As the White House continues to make changes to PPACA, some employers can get confused over whether and when they have to comply to avoid penalties. I thought now might be a good time to remind employers how things presently sit so they can make sure they properly prepare for PPACA deadlines (and avoid penalties).
First, employers have to count their number of employees. The employee count is based on full-time equivalents (FTEs). Remember that a full time employee is someone working 30 or hours per week, but FTEs include all employees as either a full-time employee or a fraction of one. A special six-month transition rule, applicable for 2014 only, allows employers to use any period of six consecutive months in 2013 when determining whether they are a large employer, rather than use the full 12 months. Plus you can exclude seasonal workers. Add up your full-time and your fractional part-timers and see how many FTEs you have.
Second, you figure out your compliance deadline. If you have fewer than 50 FTEs, congratulations. You will not face a penalty for failing to offer coverage. If you have between 50 and 99 FTEs, your compliance deadline is delayed until 2016, so you will not face penalties in 2015. If you have 100 or more FTEs, you have to comply in 2015, but your compliance level is reduced from 95% of full-time employees to 70% of full time employees. So if you offer qualifying coverage to 70% of your full time employees in 2015, you would satisfy the rule requiring you to offer coverage. Remember that you still have to consider the affordability of that coverage to avoid a penalty.
So your compliance deadlines are never, 2015 or 2016 depending on your size. At least for now. Because as we have seen lately, this is a fluid law and things can change on a moment’s notice. And if any of these terms are foreign to you, make sure to reach out to your benefits professionals for an explanation. Happy planning!
When clients get an audit request letter from the EBSA, they usually call me surprised at the amount of information being requested. It is not just the shock of being audited that impacts them, but the amount of information they need to provide. Sometimes, the requested documentation may not be available, which creates its own set of issues. But for planning purposes, I thought it would be beneficial to lay out the list from the most recent audit request I reviewed.
Plan sponsors of defined contribution plans will likely be required to produce the following in response to an audit:
- Plan documents and all amendments, including trust documents and summary plan descriptions (which reminds us these should exist and amendments should be formally written and adopted)
- Summary annual reports for the period under review
- Fiduciary insurance and bond policies
- Internal income and disbursement statements
- IRS determination letters
- Meeting minutes for committee or subcommittee meetings (which suggests there should be meetings regarding plan administration)
- Plan financial records, including account statements and ledgers
- Service provider contracts
- A sample participant benefit statement
- RFPs disseminated showing the process for hiring plan professionals
- Form 5500s
- All documents related to service provider fees , including fee schedules and compensation paid to professionals by the plan
- All documents related to costs charged to the plan
- Documents identifying fiduciaries, including their dates of service
- Any ERISA compliance policies or procedures adopted by the plan or sponsor
- All documents related to plan investment performance (which includes an investment policy statement)
- All documents related to administrative expenses (direct or indirect) related to the plan
- Documents showing the names and service times of board members and officers of the plan sponsor
- Documents showing timeliness of employer contributions and repayment of participant loans
- Documentation showing the procedure for handling participant loans, if applicable (because loan administration and repayment of loans is a frequent issue in audits)
As you can see from this list, there are certain documents that relate to the plan (like plan documents) and certain information related to the sponsor. Plus there is a lot of financial data that has to be provided. The time to see if you have this required information is before you receive the audit request. So consider this list as a test. If there is a request here that you could not satisfy if you were undergoing an audit, now is the time to locate that information. And if it is documentation that needs to be created, don’t hesitate to ask you attorney at Fox Rothschild for assistance.
Appeals for denial of benefits can create a real quagmire for plan administrators. The appeal process creates an administrative record, and sometimes the administrative record is not complete. It is important for plan administrators to consider each appeal completely, and address all issues related to claims processing, even ones not necessarily raised by the participant, because the plan is stuck with the administrative record once litigation is filed. That’s why, in Garrett v. Principal Life, the 10th Circuit Court Appeals recently ruled that a plan administrator could not introduce a new basis for claim denial after suit was filed.
Garrett received inpatient alcohol abuse treatment at a clinic which the plan administrator denied because the service was at a non-covered facility. When he changed facilities, the plan administrator again denied the claim, but this time claimed that in-patient treatment was not covered under the terms of the plan. Garrett appealed and then filed an action for payment of benefits. The total amount of the claim was $65,000. As part of the litigation, the administrator submitted the administrative record and the Court determined that Garrett was entitled to benefits under the terms of the plan.
The interesting part of the case is that the court ordered payment of the claim in full. But the plan administrator then argued that if it was covered, the payment would have to be subject to deductibles and also reduction for length of stay and for going to a non-preferred provider. The Court of Appeals affirmed the lower court’s decision denying the reduction, saying that the only thing that could be considered was the rationale denying the claim, not other justifications. In other words, the plan could not submit new evidence to supplement the administrative record. It was stuck with its original administrative record and had to pay the full face value of the claim.
For plan administrators, this decision is significant because it reminds us that when considering claims appeals, the administrative record has to be complete, and has to lay out all of the possibilities for addressing the appeal. Then the basis for the denial has to be completely and fully articulated. Don’t assume that the court will allow you to supplement an incomplete administrative record. Consider all avenues the first time and make a record of them. That way, challenges in court can be fully considered and your plan won’t end up being barred from raising all relevant claims issues.
Previously I had written about instances where a retirement plan was able to recoup overpayments from a pensioner when the payments were made as a result of a mistaken calculation. As I said then, plan administrators should be wary about relying on ERISA as a guarantee that they could recoup overpayments. Sure enough, the 7th Circuit, in Kolbe & Kolbe Welfare Plan v. Medical College of Wisconsin, a self-funded plan was denied reimbursement for paying claims for a child that was ultimately determined to be ineligible as a participant.
Factually, this case arose from the birth of a newborn child. The employee participant did not provide the plan administrator with necessary proof to establish that the child met the criteria in the plan for eligibility. The plan ended up paying $1.7 million in claims to the hospital for treatment to the child and, sure enough, the child turned out to be ineligible for treatment (although it took almost a year for the plan to confirm that fact). The plan made a demand to the hospital to refund the payments and the hospital refused. The plan sued the hospital and the Court denied the reimbursement.
In denying the plan’s claims against the hospital, the Court essentially affirmed that even though the child was not eligible as a participant, there was no valid claim against the hospital. No claim for “unjust enrichment” could survive because services were rendered, and a breach of contract claim could not survive because, even though there was a provider agreement in place, it did not obligate the provider to reimburse the plan simply because the plan neglected to determine eligibility before the payment was made. So the hospital got to keep the money and the plan was left with nothing more than a possible claim against the individual participant.
What this case demonstrates is that while reimbursement might be an option, who the plan can get reimbursement from can be a problem. The hospital may have received the payment, but it was not the right party for the plan to pursue. So in order to avoid situations like this, plan administrators should be very wary of paying claims for individual that are not clearly eligible for benefits under the terms of the plan. Follow eligibility rules to the letter and don’t make payments until all enrollment conditions are satisfied. Don’t assume you can get the money back from any source. As this case shows, a mistake in payment can be very costly so avoid making them.
Well, Treasury issued the “final” regulations on the employer mandate under PPACA. The “pay or play” rules got a little delay and some revision that will be debated for weeks to come. But the nuts and bolts of the “high points” of the regulations are as follows:
1. Employers that have between 50 and 99 “full time equivalents” will have until 2016 to comply, not 2015. So if you have 100 or more FTEs in 2014, January 1, 2015 is still your target. But if you had 99 or fewer, you get a one-year extension.
2. Transitional relief is now available for non-calendar plans. There was some confusion over whether the 2014 transition relief would apply for 2015 and now it appears that it does. Employers with non-calendar year plans are subject to the mandate based on the start of their 2015 plan year rather than on January 1, 2015.
3. Large employers (those with more than 99 full-time employees) have to comply in 2015, but for the first year, they will only have to offer coverage to 70% or more of their full-time employees. The 95% requirement will not go into effect until 2016.
4. For large employers that contribute to a multiemployer plan, an employer will not be subject to shared responsibility penalties with respect to employees for whom the employer is required by the collective bargaining agreement or appropriate related participation agreement to make contributions to the multiemployer plan.
5. Some categories of employees are better defined:
- For bona fide volunteers for a government or tax-exempt entity (like emergency response personnel), hors they volunteer will not cause them to be considered for their full-time employment status
- For teachers and other educational employees, they will not be treated as part-time for the year simply because their school is closed or operating on a limited schedule during the summer. Also, for adjunct faculty, employers of adjunct faculty may credit them with 2 ¼ hours of service per week for each hour of teaching or classroom time.
- For those in traditionally seasonal positions where annual employment is customarily six months or less, they will not be considered full-time employees.
- For students in work-study programs, these hours will not be counted in determining whether they are full-time employees.
The new regulations are 227 pages long and have a lot of examples and explanations that will certainly be clarified over the coming weeks. But rest assured that we are keeping track of these changes so stay tuned for more updates and guidance. Of course if you have any questions about the impact of these changes on your compliance package, make sure to ask your attorney at Fox Rothschild for assistance.
On February 4, the House Ways and Means Committee approved a bill on February 4 to define a full-time employee under PPACA as an employee who works on average at least 40 hours per week. The Ways and Means Committee calls it the “Save American Workers Act.” There is a similar bill in the Senate called “The Forty Hours Is Full Time Act.” Essentially, these proposed bills would change the definition of “Full time employee” under PPACA to be employees who average 40 hours per week as opposed to the 30+ hours per week that PPACA presently requires.
Employers working through PPACA compliance in 2014 should not read too much into these bills. Under ERISA, plan sponsors (which generally mean employers) have always had the ability to define eligibility for health benefits. The definition of “full time” under ERISA has never been officially formalized in any set hour figure. So plans have defined full-time as being anywhere from 30 to 40 hours per week for years. PPACA simply added the possibility of a penalty to employers who don’t offer coverage to employees working 30 or more hours per week. Ostensibly these bills would eliminate the penalty (the “employer mandate”) if employers don’t offer coverage to employees working less than 40 hours per week.
However, as with the passage of PPACA, the drafters of these bills are again overlooking that various state laws regulating insurance coverage already dictate what full-time means for state-law insurance purposes. Some states, like New Jersey, specifically define “full-time” for certain things like small group insurance coverage, where a full-time employee is anyone working more than 25 hours per week. So employers could still have to offer coverage to employees working less than 40 hours per week under state laws, and might still be offering coverage to employees working less than 40 hours per week based on their own eligibility provisions in their plan.
In many ways, these bills are more about making political hay than anything else. If the limit is changed from 30 to 40 hours, very few employers would ever face any type of penalty for failing to offer coverage, which would naturally take away any incentive to offer coverage to avoid penalties. In practical terms, it has no impact on employers who are doing what they should be doing right now….measuring hours. Whether the number is 30 or 40 or 100, we are still in our first measurement period and this first period will dictate who we have to offer coverage to on January 1, 2015. Establish your measurement period, keep track of hours and when the dust on this issue finally settles, then you will know who gets the coverage and who doesn’t (and presumably you will also know whether or not you face a penalty).
Sunday night, on the first play from scrimmage, the center snapped the ball over the quarterback’s head and into the end zone. The running back fell on the ball and was tacked by the other team for a safety. And in that one moment, plan administrators could find a very important lesson when it comes to mistakes in plan administration: don’t take chances that could make things worse.
Now it turns out falling on the ball was the right play. Now, the running back could have tried to pick up the ball and run it out of the end zone and maybe scored a touchdown. Then we would be talking about how he was a hero. But it is a lot more likely that he would have fumbled the ball and that might have led to a touchdown for the other team, which is worse than the 2-point safety and he would have been excoriated for not simply falling on the ball and taking his lumps. Plan administrators are supposed to be looking for the less risky, not the heroic. Which means that when mistakes are made, don’t compound them by making bigger ones or taking risky moves.
As it turns out, that one play did not win or lose the game, but it did have the potential to be an even bigger disaster than it was. So do errors in plan administration. The good news about making a mistake is that there are set ways to fix common plan errors. In fact, the IRS even has a website devoted to instructions on “Fixing Common Plan Mistakes.” But there are 3 key things that have to be remembered: (1) when plan errors are identified, don’t compound them by trying to hide them, (2) make sure you choose the right fix based on the mistake made and (3) regularly check your plan administration practices to make sure you don’t have errors in administration.
Unlike in football, when a mistake usually is readily apparent, plan errors are usually uncovered during the course of an audit or because a participant raises a question about their benefits. So plan sponsors should be regularly checking their processes to make sure they are avoiding mistakes. When a mistake in administration is identified, the due diligence obligation almost always mandates some type of corrective action, even if it is as simple as a self-correction.
So check to make sure your plans are being properly administered to avoid plan errors. And if an error is identified, take appropriate corrective action. Avoid risk in plan administration and you will avoid problems with the regulatory agencies and your participants. Your attorneys at Fox Rothschild can help you identify potential problems in advance and avoid them, and can also help you correct them if they already exist. Don’t try to be a hero and make the right play.
I happened upon two interesting articles today about spousal coverage under employer sponsored benefit plans. The first was an article about UPS eliminating spousal coverage and blaming PPACA. The second was a study conducted by the Employee Benefits research Institute that concluded that, on average, spouses cost more to insure than employees, but elimination of spousal coverage may not save money in the long run. Without opining on whether or not the elimination of spousal coverage makes financial sense, there is an issue here about how to eliminate spouses from eligibility under a health plan which bears some consideration.
Generally, PPACA defines affordable coverage based on the single “employee only” rate. Employers are required to offer dependent coverage, but that requirement excludes an obligation to offer coverage for a spouse. So, like UPS, an employer can eliminate coverage for souses, keep coverage for children and still satisfy PPACA’s requirements. But UPS did not eliminate all spouses from eligibility, only those with coverage available from their own employer. So if the decision is made to eliminate spousal coverage that is not necessarily the end of the process.
Will the coverage be offered to spouses who don’t have other options or will all spouses be excluded? What are the definitions of dependent in the plan? Do you offer family coverage and not “single plus children” or “single plus spouse’? It comes down to the ongoing requirement to make your PPACA compliance plan meet the ERISA requirements. Remember that eligibility is dictated by plan terms and if your plan does not define terms like “spouse,” “dependent” and “family,” you could be creating a problem with ERISA by having conflicting interpretations of those terms. Then, assuming your definitions are complete, you have to make sure the eligibility rules you outlined not only use those definitions but also clearly explain the eligibility requirements. In the case of UPS, what does it mean to have “other available coverage”?
If you decide to offer coverage to spouses who don’t have other coverage, how will you verify eligibility? What are your rules for confirming eligibility? How are these rules communicated? There are no absolute answers to these questions and employers have a variety of options for plan administration if they decided to go this route. But they have to think these things through in advance. Never lose sight of the fact that when an employer provides health insurance to employees, it is a plan sponsor under ERISA. Make sure that if you decide to restrict spousal coverage because of PPACA, you follow ERISA rules in the process.
One of the hallmarks of the fiduciary obligation is to make decisions on an informed basis and to be reasonably diligent when making decisions related to the plan and its administration. Fiduciaries can reasonably relay on experts, like plan counsel, when making decisions related to plan administration. In Clark v. Feder Semo and Bard, P.C., the United States Court of Appeals for the D.C. Circuit recently affirmed that “relying on the advice of legal counsel” was a good thing for the plan administrator.
In the underlying case, a law firm went out of business and terminated its retirement plan. One of the former attorneys sued, claiming a breach of fiduciary duty stemming from a claim she thought she had to benefits. Her contention was the plan improperly relied on advice of counsel to deny the request. The DC Circuit affirmed the lower was right to conclude that relying on the advice of counsel was justified under the circumstances, felt compelled to elaborate. The Appeals Court concluded that, by adopting the common law’s standard of fiduciary care, ERISA Section 404(a)(1)(B) permits prudent fiduciaries making important decisions to rely on the advice of counsel in “appropriate circumstances.” Those circumstances depend on the situation, but they did fall back on the idea that a prudent trustee can reasonably act on advice of counsel.
In this case, the plan had been using the same counsel for a long time and he was familiar with their plan. He conducted a thorough review of the plan documents when he gave his advice and, ultimately, the Court decided it was reasonable for the plan to rely on it. What is interesting is that while it appears the Court agrees that the plan made the right call, the Court seemed more inclined to focus on why reliance on legal advice is ok and under what circumstances it would be justified. It was not just using a legal expert, but using one that was qualified and knew the subject well.
Ultimately, this case should serve as a sort of roadmap to plan sponsors and administrators intending to rely on legal advice. Legal advice is only as reliable as the party providing it, and if they are not familiar with ERISA, familiar with the plan or familiar with the issues presented, a fiduciary would not necessarily be reasonable in relying on that advice. Due diligence means more than just taking legal advice. It means considering whether the advice is sound and from a knowledgeable source. In short, just any old lawyer won’t do. When it comes to benefit plan administration, the standard for reliance on legal advice requires more than just using a lawyer. You have to use one that knows about ERISA.
Employers may recall that one of the key provisions of PPACA was to apply the Section 105 non-discrimination rules to insured health plans. Starting in 2014, employers could not discriminate in favor of highly-compensated individuals when offering health insurance coverage. However, the rules relating to non-discrimination have yet to be written and IRS Notice 2011-1 specifically provides that the non-discrimination rules would not apply until regulations are written.
Well, here we are in January of 2014 and no rules have yet been written. So what is an employer supposed to do? According to the New York Times, the Obama administration is delaying enforcement of the non-discrimination provision because, as was the case in 2011, the rules have not yet been written. According to the Times, Bruce I. Friedland, a spokesman for the IRS, said employers would not have to comply until the agency issued regulations or other guidance.
One of the key questions facing the IRS is how to apply the non-discrimination rules if an employer offers the same coverage to all employees but large numbers of low-paid workers turn down the offer and instead obtain coverage from other sources, like a health insurance exchange. In other words, the employer does not intend to discriminate, but ends up with only a few highly compensated employees electing the plan. Plus, there is a question about whether to revise the existing non-discrimination rules for self-funded plans that have been in effect for years. In short, the same questions that existed in 2010 when the Act was passed exist today, and until regulations are written, enforcement remains impossible.
The long and short of it is that employers remain in limbo and, while they should try to offer coverage in a non-discriminatory fashion, until there are actual rules written the best we can rely on is our good faith efforts. As I have previously noted, the $100 a day penalty for non-compliance would be a real problem for employers if they start trying to enforce this provision without written rules so it will be a relief if the White House and IRS make this official and further suspend enforcement.