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Coordinating Medical
Benefits with Medicare
A recent federal district
court decision again puts in jeopardy the ability of employers to
coordinate retiree health benefits with Medicare. In AARP v. EEOC,
No. 2:05-CV-00509 (E.D. Pa. March 30, 2005), the court ruled that the
Equal Employment Opportunity Commission (EEOC) does not have the power to
exempt retiree medical plans from the requirements of the Age
Discrimination in Employment Act of 1967 (ADEA). The cost of maintaining
retiree health benefits without a Medicare bridge or carve-out feature
(providing lesser retiree health benefits to retirees who are eligible for
Medicare than to retirees who are not yet eligible for Medicare) likely
will encourage more employers to limit or eliminate retiree health
benefits coverage.
The AARP case is the
latest word in a decades-long struggle among Congress, the EEOC and groups
purporting to represent the interests of retirees to define the extent to
which employers can provide retiree health programs that coordinate with
Medicare. The decision of the U.S. Court of Appeal for the Third Circuit
in Erie County Retirees Ass’n v. County of Erie, 220 F.3d 193
(3d Cir. 2000) that offering lesser benefits to Medicare-eligible retirees
is a clear violation of the ADEA came as a surprise to many employers. And
although the EEOC initially adopted the Third Circuit’s decision as its
national enforcement policy, the agency soon recognized that the policy
was causing employers to drop their retiree health plans or to refrain
from starting them. As a result, in April 2004 the EEOC approved the final
rule exempting retiree health benefits from the prohibitions of the ADEA
that is at issue in the AARP case.
The AARP decision is
probably not the final word on this issue since the EEOC has indicated it
will appeal the district court’s decision. However, the appeal would be
decided by the Third Circuit Court of Appeals, the same court that found
coordination of retiree health benefits with Medicare violated the ADEA in
the Erie case. Final resolution of this issue ultimately may rest
in the hands of the U.S. Supreme Court or Congress. In light of this
controversy and the uncertainty in this area, employers should exercise
caution in implementing or changing retiree health coverage and should
make such changes only after consulting their legal advisors.
Electronic Communications
with Employees
A recent ruling in the U.S.
District Court of Massachusetts may have an impact on the use of email and
other forms of electronic communications as a method of providing
employees with important notices. In Campbell v. General Dynamics
Governments Systems Corp., 321 F. Supp. 2d 142 (D. Mass. 2004) the
court found that an employee was not bound by a revised employee dispute
resolution policy because the sender line and subject line of the email
communicating the revised policy was not adequate to inform the employee
that the email contained important information affecting the employee’s
legal rights. While the case is on appeal to the U.S. Court of Appeals for
the First Circuit, regardless of the final outcome of this case the
district court’s opinion is a timely reminder of the ‘best practices’
that employers should use when communicating important employment-related
notices or policies by email or other electronic methods.
The IRS and the DOL both
have issued guidance that permits the use of electronic methods to provide
certain notices and other required disclosures to benefit plan
participants as long as certain specific guidelines are followed. These
rules have accelerated the use of email and other electronic communication
channels by employers to communicate important legal notices to employees.
While helpful in setting the framework for electronic communications,
these guidelines may not be fully up to pace with the modern work world,
however, as the Campbell case illustrates.
When using electronic
methods of communications, employers should consider the following ‘best
practices’: (1) make sure the sender is matched to the importance of the
message, so that the more important the message the more senior the
sender; (2) the subject line should clearly indicate the content and
convey the importance of the message; (3) use priority indicators to
highlight critical emails; (4) use an equivalent of U.S. mail ‘return
receipt requested’ when sending important notices; (5) protect the
privacy of individual recipients by using a blind distribution list; (6)
clearly identify in the message any supplementary components to the
communication, such as employee meetings, paper or electronic forms, or
important attachments to the email.
For more information and
guidance on using email or other forms of electronic communications to
provide employees with benefits or other employment-related information,
employers should consult employment benefits counsel.
401(k) Plan Automatic
Enrollment
Automatic enrollment of
participants into a company’s 401(k) plan can be a powerful tool for
improving participation and contribution levels in the plan. While
statistics prove that automatic enrollment boosts overall retirement
savings, lingering questions about the interaction between automatic
enrollment and some state wage and hour laws and ever-present fiduciary
concerns have kept many employers from embracing this plan design
alternative. Two bills recently introduced in Congress would address these
issues and create incentives for employers to implement automatic
enrollment.
H.R. 1508, "401(k)
Automatic Enrollment Act of 2005," sponsored in the House by Rep.
Emanuel (D-CA) and S. 875, "Save More for Retirement Act of
2005," sponsored in the Senate by Sen. Bingaman (D-NM) were both
introduced in April of this year and have been referred to committee for
further action. Both bills would create an automatic enrollment ‘safe
harbor’ for actual deferral percentage (ADP) testing and would provide
some level of fiduciary protection with respect to default investment
options selected by plans for participants who are automatically enrolled
and fail to direct the investment of contributions. In addition, the bills
generally would amend ERISA to preempt state wage and hour laws to the
extent they would prohibit or restrict automatic enrollment.
While it is uncertain
whether Congress will take action on this or other pension reform
legislation this year, stay tuned for further developments regarding this
positive move to encourage retirement savings.
New Nonqualified
Retirement Plan Rules
The addition of Section 409A
to the Internal Revenue Code is a significant change that will affect most
nonqualified deferred compensation plans and many other arrangements,
including employment agreements and severance plans. We provided
information about this important change in our client alert ‘Act
Now to Safely Navigate Nonqualified Deferred Compensation Minefield’.
We are still awaiting important additional guidance from the IRS for the
implementation of these new rules, but employers should identify affected
plans and be ready to work with their employee benefit counsel as soon as
that guidance is issued to implement operational changes and complete
necessary plan amendments to assure compliance with year-end deadlines.
For more information about any of the
topics discussed in this update or for assistance with any other employee
benefit or executive compensation matters, please contact our employment
benefits counsel Gene Griggs at 704.342.5320 or ggriggs@poynerspruill.com,
Hugh Davis at 919.783.2908 or hwdavis@poynerspruill.com,
or Nancy Brower at 704.342.5275 or ncbrower@poynerspruill.com.
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