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Employee Benefits Legal Blog

Employee Benefits Related to Labor & Employment Matters

Is Self-Insuring the Answer? It Depends on the Question

Posted in Plan Administration, Welfare Plans

As we bear down on the first date of compliance with the ACA, much has been written about the benefit of shifting coverage to a self-funded plan because self-funded plans are not subject to many of the requirements of the ACA.  The suggestion is that self-funding might actually be more affordable that simply purchasing insured coverage.  But cost cannot be the only consideration.  So how does one decide to self-insure a health plan or go the fully-insured route?  Insurance premiums continue to go up, but on the other hand, self-insuring a plan has its own set of risks and burdens to consider.  So what are some of the things to think about when considering either option?  Here are some issues that I commonly see related to that decision.

Remember that when a plan is self-insured, it means the employer is paying all of the health care costs plus administration costs—not “just” premiums.  So the employer bears the risks and is ultimately on the hook for the costs of coverage and the employer, as plan sponsor, has the responsibility for ensuring proper administration and compliance.  Plan sponsors of self-insured plans are faced with real dollar-value problems related to high claims levels, maintaining adequate stop loss coverage (and premiums for that coverage) and fluctuating costs of new treatments and medications.  On the other hand, they are not paying for risk of other employers and their exposure is limited, to some extent, to actual claims.  So the actual dollars spent on claims in a given year can be significantly lower than one would pay for comparable insurance coverage.

Insured plans work so that the insurance company is ultimately responsible for the health care costs and the employer pays premiums.  The only costs concern is the premium dollars.  The insurance company bears the risk (which is built into the premium) so fluctuating costs and unexpected high dollar claims are simply absorbed by the carrier.  Sure, they might increase your premiums next year, but a catastrophic high dollar claim won’t immediately impact the company bottom line.  Plus, most costs of administration are borne by the insurance carrier, not the employer.

Most companies that move to self-insured plans do so because of the size of their population because it becomes less expensive for them to pay for all of the medical expenses than to pay the premiums required by the insurance company to take on the risk.  Smaller companies can consider self-insuring as an option, but they have to be wary of the possibility that significant claims costs can adversely impact revenue streams.  Companies with stable populations or populations with younger, single employees seem to statistically have lower claims experience and might be better candidates for self-insuring.  However, population stability can be tricky to maintain and companies should be keenly aware of anti-discrimination laws protecting employees based on age and marital status (in other words, don’t create a policy of only hiring 25 year old single men to keep health costs low).

Of course any discussion of plan funding should start with an understanding of your annual claims experience, preferably measured over a period of time.  If you are thinking of going to a self-insured plan, or going from self-insured to fully insured, it is best to know what your claims history actually looks like.  It may be that simple plan design changes can be made that make your current funding status more affordable.  And don’t forget the obligations related to being a plan sponsor and the notice and documentation requirements.  Even if the employer contracts out for administration services, the obligations of compliance still fall to the employer.  And don’t forget about discrimination testing.  Self-funded plans are subject to testing requirements that are not in place for insured plans.  Plus there are the added reporting requirements of being self-funded.  The annual cost of these types of administrative issues has to be taken into account before making a final determination.  And there is the need for more professionals, like lawyers, administrators and consultants.

In the end, no one can say automatically which option is best for your plan.  It is a conversation that you might want to have with your broker, benefits adviser or legal counsel.  It should not be just about cost, but also about capacity and capabilities and the administration of a self-funded plan can place a substantial burden on company employees charged with maintaining the plan, particularly if they are not familiar with how benefit plans operate.  So don’t make a decision based on a blog you read on the Internet.  Make it based on the facts specific to your company’s needs and abilities.  In the end, the real question is what works best for your company.

Can I Have A “Skinny” Plan? ACA and the Minimum Value Plan

Posted in Plan Administration, Welfare Plans

No question that employers have been struggling with how to satisfy the ACA requirements of offering coverage while still avoiding what is perceived to be a heavy burned financially of offering full coverage.  Some employers in this situation have considered offering a new type of plan to full-time employees, called a “minimum value” plan.  From that concept derived a type of plan called a “skinny” plan that provides coverage for some medical services, but excludes coverage for others like inpatient hospital services, or possibly physician services.

In IRS Notice 2014-69, there is some clarification that these skinny plans (plans that offer limited or no coverage for in-patient hospitalization services and/or physician services) will not provide “minimum value” under the health reform law.  But then they give a one year extension to offer that coverage if it is already in place.  In order to take advantage of this extension, there are two conditions:

  1. The employer must have a binding written commitment to adopt or began enrolling employees into a skinny plan prior to November 4, 2014.
  2. The employer must have relied on the results of the MV Calculator to determine whether the plan offered minimum value coverage.

Of course more regulation is anticipated, and it is anticipated that  when final regulations are issued, they will not apply to these plans immediately if the above criteria are satisfied.  These plans will be considered minimum value for the purposes of the employer mandate until the end of the plan year as long as the plan year commences prior to March 1, 2015.

If an employer decides to offer a minimum value plan that does not include inpatient hospital or physician services, the employer has to be careful about its disclosures to employees.  First, it must not state or imply that the offer of coverage under the skinny plan prevents an employee from obtaining a premium tax credit in the exchange.  Second, the employer must correct any prior disclosure which implied that the offer of the skinny plan would prevent an employee from being eligible for the subsidies.  This is because employees are not required to consider skinny plans when looking to obtain subsidies for exchange participation.

Based on this notice, it appears fairly clear that if an employer does not already have a skinny plan in place, they can’t create one.  If they have created one, it is a temporary fix, not a permanent solution.  Finally, since they took the time to issue regulations specific to these plans, it should be anticipated that they will be pretty heavily scrutinized if an employer determines to offer it.  But the rules are out there.  So if you decide to maintain a skinny plan, make sure you know what the true limitations are and stay aware of the possibility of future changes to the limits on such an offering.

Can Employers Pay for Employees in Exchanges? No.

Posted in Plan Administration, Welfare Plans

On November 6, the DOL issued FAQ Part 22, which directly addresses some recent efforts by employers to reimburse employees for participation in the exchange through Code Section 105, or through some type of other arrangement.  Here are the questions, with shortened answers.  For a complete copy of the notice, click this link.

Q1: My employer offers employees cash to reimburse the purchase of an individual market policy.  Does this arrangement comply with the market reforms?

No.  If the employer uses an arrangement that provides cash reimbursement for the purchase of an individual market policy, the employer’s payment arrangement is part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees, without regard to whether the employer treats the money as pre-tax or post-tax to the employee.  Under the Departments’ prior published guidance, the cash arrangement fails to comply with the market reforms because the cash payment cannot be integrated with an individual market policy.

Q2: My employer offers employees with high claims risk a choice between enrollment in its standard group health plan or cash.  Does this comply with the market reforms?

No.  PHS Act section 2705, as well as the nondiscrimination provisions of ERISA and HIPAA prohibit discrimination based on one or more health factors.  Offering, only to employees with a high claims risk, a choice between enrollment in the standard group health plan or cash, constitutes such discrimination.  Also, because the choice between taxable cash and a tax-favored qualified benefit (the election of coverage under the group health plan) is required to be a Code section 125 cafeteria plan, imposing an effective additional cost to elect coverage under the group health plan could, depending on the facts and circumstances, also result in discrimination in favor of highly compensated individuals in violation of the Code section 125 cafeteria plan nondiscrimination rules.

Q3:  A vendor markets a product to employers claiming that employers can cancel their group policies, set up a Code section 105 reimbursement plan that works with health insurance brokers or agents to help employees select individual insurance policies, and allow eligible employees to access the premium tax credits for Marketplace coverage.  Is this permissible?

No.  The Departments have been informed that some vendors are marketing such products.  However, these arrangements are problematic for several reasons.  First, the arrangements  are themselves group health plans and, therefore, employees participating in such arrangements are ineligible for premium tax credits for Marketplace coverage.  The mere fact that the employer does not get involved with an employee’s individual selection or purchase of an individual health insurance policy does not prevent the arrangement from being a group health plan.  Second, such arrangements are subject to the market reform provisions of the Affordable Care Act, including  prohibition on annual limits and the requirement to provide certain preventive services without cost sharing.  Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code.

So if you are thinking the solution to compliance is to simply pay for your employee to participate in the exchange, make sure you understand the answers to these questions.  Clearly the department is aware that employer have considered this as a solution and are giving it careful scrutiny.

Thoughts Post-Election: Don’t Count on Changes to the ACA Until They Actually Happen

Posted in Plan Administration, Retirement Plans, Welfare Plans

As soon as the mid-term races were called, I started to get e-mails from people wondering about the potential impact the change to a Republican controlled Congress would have on ACA compliance.  My general response: don’t expect any immediate relief or changes and keep on working toward compliance.  Changes in the law might eventually come, but the administration still remains the same.

The problem with trying to anticipate potential changes to the ACA based on a revised Congressional make-up is that so much of the “law” relies on regulations.  Rules and interpretation of the law is not something controlled by Congress directly.  So while Congress may eventually change the law, the regulations we are dealing with now anticipate the current effective dates, most of which start on January 1, 2015.  Nothing is going to change between now and then.  Throughout 2015, there might be some changes to the law, but as we have seen with the struggle to write regulations, those don’t happen immediately.  It will take time to implement changes that back away from the change we are presently implementing because of the implementation of the Act in the first place.

The same can be said for benefit administration beyond ACA compliance.  Changes in control of Congress rarely have an immediate impact on the rules and regulations governing plan administration.  Instead, they are more likely to change to focus from one area of law to another.  Employers and sponsors would be well served by continuing their present course of ACA compliance efforts instead of hoping for repeal.  What changes we may see will not likely be as monumental and the implementation of the ACA itself.

That said, I do think that 2015 is going to be a bumpy ride for compliance, so make sure to keep in contact with your benefits professionals and see how things develop.

IRS Announces Cost of Living Adjustments for Qualified Retirement Plans

Posted in Plan Administration, Retirement Plans

Susan Jordan, my partner in Pittsburgh, propvides me with the following:

In a news release (IR-2014-99) on October 23, 2014, the IRS announced the cost-of-living adjustments to the various dollar limitations applicable to qualified retirement plans for 2015.  As had been widely predicted, most of the limitations have been increased.

1.         LIMIT ON COMPENSATION:  The maximum amount of compensation that may be counted for plan purposes for plan years beginning in 2015 is $265,000, up $5,000 from the $260,000 limitation applicable in 2014.  This limitation applies for calendar year 2015 and for limitation years beginning in 2015.

2.         LIMITS ON CONTRIBUTIONS AND BENEFITS.  The maximum limit on annual additions to a defined contribution plan is increased from $52,000 to $53,000. However, the maximum annual benefit which may be accrued under a defined benefit plan remains unchanged at $210,000.  These limitations are applicable for calendar year 2015 and for limitation years ending within 2015.

3.         401(k) and 403(b) DEFERRAL LIMIT.  For purposes of 401(k) and 403(b) plans, the maximum limitation on voluntary salary deferrals is increased for calendar year 2015 from $17,500 to $18,000, and the limit on catch-up deferrals by those age 50 or older, which had been fixed for the last six years at $5,500, is bumped up to $6,000.

4.         IDENTIFICATION OF HIGHLY COMPENSATED AND KEY EMPLOYEES.   Effective for plan years beginning in 2015, a Highly Compensated Employee is any employee who (a) was a 5% owner during the current or preceding year, or (b) who received compensation from the employer during the preceding year in excess of $120,000. This compensation threshold had been set at $115,000 since  2012.  The dollar limit used to define a key employee in a top heavy plan under IRC Section 416(i)(1)(A)(i), however, remains unchanged at $170,000.

5.         SEP THRESHOLDThe compensation minimum for which coverage is required for a simplified employee pension plan (SEP) is increased from  $550 to $600.

6.         TAXABLE WAGE BASE.  As announced by the Social Security Administration on October 22, 2014,  the Social Security taxable wage base for 2015 will be $118,500, an increase of just 1.28% from $117,000 which was the wage base for 2014.  For plan years which operate on a fiscal year basis, this wage base will be effective for plan years beginning in 2015.

*   *   *  *   *   *   *   *   *

We frequently are asked to provide the contribution formula needed to maximize contributions for an individual with compensation at or above the maximum limit.  The following have been calculated based on the new wage base and these cost-of-living adjustments:

For a calendar year profit sharing plan integrated at the Social Security wage base, the contribution formula needed to achieve the maximum permissible allocation for an individual with compensation of $265,000 or more is:

16.84886% up to $118,500, plus 22.54886% in excess of $118,500 (up to $265,000)

For a calendar year 401(k) plan integrated at the Social Security wage base and using the 3% safe harbor design, the profit sharing contribution formula which, in the aggregate (with a $18,000 deferral and $7,950 safe harbor contribution), will achieve the  maximum permissible allocation for an individual with compensation of $265,000 or more is:

7.05641% up to $118,500, plus 12.75641% in excess of $118,500 (up to $265,000)

To Have an Expert or Not: A Fiduciary’s Quandary

Posted in Plan Administration, Retirement Plans, Welfare Plans

I am working on some cases now that involve allegations of misuse of an expert by a fiduciary of a benefit plan.  Consequently, I have been reading a lot of articles and cases relating to the fiduciary duty and expert advice.  As a result, I can see where fiduciaries could have a real question about their duty to retain experts and the restrictions on relaying on expert advice.

Generally, the only real requirement for someone to act as a fiduciary of a benefit plan under ERISA is that they be a “reasonably prudent person” and that they act with diligence and due care.  That is the essence of ERISA Section 404.  However, Section 404 includes that the measurement of care is based on a reasonable person “familiar with such matters.”  Thus, the law recognizes that someone could possibly have to look outside of their own knowledge in order to be acting reasonably.  But it is not automatically required.  Again, the standard is one of reasonable prudence, so a fiduciary is not required to substitute their own knowledge for that of another if the fiduciary has a certain skill.

What this means is that the process of selecting and relying on an expert requires a fiduciary to go deeper than simply selecting someone who claims to know more than the fiduciary.  Assuming the fiduciary determines that a reasonably prudent person would seek outside advice, the fiduciary then has to determine from whom the advice should be sought.  The due diligence of investigating and selecting someone who does in fact have an expertise defines whether a fiduciary can rely on the advice.  Simply put, you can’t rely on an expert if you have not first determined them to be an expert and that is only done through investigating their qualifications.

Assuming a fiduciary has diligently selected an expert, the next question is whether the fiduciary can rely on the advice given.  In order to do that, the trustee has to reasonably understand the advice given.  In other words, the fiduciary has to demonstrate that they understood what the expert has opined and why.  How and why are the important questions…why did you reach this conclusion and how did you get there?  Fiduciaries have to show the understood the rationale, not just the recommended action.

This last part creates the quandary because sometimes it can be reasonable to reject expert advice.  A fiduciary is not always required to replace their own knowledge and skill with that of an “expert.”  A fiduciary should recognize that they have the duty to act and they will be judged on those actions, not the expert.  So a fiduciary who does not agree with the rationale provided by the outside expert should not blindly agree to an action simply because the advice came from an expert.  This is not to suggest that expert advice should be easily rejected or ignored.  But expert advice does not replace the knowledge and skill of the reasonable fiduciary.

Having experts is not a bad thing.  And relying on experts is generally good when it is a topic about which a fiduciary has no knowledge.  But don’t assume that using an expert will be an insulator from any claim for breach of duty.  It only helps if it is truly an area where an expert is needed, they were properly selected and you understand their advice.

It’s Not Easy Having Plans: Revising Benefits Can Give Rise to Other Claims

Posted in Plan Administration, Retirement Plans, Welfare Plans

As employers continue preparing for health plan changes that take place in 2015 under the ACA, I have been following a number of developments that remind me of the importance of thinking globally with respect to revisions to benefits.  What I mean by that is just because you can do something does not necessarily mean you should do something because of the breadth of other laws that impact employers beyond ERISA and the ACA.

Earlier this week, a number of news outlets reported how some companies were adding “egg freezing” benefits to their health plan fertility coverage.  The health plans cover the cost of female employees who want to cryogenically preserve eggs to be used to have children.  In one quote I read, it suggested that this would allow women more opportunity to wait to have children until after their career has matured.  But a concern with this type of benefit is that the company is sending a message that if you have children when you are younger, the company sees you as being not career oriented.  Women who chose not to take advantage of the benefit might feel discriminated against if they are not promoted as quickly.  So the risk for these companies is that women who decide to have children can make claims for discrimination.

Wellness plans have to be carefully considered as well.  Recently, the EEOC announced that it had filed two suits against employers under the ADA by requiring employees to submit to medical examinations and inquiries that “were neither job-related nor consistent with business necessity.”  The EEOC contended that these programs were not voluntary and thus violated the ADA.  Since the EEOC has not yet issued guidance on how employers may structure their wellness programs to avoid violations of the ADA, this leaves employers up in the air over whether their “voluntary” wellness programs, while permissible under the ACA, will run afoul of the EEOC.

Finally, I saw a notice at AT&T is terminating its retiree medical and replacing it with an HRA.  AT&T anticipates this will help them control costs associated with their medical plan.  As someone who has defended employers in class action litigation brought by retirees for terminating medical coverage, I can say for certain that while it may be permissible to make that change, the process for doing it properly requires much more than just announcing change and implementing the new plan.  Careful consideration has to be given to each phase of the process.  I am not suggesting AT&T has not followed the appropriate procedure, but merely suggesting that making a change like this is a much longer and more involved process than a new notice might reveal.

The point being that while employers are diligently seeking ways to manage ACA compliance and health benefits costs, they should not lose sight of the adage that just because you can do something does not mean you should do it.  Any change to a benefit plan comes with some risk and it has to be fully evaluated before the change is made.  The more an employer considers potential risks, the less likely there are to get bad press.

Locating Missing Particiants, Or at Least Trying To

Posted in Plan Administration, Retirement Plans, Welfare Plans

One of the most frustrating things about benefit plans is that they have participants, participants are people and people sometimes disappear.  It is unfortunately a fact of plan administration and it can be a problem.  Plan sponsors, and administrators sometimes need to locate missing participants or beneficiaries for things like notice, distributions or even corrective actions being taken by the plan.

Consider Section 6.02(5)(d) of Revenue Procedure 2013-12:

“(d) Locating lost participants. (i) Reasonable actions must be taken to find all current and former participants and beneficiaries to whom additional benefits are due, but who have not been located after a mailing to the last known address. In general, such actions include, but are not limited to, a mailing to the individual’s last known address using certified mail, and, if that is unsuccessful, an additional search method, such as the use of the Social Security letter forwarding program, a commercial locator service, a credit reporting agency, or Internet search tools. Depending on the facts and circumstances, the use of more than one of these additional search methods may be appropriate. A plan will not be considered to have failed to correct a failure due to the inability to locate an individual if reasonable actions to locate the individual have been undertaken in accordance with this paragraph; provided that, if the individual is later located, the additional benefits are provided to the individual at that time.”

It used to be that the IRS would help, but it eliminated its letter-forwarding services to help locate missing plan participants. See Revenue Procedure 2012-35.  Instead, the IRS suggests using commercial locator services, credit reporting agencies or internet search tools.  In Field Assistance Bulletin No. 2014-01, the DOL lists the following search methods as the minimum steps the fiduciary of a terminated defined contribution plan must take to locate a participant:

  • Send a notice using certified mail
  • Check the records of the employer or any related plans of the employer
  • Send an inquiry to the designated beneficiary of the missing participant
  • Use free electronic search tools

DOL Field Assistance Bulletin 2004-02 provides guidance on locating missing participants in defined contribution plans.  It gives search methods and default treatment of account balances for participants you can’t find, but the options look a lot like with the IRS already suggests.  In any event, there will have to be a showing of the good faith efforts used to locate a missing participant, so keep a record of what effeorts were made.

It might be worthwhile for a plan to consider adopting certain administrative guidelines for dealing with participants that cannot be located.  For example, if participant consent is required to change administrators (such as in an employee stock plan or some other retirement plan), consider inserting a provision in the plan that provides that if consent is not denied within 30 days from the notice date, it will be deemed accepted.  Or perhaps inserting specific language that obligates the participant to provide the plan with current contact information with the understanding that the plan will rely on that information as current unless told otherwise.

But unfortunately there is no easy answer except to try and find them using suggested resources.  The good news is that if you show that you use them, you will have a stronger defense to a charge that you failed to find interested people.

Who’s in Control? Determining Control Group Status is Important

Posted in Plan Administration, Retirement Plans, Welfare Plans, Withdrawal Liability

The existence of a “control group” is important in a variety of benefit concerns.  From retirement plans to welfare plan, and particularly in withdrawal liability matters, establishing whether companies are under common control is very important.  Under the ACA, it matters for determining whether you are an applicable large employer so as we get closer to that January 1, 2015, deadline, lets revisit control group rules.

Basically there are two types of control groups.  The first is a parent-subsidiary control group.  In this relationship, 80 percent of the stock of each corporation, (except the common parent) is owned by one or more corporations in the group; and the parent corporation must own 80 percent of at least one other corporation.  The second type is a brother-sister control group.  It is a little more complex.  A brother-sister controlled group is a group of two or more corporations in which five or fewer common owners own directly or indirectly a controlling interest of each group and have “effective control”.  The first part, the controlling interest, means that the group holds 80 percent or more of the stock of each corporation (but only if such common owner own stock in each corporation).  Effective control means more than 50 percent of the stock of each corporation, but only to the extent such stock ownership is identical with respect to such corporation.

Confused yet?  Well you also have to consider the definition of person that includes, amongst other things, estates and beneficiaries of trusts.  You also have to consider the attribution rues in Section 1563 of the Code because ownership between spouses, children and even adult children can be attributed to other owners depending on the circumstances.  So it is not just a function of who owns what, but also how the owners are related to each other.

All of this is relevant because in many instances, the IRS and DOL measure compliance by control group, not simply by individual employer.  Moreover, there are many situations in the benefits arena where liability for wrongdoing flows to the entire control group, not just one member.  Commonality of ownership can cause common responsibility.

Remember that being part of a control group is not in and of itself a bad thing.  But make sure you know whether or not your company is part of one.  It can have a substantial impact on benefit related decisions, so make sure to figure out who is in control.  For assistance in determining whether you are part of a control group, you can always seek assistance from your attorneys at Fox Rothschild.

The Latest on Cafeteria Plan Elections: Changes that Allow Changes

Posted in Plan Administration, Welfare Plans

What happens if an employee wants to drop out of the company plan and get into the exchange?  Seems like an option except the cafeteria plan rules prevent someone from making a mid-year change in their cafeteria plan election.  Along comes the IRS with Notice 2014-55.  This notice addresses situations in which individuals can change their health coverage elections under a Section 125 cafeteria plan and expands the options available.  This is a step toward final rules that should be consistent with this notice, but this guidance provides for immediate remedies.

Generally, a cafeteria plan participant can’t change elections mid-year, with certain specific exceptions that the plan can permit.  These exceptions did not include any reference to exchanges until now.  Now a plan can provide for revocations in two situations directly related to participation in the exchanges.  Specifically, an employee may revoke a cafeteria plan election if:

  • The employee has a reduction of hours that will drop them below 30 hours per week average but they still remain eligible for company coverage; or
  • The employee wants to drop employer coverage and purchase coverage through the exchange without having a period of either duplicate coverage or no coverage.

This is now permissible so long as:

  • The cafeteria plan is not a health FSA; and
  • It provides minimum essential coverage.

Note that the revocation cannot be retroactive.

What this means is that if an employee has a change in employment during a stability period that results in a reduction in hours but does not eliminate eligibility for coverage, that employee may elect to revoke the cafeteria plan election and go into the exchange.  Also, a cafeteria plan may allow an employee to revoke an election of coverage under a group health if the employee is eligible for special enrollment in an exchange plan OR the he intends to enroll in the exchange during an open enrollment period AND the revocation of the election of coverage under the group health plan corresponds to the intended enrollment of the employee in the exchange.

But it is not automatic.  The plan has to be amended to permit these election changes.  So if you want to provide the option to revoke participation in the cafeteria plan to allow employees to opt out and get into the exchange, review this notice with your benefit professionals and take appropriate action.