Michigan Municipal Adult-Use Marijuana Licensing Processes Give Rise to Lawsuits

In December, 2019, Michigan authorized the sale of adult-use marijuana (i.e., recreational marijuana). Michigan municipalities are thus automatically deemed to permit adult-use businesses without restriction unless they pass ordinances restricting or prohibiting them within their jurisdictions.

The legalization of adult-use marijuana has resulted in the establishment of procedures for businesses to become licensed to sell in accordance with local regulations and restrictions on the number and types of businesses that qualify. These procedures and restrictions apply in addition to the Michigan Marihuana Facilities Licensing Act (MMFLA) and Michigan Regulation and Taxation of Marihuana Act (MRTMA).

Under MRTMA, a municipality is authorized to limit the number of marijuana establishment licenses. If a municipality does impose limitations, and the limit prevents the state from issuing a state license to all applicants, then “the municipality shall decide among competing applications by a competitive process intended to select applicants who are best suited to operate in compliance with [MRTMA] within the municipality.”  MRTMA permits restrictions that go beyond limiting the number of licenses allowed within an area as long as such restrictions  are not “unreasonably impracticable.”  To avoid being unreasonably impracticable restrictions must not “subject licensees to unreasonable risk or require such a high investment of money, time, or any other resource or asset that a reasonably prudent businessperson would not operate the marihuana establishment.”

The process of establishing criteria for businesses seeking marijuana licenses, and reviewing business applications for licenses, is complex. There is a lot of money at stake. And unsurprisingly, in many municipalities across Michigan, the licensing process has led to significant and costly litigation.

In November, 2020, the City of Detroit announced its rules for allowing licensed adult-use 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.”

Detroit is not the first (and almost certainly won’t be the last) municipality to have its licensing process challenged.

In November, 2020, Traverse City was ordered by a judge to refuse to accept applications for adult-use marijuana retail and microbusiness establishments in light of pending lawsuits. One of the primary issues being litigated in the Traverse City lawsuits is whether existing medical marijuana retailers have the automatic right to sell recreational marijuana as well.

In December, 2020, the Oakland County Circuit Court issued a preliminary injunction in a case brought against the City of Berkley, enjoining Berkley from issuing licenses to marijuana establishments pursuant to the MMFLA or MRTMA. The court enjoined Berkley based on the likelihood that its process for scoring and awarding licenses violates the requirements of MRTMA.

The process of establishing rules and reviewing license applications for adult-use marijuana will remain a contentious one. Given that adult-use sales in Michigan totaled nearly $440 million in the first full year of the program, there is a lot to be won (or lost) in the process.

For assistance in the application process, or any other issues related to operating a marijuana business in Michigan, please contact your Fraser Trebilcock attorney.

Michigan Department of Treasury Confirms that PPP Loan Forgiveness will Conform to Federal Treatment

On April 19, 2021, the Michigan Department of Treasury issued a notice (the “Notice”) announcing Michigan’s conformity to the federal income tax treatment of loans (“PPP Loans”) issued under the Paycheck Protection Program. The Notice also sets forth additional guidance for individual and corporate taxpayers regarding various income tax issues raised by the federal loan program.

As originally established under the CARES Act, any forgiven PPP was excluded from gross income for federal income tax purposes. However, no similar provision was enacted authorizing a deduction of the business expenses paid for by those forgiven loans. This issue was addressed in the Consolidated Appropriations Act (the “CAA”), enacted on December 27, 2020, which provided taxpayers with the ability to deduct the underlying business expenses paid for by the forgiven loan. The Notice makes clear that Michigan will conform to the manner in which the federal government is treating both PPP loan forgiveness and the deductibility of business expenses.

The Notice also provides guidance for both individual and corporate taxpayers relating to the calculation of sales factor apportionment, gross receipts, and the calculation of Total Household Resources when taking into consideration the impact of PPP loan forgiveness.

Finally, the Notice states that additional documentation substantiating a PPP loan is not required for Michigan tax return filing purposes. Taxpayers are not required to include any specific loan documentation, including proof of forgiveness or proof of expenses, with Michigan individual or corporate income tax returns. However, borrowers of PPP loans must retain sufficient documentation of their participation in the PPP loan program as part of their obligation to keep accurate and complete records necessary for an accurate determination of their tax liability.

If you have any questions about how the forgiveness of your PPP loan impacts your Michigan tax liability and the filing of your tax returns, please contact Fraser Trebilcock shareholder Paul McCord.

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.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

American Rescue Plan – Affordable Housing – HUD

The Biden Administration American Rescue Plan contains sizeable funding for affordable housing along with other policy proposals. It totals $231 Billion in funding in 3 key areas:

Produce, preserve, and retrofit over 1 million affordable housing units to be resilient, accessible, energy-efficient, and electrified. To do accomplish this Biden proposes funding with tax credits, formula funding, grants, and project-based rental assistance. Units would be targeted to households in underserved, rural and tribal communities.

Build 500,000 affordable housing units for low and middle-income buyers. This begins to address the remarkable housing shortage in the country. Funding would come from the proposed Neighborhood Homes Investment Act. $20 Billion.

Update and Upgrade Public Housing through $40 billion in capital funding.

Leveraging existing block grant programs to increase available tax credits for clean energy. For example, Biden proposes creating a $27 billion Clean Energy and Sustainable Accelerator.

HUD announced it will make available $5 billion in new grants to states and local government for rental assistance and development of affordable housing and other services to people experiencing homelessness. This translates in about $150 million for Michigan.

If you have any questions, please contact Mary Levine.

Mary P. Levine is an attorney with Fraser Trebilcock, focusing on affordable housing and community development. Mary was the former President and Secretary of the Greater Lansing Housing Commission (GLHC). She can be reached at mplevine@fraserlawfirm.com or (517) 377-0823.

Labor Law Changes are Coming Under the Biden Administration

President Biden has signaled support for many legislative and regulatory proposals that, if enacted, will significantly change the labor law landscape. For example, on March 9, 2021, the U.S. House of Representatives passed the Protecting the Right to Organize Act, known as the PRO Act, with a largely party line vote of 225-206. The implications of the PRO Act, should it be enacted into law, are discussed below. Further, other aspects of national labor law policy are actionable within President Biden’s discretion.

NLRB Developments

NLRB Member Appointments Subject to Senate Confirmation

Readers of our column will know that appointments to positions on the National Labor Relations Board (“NLRB”) are shared 3-2 in favor of the party holding the presidential appointment power. Currently, the Board consists of four members (two Republicans and two Democrats). The one open Board seat that President Biden is expected to fill soon will tip the balance of power. President Biden has already appointed and the Senate has confirmed Lauren McFerran as the new Board Chair. Chair McFerran previously served as a Member of the Board from 2014 until  2019, prior to which her career, unlike many members, predominantly was as staff to Senate committees or elected officials.

Once the next appointment is made and confirmed it is predictable that labor relations policy as dictated by the NLRB will take a hard swing in favor of organized labor and away from protection of rights of individual workers and employers. Such areas as protected and concerted actions by employees and employee solicitation in support of unions at the workplace are likely targets for reversal of Trump-era or earlier rulings.

Some of the more vulnerable rulings include:

Reinstate Specialty Healthcare

The Biden NLRB will likely reinstate Specialty Healthcare (2011), which was overturned by the NLRB in 2017. Under Specialty Healthcare, the NLRB presumes a bargaining unit is appropriate when it is composed of employees that perform the same job at the same facility, regardless of whether other employees share a community of interest with that unit. This allows organizing efforts to focus on a smaller group of employees, called a “micro unit,” at a company.  The easier it is for a labor organization to identify a permissible unit, and especially, smaller units where fewer adherents are required, the more success in organizing is expected.

Reinstate the Joint-Employer Test

It is also likely that the Biden NLRB will reinstate the joint-employer test found in the Obama-era decision Browning-Ferris Industries (2015). In Browning-Ferris Industries, the NLRB expanded the joint-employer standard by holding that an employer’s status as a joint employer rests on its reserved right to control employees, either directly or indirectly. A return to this standard would enable employees to assert a right to bargain with both their direct employer and the company that contracted their services, leading to increased bargaining in many industries and likely greater leverage on the part of the labor organization.

Reinstate Purple Communications

The Biden NLRB is on our opinion likely to reinstate Purple Communications, which was overturned by the NLRB in 2019. The original ruling determined that as long as the employer makes any use whatsoever of its electronic mail system to address or counter union organizing efforts, the employer would be acting with unlawful anti-union bias if it enforced a rule prohibiting employees from using the same system for pro-union efforts and communications, despite that the employer clearly owns, controls and provides the instrumentality (the email platform).  Purple Communications was at the time of its issuance, and still is, seen as a retreat by the NLRB from more traditional deference to employer property rights in opposing organizing efforts.

NLRB General Counsel

The President also has the appointment power subject to Senate confirmation over the powerful position of NLRB General Counsel.  The “GC” has significant “policy-setting” authority in issuing guidance and expectations of NLRB “interpretation” of the National Labor Relations Act, and “prosecutorial” decision making authority to determine what cases and issue will – and will not – be pursued.

President Biden upon taking office dismissed former NLRB General Counsel Peter B. Robb, and on January 25, 2021, designated Peter Sung Ohr as Acting General Counsel of the NLRB.

Legislative Developments

Protecting the Right to Organize Act

President Biden has voiced his support for the PRO Act, which was passed by the U.S. House of Representatives on March 9, 2021. That proposal seeks to legislate protection for union organizing efforts, regulation of which otherwise falls under the ambit of the NLRB itself, including:

  • Provisions instituting financial penalties on companies that interfere with workers’ organizing efforts, including firing or otherwise retaliating against workers. Currently, remedies for such alleged “violations” of the National Labor Relations Act are crafted and determined by the NLRB, are subject to review by the U.S. Circuit Courts of Appeals, and thus are not uniform across the nation. Current NLRB-fashioned remedies  are specifically intended not to be “punitive” in the sense of penalizing employers, but merely, “remedial” to protect workers determined to have been subjected to unfair labor practices.
  • During the election campaign, then-candidate Biden indicated he would push for legislation that goes even further than the PRO Act, seeking to impose stiffer penalties on corporations and potentially holding company executives personally liable for interfering with organizing efforts. Further, the possibility of imposition of criminal liability when election interference is deemed “intentional,” is being considered. This proposal, if adopted, would be virtually unprecedented.  No labor relations law in history has even suggested criminal liability except where, for example, financial theft or fraud has been proven, for example, in the recent Chrysler/UAW series of cases.
  • The PRO Act would also significantly alter the standards for determining whether an independent contractor is an employee by adopting the “ABC test” established by California’s Department of Labor. The ABC test provides that an individual performing any service shall be considered an employee and not an independent contractor, unless:
    • the individual is free from control and direction in connection with the performance of the service, both under the contract for the performance of service and in fact;
    • the service is performed outside the usual course of the business of the employer; and
    • the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.

Looking Ahead

It’s all but certain that significant changes are on the way to the nation’s labor and employment laws. The extent of changes, and how they will be implemented, remains to be seen. We will continue to keep you informed of new developments and their implications for your business.

If you have any questions, 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.

FFCRA Paid Leave Extension Until September 30, 2021 with Tax Credits

If you are a private employer with under 500 employees, were you aware you can voluntarily extend FFCRA paid leave from April 1 through September 30, 2021 and still receive a tax credit?

This is now allowed under the American Rescue Plan Act (“ARPA”), which was enacted on March 11, 2021.

However, be cautious. ARPA changes the rules for Emergency Paid Sick Leave (“EPSL”) and Emergency FMLA Extension (“EFMLA”). If these rules are not followed, no tax credit will be available.

Highlights of these changes are below.

Under the EPSL, in addition to the previous 6 reasons for leave, you must allow leave for 3 more reasons, namely:

  • When the employee is seeking or awaiting results of a COVID-19 test or diagnosis;
  • When the employee is obtaining a COVID-19 vaccine;
  • When the employee is recovering from an injury, disability, illness, or condition related to the COVID-19 vaccine.

EPSL also includes a fresh 10-day bank of leave effective April 1, 2021.

Under the EFMLA, which previously was limited to leave needed to care for children due to COVID-19 related school and place of care closures or unavailable care providers, will now include “all” of the EPSL reasons for leave, including the 3 additional reasons.

EFMLA also gets rid of the first 10 days of unpaid leave, starts paid leave immediately, and increases the maximum paid leave over 12 weeks from $10,000 to $12,000.

Additionally, both EPSL and EFMLA provide new non-discrimination rules, stating that tax credits are not available if employers discriminate in favor of highly compensated individuals, full-time employees, or employees based on tenure.

Questions arising include whether employers can pick and choose which parts of this voluntary FFCRA extension to apply.

  • Can we extend paid sick leave without the fresh 10-day bank?
  • Can we extend either EPSL or EFMLA without the new reasons?
  • Can we extend EPSL but not the EFMLA (or vice versa)?

Given the wording of ARPA, picking and choosing whether to apply the new reasons for leave or the fresh 10-day bank does not appear to be an option. Strict compliance is required.

However, whether an employer can extend that EPSL but not the EFMLA (or vice versa) is not as clear. While it appears to be allowable, we are anxiously awaiting updated government guidance and clarification.

In the meantime, if you intend on providing FFCRA paid leave starting April 1st, be prepared to apply it with an “all or nothing” approach.

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.

Does Low-Income Housing Affect Nearby Home Prices?

Recently, Redfin issued an analysis it performed looking at over 220,000 home sales and found NO consistent relationship between the addition of low-income housing and changes in home prices. In fact, in 4 metro areas homes sold for more after construction of low-income housing.

Redfin researched 26 metro areas in the US. However, the study also showed that there is continues to exist economic segregation with the challenge creating economic integrated neighborhoods. These types of neighborhoods are rare in the US according to Redfin.

Here is a link to the report.

If you have any questions, please contact Mary Levine.

Mary P. Levine is an attorney with Fraser Trebilcock, focusing on affordable housing and community development. Mary was the former President and Secretary of the Greater Lansing Housing Commission (GLHC). She can be reached at mplevine@fraserlawfirm.com or (517) 377-0823.

Client Alert: Dependent Care FSA Relief, In a Big Way

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

Dependent care FSAs 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, dependent care FSAs can reimburse over double! The max is now $10,500 (or $5,250 for married individuals filing single returns).

Employers, of course, 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.

This will be welcome news for all employers who were struggling with allowing carryovers or grace periods for dependent care FSAs that would exceed the $5,000 max.

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: The ARPA Brings COBRA Subsidies Back!

The American Rescue Plan Act (“ARPA”) was enacted Thursday, March 11, and will have a major impact on employee health and welfare benefit plans.

In part, the ARPA brings back the requirement to provide COBRA subsidies, although this time premiums are 100% subsidized.

Background

Do you recall back in 2009 when a percentage of COBRA premiums were reimbursed by the government? We called these ARRA COBRA subsidies. The American Recovery and Reinvestment Act of 2009 (ARRA) reduced the COBRA premium in some cases. The premium reductions were available to certain individuals who experienced qualifying events that were involuntary terminations of employment during the period beginning with September 1, 2008 and ending with December 31, 2009. If one qualified for the premium reduction, s/he needed only pay 35 percent of the COBRA premium otherwise due. The premium reduction was available for up to nine months.

Well, COBRA subsidies are back! And employers must pay close attention.

ARPA of 2021: 100% Subsidy

Under the American Rescue Plan Act (“ARPA”), any assistance eligible individual shall be treated as having paid the full amount of the COBRA premium from April 1, 2021 through September 30, 2021.

Moreover, any assistance eligible individual (“AEI”) may, within 90 days after notice, elect to switch from one group health plan offered by the plan sponsor (i.e., employer in most cases) to another coverage offered by the plan sponsor, if:

  • the employer permits the switch;
  • the premium for such different coverage does not exceed the premium for coverage in which the individual was enrolled at the time of the qualifying event;
  • the different coverage is also offered to similarly situated active employees of the employer; and
  • the different coverage is not only for excepted benefits, a qualified small employer HRA, or an FSA.

However, the 100% subsidy is not available to AEIs for months beginning on or after the earlier of:

  • the date the individual is eligible for coverage under another group health plan (other than excepted benefits only, qualified small employer HRAs, or FSAs);
  • the date the individual is eligible for Medicare; or
  • the date COBRA expires, which is the earlier of: (a) the date the maximum COBRA period ends; or (b) the date the maximum COBRA period should have ended if it had been originally elected or not discontinued.

AEIs must notify the group health plan when they are no longer eligible for subsidies due to being eligible for other group health plans or Medicare.

Assistance Eligible Individuals (AEIs) & New Election Rights

AEIs include individuals who, from April 1 through September 30, 2021, are COBRA qualified beneficiaries who:

  • are eligible for COBRA due to involuntary termination (for reasons other than the employee’s gross misconduct) or reduction in hours; and
  • elect such coverage.

However, with regard to COBRA election periods, for individuals who do not have a COBRA election in effect as of April 1, 2021 (but could have had they elected COBRA or not dropped COBRA coverage early), the ARPA allows such individuals to elect COBRA any time beginning April 1, 2021 and ending 60 days after receiving notice that they are allowed to do so…

For these new elections, COBRA will begin on or after April 1, 2021 and cannot extend beyond the original date of COBRA had it originally been elected or not discontinued.

New Notice Requirements

Premium Assistance Notice

For AEIs who become entitled to elect COBRA at any point from April 1 through September 30, 2021, the COBRA election notices must include the following:

  • the availability of the premium assistance if eligible;
  • the option to enroll in different coverage (if the employer permits);
  • the forms necessary to establish eligibility for the premium assistance;
  • the name, address, the phone number to contact the plan administrator (or TPA, etc) regarding the premium assistance;
  • a description of the extended election period;
  • a description of the qualified beneficiary’s obligation to notify the plan of their eligibility for other group health plan coverage or Medicare and the penalty if they fail to do so (which, for intentional failures, is sizable under the ARPA); and
  • a description of the right to the subsidized premium as well as the conditions for receiving it.

This can be accomplished by amending the current notices or including a separate document with the notices to describe the above.

Model notices are to be provided by the Department of Labor within 30 days of the ARPA’s enactment.

Re-Opened Election Rights Notice

For AEIs who previously failed to elect COBRA or discontinued it, but may now elect under the extended election period, the above notice must be provided within 60 days of April 1, 2021.

Subsidy Ending Notice

Additionally, the plan administrator (i.e., the employer or TPA in most cases) must provide clear notice when the premium assistance expiration date is approaching, as well as notice that the individual may be eligible to continue COBRA without the premium subsidy or other group health plan coverage (if eligible).

Notice must be provided between 45 days before such expiration and ending 15 days before the expiration date. This notice requirement does not apply if the individual will be losing the subsidy due to being eligible for another group health plan or Medicare.

Here again, the Department or Labor will be providing model notices, but within 45 days of the ARPA’s enactment.

COBRA Penalties

Failure to provide these notices is deemed a failure to meet the COBRA notice requirements.  As you may know, failure to provide accurate and timely COBRA notices come with hefty penalties, so compliance is imperative.

Employer Tax Credit

In most cases, employers will be responsible for initially funding these COBRA subsidies and will receive a payroll tax credit for doing so. These tax credits are calculated per quarter, and credits provided may not exceed the Code section 3111(b) taxes imposed on wages paid for employment of all the employer’s employees.  However, if the amount of the credit does exceed this amount, it is treated as an overpayment which will be refunded. Additionally, credits may be advanced.

Conclusion

Due to severe penalties for COBRA noncompliance, it is incredibly important for employers to act swiftly to ensure notices, procedures, plans and other employee communications are updated quickly.  Coordination with third-party administrators, consultants, and attorneys will also be important to ensure legal and tax compliance.  It is also essential to keep in mind the expiration date of these legal changes, so that regular COBRA notices and procedures go back into effect after September 30, 2021.

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 Cafeteria Plan Flexibility into 2022: Amendments Required to Take Advantage

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (also known as the Consolidated Appropriations Act, 2021 or CAA) was signed into law on December 27, 2020. With regard to flexible spending accounts (FSAs), Section 214 of the CAA provided great flexibility for plan years 2021 and 2022. Please see our January 11, 2021 Client Alert. However, tax consequences of these relaxed rules were unclear.

On February 18, 2021, the IRS provided the necessary clarity by releasing Notice 2021-15.

Notice 2021-15 imposes some additional limitations and provides some expansions to Section 214 of the CAA. Significantly, the Notice expands the mid-year change in election relief to group health plans as long as certain requirements are met. The Notice further addresses the impact on HSAs, COBRA, and nondiscrimination testing with regard to FSA carryovers and grace periods. Moreover, it tightened the plan amendment timeline. Finally, it allows additional time for health FSA and HRA plans to be amended to include OTCs and menstrual care products.

The Notice reiterates the loosened rules as provided in the CAA, with the following clarifications:

Expanded Carryover Rules

  • Carryover to the 2021 Plan Year: This provision allows any unused benefits or contributions in both dependent care and health FSAs from plan years ending in 2020 to be carried over to the plan year ending in 2021;
    • The carryover must follow rules similar to the health FSA rules… however, while health FSA carryovers are normally subject to a $550 cap [as indexed], the Notice specifically states that any unused benefits or contributions may be carried over.
    • Significantly, dependent care FSAs were not previously allowed to have a carryover provision.
  • Carryover to the 2022 Plan Year: This provision allows any unused benefits or contributions in FSAs from plan years ending in 2021 to be carried over to the plan year ending in 2022;
    • We find this provision important especially in situations involving the dependent care FSAs. These FSAs have a maximum reimbursement of $5,000 per calendar year in order to be excluded from gross income.  See Code section 129(a). If an employee is allowed to carry over unused contributions into 2021 from 2020, but had also elected a full $5,000 for plan year 2021, s/he would have an overfunded account. This can be handled in one of two ways: (1) carrying over the extra funds from 2021 to 2022, and/or (2) prospective election changes for FSAs for plan years ending in 2021 without regard to the strict status change rules (see the Change in Election section below). With regard to the latter, employees can reduce their dependent care election for 2021 and prevent future contributions from being made.
      • Note: While Example 3 of the Notice indicates that more than $5,000 can be reimbursed, we recommend exercising caution here. Code section 129(a), which clearly limits the dependent care exclusion from gross income to $5,000 of services rendered during a taxable year, was not amended. Code 129(a)(2)(A) says: “The amount which may be excluded under paragraph (1) for dependent care assistance with respect to dependent care services provided during a taxable year shall not exceed $5,000.”
    • While widely understood, the Notice clarifies that carryover of amounts in a general-purpose FSA will make an employee ineligible for HSAs. Employers may amend their plans to convert general-purpose FSAs to ones compatible with HSAs (limited-purpose or post-deductible) or may amend their cafeteria plans to allow employees to opt out of the carryover feature to preserve their eligibility for HSAs.
    • This limited relief allows the Expanded Carryover to be adopted, regardless of whether the plan currently has a grace period or carryover or not (having carryovers and grace periods in the same years normally would not be allowed – see Notice 2013-71).
    • Moreover, the Notice provides that an employer may limit the carryover amount and may limit the carryover to a specified date during the plan year.
    • Plan amendments are required.
  • However, an employer may not adopt both the Extended Grace Period and Expanded Carryover rules with respect to a particular FSA.

Extended Grace Periods

  • Grace Periods: Health or dependent care FSAs 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.
    • As with the Expanded Carryovers, Extended Grace Periods in a general-purpose FSA will make an employee ineligible for HSAs. Employers may amend their plans to convert general-purpose FSAs to ones compatible with HSAs (limited-purpose or post-deductible) or may amend their plans to allow employees to opt out of the grace period feature to preserve their eligibility for HSAs.
    • This limited relief allows the Extended Grace Period to be adopted, regardless of whether the plan currently has a grace period or carryover or not (having carryovers and grace periods in the same years normally would not be allowed – see Notice 2013-71).
    • An employer may limit the grace period to a specified date during the plan year.
    • Plan amendments are required.
  • Post-Termination Health FSA Reimbursements: Health FSAs are now allowed to continue to reimburse former participants for claims incurred post-termination similar to dependent care FSAs, namely:
    • Employees who ceased participation in the plan during calendar years 2020 or 2021 may continue to receive reimbursements from unused benefits or contributions through the end of the plan year in which participation ceased (including any grace period).
    • Cessation of participation includes termination of employment, change in employment, or a new election during calendar year 2020 or 2021.
    • This is only allowed if Extended Grace Period is adopted. It is not applicable for Expanded Carryovers…
    • COBRA still applies.
    • An employer may limit this to a specified date during the plan year.
    • Employers may limit the amount in a health FSA to the amount of contributions made by the employee from the beginning of the plan year in which the employee ceased to be a participant (i.e., not including carryover/grace period amounts).
    • Participation in a general-purpose FSA will make an employee ineligible for HSAs. Employers may amend their plans to convert general-purpose FSAs to ones compatible with HSAs (limited-purpose or post-deductible) or may amend their plans to allow employees to opt out of the extended participation feature to preserve their eligibility for HSAs.
    • Plan amendments are required.
  • However, an employer may not adopt both the Extended Grace Period and Expanded Carryover rules with respect to a particular FSA.

Dependent Care FSA Age Out Rule

  • Dependent Care FSA Age Out Rule: In order for eligible employees to receive reimbursement for dependent care assistance, their dependent must be under the age of 13 when the expenses were incurred. However, for employees who were enrolled in the dependent care FSA (as long as the regular enrollment period was on or before January 31, 2020), age 14 is substituted for age 13 for the last plan year, and, if the employee had an unused balance in the FSA for such plan year, age 14 may also be substituted for the subsequent plan year with respect to those unused amounts.
  • Plan amendments are required.

Nondiscrimination

  • Amounts available due to either the Expanded Carryover or Extended Grace Period, as well as the Dependent Care FSA Age Out Rule, are not taken into account for Section 125 and/or Section 129 nondiscrimination testing. However, otherwise, the nondiscrimination rules remain in effect.

Normal Rules Resume for Plan Years Ending In/After 2022

  • Normal FSA rules resume for plan years ending in or after 2022,
    • Calendar year plans with regular grace periods will allow all amounts remaining at the end of the 2022 plan year to be used during the first 2.5 months of 2023.
    • Calendar year plans with regular carryovers will allow up to $550 (as inflated) to be carried over and used in any month of 2023.
    • Carryovers, as previously, will only be allowed for health FSAs.

Change in Election

  • Change in Election for FSAs: Similar to IRS Notice 2020-29, but for plan years ending in 2021, health and dependent care FSAs may allow employees to make mid-year election changes prospectively without regard to the rigid change in status rules Under Treas. Reg. 1.125-4.
  • Change in Election for Group Health Plans (health / dental / vision):
    • Although the CAA did not so provide, Notice 2021-15 also allows mid-year changes under a cafeteria plan for group health plans without regard to change in status rules as long as certain requirements are met.
    • Similar to relief provided by Notice 2020-29, an employer may amend one or more of its Section 125 cafeteria plans to allow employees to:
      • (1) make a new election for employer-sponsored health coverage on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage;
      • (2) revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis (including changing enrollment from self-only coverage to family coverage);
      • (3) revoke an existing election for employer-sponsored health coverage on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer.
    • The Notice includes sample written attestation language.
  • Plan amendments are required.
  • The Notice clarifies that health FSAs may only be used for medical care expenses and dependent care FSAs may only be used for dependent care expenses.
  • Employers can limit election changes in a plan year to increases in coverage, decreases in coverage, number of changes, and others.
  • Under this relief, employers may allow employees to change from general-purpose health FSAs to HSA-compatible FSAs for a portion of the year.
  • No cash outs of FSAs are allowed.

COBRA

  • The Notice clarifies the application of COBRA with regard to these unique changes:
    • Extended Grace Period: Health FSA spend down amounts for terminated employees will not prevent individuals with qualifying events from having a loss of coverage (i.e., they will still have the right to COBRA), and the employer must provide the COBRA notice.
    • Expanded Carryover or Extended Grace Period: If a terminated employee qualifies for COBRA, s/he may elect and access the additional funds made available due to the carryover or grace period. However, these excess amounts will not be included when determining the applicable COBRA premium.

Amendments

  • To allow any of the above provisions, the cafeteria plan or arrangement must be amended to allow for such provisions.
  • Rarely are cafeteria plan amendments allowed to take retroactive effect, however, this Notice provides some of those rare opportunities. A cafeteria plan amendment to adopt one of the above provisions may be implemented retroactively if:
    • (1) the amendment is adopted not later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective, and
    • (2) the plan or arrangement is operated consistent with the terms of the amendment during the period beginning on the effective date of the amendment and ending on the date the amendment is adopted.
  • For a calendar year plan, if 2020 FSA amounts carry over to 2021, the amendment must be adopted by December 31, 2021. For a non-calendar year plan where the last day of the applicable plan year ends in 2021, the plan amendment must be adopted by December 31, 2022.
  • With regard to amendments to allow over-the-counter drugs and menstrual care products to be reimbursed from health FSAs, the Notice also clarifies that retroactive amendments are allowed:
    • Under the CARES Act, FSAs/HRAs (and HSAs) may reimburse over-the-counter drugs and menstrual care products incurred after December 31, 2019 if the FSA/HRA is amended. Typically, as mentioned above, Code section 125 only allows reimbursement after the plan is amended (and Code section 105(b) only allows exclusion from gross income if the plan covers the expense on the date the expense was incurred). However, this Notice clarifies amendments and coverage can be retroactive to January 1, 2020.

Form W-2 Reporting

  • Amounts contributed to dependent care FSAs are required to be reported in Box 10 (the employee’s salary reduction amount elected plus any employer matching contributions).  However, this does not need to include account amounts that remain available during the grace period. The Notice clarifies that this rule continues to apply for with regard to amounts available due to Expanded Carryovers and Extended Grace Periods.

Conclusion

Obviously there are numerous relaxed rules contained within this Notice, each with its own set of requirements and implications. As always, consultation is important to determine if these changes will be of benefit to employers and their employees. Many factors should be considered, such as nondiscrimination rules, adverse selection with allowing mid-year changes, whether extending health FSA reimbursement provisions will negatively affect health savings accounts, and additional required employee communications.

Plan sponsors must determine whether they wish to proceed with any of the above provisions, largely in part depending on whether typical FSA rules would result in unprecedented forfeitures due to the pandemic. If so, they must communicate such provisions with their workforce and must administer the cafeteria plan or arrangement accordingly as of the amendment’s effective date, even if the amendment is adopted at a later date.

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.

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] Outbreak Period Nightmare: Employee Benefit Deadline Extensions Now Based on Individual Case-by-Case Basis

Employee benefit plan administration is no small feat. However, it is becoming more and more difficult, especially with pandemic related modifications. As you may recall from our previous Client Alert regarding the Outbreak Period, various benefit deadlines were extended due to COVID-19. Plans could not deny certain benefits or impose certain deadlines during the designated Outbreak Period (i.e., March 1, 2020 through 60 days after the National Emergency ends (or another specified date)). However, when the Outbreak Period ends has been a lingering question recently, and the Department of Labor has just answered it in a way that may make plan administrators’ heads spin.

In summary, the period of time which must be disregarded for certain benefits deadline purposes (such as HIPAA special enrollment, as well as certain COBRA and claims procedure due dates) will now end on the earlier of: (a) 1 year from the date that the individual or plan was first eligible for the particular relief, or (b) 60 days after the announced end of the National Emergency (the end of the Outbreak Period). What does this mean? It means that plan administrators must keep track on a case-by-case basis of each individual who would have had a deadline imposed on/or after March 1, 2020 but for the 2020 relief, the date of the original deadline, and track one year from that date (unless the Outbreak Period ends earlier).

Background

Last year when the pandemic hit, and to assist plan participants and beneficiaries, employers and other plan sponsors, plan fiduciaries, and other service providers of employee benefit plans impacted by the COVID-19 pandemic, the U.S. government took the following action as authorized by ERISA Section 518:

2020 Disaster Relief Notice

On April 28, 2020, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) issued EBSA Disaster Relief Notice 2020-01 (Disaster Relief Notice). The Disaster Relief Notice provided deadline relief and other guidance and extended the time for plan officials to furnish benefit statements, annual funding notices, and other notices and disclosures required by Title I of the Employee Retirement Income Security Act of 1974 (ERISA).

2020 Joint Notice

Additionally, on April 28, 2020, the Department of Treasury, the Internal Revenue Service (IRS), and EBSA issued a joint notice which extended certain time frames affecting participants and beneficiaries under ERISA and the Internal Revenue Code (Joint Notice). The Joint Notice extended time frames affecting a participant’s right to group health plan coverage during the COVID-19 outbreak, special enrollment periods, and COBRA continuation of such coverage. Time periods for filing claims for benefits, appealing denied claims, and external review periods were also extended.

The Joint Notice is applicable to all group health plans, disability plans, other employee welfare benefit plans, and employee pension benefit plans subject to ERISA or the Code. Specifically, the Joint Notice provided that these plans must disregard the period from March 1, 2020 until sixty (60) days after the National Emergency ends (or other specified date) when determining certain deadlines for plan participants, beneficiaries, qualified beneficiaries, and claimants. This period is called the Outbreak Period. In particular, plans must disregard the Outbreak Period for the following due dates:

  • HIPAA Special Enrollment
  • COBRA Election Period
  • COBRA Premium Payment Due Date
  • Date for Individuals to Notify the Plan of Qualifying Events or Disability Determinations
  • Claim Procedure Date for Individuals to File A Benefit Claim
    • Keep in mind health FSA runout periods and forfeitures are also delayed during this period
  • Claim Procedure Date for Claimants to File An Appeal
  • Date for Claimants to File A Request for External Review
  • Date for Claimants to Perfect A Request for External Review

Note: The Joint Notice only extended the claims procedure deadlines for claimants; it did not explicitly extend the date by which a plan administrator had to respond to claims and appeals. However, the plan administrator’s deadlines for issuing such adverse benefit determination on claims and appeals would appear to fall within the general notice and disclosure relief provided by the Disaster Relief Notice. 

Additionally, for purposes of group health plan obligations, the Outbreak Period is disregarded for the following:

  • Date to Provide a COBRA Election Notice

Employers and Plan Sponsors have had to pay close attention to these deadlines as they can have significant administrative and economic impacts.

Lingering Questions

However, many have questioned whether the deadline extension would end on February 28, 2021 due to statutory provisions within ERISA and the Internal Revenue Code stating that with such declared disasters, the Secretaries of Labor and Treasury may provide that periods of time up to one year may be disregarded when determining certain deadlines. That one year period from March 1, 2020 would have expired February 28, 2021.

However, the Department of Labor answered at the last hour, and unfortunately, the difficulty of these previous administrative functions has just been magnified.

Answer: EBSA Disaster Relief Notice 2021-01 (Released Friday, February 26, 2021)

On Friday, February 26, 2021, the Department of Labor released EBSA Disaster Relief Notice 2021-01. The Departments of Treasury, IRS and HHS have reviewed and concur with this guidance.

Instead of ending the disregarded periods on February 28, 2021, or instead of extending the period of disregarded periods to a future date certain, the Department of Labor instituted a case by case analysis, applicable to individuals and plans for whom timeframes were extended. Specifically, individuals and plans who are subject to the relief afforded under the 2020 Disaster Relief Notice and the 2020 Joint Notice as described above will have the applicable periods under the Notices disregarded until the earlier of:

(a) 1 year from the date they were first eligible for relief, or
(b) 60 days after the announced end of the National Emergency (the end of the Outbreak Period).

On the applicable date, the timeframes for individuals and plans with periods that were previously disregarded under the Notices will resume. In no case will a disregarded period exceed 1 year.

Notice 2021-01 provides examples to illustrate application of the above:

If a qualified beneficiary, for example, would have been required to make a COBRA election by March 1, 2020, the Joint Notice delays that requirement until February 28, 2021, which is the earlier of 1 year from March 1, 2020 or the end of the Outbreak Period (which remains ongoing). Similarly, if a qualified beneficiary would have been required to make a COBRA election by March 1, 2021, the Joint Notice delays that election requirement until the earlier of 1 year from that date (i.e., March 1, 2022) or the end of the Outbreak Period. Likewise, if a plan would have been required to furnish a notice or disclosure by March 1, 2020, the relief under the Notices would end with respect to that notice or disclosure on February 28, 2021. The responsible plan fiduciary would be required to ensure that the notice or disclosure was furnished on or before March 1, 2021. In all of these examples, the delay for actions required or permitted that is provided by the Notices does not exceed 1 year.

The Department of Labor further reiterates concerns over COVID-19 related problems that plan participants and beneficiaries may encounter. In such vain, the Department states as follows:

  • plan fiduciaries should make reasonable accommodations to prevent the loss of or undue delay in payment of benefits in cases where pandemic delayed deadlines are reinstated; and
  • plans should take steps to minimize the possibility of individuals losing benefits because of a failure to comply with pre-established time frames, such as:
    • affirmatively sending a notice regarding the end of the relief period;
    • reissuing or amending disclosures regarding the end of the relief period and the time period in which participants and beneficiaries are required to take action, e.g., COBRA election notices and claims procedure notices;
    • reminding participants and beneficiaries who are losing coverage under ERISA group health plans that other coverage options may be available to them, including the opportunity to obtain coverage through the Health Insurance Marketplace in their state.

The Department of Labor understands that full and timely compliance with ERISA’s disclosure and claims processing requirements by plans and service providers may not always be possible due to the end of the relief period. Good faith compliance will be taken into consideration.

Conclusion

The case-by-case determinations were not anticipated last year and will require continual monitoring and possibly enhanced recordkeeping, especially if initially imposed deadlines were not accurately recorded at the time due to the deadline delay. Plan sponsors should promptly speak with their benefit and COBRA administrators to ensure the new guidance can be followed. And, as mentioned by the Department of Labor, group health plan communications regarding these deadline changes should be made as quickly as possible.

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.

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.