Transcript TRENDS IN EXECUTIVE COMPENSATION

Benefits Best Practices for 2010
Michel P. Vanesse, Partner
Lynne S. Wakefield, Partner
April 20, 2010
Copyright © 2010 by K&L Gates LLP. All rights reserved.
Copyright © 2010 by K&L Gates LLP. All rights reserved.
Presenters
Michel P. Vanesse, Partner
Charlotte Office
[email protected]
704.331.7464
Lynne Shore Wakefield, Partner
Charlotte Office
[email protected]
704.331.7578
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TRENDS IN EXECUTIVE COMPENSATION
Michel P. Vanesse
Partner – Charlotte, NC
April 20, 2010
Copyright © 2010 by K&L Gates LLP. All rights reserved.
Executive Compensation Under Scrutiny
 Sources
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Institutional Shareholders
Riskmetrics
Media
Federal Agencies
Legislators
 Reasons
 Pay Differential
 Disproportionate Risk-taking
 Continued Lack of Alignment with Shareholders’
Interests
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Compensation and Benefits Review
 Current environment requires a comprehensive
understanding of compensation and benefits
structures
 Due diligence should not be limited to levels of
compensation and benefits
 Good documentation is critical
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Pay Practices That May Cause Concern
 Employment contracts
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Nonperformance-based compensation
Guaranteed salary increases
Severance
Change-in-control provisions and related parachute
payments
 Make-whole provisions
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Pay Practices That May Cause Concern
(cont’d)
 Benefits and Perquisites
 SERPs
 Tax gross-ups and other reimbursements
 Severance
 Equity-based compensation
 Types of awards (options have inherent issues)
 Dividend equivalents (may not be appropriate on
unvested awards)
 Repricing
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Risk Management
 Identify pay practices and provisions that may
encourage excessive risk taking
 Understand global business plan and related
risks
 Analyze compensation and benefits plans to
determine if they will help implement the
business plan or trigger unwanted behaviors
(e.g., excessive risk-taking)
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Legal Environment
 Current legal environment gives additional
reasons for due diligence
 SEC disclosures
 IRS focus on compensation and benefits
practices
 409A
 Reasonable compensation
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Adequate Documentation
 Contradictory trends
 Employment agreements
 Benefit plans
 Adequate documentation means more than
performance metrics
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Eligibility
Form and time of payment
Vesting/Forfeiture
Governance
Boiler plate
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Adequate Documentation (cont’d)
 409A mandates comprehensive documentation
 “Deferred compensation” is a broad concept (may
include not only retirement-type benefits, but also
severance, some equity-based arrangements, bonus
plans, LTIPs, tax reimbursement, health
reimbursements, earn-outs, etc.)
 Documentation requirements are similar to those
applicable to traditional ERISA plans
 IRS Correction Program
 Operation must reflect plan documents
 Potential cultural change for HR
 IRS Correction Program
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162(m) Update
 Compensation is NOT performance-based for
purposes of 162(m) if it is payable upon the
occurrence of certain events, irrespective of
whether performance goals are met
 Termination without cause
 Termination for good reason
 Retirement
 Transition relief is available in 2010 only if:
 Performance period started on or before 1/1/09; or
 Contract was in effect on 2/21/08
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Design Trends
 Multiple performance metrics per program
 Multiple parameters used to determine payouts
 Objective and subjective approach
 Blended benchmarks (company-wide, line of
business, individual)
 Layered Structure
 Annual and long-term
 Maximum payouts
 Medium of payment
 Clawbacks
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Design Trends - Equity
 Traditional forms of awards are criticized
 Options (pricing, exercise, underwater options)
 Restricted stock or RSUs with time-based vesting (not
an proper incentive, 162(m))
 Increased prevalence of performance-based
awards
 Need for repricing for outstanding awards
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Repricing Considerations
 Plan document
 Procedure to follow
 Consent requirement
 Potential prohibition
 Tax Issues
 New grant
 Fair market value
 409A
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Repricing Considerations (cont’d)
 Accounting
 Modification of existing award
 Impact on fair value
 SEC considerations
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Investment decision and tender offer rules
Unilateral repricing
Option exchange
Available exemptions
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Repricing Considerations (cont’d)
 Structuring
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One-to-one ratio or value-for-value
Eligibility
Procedure (unilateral repricing, exchange)
Other forms of awards
 Employee communication
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Questions?
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BENEFITS BEST PRACTICES FOR 2010
Lynne S. Wakefield
Partner – Charlotte, NC
April 20, 2010
Copyright © 2010 by K&L Gates LLP. All rights reserved.
Introduction
 Health Care Reform – Immediate and Near Term
Impacts on Employer Plans
 Health and Welfare Plan Best Practices and Trends
 Legal Update/Other Emerging Issues
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
Two-Part Health Care Reform Legislation
 Patient Protection and Affordable Care Act
 signed into law March 23, 2010
 Health Care and Education Reconciliation Act of
2010
 signed into law on March 30, 2010
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
Major Components of Health Care Reform
 Individual Mandate – Individuals will be subject to
tax for not purchasing coverage (government
subsidies will assist those with lower incomes)
 Employer Obligation – Employers must provide
coverage or pay penalty – referred to as “pay or
play” or “freerider surcharge”
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
Major Components of Health Care Reform (cont’d)
 Insurance Reform – Guaranteed issue and
underwriting, prohibition on pre-existing condition
exclusions
 Creation of state–level health insurance
clearinghouses or “exchanges” where individuals
and employers can purchase coverage
 Tax-Based Funding Mechanisms
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
Effective Dates
 There are several immediate 2010 impacts of
Health Care Reform that need to be considered
 There are also a number of reforms and plan
design changes required for plan years beginning
on or after September 23, 2010, which for calendar
year plans is January 1, 2011
 Plan design changes must be considered soon so that
they can be communicated during annual enrollment and
implemented for 2011
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
Effective Dates (cont’d)
 Later Health Care Reform provisions become
effective from 2013 to 2018
 Individual and employer pay or play mandates are
effective in 2014
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
Immediate 2010 Impacts of Health Care Reform
 Early Retiree Reinsurance Program
 Beginning in June 2010, the government will launch a
temporary reinsurance program which provides for
reimbursement of certain employer costs in connection
with employer-provided retiree health coverage
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
Immediate 2010 Impacts of Health Care Reform (cont’d)
 Change in Employer Tax Treatment of Medicare Part
D Retiree Drug Subsidy
 Employers whose drug expenses are reimbursed under the
Medicare Part D retiree drug subsidy program will lose their
tax deduction in 2013
 Although the change does not take effect until 2013,
employers participating in the retiree drug subsidy program
will be required to recognize the full accounting impact of
the loss of this federal tax deduction on current financial
statements
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
Immediate 2010 Impacts of Health Care Reform (cont’d)
 Small Employer Tax Credit
 New tax credit for eligible small employers equal to a
portion of the employer’s cost to provide health
insurance
 Creation of state high risk pool for individuals with
pre-existing conditions
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
Near Term Impacts of Health Care Reform
 Three Primary Categories of Health Care Reform
Changes for 2011
 Plan Design Changes
 Reporting and Disclosure Changes
 Nondiscrimination Changes
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
Near Term Impacts of Health Care Reform
 “Grandfathered Plans” are exempt from certain
aspects of Health Care Reform
 A “Grandfathered Plan” is a plan that was in effect on
March 23, 2010
 A “Grandfathered Plan” does not lose its status when new
employees are hired and enrolled or when dependents are
added to the plan under provisions in effect on March 23
 There is no current guidance on what could cause a plan to
lose grandfathered status
 Unless otherwise indicated, Grandfathered Plans are subject to
the requirements in the following slides
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
2011 Plan Design Changes
 Plans that cover dependent children must provide
coverage for adult children up to age 26, regardless
of marital or student status
 Prior to 2014, Grandfathered Plans only have to cover
such dependents who are not eligible under another
employer’s plan
 Prohibition on imposing lifetime and annual limits
on the dollar value of essential health benefits
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
2011 Plan Design Changes (cont’d)
 Plans must provide 100% coverage for preventive
care and certain immunizations (e.g., no
deductible, copayment or other cost-sharing)
 Grandfathered Plans are exempt from this requirement
 Prohibition on imposing pre-existing condition
exclusions on children under age 19
 Over-the-counter medicine and drugs are not
eligible for reimbursement under a Health FSA,
HSA or HRA without a doctor’s prescription
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
2011 Plan Design Changes (cont’d)
 Excise tax for non-qualified distributions from HSAs
increases from 10% to 20%
 No rescission of coverage is permitted except in
cases of fraud or intentional misrepresentation
 New appeals process
 Grandfathered Plans are exempt from this requirement
 Simple cafeteria plans for small employers
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
Action Required to Implement 2011 Plan Design
Changes
 Coordinate with third party administrators (selfinsured plans) or insurers (fully insured plans) to
implement changes
 Determine impact of cost changes
 Amend plan documents and update benefits
booklets and SPDs to reflect changes
 Describe changes to participants in annual
enrollment materials
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
2011 Reporting and Disclosure Changes
 Employers will be required to include the value of
employee health coverage on employees’ Form W2 beginning with the 2011 tax year
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
2011 Nondiscrimination Changes
 Nondiscrimination rules under Section 105 of the
Internal Revenue Code previously were applicable
only to self-insured plans
 These nondiscrimination rules also apply to fullyinsured plans effective January 1, 2011
 May impact fully-insured medical plan products
offered solely to executives
 Grandfathered Plans are exempt from this
requirement
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Health Care Reform – Immediate and Near
Term Impacts on Employer Plans
Other Considerations
 There are a number of other reforms and plan
design changes that go into effect in 2013 and
2014
 As Health Care Reform goes into full effect in 2014,
employers will be making strategic changes in their
overall program and determining whether to pay or
play
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Benefits Best Practices and Trends
 Compliance Audits
 Dependent Eligibility Audits
 Wellness Programs
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Benefits Best Practices and Trends
Compliance Audits
 Plan Document/Summary Plan Description Audits
 Ensure compliance with applicable legal requirements
 Minimize risk and exposure with respect to participant
claims
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Benefits Best Practices and Trends
Compliance Audits (cont’d)
 Legislative Audits (e.g., COBRA, HIPAA, CHIPRA)
 Ensure compliance with applicable legal requirements,
particularly with respect to the required content and
timing of notices
 Minimize risk of violation of applicable requirements and
associated penalties, as well as assessment of penalties
on audit
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Benefits Best Practices and Trends
Compliance Audits (cont’d)
 Medical/Prescription Drug Claims Administration
Audits
 Reduce costs by identifying ineligible claims being
processed under plans
 Improve administration by identifying issues and gaps
with respect to processing of claims
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Benefits Best Practices and Trends
Compliance Audits (cont’d)
 Increased stakes due to new group health plan
excise tax reporting requirements on Form 8928
 Provides mechanism and new requirement to self report
excise taxes on violations of COBRA, HIPAA, mental health
parity, Newborns’ and Mothers’ Health Protection Act,
GINA and Michelle’s Law
 Excise taxes can be avoided if violation is corrected within
30 days of when it became known and affected individuals
are placed in the same position they would have been in if
failure had not occurred
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Benefits Best Practices and Trends
Dependent Eligibility Audits
 Purpose
 Reduce costs by identifying ineligible participants and
removing them from coverage
 Ensure compliance with applicable ERISA fiduciary
requirements, as ERISA plans must be maintained solely
for the benefit of eligible employees and beneficiaries
 Improve administration through development of clear and
concise eligibility requirements that can be consistently
enforced
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Benefits Best Practices and Trends
Dependent Eligibility Audits (cont’d)
 Keys
 Ensure that dependent eligibility criteria are clear and
accurate before the audit starts
 Communicate the audit early and often
 Be precise about the documentation which must be
submitted to verify eligibility
 Consider impact of Health Care Reform
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Benefits Best Practices and Trends
Wellness Programs
 Most Common Wellness Initiatives
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Employee Assistance Programs
Immunizations and Flu Shots
Health Risk Assessments
Nurse Line
Health Portal/Website
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Benefits Best Practices and Trends
Wellness Programs (cont’d)
 Other Wellness Initiatives
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Personal Health Coaches and Advocates
Tobacco Cessation Programs
Health Fairs
Workplace Health Challenges
Biometric Health Screenings
Obesity Management
Onsite Clinics
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Benefits Best Practices and Trends
Wellness Programs (cont’d)
 Traps for the Unwary
 HIPAA compliance obligations vary depending on
whether the wellness incentive/reward is standardsbased or participation-based
 GINA regulations impact the content of health risk
assessments – no family history questions permitted
 Purpose
 Improve employee health and productivity
 Reduce costs of medical plan claims
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Legal Update/Other Emerging Issues
 COBRA Subsidy Extension
 Mental Health Parity and Addiction Equity Act
Compliance
 Children’s Health Insurance Program Notifications
 Final Cafeteria Plan Regulations
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Questions ?
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