Michigan’s Earned Sick Time Act: What Employers Should Know

Michigan's Earned Sick Time Act: What Employers Should Know

As of today, Michigan’s Earned Sick Time Act (ESTA) is slated to take effect this Friday, February 21, 2025. Guidance on the Act as written is available on the Michigan Department of Labor and Economic Opportunity Wage and Hour Division’s website or in Varnum’s recent advisory on Common Questions from Employers regarding ESTA.

However, both the Michigan House of Representatives and the Michigan Senate have proposed amendments to ESTA that, if enacted, would significantly revise the Act. Both sets of proposed amendments differ substantially from each other. The provisions of these competing sets of legislative amendments have been summarized in a recent advisory. So far, the Michigan House has passed its proposed amendments and sent them to the Michigan Senate for consideration. The Michigan Senate has held hearings on its own set of proposed amendments but has not passed its amendments – or the House’s proposed amendments – as of yet.

Governor Gretchen Whitmer has urged both House and Senate leaders to reach a compromise on the proposed changes prior to ESTA’s effective date of February 21. She has also called for a delay in the Act’s implementation date until July 1, 2025, to give the legislature time to work out a compromise and Michigan businesses time to comply. Both House Speaker Matt Hall and Senate Majority Leader Winnie Brinks have expressed a commitment to reaching a compromise by the February 21 deadline, but a compromise on the ESTA amendments may not be possible by the end of this week due to the significant differences between the competing legislative proposals.

Given this present uncertainty, employers should be prepared to comply with the current form of ESTA on Friday, February 21, 2025, but should refrain from formally rolling out any changes to the policy prior to Friday in the event the Michigan legislature does act before that date.

Varnum’s Labor and Employment Team will continue to monitor ESTA as lawmakers attempt to reach a compromise agreement.  

Cafeteria Plan, Meet 401(k) Plan

IRS Allows New 401(k) Contributions through Cafeteria Plans

Varnum Viewpoints

The IRS’s recent ruling offers increased flexibility for employers in structuring 401(k) contributions within cafeteria plans, benefiting both employers and employees.

  • More Employee Benefit Choices: Employers can now make discretionary contributions more ways, including combining some 401(k) and welfare benefit choices.
  • Opportunities for Competitive Benefits: The ruling enables employers to design more tailored, competitive benefits packages, enhancing employee satisfaction and retention.

The IRS has surprised employers with a new interpretation of how 401(k) contributions can be made in connection with a cafeteria plan. Many employers offer cafeteria plans, allowing employees to choose from various health and welfare benefits or taxable compensation. Historically, the IRS’s “contingent benefit rule” has prevented employers from offering a similar choice to employees regarding 401(k) plan contributions, because the rule prohibited other benefits from being contingent on 401(k) plan benefit elections. However, the IRS’s new ruling now allows an employer to make a discretionary contribution that employees may allocate to different plans, including a 401(k) plan, without the contribution being included in the employee’s taxable income.

What Did the Proposed Plan Look Like?

An employer asked the IRS for its ruling on several proposed plan amendments, which would change the discretionary contributions to the 401(k) plan without changing the safe harbor non-elective contribution. Specifically:

  • The proposed amendment to the 401(k) plan allowed eligible employees to choose where to receive an annual, irrevocable employer contribution — in the employer’s 401(k) plan, the employer’s Health Reimbursement Account (HRA), the employer’s Educational Assistance Program (EAP) or the employee’s Health Savings Account (HSA). If no employee election was made during open enrollment, the contribution would be made to the 401(k) plan. Employees could not receive the contribution as cash or a taxable benefit.
  • An amendment to the EAP proposed allowing student loan payments to be made directly from the EAP to the lender if the employee allocated the employer contribution to the EAP.
  • The proposed amendment also allowed employees to allocate the employer contribution to the EAP or as an employee’s HSA contribution but prohibited receiving other benefits from the EAP or making pre-tax payroll contributions to the HSA, until after March 15 of the following year. This timing would prevent contributions greater than the limits set under the Code.

How Did the IRS Respond?

The IRS provided several helpful rulings on the changes proposed by the employer. Specifically, the IRS ruled that:

  • The proposed 401(k) plan amendment would not cause the plan to violate the contingent benefit rule (described above).
  • The employer’s contribution would not be considered an employee pre-tax contribution, which would be subject to the lower elective deferral limit, rather than the much larger annual additions limit.
  • The allocation of the employer contribution to the HSA would be excludable from the employees’ taxable income.
  • The EAP amendment would not affect the treatment of tuition or loan payments made under the EAP as excludable from the employee’s taxable income.
  • The employee’s ability to allocate the contribution between different programs would not prevent the EAP from qualifying as an EAP under section 127 of the federal tax code.

IRS “private letter rulings,” like this one, are technically directed only at the requesting employer and cannot officially be followed as precedent. However, because they often guide practitioners on the IRS’s perspective on issues, this ruling increases flexibility for employers designing competitive benefits packages. If you are interested in considering plan design options using this increased flexibility, please contact your Varnum Employee Benefits attorney.

Insurtech in 2025: Opportunity and Risk

Insurtech in 2025: Opportunity and Risk

The explosion in artificial intelligence (AI) capability and applications has increased the potential for industry disruptions. One industry experiencing recent material disruption is about as traditional as it gets: insurance. While some level of disruption in the insurance industry is nothing new, AI has been accelerating more significant changes to industry fundamentals. This is the first advisory in a series exploring the legal risks and strategies surrounding disruptive insurance technologies, particularly those leveraging AI, known as Insurtech.

What is Insurtech?

Insurtech is a broad term that encompasses every stage of the insurance lifecycle. Cutting-edge technology can be instrumental in advertising, lead generation, sales, underwriting, claims processing and fraud detection, among others.  Generative AI can assist in client management and retention. Insurtech can augment traditional forms of insurance such as car and health insurance, and facilitate less traditional forms of insurance, such as parametric insurance or microinsurance at scale.  

Legal and Regulatory Risks of Insurtech

As Insurtech continues to evolve, designers, providers and deployers must be aware of the legal and regulatory risks inherent in the use of Insurtech at all stages. These risks are particularly heightened in the insurance world, where vendors and carriers process an enormous amount of personal information in the course of decision-making that impacts individuals’ rights, from advertising to product pricing to coverage decisions. 

The heavily regulated nature of the traditional industry is also enhanced in the Insurtech context, given overlapping regulatory interests in regulating new technology applications. These additional layers of oversight – which in traditional applications may not be as much of a primary concern – include the Federal Trade Commission, states’ Attorneys’ General and in some jurisdictions, state-level privacy regulators.     

Building Compliance for Insurtech Solutions

Designing, providing and deploying Insurtech solutions requires a multifaceted, customized approach to position agents, vendors, carriers and indeed any entity in the insurance stack for compliance. Taking early action to build appropriate governance for your Insurtech product or application is critical to building a defensive regulatory position. For entities that have an eye on raising capital, engaging in mergers or acquisitions, or other collaborative marketplace activity, such governance will minimize friction that can impede success. 

Additionally, consumers are increasingly attentive to data privacy and AI governance standards. Incorporating proper data privacy and AI governance regimes from day one is not only a forward-thinking business decision to mitigate risk and facilitate success; it is also a market imperative. 

Looking Ahead: Risks and Opportunities in 2025

Over the next few months, we will take a closer look into more discrete risks and opportunities that Insurtech providers and deployers need to keep in mind throughout 2025. Follow along as we explore this exciting area that in recent years has demonstrated enormous potential for continued growth.

Contact a member of Varnum’s Data Privacy and Cybersecurity Practice Team to discuss how your business can ensure compliance.

Registration for H-1B Lottery

Update February 14, 2025: U.S. Citizenship and Immigration Services (USCIS) announced the initial registration period for the fiscal year 2026 H-1B cap will open at noon Eastern on March 7, 2025, and run through noon Eastern on March 24, 2025. For any questions, please contact your Varnum immigration attorney.

U.S. Citizenship and Immigration Services (USCIS) has not yet announced dates, but the annual electronic registration process for H-1B cap-subject petitions should open in March 2025. The USCIS registration fee is now $215.  USCIS will select by random lottery process 85,000 petitions for the H-1B cap (65,000 for the general category and 20,000 for the U.S. advanced degree category). Applicants selected should be notified by March 31 and will have until June 30 to submit the H-1B petition.

Varnum’s immigration attorneys have started to collect information to prepare for the March registration period. Employers with employees on F-1 Optional Practical Training (OPT) or candidates requiring cap-subject H-1Bs should contact us to prepare for the registration.

Navigating the Tariff Landscape: Updates on U.S. Imports from Canada, Mexico and China

Navigating the Tariff Landscape: Updates on U.S. Imports from Canada, Mexico and China

On February 1, 2025, President Trump signed orders imposing a 25% tariff on imports from Canada and Mexico and a 10% tariff on imports from China. The tariffs are set to take effect on Tuesday, February 4.

Following a discussion with Mexico’s President Claudia Sheinbaum on Monday, February 3, President Trump announced a 30-day pause on the tariffs for Mexico. Canadian Prime Minister Justin Trudeau and President Trump announced that they had reached an agreement for a similar 30-day pause later that evening.

History

A president can raise tariffs without congressional approval in certain circumstances, such as if there is a threat to national security, a war or emergency, harm or potential harm to a U.S. industry or unfair trade practices by a foreign country. President Trump is using the International Emergency Economic Powers Act to impose these tariffs. Tariffs saw their first major resurgence since the 1930s during President Trump’s 2017-2020 term, and President Biden continued to use tariffs during his administration.

Tariffs are generally imposed as a percentage of a good’s value or as a fixed amount on a specific item when it crosses an international border. The tariff is paid by the importer. The increase in cost may cause a variety of effects such as:

  1. Importing companies finding alternate sources for the goods,
  2. Importing companies passing the price increase on to consumers,
  3. Exporting companies lowering the product price to maintain the importer’s business, or,
  4. Exporting companies relocating to other jurisdictions to avoid tariffs altogether.

Updated Tariffs

Mexico Tariffs

Following the 30-day pause referenced above, the new tariff will be at a rate of 25% on the value of the good, in addition to any other import fees. The order indicates that tariffs will cover all imported merchandise.

Canada Tariffs

Following the 30-day pause referenced above, the new tariff will be at a rate of 25% on the value of the good, in addition to any other import. The order indicates that tariffs will cover all imported merchandise other than “energy or energy resources” which will be subject to a 10% rate instead.

“Energy or energy resources” includes crude oil, natural gas, lease condensates, refined petroleum products, uranium, coal and critical minerals among other energy sources.

China Tariffs

The new tariff will be 10% on the value of the good, in addition to any other import fees. The order indicates that tariffs will cover all imported merchandise from China.

Client Guidance

The increased costs from tariffs may be challenging for many businesses and the following actions serve as a baseline for navigating the current landscape as you navigate these new tariffs.

  • Notify customers if increased costs of tariffs will be passed down to them and inform them that any tariff-related price hikes will be reflected on invoices. Failure to pay may result in supply disruption.
  • Review contracts with suppliers and customers to determine how the cost of the new tariffs will be allocated. Look for price-adjustment clauses, force majeure language or other relevant terms.
  • Begin negotiations with suppliers or explore sourcing options from different countries.
  • Importers should review import compliance policies.

Varnum’s attorneys continue to monitor these developments. If you have questions regarding tariffs or would like further guidance, please contact a member of Varnum’s Corporate or Tax Teams.

 

Geolocation Data in AI: Lessons from Niantic’s “Pokémon Go”

Geolocation Data in AI: Lessons from Niantic's "Pokémon Go"

The use of geolocation data in AI development is rapidly evolving, with its applications expanding across various industries. In this advisory, members of Varnum’s Data Privacy and Cybersecurity team examine a key AI use case: Niantic’s “Pokémon Go”. This case highlights critical considerations that businesses must address as they leverage vast amounts of data for new applications. These considerations include the protection of children’s data and the compliance requirements necessary to safeguard sensitive information.

What is “Pokémon Go”?

“Pokémon Go”, launched in 2016 by Niantic, is an augmented reality (AR) mobile game that overlays digital creatures on real-world locations. Players interact with the game by traveling to specific geolocated spots to capture virtual Pokémon, participate in battles and explore their surroundings. With over one billion downloads globally, “Pokémon Go” has gathered vast amounts of geolocation data as users traverse real-world environments.

What Did Niantic Do with This Data?

Recently, Niantic revealed that it has been leveraging data collected from “Pokémon Go” to develop a large-scale geospatial AI model. This model uses anonymized and aggregated location data to better understand geographic patterns and improve AR experiences. According to Niantic, the model not only aids in enhancing its existing products but also paves the way for broader applications in geospatial intelligence, urban planning and beyond. Niantic’s efforts underscore the value of real-world data in building sophisticated AI systems, potentially revolutionizing industries ranging from gaming to infrastructure.

Why Is This Valuable for Companies?

The integration of real-world geolocation data into AI systems offers significant advantages:

  1. Enhanced AI Models: Access to extensive geospatial data allows companies to train AI systems that better understand spatial relationships and human movement patterns.
  2. Improved Customer Experiences: Applications powered by such AI models can offer personalized and context-aware services, leading to increased user engagement and satisfaction.
  3. New Revenue Streams: Companies can monetize insights derived from location data across industries such as retail, real estate and logistics.

Special Considerations for Children’s Data

The ability to use data collected from a globally popular app highlights the potential for gaming companies and other businesses to pivot into data-driven AI innovation. However, leveraging such data raises critical privacy considerations. For example, when leveraging a mobile gaming application, companies should be cognizant of the fact that the game may be largely used by younger audiences, increasing the likelihood that the company will be collecting children’s data and be subject to regulations such as the Children’s Online Privacy Protection Act (COPPA). As such, companies must address several key issues to ensure compliance with privacy regulations and maintain public trust:

  1. Transparency: Companies should clearly disclose how geolocation data is collected, processed and used. For example, concise and accessible privacy policies tailored to both parents and children can help end users better understand how the company is leveraging the data collected through the use of the app and foster better understanding and trust.
  2. Consent: In many cases, companies should obtain explicit parental consent before collecting or processing data from children. This step is crucial to comply with regulations in the United States and similar laws globally. For example, COPPA not only mandates that a company obtain verifiable parental consent before collecting personal information from minors, but also requires that the parent is given the opportunity to prohibit the company from disclosing that information to third parties (unless disclosure is integral to the site or service, in which case, this must be made clear to parents).
  3. Opt-Out Mechanisms: Companies should give parents the opportunity to prevent further use or online collection of a child’s personal information. Providing users, especially parents, with the ability to opt out of data collection or usage for AI development ensures greater control over personal information.
  4. Protections and Guardrails: Companies should implement safeguards to prevent misuse or unauthorized access to children’s data. This includes anonymizing datasets, restricting data sharing and adhering to data minimization principles. Companies should also have mechanisms in place to allow parents access to their child’s personal information to review and/or have the information deleted.

As companies increasingly leverage tracking technologies, such as geolocation data or online behavior, to enhance their AI models, it is imperative to address privacy concerns proactively. Sensitive data, particularly information related to children, must be handled with care to comply with regulatory requirements and uphold ethical standards.

Niantic’s use of “Pokémon Go” data serves as a compelling example of how innovative applications of real-world data can drive advancements in AI. However, it also emphasizes the need for organizations to prioritize transparency, consent and robust data protection. By doing so, businesses can unlock the potential of cutting-edge technology while safeguarding user trust and meeting their legal obligations.

Varnum’s Data Privacy and Cybersecurity Team is well-equipped to help companies navigate these challenges, ensure compliance with evolving privacy laws and safeguard the rights and safety of younger users.

Unlocking Transparency: New DOL Guidance Clarifies Gag Clause Prohibition Rules Helping Health Plans Secure Their Claims Data

New DOL Guidance on Gag Clause Prohibition Rule

On January 14, 2025, the U.S. Department of Labor (DOL), Health and Human Services (HHS) and Treasury Department jointly issued new guidance in a FAQ format (Guidance) regarding compliance with certain provisions of Title I (No Surprises Act) and Title II (Transparency) of the Consolidated Appropriations Act, 2021. 

This Guidance provides important clarifications on the Gag Clause Prohibition rules that will help group health benefit plans ensure that the federal government’s transparency mandates are complied with and that requests for claims data from health insurance carriers are obeyed.

Background

The Gag Clause Prohibition, enacted under the Consolidated Appropriations Act of 2021 (CAA), includes a set of federal regulations and rules that were designed to promote transparency in the employee benefit and healthcare insurance industries. These regulations prohibit group health benefit plans and health insurance carriers from entering into contracts that restrict access to critical claims data and cost or quality information, or otherwise prevent group health benefit plans or insurance carriers from disclosing such claims data and information to plan participants, beneficiaries, or enrollees; plan sponsors (e.g., employers); or to a plan’s business associate, such as a third-party administrator (TPA) or vendor, consistent with applicable privacy regulations. 

Despite the clear mandates of the Gag Clause Prohibition rules, for the last four years, some health insurance carriers have repeatedly obstructed or refused to adequately comply with the federal transparency mandates. Specifically, some health insurance carriers who own healthcare provider networks and who essentially rent such networks to group health benefit plans have continuously refused to share a complete and accurate set of health claims data either with the plan sponsor or the plan’s business associates. 

Likewise, if a group health benefit plan engaged its own independent TPA with the expectation that they would separately contract with the health insurance carrier who owns the provider network the plan wants access to, the health insurance carrier would refuse to allow the TPA to share a complete and accurate set of health claims data either with the plan sponsor or the plan’s business associates.

In both instances, health insurance carriers would justify their refusal on the basis that their separate “downstream” agreements with their participating provider networks took precedence over the federal Gag Clause Prohibition rules. In essence, they argued their private contractual rights, and confidentiality or data restriction provisions stated therein, allowed them to sidestep the transparency obligations imposed by the federal government.

As a result, group health benefit plans, their sponsors, TPAs and vendors have been advocating for additional guidance or clarification on the federal transparency rules.  Some group health benefit plans and plan sponsors have even initiated lawsuits against carriers who refused to provide the plan and plan sponsor their claims data. See e.g., Trustees of the International Union of Bricklayers and Allied Craftworkers Local 1 Connecticut Health Fund et al v. Elevance, Inc. et al, Docket No. 3:22-cv-01541 (D. Conn. Dec 05, 2022); Owens & Minor, Inc. et al v. Anthem Health Plans of Virginia, Inc., Docket No. 3:23-cv-00115 (E.D. Va. Feb 13, 2023).

Updated Guidance

The new Guidance provides the following clarifications:

  1. All separate “downstream agreements” that restrict a group health benefit plan or health insurance carrier from providing, electronically accessing, or sharing critical claims data and cost or quality information with a plan sponsor, its participants or beneficiaries, or the plan’s business associates are prohibited.
  2. Likewise, owners of provider networks cannot use discretionary language or self-serving contractual provisions (e.g., only allowing de-identified claims data to be shared at “its discretion”) in their agreements with group health benefit plans, providers, TPAs or other service providers which have the practical effect of preventing disclosure of critical claims data, and cost or quality information data, to a plan sponsor or a plan’s business associates, consistent with applicable privacy regulations.
  3. Health insurance carriers and provider networks cannot place any limitation on the “scope, scale or frequency of electronic access to de-identified” claims data when requested as part of an audit or claims review.
  4. Lastly, most group health benefit plans are likely aware of the Gag Clause Prohibition through compliance with the annual attestation requirement. The Guidance makes clear that plan sponsors, when submitting their annual attestation of compliance, can essentially report any other vendor or carrier who refuses to remove a gag clause in any separate “downstream” agreements if the plan sponsor has taken steps to ensure their own compliance, including requesting the gag clause be eliminated.

Action Steps

In light of the new Guidance, group health benefit plans, plan sponsors and plan vendors should consult counsel to assist with obtaining plan claims data and cost or quality information from carriers, healthcare providers, TPAs or others with control over that data.  They should also review their contracts with those entities to help identify and eliminate gag clauses or other restrictive provisions that run afoul of the federal government’s transparency rules.

To the extent any group health benefit plan or plan sponsor receives pushback from a carrier or provider, this new Guidance can be leveraged to challenge the restrictive practices in place and refute any arguments by such insurance carriers and/or providers who may be attempting to sidestep the federal transparency rules. 

If you have any questions on how the new Guidance may affect your business, or if you need assistance in navigating these updates, ensuring compliance and/or enforcing your rights under the Gag Clause Prohibition rules, please contact your Varnum attorney.

SECURE 2.0: Guidance on Roth Catch-Up Contributions

The long-awaited guidance on the provisions of the SECURE 2.0 Act of 2022 (SECURE 2.0) impacting catch-up contributions has been issued and answers questions plan practitioners have been asking. SECURE 2.0 added a requirement that employees who made $145,000 or more in the previous year must designate any catch-up contributions as Roth (after-tax) deferrals.

Plans That Do Not Currently Permit Roth Contributions

The guidance does not require a plan to allow Roth deferrals. However, if the plan does not allow Roth deferrals, the limit on catch-up contributions for those who made $145,000 in the prior year is $0. To pass testing, a highly compensated employee (HCE) who is not subject to Roth catch-up contributions may need to be precluded from making catch-up contributions. This could happen if the top-paid group election is made for the definition of HCE or if a participant is an HCE because the employee is a 5% owner.

Compensation Limit

The guidance specifies that the $145,000 compensation limit is determined based on Federal Insurance Contributions Act wages (FICA wages) for the previous year. This excludes self-employment income, which is not FICA wages. The compensation limit is determined without prorating wages for employees hired midyear. Only wages paid by the common law employer responsible for the employee’s compensation are considered, regardless of whether employers are aggregated under the controlled group rules.

Deemed Roth Elections

After a participant is required to make Roth catch-up contributions, the plan may deem the participant’s pre-tax deferral election to be a Roth deferral election; the plan is not required to obtain a new deferral election. The participant must still be provided the opportunity to change the participant’s deferral election if the participant no longer wants to defer. If a participant makes Roth deferrals during the year equal to the catch-up limit, but before the participant’s deferrals have reached the catch-up limit, the plan may count the amount of the Roth deferrals toward the required amount of Roth catch-up contributions.

Roth Elections for All Participants

If Roth elections are permitted for some participants, they must be permitted for all participants. A plan may not require all catch-up contributions to be Roth contributions. Participants must have a choice between designating deferrals as pre-tax or Roth.

Correction Methods

The guidance provides correction methods for failure to follow the Roth catch-up contribution rules accurately. To follow the correction methods, the plan must have practices and procedures in place to prevent failures, including providing for deemed Roth election at the time catch-up contributions start for affected participants or when deferrals exceed the Code §415(c) limit. The methods and deadlines for correction vary depending on the failure.

Effective Date

For plans that are not collectively bargained, the rules apply for contributions in taxable years that begin more than 6 months after the final regulations are issued. If final regulations are issued before the end of 2025, the rules would apply beginning January 1, 2027. However, plans are permitted to apply these rules to taxable years beginning after December 31, 2023.

For collectively bargained plans, the deadline is extended to the first taxable year beginning more than 6 months after the final regulations are issued or, if later, the first taxable year beginning after the termination of the last collective bargaining agreement related to the plan that is in effect on December 31, 2025, excluding any extensions.

If you have a catch-up contribution failure or questions regarding catch-up contributions, please contact a member of Varnum’s Employee Benefits Team.