San Francisco Preemption, Cycle B Submissions, Erie County, Year 1 Compensation Disclosures, Reporting Settlement Payments
Focus On Employee Benefits
Tony Shelley and Susan Relland
In December, the U.S. District Court for the Northern District of California ruled that San Francisco's local health care mandate was preempted by ERISA. However, the Ninth Circuit Court of Appeals has recently granted an emergency stay pending a decision on appeal. Therefore, the city may proceed with implementing its health ordinance which had been scheduled to take effect January 1, 2008. This development has important implications for all ERISA plans.
The San Francisco Health Care Security Ordinance contains an employer health spending requirement and a government health care program, funded in part by the employer contributions. The ordinance requires medium and large businesses to make minimum "qualifying" health care expenditures or make payments to the city to be used on behalf of covered employees. The ordinance also requires employers to maintain records and proof of health care expenditures, to allow city officials reasonable access to such records, and to annually report such other information as the city requires.
The Golden Gate Restaurant Association filed suit arguing that the employer spending requirement was preempted by ERISA. The district court agreed, holding that the ordinance had an impermissible connection with ERSIA plans and the expenditure requirements made unlawful reference to employee benefit plans. The Ninth Circuit granted an emergency stay of the district court's decision, stating that there was a strong likelihood that it would reverse the lower court's preemption ruling.
The Ninth Circuit's decision is directly opposite to the Fourth Circuit's findings in the litigation that had involved similar legislation in Maryland. The Ninth Circuit will still pursue its full appellate proceedings (with a decision expected this summer); however, the court seems ready to rule in favor of the city. A conflict with the Fourth Circuit would likely send this issue to the U.S. Supreme Court. Because almost half the states are currently considering some kind of health care reform, this is a major development, indicating that, at least in the Ninth Circuit, ERISA plans are likely going to have to comply with expenditure mandates that state and local governments adopt.
Fred Oliphant and Patricia Szoeke
Issued earlier this month, Revenue Procedure 2008-6 requires that a submission for a determination letter from the IRS on the qualified status of an employee benefit plan include, among he plan and trust documents and (2) redlining or highlighting of all changes made to the most recently approved plan document. Many employers and employee plan professionals have expressed concerns regarding the requirement to highlight all changes made to the plan document since the latest favorable determination letter, pointing out that the requirement is overly cumbersome, particularly in light of frequent changes in technology, and will result in increased costs to employers.
As reported in recent tax press articles, Andrew Zuckerman, director of the IRS' Employee Plans Rulings and Agreements, addressed this concern at an American Bar Association Section of Taxation midyear meeting that took place last week. Although stating that the initial thought was that such redlining would be relatively easy given the prevalence of word processing technology, Mr. Zuckerman did indicate that the change will not apply to plans filing in Cycle B of the determination letter filing process. We also received similar information in a prior informal telephone conversation with another IRS official.
While these IRS comments provide some reprieve for employers who sponsor qualified plans that fall within Cycle B, the requirement to provide a redlined document in the materials submitted to the IRS still remains. However, based on the IRS comments, it appears that the IRS may give some consideration to revisiting such requirement.
Susan Relland and Patricia Szoeke
Final regulations issued by the Equal Employment Opportunity Commission (EEOC) have created an exemption from age discrimination laws for employer-sponsored retiree health benefits that coordinate with Medicare. Under the new rule, employers may elect to provide retiree health benefits to those retirees who are not yet eligible for Medicare and may alter, reduce, or eliminate such benefits once the individual becomes eligible for Medicare. Such a practice is common-place among employers who provide retiree health benefits.
By permitting employers to provide different levels of benefits to their retirees based on their eligibility for Medicare coverage, the EEOC has stated that it hopes employers will continue to provide comprehensive coverage to those retirees not yet eligible for Medicare and provide some benefits, even if at a reduced level, to retirees who are eligible for Medicare. The preamble to the final regulations states that by allowing employers to create two categories of benefits coverage for their retirees, it is the EEOC's intent that employers continue to voluntarily provide retiree health benefits -- even in light of the increasing cost of health care coverage -- rather than using the new regulations to discontinue providing coverage for retirees age 65 or older.
This is welcome and long-awaited guidance for employers. In 2000, the Third Circuit Court of Appeals in Erie County Retirees Association v. County of Erie disregarded legislative history and held that pre-Medicare coverage, provided to bridge the gap between retirement and Medicare eligibility, violated the Age Discrimination in Employment Act (ADEA). Subsequently, the EEOC issued a proposed rule exempting from ADEA the coordination of employer-sponsored retiree health benefits with Medicare, which was then challenged by AARP. The Third Circuit Court of Appeals finally resolved the issue last June, paving the way for EEOC to publish this final rule.
Anthony Provenzano and Patricia Szoeke
This past proxy season was the first year of compliance with the SEC's new executive compensation disclosure rules for many companies. Following its review of these initial proxy disclosures, the SEC issued comment letters to various companies requesting additional information relating to executive compensation. After this initial round of comments, the SEC issued a report summarizing its findings and providing guidance for the upcoming proxy season. The SEC report highlights those areas where the SEC staff felt that additional disclosure was needed and provides guidance for future disclosures. The central theme of the SEC's report could be described as the need for companies to describe "how and why" various levels of compensation or performance targets were established.
The compensation disclosure and analysis (CD&A) is aimed at providing a plain-English but precise discussion of how and why a company arrived at the specific compensation decisions. The SEC staff noted that many of the disclosures only included compensation philosophies and policies in general terms and did not discuss the real mechanics of how compensation decisions were made and whether or not these decisions have been effective in the past.
The SEC staff issued more comments on performance targets and goals than any other issue. As an initial matter, the staff wanted a company to disclose the specific performance targets used by the company unless the company could demonstrate that disclosure of the particular targets could cause competitive harm. The staff also wanted companies to discuss how and why such performance targets were selected, whether or not such targets were difficult, and whether or not such targets were met in the past.
Other areas that the SEC has indicated require greater disclosure include: (1) how various elements of compensation impact each other, (2) the use of benchmarking data, (3) disparities in compensation among officers, (4) change in control and termination agreements, and (5) corporate governance issues (e.g., the role of the compensation committee, outside compensation consultants, etc.).
One of the main sources of confusion among clients in reporting litigation settlement payments when the payments are routed through the claimant's law firm is the apparent "duplication" of reporting. Confusion appears to stem from a misreading of the "non-duplication" exception under Code Section 6045(f)(2)(B). In most cases the exception will not apply, and the same settlement payment will have to be reported separately to two payees -- the claimant and the claimant's law firm -- and, of course, to the IRS as well; reporting the settlement payment to the law firm alone, or to the claimant alone, is usually not sufficient where the payment constitutes income to the claimant.
Generally, business payments totaling $600 or more in a calendar year to law firms (or individual attorneys) in connection with legal services must be reported on Form 1099-MISC (to the law firm and to the IRS), whether or not: (1) the services of the law firm are rendered to the payor, (2) any of the payments are kept by the law firm as compensation for legal services, or (3) other information returns are required to report the same payment (e.g., under Code section 6041 or 6051). The basic information reporting rules that apply in the context of litigation settlement payments are as follows:
1. Regardless of whether information reporting is required under Section 6045(f), the settling payor must report to the claimant (and the IRS) the full amount of payments that are taxable to the claimant (e.g., on a Form 1099-MISC or Form W-2, as appropriate) in the normal manner required by the Code and regulations.
2. If the check is payable to the claimant alone, the payor is not required to report the check to the claimant's law firm on a Form 1099-MISC, irrespective of whether the check is delivered to the law firm or to the client, because the law firm is not the payee. Similarly, the law firm is not the payee (and reporting is not required under Section 6045(f)) when the firm's name is included on the payee line as "in care of" the law firm, such as a check written to "client c/o firm," or if the law firm's name is included on the check in any other manner that does not give it the right to negotiate the check. This exception is an important one to keep in mind.
3. If the check is payable (1) to the law firm alone (including to the law firm's client trust fund), (2) jointly to the claimant and the claimant's law firm, (3) or to the law firm as an alternative payee, the payor must report it in full on an information return as gross proceeds paid to the claimant's law firm, regardless of to whom the check is delivered.
4. Special rules apply where there are joint or multiple law firm payees on the check. If the check is delivered to one of those firms, an information return is required with respect to that firm. If the check is delivered to a non-law firm payee or to a non law-firm non payee, the information return is required with respect to the law firm that is listed first on the check.
5. All reportable payments to the claimant's law firm under item 3 above should be reported in box 14 of the Form 1099-MISC, using the TIN of the law firm.
For further information, please contact any of the following lawyers:
Anthony Shelley, firstname.lastname@example.org, 202-626-5924
Fred Oliphant, email@example.com, 202-626-5834
Lee Spence, firstname.lastname@example.org, 202-626-5965
*Former Miller & Chevalier attorney
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