Pension Protection Act Blog

Workforce Management is reporting that Clarian Health has announced it will start fining employees $5 per paycheck, up to a maximum of $25 per paycheck, for engaging in unhealthy practices starting in 2009. The unhealthy practices are listed as having a body mass index over 29.9, blood pressure over 140/90, blood glucose over 120, and LDL cholesterol over 130.

The article, by Joanne Wojcik, states that more employers are expected to implement this same type of policy since it is believed to be permissible under the Final Rules on Nondiscrimination and Wellness Programs in Health Coverage in the Group Market, issued jointly by the IRS, Dept. of Labor and Dept. of Health and Human Services on December 13, 2006.

The Final Rules contain provisions for rewarding employees who participate in wellness programs, including 5 requirements imposed on the reward programs so they comply with the nondiscrimination requirements. The Final Rules do not contain information on negative incentives, including how to treat the deductions from compensation which Cardinal Health has stated they will implement in 2009.

The Final Rules are effective July 1, 2007, which means that they may have an impact on compensation used to calculate benefits and non-elective contributions in 2007 if companies implement such programs this year. Qualified defined contribution plans, such as profit sharing, 401(k), or money purchase plans, as well as defined benefit plans, define compensation in the plan document using one of three standard definitions. The plan will define compensation either as W-2 compensation 414(s) compensation or 415 compensation (typically 415(c)(3) compensation). Each one of these definitions specifically states whether specific items are included in the compensation number used to calculate benefits, or whether it is not included.

For example, if the definition of compensation used in the plan document includes bonuses, and an employee earns compensation in 2007 of $50,000 and earns a bonus of $5,000, the compensation total used for calculating his benefits, such as the profit sharing contribution into his retirement account, is $55,000. If the employer does not include bonuses, then the compensation total used for calculating his benefits is $50,000, not $55,000. With a positive reward program, it is simply working through the examples in the Treasury regulations to determine whether to include or not include the reward in the employee’s compensation total when calculating his benefits under the plan for the year.

With a negative reward program, such as the one announced by Clarian Health, I am wondering how it will be reflected in the yearly compensation figures for their employees who participate in their profit sharing or 401(k) plan. Even though these Final Rules did not explicitly impact qualified retirement plans, they may have a direct impact on qualified plans if the employer implements the incentive, or negative incentive, program in such a way that it impacts the annual compensation amounts for employees.

Another issue pointed out to me by a colleague today is the potential impact such a program may have on vesting. Clarian Health announced that they are implementing their program in 2009, which will give employees time to adjust their lifestyles. As suggested by my colleague, it will also give employees the opportunity to look for employment at a company without such a program. It is possible that the impact of implementing the negative reward program could be a partial plan termination if 20% or more of employees decide to terminate their employment instead of continuing their employment under this type of program.

Note: Nov. 5, 2007: Clarian Health announced that they are changing their program to a voluntary program which rewards employees for meeting certain measurements of good health. I’ve posted an update here.

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