Compensation and Benefits Insights – September 2016

King & Spalding

New Guidance Affects Wellness Program Design

Author, Donna Edwards, Atlanta, +1 404 572 2701,

Over the last several months, the Equal Employment Opportunity Commission (“EEOC”) and the Internal Revenue Service (“IRS”) have provided additional guidance regarding the administration of wellness programs.  The recent EEOC guidance builds upon guidance previously issued by the EEOC and the Departments of the Treasury, Labor and Health and Human Services placing limitations on the value of certain incentives offered by wellness programs.  The recent IRS guidance clarifies that certain wellness program benefits may constitute taxable income.  In light of this new guidance, employers offering wellness programs should carefully review their wellness program design for compliance. 


Employer-sponsored wellness programs must comply with many federal laws, including the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which generally prohibits group health plans from discriminating based on adverse health factors, the Americans with Disabilities Act (the “ADA”), which generally prohibits discrimination in any aspect of employment against disabled individuals, and Title II of the Genetic Information Nondiscrimination Act (“GINA”), which generally prohibits discrimination based on genetic information in employment. Over the past several years, overlapping guidance affecting wellness program design has been issued for each of these laws, complicating compliance efforts by employers.  Some highlights of the prior guidance are summarized below.

2013 HIPAA Rules: As we previously reported, in 2013 the Departments of the Treasury, Labor and Health and Human Services issued final regulations on wellness programs based on statutory changes made by the Affordable Care Act (the “HIPAA Rules”) setting forth criteria for group health plans to use when designing wellness programs, in order to comply with HIPAA’s nondiscrimination requirements.  A “participatory” wellness program complies with the HIPAA Rules so long as participation in the program is made available to all similarly situated individuals, regardless of health status. However, in order to comply with the HIPAA Rules, “health-contingent” wellness programs must, in addition to being made available to all similarly situated individuals, regardless of health status, (i) limit the reward to an amount that, when considered together with the rewards for other health-contingent wellness programs offered with respect to the group health plan, does not exceed 30% (50% for a program designed to prevent or reduce tobacco use) of the total cost of coverage (i.e., including both employer and employee contributions) for the coverage tier in which the employee is enrolled (i.e., employee-only, employee plus spouse, etc.); (ii) provide eligible employees with an opportunity to qualify for the reward at least one per year; (iii) be reasonable in design; and (iv) offer a reasonable alternative for individuals with health conditions.

INSIGHT:  Wellness programs generally fall into two categories: participatory or health-contingent. Participatory programs do not require participant satisfaction of a particular health standard, but instead provide incentives for mere participation, while health-contingent programs require that a participant satisfy a standard related to a particular health factor to obtain a reward.

2015 Proposed ADA Rules:  In addition, as we previously reported, in 2015 the EEOC published proposed regulations (the “Proposed ADA Rules”) addressing how employers can implement wellness programs that comply with the ADA.  Although the ADA generally prohibits employers from making disability-related inquiries or requiring medical exams, these activities are permissible as part of a “voluntary” wellness program.  The Proposed ADA Rules provide that a wellness program that is part of a group health plan will be considered  “voluntary” under the ADA as long as the program, in relevant part, (i) does not require employees to participate; (ii) does not deny coverage under the plan or access to particular benefits packages within the plan, or limit the extent of such coverage under the plan, as retaliation for non-participation or failure to achieve certain health outcomes; (iii) does not result in the employer taking any other adverse action or retaliating against, interfering with, coercing, intimidating, or threatening employees (such as by threatening to discipline an employee who does not participate or who fails to achieve certain health outcomes); and (iv) is reasonably designed to promote health or prevent disease (i.e., it must not be overly burdensome, a pretense for violating the ADA or other employment discrimination laws, or highly suspect in the method chosen to promote health or prevent disease).

Similar to the HIPAA Rules, the Proposed ADA Rules limit the total allowable incentive a wellness program may offer. The Proposed ADA Rules provide that financial and in-kind incentives under the wellness program offered in the form of a reward or penalty may be no more than 30% of the cost of employee-only coverage in that plan (without regard to whether the program is participatory or health contingent), and if the wellness program is part of a group health plan, employers must provide a notice that clearly explains what medical information will be obtained, how it will be used, who will receive it and the restrictions on the disclosure. 

INSIGHT:  Unlike the HIPAA Rules, the Proposed ADA Rules limiting financial incentives apply to both participatory wellness programs and health-contingent wellness programs.

2015 Proposed GINA Rules: Finally, in 2015 the EEOC proposed rules under GINA that relate to employer wellness programs tied to group health plans.  The Proposed GINA Rules set forth an exception to the general rule under GINA that genetic information (including information about a family member) cannot be used in employment decisions and that employers cannot request, require, disclose or purchase genetic information. 

The Proposed GINA Rules provide that a wellness program may offer financial and/or in-kind incentives in exchange for the provision by employees and/or their spouses of a health risk assessment without violating GINA, so long as the program meets the following requirements: (i) the program must be reasonably designed to promote health or prevent disease and cannot be overly burdensome; (ii) an incentive cannot be offered in return for a spouse’s information unless the spouse providing the information is covered by the employee’s health plan and the information gathered is limited to the spouse’s current or past health status (and must not extend to family medical history or genetic testing), and the spouse must provide the information and give a knowing, voluntary and written authorization; (iii) no incentive is conditioned on the receipt of genetic information of an employee’s biological or non-biological children or information about their current or past health status; and (iv) the total incentive under the program cannot exceed 30% of cost of the plan in which the employee and spouse are enrolled.

New Final ADA and GINA Rules

In May 2016, the EEOC finalized the Proposed ADA Rules and the Proposed GINA Rules by issuing new final ADA regulations and new final GINA regulations (collectively, the “Final Rules”) with minimal changes to the proposed regulations.  The Final Rules apply to all employer-sponsored wellness programs that include medical exams and disability-related inquiries, regardless of whether the program is tied to a group health plan.

The Final Rules coordinate the maximum incentive limitations under the Proposed ADA Rules and the Proposed GINA Rules by providing that the employer can offer an incentive of up to 30% of the total cost of employee-only coverage under the plan to which the wellness program relates (even if an employee’s spouse participates in the wellness program).  Moreover, the Final Rules provide that if an employer offers more than one group health plan, and participation in the wellness program does not depend on the employee’s enrollment in any plan, the limit on the value of the wellness incentive is 30% of the total cost of the lowest cost self-only coverage (regardless of which group health plan the employee is actually enrolled in).  In addition, if no group health plan is offered by the employer, the Final Rules limit the value of the wellness incentive to the cost of the second lowest cost silver plan for a 40-year old non-smoker on the state or federal health care exchange in the location that the employer identifies as its principal place of business.

In addition, the Final Rules clarify that GINA does not apply to asking a spouse under a wellness program if he or she uses tobacco or requiring a spouse to submit to a blood test to measure nicotine levels (i.e., authorization is not required).

The Final Rules and notice provisions apply to plan years beginning on or after January 1, 2017.

INSIGHT:  Note that a certain wellness program will not be subject to both the HIPAA Rules and the Final Rules. However, where a wellness program is subject to both sets of rules, the employer will need to determine whether the program’s design complies with the most restrictive limitations of the applicable laws. 

New EEOC Sample Notice

In addition, in June 2016 the EEOC published a sample notice to help employers comply with the requirement to clearly explain what medical information will be obtained in connection with the wellness program, how it will be used, who will receive it and the restrictions on the disclosure.  Q&As were also issued along with the sample notice. 

There is no requirement under the Final Rules to provide employees with the notice within a particular timeframe (e.g., within 10 days prior to collecting health information), except that employees must receive the notice before providing any health information with “enough time to decide whether to participate in the program.”  Use of the same notice published by the EEOC is not required, and hard copy delivery or email delivery (with a subject line indicating the information being communicated) of the notice is acceptable.  The notice requirement takes effect as of the first day of the plan year that begins on or after January 1, 2017. 

INSIGHT.  Note that the Final Rules are not clear as to whether the notice must be provided during open enrollment in the year prior to the year in which the notice requirement takes effect—for example, in 2016 for 2017 calendar year plans.  However, cautious employers are likely to provide the notice during such open enrollment period to ensure that the notice has been timely given.  

IRS Guidance Regarding Tax Treatment of Wellness Program Benefits
Finally, in April 2016, the IRS issued a Chief Counsel Memorandum clarifying that cash rewards under a wellness program (including the payment of gym membership fees) are always taxable as income, and cash fringe benefits, other than overtime meal money or local transportation fares, are never excludable from income as de minimis fringe benefits.  However, de minimis fringe benefits (such as t-shirts) are excluded from income if they satisfy the requirements to be excluded under Section 132(e) of the Internal Revenue Code (the “Code”).  In addition, the memorandum clarifies that reimbursements of premiums originally made via salary reduction through a Code Section 125 plan for participating in a wellness program are taxable as income.

King & Spalding will be happy to assist you with any questions you have about how this new guidance may affect your wellness programs.

Nervous about the ongoing qualification of your Retirement Plan?   

Author, James P. Cowles*, Atlanta, +1 404 572 3455,

On June 29, 2016, the Internal Revenue Service (“IRS”) issued Revenue Procedure 2016-37 which all but eliminates the favorable determination letter (“FDL”) program for individually designed retirement plans beginning in 2017.  Effective January 1, 2017, individually designed retirement plans will be eligible to apply for a FDL only upon a plan’s initial adoption and upon termination (and other limited circumstances that are yet to be determined by the IRS).

Background  - What is a FDL and why does a Plan Sponsor want one?
A FDL is issued by the IRS in response to a request by a plan sponsor for a determination as to the qualified status of its individually designed retirement plan under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”).  Employers who sponsor individually designed retirement plans generally are not required to apply for a determination letter from the IRS.  However, having a FDL provides the employer with some reliance that the plan is qualified under Section 401(a) of the Code and the related trust is exempt from taxation under Section 501(a) of the Code.

Generally, if a plan has a FDL and the plan sponsor operates the plan in accordance with its terms, the plan sponsor has comfort that the plan qualifies under applicable law.  The benefits of having a qualified retirement plan are:

  1. the employer can deduct employer contributions when made to the plan up to the applicable limits;
  2. participants can defer income taxes on the amounts contributed to the plan (other than voluntary after-tax contributions); and
  3. contributions, both from the employer and employee, grow tax-deferred until distributed from the plan to the employee or former employee (subject to certain restrictions on distributions).

Employers who adopt pre-approved plans (i.e., plans with pre-determined design options and are not “individually designed” for a particular employer) don’t typically apply to the IRS for a FDL.  The sponsor of a pre-approved plan has already submitted the pre-approved plan to the IRS for review and approval, and the adopting employer can rely on the opinion or advisory letter issued by the IRS to the sponsor for such plan.

Elimination of the FDL program for ongoing retirement plans

Prior to Revenue Procedure 2016-37, individually designed retirement plans were submitted to the IRS for review in five-year cycles based on the last digit of the plan sponsor’s EIN (with a few exceptions).  The last five-year cycle (referred to as “Cycle A”) will end January 31, 2017.  To be considered for the issuance of a FDL, plans assigned to Cycle A (i.e., plans whose plan sponsor’s EIN ends in 1 or 6 and controlled groups and affiliated service groups that previously elected to be in Cycle A) must be submitted for review by the IRS no later than January 31, 2017. 

Beginning January 1, 2017, all individually designed retirement plans will be eligible to make an application for a FDL only upon (1) initial adoption of the plan, (2) plan termination or (3) certain other limited cases that are yet to be identified by the IRS.   

INSIGHT:  This means that, absent additional guidance from the IRS, ongoing individually designed retirement plans (other than the plan submitted for review in Cycle A) will not be eligible to apply for a FDL after January 1, 2017.

When will current FDLs expire?

The good news is that previously issued FDLs may be relied upon with regard to plan provisions that are not amended or affected by a law change.  Additionally, the expiration dates contained in FDLs are no longer operative.  The bad news is that plan provisions amended or affected by a law change in the future will not be covered by the existing FDL.

INSIGHT:  As the years go by, it will become more difficult to determine which plan provisions have been amended or affected by a law change and, as a result, are not subject to the plan’s FDL.   Law firms may be asked to provide opinions as to a plans compliance with current law. 

What will plan sponsors need to do to maintain a plan’s qualified status?

Plans will need to continue to be amended and operated in compliance with current law.  The IRS will release, on an annual basis, two separate lists outlining (a) the amendments that must be made to a plan to comply with current law (a “Required Amendments List”) and (b) how plans must be operated to comply with current law (a “Operational Compliance List”).

The Required Amendments List will be issued on or after October 1st of each year.  The list will identify changes to qualification requirements (i.e., laws) applicable to the terms of qualified retirement plans.  In general, the deadline for adopting such required amendments will be the end of the second calendar year following the year in which the Required Amendments List was issued.  For example, a plan must be amended for a qualification provision listed in the 2017 Requirement Amendments List no later than December 31, 2019.  Keep in mind, however, that despite the ability to retroactively adopt amendments required by the Required Amendments List, discretionary amendments (i.e., amendments not required by law or put into effect before required by law) must be adopted by no later than the end of the plan year for which they are effective.

The Operational Compliance List will also be issued annually.  Notwithstanding the extended period of time a plan may have to adopt a required amendment as described above, a plan must be operated in compliance with current law at all times.  The Operational Compliance List will contain a list of the changes applicable to plan operations effective for the calendar year in which it is issued, even though a plan amendment may not be required to be adopted until a later date.  

How will the elimination of the FDL impact plan operation?

Audits: Plan auditors typically request a copy of the current FDL as part of the audit.  As reliance on the FDL becomes more limited in the coming years due to plan amendments and changes in the law, it is unclear what representations auditors may require from plan sponsors.

Merger, Acquisitions and Financings: It is common for the parties in a transaction to request copies of FDLs for plans involved in the transaction.  Again, as reliance on the FDL becomes more limited, additional representations may be required by acquiring entities in the purchase and/or sale agreements and by banks in credit agreements or additional diligence by the acquiring or lending entity may be necessary.

EPCRS:  Currently, plan sponsors may self-correct certain plan operational failures under the Employee Plans Compliance Resolution System (“EPCRS”) only if the plan is subject to a FDL.  If the plan is not subject to a FDL, a submission under the Voluntary Correction Program must be made to correct operational failures, which can be a very expensive process.

INSIGHT:  As portions of a plan are not covered by an existing FDL because it has been amended or affected by a change in the law, it is not clear if such a plan is, or is not, eligible for the self-correction provisions of EPCRS.  The IRS has indicated it will issue additional guidance on the eligibility for the EPCRS program as it relates to the changes to the FDL program.

Annual Review of the Required Amendments List:  Plan sponsors will need to review plan documents annually to be sure that the required amendments are timely adopted. 

INSIGHT:  There will be items on the Required Amendments List for which the reviewer (whether it be the plan sponsor, vendor or outside counsel) determines an amendment is not necessary.  We believe it will be just as important to have written documentation as to why an amendment was not necessary as it will be to timely adopt the required amendments.  In the event of an audit, an IRS agent may disagree with a determination that an amendment was not required.  If this occurs, it will be critical to have written documentation confirming that the plan sponsor reviewed the plan in a timely manner and determined an amendment was not required (as opposed to simply overlooking the required amendment altogether).

Annual Review of the Operational Compliance List:  Plan sponsors, recordkeepers, and plan administrators will need to review plan operation annually to ensure compliance with the Operational Compliance List.

INSIGHT:  As discussed above, in many cases an amendment to a plan document may not be adopted until two years after a change in plan operation is required due to a change in the law.  Consequently, recordkeepers and plan administrators may not be able to rely on the plan document for guidance on operational compliance.

Action items for plan sponsors:

FDL Applications:  Plan sponsors with EINs ending in 1 or 6 (and controlled groups and affiliated service groups that previously elected to be in Cycle A) should amend their plans for current law and file FDL applications by no later than January 31, 2017.

Alternative Plan Qualification Evidence:  Starting in 2017, plan sponsors will need to develop a strategy for providing evidence of a plan’s ongoing qualification in the case of mergers and acquisitions, plan audits and certain investments.

King & Spalding LLP would be delighted to assist you with questions that may arise in connection with the qualification of your retirement plans.

*Non-lawyer Employee Benefits Consultant

September and October 2016 Filing and Notice Deadlines for Qualified Retirement and Health and Welfare Plans

Author, Ryan Gorman, Atlanta, +1 404 572 4609,

Employers and plan sponsors must comply with numerous filing and notice deadlines for their retirement and health and welfare plans. Failure to comply with these deadlines can result in costly penalties.  To avoid such penalties, employers should remain informed with respect to the filing and notice deadlines associated with their plans.

The filing and notice deadline table below provides key filing and notice deadlines common to calendar year plans for the next two months. If the due date falls on a Saturday, Sunday, or legal holiday, the due date is generally delayed until the next business day.  Please note that the deadlines will generally be different if your plan year is not the calendar year. Please also note that the table is not a complete list of all applicable filing and notice deadlines (including any available exceptions and/or extensions), just the most common ones. King & Spalding is happy to assist you with any questions you may have regarding compliance with the filing and notice requirements for your employee benefit plans. 




Affected Plans

September 15
(8 ½ months after the end of the plan year)

Minimum Contribution Deadline

Deadline for plan administrator to contribute balance of minimum contributions necessary to avoid a funding deficiency.

Defined Benefit Plans

September 30 (within 9 months of the end of the plan year)

Summary Annual Report (SAR)

Deadline for plan administrator to distribute Summary Annual Report for prior year to participants and beneficiaries.  This deadline may be extended until 2 months following the close of the extension period for filing a Form 5500, if applicable.

Defined Contribution Plans
Health and Welfare Plans
(unfunded welfare plans are exempt)

September 30
(last day of the 9th month following the end of the prior plan year)

Certification of Adjusted Funding Target Attainment Percentage (AFTAP)

Deadline for actuary to certify AFTAP to avoid presumption that AFTAP is less than 60%.


Defined Benefit Plans

October 15

Medicare Part D Creditable Coverage Notice to Individuals

Deadline for employers that provide prescription drug coverage to Medicare Part D eligible individuals to provide a written disclosure notice to Medicare eligible individuals and their dependents covered under the plan indicating whether their prescription drug coverage is creditable coverage.

Health and Welfare Plans that provide prescription drug coverage to Medicare Part D eligible individuals

October 15
(2 ½ months after extension granted)

DOL Form 5500

Deadline for plan administrator to file Form 5500 for prior year if deadline was extended by filing a Form 5558.

Retirement Plans
Health and Welfare Plans

IRS Form 8955-SSA

Deadline for plan administrator to File Form 8955-SSA if deadline was extended by filing a Form 5558.

Retirement Plans

October 15
(9 ½ months after the previous plan year)

PBGC Premium Filing

Deadline for plan administrator of large plans (500 or more participants) to pay flat-rate or variable PBGC premium for current plan year.


Defined Benefit Plans with 500 or more participants


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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