BakerHostetler's Benefits Broadcast

Alerts / June 3, 2013

To many of our readers, watching the implementation of the Affordable Care Act is like watching Godzilla tear through Tokyo: the sight is too amazing to look away, even though you know you ought to run! All kidding aside, there are many current events that are occurring in the world of employee benefits that are just as important as the all-engrossing Affordable Care Act. In this and the coming editions of the Benefits Broadcast Newsletter, we will strive to highlight and inform you about current topics related not just to the Affordable Care Act, but to the rest of the world of health, welfare and retirement benefits for employees and compensation and benefits for directors and executives. Topics covered today include:

We hope you find these brief articles helpful. As always, if there is a subject you would like to see covered, let us know. Contact any member of BakerHostetler's Employee Benefits Group with questions or comments.


The U.S. Department of Labor (DOL) recently issued model notices that employers may use to satisfy the Health Insurance Marketplace notice required beginning October 1, 2013. Because individuals must have access to private health insurance through the new Health Insurance Marketplace (also referred to as the Health Insurance Exchange) beginning in 2014, most employers must provide a written notice to all of their employees regarding the coverage options available through the Health Insurance Marketplace no later than October 1, 2013. Also on October 1, 2013, most employers must begin providing a Health Insurance Marketplace notice to each new employee within 14 days of the employee's start date.

Employers subject to the Health Insurance Exchange notice requirement are the same as those who are subject to the federal Fair Labor Standards Act (FLSA). This generally includes employers that have employees who engage in interstate commerce. The FLSA also specifically applies to certain entities such as hospitals, preschools, elementary and secondary schools, institutions of higher education and government agencies. According to the FLSA rules, certain affiliates of covered employers will also be subject to the notice requirements.

According to the temporary guidance issued by the DOL on May 8, 2013, the notice may be provided by first-class mail or it may be provided electronically in a manner that satisfies the DOL's electronic disclosure safe harbor. The model notice for employers that offer a health plan to some or all employees may be obtained here. The model notice for employers that do not offer a health plan may be obtained here. The DOL has also issued a new model COBRA election notice that includes information regarding the Health Insurance Marketplace. The model COBRA election notice may be obtained here.

October will be here before you know it! Employers are encouraged to take immediate action to (1) determine whether the Health Insurance Marketplace notice requirement applies, and (2) schedule preparation of appropriate notices.

If you have any questions about the Health Insurance Exchange notices, the October 1, 2013, deadline or FLSA requirements, contact Stacy E. Wilhite at or 614.462.2609, Leigh Ann Wilson at or 614.462.2603, or any other member of the BakerHostetler Employee Benefits Group.


One theme weaving its way through the multitude of Affordable Care Act (ACA) guidance released over the past few years is this: Employers and group health plans must learn to count, and they must learn to count the "ACA way." Several provisions with effective dates starting in 2014 require employers to know the size of their workforce. Similarly, several provisions with effective dates starting in 2013 and 2014 require group health plans to know the number of lives covered by the plan. In all instances, there are specific rules regarding when employees and plan-covered lives should be counted and how they should be counted.

The following chart identifies the ACA provisions affected by an employer's number of employees or a plan's number of covered lives. Employers and group health plans should study this chart to identify what and when to start counting employees and covered lives to ensure compliance with the ACA. Click on the image for a larger versiom of the chart.

Please contact Jennifer Mills at or 216.861.7874 or Susan Whittaker Hughes at or 216.861.7841 if you need any assistance in determining when and how to count employees and plan-covered lives in compliance with the ACA.

See the coming editions of the Benefits Broadcast Newsletter for an overview of the rules for identifying full-time employees, the ACA 90-day waiting period, and additional updates about compliance with the ACA.


Several governmental agencies, including the Internal Revenue Service (IRS), Department of Labor (DOL), Securities and Exchange Commission (SEC) and Department of Health and Human Services (HHS), have stepped up their audit and examination activities in a number of areas related to employee benefits and executive compensation. Clients are receiving audit letters from IRS, DOL and HHS for their qualified retirement plan and group health plans with increasing frequency. The IRS has embarked on various "compliance" projects, such as the "compliance questionnaire checklist" project recently completed on Internal Revenue Code Section 401(k) plans, and a recently announced compliance initiative related to Code Section 457(b) plans sponsored by non-governmental entities. Even though the compliance questionnaires are not considered an official "examination," plan sponsors are cautioned to respond carefully to avoid a full examination or a plan disqualification event.

In an effort to assist plan sponsors in understanding the targeted areas of focus, self-assessing potential "risk" areas and taking proactive steps, we will be including periodic articles in the Benefits Broadcast on selected audit topics. We will cover the types of plans that may be subject to audit or examination (including defined contribution plans, welfare plans, executive compensation arrangements and other non-qualified plans), the key areas of focus of the audits and examinations (including compliance with HIPAA and COBRA), common noncompliance issues and the potential penalties if deficiencies are not timely corrected. We will also explore the various methods of self-correction and correction by application offered by the various government agencies. Making sure that your employee benefit and compensation plans are in good order is not only important, but can also reduce the chance for expensive "surprises" if noncompliant processes or issues are found on audit.

For questions about this article, contact Leigh Ann Wilson at or 614.462.2603 or any member of the BakerHostetler Employee Benefits Group.


On July 1, 2013, the portion of the revised "listing standards" of the New York Stock Exchange (NYSE) and NASDAQ Stock Market (Nasdaq) related to the independence of advisors to compensation committees of listed companies becomes effective. Even though not directly required by the listing standards, the heightened authority and responsibility to retain independent consultants and advisors, in combination with additional points of consideration in determining the independence of advisors and the committee's increased responsibility for oversight, makes the subject of independent advisors an important consideration in formulating compensation and benefits for executives and directors.

Due to the focus of shareholders, the Securities and Exchange Commission (SEC) and the media on executive compensation of listed companies, compensation committee members should identify the extent to which current advisors are or are not "independent" according to the listing standards or when there is a conflict of interest or the appearance of a conflict. Determining independence is situational. Factors to consider may include the extent of other services provided by the advisor to, and the relative value of fees received from, the issuer. Consultants and legal advisors selected by the management team may not be viewed as "independent" in the context of management compensation and benefits. A legal advisor that serves the issuer in a significant ongoing role may not be viewed as independent in situations where the issuer's goals or those of its executive officers are at odds with those of its shareholders.

Circumstances and topics of compensation committee consideration that would likely mandate the use of independent advisors or legal consultants include executive or director compensation or benefits (especially where "say on pay vote" requirements are applicable), change in control severance benefits for executives and the compensation package for a new chief executive officer. Although the listing standards exclude broad-based benefits from the scope of independent review requirements, the existence of a non-qualified supplemental retirement benefit plan that is tied to a broad-based retirement plan may create the need to include the broad-based plan in the scope of the independent review.

There are many factors that committee members should consider and a range of approaches to take. The appropriate approach may depend on the size and industry of the issuer, or other circumstances that may necessitate a more or less cautious approach. The committee might consider utilizing the issuer's in-house counsel, who is generally exempt from the independence standards or the committee may determine to retain independent counsel to analyze the independence of current advisors, identify circumstances that call for a level of independent review and design appropriate corporate governance procedures.

For a detailed review of the revised listing standards that were issued in January 2013, see the BakerHostetler January 2013 executive alert, "SEC Approves NYSE and NASDAQ Listing Standards Addressing Dodd-Frank Act Requirements for Compensation Committees."

If you have any questions about planning for executive compensation, contact John J. McGowan at or 216.861.7475, Raymond M. Malone at or 216.861.7879, Georgeann G. Peters at or 614.462.4769 or any other member of the BakerHostetler Executive Compensation and 409A Compliance Team.


Most issuers of healthcare insurance likely have heard about the $500,000 limit on deductible compensation that became effective January 1, 2013, but might be surprised to know how much broader the scope of the deduction is compared to the familiar $1 million deduction limit on executive compensation applicable to public companies. Affiliates of those health insurance providers might be even more surprised to learn that the regulations recently proposed by the IRS extend the $500,000 deduction limit to certain subsidiaries and affiliates even though they are not health insurance providers. For example, the deduction limit may apply to a for-profit parent company and its affiliates that do not provide healthcare insurance if at least one affiliate does or to a parent corporation to a captive insurance company. Any for-profit healthcare providers, hospital systems and others considering whether to become a provider of healthcare insurance are cautioned to consider the potential cost of providing non-deductible compensation.

The scope of the limit is broad. Introduced by the Affordable Care Act (ACA), Internal Revenue Code Section 162(m)(6) provides that covered health insurance providers and their non-insurance company affiliates may not deduct compensation and other remuneration in excess of $500,000 per year. The limit applies generally to compensation paid or otherwise deductible (but for the limit) beginning on or after January 1, 2013, and may include payments after 2012 of deferred compensation attributable to services performed during a 2010-2012 transitional period. Deferred compensation attributable to services performed prior to 2010 is entirely excluded.

A covered health insurance provider means any insurance company or similar organization, such as an HMO, that is subject to state insurance law and receives premiums from providing health insurance coverage. The proposed regulations specifically exempt an employer that maintains a self-insured health plan for its employees from the definition of a covered health insurance provider but leave open the possibility that a captive insurance company may be a covered entity. For years after 2012, health insurance providers will be subject to the $500,000 deduction limit for only in years in which 25 percent or more of the total premiums received for health insurance are for "essential healthcare services."

The $500,000 deduction limit will apply to any member of a parent-subsidiary controlled group of corporations, a parent-subsidiary group of trades or business or an affiliated service group in which a covered healthcare provider is a member at any time during the taxable year. Brother-sister commonly controlled groups of businesses are excluded. The affiliate or parent need not be a health insurance provider to be a covered entity. However, the proposed regulations provide a "de minimus" exception for years in which total healthcare premiums are less than two percent of the gross revenues of the health insurance provider and all other members of its affiliated group.

The $500,000 deduction limitation under Section 162(m)(6) is different from the general $1 million limit on deductions for executive compensation under Section 162(m)(1) in the following notable ways:

  • The $500,000 limit does not apply to just publically traded entities, but to any private or public covered entity and members of the affiliated group.
  • The $500,000 limit applies not just to the top-tier executive, but to all individuals providing services to a covered health insurance provider and its affiliates, including employees, consultants, non-employee directors and independent contractors who do not provide substantial services to unrelated entities.
  • There is no exception to the $500,000 limit for performance-based or commission-based compensation, or compensation related to binding contracts. Thus, remuneration subject to the limit includes all types, including equity-based compensation and bonus payments. An exception is provided for benefits earned under qualified plans (including pre-tax deferrals to a 401(k) plan), tax-favored retirement benefits and other similar tax- advantaged arrangements.
  • Because the limit applies to the year of the deduction and not necessarily the year of the payment, the $500,000 limit continues to apply after the employee's termination. For example, involuntary severance pay may be attributed to the year of the termination or in a proportional method according to the years in which the services were performed.
  • Starting on January 1, 2013, the $500,000 deduction limit applies to vested deferred compensation attributable to services performed on or after January 1, 2010, as long as the employer is a covered entity in the year of the deduction.

Thus, many tools traditionally deployed to address the $1 million deduction limit will not be useful to escape the $500,000 deduction limit. Covered entities and their affiliates to which the deduction limit applies will want to review their current executive compensation packages as they consider strategies and options to address the $500,000 deduction limit.

For more information about the $500,000 limit on deductible executive compensation, contact John J. McGowan at or 216.861.7475, Raymond M. Malone at or 216.861.7879, Georgeann G. Peters at or 614.462.4769 or any other member of the BakerHostetler Executive Compensation and 409A Compliance Team.

Baker & Hostetler LLP publications are intended to inform our clients and other friends of the firm about current legal developments of general interest. They should not be construed as legal advice, and readers should not act upon the information contained in these publications without professional counsel. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you written information about our qualifications and experience. © 2013 Baker & Hostetler LLP