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Employee Benefits Legal Blog

Employee Benefits Related to Labor & Employment Matters

Finding a Needle in a Stack of Needles: DOL Makes Hay on Bad Plans

Posted in Plan Administration, Retirement Plans, Welfare Plans

The DOL fiscal year facts sheet for 2014 has some real interesting (and scary) facts.  The DOL claims that the Employee Benefits Security Administration (EBSA) oversees the administration of 684,000 retirement plans, 2.4 million health plans and probably as many other welfare plans like disability and life insurance plans.  That’s a lot of benefit plans.  Of course it also touts more than $832 million in monetary recoveries that the agency collected of which about $600 million went back to plan participants.  Those are some pretty heady figures.

Back in 2013, I made mention of the fact that the DOL was hiring some 1000 new investigators to help in the audit and enforcement process.  You can imagine with millions of plans and an army of investigators, it’s not difficult for the EBSA to find plans that are deficient, improperly administered or subject to some corrective process.  That means restoring plan assets, maybe additional benefits, and probably fines and penalties.  All of which mean added costs to plan sponsors.

Tucked in the middle of the fact sheet is a figure that is worth noting.  The DOL reports that it received 1,643 Voluntary Fiduciary Correction Program (VFCP) applications and 25,060 applications under the Delinquent Filer Voluntary Compliance Program (DFVCP).  The VFCP process is available to anyone who may be liable for fiduciary violations under ERISA, including employee benefit plan sponsors, officials, and parties in interest, may voluntarily apply for relief from enforcement actions, while the DFVCP program allows for plan administrators to pay reduced civil penalties if the required filings are made prior to the date on which the administrator is notified in writing by the DOL of a failure to file a timely annual report.  Why is that so important?

Well, for fiduciaries and plan administrators, the VFCP process and the DFVCP process present them with the opportunity to avoid becoming one of the “bad” statistics.  In many ways, it is better to confess and correct instead of being discovered and penalized.  Chances are pretty good that if your plan is the subject of an EBSA investigation, things are going to turn up that have to be corrected.  Self-policing, self-reporting and self-correcting before there is an investigation presents plan sponsors and administrators with a better opportunity to control the costs and mechanisms of the corrective process.  It’s certainly not a guarantee that everything will come out rosy, but it is better than having mistakes pointed out by the government’s auditing team.

So we know that the EBSA has a lot of investigators that take pride in reporting annually all of the money they recover on behalf of participants.  And we know from practical experiences that with all of the rules and regulations governing benefit plans, chance are pretty good that we have made a mistake somewhere.  Thus, it is not a bad idea to take a serious look at the plans we sponsor and see if there are errors that we should self-correct.  Your plan professionals should be able to help guide you through that process.  Your attorneys at Fox Rothschild can help get you started on the road toward self-correction if you ask.

As a side note, the DOL also reports that 106 individuals were criminally indicted in 2014.  You definitely don’t want to be someone who falls into that statistic if you can avoid it.

What Makes An Average Defined Contribution Plan?

Posted in Plan Administration, Retirement Plans

When I am meeting with plan sponsors to review the specifics of their defined contribution retirement plans, I am routinely asked about how they compare to other plans.  Notwithstanding the variety of sizes of plans, it’s not necessarily a bad question to ask.  Section 404 of ERISA generally defines prudence as acting in accordance with how a reasonable person in like circumstances would act.  However, decisions on how to structure a plan are settlor functions, not necessarily fiduciary functions so what is “reasonable” in the fiduciary sense may not apply in the framework of a settlor function.  But since settlors should still act reasonably in discharging their roles, it does not hurt to consider what others might be doing.

I was surprised by the amount of data and surveys available from a variety of sources on the issue of defined contribution plans.  I was also surprised by the variety of results of these surveys, which certainly suggests that sample size and respondent selection has a lot to do with formulating conclusions.  The statistics I cite are a good faith effort to aggregate the various responses I considered and should by no means be taken as absolute fact, only an effort to summarize my complied data relating to plans generally.

That said, it seems that somewhere around 94% of private employers report that they offer some form of a defined contribution plan.  Of those private employers, offering plans, the average eligibility appears to be about 88% of their full-time employee population with about 65% active participation of eligible employees.  Of the companies that sponsor defined contribution plans, about 90% offer more than 10 investment options to employees, and 56% offer more than 15 choices.  For their part, employees selected target date (or life cycle fund) most frequently (almost 70% of the time), with domestic equities a close second (67%)  Around 56% employers offer automatic enrollment of some form and around 92% of employer with plans had employer matching of some kind.

When deciding on investment options to provide, sponsors report that their top three considerations are fees (74%), historical and expected returns (63%) and diversification of plan options (52%).  56% of companies provide some form of investment advice to employees and of those that do, 65% report that they provide this counseling through someone independent of the plan’s investment manager.  79% reported that they have concerns about the lack of employee participation and the three most common ways they try to improve participation is through simplifying the enrollment process, including life cycle funds into the plan as an investment option and providing participant education.

So there may not really be an “average” defined contribution plan.  But there are certain consistencies that seem to make up a typical defined contribution plan, and certain typical considerations that plan sponsors consider when forming and administering their plans.  There is not one right answer to what a plan should look like, but when considering how to administer your plan, there is no harm in asking around to see what others might consider reasonable.

ERISA Equitable Relief: Reversing Rochow

Posted in Court Cases, Plan Administration, Retirement Plans

Previously I had written about the 6th Circuit’s expansion of what constitutes appropriate remedies under ERISA, when it affirmed a judgment directing a disability insurer to pay not just benefits due, but also $2.8 million in earnings.  As a refresher, the original case, Rochow v. Life Ins. Co. of N. America, dealt with an executive who fell seriously ill and applied for long-term disability benefits, which were denied.  His estate sought disgorgement of profits in addition to benefits, and the Court awarded $3.78 million award that consisted of $910,629 in denied benefits and $2.8 million more in earnings based LINA’s rate of return on equity, which ranges between 11% and 39% per year.

The court ruled that ERISA permitted a participant to recover both the benefits payable under the plan (502(a)(1)(B)) plus additional equitable relief (502(a)(3)).   Thus, the majority concluded that their remedy was a “logical extension” of the remedies available under ERISA and prior case law.  According to the majority, merely awarding benefits was not adequate relief, so more relief was required.  There was a dissent, which pointed out that there is a need for a distinct injury to the plaintiff or the plan to support a claim for equitable relief on top of a claim for benefits, but the majority ignored this position.  The dissent was also concerned with the potential a ruling like this might allow plaintiffs to expand every abuse-of-discretion claim into a claim for returns on investments or profits which could create serious problems for plans that were self-insured.

Last week, the Sixth Circuit reversed that opinion in an en banc opinion.  The new decision determined that unless there is a showing that that the remedy for denial of benefits under 502(a)(1)(B) is inadequate to make plaintiff whole, equitable relief under Section 502(a)(3) is unavailable.  Simply put, the en banc decision found it inappropriate to provide equitable relied when the actual remedy of providing benefits was available.  Allowing outsized damages awards based on perceived equitable remedies would be inconsistent with ERISA’s purpose.  Instead, the remedy would be more akin to whether prejudgment interest was due rather than a windfall on company profits.  Consequently, the case was remanded to the lower court to determine a remedy consistent with this finding.

Ultimately, what probably held the most sway was that Rochow’s claim for breach of fiduciary duty was perceived as nothing more than a repackaged claim for a wrongful denial of benefits.  In a case where the remedy of providing benefits is available, the relief for an alleged breach of duty is not always limited to providing benefits.  But this decision seems to suggest that the place to look first for relief is the satisfaction of the 502(a)(1)(B) claim.

New FMLA Rules Recognize Celebration Rule: Managing Benefits

Posted in Plan Administration, Retirement Plans, Welfare Plans

Although the Family and Medical Leave Act of 1993 (“FMLA”) is not something I usually address, the DOL final regulations issued last week did address an issue I have previously written about and that is recognition of same-sex spouses.  The FMLA generally provides that eligible employees can take leaves of absence for certain family- and medical-related reasons, including caring for a spouse.  The new regulations redefine the term “spouse” for FMLA purposes to include same-sex couples who have been legally married in any jurisdiction, regardless of whether the state in which they reside or work recognizes their marriage.  The new regulatory definition of “spouse” under the FMLA goes into effect on March 27, 2015.

This is somewhat significant in the employee benefits arena in that health benefits are generally continued during a qualified leave.  More often than not, the request for FMLA leave is handled through the HR department, which also happens to be handling benefit plan administration.  Consequently, the question can come up as to whether FMLA leave is available, and if so, is it the type of leave that permits continuation of health coverage.  More importantly, though, I think it is further clarification that, from a federal perspective, the “celebration” rule is becoming the accepted norm.  In short, if the jurisdiction where the marriage was performed recognizes the marriage, it would be recognized anywhere else.

Tucked within the FMLA final rules is a little further clarification for marriages outside of the United States.  The Final Rule provides that in these cases, if the marriage is valid in the place where it was entered into and could have been entered into in at least one state, it will be recognized for FMLA purposes and the definition of “spouse.”  This is also helpful to some extent in understanding benefit plan administration because it gives at least some insight into how the DOL might look at a benefit plan trying to determine whether a foreign same-sex marriage should be recognized. It is not definitive, but it does add a layer to help understand the verification of dependent status for enrollment in US plans.

The point being is that as we fine tune plan administration, employers and plan sponsors can get additional insight from this type of indirect revision to rules.  Employers subject to the FMLA clearly have to abide by this new rule, but benefit plans can also use it as a sounding board to ensure proper compliance.  If the employer has to recognize the spouse for FMLA purposes, it seems to suggest that the employer should also recognize the spouse for benefit plan purposes.  In any event, employers who start revising their FMLA policies to reflect this change should also use it as an opportunity to review their benefit plan language to make sure it accurate reflects the definition of “spouse.”

Medical Premium Reimbursement: Limited Relief for Some Employers

Posted in Plan Administration, Welfare Plans

Back in November of 2014, 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.  The gist of the FAQs, consistent with Notice 2013-54, was that employers could not offer employees cash to reimburse the purchase of an individual market policy.  This type of arrangement would fail to comply with the market reforms and would subject the employer to a penalty.

Fortunately, some additional guidance has been issued that provides some transitional relief for employers who have been using such an arrangement.  IRS Notice 2015-17 still adheres to the proposition that giving employees money to pay for coverage in the individual market or on a health insurance exchange will not be considered to be an employer plan satisfying ACA’s employer mandate.  But it also gives some transitional relief that allows for some avoidance of the $100 a day penalty that these arrangements would create for employers.

Transitional relief is available only to those who are not “applicable large employers” meaning 50 or fewer FTEs.  It also applies if the arrangement is sponsored by an S-corporation for 2-percent shareholder-employees, is a Medicare premium reimbursement arrangement or a TRICARE-related health reimbursement arrangement.  The stay on enforcement is in effect until June 30, 2015.  After July 1, 2015, penalties may apply to a reimbursement arrangement of this nature unless the relief is extended further.  So the effect is that the $100 per day excise tax will not be asserted for (and no reporting obligations will apply to) arrangements if they meet one of the 4 criteria identified above.

Warning: this relief does not apply to stand-alone health reimbursement arrangements or other arrangements that reimburse employees for medical expenses other than insurance premiums, and employers who are applicable large employers.

By way of additional clarification, this new guidance provides that if an employer increases an employee’s compensation, but does not condition the payment of the additional compensation on the purchase of health coverage, the arrangement is not an employer payment plan that would be subject to the excise taxes described above.

So if you currently “reimburse” your employees for the cost of premiums for individual medical insurance policies, Medicare or TRICARE, make sure you meet the standards for transitional relief and be prepared to eliminate these arrangements if no additional relief is granted.  If you have an arrangement that reimburses for premiums and you do not get relief, you have to look at reporting non-compliance for the first part of this year and also how to eliminate it.

IRS Releases “Final” Versions and Instructions for Forms 1094 and 1095: Start Collecting Data

Posted in Plan Administration, Welfare Plans

At last, the forms are upon us.  Last week, the IRS issued its “final” versions of the forms 1094-B, 1094-C, 1095-B and 1095-C along with instructions for the “B” forms and instructions for the “C” forms.  The good news is that the forms are pretty much the same.  What has changed is that the instructions have filled in some gaps about reporting, some of which I highlight below:

  1. Employers with 50-99 FTEs who were exempt from compliance in 2015 must still file these forms for the 2015 tax year.
  2. For employers that cover non-employees (COBRA beneficiaries or retirees being most common), they can use forms 1094-B and 1095-B instead of filing out 1095-C Part III to report for those individuals.
  3. With respect to reporting for employees who work for more than one employer member of a controlled group aggregated ALE”), the employee may receive a report from each separate employer.   However, the employer for whom he or she works the most hours in a given month should report for that month.
  4. Under the final instructions, a full-time employee of a self-insured employer that accepts a qualifying offer and enrolls in coverage, the employer must provide that employee a 1095-C. The previous draft indicated that it would be enough to simply provide an employee a statement about the offer rather than an actual form
  5. For plans that exclude spouses covered or offered health coverage through their own employers, the definition of “offer of health coverage” now provides that an offer to a spouse subject to a reasonable, objective condition is treated as an offer of coverage for reporting purposes.
  6. There are some changes with respect to what days can be used to measure the “count” for reporting purposes.  Employers are allowed to use the first day of the first payroll period of each month or the last day of the first payroll period of each month, as long as the last day is in the same month as when the payroll period starts.  Also, an employer can report offering coverage for a month only if the employer offers coverage for every day of that month.  Mid-month eligibilities would presumably be counted as being covered on the first day of the next month.  However, in the case of terminations of employment mid-month, the coverage can be treated as offered for the entire month if, but for the termination, the coverage would have continued for the full month.

Now as a refresher about what needs to be filed:

  • Each ALE member may satisfy the requirement by filing a Form 1094-C (transmittal) and, for each full-time employee, a Form 1095-C (employee statement).
  • Non-ALE members (meaning employers not subject to the employer shared responsibility provisions) that sponsor self-insured plans will file Forms 1094-B and 1095-B to satisfy the reporting requirements.
  • An employer must furnish a Form 1095-C to each of its full-time employees by January 31 of the year following the year to which the Form 1095-C relates. Filers of Form 1095-B must furnish a copy to the person identified as the responsible individual named on the form.

Bear in mind that there is a considerable amount of time between now and the final filing obligation so there may be additional revisions to these instructions, or at least some further clarification. But in the meantime, read the instructions and familiarize yourself with the reporting obligations.

Benefits for “Domestic Partners”: What Does Your Plan Actually Say?

Posted in Plan Administration, Retirement Plans, Welfare Plans

Recently I was working with a client updating some of the plan documents and we ran into an interesting issue.  The plan provides for eligibility for same-sex partners under a provision defining them as “domestic partners.”  The plan sponsor asked “since all of our employees reside in a state that recognizes same-sex marriage, do we still need this?”  Great question.  Since they asked, I have been doing a fair bit of research and have come to the following conclusion: it depends on what you want to do, but make sure you know you are doing it.

At the outset, this is not about whether or not same-sex marriage is a positive or a negative.  I am only concerned with appropriate plan administration.  And one considerable difficulty with plan administration is that some terms and provisions become “legacy” provisions that just continue to show up, restatement after restatement, without any clear understanding of why they are in there.  So as a starting point, you should really be reviewing your plan documents with an eye toward making sure you know what eligibility and benefits provisions are included.  Many a plan sponsor has been frustrated in finding “surprise participants” based on plan language that was just carried over year after year.  Don’t let plan provisions stick around just because they are already in there.  Make sure they are actually doing what you want them to do.

That said, the definition of “domestic partner” can be part of the problem.  Many plans started by defining domestic partners as same-sex couples who legally could not get married.  37 states now recognize same-sex marriage, so in many ways, the necessity for this type of eligibility may be falling away.  Legally speaking, there is little rationale for treating opposite sex couples differently from same-sex couples if both can marry so the plan can certainly limit the definition of “spouse” to those legally married.  Further, recall that the IRS recognizes same-sex marriages if they are performed in a jurisdiction that recognizes them, so even out-of-state marriages would create a “spouse” if your plan includes a provisions defining a spouse as being anyone legally married in a jurisdiction recognizing the marriage.

So there is certainly ample justification for considering limiting the definition of “spouse” to people legally married and doing away with domestic partners.  However, there is also some support for keeping the definition in.  Some plans want to provide coverage for domestic partners regardless of the gender of the employee.  Yes, some plans offer benefits to opposite sex domestic partners, provided certain plan requirements are met.  There might be tax issues to consider, but the point is you can include such a provision in your plan.

The point is that whether you decide to leave “domestic partners” in, or decide to take them out, make sure you know how you have defined them, how you verify the status and how you apply the plan terms.  If you decide to take them out, make sure you provide proper notice to plan participants and properly amend the plan documents, including any summaries that explain eligibility.  And while you are at, give the other plan terms a once-over to see if there is anything else in there that might need to be updated to reflect current practices.

Why Keep Track of Dependents? Wrongful Termination Case and the Ex-Spouse

Posted in Court Cases, Plan Administration, Retirement Plans, Welfare Plans

In the past I have written about the importance of doing regular “dependent eligibility audits” and litigation over payment of retirement benefits to spouses, ex-spouses and other beneficiaries.  But every once in a while, a case comes to my attention that reminds me that one of the hardest parts of maintaining benefit plans is that they benefit employees and their dependents, and frequently the status of these folks can change.  Consequently, keeping track of dependent status is a key component of good plan administration.

In Forristal v. Federal Express, the District Court in Massachusetts considered a case where the employee claimed that he was a victim of wrongful termination.  He claimed that the basis for his termination was, in part, punishment for keeping his ex-spouse enrolled in the company health plan for 7 years after his divorce.  The company found out about the deception when the employee asked to drop the ex-spouse because he was getting remarried.  From a purely legal point of view, the employer argued that ERISA preempted the wrongful discharge claim and the Court ultimately agreed.  Because the claim ultimately related to the administration of the plan, it was preempted by Section 514 of ERISA.

However, setting the legal arguments aside, the plan language in question clearly made it so that the ex-spouse was not eligible for benefits.  But for 7 years, it continued to treat the ex-spouse as a covered dependent.  I have seen in the past where retirement plans have run into a quandary over payment of retirement benefits to the “spouse” only to find out that a divorce has occurred.  Moreover, I have actually seen situations where the plan has continued to list a deceased spouse as a primary beneficiary.  I have even seen a situation where a health plan accidentally continued coverage for a spouse of a deceased employee for years, apparently not aware that the employee had died.

In each of these situations, there were logical explanations for how the mistakes occurred.  But in each case, it struck me that problems could have been avoided with a regular review of who the plan considered to be “dependents.”  Good recordkeeping is important for good plan administration.  Not all plans have pen enrollment every year where dependent eligibility can be checked so consider some type of audit of your planes to verify dependents are still in fact “dependents” under the terms of your plan.  And before you make fun of Federal Express in this case, make sure you don’t have the same problem.

Supreme Court Says Health Benefits Don’t Vest: Contract Principle Apply

Posted in Court Cases, Plan Administration, Welfare Plans

For some time, there has been a question about whether health benefits “vest” under a collective bargaining agreement.   Since neither ERISA nor the National Labor Relations Act actually requires employers to provide health-care benefits, employees typically bargain for health benefits that are then memorialized in a collective bargaining agreement.  Over the course of time, employers have trouble dealing with this potential obligation to provide retiree medical benefits, and as with most disputes, it ended up in litigation.  Now the Supreme Court has ruled on the issue.

In M&G Polymers USA v. Tackett, the Supreme Court of the United States considered a case that directly questioned the obligation to provide retiree medical benefits established through a collective bargaining agreement.  In sum, the retirees were arguing that the right to receive the medical benefits was “vested” as of the date of their retirement, particularly where the collective bargaining agreement made no mention of the duration of these benefits and provided no provision for their termination.  A unanimous Court (which is rare in and of itself) disagreed with the lower court opinion that silence in a collective bargaining agreement regarding the duration of bargained-for retiree health care benefits should be construed as evidence of the parties’ intention that those benefits vest and continue indefinitely.  Instead, the Court determined that ordinary contract law principles should apply.

The general rule in interpreting contracts is that the court has to look to the intention of the parties to resolve ambiguities.  Instead of applying contract principles, the lower court applied a standard that presumed that unless there was evidence to the contrary, the provisions of a collective bargaining agreement providing for retiree medical intended to grant those benefits for life.  This concept, developed under a case called Yard-Man, had acted as the basis for the proposition that retiree medical benefits vest unless otherwise specified.  The Supreme Court’s primary concern was that this presumption improperly places “a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements.”  It presumes intent rather than requiring a determination of the actual intent.

It should be noted that the Supreme Court has a fairly long history of determining that welfare benefits (including retiree medical care benefits) are exempted from ERISA’s vesting requirements.  Correspondingly, this is why many plans include provisions that preserve the right to amend or terminate so that there is no implication that they can never be changed.  So while this case deals primarily with collectively bargained obligations, it should also serve as a reminder to plan sponsors to include those provisions in their plan documents so they have that discretionary authority.  As for this case, it provides a not-so-subtle warning to employers engaged in collective bargaining that while silence does not presume vesting, the intent of the parties in bargaining may ultimately become an issue that has to be proven with actual evidence. 

So the take away from this case may actually be more than just an elimination of the Yard-Man presumption.  It may be that it is a reminder to employers that engage in collective bargaining to not assume silence in an agreement has any particular meaning.  You may ultimately have to prove intent, particularly when it comes to benefit issues.  Intent is easier to prove when it is specifically spelled out in actual contract terms.  Therefore, it could be that the best way to preserve the right to change or eliminate benefits (or terminate retiree medical) is to specifically include that right in the agreement.  Sure, it might cause an issue at bargaining, but it may end up avoiding future problems where “proving intent” becomes an issue. 

HIPAA Medical Privacy Matters: Court Permits ADA Claim to Proceed

Posted in Court Cases, Plan Administration, Welfare Plans

Normally I do not like to comment on cases that are not final or court opinions that do not have a definitive outcome on a case.  But this is an exception because of the topic, which is HIPAA and privacy, which can get overlooked too frequently.  Also, because the facts are such that it could happen to other employers,  it bears consideration. 

The case is Myers v. Hog Slat, Inc., which is pending in the Northern District of Iowa.  Myers was employed by Hog Slat and happens to have a daughter who is very ill.  So ill, in fact, that she incurred medical expenses of around $1,000,000.  The employer’s plan is a self-insured health plan, which paid the expenses.  They then terminated Myers, which they claimed was for cause.  Myers sued, making claims under the Americans with Disabilities Act (ADA) and interference with benefits in violation of ERISA (a Section 510 claim).

After the close of discovery, the employer moved for summary judgment.  The Court denied the motion, which means the case can proceed to trial.  The Court determined that the ADA prohibits discrimination against an employee due to expenses arising from a family member’s disability.  But more importantly (from my point of view) was the fact that the Court cited numerous pieces of evidence that not only did the company executives know that Myers’ child was extremely ill, but they actively engaged in discussions about how they could limit the plan’s exposure to those claims.  One key piece of evidence was an e-mail from Myers to the CFO updating him on the condition of Myer’s daughter.  And therein lies the rub.

Arguably, Myers’ e-mail did not implicate HIPAA medical privacy concerns because the individual health information was provided by the father of the child, who was acting on behalf of and for the child.  Information provided voluntarily by the patient himself or herself (or in this case the parent of a minor patient) is not protected health information (PHI) under HIPAA.   Further, because the CFO knew about the sick child, he was able to review the plan expenses and deduce that the higher costs were associated with that particular dependent.  Even that was not in and of itself a violation of HIPAA medical privacy (assuming his role with the plan was part of the plan’s operation).  So there is no indication that there was an improper use of PHI so as to create a privacy violation under HIPAA. 

But just because there is not a violation does not mean the employer can freely act on that information.  Remember that one of the purposes of the HIPAA privacy rules is to make sure  that employees do not suffer adverse employment actions as a result of their employer getting wind of their medical costs paid by the plan.  Here, the employer may not have violated the “privacy rule” but it still used that information to terminate the employee.  So the fact that “medical information” may not be protected does not mean the employee is not still protected from an employer misusing that information.