The past few weeks have been filled with an increasing drumbeat of Affordable Care Act (ACA) developments.

From the US Senate’s second failure to pass a repeal and replace measure to contraceptive mandate revisions and last Thursday’s executive order directing agencies to modify parts of the ACA, and winding up with the end of cost sharing reduction payments to insurers, this has been the most consequential period of ACA developments in years.

While some of these developments may appear to only have an indirect impact on employer group health plans, all of them will play a part in 2018 and beyond in design decisions and administrative steps for employers.

Join us at our upcoming Affordable Care Act: Potential Changes, Likely Effects Webinar October 24 as we review these developments and place them into a framework that will help employers understand the near- and mid-term consequences for their group health plans.

To register for the Webinar, please click here.

Congratulations to our partners John Ferreira (Pittsburgh) and Steven Spencer (Philadelphia) for being recognized as “Lawyers of the Year”in the Employee Benefits (ERISA) Law practice area in the 24th edition of Best Lawyers in America (2018). This prestigious honor is presented annually by Best Lawyers to a single outstanding lawyer in each practice and designated metropolitan area covered by the US publication, based on the highest peer ratings received. In total, 19 Morgan Lewis lawyers were recognized in the Employee Benefits (ERISA) Law practice area.

To view a complete listing of the Morgan Lewis lawyers included in this year's Best Lawyers, read our press release.

On October 5, 2017, the Internal Revenue Service (IRS) and the Department of the Treasury (Treasury) published a final rule in the Federal Register providing new mortality tables used for calculating the minimum present value under Internal Revenue Code (Code) Section 417(e)(3) and minimum funding obligations for single-employer pension plans under Code Sections 412(a)(2) and 430. Related guidance was released in IRS Notice 2017-60 and Revenue Procedure 2017-55; this guidance is collectively referred to herein as the “Rule.”

The Rule will generally result in (1) higher present values in defined benefit plan lump sum distribution calculations, and thus larger cash payouts, and (2) higher minimum funding obligations for employers maintaining single-employer defined benefit plans, as the new mortality tables reflect increased life expectancies for participants and beneficiaries.

On August 22, 2017, the District Court for the District of Columbia determined that recent Equal Employment Opportunity Commission (EEOC) regulations governing wellness program incentives are “arbitrary and capricious,” and remanded the regulations back to the EEOC for further consideration. The ruling is significant because the court determined that the EEOC regulations are too permissive. If the EEOC modifies the regulations, the new regulations will probably give employers less flexibility to provide wellness program incentives.

The EEOC may appeal the decision, and the regulations remain in effect for the time being. In fact, the court acknowledged that vacating the regulations would cause “potentially widespread disruption and confusion” because employers have already designed and implemented wellness incentives in reliance on the new regulations.

The CEO pay ratio disclosure requirement of Regulation S-K, Item 402(u) mandated by section 953(b) of the Dodd-Frank Act requires most publicly held companies to disclose, among other matters, the ratio of the compensation of the CEO to the compensation of the company’s median employee, excluding the CEO, beginning in the 2018 proxy season. For more detail, see our White Paper SEC Adopts Pay Ratio Disclosure Rule, The Securities and Exchange Commission (SEC) has confirmed that it does not plan to postpone the effective date of the CEO pay ratio rule.

Companies are in the midst of establishing the processes to gather the data and determining the methodologies to use to identify the median employee for the pay ratio disclosure. Many companies are also thinking about whether to issue internal communications to put the pay ratio, once disclosed, into context for their employees. The process of gathering the data for the pay ratio can be daunting. Fortunately, recent guidance from the SEC (in the form of interpretive guidance and Division of Corporation Finance guidance) provides companies with helpful suggestions on how to approach this task to ultimately develop their pay ratio disclosure.

The key points of the new guidance are as follows:

  1. Reasonable Estimates, Assumptions, and Methodologies: Companies may use reasonable estimates, assumptions, and methodologies for identifying the median employee and calculating total compensation for employees other than the CEO. The proxy must disclose the estimates, assumptions, and methodologies used. The SEC’s recent guidance clarified that, if reasonable estimates, assumptions, and methodologies are used, there will be no basis for an SEC enforcement action if the resulting pay ratio and related disclosures are made on a reasonable basis and in good faith.
  2. Employee Determinations: Companies may use a widely recognized test under another area of law, such as tax or employment law, to determine who is an employee for purposes of the CEO pay ratio (e.g., whether an individual receives a Form W-2 or Form 1099). There is no need to conduct a separate employee/independent contractor analysis for purposes of the CEO pay ratio, and the SEC Compliance and Disclosure Interpretation that created confusion on this point has been removed.
  3. Median Employee Determinations: To identify the median employee, companies may use existing internal records, such as tax or payroll records, which reasonably reflect annual compensation, even if those records do not include every element of compensation, such as equity awards widely distributed to employees. Where use of a consistently applied compensation measure identifies a median employee whose compensation package contains anomalies that significantly impact the pay ratio, companies may substitute another employee with substantially similar compensation (and must disclose this substitution when describing the methodology used).
  4. Combining Methods and Useful Guidance Regarding Statistical Sampling: Previous guidance indicated that companies may apply statistical sampling and other methods to identify the median employee. The SEC has clarified that companies are permitted to combine methods, applying the ones that best suit the facts and circumstances. For instance, a company may choose a statistical sampling method to identify the median employee for its overseas operations while relying on more exact calculations based on Forms W-2 for its domestic employees. The guidance provides examples of various kinds of sampling (which is particularly helpful for companies with multinational operations), identifies situations where other reasonable methods may be appropriate, and provides fact patterns on how one or more methods may be applied.

If you have questions or would like help developing an action plan for compliance, please contact any of us.

Join Morgan Lewis in October for these upcoming programs on a variety of employee benefits and executive compensation topics:

Disruption in Washington: Impact on Benefits and Compensation | October 3 | Philadelphia | Seminar presented by Morgan Lewis and The ERISA Industry Committee (ERIC) | Morgan Lewis panelist is John Ferreira

Morgan Lewis Public Company Academy – Equity Plans | October 4 | Webinar presented by Randall (Randy) McGeorge, Patrick Rehfield, and Mims Maynard Zabriskie

2017 Roundtable for Consultants & Institutional Investors – Successfully Navigating the DC Seas | October 5 | Chicago | Morgan Lewis panelist is Marla Kreindler

Pensions & Investments Annual West Coast Defined Contribution Conference – It’s Process, Process, Process . . . | October 10 | San Diego | Morgan Lewis moderator is Marla Kreindler

Visit the Morgan Lewis events page for more of our latest programs.

More than a dozen class action lawsuits have been filed alleging fiduciary breaches in the management of 403(b) retirement plans of leading universities. The suits claim, among other things, that participants paid excessive fees and that the investment lineups were sub-optimum. If plaintiffs’ firms continue to focus on 403(b) plans and/or tax-exempt organizations, large health systems may be in the next wave of litigation. In August, a class action with similar allegations was filed against a large non-profit multi-hospital healthcare system.

Smaller plans are also becoming the target of litigation. This month, lawsuits were filed against two companies alleging that their 401(k) plans were mismanaged. According to the complaints, one plan had just under $100 million of assets and the other more than $157 million. These plans are markedly smaller than the university 403(b) plans mentioned above, and also much smaller than 401(k) plans that were targeted in earlier rounds of ERISA fee litigation.

Our partner David Fuller was quoted in The Wall Street Journal about the wide range of tax-favored options available to companies that want to assist workers and other victims recovering from disasters. Read the article, “Helping Employees Recover from Harvey and Irma? You Can Also Save Taxes.”

As we approach 2018, companies that are planning to submit equity plans for shareholder approval should start to consider a wide range of issues, including the 15 steps that we outline in this blog series that has been updated for 2018:

One effective way to assist hurricane victims is for employers to give employees the option of donating leave that can be converted into cash charitable contributions. For practical tips on how to set up this type of program, please read Hurricane Recovery Client Alert: Establishing a Charitable Leave Donation Program.