[Note
that this Outline is only a very general discussion of
some issues in the law, and is not intended as legal
advice for any particular situation.]
I. HIPAA
PRIVACY - THE SHORT COURSE
HIPAA's
privacy rules have been effective for large health plans
(over $5M) since April 14, 2003, and will become
effective for other health plans on April 14, 2004. The
primary substantive requirement of the HIPAA privacy
rules is to limit a health plan's (i.e., an employer's)
ability to use or disclose individually identifiable
health information (so-called "PHI" or "Protected Health
Information") except to the minimum extent necessary to
operate the Plan. In addition, the HIPAA privacy rules
contain a number of mechanical steps that must be taken
by employers (on behalf of their health plans). For
example, health plans (acting through their
employer-sponsors) must be able to show that:
1. they
have taken steps to ensure that PHI maintained by the
plan is not disclosed to persons who do not need to have
access to the PHI in order to operate the plan;
2. they
have designated a “privacy official” to manage and
implement the plan’s privacy policies as well as a
contact person (who could be the same person) to be
responsible for receiving privacy-related
complaints;
3. they
maintains records of PHI disclosures made (other than
those made for routine plan purposes or pursuant to an
individual authorization);
4. they
maintain “administrative, technical and physical
safeguards” as appropriate given their particular facts
and circumstances to protect the privacy of PHI;
5. they
continuously train those individuals who are covered by
the plan’s privacy policy;
6. they
have implemented, and they regularly review and revise
as necessary, written policies and procedures to ensure
compliance with the HIPAA privacy rule;
7. they
have entered into Business Associate Agreements with all
Business Associates of the plan;
8. they
have amended the plan’s governing document and SPD to
contain required HIPAA privacy language (not applicable
to government plans); and
9. they
provide the required HIPAA privacy notice to
participants at the required times.
Employers
should perform a "self-diagnostic" on their health plans
and the policies and procedures to make sure that they
are able to show "good faith compliance" with the HIPAA
privacy rules.
II.
"FREE" (OR NEARLY "FREE") BENEFITS TO THE EMPLOYER
In the
challenging economic times, employers are seeking ways
to improve their employees' benefit packages without
adding direct costs to the employer. The following are
some benefit programs that have little or no hard costs
for the employer, and that, in some cases, may actually
save money for the employer.
A.
Qualified Transportation Plans
If an
employer allows employees to pay for qualified
transportation expenses (i.e., qualified parking,
transit passes and/or transportation in a commuter
highway vehicle) on a salary reduction basis, employee
gross income will not include the cost of the
benefit.
The
statutory requirements for these plans are relatively
simple and these plans are easy to design. Although
employers may subsidize these benefits, these plans may
be designed so that the only employer cost is the
administrative expense.
B. "POP"
Section 125 Plans
The only
employer cost for so-called "Premium Only Plans" (or
"POPs") which provide a mechanism whereby employees pay
premiums for certain welfare benefits (such as health,
group term life insurance, long term disability
insurance) with pre-tax (salary reduction) dollars, is
the administrative cost of operating the plan, and the
employer actually saves payroll taxes on amounts
contributed to the plan.
C.
FSAs
The only
employer cost for Health Flexible Spending Accounts and
Dependent Care Flexible Spending Accounts is the
administrative cost of operating the plan (some or all
of which cost may be paid from any forfeited amounts
under the FSAs), and again the employer saves payroll
taxes. (Employees contribute to FSAs with pre-tax salary
reduction dollars.)
D.
Adoption Assistance Plans
Under
this relatively new type of plan, employees contribute
pre-tax salary reduction dollars to pay for certain
adoption-related expenses. Again, the only employer cost
is the administrative costs, but amounts are subject to
payroll taxes.
E. Salary
Reduction Only Tax Sheltered Annuity Plans (403(b))
Plans)
These
plans, which may be maintained by 501(c)(3) entities and
public schools, permit only employee pre-tax salary
reduction contributions (which are subject to
FICA/FUTA). Generally, vendors handle much of the
administrative responsibility, and the administrative
costs are paid from the plan.
F. Group
Long Term Care Insurance
With the
aging of the "baby boom" generation, these types of
plans are rapidly gaining popularity. Employees pay
premiums with after-tax dollars. That is, these plans
may not be part of a Section 125 plan. (Incidentally,
employer subsidies to these plans are tax-free to the
employee and deductible to the employer, and there are
no non-discrimination rules applicable to these
plans.)
G.
Nonqualified Deferred Compensation Plans for
Executives
Nonqualified
plans often are designed so that the only contributions
are salary reduction contributions by the participating
executives. (These contributions are subject to
FICA/FUTA.) The only cost to the employer is the
administrative cost, which may be charged against the
plan.
Naturally,
the Code and ERISA impose various requirements in order
to take advantage of these plans. Employers should
review their benefit offerings and consult with counsel
to determine whether adding one of these "free" benefit
programs might be in order.
III.
PRACTICAL RESPONSES TO THE UPCOMING SPLIT DOLLAR
CHANGES
December
31, 2003 is the deadline for employers to take advantage
of the various special transition rules for Split Dollar
Life Insurance plans contained in IRS Notice 2002-8 and
the Proposed SDLI Regulations. It is critical that each
employer that sponsors a SDLI plan have that plan
analyzed in light of the various options contained in
the IRS guidance. We have found that, although in many
cases the optimum course is to terminate the SDLI on
December 31, 2003 and take advantage of the "no tax on
executive equity" transition rule contained in Notice
2002-8, this is not always the most advantageous course
of action.
In order
to have time to make a thoughtful decision before the
December 31 deadline, employers who sponsor SDLI plans
should put together a file of containing the governing
plan documents and up-to-date information about the
performance of the underlying insurance contract, and
deliver that file to counsel with a request that a
"Notice 2002-8 analysis" be completed. The results of
this analysis will indicate which course of action
should be taken by the employer and the participant.
In
addition to analyzing existing SDLI plans, employers
contemplating establishing a SDLI plan need to do a
careful analysis of the new (and radically changed)
rules for the taxation of SDLI under the Code Section 83
and Code Section 7872 rules.
IV. A
CHECKLIST FOR MAXIMIZING KEY EMPLOYEE QUALIFIED PLAN
BENEFITS
Tax-qualified
retirement plans offer employees the most tax favored
and the most protected from creditors form of employer
provided retirement benefits. Therefore, before
implementation of a non-qualified deferred compensation
program for key employees, an employer should review the
tax-qualified retirement vehicles that can be offered to
its employees and determine if some or all of the
compensation goals for its key employees can be met
through one or more tax-qualified plans. The following
lists the current limits on contributions and benefits
for tax-qualified retirement plans and briefly mentions
some of the contribution and benefit structures
permitted under such plans that allow an employer to
push a greater percentage of the contributions or
benefits to key employees.
A.
Defined contribution plan contribution limits.
Salary
reduction contribution limits for 401(k), 403(b) and
457(b) plans are $12,000 in 2003, $13,000 in 2004,
$14,000 in 2005 and $15,000 in 2006. An additional
“catch-up” salary reduction contribution limit for
participants age 50 and older in a 401(k), 403(b) or
governmental 457(b) plan is $2,000 in 2003, $3,000 in
2004, $4,000 in 2005 and $5,000 in 2006. These catch-up
contributions are exempt from other contribution
limitations and non-discrimination rules (although the
plan must allow all eligible participants to participate
in the same manner in the catch-up contribution
feature). Other special catch-up provisions apply to
403(b) plans and 457(b) plans. Also, contributions to
other types of defined contribution plans by the
participant no longer count against the dollar limits
applicable to the 457(b) deferrals. In other words,
individuals who are eligible under a 457(b) plan do not
have to coordinate the contribution limit under the
457(b) plan with the contribution limit pertaining to
elective salary reduction contributions under 401(k) and
403(b) plans. This many create significant deferral
opportunities for executive employees of tax-exempt and
governmental entities.
The
415(c) annual addition limit for defined contribution
plans is the lesser of $40,000 or 100% of the
participant’s compensation.
B.
Defined benefit plan benefit limits. The 415(b) annual
benefit limit for defined benefit plans is $160,000 in
2003, with actuarial reductions in the limit no longer
required for retirements between ages 62 and 65.
C. Limit
on compensation. The limit on compensation that can be
recognized by a qualified plan increased to $200,000 in
2002, and the COLA rules are changed so the limit will
be increased in $5,000 increments. This will mean
greater benefits for higher paid employees under
qualified retirement plans. This change also will
require review of most non-qualified supplemental
retirement plans that were meant to “make whole” for
this limit.
D.
Alternative contribution and benefit structures.
Integration
with social security benefits. Safe harbor and non-safe
harbor integration.
Defined
contribution age weighted and/or service weighted
formula or comparability formula.
Cash
balance pension plan with age and/or service
weighting.
Plans not
subject to discrimination testing. Governmental plans.
Certain church plans.
E.
Combination of defined contribution and defined benefit
plans.
The
limits under 415 on contributions and benefits no longer
are coordinated. An employee can participate in both
types of plans and receive the maximum benefit under the
defined benefit plan and the maximum contribution under
the defined contribution plan.
Employers
should review their tax-qualified retirement plans to
determine if it makes sense to (1) implement additional
plans, (2) eliminate any percentage limits on salary
reduction contributions, (3) add the catch-up
contribution provisions to the plan or (4) modify the
contribution or benefit structure to maximize benefits
for key employees.
V. WAYS
FOR ENSURING ADP/ACP COMPLIANCE
Recent
legislation has simplified the rules for meeting the
ADP/ACP tests applicable to 401(k) plans. These new
rules have, for example, eliminated the prohibition
against the multiple use of the 2%/200% test to meet
both the ADP and the ACP tests, permitted testing of HCE
contributions using either prior year or current year
NHCE contributions, allowed the use of matching
contributions to satisfy both the ACP test and the
top-heavy contribution requirement, and added safe
harbor contribution formulae that avoid the ADP/ACP
tests altogether.
A.
Definitions of compensation for testing purposes. Using
any definition of compensation under 414(s) is permitted
for testing purposes. Pre-tax deferrals must be
included. A plan amendment may be necessary to change
the definition of compensation for testing purposes. Any
definition of compensation may be used for determining
the amount of salary reduction contributions and
matching contributions.
B.
Definition of HCE. The HCE group can be limited to the
top paid 20% of all employees. This will help meet the
ADP/ACP tests if the employees who would be HCEs, but
for the 20% cut off, contribute at a higher average rate
than the remaining NHCE group.
C. Prior
year testing for certainty of the limit on HCEs for the
current year. Switching to current year testing.
Employers may use the prior years' nonhighly compensated
employee average deferral and contribution percentages
to determine the permitted highly compensated employee
deferral or contribution percentages for the current
year (with a special rule for a plan's first year).
Employers can elect instead to use the current years'
nonhighly compensated employee average deferral and
contribution percentages, but once this election is
made, it can be changed only as provided by the
Secretary of the Treasury in future guidance.
D.
Separate testing for participants with less than one
year of service and under age 21. For the stated purpose
of encouraging employers to extend eligibility for
participation in retirement plans to new hires, recent
legislation simplified the nondiscrimination testing
alternative available to plans that provide for
participation in the plan prior to age 21 and 1 year of
service. The plan can elect to apply a single ADP test
and a single ACP test, and disregard employees (other
than highly compensated employees) who have not met the
age 21 and 1 year of service requirements, if the
employees in this group (both highly and nonhighly
compensated employees) meet the minimum coverage
requirements of Code section 410(b).
E. If
QMACs and QNECs are made to the plan, borrow from these
contributions to pass the ADP test.
F. Make
additional contributions to the accounts of some or all
of the NHCE group, instead of returning contributions to
HCEs, to meet the nondiscrimination tests. The plan can
be written to allow contributions to NHCEs to meet the
nondiscrimination tests, and the group of NHCEs who
receive the additional contributions can be limited to
the lowest paid NHCEs.
G.
Exclude one or more groups of employees who historically
do not elect to participate in the plan. Even if 100% of
HCEs are eligible, the plan can exclude 30% of the NHCEs
of the employer. The plan may not exclude part-time
employees solely because of their part-time status.
However, the plan can have a different eligibility
requirement for part-time employees (e.g., a one year of
service requirement for part-time employees and
immediate participation for everyone else).
H. If
permitted, use 403(b) plan instead of 401(k) plan for
salary reduction contributions. The salary reduction
contributions to a 403(b) plan are not subject to
nondiscrimination testing. In addition, matching
contributions can be made to a separate tax-qualified
plan but based upon salary reduction contributions to
the 403(b) plan. Finally, if the employer does not
exercise too much control over the 403(b) plan, it will
not be treated as maintained by the employer and many of
the reporting and disclosure requirements (e.g., 5500,
summary plan description) will not apply to the 403(b)
plan.
I. 401(k)
Plan Safe Harbor Alternatives.
General
rule - 401(k) plans may use safe harbor alternatives to
pass the ADP and ACP test requirements. If the plan
meets a safe harbor alternative, no further ADP or ACP
testing is necessary.
ADP safe
harbor - ADP test (401(k) salary reduction
contributions) safe harbor is met if the plan satisfies
one of two contribution requirements and a notice
requirement.
ACP safe
harbor - ACP safe harbor for testing employer matching
contributions (there is no safe harbor for testing
employee after-tax contributions) is met if the plan
meets the contribution and notice requirements described
under the ADP safe harbor testing and the plan satisfies
a limitation on matching contributions.
If, in
addition to requiring the safe harbor contributions, the
plan permits discretionary matching contributions (i.e.,
the plan provides that the employer can decide each year
whether or not to make the matching contributions), the
ACP safe harbor will be met only if the discretionary
matching contributions for the year cannot exceed 4% of
compensation.
Employers
should review their 401(k) plans to be sure the
provisions that provide maximum flexibility with respect
to nondiscrimination testing are included in the plan.
In addition, if the ADP/ACP tests appear to have not
been met for a year, employers should consider other
testing alternatives, including plan amendments if
necessary, that will result in compliance with the
tests.
VI.
UNDERSTANDING DOMESTIC PARTNER BENEFIT TAXATION
More and
more employers are offering domestic partner benefits,
especially health plan benefits. Some employers offer
these benefits only to same-sex domestic partners, and
some employers offer these benefits to all domestic
partners. Some employers also offer and health and other
benefits to children of domestic partners.
The IRS
has now provided clear guidance on how domestic partner
benefits are taxed. In essence, if the domestic partner
receiving health benefits, or the child of the domestic
partner receiving health benefits, is a Code Section 152
"dependent" of the employee, the benefits will be
tax-free. On the other hand, if the domestic
partner/child of domestic partner receiving benefits is
not a Code Section 152 "dependent" of the employee, the
employee will be taxed on the value of the benefits
provided.
A
domestic partner/child of domestic partner will qualify
as a "dependent" of an employee only if:
1. The
individual receives over half of his or her support from
the employee.
2. The
individual has as his or her principal place of abode
the home of the employee.
3. The
individual is a member of the employee's household.
4. The
individual is a citizen or national of the U.S. or a
resident of the U.S. or a contiguous country.
5. The
relationship between the individual and the employee is
not in violation of local law.
Because
of the penalties on employers for both under-reporting
and over-reporting income to employees, employers who
offer domestic partner/child of domestic partner
benefits must institute procedures to determine, in each
case, whether the provision of those benefits result in
income to the employee. Communicating these rules to
affected employees, and working with them to determine
whether the covered domestic partner/child of domestic
partner is a dependent, requires special care.
VII.
PROACTIVE RESPONSES TO SUGGESTED NQ PLAN LEGISLATION
In
February, the staff of the Congress' Joint Committee on
Taxation presented to the Senate Finance Committee its
recommended changes to federal tax laws based on its
study of the Enron situation. Several aspects of the
recommendations are very troubling and merit careful
consideration by employers.
Three of
the staff's recommendations concern nonqualified
deferred compensation plans. The first of these
recommends prompt finalization of the IRS proposed SDLI.
Because the finalization of the proposed regulations
would accelerate the termination of certain transition
rules that are available only until the regulations are
finalized, employers who sponsor SDLI plans should
accelerate the Notice 2002-8 analysis discussed
above.
The
second of the staff's recommendations suggests the
repeal of the grandfather rule which permits significant
interest expense deductions with respect to borrowing
from pre-June 20, 1986 corporate-owned life insurance
(or "COLI") policies. This change would negatively
impact employers who use unlimited COLI borrowing as a
financing tool. Fortunately, this is a very small number
of employers. There is little these employers can do to
respond to this proposal.
The third
of the staff's recommendations is the most troubling,
and would affect virtually all employers who sponsor
nonqualified plans. Apparently, because Enron executives
were able to withdraw as much as one-third of their
nonqualified deferred compensation benefits before the
Enron bankruptcy, which caused the loss of the remainder
of their benefits, the staff has recommended that laws
be enacted that eliminate "effective control" of
nonqualified plan accounts by participants. These laws
would include prohibitions on plan features that today
are very commonplace, such as participant investment
direction and accelerated distribution (e.g., "haircut"
distribution) features. The staff also questions whether
the use of rabbi trusts for nonqualified plans should be
limited.
Also
troublesome is a remark by Committee Chair Grassley that
any legislation resulting from the recommendations will
be made effective as of the date of the recommendations,
February 13, 2003. Taken at face value, this comment
would seem to imply that virtually all nonqualified plan
interests in the country would become taxable on
February 13, 2003. Hopefully, the Chairman had not
considered fully the implications of this remark.
Although
the various interested lobbying groups will no doubt
energetically oppose these recommendations, the Congress
may feel the need to do something "symbolic" to respond
to public outrage over the perceived greed of the Enron
executives. Unfortunately, it appears that the perceived
excesses of the few might endanger the legitimate
practices of the many.
We have
begun to work with many of our clients that sponsor
nonqualified plans to consider appropriate communication
with plan participants and other pro-active steps. For
example, a number of our clients have added "fail-safe"
amendments to their nonqualified plans to anticipate,
and minimize the impact of, any legislation that might
curtail various plan features. We urge all of our
clients that sponsor nonqualified plans to consider
whether this particular "ounce of prevention" might
truly be worth a "pound of cure".
VIII. A
DISCUSSION OF HEALTH REIMBURSEMENT ARRANGEMENTS
A health
reimbursement arrangement, or HRA, is an employer-funded
account that reimburses participants for Code Section
213 deductible medical expenses. HRAs may be part of a
stand alone plan or a component in an employer health
plan. IRS guidance in 2002 provides what is essentially
a safe harbor for providing HRAs to participants that
will not result in taxation to those employees. (Many
designs for what are commonly called “defined
contribution health plans” are being developed and
marketed, but the IRS guidance addresses only one model
(with some limited variations). The IRS safe harbor
contains the following guidance:
1. The
HRA must be funded only by employer contributions and
not directly or indirectly by employee salary
reductions.
2.
Because the account is totally funded by the employer,
an HRA is not subject to Section 125.
3.
Because the account is totally funded by the employer,
HRAs are subject to the nondiscrimination rules of IRC
Section 105(h).
4.
Current and former employees (including retirees) may
participate; self-employed individual (partners, sole
proprietors, 2% or more sub-S shareholders) may not.
5.
Typically, an HRA provides reimbursements up to a
maximum dollar amount specified by the sponsor for a
specified coverage period (which can be less than a
year). Unlike the case with a HFSA, the maximum dollar
amount does not have to be available during the entire
period of coverage.
6. Only
Code Section 213 expenses incurred after the date the
HRA is implemented may be reimbursed. The HRA can limit
the universe of reimbursable expenses. For example, the
HRA may be designed not to reimburse expenses that are
excluded from coverage under the employer’s medical
plan.
7. Only
expenses incurred by current and former employees, their
spouses and dependents can be reimbursed. The IRS has
indicated that coverage of non-dependent domestic
partners will not disqualify the HRA arrangement but
will result in taxable income to the participant.
8. The
Plan may require that all HFSA amounts be used first. If
the HRA is silent on this issue, the HRA will reimburse
first.
9.
Expenses incurred in one coverage period can be
reimbursed in a later period of coverage if the
participant was covered under the HRA when the expense
was incurred.
10. If
desired, amounts to be reimbursed can include health
insurance premiums (including COBRA premiums) and long
term care insurance premiums (but not expenses for long
term care). Premiums for short or long term disability
coverage may not be reimbursed.
11. The
HRA may permit unused amounts to be carried forward to
later periods of coverage.
12. The
HRA may, but is not required to, permit terminated
employees, COBRA beneficiaries and/or retirees to
utilize the balance in their account and may, but is not
required to, provide for additions to the HRA accounts
of such participants.
13.
Adverse tax treatment will be triggered if participants
receive cash or other taxable or non-taxable benefits
under the arrangement. For example, the employer cannot
adjust an employee’s compensation or pay a death benefit
or bonus on termination of employment directly or
indirectly from the balance in an HRA.
14. HRAs
are subject to COBRA.
15. Plan
design features such as different HRAs for different
groups of employees and vesting schedules are permitted
if the Plan can pass the Code Section 105(h)
nondiscrimination rules.
16. HRA
claims can be paid by debit card, with standards similar
to the requirements for such payments by HFSAs.
IX.
CURRENT GUIDANCE ON IRS SELF-CORRECTION
Until
relatively recently, sponsors of tax-qualified plans,
403(b) plans and SEP plans who discovered that their
plan failed a qualification requirement had no official
method by which to seek "grace" from the IRS. Over the
past decade or so, an IRS program, called the Employee
Plans Compliance Resolution System (EPCRS) has evolved
which permits the correction of compliance failures
through a self correction program (SCP), a voluntary
correction program (VCP), and an audit closing agreement
program (Audit CAP).
A. The
SCP. An employer that sponsors a tax-qualified plan, a
403(b) plan or a SEP that has established compliance
practices and procedures may correct insignificant and
even significant operational failures through SCP
without paying any fee or sanction.
B. The
VCP. An employer that sponsors a tax-qualified plan, a
403(b) plan or a SEP can correct all qualification
failures–operational, plan document, demographic, and
employer eligibility–by paying a limited fee and
receiving IRS approval for the correction.
C. Audit
CAP. An employer that sponsors a tax-qualified plan, a
403(b) plan or a SEP can correct all qualification
failures found in an IRS audit by correcting the failure
and paying a sanction penalty.
The most
favorable relief available under these programs is
available only to employers who discover their plans
failures prior to an IRS or DOL audit. Therefore,
employers should consider performing a careful
"self-diagnostic" of their plans, and should consult
with counsel about pursuing the appropriate EPCRS
program for any defects discovered in the
"self-diagnostic".
X.
EMPLOYER-PAID AND PLAN-PAYABLE EXPENSES
Although
it is permissible to charge many benefit plan-related
expenses against the assets of the benefit plan, not all
expenses incurred in connection with the establishment,
maintenance and termination of an ERISA-governed plan
may be paid from plan assets.
Generally,
the Plan may pay only direct plan expenses that are
reasonably related to plan administration and authorized
by the plan's governing document. The DOL considers
activities which relate to the formation, design and
termination of a plan as "settlor" functions, and costs
related to these functions must be paid by the employer,
not the plan. Examples of settlor expenses which must be
paid by the employer include plan design studies, plan
amendments to implement plan design changes, expenses
related to negotiating potential plan changes with a
union, and consulting fees paid to analyze an employer's
options in complying with changes in the law.
Examples
of expenses which may be paid from plan assets (assuming
the expenses are reasonable and the plan permits
payment) include drafting amendments to comply with
changes in the law, expenses to compute participant
benefits, most expenses for communication to
participants of changes, additions to plan benefits
(such as an early retirement window), expenses related
to obtaining an IRS determination letter for the plan,
and expenses for routine nondiscrimination testing to
ensure compliance with tax qualification
requirements.
The DOL
has indicated that some expenses may be apportioned
between the plan and the employer because they involve
both settlor functions and administration expenses.
Paying
expenses from the plan is an ERISA fiduciary issue.
Whether the plan or the employer paid specific expenses
should be documented and, if the plan paid the expense,
the rationale permitting the plan to pay the expense
also should be documented.
XI. PLAN
AMENDMENT DEADLINES
A. GUST
Amendments. GUST amendments (and related IRS filings)
for qualified retirement plans using individually
designed documents were required to be made by the later
of February 28, 2002 or the last day of the Plan year
beginning in 2001. (Correction procedures are available
for plans that failed to timely amend (with additional
extensions for plans directly affected by the attacks of
September 11.)
GUST
amendments (and related IRS filings) for qualified
retirement plans using prototype or volume submitter
documents must be made by the later of September 30,
2003 or 12 months after the date the IRS issued the last
GUST opinion or advisory letter to the prototype or
volume submitter sponsor.
B.
Mortality Table Amendments. Individually designed
defined benefit pension plans must adopt the 1994 GAR
mortality table by the last day of the plan year that
includes the effective date of the mortality table
amendment (which can be not later than December 31,
2002). Prototypes and volume submitter defined benefit
pension plans must adopt the 1994 GAR table by the end
of the GUST remedial amendment period discussed
above.
C. EGTRRA
Amendments. EGTRRA amendments to retirement plans using
individually designed documents must be made by the
later of (1) the end of the plan year in which the
change is required to be made or is optionally put into
effect or (2) the end of the GUST remedial amendment
period discussed above (unless the amendment will result
in a cutback in benefits in which case the amendment
must be adopted on or before the first day of the plan
year in which the change is effective or is optionally
put into effect). Note that plans may well have to be
amended again prior to the eventual IRS submission.
(Collectively
bargained plans that are required by EGTRRA to adopt a
faster vesting schedule for matching contributions have
a delayed effective date with respect to that
provision.)
EGTRRA
amendments for retirement plans using prototype or
volume submitter documents must be made by the later of
(1) the end of the plan year in which the change is
required to be made or is optionally put into effect or
(2) the end of the GUST remedial amendment period
discussed above (unless the amendment will result in a
cutback in benefits in which case the amendment must be
adopted on or before the first day of the plan year in
which the change is made). The sponsor may amend the
document to the extent authorized. If the amendment
requires an addendum to the adoption agreement, the
addendum is only effective if signed and dated by the
employer.
(The IRS
submission deadline for EGTRRA amendments is expected to
be in 2005 at the earliest.)
D. Final
and Temporary Minimum Required Distribution Regulations.
Defined contribution plans must be amended to reflect
the MRD Regulations by the end of the 2003 plan year.
Defined benefit plans must be amended by the end of the
EGTRRA remedial amendment period (discussed above).
E.
Special Rules for 403(b) Plans.
GUST -
The remedial amendment period does not apply, so the
403(b) plan must have been amended no later than the end
of the plan year in which a change is required to be
made.
EGTRRA
amendments must be made by the end of the plan year in
which the change is required to be made or is optionally
put into effect (unless the amendment will result in a
cutback in benefits in which case the amendment must be
adopted on or before the first day of the plan year in
which the change is made).
F.
Special Rules for Eligible Plans Under 457(b).
EGTRRA
amendments are not required until final regulations are
issued. However, there may be cutback/contract/employee
relations issues if amendments are delayed
indefinitely.
G.
Welfare Benefit Plans
New
status change rules - The plan may be amended for plan
years beginning on or after January 1, 2001, if the plan
wants to use the new rules.
New
claims procedures (ERISA plans only). (1) Health
Benefits - The later of the first day of the first plan
year beginning on or after July 1, 2002, or January 1,
2003. (2) Other Benefits - January 1, 2002.
HIPAA
Privacy Amendments. (1) April 14, 2003 for plans over $5
million. (2) April 14, 2004 for other plans.
XII.
DELIVERING PLAN DOCUMENTS ELECTRONICALLY
A. SPDs.
An employer may electronically deliver SPDs only to
those employees who have access to a computer in the
workplace or those employees who have affirmatively
consented to receiving benefits information
electronically. For those employees who qualify for the
electronic delivery of SPDs, the employer must ensure
that the employees actually receive the SPDs (e.g.,
using electronic return-receipt).
The
electronically delivered SPD must be consistent with the
style, format and content requirements applicable to
"paper" SPDs, and notice must be provided to the
recipient that tells the recipient of the significance
of the SPD. In addition, the recipient must be informed
of her right to request a paper version of the SPD.
B. HIPAA
Privacy Notices. The electronic delivery rules for HIPAA
privacy notices do not permit electronic delivery to any
employee unless that employee consents in the manner
specified in the regulations.
XIII. AN
UPDATE ON SARBANES-OXLEY
The
Corporate Auditing Accountability, Responsibility and
Transparency Act of 2002 (also known as the
Sarbanes-Oxley Act) was enacted into law on July 30,
2002, primarily to address financial reporting and
corporate governance abuses that have received so much
attention in the last year or so. What some of you may
not be aware of is that the Act also contained a number
of provisions impacting employee benefits and executive
compensation, the more significant of which are
summarized below.
On
October 21, 2002, the DOL issued Interim Final
Regulations on blackout period notices and civil
penalties. On January 23, 2003, the DOL issued Final
Rules and a Model Blackout Period Notice.
Blackout
Periods. Defined contribution plans, such as 401(k)
plans, profit sharing plans and TSAs, sometimes impose
"blackout periods", during which participants are
temporarily suspended, limited or restricted from
directing the investments of their accounts or obtaining
plan loans or distributions. These blackout periods
commonly are imposed when plan service providers are
being replaced and there is a need to freeze temporarily
plan activities in order to facilitate the
transition.
Under the
Act, before any blackout period lasting more than three
consecutive business days may be imposed, plan
administrators must first provide participants with at
least 30 days, but not more than 60 days, advance
written notice of the blackout period, so the
participants have time to take actions with respect to
their plan accounts in advance of the blackout
period.
In
addition, if the plan is sponsored by a publicly traded
company, and if company stock is among the investments
available under the plan, the Act generally prohibits
directors and executive officers (as those terms are
defined under the federal securities laws) from trading
during the blackout period any company stock acquired in
connection with their service to the company.
The
effective date of these blackout period provisions is
January 26, 2003, although it should be noted that the
current fiduciary rules applicable in these situations
continue to apply in the interim.
Loans to
Directors and Executive Officers. The Act prohibits
publicly traded companies from directly or indirectly
extending credit in the form of personal loans to their
directors and executive officers (again, as those terms
are defined under the federal securities laws).
Because
of the uncertainty of the prohibition against loans to
directors and executive officers under Sarbanes-Oxley,
on April 15, 2003, the DOL issued Field Assistance
Bulletin 2003-1. This Bulletin concludes that a plan
administrator can place restrictions on loans to
directors and executive officers without violating the
requirements under ERISA that loans be made available to
all participants on a reasonably equivalent basis.
It is
unclear at this point to what extent certain
arrangements in place before the Act will be exempted,
and what types of modifications can be made to in-place
arrangements without causing them to lose their exempted
status. For example, even if a split dollar arrangement
had been entered into years ago, post-July 2002 premium
payments may not be permitted because they may be
characterized as "loans" under the Act. We urge our
publicly traded clients to contact us before making any
further premium payments into a split dollar life
insurance policy for a director or executive officer,
before arranging a "cashless exercise" by a director or
executive officer of his or her stock options, or before
modifying the terms of any outstanding loan made to a
director or executive officer.
Section
16 Reporting by Insiders. Before Sarbanes-Oxley, Section
16(a) of the Securities Exchange Act of 1934 required
"insiders" (i.e., generally officers and directors) to
report changes in beneficial ownership in the employer's
securities after the close of the calendar month in
which the change occurred, on a Form 4. Some
transactions needed to be reported only on an annual
basis (Form 5) rather than on a monthly basis (Form
4).
As you
might imagine, the above is only a very general
description of the more significant employee
benefits/executive compensation provisions of the Act.
The legislation is complex and very detailed (e.g.,
providing express requirements for what the blackout
notice may contain, etc.), and it leaves unresolved many
important issues. We strongly urge you to contact us
before acting on any of the above.
XIV. A
CHECKLIST FOR SIMPLIFYING PLAN ADMINISTRATION
A. Use of
"Wrap Plans". Many employers have greatly simplified
their health and welfare benefit plan operations by
implementation of a "wrap plan" to consolidate all of
their health and welfare benefit programs into a single
plan. (In addition to the ERISA required plan document,
the following also would be capable of consolidation
using this wrap plan approach: the Summary Plan
Description, Election Form, Status Change Form, COBRA
Forms, Certificate of Coverage, Notice of Special
Enrollment Rights, Health and Dependent Care
Reimbursement Request Form, the Notice of Health
Information Privacy Practices and such other forms as
are needed by the design of the "wrap document's"
constituent programs. Some of the primary benefits that
use of the “wrap” approach will achieve are:
Legal
Compliance and Protection. The separate documents
governing the several programs prior to their
consolidation often are served up by a non-lawyer vendor
(e.g., an insurance company), which has little interest
or expertise in achieving maximum liability protection
for the employer. These documents typically are drafted
by the insurer to comply with state laws, but typically
do not include all of the provisions required under
federal laws, such as ERISA. By the use of a "wrap
document", which contains legal language governing the
delivery of each benefit provided under the "wrap", an
employer is assured of an expertly prepared document
which complies with applicable law (tax laws, ERISA,
nondiscrimination laws, etc.) and which provides maximum
legal liability protection to the employer. Also, when
changes in the law occur, such as the rather profound
changes that were brought about by HIPAA ‘96, only one
document (i.e., the wrap document) needs to be amended
to reflect the changes. The documents provided by the
insurers would be attached to the wrap plan document, as
component plans of the wrap plan.
The other
documents included as part of the wrap document package
(i.e., the Summary Plan Description and administrative
forms) also are tailored to protect the employer to the
maximum possible extent and to comply with current law.
Again, any summaries provided by insurers or third party
administrators are attached to the wrap plan summary
plan description as component summary plan
descriptions.
Integration.
The wrap document streamlines an employer's
administrative processes by integrating the various
benefits, plan years, election periods and other benefit
variables into one "holistic" administrative process, so
that an employee need only look to one place to learn of
the employee benefits offered by the employer (i.e., the
wrap document's Summary Plan Description), would only
use one election form for the variety of benefits
offered by the employer, would have one election period
for selecting all benefits offered by the employer, and
the like. The wrap document avoids the employee
confusion that often is created as a result of different
plans using different or inconsistent terms.
Form
5500. The integration of the benefits formerly offered
separately into one wrap document permits the employer
to use one Form 5500 for the entirety of the benefits
provided under the wrap plan, in lieu of preparing a
separate Form 5500 for each such benefit. This
substantially reduces reporting complexity and costs for
the employer -- with the most substantial cost savings
typically flowing from the ability to obtain only one
set of accountant prepared audited financial statements,
rather than separate audited statements for each
program.
Due
Diligence. As an incidental benefit, in the process of
preparing the wrap document, each of the programs
consolidated into the wrap document receives a fairly
thorough legal compliance review by us where we
participate in the conversion. This sometimes leads to
the discovery of past compliance deficiencies for which
we can recommend correction strategies, and also
sometimes leads to the discovery of tax and/or cost
inefficiencies for which we can recommend
improvements.
B.
Modification of the Definition of Disability in
Retirement Plans. The Department of Labor recently
announced that the new, more stringent disability plan
claims and appeal procedure regulations apply not only
to disability plans but also to the "disability
portions" of qualified and nonqualified retirement
plans, except retirement plans that refer to external
determinations of disability to determine whether a
participant is entitled to disability benefits under the
plan.
(Often, a
qualified plan or a nonqualified plan will grant special
rights to a plan participant who terminates employment
because of disability, such as immediate vesting,
accelerated distributions, or the right to an allocation
under the plan, even though the participant has not
otherwise satisfied the plan’s normal requirements.)
Under
this DOL interpretation, retirement plans that provide
that the retirement plan administrator will determine
whether a participant is disabled and therefore entitled
to a retirement plan benefit (or other right) under its
disability provisions (either in all cases or in
"default" cases such as where the participant does not
participate in a referenced external source plan) must
be amended to reflect the new, more stringent
regulations.
On the
other hand, retirement plans that refer exclusively to
an external source -- such as the determination
concerning disability made under the employer's
disability plan or to a determination of disability made
by the Social Security Administration -- do not need to
be amended to reflect the new, more stringent
regulations.
Most of
our clients who have considered this issue have decided
to amend their qualified and nonqualified retirement
plans to use an external disability determination,
rather than to amend their plans to include the more
stringent regulations. [Note that these rules do not
impact retirement plans not subject to ERISA (e.g.,
church plans and governmental plans).]
C. Same
Desk Rule. EGTRRA eliminated the extremely troublesome
“same desk rule” that often played havoc with employer
attempts to effect distributions in corporate
transaction situations. Employers maintaining plans
currently holding assets attributable to former
employees with respect to whom the “same desk rule” has
prevented distributions should now review opportunities
to make distributions to these former employees.
D.
Elimination of Optional Forms of Benefit. EGTRRA also
reformed the “anti-cutback” rules by permitting defined
contribution plans to eliminate most optional forms of
benefit distributions, e.g., following plan mergers and
similar events.
E.
Cash-out of Benefits Valued at $5,000 or Less.
Typically, a retirement plan will provide for the
automatic distribution of a benefit or account balance
under the plan that is valued at $5,000 or less.
Employers should review the value of benefits and
accounts of former employees and beneficiaries each year
and take advantage of this plan provision to avoid the
cost and administration for these small benefits and
accounts.
XV. ADA
REASONABLE ACCOMMODATION ROAD MAP
The goal
of the ADA is to provide equal access and opportunities
to individuals with disabilities, not to give them an
unfair advantage. The hallmark of this goal is the
principle of “reasonable accommodation”. Reasonable
accommodations are adjustments or modifications provided
by an employer to enable people with disabilities to
enjoy equal employment opportunities. Accommodations
vary depending upon the needs of the individual
applicant or employee. Not all people with disabilities
(or even all people with the same disability) will
require the same accommodation.
An
employer must provide a reasonable accommodation if a
person with a disability needs one in order to apply for
a job, perform a job, or enjoy benefits equal to those
offered to other employees. An employer does not have to
provide any accommodation that would pose an “undue
hardship”. An undue hardship means that providing the
reasonable accommodation would result in significant
difficulty or expense, based on the employer’s resources
and the operation of the employer’s business. If
providing a particular accommodation would result in
undue hardship, an employer must consider whether there
might be another accommodation that would not pose such
a hardship.
Regardless
of cost, an employer is not required to provide an
accommodation that would pose significant difficulty in
terms of the operation of its business. In addition to
actions that would result in undue hardship, an employer
does not have to provide an employee with an adjustment
or modification that would assist the individual both on
and off the job, such as a prosthetic limb, wheelchair,
or eyeglasses. Moreover, an employer need not remove or
alter a job's essential functions; lower production or
performance standards; or excuse violations of conduct
rules necessary for the operation of the employer’s
business.
An
employer generally does not have to provide a reasonable
accommodation unless an individual with a disability has
asked for one. A request can be a statement in "plain
English" that an individual needs an adjustment or
change in the application process or at work for a
reason related to a medical condition. The request does
not have to include the terms "ADA" or "reasonable
accommodation," and the request does not have to be in
writing, although an employer may ask for a something in
writing to document the request. A family member,
friend, health professional, rehabilitation counselor,
or other representative also may request a reasonable
accommodation on behalf of an individual with a
disability. (By way of example, a doctor's note
indicating that an employee can work "with restrictions"
is a request for a reasonable accommodation.)
Once a
reasonable accommodation is requested, the employer and
the individual should discuss his/her needs and identify
the appropriate reasonable accommodation. Where more
than one accommodation would work, the employer may
choose the one that is less costly or that is easier to
provide. This "interactive process" is perhaps the
single greatest focus of the EEOC in its evaluation of
reasonable accommodation issues. In short, the EEOC
expects that the employer and the employee or applicant
will talk about the request for a reasonable
accommodation, especially where the need for the
accommodation might not be obvious. Any and all such
conversations should be carefully and thoroughly
memorialized in writing.
If the
need for an accommodation is not obvious, an employer
may ask for documentation describing the individual's
disability and why the requested accommodation is
needed. Such document requests may include information
regarding the type of impairment the individual has, and
how the impairment limits a major life activity (like
sitting, standing, performing manual tasks, or
sleeping).
The ADA
does not require an employer to have a particular type
of procedure in place for providing reasonable
accommodations. However, for the sake of consistency, it
may be useful under certain circumstances to adopt
written procedures for providing reasonable
accommodations. With or without written procedures, the
EEOC expects an employer to:
a.
Develop time frames within which accommodations
generally will be provided, remembering that employers
must respond promptly to a request;
b. Keep
lines of communication open, particularly when it will
take longer than expected to provide an accommodation or
when an employer needs more supporting documentation
from the individual;
c. Use
outside resources to identify and provide reasonable
accommodations; and
d.
Explain its decision to the an applicant or employee so
that s/he understands why the employer denied a
requested accommodation.
There are
many accommodations that enable individuals with
disabilities to perform successfully the essential
functions of their jobs. In general, though, these
accommodations can be grouped into the categories of
equipment; accessible materials; changes to the
workplace; job-restructuring; working at home; modified
work schedules; leave; policy modifications; modifying
supervisory methods; and reassignment.
XVI. AN
UPDATE ON FMLA DEVELOPMENTS
A.
California Paid Leave. California's paid leave
legislation, enacted this past fall, provides employees
with six weeks of paid family leave over a twelve month
period. The leave is to be funded by an increase in
employee contributions to the State Disability Insurance
Fund. Leave is available for the birth or adoption of an
employee's child, birth or adoption of a child by an
employee's domestic partner, or for an employee to care
for a seriously ill spouse, domestic partner, parent or
child. California's paid leave measure will begin in
2004, and it applies to all employers regardless of
size.
B.
Proposed Expansion of FMLA. Senator Christopher Dodd
(D-Conn.) recently introduced a bill (S. 304) that would
expand the Family Medical Leave Act to employers with
twenty-five or more employees, which would lower the
threshold from the current fifty employees.
C.
Judicial Developments.
Doe v.
USPS, D.C. Cir., No. 01-5395, Feb. 7, 2003. In Doe, the
Court held that due to medical privacy concerns, a
postal worker's HIV status which was revealed to his
coworkers following his submission of medical
certification for FMLA leave enabled him to sue his
employer.
Dodaro v.
Glendale Heights, N.D. Ill., No. 01C6396, March 28,
2002. In Dodaro, the court held that the employer's
failure to include in its FMLA policy its method for
calculating employee FMLA-eligibility rendered its FMLA
policy ineffective.
Smith v.
Diffee Ford-Lincoln-Mercury, Inc., 2002 WL 1753175 (10th
Cir. 2002). While on FMLA leave, the employer discovered
that the employee, as per her job requirements, had
failed to adequately train another employee, which
subsequently cost the employer substantial revenue. The
employer fired her while she was on FMLA leave. The
Court of Appeals affirmed the jury verdict for the
employee in the amount of $62,785 in backpay and
interest, concluding that when an employee on FMLA leave
is terminated, the employer maintains the burden of
proving that the person would have been dismissed
regardless of the employee’s request for FMLA leave.
Spangler
v. Federal Home Loan Bank of Des Moines, 278 F.3d 847
(8th Cir. 2002). In Spangler, the court held that a bank
employee’s voice mail message to her employer stating
“depression again” was a potentially valid request for
medical leave.
Woodman
v. Miesel Sysco Food Serv. Co., Mich Ct. App., No.
226001, 11/26/02. A truck driver was awarded
approximately $59,000 in damages when he was fired for
taking 10 days off from work while awaiting a stress
test to determine the cause of his chest pains. The
court found that he had a “serious health condition”
even though the test revealed no heart condition and he
was released for work the next day.
D.
Employer Audits. Employers should audit their current
FMLA policies and procedures to ensure that such
policies and procedures comply with the FMLA
regulations. Questions to ask include:
1. Are
proper and timely notices being provided?
2. Are
employee leave requests getting to the right person?
Employers
must establish written polices and adhere to them. At a
bare minimum, polices should address:
1.
Employee eligibility for FMLA leave;
2. How
FMLA leave will be measured (e.g., calendar or rolling
basis);
3. The
criteria to be used in intermittent or reduced leave
situations;
4. The
criteria used to determine when re-certifications and
fitness-for-duty certifications will be required;
5. A
statement that the employer will require any paid leave
to run concurrently with FMLA; and
6. How
the employer will handle employee contributions to
medical insurance.
XVII. A
CHECKLIST FOR HARASSMENT COMPLIANCE
Title VII
of the Civil Rights Act of 1964 (“Title VII”) prohibits
employment discrimination based on race, color,
religion, national origin. Every aspect of the
employment relationship is covered by Title VII,
including hiring, promotions, salary, benefits, job
assignments, transfers, and terminations. The purpose of
Title VII is not to mandate preferential treatment for
protected employees; instead, it is to ensure that all
employees are treated neutrally.
Like all
federal employment-related Civil Rights laws, Title VII
prohibits an employer from retaliating against an
employee who asserts his/her rights under Title VII.
Accordingly, an employer who retaliates against an
employee raising Title VII concerns will violate Title
VII even if the underlying concerns prove to be
unfounded.
The Need
For a Sexual Harassment Policy: No single labor and
employment issue has received more publicity in the past
10 years than sexual harassment. The attention is well
deserved, as the 1990's saw a dramatic, unprecedented
rise in sexual harassment claims. For example, in 1986
there were less than 4,500 harassment claims filed with
the EEOC; ten years later, the EEOC received 15,500
claims of harassment. This increase can be attributed in
large part to the Civil Rights Act of 1991, which
amended Title VII to allow jury trials, compensatory
damages and punitive damages in an amount up to
$300,000.00. With this new potential for blockbuster
damage awards, there has been an increase in the number
of attorneys willing to represent employees in
harassment claims.
Win or
lose, the costs associated with defending against
harassment claims can be staggering. Successful
employers spend on the average in excess of one hundred
thousand dollars ($100,000.00) in their efforts to
defeat a claim of sexual harassment. Employers who
litigate and lose sexual harassment claims not only
incur their own defense costs, they also must face the
possibility of back pay, front pay, interest, the cost
of an employee’s lost benefits, the employee’s
attorney’s fees, as well as compensatory and punitive
damages. In light of these costs and risks, it is
absolutely imperative that employers take strong
prevent1ative measures against harassment in the
workplace.
In 1998,
the Supreme Court provided considerable guidance to
employers seeking protection from the harsh consequences
of sexual harassment litigation. In two landmark cases —
Faragher v. City of Boca Raton and Burlington Industries
v. Ellerth — the Court set forth the following standard
for holding employers liable for supervisory harassment:
“An
employer is subject to vicarious liability to a
victimized employee for an actionable hostile
environment created by a supervisor with immediate (or
successively higher) authority over the employee. When
no tangible employment action is taken, a defending
employer may raise an affirmative defense to liability
or damages, subject to proof by a preponderance of the
evidence. The defense [requires] two necessary
elements:
(a) that
the employer exercised reasonable care to prevent and
correct promptly any sexually harassing behavior, and
(b) that
the plaintiff employee unreasonably failed to take
advantage of any preventive or corrective opportunities
provided by the employer or to avoid harm otherwise.
While
proof that an employer had promulgated an
anti-harassment policy with complaint procedure is not
necessary in every instance as a matter of law, the need
for a stated policy suitable to the employment
circumstances may appropriately be addressed in any case
when litigating the first element of the defense. And
while proof that an employee failed to fulfill the
corresponding obligation of reasonable care to avoid
harm is not limited to showing any unreasonable failure
to use any complaint procedure provided by the employer,
a demonstration of such failure will normally suffice to
satisfy the employer’s burden under the second element
of the defense. No affirmative defense is available,
however, when the supervisor’s harassment culminates in
a tangible employment action, such as discharge,
demotion or undesirable reassignment.” (Emphasis
supplied.)
At first
glance, the Supreme Court’s standard appears to be a
foreboding one, as it deprives employers of all
affirmative defenses in those instances where a
supervisor’s harassment leads to a tangible employment
detriment for the harassed employee. In light of this
strict liability standard, employers should establish
safeguards to ensure that employment decisions such as
terminations, suspensions, demotions, transfers, etc.,
are screened by management officials other than the
supervisor of the affected employee.
However,
with respect to supervisory harassment that does not
culminate in a tangible employment loss, the Supreme
Court has set forth a refreshingly clear road map to
employers seeking protection from costly harassment
litigation. Specifically, employers must establish a
carefully crafted sexual harassment policy “suitable to
the employment circumstances” of their workplace.
Employers should avoid “cookie cutter” policies drafted
on a generic basis or for other companies; instead,
employers should thoroughly evaluate the nuances and
personality of their own particular work places, and
then develop a policy which best addresses their
situations.
A
well-crafted sexual harassment policy will, at a
minimum, include the following information:
a. A
strong, unequivocal statement of the employer’s
opposition to harassment in the workplace.
b. A
clear definition of sexual harassment.
c. Clear
procedures for reporting allegations of harassment.
d. An
overview of the procedures for handling harassment
complaints.
e. A
statement of the sanctions that will be imposed upon an
employee that violates the employer’s sexual harassment
policy.
f. An
assurance that employees filing harassment claims will
not suffer retaliation as a result of their complaint.
g. An
internal appeal procedure in the event an employee is
dissatisfied with the outcome of an harassment
investigation.
Prohibiting
other unlawful harassment. Although sexual harassment is
the most visible form of unlawful harassment, state and
federal law prohibit harassment on the basis of any
protected classification. Accordingly, in addition to a
sexual harassment policy, an employer must also adopt a
separate policy addressing harassment on the basis of
race, national origin, disability, age, etc.
XVIII.
DEALING WITH FLSA OVERTIME ISSUES
The Fair
Labor Standards Act (“FLSA”) establishes the standards
for minimum wages, overtime pay, recordkeeping, wage
deductions, child labor and calculation of hours. The
FLSA requires that employers pay time and one-half the
employee’s regular rate of pay for all hours worked in
excess of 40 in a workweek. The “regular rate” is
defined as an hourly rate roughly equal to an employee’s
straight time earnings divided by the number of hours
worked.
The FLSA
contains specific exemptions from both the minimum wage
and overtime provisions of the Act for certain
employees. These exemptions are identified as the
executive, professional and administrative exemptions or
the “white-collar exemptions.”
In order
to be considered “exempt”, an employee must be paid on a
salary basis. In other words, an employee must receive
his or her full salary for any week in which the
employee performs work, regardless of hours worked or
days worked, unless:
(1) The
employee is absent form work for a day or more for
personal reasons other than sickness or disability;
(2) The
employee is absent for a day or more because of sickness
or disability and a deduction is made in accordance with
a bona fide plan, policy or practice of the employer;
or
(3) The
employer imposes a penalty for a major safety
infraction.
In order
to qualify for the "executive exemption" under the FLSA,
the employee must be:
(1) Paid
on a salary basis;
(2) Paid
more than $250.00 per week;
(3) Spend
a majority of their time involved in management
activities, exercising discretion and independent
judgment; and
(4)
Supervise at least two full-time employees.
In order
to qualify for the "professional exemption" under the
FLSA, the employee must be someone who has acquired
knowledge through a prolonged period of learning,
and:
(1) Paid
at least $250 per week;
(2) Paid
on a salary basis; and
(3)
Exercise discretion and independent judgment in a
position requiring knowledge of an advanced type.
In order
to qualify for the "administrative exemption" under the
FLSA, the employee must be:
(1) Must
be paid at least $250 per week;
(2) Paid
on a salary basis;
(3)
Undertake as primary duties the performance of office or
non-manual work directly related to the management
policies or general business operations of the employer;
and
(4)
Perform work that requires the exercise of discretion
and independent judgment.
Employers
should conduct a FLSA audit on an annual basis. An
employer's audit should include:
(1) A
review of all personnel and payroll policies that may
impact the salary basis test;
(2) A
review of job descriptions and the exempt status of all
employees; and
(3)
Training the appropriate employees to recognize
situations that may comprise compliance with the
FLSA.
Proposed
Legislation: The Department of Labor has recently
proposed an overhaul of the wage and hour regulations
for classifying executive, administrative and
professional employees. Some of the proposed changes
include:
(1) An
increase in the minimum weekly salary to $425.00 per
week;
(2) The
creation of an entirely new salary test for those
employees who perform office or non-manual work and are
guaranteed a salary of at least $65,000.00 per year;
(3) The
deductions from exempt employees' salaries for full-day
absences for disciplinary reasons;
(4)
Clarification of the "window of correction". An
employer's policies would be reviewed to look for a
"pattern and practice" of improper deductions. If an
employer made an inadvertent deduction, but subsequently
rectified the matter, then it would not lose the exempt
status for the employee;
(5) The
"duties" tests for the exemptions will be streamlined;
and
(6) Under
the administrative exemption, the requirement that
workers exercise discretion and independent judgment
would be dropped.
In
addition, the House Education and Workforce Committee
approved the Family Time Flexibility Act (H.R. 1119) on
April 9, 2003. A full House vote is expected on May 11.
Under the bill, private employees would be permitted to
receive "compensatory time" in lieu of overtime.
Currently, only government employees may accept
compensatory time in lieu of pay. The bill proposed the
following specific requirements:
(1)
Employees would receive one and a half hours of
compensatory time for every hour of overtime worked;
(2)
Employees wishing to receive compensatory time would
have to enter into a written agreement with the
employer;
(3)
Employees could accrue no more than 160 hours of
compensatory time per year; and
(4) Any
unused compensatory time must be "cashed out" by January
31 of the following year.
