This Employee Benefits Alert is brought to you by Snell & Wilmer s Employee Benefits Group:

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1 This Employee Benefits Alert is brought to you by Snell & Wilmer s Employee Benefits Group: Tom Hoecker Stephanie Derby Bucky Swift Denise Atwood Nancy Campbell Jim Morse Cassie Wehling Michael Wise ORIGINAL DOCUMENT: Will not be sent NUMBER OF PAGES: 6 DATE: 11/03/99 CLIENT/ MATTER: PLEASE RETURN TO: Nancy Campbell PERSONAL FAX: No REQUEST/ATTORNEY: Nancy Campbell DIRECT LINE: IF YOU HAVE NOT PROPERLY RECEIVED THIS TELECOPY PLEASE CALL US AT (602) OUR FACSIMILE NUMBER IS (602) THE PURPOSE OF THIS NEWSLETTER IS TO PROVIDE OUR READERS WITH INFORMATION ON CURRENT TOPICS OF GENERAL INTEREST. THE ARTICLE SHOULD NOT BE CONSIDERED LEGAL ADVICE OR OPINION, BECAUSE ITS CONTENT MAY NOT APPLY TO THE SPECIFIC FACTS OF A PARTICULAR CASE. PLEASE CONTACT NANCY CAMPBELL AT (602) WITH ANY QUESTIONS.

2 November 3, 1999 Need Help Deciphering 401(k) Administrative Fees? Help has arrived. The Department of Labor, along with the American Council of Life Insurance, the American Bankers Association and the Investment Company Institute, recently released a model disclosure form package to help employers compare 401(k) fees charged by service providers. The Department also released an informational pamphlet on the topic, A Look at 401(k) Fees for Employers. The form package is fairly short and informative, with an initial overview section that explains that ERISA requires plan fiduciaries to consider cost when choosing investment options and service providers. The package also outlines several methods for calculating fees. Also included are four schedules that allow service providers to fill in blanks with cost information. Perhaps most important, the package ends with a section defining many of the major services that service providers offer. Until now, no common set of definitions for major plan services existed. Plan sponsors are not required to use the forms. Legislation introduced this August in the U.S. Senate, however, would require plan service providers (e.g., mutual funds and banks) to implement procedures to disclose their administrative fees. The informational pamphlet also offers assistance to plan sponsors by outlining ten questions to consider when weighing the issue of plan fees and expenses, such as: Have you decided which fees and expenses you, as plan sponsor, will pay, which your employees will pay, and/or which you will share? Do you know which fees and expenses are charged directly to the plan and which are deducted from investment returns? Does the prospective service arrangement have any restrictions, such as charges for early termination of your relationship with the provider? You can obtain copies of both the model form package and A Look at 401(k) Plan Fees for Employers on the Pension and Welfare Benefits Administration s website at Calculating FMLA Leave Taken Intermittently Requires Extra Attention The Family and Medical Leave Act (FMLA) allows employees to take up to twelve weeks of unpaid leave during a twelve-month period for a serious health condition, pregnancy, or adoption of a child. The time off must be measured in calendar weeks, not work hours, even though the leave does not need to be taken all at once. Confusion may arise when employees take FMLA leave intermittently, such as for cancer treatments. If leave is taken intermittently, only the amount of For more information, please contact any member of the Employee Benefits Group listed on the cover page of this fax.

3 2 leave actually taken may be counted toward the twelve weeks of leave to which an employee is entitled. For example, if a full-time employee who normally works five days a week takes off one day, the employee would use 1/5 of a week of FMLA leave. As another example, if a full-time employee who normally works eight-hour days instead works four-hour days for one week and takes off 4 hours each day for FMLA leave, that employee would use 1/2 week of FMLA leave. If an employee works part-time or variable hours, the amount of leave to which he or she is entitled is also determined on a proportional basis by comparing the new schedule with the employee s normal schedule. For example, if an employee who normally works thirty hours per week works only twenty hours per week for one week, the employee s ten hours of leave constitutes 1/3 of a week of FMLA leave. These calculations are easier to apply to non-exempt employees (i.e., employees who by law are entitled to be paid overtime), because employers are required to keep records of actual hours worked. Exempt employees, however, for whom employers are not required to keep records of actual hours worked, are also entitled to FMLA leave based on their normal work week. For example, if an exempt employee regularly works sixty hours per week, that person is entitled to twelve weeks at sixty hours per week, for a total of 720 hours of unpaid leave. Employers can negotiate with exempt employees to arrive at a mutually acceptable number of FMLA hours, using a twelve-week period from the prior year as a starting point. Once an agreement is reached, it should be committed to in writing by both the employer and the employee. Recipients of Social Security Disability Insurance Benefits not Precluded from Bringing a Claim Against Their Employer Under The Americans With Disabilities Act. In a recent case, the United States Supreme Court held that disabled individuals who apply for Social Security Disability Insurance benefits are not automatically barred from bringing an employment discrimination claim under the Americans With Disabilities Act (ADA). In reaching its decision, the Court recognized the differences between the ADA and the Social Security Act. The Social Security Act provides monetary benefits to individuals who are considered disabled. Disability is defined as the applicant s inability to engage in any substantial gainful activity by reason of any physical or mental impairment. On the other hand, the ADA attempts to eliminate unjustified discrimination against disabled individuals by prohibiting employers from discriminating against a qualified individual with a disability on account of the individual s disability. A qualified individual is defined as a disabled person who can perform the essential functions of his or her job, including disabled individuals who can only do so with reasonable accommodation. The Court recognized that there may be instances in which a disability benefits claim and an employment discrimination claim exist side by side. For example, the Social Security Administration does not consider whether the applicant can perform any job with reasonable accommodation. Therefore, a disabled individual s claim under the ADA that she can perform her job with reasonable accommodation is not necessarily inconsistent with her Social Security disability benefits application that she cannot perform any job without reasonable accommodations.

4 3 In this case, the Court unanimously rejected the argument that a claim for disability benefits is presumed to conflict with an employment discrimination claim under the Americans With Disabilities Act. Whether a genuine conflict exists must be determined on a factual, case-by-case basis. IRS Reverses Its Position on the Deductibility of Smoking Cessation Programs The regulations issued under Code Section 125 provide that only medical expenses as defined in Section 213 may be reimbursed through health flexible spending accounts (HFSAs). In Revenue Ruling , the IRS had previously ruled that the cost of a smoking cessation program was not a deductible medical expense under Section 213 if the taxpayer had no specific disease. As a result of the prior ruling, the cost of smoking cessation programs could not be reimbursed through HFSAs. In Revenue Ruling 99-28, the IRS reversed its long-standing position and held that smoking cessation programs and prescription drugs that alleviate nicotine withdrawal are deductible under Section 213 although nonprescription nicotine gum and nicotine patches are not deductible under Section 213. Consequently, smoking cessation programs and prescription drugs that alleviate nicotine withdrawal can now be reimbursed through HFSAs. Employees should be notified of this change and employers should revise their HFSA procedures to allow for the reimbursement of these expenses. Plans With Puerto Rico-Based Employees Must be Approved by the Puerto Rico Department of the Treasury Qualified retirement plans operating in the U.S. must clear an additional hurdle if Puerto Rico-based employees participate in the plans. While plans operating in Puerto Rico are subject to ERISA, they are not subject to the Internal Revenue Code. Instead, Puerto Rico s own tax code applies. As a result, U.S.-based plans that cover employees located in both the U.S. and Puerto Rico must comply with both the U.S. and Puerto Rico tax laws, and must be dual-qualified. Some of the peculiarities of Puerto Rico tax law include: a different definition of highly-compen-sated employee, a lower limit on pre-tax contributions, and different tax-deferred rollover rules. Failure to recognize these differences can lead to violations such as excessive contributions with respect to the Puerto Rico employees, and can subject the plan sponsor to penalties. Dual-qualification can usually be accomplished by simply preparing an addendum to the plan document, and submitting the plan documents to the Puerto Rico Department of the Treasury in a process similar to the IRS s determination letter process. Unlike in the U.S., however, qualification of the plan by the Puerto Rico Department of the Treasury is mandatory. It is not enough to operate the plan in compliance with the Puerto Rico tax laws. If you have concerns about whether your plans need to be dual-qualified, please call us. Phoenix Employee Benefits Practice Group Members Thomas R. Hoecker thoecker@swlaw.com Marvin S. Swift mswift@swlaw.com Nancy K. Campbell ncampbell@swlaw.com Catherine E. Wehling cwehling@swlaw.com Stephanie R. Derby sderby@swlaw.com Denise L. Atwood datwood@swlaw.com James B. Morse jmorse@swlaw.com Michael J. Wise mwise@swlaw.com

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