the audit process, both in terms of budgeting dollars for the cost, and time to gather responses to the auditor’s questionnaires.  New auditing standards going into effect this year put increased responsibilities on plan sponsors to account for plan operations and documentation.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2022 Christine P. Roberts, all rights reserved.

Photo credit:  Goh Rhy Yan, Unsplash

How to Prepare Business Owners for the Approaching CalSavers Deadline

CalSavers is a state-run retirement program that applies to employers who do not already sponsor their own retirement plan.  It automatically enrolls eligible employees in a state-managed system of Roth IRA accounts. It has been in place since September 30, 2020 for employers with more than 100 employees and since June 30, 2021 for employers with more than 50 employees.  On June 31, 2022, it goes into effect for employers with 5 or more employees.  Below we cover key aspects of the CalSavers program, focusing on the types of issues that California business owners might bring to their benefits advisor for further clarification. A version of this post was published in the March 2022 issue of Santa Barbara Lawyer magazine.

Q.1:  What is CalSavers?

A.1:  CalSavers is the byproduct of California Senate Bill 1234, which Governor Brown signed into law in 2016. It is codified in Title 21 of the California Government Code and in applicable regulations. It creates a state board tasked with developing a workplace retirement savings program for private for-profit and non-profit employers with at least 5 employees that do not sponsor their own retirement plans (“Eligible Employers”).  Specifically, CalSavers calls for employees aged at least 18, and who receive a Form W-2 from an eligible employer, to be automatically enrolled in the CalSavers program after a 30-day period, during which they may either opt out, or customize their contribution level and investment choices.   The default is an employee contribution of 5% of their wages subject to income tax withholding, automatically increasing each year by 1% to a maximum contribution level of 8%. Employer contributions currently are prohibited, but they may be allowed at a later date.

Q.2:  If a business wants to comply with CalSavers, what does it need to do?

A.2:  The steps are as follows:

  • Prior to their mandatory participation date – which as mentioned is June 30, 2022 for employers with 5 or more employees, Eligible Employers will receive a notice from the CalSavers program containing an access code, and a written notice that may be forwarded to employees. Eligible Employers must log on to the CalSavers site to either register online, or certify their exemption from Calsavers by stating that their business already maintains a retirement plan. The link to do so is here. To do either, the employer will need its federal Employer Identification Number or Tax Identification Number, as well as the access code provided in the CalSavers notice. 
  • Eligible Employers who enroll in CalSavers will provide some basic employee roster information to CalSavers. CalSavers will then contact employees directly to notify them of the program and to instruct them about how to enroll or opt-out online. Those who enroll will have an online account which they can access in order to change their contribution levels or investment selections.
  • Once an Eligible Employer has enrolled in CalSavers, their subsequent obligations are limited to deducting and remitting each enrolled employee’s contributions each pay period, and to adding new eligible employees within 30 days of hire (or of attaining eligibility by turning age 18, if later).
  • Eligible Employers may delegate their third-party payroll provider to fulfill these functions, if the payroll provider agrees and is equipped to do so.  CalSavers provides information on adding payroll representatives once a business registers.

Q.3:  How does a business prove it is exempt from CalSavers?

A.3:  There are several steps:

  • First, it must have a retirement plan in place as of the mandatory participation date.  This may mean a 401(k) plan, a 403(b) plan, a SEP or SIMPLE plan, or a multiple employer (union) plan. 
  • Employers with plans in place must still register with CalSavers to certify their exemption.  The link is at https://employer.calsavers.com (Select “I need to exempt my business” from the pull-down menu.)  They will need their federal Employer Identification Number or Tax Identification Number and an access code that is provided on a notice they should have received from CalSavers.  If they can’t find their notice, they can call (855) 650-6916.  

Q.4:     How does a business count employees, for the 5 or more threshold?

A.4: To count employees for purposes of the 5 or more threshold, a business takes the average number of employees that it reported to the California Environmental Development Department (EDD) for the previous calendar year.  This is done by counting the employees reported to the EDD on Form DE 9C, “Quarterly Contribution Return and Report of Wages (Continuation)” for the quarter ending December 31 and the previous three quarters, counting full- and part-time employees.   So, for example, if a business reported over 5 employees to EDD for the quarter ending December 31, 2021 and the previous three quarters, combined, and it did not maintain a retirement plan, it would need to register with CalSavers by June 30, 2022.  If a business uses staffing agencies or a payroll company, or a professional employer organization, this will impact its employee headcount. The business should seek legal counsel as the applicable regulations are somewhat complex.

Q.5: What are the consequences of noncompliance with CalSavers requirements?

A.5:  There are monetary penalties for noncompliance, imposed on the Eligible Employer by CalSavers working together with the Franchise Tax Board. The penalty is $250 per eligible employee for failure to comply after 90 days of receiving the CalSavers notification, and $500 per eligible employee if noncompliance extends to 180 days or more after the notice.  CalSavers has begun enforcing compliance with the program in early 2022, for employers with more than 100 employees who were required to enroll by the September 30, 2020 deadline.   

Q.6:  Are there any legal challenges to CalSavers?

A.6:  Yes, but the main suit challenging the program has exhausted all appeals, without success. A bit of background information is necessary to understand the legal challenge to CalSavers. The Employee Retirement Income Security Act of 1974 (ERISA) generally preempts state laws relating to benefits, but a Department of Labor “safe harbor” dating back to 1975 excludes from the definition of an ERISA plan certain “completely voluntary” programs with limited employer involvement. 29 C.F.R. § 2510.3-2(d).  The Obama administration finalized regulations in 2016 that would have expressly classified state programs like CalSavers, as exempt from ERISA coverage, and thus permissible for states to impose. However, Congress passed legislation in 2017 that repealed those regulations, such that the 1975 safe harbor remains applicable. Arguing that the autoenrollment feature of CalSavers program makes CalSavers not completely voluntary and thus takes it out of the 1975 regulatory safe harbor, a California taxpayer association argued that ERISA preempts CalSavers.   On March 29, 2019, a federal court judge concluded that ERISA did not prevent operation of the CalSavers program, because the program only applies to employers who do not have retirement plans governed by ERISA.  The Ninth Circuit affirmed.  In late February 2022, the Supreme Court of the United States declined to review the case. Meanwhile, state-operated IRA savings programs are underway in a number of other states, including Oregon, Illinois and New York, and in the formation stages in yet others. 

Q.7:  Does CalSavers apply to out-of-state employers? 

A.7:  It can.  An employer’s eligibility is based on the number of California employees it employs, as reported to EDD. Eligible employees are any individuals who have the status of an employee under California law, who receive wages subject to California taxes, and who are at least 18 years old. If an out-of-state employer has more than 5 employees meeting that description, as measured in the manner described in Q&A 4, then as of June 30, 2022 it would need to either sponsor a retirement plan, or register for CalSavers.

Q.8.  Does CalSavers apply to businesses located in California, with workers who perform services out of state? 

A.8:  Yes, if the employer is not otherwise exempt, and if they have a sufficient number of employees who have the status of an employee under California law, who receive wages subject to California taxes, and who are at least 18 years old.

Q.9: Can an employer be held liable over the costs, or outcome of CalSavers investments?

A.9:  No.  Eligible Employers concerned about lawsuits should be aware that they are shielded from fiduciary liability to employees that might otherwise arise regarding investment performance or other aspects of participation in the CalSavers program.  In that regard, the CalSavers Program Disclosure Booklet, available online, goes into significant detail about the way CalSavers contributions will be invested; notably the cost of these investments (consisting of an underlying fund fee, a state fee, and a program administration fee).

Q.10:  Can an employer share its opinions about CalSavers, to employees?

A.10.  Not really.  Eligible Employers must remain neutral about the CalSavers program and may not encourage employees to participate, or discourage them from doing so. They should refer employees with questions about CalSavers to the CalSavers website or to Client Services at 855-650-6918 or clientservices@calsavers.com.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2022 Christine P. Roberts, all rights reserved.

Call Me Maybe?  Prerecorded Wellness Messages Trigger Anti-Telemarketing Laws

WellCare Health Plans, Inc., which primarily services Medicare and Medicaid enrollees, fell afoul of federal laws governing unsolicited telephone calls when it reached out with voicemail and pre-recorded messages about preventive services, and medical management and educational health programs.  In Fiorarancio v. WellCare Health Plans, Inc., 2022 WL 111062 (D.N.J. 2022), a New Jersey federal trial court denied WellCare’s motion to dismiss a compliant that the calls violated the Telephone Consumer Protection Act and related FCC regulations, even though the calls promoted free services.  The case provides some helpful insight on when wellness outreach via automated phone calls might cross the border of solicitation. 

First, some background.  The TCPA dates back to 1991 when telemarketing and unsolicited faxes reached their peak.  Facilitation of the TCPA included creation of the National Do Not Call Registry in 2003.  The specific Federal Communications Commission regulations under the TCPA that are were at issue in the Fiorarancio case were as follows:

  • 47 C.F.R. § 64.1200(a)(1) prohibits any calls using an automatic telephone dialing system (robocalls) or an artificial or prerecorded voice, other than calls made for emergency purposes, or with the express consent of the called party.
  • 47 C.F.R. § 64.1200(a)(2) requires prior written consent if the robocall or pre-recorded calls include or introduce an advertisement or constitute telemarketing.  Exceptions to the written consent requirement apply if the call is made by or on behalf of a tax-exempt nonprofit organization, or delivers a “health care message” made by or on behalf of a covered entity or its business associate as defined under HIPAA. 

Next, the relevant facts of the Fiorarancio case.  Mr. Fiorarancio had no relationship to WellCare or any of its plans.  Between February and December 2019, his cell phone received 18 voice mail messages, of which 4 were pre-recorded, intended for a third party (apparently WellCare was dialing a wrong number).  The messages addressed the third party by name and requested the person call back in relation to a number of matters including free preventive care, an educational health program, an in-home health assessment, and the Healthy Living program, which was a free service WellCare offered to those who were at risk of experiencing a drug therapy problem.  During that same time his cell phone also received two text messages with flu shot reminders.

Mr. Fiorarancio brought a class action on the TCPA violations.  With regard to the National Do Not Call Registry, WellCare moved to dismiss the complaint on the grounds that that the calls were not telephone solicitations because they were merely intended to inform the recipient about WellCare benefits or health care in general.  The court disagreed, noting that even though the messages may have been informational on their face it was plausible that they were part of a larger marketing or profit-seeking scheme and thus within the TCPA’s scope.  It noted that the sizeable number of calls and their direct relation to WellCare’s business permitted the inference that they were a pretext to commercial activity, and the complaint did not need to specify the underlying purpose of the calls in order to survive a motion to dismiss.

With regard to the 4 prerecorded messages falling within the scope of the consent requirement of the FCC regulations cited above, WellCare argued that as health care messages they were exempt from all prior consent requirements under the TCPA, not just the written consent requirement applicable to advertisements and telemarketing.  Plaintiffs rebutted that the health care messages were still subject to the general consent requirement.  The court agreed with this narrower interpretation of the health care message exception and upheld this aspect of the complaint.  It dismissed the compliant, however, with respect to the two text messages with flu shot reminders, due to prior case law that flu shot reminders were not solicitations under the TCPA.

In its decision the court noted an Ohio case decided on similar grounds, Less v. Quest Diagnostics Inc., 515 F. Supp. 3d 715-757-18 (N.D. Ohio 2021) , in which a prerecorded message reminding of annual no-cost wellness visits were at issue; in that case a motion to dismiss the complaint under the TCPA also failed and the case went on to the discovery process in order to reveal more about whether or not the messages were a pretext to a solicitation.

The lesson in this case is that wellness outreach does not have blanket immunity from laws prohibiting unwonted telephone solicitation, particularly where, as here, the number and persistence of the phone contacts suggests an overriding commercial aim.  Further, the health care message exception applies only to the written consent component of applicable FCC regulations, and the general consent requirement still applies if robocalls or recorded messages are put in use.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2022 Christine P. Roberts, all rights reserved.

Photo credit: Wesley Hilario, unsplash

What the Supreme Court’s Hughes Decision Means to Plan Sponsors

“The point is that you’re not insulated from making bad [investment] decisions in your — [ . . . ] plan by the fact that you’ve made some good [investment] decisions in your plan, are you?”[1]

The fiduciaries of two 403(b) plans maintained by Northwestern University were sued for ERISA fiduciary breach on the grounds that the plans paid excessive recordkeeping fees, in part because of the existence of multiple recordkeepers, offered retail share class mutual funds and annuities when cheaper and materially identical institutional class alternatives were available to a plan of Northwestern’s size, and had a too-large roster of investment options that confused participants (Northwestern made changes that corrected some of these issues by the time the Supreme Court heard oral argument.)  The Northwestern fiduciaries moved to dismiss these claims, in part, on the grounds that the participants could have chosen from among lower-priced investments offered by the plans, hence failed to successfully allege that a fiduciary breach occurred.

In a unanimous decision by Justice Sonia Sotomayor in Hughes v. Northwestern University, the Supreme Court addressed a narrow issue on the standard of pleading an ERISA fiduciary breach: 

  • Whether, if plaintiffs can allege the existence of overpriced or otherwise imprudent investment options or recordkeeping arrangements, their complaint will survive a motion to dismiss, and may proceed to trial, even if participants could have chosen from among other investments that were not similarly flawed.

The Supreme Court answered this question “yes,” and remanded the case to the Seventh Circuit to determine whether fiduciary breaches were sufficiently alleged, notwithstanding that the Northwestern University 403(b) plans included some low-cost investment options which participants, in the self-directed arrangement, were free to choose over higher-priced options.

In reaching its conclusion the Supreme Court called out the Seventh Circuit for using “flawed” reasoning in its over-reliance on participant choice: “[s]uch a categorical rule is inconsistent with the context-specific inquiry that ERISA requires and fails to take into account respondents’ duty to monitor all plan investments and remove any imprudent ones.”  Hughes Opinion at p. 2, citing Tibble v. Edison Int’l, 575 U.S. 524, 530 (2015).

In other words, because ERISA fiduciaries must continually monitor investment options (and recordkeeping contracts, and other arrangements whose costs offset the growth of ERISA assets), the maintenance of some options that reflect fiduciary prudence does not excuse the continued presence of other options that do not. 

Reliance throughout the Hughes opinion on the Tibble case is instructive.  In that case, plaintiffs alleged in 2007 that the Edison 401(k) Savings Plan added mutual funds in 1999 and in 2002 with retail share pricing when materially identical, lower-priced institutional-class mutual funds were available.  The district court allowed the allegations regarding the funds added in 2002 to proceed but not the funds added in 1999, because more than six years had passed since the overpriced funds were added to the investment mix, and that exceeded the applicable statute of limitations for fiduciary breach.

The Ninth Circuit affirmed, but the Supreme Court disagreed, holding that ERISA fiduciary’s continuing duty to monitor and remove imprudent investments meant that the statute of limitations with regard to the 1999 fund additions remained open, because imprudent retention of an investment was a fiduciary breach, separate and distinct from a breach that occurs at the point of selecting an investment. 575 U.S. at 529, citing, inter alia, A. Hess, G. Bogert, & G. Bogert, Law of Trusts and Trustees § 684, at 147-148.

While it does not provide bright-line answers to what constitutes a fiduciary breach, the Hughes decision does acknowledge the complexity that the duty of prudence encompasses, stating that examinations of fiduciary prudence “will necessarily be context specific,” turning on the factual circumstances that prevail at the time the fiduciary acts; that at times, the circumstances facing an ERISA fiduciary will implicate “difficult tradeoffs,” and that courts must give “due regard” to the “range of reasonable judgments a fiduciary may make based on her experience and expertise.” Hughes Opinion at p. 6.

What does this mean for plan sponsors, plan investment committees, and other fiduciaries of 401(k), 403(b) and other ERISA retirement plans?  Nothing that common sense did not already dictate, but seeing the issues addressed so succinctly by the country’s highest court should be an impetus for plan fiduciaries to take the proper steps, which include (but are not limited to):

  • They must regularly evaluate the performance and pricing of their entire universe of investment options, as well as their recordkeeping and other vendor relationship, in a regular benchmarking or other apples-to-apples comparison process.
  • They must also put those relationships out to competitive bid at the outset of the relationship and periodically thereafter.
  • The benchmarking and bidding process must be documented in the form of meeting minutes and resolutions as must the periodic, such as quarterly, review of investment performance.
  • Use of a carefully chosen ERISA 3(21) investment advisor or 3(38) investment manager will assist with this process, but the choice and retention of the fiduciary advisor or manager is itself subject to the fiduciary standard and failing to benchmark and bid out those relationships could lead to potential liability.
  • An investment policy statement that articulates the process through which fiduciaries fulfill their duties of prudence, loyalty, and diversification with regard to selection and retention of investments is also advisable. However, care must be taken to not create too specific a set of guidelines as drifting from them could itself give rise to fiduciary liability.

In summary, the Supreme Court has weighed in, and ERISA fiduciaries who can point to some prudent investment options will not defeat fiduciary breach allegations at the pleading stage if they have not also regularly monitored and pruned inefficient and overpriced investments and recordkeeping relationships from their plan lineup.  Plan sponsors and other fiduciaries who already have good fiduciary hygiene practices in place should have little to fear, but those who do not now have no comfort that some is good enough, for defeating allegations of fiduciary imprudence.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2022 Christine P. Roberts, all rights reserved.

Photo credit: Bill Mason, Unsplash


[1] Justice Elena Kagan, Transcript of Oral Argument, Hughes v. Northwestern (19-1401), Retrieved at https://www.supremecourt.gov/oral_arguments/argument_transcripts/2021/19-1401_d18f.pdf

Five Fast Facts About Reproductive Health Benefits

Employers are increasingly looking to offer employees assistance in starting and adding to their families, which in a growing number of cases involves dealing with infertility treatments and other reproductive health issues.   Below are five fast facts about this trending employment benefit.

  1. Reproductive health benefits are increasingly in demand.  According to a survey by the International Foundation of Employee Benefit Plans, summarized here, 24% of employers surveyed covered the cost of in vitro fertilization benefits in 2020, up from 13% in 2016.  Similar or greater increases in coverage were seen across other categories, including fertility medications, visits with genetic counselors and surrogacy advisors, genetic testing, non-IVF fertility treatments, and egg harvesting and freezing services (coverage of which jumped from 2% in 2016 to 10% in 2020). 
  2. Only some reproductive health benefits are likely to qualify as medical expenses under a health FSA or HRA.  Such expenses must be incurred “for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body [of the employee, the employee’s spouse, or the employee’s dependent.]”  IRS Publication 502, Medical and Dental expenses, mentions only in vitro fertilization, including temporary storage of eggs or sperm, and surgery to reverse procedures to prevent conception, as qualifying medical expenses.  With regard to other reproductive health measures, such as surrogacy expenses, egg donation and the like, we have only private letter rulings or other IRS guidance that is specific to the taxpayers who seek an opinion and may not be relied upon by other tax payers.  As a consequence, a comprehensive reproductive health benefit plan may have to comprise a blend of pre-tax and after-tax benefits.
  3. State laws may apply, especially with regard to surrogacy benefits.  Some states, including New York, prohibit certain types of gestational surrogacy contracts, whereas other states permit them subject to certain conditions.  This article provides a survey of state laws as of early 2020.  Employers with operations in multiple states will want to proceed cautiously in designing their reproductive health benefits so as not to offer benefits that are prohibited or restricted under state laws.
  4. A number of vendors have cropped up in this space as a consequence of the complexity around the federal tax and state law issues.  Services they offer include integration with insurance carriers, care navigation, and coaching. Some of the leading reproductive health benefit vendors include the following:
  5. Retirement plans are getting into the game.  Effective as of last year, the SECURE Act permits 401(k) plans to offer “qualified birth or adoption distributions” of up to $5,000 person, to cover expenses incurred in childbirth or adoption, that are subject to income taxes but exempt from the 10% early distribution tax under Code Section 72(t).  More information on these distributions can be found in our earlier post on this topic.  Adding this distribution feature can help support an employer’s overall reproductive health benefit offerings.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2022 Christine P. Roberts, all rights reserved.

Photo credit:  Garret Jackson, Unsplash

In A Competitive Job Market, Helping With Student Loan Payments May Give Your Business the Edge

Through 2025, businesses have the opportunity to help employees pay off up to $5,250 in student loans each year ($21,000 total), through adoption of a simple written reimbursement program.  If structured properly, the assistance is deductible by the employer and excluded from employees’ taxable income.

This is thanks to one of the lesser known provisions of the CARES Act of 2020, which expended the use of the existing Internal Revenue Code Section 127 for tuition reimbursement programs, to permit repayments of principal or interest on an eligible employee’s “qualified education loan,” as defined under 26 U.S.C. 221(d).  This generally refers to debt incurred for eduction leading “to a degree, certificate, or other education credential” from an “eligible educational institution,” which is widely defined to include any accredited public, non-profit or privately owned for-profit college, university, trade school, or other post-secondary educational institution.  The CARES Act provision was meant to expire in 2021 but was extended, through December 31, 2025, under the Consolidated Appropriations Act, 2021.  As mentioned, the annual limit on tuition assistance, and by extension on student loan repayment assistance, is $5,250, but if a reimbursement plan is put into place in 2022 and used each year to the maximum limit, a participating employee can chop up to $21,000 off of existing student debt. 

For employers looking to put a student loan reimbursement plan in place, or amend an existing tuition reimbursement plan to add a student loan feature, there are a few rules to keep in mind.

  1. The $5,250 annual limit applies to both student loan repayments, and tuition reimbursement.  Therefore, an employee who is paying off qualified education loans while incurring new tuition expenses would have to allocate the $5,250 annual budget between the two expense categories.  No double dipping.
  2. You need a written plan document.  This is a requirement of Section 127.  It needs to spell out who is eligible to receive benefits (note that nondiscrimination rules apply), whether tuition reimbursement or student loan repayments, or both, are offered, the annual dollar limit (whether $5,250, or a lower amount), and any applicable limitations on benefits.  In this regard, some plans require repayment of benefits if employees leave employment within one year after receiving tuition or loan repayment assistance.  
  3. The assistance must be fully employer-funded and may not be offered as an alternative to employees’ existing or additional cash compensation.
  4. You must substantiate proper use of the funds for permitted tuition or student loan repayments.  Substantiation is required whether employers pay student loans directly to vendors (or pay educators directly for tuition) or reimburse employees for payments they incur.

Making your company stand out with a valuable benefit offering may help it attract and retain employees in today’s tight job market.  For more information on student loan reimbursement plans, visit our prior post on this topic.  And if you need help adding or amending a reimbursement program for 2022 to permit student loan repayments, use EforERISA’s contact form or reach out at croberts@mullenlaw.com.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2021 Christine P. Roberts, all rights reserved.

Photo credit: Standsome Worklifestyle, Unsplash

Five Good Reasons to Correct Retirement Plan Errors

If your business sponsors a Section 401(k) or other retirement plan, it is governed by a lengthy plan document, often a separate trust agreement or custodial account agreement, and multiple other documents (salary deferral agreements, loan policy statement, investment policy statement, etc.)  Not surprisingly, most plan sponsors get something wrong somewhere along the way, whether with respect to the plan document, or operation of the plan.  Below are five reasons why taking prompt action to correct plan errors is in the best interests of your business, and your employees.   

  1. To preserve the tax-qualified status of your plan.

Contributions to your plan are deductible to your business and excluded from your employees’ taxable compensation (i.e., are “tax-qualified”) because the plan document, and operation of the plan, conform to certain requirements under the Internal Revenue Code.  Under the Employee Plans Compliance Resolution System or EPCRS, the Internal Revenue Service permits plan sponsors to voluntarily correct a wide range of errors that, if left uncorrected, could result in a loss of the plan’s tax-qualified status and subject plan assets to taxation.   There are costs associated with participating in the EPCRS, including amounts that may be owed to the plan, attorneys’ fees, and program fees, but they are usually only a fraction of the potential expense of plan disqualification. 

  1. To correct prohibited transactions.

While the IRS monitors the tax-advantaged status of benefit plans, the Department of Labor policies the actions of plan fiduciaries, both with respect to plan assets, and in fulfilling reporting and disclosure duties.  When salary deferrals and loan repayments are withheld from employees’ pay and not promptly deposited in the plan’s trust account, the Department of Labor essentially views this as an interest free loan, by the employer, of employee money.  Technically speaking, it is a “prohibited transaction” that requires correction under the DOL’s Voluntary Fiduciary Correction Program.  Uncorrected prohibited transactions, if discovered on audit, can result in civil monetary penalties to the fiduciaries, and also triggers excise taxes payable to the Internal Revenue Service.  Prohibited transactions also must be disclosed on the annual Form 5500 Return/Report, potentially alerting the Department of Labor to initiate further inquiry or audit.  Timely participation in VFCP eliminates the fiduciary penalties and offers alternatives to payment of the excise taxes in some circumstances (e.g., if the same amount is paid to the plan). 

  1. To minimize penalties in the event of a plan audit.

The IRS, on audit, may assess penalties for uncorrected errors in plan documentation and operation, that can reach many thousands of dollars, on top of the amounts owed to the plan in order to correct operational errors.  And, as mentioned, prohibited transactions trigger potential civil monetary penalties.  Participation in IRS and DOL voluntary correction programs protects plan sponsors from these potential large assessments.  Whatever the cost of taking part in the voluntary program, whether it be costs of corrective contributions and earnings, attorneys fees, and the program fee, it is a quantifiable cost and one that is much smaller than the cost of correcting under the supervision of the IRS or DOL.

  1. To ensure the saleability of your business.

Plan sponsors sometimes think that their uncorrected plan errors are only at risk of discovery if they are audited, and point to low levels of IRS and DOL audit activity as proof that they can safely play “audit roulette.”  However they are forgetting that, if they want to sell their business – particularly stock sales – or merge with another business, the due diligence process preceding the transaction will likely require them to identify any errors in plan documentation or operation within a 3 year or longer period.  An unresolved plan error could derail the transaction, or at best require correction under terms and conditions that are not as favorable, to the plan sponsor, as self-correction would have been.  If you envision your business as a purchase target or merger partner in the future you owe it to yourself to make sure that plan errors are corrected promptly and in advance of any due diligence inquiries. 

  1. Because it’s the right thing to do.

Your retirement plan document is a contract you have entered into for the benefit of plan participants and beneficiaries and you should take it as seriously as any contract you enter into with a third party.  It spells out the right way to do things, for the most part, and the IRS and DOL self-correction programs are there to minimize the downside when plan documentation or operation falls short of perfection.  Whether your goal is to sell your business without a hitch, or glide through an IRS or DOL audit with a minimum of fuss, fixing plan errors promptly is the right choice every time.

The above information is a brief summary of legal issues that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2021 Christine P. Roberts, all rights reserved.

Photo credit:  Sasun Bughdaryan, Unsplash

When is a 401(k) Not a Retirement Plan?                 

Short answer – a 401(k) plan is not a “retirement plan” for California creditor protection purposes when it was expressly set up to protect IRA rollover assets from creditors. This was the holding in a 2019 California Court of Appeal decision that is still valid law and that is worth revisiting: O’Brien v. AMBS Diagnostics, LLC, 38 Cal. App. 5th 553, 562 (2019), rev. den. 2019 Cal. LEXIS 8003 (October 23, 2019)

Mr. O’Brien got into a legal dispute with his former business partners in AMBS Diagnostics, LLC (AMBS) and lost at trial, resulting in a judgment against him for over $600,000.  AMBS sought to collect on its judgment and filed notices of levy against Mr. O’Brien’s assets, including four IRA accounts then valued at $465,350.  (There was no dispute that the IRA funds had originally been set aside for retirement purposes.)  The court ordered an assessment of what portion of the funds in O’Brien’s IRAs were necessary for his support in retirement and what portion could be used to satisfy the judgment.

This is because, under California Code of Civil Procedure (C.C.P.) § 704.115(a)(3), IRA funds, and funds held in self-employed retirement plans, are exempt from creditors “only to the extent necessary to provide for the support of the judgment debtor,” and their spouse and dependents, upon retirement. This is to be distinguished from protection from bankruptcy creditors, which is governed by federal law (and which exempts up to $1 million, indexed for inflation), and is further to be distinguished from protection of assets held in “[p]rivate retirement plans” that are “established or maintained by private employers or employee organizations, such as unions,” including “closely held corporations.”  Assets held in this fashion are fully protected from creditors under C.C.P. § 704.115(b).  The I.R.S. generally can invade such assets pursuant to a federal tax lien, but that was not at issue in the O’Brien case. 

Mr. O’Brien was aware of the different degree of creditor protection under California law, accorded to IRAs versus employer-sponsored retirement plans.  Accordingly, within 18 days the court order to assess the IRA assets for necessity in retirement, Mr. O’Brien set up a limited liability company and formed a 401(k) plan for the LLC.  He then rolled over his IRA assets to the newly-established 401(k) plan, and then dissolved the LLC.  He also somehow got on the record as admitting that he took these actions to protect his IRA assets from his creditors. AMBS sought to levy funds from the new 401(k) plan but the trial court sided with O’Brien, holding that the funds were fully exempt as held in a “retirement plan” notwithstanding the plan’s recent vintage.

The Court of Appeal reversed on the grounds, in part, that the full exemption available to a retirement plan rests on the assumption that the plan holding the funds was principally or primarily designed and used for retirement purposes, and in light of Mr. O’Brien’s admission the LLC’s plan simply did not meet that standard. “O’Brien freely admitted his subjective intent for creating the 401(k) plan and in transferring the funds . . . ‘[T]he shielding and hiding of assets from creditors is clearly not a “use for retirement purposes.”’”  38 Cal. App. 5th at 562, citing In re Daniel, 771 F.2d 1352, 1358 (9th Cir. 1985), In re Dudley, 249 F.3d 1170, 1177 (9th Cir. 2001), In re Bloom, 839 F.2d 1376, 1378 (9th Cir. 1988).  The court concluded that the 401(k) funds were still subject to the more limited, “as necessary for retirement” protection available to IRA assets and sent the matter back to the trial court for assessment of the funds against that standard, as originally had been intended.  Interestingly, in reaching this conclusion the court favorably cited an earlier decision, McMullen v. Haycock, 147 Cal. App. 4th 753, 755-756 (2007), in which funds in a retirement plan account were held to have kept their higher level of protection against creditors after having been rolled to an IRA.  This “tracing rule” remains citable legal authority in California although it is somewhat at odds with the language of C.C.P. § 704.115(a)(3). 

Would the outcome in the case have been different had O’Brien not been so bold about stating his intentions?  Probably not, though he certainly did not help himself.  The timing of the LLC and plan setup were damning enough in themselves, and it would appear from the opinion that the rollovers were made in violation of the 401(k) plan terms (AMBS alleged that “O’Brien’s purported rollover of funds was invalid because he did not meet the qualifications set forth in the 401(k) plan itself for such a rollover.”)  58 Cal. App. 5th at 558.

Clearly, a poor plan, poorly executed, and an object lesson that creditor protection of retirement plan assets will be based on all the relevant facts and circumstances, not just the name on the account.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2021 Christine P. Roberts, all rights reserved.

Photo credit: Sasun Bughdaryan, Unsplash