Make Food “Healthy” Again: FDA’s Resolution for a Healthier 2025
The U.S. Food and Drug Administration (FDA) began 2025 with a resolution to make food “healthy” again by announcing a trio of new final and proposed rules that are intended to make it easier for consumers to identify healthy food choices. These rules – which include a new ban on the use of red dye No. 3, a revised definition of what “healthy” claims can be made about foods, and new proposed requirements for nutritional labeling on the front of food packaging – have implications for many stakeholders in the food industry.
Although these healthy food initiatives were initiated under the Biden Administration, they directly align with the new Trump Administration’s agenda for the U.S. Department of Health and Human Services (HHS). The recently confirmed Secretary of HHS under the second Trump administration, Robert F. Kennedy Jr., has campaigned on limiting the use of food dyes and taking aim at highly processed “junk foods” that contribute to obesity. Therefore, we expect that these new rules will be here to stay, despite the new administration’s recent freeze on new proposed rules and recommended postponement of new final rules (which is currently pending court review). Regulated stakeholders should take steps now to prepare for compliance.
Revocation of Use of Red Dye No. 3 in Food and Ingestible Drugs
On January 16, 2025, FDA announced that it amended its color additive regulations to revoke the authorization for the use of FD&C Red No. 3 (commonly known as “red dye No. 3”) as a color additive in food and drugs (90 Fed. Reg. 4628 (Jan. 16, 2025)). Therefore, effective January 15, 2027, red dye No. 3 will no longer be permitted for use in food products, such as candy, cakes, cupcakes, cookies, frozen desserts, frostings, and icings, and all certificates for the use of red dye No. 3 in such products will cease to be effective. Red dye No. 3 will be banned from use as a color additive in ingestible drugs, effective January 18, 2027. Any food and ingestible drug products (including imports) containing red dye No. 3 without effective certification will be considered adulterated.
Notably, although other countries still permit certain uses of red dye No. 3 (sometimes called “erythrosine” abroad), foreign manufactured food products imported into the U.S. will also need to comply with this new ban. Though FDA has not yet signaled whether the implementation of this new rule will be delayed further, food industry members should take steps now to reformulate any products containing red dye No. 3.
FDA’s action on red dye No. 3 is not surprising to some extent, considering that the agency revoked use of the dye in cosmetics in 1990, and its use is already prohibited in food in other countries. What remains to be seen is whether FDA will continue down the regulatory path it has begun. Petitions are presently before the agency to ban other chemicals in food use, such as PFAS, BPA, TCE, and titanium dioxide—some of which have been pending for years. Further, prior to the change in administrations, FDA announced that it is developing a “systemic process” for conducting post-market assessments of chemicals in food, including GRAS ingredients, color additives, food contact substances, and potential contaminants, and established a docket for public comment. By the time the comment period closed, more than 34,000 comments had been submitted to FDA, signaling significant interest in this issue. Given the new HHS Secretary’s stated priorities, it would not surprise us if FDA continues its rulemaking efforts in this space.
Updated Requirements for “Healthy” Claims
In recent years, FDA has expressed concern over the growing prevalence of preventable chronic diseases and health conditions associated with unhealthy diet choices. Because FDA’s research demonstrates that U.S. consumers choose foods based on information readily (and easily) available to them, FDA has focused its attention on revising its food labeling regulations to provide consumers with additional information about a food’s nutritional benefits (or lack thereof). The result is the revised final rule for “healthy” claims and a proposed rule mandating front-of-pack nutrition disclosures, as discussed below.
The preambles to these rulemaking efforts demonstrate that FDA’s thinking has been heavily influenced by the Dietary Guidelines for Americans, 2020-2025 (the “Dietary Guidelines”). Under the National Nutrition Monitoring and Related Research Act of 1990, the U.S. Department of Agriculture (USDA) and HHS must publish the Dietary Guidelines at least once every five years, based on the current state of scientific and medical knowledge. The current Dietary Guidelines deemphasize the importance of individual nutrients or food groups in isolation in favor of a more holistic approach that focuses on dietary patterns during different life stages. A healthy dietary pattern, according to the Dietary Guidelines, emphasizes nutrient dense foods across all food groups, while staying within calorie limits and limiting sugars, saturated fats, and sodium.
FDA regulations have included parameters on “healthy” claims since 1994, but the requirements have not significantly changed since that time, even though nutrition science has evolved. The parameters established under the original rule were fairly rigid, and included specific limits on total fat, saturated fat, cholesterol, and sodium, as well as minimum amounts of nutrients whose consumption was encouraged (e.g., vitamin A, iron, protein). Under the 1994 rule, a food had to meet all the limits of the “discouraged” nutrients and contain the minimum amount of at least one of the “encouraged” nutrients to bear a “healthy” claim. That had the effect of excluding certain “nutrient dense” foods often viewed by consumers as healthy, such as salmon (due to its fat content).
The new Final Rule (89 Fed. Reg. 106,064 (Dec. 27, 2024)) proposes a more flexible approach consistent with the revised Dietary Guidelines. Current nutrition science emphasizes nutrient-dense foods – such as fruits, vegetables, and whole grains – as part of a healthy dietary pattern. Nutrient-dense foods and beverages are defined as those that provide vitamins, minerals, and other health promoting nutrients but also have little or no added sugars, saturated fats, or sodium. Accordingly, foods that meet the requirements for “healthy”, as defined in the new rule, are foods that, because of their overall nutrition profiles, can be the “foundation” or “building blocks” of an overall healthy dietary pattern recommended by the Dietary Guidelines.
Under the rule, a “healthy” food claim “[s]uggests that a food, because of its nutrient content, may be useful in maintaining healthy dietary practices, where there is also implied or explicit information about the nutrition content of the food (e.g., “healthy”).” See 89 Fed. Reg. 106,064, 106161. In general, to meet the new parameters for “healthy” food claims, including claims that foods are “healthful” or “healthier”, food products (including individual foods, mixed products, main dishes, and meals) must (1) for example, contain a certain amount of food (referred to as a “food group equivalent”) from at least one of the food groups or subgroups recommended by the Dietary Guidelines for Americans (e.g., vegetables, fruits, whole grains, fat-free or low-fat dairy, lean meat, seafood, eggs, beans, peas, lentils, nuts, or seeds) and (2) meet specific limits for added sugars, saturated fats, and sodium (based on a percentage of the Daily Value (DV) for these nutrients). Under the new criteria, some categories of foods – vegetables, fruits, seafood, lentils, nuts and seeds, among others – automatically qualify for the “healthy” claim due to their nutrient density, so long as they do not contain any additional ingredients other than water. And some foods that did not qualify for a “healthy” claim under the old rule due to their fat content now do, including avocados, salmon, and olive oil. Conversely, some food products that qualified as “healthy” under the old rule now do not, including fortified white bread, highly sweetened yogurts, and highly sweetened cereal.
The new rule also contains a substantiation requirement. Manufacturers of foods for which “healthy” claims are made must make and keep written records substantiating the “healthy” claims in accordance with the new requirements, except where nutritional food labeling makes clear that the requirements are met.
The food industry may begin voluntarily complying with the new rule on or after February 25, 2025, and must comply by February 25, 2028. Therefore, the food industry should take steps now to review any “healthy” claims made for their products, assess whether those claims should be changed in light of the new final rule, and document the substantiation for their claims.
We add that health claims on food labeling are heavily policed by consumer class action attorneys under consumer fraud laws (particularly in California and New York), and that compliance with FDA’s requirements for “healthy” claims will not necessarily preempt these lawsuits, if a court determines that other aspects of the label or packaging renders the claim misleading on the whole. Therefore, food manufacturers should work closely with experienced counsel in formulating “healthy” claims and ensuring that these claims are properly substantiated.
Nutrition Labeling
On January 16, 2025, FDA published a proposed rule (90 Fed. Reg. 5426 (Jan. 16, 2025)) (the “Proposed Rule”), which, if finalized, would require a front-of-package nutrition label called a “Nutrition Info box” on most packaged foods to assist consumers in more easily identifying healthy foods. This new label would require manufacturers to address the relative amounts of saturated fat, sodium, and added sugars in a serving of the food, and identify whether those amounts are low, medium, or high. FDA’s proposed format for the new label appears below:
The ranges that FDA proposes for each category are as follows:
Low: 5% daily value (DV) or less
Medium: 6% to 19% DV
High: 20% DV or more
In proposing these DV ranges, FDA considered the regulatory history of the percent DV; the agency’s commitment to helping consumers understand the percent DV concept in the context of a person’s daily diet; and the agency’s existing regulatory definitions for nutrient content claims (including definitions established for “low” and “high” claims), among other factors. FDA believes that the ranges it proposes for the interpretive descriptions – and in particular, its designation of 5% DV or less as “low” and 20% DV or more as “high” – align with its longstanding regulatory approach.[1] However, FDA invites comment on its conclusions and analysis.
Calorie disclosures
In the Preamble to the Proposed Rule, FDA acknowledged that some manufacturers already voluntarily include a calorie statement on the front of the food packaging, in accordance with existing regulations. FDA invites comment from industry stakeholders on the inclusion of a mandatory or voluntary statement of calories in the proposed Nutrition Info box, as well as suggestions as to how FDA could consider including quantitative calorie information (e.g., “low”, “medium”, “high”) in the box (including any new data or other information on which FDA could base this interpretation).
Anticipated costs
One notable aspect of the Proposed Rule is its anticipated cost to industry, which FDA analyzed as part of the rulemaking effort. FDA quantified the estimated costs of relabeling to the packaged food industry as a whole to range between $66 million and $154 million per year over a ten-year time horizon. Further, although product reformulation is not a requirement or a stated goal of the Proposed Rule, FDA recognizes that the rule may result in voluntary reformulation efforts by some food producers. FDA estimates that the annualized costs of reformulation would range from $125 million to $377 million over a ten-year time horizon. FDA recognizes the possibility that some of these relabeling/reformulation costs may be passed along to consumers (at least in part).
If finalized, businesses with $10 million or more in annual food sales will be expected to comply with these requirements within three years of the final rule’s effective date. Businesses with less than $10 million in annual food sales will be expected to comply with the requirements within four years of the final rule’s effective date. FDA is accepting comments on this new proposed rule by May 16, 2025. Food industry stakeholders should consider submitting comments to this proposed rule. Foley’s Food and Beverage Industry Team members have extensive experience assisting regulated stakeholders in preparing comments on FDA rulemaking. Any of the authors would be happy to provide additional information.
Regulatory Freeze
As is standard practice for an incoming administration, one of President Trump’s first Executive Orders (“EO”) places a freeze on all pending regulations proposed in the last days of the Biden administration. The EO encourages a 60-day review of any such proposed rules or guidance, with further consultation by the Director of the Office of Management and Budget (OMB) as-needed for “for those rules that raise substantial questions of fact, law, or policy.”
Next Steps
Though there is some uncertainty about timing, overall, industry should plan for the possibility that these rules and orders will take effect. Therefore, food industry stakeholders should act now to:
Begin planning on reformulation of products with red dye No. 3;
Review and assess what “healthy” food claims are made about their products, and document their support for those claims in accordance with the new “healthy” framework; and
Consider submitting comments to the new proposed rule requiring front-of-package nutrition information labeling.
[1] FDA does not have a regulation that establishes a “medium” nutrient content claim for any nutrient. In the Preamble to the Proposed Rule, FDA effectively takes a common-sense approach to defining that term. See 90 Fed. Reg. 5426, 5445 (“The adjective ‘medium’ is defined as, for example, ‘being in the middle between an upper and lower amount, size, degree, or value . . . and ‘intermediate in quantity, quality, position, size, or degree’ . . . . The common meaning of the adjective ‘medium’, then, aligns with the meaning of the interpretive . . . we are proposing.”). Which is just to say that the “low” and “high” goalposts are really what matter for purposes of comment on the Proposed Rule.
What Will Trump 2.0 Mean for Employee Benefits?—One Place to Look for Clues: Project 2025
Even as high-priority issues such as diversity, equity, and inclusion (DEI), immigration, and Ukraine take center stage in the first months of the new presidential administration, many employers are wondering what the next four years might mean for employee benefits.
Quick Hits
The Heritage Foundation’s Project 2025 provides clues for potential employee benefits changes under the second Trump administration.
Project 2025 calls for reversing federal rules that added gender identity, sexual orientation, and pregnancy as protected classes covered under the nondiscrimination provisions of the Affordable Care Act.
Project 2025 also proposes eliminating the dispute resolution process under the No Surprises Act in favor of a “truth-in-advertising approach.”
Plan sponsors may find clues in Project 2025, the far-reaching report produced by Washington, D.C., think tank Heritage Foundation as a blueprint for a second Trump administration and actually written in part by a number officials in the first Trump administration and public advocates for the 2024 Trump presidential campaign. (The president distanced himself from Project 2025 during the campaign, although several contributors are serving in the new administration.)
Specifically, three chapters of the 900-plus page report may offer insight for plan sponsors: one covering the U.S. Department of Health and Human Services (HHS), one covering the U.S. Department of the Treasury (Treasury), and one covering the U.S. Department of Labor (DOL) and related agencies.
Below, we dust off our copies of the report—originally released in 2023—and recap a few notable Project 2025 employee benefits policy recommendations (and the specific page numbers in the report):
ACA Section 1557: Reverse federal rules that added gender identity, sexual orientation, and pregnancy as protected classes covered under the nondiscrimination provisions of Section 1557 of the Affordable Care Act (ACA). These provisions have a limited impact on employee benefit plans, and in 2020, the Trump administration issued regulations that removed provisions detailing specific forms of discrimination, including gender dysphoria treatment, health insurance participation, and benefit plan design. (Page 475)
No Surprises Act: Encourage the U.S. Congress to revisit the 2021 legislation, including addressing the “deeply flawed system for resolving payment disputes between insurers and providers.” Project 2025 advocates eliminating the dispute resolution process in favor of a “truth-in-advertising approach.” (Page 469)
State restrictions on “anti-life” benefits: Encourage Congress and the DOL to “clarify” that the Employee Retirement Income Security Act (ERISA) would not preempt state attempts to prevent employer-sponsored health benefit plans from offering plan coverage for abortion, surrogacy, or other “anti-life” health care benefits (Page 585)
Individual Retirement Accounts (IRAs): Increase the IRA contribution limit to equal the amounts that can be contributed under 401(k) or 403(b) plans with respect to married couples. (Page 588)
Independent contractor benefits: Project 2025 encourages Congress to provide “a safe harbor” from employer-employee status when an employer permits independent contractors to participate in employer-provided benefits. Traditionally, only common law employees can participate in employer-sponsored retirement programs. (Page 591)
ESG investing: Encourage the DOL to prohibit ERISA retirement plans from investing plan assets based on any factor other than investor risks and returns, specifically environmental, social, and governance (ESG) factors. In addition, Project 2025 encourages the DOL to consider taking “enforcement and/or regulatory action to subject investment in China to greater scrutiny under ERISA” based on a perceived lack of compliance with American accounting standards and state control of Chinese companies. (Page 606)
Multiemployer plans: Project 2025 advocates greater scrutiny and reporting requirements for multiemployer plans, which are jointly administered by unions and employers. Among the specific recommendations is that the Pension Benefit Guaranty Corporation (PBGC), which insures defined benefit pension plans, require more detailed and timely reporting from plans. (Page 609)
ESOPs: Project 2025 recommends the DOL issue regulations that encourage greater participation in employee stock ownership plans (ESOPs). (Page 610)
Cap benefits deductibility: Project 2025 recommends limiting the amounts that employers can deduct for certain benefit costs to $12,000 or less per year per full-time equivalent employee. Retirement plan contributions would not count against that limit, and only “a percentage” of contributions to health savings accounts (HSAs) would count toward such limitation. (Page 697)
Deductibility for dependent coverage: Limit the ability of employers to deduct the value of health insurance and other benefits provided to employee dependents who are 23 or older. (Page 697)
Universal Savings Accounts (USAs): Establish accounts for taxpayers to contribute up to $15,000 of post-tax wages into USAs, similar to Roth IRAs. Investment gains would be nontaxable, portable, and withdrawable at any time for any purpose without penalty. (Page 696)
Practical Implications of Immigration Enforcement Activity on Retirement Plans
The second Trump administration is intensely focused on enforcement of U.S. immigration laws. Understandably, employers are concerned about immigration visits and Form I-9 compliance, and human resource professionals are bracing for potential workforce disruptions and increased scrutiny of hiring procedures. Retirement plan administrators should also consider the consequences of undocumented workers participating in company retirement plans.
How an Undocumented Worker Becomes a 401(k) Plan Participant
In spite of an employer’s Form I-9 process, employees can provide incorrect, misleading, or false documentation as evidence that they are legally allowed to work in the U.S. If the employer does not have adequate systems in place to verify the documentation provided, then such employee can, nevertheless, become a participant in the employer’s 401(k) plan in accordance with the plan’s eligibility terms. For example, an employer may automatically enroll new employees in its 401(k) plan at three percent of compensation. The employer may also provide a matching or nonelective contribution on a payroll-by-payroll basis. Under this scenario, an unauthorized worker could relatively quickly begin accruing an account balance as a participant under the 401(k) plan. The same result could occur for undocumented workers under the eligibility terms of most retirement plans.
Plan Language Regarding “Employee” and ERISA
Most retirement plans define “employee,” “eligible employee,” or “participant” without reference to immigration status. For example, a common definition of “employee” could be similar to –
Employee means an individual who is reported on the payroll records of the Employer as a common-law employee.
While it may seem counter-intuitive, undocumented workers are indeed protected under the Fair Labor Standards Act (FLSA), which is enforced by the Department of Labor (DOL). Interestingly, the DOL also enforces the Employee Retirement Income Security Act (ERISA), which does not address the immigration status of employees. In other words, an individual is a covered (protected) employee under ERISA whether documented or not. So employers should proceed with the understanding that a plan participant – without regard to immigration status – is entitled to the benefits earned under a retirement plan.
It is important to distinguish undocumented workers from the “nonresident aliens” exclusion from eligibility that is contained in many retirement plans. Nonresident aliens without United States source income are often expressly excluded from retirement plan participation. According to the Internal Revenue Service, an alien is any individual who is not a U.S. citizen or U.S. national. A nonresident alien is an alien who has not passed the green card test or the substantial presence test. Because undocumented workers have U.S. source income, that exclusion under the retirement plan does not address issues that may come up related to undocumented workers.
With the assistance of counsel, employers may consider whether it is feasible to amend the plan to expressly exclude undocumented workers – i.e., employees who do not provide documentation that they are legally allowed to work in the U.S. Care should be taken in order to make sure such amendment can be properly administered without triggering any unintended consequences. Moreover, the amendment should not inadvertently violate applicable employment discrimination laws.
Distributions to Deported and Terminated Undocumented Workers
If an undocumented participant is deported or is absent from work for an extended period without notice, then the employer may terminate their employment. In such cases, like any other participant, an undocumented participant is entitled to receive distributions of vested benefits under a retirement plan upon termination of employment. The issue becomes how to process the distribution when the employer’s Form I-9 records include an incorrect or false individual tax identification number (ITIN) or Social Security number (SSN). Employers – plan recordkeepers, in particular – require a correct ITIN or SSN in order to properly report a retirement plan distribution on Form 1099-R. Obtaining this information from an undocumented participant may be challenging because they may be in custody, living in a different location, or intentionally avoiding contact. In these circumstances, the employer should designate them as “missing or lost participants” and take actions consistent with the DOL’s best practices for handling such participants (see our previous articles related to missing participants in retirement plans here and here).
Keep in mind that the employer should consider the DOL guidance whether the distribution is a small balance cashout, an automatic rollover to an IRA, or a series of installment payments. After the employer has exhausted its responsibilities under the DOL guidance, it may be able to transfer certain small distributions ($1,000 or less) to state unclaimed property funds as described under the recent Field Assistance Bulletin 2025-01.
Distributions to Those Seeking to Help Deported Family Members
Employees affected by immigration enforcement efforts may be interested in accessing their retirement accounts to provide financial assistance to deported friends and family. If the employer sponsors a 401(k) plan, then the plan may allow loans or penalty-free in-service distributions (if the participant has reached age 59½).
In addition, as permitted under SECURE 2.0, a 401(k) plan may be amended to allow employees to take penalty-free distributions up to $1,000 (or smaller amounts that leave at least $1,000 of vested benefits in the account afterward) if they certify the amount is for a personal or family emergency. Such emergency distributions must be repaid to the plan within three years of receipt in order to remain penalty-free.
Action Steps
Assess Risks. Based on workforce demographics, proximity to immigration enforcement activity, and other related factors, consider the likelihood that immigration enforcement agencies will select the employer for an on-site review or worker deportation. If so, consider whether to amend the 401(k) plan to permit emergency distributions for those wishing to provide financial assistance to deported family members.
Audit. Human resource, payroll, and benefits professionals should collaborate to determine whether undocumented workers are currently eligible for retirement plan benefits (or any other employee benefits offered by the employer). Consider whether it may be appropriate to engage a background screening service to verify Form I-9 employee authorization documentation.
Review DOL Missing Participant Best Practices. Review and document the procedures and processes used to locate missing participants, including those who may be at risk for deportation.
Consult Plan Recordkeeper. Contact the recordkeeper to inquire what procedures it has in place to process distributions and Forms 1099-R when there is an incorrect ITIN or SSN (or none at all).
Seek Legal Counsel. Ask legal counsel whether it is feasible to amend the retirement plan to expressly exclude undocumented workers.
CTA Reporting Requirements Reinstated and Beneficial Ownership Reports Due March 21, 2025 for Most Reporting Companies
The beneficial ownership information reporting requirements of the Corporate Transparency Act (CTA) are now back in force. As described in more detail below, the majority of Reporting Companies are required to file their initial, amended, or corrected beneficial ownership information reports (BOIRs) by March 21, 2025, absent any subsequent legal developments.
On February 17, 2025, the US District Court for the Eastern District of Texas in Smith, et al. v. U.S. Department of the Treasury, et al., Case No. 6:24-cv-00336 (E.D. Tex.), stayed a preliminary injunction enjoining the Reporting Rule containing compliance deadlines to file BOIRs. This order removed the final hurdle (for now) blocking the CTA’s reporting deadlines and requirements.
As previously indicated, the Financial Crimes Enforcement Network (FinCEN) extended a 30-day grace period for Reporting Companies to file BOIRs. Specifically, on February 19, 2025, FinCEN published an official notice stating that FinCEN is generally extending the reporting deadline for most Reporting Companies that were previously required to file BOIRs, but have not already done so, to March 21, 2025. FinCEN also noted that (a) during this period FinCEN would “assess its options to further modify deadlines, while prioritizing reporting for those entities that pose the most significant national security risks,” and (b) it intends to revise the CTA’s Reporting Rule to reduce burdens for lower-risk, small business entities. Note that, in parallel, there are several bills pending in Congress to repeal the CTA and to extend certain reporting deadlines to January 2026. As there can be no guarantee that FinCEN will further extend the grace period, or that a subsequent legal development will once again intervene with the enforcement of the CTA, Reporting Companies should prepare to file their BOIRs by March 21, 2025.
A copy of the official FinCEN notice may be accessed here.
Scott Vetri and Walter Weinberg contributed to this article
Five Compliance Best Practices for … Minimizing Customs Tariffs (Part I)
Minimizing tariffs is a common objective for businesses engaged in international trade, as tariffs can significantly impact the cost of importing or exporting goods. Here are several strategies businesses can consider to minimize tariffs.
Duty Drawback. A duty drawback is a refund or remission of a customs duty, fee, or internal revenue tax previously imposed. The refunds occur when the product is exported from the United States or destroyed. Duty drawback programs allow businesses to claim refunds or credits for duties paid on imported inputs that are exported or incorporated into exported products. This is a complex process, as it involves imports and exports, but for certain types of transactions it can offer real duty savings.
Foreign Trade Zone (FTZ). A foreign trade zone is a secured location in or near CBP ports, where no tariffs apply while the product sits in the FTZ. The product can be stored, exhibited, assembled, manufactured, or processed in this zone without any duties being applied. This allows for duty deferral if the goods are eventually withdrawn into the U.S. Customs territory, or potentially no duties at all if the goods are shipped to another country.
Consider Holding Products in a Bonded Warehouse. Bonded warehouses provide similar benefits by allowing businesses to store imported goods under bond, deferring duty payments until the goods are removed for consumption. Bonded warehouses are buildings or secured locations in which products with duties can be stored or altered without paying the duties for a maximum of five years. If the products are exported, no duty is owed on the products.
Temporary Importation Under Bond (TIB). When using a TIB, an importer may post a bond for twice the amount of the duties and then must export or destroy the imported items within a specified time or pay damages. TIBs represent another way to handle temporary imports to secure duty savings.
American Goods Returned.For goods that were initially exported abroad and then returned to the United States, such as for servicing, warranty services, or value-added activities, it may be possible to declare an entered value equal to the value added abroad. If this is a common importing pattern for your company, you should check and see if you are appropriately taking advantage of opportunities to minimize tariffs using the American Goods Returned program.
For further information, check out our four-part “Managing Import Risks Under the New Trump Administration” series on risk-planning for the anticipated tariff increases:
Identifying Risks and Opportunities
The Implications of President Trump’s “America First” Trade Memorandum
A 12-Step Plan for Coping with Tariff and Supply Chain Uncertainties
Contractual Provisions to Cope with the Increasing Tariffs and Trade Wars
China on the Move: Lessons from China’s 2024 National Negotiation of Drug Prices
China’s share of the global drug development pipeline grew from 3% in 2013 to 28% in 2023, positioning China as the second-largest region for clinical trials after the United States. Additionally, the proportion of drugs launched first in China increased from 9% in 2017 to 29% in 2023, placing China just behind the United States in terms of first-in-class launches. This trend highlights the contributions of domestic companies, whose pipelines are replenishing the global pharmaceutical landscape. As a result, NextPharma estimates that the combined value of China’s licensing-out deals reached around $46 billion in 2024, up from $38 billion in 2023 and $28 billion in 2022.
On the demand side, from 2019 to the first quarter of 2023, the National Healthcare Security Administration (NHSA) allocated 60% of savings from generic drug procurement to innovative drugs listed on the National Reimbursement Drug List (NRDL). This shift mirrors trends in developed markets where patented drugs dominate sales. By 2023, innovative drugs accounted for 15.1% of hospital drug expenditures in sample hospitals, up from less than 10% in 2018. However, affordability remains a challenge, which is significant as China continues to push for increased access to cutting-edge therapies.
The 2024 NRDL negotiations, which concluded in November 2024, offer insights into how China is addressing these affordability concerns while seeking to ensure access to innovative medicines. This GT Advisory explores five key takeaways from the 2024 NRDL negotiations and their potential implications for the future of innovative drug pricing and reimbursement in China.
A Contradiction Between NRDL Outcomes and the Growing Influence of Chinese Companies in Global Innovation
Support for First-in-Class and Innovative Drugs
BMI Fund Sustainability
A Continuous Dilemma for Multinational Companies (MNCs)
Reimbursement Coverage Expansion: Category C and Commercial Health Insurance
Continue reading the full GT Advisory.
What GSA Contractors Need to Know About the New FAR Deviation for Revoked Executive Order 11246, Equal Employment Opportunity
On February 18, 2025, the General Services Administration (“GSA”) announced that it issued GSA Class Deviation CD-2025-04 (“the GSA Class Deviation”) effective February 15, 2025, to implement Executive Order (“EO”) 14173 titled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” which, as Blank Rome has previously written about here and here, revoked the landmark 60-year-old EO 11246 titled “Equal Employment Opportunity.”
Below is a summary of the key takeaways.
Overview:
The GSA Class Deviation only applies to GSA solicitations, contracts, and real property leases. However, it may serve as a preview of how other agencies will implement the revocation of EO 11246.
The GSA Class Deviation does not include new contract clauses or certifications, whether for the expected Diversity, Equity, and Inclusion certification required by EO 14173, or any other subject.
Supplement 1 to the GSA Class Deviation removes the term “gender identity” from FAR 22.801 and from clauses in FAR Part 52 that include the term. The apparent purpose of this removal is to comply with EO 11246 titled “Defending Women from Gender Ideology Extremism and Restoring Biological Truth to the Federal Government.” Notably, Supplement 1 to the GSA Class Deviation states that GSA Contracting Officers (“COs”) “must” notify contractors that “as of February 15, 2025, all uses of the term ‘gender identity’ are not to be recognized or used prospectively by Federal contractors.” There is no guidance on whether or how this prohibition will be made contractually applicable, or the extent of its purported applicability within a contractor’s organization or operations, e.g., to strictly internal communications, to external communications that do not include GSA, to communications with commercial partners, in oral communications, etc. There is likewise no guidance on how, in practical terms, a GSA contractor should cease to “recognize” the phrase “gender identity” nor does the GSA Class Deviation provide or refer to a definition of the phrase “gender identity.” Given these and other issues, we expect this prohibition will be litigated after an affected GSA contractor receives the required CO notice. We recommend that GSA contractors confer with counsel regarding whether and how to respond to a CO notice on this issue. The GSA Class Deviation does not address or purport to prevent GSA contractors from allowing their employees to specify preferred pronouns. (An Office of Personnel Management Memo dated January 29, 2025, has directed the heads of federal agencies to disable Outlook features that prompt government employees for their pronouns.)
Updates Regarding New or Open Solicitations, New Contracts, or Leases with at Least Six Months of Performance Remaining:
COs must amend solicitations or otherwise incorporate the GSA Class Deviation changes prior to contract award. This will generally require the removal of any and all representations and certifications related to affirmative action and equal opportunity compliance. Notably, the GSA Class Deviation does not purport to modify or rescind any applicable affirmative action and equal opportunity obligations arising under a GSA contractor’s contracts or leases with states.
COs must notify contractors that although SAM.gov may continue to require responses to representations based on provisions that will no longer be included in GSA solicitations (such as FAR 52.222-25 Affirmative Action Compliance and FAR 52.212-3(d) Offeror Representations and Certifications – Commercial Products and Commercial Services), GSA COs will neither consider those representations when making award decisions nor enforce the requirements of those clauses.
COs must not include the following clauses in new GSA solicitations:
FAR 52.222-21, Prohibition of Segregated Facilities
FAR 52.222-22, Previous Contracts and Compliance Reports
FAR 52.222-23, Notice of Requirement for Affirmative Action to Ensure Equal Employment Opportunity for Construction
FAR 52.222-24, Preaward On-Site Equal Opportunity Compliance Evaluation
FAR 52.222-25, Affirmative Action Compliance
FAR 52.222-26, Equal Opportunity
FAR 52.222-27, Affirmative Action Compliance Requirements for Construction
FAR 52.222-29, Notification of Visa Denial
Finally, COs must “ensure” that GSA contractors understand that the FAR subparts related to Equal Opportunity for Veterans and Employment of Workers with Disabilities are not affected. Additionally, the GSA Class Deviation states that it does not affect existing federal laws on civil rights, non-discrimination, or any laws that generally apply to a company regardless of whether it is a government contractor.
We will continue to monitor and report on developments as federal agencies continue their efforts to implement EOs and other directives relevant to government contractors.
It’s The Hope That Kills You: My Experience with Alabama’s Medical Cannabis Experiment
If you haven’t seen Ted Lasso, you need to do that immediately (after reading this). In the final episode of the first season, Ted Lasso – an American football coach hired, for reasons that don’t matter here, to coach an English football team – who is played exquisitely by an endearing Jason Sudeikis – notes that he has heard the expression “it’s the hope that kills you” when describing the trials and tribulations of English football. I will leave my thoughts on the merits of relegation and promotion in American sports for another forum.
It’s a classically English turn of phrase, but Ted rejects the premise. Ted says “I disagree, you know? I think it’s lack of hope that comes and gets you. See, I believe in hope.” As all Budding Trends readers know (and there are tens of you around the world), I couldn’t help but think Lasso was channeling the line from Shawshank: “Hope is a good thing, maybe the best of things.”
I suspect those who have known me for a while wouldn’t consider me to be a natural optimist. And years of litigating cases probably hasn’t done anything to change that tendency. I understand why those applicants and would-be patients in the Alabama medical cannabis program would be bereft of hope these days. After all, it has been nearly four years since the Alabama medical cannabis program was enacted by the legislature and not one patient has received medical cannabis.
But somehow in the face of years of advising clients and potential patients going through the hell that can be waiting on lawmakers, regulators, and courts to get a medical cannabis program off the ground, I became an optimist. At first, I’m sure it was little more than putting on a brave face for disappointed, frustrated, and even angry folks wondering why they couldn’t simply get resolution to their dreams. Perhaps this was the “fake it ‘til you make it” phase of my journey, but over time I actually became optimistic that Alabama would be able to launch a medical cannabis program that could provide relief to Alabamians so desperate for a different kind of therapy for what ails them.
I know, maybe as much as anyone in Alabama, how arduous and costly it has been to stand by while this process has played out. I have friends and clients holding licenses issued by the State of Alabama to cultivate and process marijuana. They are wondering whether the countless hours, dollars, and worry have been worth it, and similarly whether it is worth pouring the same into an unknown future. And I have other friends and clients in the integrated and dispensary arena feeling stuck in a regulatory and judicial morass that feels like wading through quicksand.
And, if we’re being honest with each other as friends should, I have left untold fees on the table choosing not to take a side in the long-running litigation because I choose not to take sides when I have clients with different goals and wishes.
For all of these reasons, I am incredibly empathetic to all involved in the seemingly endless delays in the program. But I absolutely believe that Alabama is poised to launch its medical program. Yeah, this is coming from a guy who relies on pop cultural references and jam band quotes. But that guy has never lied to you and has always done his best to take the broader view and make calculated judgments about the facts as they evolve and the future.
I don’t have a crystal ball, and I don’t have a monopoly on predictions. But as I write this, I remain optimistic that Alabama’s medical cannabis program will launch, and it will do so sooner than many believe.
As Coach Lasso instructed: “Onward. Forward.”
Thanks, as always, for stopping by. Your friends at Budding Trends will be right here.
Two Separate Claims of Action in Relation to Employment Discrimination
Most people are familiar with Title VII of the Civil Rights Act of 1964, it frequently used by aggrieved employees. However, Section 1981 of the Civil Rights Act of 1866 is another legal mechanism that can be used to bring employment discrimination claims.
Before bringing an employment discrimination claim, it is important to understand the differences between these two statutes, when they apply, and how they operate.
Overview
The Civil Rights Act of 1866 was enacted shortly after the Civil War, with the aim to protect the rights of newly freed slaves. Section 1981 was an original part of the Act, which guaranteed that all individuals within the United States enjoy the same right to make and enforce contracts, regardless of race. Over the years, the Supreme Court has interpreted Section 1981 to apply broadly to various forms of racial discrimination in contractual relationships, including employment.
The Civil Rights Act of 1991 amended Section 1981 to include protections against discrimination in the performance, modification, and termination of contracts, and clarified that it applies to both private and public discrimination.
Title VII of the Civil Rights Act of 1964 (42 U.S.C. § 2000e) prohibits employment discrimination based on race, color, religion, sex (including pregnancy, sexual orientation, and gender identity), or national origin. Title VII was a pivotal piece of legislation in the fight against employment discrimination in the United States. Its historical context is deeply rooted in the broader Civil Rights Movement of the 1960s, which sought to address systemic racial discrimination and inequality. Title VII also established the Equal Employment Opportunity Commission (“EEOC”) to enforce its provisions and handle workplace discrimination complaints.
Scope of Protection
One of the key differences between Title VII and Section 1981 lies in the scope of protection they offer. Title VII provides a broad range of protections against various forms of discrimination, including race, color, religion, sex, and national origin. It covers all aspects of employment, such as hiring, firing, promotions, compensation, and other terms and conditions of employment. Additionally, Title VII applies to employers with 15 or more employees, including federal, state, and local governments, as well as private and public sector employers.
In contrast, Section 1981 specifically addresses racial discrimination in the making and enforcement of contracts. This includes employment contracts, but its protections are limited to race and do not extend to other protected characteristics covered by Title VII. Section 1981 applies to all employers, regardless of size, and does not require the involvement of the EEOC for enforcement. This means that individuals can bring claims directly to federal court without first filing a charge with the EEOC, which can be a significant advantage in certain cases.
Types of Discrimination
Title VII addresses a broad spectrum of discriminatory practices in the workplace. It prohibits discrimination based on race, color, religion, sex (including pregnancy, sexual orientation, and gender identity), and national origin. This includes disparate treatment, disparate impact, harassment, and retaliation.
Section 1981, on the other hand, is specifically concerned with racial discrimination. It ensures that all individuals, regardless of race, have the same rights to make and enforce contracts, which include employment contracts. This statute addresses both intentional discrimination and discriminatory practices that affect the ability to enter into or maintain contractual relationships. While Section 1981 does not explicitly cover other forms of discrimination like sex or religion, it provides robust protection against racial discrimination in the workplace and other contractual settings.
Enforcement and Remedies
Title VII is enforced by the Equal Employment Opportunity Commission (EEOC), which investigates discrimination complaints, mediates disputes, and can file lawsuits on behalf of employees. Before filing a lawsuit under Title VII, individuals must first file a charge with the EEOC. Remedies under Title VII can include reinstatement, back pay, front pay, compensatory damages for emotional distress, and punitive damages for particularly egregious conduct. The amount of compensatory and punitive damages is capped based on the size of the employer, ranging from $50,000 to $300,000
Section 1981, in contrast, allows individuals to bypass the EEOC and file lawsuits directly in federal court. This can expedite the legal process for those facing racial discrimination. Remedies under Section 1981 are similar to those available under Title VII, including compensatory and punitive damages, but there are no caps on the amount of damages that can be awarded. This makes Section 1981 a powerful tool for addressing racial discrimination, providing broader potential financial recovery for plaintiffs.
It is important to note that these are general distinctions between Title VII and Section 1981, and specific legal requirements may vary in different jurisdictions.
Consulting with an attorney who specializes in employment litigation can provide further guidance on the application of these laws to the facts and circumstances of specific cases.
A New Era for Crypto Regulation & Innovation? The Crypto Executive Order, a Rebooted SEC Crypto Task Force & the Journey Ahead
Recent regulatory developments in the crypto asset and financial technology space suggest that US regulators may be shifting toward a more balanced approach — one that prioritizes clearer regulations while fostering innovation over a more enforcement-driven strategy. President Trump’s recent executive order on this topic reshapes the Biden administration’s approach to crypto assets by eliminating many of the prior administration’s policies on crypto and establishing the President’s Working Group on Digital Asset Markets (Working Group). Acting US Securities and Exchange Commission (SEC) Chairman Mark Uyeda has relaunched the SEC’s Crypto Task Force, appointing Commissioner Hester Peirce to lead its efforts and set its objectives. The SEC has also moved to roll back problematic accounting guidance and pause certain enforcement actions against major crypto companies. Other key regulators, including the Commodity Futures Trading Commission (CFTC) and the Office of the Comptroller of the Currency (OCC), have yet to take similar steps. However, the president recently nominated Brian Quintenz to lead the CFTC, and Jonathan Gould to head the OCC, both of whom have substantial crypto experience. Taken together, these developments may signal a long-awaited shift toward regulatory clarity for crypto that balances innovation and investor protection.
If these developments are received favorably by the industry, we anticipate more investment and new entrants in the crypto asset space. In particular, we can expect additional research & development and new innovations by both start-ups and existing enterprises. Past cycles have brought a race to develop valuable technology and stake out intellectual property rights to capture the value represented by those innovations.
The Trump Administration’s Executive Order on Crypto Assets
On January 23, 2025, President Trump issued an executive order titled “Strengthening American Leadership in Digital Financial Technology,” which establishes a new framework for crypto asset policy. The order revokes prior executive order 14067 and the Department of the Treasury’s “Framework for International Engagement on Digital Assets,” effectively reversing the prior administration’s approach to crypto regulation. The Trump administration’s policy suggests a preference for open public blockchain networks, opposes the creation of a US central bank digital currency (CBDC) or the recognition of CBDCs issued by other countries, and seeks to provide regulatory certainty through better-defined jurisdictional boundaries.
The executive order also created the President’s Working Group on Digital Asset Markets, chaired by David Sacks as the Special Advisor for AI and Crypto. The Working Group’s mandate is to develop a federal regulatory framework governing crypto assets, including stablecoins, and to evaluate the potential creation and maintenance of a national crypto asset stockpile. They are tasked with submitting a report to the president within 180 days recommending regulatory and legislative proposals that advance the policies established in the executive order.
Federal agencies, including the SEC and CFTC, also must now review and potentially rescind previous regulatory guidance that conflicts with this new direction. Additionally, the Working Group will evaluate the feasibility of a national crypto asset reserve derived from lawfully seized cryptocurrencies and seek to ensure that existing and future US regulatory frameworks support US leadership in blockchain and digital financial technology.
Crypto Task Force Reboot & Pause on Binance Enforcement
In a related development, the SEC re-formed a new dedicated Crypto Task Force led by Commissioner Hester Peirce (Task Force). In an announcement titled “Crypto 2.0,” Commissioner Uyeda stated that, among other things, the Task Force aims to resolve long-standing uncertainties in crypto regulation by developing clearer registration pathways, enhancing disclosure frameworks, and ensuring a more consistent enforcement strategy. Many have criticized the SEC’s prior regulatory approach for relying too heavily on enforcement actions, which created uncertainty for industry participants. The Task Force will reportedly collaborate with stakeholders across the public and private sectors, including Congress, the CFTC, and international regulators, to shape a more coherent regulatory approach. The release announcing the Task Force acknowledges the need for a clear regulatory framework that fosters both innovation and investor protection.
Shortly after announcing the Task Force, the SEC and Binance jointly requested a 60-day stay of the SEC’s lawsuit against the crypto exchange, citing the potential impact of the newly established Task Force. The SEC previously sued Binance, its US unit, and founder Changpeng Zhao in June 2023, alleging market manipulation and investor deception. The request signals a potential shift in the SEC’s enforcement strategy, with some viewing it as a step toward a more crypto-friendly stance in line with the president’s broader industry goals. A similar pause was also requested in the SEC’s ongoing action against Coinbase.
Commissioner Peirce’s Statement on the Future of Crypto Regulation
In her February 4 statement titled “The Journey Begins,” Commissioner Peirce outlined the Task Force’s objectives and highlighted several key areas of focus.
Clarifying “Security” Status. The Task Force “is working hard” to assess different types of crypto assets and determine their status under securities laws. Currently, market participants face uncertainty regarding whether certain crypto assets qualify as securities, which affects compliance obligations, trading, and broader market adoption. To date, the SEC has largely relied on enforcement actions to define its stance, leaving investors and other market participants without clear regulatory guidance. Establishing a clear framework to help determine the security status of crypto assets has the potential to provide much-needed regulatory certainty, support responsible innovation, and facilitate greater institutional participation in the crypto markets.
Providing a Pathway to Registration & Trading for Unregistered Offerings. The Task Force “is thinking about” recommending SEC action to grant temporary prospective and retroactive relief for coin or token offerings not registered with the SEC if an entity takes responsibility to provide specified information, updates it, and accepts SEC jurisdiction in fraud cases. Such coins or tokens would be deemed non-securities, allowing trading on unregistered secondary markets if disclosures remain current. The potential success or failure of such a proposal is likely to depend on the specific disclosure requirements imposed and on whether the relief provided offers real benefits while avoiding excessive regulatory burdens.
New Crypto ETFs, Staking, and In-Kind Creations and Redemptions. The Task Force “will work” with the SEC staff to clarify the SEC’s approach to approving or denying proposed rule changes to list new types of crypto exchange-traded products. To date, the SEC has taken a cautious approach to crypto exchange-traded funds (ETFs), or investments focused on cryptocurrency assets, approving only spot Bitcoin and Ethereum ETFs, despite applications to create ETFs for other crypto assets (e.g., Ripple’s XRP). Existing crypto ETFs also cannot currently engage in staking. Staking typically involves committing crypto tokens to a blockchain network to earn rewards, sometimes requiring them to be locked for a period. ETFs also cannot engage in in-kind redemptions. Allowing staking could enable ETFs to generate additional yield for investors by participating in network validation, aligning ETF returns more closely with the underlying assets’ earning potential. Permitting in-kind creations and redemptions — where ETF shares are exchanged directly for crypto assets rather than cash — could also reduce transaction costs, improve tax efficiency, and minimize tracking errors. Clarifying the regulatory path forward on these issues has the potential to further expand investment opportunities and provide ETF investors with more cost-effective and capital-efficient access to crypto assets.
Addressing Crypto Lending and Staking Programs. The Task Force “plan[s] to work” to help address how crypto lending and staking programs can be structured consistent with applicable law. Currently, these programs face substantial regulatory uncertainty, particularly regarding whether they involve securities offerings subject to SEC registration and investor protection requirements. The SEC has pursued enforcement actions against certain crypto lending platforms, but clear guidance on compliant structures remains lacking. Establishing clear guidelines for crypto lending and staking programs could provide investors with greater confidence in accessing staking rewards while ensuring these services operate transparently and in compliance with regulatory protections.
Clarifying Custody Solutions for Investment Advisers. The Task Force “will work” with investment advisers to provide a framework within which advisers can safely, legally, and practically custody client assets themselves or with a third party. Currently, investment advisers face challenges in complying with the “Custody Rule” (Rule 206(4)-2 under the Investment Advisers Act of 1940), which requires client funds and securities to be held by a “qualified custodian.” This is because substantial ambiguity remains about whether any crypto custodians meet this standard and whether advisers can safely custody crypto assets themselves. Establishing a clear framework that provides advisers with a practical and legally compliant pathway to custody client assets has the potential to significantly reduce regulatory uncertainty for advisers to both individuals and investment funds and to help expand institutional participation in crypto-asset markets.
Updating Special Purpose Broker-Dealer Relief. The Task Force “will explore” updating its special-purpose broker-dealer framework to potentially allow broker-dealers to custody crypto asset securities alongside crypto assets that are not securities. Current securities laws effectively prohibit broker-dealers from facilitating transactions in many crypto assets, substantially limiting their ability to offer comprehensive crypto-related services. The SEC’s prior relief for special-purpose broker-dealers was very narrowly tailored and imposed operational constraints on broker-dealers, making it unworkable for most. Expanding the framework to permit custody of both security and non-security crypto assets would be a helpful first step in broadening its appeal.
If the Task Force can accomplish even half of these objectives, it bodes well for the larger crypto community.
There may also be reason to hope for such progress. As noted by Commissioner Peirce, the SEC recently rescinded “SAB 121,” which stands for Staff Accounting Bulletin No. 121. SAB 121 was issued by the SEC’s Office of the Chief Accountant and Division of Corporation Finance in March 2022, and it required financial institutions that custodied crypto assets to record them as both assets and liabilities on their balance sheets. As a result, banks and other financial institutions faced significantly higher capital requirements when holding crypto assets compared to more traditional assets, making crypto custody prohibitively expensive for many. Thus, SAB 121’s rescission simultaneously removes a major regulatory obstacle to providing crypto custody and marks a meaningful shift in the SEC’s regulatory approach.
Conclusion
While many questions remain, the regulatory developments above appear to signal a significant shift in the treatment of crypto assets by the SEC. In the crypto space, the relaxation of regulatory restrictions combined with new technological advancements often drives growth for the most innovative players, which can expand both market share and valuable intellectual property rights. Market participants should remain proactive in monitoring developments and position themselves to capitalize on the new opportunities that will emerge.
Is Your Nonprofit Slashing Benefits to Offset Federal Funding Cuts?
Use Caution When Responding to the Recent Executive Orders
On February 6, 2025, the Trump administration (the Administration) issued an executive order (the Review Order) directing the heads of Federal executive departments and agencies (Agencies) to review all funding the Agencies provide to “Nongovernmental Organizations.”[1] The Agencies were further ordered to align all future funding decisions with the interests of the United States and the Administration’s goals and priorities.
The Administration’s issuance of the Review Order, when coupled with an earlier executive order (the Funding Order) freezing federal spending on grants, loans, and other initiatives,[2] has shaken the nonprofit community by threatening the funding of nonprofit organizations both in the United States and around the world. Nonprofit organizations are now weighing their options for managing the potential impact the Funding Order and the Review Order may have on their operations and finances.
While some nonprofit organizations may turn to layoffs or furloughs as a means of cost-cutting,[3] others may consider reducing employer contributions to their employee benefit plans to stay afloat while the funding fight plays out. Like for-profit employers, nonprofit employers recognize the important role generous benefits play in hiring and retaining talented employees, and understand that reducing benefits mid-year is not a decision to be taken lightly. This article discusses some of the compliance challenges nonprofits may face if they elect to do so.
Health Care Plans
Nonprofit employers (like other employers) typically set the employee contribution levels for their health and welfare plans for the full plan year and don’t adjust those levels until the next year. As a result, if an employer wants to increase employee contributions during the plan year, it must make such changes carefully.
Plan Amendments and Employee Notifications:
A nonprofit employer should work with its third-party administrator and/or legal counsel to amend the terms of its health plan documents to implement any planned increase in employee contributions. In determining the effective date of any changes, the employer should consider both when it must notify its employees of the change and how best to do so.
SPDs and SMMs. Under ERISA, employers must provide retirement and welfare benefit plan participants[4] with a “summary plan description” (SPD) describing the terms of their plans in a way that is straightforward and understandable to participants. If an employer amends an ERISA benefit plan in a way that materially modifies the SPD, it must provide plan participants with a “summary of material modifications” (SMM) describing the change. Generally, an SMM must be provided to plan participants within 210 days after the end of the plan year in which the employer adopted the change.
Different timing rules apply, however, if the employer amends a health or welfare plan to materially reduce the plan’s “covered services or benefits.” A material reduction in covered services or benefits may occur due to increases in “premiums, deductibles, coinsurance, copayments, or other amounts to be paid by a participant or beneficiary.”[5] When an employer amends a health or welfare plan to materially reduce the plan’s covered services or benefits, it must provide plan participants with an SMM describing the change within 60 days after adopting that change.
SBCs. Sometimes, an employer may also be required to provide participants and beneficiaries with advance notice of a change to the employer’s health plan. Under the Patient Protection and Affordable Care Act (the ACA), an employer must provide its employees with a “Summary of Benefits and Coverage” (an SBC), an easy-to-understand summary of each coverage offered under the employer’s health plan. If a material modification to a health plan affects the content of the plan’s SBC, the employer must provide participants and beneficiaries with advance notice of the change – at least 60 days before the date on which the change becomes effective.
Cafeteria Plan Elections:
Even if an increase in employee premium contributions doesn’t affect a health plan’s SBC, from a practical standpoint, an employer will likely want to give plan participants advance notice of any premium increase. This will allow the employer to provide context for the increase, and if permitted under the employer’s Code §125 or “cafeteria” plan, to communicate to employees their ability to make new benefit elections under that plan.
A cafeteria plan allows employees to purchase (or pay the cost of) certain welfare benefits (such as premiums for group health benefits, group life and AD&D coverage, dependent care assistance, etc.) on a pre-tax basis. To receive that benefit, however, employee elections must be made during open enrollment (before the beginning of the applicable plan year) and are generally irrevocable for the entire year.
Employees may be permitted to change their elections, however, if they experience certain “change in status” events, such as marriage, birth/adoption of a child, etc. They may also be permitted to change prior elections because of a “significant” change in cost or coverage.[6] Whether a change in cost or coverage is significant is based on the relevant facts and circumstances, including the relative impact on the employee population, prior cost increases, etc. If increasing employee health care premium contributions is deemed “significant,” employees must be given the opportunity to change their prior health care elections.
Potential ACA Penalties:
If employees are permitted to change their health care elections due to an increase in their health care premium contributions, they may elect to drop a nonprofit employer’s health care coverage entirely. This could lead to unintended consequences for the employer. For instance, if after dropping the employer’s health care coverage, the employee then obtains alternate coverage on a state ACA marketplace and qualifies for a premium subsidy (because the employer’s coverage is now deemed to be unaffordable), the employer could be subject to ACA penalties.
Tax-Qualified Retirement Plans
Code §401(k) and §403(b) Plans:
A nonprofit employer may elect to offer its employees access to a Code §401(k) plan, a §403(b) plan, or (in some cases) both, to allow them to save for their retirements.[7] Nonprofits may provide employer nonelective or matching contributions as an additional benefit to their employees. If, as a cost-cutting measure, a nonprofit wishes to reduce its employer contributions to such a plan, it should look first to the plan’s terms.
Discretionary Contributions. If the plan grants the employer discretion to determine whether nonelective/matching contributions will be made each year, a plan amendment won’t be needed. The employer can simply reduce – or suspend entirely – its contributions going forward. (Note that any such change would need to be made prospectively.)
Because no plan amendment is required, technically, the employer would not be obligated to notify employees of the change. However, open communication with employees about the reduction/suspension is probably the better option, as it will allow the employer to explain the rationale for the change. Employees, for their parts, may want to adjust their own elective deferrals because of the reduction/suspension of employer contributions.
Fixed Rate of Contributions. If the plan specifies the rate of employer nonelective or matching contributions, the employer will need to amend the plan to implement a reduction/suspension of those contributions.
Advance notice of the amendment isn’t required in this case, but the employer will be obligated to provide plan participants with an SMM. While the SMM isn’t due until 210 days after the end of the plan year in which the amendment is adopted, again, a nonprofit employer should consider whether communicating the change sooner rather than later (by providing the SMM to participants as soon as possible or by other means) makes sense under the circumstances.
“Safe Harbor” Plans. A “safe harbor” §401(k) or §403(b) plan will be deemed to pass certain nondiscrimination testing requirements, if the sponsoring employer satisfies various contribution and participant notice requirements.
If an employer makes “safe harbor” matching contributions on behalf of participants, it may amend its plan to reduce/suspend those contributions mid-year if:
The employer is “operating at an economic loss” during the plan year; or
For any reason, if the “safe harbor” notice provided annually to plan participants includes a statement allowing the employer to reduce or suspend the “safe harbor” matching contributions during the year.
The plan amendment may take effect no earlier than 30 days after the employer provides employees with a supplemental “safe harbor” notice describing the reduction/suspension of employer contributions.
Employers that use a pre-approved plan format should contact their plan vendors for help in preparing the needed amendment (working with their legal counsel as needed) and in coordinating the amendment’s effective date with the distribution of the supplemental “safe harbor” notice.
An employer that makes “safe harbor” nonelective contributions on behalf of plan participants may also amend its plan to reduce or suspend those contributions. While such employers are generally no longer required to provide an annual safe harbor notice (per the Setting Every Community Up for Retirement Enhancement (SECURE) Act), employers should still consider providing employees with timely notice of the change.
SMMs Required. Even if an employer must notify plan participants in advance of the reduction/suspension of employer “safe harbor” contributions (through the provision of a supplemental “safe harbor” notice), the employer will also need to provide participants with an SMM describing the change within the timeframe discussed above.
Non-Qualified Deferred Compensation Plans
Code §457(b) and §457(f) Plans:
A tax-exempt nongovernmental nonprofit[8] may establish a Code §457(b) plan to permit a select group of its highly-compensated or management employees to set aside additional funds towards their retirement (in excess of the amounts contributed to a Code §401(k) or §403(b) plan). Nonprofit employers may also make contributions on behalf of Code §457(b) plan participants.
In order to defer immediate taxes on those employer and employee contributions, a Code §457(b) plan must meet certain requirements, such as limits on annual contributions (combined between employee and employer contributions), timing of distributions, etc. Nonqualified deferred compensation plans that do not meet the requirements of Code §457(b) (typically because total contributions to the plan exceeds the annual contribution limit) are classified as Code §457(f) plans. (Together, this article refers to such plans as “457 Plans.”)
Amendment Needed? Like §401(k) and §403(b) plans, whether a 457 Plan must be amended to reduce/suspend the employer’s rate of contributions (if any) will depend on whether the plan documents give the employer discretion to determine its contributions each year, or whether such language is baked into the plan document. If a 457 Plan grants the employer total discretion to make contributions, no amendment will be needed. If the 457 Plan contains language describing the employer’s level of contributions, however, the 457 Plan will need to be amended if the employer wishes to reduce/suspend employer contributions.
No SMM Needed. Even if an amendment is needed (because the 457 Plan document specifies that the nonprofit employer will make a particular level of employer contributions), the employer is not required to provide 457 Plan participants with an SMM. Because participation in 457 Plans is limited to a small group of (at least presumably) financially-sophisticated employees, 457 Plans are considered “top-hat” plans. Top-hat plans are not subject to ERISA’s disclosure rules,[9] including its requirement to provide an SPD to participants or to update that SPD with an SMM any time the plan is materially modified.
Even so, given that participants in the 457 Plan will likely include the nonprofit’s senior executives and staff, a nonprofit amending its 457 Plans to reduce/suspend employer contributions will likely wish to be open with participants about the changes to its contributions and the rationale behind those changes.
Benefits in Employment Agreements. A nonprofit employer’s ability to amend a 457 Plan may be limited if the grant of benefits under the 457 Plan is only documented in an eligible participant’s employment agreement.[10] In that case, any amendment to the employer’s obligation to contribute to the arrangement will be subject to the terms of the employment agreement, and, as a result, may be subject to the employee’s approval.
Code §409A Issues. Code §457(b) plans are exempt from the requirements of Code §409A, while Code §457(f) plans) are not. Code §409A imposes stringent rules on both the timing of payment and changes to the timing of payment under nonqualified deferred compensation arrangements.[11] Failure to meet Code §409A’s requirements can result in significant penalties to the employee (and result in information reporting failures for the employer). While the reduction/suspension of employer contributions to a Code §457(f) plan probably won’t implicate Code §409A, a nonprofit employer should consult with its tax advisor or legal counsel before making any changes to such plans.
FOOTNOTES
[1] The Review Order doesn’t specifically define what a “Nongovernmental Organization” is. However, given the broad scope of the Review Order, it seems reasonable to assume the term includes any nonprofit organization accepting federal funds.
[2] The Funding Order was challenged in Federal court by Democratic Attorneys General in 22 states and the District of Columbia. Although the District Court hearing that challenge found that a “broad categorical and sweeping freeze of federal funds” was “likely unconstitutional,” the fight to force the Administration to resume payments for federal programs is ongoing.
[3] Nonprofits considering layoffs or furloughs as a means of saving funds should review our prior article about the impact of employer furloughs on employee benefits. While written at the beginning of the COVID-19 pandemic, the article provides helpful guidance to nonprofits navigating the potential effects a furlough or layoff may have on their workforce’s benefits. Be aware, however, that the COVID-19 relief programs mentioned in that article no longer apply.
[4] Beneficiaries receiving benefits under the plan are also entitled to receive an SPD.
[5] See 29 CFR §2520.104b-3(d)(3).
[6] See 26 CFR §1.125-4(f).
[7] While some nonprofits may offer defined benefit pension plans to their employees, this is not as common as in the past. As a result, we have not discussed changes to such plans in this article. However, additional information about such changes can be found here.
[8] For clarity, this article discusses the rules applicable to Code §457(b) and §457(f) plans maintained by non-governmental, tax-exempt nonprofit organizations. Different rules may apply to Code §457(b) plans maintained by governmental entities.
[9] They are, however, subject to certain other provisions of ERISA, such as ERISA’s claims and appeals procedures.
[10] This happens occasionally, especially where only a single employee is receiving a 457 Plan benefit. The better practice is to mention the 457 Plan in the employee’s employment agreement, while documenting the 457 Plan arrangement separately.
[11] A discussion of the parameters of Code §409A is outside the scope of this article. Consider yourself lucky.
Mistake No. 8 of the Top 10 Horrible, No-Good Mistakes Construction Lawyers Make: Know the Benefits and Perils of a Privately Administered Arbitration
I have practiced law for 40 years with the vast majority as a “construction” lawyer. I have seen great… and bad… construction lawyering, both when representing a party and when serving over 300 times as a mediator or arbitrator in construction disputes. I have made my share of mistakes and learned from my mistakes. I was lucky enough to have great construction lawyer mentors to lean on and learn from, so I try to be a good mentor to young construction lawyers. Becoming a great and successful construction lawyer is challenging, but the rewards are many. The following is No. 8 of the top 10 mistakes I have seen construction lawyers make, and yes, I have been guilty of making this same mistake.
Most (but not all) commercial construction contracts contain binding arbitration clauses. Whether the contract is between an owner and architect/designer, an owner and prime contractor, or a subcontractor and prime contractor, the decision to arbitrate or litigate a dispute is always negotiable. You can refer back to one of my previous blog posts in this series discussing the pros and cons of binding arbitration vs. litigating in court. But when parties have decided to arbitrate a dispute, the next question is what rules will apply and how will the arbitration be administered?
Most arbitration clauses (especially those in the standard AIA form set of construction project documents) specify that the American Arbitration Association (AAA) will “administer” the arbitration and that the construction rules of the AAA will apply (the “AAA Rules”). Per the AAA Rules, a party filing an arbitration pays a filing fee to the AAA, the amount of which is based on the amount of the claim. For example, the total non-refundable fee (with few exceptions) for a claim (or counterclaim) from $500,000 to $1 million is $12,675. A claim from $1 million to $10 million is $17,450. There are other AAA fees to pay as the process continues. The other primary costs are the compensation (normally hourly) of the selected arbitrator (or panel).
There are many experienced construction lawyers who are unhappy with the administrative services provided by the AAA (I am not one of them) when taking into consideration the amounts charged by the AAA to the clients. Their arguments are as follows: “I know who the good and bad arbitrators in my area are. My clients do not need to pay the huge AAA filing fees to just get a list of potential arbitrators. And once chosen, a good arbitrator takes over the administration of the arbitration and all the AAA case manager does is set up calls (when the arbitrator does not do so), collects the estimated arbitrator fees from the parties, sends out notices and pays the arbitrator.”
Because of the arguments above, and other concerns, there is a growing trend for parties and their construction lawyers, even with an arbitration clause that calls for AAA administration, to completely “bypass” the AAA and have the arbitration administered “privately.” Over the past five years, I would estimate that 33% of the arbitrations for which I have served as an arbitrator (including on a panel of 3 arbitrator) over the past 3 years have been privately administered. What this means is that the parties agree to amend the arbitration clause; enter into a private arbitration agreement (which may call for portions of the AAA Rules to apply); and agree on an arbitrator(s). There can also be an agreement to a private arbitration without a pre-existing arbitration clause. While the arbitrator’s rates will normally be the same as the rates charged by the AAA, the obvious savings to the clients is that the AAA’s initial filing fees and other charges are avoided.
On first blush, especially for large claims and counterclaims, this may look like a win-win for the clients. However, before you go off and recommend this to your clients, you better be fully aware of the risks and issues that can arise.
Avoid issues by having an agreed private arbitration agreement.
If the arbitration clause calls for AAA Rules, and the parties agree to private arbitration, there should always be a carefully well-drafted private arbitration agreement signed by the clients. It should, among other items, set forth what rules will be applicable; what pre-hearing discovery will be allowed; identify the agreed arbitrator (and at what hourly rate); outline the requirement to split the arbitrator compensation; and determine a process if, for whatever reason, the existing arbitrator must withdraw prior to the hearings. I do not agree to serve as a private arbitrator without such an agreement in place (which is where I obtain my authority to issue a binding award). Also, do not forget that such an agreement is a “contract,” and there can be clauses included that were not in the original contract, such as a prevailing party attorneys’ fees/arbitration expenses clause or even an agreement for the most convenient hearing location (not the location of the project). Last year I served as a private arbitrator on a project located in Alabama with counsel in Atlanta, Tennessee and Colorado, and the hearings were in my firm’s offices in Nashville.
Involve your client in the arbitrator selection.
In the AAA process for selecting an arbitrator, the AAA sends a list of potential arbitrators to both counsel, who then send in a confidential list to the case manager with names crossed off and an order of preference (much like jury selection). The case manager then reviews the list and appoints the arbitrator (subject to conflicts). In a private arbitration, both sides must agree on an arbitrator. In most instances, the client will not have any idea of any potential arbitrator, so the client will be heavily relying on your advice, albeit tempered by the admonition that there cannot be any guaranties on how an arbitrator might rule. Another previous blog post in this series discussed the issues of not vetting potential arbitrators. The point here is to involve your client and explain who has been suggested as the private arbitrator. Because if the agreed upon arbitrator rules against your client, despite your fantastic efforts, a losing, disgruntled client may ask (when presented with your final post-hearing invoice), “I don’t recall agreeing to this arbitrator: why did you recommend we use that guy? You told me he would call balls and strikes, and he did not.”
Managing post-arbitrator selection conflicts can be tricky.
While any potential private arbitrator will disclose any conflicts (same process as the AAA), arbitrator conflicts can come up after selection. An example would be the later disclosure of expert witnesses or fact witnesses. If that arbitrator uses or has used one side’s designated expert, there should be a disclosure. The difference is that when the AAA administers the case, if a disclosure is necessary, the arbitrator discloses to the case manager who then deals only with counsel. Under the AAA Rules, the AAA has the sole discretion to rule on whether the arbitrator can continue to serve. In a private arbitration, the arbitrator must manage the conflict directly with counsel. One solution is to designate, in the private arbitration agreement, another qualified arbitrator who is authorized by the parties to rule on any conflict.
Handle party nonpayment issues.
When the AAA administers a case, the arbitrator provides an estimate of his total compensation/expenses, and the AAA bills each side one-half of the estimate. The payments go into the AAA “bank.” The arbitrator sends invoices to the AAA, and the AAA pays the arbitrator from the deposits. The difference is if one side does not pay its share. If a AAA administered arbitration, the case manager manages it internally and does not inform the arbitrator which side has not paid. If the payment is not timely made, the arbitrator is then given the option of proceeding with the hearings or putting the arbitration on hold. The AAA does give the paying party the option to pay the other side’s portion (but most of the time this does not happen). In a private arbitration, the arbitrator is the “bank.” The pre-payments are made to her, and obviously she knows which side has or has not paid.
The bottom line is not making the mistake of allowing the “benefit” of a client not having to pay the AAA fees with the real and material issues that can occur with a private arbitration. Having good, experienced counsel on both sides helps, as well as knowing that many of the identified issues can be anticipated in a well-drafted private arbitration agreement.
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