Advantages of Using ESOPs To Structure Acquisitions and Divestitures In An Uncertain Economy

M&A advisors are becoming increasingly familiar with leveraged ESOP transactions and are routinely considering the ESOP platform in structuring acquisitions and divestitures.  The first part of this article references the ways in which leveraged ESOPs have historically been used to provide a tax-advantaged exit strategy for privately held business owners. The article then discusses the advantages the leveraged ESOP structure can bring to M&A advisors and private equity groups charged with structuring acquisitions and divestitures during a down economy.

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Michigan Health Insurance Claims Assessment Act is Not Preempted by ERISA

The Sixth Circuit, has decided, on remand from the Supreme Court, that the Michigan Health Insurance Claims Assessment Act (Act) is not preempted by ERISA. The Act imposes a 1 percent tax on all paid claims by insurers or third party administrators (TPAs) for health services rendered in Michigan to Michigan residents. The case was brought by the Self-Insurance Institute of America (SIIA), a trade association representing the sponsors of self-insured health plans and their TPAs, alleging the Act was preempted by ERISA. The trial court dismissed the case, concluding that the law was not preempted by ERISA. The Sixth Circuit also held that the Act was not preempted. After granting certiorari, the Supreme Court vacated this judgment and remanded the case to the Sixth Circuit for further consideration in light of the Supreme Court’s decision in Gobeille v. Liberty Mut. Life Ins. Co., which invalidated a Vermont statute that required an ERISA plan to report health care information to an all-payer claims database, since the Vermont law interfered with nationally uniform plan administration. On remand, the Sixth Circuit reaffirmed its original decision, finding that nothing in Gobeille warranted overturning its decision.

HIPAA Privacy and Security Compliance for Group Health Plan Sponsors

Joanna Kerpen authored an article on final HIPAA rules for privacy enforcement and audit programs, particularly those with additional requirements aimed at group health plan sponsors. This report focuses on the final regulations issued under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), in January 2013, HIPAA enforcement and audit programs, HIPAA-related additional requirements of group health plan sponsors, and the actions that must be taken by group health plan sponsors to ensure compliance with the final regulations and requirements and to prepare for potential audits and enforcement actions.

“The final HIPAA regulations made many changes to the existing HIPAA privacy and security rules that are applicable to covered entities,” Ms. Kerpen wrote, and she urged plan sponsors to conduct a comprehensive review of their compliance plans to prepare for audits or enforcement action.

Read the full article here.

Proposed Changes to Form 5500 Would Significantly Increase Reporting Obligations for Health and Welfare Plan Sponsors

On July 11, 2016, the Department of Labor (DOL) and Internal Revenue Service (IRS) announced a proposal to implement significant changes to the forms and regulations that govern annual employee benefit plan reporting on Form 5500. The proposed changes, which were published in the Federal Register on July 21, 2016, would considerably increase the annual reporting obligations for nearly all health and welfare plans. The changes would also have a considerable impact on annual retirement plan reporting obligations.  For more information about the effect of the proposed changes on retirement plan sponsors, see Proposed Changes to Form 5500 Reporting Requirements May Have Significant Impact on Retirement Plan Sponsors.

The DOL is seeking written comments on the proposed changes, which must be provided by October 4, 2016. The revised reporting requirements, if adopted, generally would apply for plan years beginning on and after January 1, 2019.

Read the full article here.

Guidance on Ransomware Attacks under HIPAA and State Data Breach Notification Laws

On July 28, 2016, US Department of Health and Human Services (HHS) issued guidance (guidance) under the Health Insurance Portability and Accountability Act (HIPAA) on what covered entities and business associates can do to prevent and recover from ransomware attacks. Ransomware attacks can also trigger concerns under state data breach notification laws.

Ransomware is a type of malware (malicious software). It is deployed through devices and systems through spam, phishing messages, websites and email attachments, or it can be directly installed by an attacker who has hacked into a system. In many instances, when a user clicks on the malicious link or opens the attachment, it infects the user’s data. Ransomware attempts to deny access to a user’s data, usually by encrypting the data with a key known only to the hacker who deployed the malware. After the user’s data is encrypted, the ransomware attacker directs the user to pay a ransom in order to receive a decryption key. However, the attacker may also deploy ransomware that destroys or impermissibly transfers information from an information system to a remote location controlled by the attacker. Paying the ransom may result in the attacker providing the key necessary needed to decrypt the information, but it is not guaranteed. In 2016, at least four hospitals have reported attacks by ransomware, but additional attacks are believed to go unreported.

Read the full article here to learn about the indications of a ransomware attack, what do in the event of a ransomware attack and what circumstances constitute a HIPAA breach.

Proposed Changes to Form 5500 Reporting Requirements May Have Significant Impact on Retirement Plan Sponsors

On July 11, 2016, the Department of Labor (DOL), Internal Revenue Service (IRS) and Pension Benefit Guaranty Corporation (PBGC) announced a proposal to implement sweeping changes to the forms and regulations that govern annual employee benefit plan reporting on Form 5500. The proposed changes, which were published in the Federal Register on July 21, 2016, would significantly increase the annual reporting obligations for nearly all retirement plans. The changes also would have a considerable impact on employer-sponsored group health plans.  For more information about the effect of the proposed changes on health and welfare plan sponsors, see Proposed Changes to Form 5500 Would Significantly Increase Reporting Obligations for Health and Welfare Plan Sponsors.

The DOL is seeking written comments on the proposed changes, which must be provided by October 4, 2016. The revised reporting requirements, if adopted, generally would apply for plan years beginning on and after January 1, 2019. Certain compliance questions will, however, be effective for Form 5500 series returns filed for the 2016 plan year.

Read the full article here.

Review of Section 409A Proposed Regulations

On June 22, 2016, the Internal Revenue Service (IRS) issued proposed changes to the regulations under the Internal Revenue Code (Code) §409A. The Code intends to clarify or modify a wide range of very restrictive rules pertaining to “nonqualified” deferred compensation plans as well as other types of compensation arrangements that may defer compensation. The proposed changes are designed to benefit taxpayers, with a few intending to close potential loopholes.

The following PowerPoint highlights key points from the proposed regulations and what employers and employees should know and can expect moving forward.

View the PowerPoint slides here.

OSHA and MSHA Increase Penalties for Workplace Safety Violations

On July 1, 2016, Occupational Safety and Health Administration (OSHA) increased the maximum penalties under the Occupational Safety and Health Act by about 78 percent to account for inflation. Acting under authority conferred by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, Pub. L. 114-74, 701 (part of the Bipartisan Budget Act of 2015), OSHA published an interim final rule that will on August 1, 2016, increase penalties for OSHA violations as follows:

Other-than-serious violations: From $7,000 to $12,471
Serious violations: From $7,000 to $12,471
Repeated violations: From $70,000 to $124,709
Willful violations
minimum: From $5,000 to $8,908
maximum: From $70,000 to $124,709
Failure to abate: From $7,000 per day to $12,471 per day

Penalties under the Federal Mine Safety and Health Act of 1977 were also changed to account for inflation, as follows:

The maximum penalty for most violations will now be $68,300.
The minimum penalty for unwarrantable failure violations under Section 104(d)(1) of the Mine Act will now be $2,277.
The minimum penalty for unwarrantable failure violations under Section 104(d)(2) of the Mine Act will now be $4,553.
The minimum and maximum penalties for failure to provide timely notification under Section 103(j) of the Mine Act will now be $5,692 and $68,300, respectively.
The maximum penalty for failure to abate will now be $7,399 per day.
The maximum penalty for flagrant violations will now be $250,433.

Questions about these changes should be directed to Art Sapper at +1 202 756 8246.

A Blueprint for Maintaining an Individually Designed Qualified Plan after the IRS’s Determination Letter Program Cutback

On June 29, 2016, the Internal Revenue Service (IRS) officially sounded the death knell for the five-year remedial amendment cycle with its release of Revenue Procedure 2016-37. Effective January 1, 2017, employers that sponsor an individually designed qualified retirement plan—a group that includes most large retirement plans—may no longer request periodic determination letters. Instead, the IRS will continue to conduct random audits to assess plan compliance with plan document operational requirements.

The IRS will continue to conduct random audits to assess plan compliance with plan document operational requirements. Beginning in 2017, the IRS expects plan sponsors to amend written plan documents in accordance with Revenue Procedure 2016‑37 and without reliance on a determination letter. In the context of an audit, a plan sponsor may rely on a plan’s last favorable determination letter, but only with respect to provisions that have not been amended since the last issued determination letter. Sponsors of individually designed plans must develop new means for assuring they comply with the qualification requirements in the wake of Revenue Procedure 2016-37.

Read the full article.

View From McDermott: Fifth Circuit Focuses on Process in ESOP Valuations

Though the Supreme Court’s 2014 unanimous ruling in Fifth Third Bank v. Dudenhoeffer announced the Employee Retirement Income Security Act (ERISA) standards for stock valuation in the context of a large public employee stock ownership plan (ESOP), the vast majority of ESOPs are still grappling with valuation issues. ESOPs that hold stock of closely-held corporations—approximately 90% of all ESOPs— remain almost unaffected by Dudenhoeffer’s valuation discussions, and face continued scrutiny by the Department of Labor (DOL). Appraisal of closely-held stock is an inexact science that involves an inherent level of uncertainty in assessing a variety of potential fact patterns.

This article summarizes valuation issues in acquisitions of closely-held corporation stock by ESOPs in the context of Perez v. Bruister, a recently decided Fifth Circuit case. The case stressed the importance of ‘‘process’’ in valuation determinations being utilized for acquisitions of a corporation’s stock by an ESOP. In reviewing the case, this article provides a detail of the process that should be followed to ensure consideration of the appropriate factors by fiduciaries in reviewing valuations for ESOP transactions. The article concludes with a discussion of guidance provided by the court in Bruister that may be instructive as to best practices for ESOP fiduciaries charged with establishing the value to be used by an ESOP holding shares of stock of a private company.

View full report.

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