Health plan fiduciary issues have taken on increased urgency following a new wave of Employee Retirement Income Security Act class action lawsuits filed by plaintiffs’ firms. Sarah Raaii and Alden Bianchi recently joined the Moving to Value Alliance, a healthcare nonprofit, for a podcast episode focused on how group health plan sponsors and third-party service providers to group health plans can comply with the new fiduciary requirements enacted under the Consolidated Appropriations Act of 2021 (CAA). They also discussed what health plan fiduciaries can do to ensure they fulfill their responsibilities to beneficiaries.
Spin-offs have become increasingly popular with innovative companies as a method of unlocking shareholder value, but the transaction is not always tax-free, particularly for international employees holding equity awards or shares.
The ability to obtain tax-free treatment in the United States for both the company and shareholders in a spin-off is often attractive. However, the transaction is not always tax-free for shareholders located outside the US. When local country criteria are not met, the distribution of spin-co shares is taxable for shareholders.
Significantly, employees holding equity awards and company shares can be negatively affected by a spin-off, which can have a significant impact on morale at a very sensitive time in a spin-co’s evolution.
Companies generally take one of two approaches when adjusting equity awards in a spin-off: either a basket approach, where employees hold equity awards from both companies; or a concentration approach, where employees only retain equity awards from their post-spin employer. The basket approach raises more local tax and securities compliance issues than the concentration approach as the employee is holding awards from a company that is not their employer.
“Long” shares held by employees in an employer’s plan raise additional issues. The applicable tax analysis mirrors the analysis applicable to shareholders generally, which may or may not be taxable upon distribution, depending on the country. However, the tax result may differ when the shares are held in a trust or where the employee does not yet have full ownership of the shares. In certain cases, a local tax ruling should be submitted, potentially providing the employees with more favorable tax treatment than regular shareholders.
Tax-qualified equity awards also require consideration as the tax-advantaged treatment may be lost for the employees in many countries. For example, in the United Kingdom, Share Incentive Plans (SIPs) and Company Share Option Plans (CSOPs) are common equity awards and a spin-off impacts them differently.
When an employee holds shares in a SIP for five years, the employee may sell the shares without paying income tax or national insurance contributions. However, when a spin-off transaction does not meet the UK “demerger” rules for a tax-free spin-off, the SIP participants will be subject to taxation on the value of the distributed spin-co shares when they are distributed.
If an employee exercises CSOP options three or more years after grant, that employee doesn’t pay income tax at exercise for the difference between the exercise price and the current fair market value of the shares. Any adjustment of the CSOP awards results in the loss of tax-qualified treatment, subjecting the employee to income taxation when the options are exercised. Employees who have already met the three year requirement may therefore prefer to exercise the awards prior to the spin-off.
In most cases, particularly if the communication occurs shortly before the spin-off, employees do not fully understand the ramifications until it is too late to mitigate the tax impact. To avoid this, companies should communicate the tax implications to employees well before the spin-off, taking into [...]
With the Federal Trade Commission’s Final Rule that would ban noncompetes nationwide set to go into effect on September 4, 2024, assuming pending litigation doesn’t cause any delays, employers should begin planning now to address any potential compliance concerns. Legal and human resources teams will need to consider the impact of the Final Rule on current noncompete agreements, requirements for providing notice to impacted employees under the rule, and strategies for implementing pending and future agreements if the rule is upheld.
California’s SB 553, which went into effect July 1, 2024, creates a new layer to California employers’ existing injury and illness prevention programs. Under SB 553, all California employers are now required to implement a workplace violence prevention plan (WVPP), provide training to employees regarding the WVPP and keep records of workplace violence incidents. As of January 1, 2025, the law also expands employers’ and employee representatives’ rights to obtain restraining orders on behalf of employees affected by threats of workplace violence.
During this recent webinar, McDermott Partners Andrew Liazos, Brian Mead and Heidi Steele discussed what employers should consider in the evolving landscape of noncompete agreements. With the Federal Trade Commission’s Final Rule that would ban noncompetes nationwide set to go into effect on September 4, 2024, assuming pending litigation doesn’t cause any delays, employers will want to develop a game plan to navigate these issues both in the short and long term.
To adapt to the evolving healthcare landscape, health systems are seeking to identify alternatives to their traditional hospital-centric models and shift towards patient-centered care delivery. As a result, provider-sponsored health plans (PSHPs) are gaining traction as a potential framework for health systems to curate care delivery in the newly decentralized model of healthcare.
In this article, Brad Dennis and Gary Scott Davis explore the challenges facing the hospital-centric model, the reemergence of PSHPs and the advantages of integrating healthcare delivery and insurance functions in a PSHP-based model.
A question in response to last week’s post on self-funding of employer group health plans assumed that stop-loss coverage under a level-funded plan could be provided under a group captive medical captive. However, it cannot (at least not without first obtaining a prohibited transaction exemption from the US Department of Labor (DOL)). While group medical stop-loss coverage can be structured to avoid the Employee Retirement Income Security Act (ERISA) prohibited transaction rules by scrupulously avoiding contact with ERISA plan assets in the plan’s stop-loss layer, it is not possible to prevent such contact in level-funded products.
The early years of group captives saw no shortage of handwringing over fundamental compliance issues. For example: Are group captives multiple employer welfare arrangements (MEWAs) (and should they be regulated as such)? To what extent are states free to constrain or restrain their operation? And which state insurance licensing laws apply?
For the most part, these and other compliance-related questions have been answered, if not completely, then at least substantially so. There is now broad agreement that the group medical stop-loss captive rests on a sound legal and regulatory foundation, which we explained at length in our Special Report. When properly structured, they are not MEWAs; states are free to regulate the stop-loss policy, and the fronting carrier must be licensed in each state in which the captive operates (i.e., where plan participants reside). Critical to their operation, however, is that the group medical stop-loss captive itself does not traffic in plan assets. This means that participant contributions, which are always plan assets, must never be applied to the purchase of stop-loss coverage.
The treatment of stop loss premiums, and their status as plan assets, are set out in two DOL Advisory Opinions:
Advisory Opinion 92-02
A stop-loss insurance policy purchased by an employer sponsoring a self-insured welfare benefit plan to which employees did not contribute is not an asset of the plan if certain conditions are satisfied. These conditions include that the insurance proceeds from the policies are payable only to the plan sponsor, which is the named insured under the policy, and no representations are made that the policy will be used to pay benefits.
Advisory Opinion 2015-02A
Where a stop-loss policy is purchased by a plan that includes participant contributions, the stop-loss policy would not be a plan asset if the facts surrounding the purchase of the stop-loss policy satisfies Advisory Opinion 92-02 and if the employer puts in place an accounting system that ensures that the payment of premiums for the stop-loss policy includes no employee contributions. Also, the stop-loss policy must reimburse the plan sponsor only if the plan sponsor pays claims under the plans from its own assets so that the plan sponsor will never receive any reimbursement from the insurer for claim amounts paid with participant contributions.
In the above-cited Special Report, we provided the following example of how an employer might comply where, as is typically the case, the [...]
A nonqualified deferred compensation (NQDC) plan is a powerful employee benefits tool. However, NQDC plans can create complications for plan administrators and participants. In this PLANADVISER article, Brian Tiemann and Lisa Loesel highlight several potential NQDC plan pitfalls and offer strategies to mitigate these hazards.
In a recent article in Managed Healthcare Executive, Peter Wehrwein examines the trend of self-funding of group health benefits by smaller employers who used to depend mainly or entirely on fully insured programs.
The shift to self-funding, the article explains, is grounded in the Employee Retirement Income Security (ERISA), which exempts self-funded plans from state health insurance mandates, and in the Affordable Care Act, which strictly regulates small group and individual health insurance policies. Wehrwein presents the issues from the perspective of state and federal policymakers and regulators, which the article characterizes as “worrisome.” But what of the perspective of small employers?
Healthcare costs are rising at rates that are well in excess of the growth of real gross domestic product. This appears unsustainable, but these costs nevertheless keep climbing inexorably. For employers, the pressure to do something is compelling.
The article claims that self-funding is more expensive than fully insured coverage. But compared to what fully insured coverage, exactly? By definition, many small employers can only purchase coverage in the small-group market. This is, however, the very market these same employers are fleeing, and they are doing so precisely because it is too expensive. Indeed, the prohibitive cost of small-group market coverage is why individual coverage Health Reimbursement Arrangements have failed to gain widespread acceptance, particularly in large urban environments.
Wehrwein correctly identifies two options for self-funding: group medical captives and level funding, both of which he views as problematic. Small employers appear to disagree, however, based on their actions. In their view, these options instead represent viable options in their quest to provide competitive group health coverage to their employees. The two options for self-funding identified in the article are fundamentally different solutions that are appropriate for different cohorts of small employers.
Group Medical Captives (50 – 200 Covered Lives)
The term “captive” insurer traditionally referred to a “single parent” captive, which is a subsidiary of an operating company/parent that insures the risks of the operating company/parent and in some instances its affiliates. Historically, single-parent captives insured property and casualty risks and workers’ compensation, but they have more recently been pressed into service to cover employee welfare plan risks.
A group captive allows a group of unrelated employers to form a collective insurance company to manage some portions of their risks. Where, as is the case here, the risk is most often medical stop-loss coverage, the arrangement is referred to colloquially as a “medical stop-loss group captive.” For an extended discussion of medical stop-loss group captive funding arrangements and their accompanying legal and regulatory issues, please see our Special Report.
There is some debate over what size employer might most benefit from participation in a medical stop-loss group captive. While the conventional wisdom is that 200 covered lives is the sweet spot, credible estimates go as low as 50 covered lives. Whatever the appropriate number, medical stop-loss captives can in the right circumstances offer substantial savings when compared to fully insured coverage. [...]
In this webinar recorded for the National Center for Employee Ownership (NCEO), Ted Becker and Julian André discuss the changing landscape of employee stock ownership plan (ESOP) litigation. The program covers trends in recent significant court decisions relating to ESOPs as well as the latest theories advanced by plaintiff’s counsel and the US Department of Labor.
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