News & Resources

Publications & Media

Issue #2

For Your Benefits Robert D. Rothacker, David P. Olson, Marla B. Anderson, Sarah M. Linsley, Charles E. Harper, Gary R. Clark, Fred Gants, Jeffrey Morris, Paul D. Bauer, Otto W. Immel

This issue contains the following articles:
From the Editor Quarles & Brady Quick Hits

Interim Final Regulations on the Mental Health Parity and Addiction Equity Act of 2008 Released

Department of Labor Releases Model Employer CHIP Notice

Fiduciary Presumption of Prudence Applied Early in Latest ERISA Stock-Drop Litigation

Section 162(m) Transition Relief is Expiring for Public Companies FROM THE EDITOR

Welcome to the second issue of the Quarles & Brady Employee Benefits and Executive Compensation Group's For Your Benefits, a newsletter dedicated to keeping benefit plan managers and HR and compensation professionals informed of legal changes affecting benefit programs. We will continue to supplement this regular publication with timely, special alerts that provide in-depth coverage of significant changes.


COBRA Subsidy. The 65 percent COBRA subsidy currently applies to workers with an involuntary termination of employment on or before February 28, 2010. On February 25, 2010, the House approved legislation that would extend the subsidy to employees terminating employment after February 28, 2010. The Senate is also considering an extension.

Wisconsin Roth IRA Conversion Update. The Wisconsin legislature unanimously approved legislation on
February 25, 2010 that would permit state residents of all income levels to convert traditional individual retirement accounts to Roth IRAs without penalties. The bill was approved by the Senate earlier this month, and now heads to Gov. Jim Doyle for his signature.


On February 2, 2010, the Department of Labor, Department of Health and Human Services and the Department of the Treasury issued interim final regulations under the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 ("MHPAEA"). Group health plans that offer mental health or substance use disorder benefits are required to comply with the interim final regulations for plan years beginning on or after July 1, 2010. Calendar year plans will need to comply with the interim final regulations beginning January 1, 2011. Delayed effective dates apply for collectively bargained plans. The MHPAEA does not apply to employers with less than 50 employees during the preceding calendar year.

The MHPAEA does not require group health plans to offer mental health or substance use disorder benefits. However, plans that offer these benefits must provide parity between mental health and/or substance use disorder benefits and medical/surgical benefits. Under the MHPAEA and the interim final regulations, the financial requirements (such as deductibles and copayments) and treatment limitations (such as number of visits) that are applicable to mental health and/or substance use disorder benefits can be no more restrictive than the predominant financial requirements and treatment limitations that apply to substantially all medical/surgical benefits in the same classification. The six classifications of benefits are: inpatient, in-network; inpatient, out-of-network; outpatient, in-network; outpatient, out-of-network; emergency care and prescription drugs. A financial requirement or treatment limitation is predominant if it applies to more than one-half of the medical/surgical benefits subject to the financial requirement or treatment limitation in a classification. A financial requirement or treatment limitation applies to substantially all medical/surgical benefits in a classification if it applies to at least two-thirds of the benefits in that classification. The interim final regulations clarify that plans must use a single deductible and out-of-pocket maximum for both mental health and substance use disorder benefits, and medical/surgical benefits. Additionally, any processes, strategies or evidentiary standards (such as preauthorization) used in applying treatment limitations to mental health and/or substance use disorder benefits must be comparable to, and can be applied no more stringently than, the processes and strategies that apply to medical/surgical benefits in the same classification. 

Q&B Key: Sponsors of group health plans that offer mental health or substance use disorder benefits should review their plans to ensure that they comply with the interim final regulations. If your company sponsors an insured plan, you should speak with your company's insurance provider about compliance with the regulations.


The Children's Health Insurance Program ("CHIP") Reauthorization Act of 2009 requires employers maintaining group health plans - in states that provide premium assistance for the purchase of employer-provided group health coverage under Medicaid or the state children's health insurance program - to notify employees of such premium assistance. As of January 2010, forty states provided premium assistance for the purchase of coverage under an employer-sponsored group health plan. The Department of Labor recently released a model notice that employers can use to fulfill their notice obligations. The model notice is designed to be a national notice and contains information for all forty states that provide premium assistance. Employers must provide the notice by the later of the first day of the first plan year after February 4, 2010 or May 1, 2010. Calendar-year plans must provide the notice by January 1, 2011. 

Q&B Key: An employer is required to provide the CHIP notice if its group health plan covers employees in one of the forty identified states, even if the employer is located in a state that does not provide such premium assistance. For many multistate employers, it may be administratively easier to send the notice to all employees, even if some employees live in a state that does not provide premium assistance. Employers should decide now how they will distribute the notice. The notice is not required to be provided separately and can be included in open enrollment materials or in the summary plan description provided the notice appears separately and in a manner in which an employee could reasonably be expected to appreciate its significance. The notice is required to be sent to all employees residing in a state that provides premium assistance, even those employees who are not enrolled in or eligible for the group health plan.


As a result of the economic climate, there has been an increase in stock-drop class litigation. Though courts nationwide differ on the various legal issues that arise in stock-drop cases, the United States District Court for the Southern District of New York recently issued a favorable decision for employers and plan fiduciaries in Gearren v. McGraw-Hill Cos., Inc., Nos. 08 Civ. 7890, 09 Civ. 5450, 2010 WL 532315 (S.D.N.Y. Feb. 10, 2010). In Gearren, McGraw-Hill was sued by a class of its former and current employees who alleged that Defendants breached their fiduciary duty under ERISA by:

  1. Offering McGraw-Hill company stock as an option under the company retirement plan at a time when they knew or should have known that the company's stock was likely to sharply decline in value; and
  2. Failing to disclose that information to plan participants.

This lawsuit was filed after the company's stock dropped 64.4 percent once it was revealed that McGraw-Hill's Financial Services Division Standard & Poors ("S&P") gave residential mortgage-backed securities and collateralized debt obligations improperly high investment-grade ratings that concealed how truly risky the investments were. The Court concluded, however, that because Defendants offered company stock in accordance with the 401(k) plan agreement, the fiduciaries were entitled to a presumption of prudence, even at the pleading stage. Though allegations of a dramatic drop in company stock can suffice to state a claim for breach of fiduciary duty, Plaintiffs failed to overcome the presumption because drop in share price alone was insufficient as the stock had since rebounded. The Court also found that Plaintiffs failed to state a claim for breach of duty to disclose because under ERISA, Defendants had no duty to disclose information about the company's financial condition, only to disclose information about plan benefits. Any breach for filing SEC documents allegedly containing misrepresentations about the company's mortgage investment ratings should be remedied under securities law and not under ERISA, even though the fiduciaries incorporated the SEC filings by reference into summary plan descriptions.

Q&B Key:In light of the resurgence of stock-drop cases, fiduciaries are encouraged to disclose to plan participants that investment choices vary in risk; advise participants to diversify their portfolios; and direct participants to consult with a financial planner or investment counselor before making investment decisions. After all, the fiduciary presumption of prudence does not provide plan fiduciaries with absolute immunity nor does it apply in all cases (e.g., where plans give fiduciaries unfettered discretion over whether to include company stock as an investment option). Moreover, even if applicable, some courts will not entertain a presumption of prudence argument until past the pleadings stage of the lawsuit, after the Plaintiffs have been given an opportunity to obtain evidence in their case.


Section 162(m) of the Internal Revenue Code provides that compensation payable to a "covered employee" of a public company in excess of $1 million in any year, other than "performance-based" compensation, is nondeductible to the public company. Compensation must satisfy numerous requirements in order to qualify as performance-based. Among other things, the compensation must be payable "solely" upon the achievement of one or more shareholder-approved performance goals. Revenue Ruling 2008-13 reversed a prior IRS position and ruled that compensation will not qualify as performance-based compensation under Section 162(m) if compensation would be paid, without regard to whether the applicable performance goal is attained, in the event of a covered employee's (i) involuntary termination by the employer without cause, (ii) termination by the employee for good reason, or (iii) retirement. Transition relief under Revenue Ruling 2008-13 provided that the ruling did not apply if either: (1) the incentive compensation performance period began on or before January 1, 2009; or (2) the incentive compensation is payable pursuant to an employment contract as in effect on February 21, 2008 (without regard to future renewals or extensions, including renewals or extensions that occur automatically). For many public companies, this transition relief is expiring.

Q&B Key: Public companies should inventory all of their relevant incentive plans, arrangements and agreements that may be implicated by the Revenue Ruling. For example, shareholder-approved bonus and equity incentive plans, and the underlying award agreements should be reviewed and, if necessary, revised. Employers must also consider whether any employment agreements provide for severance that is based upon an executive's bonus opportunity because these provisions could cause the incentive program to fail under the Section 162(m) requirements for performance-based compensation.

If you have questions regarding employee benefits and executive compensation, please contact the Employee Benefits and Executive Compensation Law Group: Paul Jacobson at 414-277-5631 / [email protected], Robert Rothacker at 414-277-5643 / [email protected], David Olson at 414-277-5671 / [email protected], Amy Ciepluch at 414-277-5585 / [email protected], Sarah Linsley at 312-715-5075 / [email protected], Kerri Hutchison at 414-277-5287 / [email protected], Marla Anderson at 414-277-5453 / [email protected] or your Quarles & Brady attorney.

If you have questions regarding ERISA Litigation, please contact the ERISA Litigation Group: Charles Harper at 312-715-5076 / [email protected], Gary Clark at 312-715-5040 / [email protected], Fred Gants at 608-283-2618 / [email protected], Valerie Bailey-Rihn at 608-283-2407 / [email protected], Autumn Kruse at 414-277-5567 / [email protected] / Jeffrey Morris at 414-277-5659 / [email protected], Paul Bauer at 414-277-5139 or [email protected], Otto Immel at 239-659-5041 / [email protected], Marian Zapata-Rossa at 602-229-5447 / [email protected] or your Quarles & Brady attorney.

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