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A Better Partnership


Dec 2007
December 19, 2007

Human Resources Alert - Winter 2007

Topics included in this newsletter:


by John H. McKendry, Jr.

The U.S. Department of Labor issued final regulations on Qualified Default Investment Alternatives (QDIAs) on Oct. 24, 2007. Plan sponsors previously were granted relief from fiduciary liability for a participant's investments only if a participant actually directed investment. Because of concerns that employees are not saving sufficient amounts for retirement and are often overly conservative in choosing investment options, employers, with regulatory encouragement, have increasingly been offering automatic, required enrollment in plans and have sought fiduciary protection when participants fail to direct investments. In our Summer 2007 Human Resources Alert, we summarized the provisions of the then-proposed QDIA regulations.

The final regulations largely mirror the proposed regulations and reiterate the basic conditions for fiduciary relief with changes to: permitted default investment alternatives; the timing, content, and means of providing notice; and the addition of transition rules and effective date guidance.

Basic Conditions

A plan offering a QDIA must do the following:

  • Provide a participant with the opportunity to otherwise direct investment.
  • Distribute a compliant notice 30 days in advance of eligibility (or at eligibility, if the plan has immediate eligibility).
  • Permit investment direction as frequently as for other plan investment elections (at least quarterly).
  • Offer a broad range of investment alternatives (at least three with materially different risk and return characteristics).
  • Allow participants to make a transfer or withdrawal from the QDIA within the first 90 days of the initial investment without a penalty (liquidation, exchange, redemption or similar fee).

What Is a QDIA?

A QDIA consists of one of the following three alternative types of investments, each of which must consist of a mix of equity and fixed income investments:

  • A life cycle or targeted retirement date fund.
  • A fund or model portfolio appropriate for plan participants as a whole - such as a balanced index fund.
  • A managed fund.

The default alternatives may be provided through a variable annuity product. Stable value or money market funds are permitted only for the initial 120 days of an employee's participation. Employer securities are prohibited except as a matching contribution or as an ordinary investment of a permitted investment option.

Giving Notice

The QDIA notice must be furnished initially, and then annually, at least 30 days in advance of each plan year. The notice must describe the circumstances for default investment; the elective contributions permitted or required by the plan; the right to decline or change the rate of contribution; the objectives, risk and return characteristics and fees and expenses attributable to the QDIA; the ability of the participant to redirect investments (with any attendant restrictions, fees and expenses); the plan's other investment alternatives; and where the participant can obtain additional information.

The notice must be separate from the summary plan description but may be provided with account statements or other plan notices to the participant.

Transition/Effective Date Rules

If the current default alternative is a pre-effective date (Dec. 24, 2007), stable value or money market fund, investments before the effective date may remain and be considered as a QDIA if the rate of return is guaranteed and there are no fees or surrender charges imposed on a participant withdrawal. Mapping of a stable value/money market fund to a replacement QDIA is not automatically protected but may be made if the ERISA fiduciary standards, including the prudent expert requirements, are satisfied.

Taking Action

If there are participants who fail to make an investment election, plan sponsors should select a QDIA and provide the required notice as soon as possible. As with the remainder of the menu, a sponsoring employer should annually conduct a fiduciary due diligence review of the provider and investment menu including the QDIA.


by Steven A. Palazzolo

So, you are a frontline plant supervisor at the ACME Widget Company. What on earth is your job?

Is it to make more widgets in a more cost-effective manner to contribute to the bottom line? That might be exactly what your job description says, and if it does not say this exactly in the same way it probably says something eerily similar, written by some more senior member of management who is even farther away from the actual production process than you are.

So is your job really to make more widgets more cost-effectively? If so, I wonder, when is the last time you picked up a wrench or operated a machine? I'll bet it has been a while, because as a supervisor your job isn't really to make the widgets. It is to motivate the people who are actually making the widgets to make "more widgets in a more cost-effective manner," isn't it?

When I became a production supervisor more years ago than I care to remember, my Uncle Angelo, who was a production supervisor at the same plant, told me, "Well, that's the last time you'll actually do any productive work."

Turns out he was more right than he knew . . . I went to law school. But really, what wise Uncle Angelo was saying was I was no longer actually making the bread. (We worked in a bakery.) Instead, I was watching over others who actually made the bread.

So, I'm a supervisor; what exactly do I do for a living?

The answer should be that I motivate and inspire people to do a better job. In short, I make sure I have happy people who are satisfied with their work so that they in turn can be more productive and make better widgets in a more cost-effective manner to contribute to the bottom line.

I wonder how I am doing?

So I looked. According to Lisa Takeuchi Cullen, a staff writer for Time magazine who writes a great blog called "Work in Progress," not very well. Ms. Takeuchi Cullen, in an Aug. 21, 2007, post entitled "Three Signs of a Miserable Job," points to a recent Gallup Poll that found that about 77 percent of Americans hate their jobs. That's right, HATE! (See

Not satisfied with the raw numbers, Ms. Takeuchi Cullen went in search of the "why" and found author Pat Lencioni, whose new book is entitled, oddly enough, "Three Signs of a Miserable Job." Now I have not read Lencioni's book, but according to Ms. Takeuchi Cullen, Lencioni claims there are three signs of a miserable job:

The first is anonymity, which is the feeling that employees get when they realize that their manager has little interest in them as a human being and that they know little about their lives, their aspirations and their interests.

The second sign is irrelevance, which takes root when employees cannot see how their job makes a difference in the lives of others. Every employee needs to know that the work they do impacts someone's life—a customer, a coworker, even a supervisor—in one way or another.

The third sign is something I call "immeasurement," which I realize isn't actually a word. It's the inability of employees to assess for themselves their contribution or success. Employees who have no means of measuring how well they are doing on a given day or in a given week must rely on the subjective opinions of others, usually their managers, to gauge their progress or contribution. (See

This struck me as odd. After all, where are the complaints about the lousy pay and the crappy benefits? Why aren't these people complaining about that and how can this be right?

So I looked. According to an AFL-CIO survey that I use when I do union avoidance training, when dignity is a key issue at a plant, unions win elections at a rate of about 55 percent. Conversely, when wages are the key issue, the union win rate is only about 33 percent. Maybe Lencioni is on to something here?

I have to tell you, thinking back to my seven years as a first-line supervisor, I just don't like this at all. I can't blame lousy pay for turnover? I can't blame substandard benefits for employee dissatisfaction? You mean the key to happy, satisfied employees is right in my own hands?

You bet it is.

And if you are not a first-line supervisor, if you are a member of upper management or work in HR, it is in your hands too.

Take an interest in what your employees are doing in their lives; it is not that hard. Talk to them. More importantly, listen to them. Walk around and see what they are doing. Make sure your employees know how their jobs contribute to the overall success of the enterprise and how they fit into the success of the company. You don't have to be doing some noble thing to be contributing. Show employees that every job matters to the success of the business and the satisfaction of the customers. Show them how they fit. Sit with them and work out a system of measuring their individual success and how that success impacts the team and organization.

If you are a member of upper level management or HR, promote people who have the ability to do these things, not just people who are good at making widgets. Take an interest in making sure that your supervisors take an interest and reward them when they do it well.

Before you know it, you might like your job better too.


The IRS recently released its 2008 employee benefits limitations for retirement plans. Earlier this year the IRS issued the 2008 HAS/HDHP adjustments. The following chart lists common limitations relevant for many employers.




Retirement Plans



Qualified Retirement Plans
- annual compensation limit



Defined Benefit Plans
- annual benefit limit



Defined Contribution Plans
- annual additions limit



Catch-Up Contribution Limit



Highly Compensated Employee  



Annual Deferral Limits
- 401(k), 403(b), 457(b)



- SIMPLE plan



Social Security



Social Security Wage Base






Annual minimum deductible



- Single



- Family



Annual out-of-pocket maximum



- Single



- Family



Annual contribution limit









Catch-Up Contribution




by Norbert F. Kugele

For more than 20 years, we've been operating our cafeteria plans (also referred to as "flexible benefits plans" and "section 125 plans") under a set of proposed regulations that the IRS has never finalized. Recently, the IRS has withdrawn the old set of proposed regulations and has issued a new set. These proposed regulations set forth detailed written plan requirements, incorporate formal and informal guidance that the IRS has offered through the years, and clarify features that can be part of your plan. The IRS intends for these proposed regulations to go into effect on Jan. 1, 2009, though you may rely upon them immediately.

New Written Plan Requirements

The IRS spells out specific provisions that must appear in your written cafeteria plan document. Some of these are new requirements and may not be in your plan, such as:

  • Only an employee may participate in the plan.
  • Plan provisions apply uniformly to all participants.
  • Rules that apply to each flexible spending arrangement (FSA) offered under the plan (for example, health FSAs must describe the uniform coverage rule and the use-or-lose rule).
  • Ordering rules for paid time-off elections.
  • Rules applying to any grace periods adopted by the plan, including provisions requiring uniform treatment of all participants and prohibiting any cash-out of unused benefits or rollover to the following plan year.

Starting now, you should take a careful look at your cafeteria plan document to make sure it incorporates the new written document requirements.

The proposed regulations make clear that if your plan is defective, it is disqualified and everyone is taxed on his or her benefits. Also, changes to the plan document may apply only on a prospective basis, so an error or omission may not be corrected retroactively. (We are hoping that the IRS will consider some less draconian rules for correcting plan defects!)

Plan Features

The proposed regulations also incorporate formal and informal guidance that the IRS has offered over the years. The results are clarifications and permissible features that you may not have been aware of, such as:

  • Purchasing and redeeming paid time off through the cafeteria plan.

  • Allowing an employee who makes an election within 30 days of the date of hire a chance to elect benefits retroactive to his or her starting date.

  • Paying individual health insurance policy premiums and COBRA premiums on a pretax basis through the cafeteria plan.

  • Allowing spend-down provisions in dependent care FSAs for employees who terminate before the end of the year.

  • Permitting health FSAs to reimburse required prepayments for orthodontic services.

The IRS has indicated that for 2008, an employer can pick and choose from the new features permitted under these proposed regulations, provided that the plan is amended before the feature is implemented.

Nondiscrimination Testing

Cafeteria plans must conduct annual nondiscrimination testing to ensure that the plans do not favor highly compensated individuals. The proposed regulations give specific details on the tests that are to be used, and clarify that you must run these nondiscrimination tests as of the end of each plan year. Now is a good time to run these tests to identify potential problems that you may want to target for correction.

We expect that most plans will need to be amended to comply with the proposed regulations. If you have questions about your cafeteria plan and the proposed rules, please contact Norbert F. Kugele or another member of the Warner Norcross & Judd LLP Employee Benefits Group.


Q: In regard to 401(k) open enrollment - the open enrollment for our 401(k) plan is the first of the month each quarter, but I am wondering how far beyond the first of the month we are able to still make changes for our employees.

A: ERISA and the Tax Code do not place any restrictions on the timing of changes to withholding elections, so this really comes down to a question of what your plan document allows. You can set up your plan document to allow a change every quarter, every month, or even every pay period. This will allow employees to increase their savings when they are able, but will also let them reduce savings if they find themselves in a financial bind and perhaps avoid having to take a hardship disbursement from their accounts.

Q: Can an employer make direct deposit mandatory?

A: No. The Michigan Payment of Wages Act requires an employer to receive an employee's full, free and written consent for direct deposit or any alternate form of payment. The one exception is if an employer had a payroll debit card program in place before Nov. 1, 2005. Such an employer can continue the program and pay via debit card without its employees' consent.


The IRS has recently issued newly proposed regulations governing cafeteria plans (also sometimes referred to as "flexible benefits plans" or "Section 125 plans"). The IRS intends to have these rules finalized and in effect for 2009. Join us on Jan. 9, 2008, as we will explore what remains the same and what is changing under these new rules, so that you can begin planning for any changes that you may have to make.

Our topics will include:

  • Written plan requirements: those elements that must be in your written plan document

  • Election rules: the new rules on electronic and automatic elections

  • Flexible spending accounts: new clarifications for health, dependent care and adoption assistance FSAs

  • Substantiation requirements: new requirements for verifying that the plan reimburses for eligible expenses

  • Nondiscrimination testing: new tests, new safe harbors, and plan design implications.

For registration information, visit our Web site at

January 9, 2008
8:30 - 10:30 a.m.
University Club
10th Floor
Fifth Third Center
111 Lyon Street, N.W.
Grand Rapids, Michigan


by Robert J. Chovanec

Earlier this year the EEOC issued a new appendix to its Compliance Manual, entitled "Enforcement Guidance: Unlawful Disparate Treatment of Workers With Caregiving Responsibilities." The addition is 27 pages long and deals with several related issues, including discrimination based on pregnancy and discrimination against men with respect to child-care leaves of absence.

Its most important point, however, can be boiled down to one sentence: The EEOC believes that it can win sex discrimination cases under Title VII of the Civil Rights Act of 1964 by finding evidence that some employers discriminate against women with children because they assume that a woman (but not a man) who has children won't be able to balance family and work demands.

How does the EEOC expect to win these cases? By finding evidence that managers "stereotype" women caregivers. For example, the EEOC says that it will look for evidence that:

  • The respondent asked female applicants, but not male applicants, whether they were married or had young children, or about their child-care and other caregiving responsibilities.
  • Decision makers or other officials made stereotypical or derogatory comments about pregnant workers or about working mothers or other female caregivers.
    Employers need to be aware of the new guidance, but should also keep in mind that this initiative is part of a much bigger issue: What kind of evidence will lead to "guilty" findings on discrimination claims?

As we all know, civil rights laws (such as Title VII, the Age Discrimination in Employment Act, the Americans With Disabilities Act and the Family and Medical Leave Act) prohibit discrimination, harassment or retaliation based on specific personal characteristics. Protected characteristics include (among others) race, gender, age, pregnancy, disability, protected absences from work and complaints asserting unlawful discrimination.

All of these laws have one thing in common: Disputes about discrimination are ultimately decided in courtrooms under the legal rules on "burdens of proof" and "burdens of producing evidence." Frontline managers are often unaware of how important these rules can be, and how easily their statements or actions can result in avoidable liability by making it appear that they were inclined to discriminate, even if they weren't.

The starting point is the basic rules set by the U.S. Supreme Court more than 30 years ago in its McDonnell Douglas Corporation v. Green decision. Under these rules the obligation to produce evidence shifts back and forth. When a plaintiff establishes that she has a protected characteristic (for example, that she is female) and that she was treated unfavorably (e.g., discharged, demoted, not promoted), the burden shifts to the employer to produce evidence that the action was taken for a legitimate business reason unrelated to the protected characteristic. Once the employer does so the burden shifts back to the plaintiff, who must produce some evidence that the employer's asserted motive was "pretextual" (that is, a disguise for unlawful discrimination). The plaintiff normally has the "ultimate burden of proof" but certainty isn't required. The plaintiff just needs to persuade the court or jury that it's "more likely than not" that the employer discriminated unlawfully. In other words, an employer does not have to be guilty of discrimination to be found guilty of discrimination—inferences about what "probably happened" decide most cases. And juries often start out sympathetic to the plaintiff, not the employer. This brings us to three very important characteristics of discrimination claims.

First, the range of evidence that a plaintiff can use to show pretext is very broad. In some cases it's enough that the adverse employment action followed closely after the employer became aware of the protected characteristic ("I was fired three weeks after my employer learned that I was pregnant" or "I was fired two months after I filed a discrimination complaint"). In other cases the evidence shows that others were treated less harshly for similar misconduct ("White employees were only warned for this rule violation but I was fired"). In still others, the evidence includes inferences from other employment actions ("I was rated 'good' and given a raise in my last evaluation, then fired"). And in many cases the evidence consists of statements or (shudder) e-mails by managers that can be construed to indicate hostility based on the employee's protected characteristic ("He's a workers' comp claim waiting to happen" or "I'm not sure that a working mom can handle this job." Or one of the old favorites: "We've got too many old folks around here." Or even the ironic, "How can I work with him when he's accusing me of discrimination?").

These kinds of statements end up on poster boards in jury trials, and manager explanations that "my comment had nothing to do with my decision" or "I was only joking" don't sell well.

Second, an employer's best chance to win a discrimination lawsuit is by winning a "motion for summary judgment," which results in dismissal of the case by the judge without a jury trial. To grant summary judgment the judge must decide that there is no evidence that could persuade a reasonable juror to find for the plaintiff. In other words, the judge must not only believe that the employer didn't discriminate, he or she must conclude that no reasonable person could believe that the employer did discriminate. That's a tough test, and judges take it seriously. If the plaintiff has produced "pretext" evidence, it's much less likely that the employer will win the case by summary judgment.

Third, once a case goes to trial it becomes not only unpredictable but also subject to another important "burden shifting" rule. If the plaintiff persuades the jury that the protected characteristic was likely even a part of the reason for the adverse employment action, the jury will be instructed to find for the plaintiff unless the employer proves that it would have taken the same action even absent the "bad motive."

That may sound like gibberish, but it can play an important role in a jury trial. If jurors are unsure "who won" but have been instructed that the employer has the burden of proof on an important issue, it's more likely that they'll find the employer guilty.

Employers obviously need to make sure that they don't have managers who discriminate. But employers should also make sure that managers know that a stray comment, a badly timed discharge or an unexplained difference in treatment between a person with a protected characteristic and someone else can result in a very expensive, time-consuming and risky legal proceeding. Managers who understand and internalize these rules are much less likely to land their employers in court.

Learning these rules is like learning anything else that must be applied in "real life." For most of us it isn't enough to hear it once. We need to work at it until it's "built in." That's why training, role-playing, and regular reinforcement are good things when it comes to protecting your managers against self-inflicted discrimination claims. You can't keep someone from making a false discrimination claim, but you can avoid creating evidence that makes you look guilty even though you're not.


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