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Employee Benefits and Executive Compensation in the New Year -2012 Resolutions

January 3, 2012


With the New Year upon us, employers should survey the regulatory landscape to prepare for the year ahead in employee benefits and executive compensation.  Employers must resolve to focus on three areas in 2012 –

  • Code section 162(m) compliance of compensation plans and practices
  • 401(k) Fee Disclosure
  • Summary of Benefits and Coverage for group health plans

Code Section 162(m) Compliance

     Can you deduct your CEO’s performance compensation?

Under Code section 162(m), public companies can only deduct up to one million dollars in “applicable employee remuneration” paid to certain executives.  However, “applicable employee remuneration” does not include performance-based compensation as defined by the Code and Treasury Regulations.  Maximizing a public company’s ability to compensate its executives and deduct their performance based compensation can be tricky.  To satisfy Code section 162(m), performance goals must be set –

  • Within the first 90 days of the performance cycle
  • Before 25% of the performance cycle has elapsed
  • At a time when it is not substantially certain that the goals will be attained

Performance goals may be adjusted before the end of the performance cycle, but certain adjustments beyond the performance cycle may jeopardize the deductibility of the related compensation.  Public companies must be wary of the exercise of impermissible discretion when making such changes to performance goals.

Alternatively, public companies can maximize their flexibility in granting awards by adopting an “umbrella” design which sets a large maximum award amount, but enables the public company to reduce award amounts through the use of negative discretion.

     2012 Resolutions

In 2012, public companies should adopt procedural safeguards to increase awareness of and compliance with Code section 162(m) such as:

  • Establishing an intra-company program to educate select persons about the requirements of Code section 162(m)
  • Including confirmation of Code section 162(m) compliance as a formal step in the company’s procedures for granting performance compensation
  • Limiting the authority to negotiate and enter individual employment arrangements to a small group of select persons trained in Code section 162(m) compliance

401(k) Fee Disclosure

     Are you ready?

While there have been some efforts by industry groups to push back the May 31, 2012 deadline for meeting the new participant level 401(k) fee disclosure requirements, the DOL has not budged.  May 31, 2012 is fast approaching and plan fiduciaries must be ready to satisfy the new requirements.   Plan administrators of 401(k) plans and other participant-directed defined contribution plans must provide participants with current descriptions of certain plan related information,
including –

  • Available investment alternatives and a list of brokerage windows or other similar arrangements that allow participants to select investments outside of the specific investments designated by the plan
  • Certain fees and expenses relating to the administration of the plan
  • Participant level individual expense information (such as a loan processing fee)

Plan administrators must also provide current descriptions of certain investment related information, including –

  • Fees and expense information for each investment alternative
  • Specific data regarding historical investment performance
  • Benchmark information for investment options that do not have a fixed rate of return

Compliance with these new disclosure requirements is not a mere regulatory requirement.  Congress and the IRS saw fit to make these new disclosure requirements part of a fiduciary’s statutory duties under ERISA.  Failure to satisfy these new rules could be a breach of the fiduciary’s duties exposing the plan administrator to fiduciary liability under ERISA.

2012 Resolutions

During the first quarter of 2012, plan fiduciaries should take the following steps to prepare for the May 31, 2012 deadline –

  • Allocate responsibilities between the plan and its service providers
  • Familiarize themselves with the information they should receive from their providers and determine the appropriate deadlines for their plans
  • Develop a strategy to communicate the information to participants

Summaries of Benefits and Coverage for Group Health Plans

     When must SBCs be provided? Soon, but not yet.

Employers that sponsor group health plans should plan to comply with this new disclosure requirement imposed by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, together popularly known as Health Care Reform.    Both self-insured health plans and insured group health plans (both grandfathered and non-grandfathered) must provide SBCs to participants and beneficiaries.

  • The plan sponsor or designated plan administrator of a self-insured group health plan must provide the SBC.
  • For insured plans, the insurer and the plan are jointly responsible for providing the SBC.  If either entity provides the SBC, the requirement will be satisfied for both, provided the timing and content requirements are otherwise met.

SBCs do not replace Summary Plan Descriptions.  Plan administrators must also provide the usual Summary Plan Description.

The current deadline for providing an SBC is March 23, 2012, but the Department of Labor has indicated in guidance that it is working to finalize its proposed regulations on SBCs, and as a result, insurers and plans are not yet required to comply with this requirement.

Penalties of up to $1,000 can be imposed against a plan administrator or insurer that willfully fails to provide an SBC.  Each failure to provide an SBC to an individual or entity is a separate violation.  Plan sponsors will also generally be subject to an excise tax under IRS section 4980D of up to $100 per day, per affected individual, unless certain exceptions apply.  The DOL has indicated that it plans to issue separate penalty regulations.

2012 Resolutions

Regardless of whether a plan is self-insured or fully insured; or, grandfathered or non-grandfathered, employers should take the following steps during the first quarter of 2012 –

  • Determine the number of benefit packages offered under each of the employer’s plans to ascertain how many SBCs must be prepared and distributed
  • Make contractual arrangements with insurers or TPAs, including appropriate indemnification language, regarding who will prepare and distribute the SBCs
  • Begin preparing distribution address lists
  • Assess whether, and the extent to which, the SBCs can be distributed electronically