Participants in the Professional Benefits Trust (“PBT”) may be in danger of having to pay the United States Treasury 50% of their assets in penalties for each year of participation in PBT. The assets of the purported welfare benefit plan were moved off shore and deposited into the Mavin foreign insurance company and into Acadia annuities. The Department of Justice has sued promoter Tracy Sunderlage, Mavin LLC and others in federal court in the Northern District of Illinois, claiming the PBT/Mavin/Acadia scheme constitutes an off-shore income tax scam. Those who chose to continue in the plan after 2004 and allowed the plan assets to be moved off shore may become targets for penalties.

On July 13, 2011, the DOJ filed U.S. v. Sunderlage, et al. The Complaint seeks to enjoin the activities of the owners, organizers and promoters of the PBT/Mavin/Acadia transaction. It also seeks to acquire information about taxpayers who are participating in the Mavin and Acadia off-shore transactions. Once the government acquires the participant list, the IRS will likely commence enforcement activities against the participants on the list.

The vast majority of the participants in the PBT/Mavin/Acadia transactions do not realize the investment in “welfare benefits” actually constitutes an interest in a foreign account that obligated them to file an “FBAR” (or foreign bank account report) every year since the “welfare plan” and its investments left the U.S. The civil penalties for failing to file the FBAR can amount to 50% of the aggregate investment value every year. The criminal penalties for willful failing to file FBARs are up to ten years in prison and $500,000 in fines. These penalties are in addition to the other potentially applicable penalties (e.g., filing a fraudulent income tax return; failing to disclose a listed transaction; and failing to file the proper income tax returns relating to ownership or interest in foreign entities or trusts). The aggregate value of taxes and penalties easily may exceed the value of the investment held off shore.

The FBAR rules apply to all welfare and pension benefit plans that hold direct foreign investments or hold investments in off-shore trusts. The design of the plans dictates whether the trustee, individual plan committee members or plan participants have an FBAR reporting obligation. Reporting obligations commenced in 2003, requiring FBAR filings annually at the end of June.

Any potential penalties may be drastically reduced under the IRS voluntary disclosure program available to FBAR non-filers. However, the August 31, 2011, filing deadline is fast approaching. Participants in welfare benefit plans that have moved assets off shore should contact legal counsel and investigate the voluntary disclosure program.

Under the New York State Marriage Equality Act enacted June 24, 2011, and effective July 24, 2011, New York recognizes as valid any otherwise valid marriage regardless of whether the marital partners are of the same or opposite sex. There is an exception for religious organizations.  In general, the new law does not require such organizations to solemnize same-sex marriages or to treat same-sex partners as spouses. 

The new law further provides that –  

No government treatment or legal status, effect, right, benefit, privilege, protection or responsibility relating to marriage, whether deriving from statute, administrative or court rule, public policy, common law or any other source of law, shall differ based on the parties to the marriage being or having been of the same sex rather than a different sex. When necessary to implement the rights and responsibilities under the law, all gender-specific language or terms shall be construed in a gender-neutral manner in all such sources of law.

Thus, under New York State law, one can marry another person of the same sex and same-sex spouses are treated just like opposite-sex spouses for all purposes. Among other things, this means an employee of a New York employer covered by the state’s Military Spouse Leave Law can take protected leave for his or her same-sex spouse’s military deployment to the same extent as another employee could for his or her opposite-sex spouse. 

Employee Benefits Matters

Same-sex spouses must be treated just like opposite-sex spouses for all other employee benefits that are not covered by the federal Employee Retirement Income Security Act of 1974 (“ERISA”). For example, a group health plan insured by a policy issued in New York must offer coverage and state-mandated continuation coverage for a covered same-sex spouse just as it would for an opposite-sex spouse. However, the Marriage Equality Act has no impact on coverage terms of a self-funded group health plan. This is because ERISA preempts New York’s Marriage Equality Act to the extent that it applies to self-funded ERISA-covered employee benefits. The Marriage Equality Act also has no impact on a plan underwritten by a policy issued in a state other than New York.      

In general, nothing in federal law precludes an employer from extending benefits under ERISA-covered plans to employees’ same-sex spouses. However, the following should be noted –

  1. Federal tax exemptions and income exclusions for employees’ spouses’ coverage and benefits are not available to same-sex state-law spouses. To the extent an employer provides such coverage, it must report the value of the coverage as wages on the employee’s Form W-2 unless the same-sex spouse meets the definition of “dependent” for federal tax purposes.
  2. Many employers provide benefits under ERISA-covered plans through insurance policies or stop-loss arrangements with third-party carriers. In any case where the employer expects a payment or coverage from such a third-party, the employer must make sure – before promising coverage to same-sex spouses – that the arrangement with the third-party will cover costs associated with those same-sex spouses. (Otherwise, the employer will be paying those costs itself.)
  3. Finally, employers considering extending coverage to state law same-sex spouses should – before doing so – review the terms of the relevant benefit arrangements for any required conforming amendments.

New York Personal Taxes

The effect of the Marriage Equality Act on New York income taxes is less than clear.  The general rule under New York tax law, at section 607(a), is that a term used in the state’s personal tax laws (like “marital status”) has the same meaning as the term has for federal income tax purposes, “unless a different meaning is clearly required but such meaning shall be subject to exceptions or modifications prescribed in the [personal income tax provisions of the Tax Law] or by [other] statute.”  Thus, the New York State Department of Taxation and Finance has taken the position administratively that, under certain circumstances, if a different meaning is clearly required, departure from the federal definition may be acceptable even though there is no specific exemption or modification in the New York tax law.

Nevertheless,  the New York State Tax Law, Section 607(b) specifically provides that an individual’s marital status for state tax law is the same as the individual’s marital status for federal rate-setting purposes. Thus, the marital status of an individual for New York State personal taxes seems to be hard-wired to follow the federal definition of marital status. Because the Federal Defense of Marriage Act (P.L. 104-199), recognizes only heterosexual unions for federal purposes, the Internal Revenue Code does not recognize same-sex marriages for federal income tax purposes. Thus, it appears that action by the New York State legislature would be required to overcome the specific terms of the state’s tax laws in this regard.  In any event,  clarification is needed from New York’s Tax Department or legislature on this point.        

The benefits attorneys and employment attorneys of Jackson Lewis are available to help you with your questions regarding implementation of the Marriage Equality Act. For benefits advice, please contact Monique Warren (White Plains), Joseph Lazzarotti (White Plains), Keith Dropkin (White Plains), Bruce Schwartz (White Plains), Robert Perry (New York City), Melissa Ostrower (New York City), Michael Jacobster (New York City), Brian Goldstein (Albany), or Oleg Kotov (Albany).  

For a discussion of the impact on employers of other states’ civil union, domestic partner, and same-sex marriage laws, click here for Illinois, here for Washington, and here for Massachusetts (including  the Massachusetts Supreme Judicial Court’s decision in Goodridge v. Department of Public Health addressing the effects of recognizing same-sex marriage on employee benefits and other practices). 

UPDATE – August 3, 2011:  The New York State Department of Taxation and Finance has posted instructions for employers on its website stating that an employer is not to withhold state income tax on benefits provided to an employee for a same-sex spouse if the benefits would not be taxable to the employee under federal law if the spouse was of the opposite sex. 

Reports required under Foreign Bank Account Reporting or “FBAR” laws and regulations must be submitted to the U.S. Department of the Treasury on or before June 30, 2011. Individuals with a financial interest in foreign financial accounts (including foreign bank accounts, securities and certain insurance and annuities) or with signatory or other authority over such accounts must submit a Form TD-F 90-22.1 to the Treasury Department. Individuals that fail to file the form would face civil penalties of up to 50% of the foreign accounts’ value and criminal penalties, including imprisonment of up to five years.

The types of individuals that possess FBAR reporting obligations probably will surprise many. FBAR reporting is required of trustees and plan committee members of pension plans that hold direct foreign investments, officers and employees of corporations who have signatory or investment direction authority over the corporation’s accounts, and expatriates returning to the U.S. who leave (even temporarily) bank accounts in the country where they were working. 

FBAR reporting is not required of participants and beneficiaries of pension plans that hold foreign investments.

A foreign financial account or aggregate of accounts that exceeds $10,000 in value at any time during the previous year must be reported by individuals who have a financial interest in the accounts, signatory authority over the accounts, or authority to direct deposits, distributions or investments with respect to the account. 

The FBAR reporting requirements do not apply to foreign investments or financial accounts that are sold or maintained in the U.S. through a domestic bank or securities firm. To avoid the substantial penalties associated with non-disclosure, an individual who is unsure about whether he or she has an FBAR reporting obligation should make a protective submission of the Form TD-F 90-22.1.

Write the Rules on Employer Health Care Reform Penalties

Employers now have an opportunity to influence how the Patient Protection and Affordable Care Act’s “employer responsibility” “assessable payment” will apply in 2014. 

 

Section 4980H of the Internal Revenue Code, added by the PPACA, imposes a penalty on employers with more than 50 full-time employees if at least one full-time employee obtains subsidized “exchange” health coverage and the employer does not offer its full-time employees group health plan coverage or the coverage offered fails the PPACA’s affordability or value tests. 

 

The Internal Revenue Service issued Notice 2011-36 on May 3, inviting public comments on approaches the IRS is considering for regulations implementing the employer-penalty provision, as well as other PPACA provisions.  The Notice suggests potential approaches for, among other things, determining which employees are “full-time.”  It also invites comments on the interpretation of the 90-day limitation on group health plan eligibility waiting periods and coordination of that provision with the employer-penalty provision.

 

Comments from employers and employer groups have helped shape the legal and regulatory landscape that affects them.  Despite the PPACA’s primary enforcement agencies’ tendency, so far, to issue final regulations without a public comment opportunity, employer groups already have had significant influence on the curtailment and delay of certain regulations.  (For example, the IRS’ decision to delay enforcement of the new nondiscrimination provisions for insured group health plans.)  Also, employers and employer groups influenced Congress’ decision to repeal the PPACA’s “free choice voucher” provisions, which would have required employers to pay for certain employees’ health exchange coverage. 

 

Here’s an opportunity for employers and employer groups to voice their opinions on a significant regulation.  Our Government Relations practice regularly assists employers and employer groups to prepare comments on proposed regulations. It can pay to speak up!             

The U.S. Supreme Court has refused to engage in expedited review of the decision of a Virginia District Court that held unconstitutional the individual mandate contained in the Patient Protection and Affordable Care Act (“PPACA”). The Supreme Court’s April 25 decision suggests there will be a long road to resolution of the constitutional attack on the PPACA.

On the political front, however, there is good economic news for employers. On April 14th and 15th, the President signed into law H.R. 4 and H.R. 1473.

H.R. 4, http://thomas.loc.gov/cgi-bin/bdquery/z?d112:h.r.4: repeals provisions of the PPACA that expanded Form 1099 reporting requirements for payments in excess of $600 to individuals to payments made to individuals and corporations. P.L. 112-9. The repeal lifts from employers the obligation, which was to commence in 2012, to issue a Form 1099 to virtually every person or entity with whom they conduct business.

H.R. 1473, http://thomas.loc.gov/cgi-bin/bdquery/z?d112:h.r.1473: completely repeals all provisions of the PPACA concerning “Free Choice Vouchers.” P.L. 112-10. The Free Choice Voucher requirements, if they had remained law, would have compelled employers to ascertain which employees in their workforce have family incomes at or below 400% and pay to certain of these employees money in lieu of health plan coverage equal to the highest contribution cost of any participant in the group health plan.

The repeal of these provisions reflects both Congress’ and the President’s willingness to address those aspects of the PPACA that may harm the country’s fragile economic recovery.

In a case of first impression, as reported by our Disability, Leave & Health Management Blog, a recent decision by a Florida federal district court has upheld an employer’s use of financial incentives to motivate employees to complete health risk appraisals as part of its group health plan. The class action centered on alleged violations of the Americans with Disability Act (ADA) by the employer, Broward County. In short, the court found that the County’s program fell within the ADA’s safe harbor provisions and, therefore, did not violate Title I of the ADA.

From an employee benefits perspective, this case may be instructive for employers seeking to design wellness programs to be part of their employer-sponsored group health plans, subject to the Employee Retirement Income Security Act (ERISA). This can be critical for employers that want to take advantage of certain aspects of ERISA, such as its preemption power over certain state laws.

As a governmental employer, the County’s group health plan would not be subject to ERISA. However, the court found its wellness program to be part of its group health plan based on the following factors: 

  • The insurance carrier paid for an administered the program as part of its contract with the County.
  • Only the employees who were enrolled in the County’s group health plan could enroll in the wellness program.
  • The description of the wellness program and its requirements were set forth in group health plan documents, causing the wellness program to be a term of the group health plan. 

These factors certainly are not binding on courts deciding cases involving ERISA plans. However, employers sponsoring wellness programs they hope to be ERISA-covered should consider incorporating these and possibly other factors into their plan design.

The Department of Labor (DOL) announced it is reviewing the use of electronic media by employee benefit plans subject to ERISA to furnish information to participants and beneficiaries, following and in response to Executive Order 13563 issued by President Obama to address and improve current regulations. If you have concerns about the current process, now is a good time to voice those concerns to the Department.

Current DOL rules, issued in 2002, provide standards for the electronic distribution of plan disclosures required under ERISA. There generally are two categories of participants to whom electronic disclosures of plan information under DOL authority could be made:

  1. those who can effectively access documents furnished in electronic form at any location where the participant is reasonably expected to perform his or her duties as an employee and with respect to whom access to the employer’s or plan sponsor’s electronic information system is an integral part of those duties; and
  2. those who affirmatively consent.

So, for example, a nationwide retailer who has hundreds of employees at the store level and for whom computer access is not an integral part of their duties, electronic disclosure of plan information is not available, absent affirmative consent which is in most cases not practical. The DOL opined some years ago that kiosks made available to employees for this purpose would not be sufficient to satisfy the “furnish” requirement.

Thus, the Department’s earlier guidance, while helpful, made it difficult for some employers to utilize technology for certain groups of employees. That guidance also does not reflect some of the more recent advancements in technology that may facilitate the furnishing of plan information. In fact, a stated purpose of the DOL’s current review:

is to explore whether, and possibly how, to expand or modify these standards taking into account current technology, best practices and the need to protect the rights and interests of participants and beneficiaries

The DOL is specifically looking for comments (due no later than June 6) on how to make these rules better. Its announcement sets forth 30 specific questions on a broad range of topics related to electronic distribution of benefit plan information. Examples include:

  • What are the most significant impediments to increasing the use of electronic media (e.g., regulatory impediments, lack of interest by participants, lack of interest by plan sponsors, access issues, technological illiteracy, privacy concerns, etc.)? What steps can be taken by employers, and others, to overcome these impediments?
  • Are there any new or evolving technologies that might impact electronic disclosure in the foreseeable future?
  • Who, as between plan sponsors and participants, should decide whether disclosures are furnished electronically? For example, should participants have to opt into or out of electronic disclosures?
  • If a plan furnishes disclosures through electronic media, under what circumstances should participants and beneficiaries have a right to opt out and receive only paper disclosures?

The Department hopes to hear from plan participants and beneficiaries, employers and other plan sponsors, plan administrators, plan service providers, health insurance issuers, members of the financial community, and the general public. Plan sponsors (and service providers who assist them with plan administration) will be paying close attention to future guidance which could provide significant cost savings relating to the manner in which plan communications may be made going forward.
 

Effective February 1, 2011, IRS Revenue Procedure 2011-8 has changed the IRS’s user fees for filing for determination letters for tax-qualified retirement plans. The fee changes include those for filing Form 5300, Application for Determination for Employee Benefit Plan, and Form 4461, Application for Approval of Master or Prototype or Volume Submitter Defined Contribution Plans. Although Form 8717, User Fee for Employee Plan Determination, Opinion, and Advisory Letter Request, has not yet been updated to reflect the new fees, the IRS advised taxpayers to continue to use the old Form 8717 until the new one is available, and, beginning February 1, 2011, submit this form with the new Revenue Procedure 2011-8 fees. IRS Announcement 2011-8 corrected the user fee schedule in Revenue Procedure 2011-8 for non-mass submitter master or prototype plans.

Federal District Court Judge, Roger Vinson, for the Northern District of Florida, Pensacola Division struck down the Patient Protection and Affordable Care Act (“PPACA”), the Federal health reform law dubbed by its critics as “Obamacare,” on Constitutional grounds yesterday. Judge Vinson agreed with the Attorneys General of 26 states that the mandates of the law exceeded the authority granted to the Federal government under the Commerce Clause to the U.S. Constitution. See Bondi v. U.S. Dept. of Health and Human Services, (N.D. Fla. 1/31/2011). The decision follows three prior Federal District Court decisions, two upholding the law and one striking it down for similar reasons.

The essence of the decision is that the law’s “individual mandate” – which requires all Americans to purchase a minimum level of health insurance beginning in 2014 or incur a penalty, goes beyond the Federal government’s power to regulate interstate commence rooted in what is known as the “Commerce Clause” of the Constitution. The District Court also held, citing the Justice Department’s own arguments concerning the critical function the individual mandate serves with respect to the PPACA as a whole, that the law “cannot survive without the individual mandate” and must therefore fail along with the individual mandate. In so ruling, Judge Vinson wrote:

Because the individual mandate is unconstitutional and not severable, the entire Act must be declared void. This has been a difficult decision to reach, and I am aware that it will have indeterminable implications. At a time when there is virtually unanimous agreement that health care reform is needed in this country, it is hard to invalidate and strike down a statute titled The Patient Protection and Affordable Care Act.

The Bondi decision, although it represents a significant victory for opponents of the health reform law, was not a total victory on all points for the Attorneys General and others who filed the lawsuit. Significantly, the District Court declined to order the Federal government to cease its activities in implementing the PPACA. It also rejected the plaintiff’s argument that the PPACA’s provisions requiring States to pay for a portion of the expansion of Medicaid beginning in 2014 improperly interfered with State sovereignty.

As a result of these limitations, Bondi will have little immediate practical effect on the implementation of the health reform law. The U.S. Justice Department immediately announced that it would appeal the District Court’s decision to the Eleventh Circuit.

It is unclear how the Eleventh Circuit or the Supreme Court will resolve these legal issues should the case proceed as most expect it will, or what changes might be made to the law in the coming days and weeks as Republicans buoyed by the decision are marshaling their forces in Congress to advance legislation to “repeal and replace.” We’ll all be staying tuned.

 

The following are some excerpts from the decision which provide a view into the reasoning of the Court . . .

 

Continue Reading Score Tied 2-2 as the Healthcare Challenge Heads to the Legal Superbowl – The Supreme Court

On January 27, 2011, the New York Times reported that Moody’s Investors’ Service has started to recalculate the States’ debt burdens to include the unfunded pension obligations owed to State employees. To date, States have not shown their unfunded pension obligations on their audited financial statements. Among the states with the largest per capita liability for unfunded pension benefits are Connecticut, Hawaii, Illinois, New Jersey, Kentucky, Massachusetts, Mississippi, Rhode Island and Alaska, according to the Times’ report. The change comes at a time when investors have grown increasingly wary about investing in state and local municipal bonds.

Continue Reading MOODY’S WILL COUNT UNFUNDED STATE PENSION BENEFITS IN RATING STATE BONDS