Benefit Plan Trends - Volume 55, Issue 7

Lundstrom Insurance Agency, Inc.

2205 Point Blvd., Suite 200
Elgin, Illinois 60123
Phone: (847) 741-1000
Fax: 847-428-8857

This publication intends to provide accurate information pertaining to the subject matter covered, however, it should not be considered as legal or tax advice. It is published and distributed with the understanding that neither the publisher nor Lundstrom Insurance Agency is rendering legal or tax advice. Before taking any action, you should always obtain specific advice and assistance from a competent attorney or tax advisor.

Serving you, your business and your community since 1956
BPT Header
A report covering plan design and legislative changes

Supreme Court Upholds Constitutionality Of Health Care Reform Legislation

In a 5-4 decision handed down on June 28, the U.S. Supreme Court upheld the constitutionality of the health care reform legislation of 2010, including the law's controversial "individual mandate," which requires nearly all U.S. residents to have a minimum level of health coverage or pay a penalty starting in 2014, on the grounds that the mandate constitutes a tax. In the wake of the Court's ruling, the provisions of the Patient Protection and Affordable Care Act (PPACA) will be implemented on schedule. In the same decision, however, the Justices declared the mechanism used to require states to expand Medicaid eligibility unconstitutional.

In its much-anticipated ruling, the Supreme Court held that the "shared responsibility payment" required of individuals who do not maintain "minimum essential" health coverage for themselves and their dependents under the individual mandate does not constitute a penalty, but is instead a "permissible tax," and is therefore allowed under Article 1 of the Constitution, which gives Congress the power to lay and collect taxes. A majority of the Justices also found, however, that the individual mandate went beyond Congress' powers under the Commerce Clause, because it did not regulate existing commercial activity, but instead compelled individuals to become active in commerce by purchasing a product.

In writing for the majority in National Federation of Independent Business vs. Sebelius, Chief Justice John Roberts said, "The Affordable Care Act's requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax. Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness."

While the court upheld the entire PPACA, it limited one provision that would have required states to comply with the law's new eligibility requirements for Medicaid, or risk losing their existing Medicaid funding. The PPACA expands the scope of the Medicaid program and increases the number of individuals the states are required to cover. The court held that the provision is constitutional as long as states would forfeit only new funds if they did not comply with the requirements, and not all of their Medicaid funding.

A number of Human Resources and benefit specialists commented on the decision, advising employers who had been waiting for the Supreme Court's ruling to move forward in preparing to comply with the PPACA mandates scheduled to go into effect through 2014.

"The ruling sends a clear message—organizations need to review their plans and seize this opportunity to create better strategies around their health plans, both in design and employee communication," said Gary B. Kushner in a special report on the ruling released by the Society for Human Resources Management (SHRM). For example, Kushner noted, many health plan sponsors will soon be required to report the value of employer coverage on IRS Form W-2, and all employers must issue a summary of benefits and coverage. He recommended that employers who had been waiting to begin planning on how to comply—or whether to even offer or continue to offer health coverage—begin performing quantitative and qualitative analyses on their plans. "More importantly," Kushner added, "they need to begin looking at their health plans as part of an overall HR strategy for their organizations."

Julio A. Portalatin, president and CEO of Mercer, a Human Resources consultancy, observed that the Supreme Court's ruling "removes a major source of uncertainty surrounding this important national issue." With all of the law's provisions still in place, Portalatin advised employers to redouble their compliance efforts, especially regarding such immediate requirements as providing summaries of benefits and coverage to their employees. He also noted that this decision "reinforces the continuation of such popular features as coverage of dependents up to 26 and elimination of pre-existing condition exclusions."

For many employers, the most significant component of the PPACA by far is the so-called "play or pay" provision, Tonie Bitseff and Thomas J. McCord emphasized in a benefits alert released by law firm, Nixon Peabody. Under this provision, which goes into effect on January 1, 2014, two types of nondeductible penalties can be imposed on certain employers with at least 50 full-time equivalent employees if they do not offer certain specified minimum levels of health coverage.

"The Supreme Court's decision is not the end of the debate on health care reform," Bitseff and McCord observed. They noted that health care reform will be a significant issue running up to the November 2012 elections, and that Republicans have already announced that if they control both houses of Congress and the Presidency, they will seek to repeal the legislation.

Nonetheless, Bitseff and McCord added, "employers should not wait for the November elections, but instead should now begin to review and revive their preparations for implementing the broad-ranging requirements of the Federal legislation."

Employees More Skeptical Than Executives About Social Media

While social media are changing how people connect personally and professionally, and are increasingly being embraced as business communication tools by executives, rank-and-file employees appear to be less convinced that social networking helps to build and maintain workplace culture, the results of a survey on core values and beliefs in the workplace conducted by Harris Interactive for Deloitte LLP have suggested.

The survey of 1,005 full-time employees and 303 corporate executives conducted in March 2012 found that 41% of executives believe social networking helps to build and maintain workplace culture, compared with only 21% of employees. The findings also indicated that business leaders and employees widely differ on whether social media has a positive effect on workplace culture (45% and 27%, respectively), and on whether they provide increased management transparency (38% and 17%, respectively).

"Our research suggests executives are possibly using social media as a crutch in building workplace culture and appearing accessible to employees," said Punit Renjen, chairman of the board at Deloitte. "While business leaders should recognize how people communicate today, particularly Millennials, they must keep in mind the limits of these technologies. The norms for cultivating culture have not changed, and require managers to build trust through face-to-face meetings, live phone calls, and personal messages."

The vast majority of both the executives (94%) and the employees (88%) surveyed said they believe a distinct workplace culture is important to business success. However, the findings also indicated that executives tend to prioritize a clearly defined business strategy (76%) above clearly defined and communicated core values and beliefs (62%), whereas employees value them equally (57% and 55%, respectively).

According to Renjen, this suggests that business leaders should be looking at their organizations through a wider lens and considering both sides of the ledger: core values and beliefs as well as strategy as essential to long-term sustainability. "Leadership changes and evolving marketplace conditions can significantly impact business strategy," Renjen said. "To be an exceptional organization in today's business climate, organizations must articulate, invest in, and nurture workplace culture now more than ever. If properly supported, it will transcend any environmental shifts, and serve as the foundation for organizational sustainability and growth."

The survey also found that executives (83%) and employees (84%) agree that having engaged and motivated employees is the leading factor that substantially contributes to a company's success. In addition, the results revealed a correlation between employees who say their companies have a clearly articulated and lived culture, and those who claim they are "happy at work," feel "valued by their company," and that their organization has a "history of strong business performance."

When asked to rate the importance of various elements of workplace culture, competitive compensation (62%) and financial performance (65%) were the leading elements cited by the executives. By contrast, the employees rated regular and candid communication (50%) and access to management (47%) as more important than compensation (33%) and financial performance (24%).

The findings further suggested that there is a disconnect between organizations simply talking about their culture and those that are embedding their beliefs into their operations: only 19% of executives and 15% of employees said they believe strongly that their culture is widely upheld within their own organizations.

Majority Of Baby Boomers And Gen Xers On Track For Retirement

Partly as a result of increased adoption of auto-enrollment by retirement plan sponsors, more than half of Baby Boomer and Gen X workers are projected to have sufficient income to cover their basic expenses and uninsured health care costs in retirement, according to the results of an analysis conducted by the Employee Benefit Research Institute (EBRI).

Published in May 2012, the study, "Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model," by Jack VanDerhei, analyzed the retirement income prospects of U.S. workers using EBRI's retirement income security projection model (RSPM), which includes updates for financial and real estate market performance, employee demographics, and real-world 401(k) participant behavior, based on information from a database of 23 million 401(k) participants. The updated 2012 RSPM looked at early Baby Boomers (born 1948–1954), late Baby Boomers (born 1955–1964), and Gen Xers (born 1965–1974) to determine each group's likelihood of running short of money to cover basic expenses and uninsured health costs in retirement.

The findings indicated that, while around 44% of Baby Boomers and Gen Xers are still projected to be at risk of running short of money in retirement, the shares of these groups that are on track for retirement are five to eight percentage points higher than they were in 2003. VanDerhei attributed the improvement to the fact that, in 2003, very few 401(k) sponsors had implemented automatic enrollment provisions, and that the participation rates among the lower-income employees, who were most likely to be at risk, were quite low. The report noted that the Pension Protection Act of 2006 contained provisions encouraging plan sponsors to adopt auto-enrollment.

The analysis further showed that the aggregate national retirement income deficit number, taking into account current Social Security retirement benefits and the assumption that net housing equity is utilized as needed, is currently estimated to be $4.3 trillion for all Baby Boomers and Gen Xers. "However, while trillion-dollar deficits are useful in focusing attention on this problem, they do little to help policy makers understand exactly where these deficits are coming from," VanDerhei observed.

The most recent projections showed, for example, that a significant income gap remains in the risk of having insufficient retirement income: 87% of the lowest-income households are currently projected to be at risk, compared with 13% of the highest-income households. In addition, eligibility for a workplace defined contribution retirement plan was found to have a significant positive impact on risk levels: The results of the simulation showed that Gen Xers with no future years of eligibility would run short of money in retirement 60.7% of the time, whereas fewer than one in five (18.2%) of those with 20 or more years of future eligibility would run this risk.

The analysis also provided estimates of retirement savings shortfalls, or the additional amount that individuals would have to save by age 65 to eliminate their expected deficits in retirement, by age group, family status, and gender for both Baby Boomers and Gen Xers. For early Boomers on the verge of retirement, the average cash shortfalls at retirement age range from approximately $22,000 per individual for married households, to $34,000 for single males and $65,000 for single females. However, when only those individuals projected to run short of funds were taken into account, the average shortfalls at retirement age were found to be higher, at around approximately $70,000 per individual for married households, $95,000 for single men, and $105,000 for single women.

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2012 Liberty Publishing, Inc. All rights reserved.

2205 Point Blvd. Suite 200 | Elgin, IL 60123 | p 847.741.1000 | f 847.428.8857