Topics included in this issue:
BIG CHANGES AHEAD FOR
By Anthony J. Kolenic, Jr.
I just returned from a seminar at which several Treasury and Senate staffers discussed two bills currently in Congress that, if passed, will drastically change the rules governing deferred compensation. Both speakers stated that the bills are on the fast track and were likely to pass this year or early next year. The bills have been tied to an international tax bill that has to be passed to avoid making the World Trade Organization angry. Oh, and the bills also generate $1 billion in new tax revenue.
The two bills, the "Thomas Bill" and one known by the acronym "NESTEG," are very similar. Both are being driven by Congressional outrage over Enron and Mr. Grasso's well-publicized deferred compensation program. (In fact, Mr. Grasso—the recently resigned chairman of the New York Stock Exchange—just lined himself up to collect another $57 million or so of deferred compensation that reportedly he had previously said he would waive.)
Both bills will create, in one form or another, a general rule that all deferred compensation is currently taxable, with an exception only for deferred compensation that is subject to a "substantial risk of forfeiture" (i.e., that carries with it a real risk that the executive will never get the money) and that also meets a series of additional limits.
The additional limits include:
- A prohibition on distributions before separation from service (plus six months for "key employees"), except upon social security disability or death, a change in control (with a one-year additional waiting period in the case of a distribution to a Section 16 reporting person), or upon a specified time (not a specified event) fixed at the time of deferral, with no acceleration of that specified time unless there is an "unforeseeable emergency";
- A requirement that any election to defer must be made before the year in which the compensation subject to deferral is earned;
- A requirement that any subsequent election to defer receipt may be recognized only if the election is made one year or more before the amount would otherwise be first paid, and the additional deferral cannot exceed five years;
- Immediate taxation of any amounts placed in an offshore rabbi trust;
- Immediate taxation of any amounts placed in a rabbi trust that allow payment to the executive based on any trigger tied to the company's financial health, whether or not the executive suffers some reduction in the amount paid as a result of the acceleration; and
- Availability of any amounts placed in a rabbi trust to company creditors virtually at any time.
It is not clear at this time whether, or how, the new rules might be applied to phantom stock, SARS and even stock options. Odds are that these rules will be applied to at least phantom stock, however.
The bills currently contain an effective date of January 1, 2004, affecting only amounts deferred after that date. Amounts deferred prior to that date would continue to be governed by the current rules, even if paid later.
So, if you're thinking about deferred compensation, or are currently covered by a deferred compensation arrangement, let us know and we'll help you keep an eye on this very important proposed legislation.
HIPAA DEADLINE APPROACHING
Is your organization a covered entity subject to the HIPAA privacy, transaction, and related rules?
Health and Human Services has decreed that employers with "small health plans" (annual gross receipts of less than $5 million) have until April 14, 2004, to comply. Don't panic! We have a tool to help you meet your compliance obligation. Our HIPAA Compliance Kit is designed to help employers bring their companies' operations into compliance and provides the forms and guidelines to assist you.
The cost of the HIPAA Compliance Kit is $495, plus 6% tax. The kit includes a CD-ROM containing all the model forms so you can easily customize the forms for your company. A kit may be ordered by contacting Rose Sugarbaker at 1.800.752.2401. You may return the kit within 30 days for a full refund if you are not satisfied.
MICHIGAN LEGISLATURE CONSIDERING EMPLOYEE
COMMUNICATIONS MONITORING ACT
By Edward J. Bardelli
On September 16, 2003, the "Employee Communications Monitoring Act" was submitted to the Michigan Senate's Committee on Commerce and Labor. It is Senate Bill No. 675. The proposed law will prohibit employers from monitoring any employee communications unless the employer establishes an employee monitoring policy and discloses the policy to its employees.
The proposed law broadly defines "monitor" as an employer listening to, reading or recording a communication between an employee and a person who is not the employer. This, presumably, will include any form of communication, including but not limited to modes of communication currently monitored by employers such as voice mails and e-mails.
An employer cannot monitor employee communication unless it establishes an employee monitoring policy that is in writing, and disclosed to and acknowledged in writing by each employee subject to monitoring. The policy must also: (1) specify the method of monitoring that the employer will use, (2) specify the communication media that are subject to monitoring, (3) specify the types of communications that are subject to monitoring, (4) provide employees subject to monitoring with advance written notice of the monitoring, and (5) provide each employee subject to the policy with notice of the policy's adoption and any policy changes.
An employer also cannot request or accept a waiver from an employee of any of the rights that the employee has under any other applicable state or federal monitoring law.
If an employer monitors an employee communication in violation of the law's requirements, the employer will be held liable to the employee for actual damages, or $5,000, whichever is greater, plus reasonable attorney fees.
This proposed legislation represents a significant change in an employer's ability to monitor employee communications. As of this writing, Senate Bill No. 675 is still pending before the Committee on Commerce and Labor, and no action on the proposed law has been taken. We will keep you posted on the status of this proposed law as new information becomes available.
ARE YOUR WORKPLACE POSTERS UP-TO-DATE?
We've all seen the posters hanging in break rooms, reception areas, and hallways: notices proclaiming "Equal Employment Opportunity is the Law" or posters detailing the "Federal Minimum Wage." These notices describing employee rights and hazards of the workplace are nothing new to most employers. In fact, any given employer could be required to display nearly 20 different notices in order to comply with both Michigan and federal law.
Although these notices are commonplace, an employer should be vigilant in making sure not only that they are up-to-date but also that they don't get defaced or covered by other postings. Failure to properly post the correct, up-to-date notices not only can result in stiff fines but also can have other significant legal consequences.
Possible Monetary Penalties
Most of the postings required by the federal government carry some potential penalty for failure to post. For example, some employers are required to post a "Job Safety and Health Notice" that summarizes the Federal Occupational Safety and Health Act. A covered employer who fails to post this notice could face a fine of up to $7,000. Fines for failure to post other federally required notices pack less of a punch. For example, failure to post the following federally required notices could result in fines of $100 per violation:
Family and Medical Leave Act Notice
Notice to Workers With Disabilities
Equal Employment Opportunity Notice
Failure to post other federally required notices—like the Polygraph Protection Act Notice—does not carry specified penalties, but can result in unspecified fines based on the discretion of the enforcing agency.
In addition to the federally required posters, each state has its own specific posting requirements and corresponding penalties. For example, in Michigan, covered employers who fail to post the required notice summarizing rights and responsibilities under the Michigan Occupational Safety and Health Act ("MiOSHA") could incur a penalty of up to $1,000 per violation. Likewise, if the MiOSHA poster is covered up or posted in an inconspicuous location (such as behind a door), the same penalty would apply.
Aside from the employment law posters and notices, Michigan law also imposes several other posting requirements for employers engaged in specific types of business. For example, there are posting requirements for retailers under the Bottle Deposit Law, Item Pricing Act, Liquor Control Code, and Youth Tobacco Act. The Michigan Food Law contains a particularly complicated set of posting requirements related to hand washing by employees, nonsmoking, anti-choking techniques, raw/undercooked foods, bulk displays of unpackaged food and drink, and food identification. Failure to post these notices and warnings in conspicuous locations could result in a penalty of up to $500 for the first offense and $1,000 for each subsequent offense under the Michigan Food Law.
Apart from monetary fines, employers who fail to post required notices can face even harsher consequences in the courtroom. For example, employees who sue under the Fair Labor Standards Act ("FLSA") must generally do so within two (2) years of the complained-of action, and damages are generally limited to those incurred during the two-year period prior to filing suit. However, this period could be extended if an employer fails to post the required notice. In one recent case, a federal court in Chicago extended the FLSA's statute of limitations because the employer failed to post the required notices. The court held that the employee was unaware of his rights under the FLSA, and therefore was not to blame for his failure to file the lawsuit sooner. Other courts have had similar holdings, extending the statute of limitations in age discrimination and disability cases.
Under the Family and Medical Leave Act ("FMLA"), failure to post the required notice can have similar consequences. Like the FLSA, some federal courts have held that the time for filing suit under the FMLA can be extended if the employer fails to post the required notice. Additionally, at least one federal court has held that an employee working in a shop without an FMLA notice was justified in assuming that he was covered by the FMLA even though he wasn't. Although the employee had not worked the required 1,250 hours in the 12-month period prior to his leave, the court held that the employer was prevented from arguing that the employee was not eligible for leave because it had failed to post the FMLA notice. According to the court, an employer who fails to post the required FMLA notice is "effectively misleading that employee into believing that she is protected by the FMLA."
As you can see, keeping your workplace postings up-to-date can save you in the long run. Although state and federal posting requirements may seem confusing and at times burdensome, taking steps to ensure compliance will protect your organization from significant fines and legal consequences. Luckily, both the federal government and Michigan provide some online support for employers. Below is a listing of some helpful Web sites. A complete listing of the required postings for Michigan employers, along with links to the appropriate governmental sites can be found on the Warner Norcross & Judd Web site at www.wnj.com.
IS YOUR HEALTH FSA UP-TO-DATE?
By Sue O. Conway
The IRS recently ruled that employees may use their Section 125 plan health flexible spending accounts (FSAs) to purchase over-the-counter drugs on a pretax basis—IF the plan document allows it. This is a major change in the IRS's former informal position that only drugs that required a prescription (and insulin) could be paid for through a health FSA.
As more drugs become available without a doctor's prescription, employees are losing health plan prescription drug coverage for medications they use on a regular basis. The IRS ruling is a boon for these people, including regular users of allergy medications, since they can now use their FSAs to pay these expenses. The ruling also covers pain relievers, antacids, cold remedies and similar medications that are used to "alleviate or treat personal injuries or illness." However, it does not cover reimbursement for expenses that are merely beneficial to an individual's general health such as dietary supplements (e.g., vitamins), and it does not cover toiletries or cosmetics (e.g., toothpaste, face creams).
To take advantage of this new ruling, your health FSA document and SPD may need to be modified to permit reimbursement of over-the-counter medications.
Mid-Year Election Changes
If your Section 125 plan has not been amended within the last few years, it likely does not contain all the new "change in status" rules that give your employees more flexibility in making mid-year election changes. You should consider making those changes at this time.
New claims and appeal rules became effective for your health FSA last year. If your documents do not include these new rules, it is necessary to bring them into compliance as soon as possible. You may also want to specifically provide for the use of FSA debit/credit cards to pay for health FSA-covered expenses (the IRS has recently OK'd use of these cards).
HIPAA Privacy Rules
Lastly, don't forget that the HIPAA privacy rules apply to your health FSA. Because an FSA is not insured, the employer as plan sponsor is subject to the full array of health plan privacy requirements, including the need to develop privacy policies, train members of the workforce who assist in administering the plan, give employees a privacy notice and amend the health FSA document to address privacy requirements. For most employers (those with plans having less than $5 million in claims per year), these rules go into effect on April 14, 2004. To assist our clients, WNJ has developed a HIPAA Privacy Kit that provides plain-English guidance on what HIPAA requires employers to do and contains sample policies and other documents you will need (see article above).
For most employees, health FSAs are an important benefit, allowing them to pay uninsured medical expenses on a pretax basis. They are also valuable to employers since no FICA tax is due on the amounts elected by employees under a Section 125 flexible benefits plan. Because of the favorable tax attributes of these plans, employers need to keep them up-to-date and in compliance.
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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.