Trust the Leaders - Summer 2019

Trust the a publication of smith, gambrell & russell, llp

Summer 2019

SGRLAW.com

Benefits and Compensation Taking care of your employees – the right way

Trust the Summer 2019

3 Editor’s Letter 4 Legal Briefs

News and views from the offices of Smith, Gambrell & Russell.

8 Employee Benefits and Executive Compensation

Get to know one of SGR’s fastest-growing practices and the Firm’s Fiduciary Institute.

12 Getting Straight A’s in Retirement Plan Audits

How regular ‘self-audits’ can help eliminate the operational errors that frequently attract the attention of the Internal Revenue Service and Department of Labor.

18 ERISA Litigation Basics

Understanding the rules of the Employee Retirement Income Security Act to remain compliant, minimize risks and improve litigation strategies.

22 Attracting and Retaining Quality Talent How leading supplemental insurance provider Aflac uses benefits and career plans to attract, motivate and retain its employees.

24 Hot Topics in Executive Compensation What the 2017 Tax Cuts and Jobs Act means for rewarding senior executives.

30 Finish Line: A Word on Wellness Key considerations for implementing a workplace wellness program.

Smith,Gambrell

&Russell, llp Attorneys at Law

1230 Peachtree Street, N.E. Promenade, Suite 3100 Atlanta, GA 30309-3592 editor@sgrlaw.com editor-in-chief

Dana Richens editorial advisory board

Patrick Cain Brett Lockwood Jim Monacell Jim Porter

sgr marketing team

Lee Watts Kerry Franklin Jaleesa Smith Cheryl Walker Mollie Werner Sharon Williams

Trust the Leaders is published on behalf of Smith, Gambrell & Russell, LLP by Fourth Element Creative. www.fourthelementcreative.com The information contained herein has been obtained from sources believed to be reliable.

The content and information in this publication do not constitute legal advice, do not in all cases reflect the opinions of SGR or its attorneys and are not in all cases complete or current as of the publication date. This publication is not intended to and does not create an attorneyclient relationship or provide legal advice or legal opinion. Legal advice should be obtained from one’s legal counsel.

Permission is granted to use and reproduce this publication in whole or in part for internal and personal reference, provided that proper attribution of authorship is given. Except for material in the public domain, this publication may not be further copied, modified, used or distributed, in whole or in part, in any form or by any means without the written permission of Smith, Gambrell & Russell, LLP. All other rights expressly reserved. © 2019 Smith, Gambrell & Russell, LLP. Leaders

used with permission of Leaders Magazine, Inc.

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TRUST THE LEADERS | Summer 2019 | SGRLAW.com

Editor’s Letter

Editor’s Letter Greetings! In this issue of Trust the Leaders, we highlight SGR’s Employee Benefits and Executive Compensation Practice. Start at p. 8 to learn how SGR’s recent merger with the Mazursky Constantine boutique is a win-win for clients of both firms. In addition to the articles authored by my SGR colleagues, you’ll enjoy a piece by Matthew Owenby, Chief Human Resources Officer of Aflac, in which he describes Aflac’s strategic use of employee benefits to attract and retain top talent (pp. 22-23). SGR is pleased to assist Aflac with its benefits plans, retirement plans and executive agreements.

In conjunction with Angela Roberts’s excellent piece on employee wellness programs (The Finish Line, pp. 30-31), I must brag on SGR’s own program, GetHealthySGR. So far, the program has included: • Surveying attorneys and staff to assess their concerns and interests around health and wellness, thus allowing us to focus on the top issues of concern.

• Forming a Health and Wellness Committee to bring diverse perspectives and ideas to administer the program across all offices, departments and levels.

• Publishing a newsletter to communicate and encourage participation.

• Collaborating with the third-party administrator for the Firm’s medical plan to implement “challenges” around health risk assessments and preventive exams.

• Creating “lunch and learn” programs highlighting nutrition, healthy grocery shopping, and exercise and stress management techniques.

• Encouraging movement by giving out pedometers, sponsoring walking challenges and hosting a weekly onsite yoga program in the Atlanta office.

GetHealthySGR has fostered a true sense of community while helping to improve the individual health and well-being of all who participate. If you have questions about the legal and compliance implications of starting a workplace wellness program of your own, please contact any member of our Employee Benefits and Executive Compensation team.

Enjoy the issue!

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LEGAL BRIEFS THE LATEST NEWS AND UPDATES FROM THE SGR OFFICES

ATTORNEYS IN THE NEWS UGA’s new Innovation District will enhance collaboration and problem-solving Matt Warenzak, a member of SGR’s Intellectual Property Practice in Atlanta, has been named to the University of Georgia’s (UGA) Innovation District External Advisory (IDEA) Board. With its integrated facilities, which offer spaces and amenities designed to inspire collaboration, discovery, innovation and entrepreneurship, the Innovation District will make the university a more powerful driver of economic development in Georgia. It will be a hub for university startups, research commercialization and experiential learning, and idea generation for new products and business ventures that will benefit communities across the state. The Innovation District will also make it easier for industry partners to collaborate with UGA’s faculty and students to solve business problems and foster innovation.

Matt is an adjunct professor of patent law at UGA’s School of Law and serves as its representative for the Georgia Intellectual Property Alliance.

Lewis continues service and commitment in special needs planning Kristen Lewis of SGR’s Atlanta Tax Practice has joined the board of Cumberland Academy of Georgia, an Atlanta-based school for students with autism. Kristen’s article, “Planning Challenges for Beneficiaries With Special Needs,” was published in the March 2019 issue of the periodical Estate Planning. Kristen also received the “Helping Hands” Award from the Center for the Visually Impaired in recognition of her service and commitment to the boards and constituents of numerous nonprofit organizations serving persons with disabilities and their families. Kristen is a nationally recognized practitioner in and speaker on special needs planning.

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TRUST THE LEADERS | Summer 2019 | SGRLAW.com

PARTNERSHIPS AND PRESENTATIONS SGR and its client Blueprint RF are the winners of the Information Technology Deal of the Year award for Blueprint RF’s acquisition by Cox Communications. The award was announced at the 2018 M&A Advisor Awards Gala, the premier celebration of the year for the industry’s leading mergers and acquisitions dealmakers, held in conjunction with the 2018 M&A Advisor Summit “The Future of Finance” in New York in November.

Blueprint RF was chosen from more than 600 companies to receive the award. SGR’s Nick Rueter, John Ethridge and Erin McCallum served as legal advisors in the acquisition. Joe Mandarino in SGR’s Atlanta Tax Practice and Brandon Sherlinski in SGR’s Jacksonville Employee Benefits and Executive Compensation Practice also assisted. Leonis Partners served as the exclusive financial advisor to Blueprint RF in the acquisition and was also recognized at the gala.

Employment law seminars

Accelerating business growth

SGR hosted its annual Labor and

Under the direction of Florian Stamm

Employment seminars in April in

and Heiko Gruenwald of the

Atlanta, Jacksonville and Los Angeles.

Firm’s International Practice, SGR is

Employment law, ERISA and OSHA

a founding member of The International

attorneys spoke to more than

Startup Accelerator (ISAAC) – a business

400 employment law and human

accelerator designed to stimulate

resource professionals. To sign up

Cannabis under the spotlight SGR recently hosted an in-house

economic growth in the metropolitan

for our complimentary employment

Atlanta area. ISAAC supports international startups

law seminars for 2020, email us at:

with high growth potential through business

sgrcommunications@sgrlaw.com.

assistance programming, including mentoring

seminar to address the evolving area

and networking opportunities. Managed and

of cannabis law. Steve O’Day, Matt

administered by a 501(c)(6) not-for-profit

Clarke, Greg Kirsch, Anne Pitter,

corporation, ISAAC is a community-based

along with guest speaker Vernon

organization with the goal to increase the

Jones, a member of the Georgia House

attractiveness of metro Atlanta to foreign

of Representatives, presented at the

startups, spur job creation and stimulate innovation.

seminar. For more information on SGR’s Cannabis Practice, go to: www.sgrlaw.com.

TRUST THE LEADERS | Summer 2019 | SGRLAW.com

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LEGAL BRIEFS THE LATEST NEWS FROM THE SGR OFFICES

ATTORNEYS IN THE NEWS

IN BRIEF...

Building the Georgia Bar’s Construction Law Section SGR attorneys Peter Crofton, Greg Smith and Darren Rowles spearheaded the creation of the State Bar of Georgia’s new Construction Law Section. Now, aided by colleague Ben Deninger, Peter, Greg and Darren have helped create a continuing legal education (CLE) initiative that includes lunch-hour CLE webinars where members receive one hour of free CLE credit for each webinar attended. Webinars are recorded and members can later access the recording and submit a “self-report” CLE credit request. The Construction Law Section is the first to use the State Bar’s webinar system to offer this type of CLE program.

SGR managing partner and chairman, Steve Forte, is chair of the Atlanta Legal Aid fundraising campaign again this year. The campaign, which seeks contributions from law firms and corporate legal departments, is one of the group’s largest sources Michael Riesen, a member of

of funding, making up more than 15 percent of

SGR’s Intellectual Property

the group’s $12 million annual budget.

Practice, contributed a chapter to

Depot General Counsel Teresa Roseborough.

Virtual, and Mixed Reality in the

SGR name partner E. Smythe Gambrell founded

Library. The chapter covers potential

the Atlanta Legal Aid Society 95 years ago.

augmented reality/virtual reality program associated with a library.

Michael and SGR colleague Tom Wiseman received Patent Pro Bono Achievement certificates from the United States Patent and Trademark Office. The certificates are presented to practitioners and law firms with 50 or more hours of pro bono service to a regional pro bono program.

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TRUST THE LEADERS | Summer 2019 | SGRLAW.com

Jonathan Russell of SGR’s London office was a panelist at the 7th European Corporate Aviation Summit (ECAS) in Malta. The summit explores the latest developments and new business opportunities and challenges for the European corporate aviation industry.

Steve was co-chair last year alongside The Home

the book Beyond Reality: Augmented,

legal implications relating to an

Hon. Leah Ward Sears, a member of SGR’s Litigation Practice and former Chief Justice of the Supreme Court of Georgia, has been appointed by Atlanta Mayor Keisha Lance Bottoms to chair the newly created Task Force for the Promotion of Public Trust. The Task Force will be entrusted to evaluate the city’s legislative and administrative policies and procedures with regard to ethics, transparency and compliance.

SGR attorney and New York City Bar Association (City Bar) President Roger Maldonado was selected as one of The Responsible 100 for 2018

by City and State New York magazine. Roger was also recognized by the magazine as one of the 2019 Law Power 50 .

RECENT REPRESENTATION AND LITIGATION Domain name dispute resolved Jim Bikoff and Holly Lance of SGR’s Intellectual Property Practice secured a victory on behalf of client The Wawanesa Mutual Insurance Company.

Through the registration of the WAWANESA trademark in the Trademark Clearinghouse, a global database, SGR discovered a thirdparty entity had registered WAWANESA. XYZ without Wawanesa’s authorization and was offering the domain for sale.

SGR filed a Uniform Domain Name Dispute Resolution Policy proceeding.

The arbitrator accepted SGR’s allegations

Summary judgment obtained in Georgia Bar class action

regarding the fame of the WAWANESA trademark, the registrant’s lack of rights

Ed Wasmuth, a member of

the exams, but were later informed they had,

and legitimate interests in the domain

SGR’s Litigation Practice, obtained

in fact, passed. ILG had supplied the Georgia

name, and its bad-faith registration of the

summary judgment on behalf

Office of Bar Admissions with software used to

domain name to exploit Wawanesa’s name

of client ILG Technologies, LLC

automate the bar admission process. The federal

and mark, and awarded the WAWANESA.

(ILG) and its principal, Baris Misman. The

court granted summary judgment to ILG and

XYZ domain name to Wawanesa.

clients were defendants in a putative class

Mr. Misman, concluding the plaintiffs had no

action pending in federal court in Savannah

contractual relationship with the defendants and

brought on behalf of 90 individuals who had

that tort claims were barred by the “economic

taken the Georgia bar exam. The individuals

loss rule.” (Murray v. ILG Technologies, LLC, et

were originally told they had failed one of

al., Case No. 4:18-CV-110-RSB).

Legal Aid pro bono success story in Jacksonville Newsday’s Long Island lease negotiated

James Cummings and Nicole

leak in her apartment. SGR joined the case

Kalkines in SGR’s Jacksonville

on the client’s behalf, asserting several legal

SGR served as legal counsel to

Litigation Practice successfully

defenses and also a counterclaim against the

The We’re Group in its lease

represented a pro bono client

landlord for retaliatory eviction.

negotiations with Newsday

as part of the Firm’s ongoing

SGR negotiated a very favorable settlement

Media Group for the Long

partnership with Jacksonville Area

for the client, whereby all of the allegedly

Island newspaper’s new

Legal Aid (JALA). The client was an

past-due rent was waived and the eviction

headquarters on Long Island.

elderly woman who came to JALA

action was dismissed. SGR also helped the

Leasing 130,000 square feet,

client secure additional time to move out

Newsday signed a 15-year lease

of the premises without penalty from the

for office space in The We’re Group’s 6 and

could not afford to pay her rent only because

landlord, and assisted the client in obtaining

8 Corporate Center Drive buildings located

she was being forced to pay exorbitant bills

a credit from the utility company for the

in Melville, New York. Steve O’Connell

to the local utility company resulting from the

overages she paid as a result of the landlord’s

and Victor Metsch of SGR’s New York

landlord’s repeated failure to repair a plumbing

failure to repair the plumbing.

office worked on the lease negotiation.

having been served with an eviction lawsuit.

James and Nicole discovered that the client

TRUST THE LEADERS | Summer 2019 | SGRLAW.com

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Welcome

TO SGR’S EMPLOYEE BENEFITS AND EXECUTIVE COMPENSATION PRACTICE

Already one of SGR’s fastest-growing practices, a recent merger with law firm Mazursky Constantine has given the Firm even more bench strength

M

OST BUSINESSES work hard to provide their employees with the proper levels of

and sometimes criminal penalties. In addition,

compensation and benefits. Compensation

the wrong benefits and compensation structure

comes in various forms, including regular wages,

can result in adverse tax consequences for your

bonuses, incentive payments and deferred

employees.

compensation. Benefits include items such as pension,

Compensation and benefits need to be structured

medical, disability and life insurance, dependent care,

carefully. The employer, in coordination with outside

health and wellness, and other plans.

counsel, must establish policies and procedures to

While these efforts are well intended, as the saying

achieve and remain in legal compliance while ensuring

goes, “no good deed goes unpunished.” Trying to

that the compensation and benefits received and

take good care of your executives and other employees

perceived drive the employee behavior you intend.

through compensation and benefit plans necessarily

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failure to comply can result in substantial civil

In this issue, members of SGR’s Employee Benefits

brings into play a vast array of federal, state and local

and Executive Compensation Practice address various

laws, rules and regulations. Whether it be tax,

challenges and opportunities that businesses will

ERISA fiduciary, wage and hour, or similar rules,

encounter in their plans and programs.

TRUST THE LEADERS | Summer 2019 | SGRLAW.com

Introduction

THE STORY BEHIND THE MERGER SGR’s Employee Benefits and Executive Compensation Practice heads Andy Fawbush and Don Mazursky discuss how SGR’s recent alliance with boutique law firm Mazursky Constantine enhances the Firm’s client offering.

“ENHANCED BENCH STRENGTH”

BY ANDY FAWBUSH

“UNPARALLELED PRACTICAL EXPERIENCE”

BY DON MAZURSKY

Employee benefits and executive compensation legal issues permeate virtually every practice area of a broad commercial law practice such as SGR’s. While we deal directly with employee retirement and welfare benefit plans, executive agreements and ERISA fiduciary issues, the Employee Benefits and Executive Compensation Practice often plays a vital role in the Firm’s corporate, partnership, M&A, securities, financial instruments, real estate, timber, intellectual property, investment and tax practices. The range of legal issues in this area continues to expand and become more complex.

To be efficient, effective and responsive to client questions and needs, it has become necessary to have experience and knowledge in multiple aspects of our practice. To do that you need bench strength. Our recent merger with the Mazursky Constantine law firm has added significant depth to SGR’s already strong and recognized Employee Benefits and Executive Compensation Practice.

SGR now has one of the largest Employee Benefits and Executive Compensation practice groups in a major general commercial law firm.

We have highlighted in this edition of Trust the Leaders several of the areas and issues we address on a daily basis.

After more than 26 years of maintaining a successful legal practice in a boutique firm that specialized in employee benefits and executive compensation, there have to be compelling reasons to move from that setting to SGR… and there are. After speaking with several large law firms interested in having us join, SGR was and remains the clear choice for our attorneys and clients. SGR allows us to continue to protect and further our clients’ interests. Through the combination with SGR’s existing Employee Benefits and Executive Compensation Practice, we now provide our clients with enhanced depth in these areas. In addition, the multiple practice areas at SGR that perform superior quality legal services at reasonable fees allow us to offer assistance in matters related and unrelated to our core practice.

SGR’s existing Employee Benefits and Executive Compensation Practice shared all of the factors that have allowed us to achieve successes for our clients. These include (i) proactive leadership; (ii) finding practical solutions in an area fraught with technicalities; (iii) superior expertise, with subspecialists in each of the benefit and compensation sub-categories (e.g., retirement, health and welfare, fiduciary matters, executive compensation, executive agreements, Section 409A, M&A, securities law, and ERISA litigation); (iv) collaboration with each other and with our clients; and (v) providing value. By combining our two groups of employee benefits and executive compensation attorneys and professionals, we now offer unparalleled practical experience in our core practice area.

Through SGR’s other practices, we have expanded the areas in which we assist our clients. We merged our law firm into SGR on February 1, 2019, and we and our clients have already experienced the positive impacts of that move. These advantages will only grow over time.

Andy Fawbush is the Co-Chair of SGR’s Employee Benefits and Executive Compensation Practice. afawbush@sgrlaw.com.

Don Mazursky is the Co-Chair of SGR’s Employee Benefits and Executive Compensation Practice. dmazursky@sgrlaw.com.

TRUST THE LEADERS | Summer 2019 | SGRLAW.com

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Introducing the SGR Fiduciary Institute The SGR Fiduciary Institute serves as an extension of the SGR Employee Benefits, Executive Compensation and ERISA Litigation Practice and provides practical, operational assistance that helps our clients succeed. This institute combines multiple disciplines within the practice group to focus more intently on and to showcase industry leadership on some of the most significant issues that companies face in the benefits area.

HIPAA Privacy and Security

Retirement Plan Vendor Searches

Plan Corrections

H&W Plan Vendor Agreements

For more information on the SGR Fiduciary Institute, visit: www.sgrlaw.com/fiduciary-institute

Lost Participant and Beneficiary Searches

De-Risk Pension and Retiree Medical Plans

Data Security ACA Reporting

Join the SGR mailing list to receive invitations to attend informative events, webinars and seminars: SGRCommunications@sgrlaw.com 10

TRUST THE LEADERS | Summer 2019 | SGRLAW.com

EMPLOYMENT BENEFITS, EXECUTIVE COMPENSATION AND ERISA LITIGATION

SGR Fiduciary Institute

Fiduciary Structure

Fiduciary Training Fiduciary Protections

Discrimination Testing

Government Audits

SGR FIDUCIARY INSTITUTE

Plan Administration and Operation

Benefit Claim Administration

Power of Attorney Administration

QDRO Administration

Plan Policies Investments in Employer Stock

ERISA Litigation Avoidance ERISA Litigation

Participant Communications

LEADERSHIP

PRACTICALITY

SUB-SPECIALTIES

COLLABORATION

• Thought Leadership

• Practical Business Solutions in a Technical World

• Retirement • Health & Welfare • ACA, HIPAA, COBRA • Executive Compensation • Executive Agreements • M&A • Sector 409A • Fiduciary • ERISA Litigation

• Collaborate Internally to Provide Superior Results Efficiently

• Unique Ideas • New Developments • Problem Solving

• Not “Can We?”, but “How Can We?”

• Collaborate with Clients as an Extension of their Teams

TRUST THE LEADERS | Summer 2019 | SGRLAW.com

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TRUST THE LEADERS | Summer 2019 | SGRLAW.com

Retirement Plan Audits

GETTING STRAIGHT A’s IN RETIREMENT PLAN AUDITS

Prepare in advance to make an IRS or U.S. Department of Labor review easier

N

OTHING STRIKES FEAR into the heart of a qualified retirement plan sponsor like an audit notice from the Internal Revenue Service (IRS) or the U.S. Department of Labor (DOL). Although

nothing can make an IRS or DOL audit entirely painless, employers can minimize the pain and cost by performing periodic “self-audits” of plan

LISA CARRASCO

operations. This article discusses several aspects of plan operations that should be included in self-audits, because they are likely to be the focus of agency audits and are often undetected through regular plan processes and procedures. The article also discusses the methods for identifying and correcting these operational errors and the steps that employers may take to keep the errors from occurring in the future.

Understanding Self-Audits A thorough self-audit should cover all key aspects of plan operations,

DAVID PUTNAL

including both an employer’s internal controls and processes and the services performed by the plan’s third-party administrator (TPA).

A self-audit will provide multiple benefits, including: • Employers may self-correct errors under IRS and DOL correction programs without incurring the sanctions or additional costs that could apply if the error is discovered by the IRS or DOL. • The audit can lead to the early discovery of errors that would have significantly higher correction costs if discovered later.

TERI FOREHAND KING

• The audit may also reveal issues that could result in litigation by participants.

Although any plan can benefit from a self-audit, one category of plan that is a prime candidate for a self-audit is a frozen or partially frozen defined benefit plan. There is a good chance that an employer will eventually terminate the plan or “derisk” the plan by purchasing annuities, and both of these processes will go much smoother if the operations and participant data have been cleaned up in advance. Defined benefit plans are also prime targets for DOL and IRS audits focused on timely benefit payments, as discussed below.

TRUST THE LEADERS | Summer 2019 | SGRLAW.com

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Retirement Plan Audits

Lost Participants and Failure to Pay Benefits In recent years, both the DOL and IRS have focused much of their audit efforts on what they see as a chronic problem with the nation’s private retirement system: the loss of retirement benefits due to the failure of plans to pay benefits when due. This failure is often attributable to lost participants and beneficiaries, or the absence of a beneficiary designation, but in some cases it results simply from a lack of sufficient administrative processes for paying benefits when they are supposed to be paid.

The DOL may consider the failure to pay benefits when due a breach of the plan administrator’s fiduciary duty. From the IRS perspective, this is a failure to follow the terms of the plan and Internal Revenue Code requirements, which could jeopardize the plan’s tax-qualified status. The failure to pay required distributions may also result in punitive excise taxes being imposed on plan participants and beneficiaries.

IRS rules generally require that benefits must begin by the April 1 after the later of (i) the year in which the participant reaches age 70½ or (ii) the year in which the participant retires from the employer. IRS rules also generally require either that payments to a deceased participant’s beneficiary begin by the end of the year following the year in which the participant dies, or that the benefit be paid in full within five years of the employee’s death.

The plan document may impose even earlier deadlines, since many plans do not allow a terminated participant to defer the commencement of benefits beyond the plan’s normal retirement age (typically 65), and plans often require beneficiaries to be paid as soon as administratively feasible after the participant’s death. In addition, most plans have a small benefit cashout rule, which requires that benefits under a specified dollar limit (typically either $1,000 or $5,000) be paid out when the participant terminates employment.

An important first step is to read and understand the plan terms dictating when benefits must be paid even if not requested by the participant or beneficiary.

■ Finding Errors. An important first step is to read and understand the

plan terms dictating when benefits must be paid even if not requested by

■ Avoiding Future Errors. Here are some of the steps that plans can take to

the participant or beneficiary. A query of plan records can then identify

minimize the number of lost participants and beneficiaries:

participants and beneficiaries whose benefits are required to begin but

• Follow up immediately on returned mail, such as annual notices.

who in fact have not commenced benefits. A death search can also identify

• Establish a regular process for starting benefits when the plan requires.

deceased participants whose benefits have not been paid to a beneficiary.

■ Correcting Errors. The correction is simply to pay or commence the

required benefit, but in many cases the first and most difficult step is to locate the lost participant or beneficiary. Unfortunately, guidance from the IRS and DOL on this topic somehow combines the inadequate with the impractical. At a minimum, the employer should review employment records

• Conduct periodic death searches to avoid delays in making payments to beneficiaries.

• Use plan communications to remind participants of the need to keep addresses and beneficiary designations up to date.

• Identify search steps that the plan’s TPA is not performing and allocate internal resources or engage the TPA or another vendor to complete them.

and other employee benefit plan records, try to contact a designated beneficiary if there is one on file, perform “free” internet searches, and

Failure to Follow the Plan’s “Compensation” Definition

send a certified letter to the last known address. If these steps fail, it may

A common error identified by IRS auditors is the failure to follow the plan’s

be necessary to use a paid locater service. Most third-party administrators

“compensation” definition in calculating contributions and benefits. This

(TPAs) offer a basic locator service for a small additional charge, but may

typically results from mistakes in identifying pay types or payroll codes that

require direction from the employer to use the service. However, most

are included – or excluded – from the plan’s “compensation” definition.

TPAs would not perform additional steps to locate missing participants and

■ Finding Errors. Employers should compare the plan’s “compensation”

beneficiaries or would charge extra fees for that type of service.

definition with the actual pay types being used to determine contributions

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TRUST THE LEADERS | Summer 2019 | SGRLAW.com

NEED TO KNOW

ASSUMING OTHERS ARE MONITORING YOUR PLAN’S COMPLIANCE (OR, THE BEST WAY TO RUN INTO TROUBLE IN AN IRS OR DOL AUDIT)

to defined contribution plans and accrued benefits under defined benefit plans.

■ Correcting Errors. The appropriate correction will depend on the nature

of the error, but in many cases additional contributions or benefits will be required. If the mistake was favorable to participants – such as if ineligible compensation was included in calculations – the employer may consider requesting IRS approval to retroactively amend the plan to conform with operations. Employers should also consider making a prospective amendment if the plan’s “compensation” definition is impracticable to administer, such as a 401(k) plan definition that does not exclude equity compensation or other amounts that are not paid through payroll.

■ Avoiding Future Errors. Errors in determining plan compensation often

arise when payroll codes are added or revised, or when there are changes in the payroll software or vendor. These changes should not be made by the employer’s payroll department without input and review from the benefits department.

Failure to Use or Allocate Forfeitures Sponsors of 401(k) and other defined contribution plans often allow forfeitures to accumulate in the plan over several years, rather than (i) using those forfeitures to offset employer contributions or pay plan expenses, or (ii) allocating the forfeitures to participants. The permitted use of forfeitures, and the time frame for using them, depend on the plan terms, but the deadline

When an IRS or DOL auditor finds errors in plan operations, the employer’s first reaction is usually surprise. The employer often asks how those issues were not detected by the plan’s annual Form 5500 auditor or by the plan’s TPA. The answer is that the auditor and TPA perform specific functions that do not include overall monitoring of plan compliance.

The accounting firm performing the Form 5500 audit is only auditing the plan’s financials. While that process may reveal certain errors from time to time, it does not involve an indepth review of the plan’s operations or compliance.

Similarly, the TPA is only providing a menu of services based on its system and procedures, and does not take responsibility for many aspects of plan operations.

The TPA also does not monitor the employer’s internal operations, such as payroll, where many errors occur. Ultimately, it is the employer’s responsibility to ensure compliance, and in most cases it will be the employer that will bear the cost when errors happen.

An important step is to understand the limits of the services the TPA

is performing. Does the TPA take responsibility for locating missing participants, ensuring that forfeitures are allocated timely, or ensuring that proper compensation types are used? The answer is almost certainly “no,” and there are many other functions where the TPA will not take action without specific, proactive direction from the employer.

The next time you receive a communication from the TPA about plan administration, whether it be a draft participant communication, plan amendment or change in procedures, take the time to read the disclaimers provided by the TPA. Almost invariably, the disclaimers will state that the TPA is not providing legal advice and that employers are advised to consult counsel.

Other disclaimers are also common, such as stating that provided documents are just forms and that the employer is ultimately responsible for ensuring that they are correct and legally compliant. Many employers tend to ignore these warnings.

See the main article on selfaudits for more detail about common errors that are unlikely to be raised by the Form 5500 auditor or TPA.

may be as soon as the end of the year in which the forfeiture arises.

TRUST THE LEADERS | Summer 2019 | SGRLAW.com

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NEED TO KNOW

UH-OH! WE FOUND AN ERROR… …OR TONS OF ERRORS. NOW WHAT?

3

Audit Closing Agreement Program (Audit CAP)

From time to time, you may discover an

the percentage and amount of assets and

error in a retirement plan document or its

participants involved in the errors, how

operation. This is just a fact of life when

long the errors went on, and the reasons

Audit CAP is the method of correcting errors

navigating a complex set of rules and

behind the errors. In addition, the employer

that are discovered by the IRS, such as in

administrative systems. Luckily, almost

must establish and follow practices and

a plan audit, rather than being discovered

every error can be corrected and, in many

procedures that are reasonably designed to

by the employer and voluntarily corrected.

cases, without significant penalties. The

promote future compliance.

In Audit CAP, the employer corrects the

IRS has established a correction program

2

error, which allows the plan to remain

for operational and plan document errors that could otherwise result in the loss of a plan’s tax-qualified status. Some statutory

Voluntary Correction with IRS Approval Program (VCP)

tax-qualified, but must pay a negotiated penalty based on factors such as the

Errors in the plan document and operational

plan’s assets, the scope and type of the

penalties and taxes that attach to specific

errors that do not qualify for SCP can be

error, steps the employer took to avoid and

errors can also be waived. There are three

corrected through VCP, as follows:

detect errors, and the reasons for the error.

basic elements to the program:

1

Self-Correction Program (SCP)

Operational errors can be self-corrected

by the employer if either:

The employer (i) prepares an application,

A recent Audit CAP sanction imposed on a

using IRS forms, describing the errors and

large plan that failed to utilize its forfeiture

proposed corrections, (ii) pays a fixed fee

account for several years was more than

(currently $1,500 to $3,500, based on plan

$100,000.

asset size), and (iii) submits the application

Any correction must follow certain basic

to the IRS. The IRS may accept the proposed

principles, which include: (i) full correction

second plan year after the year in which the

correction or may suggest modifications, in

generally must be made for all affected

error occurred; or

which case the parties negotiate the final

participants; (ii) the correction should restore

terms of an acceptable correction.

the plan and participants to the position

The error is corrected by the end of the

The errors continue for a longer period but all of the plan’s combined errors are

Once the VCP is finalized, the employer

they would have been in if the error had not

considered “insignificant” based on factors

will receive a letter confirming relief from IRS

occurred; and (iii) the correction should be

such as the number of all errors involved,

penalties related to the errors.

consistent, reasonable and appropriate.

The IRS has specific methods for particular types of corrections, so it is important to consult the IRS procedures before implementing a correction. If the IRS determines that an SCP correction was not done properly, the plan would still be out of compliance and the IRS could impose an Audit CAP penalty. The IRS correction program makes it straightforward to correct plan errors through SCP and VCP. Regular self-audits not only can identify errors and allow them to be corrected, but also can support lower penalties if the employer ends up negotiating penalties in Audit CAP.

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Retirement Plan Audits

during their first year of employment or a subsequent year before becoming eligible, but the plan cannot impose a greater hours requirement.

Employers should keep in mind that part-time employees can satisfy a 1,000-hour requirement while working only 20 hours per week, compared to the 30-hour standard that many employers require for general benefits eligibility. Errors may also occur when (i) an employee changes from fulltime to part-time status, and (ii) prior service as a full-time employee is not properly taken into account in determining whether any service requirement is satisfied.

■ Finding Errors. Eligibility errors are usually identified in an audit of the

employer’s processes for enrolling new participants. The existence of this issue is often highlighted by statements in employee handbooks or in the plan’s summary plan description that describe plan eligibility as limited to full-time employees. An employer may also examine whether part-time or similar classifications are being included on data files being sent to the TPA and how those classifications are being handled during the eligibility process.

■ Correcting Errors. The employer may need to make corrective

contributions to defined contribution plans or provide retroactive benefit accruals under defined benefit plans. This may be a costly outcome, especially if the failure occurred over many years.

■ Avoiding Future Errors. Employers should bolster their processes for

accurately and timely determining when an employee has met the plan’s eligibility requirements. Prospective plan amendments may be needed if the The failure to follow plan terms in using forfeitures is a qualification defect,

plan document does not contain the proper language for a legally allowed

and the IRS has been known to take the position that the failure to use

and desired design. Employers may also consider simplifying the plan

forfeitures within a reasonable period is a defect even if it does not violate

eligibility rules.

plan terms. In addition, the IRS may deny a tax deduction for contributions made at a time when the plan had unused forfeitures and may assess an

Other Common Errors

excise tax.

Other issues that often arise in IRS and DOL plan audits and that should be

■ Finding Errors. A defined contribution plan’s account records normally

audited periodically by the plan sponsor include:

will include a separate account designated as a forfeiture account. A large

• Failure to timely adopt plan amendments;

forfeiture balance at year-end is a sign that forfeitures may not have been properly applied.

• Failure to deliver 401(k) safe harbor notices and other participant notices;

■ Correcting Errors. The method for using forfeitures will depend on the

• Errors in plan loan administration;

plan terms, so employers are advised to consult legal counsel to assess the

• Failure to timely deposit participant contributions;

options for dealing with any excess forfeitures. Counsel can also address the potential legal issues resulting from the prior failure to use forfeitures.

■ Avoiding Future Errors. Employers should verify the plan’s requirements

and establish a regular process for using forfeitures shortly after they arise.

• Failure to timely and correctly implement participant deferral elections and changes; and • Failures in administering service-counting and break-in-service rules.

If you read the sidebar on the dangers of relying solely on your TPA and Form 5500 auditor for compliance, you will understand why self-audits are

Improper Exclusion of Part-Time, Temporary and Seasonal Employees

so important. A qualified professional can assist the employer in identifying gaps in plan administration and heading off trouble before it arrives.

Although some employers routinely treat employees classified as parttime, temporary or seasonal (or similar service-based classifications such as “on-call” or “project-based” employees) as “ineligible for all benefits,” IRS rules prohibit employers from categorically excluding these employees from participating in qualified retirement plans. A plan may properly require that employees in these classifications complete 1,000 hours of service

Lisa Carrasco, David Putnal and Teri Forehand King are members of SGR’s Employee Benefits and Executive Compensation Practice. Each advises and guides the Firm’s clients on how best to comply with the complex legal issues and challenges that fall within the framework of employee benefits laws. lcarrasco@sgrlaw.com, dputnal@sgrlaw.com and tking@sgrlaw.com.

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17

ERISA Litigation

ERISA LITIGATION BASICS Important considerations for in-house counsel and benefits professionals

T

HE EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA) can be daunting. In this article, we break down some of ERISA’s complexities and highlight its key rules of engagement.

Knowledge of these rules can be invaluable in ensuring ERISA compliance, identifying risk and aiding in defense or litigation strategies.

RANDALL CONSTANTINE

■ Providing Employers with Strategic Advantages in Litigation ERISA has its own civil enforcement scheme, and the universe of claims available to potential litigants is limited. Because ERISA is intended to provide an exclusive set of remedies, it preempts state law claims that relate to ERISA plans. ERISA’s broad preemptive effect means that (1) most state actions are removable to federal court, even if no federal claim appears in the complaint, and (2) any state law claims relating to an ERISA benefit plan (think breach of contract, negligence, bad faith, misrepresentation or

EMILY FRIEDMAN

fraud) are preempted and subject to dismissal. Remedies are also limited under ERISA. A plaintiff cannot recover punitive damages, damages for pain and suffering, or other types of state law damages. For the most part, a successful plaintiff challenging a benefit denial will be entitled to recover the amount of the benefit due under the terms of the plan. Reasonable attorney’s fees may also be recoverable, at the discretion of the court, assuming the plaintiff can satisfy ERISA’s legal standards.

There are no jury trials under ERISA. For instance, a lawsuit alleging the wrongful denial of benefits will be adjudicated based on dispositive motions submitted by both parties. The court will review the “administrative record” and determine whether the claim fiduciary’s decision to deny benefits was reasonable. The “administrative record” consists of whatever documents and information were gathered and/or considered by the claims fiduciary during the administrative claims process when making the challenged benefit determination.

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19

ERISA Litigation

Under ERISA, the administrative claims process supplants a trial. ERISA also restricts discovery. Generally, discovery outside the administrative record is not permitted in claims for wrongful denial of benefits. Ensuring a full and complete administrative record during the administrative process therefore is vital, especially because a defendant likely will be precluded from relying on evidence to support the alleged wrongful claim denial when that evidence was not part of the administrative record during the claims process.

ERISA also provides employers leeway to design a plan providing significant litigation advantages (see blue box on p. 21).

■ Disclosure Obligations – Avoiding the “Gotcha” Claims ERISA requires plan administrators to respond to a written request for plan documents from a plan participant or beneficiary within 30 days. Documents are generally considered plan documents if they are “instruments under which the plan is established or operated.” The failure to respond in a timely manner to such requests risks assessment by a court of a penalty up to $110 per day for each day that the requested documentation is not provided. These types of claims are common in litigation filed by disgruntled claimants.

While not subject to the same penalty referenced above, claim fiduciaries are also required to provide, upon request, the administrative record to the claimant. Claimants tend to make these requests in connection with filing an appeal or subsequently seeking to challenge a claim denial. The failure to provide a claimant with the requested material risks application of a de novo or less deferential standard of review by the court and also may serve as grounds for a plaintiff to argue entitlement to additional discovery outside of the administrative record.

ERISA has rules requiring distribution of certain basic plan documents to participants. Strict adherence to these rules prevents a claimant from later arguing it cannot be bound by the clear terms of the plan. For example, summary plan descriptions (SPDs) describing medical and other health or welfare benefits must be provided automatically within 90 days of the

severance program’s implementation, the more likely it will be found to be an ERISA plan by a court. For example, a plan that pays different

participant becoming covered under the plan. Pension plan

amounts to departing employees based on years of service

participants or beneficiaries must be provided with the SPD

– where the payment depends on the reason for

within 90 days after first receiving benefits. Updated SPDs are required every five years if material changes are made; otherwise, they must be distributed every 10 years. Electronic distribution of plan documents is permitted only in certain instances.

■ Severance Considerations Counsel sometimes overlook that a severance plan can be an ERISA plan. When will a severance plan be an ERISA plan? The principal inquiry will be whether there is an ongoing administrative scheme.

The more discretion and administration necessary for the

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WATCH OUT FOR SECTION 409A! Many of the provisions of employment and severance agreements are subject to the requirements of Section 409A of the Internal Revenue Code, regulating deferred compensation arrangements.

Always consult with your Section 409A professional when drafting or enforcing these types of agreements.

termination – likely will be construed as an ERISA plan. On the other hand, a plan that pays a lump sum, in the same amount, to all employees due to a plant or facility closure likely will not be construed as an ERISA plan.

Further complicating matters, an ERISA plan does not have to be in writing.

An employer can create an “accidental” ERISA plan based on factors such as oral representations, side agreements, the existence of a fund from which benefits are paid, the structure involved in the payment of benefits,

NEED TO KNOW

how often separation payments are made, the employer’s past practices and intentions, and employee expectations.

THE ERISA ADVANTAGE

If a court finds an ERISA plan, the plan administrator may be subject to penalties for failing to comply with ERISA’s disclosure and reporting requirements (e.g., filing a Form 5500, reporting to the Department of Labor, and providing participants with plan documents).

As discussed above, having an ERISA-governed severance plan can be beneficial. The plan document can be drafted to provide maximum discretion in paying severance benefits. The plan sponsor and plan fiduciary also will have the benefit of ERISA preemption (thereby avoiding state law risks), ERISA’s deferential standard of review, and the ability to craft specific and mandatory claim and appeal procedures.

It also eliminates risk of a jury trial and expenses associated with protracted discovery. But remember, this also means the severance plan will be subject to ERISA’s various requirements, including the requirement to adopt reasonable claims procedures, and various reporting and disclosure requirements.

■ Anti-Retaliation and Discrimination Provision ERISA has its own retaliation and discrimination rules. ERISA Section 510 prohibits interference with benefits and retaliation for a participant’s exercise of rights under ERISA and/or an ERISA plan. Claims alleging violations of Section 510 often involve allegations by an employee that the termination was motived, at least in part, by an employer’s desire to avoid liability or reduce costs under its self-funded health plan. These claims involve medical expenses incurred by the employee, but also expenses incurred by covered dependents of the employee. To minimize potential liability under this section, employers are well advised to clearly document reasons for termination or other adverse employment actions. Screens also should be established to prohibit and prevent the sharing of information between the benefit plan and the employer. Significantly, proper amendments to an ERISA plan – including those aimed at reducing overall costs – generally cannot be challenged as a Section 510 violation because the amendment does not impact a participant’s employment status.

Conclusion In-house professionals can use the above guidelines to spot issues, assess risk and, in the event of litigation, make strategic defense decisions.

Because of ERISA’s complexities, exceptions to the above rules may exist.

Always consult with ERISA counsel when dealing with these difficult legal issues.

Randall Constantine and Emily Friedman are members of SGR’s Employee Benefits and Executive Compensation Practice. They specialize in ERISA litigation and litigation avoidance, labor and employment counseling and related matters, and executive compensation. rconstantine@sgrlaw.com and efriedman@sgrlaw.com.

EMPLOYERS CAN DESIGN A PLAN THAT PROVIDES FIVE KEY LITIGATION ADVANTAGES

1

Standard of Review The standard of review applied by the reviewing court will depend on whether the plan gives fiduciaries discretion. If the benefit plan has this “magic language,” courts must give deference to the fiduciaries’ decisions, otherwise the plaintiff will enjoy a heightened standard of review.

2

Statute of Limitations ERISA permits a plan to adopt stringent limitations periods. As a result, benefit plans can strictly enforce internal deadlines for filing administrative claims and appeals, and a separate deadline for filing lawsuits.

The plan can adopt any limitation period, so long as it is reasonable and properly disclosed. The limitation period does not need to mirror those under similar state or federal laws. A lawsuit is barred if a claimant does not timely file a claim or appeal, or if a claimant waits too long to file suit.

3

Administrative Exhaustion While ERISA lawsuits must be timely, they may not be premature. A plaintiff must exhaust administrative remedies before filing suit.

ERISA provides employers with flexibility in crafting internal claim and appeal

procedures, and a plan generally can adopt up to two levels of internal mandatory appeals. Lawsuits filed before exhaustion will be dismissed. (There are certain narrow exceptions to this rule, however.)

4

Non-Assignment, Venue and Arbitration An employer may limit the classes of parties that have legal standing to bring an ERISA lawsuit. ERISA restricts the types of parties allowed to sue, but plans can provide further limitation through “anti-assignment” clauses.

Plans can include forum- or venue-selection clauses and arbitration clauses crafted to align with employers’ litigation strategies.

5

Noncompete Subject to some exceptions, nonqualified benefit plans (unfunded supplemental retirement plans or “top hat” plans available only to a select group of highly compensated employees) can include noncompetition forfeiture clauses in the event a participant competes following separation from employment. These clauses are generally enforceable – even in states with laws prohibiting noncompete agreements – because of ERISA preemption.

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21

70% of employees said their benefits packages are extremely or very important to their wellbeing, financial health and job satisfaction.

Additionally, 34% say improving their benefits packages would help keep them in their jobs, second only to increasing their salaries.1 While additional medical benefits and value-added services are important, it’s just as important to consider the long-term success of your employees. Aflac has always operated under the belief that as employees grow with companies, their talents should grow as well.

Many Aflac employees stay with the company for 30 years or more. To ensure that employees feel they always have a next step to strive for, Aflac implemented the Career Success Center five years ago. Designed to allow employees to discuss with managers and executives the next step in their career, these candid conversations help reveal why the employee might not have been chosen for previous promotion opportunities, as well as determine what the ideal next step would be

MATTHEW OWENBY SENIOR VICE PRESIDENT CHIEF HUMAN RESOURCES OFFICER, AFLAC

ATTRACTING AND RETAINING QUALITY TALENT

When employers are flexible, receptive and communicative about the workplace benefiits they offer, everyone profits

in their career. The Center also includes helpful programs that enhance employees’ skills in areas such as resumé writing and interviewing.

While some companies might be nervous that these conversations could lead employees away from the company, Aflac feels that providing employees options to move to a department that is a better fit will ultimately lead to longer employment and increased engagement with the company. The ultimate goal is to ensure each employee is on the proper track for the position for which they are best suited.

So far, the program is paying off. To date, more than 2,000 Aflac employees have participated, with 1,300 obtaining promotions or changing

W

HEN YOU THINK of innovative

So, how can you continue to attract quality

their career direction to something more

startups and millennials in the

employees? Workers no longer look at their

suited to their talents. While Aflac’s employee

workforce, does your mind drift to

employers the same way they did 10 – or even

engagement/satisfaction is an industry-leading

ping-pong tables, free snacks and open seating?

five – years ago. Businesses know their benefits

83%, the company recognizes that employment

For years, these benefits have been highly

offerings need a certain spice to do more than

is a choice. The company’s commitment to taking

touted by employers. But while fun, these perks

merely satisfy their workers’ basic benefits needs.

care of its employees attracts new employees as

The 2018 Aflac WorkForces Report revealed

well as ensures that current employees stay and

ultimately have little impact on employees’ overall lives. And with unemployment at record

that benefits are a key differentiator when new

grow within the business. Aflac’s total employee

low levels, the competition for attracting top

employees decide whether to join a company –

turnover rate – below 9% – remains low relative

employees is continuing to heat up.

and when existing ones decide to leave. Nearly

to the financial services industry.

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Client Speak

NEED TO KNOW

THE MUST-HAVE BENEFITS ADDITIONAL OPTIONS FOR EMPLOYERS

While almost all benefits packages include at least some kind of medical insurance, many job applicants are looking for benefits that go beyond the typical coverage. Some options include:

When it comes to employee benefits, companies must ask themselves, “Are we doing enough?” Simply offering the same benefits options from 15 years ago risks having top candidates head straight for the door. But when companies offer the right benefits, it can open the door to increased overall employee satisfaction, fewer missed workdays and a higher commitment to meeting the company’s goals.

Endnotes 1. 2018 Aflac WorkForces Report – 12 Trends Influencing the Future of Workplace Benefits – Employee Survey Overview. For more information, visit AflacWorkForcesReport.com.

2. Zenefits, “FSA vs HSA: Which is Best For Your Employees?” Accessed Jan. 7, 2019. https://www.zenefits. com/blog/fsa-vs-hsa.

3. Forbes, “Student Loan Debt Statistics In 2019: A $1.5 Trillion Crisis.” https://www.forbes.com/sites/ zackfriedman/2019/02/25/student-loan-debt-statistics2019/#2fb1451d133f.

4. American Student Assistance, “American Student Assistance Young Workers and Student Debt Survey Report Methodology.” https://s3-us-east-2.amazonaws.com/ staging.asa.org/wp-content/uploads/2018/08/14141823/asa_ young_worker_and_student_debt_survey_report-1.pdf.

5. Mercer, “2018 Global Talent Trends Study.” http://www. mmc.com/insights/publications/2018/jan/mercer-globaltalent-trends-2018.html.

6. Bank of America, Merrill Lynch, “2018 Workplace Benefits Report.” https://www.bofaml.com/content/dam/ boamlimages/documents/articles/ID18_0771/2018_ wbrbrochure_arsrjr96.pdf.

Note: This article is for informational purposes only. It is not intended to be a solicitation. “Aflac” herein refers to American Family Life Assurance Company of Columbus and/or American Family Life Assurance Company of New York.

● Flexible Spending Account (FSA) An FSA is an optional savings account used to help pay off various medical expenses and is beneficial to both employers and employees. Accounts provide employers that offer these benefits a reduction in employer and Federal Insurance Contributions Act (FICA) taxes, while also reducing the taxable wage of employees who participate in the plan. And because FSAs allow tax-free reimbursement for a wide variety of qualifying health care and dependent care expenses, they can be chosen by employees who know they and their families will have their health care needs met throughout the year.2 ● Health Savings Account (HSA) An HSA is similar to an FSA in that it provides an optional savings account for employees to use for their medical expenses and have similar tax benefits.

But employees must have a highdeductible health plan (HDHP) to qualify for an HSA. The good news is that HSAs are not bound to a particular employer and accompany an individual should they change jobs or enter retirement. Another perk of an HSA is that it does not fall victim to the “use it or lose it” rule. Unlike an FSA, where money may disappear if it is not used after a year, the funds in an HSA never expire. ● Value-added services Many businesses feel the need to go beyond benefit basics. Employers are increasingly offering supplemental insurance, which gives policyholders cash to help with expenses their health insurance doesn’t cover, like deductibles and copayments. Value-added services

complement supplemental coverage to provide immediate value for employees. ● Education assistance With U.S. total student loan debt at $1.56 trillion spread among 44.7 million Americans, it’s evident that paying for college is one of the greatest stressors for Americans.3 In fact, 86% of employees between the ages of 22 and 33 said they would commit to an employer for five years if the employer helped pay off their student loans.4 Fortunately, student loan assistance is a value-added service that allows companies to contribute directly to an employee’s student loan, much like they would to a 401(k). ● Financial welfare support Employees spend an average of 10 hours per week worrying about their finances during working hours, yet only one-quarter of companies offer policies and practices that address employees’ financial health.5 Retirement planning and writing a will are two key areas where value-added services can help employees. Additionally, services exist to provide employees with a health advocate who can help answer workers’ questions about medical bills, and more. ● Health and wellness opportunities Many workers turn to fitness as an outlet for stress relief, but the costs can sometimes outweigh the benefits.

That’s where two value-added services can help employees: online wellness platforms provide resources that help employees maintain healthy lifestyles, while telemedicine lets employees connect online with a doctor wherever they go. Along with being convenient, such services can be pertinent to the business. One study found that 95% of employers view their financial wellness programs as being effective in reaching company goals.6

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23

Executive Compensation

HOT TOPICS IN EXECUTIVE COMPENSATION The Tax Cuts and Jobs Act (TCJA), which passed in late 2017, and other recent legal developments have created new opportunities and challenges for executive compensation

T

HE CHANGING LANDSCAPE of executive compensation impacts a wide range of employers, from public companies,

BRANDON SHERLINSKI

TOBY WALLS

GLENN INFINGER

• Treating an employee who is covered by 162(m) in any year as covered in all future years.

to startups, to not-for-profits. The TCJA and other recent

legal developments create many new pitfalls, but they also open the

■ Arrangements grandfathered from the 162(m) changes

door for some more flexible and tax-efficient compensation arrangements.

The TCJA provides a transition rule for compensation payable under a

Understanding these changes can be a critical part of designing an effective

written binding contract that (i) was in effect on November 2, 2017, and

and compliant compensation program. This article highlights several of

(ii) is not materially modified after that date.

the most important of these developments.

Grandfathered arrangements continue to be subject to the old 162(m) rules, including the applicable exceptions and the old covered employee

HOT TOPIC 1 CHANGES TO 162(m) DEDUCTION LIMIT ON PUBLIC COMPANY EXECUTIVE COMPENSATION

rules. As a result, taking steps to monitor and comply with these grandfathering rules can produce significant tax savings.

Section 162(m) of the Internal Revenue Code generally limits a

■ What amounts are grandfathered?

public company’s deduction for compensation paid to its “covered

An amount is payable under a written binding contract only if the company is

employees” to no more than $1 million per year. Prior to the TCJA,

legally obligated under state contract law to pay the compensation if any

much of the impact of 162(m) could be mitigated by taking advantage

contingencies in the contract (such as a vesting condition) are satisfied. The

of several important exceptions. Effective for tax years beginning on or

IRS takes a narrow view of what amounts are payable under a legally binding

after January 1, 2018, the TCJA significantly broadened the scope of

contract. For example, if a deferred compensation plan provides that the rate of

162(m) by:

earnings credited to participant accounts may be changed at the employer’s

• Eliminating an exception for performance-based compensation

discretion, earnings that accrue after November 2, 2017, may not be

• Expanding the group of individuals covered by 162(m)

grandfathered even if the earnings accrue on otherwise grandfathered amounts.

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25

■ How Is grandfathered status lost?

An otherwise grandfathered arrangement will lose its grandfathered status if it is materially modified after November 2, 2017. If a grandfathered arrangement is materially modified, no amounts paid after the modification will be eligible for transition relief. Subject to several specific and narrow

Even with more limited tax deductibility, many companies will continue to make performance-based compensation a significant component of executive pay.

exceptions, material modifications include increasing the amount of compensation payable under a grandfathered arrangement and changing

For example, it is very important to track November 2, 2017 account

when a grandfathered amount will be paid. In some circumstances, even

balances or accrued benefits under deferred compensation plans. This is

adopting a new arrangement can jeopardize the grandfathered status of an

true not just for participants who are currently covered employees. Because

existing arrangement if the new arrangement is substantially based on the

deferred compensation can be paid many years in the future, an individual

same elements or conditions as the grandfathered arrangement.

who is not a covered employee today could be promoted into a covered

In addition, a grandfathered arrangement renewed after November

position before that deferred compensation is paid.

2, 2017, will lose its grandfathered status as of the date of the renewal.

the earliest date that a termination or cancellation, if made, would be

HOT TOPIC 2 MANAGING EXECUTIVE COMPENSATION PLAN DOCUMENTS FOLLOWING THE 162(m) CHANGES

effective. Nevertheless, a contract is not treated as terminable or cancelable

Now that the 162(m) exception for performance-based compensation

by the company if it can only be terminated or canceled by terminating the

has been largely eliminated, employers have more freedom in designing

employee’s employment.

executive compensation programs.

■ The importance of recordkeeping To preserve the increased tax deduction available for grandfathered

■ Simplification of documents and administrative processes

arrangements, it is critical to identify potentially grandfathered

Numerous complex terms that were included in incentive compensation

arrangements and maintain necessary records of grandfathered amounts.

plan documents in order to satisfy 162(m) may now be considered for

Likewise, a written binding contract that is terminable or cancelable by the company without the employee’s consent is treated as renewed on

26

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Executive Compensation

removal or modification. A few examples would include: • Plan provisions requiring that performance goals be pre-established

highest-paid employees. ATEOs include 501(c)(3) entities and certain other types of tax-exempt entities.

(generally within the first 90 days of the year).

• Terms prohibiting discretionary adjustments to performance metrics and outcomes.

• Provisions requiring that incentive compensation amounts be objectively determinable.

■ Who is covered?

“Covered employees” include any current or former employee of an ATEO who (i) is one of the five highest-compensated employees of the ATEO for the current taxable year, or (ii) was a covered employee for any tax year

• Shareholder-approved lists of specific performance measures.

beginning after December 31, 2016. This means that once an employee is a

• Maximum limitations on individual awards.

covered employee, he or she will always be a covered employee.

• Compensation Committee processes previously required for 162(m) compliance.

■ What compensation is covered?

The 4960 excise tax applies to (i) remuneration paid for a taxable year

■ What do the proxy advisory firms say?

in excess of $1,000,000, plus (ii) any excess parachute payment paid

Institutional Shareholder Services (ISS) has stated that shifts away from

by the ATEO or any related organization to any covered employee.

performance-based compensation to discretionary or fixed pay elements

“Remuneration” for this purposes generally includes all wages subject to

will be viewed negatively. In its latest FAQs relating to evaluation of equity

federal income tax withholding, except designated Roth contributions,

compensation plans, ISS has stated that it encourages companies to

and any amounts that are included in income under Section 457(f) of the

maintain plan provisions that represent good governance practices, such

Internal Revenue Code.

as individual award limits, even if they are no longer required under 162(m).

In its latest proxy guidelines, advisory firm Glass Lewis suggests that the

■ What are excess parachute payments?

best practice for companies is to provide robust disclosure to shareholders

The rules for excess parachute payments under 4960 are similar to the

so that they can make fully informed judgments about the reasonableness

rules under Section 280G of the Internal Revenue Code. As with 280G,

of proposed compensation plans.

an amount is not considered a parachute payment under 4960 unless the amount of the payment exceeds three times the employee’s “base amount”

■ The next steps Even with more limited tax deductibility, many companies will continue

(generally average Form W-2 wages for the preceding five years).

However, in contrast to 280G parachute payments, which are only

to make performance-based compensation a significant component of executive pay, whether to continue performance incentives to executives or for shareholder relations purposes. However, they now have much greater flexibility in designing their incentive pay programs and plans can now be amended to increase the individual limit without resubmitting the plan for shareholder approval.

Expanding flexibility in regard to making adjustments for unforeseen events or circumstances, including the addition of positive discretion, is viewed by many companies as particularly desirable. Also, arrangements with separating executives may be simplified now that plan payouts upon employment termination may be made based on target levels of performance (instead of actual performance results), which has not been permitted under many plans due to 162(m) considerations.

HOT TOPIC 3 IRS GUIDANCE ON EXCISE TAX ON EXECUTIVE COMPENSATION PAID BY TAX-EXEMPT ORGANIZATIONS The TCJA added new Section 4960 to the Internal Revenue Code. It imposes an excise tax at the corporate tax rate (currently 21%) on certain compensation paid by applicable tax-exempt organizations (ATEOs) to their

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27

Executive Compensation

payments that are contingent on a change of control, “parachute

■ Potential advantages of 83(i)

payments” for purposes of 4960 are amounts in the nature of

In the limited situations in which an 83(i) program is viable, it can create

compensation that are contingent on the covered employee’s separation

a significant benefit for lower-level executives and other employees. An

from employment in any context. However, the IRS has indicated that this

election to defer taxation under 83(i) generally must be made within 30

is intended to be limited to “involuntary” separations (which could include

days of the date the option is exercised or the stock underlying the RSU is

“good reason” terminations).

delivered. Income tax on the stock the employee receives can be deferred for up to five years after that date, and appreciation after the date of the

HOT TOPIC 4 NEW TAX DEFERRAL OPPORTUNITY FOR PRIVATELY HELD EQUITY

election is taxed as capital gain.

The TCJA added new Section 83(i) to the Internal Revenue Code. It

owner employee who is ineligible for 83(i), or (iii) if the company’s

allows certain employees of privately held companies who receive stock

stock becomes publicly traded. Therefore, 83(i) is largely a tool to

under a qualifying stock option or restricted stock unit (RSU) program

defer income tax on startup company equity until that company has

to defer income tax for up to five years. There are significant limitations

a liquidity event.

However, the tax deferral period is cut short (i) if the stock becomes transferrable, (ii) if the employee becomes a senior executive or

on the features of a program that can take advantage of 83(i). However, in certain circumstances, especially for startups, 83(i) may have significant appeal.

■ Important limitations of 83(i)

HOT TOPIC 5 RECENT LITIGATION REGARDING BOARD OF DIRECTORS COMPENSATION Several Delaware court cases in recent years have highlighted litigation

A qualifying stock option or RSU program must be offered to at least 80%

exposure for boards of directors of public companies in regard to their

of the company’s U.S. employees, including U.S. employees of affiliated

director compensation programs. A Delaware Supreme Court case now

companies. The number of options or RSUs granted to each eligible

may increase the likelihood that plaintiffs may be able to defeat a motion to

employee need not be the same, but each eligible employee must receive

dismiss in such cases, resulting in costly litigation.

more than a de minimis grant. The company’s most senior executives – its four highest-paid officers and its CEO and CFO – and most owner employees

■ The Investors Bancorp case

cannot take advantage of 83(i). Therefore, it is really only useful for a

In December 2017, the Delaware Supreme Court, in In re Investors Bancorp,

privately held company looking to grant equity to a significant portion of

Inc. Stockholder Litigation, applied a rigorous standard of judicial review in

rank-and-file employees. It is not a tool for compensating senior executives.

refusing to dismiss a case alleging excessive director compensation.

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SECTION 409A: DEFERRED COMPENSATION PITFALLS

Many companies may now need to reconsider the terms of their nonemployee director compensation programs in light of the Investors Bancorp decision.

The court held that directors facing lawsuits from shareholders claiming that the directors breached their fiduciary duties by making excessive compensation awards to themselves have the burden of proving they were fair to the corporation – i.e., the “entire fairness” standard of review.

■ Earlier Delaware cases Before the Investors Bancorp decision, Delaware courts generally had applied the deferential “business judgment” standard of review where director awards were made under certain shareholder approved plans.

As a direct result of these earlier Delaware cases, many companies made changes to their director compensation plans, including amending plans to impose explicit, meaningful limits on amounts of compensation that potentially could be paid to directors. The Investors Bancorp decision suggests that those plan terms may not be sufficient to avoid the entire fairness standard of review.

■ What should boards do now?

Many companies may now need to reconsider the terms of their nonemployee director compensation programs in light of the Investors Bancorp decision. One approach suggested by the decision is to have shareholders approve a plan that provides for self-executing awards in fixed amounts and on fixed terms, which would be viewed as an advance ratification of the directors’ compensation decisions.

Other companies may choose to retain some discretionary authority for directors in setting their own compensation, even if in doing so the presumption of the business judgment rule may be lost.

Ultimately, further evolution of these rules will result from additional court decisions.

Brandon Sherlinski, Toby Walls and Glenn Infinger are members of SGR’s Employee Benefits and Executive Compensation Practice.

They advise clients on a broad range of benefits and human resources matters, including retirement plan compliance and operation, and compensation and benefits issues affecting executives, senior management and boards of directors. bsherlinski@sgrlaw.com, twalls@sgrlaw.com and ginfinger@sgrlaw.com.

WHAT YOU DON’T KNOW CAN HURT YOU Section 409A of the Internal Revenue Code governs “deferred compensation” and applies to all employers. Failure to comply can result in immediate taxation, i.e., income tax acceleration, of all amounts involved, a 20% excise tax and interest penalties. However, Section 409A can also apply to many types of arrangements not traditionally thought of as deferred compensation. In fact, any time an employee or other service provider, including directors, has a legally binding right to compensation that is or could be paid in a future year, Section 409A may apply. The following are some examples of arrangements that may be subject to Section 409A. BONUSES Unless structured so as to be Section 409A-exempt, annual bonuses will be subject to Section 409A. The most common exemptions are that the employee remain employed in order to receive the bonus or that payment of the bonuses will be made in all cases no later than March 15 of the following year. Bonuses can also be exempt if they are completely discretionary. If your bonus program does not adhere to one or more of these exceptions, you may inadvertently have created a deferred compensation arrangement subject to Section 409A. SEVERANCE If an employment agreement or offer letter contains severance provisions, it is by definition an amount promised to be paid in a later year or years. There are Section 409A exceptions for certain types of severance if

specific requirements are met, including a limit on the amount and the requirement that the severance be payable only upon “involuntary” separation.

Severance arrangements, whether contained in an employment agreement or a contemporaneous separation agreement, must be carefully structured so as to avoid creating Section 409A issues.

RELEASES Do you require a release from employees to receive non-exempt severance or other termination pay? If so, does the release provide that payments will be made/ start once the release is signed and returned, and not revoked?

The IRS says this potentially runs afoul of Section 409A unless the arrangement is properly structured because the employee could potentially control the tax year(s) in which they are paid by turning in or holding onto the release.

STOCK OPTIONS “Qualified” stock options -incentive stock options (ISOs) and employee stock purchase plan (ESPP) options -- are automatically exempt from Section 409A. Other types of options – “nonqualified options” – will only be exempt if granted with an exercise price at least equal to fair market value.

Below-market or discounted stock options are generally subject to Section 409A and option terms can result in the exercise price being considered below market.

If any of the above potentially apply to you, do not panic! Steps can be taken to prevent or limit the consequences of violating Section 409A, including IRSapproved correction procedures.

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A WORD ON WELLNESS When it comes to implementing a workplace wellness program, the options for employers are plentiful

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ANGELA ROBERTS

Finish Line

W

ORKPLACE WELLNESS programs

■ Tobacco Cessation

so they better align with the specific needs of

are a multi-billion dollar industry in

A typical tobacco cessation program relies on

their workforce.

the United States, with thousands

the honor system, providing an incentive (such

of vendors promising to help employers reduce

as reduced medical plan premiums) if the

■ Physical Activity Programs or Challenges

health care costs and improve employee health

employee attests that he or she does not use

The Centers for Disease Control and Prevention

and productivity. Although most large employers

tobacco products. Third-party wellness vendors

describes regular physical activity as one of

offer some type of wellness program, questions

can help employers verify an employee’s tobacco

the most important things individuals can do

remain as to their effectiveness. A number

status through more objective means, such as

to improve their health. It should come as

of different studies have delivered conflicting

a blood test, but this is less common. Other

no surprise, then, that encouraging physical

results, with some showing savings and health

components include counseling, educational

activity is a major component of many

improvements, and others warning employers

materials and medical plan coverage for tobacco

workplace wellness programs. The complexity

not to expect any return on investment.

cessation medications.

of such programs run the gamut, from posting motivational signs at elevators to encourage stair

Nonetheless, employers continue to embrace programs designed to promote the health and

■ Health Risk Assessments and Biometric

use, to providing no-cost or subsidized fitness

well-being of their employees. And there are

Screenings

trackers coupled with activity challenges and

good reasons to do so. Even studies that show

Workplace wellness programs often provide

on-site exercise facilities.

dismal results in terms of health care savings

employees with opportunities to complete

concede that workplace wellness programs

a health risk assessment (a questionnaire

■ Disease Management Programs

have perceived value to employees and can

about the employee’s medical history, health

A more involved wellness program is likely

influence employee health behaviors, if not

status and lifestyle), biometric screening (a

to include a disease management program

health outcomes.

health examination conducted by a medical

geared to a specific group of individuals

Generally speaking, the term “wellness

professional), or both. In addition to informing

who have, or are at risk of developing, the

program” refers to programs and activities

employees about their health status, employers

same chronic medical condition – such as

intended to help employees improve their health

can use the results of such screenings to tailor

diabetes, heart disease or asthma. For example,

and reduce their health care costs. However,

their wellness programs and other health benefits

a disease management program for individuals with diabetes might provide case managers

such programs have expanded over the years to include components focused on well-being beyond physical health, including mental health, financial health, community involvement, social connectedness and job satisfaction.

A workplace wellness program can be structured in a number of different ways and can vary significantly in terms of the services and activities it includes. However, workplace wellness programs often include one or more of the

7 QUESTIONS EMPLOYERS NEED TO CONSIDER 1. What are the employer’s key goals for the program?

2. Are the program’s goals and activities relevant to the employer’s workforce, taking into consideration employee age, relative health, turnover rate and general appetite for workplace wellness benefits?

to help ensure employees are taking their medications and making physician appointments, special education and counseling opportunities, and discounts on diabetes medications and supplies.

■ Incentives Many workplace wellness programs use incentives to encourage participation in the

following elements:

3. Will the program provide incentives and, if so, how much and in what form?

program and healthier behavior. The incentives

■ Educational Programs

4. Will the program be offered to all employees or only to employees enrolled in the employer’s medical plan?

tickets and gift cards -- to significant reductions in

A workplace wellness program can be as simple as hosting “lunch and learn” sessions where employees can learn about healthy behaviors or stress management techniques; making informational videos or podcasts available on the employer’s intranet; placing posters promoting healthy behaviors in common areas; or hosting onsite health fairs.

5. Will the program encourage employees’ family members to participate?

6. What compliance and tax implications will the program raise?

7. How will the success of the program be evaluated?

range from relatively minor – for example, raffle medical plan premiums, deductibles, copayments or coinsurance.

Angela Roberts is a member of SGR’s Employee Benefits and Executive Compensation Practice.

She advises employers on a broad range of compensation and benefits issues, with a particular focus on health and welfare benefit programs. aroberts@sgrlaw.com.

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