Author: Erwin Kratz

Erwin Kratz practices exclusively in the areas of ERISA and employee benefits law, focusing on tax and regulatory matters relating to qualified and nonqualified deferred compensation and welfare benefits.

Supreme Court Obergefell Decision Impacts Employer Welfare Benefit Plans

Today’s Supreme Court decision in Obergefell v. Hodges, requiring all 50 States to license same sex marriages, has two immediate implications for employer-sponsored welfare benefit plans:

1. Do your welfare benefit plan documents define “Spouse”, and if so, how?

If all of your operations are in a state that recognized same sex marriage before today’s ruling, then your welfare benefit plans probably already either do not contain a definition of “Spouse”, or they define “Spouse” by reference to state law. If that is true for you, then you probably do not need to amend your plan documents. You will automatically extend benefits to legally married same sex spouses, just as you have already done, since you operate in a state that recognized same sex marriage before today’s ruling.

However, if you operate in a state that did not recognize same sex marriage before today’s ruling, then your welfare benefit plans might define “Spouse” by reference to one man and one woman. If that is how your plan defines “Spouse”, you ought to discuss with ERISA counsel whether to change that definition.

In addition, even if you maintained an opposite sex definition of “Spouse” for your welfare benefit plans in states that previously recognized same sex marriage, you should revisit this issue in light of today’s ruling.

While welfare benefit plans are not required to offer spousal coverage, and therefore in concept could extend coverage only to a subset of Spouses (opposite sex spouses), this practice is more risky today than it was yesterday. Given the Obergefell holding – that same sex marriage is a fundamental right protected by the 14th Amendment, there are now significant risks associated with offering spousal coverage that is limited to opposite sex people.

Public sector employers cannot maintain such policies because they would be subject to a direct claim of employment discrimination based on the 14th amendment fundamental rights holding in Obergefell. A direct claim such as this in the private employment market would have significant weaknesses, at least in jurisdictions that do not prohibit discrimination on the basis of sexual orientation or preference. The reason? The 14th Amendment does not apply to private actors. However, additional circumstances, such as a disparate impact of such a provision on one sex or the other, could make such a claim viable.

Moreover, employers that maintain the opposite sex definition of “Spouse” will increasingly be out of the mainstream. This may be a good or a bad thing, depending on your market.

The point is, check your plan documents and talk to counsel about the implications of leaving them unchanged vs. changing them.

2. Do you offer Domestic Partner Coverage? If so is it limited to same sex domestic partners? Is it limited to domestic partners in states that did not recognize same sex marriage before today’s ruling?

In recent years many employers offered welfare benefits to same sex domestic partners, but may not have done so for opposite sex domestic partners, on the theory that same sex domestic partners could not get married. Other employers may have limited domestic partner coverage to states that did not recognize same sex marriage, again on the theory that this was only an issue on those states. This rationale has been breaking down as more states recognized same sex marriage, and it is now gone entirely.

You should revisit your decisions regarding domestic partner coverage in light of today’s ruling. Employers that limit domestic partner coverage in one of these ways need to decide whether to :

(a) continue offering coverage only to same sex domestic partners,

(b) extend coverage to all domestic partners (both same sex and opposite sex), or

(c) eliminate domestic partner coverage.

There are serious risks associated with option (a) (continue offering coverage only to same sex domestic partners), for many of the same reasons discussed above, except that now, opposite sex unmarried domestic partners who do not get a benefit offered to same sex domestic partners might challenge those provisions.

Option (b) (extend coverage to all domestic partners) is a legally safer course, though it may have significant financial implications for employers. Extending benefits to same sex unmarried domestic partners was not very costly because not many people took up the offer. Extending those benefits to opposite sex unmarried domestic partners could be attractive to a much larger pool of your employees.

Option (c) (eliminate domestic partner coverage) might make logical sense, and may be the best alternative to (b). Bloomberg reports that this may in fact be a significant result of the ruling:

“A survey of large corporations released earlier this month showed that far fewer of them offer health coverage to unmarried heterosexual couples — 62 percent — than to same-sex domestic partners, at 93 percent.

That gap suggests less of a willingness to cover unmarried couples when legal marriage is an option. More powerfully, 22 percent of the companies said they plan to drop coverage of domestic partners as a response to a ruling that makes gay marriage a viable option nationwide.”

But there are both legal and practical risks associated with taking a benefit away from a group of employees.

Again, think about these issues, discuss them with counsel and make deliberate and informed decisions about how to deal with them, given your unique situation.

IRS Expands Pre-Approved Plan Document Program to Include Cash Balance Plans and ESOPs

On June 8, 2015, the IRS issued Revenue Procedure 2015-36, which announces the IRS expansion of its pre-approved plan program to include cash balance plans and employee stock ownership plans (ESOPs). With this expansion, master & prototype and volume submitter plan providers can apply for opinion and advisory letters for cash balance plans by October 30, 2015, and for ESOPS during the defined contribution application period beginning February 1, 2017.

While this presents opportunities for ESOP sponsors to streamline their plan documentation, it is not without risks. As Cindy Shupe warned back in 2013, use of pre-approved documents can increase the risk of non-compliance if plan sponsors assume that use of a pre-approved document will ensure compliance with the complicated ESOP financing and prohibited transactions rules. Therefore, while we encourage ESOP sponsors to consider adopting a pre-approved plan document in the next cycle, we also encourage early conversations with ERISA counsel to evaluate the viability and implications of doing so. In addition to the above compliance issues, Employers currently maintaining individually designed ESOPS that intend to adopt a pre-approved plan (when available) will need to complete Form 8905, Certification of Intent To Adopt a Pre-approved Plan, before the end of their plan’s current 5-year remedial amendment cycle.

COBRA, FMLA and the ACA Employer Mandate

Let’s assume you have diligently designated initial and standard measurement and stability periods to take advantage of the opportunities provided by the final employer mandate regulations to minimize the risk of incurring employer mandate penalties under the ACA (if you have not, let’s do it now – better late than never). But you may not yet have figured out how these designations may impact your FMLA and COBRA administration. To help you do that, let me tell you a story….

Joe Blow worked as a full-time employee for Acme, Inc. for several years. As such, he and his family were covered by Acme’s medical plan. In 2014, Acme designated a November 1 – October 31 standard measurement period, and a January 1 – December 31 standard stability period for ongoing employees such as Joe. In November 2014, Joe was diagnosed with cancer and went out on FMLA leave. In accordance with its long-standing practice, Acme continued Joe’s coverage under the medical plan while Joe was on FMLA leave, until the later of February 28, 2015 (the end of the month in which the 12 week FMLA leave period ended), or the date Joe indicated he would not return to work.

In January 2015, Joe let Acme know that he would return to work on March 1, 2015, but that due to his medical condition he could only work 20 hours per week. Joe was a valuable employee, and Acme wanted Joe to return to work in whatever capacity they could have him. So Acme welcomed Joe’s return.

Now, before the ACA, Acme would have:

  • terminated Joe’s medical coverage upon his return to work,
  • retroactively collected from Joe the employee portion of the premium for his coverage for the FMLA leave period, and
  • offered Joe and his qualified beneficiaries COBRA coverage. The COBRA period would have started running as of March 1, 2015 (the end of the FMLA leave period).

What about after the ACA? When Joe returns to work in March 2015, Acme can no longer terminate his employee coverage, because Joe worked full time during the measurement period that ran from November 1, 2013 to October 31, 2014 (and therefore he satisfies the requirement to be considered a full-time employee for the stability period that runs from January 1, 2015 to December 31, 2015). This would remain true, even if Acme had extended Joe’s leave beyond the FMLA period, into March and April 2015. For example, if Acme had agreed to extend Joe’s leave through April 1, 2015 as an accommodation under the ADA, or if Acme had voluntarily permitted Joe to extend his leave (without terminating employment) through April 1, 2015, Acme would still not be able to terminate Joe’s coverage at the end of the FMLA leave, because of its ACA measurement and stability period designations. Acme needs to continue offering Joe coverage under the Plan through the end of 2015.

What about COBRA after the ACA? Joe works 20 hours per week for the remainder of 2015. Therefore, he does not work sufficient hours during the November 1, 2014 – October 31, 2015 measurement period to be considered a full time employee for the stability period that runs from January 1, 2016 to December 31, 2016, and Acme terminates Joe’s employee coverage as of January 1, 2016.

Under COBRA, the coverage period runs from the date of the qualifying event that leads to a loss of coverage (not from the date of the loss of coverage). Therefore, Joe’s standard 18 month COBRA period would end on August 31, 2016 (18 months after March 1, 2015). So under COBRA, Acme cannot terminate Joe’s COBRA coverage before August 31, 2016.

Alternatively, Acme could design its medical plan to start the COBRA period as of the date coverage is lost (as opposed to the date of the qualifying event). Here, that would give Joe 18 months of COBRA after January 1, 2016. Before it does so, however, Acme needs to make sure that its stop loss insurer is on board (Acme’s plan is self-funded, with a stop loss policy).

As this little tale teaches, regardless of whether Acme’s plan is self-insured or fully insured, and regardless of whether it decides to run the COBRA period from the original qualifying event, or from the loss of coverage at the end of the stability period, Acme should make sure that its insurance policies, plan documents, summary plan descriptions, medical plan eligibility administration, COBRA administration, and leave policies all account for the implications of its designated measurement and stability periods.

Class Action Lawsuit Accusing Employer of Reducing Employees’ Hours to Avoid Providing ACA Health Coverage

A May 8, 2015 class action lawsuit filed in New York alleges restaurant chain Dave & Buster’s, Inc. violated ERISA Section 510, which prohibits interfering with an employee’s attainment of an employee benefit under an ERISA benefit plan, when it converted up to 10,000 employees from full-time to part-time status in 2013 in an effort to right-sized its work force in response to the Affordable Care Act (ACA). This is one of the first lawsuits we are aware of making this allegation.

The Complaint alleges Dave & Buster’s made numerous public statements that the reason they reduced employees’ hours of employment was to avoid the increased costs of providing health benefits to their full-time employees after the ACA. If those allegations are proven true, the restaurant chain will have a difficult time defending their actions.

And worse is yet to come. As we began warning employers back in September 2013 and October 2013, the risk of lawsuits challenging workforce restructuring and reductions in force is greater since the employer mandate and the individual mandate went into effect, due to anti-retaliation provisions included in the ACA, which prohibit any adverse employment action in retaliation for receiving subsidized coverage through the Marketplace. As we explained back in 2013:

Imagine that Employee A … receives a federal subsidy for his marketplace coverage,…. [a few months later], your company determines it needs to conduct a reduction in force due to a business slowdown. Your HR manager works with senior management to carefully select RIF participants based on their skills, length of service with your company and the expected needs of your business.

The HR manager makes sure the RIF does not disproportionately impact people based on all of the protected classifications (race, nationality, sex, age, disability, etc.). …. Employee A is laid off ….

Employee A files a claim against your company with the Occupational Safety and Health Administration, alleging that your company chose Employee A for the RIF because he received subsidized coverage through the marketplace.

Employee A can establish a case of retaliation under the Affordable Care Act merely by providing evidence that his receipt of a subsidy was a “contributing factor” in the RIF decision. And under the OSHA rules that have been proposed to enforce the retaliation prohibition, Employee A will be able to meet his burden merely by showing that the HR manager knew he was receiving a subsidy at or near the time he was laid off.

The burden then shifts to your company to establish by clear and convincing evidence (which is a high bar to clear) that it would have laid Employee A off even if he had not received the subsidy.

Inside Tucson Business, October 25, 2013.

The lessons to draw from all of this include:

  • If you are planning a RIF (or any other adverse employment action), consider whether anyone making the employment decisions knows that any of the affected employees is or has received subsidized coverage through the marketplace.
    • If so, address it like you would for other protected classifications like age, race, sex, national origin and disability status (by documenting your reasons for the decision before you take the action).
    • If not, include that fact in the documentation you create before taking the adverse employment action.
  • And above all, don’t shoot yourself in the foot by proclaiming to the world that you are reducing employees’ hours because you are trying to reduce your risk of incurring the employer mandate.

IRS Updates Health Savings Account Limits for 2016

The IRS has updated the Health Savings Account (HSA) limits for 2016:

  • The annual limit on HSA contributions for individuals with self only coverage under a High Deductible Health Plan (HDHP) is $3,350 (unchanged from 2015). For an individual with family coverage, the limit is $6,750 (up from $6,650 in 2015).
  • The minimum annual deductible for a HDHP is $1,300 for self only coverage and $2,600 for family coverage (both unchanged from 2015).
  • The annual out of pocket maximum for an HDHP is $6,550 for self-only coverage (up from $6,450 in 2015) and $13,100 for family coverage(up from $12,900 in 2015)

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EEOC Proposes Amendments to ADA Regulations regarding Employer Wellness Programs

On April 20, 2015 the EEOC released proposed amendments to regulations under the Americans with Disabilities Act (ADA) related to employer wellness programs. The proposed rule provides guidance on the extent to which employers may use incentives to encourage employees to participate in wellness programs that are part of their group health plans, and that include disability-related inquiries and/or medical examinations. The proposed rules explain how a wellness program that includes incentives for participation can satisfy the “voluntary medical examination” exception to the ADA’s prohibition on “making disability-related inquiries or requiring medical examinations”. The exception allows “voluntary medical examinations, including voluntary medical histories, which are part of an employee health program available to employees at that work site.”

This is the latest action in an ongoing turf battle between the EEOC (which administers the ADA) and the Departments of Labor, Treasury, and HHS (which administer the HIPAA nondiscrimination rules). HHS has taken a liberal approach, allowing wellness programs to impose a 30% penalty for failure to participate in wellness programs (and up to 50% in the case of tobacco prevention or reduction programs), in accordance with the Affordable Care Act’s policy of encouraging wellness programs. The EEOC has traditionally taken a more conservative view, holding such a large incentive would violate the ADA because it would render the program not voluntary.

The proposed rules permit incentives as high as 30% to encourage participation in a wellness program that includes disability-related inquiries or medical examinations, as long as participation is voluntary. Voluntary means that the employer:

(1) does not require employees to participate;

(2) does not deny coverage under any of its group health plans or particular benefits packages within a group health plan for non-participation or limit the extent of such coverage (except pursuant to allowed incentives); and

(3) does not take any adverse employment action or retaliate against, interfere with, coerce, intimidate, or threaten employees who do not participate.

In addition, an employer must provide a notice that clearly explains what medical information will be obtained, who will receive the medical information, how the medical information will be used, the restrictions on its disclosure, and the methods the covered entity will employ to prevent improper disclosure of the medical information. Finally, the proposed rule allows the disclosure of medical information obtained by wellness programs to employers only in aggregate form, except as needed to administer the health plan.

icon The Proposed Rules

icon EEOC Q&As on the Proposed Rules

 

DOL Provides Timing Relief for Fee Disclosures in Participant-Directed Individual Account Plans

On March 19, 2015 the Department of Labor issued final rules that give retirement plan administrators a two-month window in which to provide annual fee disclosures to plan participants. Under existing regulations, plan administrators must provide fee disclosures to participants in plans with individually directed accounts at “at least once in any 12-month period, without regard to whether the plan operates on a calendar or fiscal year basis”. This 12-month rule presents some administrative difficulty because Plans that provide the disclosures in the same month every year could easily run afoul of the regulatory language if their disclosures are not done on the exact same day of the month each year.

The new rule replaces “12-month period” with “14-month period”, giving plan administrators a two month window each year in which to make the disclosures The new rules will become effective on June 17, 2015 (unless the DOL gets significant adverse comments on the rule, which is not expected). In the meantime, the DOL indicates that for enforcement purposes plan administrators can rely on the new rule immediately.

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Final Rule Expanding Excepted Benefits to Include Limited Wrap Around Coverage

The U.S. Departments of Labor (DOL), Health and Human Services (HHS), and Treasury published final rules on March 18, 2015 to amend the definition of excepted benefits to include certain limited coverage that wraps around individual health insurance. The significance of this is that plans providing excepted benefits do not need to comply with many provisions of ERISA and the Tax Code (such as HIPAA and the Affordable Care Act Coverage Mandates).

To qualify as excepted benefits under the new rules, “wrap around” coverage would have to be specifically designed to provide meaningful benefits such as coverage for expanded in-network medical clinics or providers, reimbursement for the full cost of primary care, or coverage of the cost of prescription drugs not on the formulary of the primary plan.

In addition, under the final rules group health plan sponsors may, in limited circumstances, offer wraparound coverage to employees who are purchasing individual health insurance in the private market, including in the Health Insurance Marketplace. The final rule sets forth two pilot programs for limited wraparound coverage. One pilot allows wraparound benefits only for multi-state plans in the Health Insurance Marketplace. The other allows wraparound benefits for part-time workers who enroll in an individual health insurance policy or in Basic Health Plan coverage for low-income individuals established under the Affordable Care Act. These workers could, under existing excepted benefit rules, qualify for a flexible spending arrangement alternative to this wraparound coverage.

icon The Final Rule

Additional Background Information:

There are four categories of statutorily excepted benefits.

The first category includes benefits that are generally not health coverage (such as automobile insurance, liability insurance, workers compensation, and accidental death and dismemberment coverage). The benefits in this category are excepted in all circumstances. In contrast, the benefits in the other categories are types of health coverage but are excepted only if certain conditions are met.

The second category of excepted benefits is limited excepted benefits, which may include limited scope vision or dental benefits, and benefits for long-term care, nursing home care, home health care, or community based care.

The third category of excepted benefits, referred to as “noncoordinated excepted benefits,” includes both coverage for only a specified disease or illness (such as cancer-only policies), and hospital indemnity or other fixed indemnity insurance. In the group market, there benefits are excepted only if all of the following conditions are met: (1) the benefits are provided under a separate policy, certificate, or contract of insurance; (2) there is no coordination between the provision of such benefits and any exclusion of benefits under any group health plan maintained by the same plan sponsor; and (3) the benefits are paid with respect to any event without regard to whether benefits are provided under any group health plan maintained by the same plan sponsor.

The fourth category of excepted benefits is supplemental excepted benefits. Such benefits must be: (1) coverage supplemental to Medicare, coverage supplemental to the Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA) or to Tricare, or similar coverage that is supplemental to coverage provided under a group health plan; and (2) provided under a separate policy, certificate, or contract of insurance.

CMS 2016 Payment Notice effectively embeds individual out of pocket limit in family HDHPs

The Health and Human Services (HHS) Centers for Medicare & Medicaid Services (CMS), recently issued its final 2016 Notice of Benefit and Payment Parameters (2016 Payment Notice), in which it stated that, starting in the 2016 plan year, the self-only annual limitation on cost sharing applies to each individual, regardless of whether the individual is enrolled in other than self-only coverage, including in a family high deductible Health Plan (HDHP). The significance of this is that it effectively embeds an individual out-of-pocket limit in all family group health plans with a higher family deductible.

For example, an HDHP plan that has a $10,000 family deductible may provide payment for covered medical expenses for a member of the family if that member has incurred covered medical expenses during the year of at least $2,600 (the minimum deductible for a 2015 family HDHP). Under the policy finalized in the 2016 Payment Notice, this plan must also apply the annual limitation on cost sharing for self only coverage ($6,600 in 2015) to each individual in the plan, even if this amount is below the $10,000 family deductible limit.