Category Archives: Uncategorized

ACA Implementation for Small to Mid-Sized Employers: A Short Podcast

Recently, Mark Weiss of the Advisory Law Group interviewed me on Affordable Care Act compliance issues for small to mid-sized employers. You can listen to the resulting podcast on Mark’s Wisdom.Applied blog by clicking here.   Topics covered include preparing for pay or play, employee interaction with the exchanges, exchange readiness (or un-readiness), and the viability of wellness programs in a small employer setting.  Thank you, Mark, for giving me the opportunity to share my views with your audience.

Mark’s practice focuses on medical groups, physicians and other healthcare providers, and I hope to soon interview him on the ACA as seen from the provider perspective, including how it is changing – in several different aspects – the ways in which healthcare is delivered in the U.S.     The law is not much more popular among healthcare providers, than it is among employers, but for different reasons Mark will ably explain.  Check back soon for more good information along those lines.

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Proposed Regulations on Employer Shared Responsibility Provide Some Welcome News, Some Measures to Thwart Abuse

On December 28, 2012, the Internal Revenue Service and Treasury Department issued proposed regulations on the employer coverage mandate (“employer shared responsibility” rules) under Section 4980H of the Internal Revenue Code (“Code”), which was added as part of the Affordable Care Act.  On that date the IRS also posted on its website a list of Questions and Answers on the new guidance, written in more colloquial terms than the regulations.   Employer shared responsibility rules apply only to “applicable large employers” (ALEs), i.e., businesses that employed an average of 50 or more full-time employees (those working 30 or more hours/week, or 130 or more hours/month) or full-time equivalent (FTE) employees on business days in the preceding calendar year.  Therefore, smaller employers need not concern themselves with the new proposed regulations  — with one very significant caveat:  if they share common ownership with or are otherwise related to other business entities with their own employees, the proposed regulation may require that employees of all entities are combined for purposes of the 50 FTE headcount, such that the entire group of businesses constitutes a single ALE and must comply with the employer mandate.[1]

The proposed regulations incorporate a significant body of prior guidance on the employer mandate published in the form of IRS Notices in late 2011 and during 2012, which I addressed in an earlier post.[2]  The proposed regulations build on this prior guidance in response to public comments it received, resolve some questions the guidance left open, and depart from the prior guidance in certain instances.  The proposed regulations also contain several new “anti-abuse” rules that anticipate and attempt to thwart ways in which employers might manipulate employment status and thus reduce their employer mandate obligations starting in 2014.  A summary of key provisions follows.  In reviewing it, please bear in mind that it only skims the surface of a 144-page regulation (including an 89-page preamble), every page of which contains important guidance for employers who, this current calendar year, will or are likely to exceed the 50 full time/FTE threshold and thus have shared responsibility duties in 2014.

  • Affordability Based on Self-Only Coverage.  The proposed regulations finally resolve the question of whether the “affordability” yardstick for group health coverage will be based on the employee’s share of self-only coverage, or on its share of the always much higher dependent coverage.  “Affordable” in this context means coverage for which the employee-paid share of premiums does not exceed 9.5% of the employee’s compensation from the employer reported in Box 1 of Form W-2 for the year just ended.  ALEs that offer coverage to their full-time employees can still be subject to excise taxes under Code Sec. 4980H(b) if the coverage that they do offer is either unaffordable, as described above, or fails to provide “minimum value” meaning that the plan’s share of costs is at least 60%.  The proposed regulations make clear that the 9.5% of W-2 income threshold applies to the employee’s share of self-only coverage available under the lowest-cost plan or option the employer offers, that also provided minimum value.  This will come as a relief to large employers.  In response to comments that criticize the Box 1 of Form W-2 standard on the grounds that it excludes employee salary deferrals under 401(k) and cafeteria plans, the proposed regulations propose two other affordability safe harbors – one based on rates of pay and one based on the Federal Poverty Level.
  • Grace Period with Regard to Dependent Coverage.  The proposed regulations provide that, for ALEs that do not now offer dependent coverage to full-time employees, no assessable payments will be required for an ALE’s failure to offer dependent coverage during their 2014 plan year, provided that the employer takes steps during the plan year that begins in 2014 toward satisfying Code Section 4980H in full.  In addition, the proposed regulations define “dependents” for purposes of employer shared responsibility rules as the employee’s children up to age 26 (their 26th birthday), and as not including spouses.
  • 95% “Margin of Error” Rule.  To understand this provision of the proposed regulations, a bit of review is in order.  The Affordable Care Act imposes two different types of excise taxes on ALEs, called “assessable payments,” depending on whether or not the ALE fails to offer coverage to its full-time employees entirely, or offers inadequate coverage.  Inadequate coverage is coverage that fails to provide minimum value and/or is not “affordable” as defined above.  In the “no coverage” scenario, the excise tax under Code Section 4980H(a) applies.[3]  In the inadequate coverage scenario, the excise tax under Code Section 4980H(b) applies.[4]  With regard to the first excise tax for “no” coverage, the proposed regulations state that this tax will apply to ALEs that do not offer coverage at all, as has always been the rule, but also provide that the tax will not apply to an ALE that offers coverage to at least 95% of its full-time employees (or, if greater, 5 employees), but less than 100% of full-time employees.  This margin of error rule applies whether or not the failure to offer coverage to 100% of full-time employees is inadvertent.   However, the ALE could still pay an excise tax under Code Section 4980H(b), if at least one of the full-time employees not offered coverage qualifies for premium tax credits or cost-sharing reduction on an exchange.  Beginning in 2015 for ALEs who do not currently offer dependent coverage, the 95% minimum threshold will apply to full-time employees and their dependents.
  • Flexibility with Regard to Seasonal Employees.  Seasonal hires come into play in determining whether an employer is, or is not, an “applicable large employer” or “ALE” subject to shared responsibility rules, and again when determining which employees are “full-time.”   For purposes of determining ALE status, an employer counts seasonal workers who work full-time hours (30 or more per week; 130 or more per month) towards their “full-time” employee headcount.  The employer also counts less-than-full-time seasonal workers towards their “full-time equivalent” or FTE headcount.  Once an employer determines that the monthly average was 50 or above, it needs to determine whether the seasonal worker exception applies.   Under that exception, if the sum of an employer’s full-time employees and FTEs exceeds 50 for 120 days or less during the preceding calendar year, and the employees in excess of 50 who were employed during that period of no more than 120 days are “seasonal workers,” the employer is not considered to employ more than 50 full- time employees (including FTEs) and the employer is not an applicable large employer for the current calendar year.   Notice 2011-36 permitted four calendar months to be treated as the equivalent of 120 days, for these purposes, and the proposed regulations add even more flexibility by allowing that neither the four calendar months nor the 120 days used for these purposes need be consecutive.  Right now, the “seasonal worker” term is borrowed from Department of Labor regulations that primarily define seasonal workers as agricultural workers, and retail workers employed exclusively during the holiday season.  Contrast this with “seasonal employees,” which is a term used in the context of assessing full-time status.  Seasonal workers are classified with “variable hour employees” – employees who cannot accurately be predicted to be full-time or not upon hire – for purposes of the look-back “measurement period” and subsequent “stability period” safe harbors described in Notices 2011-36, 2012-17 and 2012-58, and incorporated into the proposed regulation with some changes.    “Seasonal employee” could include more types of employees than “seasonal worker” because the proposed regulations allow employers to use a “reasonable good faith interpretation” of the DOL “seasonal worker” definition, in applying the seasonal worker exception.  The preamble to the regulations specifically provide that treating an educational employee who takes the summer off from employment as a seasonal worker would not be a reasonable interpretation of the seasonal worker standard.
  • Service Counted Towards Full-Time Status Includes Paid Leave.  The proposed regulations provide that employees’ full-time status will be based on 30 (per week) or 130 (per month) “hours of service” which term will include non-work time for which pay is provided or due to be provided including absences for vacation, holidays, illness, incapacity (including disability), layoff, jury duty, military duty, and paid leaves of absence.  A proposed maximum allocation of 160 hours of paid time off was rejected because legally protected leaves of absence could exceed this budget, and thereby expose employers to discrimination claims if the limit were applied.  The proposed regulations also provide guidance on averaging hours of service, over look-back measurement periods, when an employee missed work due to one or more special unpaid leaves of absence including FMLA, USERRA (military duty) and jury duty, so that an employee is not misclassified as less than full-time as a result of such absences.
  • Ability to Use Pay Periods Start or End Dates for Certain Measuring Functions. The process of determining which employees are “full-time” and entitled to an offer of group health coverage is based on a chosen look-back “measurement period.” If an employee averages 30 or more hours per week or 130 or more per month during the measurement period, the ALE must offer the employee and his or her dependents (subject to the 2014 exception mentioned above) group health coverage for a subsequent “stability period,” whether or not the employee retains a full-time schedule during the stability period.   Notices 2011-36, 2012-17 and 2012-58 generally refer to measurement and stability periods based on periods of calendar months or month-long periods (e.g., April 15 to May 14).  However, public comments requested that employers be allowed to start or end a measurement period at the beginning or end of a payroll period.  The proposed regulations grant this request for payroll periods that are one week, two weeks, and semi-monthly in duration, and explain how to handle gaps between the payroll period start- or end-date, and the related measurement period start- or end-date.   In an example given, an employer using the entire calendar year as a measurement period, but wanting to start or end the measurement period on a payroll period start- or end-date, could either exclude the entire payroll period that included January 1 (the beginning of the year) if it included the entire payroll period that included December 31 (the end of that same year), or, alternatively, could exclude the entire payroll period that included December 31 of a calendar year if it included the entire payroll period that included January 1 of that calendar year.
  • Anti-Abuse Provisions.  The proposed regulations contain some anti-abuse rules aimed at anticipated employer efforts to manipulate the nature or length of the employment relationship so as to avoid application of shared responsibility rules.
    • Rehires/Returns from Unpaid LeaveThe employee rehire/return from unpaid leave of absence rules come into play in determining an employee’s status as full-time, or less than full-time, during a measurement period.  Specifically, when an employee works full-time hours during a portion of a look-back measurement period, later terminates employment, or goes on an unpaid leave of absence, and then is rehired or returns from that leave of absence, at what point may the employer disregard the hours of service worked prior to the absence and treat the employee as a new hire for purposes of evaluating full-time status?    The proposed regulations provide that an employer may treat an employee as terminated, and newly rehired, if the employee performs no service for a period of at least 26 consecutive weeks.  The employer can also use a “rule of parity” for periods less than 26 weeks, but at least four weeks long.  Under the rule of parity, the employee will be treated as a new hire if the period of absence (of at least four weeks) exceeds the length of the employment period that immediately preceded it.  For instance, if an employee works three weeks for an applicable large employer, terminates employment, and is rehired by the same employer ten weeks after terminating employment, the rehired employee is treated as a new hire.  An employee who is treated as a continuing employee (as opposed to an employee who is treated as terminated and rehired under the 26-week or “rule of parity” periods) is subject to the measurement period, and entitled to coverage during the stability period (presuming full-time status is attained over the measurement period) that would have applied to the employee had the employee not experienced the absence from service.
    • General Anti-Abuse RuleThe proposed regulations also provide that any hour of service will be disregarded if the hour of service is credited, or the underlying services are requested or required of the employee, for the purpose of circumventing employer shared responsibility rules.
    • Use of Temporary Employment AgenciesThepreamble to the regulations identify practices that the IRS and Treasury anticipate employers may try to exploit, using temporary employment agencies as purported common law employers, and state that final regulations on employer shared responsibility duties will expressly prohibit such practices.  In one scenario the employer would purport to employ individuals only part of a week, such as 20 hours per week, but would then hire the same individuals through a temporary employment agency who acts as their common law employer for the remaining hours in the week, with the result that the individuals do not qualify as full-time employees, for shared responsibility purposes, of either the employer “client” nor the temporary employment agency.  An alternative scenario would split the hours between two separate temporary employment agencies.  The preamble minces no words in commenting on these strategies:

“The Treasury Department and the IRS anticipate that only in rare circumstances, if ever, would the “client” under these fact patterns not employ the individual under the common law standard as a full-time employee. Rather, the Treasury Department and the IRS believe that the primary purpose of using such an arrangement would be to avoid the application of section 4980H.”

As this excerpt makes clear, the government intends that the employer shared responsibility duties will attach to businesses based on “common law” employment relationships, irrespective of third party involvement.  Very generally, a common law employment relationship exists if the employee is subject to the will and control of the employer not only as to what work must be done but as to how the work will be performed.  (This is a gross oversimplification; the IRS follows a 20-point test.)  This is a straightforward inquiry if the employer directly employs its entire staff.  However, complications arise for employers that use employee leasing companies/Professional Employer Organizations (PEOs) and temporary hire agencies.  Such employers will need to closely examine those relationships and determine where the common law employment relationship lies.    There is no better guide to such matters than Derrin Watson’s publication “Who’s the Employer” (6th Edition, 2012), however as is the case with common ownership issues, employers likely will need a seasoned ERISA attorney or other tax practitioner to determine where the true employment relationship lies.

  • Transition Relief for Fiscal Year Plans, Including Cafeteria Plan Election Changes.  The proposed regulations are effective for months beginning after December 31, 2013 but employers may rely upon them until a final regulation issues.   In addition, special transition rules are provided for employers with fiscal year plans.  If an applicable large employer member maintains a fiscal year plan as of December 27, 2012, the relief applies with respect to employees of the applicable large employer member (whenever hired) who, under the plan eligibility rules in effect as of December 27, 2012, would be eligible for coverage as of the first day of the first fiscal year of that plan that begins in 2014 (the 2014 plan year).  If an employee described in the preceding sentence is offered affordable, minimum value coverage no later than the first day of the 2014 plan year, no excise taxes will be due with respect to that employee for the period prior to the first day of the 2014 plan year.   Additional transition relief applies to employers who cover a significant percentage of employees under one or more plans with the same fiscal year as of December 27, 2012, and want to expand coverage under those plans, effective as of the first day of the 2014 plan year, to other, currently excluded employees in order to satisfy shared responsibility duties.  Finally, the proposed regulations contain transition relief for fiscal year Section 125/cafeteria plans, so that in January 2014, employees of an applicable large employer making salary reduction elections to pay for group health coverage can stop those deferrals in order to purchase individual coverage on an exchange.  In addition, employees who had not chosen to enroll in employer group health coverage could enroll effective January 1, 2014, in order to avoid penalties under the individual mandate going into effect that year, and could elect to pay their portion of premiums on a pre-tax basis through the cafeteria plan.   This cafeteria plan transition rule only applies to fiscal year plans and then only to employees’ elections to pay for group health coverage on a pre-tax basis and not to health flexible spending accounts or dependent care accounts.  These change in election rules, if adopted by an applicable large employer, must be set forth in the written cafeteria plan document.  Retroactive amendments may be made any time by December 31, 2014 and must be effective retroactively to the date of the first day of the 2013 plan year of the cafeteria plan.

 


[1] There is no better guide to shared ownership issues than Derrin Watson’s publication “Who’s the Employer” (6th Edition, 2012), however employers likely will need a seasoned ERISA attorney or other tax practitioner to carry out the analysis.  Keep in mind, also, that certain types of “affiliated service groups” can lead to a combined group of businesses for these purposes, even without any shared ownership between the entities.

[2] See Notice 2011-36 (definitions of employer, employee, and hours of service; proposed look-back/stability period safe harbor for determining full-time status); Requests for Comments set forth in Notice 2011-73 (“affordability” safe harbor based on 9.5% of Form W-2 compensation received from employer sponsoring health plan): Notice 2012-17 (proposed methods of determining full-time status of new employees); Notice 2012-58 (establishment of look-back/stability period safe harbors that employers may rely on through the end of 2014; guidance on determining full-time status of newly hired variable hour and seasonal employees).

[3] The “assessable payment” in such instance is determined on a month-to-month basis and is equal to 1/12th of $2,000 for all full-time employees for each month (after disregarding the first 30 full-time employees), regardless of which employees receive exchange subsidies.  The 30 full-time employee exclusion must be allocated among employers related by ownership, or otherwise, in proportion to each employer’s number of full-time employees as measured against total full-time employees in the controlled group, etc.

[4] The “assessable payment” in such instance is determined on a month-to-month basis and is equal to 1/12th of $3,000 for each full-time employee for each month that receives exchange subsidies.  However in no event will the assessable payment under Code Section 4980H(b) be larger than the penalty would be under Section 4980H(a) if no coverage were offered.

[5]

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Filed under Affordable Care Act, Benefit Plan Design, Employer Shared Responsibility, Health Care Reform, PPACA, Uncategorized, USERRA

Year-End Troop Return Triggers Benefit Obligations under USERRA

Last month President Obama announced that the remaining 40,000 or so American troops in Iraq would be returning home by December 31 of this year; it is also expected that he will announce an additional troop draw-down from Afghanistan.

For U.S. employers, this means that it is time to get reacquainted with benefit reinstatement rights under the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA). USERRA generally protects the workplace rights of persons who voluntarily or involuntarily leave employment positions to undertake military service and broadly applies applies to all U.S. employers, public or private. Essentially USERRA requires employers to treat employees as if they were employed throughout their period of military service, despite their physical absence.

Provided that the returning servicemember applies for reemployment within set time frames under the regulation, which are based on the period of military service, there is a duty to rehire the servicemember that is subject to very few exceptions. Further, the returning servicemember must be reinstated not to his or her “old” job but to the position – and compensation and perks – that the servicemember would have enjoyed had he or she never interrupted their career to serve our country. This is called the “escalator position.” As with the duty of reemployment there are exceptions to the duty to restore to the “escalator position” but they are few and narrowly construed.

With specific regard to health benefits, employees have a COBRA-like continuation coverage right upon leaving for military service that, provided they pay applicable premiums at 102% of the active employee’s rate, can last for as long as two years following commencement of military service. Upon return to employment those employees would simply transition to the same coverage they enjoyed as active employees. Employees who let their group health coverage lapse while on military leave have the right to have their coverage reinstated. If no waiting period or exclusions would have applied to the servicemember had their coverage been uninterupted, none may apply upon restoration of such coverage. USERRA regulations allow an employer to permit a servicemember to delay reinstatement of health plan coverage until a date that is later than the date of reemployment, but the employer is not required to do so, and employers who wish to do so are advised to first checkwith their insurers to make sure that such coverage will be honored.  Employers planning to delay coverage within USERRA guidelines should also be aware that they may have different insurance reinstatement obligations under the Servicemembers Civil Relief Act.  In short, any plan other than to provide immediate reinstatement of coverage upon reemployment should be discussed with legal counsel and otherwise vetted before implementation.

With regard to retirement plans, the reemployed servicemember is treated as though he or she had remained continuously employed for purposes of pension plan participation, vesting, and accrual of benefits. USERRA treats military service as continuous service with the employer for benefit plan purposes, such that “break in service” rules are not triggered. USERRA pension protections apply to defined benefit plans and defined contributions plans as well as plans provided under federal or state laws governing pension benefits for government employees.

If pension plan contributions are not dependent on employee contributions, the employer must make them within 90 days after reemployment or when contributions are normally made for the year in which the military service was performed, whichever is later. If pension plan contributions are derived from employee contributions or elective deferrals, (such as employer matching contributions to a 401(k) plan) or from a combination of employee contributions or elective deferrals and matching employer contributions, the reemployed service member may make his or her contributions or deferrals during a time period starting with the date of reemployment and continuing for up to three times the length of the employee’s immediate past period of military service, with the repayment period not to exceed five years. The employer is not required to restore retirement plan contributions in advance of a servicemember’s actual return to work.

More information is available in a convenient question and answer format in the Department of Labor’s Final Regulation under USERRA, published December 19, 2005, which you can review here.

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State Privacy Breach Laws May Trump HIPAA/HITECH

When HITECH amended HIPAA in 2009 it empowered state attorneys general to sue breaching parties to enforce the privacy and security rights of their respective state’s citizens. Prior to this time only the Department of Health and Human Services (DHHS) was permitted to enforce HIPAA. However, § 13410(e) of the HITECH Act limits the money damages that attorneys general can collect to $100 per individual affected, however not to exceed $25,000 for all violations of an identical requirement or prohibition during a calendar year.

Some state health privacy laws impose higher money penalties on breaching parties, and recently the Indiana Attorney General invoked state law, over HIPAA/HITECH, when prosecuting a privacy breach by insurer WellPoint, Inc. In that instance, the applicable Indiana statute permitted recovery of up to $150,000 per failure to disclose a health data security breach.

In the WellPoint breach, applications for individual health insurance policies containing Social Security numbers, financial and health information for 32,051 Indiana residents were accidentally made available on the internet for at least 137 days between October 2009 and March 2010. A member of the public notified WellPoint of the problem on February 22, and ultimately the individual filed a class action lawsuit against WellPoint on March 8. After being sued WellPoint quickly fixed the online problem, which had occurred during a system upgrade. However, WellPoint did not begin notifying its customers of the breach until June 18. And, when it did notify customers in Indiana, it did not notify the Attorney General, as required under state law.

WellPoint notified the DHHS of the breach in accordance with HITECH. However when Greg Zoeller, the Indiana Attorney General, filed suit against WellPoint in October 2010, it did so not under HITECH but under a provision of the Indiana Code allowing recovery of up to $150,000 per “deceptive act,” which term included a failure to disclose a breach of the security of personal data. The Indiana statute also allows recovery of the Attorney General’s reasonable investigation and prosecution costs.

Regarding this choice of law, a spokesperson for the Indiana Attorney General’s office stated:

“While the option to file under HITECH/HIPAA in federal court was considered, Indiana’s notification laws and enforcement options allow greater remedies . . . . [u]nder HITECH/HIPAA, the possible penalties maximum would have been $25,000 vs. $300,000 under Indiana law.” (Presumably the two “deceptive acts” were delayed notification of the public and failure to notify the Indiana AG).

WellPoint ultimately reached a settlement with the Attorney General on June 23, 2011, pursuant to which it will pay a $100,000 fine to a state fund providing restitution to defrauded consumers and will provide two years of credit monitoring and identity theft protection to affected individuals in Indiana. In addition, it will reimburse victims of identity theft for losses up to $50,000 per individual.

Prior to this case, the Connecticut Attorney General sued Health Net under HITECH/HIPAA following the insurer’s delayed notification of its loss of an unencrypted portable disk drive holding records for more than 500,000 insureds in Connecticut and more than 1.5 million nationwide. In that settlement HealthNet agreed to pay $250,000 in damages, provide two years of credit monitoring, $1 million of identity theft insurance and reimburse the costs of security credit freezes.

When HITECH first empowered attorneys general to prosecute data security breaches, little thought was given to the possibility that they might have more leverage under state laws than under the new federal statute. With state budgets stretched to the limit, this may prove more of a factor in which security breaches are prosecuted, and under which laws.

California law permits individuals to sue over breaches of their personal security data and recover up to $3,000 per violation as well as attorneys’ fees, but neither mandates the contents of security breach notices, nor requires notification of the California Attorney General. This may change, however, as a California Senate bill would specify the contents of breach notifications and, and for breaches affecting more than 500 California residents would require that breach notifications be sent electronically to the Attorney General. The Senate passed SB 24 in April 2011 and it is easily passing committee votes in the State Assembly. I will continue to update the progress of the bill in future posts.

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DOL Sanctions Plan Sponsor Purchase of Real Property from Plan

Last February, noted fiduciary guidance counsel Peter Gulia alerted me to a prohibited transaction exemption application involving a 401(k) plan sponsor’s purchase of troubled real property from the plan. At the time Peter observed that the application, if granted, would allow the sale on the opinion of an appraiser without requiring any supervision by an independent fiduciary.

The exemption was granted, and is published in the Federal Register on May 11, 2011. The property was an antique home used as a bed & breakfast. The B&B represented 93% of the value of the assets of a 401(k) plan maintained by a professional medical corporation, the sole participants of which plan were the doctor, his wife (another doctor), and their three children. Despite the significant investment of Plan assets, the property yielded only small amounts of net income to the Plan. The family was not able to afford the third party management fees and tried to manage the property themselves. Due to poor cash flow, significant maintenance and safety issues went unaddressed. Ultimately, the Plan’s aggregate net income from the property between 2004 and 2010 (purchase price, less aggregate net acquisition and holding costs) was determined to be only $141,648.

In order to get the Plan out from under the burden of running the property at a loss, the doctor and his wife sought to purchase the property from the plan and obtained the lender’s approval to assume the loan from the bank. The stated rationale for the exemption was that the sale would allow the plan fiduciaries to “divest the Plan of an asset that has been difficult to manage within the Plan as a result of adverse economic conditions.” The conditions of the sale included all of the following:

1) All terms and conditions of the sale were at least as favorable as the Plan could obtain in an arm’s length transaction with a third party. (This was almost assured under the circumstances due to the depressed real estate market and drop in tourism.)
2) The applicants either personally assume the loan on the property, which represented less than half of its value, or paid the loan off from the sale proceeds. (The applicants had obtained the lender’s consent to their assuming the loan, or obtaining another loan.)
3) The Plan receive the greater of (a) the property’s fair market value as determined by a qualified independent appraiser, less the loan principal assumed by the applicants, or (b) the property’s net acquisition and holding costs, less the loan principal. (In this case the FMV was higher.)
4) The FMV be updated by the appraiser on the date the sale is consummated.
5) The sale be a one-time transaction for cash.
6) The Plan pay no real estate commissions or fees in connection with the sale.
7) The Plan fiduciaries, who were also the applicants, do all of the following:
a. Determine whether the sale was in the interest of the Plan;
b. Review and approve the appraisal methodology; and
c. Ensure that the appraiser uses the methodology to determine the FMV.

Several factual points, although not expressly cited by the Department of Labor as grounds for their ultimate approval of the exemption, no doubt contributed to the application’s favorable outcome:
➢ The parties used a highly qualified appraiser. He had state and national appraisal credentials and had spent 20 of his 25 years of professional experience appraising commercial properties. The appraiser’s valuation methods (combination of sales comparison and income approach) were logical and clearly explained. It no doubt helped that in there were comparable sales transactions in the community as well as numerous B&B businesses from which to draw income figures.
➢ The Plan covered only five members of the same immediate family. Were there non-family member participants in the Plan, it is likely that the initial fiduciary decision to invest over 90% of Plan assets in a single property would not have passed muster.
➢ The Plan would fare much better in a sale to interested parties than it would if the property were sold on an open market; depressed real estate values would have meant a lower-than-FMV sale price as well as a hefty sales commission and other transaction expenses. By contrast the terms of the exemption required a FMV sale (with an appraisal update on the transaction date) with no fees or commissions paid by the Plan. In addition, if the applicants assumed the loan from the plan they would indemnify the Plan and hold it harmless from any future liability for payments.

I want to thank Peter Gulia first for alerting me to the exemption application and also for sharing his opinion – which I share – that lack of non-family member participants likely contributed to the Department not insisting on more stringent conditions, such as supervision by an independent fiduciary.

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California Senate Passes AB 36 With Unanimous Vote

Updated April 5, 2011
The California Senate voted unanimously on March 24, 2011 to approve California Assembly Bill 36, which would bring California income and employment tax laws into conformity with federal tax law regarding group health coverage provided to dependents up to age 26. This vote was the last step in the legislative process before the bill goes to Governor Brown for signature.

Because AB 36 offers retroactive relief from having to track imputed state income for employees with overage dependents, employers will need to look to the Employment Development Department for guidance on amending information reported for 2010 on Forms DE 6 and DE 7, the quarterly wage and withholding report, and annual reconciliation report, respectively. Adjustments to either form filed in 2010 are made on form DE 678.

For 2011, however, DE 6 and DE 7 are replaced with form DE 9 (Quarterly Contribution Return and Report of Wages) and DE 9C (Quarterly Contribution Return and Report of Wages (Continuation)). Those new forms are amended by filing new EDD form DE 9ADI (Quarterly Contribution and Wage Adjustment Form). Per a contact at the EDD, after final passage of AB 36 they will study the measure and advise on corrective reporting steps; so the above instructions may change. To correct employee wage statements, employees will need to file Form 540X with the Franchise Tax Board.

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Proposed Regs Describe State Innovation Waiver Process

The Treasury Department and Department of Health and Human Services (HHS) today released guidance, in the form of proposed regulations, on how states may obtain “Waivers for State Innovation” in lieu of complying with central features of PPACA, including the individual mandate. Originally such waivers were to become available in 2017 but the Obama Administration recently accelerated that deadline to 2014, which is when the key PPACA features first go into effect.

According to the regulations, waiver applications are to be submitted to the Secretary of HHS, which will complete a preliminary review within 45 days. The regulations do not set a minimum time between submission of an application and the effective date of the waiver, but request public comments on whether or not it should require submissions be filed no less than 12 months before the waiver is to take effect.

Completion of the preliminary review triggers the federal public notice and comment period, and the 180-day federal decision-making period. Additional public notice and comment periods occur at the state level, as well.

In order to receive a waiver, a state must demonstrate that its alternative system will provide coverage that is at least as comprehensive (in terms of benefits) as coverage would be under the PPACA, and as least as affordable, in terms of cost-sharing protections against excessive out-of-pocket spending. States must also demonstrate that a comparable number of citizens would be covered under the alternative plan, and that the plan is federal deficit neutral.

The regulations describe heavy documentation requirements on each of those points, including a detailed 10-year budget plan showing federal deficit neutrality.

The regulations also describe post-award monitoring and quarterly and annual reporting procedures states must follow in order to maintain their waiver. This includes a requirement to hold a public forum at the state level, six months after a waiver is implemented, at which members of the public may comment on the progress of the waiver. The state must provide a summary of this forum to the Secretary of HHS.

The preamble to the regulations also notes that the Treasury and HHS Departments are soliciting public comment on whether or not there should be annual limits on the number of waivers that may be submitted.

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