ERISA – Page 3 – ERISA Benefits Law

DC Circuit Court Invalidates Significant Provisions of the DOL Association Health Plan Rules

On March 28, 2019, the U.S. District Court for the District of Columbia found significant provisions of the Department of Labor’s (DOL’s) final rule expanding the availability of association health plans (AHPs) to be unlawful. In State of New York et. al. v. United States Department of Labor, the Court held that the rule’s interpretation of “employer” to include working owners and groups without a true commonality of interest was unreasonable and, “clearly an end-run around the [Affordable Care Act]” with the purpose of “avoid[ing] the most stringent requirements of the [Affordable Care Act].” The court set aside those parts of the regulation and remanded the rule to the DOL to determine how the rule’s severability provision affects the remaining part of the rule.

The DOL is reviewing the decision and could decide to revoke the rule, revise it in a way that complies with the court’s ruling, or appeal the decision to the Court of Appeals for the D.C. Circuit.

Background
Trade associations often offer health insurance to their members. Historically, these associations identified themselves as employers or employee organizations under the Employee Retirement Income Security Act of 1974 (ERISA) to claim ERISA preemption from state insurance regulation. Then, in 1983, Congress amended ERISA to give states regulatory authority over self-insured multiple employer welfare arrangements (MEWAs) and some regulatory authority over fully insured MEWAs. AHPs are one type of MEWA.

The Affordable Care Act (ACA) added reporting requirements for MEWAs, imposed criminal penalties on MEWA fraud, and authorized the DOL to take immediate action to address fraudulent MEWAs. It also dropped an exception from the “guaranteed availability” provision of the Public Health Service Act that had previously existed for bona fide association plans. As a result, an insurer that offers coverage through an association must offer the same plan to non-members who want it (and are aware of it). Associations themselves are not subject to guaranteed availability requirements.

The ACA also defined large group, small group, and individual plans, without reference to how they were offered (i.e. whether as an AHP or otherwise). Prior to the new rule, AHPs continued to exist, but largely subject to the ACA rules. This “look through” doctrine considers only whether the participating individual or employer is obtaining individual, small group, or large group coverage – it does not “look” at the AHP as a whole to determine whether the small group or large group rules apply. This means that small group coverage obtained through an AHP was regulated under the same standards that applied to the small group market. This includes many of the ACA’s most significant small group rules, such as coverage of preexisting conditions, rating rules, and the essential health benefits requirements.

However, if an association could be treated as an employer who is sponsoring a single health plan for its members, the AHP would be regulated as a group health plan under ERISA. Group health plans are subject to various reporting, disclosure, fiduciary and other requirements imposed by ERISA, the Health Insurance Portability and Accountability Act of 1996 (HIPAA), COBRA, and some, but not all, of the Affordable Care Act’s market reforms. Group health plans are also exempt from most state regulation. Although insurers that insure group health plans are subject to state laws and regulations with respect to the insurance policies, states cannot regulate the underlying employer-health plan. As a large group health plan, an AHP would not have to comply with many of the ACA’s most significant consumer protections (such as coverage of essential health benefits or rating rules) that apply in the individual and small group markets, or many state requirements.

Prior to the new rule, the DOL had interpreted this AHP exception narrowly to apply only when a “bona fide” group of employers is bound together by a commonality of interest (other than simply providing a health plan) with vested control of the association so that they effectively operate as a single employer. Thus, eligible association members had to share a common interest, join together for purposes other than providing health insurance, exercise control over the AHP, and have one or more employees in addition to the business owner and spouse. AHPs offered by general business groups or that include individual members do not qualify, a position the DOL reaffirmed as recently as 2017.

The Final Rule
This exception—where an AHP can be treated as a group health plan under ERISA—was the target of the DOL’s final rule on AHPs, which was issued in June 2018. The DOL’s final rule made it much easier for an association to be considered a single multi-employer plan under ERISA. The final rule relaxed a long-standing “commonality of interest” requirement that associations must exist for a reason other than offering health insurance and allowed self-employed “working owners” to enroll in AHP coverage. The rule also included nondiscrimination protections that prohibit associations from conditioning membership based on a health factor (although not other factors such as gender, age, geography, and industry). The rule did not disturb state regulatory authority over AHPs but left open the possibility that the DOL would grant exemptions for AHPs from state requirements in the future.

The final rule also included a severability provision, which provides that the rest of the rule would remain operative even if parts of the rule were found to be invalid or unenforceable. The preamble cited an example regarding working owners: if a federal court rules that the working owners provision is void, this provision should be severed from the rest of the regulation and thus would not impact, for example, the ability of an association to meet the final rule’s updated commonality of interest test.

In July 2018, 12 states— California, Delaware, the District of Columbia, Kentucky, Maryland, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Virginia, and Washington —filed a lawsuit challenging the final rule for violating the Administrative Procedure Act. The states argued that the DOL’s new interpretation of “employer” was inconsistent with the text and purpose of ERISA, that the goal of the final rule was to undermine the ACA, and that the DOL was changing long-standing interpretations of ERISA to do so. The states argued that by picking and choosing the circumstances under which an association meets the definition of an “employer” under ERISA, the rule disregards the intent of Congress when adopting the ACA to establish three distinct sets of rules for three distinct markets (the individual, small group, and large group markets). The states also alleged that the rule increased the risk of fraud and harm to consumers, required states to devote significant resources to preventing that risk, and jeopardized the ability of states to adopt stronger protections.

The lawsuit asked the court to hold the AHP rule invalid, to vacate and set it aside, and to enjoin the DOL from implementing or enforcing the rule.

The Decision
Judge Bates held that the DOL failed to reasonably interpret ERISA and that significant provisions of the final rule—on bona fide associations and working owners—must be set aside. The bona fide association standard failed to meaningfully limit the types of associations that qualify to sponsor an ERISA plan. This violates Congress’s intent that only an employer association acting “in the interest of” its members falls under ERISA. The working owner provision is inconsistent with the text and purpose of ERISA, which is to regulate benefit plans that arise from employment relationships. By extending the rule to include working owners, the DOL impermissibly extended ERISA to plans outside of an employment relationship.

Judge Bates held that the states were challenging only parts of the new rule—i.e., the new standards for bona fide associations, commonality of interest, and working owners under 29 C.F.R. 2510.3-5(b), (c), and (e). Because the states did not challenge the rule’s other changes related to nondiscrimination and organizational structure, the court did not address those requirements, holding that they are “collateral” to the rule’s three main requirements. Instead of invalidating the entire rule, Judge Bates therefore remanded the rule to DOL to consider how the rule’s severability provision affects the remaining portions.

The Decision Regarding “Bona Fide Association”
Historically, the DOL wanted to ensure that an association had a “sufficiently close economic or representational nexus to the employers and employees that participate in the plan.” This analysis centered on 1) whether the association is a bona fide organization that has purposes and functions unrelated to providing benefits; 2) whether the employers share some commonality and genuine organizational relationship unrelated to providing benefits; and 3) whether the employers that participate in a benefit program exercise control over the program.

In the final rule, the DOL maintained the same three criteria—primarily purpose, commonality of interest, and control—for determining whether an association acts in the interest of an employer and is thus a bona fide employer under ERISA. However, the final rule reinterprets these criteria in a way that the Court found too significantly departs from the DOL’s prior guidance and in a way that fails to limit ERISA’s exemptions to only associations that act “in the interest of” employers. This unlawfully expands ERISA’s scope and conflicts with the statutory text. Judge Bates discussed each of these three criteria individually and then considers them together.

First, the final rule relaxed the requirement that associations exist for a reason other than offering health insurance. Under the final rule, an association’s principal purpose could be to provide benefits so long as the group or association had at least one “substantial business purpose” unrelated to providing benefits. DOL’s examples of a “substantial business purpose” range from resource-intensive activities (e.g., setting business standards or practices) to de minimis activities (e.g., publishing a newsletter).

This new interpretation of the “primary purpose” test fails to set meaningful limits on the character and activities of an association that qualifies as an “employer” under ERISA. Under the final rule, sponsoring an AHP may be the association’s only purpose so long as the association does de minimis activities that qualify as a “substantial business purpose.” Judge Bates concludes that this is “such a low bar that virtually no association could fail to meet it.” As such, the standards are too broad fail to identify defining characteristics of a subset of organizations that would fall under ERISA’s scope.

Second, employers must show a “commonality of interest” to form an association sponsoring an AHP. Under the final rule, an association can show commonality of interest among its members if they are either 1) in the same trade, industry, profession, or line of business; or 2) in the same principal place of business within the same state or a common metropolitan area even if the metro area extends across state lines. This change significantly relaxed the prior “commonality of interest” standard, making it easier for employers—tied only by being in the same line of business or geographic area—to band together and form an association for the sole purpose of offering health coverage.

Judge Bates explained, “ERISA imposes a common interest requirement, not merely a something-in-common requirement.” The geography test “effectively eviscerates” the commonality of interest required under ERISA and impermissibly exceeds the scope of the statute.

Third, the final rule required a group or association to have an organizational structure and be functionally controlled by its members, in both form and substance, either directly or by electing a board or other representatives. The control test does limit the types of associations that qualify as employers by ensuring that employer members direct the actions and decisions of the association with respect to the AHP. However, this prong fails too because it cannot overcome concerns about the lack of common interest among employers. The control test is only meaningful if employers’ interests are already aligned. If employer members have opposed interests, the control test—through, say election of officers—would only further the interests of some, but not all, employers within the association.

Collectively, these three criteria fail to limit “bona fide associations” to those acting “in the interest of” their employer members under ERISA. Under the final rule, groups of employers with no common characteristic other than presence in the same state could qualify as a single employer under ERISA so long as that group had an election-based officer structure and some incidental business-related project. This, in Judge Bates’ view, is not enough to show that an association and its members are connected by a true employment nexus. In addition, the rule would impermissibly enable groups that resemble commercial insurance providers to qualify as an “employer” for purposes of offering an AHP under ERISA, which has long been forbidden.

The DOL argued that the final rule’s nondiscrimination requirements balance its less stringent standards for commonality of interest and purpose. Judge Bates disagrees. The nondiscrimination provision governs how qualifying associations can structure their AHP premiums but does nothing to limit which associations qualify under the final rule. Because of this, the nondiscrimination provision does not impact the court’s analysis.

The Decision Regarding “Working Owners”
Historically, AHP enrollment has been limited to the association members’ employees, former employees, and their families or beneficiaries. This has meant that individuals—including sole proprietors with no common law employees—generally have not been able to enroll in group health AHPs.

The final rule expanded the availability of AHP group coverage to self-employed individuals referred to as “working owners.” Under the rule, a working owner without common law employees can qualify as both an employer and an employee for purposes of enrollment in a group health AHP. This “dual treatment” would allow a self-employed individual to be an employer (to participate in the AHP and offer group coverage) and an employee (of their own business to qualify for the health coverage offered by the AHP). Because of this, two sole proprietors without employees could band together to form an association and then offer an ERISA plan to themselves.

Judge Bates found this to be absurd. Rather than “interpreting” ERISA, the DOL rewrote the statute, ignoring the law’s definitions and structure, caselaw, and ERISA’s 40-year history of excluding employers without employees. A working owner’s membership in an association does not bring him under ERISA: joining an association cannot transform a sole proprietor into an “employer” or “employee” under the statute. Further, Congress did not intend for working owners without employees to be included under ERISA because ERISA’s focus is on benefits arising from employment relationships. Working owners employ no one: one does not have an employment relationship with oneself.

Implications
The most immediate impact of the decision is that it prevents the formation of self-insured AHPs under the new rule. The rule would have gone into effect for new self-insured AHPs beginning on April 1.
Another question is what happens to the existing AHPs that have been formed under the rule already. For example, AHPs formed on the basis of the expanded commonality of interest under the final rule will need to consider whether they can comply with the historical bona fide association requirements. In addition, because the final rule has been vacated, those AHPs offering coverage to working owners and small employers no longer qualify as ERISA plans under the rule. Since they no longer qualify as ERISA plans, they are governed under the ACA’s rules in the individual and small group market and subject to state regulation. Given this, these AHPs may need to come into compliance with the ACA’s individual and small group market protections.

Finally, States, and the DOL, may want to take enforcement action against AHPs presumably could, relying on state law or the prior “look through” doctrine. It is not yet clear what (if any) guidance the DOL, or potentially the Department of Health and Human Services, might give or whether they will announce an enforcement stance for AHPs currently offering non-ACA-compliant coverage.

In the meantime, DOL is reviewing the decision and could decide to revoke the rule altogether, revise it in a way that complies with the decision, or appeal the decision to the Court of Appeals for the D.C. Circuit.

Prior Post regarding the Final Rule

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

Updated Disability Claims Procedures Go Into Effect April 2, 2018

The Department of Labor’s final rules updating the procedures for disability claims goes into effect on April 2, 2018. This post summarizes the new rules; which plans are affected by the new rules; and the next steps affected plans should take.

Affected Plans

The Claims Procedure Regulations at C.F.R. §2560.503-1 affect all ERISA Plans, including pension plans such as defined benefit and 401(k) plans, welfare benefit plans like medical and disability insurance plans. As a practical matter, the changes to the rules for disability claims only impacts plans that actually make disability determinations. Therefore, if your pension or 401(k) Plan relies on disability determinations made by a third party, like the Social Security Administration, you should not need to make any changes to your plan documents or your claims procedures as a result of the new rules.

Next Steps

Affected plans have until December 31, 2018 to adopt the necessary plan amendments, but the amendment will need to be effective, and Plans will need to comply with the revised rules, as of April 2, 2018. Affected Plans will also need to update their Summary Plan Descriptions to reflect the new rules.

Summary of the Changes

The new rules amend the claims procedure regulation at 29 C.F.R. §2560.503-1 for disability benefits to require that plans, plan fiduciaries, and insurance providers comply with additional procedural protections when dealing with disability benefit claimants. Specifically, the final rule includes the following changes in the requirements for the processing of claims and appeals for disability benefits:

Basic Disclosure Requirements. Benefit denial notices must contain a more complete discussion of why the plan denied a claim and the standards used in making the decision. For example, the notices must include a discussion of the basis for disagreeing with a disability determination made by the Social Security Administration if presented by the claimant in support of his or her claim.
Right to Claim File and Internal Protocols. Benefit denial notices must include a statement that the claimant is entitled to receive, upon request, the entire claim file and other relevant documents. Previously, this statement was required only in notices denying benefits on appeal. Benefit denial notices also have to include the internal rules, guidelines, protocols, standards or other similar criteria of the plan that were used in denying a claim or a statement that none were used. Previously, instead of including these internal rules and protocols, benefit denial notices have the option of including a statement that such rules and protocols were used in denying the claim and that a copy will be provided to the claimant upon request.
Right to Review and Respond to New Information Before Final Decision. The new rule prohibits plans from denying benefits on appeal based on new or additional evidence or rationales that were not included when the benefit was denied at the claims stage, unless the claimant is given notice and a fair opportunity to respond.
Avoiding Conflicts of Interest. Plans must ensure that disability benefit claims and appeals are adjudicated in a manner designed to ensure the independence and impartiality of the persons involved in making the decision. For example, a claims adjudicator or medical or vocational expert could not be hired, promoted, terminated or compensated based on the likelihood of the person denying benefit claims.
Deemed Exhaustion of Claims and Appeal Processes. If plans do not adhere to all claims processing rules, the claimant is deemed to have exhausted the administrative remedies available under the plan, unless the violation was the result of a minor error and other specified conditions are met. If the claimant is deemed to have exhausted the administrative remedies available under the plan, the claim or appeal is deemed denied on review without the exercise of discretion by a fiduciary and the claimant may immediately pursue his or her claim in court. The revised rule also provides that the plan must treat a claim as re-filed on appeal upon the plan’s receipt of a court’s decision rejecting the claimant’s request for review.
Certain Coverage Rescissions are Adverse Benefit Determinations Subject to the Claims Procedure Protections. Rescissions of coverage, including retroactive terminations due to alleged misrepresentation of fact (e.g. errors in the application for coverage) must be treated as adverse benefit determinations, thereby triggering the plan’s appeals procedures. Rescissions for non-payment of premiums are not covered by this provision.
Notices Written in a Culturally and Linguistically Appropriate Manner. The final rule requires that benefit denial notices have to be provided in a culturally and linguistically appropriate manner in certain situations.

Cadillac Tax Delayed to 2022

The legislation passed by Congress and signed by President Trump on January 23, 2018 to continue funding the government through February 8, 2018 also delays the “Cadillac Tax” another two years.

The Cadillac Tax is now not scheduled to become effective until 2022. While it is likely future Congresses will continue to delay, or perhaps eliminate the tax entirely, employers and others that sponsor Cadillac plans should continue to monitor the situation and have contingencies to deal with it if the tax does in fact go into effect.

See our prior post on this related topic: IRS Proposes Various Approaches to Cadillac Tax Implementation

Tax Cuts and Jobs Act Includes Employee Benefits Changes and Elimination of ACA Individual Mandate Penalty

The Tax Cuts and Jobs Act, which the President signed into law on December 22, 2017 enacts significant tax reforms that include a number of employee benefits changes. Significant employee benefits changes include:

Individual Mandate Repeal.

Effective in 2019, the Act will reduce to zero the individual shared responsibility (individual mandate) penalty. This will inevitably lead to more people deciding not to purchase health insurance. Coupled with guaranteed issue, which remains the law, this will contribute to the potential “death spiral” in the individual insurance market.

Extended Rollover Period for Qualified Plan Loans.

If a participant’s account balance in a qualified retirement plan is reduced to repay a plan loan and the amount of that offset is considered an eligible rollover distribution, the offset amount can be rolled over into an eligible retirement plan. Under current law, the rollover must occur within 60 days. The legislation extends the 60-day deadline until the due date (including extensions) for the participant’s tax return for the year in which the amount is treated as distributed. Plan loan offset amounts qualifying for this extended deadline are limited to loan amounts that are treated as distributed solely by reason of either termination of the plan or failure to meet the loan’s repayment terms because of a severance from employment.

New Employer Tax Credit for Paid Family and Medical Leave.

The Act creates a new tax credit for eligible employers providing paid family and medical leave to their employees. To be eligible, employers must have a written program that pays at least 50% of wages to qualified employees for at least two weeks of annual paid family and medical leave.

Eligible employers paying 50% of wages may claim a general business credit of 12.5% of wages paid for up to 12 weeks of family and medical leave a year. The credit increases to as much as 25% if the rate of payment exceeds 50%. The provision is generally effective for wages paid in taxable years beginning after December 31, 2017, and before January 1, 2020. Leave provided as vacation, personal leave, or other medical or sick leave is not considered to be family and medical leave eligible for this credit.

Moving Expense Deduction Eliminated.

For an eight-year period starting in 2018, most employees will not be able to exclude qualified moving expense reimbursements from income or deduct moving expenses. During that period, the exclusion and deduction are preserved only for certain members of the Armed Forces on active duty who move pursuant to a military order.

Qualified Transportation Plans Eliminated.

The Act eliminates the employer deduction for qualified transportation fringe benefits and, except as necessary for an employee’s safety, for transportation, payments, or reimbursements in connection with travel between an employee’s residence and place of employment.

The tax exclusion for qualified transportation fringe benefits is generally preserved for employees, but the exclusion for qualified bicycle commuting reimbursements is suspended and unavailable for tax years beginning after 2017 and before 2026.

Other Fringe Benefits Deductions Eliminated.

Effective for amounts paid or incurred after 2017, the Act repeals the rule under Code § 274 that previously allowed a partial deduction for certain entertainment, amusement, and recreation expenses (including expenses for a facility used in connection with such activities) if those expenses are sufficiently related to or associated with the active conduct of the taxpayer’s business.

Also, effective after 2017, the deductibility of employee achievement awards is limited by a new definition of “tangible personal property” that denies the deduction for cash, cash equivalents, and gift cards, coupons, or certificates, except when employees can only choose from a limited array pre-selected or pre-approved by the employer.

Other nondeductible awards include—vacations, meals, lodging, theater or sports tickets, and securities.

Inflation Adjustments.

Beginning in 2018, many dollar amounts in the Code—including some benefit-related amounts—that are currently adjusted for inflation using the Consumer Price Index for All Urban Consumers (“CPI-U”) will instead be adjusted using the Chained Consumer Price Index for All Urban Consumers (“C-CPI-U”). According to the Bureau of Labor Statistics (which determines and issues the CPI), the C-CPI-U is a closer approximation to a true cost-of-living index for most consumers, and it tends to increase at a lower rate than the CPI-U.

Updated Form 5500s Released for 2017

The U.S. Department of Labor’s Employee Benefits Security Administration, the IRS, and the Pension Benefit Guaranty Corporation (PBGC) have releasedadvance informational copies of the 2017 Form 5500 annual return/report and related instructions. The “Changes to Note” section of the 2017 instructions highlight important modifications to the Form 5500 and Form 5500-SF and their schedules and instructions.

Modifications are as follows:

IRS-Only Questions. IRS-only questions that filers were not required to complete on the 2016 Form 5500 have been removed from the Form 5500, Form 5500-SF and Schedules, including preparer information, trust information, Schedules H and I, lines 4o, and Schedule R, Part VII, regarding the IRS Compliance questions (Part IX of the 2016 Form 5500-SF).
Authorized Service Provider Signatures. The instructions for authorized service provider signatures have been updated to reflect the ability for service providers to sign electronic filings on the plan sponsor and Direct Filing Entity (DFE) lines, where applicable, in addition to signing on behalf of plan administrators.
Administrative Penalties. The instructions have been updated to reflect an increase in the maximum civil penalty amount under ERISA Section 502(c)(2), as required by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. Department regulations published on Jan. 18, 2017, increased the maximum penalty to $2,097 a day for a plan administrator who fails or refuses to file a complete or accurate Form 5500 report. The increased penalty under section 502(c)(2) is applicable for civil penalties assessed after Jan. 13, 2017, whose associated violation(s) occurred after Nov. 2, 2015 – the date of enactment of the 2015 Inflation Adjustment Act.
Form 5500/5500-SF-Plan Name Change. Line 4 of the Form 5500 and Form 5500-SF have been changed to provide a field for filers to indicate the name of the plan has changed. The instructions for line 4 have been updated to reflect the change. The instructions for line 1a have also been updated to advise filers that if the plan changed its name from the prior year filing(s), complete line 4 to indicate that the plan was previously identified by a different name.
Schedule MB. The instructions for line 6c have been updated to add mortality codes for several variants of the RP-2014 mortality table and to add a description of the mortality projection technique and scale to the Schedule MB, line 6 – Statement of Actuarial Assumptions/Methods.
Form 5500-SF-Line 6c. Line 6c has been modified to add a new question for defined benefit plans that answer “Yes” to the existing question about whether the plan is covered under the PBGC insurance program. The new question asks PBGC-covered plans to enter the confirmation number – generated in the “My Plan Administration Account system” – for the PBGC premium filing for the plan year to which the 5500-SF applies. For example, the confirmation number for the 2017 premium filing is reported on the 2017 Form 5500-SF.

Information copies of the forms, schedules and instructions are available online

Proposed Tax Reform: Ignore The Noise

While I usually do not post about proposed legislation, because it is so speculative, I am going to make an exception in the case of the House Republicans’ proposed Tax Cuts and Jobs Act for several reasons.

The first reason is that, the much-hyped potential reduction to $2,400 in pre-tax deferral limits to 401(k) and 403(b) Plans is not in the actual proposed legislation. In any event, given the popularity of 401(k) Plans, I would rate the chances of this particular proposal ever making it into law at about as close to zero as one could get. My advice is: don’t spend any time worrying about how to deal with it.

The second reason is that there has been virtually no press coverage of the proposed evisceration of non-qualified deferred compensation plans and other employee benefits changes, which are part of the proposed legislation. More on that below, if you are interested.

The third, and bigger point, is that it is way too early to start spending your precious time figuring out how to deal with this this proposed legislation. Recent history tells us that, even with Republican control of all three branches of government, major legislation is very difficult to pass. I can count this year’s major legislative accomplishments on no hands. And even if tax reform legislation does pass, it will likely look quite different from the initial House proposal once it has gone through the House, the Senate and a joint committee. So again, my advice is: don’t spend any time worrying about how to deal with the potential changes in the tax code. You have better things to do with your precious time.

If you are still interested in more details on these proposals you can read the proposed legislation, the House Committee on Ways and Means section-by-section summary, or the short summary below.

Summary of employee benefits tax proposals

The most significant proposal, in my view, is to eliminate the ability to defer taxation of compensation earned and vested in one year into a subsequent year, which is generally governed by Code Sections 409A and 457(b). If enacted, this would essentially eliminate future non-qualified deferred compensation arrangements.

In addition, proposed changes to qualified plans would repeal the special rule permitting recharacterization of Roth IRA contributions as traditional IRA contributions, expand the source accounts from which hardship distributions could be taken, and repeal the six month prohibition on making deferrals after taking a hardship distribution.

Other proposed benefits changes would repeal income exclusions for employee achievement awards, dependent care assistance programs, qualified moving expense re-imbursement, and adoption assistance programs.

IRS Notice 2017-67 Provides Guidance On Qualified Small Employer Health Reimbursement Arrangements

IRS Notice 2017-67 provides guidance on the requirements for providing qualified small employer health reimbursement arrangement (QSEHRA) under section 9831(d) of the Internal Revenue Code (Code), the tax consequences of the arrangement, and the requirements for providing written notice of the arrangement to eligible employees.

The guidance in Notice 2017-67 includes sections on the following topics:
A. Eligible employer
B. Eligible employee
C. Same terms requirement
D. Statutory dollar limits
E. Written notice requirement
F. MEC requirement
G. Proof of MEC requirement
H. Substantiation requirement
I. Reimbursement of medical expenses
J. Reporting requirement
K. Coordination with PTC
L. Failure to satisfy the requirements to be a QSEHRA
M. Interaction with HSA requirements
N. Effective date

In addition, Executive Order 13813 (82 Fed. Reg. 48385, Oct. 17, 2017), directed the Secretaries of the Treasury, Labor, and Health and Human Services to consider revising guidance, to the extent permitted by law and supported by sound policy, to increase the usability of health reimbursement arrangements (HRAs), expand employers’ ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with non-group coverage. The guidance provided in Notice 2017-67 addresses each of those objectives. The Treasury Department and IRS are expected to issue additional guidance in the future in response to Executive Order 13813.

Background on QSEHRAs

The 21st Century Cures Act (Cures Act), P.L. 114-255, 130 Stat. 1033, was enacted on December 13, 2016. Section 18001 of the Cures Act amends the Code, the Employee Retirement Income Security Act of 1974 (ERISA), and the Public Health Service Act (PHS Act), to permit an eligible employer to provide a QSEHRA to its eligible employees.

Pursuant to section 9831(d)(1), a QSEHRA is not a group health plan, and as a result, is not subject to the group health plan requirements that apply under the Code and ERISA. Generally, payments from a QSEHRA to reimburse an eligible employee’s medical expenses are not includible in the employee’s gross income if the employee has coverage that provides minimum essential coverage (MEC) as defined in Code section 5000A(f). For this purpose, “medical expenses” means expenses for medical care, as defined in section 213(d) (which includes premiums for other health coverage, such as individual health insurance policies).

The Cures Act provides that a QSEHRA is an arrangement that meets the following criteria:

(a) The arrangement is funded solely by an eligible employer, and no salary reduction contributions may be made under the arrangement;

(b) The arrangement provides, after the eligible employee provides proof of coverage, for the payment or reimbursement of the medical expenses incurred by the employee or the employee’s family members (in accordance with the terms of the arrangement);

(c) The amount of payments and reimbursements for any year does not exceed $4,950 ($10,000 for an arrangement that also provides for payments or reimbursements of medical expenses of the eligible employee’s family members (family coverage)); and

(d) The arrangement is generally provided on the same terms (the “same terms requirement”) to all eligible employees of the eligible employer.

To be an eligible employer that may provide a QSEHRA, the employer must not be an applicable large employer (ALE), as defined in Code section 4980H(c)(2) and the regulations thereunder (and, thus, may not be an employer that, generally, employed at least 50 full-time employees, including full-time equivalent employees, in the prior calendar year), and must not offer a group health plan (as defined in section 5000(b)) to any of its employees. Pursuant to Code section 4980H(c)(2), an employer whose workforce increases to 50 or more full-time employees during a calendar year will not become an ALE before the first day of the following calendar year.

EEOC Wellness Regulations Sent to EEOC For Review (AARP v US EEOC)

The United States District Court for the District of DC has concluded in the case of AARP v. United States Equal Employment Opportunity Commission, that the EEOC’s final wellness regulations are arbitrary and capricious, and has therefore sent them back to the EEOC for review. The regulations address the impact of the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA) on employer-sponsored wellness programs.

The Plaintiff in the case, the AARP, argued that permitting incentives of up to 30% of the cost of coverage is an unreasonable interpretation of the term “voluntary” because the incentive is too high to give employees a meaningful choice whether to participate in programs requiring disclosure of ADA-protected information. It further argued that the EEOC’s reversal of its prior position on the meaning of “voluntary”, which precluded incentives, was unsupported, inadequately explained, and thus, arbitrary and capricious.

The court ruled that the EEOC has not justified its conclusion that the 30% incentive level is a reasonable interpretation of voluntariness. Rejecting the EEOC’s argument that 30% is appropriate because it harmonizes the EEOC regulations with HIPAA as amended by the ACA, the court explained that HIPAA’s 30% incentive cap is not intended to serve as an interpretation of the term “voluntary” since voluntariness of participation is not an issue under HIPAA. Moreover, the court pointed out, the EEOC regulations are inconsistent with the HIPAA regulations in other respects. For instance, the EEOC regulations extend the 30% cap to participatory wellness programs to which the HIPAA cap does not apply. While holding that the EEOC made its decision arbitrarily, the court did not vacate the regulations, noting that they have been applicable for eight months. Instead, the court remanded the regulations to the EEOC for reconsideration. For now, the EEOC’s final wellness regulations will remain in effect, pending the EEOC’s review of the regulations.

Background

Wellness programs are regulated in part by the Health Insurance Portability and Accountability Act (HIPAA), as amended by the Affordable Care Act (ACA), as well as by HIPAA’s implementing regulations.

HIPAA prevents health plans and insurers from discriminating on the basis of “any health status related factor,” but allows covered entities to offer “premium discounts or rebates” on a plan participant’s copayments or deductibles in return for that individual’s compliance with a wellness program. A “reward” or incentive may include a discount on insurance costs or a penalty that increases the plan participant’s costs because of non-participation in the wellness program. See 26 C.F.R. § 54.9802-1(f)(1)(i).

The ACA’s amendments to HIPAA, and the accompanying implementing regulations, allow plans and insurers to offer incentives of up to 30% of the cost of coverage in exchange for an employee’s participation in a health-contingent wellness program, a kind of wellness program in which the reward is based on an insured individual’s satisfaction of a particular health-related factor. See Incentives for Nondiscriminatory Wellness Programs in Group Health Plans (“the 2013 HIPAA regulations” or “2013 HIPAA rule”), 78 Fed. Reg. 33,158, 33,180. Neither the ACA nor the 2013 HIPAA regulations impose a cap on incentives that may be offered in connection with participatory wellness programs, which are programs that do not condition receipt of the incentive on satisfaction of a health factor. Id. at 33,167.

However, because employer-sponsored wellness programs often involve the collection of sensitive medical information from employees, including information about disabilities or genetic information, these programs often implicate the ADA and GINA as well. As both the ADA and GINA are administered by EEOC, this brings wellness programs within EEOC’s purview.

The ADA prohibits employers from requiring medical examinations or inquiring whether an individual has a disability unless the inquiry is both job-related and “consistent with business necessity.” 42 U.S.C. § 12112(d)(4)(A). But the ADA makes some allowances for wellness programs: it provides that an employer may conduct medical examinations and collect employee medical history as part of an “employee health program,” as long as the employee’s participation in the program is “voluntary”. Id. § 12112(d)(4)(B). The term “voluntary” is not defined in the statute.

Similarly, GINA prohibits employers from requesting, requiring, or purchasing “genetic information” from employees or their family members. The definition of genetic information includes an individual’s genetic tests, the genetic tests of family members such as children and spouses, and the manifestation of a disease or disorder of a family member. Like the ADA, GINA contains an exception that permits employers to collect this information as part of a wellness program, as long as the employee’s provision of the information is voluntary. Again, the meaning of “voluntary” is not defined in the statute.

Thus, while HIPAA and its implementing regulations expressly permit the use of incentives in wellness programs, uncertainty existed as to whether the “voluntary” provisions of the ADA and GINA permit the use of incentives in those wellness programs that implicate ADA- or GINA-protected information.

The EEOC previously took the position that in order for a wellness program to be “voluntary,” employers could not condition the receipt of incentives on the employee’s disclosure of ADA- or GINA-protected information. However, in 2016 the EEOC promulgated new rules reversing this position. Those are the rules at issue in this case. The new ADA rule provides that the use of a penalty or incentive of up to 30% of the cost of self-only coverage will not render “involuntary” a wellness program that seeks the disclosure of ADA-protected information. See ADA Rule, 81 Fed. Reg. at 31,133–34. Likewise, the new GINA rule permits employers to offer incentives of up to 30% of the cost of self-only coverage for disclosure of information, pursuant to a wellness program, about a spouses’s manifestation of disease or disorder, which, as noted above, falls within the definition of the employee’s “genetic information” under GINA.2 See GINA Rule, 81 Fed. Reg. at 31,144.

Unlike the 2013 HIPAA regulations, which place caps on incentives only in health-contingent wellness programs, the incentive limits in the new GINA and ADA rules apply both to participatory and health-contingent wellness programs.

ERISA Benefits Law attorney Erwin Kratz was recently selected by his peers for inclusion in The Best Lawyers in America© 2018 in the practice area of Employee Benefits (ERISA) Law. Mr. Kratz has been continuously listed on The Best Lawyers in America list since 2010.

Since it was first published in 1983, Best Lawyers® has become universally regarded as the definitive guide to legal excellence. Best Lawyers lists are compiled based on an exhaustive peer-review evaluation. Lawyers are not required or allowed to pay a fee to be listed; therefore inclusion in Best Lawyers is considered a singular honor. Corporate Counsel magazine has called Best Lawyers “the most respected referral list of attorneys in practice.”

Category: ERISA