Michigan Court of Appeals Rules in Favor of Newspaper’s Right to Disclosure of a Document Under Freedom of Information Act (FOIA)

In a precedent-setting case, a three-judge panel sided with a newspaper and journalists in their bid for a public body to disclose documents in a closed-session meeting. The Traverse City Area Public Schools Board of Education (TCAPS) couldn’t depend on a potential loophole in the OMA to shield information from FOIA requests. This case, at its crux, involves the intersection between the FOIA and OMA. The ruling is a victory for journalists and pushes increased accountability in Michigan’s transparency laws.

In the case, Traverse City Record-Eagle v. Traverse City Area Public Schools Board of Education and M. Sue Kelly, the three-judge panel affirmed the 13th Circuit Court Judge Kevin Elsenheimer’s order to the defendants, TCAPS and then-board president, M. Sue Kelly, to release documents related to a closed-session involving complaints against superintendent Ann Cardon. Cardon was hired by TCAPS as the superintendent. Soon after her hiring, complaints ensued. TCAPS requested a meeting to discuss complaints, and Cardon requested a closed session.

The session focused on Cardon’s employment status. A document known as the “Kelly document,” which contained the list of complaints against Cardon, was provided by Kelly at the closed session.

Cardon and TCAPS mutually agreed to her resignation. In an open session, a new interim superintendent, Jim Pavelka, was selected. The newspaper/plaintiff, the Traverse City Record-Eagle, requested the release of the Kelly document via a FOIA request. TCAPS refused to disclose the documentation, arguing that it was protected. The trial court and a three-judge panel disagreed.

TCAPS first argued the Kelly document qualifies as an exemption under OMA, where minutes of a closed session are not available via an FOIA request and only a court order could mandate disclosure. TCAPS cited the precedent established in Titus vs. Shelby, in which the court held the transcript of the closed session is part of the meeting minutes and could qualify as an exemption. This argument didn’t apply to the Kelly document. Although OMA doesn’t give an exclusive list on what may be contained in meeting minutes, it doesn’t mean every document referred to in the session can be exempt from disclosure. This would lead to a slippery slope, in that “it would seemingly allow any public body to attach anything to the official record in order to exempt it from disclosure.” The court did not consider the Kelly document as part of the meeting minutes.

TCAPS also argued that the Kelly document was a part of closed session deliberations and therefore exempt from disclosure under the OMA. This argument failed. The Titus court “focused on the fact that the transcripts were part of the minutes because of the plain and ordinary meaning of minutes and not because transcripts involved deliberations of the public body with the closed session.” In the current case, TCAPS didn’t show how the Kelly document falls within the plain and ordinary meaning of minutes.

The court used prior cases like Bradley v. Saranac Community School Board of Education and Detroit Free Press, Inc. v. Detroit to bolster its position. At issue in these cases was whether personnel files and settlement agreements were disclosable under the FOIA requests. The court found that these documents were not protected under the OMA and made an important clarification. Although minutes of a closed session meeting cannot be disclosed, the documents used in said session may be subject to a FOIA request. The specific discussions and deliberations surrounding those documents, however, are not subject to a FOIA disclosure request. But performance evaluations in Bradley, settlement agreements in Detroit Free Press and complaints regarding Cardon are subject to be disclosed as a part of a FOIA request unless a specific exemption exists. Ultimately, discussions surrounding the documents are not discoverable, but the public cannot be deprived of the documentation at the root of the case. This allows others to make their own interpretation of what is presented and requires a heightened level of transparency.

The newspaper also sued TCAPS for its decision to name Pavelka as interim superintendent. The newspaper claimed the decision was made outside of an open meeting, a violation of the OMA. The Court did not agree. An open meeting was held, and a motion was put forth to name the interim superintendent. All board members agreed. Although Kelly had an outside discussion and approached Pavelka regarding his interest in the position, there was no mention of contract terms or acceptance of the position. The newspaper failed to provide any evidence of a OMA violation. Although the court emphasized that the newspaper might be unhappy with the length of the discussions by TCAPS, “plaintiff points to no authority to show this was improper.”

This case provides important clarity for public bodies regarding their rights and responsibilities under FOIA and OMA. If you have any questions, please contact Ed Castellani or your Fraser Trebilcock attorney.


When it matters in Michigan, Fraser Trebilcock is the trusted advisor for businesses and individuals facing legal and regulatory challenges, and our capabilities extend to wherever clients require counsel.


Fraser Trebilcock Business Tax Attorney Edward J. CastellaniEdward J. Castellani is an attorney and CPA who represents clients involved with alcohol beverages as a manufacturer, wholesaler, or retailer. He leads the firm’s Business & Tax practice group, and may be contacted at ecast@fraserlawfirm.com or 517-377-0845.

U.S. Senate Passes the United States Innovation and Competition Act Which Would Allocate Billions Toward Higher Education Institutions

On June 8th, 2021, the U.S. Senate passed the United States Innovation and Competition Act (“USICA”), which is bipartisan legislation that would authorize billions of dollars in funding for technology research in the United States. A significant amount of funding is aimed at institutions of higher education.

The USICA, which would authorize $200 billion in funding for fiscal year FY 2022-FY 2026, is intended, according to its proponents, to counter the political and economic influence of China. The bill would provide for an expanded role for the federal government in certain “strategic sectors,” including semiconductors, drones, wireless broadband, and artificial intelligence, with increased funding and regulation of various industries.

The bill contains several higher-education provisions to facilitate research and development in the “key-technology focus areas,” including robotics, artificial intelligence, advanced energy sources, advanced computing, natural disaster prevention or mitigation, biotechnology and data storage and management.

The bill authorizes approximately $81 billion in appropriations for the National Science Foundation, which will oversee the allocation of funds available for higher education institutions, including:

  • Approximately $9 billion for higher education institutions to create technology centers that conduct research in one of the key technology focus areas.
  • Approximately $5 billion for scholarships and fellowships for community college students, undergraduates, graduate fellowships and postdoctoral awards for those studying in the key technology focus areas.
  • Approximately $4 billion for colleges and universities to conduct research and development with a focus on achieving “revolutionary technological advances” in the bill’s key-technology focus areas.
  • Approximately $4 billion to enable the transition of research results to developed and commercialized technologies within one of the key-technology focus areas.
  • Approximately $3 billion for establishing and operating test beds that advance the development, operation, integration and deployment of innovative technologies in one or more of the key-technology focus areas.

If you have any questions, please contact Ryan Kauffman.


Fraser Trebilcock Attorney Ryan Kauffman

Ryan K. Kauffman is a Shareholder at Fraser Trebilcock with more than a decade of experience handling complex litigation matters. You can contact him at rkauffman@fraserlawfirm.com or 517.377.0881.

Michigan COVID-Related Capacity, Mask and Gatherings Restrictions Will be Lifted Beginning June 22

Governor Gretchen Whitmer announced on June 17, 2021 that COVID-related restrictions for capacity, masks and gatherings will be lifted effective June 22. Beginning June 22, capacity in both indoor and outdoor settings will increase to 100 percent and the state will no longer require residents to wear a face mask.

MDHHS Secretary Elizabeth Hertel’s “Rescission of Emergency Orders” provides that most COVID-related restrictions for capacity, masks and gatherings will be ended effective June 22.

The lifting of these restrictions was expected to take place on July 1. However, given that more than 9 million vaccines have been administered and COVID cases are plummeting in Michigan, the timeline has been accelerated.

In addition to the order regarding gatherings and masks, additional orders being rescinded as of June 22 include:

While state mandates on mask wearing are ending, it’s important to note that individual businesses may still require masks.

In addition, some orders will remain in effect to protect vulnerable populations in corrections, long-term care and agriculture. Certain public health measures also will continue for reporting requirements and COVID testing.

If you have any questions regarding how these developments affect your business or organization, please contact Dave Houston or your Fraser Trebilcock attorney.


Fraser Trebilcock Shareholder Dave Houston has over 40 years of experience representing employers in planning, counseling, and litigating virtually all employment claims and disputes including labor relations (NLRB and MERC), wage and overtime, and employment discrimination, and negotiation of union contracts. He has authored numerous publications regarding employment issues. You can reach him at 517.377.0855 or dhouston@fraserlawfirm.com.

Judge Issues Preliminary Injunction Blocking Detroit from Issuing Recreational Marijuana Business Licenses; Says Licensing Program “Likely Unconstitutional”

Last November, the City of Detroit announced its rules for allowing licensed adult-use recreational marijuana sales, which included controversial provisions meant to give “social equity applicants” a competitive opportunity. Applicants are entitled to preferential treatment if they have lived in Detroit for:

  • 15 of the last 30 years
  • 13 of the last 30 years and are low-income
  • 10 of the last 30 years and have a past marijuana-related criminal conviction, or
  • Have parents who have a prior controlled substance record and still live in the city

These rules gave rise to a lawsuit filed on March 2, 2021, in Wayne County Circuit Court, by a plaintiff who has been a Detroit resident for 11 of the past 30 years who intends to apply for an adult-use retail establishment license.

The lawsuit alleges that the “licensing scheme favors certain Detroit residents over other Michiganders based on the duration of their residency.” The plaintiff argues that the ordinance violates the U.S. Constitution’s commerce clause because it “discriminates against out-of-state residents and punishes people for moving between states.”

In April, U.S. District Judge Bernard Friedman issued a temporary restraining barring Detroit officials from receiving any more marijuana business applications.

On June 17, Judge Friedman again ruled in favor of the plaintiff by issuing a preliminary injunction halting Detroit’s recreational marijuana licensing program indefinitely.

The issuance of a preliminary injunction in the case is significant because the U.S. Supreme Court has set a high burden of proof for a plaintiff seeking an injunction. The Court identified a four-part balancing test in Winter v. Natural Resources Defense Council, 555 U.S. 7 (2008), which requires plaintiff to demonstrate:

  1. Likelihood of success on the merits
  2. Likelihood of irreparable harm
  3. The balance of both equities and hardships is in their favor; and
  4. That a preliminary injunction would be in the public interest

In his order, Judge Friedman stated that Detroit’s licensing program is “likely unconstitutional.”

To learn more about the Detroit lawsuit, as well as other challenges to municipal licensing schemes related to recreational marijuana in Michigan, click here.

At Fraser Trebilcock we have a strong litigation department that has handled multiple lawsuits in the cannabis field and are able to assist you if you believe you are entitled to relief. If you have any questions or require assistance, please contact Paul Mallon or your Fraser Trebilcock attorney.


mallon-paulPaul C. Mallon, Jr.  is Shareholder and Chair of Fraser Trebilcock’s cannabis law practice. You can reach him at pmallon@fraserlawfirm.com or (313) 965-9043. 


Fraser Trebilcock attorney and former Michigan State Legislator Klint Kesto has nearly two decades of experience working in both the public and private sectors, including serving as Co-Chair of the CARES Task Force. You can reach him at kkesto@fraserlawfirm.com or 517.377.0868.

Federal Cannabis SAFE Banking Act Bill Gains Steam with Backing from Michigan Financial Institutions and Government

In September 2019, the U.S. House of Representatives passed the Secure and Fair Enforcement Banking Act of 2019 (“Safe Act”), which would prohibit regulators from terminating or limiting either deposit or share insurance of a financial institution for doing business with a cannabis company. It would also prohibit regulators from barring such institutions from offering financial services to cannabis companies and stop regulators from encouraging financial institutions to not do business with those companies.

In March 2021, revised versions of the bill were introduced in the U.S. House and Senate, and the House version passed in April with significant bipartisan support (a vote of 321-101).

Currently, cannabis businesses, including those in states such as Michigan where selling cannabis is legal, have extremely limited access to banking services. Many banks are concerned with violating federal anti-money laundering and other laws by engaging in transactions with the proceeds of federally illegal marijuana operations.

The SAFE Act is meant to enable financial institutions and “cannabis-related legitimate businesses” to do business without running afoul of federal law. A cannabis-related legitimate business is defined by the SAFE Act as a manufacturer, producer, person or company that participates in a business or organized activity handling cannabis or cannabis products pursuant to a state’s law legalizing cannabis-related business or activities.

The Community Bankers of Michigan and Michigan Credit Union League both support passage of the SAFE Act. The bill has also received support from Michigan politicians. In April, Governor Whitmer joined 20 other governors in urging Congress to pass the legislation.

In a statement, Governor Whitmer said: “Michiganders voted overwhelmingly to legalize the use of recreational marijuana in 2018, and we must respect the will of the voters. Although legalization continues rolling on nationwide, we still have federal laws on the books that prohibit financial institutions from working with marijuana businesses legally under state law. To be blunt, legalization is great for the economy: it creates jobs and boosts tax revenue that can go towards our schools, communities, and first responders. This legislation ensures that Michigan’s marijuana businesses can grow and access the same resources that all legal businesses can.”

The fate of the SAFE Act resides in the closely divided U.S. Senate, where its passage is uncertain. One of the concerns expressed by Mike Tierney, president and CEO of the Community Bankers of Michigan, is that instead of passing the SAFE Act, the Democrat-controlled Senate will push for full legalization of cannabis instead of the more narrowly tailored SAFE Act.

We will continue to keep you apprised of new developments related to this legislation, which has important implications for the cannabis and banking industries in Michigan. If you have any questions about these issues we are here to assist. Please contact Klint Kesto or your Fraser Trebilcock attorney.


Fraser Trebilcock attorney and former Michigan State Legislator Klint Kesto has nearly two decades of experience working in both the public and private sectors, including serving as Co-Chair of the CARES Task Force. You can reach him at kkesto@fraserlawfirm.com or 517.377.0868.

EEOC Issues New Guidance on Workplace Vaccine Policies

On May 28, 2021, the Equal Employment Opportunity Commission (“EEOC”) issued new guidance for employers regarding employment vaccination programs. As discussed below, the EEOC’s updated guidance provides additional information concerning key issues such as whether:

  • Employers may mandate vaccines
  • An employee’s vaccination status is confidential medical information
  • Employers may offer vaccination incentives to employees

Employer-Mandated Vaccination and Reasonable Accommodations

Under the EEOC guidance, employers may require all employees physically entering the workplace to be vaccinated for COVID-19, so long as employers comply with the reasonable accommodation provisions of the Americans with Disabilities Act (“ADA”), Title VII of the Civil Rights Act of 1964, and other equal employment opportunity law considerations. The EEOC does not directly enforce state anti-discrimination laws, and this Guidance should not be interpreted as giving vaccination requirements a “pass” under Michigan civil rights and worker protection laws. Under federal law, “reasonable accommodations” for vaccine-sensitive or other “disabled” workers who cannot due to a disability be vaccinated, may include requiring unvaccinated employees to wear face masks and periodic testing for COVID-19.

The Guidance also explains that when implementing a vaccination policy, employers should be aware that, “because some individuals or demographic groups may face greater barriers to receiving a COVID-19 vaccination than others, some employees may be more likely to be negatively impacted by a vaccination requirement.” Employers may not adopt vaccination policies that discriminate on the basis of a protected characteristic.

Voluntary Employer COVID-19 Vaccination Programs

The Guidance permits employers to adopt a voluntary COVID-19 vaccination policy as an alternative to a mandatory vaccination requirement. The ADA prohibits taking an adverse action against an employee for refusing to participate in a voluntary employer-administered vaccination program.

Vaccine Incentives

Employers may offer incentives for employees to receive vaccinations according to the EEOC. The EEOC requires that incentives offered by an employer not be “so substantial as to be coercive.”

However, the EEOC explained that federal equal employment opportunity laws do not prevent or limit employers from offering incentives to employees to voluntarily provide documentation or other confirmation of vaccination obtained from a third party in the community, such as a pharmacy, personal health care provider, or public clinic.

Documentation of Vaccination Status

Under the Guidance, employers may request documentation of vaccination status but must keep vaccination information confidential, including ensuring that such information is kept separate from employees’ general personnel files.

EEOC guidance on COVID-19 vaccination issues for employers is complex and is likely to be further updated. In some cases, state and local requirements may differ from federal guidance. If you have questions about these issues, please contact Dave Houston or your Fraser Trebilcock attorney.


This alert serves as a general summary, and does not constitute legal guidance. All statements made in this article should be verified by counsel retained specifically for that purpose. Please contact us with any specific questions.


Fraser Trebilcock Shareholder Dave Houston has over 40 years of experience representing employers in planning, counseling, and litigating virtually all employment claims and disputes including labor relations (NLRB and MERC), wage and overtime, and employment discrimination, and negotiation of union contracts. He has authored numerous publications regarding employment issues. You can reach him at 517.377.0855 or dhouston@fraserlawfirm.com.

Client Alert: PCORI Fees Due by July 31, 2021!

In Notice 2020-84, the Internal Revenue Service set forth the PCORI amount imposed on insured and self-funded health plans for policy and plan years that end on or after October 1, 2020 and before October 1, 2021.

Background

The Patient-Centered Outcomes Research Institute (PCORI) fee is used to partially fund the Patient-Centered Outcomes Research Institute which was implemented as part of the Patient Protection and Affordable Care Act.

The PCORI fees were originally set to expire for plan years ending before October 1, 2019. However, on December 20, 2019, the Further Consolidated Appropriations Act was enacted and extended the fee to plan years ending before October 1, 2029.

The fee is calculated by using the average number of lives covered under a plan and the applicable dollar amount for that plan year. Code section 4375 imposes the fee on issuers of specified health insurance policies. Code section 4376 imposed the fee on plan sponsors of applicable self-insured health plans. This Client Alert focuses on the latter.

Adjusted Applicable Dollar Amount

Notice 2020-84 sets the adjusted applicable dollar amount used to calculate the fee at $2.66. Specifically, this fee is imposed per average number of covered lives for plan years that end on or after October 1, 2020 and before October 1, 2021. For self-funded plans, the average number of covered lives is calculated by one of three methods: (1) the actual count method; (2) the snapshot method; or (3) the Form 5500 method.

Deadline and How to Report

The PCORI fee is due by July 31, 2021 and must be reported on Form 720.

Instructions are found here (see Part II, pages 8-9).

The Form 720 itself is found here (see Part II, page 2).

Form 720, as well as the attached Form 720-V to submit payment, must be used to report and pay the requisite PCORI fee to the IRS. While Form 720 is used for other purposes to report excise taxes on a quarterly basis, for purposes of this PCORI fee, it is only used annually and is due by July 31st of each relevant year.

As previously advised, plan sponsors of applicable self-funded health plans are liable for this fee imposed by Code section 4376. Insurers of specified health insurance policies are also responsible for this fee.

  • For plan years ending on or after October 1, 2017 and before October 1, 2018, the fee is $2.39 per covered life.
  • For plan years ending on or after October 1, 2018 and before October 1, 2019, the fee is $2.45 per covered life.
  • For plan years ending on or after October 1, 2019 and before October 1, 2020, the fee is $2.54 per covered life.
  • For plan years ending on or after October 1, 2020 and before October 1, 2021, the fee is $2.66 per covered life.

Again, the fee is due no later than July 31 of the year following the last day of the plan year.

As mentioned above, there are specific calculation methods used to configure the number of covered lives and special rules may apply depending on the type of plan being reported. While generally all covered lives are counted, that is not the case for all plans. For example, HRAs and health FSAs that are not excepted from reporting only must count the covered participants and not the spouses and dependents. The Form 720 instructions do not outline all of these rules.

More information about calculating and reporting the fees can be found here.

Questions and answers about the PCORI fee and the extension may be found here.

As you are well aware, the law and guidance are continually evolving. Please check with your Fraser Trebilcock attorney for the most recent updates.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.


We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.


Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.


Brian T. Gallagher is an attorney at Fraser Trebilcock specializing in ERISA, Employee Benefits, and Deferred and Executive Compensation. He can be reached at (517) 377-0886 or bgallagher@fraserlawfirm.com.

Michigan House Committee Advances Bill to Regulate delta-8 THC

On May 18, 2021, the Michigan House Regulatory Reform Committee unanimously approved a package of bills, including House Bill 4517, requiring hemp-derived delta-8 tetrahydrocannabinol (“THC”) to be regulated by the Michigan Marijuana Regulatory Agency (“MMRA”).

Delta-8 THC is a cannabis compound that has gained in popularity because of its similarity to delta-9 THC prevalent in marijuana plants. Delta-8 is produced by extracting CBD from industrial hemp and then using acetic acid to turn it into THC.

Producers of delta-8 THC argue that the product is legal under the federal 2018 Farm Bill, which legalized hemp extracts and other hemp products. However, the U.S. Drug Enforcement Administration (“DEA”) issued an interim final rule in 2020 declaring: “All synthetically derived (THC) remain Schedule I controlled substances.” The Hemp Industries Association and a South Carolina CBD manufacturer initiated a lawsuit against the DEA challenging the rule.

Currently, delta-8 THC is unregulated in Michigan. The new bills, which have been sent to the full House of Representatives for consideration, would bring the delta-8 THC within the MMRA’s regulatory framework.

The move to regulate delta-8 THC has the support of the Michigan Cannabis Manufacturer’s Association (“MCMA”). In a statement, MCMA executive director Stephen Linder said: “Any product considered medicine should adhere to the same health and safety standards as medicines dispensed in pharmacies. Currently these products are available to anyone and can be found in gas stations, party stores and smoke and vape shops.”

Michigan is not the only state to take action to crack down on access to delta-8 THC. According to Hemp Industry Daily at least 12 states have imposed bans on the product.

We will continue to keep you updated about developments with respect to the delta-8 THC legislation. In the interim, if you have questions, please contact Fraser Trebilcock shareholder Paul Mallon.


mallon-paulPaul C. Mallon, Jr.  is Shareholder and Chair of Fraser Trebilcock’s cannabis law practice. You can reach him at pmallon@fraserlawfirm.com or (313) 965-9043. 

Client Alert: IRS Issues Important Information on COBRA Subsidies

The IRS has recently issued 86 questions and answers regarding the COBRA premium assistance requirements under the American Rescue Plan Act of 2021 (“ARPA”). See IRS Notice 2021-31.

As explained in previous Client Alerts, the ARPA requires that employers provide 100% COBRA subsidies to certain assistance eligible individuals from April 1, 2021 through September 30, 2021. Not only will COBRA be fully paid for these individuals during this time period, but eligible individuals who had previously declined COBRA (or who had elected COBRA and dropped it) have a second chance to elect and take advantage of the subsidized COBRA coverage. Notices of such subsidies and new election rights are due by May 31, 2021, so time is of the essence.

Q&A Highlights

Here are some highlights of these IRS Q&As but please note that the IRS guidance is extensive. This Client Alert just touches on some of the issues.

Who is an AEI?

Notice 2021-31 reiterates that an assistance eligible individual (AEI) is defined as an individual who (1) is a qualified beneficiary with respect to a period of COBRA continuation coverage during the period from April 1, 2021, through September 30, 2021, (2) who is eligible for that COBRA continuation coverage by reason of a qualifying event that is an involuntary termination of employment (except for gross conduct) or reduction of hours, and (3) who elects COBRA continuation coverage. This includes employees, spouses, and dependent children.

However, the IRS now explains that an individual can become an AEI more than once. As we know, being eligible for certain other group health plan coverage or Medicare will disqualify one from AEI status. Losing such eligibility at a later date may result in regaining AEI status. For example, an employee is terminated, loses coverage, and becomes an AEI on May 1, 2021. On June 1, 2021, the individual becomes eligible for his spouse’s employer’s group health plan and loses AEI status. However, on July 1, 2021, the spouse has an involuntary termination and loses coverage. Both the individual and spouse become AEIs as of July 1, 2021.

The notice goes on to provide that because eligibility for other group health coverage and/or Medicare will disqualify one from being an AEI, employers may required individuals to provide a self-certification or attestation that they are not eligible for any disqualifying group health plan coverage or Medicare. Employers must keep a record of such attestations.

The IRS clarifies that eligibility for other group health plan coverage will only create a loss in AEI status once that individual is permitted to enroll in that coverage (i.e., AEI status continues during a waiting period or until the next enrollment opportunity). Please note that the Emergency Relief Notices and the Outbreak Period extensions of deadlines have prolonged enrollment for HIPAA special enrollment events. So if an individual is able to enroll in a spouse’s plan (or another group health plan) due to HIPAA special enrollment extensions, that individual will not be an AEI. This can be a complicated determination.

Moreover, the IRS has explained that an individual who elected and remained on COBRA beyond the initial 18-month period due to a disability determination or a second qualifying event is also an AEI and eligible for the subsidy if the COBRA extended period falls within April 1 to September 30, 2021. For example, a qualified beneficiary who lost coverage 3 years ago due to termination/reduced hours may still be on COBRA as of April 1 due to a second qualifying event (e.g., divorce). The IRS recent Q&As clarified that these individuals will also be AEIs…

What is a Reduction in Hours?

Loss of coverage due to reduction in hours would cause the qualified beneficiary to potentially become an AEI regardless of whether the reduced hours is voluntary or involuntary. Furloughs and strikes are considered reduction in hours, so long as the employee and employer intend on maintaining the employment relationship.

What is an Involuntary Termination?

Many questions have arisen regarding involuntary terminations, such as whether resignations or non-renewal of temporary contracts can be deemed involuntary terminations. The determination of whether a termination is involuntary will be based on the facts and circumstances.

The IRS defines involuntary termination of employment as a “severance from employment due to the independent exercise of the unilateral authority of the employer to terminate employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services.” See Q&A-24. This includes circumstances where the employee is terminated while the employee is off work due to illness or disability if there was a reasonable expectation that the employee would return to work after he or she had recovered. Moreover, an employee-initiated termination will also constitute an involuntary termination if it is due to employer action that resulted in a material negative change in employment, similar to a constructive discharge.

With regard to resignations or other terminations which are designated as voluntary, if the facts and circumstances indicate that the employee was able and willing to work and that the employer would have terminated the employee absent the resignation or “voluntary“ termination, the IRS will deem this an involuntary termination.

A resignation resulting from a material change in the geographic location of employment for the employee is also deemed an involuntary termination.

An employee who leaves employment due to health concerns, however, is generally not a involuntary termination. Neither is an employee who terminates due to child-care reasons.

Some of these circumstances could result in AEI status if the individual lost coverage due to a reduction in hours. Moreover, if the employer involuntarily and materially reduced the employee’s hours, an employee who terminates employment in response will be deemed to have been involuntarily terminated.

Temporary employees also present an interesting situation. Typically, temporary employees are hired on a short-term contractual basis. Whether the non-renewal of the contract at its expiration is deemed an involuntary termination is again a factual determination.

Q-34. Does an involuntary termination of employment include an employer’s decision not to renew an employee’s contract, including for an employee whose employer is a staffing agency?

A-34. Generally, yes. An employer’s decision not to renew an employee’s contract will be considered an involuntary termination of employment if the employee was otherwise willing and able to continue the employment relationship and was willing either to execute a contract with terms similar to those of the expiring contract or to continue employment without a contract. However, if the parties understood at the time they entered into the expiring contract, and at all times when services were being performed, that the contract was for specified services over a set term and would not be renewed, the completion of the contract without it being renewed is not an involuntary termination of employment.

See Q&A-34.

What Plans is the Subsidy Available For?

The IRS confirms that the subsidy is available for any group health plan subject to COBRA (including certain HRAs, as well as vision-only and dental-only plans), except for health FSAs offered under Code section 125 plans.

Extended Election Period Information

With regard to AEIs who previously had not elected or dropped their COBRA coverage, they may now elect COBRA during the extended election period. This includes spouses and dependents who were covered under the group health plan along with the employee on the day before the involuntary termination or reduced hours resulting in the loss of coverage.

The IRS clarifies that these AEIs may waive COBRA for any period before their election. If COBRA for an HRA is elected during the extended period, the AEI is not entitled to reimbursement of expenses incurred after the qualifying event and before the first period of COBRA coverage beginning on or after April 1, 2021.

Tax Credit Information

Those to whom COBRA premiums are payable (generally the employer for most purposes) are entitled to a refundable tax credit against their share of Medicare taxes. This is now allowed under newly added Code section 6432. Notice 2021-31 includes numerous questions and answers regarding the calculation of this tax credit as well as how to claim it.

Conclusion

This Client Alert sets forth highlights of these Q&As but by no means addresses them all. Moreover, the IRS indicates further guidance may be forthcoming.  Please seek out advice on these complicated issues.

As you are well aware, the law and guidance are rapidly evolving in this area. Please check with your Fraser Trebilcock attorney for the most recent updates.

Fraser Trebilcock is committed to providing you valuable information. Please watch for upcoming alerts on these and other topics.


We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.


Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.


Brian T. Gallagher is an attorney at Fraser Trebilcock specializing in ERISA, Employee Benefits, and Deferred and Executive Compensation. He can be reached at (517) 377-0886 or bgallagher@fraserlawfirm.com.

Client Alert: IRS Clarifies Taxation of Dependent Care Benefits Due to Extended Grace Periods or Expanded Carryovers

In Notice 2021-26, the IRS clarifies the taxable nature of benefits under dependent care assistance programs (“DCAPs”) that adopted the extended grace period or expanded carryover options for 2021 and/or 2022. See Notice 2021-26 (irs.gov).

Specifically, the IRS states that amounts which are available under the extended grace period or expanded carryover options will be excludable from the employees’ gross income if:

  1. The amounts would have been excluded from employees’ income had they been used during the original taxable year ending in 2020 or 2021; and
  2. If the available amounts due to the extended grace period or expanded carryover options are actually used during the following taxable year (i.e., 2021 as extended from 2020, or 2022 as extended from 2021).

Additionally, these DCAP benefits will not be counted toward the maximum exclusion from gross income that is applicable to other DCAP benefits for the 2021 and 2022 taxable years. Under previous guidance, the maximum DCAP exclusion from income has been increased from $5,000 to $10,500 (or for taxpayers who are married but filing separately, from $2,500 to $5,250) for calendar year 2021. Special rules apply for non-calendar year DCAPs.

Background

Traditionally, qualifying DCAP benefits utilized during a calendar year are subject to an income exclusion of $5,000 (or $2,500 in the case of married individuals filing separate returns). These benefits are generally forfeited at the end of the plan year, unless the plan has adopted a 2 ½ grace period. Carryovers have not previously been allowed for DCAPs as they have for health FSAs.

However, due to the COVID-19 pandemic, numerous temporary relief was implemented, including for DCAP benefits. Under the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (also known as the Consolidated Appropriations Act, 2021 or CAA) and IRS Notice 2021-15, the following relief was provided with regard to DCAPs:

Expanded Carryover Rules

  • Carryover to the 2021 Plan Year: This provision allows any unused benefits or from plan years ending in 2020 to be carried over to the plan year ending in 2021;
    • Significantly, DCAPs were not previously allowed to have a carryover provision.
  • Carryover to the 2022 Plan Year: This provision allows any unused benefits or contributions from plan years ending in 2021 to be carried over to the plan year ending in 2022.

Extended Grace Periods

  • Grace Periods: DCAPs may adopt an extended grace period for plan years ending in 2020 or 2021, which is extended from the traditional two months and 15 days to a full 12 months after the end of such plan year in order for unused benefits or contributions to be utilized.

Thereafter, the American Rescue Plan Act (“ARPA”) temporarily amended Code section 129(a) to increase the amount of dependent care expenses that may be excluded from gross income.

DCAPs have historically been capped at reimbursing $5,000 per calendar year. However, under the ARPA, and only for taxable years beginning after December 31, 2020 and before January 1, 2022, DCAPs can reimburse over double! The maximum amount to be excluded for calendar year 2021 is now $10,500 (or $5,250 for married individuals filing single returns).

Note: To implement the carryovers or grace periods, or to increase the DCAP election amount to $10,500 for calendar year 2021, employers must amend their plans. Although generally Code section 125 cafeteria plans cannot be amended retroactively, the ARPA states that retroactive amendments are allowed for this purpose as long as: (1) the amendment is adopted no later than the last day of the plan year in which it is effective, and (2) the plan is operating consistent with the term of the amendment as of its effective date.

We thought this was the welcome news for employers who were struggling with allowing carryovers or grace periods for DCAPs that would exceed the $5,000 max. However, the IRS further expanded and clarified taxation relief in its newest guidance, Notice 2021-26 (irs.gov).

IRS Notice 2021-26

In Notice 2021-26, the IRS clarifies that DCAP amounts carried over (or available due to the extended grace period) from 2020 to 2021 or from 2021 to 2022 are excluded from income when used in that subsequent year if they would have been excluded from income if used during the original taxable year ending in 2020 or 2021.

Moreover, the amounts carried over (or available due to the extended grace period) are also disregarded for purposes of the income exclusion limits in that subsequent tax year. Take the following example: An employee elects $5,000 in 2020 but used none of it. The full $5,000 is carried over to 2021. Additionally, the employee elects $10,500 (as allowed by ARPA) for the 2021 tax year. If the employee incurs $15,500 in DCAP expenses in 2021, none of the $15,500 will result in taxable income. This is because the $5,000 carryover amount is disregarded, and under ARPA, up to $10,500 of DCAP expenses can be excluded for 2021.

The IRS includes some examples to explain how this works with both calendar year plans as well as non-calendar year plans.

Moreover, with regard to the ARPA increase to $10,500 of DCAP benefits for which employees may exclude, Notice 2021-26 clarifies that this is for the 2021 taxable year only (generally the calendar year).  Therefore, a DCAP that runs on a non-calendar year basis, starting in 2021 and ending in 2022 will not have this full relief available. The Notice provides that the increased exclusion amount (i.e., in most cases the amount over $5,000) will not apply to the reimbursement of expenses incurred during the 2022 portion of the plan year.

If you have any questions about these products or would like assistance with updating documentation or employee communications, feel free to contact us.

As you are well aware, the law and guidance are rapidly evolving in this area. Please check with your Fraser Trebilcock attorney for the most recent updates.

Fraser Trebilcock is committed to providing you valuable information. Please watch for upcoming alerts on these and other topics.


We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.


Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.


Brian T. Gallagher is an attorney at Fraser Trebilcock specializing in ERISA, Employee Benefits, and Deferred and Executive Compensation. He can be reached at (517) 377-0886 or bgallagher@fraserlawfirm.com.