DOL Issues Revised FFCRA Leave Regulations in Response to Court Decision

The U.S. Department of Labor’s Wage and Hour Division (WHD) today posted revisions to regulations that implemented the paid sick leave and expanded family and medical leave provisions of the Families First Coronavirus Response Act (FFCRA).

The revisions made by the new rule clarify workers’ rights and employers’ responsibilities under the FFCRA’s paid leave provisions, in light of the U.S. District Court for the Southern District of New York’s August 3, 2020 decision in State of New York v Department of Labor, which found portions of the regulations invalid.

Background

The DOL issued its temporary rule to carry out the paid leave provisions of the FFCRA on April 1, 2020. See 85 FR 19326 (published April 6, 2020); see also 85 FR 20156 (April 10, 2020 correction and correcting amendment to April 1 rule).

On April 14, 2020, the State of New York filed suit in the United States District Court for the Southern District of New York (“District Court”) challenging certain parts of the temporary rule. On August 3, 2020, the District Court ruled that four parts of the temporary rule are invalid:

(1) the requirement under § 826.20 that paid sick leave and expanded family and medical leave are available only if an employee has work from which to take leave;

(2) the requirement under § 826.50 that an employee may take FFCRA leave intermittently only with employer approval;

(3) the definition of an employee who is a “health care provider,” set forth in § 826.30(c)(1), whom an employer may exclude from being eligible for FFCRA leave; and

(4) the statement in § 826.100 that employees who take FFCRA leave must provide their employers with certain documentation before taking leave.

The DOL’s Revised Rules

Today’s revisions to the temporary rules, effective immediately, reaffirm the prior regulations in part, revise the regulations in part, and further explain the DOL’s positions. Specifically, the DOL’s revised rules:

(1) Reaffirm that paid sick leave and expanded family and medical leave may be taken only if the employee has work from which to take leave and explains further why the DOL believes this requirement is appropriate. This temporary rule clarifies that this requirement applies to all qualifying reasons to take paid sick leave and expanded family and medical leave.

(2) Reaffirms that, where intermittent FFCRA leave is permitted by the regulations, an employee must obtain his or her employer’s approval to take paid sick leave or expanded family and medical leave intermittently under § 825.50 and explains further the basis for this requirement.

(3) Revises the definition of “health care provider” under § 825.30(c)(1) to mean employees who are health care providers under 29 CFR 825.102 and 825.125,3 and other employees who are employed to provide diagnostic services, preventive services, treatment services, or other services that are integrated with and necessary to the provision of patient care.

(4) Revises § 826.100 to clarify that the information the employee must give the employer to support the need for his or her leave should be provided to the employer as soon as practicable.

(5) Revises § 826.90 to correct an inconsistency regarding when an employee may be required to give notice of expanded family and medical leave to his or her employer.

More…

How to Register as a Pooled Plan Provider

The Department of Labor issued a Proposed Rule on August 27, 2020 setting forth the registration requirements for Pooled Plan Providers (PPPs). Under the Proposed Rule, PPPs who plan to begin operating on January 1, 2021 must submit an initial registration on or after October 3, 2020 and on or before December 2, 2020.

Background

The Setting Every Community Up for Retirement Enhancement (SECURE) Act permits “pooled employer plans” (PEPs) to begin operating starting on January 1, 2021. PEPs are multiple employer plans with participating employers that don’t share a common industry or location. PEPs are intended to allow smaller employers to leverage their collective purchasing power to reduce retirement plan costs and administrative burdens. A PPP acts as the plan administrator and is a named plan fiduciary for a PEP.

The SECURE Act requires PPPs to register with the Secretary of Labor before beginning operations, and includes a separate authorization for the DOL to require reporting of other information. The SECURE Act did not include specific content requirements for the PPP registration.

Proposed Rule

The Proposed Rule includes requirements for an initial registration filing, supplemental filings, and a final filing, as described below. The DOL explains that the purpose of these filings is to provide time-sensitive knowledge to the DOL, the Treasury Department, and the IRS to permit those agencies to oversee PPPs, and to allow employers hiring a PPP to be able to exercise their fiduciary duties of selection and monitoring.

  • Initial Filing: The prospective PPP must make an initial filing 30 to 90 days before beginning operations, which must include the following information:
    1. Basic identifying information about the pooled plan provider, including: legal business name; Federal EIN; telephone; mailing address; website, if any; identifying information for the primary compliance officer of the PPP; and agent for service of legal process.
    2. Approximate date when plan operations are expected to commence.
    3. A description of the administrative or investment services (including investment management, investment advice, investment products, plan administration, and custodial or trustee services) that will be offered, including identification of, and a description of the role of, affiliates who will help provide those services.
    4. A statement disclosing any criminal convictions related to the PPP.
    5. A statement disclosing any pending legal or regulatory proceedings.
  • Supplemental Filing: Supplemental filings are required for information about reportable events, which would include any change in the information filed as part of the initial registration and also significant financial and operational events related to the PPP and the PEPs it sponsors.
  • Final Filing: A final filing must be made once the last PEP has been terminated and ceased operations.

The Proposed Rule requires electronic filing of all PPP registrations, and also provides that a new EBSA form be established– EBSA Form PR (Pooled Plan Provider Registration) (Form PR) – as the required filing format for PPP registrations. The proposed Form PR, and draft instructions, which are attached as Appendix A to the proposal, provide blanks for a PPP to report the information required for the initial, supplemental and final filings described above.

Next Steps

This Proposed Rule was published in the Federal Register on September 1, 2020. The DOL will accept comments on the Proposed Rule for 30 days after the proposal is published in the Federal Register.

In addition to the Proposed Rule, the IRS and DOL are authorized by the SECURE Act to issue the following additional guidance related to PEPs:

  • Model plan language that may be used for a plan to be treated as a PEP;
  • Guidance about the administrative duties and other actions required to be performed by a PPP;
  • Guidance about procedures to be taken to terminate a PEP;
  • Guidance about what actions an employer must take to facilitate the administration of the PEP;
  • Guidance identifying instances in which employers should be kicked out of PEPs; and
  • Information about what audits, examinations or investigations of a PPP the DOL may perform.

Until guidance is issued, employers and PPPs will not be treated as failing to meet the applicable requirements so long as they comply in good faith with a reasonable interpretation of the SECURE Act.

DOL Final Rule Facilitates Retirement Plan Electronic Disclosures

The U.S. Department of Labor (DOL) published a final rule on May 27, 2020 that will allow employers to post retirement plan disclosures online or deliver them to employees by email, as a default. The DOL believes this will make it easier for employers to furnish retirement plan disclosures electronically, reducing administrative expenses and making disclosures more readily accessible and useful for employees.

Background

There are approximately 700,000 retirement plans covered by ERISA, covering approximately 137 million participants. ERISA-covered retirement plans must furnish multiple disclosures each year to participants and beneficiaries. The number of disclosures per year depends on the specific type of retirement plan, its features, and for defined benefit plans, the plan’s funding status.

Delivery methods for ERISA disclosures must be reasonably calculated to ensure that workers actually receive the disclosures. To deliver disclosures electronically, plan administrators previously had to rely on a regulatory safe harbor established by the DOL in 2002. See 29 CFR 2520.104b-1(c).

On August 31, 2018, the President issued Executive Order 13847, directing the DOL to review whether regulatory or other actions could be taken to make retirement plan disclosures more understandable and useful for participants and beneficiaries and to focus on reducing the costs and burdens that retirement plan disclosures impose on employers and others responsible for their production and distribution. The Order specifically emphasized that this review include an exploration of the potential for broader use of electronic delivery as a way to improve the effectiveness of the disclosures and to reduce their associated costs and burdens.

New Voluntary Safe Harbor

The new electronic disclosure rule establishes a new, voluntary safe harbor for retirement plan administrators who want to use electronic media, as a default, to furnish covered documents to covered individuals, rather than sending potentially large volumes of paper documents through the mail. The new safe harbor permits the following two optional methods for electronic delivery:

  1. Website Posting. Plan administrators may post covered documents on a website if appropriate notification of internet availability is furnished to the electronic addresses of covered individuals.
  2. Email Delivery. Alternatively, plan administrators may send covered documents directly to the electronic addresses of covered individuals, with the covered documents either in the body of the email or as an attachment to the email.

Retirement plan administrators who comply with the safe harbor will satisfy their statutory duty under ERISA to furnish covered documents to covered individuals. The safe harbor is limited in the following respects:

Limited Scope of the New Safe Harbor

The safe harbor is limited to retirement plan disclosures.

A plan administrator may use this safe harbor only for “covered individuals.” To be a covered individual, the person must be entitled under ERISA to receive covered documents and must have a valid electronic address (e.g., email address or smart phone number).

The new safe harbor does not supersede the 2002 safe harbor; the 2002 safe harbor remains in place as another option for plan administrators.

Protections for Plan Participants

The new safe harbor includes a variety of protections for covered individuals, including:
1. Right to Paper. Covered individuals can request paper copies of specific documents, or globally opt out of electronic delivery entirely, at any time, free of charge.

2. Initial Notification. Covered individuals must be furnished an initial notification, on paper, that the way they currently receive retirement plan disclosures (e.g., paper delivery in the US mail) is changing. The notice must inform them of the new electronic delivery method, the electronic address that will be used, and the right to opt out if they prefer paper disclosures, among other things. The notice must be given to them before the plan may use the new safe harbor.

3. Notifications of Internet Availability. Covered individuals generally must be furnished a notice of internet availability (NOIA) each time a new covered document is made available for review on the internet website.

To avoid “notice overload,” the final rule permits an annual NOIA to include information about multiple covered documents, instead of multiple NOIAs throughout the year.

The NOIA must briefly describe or identify the covered document that is being posted online, include an address or hyperlink to the website, and inform the covered individual of the right to request paper copies or to opt out of electronic delivery altogether.

The NOIA must be concise, understandable, and contain only specified information.

4. Website Retention. Covered documents must remain on an internet website until superseded by a subsequent version, but in no event for less than one year.

5. System Check for Invalid Electronic Addresses. Plan administrators must ensure that the electronic delivery system is designed to alert them if a participant’s electronic address is invalid or inoperable. In that case, the administrator must attempt to promptly cure the problem, or treat the participant as opting out of electronic delivery.

6. System Check at Termination of Employment. When someone leaves their job, the plan administrator must take steps to ensure the continued accuracy and operability of the person’s employer-provided electronic address.

Effective Date & Immediate Availability

The new safe harbor is effective July 27, 2020 (60 days after its publication in the Federal Register). However, the DOL, as an enforcement policy, will not take any enforcement action against a plan administrator that relies on this safe harbor before that date.

Secure Act Makes Significant Changes to the Law Affecting Qualified Retirement Plans

The SECURE Act, signed into law on Dec. 20, 2019, includes a lot of tweaks to retirement law, including many that directly impact qualified retirement plans, as well as others that indirectly impact qualified plan participants. This post addresses the most significant such provisions.

The Setting Every Community Up for Retirement Enhancement Act (known as the “SECURE Act”) was signed into law on Dec. 20, 2019, and went into effect on Jan. 1, 2020. The law includes a lot of tweaks to retirement law, including many that directly impact qualified retirement plans, as well as others that indirectly impact qualified plan participants.  This post addresses the most significant such provisions.

Primary Changes Directly Impacting Qualified Retirement Plans

Long-Term, Part-Time Employees Can Make Deferrals

The SECURE Act requires that plans permit employees who are at least age 21, have worked for at least three consecutive 12-month periods, and have completed at least 500 hours of service in those three years to make salary deferrals to the plan. As long as these individuals stay below 1,000 hours, they may be excluded from employer contributions (including top-heavy and gateway contributions), ADP testing, coverage testing, and other nondiscrimination testing. Because the law permits plans to ignore years of service prior to 1/1/2021 for the three-year period purposes, no employees will need to be permitted to defer under this provision before 2024.

Participant Statements Must Include Annuitization Information

The SECURE Act requires employers offering 401(k) and other qualified defined contribution plans to show employees not just the total balance in their account but also a projected monthly income in retirement based on that balance. The Department of Labor is expected to issue guidance for how plan sponsors should calculate projected monthly income, taking into account factors such as long-term contribution rates, investment performance and overall market growth. The DOL’s guidance will be complicated by the fact many plans have been doing this for years already. Hopefully, the DOL will not make such disclosures less useful.  These disclosures aren’t required until 12 months after the DOL does everything it is required to do: i.e., issue guidance, issue model disclosure, and outline the required assumptions.

Required Minimum Distribution (RMD) Rules

The SECURE Act requires changes to the RMD rules to extend the required beginning date for living participants from the April 1 following the year in which the participant attains 70½ to such date following attainment of age 72. This change is generally effective for employees who reach age 70½ after 12/31/2019.

Form 5500 Late Filing Penalties Increasing ten-Fold

IRS penalties for late filed Forms 5500 will be increasing from $25 per day to $250 per day, and the maximum penalty per form (per plan year) increases from $15,000 to $150,000. This makes DOL’s Delinquent Filers Voluntary Correction Program (DFVC) (and, the IRS procedure for Forms 5500-EZ under Rev. Proc. 2015-32) far more valuable for late filers. The Form 8955-SSA penalties are also increasing ten-fold: from $1 per day per unreported participant to $10; and from a $5,000 maximum to $50,000. Finally, the obscure requirement that plan administrators file Form 8822-B to register a change in plan name or plan administrator name/address is also seeing enhanced penalties. The penalty for not filing that form will increase from $1 per day to $10, up to a maximum of $10,000 (up from $1,000). All of these changes are effective for returns due after 12/31/2019.

Distribution Related to Birth or Adoption

The SECURE Act permits Plans to allow participants who have or adopt a child after 2019 to take a distribution of up to $5,000 from the plan without having to pay the 10% premature distribution tax, if the distribution is made within one year of the birth or adoption. Further, the distributed funds may be repaid and treated like a rollover to a plan or IRA. There appears to be no deadline on repayment.

Extended Adoption Deadline for New Plans

The SECURE Act permits the adoption of new plans up to the tax return due date of the employer, including extensions. This rule is effective for plan years beginning after 12/31/2019. However, this applies only to employer contributions. Deferral provisions must be in place before the plan accepts elective deferrals. This will be a boon to the establishment of new plans, particularly for small employers whose owners may be looking for a way to reduce their tax burden in the immediately prior year.

Simplifying Safe Harbor 401(k) Plan Administration

The SECURE Act includes several provisions that will reduce the administrative burden for safe harbor 401(k) plans, including:

  • No safe harbor notice is required for a safe harbor plan that has only nonelective contributions.  However, a nonelective contribution safe harbor plan that has matching contributions intended to fall within the ACP safe harbor must still give a safe harbor notice.
  • A safe harbor nonelective plan design (both regular and QACAs) may be adopted up to 30 days before the end of the plan year. This late adoption is not available for plans that have an ADP or QACA matching contribution at any time during the plan year.
  • A safe harbor nonelective plan design may also be adopted after the 30-day deadline and as late as the deadline for ADP refunds (generally the end of the plan year following the year for which the refunds are made), if the nonelective safe harbor contribution is increased from the normal 3% of compensation to 4%.

QACA Auto Escalation

The SECURE permits an increase in auto escalation in a QACA. The Act raises the 10% cap on the automatic escalation feature of QACAs after the first-year period, and replaces it with a 15% cap. This recognizes that 10% may not be a high enough rate of deferral for many participants. This is an optional provision (i.e. Plan Sponsors are not required to auto escalate to 15%, but may do so).

Pooled Employer Plans (Open MEPs) Encouraged

The SECURE Act gives a big boost to Open MEPs (now to be called “Pooled Employer Plans” or “PEPs”), effective for plan years beginning in 2021. The Act permits a “pooled plan provider” or “PPP” to sponsor a multiple employer plan for its clients.

The PPP is required to take responsibility as a named fiduciary, plan administrator, and the person who ensures that ERISA and Code requirements are met for the plan. The PPP is also required to make sure that all plan fiduciaries are properly bonded (and the new law makes it clear that bonding applies regardless of whether the fiduciary handles plan assets).

The SECURE Act provides that the PEP will not be disqualified because of a failure of an adopting employer to comply with the legal requirements. The adopting employer at issue, however, will be liable for qualification issues that affect its employees. The IRS will likely finalize its proposed rules, which permit the plan sponsor (the PPP under the Act) to eject the noncompliant part of the plan.

The law also reinforces that the adopting employer acts as a fiduciary in deciding to join a given PEP and for monitoring the PPP and other plan fiduciaries. In addition, unless the PEP has delegated investment management to someone else, the adopting employer is the investment fiduciary for its portion of the PEP. The law further provides that the PEP cannot apply “unreasonable” restrictions, fees, or penalties to employers or employees for ceasing participation, taking distributions, or otherwise transferring assets.

The SECURE Act leaves it to the Departments of the Treasury and Labor to issue regulations to flesh out the details of the new structure, and permits a good faith, reasonable interpretation of these rules until such guidance is issued.

Expect the big players in the retirement industry to roll out PEPs in the years to come.  These arrangements will likely be attractive for start-up and small plans.

Other Changes Indirectly Affecting Qualified Plan Participants

Elimination of ‘Stretch’ IRAs, with some exceptions

“Stretch IRAs” have for years been a way of reducing the tax bill non-spouse beneficiaries pay when they inherit IRAs. These beneficiaries could “stretch out” their required minimum distributions (RMDs) over their lifetimes. This provided a lot of flexibility to plan the distributions in the most tax advantageous way. The SECURE Act eliminated “stretch” IRAs for those not deemed “eligible designated beneficiaries.” Anyone who is not an “eligible designated beneficiary” now must take full distribution of an inherited IRA within 10 years after the date of death.

Eligible designated beneficiaries, who can still stretch their RMDs, include:

  • Surviving spouses
  • Minor children, up to majority – but not grandchildren
  • Disabled people- under IRS rules
  • Chronically ill people
  • Individuals not more than 10 years younger than the IRA owner

Extension of IRA Eligibility

People over age 70½ can make deductible IRA contributions starting in 2020.

Effective Date and Deadline to Make Required Amendments

The SECURE Act was generally effective January 1, 2020. However, qualified plans will not be required to make amendments to comply with the SECURE Act until the last day of the plan year beginning on or after January 1, 2022. The law also permits the IRS to extend the amendment date further if required.

Final Regulations Require Electronic Submission of “Top Hat” Statements

The Department of Labor Employee Benefits Security Administration has published final regulations that revise the procedures for filing “top hat” plan statements under § 2520.104-23 with the Secretary of Labor, to require electronic submission of these statements through EBSA’s website in accordance with instructions published by the Department. The final rule does not change the current content requirements in the regulations . The final rule will be effective August 16, 2019.

Background

Part 1 of Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), contains reporting and disclosure requirements applicable to plans covered by ERISA. For instance, sections 103 and 104 of ERISA establish requirements for the publication and filing of annual reports, while sections 102 and 104 of ERISA require plan administrators to furnish summary plan descriptions and summaries of material modifications or changes to participants and beneficiaries.

Section 110(a) of ERISA permits the Secretary to specify an alternative form of compliance with the reporting and disclosure obligations of Part 1 of Title I for any pension plan or class of pension plans subject to ERISA if certain findings are made. Under the authority of section 110(a), in 1975 the Department issued 29 CFR 2520.104-23 to provide an alternative method of compliance with the reporting and disclosure requirements of Part 1 of Title I for unfunded or insured pension plans established for a select group of management or highly compensated employees (“top hat” plans).

Under the alternative method of compliance, the administrator of a top hat plan satisfies the requirements for the reporting and disclosure provisions of Part 1 of Title I by filing a statement with the Secretary by mail or personal delivery to the address specified in the regulation, and by providing plan documents, if any, to the Secretary upon request. The statement must include the information listed in the regulation.

Originally, top hat statements had to be filed in paper form. On September 30, 2014, the Department published a proposed rule to revise the procedures for filing top hat plan statements under § 2520.104-23 to require electronic submission of these statements. On the same date, the Department also made available a new web based filing system. Use of this web based filing system was voluntary until the adoption of this final rule. Approximately 54% of the top hat plan statements have been filed electronically since then.

Going forward, EBSA’s web based filing system will be the exclusive method for filing these notices and statements; filings by mail or personal delivery will no longer be accepted. Upon submission of a completed filing, the new web based filing system sends an electronic confirmation of receipt to the administrator. This confirmation is not available through the existing paper-based filing system.

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

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

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.

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

Supreme Court Rules ERISA-Exempt “Church Plan” Includes Plan Maintained by Church-Affilaited Organizations (like hospitals and schools)

The United States Supreme Court has held, in Advocate Health Care Network v Stapleton that a benefit plan maintained by a church-affiliated organization, whose principal purpose is to fund or administer a benefits plan for the employees of either a church or a church-affiliated nonprofit (a “principal purpose organization”) is a church plan under ERISA Section 3(33), regardless of who established the Plan. This is in accordance with the long-standing regulatory position adopted by the IRS, Department of Labor and PBGC.

Background on ERISA’s Church Plan Exception

ERISA generally obligates private employers offering pension plans to adhere to an array of rules designed to ensure plan solvency and protect plan participants. “Church plans” however, are exempt from those regulations.

From the beginning, ERISA defined a “church plan” as “a plan established and maintained . . . for its employees . . . by a church.” Congress then amended the statute to expand that definition in two ways:

  • “A plan established and maintained for its employees . . . by a church . . . includes a plan maintained by an organization . . . the principal purpose . . . of which is the administration or funding of [such] plan . . . for the employees of a church . . . , if such organization is controlled by or associated with a church.” (The opinion refers to these organizations as “principal-purpose organizations.”)
  • An “employee of a church” includes an employee of a church-affiliated organization.

The Case

The Petitioners in Advocate Health Care Network v Stapleton were three church-affiliated nonprofits that run hospitals and other healthcare facilities, and offer their employees defined-benefit pension plans. Those plans were established by the hospitals themselves, and are managed by internal employee-benefits committees. Respondents, current and former hospital employees, filed class actions alleging that the hospitals’ pension plans do not fall within ERISA’s church plan exemption because they were not established by a church. The Supreme Court held for the hospitals, ruling that a plan maintained by a principal-purpose organization qualifies as a “church plan,” regardless of who established it.

The Court reasoned that the term “church plan” initially “mean[t]” only “a plan established and maintained . . . by a church.” But the amendment provides that the original definitional phrase will now “include” another—“a plan maintained by [a principal-purpose] organization.” That use of the word “include” is not literal, but tells readers that a different type of plan should receive the same treatment (i.e., an exemption) as the type described in the old definition. In other words, because Congress deemed the category of plans “established and maintained by a church” to “include” plans “maintained by” principal purpose organizations, those plans—and all those plans—are exempt from ERISA’s requirements.

What Comes Next?

Advocate Health Care Network v Stapleton does not rule on what is or is not a “principle purpose organization”, and that is where we can expect future litigation to focus. The key question will be whether such organization is “controlled by or associated with a church.” Therefore, church-affiliated organizations, such as hospitals, schools, and social welfare agencies, that are relying on ERISA’s church plan exception ought to review their documentation and evidence of either control by or affiliation with a church.