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A Better Partnership


Jun 2003
June 01, 2003

Human Resources Alert - Summer 2003

Topics included in this issue:



By Anthony J. Kolenic, Jr.

This is part three in our "How to Get in Trouble" series. If you are like most plan sponsors, you think--quite logically--that if you allow participants to invest their retirement plan funds, no one but the participant (least of all you) could ever be responsible for the participants' poor investment performance. But you would be wrong. It is easier than you probably think to get in trouble in this area. There are at least three things to watch out for.

Poor Investment Menu

The first danger area is relatively easy to understand: you can get in trouble if you do not offer participants a good mix of investment choices. Now, no plan has to offer participants the right to control their own investments. But if you do, some fiduciary--maybe you--is going to be responsible for the quality of those investment choices. So, you must act prudently in selecting and monitoring those choices and in changing those choices when circumstances warrant. This requires active and regular involvement in that process. Do not be fooled into thinking that the person helping you make those investment choices is going to take responsibility if things go awry. Most advisers make clear in their documents that they are not legally responsible for this aspect of plan administration.

Strive for 404(c) Protection

The second danger area is more difficult, because it seems to turn logic upside down. Section 404(c) of ERISA says that, unless you take certain steps, some fiduciary--maybe you--can be sued by participants because the investments they chose did not perform well. Now, granted, that is not an easy case to make. Sooner or later, however, someone somewhere is going to successfully make it. Every plan sponsor that allows participants to control their own investments should attempt to comply with Section 404(c) of ERISA. It is not terribly hard, and it might actually help decrease your liability exposure. Be alert to advisers who say, "Complying with Section 404(c) of ERISA is so complicated, you are bound to mess it up so you will not be protected anyway, so why try." I strongly disagree with that approach. It cannot hurt to try to comply, and you certainly will not comply by accident, so why not make the effort?

Ask the adviser helping you with 404(c) compliance to certify in writing that he or she is doing everything Section 404(c) of ERISA requires. You will not get that certification, but you will at least start a conversation that will help you understand what else must be done in order to fully comply. The odds are you are not getting as much help as you thought. There is a lot of partial compliance out there that attempts to pass for full compliance.

Participant Education

The third danger area is really at the heart of this issue: the government's desire to have you educate plan participants regarding their investments. The government's philosophy is that if you are going to turn participants loose to invest plan money, you must give them adequate tools to do so. You should never give participants specific investment advice, but you should work hard to make sure that participants have the information necessary to make reasonably prudent investment decisions.

In conclusion, this is one area where it pays to be diligent now, even though the problems that result may not appear for years and years. As Ben Franklin so wisely said, "A stitch in time saves nine."



Five years ago, in Koester v Novi, 458 Mich 1 (1988), the Michigan Supreme Court ruled that gender-based harassment constitutes sexual harassment under the Elliott-Larsen Civil Rights Act even where the harassing conduct is not sexual in nature. On June 11, 2003 the Supreme Court reversed its earlier decision in Koester and held that conduct must be sexual in nature to constitute sexual harassment under the Civil Rights Act.

In Haynie v State of Michigan, the plaintiff claimed that a female police officer had been subjected to hostile and offensive comments about her gender, but admitted that the comments were not overtly sexual in nature. Focusing on Elliott-Larsen's specific definition of sexual harassment as "unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct or communication of a sexual nature," the Supreme Court concluded that this type of nonsexual gender-based conduct does not constitute "sexual harassment" under Michigan law.

Sexual harassment is just one type of sex discrimination, and although gender-based conduct that is not sexual in nature does not constitute sexual harassment, the Haynie court cautioned that such conduct may still constitute sex discrimination. So why is the decision important? Because a plaintiff must prove that s/he suffered a tangible, adverse employment action to prove sex discrimination, whereas the plaintiff need not prove this element to establish a sexual harassment claim. In other words, it is often harder to prove a sex discrimination claim than a sexual harassment claim. Therefore, the Haynie decision significantly narrows the scope of sexual harassment under the Elliott-Larsen Civil Rights Act.

Haynie puts Michigan law in contrast to the federal Civil Rights Act (Title VII), where gender-based conduct that is not sexual in nature may constitute sexual harassment, and as such, the decision could have a significant effect on plaintiffs for several reasons. First, Title VII applies to employers with 15 or more employees, while Elliot-Larsen covers all employers with one or more employees. Second, to proceed under Title VII, a plaintiff must first file a charge of discrimination with the EEOC within 180 days of the alleged discrimination, and so a plaintiff who waits more than six months will lose her right to sue under Title VII. Elliott-Larsen, in contrast, has a three-year statute of limitations. Finally, although most employees work for employers who are large enough to be covered by Title VII, employees often do not want to sue under Title VII because the federal courts are perceived as less friendly to plaintiffs.

It is important to remember that even after Haynie, gender-based conduct in the workplace may still constitute sex discrimination and can result in serious employee morale problems and significant legal liability. Employers should therefore always be vigilant about preventing such conduct in the workplace.



By Jonathan P. Kok

The Fair Labor Standards Act (FLSA) was enacted in 1938 and requires employers to pay their employees minimum wages and overtime wages for any hours worked in excess of 40 per week. The FLSA, however, exempts certain "white-collar" employees from these requirements. White-collar employees include executives, professionals, computer professionals, administrative employees, and outside sales employees. The white-collar exemptions have often been criticized for being unclear and outdated, and have resulted in a great deal of recent litigation of overtime claims. On March 31, 2003, the U.S. Department of Labor issued its long-anticipated proposed regulations overhauling the white-collar exemptions. If enacted, these will be the first significant amendments to the white-collar exemptions in almost fifty years.

Simplified Criteria for Exemption Tests

Under existing rules, an employee's eligibility for the white-collar exemption is determined in part by looking at the type of work he/she does. This analysis involves two separate tests, often called the "long" and "short" tests. Which test is applied to a given employee depends on how much that employee is paid per week. The proposed regulations would eliminate this dual test and provide a single standardized test for each category of exemption.

With one exception, the criteria for the proposed standardized tests are generally the same as the criteria for the current "short" test. The exception is the test for exempt administrative employees. In the past, the short test required an exempt administrative employee to exercise "discretion and independent judgment." This ambiguous standard was confusing to employers and courts alike. The proposed test would require administrative employees to simply hold "a position of responsibility," defined as a position requiring "work of substantial importance" or work requiring "a high level of skill or training." On first blush, this new test does not appear to be any less confusing than the current one, and if enacted, it likely will continue to generate disputes and litigation.

Minimum Salary Level Increased

Under the proposed regulations, the minimum salary for an exempt employee would be increased from between $155 and $249 per week for the "long" test, and $250 or more per week for the "short" test, to a single $425-per-week level for all exempt employees. The Department of Labor estimates that this change alone would result in the lowest 20 percent of salaried employees losing their exempt status.

Special Rule for "Highly Compensated" Employees

Another significant—and potentially positive—change is the proposed rule for employees paid $65,000 or more annually. These "highly compensated" employees would be automatically exempt from overtime if they have just one identifiable executive, administrative or professional function as outlined in the standardized test. In determining who earns $65,000 or more, one would count all base salary, commissions, nondiscretionary bonuses and other nondiscretionary compensation. If an employee's total compensation does not equal $65,000 by the end of the year, the regulations allow an employer to make an additional payment in the first pay period following the end of the year sufficient to bring the employee to the guaranteed level and thereby preserve the exemption.

Deductions From Salary

Under the current regulations, an employer is severely limited in its ability to make deductions from an employee's salary for disciplinary reasons. Improper deductions can destroy an employee's exempt status. The proposed regulations would ease these restrictions in certain circumstances. Currently, employers may make deductions for certain full-day absences, but may only dock an employee's salary for a disciplinary suspension if it is for violation of a major safety rule. Under the proposed rules, deductions could be made for any full-day disciplinary suspension for violation of written workplace rules. The Department of Labor describes this as a "common sense change" that will permit employers to uniformly hold exempt employees to the same standards required of nonexempt employees.


Additional information about the proposed regulations is available on the Department of Labor's Web site at The Department of Labor will be accepting public comments on the rules until June 30, 2003. If you would like to submit a comment or have any questions about the impact these rules may have on your workplace, please feel free to contact any member of the Warner Norcross & Judd Human Resources Group.



By Sue O. Conway

Do your employees complain about the paperwork and delay in receiving reimbursement from their health flexible spending accounts? The IRS recently released guidance on the use of credit cards and debit (or "stored-value") cards to pay medical expenses with section 125 pretax health flexible spending accounts (Health FSAs). The rules also apply to health reimbursement arrangements ("HRAs"). Revenue Ruling 2003-43 describes how these cards can be used.

Health FSAs reimburse employees for medical expenses that are not otherwise covered by an employer's health insurance (such as co-payments, deductibles, orthodontics, lasik surgery, etc.). If set up in accordance with IRS rules, Health FSA reimbursements are not taxable to the employee.

Traditionally, FSAs have worked like this: an employee pays for the covered medical expense out of his/her own pocket and then applies to the employer (or a third-party administrator) for reimbursement. This involves administrative paperwork and the employee must wait for reimbursement. Much of the paperwork is due to IRS claims substantiation requirements. The participant must provide a written invoice or third-party statement that the medical expense has been incurred and the amount of the expense. The participant must also certify in writing that the expense has not already been reimbursed and is not reimbursable under any other health plan. In addition, the expense must be a qualified medical care expense under Section 213 of the Internal Revenue Code. These requirements also apply to HRAs.

Safe Harbor Requirements

The new Revenue Ruling describes a "safe harbor" method by which the substantiation requirements can occur electronically. Before the ruling, it was unclear whether debit or credit cards were permissible because, in essence, the employee could pay for the medical expenses without first substantiating them.

Now an employer can use the following safe harbor guidelines for credit or debit card ("Card") transactions:

  • Employees must certify in writing upon enrollment and once every plan year thereafter that they will use the Card only for eligible medical expenses for themselves and dependents and that expenses paid with the Card have not been reimbursed by, nor will they seek reimbursement under, any other health plan. A reference to this certification also appears on the back of the Card.

  • The employee must keep receipts for medical expenses paid with the Card.

  • The Card's "credit limit" is the maximum annual amount elected under the FSA.

  • The Card is used to pay only authorized medical providers such as physicians, hospitals, pharmacies and the like (as identified by merchant codes).

  • The Card will be canceled when the employee terminates employment (although it is expected that the IRS will permit continued use of the Card if the participant elects COBRA or in other appropriate circumstances).


Under the safe harbor, every claim paid with the Card must be substantiated; an employer should not depend on sampling techniques without further IRS guidance. Substantiation is automatic in some cases, such as where the amount of the transaction exactly equals the co-payment under the employer's major medical plan (e.g., a $10 charge at a physician's office where there is a $10 office visit co-pay) or when there is a recurring expense (e.g., a prescription that is refilled on a regular basis for the same amount using the same pharmacy), or if the provider at the point of sale verifies that the charge is for a medical expense (e.g., enters an electronic code that provides information to the claims administrator at the time of the transaction). All other charges will be treated as conditional, pending confirmation through receipts submitted by the participant.

Finally, there must be procedures to recover improper payments if a claim is later discovered to have been ineligible for reimbursement. The ruling describes a correction method that involves employee reimbursement of the plan, either voluntarily or through offsets or withholding of other benefits. The guidance also requires employers to report Card payments to medical service providers on Form 1099-MISC if they total $600 or more in a taxable year.

More Participation Expected

Because of this new guidance, it is anticipated that more employers will implement credit or debit card reimbursement and that employee participation in FSAs will increase as a result of the convenience of not having to pay the expense up front and wait for reimbursement. Employers who want to use credit or debit cards will need to review and modify their plan documents and summary plan descriptions (SPDs) to add the new procedures and safeguards. If an outside claim administrator is used, employers should ensure (through their contract with the administrator) that substantiation methods are in place that comport with the IRS guidance.



By George L. Whitfield

As a result of the current economy, employers are more and more interested in identifying administrative expenses that can be paid from qualified plan assets. ERISA and the Internal Revenue Code provide little specific guidance. In general, the Department of Labor distinguishes "settlor" (establishment and design) expenses from proper administration costs. There have been uncertainties concerning the extent to which a proper plan expense may be charged to one or more individual participants, rather than participants as a whole, and when a per capita rather than pro rata allocation is appropriate. DOL Field Assistance Bulletin 2003-3 (May 19, 2003) provides new and surprisingly flexible guidance on these issues for defined contribution plans.

In general, the DOL says that plan sponsors and fiduciaries have considerable discretion in determining how plan expenses will be allocated. Authority for allocation of expenses should be in the plan document and should be followed unless inconsistent with ERISA and the requirement to administer a plan solely in the interest of the participants and beneficiaries.

The DOL previously leaned toward allocation to the plan as a whole if the action is required by the plan or applicable law. Thus, the DOL ruled that the cost of evaluating a qualified domestic relations order (QDRO), and suggested that costs associated with benefit payments, must be paid from the plan as a whole. In contrast, the DOL allowed reasonable costs related to participant investment direction and participant loans to be separately charged to individual accounts. The new guidance reverses the QDRO position and suggests that expenses associated with such things as hardship withdrawals, calculation of optional benefits, distributions and possibly even expenses of maintaining accounts for former participants may be charged to the individual participant. This more liberal guidance is subject to compliance with all IRS requirements. For example, charging expenses to former employees may discriminate in favor of highly compensated employees or indirectly coerce a distribution prior to retirement age.

If an expense is to be allocated to the plan as a whole, the fiduciary must follow the plan, but if the plan is silent or unclear, the fiduciary must prudently balance the interests of various participants. Favoring one class over another is not prohibited if there is a reasonable relationship between the expense and the method of allocation. Additional caution must be exercised if the plan fiduciary is also a participant affected by the decision. Pro rata allocation based on the size of each participant's account is normally an equitable method of allocation, but a per capita allocation of the same dollar amount to each account also may be appropriate for services unrelated to the size of the account, such as recordkeeping and annual reporting. Expenses like investment fees based on the assets generally cannot be allocated per capita. On the other hand, the DOL suggests that individual investment advice might be allocated on either a pro rata or per capita basis, or even on a utilization basis.

The bulletin closes with a reminder that summary plan descriptions must include a summary of fees and charges that affect benefits. As a result of these more liberal rules, plan sponsors may want to reconsider their policies and practices concerning administrative expenses as well as the related plan and SPD language. On the other hand, employers who pay plan expenses directly certainly may continue to do that.



By Kathleen M. Hanenburg

In the late 1990s, many employers relied on non-U.S. workers to fill high-tech positions in information technology, engineering, and similar fields. Employers also sought foreign workers for other professional positions requiring hard-to-find skills and training, such as international finance and supply chain management. Congress responded to the demand for foreign professionals with specialized bachelor's degrees by temporarily raising the annual quota on "H-1B" visas to 195,000 per year.

Beginning in October of 2003, however, if Congress doesn't act, the H-1B quota will drop to 65,000 per year. During the most recently completed fiscal year—a time of slowing economic conditions—over 79,000 H-1B visas were issued. If this level of demand continues, or if demand increases due to an improving economy, work visas for desirable non-U.S. workers may become unavailable in early to mid-2004.

Employers who have looked to foreign workers to fill professional positions in the past, or who plan to do so in the future, will need to plan ahead to make sure the necessary work authorization will be available for such employees. Note, however, that non-U.S. workers who already have H-1B authorization to work for another employer are not subject to the quota (although a new employer must make sure that the proper paperwork is completed to transfer the visa before placing the worker on its payroll).

Employers who hired recent college graduates with temporary one-year work cards should also consider whether they will want to retain these employees, and should consider filing an H-1B application as soon as possible. Such graduates are normally in "F-1" or student status, and an application to change their status from F-1 to H-1B will be subject to the quota.

If you have questions about the H-1B process or any immigration issues, please contact any member of the Warner Norcross & Judd Human Resources Group.



An increasing number of companies are offering their employees a health flexible spending account ("health FSA"). This popular benefit arrangement allows employees to set aside a portion of their salary on a pretax basis, and then draw upon the money when they incur qualified medical expenses. Allowing employees to pay for medical expenses on a pretax basis helps both the employer and the employees. Neither federal income tax, state income tax (in most states, including Michigan) nor FICA tax (neither employer nor employee share) is payable on the amount set aside.

Employers with large health plans (over $5 million in annual insurance premiums or annual claims paid) had to comply with the HIPAA Privacy Rules by April 14, 2003. Employers with small health plans have until April 14, 2004, to comply. While most employee benefits professionals were in agreement that health FSAs are "health plans" subject to the Privacy Rules, informal comments made by certain government officials called this into question. For employers who offer only fully insured health coverage and were subject to the Privacy Rules simply because of their health FSA, this was a key concern.

The Department of Health and Human Services has now laid this issue to rest. Newly issued Q&A guidance makes clear that a health FSA is subject to the Administrative Simplification requirements of HIPAA (i.e., the Privacy, Electronic Data Interchange, and Security regulations). As with any health plan, if the health FSA is self-administered (i.e., administered by the employer rather than a third- party administrator) and has fewer than 50 participants, the health FSA is not subject to the Privacy Rules. The bottom line: if you offer a health FSA, it is now clear that you must comply with the full panoply of Privacy Rule requirements.



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Human Resources Alert is published by Warner Norcross & Judd to inform clients and friends of new developments. It is not intended as legal advice. If you need additional information on the topics in this issue, please contact your Warner Norcross attorney or any member of the Firm's Human Resources Law Group.

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