Tag: Supreme Court

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

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

The Case

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

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

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

Take-Aways

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

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.

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.

Fiduciaries Ultimately Prevail in Tibble v. Edison

On remand from the United States Supreme Court, which held in May 2015 that ERISA imposes on retirement plan fiduciaries an ongoing duty to monitor investments, even absent a change in circumstances, the 9th Circuit Court of Appeals recently affirmed the district court’s original judgment in favor of the employer and its benefits plan administrator on claims of breach of fiduciary duty in the selection and retention of certain mutual funds for a benefit plan governed by ERISA.

The court of appeals had previously affirmed the district court’s holding that the plan beneficiaries’ claims regarding the selection of mutual funds in 1999 were time-barred. The Supreme Court vacated the court of appeals’ decision, observing that federal law imposes on fiduciaries an ongoing duty to monitor investments even absent a change in circumstances.

On remand, the panel held that the beneficiaries forfeited such ongoing-duty-to-monitor argument by failing to raise it either before the district court or in their initial appeal. While the fiduciaries ultimately prevailed in this case, the lesson for fiduciaries remains clear: You have an ongoing duty to monitor the investment options in your retirement plans.

Tibble v. Edison International (9th Cir., 2016)

Full Text of the Supreme Court Decision in Tibble v. Edison International (2015)

Supreme Court Rules ERISA Equitable Relief Can’t Reach Nontraceable Settlement Proceeds

Employee benefits plans regulated by the Employee Retirement Income Security Act of 1974 (ERISA or Act) often contain subrogation clauses requiring a plan participant to reimburse the plan for medical expenses if the participant later recovers money from a third party for his injuries.

On January 20, 2016, the US Supreme Court held, in MONTANILE v. BOARD OF TRUSTEES OF THE NATIONAL ELEVATOR INDUSTRY HEALTH BENEFIT PLAN that if an ERISA-plan participant wholly dissipates a third-party settlement on nontraceable items, the plan fiduciary may not rely on a subrogation provision in their health plan to bring suit under ERSA §502(a)(3) to attach the participant’s separate assets. Plan fiduciaries are limited by §502(a)(3) to filing suits “to obtain . . . equitable relief.” The Court previously held that whether the relief requested “is legal or equitable depends on [1] the basis for [the plaintiff’s] claim and [2] the nature of the underlying remedies sought.” Sereboff v. Mid Atlantic Medical Services, Inc., 547 U. S. 356, 363. In Montanile, the Court held that the Plan was not seeking equitable relief because it sought to recover against the defendant’s general assets, not specifically traceable assets. The lesson for Plan fiduciaries wishing to assert subrogation claims is to (1) put participants on specific notice of the subrogation claim as soon as the Plan learns of a significant incident of a type that might give rise to a subrogation claim (such as an accident); and (2) pursue the claim diligently before the participant receives settlement proceeds. We routinely include in our welfare wrap plan documents a vigorous subrogation reservation to protect Plans’ subrogation rights to the fullest extent practical.

More on the Montanile case…

Montanile was seriously injured by a drunk driver, and his ERISA plan paid more than $120,000 for his medical expenses. Montanile later sued the drunk driver, obtaining a 500,000 settlement. Pursuant to the plan’s subrogation clause, the plan administrator (the Board of Trustees of the National Elevator Industry Health Benefit Plan, or Board), sought reimbursement from the settlement. Montanile’s attorney refused that request and subsequently informed the Board that the fund would be transferred from a client trust account to Montanile unless the Board objected. The Board did not respond, and Montanile received the settlement.

Six months later, the Board sued Montanile in Federal District Court under §502(a)(3) of ERISA, which authorizes plan fiduciaries to file suit “to obtain . . . appropriate equitable relief . . . to enforce . . . the terms of the plan.” 29 U. S. C. §1132(a)(3). The Board sought an equitable lien on any settlement funds or property in Montanile’s possession and an order enjoining Montanile from dissipating any such funds. Montanile argued that because he had already spent almost all of the settlement, no identifiable fund existed against which to enforce the lien. The District Court rejected Montanile’s argument, and the Eleventh Circuit affirmed, holding that even if Montanile had completely dissipated the fund, the plan was entitled to reimbursement from Montanile’s general assets. The Supreme Cour reversed for the reasons explained above.

icon Supreme Court Decision in Montanile

icon Supreme Court Decision in Sereboff

Supreme Court Obergefell Decision Impacts Employer Welfare Benefit Plans

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(c) eliminate domestic partner coverage.

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

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

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

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

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

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

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