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Employee Benefits Legal Blog

Employee Benefits Related to Labor & Employment Matters

Withdrawn Employers Don’t Have Standing: Why Employers Can’t Sue Trustees

Posted in Court Cases, Retirement Plans, Withdrawal Liability

For employers who cease to contribute to a multiemployer defined benefit pension plan, withdrawal liability is becoming more and more common.  When a pension fund is underfunded, the cessation of the contribution obligation can trigger the obligation to pay off the allocated portion of that unfunded liability which can be substantial.  When I am working with employers who are addressing withdrawal liability, I am frequently asked whether the employer can sue the fund or the trustee for causing the unfunded liability.  The short answer is no, but a recent case lays out very clearly why that answer is no.

In DiGeronimo Aggregates, LLC v. Zelma, the Sixth Circuit Court of Appeals recently considered a case where a withdrawing employer filed a complaint against the trustees of the multiemployer pension fund for negligent management of the plan that caused the underfunding.  The District Court dismissed the complaint and the Sixth Circuit affirmed.  The employer sued using ERISA Section 4301, which provides that persons, including employers, can bring a cause of action for appropriate legal or equitable relief.  However, the Sixth circuit found that this section confers no actual substantive rights.  It only provides who may potentially enforce the sections of ERISA.

The Court went on to determine that causes of action for “negligent management” of plan assets already have a specified remedy in ERISA.  When it comes to bringing claims of this nature, ERISA specifies that claims can be brought by participants and beneficiaries, but makes no mention of employers.  The Court reasoned that had Congress intended to give employers this right, they could have easily included them as parties capable of bringing an action.  Since they are not included, they must be assumed to be specifically excluded.  Since Congress did not include them, contributing employers must not have standing to bring a claim for mismanagement of plan assets.

This decision is not new or novel.  It merely reaffirms a long-held rationale that contributing employers lack standing to argue out of withdrawal liability claims by suing plan trustees.  A more effective way of dealing with withdrawal liability is to plan for it before it occurs.  If an employer is considering any transaction, be it a sale, merger, decertification or closing of a facility that will potentially halt contributions to a multiemployer pension fund, withdrawal liability must be a priority concern.  Dealing with withdrawal liability BEFORE a withdrawal is much easier than defending withdrawal liability claims after a withdrawal occurs.  Make sure to ask your professionals about withdrawal liability in advance and avoid the surprise.

The Trouble With Exceptions: Be Careful with Plan Rules

Posted in Plan Administration, Retirement Plans, Welfare Plans

Recently I was working with a client who had an appeal from an individual seeking to get additional benefits under a health plan.  In a nutshell, the issue was an annual limit on visits and the participant wanted the plan to pay for extra visits to a therapist.  The client was stuck between applying the plan language and wanting to grant the exception.  For plan administrators and sponsors, this type of situation is all too common and can cause real problems.

First, plans should always be administered in accordance with the plan terms.  A limit is a limit and, absent a plan amendment that changes the limit, it should be followed to the letter.  But applying plan provisions necessarily requires application of plan terms which requires interpretation which is within the discretion of the plan administrator.  By its nature, “interpretation” has a certain component of subjectivity that allows for the plan administrator to grant appeals based on its interpretation of plan language.  However, this does not give the administrator the ability to disregard the terms and apply anything other than their plain meaning.  In other words, the plan says what it says.  If you want to have exceptions, consider a plan amendment.

Second, plans have to follow rules.  There are regulations, IRS Code sections and statutes that dictate how things should be done.  Granting things like extra benefits, hardship withdrawals and special enrollment rights might be specifically prohibited depending on the circumstances and the dictates of applicable law.  Third, there is always the risk of discrimination.  Once an exception is granted, what happens for the next request and the request after that?  Who gets the special privilege and why?  Can someone denied the exception claim some type of discriminatory act by the administrator?  Exceptions can create a very slippery slope.

That said if the ultimate purpose of a benefit plan is to provide benefits to participants, plan administrators and sponsors should look at possible exceptions as a means of tweaking and improving their plan to really provide benefits.  A proposed exception might suggest a logical amendment to a plan that makes the exception the new rule.  It is also possible that a requested exception can actually be justified because of ambiguities or silence in the actual plan itself.  But remember that exceptions are just that, they are not the rule.

The point being that in reality, plan administrators and plan sponsors are regularly asked to consider exceptions and have to make a decision on whether or not to grant those exceptions.  It’s up to the administrator to make a determination.  Denying exceptions is one possible answer, but so is granting limited exceptions based on a diligent review of the options.  In either event, before making any determination on a request for an exception from a participant some type of flexibility in interpretation of the plan, administrators and sponsors should consider these three things: plan language, rules and regulations and possible future impact of the decision.  Having that consultation with plan counsel is probably a good idea to show due diligence.

So when it comes to requested exceptions, plans don’t have to consider them but can.  It’s all in how you approach it.

COBRA Notice Penalties: Employer Pays Even Though They Also Paid Bills

Posted in Court Cases, Plan Administration, Welfare Plans

The issue of COBRA notices and penalties can create problems when considering who is entitled to the notice and when they have to be issued.  When claims are brought for alleged violations of the provision of COBRA notices, some employers assume that they can just avoid penalties if there are not actual damages, say for example the employer agrees to pay any medical expenses.  This case illustrates that this assumption can be a costly mistake.

In Honey v. Dignity Health, the Court for the District of Nevada looked at a case where the employer, acting as its own plan administrator, failed to issue a timely COBRA notice.  The employee repeatedly asked about COBRA but was not provided with a notice.  It so happened that the employee also sought to return to work and, through her employer agreed to reinstate her and even reimburse her for her uncovered medical expenses.  She filed suit to for her employer’s failure to provider COBRA notices to her, her husband and her two children.

First, the court dismissed the husband’s claim because he was not married to the employee at the time of her COBRA qualifying event.  But the Court did award damages to the employee and her children at the rate of $110 a day for the employee and $20 a day for each of her children.  Even though the employee’s bills were paid, the Court reasoned that payment of the expenses did not actually cure the failure.  The notice obligation is separate from the coverage.  Since the children had no actual harm (that is no medical expenses), they received the lower award, but still receive some recovery.  All told, the employer was ordered to pay more than $25,000 in penalties.

This case should serve as a warning that the obligation to provide COBRA notices is not simply about providing coverage or making coverage available.  Simply paying unreimbursed expenses does not cure the statutorily defined harm.  The notice requirement exists to make sure the notices are timely issued and not tied to any actual loss.  So employers should not assume that the remedy for COBRA violations is limited to simply covering unpaid expenses.  The notice requirements carry their own risk and should be strictly followed to avoid those separate penalties.

New Rates for “Affordable Coverage” for 2015: Rev. Proc. 2014-37

Posted in Plan Administration, Welfare Plans

Under the terms of the ACA, large employers are required to provide affordable coverage beginning in 2015 or potentially face penalties.  For 2014, the definition of affordability was set at 9.5% of the employee’s income.  Within the definition of affordability, there is also a provision that provides for adjustment of that figure in the future and the IRS has issued its first adjustment for the 2015 plan year.

For plan year beginning in 2015, Rev. Proc. 2014-37 sets the new limit at 9.56% of employee income.  Revenue Procedure 2014-37 also adjusts the affordability percentage for the exemption from the individual mandate for individuals who lack access to affordable minimum essential coverage.  For plan years beginning in 2015, coverage is unaffordable for purposes of the individual mandate if it exceeds 8.05% of household income (as opposed to 8% originally).

This change stems from the requirement that the IRS must adjust the affordability percentage to reflect the excess of the rate of premium growth over the rate of income growth for the preceding calendar year, with each subsequent plan year being adjust accordingly.  Admittedly, this is hardly a monumental change for 2015, but it does serve as a reminder to employers that the definition of “affordable” can change.  So a key component of building a solid ACA compliance plan includes checking to see if the various limits and percentages have changed prior to a plan year.  Don’t assume things remain static because the act clearly provides for change.

ACA Reporting for Employers: IRS Releases Draft Forms

Posted in Plan Administration, Welfare Plans

Under the ACA, there are two unique reporting requirements.  The first is the “individual mandate reporting” requirement under Section 6055 of the Code.  The second is the “pay or play reporting” requirement under Section 6056.  Many employers have been wondering about how onerous these reporting requirements may be and while not finalized, the IRS did release draft forms that will apply to these requirements.  There have not been any instructions issued (although they are expected in August) and they are not “final” and probably will not be until sometime later this year.  But for now, they provide some insight into what information employers will have to collect.

Under Section 6055, health insurers and employers sponsoring self-funded group health plans must annually report to the IRS and participants whether the group health plan coverage constitutes minimum essential coverage under Health Care Reform.   The IRS forms used for Section 6055 reporting will vary depending on whether the reporting entity is an employer or an insurer.  Large employers that sponsor self-insured plans will report on IRS Forms 1095-C and 1094-C (transmittal form), completing both sections of Form 1095-C, under a combined reporting approach, to report the information required under Section 6055 and Section 6056, discussed below.  Entities that are not reporting as large employers (for example, health insurers and sponsors of multiemployer plans) will report on IRS Forms 1095-B and 1094-B (transmittal form).

Under Section 6056, employers have to demonstrate they have satisfied the obligation to offer coverage to employees under the “pay or play” rules.  To report this, employers are going to use Form 1095-C, with form 1094-C as the transmittal.  Note that even though they don’t have to comply until 2016, mid-size employers (between 50 and 99 full-time employees) are still required to comply with the reporting requirements if the mid-size employer sponsors a self-funded group health plan.

Now remember that these forms are drafts and the instructions are not written yet.  Certainly we hope that the instructions will provide an even clearer understanding of how and when to report and who gets copies.  But for now, employers should take a look at these drafts just to get a feel for what information they will have to provide and develop a system for making sure that information is collected in a timely manner.

Subsidies in the Federal Marketplace: A Definite Maybe

Posted in Court Cases, Plan Administration, Welfare Plans

Amidst all of the other issues surrounding implementation of the ACA, there is an underlying issue about whether or not subsidies (in the form of tax credits) are available for individuals who obtain coverage through the federal exchange marketplace as opposed to the state exchanges.  Many states have determined not to offer exchanges, which means exchange coverage in those states would be through the federal exchange.  The challenge (or argument as the case may be) is that the law specifically limits subsidies to participants participating in “state” exchange not the federal one.  So people in those states would not get subsidies.

Two federal appeals courts have now ruled on the issue and they promptly contradicted each other.  In Halbig v. Burwell, the D.C. Circuit Court of Appeals ruled that subsidies are not available to those in the federal exchange.  In King v. Burwell, the Fourth Circuit Court of Appeals ruled exactly the opposite, that subsidies are available because the law is ambiguous.  Because of the conflict between the Circuits, this would seem logically to be a case for the Supreme Court to take up, but that will take time so the conflict will likely remain for some time.

For employers, this split may have some significant impact on their ACA compliance planning.  I have heard on many occasions that employers are making decisions regarding offering coverage based on the assumption that it will be cheaper for employees to get subsidized coverage through the exchange.  But if the subsidy is not available because there is no state exchange, that assumption may not be correct.  Absent subsidies, exchange coverage may not be less expense than employer-sponsored coverage.  So before finalizing compliance based on this assumption, employers should check to see if there state offers an exchange.

According to the CMS, the following states are participating in the federal marketplace, either directly or through a partnership arrangement:

Alabama, Alaska, Arizona, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Michigan, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, West Virginia, Wisconsin and Wyoming.

Disclosures with Respect to Preventative Care: DOL Notice Requirement post-Hobby Lobby

Posted in Court Cases, Plan Administration, Welfare Plans

It seems like one of the hardest parts of ACA compliance is waiting for guidance on specific issues.  However, after the decision in Hobby Lobby, the DOL promptly issued FAQ Part XX that addresses the notice requirements for employers who cease providing contraceptive services.  The FAQ has a single question and is reprinted below in its entirety:

“Q: My closely held for-profit corporation’s health plan will cease providing coverage for some or all contraceptive services mid-plan year. Does this reduction in coverage trigger any notice requirements to plan participants and beneficiaries?

Yes. For plans subject to the Employee Retirement Income Security Act (ERISA), ERISA requires disclosure of information relevant to coverage of preventive services, including contraceptive coverage. Specifically, the Department of Labor’s longstanding regulations at 29 CFR 2520.102-3(j)(3) provide that, the summary plan description (SPD) shall include a description of the extent to which preventive services (which includes contraceptive services) are covered under the plan. Accordingly, if an ERISA plan excludes all or a subset of contraceptive services from coverage under its group health plan, the plan’s SPD must describe the extent of the limitation or exclusion of coverage. For plans that reduce or eliminate coverage of contraceptive services after having provided such coverage, expedited disclosure requirements for material reductions in covered services or benefits apply. See ERISA section 104(b)(1) and 29 CFR 2520.104b-3(d)(1), which generally require disclosure not later than 60 days after the date of adoption of a modification or change to the plan that is a material reduction in covered services or benefits. Other disclosure requirements may apply, for example, under State insurance law applicable to health insurance issuers.”

First, for reasons I laid out in a prior entry, I am not suggesting companies immediately take this step.  But a couple of things about this FAQ that are worth noting if a plan sponsor is considering eliminating contraceptive coverage.  One, the question references a “closely held for-profit company” which pretty clearly indicates that the DOL is applying a very narrow reading of the Court’s decision and non-closely held companies would be in for a fight later.  Second, if the company is eliminating contraceptive coverage, it has to follow the ACA and ERISA notice requirements for plan changes.  The change is not immediate and can only be completed after the appropriate notification time periods.  Simply eliminating the coverage will not do.

Second, this FAQ demonstrates how court decisions, particularly Supreme Court decisions, will continue to impact ACA compliance going forward.  That is why it is important for plan sponsors to continue to watch for change and guidance to increase the possibility of proper implementation of an ACA compliant plan.  Be informed, be flexible and be prepared.

Don’t Get Cute with ACA Compliance: Hobby Lobby, Safe Harbors and ERISA Concerns

Posted in Plan Administration, Welfare Plans

With the Supreme Court’s decision in the Hobby Lobby case, and the granting of the injunction for Wheaton College that came shortly thereafter, there has been considerable hand wringing over the long term implications these decisions might have.  Plan administrators and sponsors dealing with the ACA should not forget about the short term compliance requirements.  Nor should they get too caught up in thinking up ways to avoid compliance with the ACA.  If anything, Hobby Lobby might be best viewed as a cautionary tale rather than a defining moment.

Many people have written about the decision itself but for all intents and purposes, it should be considered as fairly limited in its application.  It was about a specific issue for a specific employer that had a specific structure.  For a large portion of the employer-providing-health-coverage population, it will have no impact.  In other words, most employers have to comply with the ACA as it is written.  Looking for loopholes can be risky, not just for ACA compliance but also for ERISA compliance generally.

ERISA is designed to provide uniform administration of employee benefit plans, which is why this federal law specifically preempts state law.  With the concept of uniform administration comes the expectation that plans will provide benefits (with limited exception) evenly and equally to all participants.  Eligibility rules are designed to make it so that employees can readily ascertain how and when they can obtain benefits.  Over time, the regulatory agencies have given guidance on safe harbors that plan sponsors can employ to increase the probability that they are correctly administering their plans.

The ACA, while primarily directed at employers, does certainly impact ERISA benefit plans.  The DOL and IRS have been providing various guidance for ACA compliance, and have even provided some safe harbor considerations for things like waiting periods and eligibility requirements that allow for some basic understanding of how to make it so that your ERISA plan complies with the ACA.  Sure, they might be confusing some time and require some changes to our plan administration and how our plans provide benefits, but generally they are designed to make it easier for overall compliance.

Think of the rules as lane markers on a highway.  Sure, you can change lanes to find one that you like better.  And you can even go off-road to follow a more direct route to get where you want to go.  But going off-road carries considerable risk.  The same can be said for trying to avoid ACA compliance with creative solutions.  I have seen lots of suggestions for ways an employer can avoid complying with the ACA.  I have yet to see anyone guarantee that they will work.  As 2015 approaches, it might be best to stay in the lanes.  Conservative compliance in the short run allows for safer plan administration.

“Hobby Lobby” Decision Cuts Unique Exemption into Affordable Care Act’s Contraceptive Coverage Requirement

Posted in Court Cases, Plan Administration, Welfare Plans

On June 30, 2014, in a 5-4 decision, the U.S. Supreme Court ruled in Burwell v. Hobby Lobby Stores, Inc. (“Hobby Lobby”) that closely held for-profit companies that formed their companies for a religious purpose can qualify for an exemption from the Patient Protection and Affordable Care Act (“ACA”) requirement to pay for certain contraceptive benefits (“the contraceptive mandate”).  The decision, written by Justice Samuel Alito, held that, as applied to these closely held corporations, the Health and Human Services (“HHS”) preventive services regulations imposing the contraceptive mandate violate the Religious Freedom Restoration Act of 1993 (“RFRA”).  The Court also ruled that for-profit corporations may bring RFRA claims, and owners of those corporations may sue based on restrictions imposed on those corporations.

Key Facts

The Hobby Lobby decision involved three family-owned businesses (“the Companies”) owned by two families whose owners claimed a religious exemption from the ACA’s contraceptive mandate.  The contraceptive benefits at issue were among the mandated preventive services that employers are required to provide to women without participant cost sharing under HHS-promulgated regulations. Specifically, under these regulations, nonexempt employers are generally required to provide coverage for the twenty contraceptive methods approved by the Food and Drug Administration, including the four methods that may have the effect of preventing an already fertilized egg from developing any further by inhibiting its attachment to the uterus. These four methods were of particular concern to the owners of the Companies because of their sincere Christian beliefs that life begins at conception and that facilitating access to contraceptive drugs or devices that operate after that point would violate their religion.

In separate actions, the owners of the Companies, and the Companies, sued HHS and other federal officials and agencies under RFRA and the First Amendment’s Free Exercise Clause, seeking to enjoin application of the contraceptive mandate. The RFRA provides that the federal government shall not “substantially burden a person’s exercise of religion” unless that burden is the least restrictive means to further a compelling governmental interest.

In both cases, the District Courts denied injunctive relief to the owners.  However, the Tenth Circuit Court of Appeals reversed the District Courts’ denial of the injunction, holding that the Companies are “persons” under RFRA, and that the Companies had established a likelihood of success on their RFRA claim because the contraceptive mandate substantially burdened their exercise of religion and HHS had not demonstrated a compelling interest in enforcing the mandate against them.  In the alternative, the Tenth Circuit held that HHS had not proved that the contraceptive mandate was the least restrictive means of furthering a compelling governmental interest.

The Decision

In holding that the HHS regulations imposing the contraceptive mandate violate RFRA, the Supreme Court noted that Congress designed the RFRA statute to provide very broad protection for religious liberty and did not intend to put merchants to such a difficult choice. The Court noted that for the government to prevail, it needed to demonstrate a compelling state interest and to show that its application was the least restrictive means to achieving its objectives.  While the Court assumed a compelling governmental interest, it concluded that there were less restrictive alternatives available to the government for achieving its objectives.  The Court noted that the government could, for example, simply provide these benefits to all without charge.  Further, the Court recognized that protecting the free-exercise rights of closely held corporations protects the religious liberty of the individuals who own and control those corporations.

Implications for Business Owners and Employee Benefit Plans

Significantly, the Court’s decision applies to a very small category of businesses—closely held, faith-based, for-profit corporations (religious nonprofit employers, such as churches, are already exempt from the contraceptive mandate).  In addition to interpreting the scope of “persons” protected under the RFRA broadly, the Court supported its decision by emphasizing the fact that corporations can have a broad range of purposes:

Some lower court judges have suggested that RFRA does not protect for-profit corporations because the purpose of such corporations is simply to make money. This argument flies in the face of modern corporate law. ‘Each American jurisdiction today either expressly or by implication authorizes corporations to be formed under its general corporate act for any lawful purpose or business.

While it is possible that some owners of closely held for-profit companies might change their businesses to make them “faith-based” companies, and then begin to pick and choose which mandated benefits are objectionable to them as owners (probably the expensive ones), it is unlikely that many businesses will do this.  Even though corporations can indeed have a broad range of purposes, revenues and “the bottom line” constitute the motivating purpose for most corporations today.  Accordingly, in our view, this decision has only a very limited practical impact on most businesses and their benefit plans.

Moench On This – U.S. Supreme Court’s Decision in Fifth Third Bancorp v. Dudenhoeffer for ESOP Fiduciaries

Posted in Court Cases, Plan Administration, Retirement Plans

On June 25, 2014, in a unanimous decision, the U.S. Supreme Court in Fifth Third Bancorp v. Dudenhoeffer, held that fiduciaries of employee stock ownership plans (ESOPs) are not protected by a presumption that they have acted prudently in making investment decisions—a presumption commonly referred to as the “presumption of prudence” or the “Moench presumption.”

The presumption of prudence, as originally approved in 1995 by the Third Circuit Court of Appeals in the case of Moench v. Robertson, provided that ESOP fiduciaries are presumed to be acting prudently in holding or offering employer stock as plan investments unless there is reason to believe the company’s survival is at risk or in doubt. The presumption had been adopted, in one form or another, by all of the circuit courts of appeal, and although some circuits had placed limits on it, no circuit court had specifically rejected it.

As a result of the Supreme Court ruling, except for the obligation to diversify investments, ESOP fiduciaries are subject to the same duty of prudence that applies to all ERISA fiduciaries. On the surface, this decision seems to be a major victory for plaintiffs filing lawsuits against ESOP fiduciaries; in reality, the decision may not have a significant impact on fiduciary investment decisions.

Key Facts

This case arose when former employees and participants in the Fifth Third Bancorp ESOP filed a lawsuit against Fifth Third and several of its officers (as fiduciaries of the ESOP) alleging that the fiduciaries breached their duty of prudence imposed by ERISA because: (1) they should have known, based both on publicly available and inside information, that Fifth Third stock was overpriced and excessively risky, and (2) a prudent fiduciary would have responded to this information by selling off the ESOP’s Fifth Third stock holdings, refraining from purchasing more of the stock, or disclosing the negative inside information so that the market could correct the stock’s price downward. According to the complaint, the fiduciaries failed to do these things, resulting in a decreased stock price and diminished retirement savings for the ESOP participants.

The district court dismissed the complaint, but the Sixth Circuit Court of Appeals reversed, concluding that ESOP fiduciaries are entitled to the presumption of prudence, though only at the evidentiary stage and not at the pleading stage. The Supreme Court held that ESOP fiduciaries are not entitled to any special presumption of prudence, but rather, are subject to the same duty of prudence that applies to ERISA fiduciaries in general. Further, the Supreme Court concluded that, on remand, the Sixth Circuit Court of Appeals should reconsider whether the complaint states a valid claim and provided standards for this reconsideration.

Implications for ESOP Fiduciaries

While rejecting the presumption of prudence that for so long had shielded them from liability, the ruling provided significant reassurance for ESOP fiduciaries. Justice Stephen Breyer, writing for the Court, made it clear that: (1) when employer stock in an ESOP is publicly traded, allegations that a fiduciary should have recognized, based on generally available information, that the market is overvaluing or undervaluing the stock are generally implausible under current standards, and (2) to state a claim for breach of the duty of prudence, a complaint must identify alternative action that the fiduciary could have taken that would have been legal and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it. With respect to disclosure of insider information, Justice Breyer confirmed that a fiduciary never is required to break the law to satisfy the duty of prudence under ERISA.

Additionally, the Court acknowledged that Congress seeks to encourage the establishment of ESOPs, recognized that ESOPs should not be treated like conventional retirement plans and expressly preserved the exemption from the diversification requirement that allows ESOPs to invest primarily or exclusively in employer stock. Consequently, in our view, the decision will not significantly impair or diminish the ability of ESOP fiduciaries to make plan decisions and is unlikely to have any substantial impact on closely held ESOP companies.