Erwin Kratz – Page 5 – ERISA Benefits Law

DOL Issues Final Rules Expanding Association Health Plans: New Opportunities for Small Employers to Reduce Costs?

The Department of Labor’s Employee Benefits Security Administration (EBSA) has issued a final rule under Title I of the Employee Retirement Income Security Act (ERISA) that creates new opportunities for groups of employers to band together and be treated as a single “employer” sponsor of a group health plan. The final rule adopts a new regulation at 29 CFR 2510.3-5. This post summarizes the major provisions of the rule.

The general purpose of the rule is to clarify which persons may act as an “employer” within the meaning of ERISA section 3(5) in sponsoring a multiple employer “employee welfare benefit plan” and “group health plan,” as those terms are defined in Title I of ERISA. The essence of the final rule is to set forth the criteria for a “bona fide group or association” of employers that may establish a group health plan that is an employee welfare benefit plan under ERISA. The rule sets forth 8 broad criteria that must be satisfied.

1) The final rule establishes a general legal standard that requires that a group or association of employers have at least one substantial business purpose unrelated to offering and providing health coverage or other employee benefits to its employer members and their employees, even if the primary purpose of the group or association is to offer such coverage to its members.

Although the final rule does not define the term “substantial business purpose,” the rule contains an explicit safe harbor under which a substantial business purpose is considered to exist in cases where the group or association would be a viable entity even in the absence of sponsoring an employee benefit plan. The final rule also states that a business purposes is not required to be a for-profit purpose. For example, a bona fide group or association could offer other services to its members, such as convening conferences or offering classes or educational materials on business issues of interest to the association members.

2) Each employer member of the group or association participating in the group health plan (the “Association Health Plan” or “AHP”) must be a person acting directly as an employer of at least one employee who is a participant covered under the plan.

3) A group must have “a formal organizational structure with a governing body” as well as “by-laws or other similar indications of formality” appropriate for the legal form in which the group operates in order to qualify as bona fide.

4) The functions and activities of the group must be controlled by its employer members, and the group’s employer members that participate in the AHP must control the plan. Basically – act like an employer sponsored group health plan, not like an insurance company.

5) The group must have a commonality of interest. Employer members of a group will be treated as having a commonality of interest if they satisfy one of the following:

the employers are in the same trade, industry, line of business or profession; or
each employer has a principal place of business in the same region that does not exceed the boundaries of a single State or a metropolitan area (even if the metropolitan area includes more than one State)

6) The group cannot offer coverage under the AHP to anyone other than employees, former employees and beneficiaries of the members of the group. Again, act like an employer sponsored group health plan, not like an insurance company.

7) The health coverage must satisfy certain nondiscrimination requirements under ERISA. For example, an AHP:

cannot condition employer membership in the group or association on any health factor of any individual who is or may become eligible to participate in plan;
must comply with the HIPAA nondiscrimination rules prohibiting discrimination in eligibility for benefits based on an individual health factor;
must comply with the HIPAA nondiscrimination rules prohibiting discrimination in premiums or contributions required by any participant or beneficiary for coverage under the plan based on an individual health factor; and
may not treat the employees of different employer members of the group or association as distinct groups of similarly-situated individuals based on a health factor of one or more individuals.

8) The group cannot be a health insurer.

The final rule also describes the types of working owners without common law employees (i.e. partners in a partnership) who can qualify as employer members and also be treated as employees for purposes of being covered by the bona fide employer group or association’s health plan.

Implications of the final rule will take some time to play out. The administration has stated that its intention behind the final rule is to allow “small employers – many of whom are facing much higher premiums and fewer coverage options as a result of Obamacare – a greater ability to join together and gain many of the regulatory advantages enjoyed by large employers.” The Congressional Budget Office estimated that 400,000 previously uninsured people will gain coverage under AHPs and that millions of people will switch their coverage to more affordable and more flexible AHP plans and save thousands of dollars in premiums.

For our part, we are evaluating the potential to assist smaller employers to save costs and improve the benefits in their health plans by establishing groups and associations to provide AHPs, and we will update our clients as those opportunities mature.

More from EBSA on Association Health Plans:

Final Rule

Fact Sheet

Frequently Asked Questions

News Release

IRS Posts Explanation and Forms of Letters Used to Close Employer Mandate Inquiries

The IRS has posted an explanation of the various Letters 227, which the IRS will use to acknowledge the closure of an Employer Shared Responsibility Payment (ESRP) inquiry, or to provide the next steps to the Applicable Large Employer (ALE) regarding the proposed ESRP. There are five different 227 letters:

Letter 227-J acknowledges receipt of the signed agreement Form 14764, ESRP Response, and that the ESRP will be assessed. After issuance of this letter, the case will be closed. No response is required.
Letter 227-K acknowledges receipt of the information provided and shows the ESRP has been reduced to zero. After issuance of this letter, the case will be closed. No response is required.
Letter 227-L acknowledges receipt of the information provided and shows the ESRP has been revised. The letter includes an updated Form 14765 (PTC Listing) and revised calculation table. The ALE can agree or request a meeting with the manager and/or appeals.
Letter 227-M acknowledges receipt of information provided and shows that the ESRP did not change. The letter provides an updated Form 14765 (PTC Listing) and revised calculation table. The ALE can agree or request a meeting with the manager and/or appeals.
Letter 227-N acknowledges the decision reached in Appeals and shows the ESRP based on the Appeals review. After issuance of this letter, the case will be closed. No response is required.

IRS Announces 2019 HSA Contribution Limits, HDHP Minimum Deductibles and HDHP Maximum Out-of-Pocket Amounts

The IRS has announced 2019 HSA and HDHP limits as follows:

Annual HSA contribution limitation. For calendar year 2019, the annual limitation on deductions for HSA contributions under § 223(b)(2)(A) for an individual with self-only coverage under a high deductible health plan is $3,500 (up from $3,450 in 2018), and the annual limitation on deductions for HSA contributions under § 223(b)(2)(B) for an individual with family coverage under a high deductible health plan is $7,000 (up from $6,900 in 2018).

High deductible health plans. For calendar year 2019, a “high deductible health plan” is defined under § 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,350 for self-only coverage or $2,700 for family coverage (unchanged from 2018), and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,750 for self-only coverage or $13,500 for family coverage (up from $6,650 and $13,300 in 2018).

Rev. Proc. 2018-30

IRS Grants Relief Raising the 2018 Annual HSA Contribution Limit for Family Coverage Back up to $6,900

On April 26, 2018 the Internal Revenue Service issued Revenue Procedure 2018-27, which provides relief for 2018 for taxpayers with family coverage under a High Deductible Health Plan (HDHP) who contribute to a Health Savings Account (HSA). For 2018, taxpayers with family coverage under an HDHP may now treat $6,900 as the maximum deductible HSA contribution.

History

The $6,900 annual limitation was originally published in 2017, in Revenue Procedure 2017-37.

In March 2018, as discussed in our prior post, the IRS reduced the maximum 2018 deductible HSA contribution for taxpayers with family coverage under an HDHP by $50, to $6,850, due to a change in the inflation adjustment calculations for 2018 under the Tax Cuts and Jobs Act.

Now, with the issuance of Revenue Procedure 2018-27, the IRS has announced this relief for affected taxpayers, which allows the $6,900 limitation to remain in effect for 2018.

Question: Do we Need to Offer COBRA Coverage to the Domestic Partner of a Terminated Employee?

Hypothetical: Employer’s self-insured medical plan covers domestic partners. An employee with EE + Domestic Partner coverage terminates employment. We offer the employee COBRA coverage, but do we need to also offer COBRA to the domestic partner?

Answer: COBRA does not require you to offer continuation coverage to the domestic partner. The COBRA regulations at 26 CFR 54.4980B-3 provide that only a covered employee, or their spouse or their dependent child is a qualified beneficiary under COBRA (plus any child who is born to or placed for adoption with a covered employee during a period of COBRA coverage).

While COBRA does not require the employer to offer continuation coverage, the employer ought to check their plan documents to see whether the Plan Documents provide continuation coverage to domestic partners. If the Plan document provides continuation coverage for domestic partners, then the Plan must offer it.

PBGC’s Expanded Missing Participant Program Final Rule Covers DC Plans and non-PBGC Insured DB Plans

As authorized by the Pension Protection Act of 2006 (PPA), the Pension and Benefit Guarantee Corporation (PBGC) has issued a final regulation that expands PBGC’s missing participants program, effective as of plan terminations that occur on or after January 1, 2018. PBGC’s missing participant program was previously limited to terminated single-employer DB plans covered by title IV’s insurance program. It is now available to other terminated retirement plans.

Summary of How the PBGC MIssing Participant Program Applies to Defined Contribution (DC) Plans and non-PBGC Defined Benefit Plans

The revised program now provides that PBGC’s missing participants program is voluntary for terminated non-PBGC-insured plans, e.g.,DC plans.

In addition, a non-PBGC-insured plan that chooses to use the program may elect to be a “transferring plan” or a “notifying plan.” A transferring plan sends the benefit amounts of missing distributees to PBGC’s missing participants program. A notifying plan informs PBGC of the disposition of the benefits of one or more of its missing distributees. Section 4050(d)(1) of ERISA permits but does not require non-PBGC-insured plans covered by the program to turn missing participants’ benefits over to PBGC.

A DC plan that chooses to participate in the missing participants program and elects to be a transferring plan must transfer the benefits of all its missing participants into the missing participants program. PBGC explains that this is to prevent the possibility of “cherry-picking”—that is, selective use of the missing participants program—by transferring plans.

PBGC will charge a one-time $35 fee per missing distributee, payable when benefit transfer amounts are paid to PBGC. There will be no charge for amounts transferred to PBGC of $250 or less. There will be no charge for plans that only send to PBGC information about where benefits are held (such as in an IRA or under an annuity contract). Fees will be set forth in the program’s forms and instructions.

The program definition of “missing” for DC plans follows Department of Labor regulations,which treat DC plan distributees who cannot be found following a diligent search similar to distributees whose whereabouts are known but who do not elect a form of distribution.

A distributee is treated as missing if, upon close-out, the distributee does not accept a lump sum distribution made in accordance with the terms of the plan and, if applicable, any election made by the distributee. For example, if a check issued pursuant to a distributee’s election of a lump sum remains uncashed after the last date prescribed on the check or an accompanying notice (e.g., by the bank or the plan) for cashing it (the “cash-by” date), the distributee is considered not to have accepted the lump sum.

A DC plan must search for each missing distributee whose location the plan does not know with reasonable certainty. The plan must search in accordance with regulations and other applicable guidance issued by the Secretary of Labor under section 404 of ERISA. See the DOL’s FAB 2014-01 for guidance on search steps. Compliance with that guidance satisfies PBGC’s “diligent search” standard for DC plans.

Some other major features of the new program include:

A unified unclaimed pension database of information about missing participants and their benefits from terminated DB and DC plans.
A centralized, reliable, easy-to-use directory through which persons who may be owed retirement benefits from DB or DC plans could find out whether benefits are being held for them.
Periodic active searches by PBGC for missing participants.
Fewer benefit categories and fewer sets of actuarial assumptions for DB plans determining the amount to transfer to PBGC and a free on-line calculator to do certain actuarial calculations.

Visit the PBGC’s Missing Participant site for more information, including an explanation of the plans covered by the program and the forms and instructions to use with the program.

Our prior post on the proposed regulations is here

Private Letter Ruling Applies Controlled Group Rules to 501(c)(3) Entities

On March 16, 2018 the IRS issued a private letter ruling (PLR 201811009) analyzing and applying the controlled group rules to two related 501(c)(3) entities. The first entity is a Medical Center, organized in part for the purpose of operating an academic medical center as part of a health system affiliated with the other entity, a University.

The PLR reiterates the general rule that one 501(c)(3) entity (the University) in this case) does not “Control” another 501(c)(3) entity (the Medical Center) for purposes of the IRS controlled group rules where:

The University holds the power to approve and remove without cause four of the Medical Center’s 11 directors.
With the exception of the University’s chancellor, no employee of the University may serve as a director of the Medical Center.
The University holds no right or power to require the use of the Medical Center’s funds or assets for the University’s purposes.
Rather, the Medical Center determines its budget, issues debt and expends funds without oversight from the University.
The Medical Center has sole control over collection of its receivables and sole responsibility for satisfaction of its liabilities.
The University does not control hiring, firing or salaries of the Medical Center’s Employees.

The PLR states that the above facts evidence the Medical Center’s operational independence from the University and support a conclusion that the University does not directly control the Medical Center.

The PLR goes on to conclude that the University does not directly control the Medical Center, even though the University has the right to prohibit the Medical Center from taking certain actions, including:

any major corporate transaction not within the ordinary course of business;
any action that would result in a change in the Medical Center’s exempt status under §§ 501(c)(3) and 509(a) of the Code;
any material change to the Medical Center’s purposes;
any change in the fundamental, nonprofit, charitable, tax-exempt mission of the Medical Center;
any action that would grant any third party the right to appoint directors of the Medical Center;
a joint operating agreement or similar arrangement under which the Medical Center’s governance is substantially subject to a board or similar body that the Medical Center does not control; and
the sale or transfer of all or substantially all of the Medical Center’s assets.

The IRS determined that, although the above rights certainly represent a form of control over the Medical Center, such control is qualitatively different from the operational control factors that were not present here.

The key to the ruling is that the University’s rights do not confer the power to cause the Medical Center to act. Rather they confer the power to bar the Medical Center from taking certain actions. The right merely limits the Medical Center’s capacity to deviate from the charitable mission it shares with the university and diminishes the chance that the Medical Center will stray from the quality standards and community focus that the University wants in an academic medical center.

Background on Tax Exempt Control Group Rules

In the case of an organization that is exempt from tax under Code section 501(a), the employer includes the exempt organization and any other organization that is under common control with that exempt organization under the special rules set forth in Treas. Reg. §1.414(c)-5(b).

For this purpose, common control exists between an exempt organization and another organization if at least 80 percent of the directors or trustees of one organization are either representatives of, or directly or indirectly controlled by, the other organization. Treas. Reg. §1.414(c)-5(b). A trustee or director is treated as a representative of another organization if he or she also is a trustee, director, agent, or employee of the other organization. A trustee or director is controlled by another organization if the other organization has the general power to remove such trustee or director and designate a new trustee or director. Whether a person has the power to remove or designate a trustee or director is based on all the facts and circumstances. Id.

In the case of PLR 201811009, the University controlled far less than 80% of the Medical Center’s board positions, so the analysis focuses on the “facts and circumstances” element of control. The key takeaway is that the power to prevent another entity from acting does not necessarily result in control. Keep in mind, however, that PLRs are fact specific and can only be relied on by the taxpayer to whom they are issued. We therefore cannot conclude that the power to preclude action by another 501(c)(3) entity will never result in control.

9th Circuit Clarifies Service Provider’s Fiduciary Duties When Negotiating Fees and When Withdrawing Fees from Plan Assets

The Ninth Circuit Court of Appeals has issued an opinion in Santomenno v. Transamerica LLC, clarifying the circumstances under which a retirement plan investment service provider breaches (and does not breach) its fiduciary duties when negotiating its fees and when collecting the agreed fees from plan accounts.

The Case

The trial court in this case held that the plan investment service provider breached its fiduciary duties to plan beneficiaries first when negotiating with the employer about providing services to the plan and later when withdrawing predetermined fees from plan funds.

The 9th Circuit held that a plan administrator is not an ERISA fiduciary when negotiating its compensation with a prospective customer. The employer/plan sponsor doing the hiring is acting under a fiduciary duty when it negotiates these fees. Therefore, the prospective service provider did not breach its duties in negotiating for the fees it wanted to receive.

The Court also held that the service provider was not a fiduciary with respect to its receipt of revenue sharing payments from investment managers after it became a service provider to the Plan because the payments were fully disclosed before the provider agreements were signed and did not come from plan assets.

Finally, and most significantly, the Court held that the service provider also did not breach its fiduciary duty with respect to its withdrawal of the preset fees from plan funds. The Court concluded that when a service provider’s definitively calculable and nondiscretionary compensation is clearly set forth in a contract with the fiduciary-employer, collection of those fees out of plan funds in strict adherence to that contractual term is not a breach of the provider’s fiduciary duty. The withdrawal of its fees in such circumstances is a ministerial act that does not give rise to fiduciary liability.

The Take-Aways

This case highlights the importance of the fiduciary role played by the plan sponsor and administrator when hiring service providers to the Plan. Hiring and retention decisions are fiduciary acts on the part of the employer/plan sponsor, but are not fiduciary acts on the part of the service provider being hired.

In addition, while this case illustrates that it is not always a fiduciary act for a service provider to withdraw its fees directly from plan assets, that is not true in every case. For example, if the Plan sponsor or administrator disputed a charge before the service provider withdrew its fees, or if the fees withdrawn by the service provider were based on hours worked or some other non-ministerial measure of the service provided, the withdrawal may not be ministerial. This case therefore does not give service providers free reign to withdraw fees from plan assets without consideration of their fiduciary duties.

Santomenno v. Transamerica LLC

IRS Revises 2018 Annual HSA Contribution Limit for Family Coverage to $6,850 (down from $6,900)

The IRS has issued Rev. Proc. 2018-18, which revises the previously-published annual limitation on deductions under Code § 223(b)(2)(B) for 2018 for an individual with family coverage under a high deductible health plan. The originally published limitation was $6,900. It has now been reduced to $6,850.

Why the Change?

The recently enacted Tax Cuts and Jobs Act requires cost of living adjustments be made using the Chained Consumer Price Index for All Urban Consumers (C-CPI-U), which over time will reduce the cost of living adjustments made to various IRS limits.

What to Do

Employers making Health Savings Account (HSA) contributions for employees (either directly, or through their cafeteria plans) should review the elections made by their employees and adjust those elections to avoid exceeding the $6,850 limitation for 2018. Likewise, individuals making HSA contributions should revise any automatic contribution schedule they have established to avoid exceeding the limit.

The following chart summarizes various significant employee benefit Plan limits for 2016 through 2018:

Type of Limitation	2018	2017	2016
415 Defined Benefit Plans	$220,000	$215,000	$210,000
415 Defined Contribution Plans	$55,000	$54,000	$53,000
Defined Contribution Elective Deferrals	$18,500	$18,000	$18,000
Defined Contribution Catch-Up Deferrals	$6,000	$6,000	$6,000
SIMPLE Employee Deferrals	$12,500	$12,500	$12,500
SIMPLE Catch-Up Deferrals	$3,000	$3,000	$3,000
Annual Compensation Limit	$275,000	$270,000	$265,000
SEP Minimum Compensation	$600	$600	$600
SEP Annual Compensation Limit	$275,000	$270,000	$265,000
Highly Compensated	$120,000	$120,000	$120,000
Key Employee (Officer)	$175,000	$175,000	$170,000
Income Subject To Social Security Tax (FICA)	$128,400	$127,200	$118,500
Social Security (FICA) Tax For ER & EE (each pays)	6.20%	6.20%	6.20%
Social Security (Med. HI) Tax For ERs & EEs (each pays)	1.45%	1.45%	1.45%
SECA (FICA Portion) for Self-Employed	12.40%	12.40%	12.40%
SECA (Med. HI Portion) For Self-Employed	2.9%	2.9%	2.90%
IRA Contribution	$5,500	$5,500	$5,500
IRA Catch-Ip Contribution	$1,000	$1,000	$1,000
HSA Max. Contributions Single/Family Coverage	$3,450/ $6,850	$3,400/ $6,750	$3,350/ $6,750
HSA Catchup Contributions	$1,000	$1,000	$1,000
HSA Min. Annual Deductible Single/Family	$1,350/ $2,700	$1,300/ $2,600	$1,300/ $2,600
HSA Max. Out Of Pocket Single/Family	$6,650/ $13,300	$6,550/ $13,100	$6,550/ $13,100

Supreme Court Rejects “Yard-Man” Inference of Vesting of Retiree Health Benefits

The United States Supreme Court has ruled in the case of CNH Indus. N.V. v. Reese, that courts cannot simply infer lifetime vesting of retiree health benefits from a collective bargaining agreement. Instead, lifetime vesting must be expressly written into the agreement.

The Case

The employer in this case provided health benefits to certain employees who were eligible for benefits under the employer’s pension plan, in accordance with a collective bargaining agreement (CBA). When the CBA expired in 2004, some retirees sued, arguing that their health benefits were vested for life.

While the lawsuit was pending, the Supreme Court decided M&G Polymers USA, LLC v. Tackett, which held that courts must interpret CBAs according to “ordinary principles of contract law.” The trial court in this case then ruled for the retirees, and the Sixth Circuit affirmed, relying on presumptions the 6th Circuit originally established in UAW v. Yard-Man, Inc., even though the Supreme Court had explicitly rejected those presumptions in Tackett. The Sixth Circuit’s decision turned on its holding that the CBA’s 2004 expiration date was inconclusive as to whether the retiree health benefits terminated in 2004 or were vested for life because (1) the CBA specified that certain benefits, such as life insurance, ceased at a time different from other provisions, and (2) the CBA tied health care benefits to pension eligibility. The court acknowledged that Tackett precluded it from inferring vesting based on these plan provisions, but concluded that the provisions nevertheless rendered the CBA ambiguous, allowing consideration of extrinsic evidence that supported lifetime vesting.

The Supreme Court reversed, stating that “inferences applied in Yard-Man and its progeny” do not represent ordinary principles of contract law and therefore cannot be used to generate a reasonable inference that then creates ambiguity. The Court acknowledged that, when a contract is ambiguous, courts can consult extrinsic evidence to determine the parties’ intentions—but a contract is not ambiguous unless it is susceptible to at least two reasonable but conflicting meanings. In this case, the Supreme Court held that the CBA contained a durational clause that applied to all benefits, with no exception for retiree health benefits, and that therefore there is only one reasonable interpretation of the CBA – that it does not vest retiree health benefits for life.

Take-Aways

This case is re-assuring for employers offering retiree medical plans – that they are less at risk of inadvertently creating a vested lifetime retiree health benefit than if the Plantiffs had prevailed in this case. However, the long standing advice still stands: Employers should be explicit in their retiree health plan documents and SPDs that the benefit is not vested and that the employer retains full and unfettered discretion to amend or terminate the plan and the benefits at any time.