In this issue, new SFE&G partner Theresa Borzelli and guest co-author Mary B. Anderson of ERISAdiagnostics Inc. discuss the timely issue of shared responsibility regarding health coverage (Pay or Play). Mychelle Holloway explains why your record keeper requests certain information from the plan sponsor. Also read about SES' recent promotions and new hires

1. Client Alert
MARCH 2013
STEIKER, FISCHER, EDWARDS & GREENAPPLE, P.C. | SES ADVISORS, INC.
Shared Responsibility (Pay or Play)
Co-authored by: Theresa Borzelli, Esq.— Principal, SES and SFE&G and
Guest co-author, Mary B. Anderson, CEBS — Founder, ERISAdiagnostics, Inc.
ESOP companies have many of the
same issues when it comes to employee
benefits, including health coverage.
On January 2, 2013 the IRS issued
proposed regulations regarding Shared
Responsibility Regarding Health
Coverage. The proposed regulations
offer some clarification, flexibility and
transition rules. The material is
complex and will be discussed in three
separate articles. Here, we summarize
key provisions of both the statute and
the proposed regulations.
The Rule
The applicable large employer (ALE)
must offer minimum essential coverage
(more guidance expected) to full-time
employees and their dependents (not
spouses) that is affordable AND
provides minimum value (calculators
not finalized yet) or face an assessable
penalty.
Applicable
Large Employer (ALE)
Generally, an employer is an ALE if it
employs on average at least 50 fulltime employees, including full-time
equivalents (FTE) during the previous
calendar year. Practically speaking, an
employer knows if it employs more than
50 full-time employees. If it does, then it
really doesn't have to go through the
FTE calculation. This would be the case
if the workforce is predominantly
salaried employees, or it could also be
true if there is a mix of salaried and
hourly employees where the hourly
employees generally work a traditional
full-time schedule (35 or 40 hours per
week). In fact, the preamble to the
regulations states, "For most employers,
their status as an applicable large
employer will be evident without the
need for an actual employee
calculation…" Calculating FTE is
relevant for employers close to the 50
full-time employee threshold, especially
if the employer has a large seasonal
workforce. We will provide more details
in our next article.
Three Prong Test
An applicable large employer is subject
to an assessable penalty if the employer
does not offer minimum essential
coverage or if the coverage that is
offered is either not affordable or does
not provide minimum value.
Minimum
Essential Coverage (MEC)
The minimum essential coverage
definition in the statute includes a number
of governmental programs (Medicaid,
CHIP, etc.) and "coverage under an
eligible employer sponsored plan." An
eligible employer sponsored plan is a
government plan or "any other coverage
offered in the small or large group market
within a State." The proposed regulations
provide that future regulations are
expected to provide more guidance on the
definition of minimum essential coverage
and eligible sponsored plan.
Affordable Coverage
The statute provides that employer
provided coverage is unaffordable if the
employee premium is greater than 9.5% of
household income. Since employers do
not know an employee's household
income, previous guidance offered a safe
harbor providing that affordable coverage
is coverage where the employee's
contribution doesn't exceed 9.5% of the
employer's lowest cost self-only coverage
offered to employees. The proposed
regulations offer additional safe harbors
relating to rate of pay and the Federal
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2. Poverty Line. We will provide more
details in our next article. Employers
must review their plan's cost structure to
determine if at least one offering
satisfies the affordability requirement.
Minimum Value
A plan fails to provide minimum value if
the plan's share of the total allowed costs
of benefits provided under the plan is
less than 60% of those costs.
Notice 2012-31 requested comments on
the following methods of determining
minimum value:
Actuarial value calculator
Minimum value calculator to be made
available by HHS and IRS
Checklists
Plans with nonstandard features that
cannot utilize the above methods may
require an actuarial certification.
HHS provided proposed regulations
regarding methodologies for determining
minimum value including a minimum
value calculator. Additional calculators
are expected to be provided by the IRS.
More guidance is expected in this area.
Assessable Penalty
There are two potential penalties: one
penalty for not offering minimum
essential coverage to full-time
employees and another penalty for
offering minimal essential coverage that
is not affordable or of minimum value.
The penalty will be assessed if one fulltime employee who purchases coverage
on an exchange is eligible for a premium
subsidy or tax credit. The penalty for no
coverage equals $2,000 times each fulltime employee (subject to the
substantially all exception noted below).
The full-time employee count is reduced
by 30 before calculating the penalty. The
penalty for coverage that is not
affordable or does not meet the
minimum value requirements is $3,000
for each full-time employee purchasing
coverage on the exchange. The
maximum penalty cannot exceed the no
coverage penalty.
Overview of some key
provisions that were clarified
in the proposed regulations
Applicable large employers (ALE)
(50 or more full-time employee
equivalents) must offer full-time
employees and their dependents the
opportunity to enroll in minimum
essential coverage. The addition of
dependents is a clarification.
Dependent does not include spouse.
Affordability safe harbor expanded to
include a rate of pay safe harbor and
federal poverty level safe harbor. In
addition, the proposed regulations
permit adjustments for a partial year of
coverage.
Controlled group rules apply in
determining whether or not an
employer is an ALE. For example, if
the controlled group meets the ALE
definition then each member of the
controlled group is an ALE regardless
of the number of employees.
An ALE will be treated as offering
coverage to its full-time employees
(and dependents) for a calendar month
if it offers coverage to all but five
percent or if greater five of its full-time
employees (the substantially all test).
Introducing
Theresa Borzelli
MARCH 2013
Steiker, Fischer, Edwards &
Greenapple, P.C. is pleased to
announce that Theresa Borzelli
has joined the firm’s New
Jersey office as a Partner.
Contact Terrie:
(973) 540-9292 or
tborzelli@sfeglaw.com
Introducing
Michael Golden
Transition Rules
Plans with non-calendar year plan
years will not be subject to the
assessable penalty from January 1,
2014 to the first day of the 2014 plan
year if the plan offers minimum value,
affordable coverage on the first day of
the 2014 plan year.
Cafeteria plans with non-calendar
year plan years may be amended no
later than December 31, 2014 to
retroactively amend the plan to allow a
participant to prospectively revoke a
salary reduction election for accident
and health plans once during the plan
year. In addition, the plan can allow an
employee who made a salary reduction
election before the beginning of the
plan year to make another prospective
salary reduction election regardless of
whether the employee experienced a
SES Advisors welcomes new Vice
President, Michael Golden, to
the firm’s Philadelphia office.
Contact Michael:
(215) 508-7715 or
mgolden@sesadvisors.com
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Client Alert

3. change in status. The preamble indicates
that such changes will allow employees
who want to enter an Exchange to cease
contributions under the cafeteria plan
and permit employees who previously
declined coverage to avoid the
individual mandate penalty by electing
coverage.
Employers that intend to adopt a 12
month measurement period and a 12
month stability period, for 2014 only,
may adopt a transition measurement
period that is at least 6 months, that
begins no later than July 1, 2013 and
ends no earlier than 90 days before the
first day of the plan year beginning on or
after January 1, 2014. For example, a
calendar year plan could select an April
15, 2013 through December 15, 2013
measurement period with administrative
period ending December 31, 2013.
Without this transition rule, many
employers would have been required to
begin their measurement periods in
2012.
Plans offering coverage to employees
only will have to expand coverage to
include dependents of full-time
employees. Any employer that takes
steps during 2014 toward offering
coverage to dependents of full-time
employees will not be liable for a
penalty in 2014 solely because they don't
offer coverage to dependents.
Employers that participate in
multiemployer plans subject to
collective bargaining agreements will
not be subject to a penalty if coverage is
offered to full-time employees and their
dependents and the coverage is
affordable and provides minimum value.
Affordability is determined according
the affordability safe harbors and
minimum value is determined in
accordance with existing guidance.
Practically speaking
As an employer or plan sponsor:
1. You may not have to calculate the
number of full-time equivalents.
2. You will have to calculate the
number of full-time employees.
3. You can avoid the penalty via plan
design.
4. You will have to maintain necessary
documentation.
MARCH 2013
Watch our blog – theesopauthority.com
– in the next few weeks for Part II of
this article, which will provide more
details on some of the key provisions
of the regulations.
Contact Theresa
tborzelli@sfeglaw.com
Disclaimer: This material is for the sole purpose of providing general information and does not under any circumstances constitute legal advice
and should not be used as a substitute for legal advice. You should seek the advice of counsel when applying the requirements to your plan. For
more information, contact Mary Anderson at ERISAdiagnostics Inc. at 610.524.5351 or Theresa Borzelli at SFE&G at 973.540.9292.
Why is My Record Keeper Asking For That?
Written by: Mychelle Holloway, Principal & Senior ESOP Administrator
It is that time of year when you are
responding to year-end data requests from
your ESOP record keeper. You may be
wondering why he/she truly needs all this
information. In order to maintain
compliance with extensive Internal
Revenue Service and Department of
Labor regulations, a lot of information has
to be compiled and provided to your
record keeper. This article will explain
why some of the more difficult data items
are being requested.
Synthetic Equity
If you are an S Corporation sponsoring an
ESOP, your record keeper will ask you for
copies of plans or agreements defining all
forms of synthetic equity, and you may
not think you have any. You may be
surprised to learn just what the IRS has
defined as synthetic equity. Obvious
forms of synthetic equity include stock
options, warrants, and certain buy-sell
agreements that allow individuals to
acquire stock directly, but the
definition is much broader. Phantom
stock (often used to offset restrictions
on plan participation by selling
shareholders and their family members
who elected Section 1042), stock
appreciation rights, supplemental
executive retirement plans, deferred
compensation plans, and certain
severance and employment agreements
that provide for termination benefits to
be paid more than two and half months
after the end of the year in which the
individual's employment terminated are
all synthetic equity under the
regulations. Synthetic equity can even
be a split dollar life insurance
arrangement where premiums and
benefits are split between the employer
and the employee, or rights to acquire
stock or similar interests in an entity
related to the S Corporation. Because
of the breadth and sensitivity of some
of these benefits, the Human Resources
department should have senior
management verify that all forms of
synthetic equity are indeed being
reported to the record keeper.
Family Attribution Rules
Your record keeper will need to know
who is related to whom in your
employee database. Family attribution
rules pursuant to IRC Section 318 will
affect the determination of key and
highly compensated employees who
are included in most compliance tests.
The IRC Section 318 definition of
family includes the individual and any
spouse, children, grandchildren and
parents of the individual. If you have
any stock with an IRC Section 1042
taint, you would be subject to the
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Client Alert

4. broader family definition of IRC
Section 267, which requires that you
also report any siblings (half or whole
blood) and grandparents of the
individual. Additionally, if you are an S
Corporation, you are subject to IRC
Section 409(p) testing, which uses the
broadest possible definition of family
and requires the Human Resources
department to track family
relationships not normally monitored.
The expanded IRS Section 409(p)
definition of family includes all of the
above relationships plus any ancestor
or lineal descendant of the individual's
spouse or siblings, spouses of the
siblings of the individual, the lineal
descendants of those siblings and the
spouse of any person listed above.
Historical Data
There are many reasons why your
record keeper may ask you to gather
historical data about an employee. The
most common reason is that you have
rehired an employee. In order to
calculate eligibility, vesting, date of
entry into the ESOP, and possible prior
forfeiture restoration, you will need to
provide all the hire, term, rehire, reterm dates that apply to that employee,
as well as hours worked for those
periods. Another reason could be that
your record keeper is trying to
determine forfeiture timing and may
need hourly data from five years ago to
determine if the participant has
incurred a five-year break in service.
Employee Terminations
Record keepers are also very
concerned with how an employee
terminates employment during the plan
year. In order to accurately calculate
eligibility for allocations, vesting, and
timing of distributions, your record
keeper will need to know if the
termination is due to death or
disability, as defined in your plan
document (the record keeper can
typically determine retirement based
on the census data provided). In order
to comply with USERRA regulations,
he/she needs to know if a termination
(or subsequent rehire) is due to
military service. To determine if there
has been a partial termination, he/she
needs to know the difference between
voluntary terminations and
involuntary terminations. Lastly, for
certain kinds of leave you may even
need to credit hours for periods of
time not worked; therefore, you need
to let your record keeper know if an
employee was separated from service
due to authorized leave of absence,
paternity or maternity leave, family
medical leave or other types of
approved leave of absence.
Multiple
Plan Compliance Testing
Finally, you may wonder why your
ESOP record keeper is asking for so
much information on your 401(k)
plan. Combined compliance testing
for multiple plans sponsored by a
company can be a complicated task.
Typically, ESOP record keepers
perform this service because the
ESOP valuation is done after the
401(k) allocations are completed. In
addition, most of the regulations
complicating this testing process are
ESOP related, so your ESOP record
keeper may be better equipped to
accurately complete the testing. At a
minimum, you will need to provide
your ESOP record keeper with 401(k)
deferrals or other types of employee
deferrals (e.g., catch up, ROTH), matching
amounts, profit sharing and other types of
employer contributions, amounts of
reallocated forfeitures and ending account
balances. You may also need to provide
prior distribution information, rollover
information, or plan document information
depending on what types of compliance
testing your plans are subject to and the
results of those tests.
MARCH 2013
Your record keeper's data requests can
seem daunting, but each request is
necessary for accurate record keeping. If
you do not understand why something is
being requested, ASK! The record keeper
will be happy to explain to you why he/she
is asking for that particular information.
Remember, it takes a team effort to keep
your ESOP administration accurate,
efficient and compliant.
Contact Mychelle
mholloway@sesadvisors.com
SES Promotions
Please join us in congratulating
several of our SES staff on their
recent promotions.
Doug Cannon was promoted
from Senior Vice President to
President, Plan Services
Division.
Jim Capone was promoted from
Controller to Vice President of
Finance and Administration.
Alice Simons was promoted
from Marketing Manager to
Director of Marketing.
PENNSYLVANIA SES (215) 508-1600, SFE&G (215) 508-1500 | NEW JERSEY SES (973) 540-9200, SFE&G (973) 540-9292
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Client Alert