Category: Benefits

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Do Employees Have the Right to Moonlight

Moonlighting in second, third or even more jobs may be the American way, especially in tough economic times with increasing unemployment, declining benefits and shrinking work hours. But moonlighting is not an employee’s protected legal right.


Moonlighting can be a challenge for both employees and employers. From employers’ point of view, the expectation is that employees will show up “present, prompt and prepared,” as one of my law professors used to say.


If employees are hustling and juggling to take care of multiple jobs, sometimes things slip. Fatigue, transportation glitches, lack of sleep and poor attentiveness can become issues. Employees sometime perform mediocre work at all their jobs, instead of excellent work at the day jobs that are their primary livelihoods. If that happens, primary employers are within their legal rights to terminate employees because moonlighting is hurting performance, dependability and attentiveness.


Some employers welcome moonlighting—when they’re the ones doing the hiring. Moonlighters tend to be cheaper and more flexible than regular full-time employees, who may be earning expensive overtime wages. Moonlighting employees also are less likely to qualify for such benefits as medical insurance or retirement because some other employer may be providing them. Moonlighting employees are particularly attractive and affordable for short-term and unusual projects and work such as inventory, month-end or seasonal rushes, and annual maintenance.


Many employers insist that their employees’ true commitments be to their full-time and primary jobs. Employers may lawfully prohibit or severely limit moonlighting, especially if the jobs are safety- or production-sensitive and response times to unscheduled work are critical. Examples would be emergency, medical, repair or safety personnel.


Sometimes there is a requirement that certain employees carry beepers or cell phones in order to be available on call on certain days, especially weekends. Such immediate availability requirements may make moonlighting at another job impractical for workers, and especially problematic for their employers.


Another concern is whether the moonlighting may violate employees’ duty of loyalty to their primary employers. If the worker is moonlighting for a competitor, all kinds of issues can arise. Employees owe their employers loyalty, meaning they cannot violate confidences or take advantage of proprietary or secret information in order to moonlight.


Moonlighting and noncompete agreements
The stakes are higher for both employers and employees if the moonlighting workers have noncompete, confidentiality or trade-secret agreements with primary employers. Such employers may consider spelling out why moonlighting is a bad idea. Here are a few reasons that can be cited to employees:


• If employees’ moonlighting work violates noncompete agreements, primary employers can fire them and seek injunctions barring competing work.


• Employers can sue subsequent employers for tortiously interfering with their noncompete agreements by hiring former employees.


• By competing with their day-job employers, employees could wind up losing both jobs, and be left with little hope of getting subsequent jobs in the field.


• It’s a myth that if an employer terminates an employee who has a noncompete agreement, the noncompete terminates too. Many noncompete agreements survive and remain enforceable, even if there are discharges, resignations, layoffs, corporate mergers or acquisitions, or changes in ownership. The same may be true for forced furloughs, which have been increasingly popular during the downturn.


The law governing noncompete agreements varies from jurisdiction to jurisdiction. So it is best for an employer to check with an attorney before taking a chance on hiring someone whose noncompete may still be in force, despite a furlough or firing.


My best advice to employees is to assume that your noncompete agreement has teeth until your lawyer has reviewed it and your circumstances. Be very careful before you commit to and sign a noncompete agreement.

My advice to employers is also to check with a lawyer on any noncompete agreements, since results vary state to state. It is also prudent to check with someone moonlighting for you about any noncompete limits on the work.


The proactive approach
One way to head off moonlighting problems in your workforce is to let employees know that you expect them to disclose and clear any potential moonlighting issues before undertaking such jobs.


If you are generally amenable to moonlighting, let your workforce know that. Tell employees that moonlighting isn’t the problem—lying about it is, and could result in the loss of their day job. You could let the workforce know that you understand their dilemma in a bad economy. You understand that they are trying to make ends meet. The proactive approach is a good one if your company has many entry-level manual or clerical jobs where pay tends to be low or if you are in an industry where it’s quite common for workers to have multiple jobs.


Emphasize that you expect employees to be at work and on time. Say that working second (or third) jobs will not be an acceptable excuse for absences or tardiness. You could add, however, (if you hold this view) that moonlighting may be a better explanation than sleeping late or blowing off work.


You might also want to let your workforce know that anything that happens at moonlighting jobs may reflect badly upon and endanger their day jobs. One reporter interviewed me about a phenomenon of women with daytime jobs moonlighting as strippers. I cautioned that moonlighting strippers need to think about their soon-to-be former jobs with churches, private schools and health care providers. Not all moonlighting jobs are created equal, and if that is your company’s position, let workers know that.


The bottom line, of course, is that you do not want moonlighting to affect your operation or reputation, and it’s a good idea to communicate that belief to employees. If you want to discourage moonlighting, you might want to remind them of the current employment picture, in which employers can hire people who are willing to commit to no moonlighting.


Here is a recap of basic moonlighting considerations:


• Set out any policies on moonlighting, such as disclosure and preapproval.


• Consider if letting one of your workers moonlight will violate noncompete agreements or confidentiality or trade secrets. Also consider if you are putting your organization in jeopardy by taking on a moonlighter who might have such restrictions imposed by a primary employer.


• Determine if a worker’s moonlighting job will negatively affect your operations or your reputation. (See the teacher/stripper example above.)


• Determine if you can save on fringe benefits or overtime wages by hiring moonlighters. Do those savings outweigh other moonlighting issues?


• Decide if special requirements for your workers, such as around-the-clock availability, will make moonlighting impractical for them and perilous to your 24/7 business.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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GAO Suggests Change To 401(k) Hardship Withdrawal Rule


To enable employees to replenish their 401(k) plan account balances more quickly after they take hardship withdrawals, Congress should consider changing current law that bars plan participants from making new contributions until six months after a hardship withdrawal, the Government Accountability Office suggests in a report.


The GAO also recommends that the Labor Department encourage employers to post on participant Web sites information on the long-term impact preretirement withdrawals of funds can have on their 401(k) plan account balances.


For example, employers could provide participants with modeling tools to help them calculate the impact of a preretirement withdrawal of funds, the GAO said.


In addition, the Labor Department could encourage employers to provide employees who terminate employment with projections showing how their account balances would compare at retirement if left in the plan or taken as a lump-sum distribution, the GAO said.


Sen. Herb Kohl, D-Wisconsin, who chairs the Senate Special Committee on Aging and who requested the GAO report, said in a statement that he intends to introduce legislation to reduce preretirement “leakage” from 401(k) plans.


“Despite the financial hardships many are facing, people need to resist raiding their 401(k), because it can be a really bad deal for them over the long run,” Sen. Kohl said.



Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.



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Senate Panel Releases Trimmed-Down Health Reform Plan


The chairman of the Senate Finance Committee unveiled a much-anticipated health reform plan Wednesday, September 16, that has allayed some employer concerns while introducing a controversial tax on high-cost health plans.


Gone from the proposal released by Sen. Max Baucus, D-Montana, is a public plan option. Many in the business community believed such a plan—essentially a Medicare-like publicly run insurance plan—would shift more health care costs to employers. Instead, it calls for the creation of nonprofit, member-run health cooperatives that would operate in the individual and small-group markets.


Baucus said the committee also removed an employer mandate. In its place is what critics call a “backdoor mandate”—a requirement that employers pay for subsidies provided by the federal government to help employees purchase their own health insurance.


The America’s Healthy Future Act of 2009, released as a “chairman’s markup” because it does not yet have the full support of Republicans on the committee, would cost an estimated $774 billion over 10 years, which is less than the $1 trillion price tag of proposals in the House and the Senate’s Health, Education, Labor and Pensions Committee.


“It ain’t perfect, but it is certainly a vast improvement over the other bills we’ve seen so far,” said James Gelfand, senior manager for health policy at the U.S. Chamber of Commerce. “This is a much better place to start the conversation.”


To pay for health care reform, the finance committee is proposing a 35 percent excise tax on insurers for employer-sponsored health plans that exceed $8,000 for individuals and $21,000 for families in 2013.


A family health plan is expected to cost $16,949 annually by 2013, according to research published Tuesday, September 15, by the Kaiser Family Foundation and the Health Research & Educational Trust. In the case of self-insured employer health plans, the tax is applied to the plan’s administrator.


“For example,” the chairman’s draft states, “for an employee who elects family coverage under a fully insured health care policy covering major medical and dental with a value of $28,000, the amount subject to the excise tax is $7,000 ($28,000 less the threshold of $21,000). The employer reports $7,000 as taxable to the insurer, which calculates and remits the excise tax to the IRS.”


Gelfand said the chamber would prefer the tax be applied to individuals rather than the insurance industry, which he believes will pass the cost on to consumers.


The tax would generate $215 billion over 10 years, according to a preliminary review of the plan by the Congressional Budget Office. Over time, what constitutes a high-cost health plan would grow with inflation, a point that employers say is a problem because medical costs have been rising at least two times faster than inflation.


“Considering the cost of health insurance has doubled over the last 10 years, this [tax] could very quickly hit everyone,” Gelfand said.


The health insurance industry group America’s Health Insurance Plans applauded the committee’s proposal but reiterated its opposition to a public plan in the form of health cooperatives.


The 223-page plan from Baucus shares basic elements with proposed legislation in the House and in the Senate HELP Committee, including a requirement that all individuals purchase insurance or face a penalty of up to $3,800 a year for families. The bill would also create a national health insurance exchange where consumers and small employers could purchase health plans.


Like other proposals, it would reform insurance regulations to prevent insurers from denying coverage to people with pre-existing conditions or based on annual or lifetime limits. It states that insurance companies could rate individuals and small group plans based only on age, tobacco use and family size, though insurers would be limited in how much they could raise premiums. Insurers would also have to provide tobacco cessation programs if they raised rates on people who smoke.


While many of the reforms would not take effect until 2013, consumers who have been denied coverage based on pre-existing conditions would have immediate access to a high-risk insurance pool created by the federal government.


Despite forgoing an employer mandate, the bill could hit companies that employ more than 50 people with penalties if they do not provide insurance deemed acceptable or affordable.


A plan would meet the “minimum creditable coverage” requirement if it offers benefits on par with high-deductible health plans with health savings accounts. It would be considered affordable if the plan’s cost to employees does not 13 percent of their gross adjusted income.


If employers’ plans are neither affordable nor acceptable, employees would be eligible to opt out of employer-sponsored health insurance and buy coverage through a health insurance exchange, where they could be eligible for federal subsidies. In such cases, an employer would be required to reimburse the government for any federal subsidies given to its employees.


This provision has brought opposition from retailers and other employers that hire low-wage workers.


Neil Trautwein, vice president of the National Retail Federation, called it a “backdoor mandate,” though he praised the decision to drop an earlier “free rider” proposal that would have required employers to pay for the cost of providing Medicaid to employees.


“We’re never going to support an employer mandate because we are such a labor-intensive industry and we have little room to pass costs on to customers,” he said.


Another change allows individuals 25 or younger to purchase a “young invincible” policy that would only provide catastrophic coverage.


Thomas D. Snook, an analyst at actuarial firm Milliman, said allowing young people to purchase catastrophic plans would make it more likely they could comply with an individual mandate. It could, however, increase costs for older, sicker individuals, since the young invincibles would contribute less to the overall risk pool.


The finance committee plan also introduces new provisions that could make insurance more affordable for individuals and small employers. Under the plan, insurers would be allowed to create multi-state plans for small groups and allow them to circumvent state insurance mandates unless such a requirement exists in 26 or more states.


Individuals would also be allowed to use pretax dollars to purchase health insurance.


The bill, while appealing to employers, must be approved by the Senate Finance Committee before being introduced as legislation.


—Jeremy Smerd


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Cost of Health Benefits Still Accelerating Faster Than Inflation

Health insurance premiums continued to rise faster than inflation last year, though at relatively moderate levels, with employers shifting more costs to workers through higher deductibles, according to an annual survey.


In their 11th annual survey on health benefits, the Kaiser Family Foundation and the Health Research & Educational Trust jointly reported Tuesday, September 15, that premiums for employer-sponsored health insurance rose to $13,375 for family coverage, up 5 percent from last year.


Health care premiums have risen 131 percent in the past 10 years; workers’ contributions to premiums have risen 128 percent—about 10 times faster than inflation, the survey notes. Last year, workers paid 17 percent of the premium for individual coverage and 27 percent for family coverage.


The result has been that health care costs consume a greater percentage of workers’ total compensation, researchers said. Wages, meanwhile, have stagnated. The economic impact of health care costs on families has made health care reform as much about restoring people’s economic health as it is about improving access to health services.


“It is health care as an economic issue that has fueled the health reform debate,” said Drew Altman, president and CEO of the Kaiser Family Foundation in Washington.


The 5 percent increase in family premiums, though much lower than the double-digit growth earlier this decade, has nonetheless been felt by workers who have dealt with layoffs, pay cuts, dwindling savings, home foreclosures and other acute financial pressures that have defined the current recession. In a poll conducted by the group, 19 percent of consumers said the recession has made it more difficult to pay for health care and health insurance.


“Rising health care costs are always much more painful in a bad economy,” Altman says. “The irony is it’s tougher to pay for health reform in a bad economy.”


The rise in health care costs also ran counter to general inflation, which actually dropped 0.7 percent in the past year. In 2008, the rise in the cost of premiums, at 5 percent, was more closely aligned with the overall inflation rate of 3.9 percent.


Altman said the “moderate” increase in family premiums—at 5 percent—is likely due to wariness among insurers to raise premiums during a recession and a tendency to resist major rate increases during times when Congress is considering health reform. Health insurance cost increases have remained steady between 5 and 7 percent for the past few years, but researchers maintain that insurance is likely to grow at higher rates unless significant changes are made to the health care system.


“I’m confident we’ll return to more typical rates of increase that we’ve seen in the past,” Altman said. “There’s no reason to believe we’ve done anything meaningful to deal with the fundamental drivers we see in the rates of increase.”


The survey of more than 2,000 non-federal private and public employers tracks the cost of health benefits of the previous year and was conducted earlier this year, when the recession was more pronounced.


The percentage of all firms offering health benefits shrank last year to 60 percent. Though not statistically different from the previous year, when 63 percent of firms offered health benefits, it is significantly less than the 69 percent of firms that offered benefits in 2000.


Not surprisingly, the percentage of firms offering insurance to employees was lower for small employers with three to nine workers—46 percent offered health benefits.


Health reform proposals would generally offer subsidies for small firms to purchase health insurance. New laws would also prohibit insurers from charging small firms higher premiums based exclusively on the health of their employees.


The recession has only hastened the speed at which employers have shifted health care costs to workers as a means to spread the economic pain.


As a result of the economic downturn, 15 percent of surveyed employers have increased workers’ premiums. Twenty-one percent of all employers have reduced the scope of benefits or shifted more costs to employees, for example, by increasing deductibles.
 
The survey showed that in 2009, 22 percent of workers with individual plans paid at least $1,000 out of pocket annually before their plan paid a share of their health care bills, up from 18 percent last year and 12 percent in 2007.


Small employers have been quicker to shift costs to workers, with 40 percent of workers at small firms (three to 199 employees) facing deductibles of at least $1,000—including 16 percent with deductibles of $2,000 or more.


The survey also shows that larger firms are increasingly turning to deductibles of $1,000 or more to keep down their own costs, though workers were not necessarily enrolling in high-deductible health plans with health savings accounts.


Preferred provider organizations, or PPO plans, remain the most popular health plan. Sixty percent of covered workers enroll in them despite having to pay higher out-of-pocket costs.


The percentage of workers enrolled in high-deductible health plans did not change at 8 percent. The lack of growth in high-deductible plan enrollment is likely related to the moderate increase in overall health care costs, said Gary Claxton, vice president of the Kaiser Family Foundation.
 
Wellness benefits are becoming staples of benefits packages. According to the survey, 58 percent of all employers that provide health benefits—and 98 percent of all large firms—offered at least one type of wellness benefit in 2009, such as gym membership discounts, weight-loss programs, on-site exercise facilities, smoking-cessation programs, personal health coaching, classes in nutrition or healthy living, Web-based resources for healthy living or a wellness newsletter.


On-site health clinics, once used to treat work-related injuries, are seeing a comeback as centers for primary care. Among firms with 1,000 or more employees, 20 percent have on-site clinics, of which 79 percent provide treatment for nonwork-related illnesses.


If costs continue to rise at the rate of 6.1 percent—an estimate considered conservative—a family plan will cost $24,180 in 10 years.


—Jeremy Smerd



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Risk Dominates Conversations Around Retirement Plan Investing


As it appears the economy may be rebounding, employers and retirement plan providers are challenging long-held beliefs about the proper diversification and asset allocation of their retirement plan investments.


Employers with both 401(k) and defined-benefit plans are taking a closer look at those plans’ investments and questioning whether they should be doing more to mitigate risks, experts say.


“The whole philosophy of using diversification to manage risk has been called into question,” said Mark Ruloff, director of asset allocation at Watson Wyatt Worldwide. “Simply putting your money into many different risky assets generally failed in 2008.”


Employers with defined-benefit plans are coming to terms with the reality that while diversification can help control risk, it doesn’t always help. As a result, many employers are talking more about how they can reduce the risk within their plans, Ruloff said.


For defined-contribution plan sponsors, the conversation around diversification has become more specific, experts say. Instead of having bond funds to represent conservative investments, plan sponsors are questioning what kind of fixed-income products they should include and whether they have any associated risk, said Lori Lucas, executive vice president and defined contributions practice leader for Callan Associates, a San Francisco-based institutional investment consultant.


“For example, some plan sponsors are asking whether they need a money-market fund in addition to a stable-value fund as the conservative options in their plans,” she said.


As a result, defined-contribution plan sponsors are increasingly reviewing the funds in their plans. A February survey by Callan Associates found that fund due diligence is the top priority for plan sponsors in 2009.


Defined-contribution plan sponsors are also taking a closer look at the target-date funds and questioning whether they are too aggressive in their exposure to equities, said Bob McAree, retirement practice leader at Sibson Consulting.


“The conversation that’s emerging is whether the asset allocation strategy that many thought was appropriate historically now needs to be reconsidered,” he said. “For example, many individuals found themselves in 2010 target-date funds that were still 60 percent invested in equity.”


In an effort to increase the diversification of their offerings, many employers are adding “funds of funds” overseen by a number of managers, said John Sturiale, director of Charles Schwab’s retirement investment services group. In the past six months, Schwab has seen its fund-of-funds sales to defined-contribution plans jump 25 percent from normal levels, Sturiale said.


But what the right level of diversification and what the right asset allocation is remains a big question mark for most companies.


“I am not sure anyone has the magic answer,” said Carol Klusek, head of retirement and financial services at Aetna. “It’s almost like there is a feeling out there that the dynamics have shifted, but there is no new baseline.”


—Jessica Marquez


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Employers Seek to Limit 2010 Health Cost Increases, Survey Finds


Employers are expecting a nearly 9 percent increase in the cost of their group health care plans in 2010 but plan to trim that increase to 5.9 percent through a variety of cost-cutting actions, early responses to an annual survey by Mercer indicate.


Although employers try to reduce their projected cost increases every year, survey respondents say they are cutting their health care benefit budgets more than usual for 2010 because of the recession.


In fact, employers most strongly affected by the recession reported both a higher underlying cost trend, 9 percent, and a lower targeted cost increase, 5.4 percent, on average than unaffected employers, which anticipate an 8.5 percent growth rate that they plan to trim to 6.3 percent.


Linda Havlin, a worldwide partner at Mercer based in Chicago, attributed the higher costs among recession-affected employers to a surge in stress-related illnesses among employees and layoffs.


“Actual or feared loss of employer-subsidized coverage makes people think about filling their medications, getting their preventive care and taking care of any elective procedures that they have postponed,” she explained.


Among the most popular measures employers are using to lower their 2010 health care cost trend are eliminating higher-cost or more generous health plan options as a way to move employees into lower-cost options, such as high-deductible consumer-directed health plans; auditing plans to ensure that all covered dependents are actually eligible for coverage; and adding or renegotiating performance guarantees with plan vendors.


These preliminary findings are based on responses from 1,562 employers. The survey is still being conducted, and complete results, including the actual rate of increases employers experienced in 2009, will be released by year’s end.



Filed by Joanne Wojcik of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.


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Granting Equity Incentives to Employees

The current economic downturn has caused many companies to search for creative ways to motivate and compensate employees without using cash. Some corporations are responding to this challenge by promising stock or other equity awards to employees in order to give them a “piece of the upside” associated with the employer’s business. Although many companies already have a well-established process and infrastructure for making and managing equity grants, other employers are exploring this territory for the first time or are looking to grow their equity programs.


The grant of equity to employees implicates issues across several areas of the law, including tax, securities, corporate and contract law. Although an entire book could easily be written on the subject of employee equity grants, here are some of the initial questions and issues that employee equity grants frequently involve:


Will the equity awards be granted under an employer plan? Although companies sometimes grant equity on a one-off basis to employees, in most companies, the basic framework for making equity grants is set forth in an overarching written plan that is adopted by the company’s board of directors and is in many cases approved by the company’s stockholders. These plans are often referred to as stock option plans, equity incentive plans or stock incentive plans. These plans typically specify the types of grants that can be made under the plan, the maximum number of shares that may be granted, and other guidelines and rules relating to the grant of equity. Equity plans should be distinguished from employee stock ownership plans, which are tax-qualified employee benefit plans that buy and hold employer stock for the benefit of the plan participants.


What type of equity will be granted? Equity awards are typically made in the form of an individual written agreement or certificate indicating the type of award, the number of shares subject to the award and other relevant information. Equity grants are sometimes made in the form of direct grants of stock to employees. In other cases, equity is granted in the form of an option, which is a right to purchase shares of employer stock in the future for a pre-determined price. While direct equity grants and options tend to be the most common ways to grant equity, there are other types of grants that companies sometimes make. Stock appreciation rights are rights to receive the amount of the appreciation of a share of employer stock. Phantom stock is generally a bonus based on the value of an employer’s stock on a future date.


How do securities laws apply to employee equity grants? Generally speaking, federal and state securities laws require that the offer or sale of stock or other securities be registered with the Securities and Exchange Commission and relevant state securities agencies unless the offer or sale can be made under a statutory or regulatory exemption. This general principle applies even in the context of employee equity grants. When stock or options are granted to a small number of people in a company, it will be much easier to claim an exemption for the grant. However, as a company starts granting equity to a larger number of people, then there is an increased chance that an exemption won’t apply. This is why publicly held companies typically file an S-8 Registration Statement with the SEC to register employee equity grants. In the absence of such a registration statement, it is important to structure the grant under a securities law exemption with the advice of competent securities counsel.


What does “vesting” mean? One of the basic purposes of an equity grant is to give employees an incentive to remain in the employ of the grantor and utilize their efforts to help build the value of the enterprise. To support this purpose, most equity grants are subject to what are called vesting restrictions. In the case of a stock option, the vesting restrictions typically provide that an option cannot be exercised until the employee has remained with the employer for a specified period of time. Often the vesting restrictions will be staged over a period of time. For example, an option agreement may provide that one-fourth of the option vests on each of the first four anniversaries of the option grant date.


In the case of an outright grant of stock, the vesting restrictions usually provide that the granted shares cannot be transferred and are subject to forfeiture by the employee until the employee remains with the employer for a specified period of time. As with options, these vesting restrictions are often staged over a period of years. Stock that is subject to such vesting restrictions is commonly referred to as restricted stock. The vesting schedules of options or restricted stock are generally set forth directly in the award agreements or certificates.


When does the award expire or terminate? In the case of an option, the option award agreement will establish an expiration date after which the option cannot be exercised (this is usually between five and 10 years after the date of grant). The awards will also usually provide that if the employee ceases to be employed prior to the full vesting of the award, the unvested parts of the award will be forfeited and the employee will have a limited amount of time to exercise any vested options.


It’s not cash, but is it still taxable? Many people are surprised to learn that a grant of equity to an employee is, except in certain circumstances, a taxable event to the employee even though it is not paid in cash. That is, an outright grant of unrestricted stock to an employee is compensation for which the employer has a withholding obligation and on which payroll and income taxes are payable. The employee will have taxable income for federal income tax purposes equal to the fair market value of the equity received, which will be taxed at ordinary income rates. In the case of a grant of restricted stock, the employee does not have taxable income on the granted shares until the years in which the shares vest. This means that if the fair market value of the employer’s stock increases over time, the employee’s associated tax liability will correspondingly increase each year as the additional vestings occur. In this case, the employee could choose to file a Section 83(b) election with the IRS within 30 days of the grant. This requires the employee to pay, in the year of grant, taxes on all unvested restricted shares based on the fair market value of the shares at the time of grant, as opposed to paying taxes as the shares vest on the potentially higher share value at that time.


If equity is granted in the form of an option with an exercise price equal to the fair market value of the employer’s stock on the date of grant, there will generally be no federal income tax liability in the year of grant. However, whenever the option is exercised, the employee will be taxed on the spread, which is the difference between the exercise price and the stock value at the time of exercise. The spread is taxed at ordinary income rates and not capital gains rates.


If an option is granted to an employee under an equity incentive plan that is approved by the employer’s stockholders, has an exercise price equal to the fair market value of the employer’s stock on the date of grant, and if certain other IRS requirements are met, then the option can be granted as an incentive stock option. This option is given special tax treatment. It is not taxed at the time of grant or exercise, and assuming that certain conditions are met, the underlying stock can later be sold at capital gains rates.


Obviously, not all companies are organized as corporations. Some may be organized as limited liability companies, limited partnerships or other entity types. Additionally, some corporations may have elected to be taxed as “S-corporations,” which present special issues of their own when it comes to employee equity grants. The entity type is yet another consideration that could have a significant effect on how equity grants should be structured. For these reasons and in light of the issues discussed here, companies should always ensure that the structuring and granting of equity to employees is made in conjunction with experienced legal and tax advisors.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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Pilots Sue to Drop PBGC as US Airways Pension Plan Trustee


The U.S. Airline Pilots Association is suing the Pension Benefit Guaranty Corp. to remove it as trustee of the US Airways pilots’ pension plan and appoint a temporary trustee, according to a news release from the union.


The Charlotte, North Carolina-based association claimed the PBGC breached its fiduciary duty by failing to investigate the company management of the plan, as required under Employee Retirement Income Security Act, when it took over the plan on March 31, 2003.


US Airways Group Inc. terminated the plan while in Chapter 11 bankruptcy proceedings. At that time, the plan had $1.2 billion in assets to cover $3.7 billion in liabilities. The PBGC took responsibility for $726 million of the shortfall.


The lawsuit was filed in U.S. District Court in Washington.


“The PBGC has not fulfilled its obligation as trustee of our pilots’ retirement fund,” USAPA president Mike Cleary said in the news release. “Our own investigation has uncovered a number of questionable circumstances surrounding activities and investments of our retirement fund prior to its termination. Our request to the PBGC for a thorough investigation has fallen on deaf ears, so we are asking the court to appoint a trustee who will do its due diligence in this matter and investigate the management, or perhaps the mismanagement, of our pilots’ retirement fund.”


A PBGC spokesman declined comment on the lawsuit.




Filed by Timothy Inklebarger of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.


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Kennedy’s Legacy Includes Landmark Benefits Laws


Sen. Edward Kennedy, D-Massachusetts, the standard bearer for universal health coverage during his more than four decades in the U.S. Senate and whose legislative accomplishments had a huge influence on the design on employee benefit plans, died Tuesday evening, August 25, more than a year after he was diagnosed with a malignant brain tumor.


“An important chapter in our history has come to an end. Our country has lost a great leader who picked up the torch of his fallen brothers and became the greatest United States senator of our time,” President Barack Obama said Wednesday, August 26.


His legislative successes in the employee benefits arena are numerous and significant. He was a driving force behind the passage of legislation in 1978 that requires health care plans to provide the same coverage for maternity and childbirth as other medical conditions, a change that expanded benefits for millions of women.


In 1996, he played a key role in the enactment of legislation that curbed the use of exclusions of pre-existing medical conditions in health plans. That law makes it easier for employees to change jobs without losing coverage for current medical conditions.


His decision several years ago to invite business groups, insurers and mental health organizations to work together and develop mental health care benefits parity legislation was the starting point that led to the passage of a parity bill last year.


The strong support that developed and held firm behind the measure Sen. Kennedy championed ultimately led backers of a parity bill passed by the House to drop a provision—one vehemently opposed by employers—that would have required group health care plans to provide coverage for any mental condition listed in the psychiatric industry’s compendium of mental disorders.


The measure that ultimately passed goes into effect next year and will require group health care plans to provide the same coverage for mental disorders as other medical conditions, ending widespread discriminatory design practices.


While known for his soaring oratory, his success was due to his ability to negotiate and to compromise. The enactment of the portability bill had much to do with Sen. Kennedy’s decision to accept a Republican provision to allow employers to offer medical savings accounts—the predecessor to health savings accounts.


In his last major public address, which he made at the Democratic National Convention a year ago in Denver, he briefly but eloquently described one of his great passions in his 46-year career in the Senate: the need to expand health insurance coverage.


He said there was “new hope that we will break the old gridlock and guarantee that every American—north, south, east and west; young, old—will have decent quality health care as a fundamental right and not a privilege.”


Because of his illness, Sen. Kennedy was not an active player in the debate and passage of sweeping health care reform legislation in July by the Health, Education, Labor and Pensions Committee, the Senate panel he chaired.


Benefit lobbyists earlier said his illness was felt markedly as his successor, Sen. Chris Dodd, D-Connecticut, lacked Sen. Kennedy’s command of health care issues. Sen. Kennedy’s death could influence the outcome of the legislation, with the loss of a reform champion who also had the ability to hammer out compromises with opponents.



Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.


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New Regulations Cover Health Care Information Data Breaches


The U.S. Department of Health and Human Services has issued regulations requiring providers, health plans and other entities covered by the Health Insurance Portability and Accountability Act to notify individuals when their health information is breached.


The regulations issued Wednesday, August 19, implement provisions of the Health Information Technology for Economic and Clinical Health Act, which passed as part of the American Recovery and Reinvestment Act of 2009, which President Barack Obama signed into law in February.


The regulations require health care providers and other HIPAA-covered entities to promptly notify affected individuals, the HHS secretary and the media when the breach affects more than 500 individuals.


Breaches affecting fewer than 500 individuals must be reported to the HHS secretary annually. Business associates of covered entities also are required to notify the covered entity of breaches at or by the business associate, according to the HHS.


“The new federal law ensures that covered entities and business associates are accountable to the department and to individuals for proper safeguarding of the private information entrusted to their care,” Robinsue Frohboese, acting director and principal deputy director of the HHS Office for Civil Rights, which developed the regulations, said in a statement. “These protections will be a cornerstone of maintaining consumer trust as we move forward with meaningful use of electronic health records and electronic exchange of health information.”


Alison Schaap, a Chicago-based legal consultant with Hewitt Associates, said employers are “going to have to look at their existing polices, what needs to change in terms of how they provide the required notification to individuals, and what updates they need to make” to their business associate agreements “so they can get the necessary information within the required time frame to provide notification to individuals in the event of a breach of unsecured protected health information.”


America’s Health Insurance Plans, the Washington-based health insurer trade group, applauded the regulations.


“We are pleased that the new regulations give practical guidance plans and outline reasonable standards for assessing if a data breach has occurred,” AHIP said in a statement.



Filed by Judy Greenwald of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.


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