Summer/Fall 2006 by Dean F. Pacific CLAIMS, BUT THERE IS STILL MUCH - - PowerPoint PPT Presentation

SLIDE 1

HUMAN฀RESOURCES฀ALERT

Warner Norcross & Judd LLP

900 Fifth Third Center 111 Lyon Street NW Grand Rapids, Michigan 49503-2487 ADDRESS SERVICE REQUESTED

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SUPREME COURT MAKES IT EASIER TO BRING RETALIATION CLAIMS, BUT THERE IS STILL MUCH EMPLOYERS CAN DO OFCCP/EEOC UPDATE: NEW GUIDANCE ON COMPENSATION ANALYSIS AND REVISIONS TO FORM EEO-1 2006 MISHRM STATE CONFERENCE CONGRESS OVERHAULS RETIREMENT PLANS: THE PENSION PROTECTION ACT OF 2006 NEW MEDICARE PART D NOTICE OF CREDITABLE COVERAGE FORMS AVAILABLE FOR THIS YEAR’S ANNUAL NOTICE REQUIREMENT “BOSS, YOU’RE NOT GOING TO BELIEVE THIS, BUT SOMEONE STOLE MY LAPTOP.” IS YOUR ORGANIZATION PREPARED?

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www.wnj.com

In June, the United States Supreme Court issued its much anticipated decision in the case of Burlington Northern v White. As reported in the media, the decision lowered the bar for plaintiffs who make claims of unlawful retaliation against their employers under federal civil rights laws. That being the case, there are still many things that employers can do to avoid retaliation claims and to ensure that they successfully can be defended when they are brought. Like all major state and federal antidiscrimination statutes, Title VII of the Civil Rights Act of 1964 states that employers may not retaliate against anyone who complains of discrimination based upon race, color, sex, religion or national origin. The protection against retaliation extends to anyone who cooperates in the investigation or prosecution of someone else’s complaint, and to anyone who opposes in any other reasonable manner an alleged violation of the Act. Historically, courts have held that to succeed

• n such a claim, plaintiffs must prove that they engaged in some

sort of protected activity, and that because of that protected activity, they suffered an “adverse employment action.” This adverse employment action was generally defined as some material change in the terms and conditions of employment, such as termination, demotion, reduction in pay or benefits, and the like. Because many plaintiffs could not show a material change in their terms of employment, their claims failed as a matter of law. The Supreme Court in Burlington Northern changed all that. It held that a plaintiff in a Title VII retaliation case need not prove that they suffered an adverse employment action. In fact, the alleged retaliatory acts do not even need to be employment- related at all, and they are not limited to things that happen in the workplace. Under Burlington Northern, all that a retaliation plaintiff must prove is that, from the point of view of a “reasonable employee,” the alleged retaliation was materially adverse. Put another way, any act that “might” dissuade a reasonable worker from making a complaint meets this standard. The court characterized its standard as an objective one, and it went on to say that what is materially adverse varies from case to case depending upon all of the surrounding circumstances. What might not be material to one employee, the court stated, might be material to another. The court gave the example of changing an employee’s shift--while this might not be a material change to some employees, it might be to a single mother juggling school, work, and child-care schedules. Because the Supreme Court removed the “adverse employment action” requirement, news reports of the decision emphasized the bad news for employers. They reported that this “lower” standard favored plaintiff employees and that it likely would result in more cases going to trial and increased costs for defending or settling claims for employers. While this may be true if you focus on the decision in a vacuum, there is still much that an employer can do to avoid retaliation claims and place itself in a position to successfully defend them if they are brought. The first step for any employer is to have written antiharassment and antidiscrimination policies. Those policies must not only clearly prohibit harassment and discrimination, but they must also make clear that retaliation against anyone who complains of harassment or discrimination, as well as others who participate in the investigation of such complaints, is prohibited. Managers and supervisors must be properly trained to handle complaints promptly and appropriately, and to avoid taking action that may appear to be

• retaliatory. Employers should also document this training.

Second, it is important to remember that a retaliation plaintiff is required to do more than simply show that they engaged in protected activity and that some later adverse action occurred. The plaintiff must also show a causal connection between the two; that is, he or she must prove that the adverse action happened because of the protected activity. If an employer can prove that it took action for legitimate, non-retaliatory reasons, the retaliation claim can be defeated. This aspect of a retaliation claim is likely to become more important after Burlington Northern. In turn, accurately assessing and documenting employee performance problems to support discipline or discharge decisions will take on heightened

• importance. An employee who complains of harassment or

discrimination is not immune from discipline or discharge, but his

• r her file should contain proper documentation of performance
• issues. It can be helpful for supervisors to involve a neutral third

party, such as a human resource manager, in the counseling and documentation process. In summary, while Burlington Northern liberalized one key element

• f retaliation law, employers are not dead in the water. Proactively

developing appropriate harassment and discrimination policies that include anti-retaliation provisions, training managers and supervisors in those policies and how to review and document employee performance, and promptly and properly investigating and resolving employee complaints can all help to prevent a potentially costly retaliation claim. Qualified legal counsel can help you with all of these things, and can help address a retaliation claim if one is asserted.

SUPREME COURT MAKES IT EASIER TO BRING RETALIATION CLAIMS, BUT THERE IS STILL MUCH EMPLOYERS CAN DO

by Dean F. Pacific

Summer/Fall 2006

Antitrust Appellate Law Automotive Bankruptcy & Creditors’ Rights Class Action Defense Closely Held Businesses Commercial Transactions Computers & Technology Concierge Medical Practices Condominiums Construction Corporate Law E-Commerce & Internet Education Law Employee Benefits Employee Relations Environmental Executive Compensation Family Business Family Law Financial Institutions Financial Services Regulation Health Care and Hospitals Immigration Intellectual Property International Business IT Procurement Labor Litigation Mergers & Acquisitions Oil & Gas Personal Injury Litigation Privacy and Information Security Real Estate Securities Tax-Exempt Organizations Tax Planning Trusts and Estates Planning & Administration White-Collar Criminal Defense Workers’ Compensation Defense

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Announcement Mark Your Calendar:

HR Seminar Our full-day seminar will take place

• n May 10, 2007

Amway Grand Plaza

Full program details will be announced later so please mark your calendar and plan to join us in the Spring.

Human Resources Alert is published by Warner Norcross & Judd LLP to inform clients and friends

• f 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 & Judd attorney or any member of the firm’s HR Group. The members of the Human Resources Group are: Edward Bardelli 616.752.2165 Andrea Bernard 616.752.2199 Michael Brady 248.784.5032 Scott Carvo 616.752.2759 Robert Chovanec 616.752.2120 Jack Combs 616.752.2112 Sue Conway 616.752.2153 Amber DeLong 231.727.2630 Kevin Dougherty 616.752.2175 Gerardyne Drozdowski 616.752.2110 Robert Dubault 231.727.2638 Carl Dufendach 616.752.2136 Daniel Ettinger 616.752.2168 Kathleen Hanenburg 616.752.2151 Angela Jenkins 616.752.2480 Gregory Kilby 616.752.2181 Jonathan Kok 616.752.2487 Anthony Kolenic, Jr. 616.752.2412 Norbert Kugele 616.752.2186 Joseph Martin 616.752.2113 John McKendry, Jr. 231.727.2637 Kimberly Mitchell 616.396.3118 Yvette Moody 616.752.2739 Matthew Nelson 616.752.2539 Jeffrey Ott 616.752.2170 Dean Pacific 616.752.2424 Christopher Predko 616.752.2190 Louis Rabaut 616.752.2147 Janet Ramsey 616.752.2736 Vernon Saper 616.752.2116 Valerie Simmons 616.752.2163 Paul Sorensen 616.752.2135 Justin Stemple 616.752.2375 Karen VanderWerff 616.752.2183 Donald Veldman 231.727.2603 George Whitfield 616.752.2102 Kathryn Wood 616.752.2782

NEW MEDICARE PART D NOTICE OF CREDITABLE COVERAGE FORMS AVAILABLE FOR THIS YEAR’S ANNUAL NOTICE REQUIREMENT

by Norbert F. Kugele

Although it’s hard to believe that a year has passed since we implemented rules for Medicare Part D, it is time once again to start planning to distribute the annual notice of whether the prescription drug coverage offered under your health plan constitutes creditable or noncreditable

• coverage. As you begin your planning, you should

be aware the Centers for Medicare and Medicaid Services (“CMS”) has issued updated guidance on the notice of creditable coverage, including new notice forms. As you will recall from last year’s rollout, employers who sponsor a health plan offering prescription drug benefits must provide an annual notice to all Medicare-eligible participants that explains whether the prescription drug benefits offered under the plan are at least as good as the benefits

• ffered under the Medicare Part D plan. The only

employers exempt from this notice requirement are those that establish their own Part D plan or who contract with a Part D plan. The forms you used last year included language relating to the initial enrollment period for Medicare Part D. The updated forms no longer use this language. CMS has also provided a “personalized” notice that you can use instead

• f the generic notice forms. The guidance and

forms are available on the CMS Creditable Coverage website (http://www.cms.hhs.gov/ CreditableCoverage). The notice must be provided:

• At least once a year before November 15 (the

start of the annual Medicare Part D enrollment period);

• whenever a Medicare-eligible employee enrolls in

your health plan;

• whenever there is a change in the creditable
• r non-creditable status of your health plan’s

prescription drug coverage;

• whenever an individual requests the notice.

Because it is difficult to keep track of which employees (and their spouses or dependents) are eligible for Medicare benefits, we recommend that you make the Notice a part of your new- hire enrollment materials and your annual open enrollment materials. If you have any questions about which notification forms to use, please contact a member of our Employee Benefits practice group.

SLIDE 2

OFCCP/EEOC UPDATE: NEW GUIDANCE ON COMPENSATION ANALYSIS AND REVISIONS TO FORM EEO-1

by Robert J. Chovanec

HUMAN RESOURCE ALERT

The Office of Federal Contract Compliance Programs (“OFCCP”) recently issued new guidance that will impact any employer who is required to maintain an affirmative action

• plan. This comes on the heels
• f the Equal Employment

Opportunity Commission’s (“EEOC”) revisions to the Form EEO-1 that certain employers have to file every September. OFCCP Compensation Releases On June 16, 2006, the OFCCP issued two releases that all employers who maintain written Affirmative Action Plans (“AAPs”) should be aware of. The first is the OFCCP’s Voluntary Guidelines for Self-Evaluation of Compensation Practices (“Guidelines”). The second is a new OFCCP Interpretive Standard describing the investigation process that the OFCCP will use to look for “systemic compensation discrimination.” The new releases apply to “federal government contractors” that are required to have AAPs pursuant to Executive Order 11246 and the OFCCP’s affirmative action regulations at 41 CFR Part 60. An employer is required to do an annual AAP if it has at least 50 employees and has a contract to supply at least $50,000 of goods or services to the federal government (either directly or as a subcontractor). In addition, any financial institution that has 50 or more employees is covered if it serves as a depository of federal government funds in any amount or is an issuing and paying agent for U.S. Savings Bonds and Notes. Although AAPs need not include “compensation analysis” as part of the plan document, the OFCCP’s affirmative action regulations require each covered employer to evaluate its compensation systems “to determine whether there are gender-, race- or ethnicity-based disparities.” The results

• f the employer’s compensation analysis must be made

available to OFCCP auditors if the employer is selected for a “compliance review.” The stated purpose of the Guidelines is to provide a clear “safe harbor” method for employers to comply with the “compensation analysis” requirement. Unfortunately, the “safe harbor” is neither clear nor safe. When conducting compensation analysis under the Guidelines, employers must create “Similarly Situated Employee Groupings” (“SSEGs”) consisting of employees in positions for which the work performed, responsibility level, and requisite skills and qualifications are similar. The Guidelines direct that at least 70% of the workforce should be in SSEGs and each SSEG should consist of at least 30 employees, including at least 5 female employees, 5 male employees, 5 minority employees, and 5 nonminority

• employees. These numbers were selected by the OFCCP for

a reason: they are the minimum “sample sizes” to create a group for which compensation differences can be considered “statistically significant” and admissible evidence against the employer in enforcement proceedings. For most employers, creating SSEGs of the size required by the Guidelines will require including more than one job title in each SSEG, by making judgment calls about which jobs are “similar.” Once an employer makes those judgment calls, it has effectively admitted that it can be held liable for compensation discrepancies within the SSEG, unless it proves that the differentials are caused by “nondiscriminatory factors.” Nondiscriminatory factors may include any differences

• ther than race or gender that explain the compensation
• differentials. For example, if an initial analysis shows that

men in the group are paid significantly higher than women, further analysis might show that the men have greater length

• f service than the women and that pay is higher the longer

an employee is “on the job.” This would dispel the initial indication of discrimination. Keep in mind, though, that if the employer has already admitted that the work, skill, responsibility and qualifications are similar for all job titles in the SSEG, the potential nondiscriminatory factors that may be used to defend against a discrimination claim are much more narrow than if the OFCCP was asserting that two jobs are similar and the employer was disputing that assertion. The Guidelines also require employers to perform formal “multiple regression analysis” in each SSEG if 500 or more employees are covered by the AAP or an establishment within the AAP . Multiple regression analysis is a sophisticated statistical analysis that is difficult and expensive to do

• correctly. Moreover, even when done correctly, the “validity”
• f a multiple regression analysis depends on the accuracy of

the judgment calls about the factors that affect compensation. The OFCCP states that employers are not required to use the Guidelines, and that they may instead use other forms of compensation analysis. It also states, however, that an employer will be considered “out of compliance” with OFCCP AAP requirements unless it does some form of compensation analysis that the OFCCP considers “acceptable,” and the OFCCP does not identify any form of analysis that it considers acceptable other than that described in the Guidelines. Large employers now have a difficult judgment call to

• make. On the one hand, larger employers are more likely

to be selected for compliance reviews, and attempting to use the “safe harbor” methodology in the Guidelines may avoid detailed statistical analysis of the contractor’s raw compensation data by the OFCCP . On the other hand, complying with the Guidelines will be difficult and

• dangerous. Smaller employers should not use the Guidelines

unless they can create SSEGs of the required size with confidence that they are not combining “dissimilar” job titles. All employers should keep in mind that carelessly created SSEGs will come back to haunt them in court.

The new OFCCP Guidelines and Interpretive Standards are available on the Internet at: http://www.dol.gov/esa/regs/fedreg/ notices/2004025402.htm, and http://www.dol.gov/esa/regs/fedreg/ notices/2006005458.htm.

Revisions to Form EEO-1 Long-standing regulations of the Equal Employment Opportunity Commission (“EEOC”) require any employer that has at least 100 employees (or at least 50 employees if it is required to have an AAP) to file Form EEO-1 by September 30 each year. Form EEO-1 is a “snapshot” of the composition of the employer’s workforce by race and gender in each “Form EEO-1 job category” at each of its

• establishments. Form EEO-1 also requires the employer

to state whether it has federal government relationships or contracts requiring it to have an AAP under OFCCP rules. Form EEO-1s are the principal way the OFCCP selects target employers for AAP compliance reviews. Compliance reviews are the OFCCP’s process for conducting in-depth audits of government contractor AAPs, and selecting targets for discrimination litigation. Effective next year (September 30, 2007) there will be two significant revisions to Form EEO-1: revised race categories, and a new job category. The current race categories are “White,” “Black,” “Hispanic,” “Asian or Pacific Islander” and “American Indian or Alaskan Native.” The 2007 Form will change the names of several race categories slightly, will add a new race category (“Two or More Races”), and will split the “Asian and Pacific Islander” category into two categories: “Asian” and “Native Hawaiian or other Pacific Islanders.” The EEOC emphasizes that employers are “strongly encouraged” to make racial identifications by soliciting “self-identification” information from employees, rather than only from observation. The current job categories are “Management,” “Professional,” “Technician,” “Sales,” “Craft,” “Office and Clerical,” “Operative,” “Laborer,” and “Service.” The 2007 form will split the “Officials and Managers” job category into two categories: “Executives/ Senior Level” and “First/Mid Level Officials.” The data in the September, 2007, report will come from your employee lists as of July 2007. Accordingly, you should plan to revise your data sorting function for preparation of Form EEO-1 by mid-2007. The EEOC’s release describing the revisions to Form EEO-1 for 2007 is on the net at: http:// edocket.access.gpo.gov/2005/05-23359.htm.

On almost a daily basis, we see reports in the media about how a laptop computer or other data storage device containing confidential client, patient, or employee information was lost or stolen. With so many employees working remotely through laptops, PDAs and cell phones, we can expect that these incidents will not only continue, but they also may increase in frequency. Currently 32 states have enacted data breach statutes that require a business or organization that suffers a release of confidential customer or patient information to notify the affected individuals so that they can take steps to protect themselves from possible identify

• theft. Michigan does not currently have a data-breach-

notification statute. Nevertheless, Michigan courts have recognized that organizations that do not take reasonable steps to protect confidential information about their customers, patients, or members may be legally liable to those individuals for failing to take reasonable precautions to prevent the theft or loss of their information. Leaving aside the administrative disruption and potential legal liability that may result from a data theft or loss of confidential information, the public relations implications to your organization could be disastrous. Although you may not be able to completely prevent someone from breaking into an employee’s car and stealing a company laptop or PDA, you can take steps to minimize the possibility that a thief will be able to gain access to sensitive information contained

• n the device. Likewise, by adopting reasonable

policies and procedures, you may be able to limit your liability should someone gain unauthorized access to information stored on a lost or stolen device. First, you should assess the types of information you have on your information system and how it is stored, accessed and used. Where confidential information is stored on portable storage devices that are removed from your facility or where confidential information is accessed remotely by employees or vendors, you should put safeguards in place to limit unauthorized access to that information. Third, you must train your users in the policies and procedures, monitor their compliance, and take appropriate corrective action where violations

• ccur.

The White House Office of Management and Budget (OMB) recently issued guidelines governing laptop security within governmental agencies. While every

• rganization is different, the OMB’s guidelines could

be a useful starting point for you in developing your policies and procedures. Among other things, the OMB Guidelines recommend that government agencies take the following actions as they relate to mobile storage devices and remote access of sensitive information: This is only a summary of the OMB’s guidelines. Additional information and guidance can be found at http://www.whitehouse.gov/omb/memoranda/fy2006/ m06-16.pdf. Vendors are increasingly offering technological solutions to guard against lost or stolen devices. Some vendors offer a homing beacon that signals the whereabouts of a lost or stolen device when it is connected to the Internet, allowing the owner to alert

• authorities. Others offer a program that allows the
• wner to send a signal over the Internet commanding

the device to automatically delete sensitive files. Such after-the-fact solutions are appealing, but they do not take the place of good security practices such as those suggested by the OMB. Neither the homing beacon nor the auto-delete program works if the computer is not connected to the Internet. As you examine your security procedures for mobile devices, you can take a lesson from the American Institute of Certified Public Accountants (the “AICPA”). Earlier this year, the AICPA informed its 330,000 members that a hard drive containing personal information about them, including their Social Security numbers, had been lost. This, of course, was very embarrassing to an organization of professionals who verify that their clients maintain appropriate controls. In response to the data loss, the AICPA did more than tighten its security procedures. It took the additional step of reconsidering why it collected Social Security numbers at all. It determined that it had no good purpose for maintaining the numbers and purged them from its records. There’s a lesson for all of us. If you don’t need the data, don’t keep it. (And don’t let your employees keep it.) After all, you can’t lose data if you don’t have it.

“BOSS, YOU’RE NOT GOING TO BELIEVE THIS, BUT SOMEONE STOLE MY LAPTOP .” IS YOUR ORGANIZATION PREPARED?

by Rodney D. Martin and Robert A. Dubault

• 1. All data on mobile computers/

devices which carry agency data must be encrypted unless the data is determined to be nonsensitive;

• 2. Remote access of sensitive

information is allowed only with two- factor authentication where one of the factors is provided by a device separate from the computer gaining access;

• 3. Remote access and mobile devices

should be programmed with a “time-

• ut” function that requires user

reauthentication after 30 minutes of inactivity; and

• 4. All computer-readable data

downloaded from databases holding sensitive information should be logged and the agency should verify each download, including sensitive data, has been erased within 90 days or its use is still required.

SLIDE 3

2006 MISHRM STATE CONFERENCE

The state’s largest gathering of HR professionals will take place in Grand Rapids at the DeVos Place Convention Center on September 20 -22, 2006. Warner Norcross & Judd is proud to be a part of such an important industry event. We are a sponsor of this conference and will also be set up in the exhibit hall. Stop by to see how we can ‘Help Take The Stress Out of HR’ and get your chance to win some great prizes. Sue Conway and Lou Rabaut have also been selected to be presenters at the conference. Sue Conway will be speaking on Wellness Programs on September 21 at 10 am. She has asked Pam Ries, the Corporate Director, Benefi ts/Health & Disability Management at Spectrum Health to join her in sharing what’s legal, what’s working and what’s not in the world of wellness programs. Working with one

• f West Michigan’s largest employers, and as a leader in the health care industry,
• Ms. Ries will provide great insight for companies who may be considering a

wellness program. Lou Rabaut will be reviewing Effective and Legal Performance Reviews on September 21 at 3:45 pm. If you have been to one of Lou’s talks in the past, you know what a dynamic, entertaining speaker he is. Lou will provide managers with the tools and processes to effectively and legally evaluate employees. We look forward to seeing our clients and colleagues at this one-of-a-kind HR conference. For more information on the conference or to register, visit the Michigan Council of SHRM’s Web site at http://www.mishrm.org/ 2006Conference/index.asp. Recently, Congress passed sweeping changes to retirement plans in the Pension Protection Act of 2006 (“Act”). The Act provides over 800 pages of new law related to retirement plans, with particular focus

• n the operation and funding of defi

ned benefi t plans. The changes are too numerous to discuss in detail in a newsletter, but the following are some of the highlights of the new legislation. New Design Features. The Act adds new plan design features, including:

• Allowing hardship distributions on behalf of a

participant’s benefi ciary, not just a participant’s spouse or dependent.

• Vesting under a defi

ned contribution plan for all employer contributions after 2006 must be no worse than a 3-year cliff or 6-year graded vesting schedule.

• Allowing in-service distributions from defi

ned benefi t plans to participants age 62 or older. 401(k) Automatic Enrollment. The Act encourages automatic enrollment and exempts it from state law restrictions if participants enrolled automatically are given proper notice. The Act also allows a plan to provide for the return of contributions in the fi rst 90 days of participation, without penalty, to automatically enrolled participants who opt out.

• An additional safe harbor for nondiscrimination

is made available to automatic enrollment plans that meet matching and contribution requirements given in the Act; however, a plan that performs discrimination testing is given a 60-month window to refund problematic contributions instead of the usual 2 1/2-month period.

• The Act also provides for guidelines to permit

automatic enrollment plans to meet the participant investment rules of Section 404(c) of ERISA. Prohibited Transaction Exemptions. The Act identifi es several prohibited transaction exemptions and a narrow prohibited transaction correction.

• A plan fi

duciary may be compensated for providing investment advice to ERISA plan participants if the fi duciary is a type listed in the Act, and if the fee does not vary depending on participants' investment choices or its recommendations are based on an independently certifi ed computer model. Fiduciaries can be compensated for investment advice for IRAs if the advice is based on computer models that comply with Department of Labor guidelines.

• Prohibited transaction exemptions are created for

the following: block trading; transactions through regulated electronic communications networks; loans, sales, exchanges, and leases involving a plan and non-fi duciary service provider; foreign exchange transactions; and cross trading.

• Prohibited transactions involving securities or

commodities can be corrected within 14 days of discovery of the transaction (unless the transaction involves employer securities or the parties knew

• r should have known that the transaction was

prohibited). Diversifi cation Requirements. The Act makes defi ned contribution plans that hold any publicly traded employer securities (except ESOPs that do not have elective deferrals, after-tax employee contributions, or matching contributions and that are separate from any other qualifi ed plan of the employer) subject to the following rules:

• Participants can diversify employee after-tax

contributions and elective deferrals invested in employer securities.

• The plan must provide at least three other

investment options.

• Participants with three or more years of service can

also diversify employer contributions.

• These rules are effective for plan years beginning

January 1, 2007, with a 3-year phase-in for securities acquired before 2007. Cash Balance/Hybrid Plans. The Act addresses various issues with respect to hybrid plans, including age discrimination, the “whipsaw effect,” and the wearaway of benefi ts due to the conversion to a hybrid plan, as well as requiring such a plan to have a 3-year vesting schedule.

• The Act provides that there is no age discrimination

if an employee’s accrued benefi ts are equal to or greater than those of a younger employee when all variables, other than age, are identical.

• The Act addresses the “whipsaw effect” that occurs

with the election of a lump-sum distribution by allowing that the payout of a lump sum must only be a payout of the participant’s hypothetical balance, avoiding the infl ation of benefi ts that occurred in the calculation of benefi ts for plans that credited interest at a higher rate than the permitted discount rate. However, the Act also does not allow a plan to credit interest at a rate higher than a market rate given in regulations.

• In the context of a conversion to a hybrid plan, the

Act deals with the wearaway of benefi ts by requiring that a participant’s benefi ts must be equal to his pre- conversion benefi t plus the benefi t under the post- conversion formula. Defi ned Benefi t/401(k) Combined Plan. The Act permits combined defi ned benefi t and 401(k) plans for certain employers. Although these plans will be set up as a single plan, with one plan document, trust and Form 5500, the defi ned benefi t and 401(k) portions will operate separately, with each subject to the normal rules applicable. Additional requirements, including automatic 401(k) enrollment and minimums for benefi t accrual and contributions, must also be met. Defi ned Benefi t Plan Changes. A signifi cant portion of the Act focuses on the funding and design

• f defi

ned benefi t plans in an attempt to avoid the funding problems that have plagued defi ned benefi t plans in recent years.

• In most cases, the Act will increase current

contributions to defi ned benefi t plans by increasing the minimum funding requirement. This will be particularly noticeable with currently underfunded

CONGRESS OVERHAULS RETIREMENT PLANS: THE PENSION PROTECTION ACT OF 2006

The Employee Benefi ts Group

SLIDE 4

plans, plans that give signifi cant benefi t increases that apply to already-earned "past service" under the plan, and plans that experience signifi cant investment losses.

• An even more accelerated minimum funding

requirement will apply to "at-risk" plans, generally defi ned as plans that are less than 80% funded. The Act's goal is to force-fund the plan out of at-risk status as quickly as possible.

• The Act also requires that an annual funding notice

be provided to participants, any union representing participants and the PBGC, beginning for the 2008 plan year.

• Defi

ned benefi t plans that pay lump sums will have to gradually adjust how those lump sums are

• calculated. In many cases, lump sums will be lower

than under current law.

• Poorly funded plans will be prevented from

increasing benefi ts and may have to curtail some

• distributions. Very poorly funded plans may be

forced to stop benefi t accruals and will be prevented from paying shutdown benefi ts.

• Publicly traded companies with a poorly funded

defi ned benefi t plan will be prevented from even informally funding their executive deferred compensation programs for their top fi ve executive

• ffi
• cers. This includes, but is not limited to, use of a

"rabbi trust."

• On the plus side, the Act blesses, prospectively,

"cash-balance" and "pension equity" plans that have been controversial since their creation almost ten years ago.

• The Act also encourages the development of "phased

retirement" programs, allowing participants to begin to collect partial plan benefi ts while phasing down from full-time employment.

• Finally, the Act increases PBGC premiums in certain

circumstances and limits some PBGC benefi t guarantees, in order to strengthen the PBGC's fi nancial situation. ERISA Plan Administration. The Act includes several provisions that affect the administration of ERISA plans.

• Quarterly benefi

ts statements must be provided to defi ned contribution plan participants who have the right to direct investment of plan assets (participants without that right must receive annual statements). The statements must discuss diversifi cation and include a notice referring to additional information

• n the Department of Labor Web site. Certain

Form 5500 information must be made available on the Internet and on the employer's intranet.

• After 2006, participants in a defi

ned benefi t plan must receive a benefi t statement at least every three years.

• The Act provides several provisions to simplify the

administration of government plans and promote savings by government employees, including clarifying the rules on purchasing permissive service credits.

• Plans that allow self-directed investment and only

include one individual or partners in a partnership are not subject to the blackout notice requirement and may not be subject to Form 5500 reporting requirements.

• The bonding requirement for plans holding

employer securities is increased from $500,000 to $1,000,000.

• Penalties for interference with ERISA rights are

increased from a $10,000 fi ne and one year in prison to a $100,000 fi ne and 10 years in prison. EGTRRA Made Permanent. The Act made the rules under EGTRRA permanent, including:

• The current maximum annual contribution limits

for IRAs, 401(k) and 403(b) plans.

• The total annual contribution limit for a participant

in a 401(k) plan.

• The maximum benefi

t increase under a defi ned benefi t plan.

• The maximum compensation the plan can use as the

basis of contributions.

• Roth provisions in a 401(k) or 403(b) plan.
• Allowing educational and charitable organizations

to make employer contributions to a 403(b) plan for former employees for up to fi ve years after termination of employment.

• The automatic distribution provision for amounts

between $1,000 and $5,000.

• Simplifi

cation of rollovers between tax-favored retirement accounts, including removing the need for a conduit IRA for transfers from a qualifi ed plan to a Roth IRA.

• Allowing after-tax contributions to a qualifi

ed plan to be rolled into an IRA.

• Allowing the IRS to waive the 60-day IRA rollover

period if the failure is due to an event outside the individual’s reasonable control.

• Repeal of the multiple-use discrimination test.
• Eliminating the “same-desk” rule.
• Shortening the suspension on deferrals after a

hardship withdrawal from one year to six months.

• Not counting rollover accounts when calculating

the amount in the plan for purposes of automatic distribution for accounts of less than $5,000.

• Simplifying the elimination of optional forms of

benefi ts under a defi ned contribution plan. Correction Procedure. For the fi rst time, Congress has provided support for the IRS Employee Plan Compliance Resolution System that provides plan sponsors the opportunity to voluntarily correct failures in plan compliance. Church Plans. The Act provides that church plans that self-annuitize can apply the 403(b) required minimum distribution rules. Military Service. The Act exempts certain military reservists called to active duty from the 10% excise tax

• n distributions prior to age 59 ½.

The Act is extensive and will require action by most plan sponsors to ensure compliance with the new

• requirements. Some of the provisions in the Act are

effective immediately while others are not effective until as late as 2010. We will continue to review the Act to determine the ways the Act affects your plans and expect to provide further guidance over the months to come describing the Act and necessary changes in more detail. If you have any questions about the Act, please contact a member of our Employee Benefi ts practice group.

continued... CONGRESS OVERHAULS RETIREMENT PLANS: THE PENSION PROTECTION ACT OF 2006