The US Department of Health and Human Services’ Office for Civil Rights (OCR) is gearing up for the second phase of Health Insurance Portability and Accountability Act (HIPAA) audits. As reported in trade press, a government official announced that the audits may be rolled out shortly. The OCR has chosen a vendor to conduct the audits and has started verifying contact information for potential auditees.

We will continue to monitor for a written announcement and/or guidance from the OCR. In the meantime, HIPAA-covered entities should review (and update as necessary) their policies and procedures and make sure that their workforce members are trained to comply with HIPAA’s privacy and security rule requirements.

The US Supreme Court issued its decision in Tibble v. Edison on May 18. The participants who brought the suit in Tibble alleged that the Edison fiduciaries breached their duties by offering as investment options classes of mutual funds with higher fees than other classes. For more details on the facts, please see our LawFlash. The issue that emerged as the case worked its way up to the Supreme Court, however, was a statute of limitations defense, because some of the mutual funds in question were initially selected by the Edison fiduciaries more than six years before the lawsuit was filed. The Edison fiduciaries argued before the US Court of Appeals for the Ninth Circuit that those claims were time-barred under ERISA’s six-year statute of limitations because the alleged breach (i.e., the selection of higher fee mutual funds) occurred outside the six-year period. The participants argued that keeping these funds constituted a continuing breach of fiduciary duty that extended well into the six-year statute of limitations. The Ninth Circuit agreed with the Edison fiduciaries and held that the claims with respect to that older group of funds were time-barred.

By the time the case got to the Supreme Court, however, the focus had shifted from the statute of limitations to the nature of the duty to monitor investment options on an ongoing basis. The discussion at oral arguments focused almost exclusively on the “contours” of the alleged breach of the duty to monitor, so it was perhaps not surprising when the Court vacated the Ninth Circuit’s judgment and remanded the case to the Ninth Circuit to consider “trust law principles” and the “nature of the fiduciary duty” at issue in this case.

To most plan fiduciaries, it is not surprising that there is a fiduciary duty to monitor investments on an ongoing basis. Indeed, we might expect that many readers of this blog spend a great deal of their time doing exactly that and supporting the fiduciary committees that have this responsibility. This may be why the Tibble opinion has been largely met with the formal equivalent of “duh” by many in the plan sponsor community.

In light of robust merger and acquisition activity, companies should review their compensation and benefits programs to understand the effect that a change-in-control transaction would have. Often, in the face of an impending change-in-control transaction or at the time that a company puts itself into play, it may be too late to implement new programs or make changes to existing programs. Companies should consider change-in-control implications at the time that they adopt plans or, where applicable, at the time awards under those plans are made.

Many compensation components can be affected by a change-in-control transaction, including equity awards (in particular, those that are unvested), cash-based incentive awards (both annual and long-term) for then-in-progress performance periods, deferred compensation (and any funding of deferred compensation), severance entitlements and triggers, and noncompetition and similar restrictions. Tax considerations and, in particular, the golden parachute rules of section 280G of the Internal Revenue Code must also be taken into account.

A recent Seventh Circuit Court of Appeals case highlights a troubling trend of courts finding successor liability for multiemployer pension contributions and withdrawal liability following corporate asset sale transactions.

In 1990, the Seventh Circuit held in Upholsterers’ International Union Pension Fund v. Artistic Furniture of Pontiac that under ERISA, a purchaser of assets could be liable for delinquent pension contributions owed by the seller to a multiemployer pension fund, provided that there is sufficient evidence of continuity of operations and the purchaser knew of the liability of the seller.

Subsequently, in 2011, the Third Circuit in Einhorn v. M.L. Ruberton Construction Co. reversed a lower court ruling and held that a purchaser of assets of an employer obligated to contribute to a multiemployer benefit plan may, where there was a continuity of operations and the purchaser knew of delinquency, be held liable for the delinquent contributions.

Recently, in Tsareff v. Manweb Services, Inc., the Seventh Circuit has taken what some may consider a step too far in holding that an asset purchaser could be liable for a seller’s withdrawal liability triggered as a result of an asset sale, provided that the purchaser had known of the seller’s “contingent” withdrawal liability that would be triggered by the sale. The Seventh Circuit found that the buyer knew of the potential withdrawal liability because it engaged in due diligence and addressed withdrawal liability responsibility through an indemnification clause in the asset purchase agreement. The Seventh Circuit remanded the matter back to the district court to determine whether there was a sufficient continuity of operations after the sale for the buyer to be a “successor” and hence liable.

On July 31, US President Barack Obama extended the funding for US highways when he signed H.R. 3236 (now Public Law No. 114-41) into law, but tucked into the law were changes to some significant benefits-related tax filing dates and veterans’ benefit rules.

We describe the tax filing and veterans’ benefits changes below.

Tax Filing Dates

The new law includes a number of revised automatic extensions of the due dates for income tax and information returns, including the Form 5500 (the annual return for employee benefit plans) and the Form 990 series (the annual return for tax-exempt organizations).

Form 5500
Typically, Form 5500 returns for employee benefit plans are due the last day of the seventh month after a plan year ends. This is July 31 for calendar-year plans. Plans may file an extension of this filing date, which, under current law, is limited to a two and a half month extension (or October 15) for a calendar-year plan. The new law requires the US Treasury Secretary to modify Treasury regulations to provide an automatic extension of the 5500 filing due date of three and a half months (or until November 15) for calendar-year plans.

On July 30, the Internal Revenue Service (IRS) released Notice 2015-52 (the Notice) addressing issues raised by the excise tax on high cost employer-sponsored health coverage (often referred to as the “Cadillac tax”). Beginning in 2018, the Cadillac tax is a nondeductible 40% excise tax on the aggregate cost of applicable employer-sponsored health coverage in excess of a baseline amount of $10,200 (for self-only coverage) and $27,500 (for family coverage). The guidance in Notice 2015-52 supplements Notice 2015-15, which was issued in February 2015.

The development of guidance on the Cadillac tax can be seen as a case study in how a federal agency develops regulations for a dysfunctional statutory provision. In less partisan times, we may have expected a technical corrections bill or follow–on legislation, but for a variety of reasons—not the least of which is the partisan political climate—we don’t anticipate that a legislative fix or repeal of the Cadillac tax is likely, at least prior to the 2016 election.

These days, it’s not uncommon for pension plans to be in some sort of frozen state. It is important for plan sponsors to remember that even though their pension plans may be totally frozen (with no one accruing benefits), partially frozen (closed to some or all new participants), or in some other “frozen status,” the plans are still subject to the PBGC reportable event rules under section 4043 of ERISA. Only once a pension plan is fully terminated and all assets are distributed do the reportable event rules no longer apply. Of course, the reportable event rules also apply to active pension plans. Failure to comply with the rules may result in steep penalties of up to $1,100 a day.

Although there may be a few reportable events that are not likely to occur if a pension plan is frozen, most reportable events can occur regardless of a pension plan’s status. These reportable events include, among others,


As we were posting, the IRS released draft instructions for 2015 ACA reporting. These draft instructions confirm that for 2015 reporting, ALEs that contribute to multiemployer health plans need only to receive confirmation from each such plan of three things: that the plan (1) offers minimum essential coverage that is affordable, (2) provides minimum value to individuals who satisfy the plan’s eligibility conditions, and (3) offers minimum essential coverage to those individuals’ dependents. The ALEs do not need more detailed information from the multiemployer plans to complete their 2015 reports. This IRS clarification is welcome guidance to ALEs that contribute to one or more multiemployer plans, as it simplifies their preparation for 2015 reporting.

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The Affordable Care Act (ACA) reporting requirements are in full force for 2015. These reporting rules require both applicable large employers (ALEs, which are generally employers with 50 or more full-time employees) and other entities that provide minimum essential health coverage—including multiemployer health plans—to gather and report certain information to the IRS and covered individuals. These entities must report 2015 health coverage information to individuals by February 1, 2016 (the annual due date is January 31, but the date is adjusted for 2016 because January 31 is a Sunday) and to the IRS by the end of February or March 2016, depending on the number of reports.

Identifying and capturing the required information can be a daunting task for an ALE. ALEs must collect a significant amount of data for each full-time employee (i.e., an employee who works on average 30 or more hours a week or 130 or more hours a month) for each month of 2015. This information includes: (i) each month that an employee enrolled in coverage (or the reason an employee was not enrolled); (ii) each month an employee was offered minimum essential coverage providing minimum value; (iii) each month that minimum essential coverage was offered to the employee’s spouse and/or dependent children under age 26; and (iv) the dollar amount of the employee’s share of the lowest cost monthly premium for self-only coverage providing minimum value that was offered.

It is common in a private company sale transaction to have an escrow in place that holds a portion of the sale proceeds to cover the seller’s post-closing indemnification liability. It also common to have an earn-out component, through which payment of a portion of the sale proceeds may be tied to the business’s achieving specified future performance metrics. However, unforeseen complexities may result when compensatory payments to employees of the business, such as the cash-out of stock options or the payment of sale bonuses, are subject to an escrow or earn-out.

For example, if there is an escrow in place for 10% of the sale proceeds and stock options are being cashed out for a payment at closing, 10% of the payment attributable to the cashed-out stock options may be held back in escrow. This commonly used structure ensures that the optionholders are subject to the same indemnification escrow as other shareholders. However, because most escrows are fully funded arrangements, careful consideration must be given to any compensatory amounts that are subject to the escrow.

One of the most popular pension derisking strategies for the last few years—which shows no sign of slowing down in 2015—has been offering lump-sum windows (LSWs) to terminated vested participants. (As discussed in an earlier blog post, after the issuance of IRS Notice 2015-49, lump-sum offers to retirees in pay status are no longer permissible, but the vast majority of LSWs have not been extended to retirees in any event.) LSWs offer plan sponsors the opportunity to reduce their pension plan liabilities and headcount, and the associated Pension Benefit Guaranty Corporation (PBGC) premiums and administrative expenses without the premium required to settle liabilities through an annuity purchase (and, in some cases, at a discount to the related balance-sheet liabilities). The knowledge that new updated mortality tables will be required in determining lump-sum amounts (and will increase those amounts by 5–8%) as early as 2016 (although, more likely, in 2017) has added some wind to the lump-sum sails this year.

But, as LSWs have proliferated, so have concerns among the various federal agencies that regulate pension plans. As noted, the IRS has served notice that lump-sum offers can no longer be made to retirees in pay status. The US Department of Labor's ERISA Advisory Council held hearings in 2013 on derisking, including LSWs, and issued a report that raises a number of concerns, including whether participants understood the risks that they were assuming by taking a lump-sum distribution and whether current disclosure requirements were sufficient. Additionally, the PBGC has recently begun requiring pension plans sponsors to provide reporting to PBGC regarding derisking activities, including LSWs.