Smoke ‘Em One By One … Navigating the Wave of Tobacco Surcharge Lawsuits

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by Alex Smith

Over the past several months, numerous large employers and their health plan fiduciaries have faced lawsuits regarding their health plan’s tobacco surcharge. A tobacco surcharge wellness program typically charges a higher monthly premium to employees and covered dependents who smoke or otherwise use tobacco products to account for some of the higher medical costs associated with tobacco use. Tobacco users can typically avoid the surcharge by completing a smoking cessation program, regardless of whether they actually quit.

This wave of putative class action lawsuits began earlier this year even though employer health plan tobacco surcharges have been around for years and the HIPAA regulations permitting the surcharges were last updated in 2013. Since then, numerous lawsuits challenging employer health plan tobacco surcharge programs have been filed. Courts have yet to rule on the recently filed lawsuits, with the plaintiffs voluntarily dismissing one of the lawsuits prior to the court ruling on the employer’s motion to dismiss. Read more

Everything Counts in Large Amounts…2025 IRS Limits Announced

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by Lyn Domenick

The IRS has announced the 2025 cost of living adjustments to qualified plan limits. Below are the highlights, and our full historical chart can be found here for easy reference. Read more

Heads California, Tails Carolina… Employer Considerations Following Wave of 401(k) Forfeiture Lawsuits

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by Alex Smith

Over the past year, numerous employers and their 401(k) plan fiduciaries have faced lawsuits regarding how forfeited employer contributions to their 401(k) plan are utilized.  This wave of lawsuits began approximately a year ago when a plaintiff’s law firm filed putative class action lawsuits raising this novel claim against multiple large employers, including Intuit, Clorox, and Thermo Fisher Scientific in California federal courts.  Since then, this claim has been included in numerous 401(k) plan lawsuits even though none of these lawsuits have reached a final judgment on the merits and only five have had decisions on motions to dismiss.

These lawsuits allege that the employer and its 401(k) plan fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), by using forfeited employer contributions to the 401(k) plan to offset future employer contributions instead of using the forfeited amounts to offset 401(k) plan expenses that were charged to participant accounts.  The plaintiff’s counsel alleges that the employer and 401(k) plan fiduciaries are violating ERISA’s fiduciary requirements to make decisions for the benefit of plan participant because the employer benefits from a reduction in its future employer contributions at the expense of plan participants who have to pay for certain expenses that are charged to their 401(k) accounts. Read more

Vacation, All I Ever Wanted – But Don’t Forget Your July Compliance Deadlines

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by Benjamin Gibbons

Congratulations! You made it to summer, that wonderful time of year when things at work (hopefully) slow down a bit and you’re able to take some well-deserved time off. Though before you Go-Go(‘s) (do you see what I did there?), be sure your July employee benefits compliance deadlines are covered.

July 29 – Summary of Material Modifications (SMM) – Were any of your organization’s plans materially amended last year? If so, you may be required to furnish an SMM to participants (or a revised summary plan description). Those SMMs must be provided no later than 210 days after the end of the plan year in which the change was adopted. So, for a 2023 change, the SMM deadline would fall on July 29 (you get an extra day this year because 210 days falls on July 28, a weekend). Read more

Never Make Your SPD Move Too Soon… or Should You?

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by Lyn Domenick

As the late, great B.B. King would sing, never make your move too soon. That’s often a smart approach in life. But when it comes to employee benefits communications, that might not be the right advice. The recent legislation known as SECURE 2.0 has a delayed deadline for retirement plan amendments. Generally, for a calendar year retirement plan, the SECURE 2.0 amendment deadline is December 31, 2026; collectively bargained plans have until December 31, 2028, and governmental plans have until December 31, 2029. However, many of the relevant SECURE 2.0 provisions may already be in effect now—or will be very soon—in your plan. What are the plan sponsor’s obligations regarding communicating the SECURE 2.0 changes to employees?

In general, a plan sponsor must either update its Summary Plan Description (SPD) or issue a Summary of Material Modifications (SMM) to employees by no later than 210 days following the end of the plan year in which a retirement plan change is adopted. For a calendar year plan, that is typically July 29th following the plan year of the change (July 28th this year due to leap year). For example, if you made any plan amendments in 2023, you should issue an updated SPD or SMM by July 28, 2024. Read more

ERISA, ERISA…Just an Old Sweet Song Keeps ERISA on my Mind

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by Becky Achten

“Georgia” on your mind? As we look towards the upcoming Masters golf tournament weekend, our minds turn to the condition of the greens (exquisite), the players tee off order (does afternoon help or hinder Tiger on an expected rainy day?), and who will make that amazing chip shot out of the bunker to save par. It may not get quite the level of TV viewership of other sporting events, but benefit plan administration is a lot like golf: a series of pars, birdies and bogies, and—oh my, not a double bogie!

If you’re hitting par with your benefit plans, they’re operating smoothly, participants are happy with the offerings, and you’re in compliance with the most obvious regulations. All is good, but you probably won’t earn a green jacket. Read more

Go Your Own Way (Or Maybe Not): New Heightened Fiduciary Standards are Coming to Group Health Plans

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by Bret Busacker

There has been a shift taking place in ERISA litigation and compliance that could significantly impact group health plan fiduciary requirements. We anticipate group health plan fiduciary standards will evolve along the same lines as what occurred in the 401(k) industry after the ERISA 408(b)(2) rules became effective in 2012.

401(k) plans for years have been subject to fee disclosure and relatively well-defined fiduciary standards of conduct. Much of the improvement in 401(k) fiduciary practices over the past decade can be attributed to the ERISA 401(k) fee disclosure requirements that went into effect in 2012 under ERISA 408(b)(2) and the resulting fee litigation fueled by the ERISA 408(b)(2) fee disclosure rules. As a result of the ERISA 408(b)(2) and the related litigation, employers and plan fiduciaries, often with the aid of counsel, have become significantly more proficient in monitoring fees and negotiating agreements with 401(k) plan TPAs and investment service providers.

The Consolidated Appropriations Act (CAA) in 2021 extended the ERISA 408(b)(2) fee disclosure requirements to group health plans. Based on what took place in the 401(k) industry after 2012 when the ERISA 408(b)(2) disclosure went into effect, we anticipate the ERISA 408(b)(2) fee disclosure requirement, now also applicable to group health plans, will make it easier for plan participants to bring breach of fiduciary duty claims against employer and plan fiduciaries. There are already several such cases currently making their way through the courts.

In addition to the ERISA 408(b)(2) fee disclosure requirement, group health plan fiduciaries now have a better line of sight into the structure and economics of their group health plans than ever before. This insight comes in the form of a series of new disclosure requirements that require plans to obtain and publish network and out of network payment rates, and to report plan drug and service cost information to HHS. Further, the CAA now requires employers to prepare periodic reports demonstrating compliance with the Mental Health Parity rules. These new rules give employers and plan fiduciaries unprecedented leverage with their service providers through increased transparency and improved awareness of the structure and economics of their group health plans.

With this greater knowledge and understanding comes more risk of criticism that an employer or plan fiduciary could have looked closer—and should have looked closer—at fees and plan design in carrying out their fiduciary responsibilities. We think these new group health plan transparency and disclosure rules will drive new litigation against group health plan fiduciaries similar to what occurred in the retirement plan industry after ERISA 408(b)(2) became effective for 401(k) plans.

Employers and plan fiduciaries should be considering now how to formalize appropriate compliance structures to ensure that reasonable fiduciary standards are being applied to group health plan administration. Our general recommendation is to adopt similar group health plan governance structures and practices that are now common in 401(k) plan administration. These governance structures may take on different forms than what we see in the 401(k) industry, but employers should be thinking now how best to match step with the shifting fiduciary standards applicable to group health plans.

You Live, You Learn… Correcting “Qualification Failures” under the Self-Correction Program

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by Leslie Thomson

 The Employee Plans Compliance Resolution System (“EPCRS”), as set forth in Revenue Procedure 2021-30, allows plan sponsors to correct “Qualification Failures,” which are defined as any plan document, operational, demographic or employer eligibility failures. Failure to follow the terms of a plan constitutes an operational failure.

Operational Failures can be corrected without IRS supervision under the Self-Correction Program (“SCP”) of EPCRS without paying a fee or sanction in two circumstances: (1) insignificant operational defects can be corrected at any time, even if the plan is under an IRS audit; and (2) significant operational defects can be corrected by the end of the third plan year following the plan year in which the defect arose. EPCRS summarizes the factors a plan sponsor may use to determine if a failure is insignificant or not. Moreover, SCP is only available if the plan sponsor has established practices and procedures reasonably designed to promote and facilitate overall compliance with applicable Internal Revenue Code requirements, and the failure occurred through an oversight or mistake in applying the procedures or because the procedures were not sufficient to prevent the occurrence of the failure. Read more

Deferred Compensation Arrangements for Non-Profits: What I’ve Felt, What I’ve Known, Is Not Consistent with the Code

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by Benjamin Gibbons

Deferred compensation options for executives of tax-exempt entities are often misunderstood by those organizations who have not previously delved into them. Traditional tax-exempt organizations – think charities and non-profits – are subject not only to the deferred compensation rules of Section 409A of the tax code, but also Section 457 (though note that Section 457 does not apply to deferred compensation arrangements of churches). Section 457-subject organizations without deferred compensation experience are often under the impression that they are able to establish deferred compensation arrangements that are similar to those of for-profit entities, in that the right to deferred compensation can vest now and be taxed at a later date. When such organizations begin moving forward to put a deferred compensation arrangement place, they are often surprised to learn that Section 457 generally limits their ability do so.

The most analogous deferred compensation arrangement for tax-exempt executives compared to a traditional for-profit deferred compensation plan is what’s generally known as a Section 457(f) plan. While there are a number of differences between a Section 457(f) plan and a for-profit deferred compensation plan, the biggest is the timing of the taxation of the deferred compensation. A for-profit deferred compensation plan can be designed so that once the right to deferred compensation vests, it can be taxed (for income tax purposes) on the date that it is paid, which can be many years in the future. With a Section 457(f) plan, once the deferred compensation vests, it becomes immediately taxable, even if the plan provides for payment of the deferred compensation in a future year. Read more

A Change Would Do You Good, But Do The Section 125 Cafeteria Plan Rules Permit It?

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by Elizabeth Nedrow

Inevitably, an employee will wake up from their holiday food coma and realize that they made a mistake in open enrollment. “But I didn’t mean to elect family coverage! My spouse is covering the kids this year!” Employers are allowed to set enrollment rules for their self-funded medical plans. One response to the employee is the hard line that the door was closed at the end of the enrollment period. But what if you want to be more flexible?

If the employee catches their mistake before the ball drops on New Year’s Eve, the IRS won’t care. But if the question comes up in January, it’s likely too late. The IRS’s rules on cafeteria plan elections don’t make any exception for mistake. Elections can only be changed if the employee has a change in status event like a divorce or new dependent. Read more