Employee Benefits Legal Blog : Employee Benefits Lawyer & Attorney : Fox Rothschild Law Firm : Health Care, Retirement, ERISA : Philadelphia, New York, Northeast

The Genetic Information Nondiscrimination Act (GINA) passed in 2008.  Since then, most of the discussion benefit plan professionals have had regarding GINA has focused on HIPAA notice requirements and compliance with GINA restrictions in wellness plans.  This month, the EEOC settled its first case brought under GINA and the facts should serve as a reminder for plan sponsors about what GINA really does.

By way of background, GINA prohibits health plans from discrimination on the basis of the genetic information of enrollees.  Health plans may not use genetic information to make eligibility, coverage, underwriting or premium-setting decisions.  Plans may not request or require individuals or their family members to undergo genetic testing or to provide genetic information.  As defined in the law, genetic information includes family medical history and information regarding individuals' and family members' genetic tests.  GINA also prevents employers from using genetic information in employment decisions such as hiring, firing, promotions, pay, and job assignments. Genetic information means information about an individual’s genetic tests, the genetic tests of family members of the individual, the manifestation of a disease or disorder in family members of the individual or any request for or receipt of genetic services, or participation in clinical research that includes genetic services by the individual or a family member of the individual.

The case involved a company that asked an applicant about her family medical history as a component of her post-offer medical exam.  The exam was mandatory and had to be completed in order to obtain employment.  The questionnaire included questions about heart disease, cancer, arthritis and mental illness, among others.  The employee was eventually denied employment and the EEOC charged that the company violated GINA.  The matter resolved for a $50,000 settlement and a consent decree agreeing not to discriminate in the future.

So the mistake here was the appearance of discrimination based on family medical history.  The fact that the employers asked about that history implies they misused it.  So before you ask employees or potential employees about their family medical history for any reason, remember GINA and make sure you are not collecting and using that information for inappropriate purposes.

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As a component of PPACA, employees will be able to opt out of employer coverage and go to exchanges (or go there directly if the employer does not offer coverage).  The government refers to this program as the "Health Insurance Marketplace."  Open enrollment for health insurance coverage through the Marketplace begins October 1, 2013, which, in conjunction with the new Section 18B of the FLSA, requires employers to provide notices to their employees by October 1.  All active employees must get this notice before 10/1, and all new hires after 10/1 the must receive it within 14 days of their hire date.  This continues on then as a requirement for every new hire.

Four important documents came out.  The first is the Technical Release 2013-12.  It provides the DOL instructions on how has to issue the notice and what employers are subject to the notice requirement.  Then there is a Model Notice for Employers Who Offer Coverage.  It is distributed by employers who offer health insurance coverage or self-insured plans.  Finally, there is a Model Notice for Employers Who DO NOT Offer Coverage.  The purposes of these notices is to allow employees to go to the exchanges and who them what coverage their employer does and does not offer, as well as reminding employees about their insurance coverage options.

In addition to these three documents, we also get a new Model COBRA Notice that is available from the DOL's Affordable Care Act Website.  The site also includes a red-line version so you can see how the old Model COBRA notice was changed.  Not to spoil it for you, but basically it just adds reference to the exchanges.  This new notice should be implemented for COBRA events after October 1, 2014.

So employers should review these notices and make themselves aware of the requirements.  And if you have any questions, make sure to consult with your benefit professionals to sort out the details.  October 1 will be here sooner than you think.

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One of the quirks about PPACA is that the measure of "affordability" of coverage is based on the value of single (or "employee only") coverage.  A qualifying plan has to make coverage available to dependents, but it can exclude spouses as dependents.  And don't forget that outside of PPACA, there are ERISA rues, IRS rules and sometimes state rules that define "dependent" or "spouse" for various purposes.  So as we get closer to the 2014 deadline, plan sponsors should be reviewing their welfare plans to make sure they have these terms properly and consistently defined so that they make coverage available to those they intend to offer it to, and exclude those intended to be excluded.

Of course, PPACA is not the only consideration for clarifying these terms.  What constitutes a "spouse" or "dependent" can vary.  For example, in Maryland, the state is getting ready to eliminate coverage for "domestic partners" because as of January 1, 2013, same-sex marriage became legal in that state.  That means that there would no longer be a need to carve out coverage for same-sex partners who could not marry.  In sum, now that everyone can get married under state law, the term "spouse" now has no differentiation between same-sex or opposite-sex couples.  Continuing to provide coverage to same-sex domestic partners would also now discriminate against opposite-sex couples who chose not to marry because eligibility of benefits would be based on sexual orientation (specifically being in a same-sex relationship gets you benefits without the legal commitment of marriage).

And it is not just major medical plans that should be reviewed.  Cafeteria plans have their own set of eligibility rules and definitions.  Some plan sponsors may want to consider excluding coverage for claims incurred by spouses not covered by the major medical plan.  They don't have to, but remember that the rules for eligibility in a cafeteria plan define certain benefits the plan MAY provide, not MUST provide.  It is up to the plan sponsor to define who is actually eligible.  The same holds true for the definition of employee eligibility for "full time" or "part time" employees.  PPACA has penalties for not providing coverage to employees who work 30 or more hours per week, but it is up to the plan sponsor to make sure the definitions in the plan match the desired eligibility requirements.  Your plan terms control the operation of your plan, not PPACA.

So, when you are looking at who you want to cover, start with your definitions and see how your plans defined "full time," "eligible employee,' "spouse" and "dependent."  These terms will dictate who can participate in your plan.  Once you decide who you want to let in, make sure your plan correctly identifies them.  And if you need help sorting out eligibility terms, make sure to contact your attorneys at Fox Rothschild.

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Last week, we upgraded our software and changed our document management system.  For non-computer savvy people like me, it was a real challenge.  The trainer told me that whenever I did something that caused an error, I should write down what I did and ask him to explain to me what went wrong and how to avoid it in the future.  This struck me as an interesting piece of advice that could also be good for plan sponsors and plan administrators when it comes to compliance so when I finally was able to get access to the internet, I decided to write my thoughts about it.

I have written before about fiduciaries and their responsibility to act diligently and to make informed decisions.  It is essential that fiduciaries document the steps they took in reaching decisions related to plan operations.  The process for choosing advisors, service providers or investments should all be documented so that there is a record of how the decision was reached to demonstrate diligence.  Similarly, when mistakes are made, there should be a record of how they were identified, how they were corrected and what steps are being taken to make sure they do not happen again. 

When it comes to benefit plan administration, there are several "corrective mechanisms" available to fix mistakes.  Sometimes the best mechanism is to document the procedure being implemented to prevent them from happening in the future.  Things like written policies and procedures can be a boon to both show diligence and to also adjust future administration.  Memorializing how and why the actions were taken give us a roadmap in case a mistake occurs so we can look back and see where a wrong turn might have been made.  It is very difficult to fix a mistake if you can't identify why it happened or what practice or policy was ignored.

I think this will become even more relevant the closer we get to full PPACA compliance.  Plan sponsors are making decisions about how to count employees, what coverage to offer and how to measure hours.  Undoubtedly, mistakes will be made.  There should be a record of how conclusions were reached for each of these issues so that there is both proof of diligence and a reference point for correction if necessary.  Mistakes can be fixed, but it is usually easier (and less costly) to fix things if there is a record to look back on.

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As we continue to get closer to the January 2014 deadline for PPACA compliance, we continue to get additional guidance from the DOL.  On 4/23, the DOL issued another set of FAQs addressing the summary of benefits and coverage (SBC) disclosure requirement under health care reform.  These FAQs reflect changes to SBCs distributed for coverage that begins on or after January 1, 2014, and before January 1, 2015, which is generally referred to as the "second year of applicability."  Remember that the SBCs are supposed to provide a summary of coverage offered to be compared against other available coverage options (like the exchanges).  Plan sponsors should have issued SBCs for coverage in place before January 1, 2014, so now we have some guidance for what SBCs will look like.

The FAQs address issues related to providing SBCs in the second year of applicability.  The updated SBC template and sample completed SBC are for use in the second year of applicability.  The good news is that these documents make no changes to the uniform glossary, the SBCs "Why This Matters" language, coverage examples, or related "Instructions for Completing the SBC."  The only significant change to the SBC template and completed SBC is the addition of statements addressing whether the plan or coverage provides minimum essential coverage meets the minimum value requirements.

The FAQs contain several items related to the content of the second-year SBCs and adjustments that have to be made about benefit limits and also contains some explanation of transitional relief that is available to plans that already started writing the second years SBCs.  I think it is odd that they decided to publish this particular guidance when so many more questions need to be answered, but if preparing your second year SBC is on your current to-do list, make sure to review this new guidance.

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While it may seem boring to those who don't deal with benefit plans on a daily basis, the Supreme Court's recent decision in US Airways, Inc. v. McCutchen is somewhat important.  The issues litigated in that case were whether two equitable defenses applied in the context of a health plan's claim for reimbursement under ERISA Section 502(a)(3).  With it, comes some further insight into defining plan terms and available remedies.  This can be important for plan undergoing changes for PPACA compliance.

McCutchen was a participant in a self-funded ERISA health plan sponsored by US Airways.  He was injured in an automobile accident and the plan paid his medical expenses.  McCutchen subsequently recovered money from third parties, but refused to reimburse the plan claiming that (1) he should not have to reimburse the plan because he did not receive full recovery for his injuries and (2) the plan would be unjustly enriched if allowed to take full recovery without taking into account attorneys fees.  The district court rejected these arguments and granted summary judgment to US Airways on the ground that the plan terms clearly provided for full reimbursement of medical expenses.  The US Court of Appeals for the Third Circuit vacated the district court's order, holding that an award of "appropriate equitable relief" under ERISA Section 502(a)(3) may be limited by equitable defenses and principles, including unjust enrichment.

The Supreme Court held that equitable defenses cannot override clear plan terms.  However, equitable rules can be used to fill a gap where the plan is silent regarding an aspect of the reimbursement, especially for things like allocation of costs.  In other words, equitable defense cannot override clear language in a plan...plan terms speak for themselves.  So specific terms apply and if terms are missing, courts can fashion remedies based on equitable principles, even if the result is not what the plan sponsor intended.

So the lesson here is, for subrogation and reimbursement cases, health plans should make sure they have very specific subrogation and reimbursement language to avoid challenges on an equitable basis.  But the broader concept is an affirmation that plan terms mean what they say.  In a time when we are revising and redrafting plans to comply with PPACA, it is important to keep in mind that we have to say exactly what we mean.  To avoid "equitable" interpretations of plan language, be specific and detailed.  If you need help crafting specific plan language, you can always look to your attorneys at Fox Rothschild for assistance.  

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With PPACA, we have added an extra component of the appeals process to include an external review.  While this is added for health plans, other welfare plans like disability or life, and of course retirement plans, do not have this same requirement.  But what happens if, during the course of the appeals process, the plan administrator comes across information that might impact the decision on appeal that makes the administrator want to grant the appeal?  Does the administrator have to disclose why? 

First, we can operate on the presumption that there would not be an appeal unless the participant was being denied a benefit (or at least seeking to modify a benefit granted).  The initial "internal" appeal requires the administrator to consider what ever additional information the participant chooses to provide.  Plus the administrator has to provide to the participant that information it relied on in denying the claim.  But the administrator may also get information from someone other than the participant during the appeal.  So how does this impact the appeals process? 

In the recent case of Lee v. Hartford Life, the District Court for the District of Columbia dealt with an issue where, while the appeal was pending, the administrator received another medical report from its doctor affirming its original denial.  Hartford did not share that opinion with the participant until after the appeal was denied.  She subsequently claimed she was denied a full and fair review on appeal because she did not know about this second report during her appeal.  The Court confirmed that, when an appeal is filed, the administrator has to give the participant documents generated and relied on prior to the original claim denial, but not any documents received after the initial appeal is filed.  So the subsequent report was not something that had to be disclosed during the appeal because the appeal was already made.  Of course after the appeal was denied, the administrator has to reveal the basis for that denial, which it did, which gave rise to this lawsuit.

When applied to a health plan with an external review, the steps would work something like this: (1) initial claims denied; (2) appeal filed, give all documents relied on for original denial; (3) when appeal denied, give all documents relied on when making the denial of the appeal (including, in this case, the second report).  After a claim is denied and an appeal is filed, you don't necessarily have to supplement your original denial with information acquired after the appeal is filed until you actually deny the appeal.  So, why the title question about changing your mind?  Well, because information only has to be produced that existed prior to the filing of the appeal, but not information received during the appeal process unless the appeal is also denied.  If the plan administrator receives subsequent information that makes it want to rescind the original denial, it appears that there would not be an obligation to explain why the reversal occurred.  A plan administrator can simply grant the appeal without ever specifying it relied on something other than the participants appeal submission.

The point is you might not want the participant to know why you changed your mind, only that you did.  Plan administrators sometimes want to keep their resources close to the vest.  Fortunately, under this case, the basis for granting an appeal (or reversing a denial of benefits) does not have to be disclosed.  If the appeal is granted, there is no more requirement to provide a disclosure to the participant.  So it is OK to change your mind between the initial denial and the determination on the appeal and simply grant the appeal.  If there is no denial of the appeal, there is no obligation to disclose why it was granted. 

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Even when it is not all about PPACA, it can still be about PPACA.  I happened to be reading some recent court decisions and came upon a decision from the 6th Circuit Court of Appeals that has an impact on welfare benefits generally, but also a possible impact on PPACA health plans, so I thought I would share it.

In Price v. Laborers Pension Fund, the 6th Circuit was considering a case related to disability benefits.  Price was granted disability back in 1990.  In 2006, because of an amendment to the plan, his disability benefits were eliminated and he promptly filed a lawsuit.  In affirming the termination of his disability benefits, the Court made a couple critical observations that are important to all plan sponsors.  First, the Court affirmed the proposition that welfare benefits (as opposed to retirement benefits) do not generally "vest."  Welfare benefits can generally be terminated at any time so long as the termination is consistent with the terms of the plan.

Second, the Court resolved the issue by looking at the specific terms of the plan where the trustees had reserved the right to amend or terminate benefits, even retroactively.  The Court found that the specific language of the plan was such that it allowed for elimination of disability benefits at any time, thereby precluding an argument that the right to receive these benefits was "vested" or guaranteed. So in terms of these "welfare" type benefits, if a plan sponsor has reserved the right to amend or terminate benefits in the plan language and follows the terms in the plan when it takes action, it can generally avoid a claim that the right to the benefits has vested.

Under PPACA, many plan sponsors are considering eliminating or curtailing welfare benefits (like health, vision and dental coverage) for cost concerns.  All well and good provided that the plan sponsor has reserved the right in the plan to change, amend or terminate these welfare benefits at any time.  While ERISA might generally give a plan sponsor the right to act, if you are considering eliminating health insurance coverage for employees because of PPACA, a good place to start is to see if your health plan has a provision giving you the ability to amend or terminate coverage at any time.  Having a provision like this goes a long way to defeating any argument that the benefits have "vested."   

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As we know, PPACA creates the concept of an exchange that will be available to individuals to obtain coverage, either as an alternative to employer sponsored coverage or as a replacement if an employer does not offer coverage.  As we come closer to implementation of PPACA, the question continues to come up about what the exchanges will look like and how much coverage in the exchanges will actually cost.  Well, we have at least a glimpse of the answer to these questions.

Today, Vermont became the first state to publish proposed rates for its exchange.  The single coverage rates average between $365.76 per month for bronze coverage up through $609.47 for platinum coverage.  Family rates average between $1,027.78 and $1,712.61.  These averages are measured based on the options available under each level of coverage, so it might be that some coverage levels cost more or less depending on the option selected.  These rates do not take into account any subsidies that might be available based on household income. 

For states that have decided not to adopt an exchange, we will have to wait for a federal exchange rate to be published, or at least for some clarification of how the federal exchange rates will be determined.  Plus other states will have to create their own rates based on their own compliance criteria.  But for now we have at least a base point to consider moving forward.  Assuming these rates remain unchanged between now and the date of implementation, we now have some idea about what exchange coverage might actually cost.

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Under PPACA, once we decide who we have to offer coverage to, then we have to decide when they get the coverage.  Generally the new rule is that a waiting period for coverage cannot exceed 90 days.  So now the IRS has given us proposed rules on the 90 day waiting period.  As with all other proposed rules, they are not final until they are final, but these do give employers some additional guidance on how to maintain the correct waiting period.

The proposed regulations define a waiting period as “the period that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of a group health plan can become effective.”  What this means is that once eligibility requirements are met (meaning that an employee is "full time"), coverage must begin 90 calendar days after eligibility is obtained.  This includes weekends and holidays.  If day 91 falls on a weekend or holiday, the plan sponsor may elect to have coverage be effective earlier than the 90th day, for administrative convenience, but may not delay coverage past the 91st day.  So plan sponsors should eliminate any plan provisions that provide that coverage begins at some time after the 90th day (like the first day of the month after the expiration of the 90 day period).

The proposed rule also provides that a plan may impose eligibility criteria such as completion of a period of days of service (which may not exceed 90 days), attainment of a specific job category, or other criteria, so long as they have not been designed to avoid compliance with the 90-day waiting period.  For example, a plan provides coverage only to employees with the title of manager.  John is hired on September 1, 2014 as an associate.  On April 1, 2015, he is promoted to manager.  John must be offered coverage no later than July 1, 2015.  This does not mean that John might not have otherwise been offered coverage as a full-time employee.  So be wary of reading too much into this job classification option.  We still have to measure how many hours John works even as an associate.

Also, there had been some question about certificates of creditable coverage being required after January 1, 2014.  The proposed rules provided that these certificates will be phased out by 2015 because PPACA's prohibition on exclusions from coverage due to pre-existing health conditions renders them obsolete.  Since pre-existing condition exclusions have to be eliminated for plan years beginning on or after January 1, 2014, these certificates are no longer necessary.  But they still have to be provided throughout the 2014 plan year.

There are other specifics in the proposed rules that will have to be fleshed out and, again, these rules are proposed and subject to change.  But they serve as an ongoing reminder that plan sponsors have to be watchful of how they administer their plans and must make sure that their stated eligibility rules satisfy the requirements of both ERISA and PPACA.

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In prior entries, I have discussed wellness programs and the rules related to discrimination.  Specifically, we considered what can and cannot be done with respect to "participation based" versus "outcome based" programs.  Clearly wellness programs are a key component of controlling health claims costs and PPACA certainly allows them to exist (and even encourages them).  So looking at the CVS model announced last week, we can see how implementing a "participation based" program can be very effective.

According to reports, CVS will implement a wellness program that will require its employees that enroll in the company medical plan to have a wellness review completed or face a penalty.  The company will pay for the review and it will be administered by a third party.  The company will not know any of the results, only whether or not the employee participated in the review.  The employee will then be told about potential health risks they face and how to get healthier.  If employees do not participate, they will pay a $600 annual "penalty" in the form of increased contributions to health insurance coverage.

The reward, not paying the $600, is the incentive to participate in the program and since the reward is not based on a particular outcome (such as losing weight or lowering BMI), it avoids the HIPAA non-discrimination concerns that outcome based programs face.  Of course it has caused quite an uproar because the assumption is that it penalizes employees for being overweight, but this is not actually the case.  It merely provides an incentive to employees to find out how they can be more healthy, including the fact that they might need to lose weight.  Ideally, as employees find out about their health risks, they will seek to improve their health, thus driving down overall health plan costs.

So as we come closer to full PPACA compliance, employers should consider adding a wellness program component to their health plan as a means of potentially controlling health claims expense.  It is perfectly legal and can be done in a manner as simple as the CVS model.  But make sure you know whether you have an outcome based or participation based program to avoid discrimination concerns. 

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The IRS and HHS have been issuing guidance and notices, as well as regulations, regarding the definition of affordable coverage.  But employers seem to be caught up in household income, 8%, 9.5% and what constitutes affordable coverage to avoid penalties.  So breaking down this one issue of "affordability," let's summarize where we presently appear to be (at least as I understand the rules):

First, assume you are offering coverage that meets the minimum essential value test (which is still being defined).  If the employee cost of obtaining "single coverage" is less than 9.5% of that employee's total compensation as reported in box 1 of that employee's W-2, that coverage will be "affordable."  Coverage generally has to be available to cover dependents, excluding spouses, but the cost of dependent coverage is not calculated in the determination of whether the employer is offering affordable coverage.  It may have an impact on the eligibility for subsidies of the employee, but not the employer.  So, as it presently sits, if the cost of single coverage to the employee is less than 9.5% of their compensation, it is affordable.

Now, from the employee's perspective, whether or not the coverage offered by the employer is affordable looks at total household income.  For the individual, their personal definition of whether they are being offered affordable coverage will be based on 8% of total household income.  By way of example, think of an employee making $30,000 a year.  The employer has to offer that employee single coverage for an employee contribution of $237.50 a month or less ($30,000 x 9.5% = $2850/12).  The employer would be OK because that coverage would be affordable. 

Now suppose that employee has two children.  The employer can charge more for the family coverage than the 9.5% because that limit applies only to the single coverage.  So let's assume the employer charges $500 a month to the employee for family coverage.  The coverage would still be affordable and the employee would not be subsidy eligible if they went to the exchange because the employer is offering affordable coverage.  The exchange coverage for the family might be a cheaper option and the employee could choose it, but they would not get subsidies.

Where things get interesting is when you consider non-covered spouse.  Assume the spouse is unemployed and the total household income is that same $30,000.  If the spouse goes to the exchange for coverage themselves, the spouse would be eligible for a subsidy because they are not offered any employer sponsored coverage and the total household income for the family is below 400% of the federal poverty level.   Further, because of the household income is so low, it is likely that children could end up with coverage through a state-sponsored S-CHIP plan.

Now it gets even more confusing.  If the employee decides to opt out of the employer coverage and the whole family remains uninsured, they would not be subject to the individual tax penalty for not having insurance because the cost of the employer coverage for the family is more than 8% of total household income ($2,400 versus $6,000).  But that total household income calculation applies to the employee and family, not the employer.  Back to step one, if the employer's single only coverage is less than 9.5% of the employee's income, it is affordable and the employer pay no penalty,

As you can see, this means that it would be hard to argue that this is going to make coverage more affordable for families.  And employers that were charging employees more than 9.5% of the cost of coverage (or not offering coverage at all) will see some additional cost.  But for employers, the point is you don't have to get caught up in trying to figure out the total household income of your employees.  Look only at their individual income and base your affordability measure on that figure (at least for now).

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These are trying times for employers sponsoring health plans and as we get closer to January 1, 2014, PPACA guidance is not always easy to come by.  Lots of regulations still have to be written.  However, today the DOL did issue a couple "compliance tools" to help employers self-test to see if their plans are complaint with HIPAA and some of the provisions of PPACA as they presently sit.

The HIPAA Self-Compliance Tool looks primarily at regulations and requirements other than PPACA.  It is designed to help determine whether a plan is compliant with the HIPAA non-discrimination rules and also such things as wellness programs, mental health parity and the WHCRA and Newborns Act.  The PPACA Self-Compliance Tool provides a checklist of items that are already in effect for PPACA and gives some guidance to plans on how things should already be operating. 

Neither checklist predicts the future, and while they do include useful tips about how to comply or what may be required, they do not provide definitive guidance on all issues.  Specifically missing from the PPACA tool is an explanation of how to count employees or hours or any explanation of how to determine who will ultimately be eligible for coverage.  But they do give us some way of determining if a plan is doing things correctly so far.  Plan sponsors should review these lists and take this as an opportunity to self-correct deficiencies, even while planning for how things will look next year.

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So some good steps to dealing with the seasonal employees issue might be to (1) clearly define them as seasonal and tell them, (2) limit their employment to a reasonable "season" (probably fewer than 120 consecutive days), and (3) clearly designate them as seasonal when you do your calculations for large employer status and for eligibility.  I suspect that where employers will most likely get in trouble is when they either don't make it clear to employees they are seasonal, or don't limit their employment to a defined "season."  If you need help defining who is a seasonal worker, what their season of employment is or how they effect your counting employees under PPACA, ask you attorney at Fox Rothschild for guidance.

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I frequently am asked by plan sponsors and plan administrators about how to respond to a request for "plan documentation."  Under Section 104(b)(4) of ERISA, a plan administrator is obligated to provide certain information when requested by a participant or beneficiary.  This documentation includes the summary plan description, the latest annual report (if the plan files one) and any bargaining agreement, contract or trust document under which the plan is established.  Sounds fairly simple, right?

Well, under 502(c), there is a $110 a day penalty for failing to provide the documentation within 30 days when requested, so there is some timeliness requirements to the response, and there is some penalty associated with no complying with the request.  104(b)(4) allows for their to be a reasonable charge for copies if requested.  But who can request them?  The term "participant" or "beneficiary" is not cleanly defined in these sections.  Well, generally, we know that a participant or beneficiary is someone who participates in the plan or is entitled to benefits under the terms of the plan.  But it may also be someone who has a "colorable claim" to benefits.  Say perhaps an ex-spouse who thinks they are entitled to life insurance benefits.  Or perhaps a step-child who thinks they meet the definition of a dependent.  So it is important to consider who is requesting the information and not just their actual status, but their possible status as well.

Also, the request can come from an attorney.  There is an old DOL opinion letter that suggests that since the statute says the request has to come from the participant or beneficiary, a request from an attorney does not trigger the obligation to comply.  But more recent case law has considerably blurred that line so that a request from an attorney for a participant or beneficiary made in good faith should elicit a response.  Further, while the statute says the request has to be made to the "administrator," an employer, as plan sponsor, should not assume that it is free from compliance because it has outside administration.  Lots of cases have been litigated over whether that "fiduciary" status is sufficient to require an employer to provide documentation.  Simply put, the risk associated with penalties and litigation over failing to provide documentation seem to clearly favor erring on the side of giving documents when requested.

So plan sponsors (and administrators) should collect the required documentation, keep it in a nice folder and be prepared to send it out on request.  Set an reasonable fee in advance and apply it uniformly.  Make sure to comply within 30 days and err on the side of providing the documentation to anyone with a colorable claim to participant or beneficiary status.  And if you have any questions, contact your attorney at Fox Rothschild for guidance.

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By off chance, a client sent me a letter from the Department of Labor conducting an audit of their self-funded health plan.  While I have responded to many audit requests in the past, this most recent audit letter was unique in that it is the first one I have received that specifically requests information related to compliance with PPACA.  Looking at what was specifically requested by the DOL in it's audit can go a long way toward preparing plan sponsors for compliance with these requests, so let's consider the PPACA specific documents the DOL asked to see.

The DOL requested that, if a plan is claiming grandfathered status, it provide a copy of the "grandfathered health plan status disclosure statement" as well as each document the plan maintained substantiating it retained grandfathered status.  The DOL also requested a copy of each written notice describing the opportunity to enroll dependents up to age 26 as well as copies of all notices relating to lifetime or annual limits, or the elimination of those limits.  Also included was a request for copies of all summary material modifications related to any plan changes instituted to effect PPACA compliance.

The audit request included a request for the process and procedure for administering external appeals, as well as a contract hiring an external appeals administrator and the process for evaluating that administrator.  The DOL also requested copies of the last five appeals filed after September 23, 2010, with all information relating to the highest level appeal that was completed.  There was a request for the notice informing participants of the rights to designate primary care physicians if the plan is not grandfathered, samples of all adverse benefit determination notices and copies of all documents issued in a non-English language required for counties with 10% or more of the population speak a particular language.

Of course, to the extent all of this documentation should now be a part of a plan's administrative process, it should not come as complete surprise that it was requested.  But it does serve as a reminder of the reporting and documentation requirements that existed before, and was modified by, PPACA.  If you don't have some of these documents, or were not aware they were required, now would be a good time to find out more about them so that if you are audited in the future, you have the documents at the ready.  And if you do receive an audit notice, make sure you ask for assistance from your attorneys at Fox Rothschild. 

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On January 25, the new (final?) rules about HIPAA Privacy under the HITECH Act were issued in the Federal Register.  While the effect of the new rules may not be to substantially change the way HIPAA privacy is viewed, there are a number of action items for employers as plan sponsors that have to be accomplished when these rules go into effect.

There are two pieces of good news.  The first is that the general purpose of compliance remains the same.  Plan sponsors have to ensure PHI is properly protected, refrain from impermissible disclosures and provide notices of security breaches.  The second is that the earliest possible deadline for compliance with the new rules is September 23, 2013, so there is some time to prepare.  But it is not a bad idea to start preparing now.  So let's consider the key changes.

1. Tougher Security Breach Notification Standard

Under the old rule, the standard for notification to participants of a security breach was only necessary if the release of information "posed a significant risk of financial, reputational or other harm" to a covered person.  Now, that standard is tightened to apply to ANY security breach unless the plan sponsor can prove "a low probability that the [PHI] has been compromised based on a risk assessment."  This should encourage plan sponsors to tighten their security breach protections because any release, even things like accidental e-mails, can potentially become reportable events.  So the first step in compliance would be to review security standards and document steps taken to avoid security breaches.

2. Tougher Standards for Business Associates Agreements

Because the new rule provides for penalties to a covered entity for breaches by business associates, the default position is that plan sponsors should be much more concerned about how compliant their business associates really are.  Where in the past, plan sponsors may have felt comfortable simply handing off certain protection functions to service providers, the new rule makes it pretty clear that plan sponsors have to actually know that their business associates are HIPAA compliant and diligently seek to confirm that compliance.

3.  New Privacy Notices for 2013 Open Enrollment

The new rule also requires that plan sponsors add or amend their privacy notices:

1. The notice must specifically state that the covered health plans are required to obtain plan participants' authorization to use or disclose psychotherapy notes, to use PHI for marketing purposes, to sell PHI, or to use or disclose PHI for any purpose not described in the notice as well as a statement explaining how plan participants may revoke an authorization.
2. The notices must state that the plans (other than a long-term care plan) are prohibited from using PHI that is genetic information for underwriting purposes
3. The notice must inform plan participants of their right to receive a notice when there is a breach of their unsecured PHI.

The new rules makes it clear that since this new language is a "material change," plan sponsors are required to distribute this revised notice, even if they had just recently sent the old notice. 

4. Genetic Information and the GINA Notice

The Genetic Information Non-Discrimination Act of 2008 (GINA) prohibits discrimination based on genetic information.  The HIPAA Privacy Rule now similarly prohibits HIPAA-covered plans from taking genetic information into consideration when offering incentives or discounts through a health risk assessment.  Because this modification of the Privacy Rule materially affects how a plan may use PHI, the HIPAA Privacy Rule requires that plan participants be informed in the plan's privacy notice of the prohibition on the use of PHI for underwriting purposes.  See the second item under Part 3, above.

So in the midst of our struggles to comply with PPACA, plan sponsors should not forget about HIPAA medical privacy concerns.  Start pulling together privacy notices, business associates agreements and plan documents for review and amendment.  Review your security practices to avoid even accidental breaches.  And be prepared to issue new notices as necessary for your next open enrollment.  For more detailed information about HIPAA and HITECH Compliance, please make sure to check out our HIPAA Blog as well.  More information means better compliance, which is always a good thing.

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One component of PPACA that has been hotly contested is the provision of birth control expenses and its impact on religious-affiliated groups opposed to contraception.  New proposed rules and a fact sheet have been issued that are apparently an effort to quell some of the debate.

The new regulations propose to have insurers who sell the coverage to pick up the cost of the contraceptives.  Now, there is a proposal that applies to religious institutions that self-insure which obligates the administrator of the plan to find a policy that would cover contraceptives.  The insurer would be compensated for that coverage through a reduction in the fees it pays to the state-based marketplaces, or exchanges, being established to provide coverage to individuals and small businesses.  Under the proposed rule, women employed by nonprofit religious organizations opposed to contraceptives, such as Catholic hospitals or colleges and student health plans, are entitled to get contraceptive services and products without a co-payment.   Since the organization is not required to bear the cost of the service, the insurer of the organization has to notify workers that it will provide the coverage through separate individual health insurance policies.

For self-insured plans, the administrator of the plan (typically an insurance company) would provide a separate individual policy and then offset the costs of those policies through an “adjustment” in the fees that will be charged to insurers participating in the health marketplaces.  Of course this does not explain what will happen if the plan is administered through an entity that is not an insurer and there is also no explanation about what will happen when those in the marketplace bearing the additional cost start complaining about paying extra to subsidize the cost of contraceptive coverage.

All in all, it is fairly clear that the Supreme Court will ultimately have to sort out this contraceptive issue.  While the proposed regulations may appear to have implemented some type of fix, it may prove to be illusory and unworkable when practical market realities intrude. 

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Earlier this month, Treasury and the IRS published a proposed rule regarding the shared responsibility penalty.  The proposed rule describes how the penalty will be applied and includes a number of safe-harbor methods that employers may use to determine whether an employee is a full-time employee for purposes of the employer shared responsibility penalty. (See my January 2, 2013 entry).  Within this proposed rule, there is a section dealing with employers that contribute to multiemployer plans.  It is a transitional rule, but at least it gives some guidance on whether contributions to a multiemployer plan will be sufficient to avoid the pay-or-play penalties.

As I have discussed before, the amount of the employer penalty will be based on whether the employer offers qualifying health coverage to full-time employees.  Employers have asked whether contributions to a multiemployer health plan will satisfy the obligation to offer coverage and allow them to avoid the penalties.  Under the proposed transitional rules, a large employer will not owe the penalty for a full-time employee if the following three things apply:

1. The employer is required to contribute to a multiemployer plan with respect to that employee pursuant to a collective bargaining agreement or participation agreement,
2. Coverage is offered under the multiemployer plan to the full-time employee (and the employee’s dependent children), and
3. the coverage offered to the full-time employee is affordable and provides minimum value.

This brings into question whether the multiemployer plan to which an employer is contributing satisfies items 2 and 3.  An employer might have a bargaining agreement, but unless the plan offered dependent coverage and is affordable and provides minimum value, this transitional rule would not apply.  While most coverage provided by multiemployer plans satisfies number 3, employers should get a certification from the plan that it does.  More recently, number 2 can be an issue.  Plans that may have eliminated dependent coverage to control costs could create problems for employers who contribute to a multiemployer plan and then discover it does not satisfy the obligation to offer coverage.  In other words, an employer could be obligated to contribute to a plan and still face a penalty for not offering coverage.  Remember, the penalty is paid by the employer, not the plan.

So while this transitional rule seems to provide some relief by allowing that contributions to a multiemployer plan satisfy the obligation to offer coverage, it is not a rubber stamp.  Employers who contribute to a multiemployer plan should verify that the plan meets the requirements under this guidance or potentially face penalties.

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In the fiscal cliff debates last quarter, there was some discussion about limiting deductions or changing the tax code to eliminate certain exclusions from compensation.  It is not uncommon for employers to offer fringe benefits to employees as an alternative to direct compensation because fringes are not always taxable.  But it is important to know whether what you are offering is treated as taxable income and what the limitations are on that "fringe."  Fortunately, the IRS Code contains specific provisions related to the taxation or exemption of fringe benefits.

The big ones are under Sections 104, 105 and 106 that exclude from compensation (and thus taxation) injury or sickness benefits, benefits received from employer health insurance and health insurance premiums paid by employers.  Section 119 excludes certain meals and lodging.  Section 125 establishes cafeteria plans and allows for flexible spending accounts.  Section 127 allows for educational assistance programs, while Section 129 provides for dependent care assistance programs.  Section 132 allows for employee discounts, de minimus fringes, transportation expenses, moving expenses and other similar working condition fringe benefits.  Section 137 provides for adoption assistance.  These name but a few of the Code sections related to fringe benefits.

The point to this is that there are actually specific guidelines provided in each of these sections that can help employers administer employee fringe benefit programs to make sure they remain non-taxable.  Employers who assume that they are giving a qualified non-taxable fringe benefit because it just seems like it should be frequently find themselves knee-deep in an audit, trying to explain why they did not follow the rules.  So before providing a "fringe" because it makes employees happy or because it sounds like a good idea, check the Code and see if what you are doing is permissible.  Check with your legal counsel and get an opinion as to the limitations.  And then follow the rules.  After all, you don't want to end up having to pay taxes on a "fringe" just because you did not understand it.

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When the Supreme Court decides not to take a case, that is generally not news.  But in the case of the Court's decision to decline a review of Walker v. Federal Express Corp., there should be some mention of its impact on claims under ERISA.  Usually, when I am defending a claim made against a plan or a plan administrator, I see that the Plaintiff has thrown in a claim for "breach of fiduciary duty" as a sort of catch-all argument.  Frequently, this claims is is coupled with some type of claim for failing to provide documents or for having defective notices.  But these types of claims may survive under ERISA, as the underlying decision in Walker illustrates. 

Factually, the case involved a claim for benefits under a life insurance policy.  In addition to the claim for benefits under Section 502(a)(1), the plaintiff included a claim for breach of fiduciary duty under Section 502(a)(2) for either failing to provide a conversion notice, or in breaching a duty to the participant by not giving benefits.  The Sixth Circuit Court of Appeals affirmed the decision of the Court from the Western District of Tennessee, finding that the relief available under Section 502(a)(2) for breach of fiduciary duty is not relief available to an individual.  It is relief that should be limited to the plan as a whole.  By not hearing the case, the Supreme Court has effectively left the 6th Circuit's decision intact. 

It is also important to note that this leaves intact the Appeals Court's decision that nothing in ERISA requires a life insurance plan fiduciary to issue a separate conversion notice beyond what is contained in the summary plan description, but that is not what I focus on here.

Certainly, other jurisdictions have had similar decisions and much has been written about relief available under 502(a)(2) and equitable remedies available under 502(a)(3).  But my point here is that making a claim for "breach of fiduciary duty" means something more than just disagreeing with a plan administrator's determination.  It has specific statutory and administrative limits.  So if you are a plan fiduciary facing an allegation that you have breached a fiduciary duty, your first consideration might be whether the requested remedy is even available.  I am not suggesting it is a good idea to engage in breaches of duty, but a claim for breach is not a blank check for a claimant.  It is a very specific claim that has very specific remedies and very specific limits.  Make sure that if you are a fiduciary, you are aware of your fiduciary obligations as well as the remedies so you don't further compound problems with your plan administration by giving the wrong thing. 

For more information about being a well-informed fiduciary, or to arrange for fiduciary training, please contact your attorney at Fox Rothschild.

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Between talk about the "fiscal cliff" and "shared responsibility,"  it makes me wonder how plan sponsors and fiduciaries are going to manage to keep their plans looking the same way for an entire plan year.  It seems like every day new issues are presented that might require employers to have to change their benefits plans.  Unfortunately, most time when people talk about changing plans, they overlook some of the rules relating to changes, particularly notices to participants. 

ERISA has a rule about "summary of material modifications" that provides that notice of plan changes have to be distributed to a participant within 210 days of the end of the plan year that the change is effective.  This applies to welfare plans and retirement plans alike.  For group health plans, if the material modification is a material reduction in benefits, the summary has to be distributed 60 days after the effective date of the reduction.  PPACA gives us a rule that provides that if a health plan makes a mid-year plan change that changes one of the terms in their summary of benefits coverage, the plan has to give a notice to participants 60 days prior to the effective date of the modification.  The notice of the changes would satisfy both the SMM requirement and the SBC notice requirement.  So you might have to issue a notice in 60 days or not depending on the change. 

Retirement plans have notices too.  Not only do the SMM rules apply, but there are special rules about notice requirements like a 30-day advance notice of amendments to 401(k) plan to eliminate matches or a 60-day advance notice of an intent to terminate a plan.  So mid-year changes to retirement plans can trigger an obligation to provide notices to participants prior to the change.  In the case of either welfare plans or retirement plans, failure to provide proper notice could constitute a breach of fiduciary duty, which creates its own potential liability.

The point is that changes can be made to plans mid-year or end of year, or both, be they retirement or welfare, and that plan sponsors can modify their plans to fit their changing needs.  But it is imperative to know the timing restrictions and notice requirements in advance of making those changes so you don't run into problems.  Don't assume, ask an expert. 

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As we ring in 2013, employers should be focused on measuring their obligations under the shared responsibilities provisions of PPACA.  On December 28, we got two additional pieces of guidance that tie together various prior notices relating to minimum essential coverage, measuring employees and potential liabilities.  The IRS has given us the proposed rule on Shared Responsibilities for Employer Regarding Health Coverage and some questions and answers to Frequently Asked Questions.

What the IRS has provided is consistent with prior advice, but it does clarify some key points.  Not the least of which is that while these rules do not go into effect until January 1, 2014, employers should be using the 2103 plan year as their basis for collecting information relevant to their compliance obligation.  There is also clarification that, when determining whether or not employers have 50 or more employees, companies with common ownership are treated as a single entity.  There is further clarification that, for determining the 50-employee threshold, an employer only counts those employees employed in the United States.  The FAQs also promise that a calculator is being developed to determine whether coverage offered meets the "minimum value" to be qualified health coverage.

The release of this information continues to underline the importance of counting employees and measuring their hours to see if they are full or part-time under the definitions provided in PPACA.  Employers should start counting now and avoid any last minute confusion over their status or their obligations.  As more guidance is issued, we can fine tune these measurements.  But don't get caught short at year end having failed to manage your population.

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As we close in on the end of 2012, I thought it was worth mentioning some new taxes (and some other tax changes) that go into effect in 2013 as a result of the provisions of PPACA.  Some have direct impact on employers, both for reporting and withholding purposes, while others may simply add to the cost of providing medical coverage to employees.  In any event, here they are:

1. A 3.8% surtax on investment income for households making in excess of $250,000 ($200,000 single filer)
2. Medicare payroll taxes increase from 1.45% to 2.35% for employees on wages in excess of $250,000 per household ($200,000 single) and self-employed tax increases from 2.9% to 3.8%.
3. A 2.3% excise tax is imposed on medical device manufacturers.
4. Medical expense deduction is raised from 7.5% to 10% of AGI
5. FSAs are capped at $2,500
6. Elimination of tax deduction for employer-provided retirement drug coverage

For employers, as plan sponsors, item 5 means you have to make sure your cafeteria plans have been properly amended and that the limit is in place for the 2013 plan year.  For items 1 and 2, employers should make sure that their payroll service provider, payroll department and/or accountants are aware of and prepared to implement the changes.  Throughout 2013, and as we get closer to 2014, we can expect more PPACA guidance to be issued by the respective regulatory agencies.  In the mean time, make sure that your 2013 benefits compliance strategy includes preparation for the 2014 changes so the next new year does not surprise you. 

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As we get closer to full enactment of PPACA, the issue of penalties and cost-sharing comes closer and closer to the forefront.  Within this penalty consideration comes the issue of whether or not a state exchange is established.  As of December 14, 18 states have committed to establishing a state exchange and 24 states have committed to participating in the federal exchange.  This becomes significant because of the issue over whether employers who operate in states that DO NOT have a state-established exchange will face penalties.

See, the trigger for penalties is whether a large employer has one or more employees who participate in an exchange who are eligible for tax credits.  But a strict reading of the rules indicates that tax credits are only available to employees who participate in state exchanges.  There is no similar provision for credits for those who participate in the federal exchange.  So if the plain language is read literally, a person who participates in the state exchange who is eligible for a tax credit would trigger a penalty to his employer, whereas a participant in the federal exchange could not get a tax credit and so his employer would not face a penalty.

For example, a large employer in New Jersey (opting for the federal exchange) could opt to not offer health insurance and avoid the $2,000 per person penalty because none of those employees would be eligible for tax credits.  A large employer in New York (opting for the state exchange) would face a penalty if any of its employees participated in the exchange and received tax credits.  As you can imagine, this makes New York appear much less hospitable to business because of the potential penalty.

Of course there will have to be further guidance on this issue and there is already litigation pending by one state challenging the application of the statute.  While many commentators expect the IRS to opine that the law was intended to provide credits for those in the federal exchange as well, the statute does not provide for that extension and the IRS is not free to interpret laws; it can only act on laws as written.  So watch carefully for what your state is doing with respect to the exchanges.  If they go with state exchanges (like New York and California), penalties should be a concern.  If they go with the federal exchange (like Pennsylvania and New Jersey), there may still be penalties, but we can't be certain until we get further guidance.

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Between COBRA, discrimination testing and determining PPACA compliance, employers really have to know who to count when counting employees.  Take, for example, the case of Warnecke v. Nitrocision LLC, where a district court held that an employer had more than 20 employees and was subject to COBRA because even though the direct employer had fewer than 20 employees, it was part of a control group and when all employees of the commonly controlled company were added up, the companies exceeded the 20-employee threshold.  Remember that, for ERISA purposes, when two or more businesses are under common control, each can be considered to be a single employer of all employees in the group.

Now, PPACA says when we are counting up to 50 employees, not only do we have to account for part-time employees, but we also have to include employees in our control group.  Notice 2011-36 tells us that all employees of a controlled group under § 414(b) or (c), or an affiliated service group under § 414(m), are to be taken into account in determining whether any member of the controlled group or affiliated service group is an applicable large employer.  These code sections are the same ones that apply to discrimination testing for 401(k) plans and other benefit plans subject to discrimination testing.  So you have to know when to count people who may not be your actual employees but should be included because of control group status.

Basically there are three types of control groups: brother-sister, parent-subsidiary and affiliated service groups.  Each has specific rules for figuring out if they apply but the simple starting point is commonality of ownership.  A parent-subsidiary control group exists when one company owns 80% or more of a subsidiary.  In a brother-sister control group, 5 or fewer individuals own 80% or more of two or more companies.  This is common in many closely-held or family businesses.  In some cases, ownership by a spouse, parent, child or grandchild may be combined to determine whether a control group exists.  If you have more than 5 owners, there are special rules for testing that structure which can also create control group concerns based on the total percentage of ownership between related individuals or owners.

The point is that if you sponsor a benefit plan and the owners of your company own other businesses, control group status should be something to consider.  Don't assume that separate EIN numbers means that employees never get counted as a group.  If you don't know the rules about control group status, you might accidentally find yourself being considered as part of a much large whole, which means much larger penalties if you don't comply properly.  To find out your control group status, ask your attorney at Fox Rothschild to help you sort it out.

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With all of the recent talk about calculating the number of employees and determining whether they are subject to PPACA compliance, employers are more and more asking whether they have to worry about discrimination in their health plans.  Under PPACA, IRS Code Section 105(h) will apply to insured health plans (like it always has for self-funded plans), so let's take a look at what that means.

First, the IRS has issued two notices, 2010-63 and 2011-1, that address the timing of non-discrimination rules.  The general rule is that compliance with this non-discrimination feature will not have to take place until AFTER regulations have been issued (which has not happened) and not until AFTER the beginning of a plan year AFTER the regulations are issued.  So while January 1, 2014 is generally accepted as the date to expect this to go into effect, until there are regulations written, we can't say for certain when employers will have to comply or how they will have to revise their plans to comply.

Second, some practical questions:

1. Can I offer different plans to different classes of employees?  Generally, yes.  Under the current state of the law, you can continue to offer (or not offer) insured coverages to different class of employees.  And you can make different classes of employees make different levels of contribution so long as you are dealing with an insured plan. 
2. What will "discrimination" mean? The assumption is that the rules (when written) will require that a plan cannot favor highly compensated employees.  It has to (1) benefit 70% or more of all employees, (2) benefit 80 percent or more of all employees who are eligible for benefits, or (3) benefit a group of employees set yup by the employer as a class that are not highly compensated employees. 
3. What is a highly-compensated employee?  One of the 5 highest paid officers, a shareholder owning more than 10% of the stock or someone amongst the highest paid 25% of all employees.  For most employers, look at the top 25% of your payroll and chances are, these will be "HCEs" for testing purposes.
4. Are there penalties for non-compliance?  You bet.  $100 a day for every day an individual is discriminated against, which can get expensive if you discriminate against a large class of employees.  The cap is $500,000 which is a fairly hefty penalty.
5. What should I do now?  The short answer is nothing because we don't have rules.  But the practical answer is to look at your population and see who is eligible and who is not and then self-test to see if you would pass the current non-discrimination rules.  If you fail, chances are you will fail once the rules are written.  So plan ahead.

In a prior entry, I suggested that employers should keep doing what they are doing until they tell us otherwise.  I think that is still the case, but with the caveat that you should at least know whether or not what you are doing now is going to create a potential problem.  So prepare for a change, but before changing to comply with anything, check with your attorney at Fox Rothschild.

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Earlier this month, HHS  issued new proposed regulations on wellness programs.  These proposed regulations are designed to comply with the provisions of PPACA dealing with wellness programs.  Again, these are proposed regulations and are not final yet, but they provide some insight into what will ultimately be the rules for wellness programs going forward.

The proposed regulations would apply to plan years beginning on or after January 1, 2014 and do not significantly change the 2006 regulations previously issued.  Some key points:

1. The maximum allowed reward for "standards-based" programs increases to 30% of the cost of coverage.
2. The maximum allowed reward for programs designed to prevent or reduce tobacco use is 50%.
3. Reasonable alternatives for rewards must be provided to account for medical conditions (or conditions where it is medically inadvisable to attempt compliance).
4. Plans and insurers may seek verification of claims for medical exemptions (unless the condition is obvious or known to the plan or insurer already).

The proposed regulations also include sample language on how to provide notice of opportunities to obtain rewards and how to request the alternative from the plan. 

For the most part, the proposed regulations seem to be focused primarily on clarifying certain provisions of the 2006 regulations relating to non-discrimination and options to obtain rewards and benefits as part of an accommodation or exception.  While these are not final yet, sponsors of wellness programs would be wise to review their plans to make sure that they offer appropriate alternatives in both their standards-based and participation-based programs.

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In the excitement over the presidential election, it might have been overlooked that voters in the states of Maine, Maryland and Washington voted to approve same-sex marriages.  As more states recognizes same-sex marriages and civil unions, it is important to for plan administrators and sponsors to be keenly aware of the ongoing conflict between federal and state law related to these relationships. 

First, let's review retirement plan concerns.  Qualified retirement plans are generally governed by ERISA and various corresponding tax regulations.  All of these regulations are subject to the impact of the federal Defense of Marriage Act.  While this Act is subject to various disputes right now, it is still the law so it has to be followed.  The net effect is that when considering the term "spouse" in your qualified plans, it does not include a same-sex partner, married or otherwise.  So any provision in a plan that provide for benefit to a "spouse" would not apply to a same-sex spouse even when married under state law.  For example, consider a defined benefit plan distribution that requires spousal consent for distribution.  A partner in a same-sex marriage is not required to obtain spousal consent because in the eyes of the plan, he or she has no spouse.  Similarly, any spousal rights that may accrue as a result of the death of the participant under the terms of the plan would not accrue to the same-sex partner. 

Second, when we look at welfare plans, all of the dependent coverage definitions in the plan referring to "spouse" would not automatically include the same-sex spouse.  Certainly a plan can add coverage for same-sex partners, but doing so does not grant them the federal protections of things like COBRA (which would not apply since the dependent would not be recognized as a spouse under federal law).  Cafeteria plans cannot provide benefits to same-sex partners, which means that employees cannot pay that portion of their health coverage attributable to same-sex partners with pre-tax dollars.

This is not to say that plans, retirement or welfare, cannot be amended or designed to recognize and benefit same-sex spouse.  What is does mean, though, is that plan administrator have two particular concerns.  One, if the plan administrator does decide to recognize same-sex partners as spouses, it has to be very careful to administer benefits in accordance with federal law.  Second, the plan administrator has to be very careful to make sure that it is not providing benefits improperly because of lack of diligence.  Plan administrators should be very careful about enrollment of participants, particularly in states recognizing same-sex marriage and domestic-partners.  Participants have to be advised of the distinction between state and federal law and how benefits may or may not be administered for their same-sex partners.

Finally, there are tax concerns.  Because the amount of the benefits for the same-sex partner are disallowed for federal tax purposes, the employers' withholding responsibilities are calculated based on the total gross compensation that includes the value of the benefits to the same-sex partner and has to take into account that the premiums paid are not using pre-tax dollars.  Plus the level of withholdings for state purposes might be different from the withholdings for tax purposes.  An employee in a same-sex marriage could be "married" with two dependents for state tax withholding purposes, but "single" with no dependents for federal tax purposes.  So employers can no longer assume all withholdings based on a single W-4 for same-sex couples.  They have to be wary of these distinctions between state and federal taxes.

So plan sponsors, as both keepers of benefit plans and employers paying taxes have to be cognizant of the impact of adding coverage for same-sex partners.  Changing laws require attention to detail, which in turn avoids problems in the future.  For assistance in dealing with this issue in your plans, or your payroll, ask for assistance from your attorney at Fox Rothschild.

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In preparing for the obligation to comply with health care reform, some employers have hit upon the idea that they will never be considered "large employers" (meaning having more than 50 full-time employees) if they have no full-time employees on their payroll, or at least fewer than 50 who work more than 30 hours per week.  While it is true that PPACA does not require employers to offer health insurance to part-time employees, the simple act of making all your employees part-time does not necessarily insulate you as the employer from being subject to potential obligations as a large employer.  This is because the act counts part-time employees as a fractional employee for making the determination.

Under PPACA sections 1513 and 10106, you have to count part-time employees as a fractional "equivalent full-time" employee.  To determine your status as a large employer, you first take all employees who work 30 or more hours per week in the measurement period and count them as a full time employee.  Then, you add up all of the hours worked by part-time employees in a month and divide that number by 120, which gives you the full-time employee equivalent of your part-timers.  So an employer that has 20 part-time employees all working 24 hours a week has the equivalent of 16 full-time employees ((20 x 24 x 4)/120).  So if the employer has 35 full time employees and thinks he is not a large employer, he is wrong.  Because under this calculation, he actually has the equivalent of 51 full-time employees.

We expect more guidance to be issued on this calculation methodology as time goes on, but employers should be keenly aware that there is a difference between avoiding the penalty by offering coverage to full-time employees only, and avoiding the penalty by not being a large employer.  Again, the law does not require an employer to offer coverage to part-time employees but a large employer that does not offer coverage to full-time employees is potentially subject to the penalty.  Having nothing but part-time employees is not the solution to avoiding penalties.  Knowing the law and complying with it is the only way to avoid penalties.  Make sure you plan accordingly. 

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I cannot stress enough the importance of documenting plan procedures and following them for each stage of plan administration.  Nothing brings this home as much as a high-dollar award against an employer for failure to satisfy an administrative obligation.  Since it seems like COBRA creates these scenarios most often, let's look at a recent decision related to a failure to provide a COBRA notice.

In Evans v. Books-A-Million, a recent case out of the Northern District of Alabama, the District Court awarded $83,000 in penalties and attorneys fees to a plaintiff who brought suit for a failure to provide a COBRA notice.  Of that award, $37,950 was the penalty which the court calculated as 506 days at $75 a day.  The reason that the court gave such a stiff penalty was because, at trial, the evidence was clear that not only did the plaintiff not get a notice, but the people who were responsible for COBRA administration could not articulate the basic procedures for COBRA administration and provided contradictory statements regarding what actions they took in dealing with this plaintiff.

This award may seem a little drastic, but the Judge's opinion made it very clear that the lack of documented procedures and a clean administrative record weighed very much in favor of a punitive result.  Which brings us back to my original statement that failure to comply with the rules of plan administration can lead to much larger and more expensive problems.  Think of the documentation procedure as both a road map and an insurance policy.  The road map gives plan employees a clear direction on what steps to take and provides consistency in administration.  The existence of written procedures, and evidence that those procedures were followed, gives insurance against a claim of administrative failure (and breach of fiduciary duty).

So document, document and document.  Create them and follow them.  And if you need help in creating or following them, your attorney at Fox Rothschild can be your guide.

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In the welfare plan world, the fourth quarter is typically considered as "open enrollment" season.  With Hurricane Sandy paralyzing a lot of New York and New Jersey, some clients have asked me about the possibility of extending open enrollment periods beyond their original limits. 

Generally, the rules related to health plans only require that an open enrollment period be offered.  Several regulations related to Medicare enrollment specify that the period must be 30-days and several states have adopted regulations specifying the duration of the open enrollment period for insured plans.  A 30-day period has become fairly common practice.  However, there are no specific regulations preventing the extension of open enrollment periods at the discretion of the plan administrator.

By way of example, yesterday it was announced that the Christie administration has extended the open enrollment deadline for both State and local government participants in the State Health Benefits Program and School Employees' Health Benefits Program until November 16, 2012 from the original date of November 9, 2012.  The Diocese of Newark announced that it too has extended open enrollment.  While neither of these is particularly definitive, both demonstrate that the plan administrator has that authority to extend its open enrollment period.  Shortening beyond the stated period in the summary plan description is not permitted.  But extending the period is within the authority of the plan administrator (provided it is communicated to participants).

If you have an insured plan, it is good to double check with the insurance company before committing to extending an open enrollment period.  But if you, as plan administrator, determine that it is in the best interests of the participants to extend the period, and that, as a prudent fiduciary, it makes sense to extend the open enrollment time, you have that ability.  Just make sure to document and communicate how and why you differed from any stated plan limitations.

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When I was in law school, I vaguely remember learning about "springing" interests.  They pop up when some event occurs that creates some claim to the property or trust.  Well, in some instances, fiduciary status can spring up based on whether you actually exercise discretion over plan assets.  In other words, you might not intend to be a fiduciary, but as soon as you exercise discretion, you are one.

Consider the recent decision in Borroughs Corp. v. Blue Cross Blue Shield of Michigan.  In this case, the plan was self-funded and Blue Cross was acting as the TPA under a service agreement.  The service agreements with Blue Cross provided that the amounts sent each month to pay benefits were specifically NOT plan assets.  Unbeknownst to the plan, Blue Cross was taking a little bit of the money each month as a service fee so the plan sued for breach of fiduciary duty.  First, the Court said that even though the contract said otherwise, the amounts transferred were plan assets.  You could not contract away the fact that the money coming from the plan to pay benefits is a plan asset.  Then the court held that because Blue Cross exercised discretionary authority over those assets (meaning it decided to take a little as a fee), it was a fiduciary.  Finally, the court concluded that using plan assets to pay yourself a fee that only you determine and know about is a prohibited transaction and a breach of fiduciary duty.

The fiduciary status sprung from the possession of plan assets and the use of discretionary authority.  The same thing can happen to anyone that comes into possessions of assets of a plan if they begin exercising discretionary authority.   For example, a lawyer that has money from a plan in an escrow account to be used to pay a settlement is in possession of plan assets.  If he or she just distributes it as directed by the plan, no exercise of discretionary authority and no fiduciary status.  The assets are still plan assets, but the non-exercise of discretion eliminates the fiduciary status.  But if the lawyer takes some money out of the account for any purpose other than what the plan directs, then there is an exercise of discretion and fiduciary status springs to life.

This is why it is very important for plan sponsors, plan employees and plan service providers to be keenly aware of the actions they are taking when they have plan assets under their control.  If you act with direction from a fiduciary without your own discretion, you tend to stay away from fiduciary status.  But if you start to make decisions related to the distribution of those assets, fiduciary status springs upon you.  So it is always important to know (1) if you are dealing with plan assets and (2) are you exercising authority over those assets.  Being aware of these two things is the first step in avoiding having fiduciary status arise unexpectedly.  And if you have questions about your status or whether you are dealing with plan assets, ask for assistance from your attorneys at Fox Rothschild.

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Frequently I am asked about the possibility of giving "something extra" to employees because of a long work history or because of special circumstances and the employer wants to do something special for them.  Unfortunately, they sometimes look to the benefit plan and that might mean bending the benefit plan a little or giving some extra benefit beyond what the plan provides.  This can be in the form of modifying eligibility or providing extra payments.  But the problem with that can be that changing plan terms for special treatment of a particular participant can create a variety of issues that frustrate good plan administration.

A recent decision out of the third circuit considered a case where an employer left an employee on their health plan during leave even though she was not eligible for coverage.  The plan paid a large amount of money in benefits for this person and then sought reimbursement from a stop-loss carrier.  The court determined that the stop-loss carrier was not liable for the reimbursement claim because the benefits were outside of what was required by the plan.  While not addressed by the court, it would stand to reason that since the plan should not have paid, paying those claims in the first place would be a breach of fiduciary duty.  And what if someone else came along and wanted the same dispensation?

A recent fourth circuit decision relating to severance plans looked at a claim for discrimination made by a former employee alleging that male employees were given extra severance as opposed to female employees.  While the crux of the decision related to whether Title VII applies to severance from employment, the facts plead suggest that some male employees were in fact given something beyond what the plan called for generally.  Similarly, I recently read a seventh circuit case that dealt with a claim by a former employee complaining that he was not offered the same continuation of health coverage that other employees received as part of their severance, which was provided coverage outside of normal COBRA continuation.  He claimed he was the victim of discrimination as well.

The point is that the plan has terms and the terms have to be followed.  Even if your plan is self-funded, you have to treat all participants equally under the terms of the plan.  Once you start giving special benefits to individual participants, you invite claims by any participant who does not get the "extras."  Being flexible in eligibility or benefits invites claims that the plan is being administered in an "arbitrary and capricious" fashion, which is something all plan sponsors should want to avoid.  So being nice can prove to be problematic.  Don't be flexible in applying plan terms because, when it comes to plan administration, bending the rules is the same as breaking them.

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For employers with around 20 employees, finding out whether they are subject to COBRA can be confusing.  Many states have "mini-COBRA" that are state laws that provide for a continuation of health insurance even if employers are too small to be subject to COBRA.  But as a recent case lays out, it is very important to know whether COBRA applies and what are the consequences if it does or does not.

First, to determine whether or not you are subject to COBRA, you have to decide if you have 20 or more employees.  The DOL specifies that the rule for measuring employees for COBRA is if you "employed at least 20 employees or more on more than 50% of a typical business day during a previous calendar year."  If you meet that measurement, you are subject to COBRA.  And that is important because in Hanysh v. Buckeye Extrusion Dies, Inc., the issue was one where the employer made a mistake and ended up having to pay. 

Factually, the case came from a former employee that sued his employer after his COBRA continuation coverage was retroactively terminated by the employer’s insurer.  The employee received a COBRA notice and election form and elected COBRA coverage and paid the required premiums.  For some reason, the employee filed a complaint with the DOL regarding his COBRA coverage and when the DOL investigated the complaint, the DOL determiend that the employer was not subject to COBRA.  The employer's insurer then retroactively terminated the employee’s COBRA coverage.  The employee sued to stop the employer from denying his COBRA coverage and made a claim for his medical expenses.  He claimed he had relied on "material misrepresentations" about his COBRA eligibility.  The court ultimately found that the employer could be liable for the employee’s continuation coverage and the medical expenses because it was responsible for knowing how many people they employed and whether COBRA applied.

So notwithstanding whether or not you properly administer COBRA, step one is to figure out whether you are subject to COBRA.  Don't assume, make the calculation.  If you are subject to COBRA, know that you are and comply.  If you are not, know whether you are subject to state mini-COBRA and comply with those rules.  And if you are not sure, ask your attorneys at Fox Rothschild for help. 

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Frequently benefit plan fiduciaries have to rely on experts for advice relating to plan administration.  Legal counsel, actuaries, investment advisors, appraisers and the like are essential components of the administration of benefit plans, but they are not fiduciaries.  And fiduciaries are subject to the "Prudent Man Rule" when satisfying their fiduciary obligations.

The good news is that generally courts don't look at the results of a decision so much as the process.  Fiduciaries who use experts for advice and counsel properly can sometimes be insulated from breach of fiduciary duty claims because they made diligent efforts to reach a conclusion, even if it was ultimately a bad decision.  For example, numerous court cases have found that making a bad investment is not a breach of fiduciary duty if the fiduciaries satisfied their fiduciary obligation to properly investigate the investment before they made the decision.  The process is reviewed, not the outcome.  So investment losses are not necessarily a breach if the investment decision was made properly.  As one judge noted "the test of prudence- the Prudent Man Rule -is one of conduct and not a test of the result performance of the investment.  The focus of the inquiry is how the fiduciary acted in his selection of the investment and not whether the investment succeeded or failed."

To rely on experts, fiduciaries are charged with the obligation to provide accurate and complete information, and to properly review and become familiar with recommendations and advice.  It is not enough to rubber stamp the recommendation of a fund advisor.  Fiduciaries have to understand why the advice was given and evaluate whether it was based on accurate information (and sometimes accurate assumptions).  Similarly, choosing experts is a component of the evaluation process and a decision to use a particular expert should be based on a thorough review of the need for the expert and their credentials.

Fiduciaries need not become experts themselves, and can rely on expert advice when making decisions.  Reliance on experts is an essential component of administering a plan, but it starts with choosing good experts and giving them complete and accurate information.  Year-end reviews are always a good time for fiduciaries to look at their processes for making decisions.  Consider reviewing how your plan uses experts, and who those experts are, to make sure you can verify the processes for their selection and using their advice.  Put checks and balances in place to make sure they get accurate information.  And above all, ask questions.  Fiduciaries may not have to be experts, but they always have to be prudent.     

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Health care reform has really opened up the flood gates of discussion about discrimination testing.  The new regs will (when finally written) make Code Section 105(h) applicable to insured plans.  But some sponsors of self-funded health plans might have forgotten that 105(h) already applies to them.  If your plan is self-funded, you should already be doing discrimination testing.  Let's review the requirements.

Self-funded plans (and cafeteria plans, too) have to do annual discrimination testing to make sure that they remain "qualified" as employee benefit plans.  If they are disqualified, then the benefit provided would be taxable as income to participants, and also subject to withholdings by the employer.  So the penalties for disqualification can be pretty steep.  That's why it is important to test plans to make sure they pass muster and remain qualified.

The first test is the "Benefits Test" that tests to make sure the plan does not discriminate in favor of highly compensated employees ("HCEs").  It essentially looks to see that everyone receives the same benefits.  The second test is the "Eligibility Test" that tests to see that the plan is available to the correct percentage of employees and that, again, it does not discriminate in favor of HCEs.  The third test is one not commonly discussed, but it tests "Non-Discrimination in Operation."  This happens when plans might appear to be non-discriminatory, but in their practical operation, they only benefit HCEs.

The point here is not to describe each test in detail because I don't want anyone to assume they pass based on what they read about the tests.  These tests are very detailed and is essential that sponsors of self-funded plans have their plans tested.  Don't assume that because you offer coverage to everyone, your plan passes.  Just like you test your 401(k) plan, you have to test your cafeteria plans and your self-funded health plans.  So get tested!

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PPACA provides for compliance for “large” employers, which means more than 50 full-time employees.  Many employers have questions about how to calculate full-time status.  Fortunately, the IRS has issued several guidance notices that explain some 'safe-harbor" methods that, if used, would be consider appropriate methods of making this calculation.

Most recently, Notice 2012-58 provides for a “safe harbor” employers can use relating to ongoing employees.  Under this method, there is a look-back period used to measure full-time status. The guidance provides for a “standard measurement period” that the employer can use. The measurement period has to be at least 3 consecutive months, but no more than 12 consecutive calendar months.  The guidance also explains the “stability period.” Employees who averaged at least 30 hours each week during the measurement period are full-time employees during a subsequent stability period, regardless of the employee's number of hours of service during the stability period and provided that the employee continues to be an employee. So once an employee averages 30 or more hours per week during the measurement period, they remain full-time employees through the stability period. The stability period must be (1) a least as long as the measurement period, (2) at least 6 months, and (3) measured AFTER the standard measurement period. The good news is that, for employees who did not work full-time during the measurement period, their status does not change during the stability period.

The Notice also provides explanations of how to deal with “New Employees Reasonably Expected to Work Full Time” as well as “Variable and Seasonal Employees.” This notice, in conjunction with prior notices, are designed to help employers sort out how they can make calculations without running afoul of the law, hence the “safe harbor” nomenclature. One of these options might be best for your company, so make sure to review them and ask questions of your professionals about how they work.

See also Notices 2011-36, 2011-73, 2012-17

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Many plan sponsors are unaware of the "safe harbor" provisions of the Americans with Disabilities Act as it relates to health insurance.  Basically it provides that certain insurance plans are exempt from the ADA restrictions related to screenings, medical examinations and making inquiries of employees related to their health status.  Health plans are allowed to collect information related to health conditions for the purpose of underwriting or clarifying risks, or for plan administration purposes.

In late 2011, the Southern District of Florida ruled, in a case called Seff v. Broward, that wellness plans fall within the ADA safe harbor.  At issue in the case was that a county sponsored wellness program consisted of biometric screening and a health risk assessment.  This information was collected and used to identify certain part high-risk conditions and then those participants were eligible to participate in disease management programs and waivers of co-pays for medication.  Employees who refused to participate in the wellness program were charged $20, and Seff sued because of the charge.  His claim was that the screening process violated the ADA.

The 11th Circuit affirmed the District Court's decision in favor of the county and further clarified that the wellness program was a "term" of the group health plan and was thus integrated into the health plan to be covered by the safe harbor.  Even though the plan document did not expressly reference the wellness program, the Court reasoned that since it was only available to health plan enrollees and was sponsored by the same insurer that provided the group coverage, it was part of the health plan.

Though the EEOC has not commented on this decision and has not issued formal guidance on wellness plans and ADA compliance, the Court's decision seems to continue to confirm that an integrated wellness program, even as an undefined "term" gets the same safe harbor protection as a health plan.  However, plan sponsors should be cautioned that making appropriate references to the wellness program in plan documentation will certainly go a long way toward bolstering that position.  If you have concerns or questions about the adequacy of your plan documentation, your attorney at Fox Rothschild is available to assist.

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In conjunction with the passage of PPACA, certain employers are now required to report the "aggregate cost of applicable employer sponsored coverage" under Section 6051(a)(14) on W-2s.  There is a lot of good information in IRS Notice 2012-9 that explains this reporting requirement. Some highlights:

• In the case of the 2012 Forms W-2 (and until further guidance issued) an employer is not subject to the reporting requirement for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year.  So, if an employer filed fewer than 250 2011 Forms W-2 (the ones employers gave out in January of 2012), the employer would not be subject to the reporting requirement for Forms W-2 for the 2012 calendar year.  For employers with fewer than 250 w-2s, the requirement to report takes effect for the 2013 tax year (unless further delayed).
• The aggregate reportable cost generally includes both the portion of the cost paid by the employer and the portion of the cost paid by the employee, regardless of whether the employee paid for that cost through pre-tax or after-tax contributions.  So it is the total cost of the coverage. 
• Amounts contributed to a multiemployer plan are not included in the cost of coverage.  If the only applicable employer-sponsored coverage provided to an employee is provided under a multiemployer plan, then the employer is not required to report any amount under § 6051(a)(14) on the Form W-2 for that employee. 
• An employer is not required to include the cost of coverage under a dental plan or a vision plan if such plan is not integrated into a group health plan providing additional health care coverage subject to the reporting requirements of § 6051(a)(14). An employer must include the cost of coverage under a dental plan or a vision plan if such plan is integrated into a group health plan providing such additional health care coverage.

So as we get closer to the time when 2012 W-2s have to be prepared, make sure you consult with your benefit professionals to make sure if you have to report, what you have to report and how you calculate the reportable number.

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As we press forward with implementation of health care reform, one of the things that has not been fully discussed is the penalty for not having “minimum essential coverage.”  This is the “tax” on the individual who does not have coverage. We know that for large employers (over 50 employees) who do not offer a qualified health plan, the penalty is between $2,000 and $3,000, depending on the individuals who participate in the exchange.  But what about those who don’t have coverage?  What is their penalty?

First, a side note about “minimum essential coverage.”  Minimum essential coverage is not the same as “essential health benefits.”  Minimum essential coverage is simply that coverage that is sufficient to satisfy the individual mandate.  It can be offered by an employer (or governmental entity).  If an employer offers a qualified health plan (meaning it satisfies the requirements of PPACA related to benefits and limits and meets the bronze, silver, gold or platinum standards), the assumption is that this plan will meet the definition of “minimum essential coverage.”  But they are not interchangeable.

Assuming an individual does not have minimum essential coverage, the annual penalty will be the greater of a flat dollar amount per individual or a percentage of the individual’s taxable income.  Dependents under 18 are not treated as a full person so for dependents under the age 18, the penalty is half of the penalty for an individual.

The flat dollar amount per individual is $95 in 2014; $325 in 2015 and $695 in 2016. After 2016, the flat dollar amount is indexed to inflation.  The flat dollar penalty is capped at 300% of the flat dollar amount.  It works something like this:

1. A family of three, with two partners and one child under 18 would have a flat dollar penalty of $237 for 2104 ($95 + $95 + $47)
2. A family of four, with two parents and two children over 18 would have a flat dollar penalty of $285 in 2014 because the 300 % cap would apply ($95 * 4 = $380).

Since it is the greater of the flat or a percentage, you also have to consider the percentage of income test.  The Act contains a specific definition of “income” for this test, but generally it would be similar to calculating household income for tax filing purposes.  The percentage of taxable income is an amount equal to a percentage of a household’s income less the tax filing threshold.  For 2014, it is 1%, 25 in 2015 and 2.5% in 2016. So as an example:

• If an individual has a household income of $50,000 in 2014, the percentage would be 1% of the difference between $50,000 and the tax threshold for 2014 (which is not yet defined).  Assuming that the threshold is $15,000, for 2014, the percentage would be calculated on $35,000 ($50,000 - $15,000) and 1% of that is $350. Because this percentage penalty is greater than the flat dollar penalty for 2014 ($95), the individual would pay the higher penalty of $350.

Ideally everyone will get coverage and not pay any penalties. But individuals seeking to remain self-insured should be aware of these penalties.

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Over the last few days, I have had various meetings with a number of very good benefit professionals to discuss the state of the union (at least as it relates to employee benefit packages).  Whether they were health or retirement plan service providers, or even legal counsel, we all seemed to agree that we may have reached the tipping point where rules and regulations have finally overwhelmed plan sponsors.  It is now almost impossible for an employer to keep track of all the changes and necessary forms, notices and revisions required for complete plan administration on an entirely "in-house" basis.  On the other hand, when the economy is tight, employers are loath to spend the money.

The simple truth is that it is no longer "reasonable" for plan sponsors to avoid having specialists assisting them in dealing with their benefit plans.  Under ERISA Section 404, a plan fiduciary has an obligation to act with the "care, skill, prudence and diligence" that a reasonably prudent person would act in similar circumstances.  But that standard is the base line, not the top limit.  The proliferation of specialists in the benefits marketplace almost mandates that the definition of "reasonable" under ERISA expands to include the use of these specialists.  Thus, we should anticipate that real prudence is doing more than just the minimum, and real diligence means doing more than just enough to get by.  The increasing specialization of service providers requires that fiduciaries diligently seek out experts who add value and they have to retain those specialists to provide services to the plan, and ultimately to maximize the effectiveness of the plan for the benefit of the plan beneficiaries. 

Consider the new fee disclosure rules.  Now fiduciaries have to review, understand, digest and report how fees are charged and have to show efforts to minimize those costs to plan participants.  PPACA requires us to compare, contrast and explain our plans and rationalize our actions to participants.  Employers who fail to engage professionals to assist because of concerns over cost are begging for more expensive future problems.  The cost of non-compliance will always be much higher than what compliance would have cost in the first place.  When I am going through and audit with a regulatory agency, it is hard to justify problems with a plan by explaining how the employer did not want to pay for expert guidance in the first place.

Also, there is the benefit of having assistance in long-range planning.  Reactionary decisions in this area are always more costly than a well-thought out approach.  You would not start a business on a whim with no plan.  You should not approach your benefits packages any differently.  Sure, professionals, like benefits attorneys or consultants, cost money.  But there is return on that investment in the form of more efficient, more effective and more compliant benefits packages.  Plus, having these retained professionals provides a security that, as a fiduciary, you are acting with diligence, care and prudence by not going it alone.  In the end, that is what benefit professionals are there for....to provide assistance with compliance and adherence to the regulations.  Earnest fiduciaries seek out good professionals and engage them to help with plan administration so that they are can truly be called "prudent."

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 As we have discussed previously, PPACA is going to require a number of important changes to plans over the next few years.  But in thinking long term, it is important not to overlook the seemingly minor changes that occur in the interim.  Two importance changes that went into effect as of August 1, 2012, are the application of Medical Loss Ratio (MLR) and the changes to Women's Preventative Health Services.

The Medical Loss Ratio component applies only to fully insured plans.  Under this provision, insurers must provide rebates if their percent of premiums spent on medical claims (and quality improvement) for policies issued in a state is less than 80% in the small group and individual markets or 85% in the large group market.   This ratio has to be determined on a state-by-state basis and it is measured in the state where the policy is issued.  Insurers that fail to achieve these percentages must issue rebates, and notices of rebates, to policyholders.  Plan sponsors should be aware notices of rebates are required to be sent, not only to plan sponsors, but to participants enrolled in the plan to which the rebate relates. 

PPACA, and its regulations, outline how these rebates are to be used by the plan sponsor depending on the type of entity sponsoring the plan (e.g., for profit, government, etc.)  In many cases, a portion of the rebate must be either used to reduce future premiums or distributed to plan participants in the form of a cash payment.  Plan sponsors should develop a policy regarding the use of any rebates issued and, in the case where the plan sponsor expects to receive a rebate, an internal communication to plan participants should be generated and distributed.  Developing a policy or plan regarding the use of any rebates and communicating directly with plan participants will likely reduce the number of questions and concerns raised by participants once notice of a rebate is sent by an insurer.

Under the Women's Preventive Health Services component, non-grandfathered plans have to add women’s preventive care services to their coverage, with no individual customer cost sharing.   Some of the basic services include "well-woman" visits, screening for gestational diabetes, and HPV testing.  Coverage will include contraceptives for non-religious, non-exempt employers.  Plans sponsored by "religious" employers have a one-year delay until the first plan year beginning on or after Aug. 1, 2013.  More guidance is expected on this issue, but while most insured plans will be in compliance with this provision through the insurer, self-funded plans should be checking to make sure they have properly complied.

So don't overlook the trees while looking at the forest. As much as long range planning is important, these incremental steps required plan sponsors to keep abreast of the operations of their plans to make sure they properly comply and don't find themselves surprised by changes. If you have questions about compliance, make sure to get advice from your plan professionals.

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Although it is not yet in effect, or fully defined, Section 2716 of the Public Health Service Act was revised under PPACA to provide that the anti-discrimination provisions of IRS Code Section 105(h) would apply to insured health plans.  While we are waiting for these regulations to be written, I thought it would be beneficial to review how the discrimination testing provisions in the Code generally apply.

Section 105(h) prevents a self-insured health plan from "discriminating" in favor of highly compensated employees, either with respect to eligibility or benefits provided.  Since it only applies to self-insured plans, employers sponsoring insured health plan are generally not concerned with limiting eligibility to obtain that coverage.  While the new rules for insured plans have yet to be written, 105(h) as it sits presently generally provides that unless the plan benefits 70% or more of all employees (or 80% of the 70% who are eligible), it would be discriminatory.  There are certainly other factors to keep the plan qualified, but for the purposes of this review, I am focusing on this eligibility and "benefit" issue.  Section 125, that creates cafeteria plans, contains a provision that provides that 105(h) applies to them as well.

This is slightly different from the discrimination provisions for retirement plan.  Under Section 401(a)(4), a qualified retirement plan cannot discriminate in favor of highly compensated employees.  Then, in Section 410(b), there is a requirement that the plan benefit a percentage of employees who are not highly compensated which is at least 70% of the highly compensated employees benefiting under the plan.  Instead of looking at "all employees," retirement plan testing looks at ratios of highly compensated to non-highly compensated employees.  Similar concerns, but not exactly the same.

I am not intending this to be a definitive analysis of discrimination testing, but rather I think it is important for employers to know that there are more than one set of rules for discrimination testing for employee benefit plans.  Employers who have insured health plans, but also offer retirement plans, may be familiar with 401(k) plan testing and might incorrectly assume that 105(h) testing (when implemented) would be the same.  But it is not exactly the same.  So, assuming the rules for non-discrimination for insured health plans follow 105(h) as it is presently written, it is important be be aware the distinction exists.  Just because your retirement plan passes testing does not mean that your insured health plan will be non-discriminatory simply because it has the same eligibility rules and comparable participation.

When the new rules for 105(h) compliance finally come out, we can do a deeper analysis.  But for now, remember: same, but different.  And don't hesitate to ask you lawyers at Fox Rothschild for help if you have questions about discrimination testing in any of your benefit plans.

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Since PPACA is now the law of the land, we should assume that we will need to continue working toward full compliance.  But what about those uncertainties like the exchanges and penalties that have not yet been fully defined?  For employers who are dealing with collective bargaining agreements, this can really be a challenge since we don't yet know what our obligations will be and we don't know whether or not union employees can opt out of their union health plan and get into the exchanges.  We assume that they will be able to, but this could have a substantial impact on employers with contracts that extend beyond January 1, 2014.

While not purely a "plan administration" issue, there should be some reason for employers to pause and wonder how they should address health care reform in negotiations.  For example, what will happen if employees decide to opt out of the fund and get into an exchange?  Who will be responsible for payment of penalties?  What is the fund does not meet the definition of a "qualified health plan"?  What if the coverage offered by the fund is "bronze" and the employees want "gold"?  What if the new rules will render the fund unsustainable and it ceases to exist mid-contract?

There are not really answers to these questions yet.  There are just too many variables that are not yet defined.  But one feasible option for employers currently in negotiations is to consider including a "mid-term re-opener" in the collective bargaining agreement that allows the employer, at its option, to reopen the agreement and bargain to address these issues once regulations are finally issued.  In other words, a provision that unlocks the agreement before its conclusion so that both employer and union can deal with what might be serious concerns regarding health benefits coverage.  So to the extent you as an employer may be looking at negotiating a new agreement that will carry past January 1, 2014, you should consider raising this issue at bargaining. 

Also, consider raising the issue of you as an employer opting out of providing health coverage altogether if the employer and union agree to an option that is less expensive or more manageable.  It may be that it is preferable to both sides that employee participate in the exchanges rather than the union health fund or employer sponsored coverage.  Until we see how the exchanges look, we can only speculate, but you need to careful about being locked in to making contributions for employees who drop out and go into exchanges.  Making contributions and paying penalties would not be a preferred approach.

Since we know changes are coming, it seems logical that both parties would be best served by addressing it now rather than hoping nothing bad happens later.  If you are in negotiations, or have negotiations coming up before 2014, these are issues that should definitely be considered.  For assistance in this area, you can certainly contact your Fox Rothschild attorney for guidance.

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This morning, the United States Supreme Court issued its opinion on the constitutionality of PPACA.  In a 5-4 vote, the Court appears to have upheld those provisions of PPACA that most significantly impact employers and plan sponsors.  Initial impressions indicate that the Court found that the individual mandate is constitutional under the Taxing Powers. 

Now for the practical part.  For the next few days, there will be lots of noise about what this means, and efforts to interpret what the results are and what are the political implications.  There will be lots of people trying to explain the decision and lots of debate about what to do next.  Plan sponsors, including those that have health plans maintained through the purchase of insurance will probably be best served by not overreacting.  At this point, we have worked very hard to comply with PPACA and we should assume we are going to have to continue to comply until we are told otherwise.

So take an inventory of what changes you have made and verify what changes might have to be made to comply between now and the start of your next plan year.  Continue working on your summary of benefits coverages that have to go out for open enrollment.  Get ready to report health coverage costs on the 2102 W-2s.  Make sure you have all required PPACA amendments in place and documentation to verify compliance.  And keep in touch with your benefits professionals to seek their guidance on changes to compliance.  In other words, keep moving forward.

Your attorneys at Fox Rothschild will continue to keep you updated on any additional guidance issued and are always available to assist in your ongoing compliance efforts.

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We are all expecting the Supreme Court to rule on the constitutionality of PPACA before the end of this month.  While there is much anticipation, good plan sponsors should already be hedging their bets on how they will respond to the decision.  So let's look at some road-maps to prepare for the possible outcomes.

(1) Assume PPACA is Upheld as Constitutional

If PPACA is upheld, we have to look at complying with the upcoming requirements for the 2012 and 2013 plan years.  Most importantly, we need a summary of benefits and coverage and we need to be prepared to hand that out in the next open enrollment.  We also have to be prepared for health plan reporting on W-2s which is mandatory for the 2012 tax year.  Also recall that beginning in January 2013, an individual’s annual maximum contributions are limited to $2,500 for flexible spending accounts.  So if it is upheld, we have some significant changes to make in our administration process before the end of the 2012 plan year. 

(2) Assume PPACA is Struck Down as Unconstitutional

If PPACA is struck down, the first thing we will have to do is analyze what we have changed and how we changed it.  Many plan sponsors will incorrectly assume that we revert back to the pre-PPACA status.  But remember that we are dealing with ERISA plans and you can't just change an ERISA plan at the drop of a hat.  We will have to prepare for mid-year coverage changes and amendments to coverage for the 2013 plan year.  Enrollment and eligibility will have to be analyzed and appropriate notices issued to current participants.  We will have to analyze tax implications to see if any special reporting is required for coverage provided to adult children.  And we will have to decide whether or not it is cost effective to eliminate certain benefits provided to comply with PPACA as some of the changes made might actually be worth keeping.  But most of all, we will have to amend plans to undo amendments already made, and follow the appropriate procedures for making plan amendments.

(3) Partially Upheld, Partially Struck Down.

It is because of this option that plan sponsors should use this time to develop a map of what changes they have made and design a plan for undoing those changes.  Plan sponsors do not want to be caught short trying to figure out what they still have to do to comply, or what they might have to do to revise their plan.  Now is the perfect time to make a list of all the changes you made to comply with PPACA and how specifically you made the changes.  Then prepare to either follow that map in reverse to undo changes, or continue forward to finish what we already started.  We can't say for sure yet what the court will do, but we should at least know what we have done and what we still might have to do to comply (or change) and we will have a short window in which to do it.  So take the time now to analyze your compliance thus far.  Whatever the decision, we are going to have some serious work ahead of us.  Your professionals at Fox Rothschild are ready to assist either way.

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Some time back I wrote about the Supreme Court's decision in Cigna v. Amara and pointed out that terms in a summary plan description (SPD) have to match terms in the plan document.  The issue in Amara was that the benefit calculation set out in the SPD was not included in the plan document and so there was considerable discussion about whether it constituted a "plan term."  The Court seemed to pretty clearly conclude that since the SPD was only a summary, the plan document was where we would have to look for the actual terms controlling the operation of the plan.

In March of this year, the 9th Circuit looked at a similar case, Skinner v. Northrop Grumman Retirement Plan B, and sort of agreed, but in another way.  In Skinner, the benefit calculation was described in the plan document but not the SPD.  The 9th Circuit found in favor of the plan when it determined that silence in the SPD did not mean it was not a plan term.  So it appears that if it is in the SPD but not the plan document, it is not really a plan term, and if it is in the plan but not the SPD, it is a plan term but not properly summarized. 

Justice Scalia, in his concurrence in Amara, clearly suggests that because Congress defined both an SPD and plan document in ERISA, it is expected that both will exist.  But an SPD is nothing more than a summary of the terms of the plan, and provided that summary is written in plan language and includes the right statements, it satisfies the SPD requirements.  There is nothing that specifically precludes the plan document and the SPD from being the same document as long as the one document meets the requirement for both.  Section 104(b)(4) of ERISA requires a plan administrator to furnish an SPD and any "trust agreement, contract or other instruments under which the plan is established or operated."  It does not say they have to be separate.  So your plan document and SPD could be one in the same or separate.

Depending on your plan, and whether it is subject to separate trust regulations, you might want to consider incorporating both documents, or you might be better served having two.  But if you have two, make sure the terms in rights and remedies set out in the SPD are included in the plan document.  If it is only in the SPD, then it is not a plan term.  If it is in the plan document, it should be in the SPD but it is still a plan term.  If the SPD and plan document are rolled into one, then make sure you spell that out clearly and then they should all be considered as plan terms.

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In past entries, I have written about the ongoing struggle plan administrators face when trying to locate participants to provide notices.  COBRA notices can be a particular concern because participants frequently argue a violation of COBRA when they did not receive notices.  But it is not required that an administrator prove a terminated participant received the notice, only that they sent it.

Consider Somer v. Cudd Energy Services, recently decided in the Western District of Oklahoma.  The participant argued that she was not provided with a COBRA notice and election form until she actually called and complained to HR.  As a result, the notice was 3 months late.  Fortunately, the plan sponsor was able to show that it had mailed a COBRA notice to the last known address of the participant in a timely manner.  The Court affirmed that the employer has to comply with the sending, not prove the receipt.  So the demonstration that a system was in place to send notices to the last known address, coupled with the copies of the letters sent, was enough to establish a "good faith attempt to comply."

There are a couple of good lessons from this case.  First, employers and administrators should keep copies of the notices sent as proof of sending.  They should also have a documented process and be able to demonstrate they followed the process in each case if challenged.  Having a standard procedure and following that procedure is certainly a best practice.  But beyond COBRA, consider the other various notice requirements associated with employee benefit plans.  Cases like this tend to demonstrate for us the importance of having procedures for all notices and being able to demonstrate that we followed them.  So consider this a reminder to document and save copies (even electronic versions) in case a participant claims they never got their notice.

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On may 11, the Department of Labor issued Part 9 of its FAQ series related to implementation of PPACA.  This particular is directed, in large part, to answering questions about the summary of benefits coverage that enables participants to compare their health coverage.  Some key points:

• SBCs may be provided electronically to participants and beneficiaries in connection with their online enrollment or online renewal of coverage under the plan.  SBCs also may be provided electronically to participants and beneficiaries who request an SBC online.  In either case, the individual must have the option to receive a paper copy upon request.
• The regulations state that a health insurance issuer must provide the SBC upon application for health coverage.  For this purpose, a plan or issuer must provide the SBC as soon as practicable, but no later than seven business days after receiving a substantially complete application for a health insurance product.
• If an individual, plan, or plan sponsor is negotiating coverage terms after an application has been filed and the information required to be in the SBC changes, an updated SBC is not required to be provided (unless an updated SBC is requested) until the first day of coverage.  The updated SBC should reflect the final coverage terms under the contract, certificate, or policy of insurance that was purchased. 
• While it is not permitted to substitute a reference to any other document for any content element of the SBC, an SBC may include a reference to another document in the SBC footer (including reference to a summary plan description).  In addition, wherever an SBC provides information that fully satisfies a particular content element of the SBC, it may add to that information a reference to specified pages or portions of other documents in order to supplement or elaborate on that information. 

There is also a link provided for translation services if you are required to provide a translation of the SBC because you are sending it to a county with the requisite percentage of the population speaking a particular language.

As we get closer to the actual compliance dates for SBCs, we can expect even more answers like these.  But if you have questions about compliance with PPACA, and with respect to SBCs in particular, you can always ask your attorney at Fox Rothschild.

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The IRS recently released Rev. Pro. 2012-26 that gives us the limits for 2013 minimums and maximums for HSA and HDHP plan contributions. 

• Maximum Annual HSA contribution: $3,3250 for single, $6,450 for family
• Minimum HDHP Deductible: $1,250 for single, $2,500 for family
• Maximum HDHP Out-of-Pocket: $6,250 single, $12,500 family

Remember that as a plan sponsor, it is not enough to simply change your numbers.  You have to revise or amend plan documents that have specific reference to these limits and make sure they are distributed to participants.

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Sometimes displaced employees try to co-mingle law to suggest a variety of nasty acts by their employer.  Sometimes employment law and benefits law can overlap, and sometimes they don't.  Such was the case in Thompson v. Morris Heights Health Center, recently decided by the U.S. District Court for the S.D. of New York. 

Thompson was terminated as an employee from the medical center and filed a claim with the EEOC, claiming that her employer had retaliated against her in violation of Title VII of the Civil Rights Act for filing a previous EEOC charge.  In her latest EEOC charge, she alleged, in part, that the medical center retaliated against her by failing to provide a timely COBRA notice and election form.  The late part was correct.  The employer did send it four months late, but when it finally did send it, it offered coverage retroactive to the original qualifying event date.  The EEOC dismissed her claim and she filed a federal court action alleging that her former employer (1) did not timely issue her information regarding benefits under COBRA, and (2) failed to expeditiously provide her with a statement of benefits and a disbursement under the Pension Plan.

The Court quickly disposed of the pension plan claim because it so happened that the plan was not a calendar year plan (the year ended 6/30), and since her request was mid-year, it was not unreasonable to have to wait until after the end of the plan year to receive a statement.  On the COBRA issue, the court ruled that Thompson failed to demonstrate that the late COBRA notice was "post-employment retaliation in violation of Title VII."  The Court reasoned that because Title VII is limited to to prohibit only actions that affect current employment or the ability to secure future employment, she would have had to prove that the delay in furnishing her COBRA election notice had hindered her ability to search for or procure future employment.  She could not show that she had suffered "any prejudice from this delay of the sort cognizable under Title VII."  So her claim was dismissed.  

It is important for employers to note that even though Thompson could not make a case under Title VII for post-employment retaliation, she still could have tried to assert a claim for COBRA penalties for the late election notice (although why she chose not to is not reported).  So this decision does not say there could not be any remedy, just not a remedy under Title VII.  But it does serve as a reminder that the actions taken by the plan, and the employer as plan sponsor, are distinct from the actions taken by the employer as employer.  Sometimes that works in the employer's favor.

For assistance in distinguishing actions taken as an employer or as a plan sponsor, please do not hesitate to call you attorney at Fox Rothschild. 

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Under ERISA, there are come requirements for plan administrators to provide documents or notices in languages other than English.  If a plan has participants who are literate only in a particular foreign language, the plan administrator may be required to provide the SPD or required notices written in that language, along with the SPD, stating that assistance in understanding the SPD or notice is available.  Generally for plans with fewer than 100 participants as of the beginning of the plan year, the requirement applies if 25% or more of participants are literate only in a particular foreign language.  For plans with 100 or more participants as of the beginning of the plan year, the requirement applies if the lesser of 500 participants or 10% of the total number of participants are literate only in a particular language. 

Under PPACA, which incorporated Section 2719 of the Public Health Service Act, group health plans and health insurance issuers offering health insurance coverage have to provide relevant notices in a "culturally and linguistically appropriate manner."  The idea is that plans will make certain accommodations for notices sent to an address in a county where 10% of people who reside in that county are are literate only in the same non-English language.  CMS recently published its "Culturally and Linguistically Appropriate Services County Data" which lays out which counties are affected. 

What this means is that the notices regarding enhanced internal and external appeals and also the summary of benefits coverage have to be distributed with a statement, prominently displayed, in any applicable non-English language, clearly indicating how to obtain assistance in understanding the notices.  If requested, the notices also have to be provided in the applicable non-English language.  In short, plan sponsors have to be prepared to include non-English directions on their notice and also to have non-English notices available,

A quick review of the county list provides some real-world examples.  Notices mailed to addresses in Bronx County, New York, have to include statements in Spanish.  This is also the case for Union County, New Jersey and Los Angeles County, California.  San Francisco County has to have the notice in Chinese, but not Spanish.  So first, review to find our where you are sending notices BY COUNTY in each state where you have covered participants.  Second, check to see if the county you are sending the notices to requires special non-English notice.  Third, prepare appropriate notices in that language and make arrangement for translation services to make sure participants can obtain assistance in understanding the notices.

Obviously PPACA's status with the Supreme Court remains up in the air.  But it might be worthwhile for plan sponsors to check this list out and see what they might have to prepare for if it is upheld.

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Last week, the United States Supreme Court heard oral arguments on the constitutionality of the Patient Protection and Affordable Care Act (PPACA).  Call it an employee benefits version of "March Madness."  The arguments were heard over 3 days and while the media generally reported that the "individual mandate" was the key argument, there were actually 4 separate issues being argued.  I will attempt to summarize them below, but without betting on the outcome of any particular argument.

"Does the Anti-Injunction Act Bar the Challenge?"

The Anti-Injunction Act precludes the court from hearing challenges to assessments or collection of taxes before they actually go into effect.  The Court itself was concerned about whether or not it even had the ability to hear this case before the 2014 penalties and assessments went into effect.  Since both the White House and opponents of PPACA are anxious to have this case decided, both sides argued that the Anti-Injunction Act does not apply.  The Supreme Court actually appointed an independent lawyer to argue that the Act did apply so that the Court could be certain it heard full argument on the issue.  So day one involved an argument about whether or not the case was "ripe" for consideration before the mandate and tax go into effect.

"Is the Individual Mandate Constitutional?"

Day two saw the challenge and defense of the individual mandate.  The White House argued that the individual mandate regulates the national health insurance market which is permitted because the Constitution gives Congress the power to regulate interstate commerce, because Congress can tax under the "General Welfare Clause," and Congress can do what is "Necessary and Proper" to carry out its ability to regulate interstate commerce.  Opponents argued that the mandate does not actually regulate commerce but instead forces buyers into the commerce stream.  Therefore, PPACA does not regulate commerce but rather forces people to engage in commerce. 

"Is the Individual Mandate Severable?"

Day three saw arguments related to whether the individual mandate could be separated from the other provisions of PPACA.  To hear this argument, the Court had to presume the mandate was unconstitutional and then looked to see what, if any, part of PPACA might survive.  Opponents argued that if the mandate falls, the whole act must fall, while the White House argued that many other new rules should remain.  Day three also brought arguments related to the constitutionality of the expansion of Medicaid, with states arguing the required expansion (which makes them extend Medicaid to more participants in order to get federal funding) was unconstitutional "coercion" by the Federal government.  The White House argued that the "Spending Clause" of the constitution means Washington can set whatever rules it wants for states to get federal funds.

Despite everyone saying they know, nobody really knows how the Court will rule.  It is anticipated that a decision will be issued before the end of the current Court term, which is in June of this year.  Regardless of the outcome, the decision will have significant impact on employers, insurers and plans.  However, because compliance is still required until a ruling is issued, and may still be required after a decision is issued, employers and plan sponsors should continue to prepare for compliance and not gamble on the outcome.

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In case you missed it, the Supreme Court is hearing arguments next week on the constitutional challenges to health care reform.  But government soldier's on, so Monday the EBSA release is FAQ Part 8 relating to implementation of PPACA.  Here are some highlights:

We know that the Summary of Benefits Coverage (SBC) must be delivered to the employee and beneficiaries at initial application or enrollment, upon a change after enrollment and before the plan year, at renewal, at a special enrollment and upon request. FAQ 8 specifies that the “upon application” delivery requirement applies whenever a person completes materials to enroll even if no application is required.  So a good safe harbor option may be to provide the SBC any time you are generally providing any plan documentation to participants or potential participants.

For a timing perspective, the obligation to provide the SBC is based on your plan year.  If your open enrollment period commences prior to September 23, 2012, you will not have to comply with the SBC rules and you don't have to provide an SBC until January 1, 2013.  If your open enrollment period starts on or after September 23, 2012, you must comply with all of the new SBC rules.  Otherwise, assume that after 1/1/13, everyone gets and SBC.  Like COBRA notices, the SBC must be delivered to the participant AND to the beneficiaries.  If you fail to provide an SBC, a penalty of $100 per day per person (capped at $200 per day per family) applies. 

FAQ 8 actually includes model language for an e-card or postcard for use with an evergreen website posting and there is also a requirement that the SBC must be culturally and "linguistically appropriate."  This means non-English versions of the SBC must be available and several templates are available on the DOL website.  The SBC must be sent to persons who are COBRA qualified beneficiaries and who are on COBRA continuation coverage.  It is also important to note that the SBC can be included in the summary plan description as long as it is prominently displayed right after the table of contents.  The SBC must be sent to a participant or beneficiary within 7 business days of a request.  Finally, an SBC can be provided electronically if the format is readily accessible (such as in an html, MS Word, or pdf format), it is provided in paper form free of charge upon request, and if it is provided via an Internet posting (including on the HHS web portal), the issuer timely advises the plan (or the plan or issuer timely advises the participants and beneficiaries) that the SBC is available on the Internet and provides the Internet address. 

Since it is not clear that there will be a final decision on PPACA's status before the 9/23/12 deadline, and we certainly can't predict what part or parts will stand (if at all), it is wise for plan administrators to continue on in their preparation from compliance with the SBC distribution requirements.  The good news is that FAQ 8 concludes with a statement that SBC requirements are not expected to change for 2014, so we can take some comfort in that.  For compliance assistance, please contact your attorney at Fox Rothschild.

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Back in 2009, we looked at a Third Circuit case called Pittsburgh Mack Sales v. IUOE, Local No. 66 that found that it was not against public policy to require a union to reimburse an employer for withdrawal liability.  Well, the Sixth Circuit agrees.  In Shelter Distribution v. General Drivers, Warehousemen & Helpers Local Union No. 86, the Sixth Circuit Court of Appeals considered a situation where an employer was assessed withdrawal liability because of a termination of a collective bargaining agreement.

The collective bargaining agreement that expired contained the following provision: "The Union and the members of the Bargaining Unit have agreed that only the liability of the Company to the Pension Benefit Plan are, have been and shall be limited to the actual contributions it makes during the course of the past, present and future Contracts and the Company shall not be liable for any other obligation or contingent obligation of any kind or nature whatsoever.  The Union shall indemnify the Company for any contingent liability which may be imposed under MEPPAA."  Sure enough, it happened and the company went looking for indemnification from the union.

The union argued that it was against public policy because it shifts the liability Congress imposed on employers and would defeat the statute.  But the Court disagreed, noting that since ERISA allows fiduciaries to insure against risk, there must be a way to shift potential liability, including indemnification contracts.  So it was not a frustration of the statute and not against public policy.

So when undertaking future bargaining with your unions, consider adding this indemnification language that has now been twice confirmed.  Of course, it will be part of collective bargaining and it may cost you something, but it might be worth it in the long run.  If you need assistance in dealing with multiemployer plans, or in collective bargaining, please contact your attorney at Fox Rothschild.

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While not directly impacting employers, it is important to note that the latest stage of implementation of PPACA involves defining health insurance exchanges.  The Department of Health and Human Services (HHS) has issued "implementing regulations"  that finalize some of the proposed rules addressing the creation and operation of these exchanges.

These final regulations address the creation and eligibility for the state exchanges.  By way of background, the exchanges are ideally the marketplaces that provide the "qualified health plans" that satisfy the minimum benefit standards. These plans would then be open to employers and individuals.

Some of the key components of the final rules:

1. Exchanges must provide and maintain a  website that contains information about available qualified health plans.  This includes displaying a summary of benefits coverage for each qualified health plan offered..
2. The regulations include requirements about the content, form and timing requirements for notices sent by an exchange to individuals and employers.  They must be in writing and provided electronically when possible and include the date the notice was sent and the reason for any intended action.
3. Exchanges must determine and articulate the eligibility for enrollment in a qualified health plan.  Exchanges must allow individuals to enroll in or change from one qualified health plan to another, even outside of the open enrollment period if certain things occur, such as marriage, birth or adoption, 
4. For dental plans, they must allow limited scope dental benefit plans that satisfy certain coverage requirements to be offered through the exchange.  A dental plan can be offered as a stand-alone dental plan or in conjunction with a qualified health plan.  Cost-sharing limits and restrictions on annual and lifetime limits defined under PPACA apply to stand-alone dental plans for coverage of pediatric dental essential health benefits.

The rules are designed to provide some initial explanation of how the exchanges will be formed and how they will work.  Ideally, employers could review these rules to find out what they should offer as a competitive plan and how it might be measured against an exchange.  However, the real impact may be simply to give insurance companies a clearer framework for developing their qualified health plan offerings.  Certainly more guidance is anticipated but at least we do know that the exchanges are moving forward in case employers choose that as an option.

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When making decisions about benefit plans, plan sponsors should at least take some time to consider what role they are playing.  I am working with a company that is terminating its health plan and the distinction between "settlor" functions and "fiduciary" functions became very significant.  So I thought I might share some thoughts on the topic.

Settlor functions are those typically related to plan design, such as establishment of a plan, determination of who the plan will cover and designing the benefit offerings.  The creation or termination (or even amendment) of a plan is a settlor function.  This is important because settlor functions are not subject to the same fiduciary status when making these decisions.  For instances, the decision to amend or terminate a plan is a settlor function that does not give rise to a claim for breach of fiduciary duty.  Similarly, the decision about what class of employees to make eligible for coverage would be a settlor function.  You might have qualification issues and have to comply with IRS regulations, but the decision about design is not necessarily a fiduciary one.

Fiduciary functions tend to be the "administrative" aspects of the plan.  Fiduciaries exercise control or management over plan assets and have discretionary authority over the plan operation.  So while the decision to terminate the plan may not be a fiduciary function, the way that you administer the termination would be.  Likewise, while a decision to offer coverage to a specific group of employees may not be a fiduciary function, denying eligibility to an employee who thinks they are eligible would be.  Fiduciary actions are governed by ERISA standards, while settlor activities are generally not.  I say "generally" because often times the decisions can be a mix of both settlor and fiduciary functions and it is important to know which hat you are wearing for each decision.

And it is the "mix" that is important.  When making decisions related to creating a plan, amending a plan or terminating a plan, it is important to separate those decisions made or actions taken in a settlor capacity from those decisions made or actions taken in a fiduciary capacity.  That way there is a clear delineation of what role you were playing at each point.  When you are acting as both a fiduciary and a settlor, your actions will be given very close scrutiny by a court if they are challenged, so give them that same close scrutiny before you make them.  It saves grief in the long run.

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Questions about W-2 reporting requirements for health plans to comply with PPACA?  As we continue to prepare for the 2012 reporting requirements, I thought it would be beneficial to provide a link to the sites that the IRS has published to give guidance.  The most recent "Question and Answer" is available here with links to all previously published notices.  They have also prepared a nifty chart based on the content of Notice 2012-9 available here.

While the 2011 reporting requirements was option, that does not mean it went away altogether so you should be looking at what is required for the 2012 year now so you can begin collecting the correct information.  For assistance, please contact your attorney at Fox Rothschild.

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You may recall that, under PPACA, plans were to start providing uniform "summaries of coverage" and uniform definitions by March 23, 2012.  This compliance date was delayed pending publication of final rules.  Well now they are here.  The final rule and guidance documents are now available.  Under the final rule, plans with plan years that start September 23, 2012 or later will have to supply SBCs in their next open enrollment.

Rather than try to summarize each document, I suggest you look at them first.  As more opinions and guidance are release, I will be providing additional commentary for each.  But for now please check out the following official publications to help start your compliance process:

1. Final Regulations,
2. Compliance Guide,
3. Summary of Benefits and Coverage Template
4. Sample Completed SBC
5. Instructions for Completing the SBC - Group Health Plan Coverage
6. Instructions for Completing the SBC - Individual Health Insurance Coverage
7. Why This Matters language for "Yes" Answers
8. Why This Matters language for "No" Answers
9. Uniform Glossary of Coverage and Medical Terms 

And as a sort of a catch all page, use this HHS Site for Simulating Coverage which has all the resources.

As we get closer to September 23, there will likely be some modifications.  But plan sponsors should start preparing now for compliance for their 2012-2013 open enrollment. 

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Its tax time again and I tend to get questions this time of year about reporting of benefits.  Health plans that provide coverage to same-sex couples and domestic partners require some special consideration for tax purposes so let's review some of the key issues.

The first is verification of status.  Some employers voice to me concerns over asking for marital status for fear that requiring enrollees to identify potential same-sex partners is tantamount to discrimination.  But it is OK to ask (and in many instances, you are required to).  You just can't treat enrollees differently once they are determined to be eligible for coverage.  As more states define their respective positions with regard to same-sex marriage or domestic partnerships, plan sponsors are under specific tax rules that require that benefits to these spouses and partners be properly taxed at a federal and state level.  So the employer must, as a function of tax law, inquire about status and an employee who enrolls a same-sex spouse in a state that recognizes same sex marriage can be asked to differentiate between "marriage" and "same-sex marriage" for plan enrollment and tax purposes.

However, a plan sponsor cannot require different verifications standards.  If someone enrolls their same-sex married partner, they cannot be required to produce a marriage certificate unless you are prepared to require all married couples to produce a certificate.  So it is not the asking that creates the issue, it is the verification process.

Domestic partners can create a slightly different scenario in that some states recognize both same-sex and opposite-sex domestic partnerships.  Moreover, some plans actually provide for coverage for unmarried opposite sex partners with verification of some type of long term arrangement.  Plans seeking verification of domestic partnership status would need to require all domestic partners to verify that status, regardless of gender, but making that a requirement for domestic partners might also trigger an obligation to verify marital status for married partners as well.  Remember, marital status can be a protected class.  Essentially plans have to balance the obligation to verify eligibility and properly report income against the obligation to treat participants equally, regardless of marital status and sexual orientation.

A lot of plans simply require the employee to sign an affirmation of accuracy at the time of enrollment confirming they are making true statements.  This might eliminate the need for actual verification and certainly there can be stated penalties for fraud.  How a plan verifies eligibility is a process the plan administrator has to develop and administer so there is no automatic answer for every situation.  But when it comes to enrollment, plans have to ask so that benefits are treated properly for tax purposes.  Just make sure you ask properly.

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With PPACA comes potential coverage of dependents to age 26.  But how do you confirm dependent status and what can you do with non-cooperative participants?  Many plans are undertaking to conduct "dependent audits" to make sure covered dependents are actually eligible for coverage.  But what happens when you find someone on the plan who should not be there, or you can't get cooperation.

This was the situation in Muhammad v. Ford Motor Co. (E.D. Mich. 1/12/12).  The Ford plan had discretionary authority to (1) determine eligibility, (2) demand proof of dependent status and (3) garnish wages to recover overpayment of benefits.  Ford repeatedly asked Muhammad to provide proof that his dependents met the qualifications of eligibility under the plan, which he refused to do.  ford terminated the dependents and also garnished his wages to recover over payment for the dis-enrolled dependents.  He sued and lost because, in the minds of the court, the plan had acted fairly and in accordance with its terms.

What most likely saved Ford in this case was that its plan documents and notices specifically laid out its rights and remedies.  The plan has the right to set its proof for dependent status and as long as that requirement is evenly applied and reasonable, it can also dis-enroll (or deny enrollment) for failure to satisfy those requirements.  Similarly, if the administrative processes are followed as written, the discretionary authority grant in the plan will serve to protect the plan administrator when it makes a decision.

So plans should consider doing audits to make sure they are only covering eligible dependents.  Plus, plan sponsors should undertake to update or amend their plan language to allow them to require proof and state specific remedies for failure to provide proof.  Then, set up administrative guidelines for establishing how those proofs will be treated.  Don't assume you can require proof and terminate without it.  Check your language and work with your plan service providers to make sure you can do what you need to do.

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When talking about mergers, acquisitions and maybe even liquidations, retirement plans can sometimes get lost in the shuffle.  Asset purchases that result in the liquidation of the seller company, or acquisitions of assets by buyers, can create problems over legacy retirement plans.  These "orphan" plans just don't disappear and they have to be dealt with properly.

An “orphan plan” is defined as a plan that no longer has a plan sponsor.  The sponsor may have disappeared because of bankruptcy or merger, but the primary factor leading to the "orphan" status is that the reported plan sponsor is no longer in existence.   The plan may have been abandoned or simply forgotten but it still has to be dealt with because the IRS and DOL don't let plans simply disappear.  You also have to be wary of the possibility that an "orphan" plan will lose its tax qualified status.  In order to be a qualified plan, the sponsor has to be an employer and if that is no longer the case, it would not longer maintain its tax favored status.  On top of that, there may be fiduciary concerns related to making appropriate distributions, reporting requirements and managing investments that cannot be left unattended.   

Fortunately there is a process under the IRS's Employee Plans Compliance Resolution System (EPCRS) to deal with orphan plans, so they can be saved.  But beware that correction of an orphaned plan can be more problematic than simply addressing the plan in the first place.  Perhaps the plan can be terminated?  Should it be "adopted" by the buyer?  Will the bankruptcy trustee deal with it?  I have dealt with several orphaned plans over the years and they can be messy undertakings, particularly when the buyer did not expect them and has the matter foisted upon them.  So consider this an introduction to the term and make sure to avoid making your plan an "orphan."

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I recently read an article about a company wellness program that consisted primarily of a company health fair.  At the health fair, an employee who thought he was otherwise healthy took a PSA test and discovered he had elevated PSA levels.  He was encouraged to follow up with his doctor, who discovered he had prostate cancer.  He was ultimately cured and his doctor said he probably would have died had it not been for the health fair screening. 

That's a great human interest story and certainly lends some encouragement to companies considering instituting some type of wellness program.  Of course, wellness programs can also be a pain to implement.  Last week I had the opportunity to present a seminar on the legal requirements of wellness programs and identified many important issues, like discrimination and privacy concerns, which would seem to discourage implementation of wellness programs. 

However, taking this story at face value, had the employee not been screened and simply developed full prostate cancer, the health plan costs to treat that cancer would likely have been higher than the treatment to cure the employee with the cancer caught early.  So there could arguably be some savings there.  Plus, over the longer run, statistics seem to support the conclusion that wellness programs decrease overall claims experience for health plans.  But they have to be done right and they have to be done legally (so as to avoid the unexpected costs associated with defending them later).

So consider adding a wellness component to your welfare plan.  But make sure to consult with your benefit professionals as you build the program so your plan does more good than bad.

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Insurance coverage can be a confusing thing.  Coverage for employee benefit plan fiduciaries sometimes adds a wrinkle to the process that can be overlooked.  Depending on the type of claim asserted, there are a variety of "coverage" options that may apply.  I think the new fee disclosure rules are likely to increase claims for breach of fiduciary duty in the future, but even without that development, it makes sense to at least know whether you have coverage and what your options are.  So let's take a look at some of the options.

• The ERISA Bond.  Generally, plan's have to have an ERISA bond that applies to anyone who handles plan assets.  The presumption is that handling the assets equates to "discretionary authority" which is the hallmark of fiduciary status.  The bond can be very narrow (covering only fiduciaries and employees) or broad (extending to vendors and person who do not necessarily handle plan assets), but the bond will only provide protection for claims for "fraud and dishonesty."  It does not generally provide insurance coverage for other claims, particularly claims for breach of fiduciary duty not involving fraud or dishonesty.
• Fiduciary Liability Insurance.  Unlike a bond, Fiduciary Liability coverage pays for claims arising out of the administration of a benefit plan without requiring "fraud" or "dishonesty."  Often it is combined with Employee Benefits Liability Coverage.  This type of coverage is designed to insure fiduciaries acting specifically in their capacity as benefit plan fiduciaries which include claims for breach of duty or mistake in administration of the plan.  Some policies can even be expanded to include coverage for penalties and fines (for a price). 
• Directors and Officers Liability Insurance. D&O policies generally provider coverage for directors and officers of a company in the event they are sued in conjunction with the performance of their official duties as they relate to the company.  But many D&O policies exclude claims arising from administration of benefit plans.  Others require a specific rider that includes employee benefits coverage (likely for an additional premium).  Don't assume that because you have a D&O policy that it automatically provides coverage for claims arising from plan administration. 
• Errors and Omissions Insurance. E&O polices rarely provide coverage for ERISA claims (unless the company with the coverage happens to be in the business of providing service to ERISA plans).  Unless specifically included in an E&O policy, this coverage will not likely protect a fiduciary from a claim arising from administration of a benefit plan.
• Employment Practices Liability Insurance.  EPLI coverage is typically bundled with D&O coverage and generally insures against claims that allege misconduct by the officers of a company in an employment setting.  These claims are typically for things like harassment, discrimination and wrongful discharge.  EPLI coverage does not typically provide protection against claims arising from plan administration unless specifically included (usually with a rider and usually for an extra premium).

Why be concerned?  Frequently I find myself in a position of defending a fiduciary (or an officer or owner of a company alleged to be a fiduciary) who finds him or herself in a position of being "uninsured."  They assume that their general commercial liability policy or D&O policy covers them for ERISA claims, only to find out the carrier has denied coverage.  Depending on the nature of the claim, the size of the claim or the breach alleged, ERISA claims can be very expensive to defend and can result in some hefty damages. 

Of course, insurance is not free and balancing the cost of coverage versus the risk of exposure is a business decision that plan sponsors and fiduciaries have to evaluate on their own.  I certainly recommend that anyone in a fiduciary position have coverage, but it is not required.  However, I do think it is very important for you to check to see if you do or do not have coverage for employee benefit claims.  Look at your policies to see whether or not you have coverage.  If you don't have coverage, maybe you should look at the cost of adding it.  But better to know now whether or not you do than to be surprised later to find out you don't.  And ask if you are not sure.

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Still wondering about how to report health coverage on W-2s, which is required by PPACA?  More guidance was issued on January 3, 2012 in IRS Notice 2012-9.  Under the new rules, employers must report the aggregate cost of "applicable employer-sponsored coverage," which generally consists of employer-sponsored coverage under a group health plan (insured or self-funded) that is excludable from the employee's gross income. The reportable cost generally includes the portion of the cost paid by the employer and the amount paid by the employee, regardless of whether paid through pre-tax or after-tax contributions.

Under this most recent guidance, the good news is that the reporting requirement appears to be suspended for employers with fewer than 250 W-2s issued for the prior calendar year.   It also appears that reporting requirements do not apply to coverage under a flexible spending arrangement if contributions occur only through employee salary reductions.  Also, for dental and vision plans, it appears that the standard for determining whether coverage under a dental plan or vision plan is subject to the reporting requirement is whether the benefits are offered under a separate policy, certificate or contract or insurance, or if the participants have the right not to elect the dental or vision benefits and if they do they must pay an additional premium or contribution.

Fortunately, the notice also includes some new Q&A's not contained in Notice 2011-28.   These Q&As include explanations about employee assistance program, wellness program or on site-medical clinic and also provide guidance about contributions to multiemployer plans.  The Notice also provides that this guidance is applicable starting with 2012 W-2s.  So your 2103 W-2s will have to comply with these rules.  But employers should definitely review both of these notices sooner rather than later and make sure they are prepared to make appropriate reportings come January 2013.

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According to a Towers Watson survey, only 26% of retirement plan administrators regularly conduct operational and compliance reviews of their plans.  The survey interviewed 245 executives and found that while most are concerned about plan compliance, apparently very few are doing anything about it.  Oddly, 62% said they would conduct a review if their plan advisors identified potential risks and 49% say they would conduct a review if they received notice of an IRS audit.  But few do it on their own.  So consider this identification of "potential risks."

I happened to give a talk today about fiduciary duties and Section 404 of ERISA.  I stressed to the group the importance of knowing about your fiduciary status, and also the importance of satisfying your fiduciary obligations.  That necessarily includes making sure your plan is in compliance with all statutory and regulatory obligations.  Given the vast array of benefit plan litigation in the courts these days, and the focus on fees, disclosures and reporting, it seems only logical that a good starting point would be to review your policies and procedures concerning plan administration and make sure they comply with the actual terms of your plans.

One of the first question the IRS asks when conducting plan audits is "are your plan's operations based on the terms of the plan document?"  Do you know if it is?  You should.  It is the start of a new year and budgets have been renewed.  So now is the perfect time to resolve to audit your benefit plans for operational and compliance problems.  Here are some starting points to consider:

1. When was the last time you updated plan documents?
2. When was the last time you reviewed the definitions in your plan documents?
3. When was the last time you verified your definition of eligibility in your plans?
4. When was the last time you compared investment options in your retirement plan?

If the answer to any of these questions is "I don't have any idea," then resolve to make 2012 your year to conduct a review of your plans.  Collect review and repair as needed, and let your attorney at Fox Rothschild know if we can help.

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Although it is probably not high on the list of priorities for plan administrators, the end of a calendar year usually means means the start of the process of preparing 5500s.  They may not be due right away, but it is always good to know what information you will have to provide when you eventually file them.  The EBSA has made an informational copy of the 2011 5500 available, with instructions, on its website.

Make sure you take a look at the "Changes to Note" section in the instructions to see how 2011 differs from prior years.  Also, remember that you have 7 months from the end of the plan year to make a filing (unless you request an extension).  And finally, make sure you read very carefully to make sure you know whether or not you have to file for your specific plans. 

I also like this site because it gives samples of older forms and instructions just in case you may have forgotten to make a required filing and are looking to voluntarily correct that failure. If you have any questions about filing requirements for 2011 or any prior year, don't hesitate to reach out to your benefits professionals, including your attorney at Fox Rothschild.

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Employer gifts may not be part of your "benefit" plans per se, but the IRS does have rules about fringe benefits.  IRS Publication 15-B provides employers with a good explanation for how to handle taxation of fringe benefits generally.  But what about year-end "gifts?"  How are they treated?

Since it is year-end, it is not uncommon for employer to provide "gifts" to employees for a job well done, or for sticking through another tough year.  Either way, employers should remember that gift giving has its limits and the IRS is watching.  The IRS regards some gifts as taxable income for the recipient.  Clearly there is a distinction between whether a gift is given from an individual or from an "employer."  The IRS is more concerned with the latter, so let's consider some of the options.

The IRS considers any cash given from an employer to an employee as compensation.  If an employer gives an employee cash and the cash comes fro the company (not a personal gift from, say,  attorney to legal assistant), it must be treated as compensation and reported for tax purposes.  Gift cards are the same as cash.  They are subject to FICA the same way that any other pay would be treated.  However, the IRS does not consider small non-cash gifts to employees as taxable compensation.  The IRS (on its website for "de-minimus fringe benefits") provides that holiday gifts, as well as things like flowers, fruit and books are not subject to taxation.  But any gift that has a value in excess of $100 is outside of this exception so an employer must report the value of the gift on W-2s and do appropriate withholdings. 

Note: cash gifts, gift certificate and gift cards, regardless of the size, are taxable.  There is no de-minimus exception for cash and cash equivalents.

So cash is taxable, gift card and gift certificates are taxable, small gifts are probably not, but what about the holiday party?  The good news is that the IRS does not consider a company paid holiday party to be a form of taxable compensation provided they are "reasonable."  A year-end trip to the Bahamas might be hard to justify, but dinner at the local steak joint is not going to be an issue.  If you are going to give "gifts" to employees during the holidays, make sure you know the rules and treat them correctly.

And as a side note for employers that have collective bargaining agreements, make sure to check the restrictions in that agreement before giving gifts.  If you give a gift that is taxable as compensation by the IRS, it might be treated as compensation for which contributions are due to benefit plans covering the union employees.  Many disputes have arisen over whether to treat "gifts" as "compensation" for contribution purposes so make sure you know what you are getting in to before giving those gifts. 

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I frequently get asked about paying for a separated employee's COBRA coverage as a partial severance benefit.  Not altogether an unappealing option, but you have to be careful about how you word and administer it.  Unfortunately, many employers think that the solution is just to leave someone on their coverage until the end of the severance period.  But that messes up the COBRA rules and potentially creates a situation where an ex-employee is entitled to COBRA for a full 18 months AFTER the severance period.

The key is to understand what you want to accomplish.  Do you want the employee to remain on your payroll and covered as an employee as part of the settlement?   Or do you want to terminate them and reimburse them for COBRA?  Each would be accomplished in a different fashion.  Say you are giving someone three months of "additional" coverage and pay.  If the severance agreement leaves them on your payroll for three months and then terminates them, the COBRA qualifying event would be the date you actually terminated their employment.

If you want to terminate them as of a date certain, say 12/31, then give them 3 months of coverage as a severance benefits, you have to be careful because their COBRA qualifying event date is their date of termination (12/31).  If you give them 3 months of additional coverage after that, then send them a COBRA notice, they get 18 more months for a total of 21.  Plus, you have the problem of not providing a timely notice of a qualifying event and election option.  You would hate to be sued for not giving notice because you were being nice.

Instead, I have suggested that the appropriate way to handle it is to provide that in the event the ex-employee elects COBRA, the company, as part of the severance benefit, will reimburse the employee for the COBRA premium paid for a period of up to 3 months.  The COBRA time periods for notice and election run as would normally be required and the premium reimbursement is treated as a severance payment for tax purposes.  18 months of COBRA runs from the 12/31 termination date, but the company reimburses the employee for 3 months of premiums.  Some people even suggest grossing up the reimbursement for taxes so there is full premium reimbursement, which is an option.  But it has to be reported as compensation as well.

Option two is definitely preferred for insured plans.  You don't want to have your insurance company question why they are covering employees not actively at work because they were fired.  Plus they won't be happy about the extra 3 months of continuation coverage.  For self-insured plans, you have some more latitude, but you have to be wary of Section 105(h) non-discrimination rules (if you only offer it to highly compensated employees).  Plus you might run afoul of your stop-loss coverage if you are keeping people on the plan that should not really be eligible.  So you may end up truly self-insuring the full amount of the risk.

So the point is that paying for COBRA as part of a severance package can be done, but it has benefits and tax implications that should be fully understood before releases are drafted and signed.  Just "agreeing to continue benefits" is too broad of a statement and you should make sure you lay it out clearly and completely to avoid future fights.  As always, consult, before you act and you will be glad you did in the end. 

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I recently read an article that suggested that 49% of employees surveyed anticipated that portions of their benefit packages would be eliminated or reduced in 2012.  Kind of a bleak outlook, but if that is true, then it also suggests that a lot of employers are going to undertake to change their benefit plan structures over the next year.  And with change, comes potential problems because you might not be able to just cut benefits.  You have to know (and follow) the correct process.

Earlier, I mentioned ERISA Section 206(d) that acts as the "anti-cutback" rule for some benefit plans.  There are also a number of court cases that deal with "vesting" rights related to retirement plans as well as welfare plans.  And there are a number of regulations and cases related to disclosure and retaining the right to amend and terminate benefit plans.  In sum, it is not simply a matter of declaring a change.  You have to know the process specific to the plan of benefits you are looking to change, and also what parts of the required process might be missing from your plan. 

Amendment and termination can be very problematic, both from an implementation perspective, but also from a "results" standpoint.  Something as simple as a change in eligibility requirements can cause discrimination testing concerns or "partial termination" concerns, depending on the size and nature of the plan.  Of course, there could always be collective bargaining issues if you have a union in your company.  There could be administration issues related to notices, communications and elections for the new (or revised) plan design.  And there could be distribution concerns as well as administrative reporting and termination filing requirements that are triggered.

The point is that if you are contemplating a change to your benefit plans, it is important to know what your plan requires to make changes, how the rules and regulations control those changes and the impact the proposed changes will have going forward.  Each of these items should be fully vetted with your benefits professionals BEFORE making the change.  If you have questions about how to make changes, you can always contact your attorney at Fox Rothschild.

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Concerned about the uniform benefit summaries due March 23, 2012?  Under PPACA, plans and insurers are required to furnish participants with a very abbreviated summary of benefits and coverage. This summer, proposed regulations on this requirement, were issued and some sample templates were released.  The DOL recently released some FAQs that provide that plans and insurers will not be required to distribute the summaries until final regulations are issued. The departments expect the final regulations to give plans and insurers sufficient time to comply with the final rules after they are published.  So, for now at least, it looks like the requirements to distribute these summaries is on hold.  Stay tuned.

In other news, the EBSA has created a new consumer assistance webpage (also available in Spanish) that allows users to submit questions and complaints about plans electronically.  The webpage also provides access to basic information relating to health and retirement benefit plans through several links under the following categories: Resources/Tools, Hot Topics, and Publications.  The topics covered include health plan issues such as COBRA eligibility, HIPAA special enrollment rights, and health care reform requirements and retirement plan matters such as filing a claim for benefits and understanding fees and expenses in 401(k) plans, all very hot topics.  Plan sponsors would do well to check it out for assistance in administering their plans.

Finally, HHS has issued information about its new Privacy and Security Audit Program.  This program will apply only to HIPAA-covered entities.  All audits conducted during this initial pilot period will include a site visit and result in a formal report.  Covered entities selected for audit will receive a notification letter approximately 30 to 90 days prior to the site visit.  If you receive one of these audit letters, make sure to respond and let your plan professionals know you have been selected. 

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As a follow up to last week's entry about the Supreme Court taking on the PPACA cases, today the Supreme Court determined to hear three separate cases on the constitutionality of PPACA.  The Court also  set aside 5 1/2 hours for oral argument, to be held in March.  However, the Court, did not grant all of the issues raised and it chose issues to review only from three of the five separate appeals before it.

The Court will hold two hours of argument on the constitutionality of the requirement that virtually every American obtain health insurance by 2014, 90 minutes on whether some or all of the overall law must fail if the mandate is struck down, one hour on whether the Anti-Injunction Act bars some or all of the challenges to the insurance mandate, and one hour on the constitutionality of the expansion of the Medicaid program for the poor and disabled.  Rather than hear all issues, the Court chose those issues from appeals by the federal government, by 26 states, and by a business trade group.  It opted not to review the challenges to new health care coverage requirements for public and private employers.

The blog of the US Supreme Court reports that the Court's order does the following:

• Determined to hear the issue of “severability” of the insurance mandate from the other provisions of the law, if the mandate is nullified
• Determined to hear arguments on the constitutionality of the insurance mandate
• Directed the Parties to brief and argue whether the lawsuit brought by the states to the insurance mandate is barred by the Anti-Injunction Act (
• Determined to hear the constitutionality of the Medicaid expansion

Supreme Court observers suggest that this may be a modern record for the amount of time set aside for oral arguments.  Due to the complexity of the issues presented, it is not a surprise that the Court has allotted this much time to argument, and it is also suggested that a decision could be rendered as early as June of 2012, which could significantly impact the upcoming presidential election.

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There are multiple cases related to health care reform (PPACA) that are now ready for consideration by the US Supreme Court.  These cases include:

• Thomas More Law Center, Jann Demars; John Ceci; Steven Hyder; And Salina Hyder, v. Barack Hussein Obama, et al. (docket 11-117) (constitutional);
• National Federation of Independent Business, et al., v. Sebelius (docket 11-393)(dismissed for lack of jurisdiction);
• State of Florida v. Department of Health and Human Services (two petitions: docket 11-398 and docket 11-400) (unconstitutional); and
• Liberty University v. Timothy Geithner (docket 11-438)(dismissed for lack of jurisdiction) 

The Court will consider at least 5 petitions related to PPACA during a private conference to be held on November 10.  According to the one source, the Justices will use this conference to decide (a) which petitions, if not all of the petitions, should be reviewed, (b) which issues it is ready to decide, (c) how to line up the lawyers on each side of those issues, and (d) how much time to allow for oral argument.  These cases should be heard during the Court's current term, which is expected to run until near the end of June.  Using this as a benchmark, arguments should be made some time in March or April.

This does not mean that a decision will be issued immediately after arguments and there is certainly no guarantee that a decision will even be rendered in 2012.  But it is good to know that we might have some ruling on the constitutionality of PPACA before the January 2014 deadlines.

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So how does one decide to self-insure a health plan or go the fully-insured route?  Not an uncommon question in a marketplace where health insurance premiums seem to be rising almost daily.  But on the other hand, self-insuring a plan has its own set of risks.  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 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.  They are paying for 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 that whether you are insured or self-insured, you should always be cognizant of the obligations related to being a plan sponsor and the notice and documentation requirements. 

In the end, no one can say automatically which option is best for your plan.  But it is a conversation that you might want to have with your broker, benefits adviser or legal counsel.  But 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.

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In these tough economic times, employers have been cutting employees.  But in doing so, some employers as plan sponsors are forgetting to make sure terminated employees are provided with all appropriate notices and documentation to deal with their benefit plans.

Of course we have the COBRA notice obligations, and this may include COBRA notices and continuation rights under FSAs, dental or vision plans.  But what about retirement plans?  A recent case out of the Fifth Circuit serves as a reminder that failing to satisfy the obligation to provide information to participants can be very costly.

In Kujanek v. Houston Poly Bag, a terminated employee alleged that he was not provided with sufficient information about how to roll-over his 401(k) account balance.  He claimed a loss of almost $184,000 because of the delay.  First there was a debate about whether the employee had requested information from the plan.  Under ERISA 104(b), a plan administrator has to provide certain information to the participant upon request.  But it also appears that the plan forgot the requirements of IRC 402(f) that requires a plan administrator of an employer plan to provide a participant, who is about to receive an eligible rollover distribution from the plan, with a written explanation of the rollover and other tax treatment of the distribution.  There was no indication that the plan had provided this notice at the time of his eligibility for distribution.

While not at issue in this case, group life insurance policies can also have a notice obligation.  Many states require that group life insurance policies provide conversion rights when an employee terminates.  While ERISA generally preempts state law relating to benefit plans, insurance laws (like those governing life insurance policies) are saved from preemption.  There have been multiple cases involving the failure of an administrator of a life insurance plan to provide conversion notices.  Often times the insurance regulations leave that obligation entirely to the policyholder (meaning the employer in most instances).  So failing to give notice of that conversion option would be an ERISA breach and state law may make it the sole responsibility of the plan sponsors to provide the notice.

So when terminating employees, it is good practice to have a notice or form checklist related to all the benefit plans the employee previously participated in and make sure that on their way out the door, they have all the required notices.  If you have any questions about what notices are required for your plans, don't hesitate to contact your attorney at Fox Rothschild.

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It is pretty clear that COBRA is not available for employees that are terminated for gross misconduct.  In my May 13, 2008 post, I looked at what constitutes "gross misconduct."  So what kind of notice do we give to an employee and dependents if he termination is for gross misconduct?  Do we have to give them any notice at all?

That was the issue in Berry v. Frank's Auto Body Carstar, Inc., recently decided in the Southern District of Ohio.  The employee in this case was terminated after a fight with another employee.  The facts pretty clearly supported a finding that the termination was justified.  But the employee still brought an ERISA Section 510 claiming that the employer terminated him in retaliation for his son’s large health insurance claims.  The employee also sued for failure to provide COBRA notices and election forms to him and his family members.

First, the court decided there was no Section 510 violation because the violent altercation was a legitimate and nondiscriminatory reason to discharge the employee.  There was no evidence that it was a pretext for retaliation based on his son’s significant medical claims.  After that, the Court looked at the "gross misconduct" component and clarified that this type of termination is not a "qualifying event" for the purposes of COBRA notice and election.  The Court went on to clarify that when an employee is terminated for gross misconduct, the plan is not required to provide the terminated employee and his family a COBRA election.  In effect, because there was no qualifying event, there is no requirement to provide a notice or election form.

Unfortunately, the Court did not get into what type of notification does have to be issued.  Even though there is no qualifying event, there is still some obligation by the plan to provide notice that there would be no COBRA coverage.  Ultimately, the determination that a qualifying event did not occur creates an issue that can be appealed, so the employee and his dependents had to at least be given some measure of notice that they have appeal rights.  According to the DOL, the Notice of Unavailability of COBRA Coverage" comes into play when group health plans deny a request for continuation coverage or for an extension of continuation coverage, or when the plan determines the requester is not entitled to receive it.  When a group health plan makes the decision to deny a request for continuation coverage from an individual, the plan must give the individual a notice of unavailability of continuation coverage.  The notice must be provided within 14 days after the request is received, and the notice must explain the reason for denying the request.

So if you are planning to deny coverage because of gross misconduct, you still have to provide a notice.  It should probably be provided within 14 days of the termination or at least 14 days from the date the employee asks for COBRA continuation information.  And it has to provide for an appeal right.  You may still be right about denying continuation coverage, but make sure you don't do so in a way that potentially creates some other cause of action (like failure to provide notice).  If you have questions about what to send and when, you can always contact your attorney at Fox Rothschild.

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Often times, administrators of self-insured plans make decision based on particular circumstances.  "When in doubt, err on the side of helping out the covered participant."  But doing so can create other problems for the plan.  Consider the decision in Clarcor, Inc. v. Madison Nat. Life Ins. Co., recently decided in the District Court for the Middle District of Tennessee.

This is a fight between the employer-sponsor of a medical plan and its stop-loss carrier about significant medical expenses incurred by an employee on short-term disability leave.  The employee in question had originally left full-time employment to go on FMLA leave but when she did not return from that leave, the employer-sponsor decided to place her on short-term disability leave and gave her an additional 6 months of coverage under the plan.  She was not offered COBRA until after the 6-month leave expired.  The stop-loss carrier refused to reimburse the expenses incurred during the disability leave, arguing that the employee’s move to short-term disability, without electing COBRA, made her ineligible under the terms of the plan.  The court, noting that the employer continued to ignore the plain language of the plan—under which coverage ended when the FMLA leave ended— concluded that the termination of FMLA leave was the COBRA qualifying event and therefore the employer’s much-later offer of COBRA was not timely and claims should not have been covered by the plan and were thus not eligible for stop-loss reimbursement.

Undoubtedly, the employer did what they did to help out the employee.  But in doing so, ignored the actual terms of its plan.  In the end, the plan paid the benefits and could not be reimbursed from the stop-loss coverage.  So plan administrators should be careful about making decisions to "help people out."  Making a benefits determination that exceeds plan terms, or ignores plan terms, can potentially subject a plan sponsors to claims that it is administering the plan in a discriminatory manner.  It can also give rise to claims that the plan is being administered contrary to its terms, which is itself a potential breach of fiduciary duty.

But in this instance, it result in the plan sponsor being shut out of stop-loss reimbursement.  Stop loss carriers will not reimburse plans for claims it covers that it should not have been covered under the plan terms.  So when considering whether to be "generous" with plan interpretations (like expanding eligibility to someone who is not otherwise eligible) consider the potential repercussions.  Plan sponsors and plan administrators are cautioned to stick to plan terms and not look for ways to bend the rules to help participants out.  The results can be very costly.  For assistance in interpreting plan rules in special situations, and for avoiding potential pitfalls, don't hesitate to contact your attorneys at Fox Rothschild.

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If you have an FSA (flexible spending account) or an MRA (medical reimbursement account), remember that not every expense is eligible for reimbursement.  The IRS reminded us of this in two recent "information letters" specifically addressing medical care expenses and reminding plan sponsors that they are not required to pay or reimburse every item or service that qualifies as a medical care expense, and can limit payment or reimbursement to only certain expenses.

IRS Letter 2011-0055 considers a question from a health FSA participant who sought to have hearing aid expenses reimbursed through the FSA.  The provides that while these expenses do qualify qualify as medical care, whether they will be reimbursed depends on the actual rules of the FSA itself.  The letter also notes that the health FSA’s plan documents should identify the expenses that the plan will reimburse and can actually limit reimburseable expenses to those listed in the plan.  Moreover, the plan should also specify that any unreimbursed medical care expenses that otherwise qualify for deduction under Code Section 213(d) can be deducted on the individual’s federal income tax return (to the extent that they exceed 7.5% of adjusted gross income. 

IRS Letter 2011-0027 responds to an inquiry from a participant about whether an MRA could reimburse an annual “medical concierge” fee that provided better or faster access to medical services.  According to the IRS, the MRA administrator had decided that the fee was not reimbursable.  The IRS did not opine as to whether or not the fee would qualify as a medical care expense, but it did provide that that each plan can have its own rules as to which medical expenses it will reimburse and which are excluded from coverage.  In other words, the plan can specify those Code Section 213(d) expenses it will allow.  So just because the IRS says it may be allowed, a plan is not necessarily required to permit it.

Plan sponsors can decide to exclude certain expenses, whether or not they would otherwise constitute medical care expenses under Code § 213(d).  This might be because the plan sponsors thinks they are too difficult to verify or are administratively difficult to reimburse (say because of difficulty in actually substantiating the charges).  But ultimately it is up to the plan sponsor to decide.  Then make sure the plans are administered in accordance with those limitations.  So just because the IRS says it is an eligible medical expense does not mean a plan has to reimburse for it.  Remember, the plan always follows its own terms.  Just make sure you know what they are.

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Do you know how many disclosure requirements there are for benefit plans?  If you are a plan sponsor, you probably should and then how often they have to be made.  In an effort to compile everything in one list, I decided to just lay them all out as provided in the Reporting and Disclosure Guide for Employee Benefit Plans published by the DOL.  Admittedly, this is their 2008 so there needs to be some updating for PPACA, but let's hit the basics.  These are documents, disclosures or notices that the EBSA and the DOL anticipate are part of your benefit plan administration:

All plans (retirement or welfare plans):

1. Summary Plan description
2. Summary of Material Modifications
3. Summary Annual Report
4. Plan Documents
5. Summary of Material Reduction in Covered Services or Benefits

Specific to Health Plans:

1. Explanation of Benefits
2. COBRA Notices
3. Certificate of Creditable Coverage
4. General Notice of Preexisting Condition Exclusion
5. Individual Notice of Period of Preexisting Condition Exclusion
6. Notice of Special Enrollment Rights
7. Wellness Program Disclosures
8. Women's Health and Cancer Rights Notices
9. Medical Child Support Order Notice
10. National Medical Support Notice
11. Medicare Part D Notice of Creditable or Non-Creditable Coverage
12. HIPAA Notice of Privacy Practices
13. Notice Regarding Grandfathered Plan Status
14. Children's Health Insurance Program Re-authorization Act

Note: you should also review the EBSA's Compliance Assistance Guide: Health Benefits Coverage Under Federal Law.

Whew.  But what about those specific to retirement plans:

1. Periodic Benefit Statements
2. Statements of Accrued and Nonforfeitable Benefits
3. Suspension of Benefits Notice
4. Domestic Relations Order Notice
5. Annual Funding Notices
6. Qualified Default Investment Notice
7. Automatic Contribution Arrangement Notice
8. And of course, we are on the cusp of fee disclosure requirements so those have to be considered as well.

Now not every plan will have every notice or disclosure as some may not be applicable to your specific plan.  But as a plan sponsor, an employer should be aware of what notices and disclosures are required, and more importantly, when the notices must be distributed.  Some have an annual distribution requirement, some may have more frequent distribution requirements and some might only have to be given out at the time of enrollment.

My point is that a conscientious plan sponsor wants to satisfy these disclosure obligations and remain in compliance.  So learn what they are, when they are due and whether they apply to your plan.  And if you have questions about whether they apply to your plan, when they have to be given out or what they should contain, you can always rely on your attorney at Fox Rothschild for assistance.

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The questions may sound like the title to a Dr. Seuss book, but it really has great bearing on how to you are treated under ERISA. Knowing your title also creates clarification as to what your duties are, and what they are not.

Take the term “plan administrator.” The plan administrator is the person responsible for managing the day-to-day operations of the plan. The plan administrator is designated in the plan the plan documentation as administrator. If no one is otherwise designated, the plan administrator is the plan sponsor (unusually the employer). This was relevant in a recent decision finding that an plan sponsor (employer) was not liable for the failure to send a COBRA notice because COBRA requires the plan administrator to send notices, and the plan designated an insurance company as the plan administrator. So if the duty is on the plan administrator, then you need to know if you are a plan administrator.

But plan administrator may not be the same as “claims administrator.” This would be an entity that processes claims, but may not necessarily administer the plan. So designating a claims administrator would not be enough to name someone other than the employer as the plan administrator.

Similarly, “plan sponsor” is just that, the entity that sponsors the plan. This could be the employer or an organization or a group of employers. But status as a plan sponsor or status as a “fiduciary” can be different. Particularly when evaluating the difference between decisions that implicate settler functions (such as the decision to terminate a benefit plan) and those that implicate plan administration functions (such as the obligation to provide appropriate notice about the termination of a plan). Of course, “fiduciary” has its own distinction. A fiduciary in ERISA terms is someone designated s such by the plan, or someone who exercises “discretionary authority” over the administration of the plan. Fiduciaries have specific responsibilities to the plan beneficiaries and can be sued for “breach of fiduciary duty.”

The point of this post is not to answer definitively what you are, but to make sure you know to ask what you are. The point is what you are matters. If you are an employer with a benefit plan, you are one and may be all of the above. What you are defines your risks and responsibilities. So if you have questions about what you are, ask your attorney at Fox Rothschild.

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Whether being subject to an involuntary EBSA Audit, or undertaking a voluntary correction program (VCP), there are certain things a plan sponsor should be looking for (and looking out for) if they are going to have the EBSA nosing around their plans.  The EBSA recently held an online seminar about things to anticipate in an EBSA investigation and here are some things I think are important to remember.

The general emphasis in an EBSA review falls into one of 6 categories: review of plan assets, reporting and disclosure, bonding, general plan operations, compliance with plan documents and remittance of employee contributions.  The objective is to make sure that the plan is being operated in accordance with statutory guidelines.  These six areas of focus are what the statutes generally require.

So what are the looking for?  Well, they will certainly check to see if reporting requirements are satisfied, whether required disclosures have been made and whether the fiduciaries are properly bonded.  They will also look at the transactions undertaken by the plan to see if there are any prohibited transaction or a failure to diversify plan investments.  If the plan requires employee contributions, they will want to confirm that these contributions are remitted in a timely manner. 

They will do this by reviewing the plan documentation.  So the will want to see a plan document or trust agreement, the form 5500s for the past few years and the summary plan description.  They will also want to see the summary annual report for the plan, copies of the bond and fiduciary insurance policies, provider services contracts and asset statements.  You should also be ready to produce benefit statements and payroll/contribution records.  If there are meeting minutes or formal resolutions related to plan administration, those will have to be produced as well.

So knowing what they will be looking for and what they want to see, plan sponsors should take this opportunity to (1) make sure they have the information that would be requested and (2) consider undertaking their own internal review to see if corrections should be made.  The VCP process is designed to permit plan sponsors to fix things on their own without a full blown audit (and it is better to self-police then to get caught late in an audit).  A diligent plan sponsor might take this opportunity to look at what would be looked at if there was an audit and see if there are some things that can be fixed.  For assistance in the review or the fixing, be sure to contact your attorney at Fox Rothschild.

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Get ready for new required required notices and definitions!  Be prepared to update your communications to plan participants!  Wednesday, the departments of Labor, Health and Human Services (together with the Treasury) gave us the new proposed rules for the "uniform summary of coverage" that is required under PPACA.  Health insurers and group health plans have to provide consumers with clear, consistent and comparable information about their health plan benefits and coverage starting in 2012.

All health plans and issuers would provide a summary of benefits and coverage, along with a uniform glossary of terms, to employees before enrollment.  Health plans and issuers must also provide notice at least 60 days before any significant modification is made in the plan or coverage during the plan or policy year.  You could insert a lot of fancy discussion here about what the purpose of the provision is but, in short, it is simply a dumbing down of the summary of benefits coverage into some simple standard boxes for comparison shopping.  If the exchanges ever actually come into existence, this would allow an employee to compare employer sponsored coverage against other market-available options.

For more details about the proposed regulations, check out the Model Summary of Coverage, the Fact Sheet requesting public comment and, of course, the proposed regulations.  As these are merely proposed, there is nothing final and employers do not have to immediately act, nor can then act until the proposed uniform definitions are drafted.  But employers and plan sponsors should keep this information handy as a reference point for developing a long-term compliance strategy. 

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There now appears to be some real conflict over the constitutionality of health care reform.  On Friday, the 11th U.S. Circuit Court of Appeals found that the part of the law that requires individuals to obtain health insurance was unconstitutional.  But the rest of the statute was upheld.  This ruling seems to directly conflict with a ruling from the Sixth Circuit (the only other circuit to have ruled on the law to date) which found the individual mandate constitutional. 

These decisions presumably create a sufficient conflict  between the circuits to get the law before the United States Supreme Court for review.  When and how that might happen is subject to debate as there may be other procedural hurdles that have to be crossed before its gets to the high court.  But the fact that two circuits have ruled, and ruled before the end of the first year of implementation, has some pundits suggesting a final decision could some in 2012.  Stay tuned!

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Remember those pesky COBRA subsidies?  The federal COBRA subsidy, originally introduced in March of 2009, provided that 65% of the cost of COBRA health insurance premiums would be covered by the employer for up to 15 months.  To be subsidy eligible, recipients must have originally become eligible for COBRA as the result of an involuntary termination of employment occurring between September 2008 and May 2010.

Well, it is possible that they are coming to an end.  The last group eligible recipients (those who began receiving assistance in May 2010) would cease to be subsidy eligible as of August 31, 2011.  That means that if you still have former employees receiving subsidies for COBRA coverage, that should end as of next month.  Also, there is presently no action from Congress pending to extend the subsidy further.

Although there is no specific notice requirement, we recommend that if you have COBRA participants that are still receiving the subsidy, you provide them with some notice that their subsidy eligibility is coming to an end.  Consider a simple notice that the subsidy period has expired and that they are now responsible for 100% of the COBRA premiums if they want to continue coverage.

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Health care reform includes a provision for first dollar coverage for preventative care.  On August 3, the EBSA release some Interim Rules on coverage for preventative care and left them open for comment before they become final.  There are provisions for immunizations, child care and preventative screenings for women to be developed by the Health Resources and Services Administration.

Coincidentally, on August 1, 2011, the Department of Health and Human Services issued  that one of its agencies, the HRSA, will be adopting guidelines that will apply to non-grandfathered plans as of the first plan year starting on or after August 1, 2012.  So if your plan operates on a calendar year, the guidelines would apply on January 1, 2013.

Under the new guidelines, 8 categories of services and supplies are listed as "preventative" that must be given the 100% coverage:

1. Contraceptive methods and counseling (with a narrow exception for religious institutions);
2. Well-woman visits;
3. Screening for gestational diabetes;
4. Human papillomavirus testing;
5. Counseling for sexually transmitted infections;
6. Counseling and screening for human immune-deficiency virus;
7. Breastfeeding support, supplies (such as breast pump rental), and counseling; and
8. Screening and counseling for interpersonal and domestic violence.
9. Medical management still permissible.

You can check out  the HRSA website for more details.

This is not to suggest that something has to be done immediately.  But plan sponsors who are designing plans and looking at long-term implementation should be clearly aware of the expansion of not just these services, but the likelihood of further definitions of "preventative care" being provided.  So it is important to make sure you keep up to date on the various definitions and requirements of full compliance.

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If you have employees in New York, you have a new reporting requirements.  That is because that as of July 15, New York has implemented a reporting requirements to provide that any employer with employees working in New York (not just New York domiciled companies) must report certain dependent health coverage information to the state on a quarterly basis, as well as when an employee is hired or rehired.  

The requirement works as follows:

1. Employers must report the employee’s name, address, social security number, the availability of dependent health insurance, and the date the employee is eligible for the dependent health insurance.
2. Employers must report this information within 20 calendar days after the employee’s hire date, which is the first date worked.
3. The report is made using the on-line system, Form IT-2104 or Form IT-2104-E, or you may substitute listings or other written formats provided all the required information is included.  The report is made at www.nynewhire.com (which requires registration by the employer).

Note: If you are a multi-state employer that has designated one state for your new hire reporting, you may continue to follow this practice, so long as you include the required information for New York employees. 

If course there is a penalty provision for filing to report, which is up to $20 per employee for whom you failed to report or reported inaccurately.

Then, you have to report quarterly on your population as well.  As part of your quarterly filing of Form NYS-45, you must now disclose whether you made dependent health insurance coverage available to employee through your employer-sponsored health plan.  The form will be updated and made available for the third quarter of 2011 to reflect this new requirement. 

While this seem to only be relevant to people with employees in New York, I also think it should serve as a reminder to other employers in other states to check to see what benefits reporting requirements may have been implemented as states react to health care reform.  While this NY requirement was not made as a specific reaction to health care reform, it does start the process for governmental agencies to be able to track who has coverage, who is providing it and who might later but subject to penalties.

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Service providers beware!  A recent ruling in the Ninth Circuit Court of Appeals seems to suggest that anyone who participates in the administration of a benefit plan is a potential defendant under ERISA. 

Generally, we look at claims brought by participants under ERISA Section 502 as limiting of who may bring a suit, and ERISA clearly provides that fiduciaries (including plan administrators) are certainly potential defendants in actions brought under that section.  However, in the recent case of Cyr v. Reliance Standard Life Insurance (9th Cir. 6/22/11), the Court found that Section 502 does not appear to limit which parties may be defendants in a civil action brought under that provision. 

Cyr sued the plan administrator, but also sued Reliance as the actual insurer of the benefits in question.  Reliance was not the administrator but did control approval or denial of the insured disability benefits.  The court reasoned that, based on the holding in Harris Trust v, Smith Barney, there is really not set restriction in Section 502 about who can be sued, so there is no reason to read in such a limitation.  Reliance was a "logical defendant" because it was the ultimate payer and effectively controlled the plan, even though it was not the designated plan administrator. 

So where does this leave us?  Well, companies that participate in the process of providing plan benefits, though not specifically designated as fiduciaries or administrators, are viable defendants if they have authority to accept or reject claims.  The extent of that authority may be subject to debate, but those would be issues raised against any potential defendant.  So be wary that just because you are not "named" as a fiduciary, if you exercise decision making power over claims, you could be a defendant in an ERISA litigation.

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In case you missed it, last weekend, New York passed a law recognizing same-sex marriages.  For plan administrators, this change to "marriage" might cause some problems that have to be addressed. Not the least of which is preemption of federal law.  New York employers will eventually have to comply, but generally, all employers and plan sponsors should be aware of some of the confusing aspects of states recognizing same-sex couples.

First, let's review retirement plan concerns.  Qualified retirement plans are generally governed by ERISA and various corresponding tax regulations.  All of these regulations are subject to the impact of the federal Defense of Marriage Act, which while currently not being "enforced," is still the law of the federal government.  The net effect is that when considering the term "spouse" in your qualified plans, it does count include a same-sex partner, married or otherwise.  So any provision in a plan that provide for benefit to a "spouse" would not apply to a same-sex spouse even when married under state law.  For example, consider a defined contribution benefit plan distribution (like a 401(k) plan) that requires spousal consent for distribution.  A partner in a same-sex marriage is not required to obtain spousal consent because in the eyes of the plan, he or she has no spouse.  Similarly, any spousal rights that may accrue as a result of the death of the participant under the terms of the plan would not accrue to the same-sex partner.

Second, when we look at welfare plans, all of the dependent coverage definitions in the plan referring to "spouse" would not automatically include the same-sex spouse.  Certainly a plan can add coverage for same-sex partners, but doing so does not grant them the federal protections of things like COBRA (which would not apply since the dependent would not be recognized as a spouse under federal law).  Cafeteria plans cannot provide benefits to same-sex partners, which means that employees cannot pay that portion of their health coverage attributable to same-sex partners with pre-tax dollars.  So plan administrators have to be prepared to exclude same-sex partners from cafeteria plan participation and make sure that same-sex partners' medical bills are not paid out of an FSA.

Also, because of the impact of the Defense of Marriage Act on federal tax laws, the employer paid cost of providing coverage for same sex partners who are not “dependents” under the Internal Revenue Code would be considered regular compensation and would be taxable as income.  Moreover, that portion of the premium that an employee pays that is attributable to the same-sex partners coverage would not be eligible for pre-tax treatment under a cafeteria plan.  This means that employers who have employees who take advantage of the new civil union will have to make sure the value of the partner’s benefit is properly treated for federal tax purposes.

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Don't forget to fix your cafeteria plan!  Remember that the Patient Protection and Affordable Care Act ("PPACA") enacted a provision that provided that FSAs (flexible spending accounts) and HRAs (health reimbursement accounts) have to stop paying or reimbursing amounts expended for over-the-counter medications effective January 1, 2011 (unless there is a valid prescription for it or if it is the purchase of certain specific items like insulin).  So if your plan provides for reimbursements for over-the-counters, you have to amend it to provide for these limitations.

Although these restrictions are already in effect, the IRS granted time to amend plan documents until June 30, 2011.  That is right around the corner.  The amendments can apply retroactively to expenses incurred on or after January 1, 2011, but your plan must have been administered in compliance with this restriction. 

If you have not adopted amendments, or you have not been operating in compliance, or you do not have plan documents for these plans, now would be a good time to remedy those shortfalls.  If you need guidance, your attorney at Fox Rothschild can assist.

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Your participants want to sue you!  Yep, that's right.  Apparently there is a whole cottage industry springing up relating to participants suing for hidden fees.  I read 4 articles this morning by people postulating about how much fiduciary litigation there will be in the future over fees and costs passed on to plan participants.

What it caused me to question is how far will it go?  What about health plan administration fees and costs associated with maintaining your benefit plan?  Does the cost of plan administration weigh on the value of overall benefits provided to participants?  Should profit sharing plan sponsors eliminate loads on participants' accounts and bear the full weight of the plan themselves to maximize participant account balances?  What will the "reasonable person" standard under ERISA Section 404 look like in 5 years based on the answers to these questions?

I happened to be looking at a multiemployer health fund for a client where 60% of employer contributions were being used to pay plan administrative costs.  How do you think the participants will feel when that plan starts cutting benefits because it does not have sufficient income to cover claims?  They will want to know what the fiduciaries did to control administrative costs.  Or how about a single employer plan where participants want to know why the employer did not pay administrative fees out of company assets instead of the plan?  Why should my 401(k) balance be lower just because my employer was stingy?

Well, before we try to divine the ultimate decisions of the court, let's try something more practical.  I believe that a "reasonable person" starts by looking for potential problems, so let's check ourselves out first.  I think a good starting point is to make a little chart and list all of your employee benefit plans, list all the fees and costs associated with maintaining that plan annually and then list how they are paid.  Once you know how much and who pays, you can then start evaluating whether the fees are too high and whether you can take steps to minimize the impact on participants.

Of course you don't have to do it alone.  Your benefits professionals and your attorneys at Fox Rothschild are available to help evaluate whether or not your plan practices with respect to fees and costs make you a likely target for participant litigation. 

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Failure alert!  Plan sponsors who forget to actually do discrimination testing run into all sorts of problems, including the possibility that their plan can be disqualified.  Employee health plans, like cafeteria plans and self-funded welfare benefit plans have to do annual discrimination testing to remain qualified.  Insured health plans will eventually be subject to discrimination testing, but they have a reprieve for now.  Size doesn't matter.

To pass the Section 105(h) nondiscrimination rules an employer must meet two separate tests:

1. 1. The Benefits Test
2. 2. The Eligibility Test

The benefits test measures whether the plan is "offered in a manner that is discriminatory on its face" and whether the plan is operated "in a discriminatory manner."  All benefits provided for highly compensated employees (HCEs) must be provided for all other participants” and that “all the benefits available for the dependents of HCEs must also be available on the same basis for dependents of all non-HCE participants.”  Required employee contributions must be the same for HCEs and non-HCEs for each benefit level and the same type of benefits that are available to HCEs must be available to non-HCEs.

The "discrimination in operation" occurs, for example, if a plan added a benefit for a particular treatment for one plan year during which an HCE received coverage for that treatment, then terminated the benefits as soon as the HCE no longer needed the treatment. 

Confused yet?  How about the eligibility test...

 An employer passes the eligibility test if it passes any one of the three applies:

1. At least 70 percent of employees must benefit from the plan.
2. If at least 70 percent of all non-excludable employees are eligible, the plan benefits at least 80 percent of the eligible employees.
3. The plan benefits a nondiscriminatory classification of employees.  This test requires (1) eligibility based on a bona fide business classification, and (2) a sufficient ratio of benefiting non-HCEs to benefiting HCEs.

Plan sponsors who skip testing run into trouble because they can't report they are non-discriminatory.  Plan sponsors that test incorrectly might have a failing plan and not know it.  Then benefits become taxable as income.  But I am not writing this just to scare or confuse you.  I am letting you know that Fox Rothschild has the ability to do this testing for you.  If your outside administrator or service provider can't do the testing for you, please contact your attorney at Fox Rothschild and we can certainly help get you though it.

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Lest we lose sight of upcoming changes attributable to the Affordable Case Act completely, let's recall  changes that were made to HSAs.  First, remember that after January 1, 2011, over-the-counter medications can only be reimbursed with a prescription.  Second, the penalty for non-qualified withdrawals was increased to 20% of the amount of the distribution.  

Now, there are some limit changes that have to be addressed in your 2012 plan documentation.  On May 16, the IRS issued Rev. Proc. 2011-32 that sets the following limits for HDHPs and HSAs for 2012:

1. Maximum Annual Contribution to HSAs: $3,100 for single, $6,250 for family
2. Minimum HDHP Deductible (no change): $1,200 for single, $2,400 for family
3. Maximum HDHP Out-of-Pocket Expense: $6,050 for single, $12,100 for family

The first and third items represent slight increases over the 2011 figures.  So if you have an HDHP with an HSA, take a look at your plan documentation and prepare to make the appropriate changes.  And if you are thinking about adding an HDHP option for 2012, make sure to incorporate these limits accordingly.

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When it comes to COBRA, we all understand it applies to the major medical health plan.  But frequently, plan sponsors overlook the impact of COBRA on flexible spending accounts.  Yes, COBRA does apply to FSAs so let's look at how.

In most cases, employers must offer COBRA of a flexible spending account.  The first thing to determine is whether your FSA plan is an "excepted" benefit.  If your FSA is an excepted benefit, it must offer a limited COBRA option.  The factors for determining whether your FSA is an excepted benefit are:

1. The annual FSA election amount cannot exceed 2 times the amount contributed by the employee.  If the employer DOES NOT fund the FSA, this requirement is met.
2. Was a health insurance plan was available to the FSA participant due to his/her employment? The answer here is likely yes if the employer has a medical plan and the FSA and medical plan have the same eligibility guidelines.
3. The maximum COBRA premium equals or exceeds the maximum FSA benefit.   Before adding numbers, be aware that this requirement is met if the employee is the sole contributor to the FSA

So if you have determined that your FSA is an "excepted" benefit, what type of COBRA do you have to offer?  Well, first know that COBRA must only be offered if the account is underspent.  When the remaining FSA balance (annual election minus claims) is more than the required COBRA premiums, the account is underspent.  Second, COBRA is only offered for the remainder of plan year and not for a full 18 months (it's limited). 

But wait, how is the COBRA premium calculated?  The FSA COBRA premium is calculated based on the remaining FSA annual election.  For example, assume an individual has a $2,400 FSA annual election.  If the employee terminates effective on July 1, he or she would have already paid $1,200 into the FSA.  In order to access those funds after termination, the employee needs to continue to contribute to the FSA for the remaining election amount, which is $1,200.  But those contributions are on a post-tax basis.  So the COBRA premium would be $200 each month from July through December, plus a 2% administration fee (if the employer elects to charge it).

Now, let's assume the employee elected to put $2,400 in the FSA but had only spent $1,200 by his termination date on November 1st.  So they have put $2,000 in and now have $800 left.  The required COBRA premium for the remainder of the year is $408 ($200/month plus 2%).  The account is considered underspent, so the employee must be offered COBRA, but only for November and December.  If the employee had submitted claims for $1900 by their termination date, their remaining balance is $100, which is less than their required COBRA premium.  In this case, the account would be overspent and if the plan is excepted, no COBRA is required.

Note: If your plan is NOT an excepted benefit, you will need to offer COBRA regardless of whether the account is over or underspent AND the COBRA offering runs for the full 18 months.

Employees cannot access the FSA money once they are terminated (except for claims incurred prior to the termination date).  If the employee does not elect COBRA, then any balances are forfeited.

Why do I bring this up?  Because there is a misconception that FSA balances are forfeited at the time of termination of employment and not all sponsors are sending COBRA notices.  Yes there is a COBRA obligation and make sure you know what it might be, how it is calculated and send out the appropriate notices.  If you need help, contact your attorney at Fox Rothschild. 

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As previously noted, Congress passed legislation eliminating the Form 1099 requirements for spending over $600.  Yesterday, President Obama signed into law that legislation and removed the expanded Form 1099 reporting requirement that was part of health care reform.  Incidentally, the legislation also repeals an application of similar rules to landlords, enacted under an unrelated small business law.

But that is not all.  Some other changes were tucked into that legislation and while the details are not yet entirely clear, it also appears that the “Free Choice Voucher” component of PPACA was also eliminated.  Scheduled to take effect in 2014, the Free Choice Voucher system would have provided employers with the option to provide vouchers to employees whose household income is less than 400 percent of the poverty line and whose premium contributions to the employer-sponsored health plan are between 8 and 9.8 percent of household income.  The vouchers would then have been used by these employees to purchase health insurance though a state exchange as an alternative to the employer-sponsored plan.  The voucher would serve as an alternative to an employer paying a penalty if an employee opted out of employer sponsored coverage.

With respect to the voucher option, the major concern of labor unions and employer groups alike was that younger and healthier employees might prefer to buy lower cost, voucher-subsidized insurance from exchanges rather than participate in a more costly (meaning employee contributory) employer sponsored plan.  The effect of the opt-out would mean that there would be lower risk pools and consequently higher premiums for employer health plans.  So the vouchers were perceived as a bad thing when considering the overall cost of health care reform.  However, I thought they were a good thing for penalty avoidance.  We shall have to see how this debate plays out.

I admit that the 1099 mandate and the "Free Choice Voucher" may not seem like a big portion of health care reform, but I think it clearly indicates that the process is not over.  The rumblings are that the voucher option could be re-tooled and come back in another form, and there is also discussion about increasing employer penalties for not offering coverage.  So be aware that additional revisions are likely to come between now and 2014 and plan sponsors should be diligent about keeping up on changing regulation.

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If you are in a multiemployer pension plan as a result of union participation, you should be aware by now of the concept of withdrawal liability.  Basically, withdrawal liability means that portion of unfunded vested liabilities that is allocated to an employer who ceases to have a contribution obligation to the multiemployer fund.  The allocation occurs at the time of the withdrawal.  However, there are certain exceptions to withdrawal liability and one of them is when there is a sale of assets and the buyer agrees to continue to participate in the pension fund in substantially the same way as the seller used to.  If you are not in a multiemployer pension fund, you might want to stop reading now. 

ERISA Section 4204 is called the "asset purchase exception" and it provides that there will not be withdrawal liability solely because of a sale of assets if the purchaser assumes the liabilities.  In a recent case, Central States, Southeast and Southwest Areas Pension Fund v. Georgia-Pacific (2011), the pension fund challenged the word "solely" to determine when in fact a withdrawal occurs.  Georgia Pacific sold its assets to a buyer who assumed the contribution obligation in 2004.  But prior to 2004, Georgia Pacific had gradually taken actions to decrease the numbers of employees in the pension fund without causing a partial withdrawal (which occur when the contribution obligation decreases but is not complete).  

The Fund said "hey, the withdrawal from the fund was not solely from the sale of assets, but occurred over time, so the asset purchase exception does not apply."  In other words, they contended that the word "solely" meant it could be the ONLY occurrence of withdrawal.  Since there had been prior actions that resulted in cessation of contributions, this was not the sole withdrawal.  Fortunately for employers, the Seventh Circuit Court of Appeals disagreed.  The Court said that while this was the first opinion that looked at this issue, it agreed with the arbitrator that the prior reductions should not be treated as a single transaction with the ultimate sale.  These separate reductions had their own potential consequences and could not be tied to the actual final withdrawal.

This decision is important for employers that are considering an asset purchase transaction and possible exemption.  What is says is that the transaction will be viewed as its own withdrawal event.  Prior steps taken to lower potential liability, like partial closing or reductions in force that do not trigger a partial withdrawal, do not cause the ultimate sale to fall outside of the 4204 exception.  So in essence, this affirms that it is you are contemplating a sale in the future, it's OK to act in the present to reduce potential future issues.  Knowing that these actions won't be held against you is a positive.

For questions about withdrawal liability, multiemployer pension funds or union plans in general, please contact your attorney at Fox Rothschild.

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After postponing the W-2 reporting requirement for the cost of health coverage until 2012, the IRS has now issued some explanations about how the reporting will be done.  IRS Notice 2011-28 contains guidance on W-2 reporting of the cost of health care coverage. 

Ok, some of the key components:

If your company issues fewer than 250 Forms W-2 for 2011, then in 2012 your company is relieved from tracking and reporting the value of group health care coverage on Forms W-2.

If you have to report (ie. you have more than 250 W-2s in 2011),

1. The amount that must be reported is the “aggregate cost of applicable employer-sponsored coverage.”   “Applicable employer-sponsored coverage” is defined as coverage under any group health plan that would be excluded from an employee’s gross income under IRC Section 106, except for: (i) coverage for long-term care; (ii) coverage for on-site medical clinics; (iii) coverage under separate dental or vision insurance (unbundled from group health); or (iv) individual hospital indemnity or disease-specific coverage.
2. The aggregate "cost of coverage" is the employer AND the employee portion, whether or not the employee paid for the coverage on pre-tax basis under a cafeteria plan.  This also includes the cost of coverage provided to over-age dependents even when the cost of this coverage is added to employees’ taxable wages.
3. Amounts excluded from the aggregate cost of coverage include (a) contributions to an Archer MSA, (b) contributions to HSAs, and (c) salary reduction elections under a health flexible spending arrangement (“FSA”).  When a health FSA is offered under a Section 125 cafeteria plan, the amount the employer must include in the aggregate reportable cost of coverage on Form W-2 is the amount of the employee’s salary reduction for all qualified benefits (not just the health FSA), plus the amount of any employer flex credits or contributions that the employee elects to apply to the health FSA.
4. An employer may choose from among several methods of calculating the reportable cost under a plan: (a) the COBRA premium cost to the employee; (b) the premiums charged for the employee’s coverage; or (c) a modified COBRA premium (where the employer subsidizes COBRA premiums or bases them on premiums calculated in a prior year. .

The notice also provides explanations about how to report heath care costs for employees who terminate mid year, COBRA reporting and, when an employee transitions employment in the course of a year, as well as dealing with plan year concerns and changes in costs mid-year.

Bear in mind that this is interim guidance and could be changed.  But it is a good idea to read this notice and be familiar with the proposed requirements to see how it might impact your company.

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As a component of health care reform (PPACA), rules were published on July 23, 2010, implementing new internal claims and appeals. The rules were to be effective for plan or policy years beginning on or after September 23, 2010.  These rules for internal claims provide for the following compliance requirements:

1. The definition of an adverse benefit determination was broadened to include "rescission of coverage." 
2. The time for a plan to respond to a claim involving urgent care is shortened from 72 hours to 24 hours.
3. The plan must provide the claimant with any new or additional evidence "considered, relied upon, or generated by the plan in connection with the claim."  This must be provided free of charge and as soon as possible, with sufficient advance of the date on which the review of the claim is done to give the claimant a reasonable opportunity to respond.   Also, before the plan can issue an adverse benefit determination based on a review of new or additional rationale, the claimant must be provided with the rationale (also free of charge). 
4. The plan must ensure that all claims and appeals are adjudicated in a manner, and with "independence and impartiality of the persons involved in the decision making."  Decisions regarding hiring, compensation, termination, promotion, or other similar matters with respect to any individuals, such as a claims adjudicator or medical expert, must not be made based upon the likelihood that the individual will support a denial of benefits.
5. The plan must follow "culturally and linguistically appropriate" rules for communicating notices, and the notices must meet new content requirements, including date of service, name of the provider, the claim amount, the diagnosis, treatment and denial codes (with explanations of any codes used).  There must also be a description of the standard that was used in denying the claim. 
6. For final internal adverse benefit determinations, the notice must include a discussion of the decision and a description of available appeals review processes, including information regarding how to initiate an appeal, and information regarding the availability of, and contact information for, any applicable office of health insurance consumer assistance or ombudsman established under health care reform to assist enrollees with the internal claims and appeals and external review processes. 
7. If a plan fails to strictly adhere to all the requirements of the internal claims and appeals process, the participant will be deemed to have exhausted the appeals process and is permitted to initiate litigation.

In addition to these new requirements, the regulations implemented a new statutory requirement that a plan must provide continued coverage pending the outcome of an internal appeal.  If applicable, participant with urgent care claims or those undergoing ongoing courses of treatment may be allowed to proceed with expedited external review simultaneously with internal appeals process.

Whew!  Now, on August 23, 2010, DOL Technical Release 2010-01 promptly created an enforcement grace period on compliance with these rules until July 1, 2011.  Now, Technical Release 2011-01 extends and modifies the grace period until plan years beginning on or after July 1, 2011.  But it is not complete relief and has some staggered application dates.

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I start this entry by saying "THIS IS NOT LAW SO NOTHING HAS CHANGED."  Consider this a news item only.  But it should be of interest to anyone with a flexible spending account and should be placed on your radar to see what develops.

A bill has been introduced in the House of Representatives that would repeal the “use it or lose it” aspect of medical flexible spending accounts  (FSA).  Representatives Charles W. Boustany (R- Louisiana) and John Larson (D-Connecticut) have introduced the bill that would allow participants to cash out any remaining FSA balances at the end of the year, and those funds would be treated as normal, taxable wages.  It would not be carried over, but it could at least be cashed out and the balance would not be forfeited.   

This provision is presumably designed to prevent participants from losing the money that otherwise would be forfeited and it does correctly treat the return of the balance as taxable income.  However, it also overlooks the fact that forfeited account balances are often used to defray administrative expenses incurred by the plan and often offsets amounts paid to participants who withdraw more than they have put into the plan through deferrals when they terminate before the end of the plan year.  So while there is nothing that has to be done immediately, plan sponsors should put this on their radar to see if administrative changes should be made.

We will continue to track the bill for future developments. 

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Dan Kuperstein, an attorney in our Roseland office, brought to my attention that the DOL/EBSA has released an Advisory Opinion clarifying “Prohibited Transaction” and “Party in Interest” rules pertaining to brokers providing services to ERISA plans.  This is important stuff for both brokers and plan sponsors to be aware of so I have included the full text of his summary below:

"On February 11, 2011, the Department of Labor, Employee Benefits Security Administration(“DOL”)released Advisory Opinion 2011-06A (“the Opinion”), which discusses and clarifies the “prohibited transaction” and “party in interest” rules pertaining to broker-dealers that provide services to ERISA plans. 

Under Sections 406, 404 and 3(14) of ERISA, relationships (and transactions) between a benefits plan and other parties become important, as they can lead to significant amounts of liability for those involved when a “prohibited transaction” occurs.  Generally, a prohibited transaction involves self-dealing or selfish interests of an individual or company with important responsibilities with respect to a benefits plan.  “Plan fiduciaries” and “parties in interest,” defined and discussed in these provisions, have heightened responsibilities with respect to plans.

At issue in the Opinion was whether service transactions between a group of brokers and certain employee benefit plans, for which an asset management firm acted as a plan fiduciary, violated ERISA’s prohibited transaction rules because of indirect ownership interests between the brokers and the asset management firm.   Although the Opinion concluded that the ownership interest was not sufficient to find that the brokers were parties in interest, significantly, the Opinion makes clear that general standards of fiduciary conduct under ERISA apply to any selection of a service provider by a plan fiduciary, i.e., even where a plan fiduciary is not dealing with “parties in interest” under ERISA § 3(14).  In the Opinion, the DOL says that whether a fiduciary has an interest in another party that may affect the fiduciary’s best judgment is an inherently factual question and one that requires consideration of all relevant facts and circumstances.  In other words, all relationships (and all the relevant facts) matter when it comes to the issue of whether a prohibited transaction has occurred, not just relationships with parties in interest. 

The Opinion also clarifies that Prohibited Transaction Exemption 84-14, Part I, providing an exemption from the prohibited transaction rules for plan asset transactions determined by independent qualified professional asset managers, provides an exemption only from violations of ERISA § 406(a) (pertaining to transactions between plans and parties in interest), and does not extend relief to transactions that violate ERISA § 406(b) (pertaining to transactions between plans and fiduciaries)."

I think that this opinion should serve as a reminder to plan sponsors and plan administrators that the selection of brokers (and other fund professionals) has to be carefully scrutinized, particularly if there is some other relationship between the parties.  The "relatedness" of the professional has to be a consideration and there has to be some consideration of whether the relationship gives rise to the color of a prohibited transaction.  Don't get caught with a fund professional that could give rise to a claim that the relationship fosters a "prohibited transaction."

If you have questions about prohibited transactions, or administration of your plan generally, please contact your attorney at Fox Rothschild. 

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Most employers are aware that COBRA exempts from its applicability employers with fewer than 20 employees.  But sometimes there can be more than one employing entity that is "related" and that related entity has to be considered when determining applicability of COBRA.  Take the case of Franco-Santos v. Goldstar Transport, Inc., decided last week.

The terminated employee claimed her employer failed to provide her with a COBRA election notice. The employer argued that it was not required to comply with COBRA because it fell within COBRA’s small employer exception because it had fewer than 20 employees.  The court ultimately ruled that the employer met COBRA’s small employer exception.   But in doing so, the Court considered the employees of a related company to determine whether the 20-employee figure was met. 

The court reminded the parties of the COBRA regulations, which states that an employer has normally employed fewer than 20 employees during a particular calendar year if it employed fewer than 20 employees on at least 50% of its work days that year.   There is also a mechanism for counting part-time employees as a fractional full-time employee.  The court also assumed that the two related companies must be combined as a single employer. The court then found that the number of employees, 19.4, was still below the 20 employees required to subject the plan to COBRA’s requirements.

It is important to note that the Court did not make any further comment on how the companies were related.  However, IRS regulations make it clear that when counting employees, you have to include all employees of all related employers under "common control."  So while this case resulted in a win for the employer, it should also serve as a reminder to smaller employers that just because you have 3 companies, all with fewer than 20 employees, you are not automatically exempt from COBRA.  You have to aggregate your employee count based on the rules of "common control."  If you have any questions about measuring the relatedness of business entities, or about COBRA compliance generally, please contact your attorney at Fox Rothschild.

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You might recall that the Patient Protection and Affordable Care Act contained a provision that requires employers to provide a location for nursing employees to express milk.  For more information about compliance with that regulation, check out our FMLA blog on the topic.  I make reference to it here because in conjunction with that new requirements, the IRS has recently determined that breast pumps and supplies to assist in lactation constitute "medical care expenses" under Code Section 213(d).  This means that they are now reimbursable expenses for FSAs, HSAs and HRAs.

IRS Announcement 2011-14 reverses a 2009 letter ruling concluding that the costs of lactation supplies was not a "medical care expense."  Consequently, these expenses are now eligible for reimbursement.  Oddly, the announcement does not include an effective date, so it is not clear whether 2010 expenses could be submitted for treatment under that plan year.  But it does appear that going forward, nursing mother should be able to request reimbursement for those expenses.  So plan administrators should be prepared to process those requests and should consider amending or revising any plan documentation that specifically excludes these expenses from reimbursement.

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I had the opportunity last week to speak to a number of employers in California and was surprised to learn that California has not adopted its own "age extension" coverage rules beyond age 23.  So extending health benefits coverage for dependents up to age 26 actually had some impact for those employers.  It also reminded me how important it is to be aware of the rules for every state in which you operate or provide benefits coverage.

A survey of the states where Fox Rothschild has offices paints a pretty broad picture.  New York, Pennsylvania and Florida have statutory provisions that can extend dependent coverage on partners' health plans until age 30.  New Jersey extends that coverage to age 31.  Nevada extends coverage to age 24.  Connecticut and Delaware do not have specific age extension statutes for coverage.  Generally these rules apply to insured coverage written in those states.  Some require residency in the state, while others don't.

So the health care reform "age-26" extension should serve as a reminder to employers that not only do they have to make sure their plans extend coverage up to age 26, but they should also double check to make sure they are in compliance with the rules of each state where they have employees.  Don't assume that every policy in every state is the same and be prepared to address state specific questions from employees when it comes to this issue. 

Above all, don't forget to rely on your plan professionals.  If you have questions about your insurance coverage and dependent coverage obligations, don;t hesitate to ask your attorney at Fox Rothschild.

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Last week was a particularly rough week for health care reform as PPACA took some serious hits. 

First, Judge Roger Vinson from the US District Court for the Northern District of Florida ruled that PPACA was unconstitutional as a whole.  The case was brought by 19 states claiming that the statute was unconstitutional.   Because the mandate requiring individuals to buy insurance would penalize individuals who choose not to, Judge Vinson reasoned that "[i]t would be a radical departure from existing case law to hold that Congress can regulate inactivity under the Commerce Clause" of the Constitution.  Moreover, Judge Vinson ruled that because the individual mandate is "inextricably bound" to the remainder of the Act, it cannot be severed from the rest of the law.  Thus, the judge's ruling strikes down the entire health care reform law.

This decision should not have an immediate impact on employers.  There is no restraining order or any restriction on the government continuing to implement the law.  Plus the decision is likely to be appealed to the U.S. Court of Appeals for the 11th Circuit.  This decision represents the fourth federal district court to rule on constitutionality of PPACA, and the split is even at 2 -2.

Then, the U.S. Senate, though refusing to repeal PPACA completely, did, by 81-17 vote, pass an amendment that would repeal the 1099 clause, which requires businesses to file a 1099 form with the IRS each time they spend more than $600 a year by purchasing products or services from any other business.   The reporting provision that was slated to go into effect in 2012 would have significantly expanded the 1099 reporting requirements and was generally seen as bad for businesses generally.  Although it has not been finalized as yet, it is expected that the amendment will pass both houses and be signed by the President without much delay.

So when dealing with PPACA, remember that when regulators actively make a change (like delaying the W-2 reporting requirement or eliminating the 1099), then PPACA obligations change with those regulations.  But the Court cases have no direct bearing on administration as yet.  Don't be fooled into thinking you don't have to comply or stay up to speed on what is happening just because the courts are starting to weigh in on the issue.  Assume that PPACA will be with us for a while and act accordingly.  That way you won't be unprepared for the provisions that may end up sticking around.

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Back before the Patient Protection and Affordable Care Act was passed, most flexible spending accounts provided for reimbursement of "over-the-counter" medicine and drugs.  Many FSA programs began using the "debit card" system that allowed participants to use their accounts like cash without having to actually pay and submit reimbursement claims.  Along came PPACA, which  limit OTC reimbursement to insulin, medicines and drug with a physician prescription and medical care items like bandages, blood sugar testing kits and crutches. 

IRS Notice 2010-59 was issued that prohibited the use of debit card reimbursement for OTC purchases after January 15, 2011 (unless from a pharmacy which had 90% of its gross receipts for qualifying medical care expenses under Code Section 213(d).  For practical purposes, that pretty much eliminated the ability to use debit cards at any large chain drugstore. 

But now, things have changed a little bit.  The IRS issued Notice 2011-5 which provides for a couple of new exceptions to the OTC debit card purchase restriction.  The first "new" exception is that participants can make purchases from drug stores, pharmacies and non-health care merchants that have pharmacies, and also mail order and web-based sellers of prescription drugs using their debit cards if all of the following requirements are met:

1. The participant has a prescription for the OTC drug and gives it to the pharmacist, who assign is an Rx number in accordance with applicable laws;
2. The vendor keeps a record of the prescription Rx number, purchaser, date of purchase and amount in a manner that satisfies IRS record keeping requirements;
3. The vendor makes records available to the employer if requested;
4. The debit card system is designed so that it will not accept a charge for OTC unless an Rx number has been assigned; and
5. The transaction meets any other rules or guidelines established for debit or credit card purchases for cafeteria plans.

Sounds confusing but you can bet most stores with pharmacies will make sure they comply.  Still, the participant has to have a prescription.

The second "new" exception is that a debit card can be used to purchase OTC drugs and medicines at health-care merchants (like physicians or vision care providers) provided the health-care merchant has obtained a "health care merchant code" and also meets the same requirements listed in points 2,3 and 5 above. (recording purchase, reporting and satisfying other requirements).  However, there is no prescription requirement and there is no Rx number requirements.  So it looks like you can but OTC drugs from your doctor or eye doctor without having to get a prescription.

So take these two exceptions, coupled with the "90% Pharmacy" exception, and debit cards can be used for OTC reimbursement more that was originally thought when PPACA passed.  Still, it is a considerable amount of change that plan sponsors have to incorporate into their cafeteria plan administration and documentation.

If you have any questions about administration of your cafeteria plan or debit card program, please contact your attorney at Fox Rothschild for more information.

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One of the components to health care reform that has been of great concern is the application of code section 105(h) on insured plans.  Plans that had lost grandfathered status would have been subject to the non-discrimination rules that self-insured or self-funded health plans were subjected to.

I say "would have been" because Notice 2011-1 provides that application of Section 2716 of the Patient Protection and Affordable Care Act (PPACA) is delayed until AFTER "regulations or other administrative guidance of general applicability has been issued."  Cal it a Christmas reprieve (and maybe even a miracle).

Many plan sponsors had been struggling with how to redesign existing insured plans to comply with 105(h) without having any actual guidance on how and what should be done.  If you have already undertaken to change you plan design to make a good faith effort to come into compliance with PPACA Section 2716, there is nothing that requires you to reverse that course.  Simply put, if you have not changed there is no requirement that you do just yet.  If you have changed, then you can at least rest assured that, for now, your insured plan is OK.  And when regulations and guidance are finally issued, we can start all over again.

If you have any questions about the impact of PPACA on your benefit plans, please contact your attorney at Fox Rothschild.

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Before everyone gets excited about engaging in an argument about the constitutionality of health care reform and debating the various cases that are pending on the topic, understand this is not what this posting is about.  I am just bringing out the current status of the various cases challenging the reform so you know what is ahead.

Monday, a Virginia District court ruled in a case brought by the Virgina Attorney General, that the provisions of reform that mandate the individual purchase of insurance is unconstitutional.  This conflicts with some prior district court rulings that found that it was permissible.  Not surprisingly, those decisions also were divided along  party lines depending on which president appointed them.  There have also been a couple decisions tossing out claims made by entities who were determined to not have standing.  There are also other suits filed by other states that remain open that will generate other opinions and they also include a challenge to the laws administration of Medicaid and other mandated benefits. 

The key here is that eventually this issue of the "mandate" will find its way to the Supreme Court where there will be a determination as to whether or not an individual can be required to purchase health insurance coverage.  The concern is that much of the reform currently being enacted is premised on the idea that people will be required to pay premiums so that will eventually pay for the changes.  if people cannot be forced to buy coverage, funding may ultimately become an issue.  We are a long way from having a final answer on that.

But what I do know is this: January 1, 2011, is fast upon us and for most employers and plans, that means the first set of administrative and eligibility changes are due.  These court fights do not give us the liberty to avoid compliance now.  Make sure you have sent required notices, are prepared to deal with discrimination testing and have amended your plans and documents.  No matter how this "mandate" issue plays out in the courts, the administrative and eligibility changes we now see are with us for at least the foreseeable future, so make sure you are prepared.

If you have any concerns about your compliance with the required changes, please contact your attorney at Fox Rothschild.

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When talking about healthcare reform, grandfathered status remains an important concern.  Previously, it was clear that, for self-funded plans, changing third-party administrators would not cause a loss of grandfathered status.  But for insured plans, changing carrier would.  That has now been "clarified."

In recently issued amendments to the interim final regulations on grandfathering, group health plans may now switch insurance companies and still maintain grandfathered status provided the structure of the new coverage does not violate one of the other rules for maintaining grandfathered status.  So employers can still shop for coverage and change carriers without losing this status.  They just have to be careful that the don't change the components of coverage in a way that increases employee-cost sharing beyond what is permitted to maintain grandfathered status.

This amendment applies on tot insured group health plans and not to individual policies.

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In response to my last entry about 105(h) discrimination, several people have noted to me that the penalties for failing the discrimination testing under PPACA are not levied on the HCEs.  Instead, there is an excise tax of $100 per day per employee discriminated against which is born by the employer.    While we need more guidance and/or regulations, this is correct as it relates to insured plans now subject to discrimination testing.

The problem is that PPACA testing rules for insured plans and existing 105(h) testing rules may not be mutually exclusive.  So don't assume that the current 105(h) penalties not longer apply, or that the PPACA penalties for 105(h) failure are the correct ones either.  Start by acknowledging you have to be aware of discrimination testing and go from there.

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One of the things that PPACA (or health care reform, or even "Obamacare") adds to the mix of plan administration is the concept that insured health plans will now be subject to "discrimination testing" under IRS Code Section 105(h).  Grandfathered plans do not have to comply, but a plan cannot likely be grandfathered forever.  So if you have always a had an insured health plan and never thought about non-discrimination rules, here is a quick primer of what you have been missing.

In its simplest terms, 105(h) prevents employment-based health plans from "discriminating" in favor of highly compensated employees ("HCEs").  What this means is that you cannot have a plan that gives excessive or extra benefits to HCEs (defined as (a) one of the 5 highest paid officers in the company, (b) a shareholder owning more that 10% of the company stock, or (c) is among the highest paid 25% of all employees).  If the plan discriminates, then the HCEs must include a portion of the benefits as taxable income and employers must report that on their W-2s.  Much the same way that a 401(k) plan gets tested, self-insured health plans have been dealing with this concept for years and now insured plans have to take a look.

There are three coverage tests and the plan must pass one of these three: (1) 70% of all employees benefit under the plan, (2) the plan benefits 80% of eligible employees and 70% of all employees are eligible, or (3) the plan benefits a nondiscriminatory classification of employees.  Same 3 tests as apply for qualified retirement plans and, I might add, cafeteria plans if you are required to test those. 

The IRS regulations require the plan to provide the same benefits for both HCEs and non-HCEs.  Different benefit structures are treated as a separate plan for the purposes of the eligibility tests described above.   The plan discriminates as to the benefit unless ALL benefits provided to participants who are HCEs are also provided to other participants.  You will also have discrimination if you have higher reimbursement levels or better benefit structures for HCEs.  So having an "executive only" buy-up plan that provides higher benefit payments looks an awful lot like discrimination.

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The U.S. Department of Labor's Employee Benefits Security Administration has announced a proposed rule to update the definition of "fiduciary."   The proposed rule will further clarify the regulations to more broadly define the term as a person who provides investment advice to plans for a fee or other compensation.

The DOL's website provides the following:

"The proposed rule would amend a 1975 regulation that defines when a person providing investment advice becomes a fiduciary under the Employee Retirement Income Security Act.   The proposed amendment would update that definition to take into account changes in the expectations of plan officials and participants who receive advice, as well as the practices of investment advice providers.

According to the proposal, the 1975 rule's approach to fiduciary status may inappropriately limit the department's ability to protect plans, participants and beneficiaries from conflicts of interest that may arise from today's diverse and complex fee practices in the retirement plan services market. The proposed rule is designed to remedy this limitation, and protect plan officials and participants who expect unbiased advice, by giving a broader and clearer understanding of when individuals providing such advice are subject to ERISA's fiduciary standards."

The proposed rule itself is available here.

The introduction to the rule provides that "the proposed rule takes account of significant changes in both the financial industry and the expectations of plan officials and participants who receive investment advice; it is designed to protect participants from conflicts of interest and self-dealing by giving a broader and clearer understanding of when persons providing such advice are subject to ERISA's fiduciary standards. For example, the proposed rule would define certain advisers as fiduciaries even if they do not provide advice on a ``regular basis.'' Upon adoption, the proposed rule would affect sponsors, fiduciaries, participants, and beneficiaries of pension plans and individual retirement accounts, as well as providers of investment and investment advice related services to such plans and accounts."

Written comments on the Proposed Rule may be submitted through January 20, 2011.

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Health care reform contains a provision that requires reporting of health care cost information that was to be reported on W-2s for the 2011 tax year.  However, yesterday, the Internal Revenue Service announced that it will waive that requirement for 1 year.  Under the reform law, employers were to have given health care cost information on 2011 W-2 statements that are distributed to employees in 2012.  Under the relief, health care cost information will have to be reported on the 2012 W-2s, which are issued in 2013.

The IRS affirmed that this information would be used for "informational purposes only," but also recognized that employers would have difficulty making changes to their payroll and reporting procedures before the 2011 tax year.  So the 1-year extension is intended to give additional time to develop a compliance process.

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The DOL has issued a second "FAQ"  about implementation of health care reform.  The sheet is available here.  I picked out some interesting tidbits that I found interesting:

First, relating to recissions, there has been some debate about whether retroactive termination of coverage because of non-payment of COBRA premiums would be permitted.  The DOL provides that "if a plan covers only active employees (subject to the COBRA continuation coverage provisions) and an employee pays no premiums for coverage after termination of employment, the Departments do not consider the retroactive elimination of coverage back to the date of termination of employment, due to delay in administrative record-keeping, to be a rescission."  So it appears that COBRA remains intact.

Second, as it relates to maintaining grandfathered status, there was a concern that cost sharing changes other than the 6 identified in the interim final regulations might impact grandfathered status.  The DOL clarified that "for a plan that is continuing the same policy, these six changes are the only changes that would cause a cessation of grandfather status under the interim final regulations."  So there is some security that not all changes to a plan cause a loss of grandfathered status.

Finally, there is clarification that separate vision and dental plans structured as "excepted benefits" under HIPAA, they are not subject to reform.  The DOL provides that if a plan provides its dental (or vision) benefits pursuant to a separate election by a participant and the plan charges even a nominal employee contribution towards the coverage, the dental (or vision) benefits would constitute excepted benefits, and the market reform provisions would not apply to that coverage.  

It is important to review these FAQs as the are published to see what impact they may have on your compliance process.  For more information about health care reform, please contact your attorney at Fox Rothschild.

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Sarah Ivy, from our Chester County office, shares the following:

Effective January 1, 2010, the Small Business Jobs and Credit Act of 2010 removes cell phones and similar telecommunication equipment (such as PDAs, blackberry, smart phones and the like) from the "listed property" provisions of Internal Revenue Code section 274(d).  This change eliminates the detailed substantiation requirements imposed on employers in order to take a business deduction for providing cell phones (and related calling/data plans) to their employees and also eliminates the detailed substantiation required for employees to exclude cell phones from gross income as a working condition fringe benefit.

Hopefully, this will eliminate the need for IRS cell phone audits (which has been a common target on employment tax audits).  Further, we are hopeful that he IRS will issue guidance providing that cell phones (and related calling/data plans) to employees is a deductible business expense and generally constitutes either a (1) de minimis fringe benefit, or (2) a non-taxable working condition fringe (at least with respect to phones reasonably anticipated to be used primarily for work), which would result in tax-free treatment (and no more tracking/monitoring actual use).

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As the September 23 date came and went, plan administrators should be in full compliance mode, making sure they are sending notices, finalizing plan changes and coming up to speed on health care reform packages.  I also think it is a good idea for plan sponsors to keep up to date on what is being communicated to the participant population at large, not just from your own communications, but from the government.

Healthcare.gov is the website created and updated by the US Department of Health and Human Services that is being used to provide information to the public in general.  Cynics can call it propaganda, but I think it is worthwhile for plan sponsors and administrators to check it out to see what the government is saying about health care reform.

A particularly interesting tool is the "Find Insurance Option" that allows individuals to search for insurance coverage in the states they reside.  There is also a tab called "Understand the New Law" that provides an explanation of the current and anticipated changes.  It also provides a link to the HHS site for comparing of medical providers under the "Compare Care Quality" tab. 

While we will continue to provide information about legislative updates and other formal information that is released, I thought it was important for you to know what non-regulatory communications are being sent out.  Being well informed will help avoid miscommunication and if you have any concerns about how to clarify those communications, please contact your attorney at Fox Rothschild.

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As with most things government, regulation marches on.  The US Department of Labor Employee Benefits Security Administration has made some more information available regarding PPACA (health care reform).  They should be reviewed as part of your overall compliance process.

The first is a release of "FAQs on ACA Implementation", available at http://www.dol.gov/ebsa/faqs/faq-aca.html.  It addresses a number of question, particularly relevant to grandfathereing and to multiemployer plans. 

Technical Release 2010-02, "Interim Procedures for Internal Claims and Appeals", is available at http://www.dol.gov/ebsa/newsroom/tr10-02.html.  This technical bulletin gives additional information about what appeal notices must contain and also timing of the issuance of notices for appeal rights to apply. 

Finally, in conjunction with Release 2010-02, there is a "Revised Model Notice of Adverse Benefit Determination", available at http://www.dol.gov/ebsa/IABDModelNotice2.doc.  It is important to note that this model notice does not only apply to "external appeals."  It also does not define the external appeals process.  It looks like this is the new standard for benefit denials and plan administrators should definitely review it with sponsors and plan professionals to determine its suitability for plan use. 

If you have any questions about this information, please contact your attorney at Fox Rothschild.

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Let's get right to it.  On September 3, 2010, the IRS issued Notice 2010-59  that provides guidance  regarding the use of tax-favored vehicles (like FSAs, HSAs and HRAs)  to pay for over-the-counter medicines and drugs.

The new guidance is effective for purchases on or after January 1, 2011, so plan years before then are not affected.  The guidance provides for an amendment of  the definition of "medical expenses" under employer-sponsored accident and health plans (FSAs and HRAs) and the definition of "qualified medical expenses" under HSAs and MSAs.  Beginning January 1, 2011, over-the-counter medicines and drugs will only be reimbursable from these plans if the individual obtains a prescription.  The new rules clarify that a "prescription" means a written or electronic order for a medicine or drug that meets the legal requirements of a prescription in the state in which the medical expense is incurred and that is issued by an individual who is legally authorized to issue a prescription in that state.

Note: Insulin is exempt from the new rules and remains reimbursable without a prescription.

The new rules make it clear that this does not affect the reimbursement of medical supplies and diagnostic devices, such as crutches, eye glasses, bandages and blood sugar test kits.  These items can qualify as medical care under IRS Code 213(d)(1) which covers expenses for the "diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body." 

Because there is some possible overlap in plan years, the new rules make it clear that medications purchased prior to 1/1/2011 are not impacted, even if the reimbursement is not made until after 1/1/2011.  But be aware that purchases made on or after 1/1/2011 are restricted even if they are intended to be used for reimbursements under a health FSA for the 2010 year account balance under the 2 1/2 month grace period.  So that means that account balances for the 2010 plan year that carry over into 2011 because of the grace period cannot be used to reimburse for over-the-counter medications if they were purchased AFTER 1/1/2011.

For those that use debit cards for their reimbursement accounts, the new rules also clarify that debit cards will no longer be able to be used for over-the-counter medicines or drugs because current debit card systems are not capable of recognizing and differentiating when over-the-counter medicines or drugs are obtained in conjunction with a prescription.   So beginning on 1/1/2011, debit cards cannot be used to purchase over-the-counter medicines and drugs.  Plan participants need to be notified of this change immediately so that they don't encounter unwanted surprises when they go to purchase medications after the first of the year. 

As a side note on this debit card issues, the IRS will not challenge the use of debit cards for over-the-counter purchases made through 1/15/2011 if you currently have a debit card system in place.  However, after 1/16/2011, over-the-counter purchases can no longer be made with the debit card.

Based on the issuance of this guidance, it is clear that plans have to be amended to provide for these limitations and notices should be issued to participants in advance of their 2011 elections.  For assistance in administering these changes, please contact your attorney at Fox Rothschild.

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Plans have participants, participants are people and people sometimes disappear.  It is unfortunately a fact of plan administration and it can be a problem.  As I mentioned last week, health care reform has about 5 new notices that have to be sent to participants.  There are annual notices and reporting that requirements that apply to retirement plans.  Even non-qualified plans have notices that have to go out.  But what happens when you can't find a participant?

The general rule under ERISA is that communications have to be made in a manner reasonably calculated to reach a substantial number of plan participants.  Certain specific notices, like COBRA notices, have to be issued in a manner reasonably calculated to reach that participant.  But missing from the regulatory scheme is any set action that a plan sponsor must take in locating participants.  Fortunately, there is no requirement that a plan sponsor actually confirm receipt of notice (although best practices sometimes makes us want to confirm receipt).  But what if we really need to locate them.  For example, what if we are terminating a plan and they have to be told? 

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.  The PBGC has a Missing Participants Program, but its application is limited to locating missing participants when terminating a defined benefit pension plan.  If you are dealing with these situations, follow the rules to the letter and you will be safe. 

But for other plans, maybe all you can do is look.  Some search methods recommended include

1. • Certified mail.
2. • Contact participant's designated beneficiary
3. • Consult related plan records from the employer
4. • Use of a service that forwards letters. The Internal Revenue Service and the Social Security Administration both offer this kind of service.  The IRS also has a missing participant program.
5. • Internet search tools
6. • Commercial locator services
7. • Credit reporting agencies

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 a 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 under standing that the plan will rely on that information as current unless told otherwise.

I also think that providing a plan administrator with broad discretionary authority to administer the plan and to take whatever steps are necessary to accomplish the purposes of the plan helps.  This type of "reservation of rights" gives plan administrators more leeway in dealing with issues that arise, like lost participants and how they will be treated.  So think about how you will deal with lost people before you lose them.  That may save time and effort in dealing with missing persons. 

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Remember that that the American Recovery and Reinvestment Act (ARRA) provided a COBRA premium reduction for eligible individuals who were involuntarily terminated from employment through May 31, 2010.  There may not have been an extension of subsidies to individuals terminated after 5/31/10, but the effects of the subsidy are still with us for at least a few more months.  Recall that individuals who qualified on or before May 31, 2010 may continue to pay reduced premiums for up to 15 months, as long as they are not eligible for another group health plan or Medicare. Those individuals who qualified for the premium reduction were only required to pay 35 percent of the COBRA premium otherwise due to the plan.

So here are some refreshers about how to deal with subsidy eligible individuals for the next few months:

1. If COBRA continuation coverage lasts for more than 15 months, participants will need to pay the full amount to continue your COBRA continuation coverage.  So it might be worthwhile to go into your records and find out who is getting close to that 15 month window and remind them the date on which they have to pay 100% (and not just the 35%).  Correct billing will avoid problems.

2. Make sure you communicate the amount of the full premium for coverage after the first 15 months before sending the bill.  Even though you may not necessarily be required, it is a good "best practice" to alert those receiving subsidies about the cost of COBRA coverage they will be expected to bear. 

3. Set a specific time period for receiving premiums.  Participants will have to pay the remaining 3 months of COBRA at 100% of the premium amount if at all possible.  Make sure you establish what your grace period will be and communicate that.  Without a doubt, someone will send you a check for 35% for the 16th month of coverage and you must be prepared to deal with them.  Are you going to give them 30 days to pay the balance, 14 days or cut them off immediately?  Whatever your position, make sure it is communicated in advance.

4. Make sure you know what is being communicated to participants.  The DOL has recently issued an FAQ to individuals receiving the subsidy, available here.  It not only combines an explanation of subsidy eligibility, but also of the termination of subsidies.  Also, check out this notice here the describes options one might have when losing the subsidy. 

Despite the fact that the subsidy has an expiration date, we should anticipate that its demise will come as a shock to many participants.  Make sure that you warn them before it happens to make your ongoing COBRA administrative burden smaller. 

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Health care reform compliance deadlines are closing in on us.  I have been asked by numerous clients and plan professional about "action items" that should be in place after September 23, 2010.  So I thought I would share them here.  And let's start with notice requirements to participants.

1. Grandfathered Plan Status Notice.  First, you have to understand grandfathering, then decide whether or not you are maintaining grandfathered status.  If you are, participants are entitled to a notice of intent to maintain grandfathered status. 

2. Special Enrollment Notices for Lifetime Limits.  For individuals who have otherwise reached lifetime limits under a plan are entitled to a special enrollment notice identifying that they are now available for coverage.  With the lifetime limit going away, these folks are not coming back on the plan per se, but they will have the ability to have claims paid again.

3. Patient Protection Notice for Physician Choice.  This notice advises participants that they have the ability to designate primary care physicians and to obtain OB/GYN care without prior authorization. 

4. Notice of Age 26 Coverage Extension.  With the expansion of coverage to individuals up to age 26, participants have to be notified of that option and they have to be provided enrollment rights and instructions.

5. Appeal Rights.  With the possible addition of external appeals that applies to non-grandfathered plans, participants have to be told about the new appeals rights.  Plus they should be reminded of the existing appeal rights under the plan.

So step 1, you have to decide what notices are required based on your plan.  Step 2 is to decide who gets those notices and step 3 is to draft the notices and send them out.  Certainly you can rely on the insurance company for these notices provided the insurance company is sending them out.  But ultimately it is the responsibility of the plan sponsor to make sure notices are being correctly sent.  So don't assume.  Ask questions,  Contact the company, your broker and your plan professionals to make sure you are dealing with these new notice requirements.

For assistance in understanding and preparing these notices, please contact your attorney at Fox Rothschild.

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Benefit plan design, administration and documentation is not thrilling stuff.  But when things go wrong, it can be very exciting.  As a plan sponsor, there is no "perfect" plan design that you can latch on to for every plan and never have any problems because you still have to administer them.  Still, there are some things about plan design and administration that can reduce risk, so consider the following as things you can do in designing your plan.

1. Don't make the plan sponsor the fiduciary of the plan.  It is not required that the company that creates the plan automatically takes on the role of "fiduciary."  Instead, consider whether creating an Employee Benefits Committee to be named as the fiduciary might be more appropriate.  The committee structure may help differentiate the fiduciary plan functions from the non-fiduciary (i.e., business or settlor) functions, thus reducing potential conflict-of-interest issues as well as concerns over executive v. fiduciary status in making hard business decisions.  Plus the committee could retain separate legal counsel from the company specifically for the plan concerns, thereby further preserving privilege.

2. Along those same lines, avoid naming key corporate officers as fiduciaries.  C-suite executives have loads of information about the company but that knowledge would also be imparted to them in their capacity as plan fiduciaries.  Wearing a high level executive hat AND a plan fiduciary hat carries with it a host of potential conflict-of-interest issues.  Its better to keep the company executives away from the plan if possible.

3. Before you go any further, make sure you have strong reservation of rights language in your plans.  Make sure that plan documents specifically provide for the ability to amend, revise or terminate the plan at the discretion of the fiduciaries.  Also, consider including the reservation of rights language in every communication from the plans.  Though not specifically required under ERISA, caselaw on the topic seems to clearly favor using the disclaimer in all communications.

4. Clearly define roles and responsibilities.  Make sure that everyone who has a role in plan administration knows the role and is held accountable for what has to be done.  Consider creating an administrative manual for the plan that specifies when and how plan administration activities are completed.  Don't get caught wondering whose job it was to take care of something that goes wrong.

5. Don't cut off appeals.  Appeal periods that are too short or procedures that are vague or cumbersome are always a danger.  Make sure the plan documents explain how to exhaust administrative remedies and what the specific steps are to complete the appeals process.  Make sure to follow the process as it is written.  Be aware of the new requirements for external appeal if this applies to your health plan.

6. Keep a history of the plan.  Someone should always know where documents are, how things were done in the past and what service providers were used.  Consider making a written record of all the plan professionals used for each plan year and what services they provided.  Keep track of where plan records are kept, even the old ones, and pass the history down to incoming plan personnel.  Like a family oral history, take the time to share the history of the plan with new generations so they have some idea of "how things were done."

Again, none of these is definitive or absolutely required.  But in an age where benefits administration is getting more and more confusing, a few simple tweaks to your administrative processes can go a long way toward making things easier down the road.  For assistance with your plan administration concerns, you can always contact your attorney at Fox Rothschild.

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While the focus on health care reform has been primarily major medical plans, there is no question that the new laws have a considerable impact on cafeteria plans.  The IRS has recently issued guidance that allows retroactive amendments to cafeteria plans to comply with health care reform.  Additionally, employers must revise their cafeteria plans for changes taking effect during and after 2011.  Plan sponsors and employers need to be familiar with these changes now in order to communicate them during the next open enrollment period and also to properly administer them.

1. Change to Eliminate OTC Reimbursements

Effective for expenses incurred on or after 1/1/2011, FSAs (health flexible spending accounts) in cafeteria plans may no longer provide for reimbursement for over-the-counter (OTC) drugs unless they are prescribed.  Unfortunately, the exact definition of the terms “drugs” and “prescribed” is unclear, and we will need future guidance to be sure.  We do know that the effective date is Jan. 1 even for non calendar-year plans.  The same rule will apply to health reimbursement arrangements (HRAs) and health savings accounts (HSAs).)   So every cafeteria plan with an FSA must be amended by Dec. 31, 2010, to exclude payment for OTC drugs, and this change must be communicated to plan participants so that they can adjust the amount they elect to contribute.

Although not required, plan sponsors may also want to take the opportunity to amend cafeteria plans at the same time to adopt the new $2,500 limit on health FSAs, which takes effect Jan. 1, 2013.

2. Address Changes to Benefit Elections

Remember that under health care reform, the age-26 dependent extension of coverage means that an employee’s child is covered under the health plan tax-free through the end of the calendar year in which the child turns 26.  That means that the value of health coverage for adult children should not be included as gross income for the employee.  Participants with covered “adult” children need to change their cafeteria plan elections to provide for payment of the premiums for such coverage on a pretax basis.  This may also give rise to a mid-year change in the health FSA accounts because medical expenses of adult children are now reimbursable tax-free.

Be aware that the the IRS has identified two problems for cafeteria plans designed to allow such mid-year changes for adult children:

1. Under the existing cafeteria plan regulations, adding an adult child to the plan would not seem to fit the definition of “change of status” that would justify changes outside of open enrollment..
2. IRS regulations generally require cafeteria plans to be amended on a going-forward basis, not retroactively.

Fortunately, the IRS has given some relief in Notice 2010-38, which provides that the IRS has determined that it will amend the change-of-election regulations to allow changes in elections for events affecting adult children’s eligibility, whether or not they are tax dependents.  The IRS will also allow amendments to cafeteria plans to allow such changes of election, retroactive to when the plan started allowing such changes as long as the amendment is adopted by 12/31/10.

So remember, not only does health care reform require an adjustment of treatment of over-the-counter reimbursements.  You also have to attend to the changes in elections and make sure your plan is properly amended to account for the intended benefits.  Plus there should be some opportunity to participants to change elections if they are adding adult children.  So don't assume that the major medical plan is all you have to look at.  Pay attention to your cafeteria plan, too.

If you need assistance in amending your cafeteria plan to comply with these changes, please contact me or your attorney at Fox Rothschild.

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 Lately I have been fielding a lot of questions relating to employee benefits issues in mergers and acquisitions.  Whether they be asset deals, stock deals or straight mergers, due diligence about employee benefits should always come sooner rather than later.  There are lots of checklists out there about things you need to look for and specific questions to ask, but what strikes me is that some of them overlook some of the basics that I ask first.  So I thought I would share my initial questions when being asked to consider employee benefit concerns in a deal.

1. What do the entities look like to begin with and what will then end up looking like?

The structure of the entities before the transaction and after the transaction can tell us a lot about what might need to be done with the benefit arrangements.  A parent selling a wholly owned subsidiary may have different issues then two small companies creating a joint venture.  So before you do your employee benefit analysis, make sure you know where you have been and where you are going.  Believe me, it matters.

2.  What have you got that is not wages and what will you keep giving?

Seems like a silly statement, but a good review should start with the assumption that everything provided to employees that is not a straight wage could be a benefit.  Maybe not an ERISA benefit plan, but possibly some type of "plan" or "program" that has to receive special treatment.  Don't assume that simply because it is not a qualified plan it is not relevant for consideration.  I have seen things like wellness programs, commuter benefits, pet insurance and adoption assistance plans become last minute problems that would not have been issues if considered in advance.  So a real inventory is a census of everything you have (on both sides) and what you expect to give when you are done.

3. Who will still be employed when the dust settles?

Sometimes a merger eliminates employees.  Or an acquisition can take one set of employees and moves them to a new employer.  To evaluate continuation (and COBRA) obligations, you have to know who will still be around and who will be losing their employment status.  Do we have any obligations to retirees?  What about people who retiree because of the transaction?  Will job classifications change?  You would be amazed at the amount of litigation that arises related to terminating benefits for former AND continued employees that could have been addressed beforehand by simply considering who was being let go and who was being kept.

4. Do we have any unions involved?

Without going into too much detail, collectively bargained employee benefits issues can be a ticking time bomb for anyone who waits until the last minute to consider them.  Make a list of all unions involved,both before and after, and include any multiemployer benefit fund to which there may be a contribution obligation.  Be cognizant of possible successor liability for any delinquent contributions of the seller entity.

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Step one in the process of creating insurance exchanges required under the PPACA (health care reform) is officially underway.  The Department of Health and Human Services published a request for comments from interested stakeholders - including the employer community that can be accessed here.

PPACA allows each state to establish a health insurance "exchange" to provide for the purchase of of "qualified health plans."  These exchanges will be available to certain smaller employers and individuals.  There will also be a federal exchange for people who live in states that do not offer their own state sponsored exchange.  Exchanges will ideally begin functioning on January 1, 2014.  The DHHS has now published a request for comments to obtain input from interested parties (which includes employers) on issues surrounding how the Exchanges will work.

The request for comment covers a wide assortment of topics, including who gets run the exchanges and how they will operate, time frames for implementation, information and technology needs, qualification criteria of health plans and possible pricing of the exchanges (including permissible cost-sharing components with employees).

Since employers will be impacted by the exchange offering and administration process, employers may be interested in the design and operation of the exchanges.  Beyond the comments requested, DHHS is also interested in input from employers regarding:

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If you are a regular reader, you know that I have been spending a lot of time addressing health care reform and upcoming plan administration and design issues.  As part of that administration process, it is important that plan sponsors not overlook some of the notice requirements that are hidden within the rules.  It is important to prepare for the required communications and, fortunately, the DOL has give us some samples.  So what is coming up?

1. Notice of Key Plan Design Changes

For most plans, the target date for compliance will be January 1, 2011.  So these notices are probably a good place to focus first.  The DOL has given us a notice for Annual and Lifetime Limit Changes (http://www.dol.gov/ebsa/lifetimelimitsmodelnotice.doc), a notice for Older Children Dependent Eligibility (http://www.dol.gov/ebsa/dependentsmodelnotice.doc), and a model for Primary Care Physician Designation (http://www.dol.gov/ebsa/patientprotectionmodelnotice.doc ).  Of course you will have to modify these notices to fit your plan, but they give us an idea of what will have to be in place.

2. Summary of Material Changes

Some time in 2012, plans or sponsors will have to send participants a written summary of any plan changes at least 60 days prior to the beginning of their plan year.   This is not the SPD or a summary of material modifications but rather will be targeted to summarize what changes are being made to comply with health care reform.  

These notices will be required by March 23, 2012, and ideally we will have DOL models before then.

3.  Summary of Medical Coverage

This plan summary is also due in the 2012 plan year and it will be referred to as a “uniform explanation of coverage.”  Limited to 4 pages and 12-point font, The summary must include specific content and definitions, and be written in language that is “linguistically” and “culturally” appropriate.  Again, this will not replace and SPD, but will likely supplement it as a uniform statement of certain required benefits.  

4.  Summary of Managed Care Programs

2012 looks like a big year for notices as we expect model language on notices that will describe all care management programs.  These will deal with wellness and disease management programs.  So to the extent an employer may not already have its wellness programs fully explained in writing, this notice will require those statements.

5.  Automatic Enrollment

As we get closer to 2014 and the penalties, employers will likely be looking at automatic enrollment and preparing for employees who want to opt-out of employer coverage.  In 2013, we can anticipate providing participants that they are automatically being enrolled in medical coverage and what actions they must take to opt-out.

6. Eligibility for Health Insurance Exchange

Coupled with the employee choice and the creation of the exchanges, we are going to have notices explaining what they are and how to access them.  Presumably, these notices will include information about eligibility rules for premium credits and the differences between an exchange plan and an employer-sponsored plan.  

So start with number 1, getting the 2011 notices and information in place.  Dutifully watch to see what sample or model notices are release next and continue to prepare your plan for full compliance.  And above all, don't miss any notices requirements because communication to participants will be the key to avoiding complaints.

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Within the Health Care Reform structure there is a provision that adds an external appeals component to claims processing.  In the mad rush to get regulations and guidance in place before the September 23, 2010, start date, the department of Labor issued a Fact Sheet on the appeals process.  It references interim regulations  which in tun references the Uniform Health Carrier External Review Act produced by NAIC(National Association of Insurance Commissioners).

Now the way it is set up, the regs suggest that States adopt the NAIC model for insurance written in their states.  For group health plans not subject to state regulation, or for insurance issued in states that have not adopted the NAIC model, a federal external appeals process will apply.  However, the actual process itself is not yet defined, and is not required to be fully defined until July 1, 2011.  So as best as I can tell, the idea is that the external appeals process is just that, an appeal that occurs outside of the plan.  It is ideally governed by the state insurance appeals process and models give by the NAIC.  And I would assume that the federal model eventually adopted will look like the NAIC recommendations.

So what does this mean?  Well, we still have to wait.  But for now it means they are working on it.  Plan sponsors should take a look at the NAIC model process available and recognize that they should start evaluating the process to see how they would ultimately implement such an external appeals process once actual guidance is finally issued.

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The Departments of Health and Human Services (HHS), Labor, and Treasury issued interim final regulations on July 19, 2010 requiring new plans and issuers to cover certain preventive services without any cost-sharing for the enrollee when delivered by in-network providers.  The interim final regulations do not apply to grandfathered plans and issuers.  A complete copy of the proposed interim rule is available here.

Unfortunately, the rule is not real specific about what services will be considered as preventative and will have to be covered at 100%.  Instead, there is a lot of reference to the recommendations of the United States Preventative Services Task Force (USPSTF) and what it has recommended.  Presumably, the recommendations of the task force will eventually be set into rules that explain what will be the final definition of preventative care.  But don't let the broad language fool you.  The actual rules are in there.

The proposed regs provide for four classifications of preventative care that mus be covered without cost sharing arrangements (that is co-pays or deductibles).  They are:

• Evidence-based items or services that have in effect a rating of A or B in the current recommendations of the USPSTF with respect to the individual involved.
• Immunizations for routine use in children, adolescents, and adults that have in effect a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention (Advisory Committee) with respect to the individual involved. A recommendation of the Advisory Committee is considered to be ‘‘in effect’’ after it has been adopted by the Director of the Centers for Disease Control and Prevention. A recommendation is considered to be for routine use if it appears on the Immunization Schedules of the Centers for Disease Control and Prevention.
• With respect to infants, children,and adolescents, evidence-informed preventive care and screenings provided for in the comprehensive guidelines supported by the Health Resources and Services Administration (HRSA).
• With respect to women, evidence informed preventive care and screening provided for in comprehensive guidelines supported by HRSA (not otherwise addressed by the recommendations of the Task Force).

The point to this is that if you look at the USPSTF website, here, you find all kinds of information about A and B rated services, immunizations, counseling and screenings that are recommended based on individual patient needs.  By incorporating these recommendations into the regulations, we are essentially being told go find out that the USPSTF recommends and prepare to cover it.

Admittedly, these proposed regulations are interim and have not yet been finalized.  But a plan sponsor would do well to take the time to read them and find out what is likely going to be required once these are made final. 

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You might recall from a previous posting that I discussed the Supreme Court's decision in Metropolitan Life Insurance Co. v. Glenn.  In that case, the Court held that there is an inherent conflict affecting insurance companies that both decide and pay claims for benefits.  This conflict must be considered in determining whether an insurance company abused its discretion in denying a claim for benefits.  This does not eliminate the application of the "arbitrary and capricious" standard of review that ordinarily applies to benefit determinations. Instead, is creates a  two-step analysis for courts that are asked to review claims determinations.  The first is to determine whether a structural conflict exists which occurs when the administrator both evaluates claims for benefits and pays for them.   If this is the case, then step two applies and the court then must determine how much weight the conflict should be afforded in determining whether the administrator abused its discretion in denying the claim.

Subsequent to Glenn, the Second Circuit Court of Appeals recently ruled in Durakovic v. Building Service 32 BJ Pension Fund, that, like insurance companies, Taft-Hartley funds are inherently conflicted when making benefit determinations, and that this conflict needs to be considered by federal district courts when reviewing plan determinations under an arbitrary and capricious standard of review.  This could have significant implications for these multiemployer plans and their future benefit plan determinations.

By way of background, Taft-Hartley (or multiemployer plans) are generally administered by a board of trustees, with equal numbers of union and management trustees. Appeal of benefit determinations are made to the board that ultimately makes a ruling on the appeal. The assumption is always that the balance of union and management takes away any perceived conflict because both sides would be equally represented in a decision process.

In Durakovic, an employee applied for disability benefits from her union-sponsored plans.  The plans provided benefits to those deemed to be disabled.  The plans denied her claim for disability benefits after a review of her appeal and she subsequently filed suit in federal district court challenging the funds’ decision.  On appeal, it was agreed that the challenged decision was subject to an arbitrary and capricious standard of review by the court. However, both parties disagreed with the district court’s decision that the Fund’s “conflict” was a relevant factor.  The plans argued that they were not conflicted within the meaning of Glenn because Taft-Hartley funds are administered by an entity composed equally of union and employer representatives. Durakovic argued that the conflict should have been accorded more weight.

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While I was on vacation last week, The Departments of Health and Human Services, Labor and Treasury issued interim final regulations that provide guidance on these provisions of the new law.  The rules regarding preexisting conditions exclusion, lifetime and annual dollar limits, and rescissions apply to all group health plans regardless of grandfather status.  The “patient protection” provisions apply only to plans that do not qualify as grandfathered health plans.

To recap, the Health Care Reform legislation includes provisions designed to ensure that individuals can obtain and keep their health coverage regardless of their health status or other factors.  The law includes prohibitions on preexisting condition exclusions and the imposition of annual and lifetime dollar limits on health benefits.  The proposed interim regulations are available here.

Preexisting Conditions

The health reform law provides that effective for plan years beginning on or after September 23, 2010, group health plans and insurers may not impose any preexisting condition exclusion on enrollees under age 19.  An exclusionary period that applies to an enrollee at the time the prohibition goes into effect must end.  For example, if a child enrolled in October 2010 has a preexisting condition that is subject to a six-month exclusionary period, the exclusion must end on January 1, 2011 if the plan is operated on a calendar year basis.

Plans and insurers may continue to apply preexisting condition exclusions consistent with the HIPAA portability rules on enrollees age 19 and older until the 2014 plan year, at which time no preexisting condition exclusions will be permitted.

Also, non-grandfathered plans must notify participants of the choice of provider rules whenever the plan or issuer provides a participant with an SPD or other similar description of benefits.  In conjunction with this guidance, the DOL issued a Patient Protection Model Disclosure that is available here.

There is also a Model Language for Notice of Opportunity to Enroll in connection with Extension of Dependent Coverage to Age 26 available here.

Lifetime and Annual Dollar Limits

The new law generally prohibits group health plans from imposing lifetime or annual limits on the dollar value of “essential health benefits.”  This prohibition applies to group health plans, without regard to their grandfathered status, for plan years beginning on or after September 23, 2010 (January 1, 2011, for calendar year plans), except that “restricted annual limits” on essential health benefits are allowed for plan years beginning before January 1, 2014.  The prohibition on lifetime and annual dollar limits does not prohibit a complete exclusion of benefits for any particular condition (although other laws, such as the Americans With Disabilities Act, might), but if coverage is provided to any extent with respect to a condition, the annual and lifetime dollar limit rules apply.

Remember that “essential health benefits” generally includes, but is not limited to, the following categories and items and services covered within the categories: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care.   Unfortunately, no guidance has been issued to date regarding which other benefits qualify as “essential health benefits.”  Until guidance is issued, the regulators have stated that for plan years beginning before additional guidance is issued, they will take into account consistent and good faith efforts to comply with a reasonable interpretation of the term “essential health benefits.”

In conjunction with this guidance, a Model Language Notice Lifetime Limit No Longer Applies and Enrollment Opportunity is available here.

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Harvey Katz, a benefits partner in our New York office, shares the following:

Some of our clients have adopted certain welfare plan arrangements under section 419(e) of the Internal Revenue Code. In recent years, the IRS has attacked these arrangements as devices to funnel tax-deductible dollars to shareholders and has classified these arrangements as “listed transactions.” Taxpayers who engage in a “listed transaction” must report such transaction on IRS Form 8886 every year that they “are engaged” in the transaction. Section 6707A of the Code imposes severe penalties ($200,000 for a business and $100,000 for an individual) for failure to file Form 8886 with respect to a listed transaction. The Tax Court does not have jurisdiction to abate or lower any penalties imposed by the IRS.

Many taxpayers adopted 419(e) plans based upon representations of insurance professionals that the plans were legitimate welfare benefit plans and had no idea they were engaging in a listed transaction. Vociferous complaints from these taxpayers caused Congress to impose a moratorium on assessment of section 6707A penalties. The moratorium expired on June 1, 2010, and the IRS immediately began sending out notices proposing imposition of 6707A penalties and requesting lengthy extensions of the statute of limitations for the purpose of assessing tax.

Clients who receive notices from the IRS regarding 6707A penalties should take these letters extremely seriously. The attorneys in our Employee Benefits & Compensation Planning Group are available to provide advice to those taxpayers who the IRS deems have participated in a listed transaction or any taxpayer who believes that he or she participated in such a transaction.

To get a complete copy of this alert, click here.

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Yesterday, the three primary agencies charged with regulating and enforcing the federal government’s health care reform effort (Department of Treasury, Department of Health and Human Services, and Department of Labor) released interim final regulations that address the applicable exemptions for grandfathered health plans and the changes that may and may not be made to plans seeking to retain their grandfathered status.  Recall from prior posts that a "grandfathered" health plan is an employment-based group health plan (insured or self-funded) or individual insurance coverage existing as of March 23, 2010.   The final regulations answer a few burning questions about the applicability of health care reform to these plans and how they must conform (or not).

Plans seeking to maintain their grandfathered status have to make sure they don't do certain things that cause a loss of the status. These interim final regulations provide that a group health plan or health insurance coverage no longer will be considered a grandfathered health plan if a plan sponsor or an issuer:

1. Eliminates all or substantially all benefits to diagnose or treat a particular condition. The elimination of benefits for any necessary element to diagnose or treat a condition is considered the elimination of all or substantially all benefits to diagnose or treat a particular condition;
2. Increases a percentage cost-sharing requirement (such as coinsurance) above the level at which it was on March 23, 2010;
3. Increases fixed-amount cost-sharing requirements other than copayments, such as a $500 deductible or a $2,500 out- of-pocket limit, by a total percentage measured from March 23, 2010 that is more than the sum of medical inflation and 15 percentage points.
4. Increases copayments by an amount that exceeds the greater of: a total percentage measured from March 23, 2010 that is more than the sum of medical inflation plus 15 percentage points, or $5 increased by medical inflation measured from March 23, 2010;
5. For a group health plan or group health insurance coverage, an employer or employee organization decreases its contribution rate by more than five percentage points below the contribution rate on March 23, 2010; or
6. With respect to annual limits (1) a group health plan, or group or individual health insurance coverage, that, on March 23, 2010, did not impose an overall annual or lifetime limit on the dollar value of all benefits imposes an overall annual limit on the dollar value of benefits; (2) a group health plan, or group or individual health insurance coverage, that, on March 23, 2010, imposed an overall lifetime limit on the dollar value of all benefits but no overall annual limit on the dollar value of all benefits adopts an overall annual limit at a dollar value that is lower than the dollar value of the lifetime limit on March 23, 2010; or (3) a group health plan, or group or individual health insurance coverage, that, on March 23, 2010, imposed an overall annual limit on the dollar value of all benefits decreases the dollar value of the annual limit (regardless of whether the plan or health insurance coverage also imposes an overall lifetime limit on the dollar value of all benefits).

On top of creating a standard for maintaining "grandfathered" status, the interim regulations also provide some specific clarification related to applicability of the reforms to grandfathered plans:

1. “Excepted benefits,” such as dental-only, vision-only, and health flexible spending account plans, are exempt from the health care reform plan design and operational changes.
2. There is no broad exemption for collectively bargained insured plans that are subject to bargaining agreements in effect on March 23, 2010; such plans are simply deemed to be grandfathered health plans until the termination of the last collective bargaining agreement in effect on March 23, 2010, and are subject to all of the health care reform changes that otherwise apply to grandfathered health plans (e.g., the adult child coverage rules apply, but the new appeal procedures will not apply).
3. The delayed effective date for collectively bargained insured plans does not extend to self-funded health plans.  Self-funded collectively bargained plans will be subject to the same requirements as other self-funded employment-based health plans.
4. Adding existing employees as new enrollees in an employment-based group health plan after March 23, 2010, will not affect the plan’s status as a grandfathered health plan.
5. A plan that has multiple benefit packages may have both grandfathered and non-grandfathered benefit packages; the rules apply separately to each benefit package.
6. Retiree-only health plans generally are exempt from the health care reform plan design and operational changes (e.g., extension of coverage to adult children up to age 26, coverage of preventive care without cost-sharing, etc.).
7. In general, plan changes adopted before March 23, 2010, with an effective date after that date will not cause a loss of grandfathered status.  If an employer/plan sponsor made changes to a group health plan since March 23, 2010, that would cause a plan to lose its grandfathered status under the new guidance, the employer/plan sponsor may reverse those changes before the first plan year beginning on or after September 23, 2010 (generally, the 2011 plan year) and preserve grandfathered health plan status.

We will continue to monitor developments in the law and provide updates, but we can anticipate that between now and September 23, we will get lots more information. 

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The Department of Labor has finalized its regulations on "domestic relations orders" (DROs).  The regulations, originally issued in 2007, were required under the PPA to clarify certain issues relating to the timing and order of issuing DROs under ERISA and the Code.  The final regulations are effective August 9, 2010. 

The good news is that the regulations rely heavily on examples to illustrate general principles which can make the regulations easier to understand.  But the bad news is that the DOL makes it very clear that the examples are not intended to represent the only circumstances to which the general principles apply.  A couple of the key provisions:

• Subsequent DROs.  The regulations confirm that a DRO won’t fail to be a QDRO solely because it is issued after, or revises, another order.  For example, a second order involving the same parties is issued that reduces the benefit awarded in the first order.  The final regulations clarify that the result would be unchanged if the second order increased the benefit.
• Timing of DROs.  The regulations clarify the principle that a DRO won’t fail to be a QDRO solely because of the timing of when it was issued.   For example A DRO can still be a QDRO if it is an order issued after the death of the participant or an order issued after the parties’ divorce.

While the DOL clarifications are useful, they don't significantly deviate from original narrow guidelines and while helpful, the examples don't necessarily make any significant changes to the administration of DROs and QDROs.  A complete text of the regulations are available here.  If nothing else, it will give benefits and matrimonial attorneys something in common to discuss.  For more information, please contact your attorney at Fox Rothschild.

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While Congress has not yet determined to extend the COBRA subsidy further, one of the first court decisions dealing with subsidies, and more importantly, a denial of subsidy, has been decided.  Dorsey v. Jacobson Holman, from the DC district court deals with denial of the COBRA subsidy.

Dorsey applied for the COBRA subsidy and her employer denied the subsidy application saying she voluntarily terminated.  Dorsey did not return from an FMLA leave of absence.  After checking with the DOL, Dorsey informed her employer that the DOL considered the termination to be involuntary.  In fact, the DOL representative also contacted the employer and told them so.  But Dorsey did not actually file an appeal with the DOL.  Instead, she filed this lawsuit.

The Court dismissed the lawsuit finding that Dorsey had failed to exhaust administrative remedies, which is generally a precursor to filing a case under ERISA.  The court decided that since the ARRA provides a specific appeals process, that appeals process has to be exhausted before a suit can be brought.

This decision does not necessarily result in the employer avoiding the subsidy, but it does provide some guidance and assurance to plan sponsors that the subsidy process is tied into and consistent with the normal components of plan administration.  It appears that ERISA protections and responsibilities will apply.  Thanks to Susan Jordan, a partner in our Pittsburgh office, for bringing this to my attention. 

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Several employers have approached me with questions about the health care reform changes and the potential impact it will have on collective bargaining agreements that extend beyond January 1, 2014.  While not purely a "plan administration" issue, there should be some reason for employers to pause and wonder how they should address health care reform in upcoming negotiations.

Since there is no real guidance or regulations that have come out yet, we are all waiting for explanations, but employers about to sign bargaining agreements that obligate them to contribute to a multiemployer health fund may not be able to wait.  For example, what will happen if employees decide to opt out of the fund and get into an exchange?  Who will be responsible for payment of penalties?  What is the fund does not meet the definition of a "qualified health plan" (which will eventually be defined)?  What impact will grandfathering have on coverage obligations and contribution obligations, if any?  What if the new rules will render the fund unsustainable and it ceases to exist mid-contract?

There are not really answers to these questions yet.  There are just too many variables that are not yet defined.  But one of our labor attorneys here suggested to me that maybe the best option is to consider including a "mid-term reopener" in the collective bargaining agreement that allows the employer, at its option, to reopen the agreement and bargain to address these issues once regulations are finally issued.  In other words, a provision that unlocks the agreement before its conclusion so that both employer and union can deal with what might be serious concerns regarding health benefits coverage.

So to the extent you as an employer may be looking at negotiating a new agreement that will carry past January 1, 2014, you should consider raising this issue at bargaining.  Since we know changes are coming, it seems logical that both parties would be best served by addressing it now rather than hoping nothing bad happens later.  Your Fox Rothschild attorney would be happy to assist.

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In prior entries, I made reference to the fact that the new Health Care Reform provisions will require lots of regulations and guidance from the various federal agencies.  The US Department of Labor has issued its first round of guidance that address the extension of coverage to dependents up to Age 26.

By way of background, The Affordable Care Act requires plans and issuers that offer dependent coverage to make the coverage available until a child reaches the age of 26.  Both married and unmarried children qualify for this coverage.  This rule applies to all plans in the individual market and to new employer plans.  It also applies to existing employer plans unless the adult child has another offer of employer-based coverage (such as through his or her job).  Beginning in 2014, children up to age 26 can stay on their parent's employer plan even if they have another offer of coverage through an employer.

Some interesting points on this initial guidance:

• For plan years beginning after 9/23/10, plans are going to have to give written notice and open enrollment rights to these eligible dependents
• The Dependent can not be required to pay more for the coverage than similarly situated individuals.
• Coverage is not offered to children of children or spouses of the eligible dependent.
• Age 26 Dependent coverage can be purchased with pre-tax dollars.
• The coverage terminates on the date the dependent turns 26 (not through age 26)

The regulation available here.   A fact sheet is available here.   Finally, an FAQ sheet is available here.  We will continue to monitor and provide updates about any guidance issued.  In the interim, please contact your attorney at Fox Rothschild if you have any questions about reform and its impact on your company or plan.

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My last entry dealt with wellness programs and the possibility of discrimination in their implementation.  As luck would have it, this morning, the US Department of Labor released an interactive, online "Disability Nondiscrimination Law Advisor," designed to help employers quickly determine which federal disability nondiscrimination laws apply to their business or organization and their responsibilities under them.

The DOL website can be accessed here.   To be fair, it is not really intended to provide too detailed advice to employers so the links provided to other resources and advisory materials are pretty generally written.  But it is a nifty starting point for employers interested in researching the various disability laws that apply to employers and what considerations may have to be given when instituting a wellness program.

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There is no question that corporate wellness programs are increasing in popularity.  From requiring medical checkups to smoking cessation and weight loss, many health plan sponsors are implementing wellness programs in an effort to improve employee health and decrease overall health care claims experience.  The new health care reform laws include provisions that encourage small employers to implement these programs, and even provide some measure of subsidy.  But employers must be careful about looking at a "one size fits all" program as a solution.

The most common question is to employee a carrot or a stick.  The IRS certainly recognizes that there can be up to a 20% penalty (which will increase to 30% under the new reform laws) for non-compliance.  But at the same time, HIPAA requires that plan participants have to be offered reasonable alternatives to meeting certain health goals depending on their own limitations.  Further, there are individual state laws addressing discrimination that have to be a concern.

I spoke at a seminar last week where one of the other presenters opined that a wellness program was just a gateway for an employment discrimination suit.  For example, Scotts Miracle-Gro implemented a no-smoking program and fired an employee who tested positive for nicotine.  He sued over the off-site smoking ban and they settled for an undisclosed figure.  So a termination "stick" might not be the best approach.  But charging higher premiums creates problems as well, particularly if an individual claims that a particular disability prevents them from complying with the wellness program, thereby discriminating against them.  Would charging higher premiums to those who don't quit smoking give rise to a claim for disability discrimination if it is successfully argued that nicotine addiction is a disability?  Would requiring decrease in body mass index improperly discriminate against employees with weight issues?

In a recent survey conducted by MetLife, 58% of respondents said they participated in wellness programs because of reduced costs, while only 30% said they participated because of fear of penalty.  Unfortunately, there is little case law defining the limits of mandated participation in wellness programs.  It is pretty clear that communication and education about the program is key, but design and implementation remains a minefield.

I believe that, in the end, an good wellness program is only as effective as the population that it serves.  So start by evaluating your population.  Are they carrot or stick driven?  How likely are they to comply?  What "wellness" issue are most important to them and which ones most heavily impact your plan?  It is better to start with a limited program based on known data then to assume you can put any program in place and make it work.  Knowing your options is the best way to avoid a wellness program that makes your company "sick."

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Late yesterday, President Obama signed into law another short-term extension of COBRA health insurance premium subsidies for employees who are terminated involuntarily.   This law takes immediate effect and is retroactive to April 1, 2010.

Effectively, the new law takes the last extension and replaces the "March 31, 2010" date with the new "May 31, 2010" date.  The 15-month 65% federal premium subsidy is now extended so that employees who were involuntarily terminated between April 1 through May 31 are eligible.  As with the previous extension, only Assistance Eligible Individuals (AIs) qualify for the subsidy.   To be assistance eligible, the employee has to have an involuntary termination of employment.    If the individual lost coverage as a result of a reduction in hours which was then followed by an involuntary termination of employment, that person is eligible for the subsidy if that involuntary termination occurs on or after March 2, 2010, and on or before May 31, 2010.   This part does not apply to terminations prior to March 2, 2010.

The new law does not change the length of the COBRA maximum coverage period. It is still based on the original reduction in hours Qualifying Event date.  Also, the subsidy period (up to 15 months) is unchanged.

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Part of the Patient Protection and Affordable Care Act, or the “Health Care Reform Act” as I have been referring to it, includes the idea of "grandfathering" certain plans.  Grandfathering applies to allow certain plans to avoid immediate application of some of the new rules.  Note, I said "some" and not "all."  Grandfathering does not apply to all of the new rules. 

A “grandfathered" health plan is defined as any group health plan that was in effect when the Act was passed, which was March 23, 2010.  The idea behind grandfathering is exempting the plans from having to comply with certain provisions of the new Act and allowing them to remain generally the same as they were in prior years, or for prior "pre-Act" enrollment periods.   

What this means is that new employees (and their families) may be added to the plan after March 23, 2010, and individual can even re-enroll in a "grandfathered" health plan after March 23, 2010, and the plan would still be grandfathered.  Likewise, an individual who was covered by a grandfathered health plan may add his or dependents to the plan after March 23, 2010, without negating the plan’s grandfathered status as long as the plan allowed for dependent/family coverage on March 23, 2010.

Of course, there are exceptions to the grandfathering and so here are the ones that are EXEMPT from grandfathering, which means plans have to comply with them even if they were in effect prior to March 23, 2010.  For plan years beginning after September 23, 2010: 

1. Pre-existing conditions. Pre-existing condition exclusions have to be removed from group health plans for children under the age 19.  Not for everyone.  That comes later.
2. Dependent coverage.  Group health plans must provide coverage for adult dependent children up to age 26 only if the child is not eligible to enroll in other employer-provided coverage (other than in a grandfathered plan). 
3. Rescissions.  Plans will not be able to cancel coverage after someone has submitted medical claims.  Rescission would still be permitted if an individual committed fraud or made an intentional misrepresentation of a material fact. 
4. Coverage limits.  Group health plans must removed lifetime maximum limits on coverage of essential benefits and the eliminate of certain annual limits.

Provisions generally effective Jan. 1, 2014 for calendar-year grandfathered plans:

1. Dependent coverage.  Group health plans will have to provide coverage for adult dependent children up to age 26.
2. Excessive waiting periods.  Enrollment waiting periods cannot exceed 90 days.
3. Pre-existing conditions.  Elimination of pre-existing condition exclusions entirely, not just for children under 19.

It is not all bad.  There are come provisions that are not applicable to grandfathered plans.

1. IRS Code Section 105(h) (Amount paid to highly compensated individuals under a discriminatory self-insured medical expense reimbursement plan) will not apply to insured group health plans.
2. The new rules for processing claims appeals do not apply to grandfathered health plans.
3. The requirement that women be permitted to select an OB-GYN of their choice.
4. The requirement that certain preventative care benefits be provided under group health plans.

A special note about collectively bargained plans:

Collectively bargained multi-employer and single employer plans that are in place as of March 23, 2010 are not subject to the new rules until the date on which the last of the collective bargaining agreements relating to the coverage terminates.  The Act specifically provides, however, that a collectively bargained plan is permitted to be amended early for some or all of the new rules. This voluntary amendment will not be treated as a termination of the collective bargaining agreement which might otherwise subject the plan to an earlier Reform Act compliance deadline.

However, once the bargaining agreement expires, a collectively bargained plan is then subject to health care reform rules and, assuming it remains grandfathered (based on the rules then in effect), it would have to comply with the requirements for grandfathered plans.

So grandfathering may not require your plan to make every change, but it will certainly have to make some of them.

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Since before the HCRA was passed, people have been debating about how to pay for it, what it will cost and how it will impact the economy.  I am not going to debate those issues.  Instead, let's look at the change in cost structure the Act provides that will potentially impact employers.

The Costs

The addition of the PHSA sections referenced above lay out what the additional (or amended) requirements will be for employer sponsored health plans and multiemployer plans.  They provide both administrative requirements and benefits limits.  So they tell us what plans have to look like going forward and how they have to work.  But they do not set out any specific requirements with respect to employers and their obligations to provide any particular group health plan.

In fact, there is no requirement that an employer offer any group health plan. Instead, there are penalties that apply if an employer DOES NOT offer qualified coverage.  More importantly, there will be penalties associated with offering coverage that is not as good as what is otherwise available and employee choose not to take that coverage.

For months beginning after Dec. 31, 2013, an “applicable large employer” (generally, one that employed an average of at least 50 full-time employees during the preceding calendar year) that is not offering coverage for all its full-time employees, is offering minimum essential coverage that is unaffordable, or is offering minimum essential coverage that consists of a plan under which the plan's share of the total allowed cost of benefits is less than 60%, that employer will have to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee.  The penalty for any month will be an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by one-twelfth of $2,000.

Also, an applicable large employer that offers, for any month, its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer sponsored plan will be subject to a penalty if any full-time employee is certified to the employer as having enrolled in health insurance coverage purchased through a State exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to such employee or employees.  So if an employee elects to participate in the State exchange, and is eligible for premium tax assistance, the employer will still be subject to a penalty.  This is designed to force employers to keep the employee cost of coverage down because if it is cheaper for an employee to get coverage under an exchange rather than an employer plan, the employee who elects the exchange coverage causes a penalty to the employer.

Remember back at the beginning we talked about bronze (60%) silver (70%), gold (80%) and platinum (90%) levels of coverage?  This is where the concept of “qualified plan” becomes important to employers on a penalty-payment basis.  The new law creates a concept called “exchanges” which has yet to be fully defined, but generally is intended to mean a vehicle whereby individuals can go and buy coverage for themselves. They level of coverage will have a set price. If a large employer has employees who purchase coverage through an exchange, that employer will be subject to the penalties if certain conditions are met:
1. The employer has more than 50 employees (computing part-time employees as a percentage of full time employees based on 30 hours per week)
2. the employee who purchases the coverage does so with tax-credits or cost sharing reductions; and
3. the employer is not offering coverage, is offering sub-bronze coverage or the coverage is unaffordable

Free choice vouchers. After Dec. 31, 2013, employers offering minimum essential coverage through an eligible employer-sponsored plan and paying a portion of that coverage will have to provide qualified employees with a voucher whose value can be applied to purchase of a health plan through the Insurance Exchange.  Qualified employees are those employees:
... who do not participate in the employer's health plan;
... whose required contribution for employer sponsored minimum essential coverage (if they did participate in the plan) exceeds 8%, but does not exceed 9.5% of household income; and
... whose total household income does not exceed 400% of the poverty line for the family.

After 2014, the 8% and 9.5% will be indexed to the excess of premium growth for the preceding calendar year.  The value of the voucher is equal to the dollar value of the employer contribution to the employer offered health plan and is not includable in income to the extent it is used for the purchase of health plan coverage.  If the value of the voucher exceeds the premium of the health plan chosen by the employee, the employee is paid the excess value of the voucher.  The excess amount received by the employee is includable in gross income.  If an individual receives a voucher, he is disqualified from receiving any tax credit or cost sharing credit for the purchase of a plan in the Insurance Exchange.  Similarly, if any employee receives a free choice voucher, the employer is not assessed a shared responsibility payment on behalf of that employee.

Tax credits for small employers offering health coverage. For tax years beginning after Dec. 31, 2009, an eligible small employer will be given a tax credit for nonelective contributions to purchase health insurance for its employees.  An eligible small employer generally is an employer with no more than 25 full-time equivalent employees (FTEs) employed during the employer's tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000.  However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.  These wage limits will be indexed to the Consumer Price Index for Urban Consumers (“CPI-U”) for years beginning in 2014.

For tax years beginning in 2010 through 2013, the credit will be 35% for small employers with fewer than 25 employees and average annual wages of less than $50,000 who offer health insurance coverage to their employees.  In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange will be eligible for a tax credit for two years of up to 50% of their contribution.

Excise tax on high-cost employer-sponsored health coverage. For tax years beginning after Dec. 31, 2017, a 40% nondeductible excise tax will be levied on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage.  An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions.  The tax will apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals).  Stand-alone dental and vision plans will be disregarded in applying the tax.  The dollar amount thresholds will be automatically increased if the inflation rate for group medical premiums between 2010 and 2018 is higher than the Congressional Budget Office (CBO) estimates in 2010.

Employers with age and gender demographics that result in higher premiums could value the coverage provided to employees using the rates that will apply using a national risk pool. 
The excise tax will be levied at the insurer level.  Employers will be required to aggregate the coverage subject to the limit and issue information returns for insurers indicating the amount subject to the excise tax.

Cost of employer sponsored health coverage included on Form W-2.  For tax years beginning after Dec. 31, 2010, employers must disclose the value of the benefit provided by them for each employee's health insurance coverage on the employee's annual Form W-2.

Increased tax on nonqualifying HSA or Archer MSA distributions. For distributions made after Dec. 31, 2010, the additional tax for HSA withdrawals before age 65 that are used for purposes other than qualified medical expenses is increased from 10% to 20%, and the additional tax for Archer MSA withdrawals that are used for purposes other than qualified medical expenses is increased from 15% to 20%.

Deduction for employer Part D is eliminated. For tax years beginning after Dec. 31, 2012, the deduction for the subsidy for employers who maintain prescription drug plans for their Medicare Part D eligible retirees will be eliminated. 

Since we have yet to see what the exchanges will look like, we can't be sure what types of plans employers will have to offer.  But employers should be aware of the cost load associated with offering coverage, not offering coverage, or offering "substandard" coverage to project how their particular benefit plans might be impacted in the future.

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Where the HCRA gets most cumbersome and confusing is analyzing what happens next.  After the initial changes in 2010, we get into 2011, which provides a provision where small employers that establish wellness programs can get grants for up to five years to support those programs.  Employers will also have to disclose the value of welfare benefits provided to employees on W-2s.  2012 and 2013 will be relatively quiet years, although 2013 will impose a hard cap of $2,500 on FSA contributions (unless the reconciliation bill does not pass and then this cap will apply in 2011).  Then comes 2014.  That will be a year of big changes.

Effective for Plan Years on or After January 1, 2014

First, let's look at required plan design changes, referred to as "Health Insurance Reforms."  These are changes that will occur to the health plans.  The provisions of part A of title XXVII of PHSA that are added by the Sec. 1201 of the Health Care Reform Act (effective for plan years beginning on or after Jan. 1, 2014) and that are incorporated by reference in the Code, include:

SEC. 2701. FAIR HEALTH INSURANCE PREMIUMS.
This provision will prohibit Discriminatory Premium Rates by limiting rating to things like whether such plan or coverage covers an individual or family, geographic rating area, age and tobacco use.
SEC. 2702. GUARANTEED AVAILABILITY OF COVERAGE.
Each health insurance issuer that offers health insurance coverage in the individual or group market in a State must accept every employer and individual in the State that applies for such coverage.
SEC. 2703. GUARANTEED RENEWABILITY OF COVERAGE.
If a health insurance issuer offers health insurance coverage in the individual or group market, the issuer must renew or continue in force such coverage at the option of the plan sponsor or the individual, as applicable.
SEC. 2704. PROHIBITION OF PREEXISTING CONDITION EXCLUSIONS OR OTHER DISCRIMINATION BASED ON HEALTH STATUS.
A group health plan and a health insurance issuer offering group or individual health insurance coverage may not impose any preexisting condition exclusion with respect to such plan or coverage.
SEC. 2705. PROHIBITING DISCRIMINATION AGAINST INDIVIDUAL PARTICIPANTS AND BENEFICIARIES BASED ON HEALTH STATUS.
A group health plan and a health insurance issuer offering group or individual health insurance coverage may not establish rules for eligibility (including continued eligibility) of any individual to enroll under the terms of the plan or coverage based on any of the health status-related factors.
SEC. 2706. NON-DISCRIMINATION IN HEALTH CARE.
A group health plan and a health insurance issuer offering group or individual health insurance coverage shall not discriminate with respect to participation under the plan or coverage against any health care provider who is acting within the scope of that provider's license or certification under applicable State law. This section shall not require that a group health plan or health insurance issuer contract with any health care provider willing to abide by the terms and conditions for participation established by the plan or issuer. Nothing in this section shall be construed as preventing a group health plan, a health insurance issuer, or the Secretary from establishing varying reimbursement rates based on quality or performance measures.
SEC. 2707. COMPREHENSIVE HEALTH INSURANCE COVERAGE.
(a) Coverage for Essential Health Benefits Package- A health insurance issuer that offers health insurance coverage in the individual or small group market shall ensure that such coverage includes the essential health benefits package required under section 1302(a) of the Patient Protection and Affordable Care Act.
(b) Cost-sharing Under Group Health Plans- A group health plan shall ensure that any annual cost-sharing imposed under the plan does not exceed the limitations provided for under paragraphs (1) and (2) of section 1302(c).
(c) Child-only Plans- If a health insurance issuer offers health insurance coverage in any level of coverage specified under section 1302(d) of the Patient Protection and Affordable Care Act, the issuer shall also offer such coverage in that level as a plan in which the only enrollees are individuals who, as of the beginning of a plan year, have not attained the age of 21.
(d) Dental Only- This section shall not apply to a plan described in section 1302(d)(2)(B)(ii)(I).
SEC. 2708. PROHIBITION ON EXCESSIVE WAITING PERIODS.
A group health plan and a health insurance issuer offering group or individual health insurance coverage shall not apply any waiting period (as defined in section 2704(b)(4)) that exceeds 90 days.
 

In my next entry, we will look at the 2014 changes that go outside of the plan itself and will directly impact employers.

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Yesterday we looked at two changes that the HCRA brings for health plans in 2010.  Here is a list of all of the changes that have to be made now:

Effective As of September 23, 2010

The provisions of part A of title XXVII of PHSA that are added by the Sec. 1001 of the Health Care Reform Act (effective on Sept. 23, 2010) and incorporated by reference in the Code, include:

SEC. 2711. NO LIFETIME OR ANNUAL LIMITS. (See my April 7, 2010 posting)
SEC. 2712. PROHIBITION ON RESCISSIONS
A group health plan and a health insurance issuer offering group or individual health insurance coverage cannot rescind such plan or coverage with respect to an enrollee once the enrollee is covered under such plan or coverage involved, except that this section shall not apply to a covered individual who has performed an act or practice that constitutes fraud or makes an intentional misrepresentation of material fact as prohibited by the terms of the plan or coverage.  Such plan or coverage may not be canceled except with prior notice to the enrollee, and only as permitted under section 2702(c) or 2742(b).
SEC. 2713. COVERAGE OF PREVENTIVE HEALTH SERVICES.
In general, a group health plan and a health insurance issuer offering group or individual health insurance coverage shall, at a minimum provide coverage for and shall not impose any cost sharing requirements for things like immunizations and preventive care and screenings.  The “United States Preventive Services Task Force” will set guidelines.
SEC. 2714. EXTENSION OF DEPENDENT COVERAGE. (see my 4/7/2010 post)
SEC. 2715. DEVELOPMENT AND UTILIZATION OF UNIFORM EXPLANATION OF COVERAGE DOCUMENTS AND STANDARDIZED DEFINITIONS.
Within 12 months after the date of enactment of the Patient Protection and Affordable Care Act, the Secretary of Labor shall develop standards for use by a group health plan and a health insurance issuer offering group or individual health insurance coverage, in compiling and providing to enrollees a summary of benefits and coverage explanation that accurately describes the benefits and coverage under the applicable plan or coverage.  This is going to look a lot like the rules of ERISA regarding content of summary plan descriptions.
SEC. 2716. PROHIBITION OF DISCRIMINATION BASED ON SALARY.
In general, a plan sponsor of a group health plan (other than a self-insured plan) may not establish rules relating to the health insurance coverage eligibility (including continued eligibility) of any full-time employee under the terms of the plan that are based on the total hourly or annual salary of the employee or otherwise establish eligibility rules that have the effect of discriminating in favor of higher wage employees.  But this section shall not be construed to prohibit a plan sponsor from establishing contribution requirements for enrollment in the plan or coverage that provide for the payment by employees with lower hourly or annual compensation of a lower dollar or percentage contribution than the payment required of similarly situated employees with a higher hourly or annual compensation.
SEC. 2717. ENSURING THE QUALITY OF CARE.
Not later than 2 years after the date of enactment of the Patient Protection and Affordable Care Act, the Secretary shall develop reporting requirements for use by a group health plan, and a health insurance issuer offering group or individual health insurance coverage, with respect to plan or coverage benefits and health care provider reimbursement structures measure and report the quality of care that plan participants are receiving.  This will include reporting about wellness and prevention programs.
SEC. 2718. BRINGING DOWN THE COST OF HEALTH CARE COVERAGE.
A health insurance issuer offering group or individual health insurance coverage shall, with respect to each plan year, submit to the Secretary a report concerning the percentage of total premium revenue that such coverage expends—
(1) on reimbursement for clinical services provided to enrollees under such coverage;
(2) for activities that improve health care quality; and
(3) on all other non-claims costs, including an explanation of the nature of such costs, and excluding State taxes and licensing or regulatory fees.
The Secretary shall make reports received under this section available to the public on the Internet website of the Department of Health and Human Services.  There will then be objective measures for whether insured are receiving “value” for their premiums.
SEC. 2719. APPEALS PROCESS.
A group health plan and a health insurance issuer offering group or individual health insurance coverage shall implement an effective appeals process for appeals of coverage determinations and claims.  Again, we already have this under ERISA, but it is modified slightly to allow for a external review process as well as an internal appeals process.  This will be an interesting challenge for self-insured plans and we will have to wait to see what HHS ultimately requires.

Note that the provisions of PHSA Sec. 2716 (prohibition on discrimination based on salary), and Sec. 2718 (bringing down the cost of health coverage), do not apply with respect to self-insured group health plans.  Thus, the provisions of the Code and ERISA continue to apply to self-insured group health plans as if PHSA Sec. 2716 and PHSA Sec. 2718 had not been enacted.

For plan sponsors of self-funded plans (including multiemployer plans), they will have to amend those plans to provide for compliance with these provisions to begin the first plan year after the effective date.  Additional guidance regarding these changes is anticipated before September 23, 2010, so plan sponsors should make a conscious effort to watch for that guidance and be prepared to act once it is issued.

Tomorrow, we will look at changes for subsequent years.

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In Step 2 of our Health Care Reform analysis, we were looking at the how the new laws would interface with existing employee benefits laws, particularly ERISA.  I had concluded that in order for the new laws to apply to these plans, the new law actually has to specify that it applies to them. We will be looking for phrases such as “as if included in the Code and ERISA” to tell us when these ERISA benefit plans are impacted.  So let's look at two immediate changes that have to take place for "group health plans."

A. No Lifetime or Annual Limits

Generally, ERISA plans are not subject to the Public Health Service Act, and insurance companies issuing policies to individuals are not subject to ERISA.  The Department of Labor enforces ERISA and not the Public Health Service Act.  Those lines are now blurred.

Under the 2010 Health Care Reform Act, the provisions of part A of title XXVII of the Public Health Service Act (PHSA)—Sec. 2701 through Sec. 2737, as amended by the Act—apply to (i) “group health plans,” and (ii) “health insurance issuers” providing “health insurance coverage” in connection with group health plans, as if included in the Code and ERISA.  PHSA Section 2711 is amended to provide that:

A group health plan and a health insurance issuer offering group or individual health insurance coverage may not establish—
(A) lifetime limits on the dollar value of benefits for any participant or beneficiary; or
(B) except as provided in paragraph (2), annual limits on the dollar value of benefits for any participant or beneficiary.

By inserting the reference to ERISA and the Code, PHSA Section 2711 is incorporated into those laws by reference, meaning that self-insured or multiemployer “group health plans” are now subject to this restriction.  The DOL can now require plans within its jurisdiction to comply with the PHSA requirement of no lifetime or annual cap. 

B. Extension of Dependent Coverage

The same holds true for extension of dependent coverage until age 26.  PHSA Section 2714 provides that any group health plan or a health insurance issuer that offers group or individual health insurance coverage that provides coverage of dependent children, must continue to make dependent coverage available for an adult child (who is not married) until the child turns 26 years of age.  This would include ERISA plans by reference.

Some other interesting observations about this Age-26 extension:
a). There is no requirement for a plan or issuer to provide health insurance coverage for anyone, including dependents.  But if coverage is provided for dependent children, then the coverage must continue until the children turn 26.
b). Presumably, an adult child would have to continue to meet the plan's definition of “dependent”—other than the otherwise applicable age requirement—to remain covered under the group health plan up until age 26.  Remember that the tax code has a definition of “qualifying relative” and “qualifying child” that might counteract this definition.
c). Nothing in the rule above will require a health plan or a health insurance issuer to make coverage available to a child of a child receiving dependent coverage.

So now, after September 23, 2010, there can be no annual or lifetime caps on benefits and they have to cover dependents up to age 26.  For calendar year plans, this appears to be effective January 1, 2011.  Tomorrow, we will look at some additional changes effective 9/23/10.
 

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In yesterday's entry, we saw how the concept of "qualified health plan" is being modified under the Health Care Reform Act (HCRA).  Now, we look at what is a "health plan."

2. Defining A “Health Plan”

To the extent Section 3(1) of  ERISA gives us the definition of a “welfare benefit plan,” the new law gives us an additional term that differentiates away from other welfare benefit packages.  Remember that under ERISA, welfare benefits include things like disability, life and other not-necessarily-health benefits.  Under the HCRA, the term “health plan” means both “health insurance coverage” and a “group health plan.”  The funding status is irrelevant. It become a function of whether or not that plan provides the health benefits required to be “qualified.”  So we are going to have "group health plans" that are "welfare benefit plans." 

The term “health insurance coverage” means benefits consisting of medical care (provided directly, through insurance or reimbursement, or otherwise and including items and services paid for as medical care) under any hospital or medical service policy or certificate, hospital or medical service plan contract, or health maintenance organization contract offered by a health insurance issuer.  And the term “health insurance issuer” means an insurance company, insurance service, or insurance organization (including a health maintenance organization) which is licensed to engage in the business of insurance in a state and which is subject to state law which regulates insurance.  However, a health insurance issuer does not include a group health plan.

The term “group health plan” has the same meaning given that term by section 2791(a) of the Public Health Service Act.  Section 2791 states that:

"The term “group health plan” means an employee welfare benefit plan (as defined in section 3(1) of the Employee Retirement Income Security Act of 1974 [29 U.S.C. 1002 (1)]) to the extent that the plan provides medical care and including items and services paid for as medical care) to employees or their dependents (as defined under the terms of the plan) directly or through insurance, reimbursement, or otherwise. "

Note how Section 2791 references back to the ERISA definition welfare benefit plan but limits the application to providing health benefits.  This is important because it should serve as the distinction between whether an employer is offering a “group health plan” and whether an individual has “health insurance coverage.”  An employer may be offering coverage through a health insurance issuer as the means of funding the benefit, but in fact, the employer is sponsoring a “group health plan” not “health insurance coverage.”

Oddly, except to the extent specifically provided by the 2010 Act, the term “health plan” does not include a group health plan or multiple employer welfare arrangement (MEWA) to the extent the plan or arrangement is not subject to state insurance regulation under Section 514 of ERISA.  What this means is that funding IS important for understanding when the new rules apply.  Self-funded, self-insured and multiemployer plans are not subject to state insurance regulation.  Therefore, in order for the new laws to apply to these plans, the new law actually has to specify that it applies to them.  We will be looking for phrases such as “as if included in the Code and ERISA” to tell us when these ERISA benefit plans are impacted. 

In my next entry, we will look at some instances where the HCRA specifically denotes changes that have to occur to "group health plans" and the interplay with ERISA.

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Because of the relative complexity of the Health Care Reform Act, I am breaking my analysis down into a series of discrete issues that I think will be relevant to employers.  The first part of the summary deals with the creation of the concept of a "qualified health plan."

Before the 2010 Health Care Act, there was no federal program making health care coverage available to all individuals, and the concept of a “qualified health plan” did not exist.  We had used the term “qualified” to refer to ERISA health plans meaning that they qualified for treatment as an employer sponsored health plan, and most people believed the term “qualified” meant self-funded.  Now, we have a new standard by which health plans will be measured, thereby “qualifying” them as sufficient under the terms of the Act.

Note that it appears throughout the regulations that the funding status of the plan is of little significance.  So whether it is an insured plan, self-insured or self-funded, it still has to meet these “qualifications.” ERISA “qualified” status will still have some significance for the purpose of preemption of state law.  But for the remainder of this discussion, the term “qualified” will mean what it does under the 2010 Health Care Act.

1. Defining a “Qualified Health Plan”

For purposes of the 2010 Health Care Act, a “qualified health plan” is a “health plan” that:
(1) has in effect a certification (which may include a seal or other indication of approval) that the plan meets certain criteria for certification, issued or recognized by each Exchange through which the plan is offered;
(2) provides the “essential health benefits package”; and
(3) is offered by a health insurance issuer that:
    (a) is licensed and in good standing to offer health insurance coverage in each state in which the issuer offers health insurance coverage under the Act;
    (b) agrees to offer at least one qualified health plan in the silver level, and at least one plan in the gold level, in each exchange; 
    (c) agrees to charge the same premium rate for each qualified health plan of the issuer without regard to whether the plan is offered through an exchange, or whether the plan is offered directly from the issuer, or through an agent; and
    (d) complies with the regulations that apply to exchanges, and any other requirements that an applicable exchange may establish.

The term “essential health benefits package” means, with respect to any health plan, coverage that:
(A) provides for “essential health benefits”;
(B) limits cost-sharing for such coverage; and
(C) provides either bronze, silver, gold, or platinum level of coverage (i.e., benefits that are actuarially equivalent to 60%, 70%, 80% or 90% (respectively) of the full actuarial benefits provided under the plan).

The essential health benefits must include at least the following general categories (sometimes referred to as “minimum essential coverage”), and the items and services covered within the categories:
... ambulatory patient services;
... emergency services;
... hospitalization;
... maternity and newborn care;
... mental health and substance use disorder services, including behavioral health
    treatment;
... prescription drugs;
... rehabilitative and habilitative services and devices;
... laboratory services;
... preventive and wellness services and chronic disease management; and
... pediatric services, including oral and vision care.

Incidentally, HHS is required to establish the criteria for certifying a qualified health plan. That criteria has to require that, to be certified, a plan must:
... meet certain marketing requirements;
... ensure sufficient provider choice;
... include essential community providers that serve low-income and medically-
    underserved individuals;
... be accredited for clinical quality, patient experience, consumer access, and quality
    assurance;
... implement a quality improvement strategy;
... use a uniform enrollment form;
... use a standard format for presenting plan options; and
... provide information on quality standards used to measure plan performance.

What this means is that at some point, we can anticipate that plan sponsors will have to have their plans “certified” as “qualified” by meeting the required standards set forth by HHS.

These qualified health plans can cross state lines and become a “multi state qualified health plan.” Generally, a multi-state qualified health plan is a plan that offers a benefits package that is uniform in every state, and consists of the essential benefits described above. In addition, the plan must satisfy all of the requirements for a qualified health plan, as described above, including requirements relating to the offering of the bronze, silver, and gold levels of coverage and catastrophic coverage in each state exchange (which we will define later).

So having created a concept of a "qualified" health plan, we will next look to see what a "health plan" will be.

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Don't panic.  The passage of the Patient Protection and Affordable Care Act, as well as the Health Care & Education Affordability Reconciliation Act of 2010 make some significant changes to health insurance and will certainly impact employers sponsoring health plans and other employee benefit plans, but you don' t have to change everything today.  Although we have yet to receive much of the guidance and supplemental regulation that will be necessary to implement these new laws (and in some instances to even understand them), below is what I believe are the initial provisions that should impact employers.

Beginning the first plan year 6 months after the effective date of the law (figure 1/1/11 for most plans), group health plans, including employer sponsored plans, can no longer have a lifetime cap on benefits and have to offer coverage to dependent children up to age 26. Beginning with the 2014 plan year, group health plans will be prohibited from (1) denying coverage based on pre-existing conditions, (2) requiring waiting periods of more than 90-days for eligibility and (3) having annual dollar limits on benefits.

Beginning in 2013, Flexible Spending Accounts will be limited to $2,500 maximum per year.

In 2014, "exchanges" will be set up where people and small businesses without insurance can go to buy insurance and supposedly lower rates. Large employers will get to use the exchanges in 2017.

Employers will not be required to offer health insurance to their employees. If an employer has more than 50 employees, they will have to pay a penalty of $2,000 for each full time employee (exempting the first 30 employees) if any of their employees ends up purchasing insurance through the exchange. Employers will also be hit with a $3,000 for each employee who declines employer coverage and instead purchases coverage through an exchange. Presumably this implies the employer has bad coverage or it costs too much so it creates incentives for employers to sponsor good coverage. This will be effective in 2014. Interesting that it does not apply to part-time employees and employers do not have to include coverage for part-time employees. But, as with COBRA, part-time employees will but counted as a partial full-time employee for the purpose of measuring the 50-employee threshold.

It looks like it applies to ALL employers, public or private but there are constitutional issues surrounding federal requiring state entities purchasing insurance that will have to be sorted out.

The "Cadillac Tax," if it survives, would begin in either 2013 or 2018 (depending on which version of the law is finalized). It provides that the insurer for any employer-sponsored plan (which would be the employer if the plan is self-insured and presumably the multiemployer fund itself in a multiemployer plan, or maybe even the union) will owe a 40% excise tax to the extent the cost of coverage exceeds certain thresholds. This provision could have a significant impact on collective bargaining but it is not yet clear when or if it will go into effect and it will require lost of regulations to manage it.

That said, there are lots more provisions in this law that have to be sorted out. We will be providing continued updates as more guidance becomes available. If you have any specific questions or need further assistance, please contact your attorney at Fox Rothschild.

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In conjunction with the Temporary Extension Act of 2010 that provides for the extension of the COBRA subsidy period to March 31, 2010, the DOL has published new model notices for COBRA and for application for the subsidy.  The notices are available here.

Three new notices have been added.  The first is a Model Notice of New Election Period.  It provides for a new election for COBRA coverage and treatment as a subsidy eligible individual if the individual:  (1) experienced a qualifying event that was a reduction in hours at any time from September 1, 2008 through March 31, 2010; (2) subsequently experience a termination of employment at any point from March 2, 2010 through March 31, 2010; and (3) either did not elect continuation coverage when it was first offered OR elected but subsequently discontinued the coverage.  Individuals who experience an involuntary termination of employment after experiencing a qualifying event that consists of a reduction of hours MUST be provided this notice within 60 days of the termination of employment.

The second is the Supplemental Information Notice.  It has to be provided to all individuals who elected and maintained continuation coverage based on the following qualifying events: (1) terminations of employment that occurred at some time on or after March 1, 2010 for which notice of the availability of the premium reduction available under ARRA was not given; or (2) reductions of hours that occurred during the period from September 1, 2008 through March 31, 2010 which were followed by a termination of the employee's employment that occurred on or after March 2, 2010 and by March 31, 2010.  Individuals who experience an involuntary termination of employment after experiencing a qualifying event that consists of a reduction of hours MUST be provided this notice within 60 days of that termination.  Individuals with qualifying events that occurred on or after March 1, 2010 for which notice of the availability of the premium reduction available under ARRA was not given MUST be provided this notice before the end of the required time period for providing a COBRA election notice.

Finally, a Notice of Extended Election Period was created.  Plans MUST provide, before the end of the required time period for providing a COBRA election notice, the Notice of Extended Election Period to all individuals who: (1) experienced a qualifying event that was a termination of employment at some time on or after March 1, 2010; (2) were provided notice that did not inform them of their rights under ARRA, as amended by Temporary Extension Act; and (3) either chose not to elect COBRA continuation coverage at that time OR elected COBRA but subsequently discontinued that coverage.

It is anticipated that this framework will be extended through December 21, 2010, so plan administrators should carefully review these requirements and notices to make sure they are fully compliant.  If you have any questions, please contact your attorney at Fox Rothschild for additional guidance.

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Because the COBRA subsidy continues to be a very hot topic in conjunction with the various efforts to pass jobs legislation, Congress continues to fiddle with it.  The extension of the COBRA subsidy to March 31, 2010, brings a new twist that will likely continue forward for future extensions (the latest being considered is through December 31, 2010) so employers and plan sponsors should pay careful attention to this new twist.

The latest legislation extended the COBRA premium reduction eligibility period for one month until March 31, 2010.   But it also expanded eligibility to individuals who experience a qualifying event that is a reduction of hours occurring at any time from September 1, 2008 through March 31, 2010, which is followed by an involuntary termination of employment on or after March 2, 2010 through March 31, 2010.   This expansion also includes a second election opportunity for these individuals who had a reduction of hours qualifying event followed by an involuntary termination, if they did not elect COBRA continuation coverage when it was first offered OR elected but subsequently discontinued COBRA.

What this change means is if an employee had a qualifying event that was a reduction of hours, and subsequent termination of employment AFTER March 1, 2010, that person would be eligible for the subsidy for the COBRA periods after the termination date.  For example:

Employee has a qualifying event on August 1, 2009, based on a reduction of hours.  Employee elects COBRA and pays premiums through March 1, 2010.  Employee is terminated on March 15, 2010.  Through March 2010, the employee has exhausted 8 months of COBRA coverage.  Now, he is eligible for the premiums subsidy for the remaining 10 months of his COBRA coverage because he has had a second event, the termination.  Also, the new law makes clear that the employee would not have even had to elect COBRA to be eligible for the subsidy now.  If the employee had a qualifying event as a result of reduction of hours before 3/1/10, and either did not elect COBRA coverage, or let the COBRA coverage lapse because of non-payment of premiums and he subsequently has an involuntary termination of employment, he can elect COBRA for the remained of the 18 months AND get the subsidy.

So going forward, employers should be very cognizant of the need to provide the COBRA notice and the subsidy election form to any employee who was involuntarily terminated March 1, 2010, regardless of whether they were already COBRA eligible because of a reduction of hours.  They will essentially be offered a second election period.  It won't add to their 18 months, but it will make them eligible to get the premiums subsidy.  Since this will likely be the case through the end of this year, so start paying attention now.

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Last night, President Obama signed a stop-gap bill that extends the COBRA subsidy eligibility through March 31. So employees who are involuntarily terminated between March 1 and March 31, 2010, would be eligible for subsidy participation. We will have more details as they are released, but it appears that clients should continue to use the COBRA subsidy notices and requests for treatment as a subsidy eligible individual that are currently being used until further notice.

Under H.R. 4691, the 65%, 15-month premium subsidy for laid-off workers is extended to those involuntarily terminated from March 1 through March 31.  Meanwhile, the Senate Wednesday will continue consideration of legislation, H.R. 4213, that would extend the premium subsidy to employees laid off through Dec. 31, 2010.

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As previously posted, eligibility for the COBRA subsidy was extended through February 28, 2010, and the subsidy period goes for up to 15 months.  Of course, individuals who have been denied the subsidy are entitled to appeal the denial and the new application for expedited review of the denial is available here.

While I don't anticipate employers will need to fill out this application, I think employers should be aware of what type of documents that they might have to provide terminated employees to assist them in their appeal:  The notice provides that:

• These documents will assist you in completing your application : COBRA election notice; Information on your plan sponsor, employer, insurance company, and/or plan administrator; A "Request for Treatment as an Assistance Eligible Individual" or other form used to request the premium reduction; Insurance information card; Payroll stubs showing deductions for health benefits; Any documents detailing the date and circumstances of the termination of the employee’s employment; or Any documentation you were provided regarding the denial of the premium reduction.

Note that the COBRA election notice and the request for Treatment as an Assistance Eligible Individual are required to appeal.  This means that these documents will be reviewed by the DOL when the appeal is filed.  So I think it is very important to make sure your COBRA election notice and other COBRA documents are up to date.  An employee who appeals the denial of a subsidy could potentially trigger a bigger audit if your documents are defective.

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With all of the changes to COBRA and questions about the subsidy for COBRA participants, it is important to keep in mind that accuracy of information is still very significant.  Plan administrators should keep in mind that the $110 a day penalty still looms large when dealing with COBRA content of notices and timing of distribution.

This was brought home recently in In re Olick, a bankruptcy case out of the Eastern District of Pennsylvania.  (2009 WL 5214583).  The employee terminated his employment and the employer sent a COBRA notice 4 months late, with a termination date (qualifying event date) that corresponded with a later termination date.  The employer asserted that claims denied during that 4 months were denied in error, and that the employee's actual qualifying event date was the later date.  Because the employee was in bankruptcy, the issue was presented to a bankruptcy court, that awarded $13,000 in penalties to the employee because of the intentional "misstatement" of the qualifying event date in the COBRA notice.  Oddly, the Court found that even though the employee's claims were paid by the health insurance carrier, damages were still warranted because the dating of the notice was not merely a clerical error and was not made in good faith.  It appeared intentional by the company to protect the company.

DOL COBRA regulations require the election notice to identify the qualifying event and the date coverage will terminate unless COBRA is elected, but not the specific date of the qualifying event.  But if the qualifying event date is provided in the notice, it must accurately reflect the actual qualifying event date.  In this case, the penalties covered the 120 days between the actual qualifying event date and the one erroneously reported on the notice.

This decision is consistent with past decisions relating to COBRA notice requirements and penalties and it should serve as a gentle reminder to plan administrators that information provided to COBRA eligible participants should be timely and accurate.  Even though the participant might not actually be prejudiced by the receipt of incorrect information, it can still give rise to penalties under the regulatory framework.  So make sure whatever information you are providing is accurate and accurately reflects your own plan records.

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Before the east coast started digging out from under all the snow this week, the Department of Labor published the Model Notice for Employers to Use Regarding Eligibility for Premium Assistance Under Medicaid or CHIP.

By way of background, on February 4, 2009, President Obama signed the Children's Health Insurance Program Reauthorization Act of 2009. CHIPRA includes a requirement that the Departments of Labor and Health and Human Services develop a model notice for employers to use to inform employees of potential opportunities currently available in the State in which the employee resides for group health plan premium assistance under Medicaid and the Children's Health Insurance Program (CHIP).  The EBSA Notice providing explanations of the required content of the notice is available here.  The DOL's model notice is available here.

An employer that maintains a group health plan in a State that provides medical assistance under a State Medicaid plan under title XIX of the Social Security Act (SSA), or child health assistance under a State child health plan under title XXI of the SSA, in the form of premium assistance for the purchase of coverage under a group health plan, is required to make certain disclosures. Specifically, the employer is required to notify each employee of potential opportunities currently available in the State in which the employee resides for premium assistance under Medicaid and CHIP for health coverage of the employee or the employee's dependents.  These notices are referred to as ``Employer CHIP Notices''.

If a group health plan provides benefits for medical care directly (such as through a health maintenance organization); or through insurance, reimbursement or otherwise to participants, beneficiaries, or providers in one of these States, the plan is required to provide the Employer CHIP Notice, regardless of the employer's location or principal place of business (or the location or principal place of business of the group health plan, its administrator, its insurer, or any other service provider affiliated with the employer or the plan).

An Employer CHIP Notice must inform each employee, regardless of enrollment status, of potential opportunities for premium assistance in the State in which the employee resides. The State is which the employee resides may or may not be the same as the State in which the employer, the employer's principal place of business, the health plan, its insurer, or other service providers are located.

If you have questions about providing this model notice or your obligations to comply, please contact your attorney at Fox Rothschild.

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The Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA), which amended the Public Health Service Act, the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code, generally is effective for plan years beginning on or after October 3, 2009.   For calendar year plans, the effective date is January 1, 2010.  The Departments of Labor (DOL), Health and Human Services (HHS), and the Treasury have published an interim final rule implementing the provisions of MHPAEA. The regulation is effective on April 5, 2010, and applicable to plan years beginning on or after July 1, 2010.

Also available is a DOL Fact Sheet that explains the anticipated changes and impact of the provisions in the interim final rule.  It is not anticipated that this "interim" final rule will be changed between now and the July 1, 2010 final effective date.  

If you are familiar with the Mental Health Parity Act of 1996 (MHPA), you are probably aware of the requirements that there be parity with respect to aggregate lifetime and annual dollar limits for mental health treatment and other major medical benefits.  Since MHPA did not apply to substance use disorder benefits, MHPAEA was enacted to continue the MHPA parity rules as to limits for mental health benefits, and amended them to extend to substance use disorder benefits.  Therefore, plans and issuers that offer substance use disorder benefits subject to aggregate lifetime and annual dollar limits must comply with the MHPAEA’s parity provisions.

We expect more guidance to be issued, but for plan sponsors that are concerned about compliance with the new act, start with the assumption that treatment for addiction gets the same protection as treatment for other mental illness claims.  As more guidance is issued, we will post that information.

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As of November 30, 2009, 15 states had proposed mandatory sick-leave laws to require employers to provide paid sick days to employees.  San Francisco, Milwaukee and Washington DC have municipal ordinances that require some mandatory sick leave and the New York City council has proposed similar regulation.  Federal regulation was proposed on both the Senate and the House of Representatives.  The purpose of this entry is not to survey the state or cities that have adopted these regulations, and if you have concerns that you might be subject to mandatory sick leave laws, I encourage you to reach out to your attorney at Fox Rothschild and make sure you are in compliance.

Instead, I am looking at whether an employer can create a "sick pay plan" to satisfy the obligation to pay sick days and create an ERISA governed welfare plan.  Such a plan might be beneficial for an employer for tax purposes or administrative purposes, or it might be part of preserving employee good will.  Under IRC sections 105 and 162, a business cannot deduct wages paid to a disabled employee.  The key word is wages.  IRC section 106 requires that a company pay wages only to employees who render services.  However, a company can pay wages to disabled employees under a section 105 qualified sick-pay plan (QSPP).

Generally 29 CFR 2510.3-1 provides that the definition of "employee welfare benefit plans" in Section 3(1) of ERISA does not include arrangements that pay an employee's normal compensation, out of the employer's general assets, on account of periods of time during which the employee is physically or mentally unable to perform his or her duties, or is otherwise absent for medical reasons.  This "sick pay" exclusion is designed to exempt from ERISA requirements payroll and employment practices when the benefits are uninsured and paid out of the employer’s general assets, such as vacation pay, holiday pay and short-term disability pay or sick leave.

Generally we can assume that disability plans, when funded through insurance, are probably ERISA plans.  But what about a truly "short term" type of benefit that provides compensation for something like 5 missed work days?  Going back to PWBA Advisory Opinion 96-16A (8/27/1996), the DOL looked at a three phase disability plan that provided compensation replacement coverage for three disability periods: really short (5 to 10 days), short (11 days to one year) and long term (more than one year until retirement).  The plan replaced compensation where absences was due to illness or injury.  The plan was unfunded and paid out of the general assets of the company, but the Company retained discretion to pay benefits through a group disability income insurance policy, a trust or a separate account.

The specifics of this plan are not so interesting as the DOL's decision that the entire arrangement was not a "payroll practice" within the meaning of 29 CFR 2510.3-1.  But what if "phase one" coverage (5-10 days) was separated out?  Would that sick-pay arrangement have qualified?  What about a sick pay plan covering days 1-4?  In this case, I believe the answer lies somewhere closer to our analysis of severance plans and the determination of whether they should be treated as ERISA plans.  For example, we look to things like the funding arrangement and the ongoing administrative requirements.  An employer who pre-funds sick pay at the beginning of the year, or sets aside a trust from which sick-pay benefits are paid may be creating something outside the payroll function.  If the sick pay arrangement requires some additional administration beyond a simple payment of wages (such as cost of living adjustments or eligibility requirements) would appear to look more like a "plan" rather than a payroll practice.

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As promised in my last entry, the DOL has issued model notices to help plans and individuals comply with these requirements. Each model notice is designed for a particular group of qualified beneficiaries and contains information to help satisfy ARRA's notice provisions, including those added by the 2010 DOD Act the extend the subsidy period through Feb. 28, 2010.

The DOL Notices are available using the DOL website.  Click here for that connection.

Plans subject to the Federal COBRA provisions must provide the Updated General Notice to all qualified beneficiaries (not just covered employees) who experienced a qualifying event at any time from September 1, 2008 through February 28, 2010, regardless of the type of qualifying event, and who have not yet been provided an election notice. This model notice includes updated information on the premium reduction as well as information required in a COBRA election notice. 

Plan administrators must provide notice to certain individuals who have already been provided a COBRA election notice that did not include information regarding ARRA, as amended.  The model Premium Assistance Extension Notice includes information about the changes made to the premium reduction provisions of ARRA by the 2010 DOD Act.  This notice should go to:

1. Individuals who were "assistance eligible individuals" as of October 31, 2009 (unless they are in a transition period - see below), and individuals who experienced a termination of employment on or after October 31, 2009 and lost health coverage (unless they were already provided a timely, updated General Notice) must be provided notice of the changes made to the premium reduction provisions of ARRA by the 2010 DOD Act by February 17, 2010;
2. Individuals who are in a "transition period" must be provided this notice within 60 days of the first day of the transition period. An individual's "transition period" is the period that begins immediately after the end of the maximum number of months (generally nine) of premium reduction available under ARRA prior to its amendment. An individual is in a transition period only if the premium reduction provisions would continue to apply due to the extension from nine to 15 months and they otherwise remain eligible for the premium reduction.

Individuals who experienced a qualifying event (that was a termination of employment) in December 2009 but who were not eligible for COBRA coverage until January 2010 were likely not provided proper notice of the extension.  These individuals should get the Updated General Notice AND the full 60 days from the date the updated notice is provided to make a COBRA election.

Insurance issuers that provide group health insurance coverage must send the Updated Alternative Notice to persons who became eligible for continuation coverage under a State law.  Continuation coverage requirements vary among States and issuers should modify this model notice as necessary to conform it to the applicable State law. 

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The US Department of Labor has provided 2 more Fact Sheets regarding the COBRA subsidy extension.  One is a Fact Sheet that provides a general explanation of the extension.  The second is a Frequently Asked Questions sheet that answers some more specific questions from an employee's point of view. 

I found these notices particularly useful because the introduce the concept of "transition period" as it relates to the change from 9 months to 15 months.  An individual’s “transition period” is the period that begins immediately after the end of the maximum number of months (generally nine) of premium reduction available under ARRA prior to its amendment.  An individual is in a transition period only if the premium reduction provisions would continue to apply due to the extension from nine to 15 months and they otherwise remain eligible for the premium reduction.  Individuals in a transition period must be provided notice of the extension within 60 days of the first day of their transition period.  The notice must include information on the extension from nine to 15 months and the ability to make retroactive payments for certain unpaid reduced premiums.

Neither sheet specifically addresses what happens if an individual who would otherwise be eligible for the subsidy allowed the COBRA coverage to lapse prior to November 30, 2009.  But prior explanations provide that if an individual lost COBRA coverage because of expiration of eligibility (or failure to pay premiums) before exhaustion of the full 9 months and BEFORE 11/30/09, that individual cannot jump back into COBRA and get the additional 6 months.  There is no new "special election period" as there was under the first subsidy bill.

Bear in mind that there will probably be further revision to the COBRA subsidy rules as we get close to the 2/28/2010 sunset of this provision, so be prepared to issue new notices as more regulation and guidance are given.

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The DOL issued a fact sheet regarding the extension of the COBRA premium subsidy on December 23 and it is available here.  I think there are some points of clarification that are important in the notice. 

First, while the period for measuring the involuntary termination for eligibility must occur during the period that began September 1, 2008 and ends on February 28, 2010, the premium reduction period in this extension only applies to periods of health coverage that began on or after February 17, 2009 and lasts for up to 15 months. 

Second, the extension of the COBRA premium reduction eligibility period is currently only for two months until February 28, 2010.  In addition, individuals who had reached the end of the reduced premium period before the legislation extended it to 15 months will have an extension of their grace period to pay the reduced premium.  To continue their coverage they must pay the 35 percent of premium costs by February 17, 2010, or, if later, 30 days after notice of the extension is provided by their plan administrator.

Third, the notice seems to make clear that there is no premium reduction for premiums paid for periods of coverage that began prior to February 17, 2009.  Therefore, individuals whose nine months of subsidy expired before the passage of this extension would not be able to "re-elect" this extra six months of subsidy. 

Fourth, individuals who lost their subsidy and paid the full 100 percent premium in December 2009 should contact their plan administrator or employer sponsoring the plan to discuss a credit for future months of coverage or a reimbursement of the overpayment.

My interpretation is that if an individual exhausted their nine months of subsidy eligibility prior to November 30, 2009, or who dropped COBRA coverage prior to November 30, 2009 and did not pay December premiums would not be eligible to receive the additional 6 month extension.  So you have to be on COBRA, receiving the subsidy, and paid current thought November 30, 2009 to get the additional 6 months, which would then allow you to retroactively receive a refund of 65% from your December 2009 premiums.

Going forward, the new subsidy period is 15 months, so individuals who have not used up all 9 months of their subsidy eligibility should be told about the extension.  We are expecting a sample notice to be circulated shortly.

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Following up on last Friday's entry, the Senate approved the same extension of the COBRA subsidy that the House passed.  The nine-month, 65% premium subsidy is extended by six months to a total of fifteen months.  The subsidy now is available to those who involuntarily lose their jobs through Feb. 28, 2010.  The legislation also provides an additional six months of subsidized coverage for beneficiaries whose initial nine month COBRA premium subsidy has run out.  In addition, the legislation gives beneficiaries whose subsidy ran out and who did not pay the full premium a second chance to opt for coverage.  For example, a beneficiary whose nine months of subsidized coverage ran out Nov. 30 and who did not pay the regular unsubsidized December, 2009 premium can pay the 35% premium share in January, 2010 and receive coverage for December.  The legislation requires employers to notify current COBRA beneficiaries and future beneficiaries of the new 15-month premium subsidy.

The legislation applies to coverage under the federal COBRA law and Public Health Act and any state continuation laws ("mini-COBRA").  The law provides a subsidy for continuation coverage for any employee or dependent who loses coverage under a group health plan during the period beginning September 1, 2008 and now ending on February 28, 2010.  If an employee or dependent meets the definition of "qualified beneficiary" under COBRA, that person is eligible for a subsidy if he or she is entitled to COBRA as a result of the employee's involuntary termination of employment.

Qualified beneficiaries are required to pay only 35% of the required continuation premium for up to fifteen months, while the employer is required to pay the remaining 65% of the premium.  The respective portions of the premiums are based on the continuation premium that would have otherwise been required to be paid by the qualified beneficiary.  If the employer has already agreed to pay a portion of the COBRA premium as part of a severance agreement or other shut-down arrangement, the employee would need to pay only 35% of the portion of the premium not paid by the employer.

For plans subject to federal COBRA (insured, self-insured or self-funded), employers must cover the remaining 65% percent of the premium, but are entitled to a refundable credit taken toward payment of payroll taxes.  The credit is applied as though the employer had submitted an equivalent amount of payroll tax on the date the qualified beneficiary's payment is received.  This payroll tax credit only applies to COBRA premiums paid by the employer by reason of the law so employers who voluntarily agree to pay portions of COBRA premiums as a result of any other arrangement would not be entitled to the payroll tax credit.

The subsidy is not available to all former employees and their dependents.  The subsidy does not apply for any months that begin after the qualified beneficiary becomes eligible for coverage under another "group health plan" or Medicare. So the subsidy ends when the COBRA period would normally end. If a qualified beneficiary becomes eligible for another group health plan or Medicare during the subsidy period, the qualified beneficiary must provide notice of such eligibility to the plan.  A qualified beneficiary who does not provide this notice is liable for 110 percent of the improperly paid subsidy amount.

There is an income limitation that applies to qualified beneficiaries, but the employer is not required to administer or account for the income of the beneficiary when providing the subsidy.  A qualified beneficiary is not entitled to a COBRA subsidy during a year in which he or she is a taxpayer, or spouse or dependent of a taxpayer, whose federal modified adjusted gross income exceeds $145,000 (or $290,000 in the case of a taxpayer filing a joint return).  The available COBRA subsidy is reduced for years in which gross income exceeds $125,000 (or $250,000 for joint returns).  Qualified beneficiaries will be required to account for the subsidy on their own tax return so the employer will not be required to make any adjustment to its payment of the subsidy. As a result of the income limitation and other requirements for eligibility, qualified beneficiaries must make an election to receive the COBRA subsidy following notice of potential eligibility.

What is Required?

1.  Immediately change COBRA election notices to incorporate this new law by advising newly potentially eligible former employees and beneficiaries that the COBRA subsidy is available for 15 months (changed from nine months) relating to an involuntary termination of employment occurring on or before February 28, 2010 (changed from December 31, 2009).
2. Advise currently eligible beneficiaries who have elected the COBRA subsidy that eligibility has been extended from nine to fifteen months. This notice is required to be issued within 60 days from enactment (which is expected this week) to anyone who was receiving the subsidy on or after October 31, 2009. The U.S. Department of Labor is expected to issue model notices.
3. Provide special notice to those individuals who lost assistance of the ability to make retroactive premium payments. Payment of the premium must be made within 60 days of enactment of the law or 30 days from notice, whichever is later

.We are anticipating that additional guidance, model notices and regulatory explanations will follow over the next several weeks. In the interim, employers should prepare for immediate implementation of the COBRA subsidy extension and consider its impact in any decisions involving force reductions. For more information, or for assistance in compliance, please contact Steven K. Ludwig at 215-299-2164 or Keith McMurdy at 212-878-7919.

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On December 16, the U.S. House of Representatives approved legislation that would extend the federal subsidy of COBRA premiums for employees who were involuntarily terminated.

H.R. 3326, which was actually a bill that provided for Defense Department funding, include a provision that would extend the 9 month subsidy period by an additional 6 months (for a total of 15 months) and would extend the eligibility period to persons who have an involuntary termination through February 28, 2010.  The subsidy remains at 65% of premium, meaning employees would still pay 35%.

It appears that the general intent of the bill is to extend edibility through 2/28/2010.  There are no specific details yet with respect to whether those who have exhausted the 9 month existing subsidy could obtain the additional 6 months, or if those who have dropped COBRA coverage prior to 12/31/09 because of exhaustion of the subsidy will be eligible to re-elect coverage to take advantage of the extension.  Those details would have to come from the IRS and DOL, assuming the measure passes the Senate.

Also, H.R. 2847 is still pending with a provision to extend eligibility through June 30, 2010.  As with H.R. 3326, details are still missing concerning retroactive application but we anticipate guidance on that issue if either (or both bills) ultimately become law.  Stay tuned.

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As the 12/31/09 deadline approaches for eligibility for the COBRA subsidy, and with no extension yet approved, I wanted to go ahead and add some additional comments about the subsidy and eligibility.

First, I have received a lot of questions about whether there has to be an actual loss of coverage prior to 12/31/09 or if the qualifying event is enough.  Under one scenario, the employee is terminated on 12/10/09, but has coverage through the end of the month.  So he does not lose coverage until January 1, 2010.  That person does not appear to be eligible for the subsidy because they did not have both a qualifying event AND a loss of coverage prior to 12/31/09.  So they would not be eligible for the subsidy.

Second, I have received a number of questions from elected officials about their eligibility.  The IRS guidance states the following: An elected official that ran for office and was not re-elected and is out of office prior to 12/31/09 is considered to be involuntarily terminated; An elected official that completed his or her term prior to 12/31/09 and was precluded from running for re-election because of term limits is considered involuntarily terminated; An elected official who was eligible to run for re-election and chose not to run is considered to have voluntarily terminated and is not eligible for the subsidy.

I will continue to post as we get closer to the 12/31/09 deadline, so watch for additional guidance and commentary.

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In response to multiple questions about the COBRA Subsidy Assistance, the Department of Labor has created an updated website that can be accessed here.  Although the COBRA subsidy assistance has not been extended beyond December 31, 2009, there are bills pending in congress that would possibly extend it.  I believe that this effort by the DOL to provide more guidance indicates that there is likely an extension coming.

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The United States Department of Labor (DOL) has issued revised version of their Employment Law Guide and the First Step Employment Law Advisor, which are both available online here.

Ordinarily I would shy away from talking about general labor and employment topics, but I think it is very important for plan sponsors who are also employers to be aware of important compliance issues.  Because of the significant interaction between employment laws and benefit laws, I find that I routinely have to be cognizant of various general employment issues that impact benefit offerings and administration of benefit plans.  The employment law guide does include topics for health benefits and retirement benefits and they do have good information about record keeping standards for benefit plans.  There is also a link to the Reporting and Disclosure Requirements for Employee Benefit Plans, a guide published in October of 2008 that lists all required documentation for benefit plans under federal law. 

In addition, the Guide includes information about FMLA, wage and hour requirements and various workplace standards and postings that can help employers self-audit their employment practices.  There are also links for OSHA requirements and immigration standards, as well as the whistle-blower laws and WARN laws. 

The First Step Employment Law Advisor is an interactive tool that allows employers (or potential employers) to create a customized "results" list of federal laws that apply to them.  While it does not cover state laws, I found the information provided for federal regulations to be fairly comprehensive and easy to understand.  It would be a good resource for any employer looking to verify their employment practices.

In sum, I guess this entry is simply a reminder of the importance of general compliance in all forms of employment practices, not just employee benefits.  If you are an employer and a plan sponsor, I think these guides would be worth a look.  Of course if the standards presented raise any questions or concerns about your benefit or employment practices, you can reach out to your attorney at Fox Rothschild for more detailed assistance.

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Whenever I consider trying a new restaurant, I check to see about reservations.  Some places list them as "preferred," "required," "suggested" or "not taken."  Even establishments that require reservations may not really require them, but the thought of having to plan in advance sort of kills the adventure of changing plans.  Well, when it comes to administration of benefit plans, reservations are not only a good thing, they are absolutely required.

In this case, I am referring to reservation provisions in plans that allow the plan administrator to suspend, modify, amend or terminate any particular plan or benefit provided thereunder.  A well-drafted plan document (and corresponding summary plan description) will include plain language reserving the right of the sponsor to change the plan and modify benefits which then allows for a defense to claims that a particular benefit is guaranteed to participants.  The general rule is that for a plan to be able to change things, it has to tell participants that it has the ability to make changes.

Recently, the U.S. District Court for the Southern District of Iowa looked at a case where a class of retirees claimed that their former employer violated ERISA by amending their health insurance plan to eliminate certain medical benefits.  The retirees claimed that their right to the benefits was "vested" because they believed it was promised they would never lose benefits.  After trial, the Court ruled that the existence of a provision in the company plan providing that it could be amended or terminated at any time acted as a bar to any claim that the benefits could never be modified.  If a plan specifically reserves the right to change, then it can't be denied the ability to change.  See Brubaker v. Deere & Co., 08-CV-00113.

A reservation provision does not automatically provide an unfettered ability to modify plans.  Certainly there are numerous cases providing that separately bargained agreements or contracts can provide a specific limitation to the ability of a sponsor to amend a plan (like collective bargaining agreements or supplemental retirement programs).  But reservations provisions do provide some measure of protection to plan sponsors from general claims that amendment is prohibited.  At a time when many employers are looking at changing benefit plan structures to control costs, I would certainly recommend checking first to see if the plan has reserved the right to make the changes in advance of any decision to cut benefits.  And if your plan does not include such a provision, it should be amended to protect the sponsor going forward.

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Theresa Borzelli, a partner in our Roseland office, provides the following update on Medicare Part D notice requirements:

The November 15 deadline for providing the Medicare Part D creditable coverage notice is fast approaching. This annual Notice must be provided by an employer who sponsors a health plan with prescription drug coverage. The Notice explains the benefits provided under the prescription drug plan and whether the employer's plan is at least equal to the prescription drug benefits offered under Medicare Part D so the participant can make an informed decision as to whether to enroll in Medicare Part D. This November 15 deadline coordinates with the start of the annual Medicare Part D open enrollment.

This Notice of Creditable Coverage must be provided

--- at least annually before November 15;
--- whenever a Medicare-eligible employee enrolls in the employer's health plan;
--- whenever there is a change in the creditable or non-creditable status of the employer's health plan's prescription drug benefit coverage;
--- whenever an individual requests the Notice.

Employers who establish their own Part D comparable plan or who contract for such a plan do not have to provide the Notice.

The Centers for Medicare and Medicaid Services (CMS) includes sample Notices and guidance on its website.

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In light of New York's recent adoption of coverage for individuals up to age-29, I thought it would be worthwhile to consider what other states have passed similar laws.  This is by no means intended to cover all of the specifics of each state, but I thought it was interesting to see the number of states that provide some insurance extension options to adult children.

1. Colorado: Adult can be eligible until the 25th birthday
2. Connecticut: Coverage up to age 26
3. Delaware: until they turn 24
4. Florida: up to age 25
5. Idaho: also until age 25
6. Illinois: until age 26, unless they are veterans and then to age 30
7. Indiana: until age 24
8. Iowa: under age 25
9. Maine: up to age 25
10. Maryland: also up to age 25
11. Massachusetts: age 25 again
12. Minnesota: unmarried children up to age 25
13. Montana: age 25
14. New Hampshire: until age 26
15. New Jersey: until age 30
16. New Mexico: age 25
17. Oregon: age 23
18. Pennsylvania: Age 29
19. Rhode Island: age 25
20. South Dakota: until their 29th birthday
21. Texas: up to their 25th birthday
22. Utah: until their 26th birthday
23. Virginia: under 25
24. Washington: up until age 25

Each of these states have specific rules for eligibility and age is not the only requirements.  Most require children to be unmarried, and some do have residency restrictions.  However, it does appear that all of these rules apply to insured policies issued specifically in those states, so self-insured or self-funded plans would not be impacted.  State rules vary with respect to whether an employer is required to provide the extension, has an option, or if it is strictly a requirement on the part of the insurance company.

So, in sum, don't assume that children automatically age off of the plan if they are "of age" and not a full time student.  Check with your benefit professional (or your attorney) to confirm that you are offering appropriate coverage to adult children.

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In conjunction with the 2008 amendments to the Americans with Disabilities Act, the Equal Employment Opportunity Commission is proposing certain changes to its rules and regulations governing disability issues under the ADA.  While these proposed changes may not have a direct impact on administration of disability plans, they certainly will add a level of confusion over what is and is not a "disability" when dealing with employees and plan participants.

The proposed rules impact the way disability is defined for purposes of determining whether an impairment exists.  A disability is traditionally defined as something impairing major life activities.  The rules somewhat broaden the definition of disability to include major bodily functions (e.g., "functions of the immune system, normal cell growth, digestive, bowel, bladder, neurological, brain, respiratory, circulatory, endocrine, and reproductive functions") as part of major life activities.  The new rules will also provide that an employee no longer has to show that the employer perceived the individual to be substantially limited in a major life activity, and instead says that an applicant or employee is "regarded as" disabled if he or she is subject to an action prohibited by the ADA (e.g., failure to hire or termination) based on an impairment that is not transitory and minor.  This will have substantial impact on considerations for reasonable accommodation.

I say that this should not have a significant impact on disability plans because the definition of "disabled" under most disability plans requires some showing that the participant is unable to perform the material and substantial requirements of their primary job function.  Plans generally anticipate an individual becoming disabled rather that being disabled at the time of enrollment.  However, I do believe that the broadening of the ADA definition of disability will require disability plan administrators to be more cognizant of how impairments of major life functions (now not necessarily purely physical in nature) can raise to the level of a complete disability under a plan definition.

For example, a cognitive impairment does not typically manifest itself in outward ways.  As a result of a neurological condition, an employee/participant may develop memory loss or difficulty with fact retention.  Under the new ADA definition, this cognitive impairment would appear to be a disability affecting a major life function (that of communication and neurological difficulty).  The impairment alone may not trigger a claim for disability benefits, but it might require an employer accommodation under the ADA.  If the impairment progress to the point where the employee can no longer function in their job, it would arguably give rise to a claim as a disability under the disability benefits plan.

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By now most plan administrators should be aware that there is something called the HITECH Act and that the ARRA of 2009 made some changes to HIPAA with respect to medical privacy and security regulations.  In my August 24, 2009 entry about plan compliance items, I make reference to the HITECH Act and the new "security breach" requirements and the need to update business associate agreements.  But as a follow up, I wanted to dig a little deeper into what this security breach component is and what it means and take a look at the creation of a class of information called "unsecured protected health information."

Often when I am having discussions about HIPAA, questions are are raised about what constitutes PHI.  Technically it is individually identifiable information about past, present or future medical care or diagnosis.  So while the medical care or diagnosis part was protected, the individual identifiers themselves were NOT protected by HIPAA privacy.  Now I believe that changes.

ARRA creates a class of information called “Unsecured Protected Health Information” which is protected health information (PHI) that is not secured through the use of a technology or methodology specified by HHS as one that renders the PHI as unusable, unreadable or indecipherable to unauthorized individuals.  In other words, if it is not encrypted under the technology requirements, it is unsecured.  And that may be all there is too it.  But I actually think unsecured PHI might go a little deeper. 

I think that unsecured PHI might also be that that information that is part of the PHI records, but not necessarily PHI that is specifically secured and protected by HIPAA.  So I think we might  now have "secured PHI" like a medical diagnosis, and "unsecured PHI" which would be the social security number of the patient who received the diagnosis.

The Department of Health and Human Services is required to issue guidance specifying the technologies and methodologies that render PHI as unusable, unreadable or indecipherable to unauthorized individuals within 60 days of the enactment date (i.e., April 18, 2009) and annually thereafter.  Until the guidance is issued, covered entities may rely on a technology or methodology which is developed or endorsed for this purpose by a standards developing organization accredited by the American National Standards.  That would appear to cover the technological component but I think it overlooks the fact that PHI does not exist only in electronic format.  You can't encrypt a piece of paper, but you still have to protect what is on it.

So I think that, at least in some respects, the purpose of the ARRA changes is that while technically all PHI is protected, not all ancillary information contained within the PHI is necessarily subject to the current protections.  If secure PHI is improperly released, there are corrective mechanisms in place under the original regulations.  But what to do about that ancillary information that was part of the PHI that is not necessarily protected but should still be secured?  Maybe it is now defined as unsecured PHI and new standards apply to it.

The ARRA creates a new notice obligation when the security of an individual’s unsecured PHI is breached. In other words, if unsecured PHI (like social security numbers) gets out, the entity that let it escape has breached this new obligation to protect it. The security of that information is compromised. If the security of this PHI is breached or believed to have been breached, then the covered entity that becomes aware of the breach must notify each impacted individual of the breach, in writing, without unreasonable delay but no later than 60 calendar days after discovery of the breach. Business associates are subject to the same requirement except that the business associate must notify the covered entity of the breach.

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In conjunction with New York State continuation coverage and the ARRA (which provides for the 65% subsidy), the New York Department of Insurance has published a model New York State Continuation Coverage election notice.  It is available through this link.  This notice applies to New York state continuation coverage (mini-COBRA) and includes the subsidy election form.

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In connection with the 65% COBRA subsidy that went into effect earlier this year, there is a provision that provides that an individual is no longer eligible for the subsidy if they are eligible for other coverage, including Medicare.  This means that if an employee is receiving the COBRA subsidy and gets a new job and becomes eligible for coverage with that new employer, they are no longer eligible for the 65% premium subsidy.

The IRS has clarified that an individual who is receiving the subsidy is under an affirmative obligation to notify their old employer that they are eligible for other coverage and that they must cease receiving subsidy payments.  Individuals who continue to receive subsidy payments after they are eligible for other coverage are subject to a penalty under new IRC Section 6720C.  That penalty is 110% of the subsidy obtained after the date of eligibility for new coverage. 

The model notices issued by the IRS included a model form for notifying plans that the employee is eligible for other coverage.  In addition, the IRS has provided that anyone who suspects that an individual is receiving a subsidy after they become eligible for other coverage may report the violation to the IRS using form 3949-A (Information Referral).  Click here of a copy of the form.

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By this time, all health plan administrators should be aware of the required annual notices like the Women's Health and Cancer Rights Act notice and the Medicare Part D notice.  Plus we have updated our COBRA notices to comply with the COBRA subsidy requirements of the ARRA.  So now let's take stock of what changes are in store for 2010.

1. Mental Health Parity Act.  For plan years after 10/3/09, a group health plan that provides mental health and substance abuse benefits cannot have special caps for benefits related to treatment for these disorders.  Co-pays, deductibles, limits and out-of-pocket expenses cannot be more restrictive for these treatments than for medical or surgical benefits under the plan.

2. COBRA Subsidies under the ARRA.  Remember that the COBRA subsidy is currently set to end as of December 31, 2009, meaning that for qualifying events occurring after 1/1/2010, COBRA notice and election forms will NOT contain information about eligibility for the subsidy.  So plan administrators should be prepared to go back to standard COBRA notices (unless the subsidy is extended).

3. Children's Health Insurance Program Re-authorization (CHIP).  As of April 1, 2009, all plan must provide for the special 60 day enrollment period for employees and dependents who become eligible or cease being eligible for premiums assistance under Medicaid or state children's health insurance programs.  Plans have to be updated to include this special enrollment period.  There is also an annual notice requirement beginning 1/1/2010.

4. Michelle's Law.  For plan years after 10/9/09, a group health plan cannot terminate coverage for a dependent college student because of a loss of full-time student status where the loss of status is due to a medically necessary leave of absence.  Information about Michelle's Law must be provided with any notice explaining eligibility for coverage as a dependent student.

5.  Genetic Information Non-Discrimination Act.  For plan years after 5/21/09, the plan must provide that genetic information cannot be requested, required or purchased for underwriting purposes and will not be used for enrollment.  Also, participants cannot be required to undergo a genetic test and genetic information cannot be used to set contribution rates or premiums. 

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In an era where we all like to see statistic and trends, the Internal Revenue Service has obliged by publishing a list of common recurring mistakes it sees in large case audits of qualified retirement plans.  The mistakes were identified through submissions under the Voluntary Correction Program.  While this list mainly identifies concerns with qualified retirement plans, it also provides a pretty fair checklist of concerns for welfare plan administrators looking to ensure compliance. 

Common Mistakes Across All Retirement Plan Types.  This first list covers the general common problems associated with  both defined contribution and defined benefit retirement plans.  Note that many would apply to welfare plans generally:

1. Failure to timely amend the plan document for changes in the law;
2. Failure to follow the plan's definition of and limits on compensation for contribution purposes;
3. Failure to enroll eligible employees and/or to exclude ineligible employees;
4. Failure to meet the legally-required minimum distribution provisions in the plan;
5. Failure to follow the in-service distribution provisions in the plan;
6. Failure to use correct distribution forms, make timely distributions and file correct tax reporting on distributions;
7. Failure to follow the plan's vesting schedule;
8. Failure to retain records and maintain internal controls regarding administration of the plan;
9. Failure to follow the terms of a qualified domestic relations order (QDRO); and
10. Exceeding the legal maximums on contributions and benefits under the plan.

Common Mistakes for 401(k) Plans in particular.  A more detailed list is provided specific to  401(k) plans:

1. Failure to pass ADP/ACP nondiscrimination testing
2. Failure to to provide for minimum top heavy benefit contributions
3. Failure to Satisfy IRC 415 limits

Common Mistakes for Defined Benefit Plans.  For defined benefit plan, the list includes:

1. Benefit calculations based on inaccurate data;
2. Failure to provide the required notice when benefits are suspended; and
3. Premature or delinquent commencement of benefits.

To access the EPTA Audit Team Compliance Trends and Tips click here.  What is interesting about this link is that it also provides a link to the "Correcting Plan Errors" main page which has guides for identifying and correcting plan errors, including a 41 page guide to identifying and fixing common 401(k) errors.  Bear in mind that the IRS specifically disclaims providing legal advice and reliance on the guide is not a justification for avoidance of penalties and interest if a subsequent audit does reveal problems with the plan.  But as a starting point, plan administrators should at least consider this summary a checklist of useful things to look at and discuss with their plan professionals.

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A partner of mine recently came to me with this question: if any employee is out on leave, when does the employer send the COBRA notice?  "Good question" I said, "what type of leave and what does the company's leave policy provide?"  Well, it got me to thinking (and researching) COBRA and leaves and when the "qualifying event" is triggered.

I came across an article about a case called Jennings v. Crane, out of the Western District of Kentucky where an employee was terminated while out on leave.  The company wanted the COBRA to qualifying event to be when the leave started.  The employee said it started when he was fired.  In the end, the Court sided with the employee, but did so after looking at the company leave policy and what the health plan said about leaves of absence.  In other word, what did the plan sponsor tell the participants about COBRA and leaves of absence.

The DOL is very specific about what happens while an employee is out on FMLA leave.  An FMLA leave is not a qualifying event, but a qualifying event may occur when the employee notifies the employer of the intent not to return to work.  The DOL is much less specific about COBRA when someone is out on some other type of leave.  The employer has to define how leave will apply.

Hypothetically, think of an employee who goes out on a leave for 6 weeks.  At the end of 6 weeks, the employee does not return to work and the employer has no idea if he will ever return.  Is that a qualifying event under COBRA?  Is the employee treated as losing coverage in the day he does not return to work?  Can he extend the leave indefinitely and never trigger COBRA?  All are possible if the employer is not paying attention and does not take the time to the following:

1.  When you design your group health plan, decide how a leave of absence will be treated and when the leave will trigger COBRA continuation.  A plan sponsor can clearly define when the loss of coverage will occur under various leave situations.

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Some interesting changes to Pennsylvania and New York health insurance laws have come through recently that warrant some attention.  They deal with the extension of coverage through age 29 and also the extension of continuation coverage as a whole.

First, Pennsylvania.  Effective June 10, 2009, Pennsylvania allows for adult children to retain coverage under their parents'' health plan up to age 30 (or through age 29).  Unmarried children who have no dependents, are residents of PA or are full time students are eligible for this extension.  The extension of coverage is at the option of the employer and does not preclude an increase in premiums for employers who elect the extension coverage.  Insurers writing policies or renewals after December 7, 2009 (180 days after the effective date of the law) are obligated to offer the extension coverage and employers may elect to include the coverage.  It applies only to medical coverage, not to vision and dental.  Self-funded plans are exempt.  Because employers are not mandated to make the coverage available, and because the extension could increase overall premiums for the employer, we will have to watch to see how many employers actually implement the coverage.

Second, New York.  Effective July 24, 2009, New York requires commercial insurers providing group health coverage to extend an option to continue group health coverage to unmarried children who have "aged off" of their parents' group plan.  Adult children can maintain the coverage through age 29 provided they are not eligible for other employer coverage and are not covered by Medicare.  Employers are not required to pay the premiums for the adult children who elect this coverage, so the election is entirely at the discretion of the adult child and not controlled by the employer.  This law is apparently directed at insurers only and will not require employers to make any specific election.

Third, New york again.  This one is a little trickier and will require further clarification.  Effective July 1, 2009, commercial insurers offering group health policies are required to offer continuation coverage for 36 months.  This extension would allow employees or members who have otherwise exhausted federal COBRA to maintain coverage for up to 36 months if the COBRA benefits did not extend to that full 36 months.  This bill allows workers, regardless of the size of their employer, to extend coverage to the full 36 months by returning to state continuation coverage after federal COBRA has been exhausted.  Eligible participants have to pay the premiums but their experience may impact the overall rating for employers.  This additional 18 months should not be subject to the federal COBRA subsidy regulations.  Again, as a new law, we will have to watch for the actual impact, but for now it looks like after the 18 months of COBRA is exhausted, the participant could continue to obtain an additional 18 months of continuation coverage on their former employer's New York insurance policy.

We will continue to monitor these new laws and update employers on the impact and any guidance issued.  However, employers in New York and Pennsylvania should make themselves aware of these changes and be prepared to seek counsel if employee ask questions about how they can take advantage of these options.

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One of the most significant debates about wellness programs has been what works best, the carrot or the stick.  Can you increase wellness amongst a population by providing incentives to employees to watch their health risk factors, or is it better to punish them for not getting healthy?

The July 8 edition of the Wall Street Journal Online has an interesting article about the efforts of AmeriGas to increase employee participation in its "voluntary" wellness program.  Workers were given 1 year to complete various physicals, which were covered at 100%, or risk losing their health insurance.  The article goes on to discuss the anecdotal results of employees who discovered poor health as a result of the tests and were encouraged to get healthier. 

Obviously the "complete the tests or lose coverage" sounds like a big stick.  But ultimately the wellness program still ends up relying on employees wanting to get healthier after hearing their tests results.  AmeriGas did not tell employees they would lose coverage if they had bad test results, which is a significantly different stick.  I have talked in the past about the difficulty of requiring employees to get health or face higher premiums.  I have also talked about the possibility of using a reduction in premiums for employee who do get healthier, through things like smoking cessation incentives, weight loss incentives and the like.  The AmeriGas approach presents a third option, forcing them to get tested so at least they can see what they need to fix.

The recent congressional efforts to address nationalized health care have wellness components as part of the focus.  The problem will be if employers take this effort too far and start to discriminate against workers based on health conditions.  Any employer thinking about implementing any type of wellness program, be it increased premiums, decreased premiums or mandatory testing, must take into consideration the discrimination laws of the state in which it operates.  States vary considerably in their definition of "protected classes" for disability purposes.  Mandating a particular lifestyle could subject employers to claims of discrimination depending on the steps taken.

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Having written about same-sex marriage and civil unions in the past, I would be remiss in not mentioning that New Hampshire has become the sixth state to legalize gay marriage.  However, in a unique twist, the bill legalizing same-sex marriage exempted "church-related organizations that sere charitable or education purposes are exempt from having to provide insurance and other benefits to same -sex spouses of employees."

As previous posts have noted, this recognition does not automatically mean that same-sex spouses will be recognized as beneficiaries under plans governed by ERISA.  However, non-qualified plans will likely have to be administered with the same-sex spouse as a recognized "souse" or beneficiary once the same-sex union is performed.

The New Hampshire law also provides that couples in a civil union will automatically be assumed to be in a civil marriage, so plans providing benefits to civil union partners should be revised to recognize that this equates to legal spouse, at least for residents of the state of New Hampshire.

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In recent months, we have seen an increase in severed employees filing claims for wrongful discharge under a variety of theories.  It is easy to forget that ERISA also contains a possible remedy under Section 510.  Section 510 provides that it unlawful for an employer to discharge an
ERISA plan participant for the purpose of interfering with the attainment of any right
to which such participant may become entitled under the plan.

Such was the case in Pendelton v. QuikTrip, decided by the 8th Circuit on June 9, 2009.  Pendelton told his employer that he was leaving but agreed to postpone his departure while transitioning his work.  During the transition, he disparaged a co-worker and was terminated by his employer.  He sued for wrongful discharge, alleging that his termination was a 510 violation because he was terminated to avoid certain benefits under the severance plan, including stock option benefits.  The Court disagreed, reasoning that he was not entitled to the benefits claimed in the first place, so his termination could not have been to avoid payment of benefits to which he was entitled.

I think this case is important because it reminds us of the standard that has to be set in section 510 claims.  The common view is that a claim under this section is viable if the plaintiff can allege simply they were fire because they made a claim for benefits.  They tend to overlook that for claim to survive, there had to first be a right to obtain the benefits.  It is not enough to say "I was terminated because I asked."  It must be "I was terminated because I asked for what I was entitled to."

I also think that it is very important for employers and plan sponsors who are downsizing to evaluate the benefits severed employees are entitled to upon termination and provide those benefits correctly.  If employees have made a claim for benefits to which they were entitled in the past, the employer should make sure that these benefits were provided.  If they have made a claim for benefits to which they were not entitled, make sure proper notice and appeal rights are provided.  But don't assume the claim will simply go away if the employee is terminated. 

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New Jersey and New York have mini-COBRA statutes which essentially provide for application of certain continuation rights for benefits when COBRA does not apply.  Pennsylvania has now adopted its own version.  Sarah Ivy of our Chester County Office summaries the new "Pennsylvania Mini-COBRA" as follows:

Pennsylvania has enacted a Mini-COBRA law (“Mini-COBRA”) that requires employers with fewer than 20 employees to provide COBRA-like benefits. Generally, small employers with fewer than 20 employees are exempt from the Federal COBRA laws requiring continuation of group health care coverage when there is a termination of employment (or reduction of hours) resulting in a loss of group health care coverage. Pennsylvania’s Mini-COBRA law becomes effective on July 10, 2009 and applies to group health insurance policies that are issued to employers with more than two but fewer than 20 employees.

Under Pennsylvania's Mini-COBRA law, eligible employees (and their dependents) may elect to continue group health within 30 days following the occurrence of a “qualifying event,” including termination from employment, divorce, death, or loss of dependent status.

Eligible employees include those employees who:

1. had coverage under their employer’s group health plan for the three months prior to termination,

2. are not eligible for Medicare, and

3. are not eligible for or covered by other private group health insurance.

Eligible employees who elected continuation coverage under Pennsylvania's Mini-COBRA law may be required to pay up to 105% of the group rate (unlike 102% under Federal COBRA). Further, employees who are involuntarily terminated between July 10, 2009 and December 31, 2009, must be offered a Mini-COBRA subsidy equal to 65% of the premium under the American Recovery and Reinvestment Act of 2009.

While Pennsylvania’s Mini-COBRA law mirrors the Federal COBRA statute in several ways, there are significant differences, including:

Mini-COBRA is available for nine months, as opposed to 18 or 36 months under Federal COBRA;
Mini-COBRA applies only to hospital, surgical, and major medical policies, and does not apply to vision and dental plans;
Mini-COBRA requires three months of coverage before employees become eligible as opposed to one day of coverage under Federal COBRA;
Mini-COBRA ends upon eligibility for Medicare or group hospital, surgical or major medical coverage; whereas Federal COBRA eligibility ends upon actual enrollment or coverage;
Mini-COBRA requires employee verification of non-eligibility for employer-based health insurance as a dependant through, for example, a spouse’s group health plan; and
Insurers, and not employers, bear responsibility for notifying eligible employees about their rights under Mini-COBRA. The plan administrator, or the employer if there is no designated plan administrator, is responsible for notifying the insurer of an employee’s Mini-COBRA election within 14 days of receipt.

In order to prepare for the July 10, 2009 enactment of Mini-COBRA, small Pennsylvania employers should work with their group health plan insurers to ensure that the requirements of Mini-COBRA are satisfied. Additional regulatory guidance is expected from the Pennsylvania Department of Insurance.

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In previous entries on this topic, I have noted that we should be continuing to receive guidance from the Department of Labor and the IRS on how to administer the subsidies.  Once employers got past the notice period, the task of administration becomes the main focus and the IRS has given some additional explanation of the administrative process by adding 19 new questions and answers to their website on subsidy compliance.

Some highlights:

(1)  As long as an employer's determination that an employee's termination was involuntary is consistent with a "reasonable" interpretation of the statutory provisions defining "involuntary termination," the IRS will not challenge the employers determination when considering whether an employer is entitled to a payroll tax credit for a terminated employee.  I believe this creates a "reasonableness" standard of review in future audits that will allow protections for "good faith" efforts to comply.  So a mistake will not result in a penalty if it was based on a reasonable interpretation of the rules.

(2)  An employer must retain appropriate documentation of its determinations that includes a statement by the former employee or employer that the employee was involuntarily terminated. Forms requesting treatment as an assistance-eligible individual may be used for this purpose.  I have also been considering, at least initially, keeping copies of  of any termination letters or resignation letters with the subsidy request forms as verification of the termination process.

(3) In a nod to employer concerns regarding treatment of control groups, In situations where one employer maintains a plan on behalf of related employers in the same controlled group, each of the employers will be viewed as a separate employer for payroll tax purposes.  In these cases, the payroll tax credit must be appropriately allocated among them, presumably based on the EIN numbers of each employing entity.  It also appears that, in certain circumstances, one state agency that maintains a plan can claim the credit for other state and local government agencies that participate in the plan.

(4) And finally, some additional good news.  No information reporting of the COBRA premium subsidy is required to be provided to an assistance-eligible individual or to the IRS by an employer, multiemployer plan or insurer.  However, any person claiming a payroll tax credit for the COBRA premium on Form 941, Employer's Quarterly Tax Return (or other applicable form) must keep records of the individual payments and other documentation to support the credit claimed.

For more answers provided by the IRS to multiple questions, please click here.

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Since COBRA is a very hot topic right now, I also thought this case might be of interest. 

In Laselva v. Schmidt, the District Court for the Northern District of New York affirmed that there is no qualifying event when health insurance coverage is canceled due to an employer's non-payment of premiums.  An employee sued in state court alleging that his employer breached his employment agreement by terminating health coverage and that COBRA was violated because no continuation coverage was offered.  The employer terminated the coverage by ceasing to pay premiums for the coverage. 

The case was removed to federal court and the federal court found that the COBRA claim was merit-less, remanding the case to state court.  But in doing so, the Court found that in order for COBRA to apply, the basic rule is that there has to be a "qualifying event."  A loss of coverage due to the employers termination of the health coverage, or failure to pay the premiums so that the coverage is terminated, does not create a qualifying event.

While not discussed in the decision, I believe that it is worth mentioning that the new COBRA subsidy rules have a similar restriction.  A former employee can only get COBRA, and can only receive the subsidy, so long as there is a plan in which to continue.  So if the employer terminates the coverage, the plan and the subsidy both disappear.

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In conjunction with the COBRA subsidy application (the Request for Treatment as a Subsidy Eligible Individual), there is a mechanism that was created to appeal the denial of the subsidy directly to the United States Department of Labor.  The link for DOL website for making an appeal is here.

The appeal can be made on-line, or can be submitted via paper to the DOL.  the notice included with the application confirms that to be eligible for the subsidy, an employee must (1) be eligible for COBRA between 9/1/08 and 12/31/09, (2) elect coverage and (3) have a qualifying event involving an involuntary termination.  While the statutory creation of the appeal process seems to require a ruling within 15 days, nothing in this form references that specific time frame.

From an employers perspective, nothing in the notice defines how the appeal review will be conducted.  The employee seeking to appeal the determination is asked to submit documentation that will be reviewed, but there is no commitment that the DOL will contact the employer or plan administrator for further clarification.  It remains to be seen how they will be contacted, but it is safe to assume they will be contacted to verify the information submitted by the employee on appeal.

I think that initially, employers should work with their legal counsel if they are notified of an appeal (or receive an inquiry about a denial of the subsidy) simply to control the process so that it does not broaden in scope into a deeper "employee benefits" audit by the DOL.  I believe it is likely that this type of appeal and investigation will give the DOL the opportunity to identify potential problem employers or plans to conduct a more thorough investigation of their plan administration.  Employers will also want to be very careful about their responses to an investigation as they could be considered admissions to the DOL of faulty employment practices that could give rise to a DOL or EEOC investigation.  In sum, employers should not assume the DOL is just interested in dealing with the appeal and should be very careful about how they respond.  I am not suggesting the DOL is the "enemy,"  but employers should be careful if contacted. 

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Unfortunately, these difficult economic times increase the likelihood that employees will be moved to part-time employment.  From an employee benefits perspective, moving someone to part-time can have an impact on things like eligibility and vesting so employers and plan administrators have to be aware of the various requirements in the regulations and how they define "part-time."

First, there is the 1000 hours per year requirement in IRS Code Sections 410(a)(3)(A) and 411(a)(5)(A).  For retirement plans, this means that eligibility and vesting for a "year of service" are satisfied when someone works 1000 hours in the plan year.  So going to "part time" for retirement plan purposes would really be governed by the 1000 hours measurement and working more than 1000 hours in a year would still constitute a full year of service even if it was not a 40-hour work week.

On the other hand, not all benefit plans are under that same requirement.  Major medical plans are governed in part by the eligibility requirements of 105(h), and 105(h)(3)(B) permits exclusion for part-time employees without specifically defining "part-time."  The 1000 hours does not apply to these plans, but IRS commentary provides that part-time means someone who has customary employment of less than 25 hours per week.  So eligibility to continue to participate in those plans may be protected by working an average of 25 hours per week, which is more than the 1000 hours for retirement plans.

Add to that the confusion over Section 125 plan and Section 129 Dependent Care Assistance plans.  Like retirement plans, they are subject to discrimination testing, which would seem to require the 1000 hour measurement (Section 129 actually references 410(a) and the 10000 hours).  However, Section 79 life insurance plans follow the same definition as Section 105(h), which means they permit exclusion for part-time employees without considering the 1000 hours of service.  Add to this the new requirement for Section 403(b) plans (a type of retirement plan, unusually for non-profit institutions) that retains the 1000 hours but provides that the plan generally does not have to be offered to employees expected to work fewer than 20 hours per week and you can see where there would be some considerable confusion over what it means to be "part-time."

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With all the excitement over COBRA compliance, it is important to remember that a reminder of the availability of HIPAA Privacy Notices are supposed to go out every three years.  The initial notice was due April 14, 2003, and then a reminder was to be sent April 14, 2006.  That means that another reminder is due April 14, 2009.  Health plans that have changed privacy practices or policies during the interim should issue a new notice and not simply a reminder that a notice is available.

The privacy notice reminder can be very short and need only remind participants that the privacy notice for the plan is available to them.  The reminder should include an explanation of how they can obtain the actual notice, be it from a company internet site or by making a request in writing to the plan administrator.  The reminder requirement can be satisfied in a variety of ways, including by (1) sending a copy of the actual privacy notice, (2) mailing the reminder to participants, or (3) including the reminder in a plan newsletter or some other publication.  However, it does not appear that electronic distribution of the reminder (such as through company e-mail) is satisfactory as it is not likely to be viewed by all intended recipients.

If your plan is an insured plan administered by an insurance company and you as the employer are not directly involved in the creation and distribution of notices, it is still recommended that you confirm wit your insurance company that a reminder has been issued and obtain a copy for your files.  If you have not previously issued any privacy notice or established privacy practices and procedures, please consider this a reminder that it has to be done.

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The COBRA subsidy portion of the American Recovery and Reinvestment Act includes a provision applying the 65% subsidy to state continuation programs, frequently referred to as "mini-COBRA."  These state provisions apply to groups with fewer than 20 employees that are not regulated by federal COBRA.  New Jersey has state continuation coverage for groups with fewer than 20 and the state Department of Banking & Insurance has issued its own guidelines on its continuation program and the subsidy.  There are two links, one for the State 2009 Recovery and Reinvestment Plan, and one from the Department of Banking & Insurance dealing directly with the subsidy.

Some key things that I picked out in these notices clarify how New Jersey mini-COBRA will be subsidized.  First, it is pretty clear that the state anticipates that the subsidy for these smaller plans will be handled directly through their insurance carriers.  Second, it will definitely not apply to the those dependents who are eligible for continuation as a result of the Age-30 extension.  New Jersey also clarifies that the subsidy will not apply to those who lost coverage as a result of reduction of hours. 

There were also two additional comments that jumped out at me.  New Jersey continuation is generally not available to those who were terminated "for cause."  Arguably, that means that those who were terminated for cause would not be eligible for the subsidy because they would not be eligible for the continuation coverage under state law.  This does not mean they could not apply for the subsidy, but it does appear that they would not receive it.  I expect multiple appeals on this issue.  Second, civil union participants are likely not eligible for the subsidy because, while recognized as participants in New Jersey, they are not recognized by federal law and would not be subsidy eligible individuals.  But the department has cautioned they are awaiting more guidance on this issue.

If you are subject to New Jersey mini-COBRA, I highly recommend you talk to your insurance provider to make sure they have all of the information they need from you to administer the subsidy program.

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The United States Department of Labor has issued four model notices for employers and plan sponsors to use in conjunction with administering this new subsidy. The model notices are available at the DOL website at http://www.dol.gov/ebsa/COBRAmodelnotice.html. Each notice must be specifically tailored and customized to provide accurate information for the employer or plan issuing the notice.

General Notice (full version)

This notice must be sent to all employees and qualified beneficiaries who experienced a qualifying event on or after September 1, 2008, through December 31, 2008, regardless of the basis for the event. This is essentially the “new” general COBRA notice to be distributed to plan participants at the time of a qualifying event. It is captioned as being for individuals who have not yet received an election notice. However, the instructions from the DOL appear to make it clear that this notice should be distributed to everyone even if they have already received a notice.

It includes a COBRA election form for the participant to complete, as well as an optional form for switching COBRA benefit options if the plan permits assistance eligible individuals to elect to enroll in different coverage. The participant must also complete and submit a “Request for Treatment as an Assistance Eligible Individual” to be used by the employer to determine if the participant will receive the subsidy. The employer will then be required to notify the individual of their eligibility for the subsidy. Finally, it includes a model form for participants to notify employers or plan administrators that they are eligible for other coverage to lose the subsidy.

General Notice: (abbreviated version)

This notice is sent to those who had a qualifying event on or after September 1, 2008, but who have already elected COBRA coverage. If a person is already elected COBRA, they would get this notice instead of the full general notice. It is not limited to those who were involuntarily terminated. It does not include the election form (since an election has already been made) but does include the Request for Treatment as an Assistance Eligible Individual and the form to notify the employer of other coverage.

Alternative Notice

This form mirrors the full version of the General Notice, but applies to those individuals eligible for state continuation coverage (“mini-COBRA”) that generally applies to employers with fewer than 20 employees.

Notice in Connection with Extended Election Periods

As an alternative to the General Notice, if you have participants where the employers knows specifically that the qualifying event was an involuntary termination, those individuals are entitled to take advantage of the special extended election period. If they were COBRA eligible and did not elect (or did elect and subsequently terminated COBRA coverage before February 16, 2009), they are entitled to receive notice of the special election period. It contains the same form requirements as the full General Notice, but provide an explanation of the special enrollment extension.

Recommended Steps for Compliance

In preparing for the April 17, 2009, mailing deadline, we recommend employers take the following steps (including employers who are subject to state continuation obligations because they have fewer than 20 employees):

1. Identify, including names and addresses, all individuals who were COBRA eligible on or after September 1, 2008, regardless of the qualifying event, regardless of whether they elected coverage.

2. Separate from this list all participants who actually elected coverage.

3. Separate from the first list all participants whose qualifying event was an involuntary termination who did not elect COBRA coverage or who did elect and terminated that coverage before February 16, 2009.

4. Decide whether the plan will allow switching COBRA Coverage Benefit Options.

5. Determine how the employer will handle subsidy payments for the periods between February 17, 2009, and the first election period after April 17, 2009. The employer can reimburse participants for the 65% subsidy, or they can credit against future premium payments.

6. Customize each of the applicable notices for your plan and prepare for mailing to participants before April 17, 2009.

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The American Recovery and Reinvestment Act of 2009 provides for a temporary extension of employer-provided group health coverage (generally referred to as COBRA) that creates a premium reduction for certain individuals. It provides for an employer paid subsidy of 65% of the COBRA premium. We are waiting for a model notice from the Treasury Department that will have to be distributed to COBRA eligible individuals. In the mean time, some guidance has been issued by the IRS and Department of Labor that explains some of the aspects of this new law. What follows are answers to some questions posed by employers.

1.         Does the subsidy apply to everyone terminated after September 1, 2008?

The short answer is no. Everyone who had a COBRA qualifying event subsequent to September 1, 2008, is entitled to the new notice, regardless of the qualifying event. If the qualifying event was as a result of an involuntary termination, then the individual seeking continuation coverage would be eligible for the subsidy. There is a difference between who gets the notice and who gets the subsidy.

2.         What if they were terminated for performance related issues?

The Act makes no distinction regarding the basis for the involuntary termination. However, Department of Labor Guidance says that if the individual was terminated for gross misconduct so as to be ineligible for COBRA coverage, they would not qualify for the subsidy. But termination for gross misconduct under COBRA is very rare, so employers should assume any involuntary termination will qualify. Involuntary termination may include loss of coverage as a result of a reduction of hours but more guidance on this will have to be issued.

3.         What if someone quit their job on their own?

 Voluntary terminations would not be eligible for the subsidy. It is possible that someone who quit in anticipation of layoff could argue entitlement to the subsidy but right now, the guidance appears to confirm that a voluntary termination would not create eligibility for the subsidy.

4.         What if the employee did not originally elect COBRA?

 By April 18, 2009, all plans will be obligated to notify eligible individuals of a second election period which allows an additional 60 days to elect COBRA coverage. So this is a new COBRA election window that applies even if they did not originally elect. The individual will be without coverage for the period between his original qualifying event and the time when they actually elect under this new window. They will not be required to apply for coverage retroactively or pay those past premiums and, as of now, it looks as though they will also not have coverage for bills incurred during the period for which they did not have actual coverage. This could change as more guidance is issued.

5.         Are employees who elected COBRA after September 1, 2008, eligible for a refund?

 No. The premium reduction provision only applies to elections beginning on or after February 17, 2009, the effective date of the Act. So employees who paid 100% of the COBRA premium for periods beginning March 1, 2009, and after would be eligible for a 65% refund on those premiums. Employers must decide whether to issue a refund for the 65% of the premiums paid or whether to apply this “refund” as a credit against future payments.

6.         How long does the subsidy last?

 The subsidy lasts for a maximum of 9 months. It ends if (1) the individual becomes eligible for Medicare or another group health plan, or (2) the maximum COBRA period is exhausted. The subsidy obligation applies to elections made through December 31, 2009.

7.         Can employees switch to different coverage?

 Maybe. Group health plans are permitted, but not required, to allow COBRA qualified beneficiaries to use the special enrollment period to enroll in different coverage than they had at the time of the qualifying event provided that (1) the premium for the different coverage is the same or lower than the original coverage, (2) the different coverage is also offered to active employees, and (3) the different coverage is not limited to only dental or vision coverage, counseling coverage, on-site medical clinics or a flexible spending account.

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With the excitement over the new COBRA regulations, it is possible that some plan administrators might have missed the part of the American Recovery and Reinvestment Act that includes a new set of obligations under the Children's Health Insurance Program Re-authorization Act of 2009 (CHIPRA).  CHIPRA places certain notice and  reporting requirements on plans.  Specifically, it requires group health plans to allow individuals who were not covered by the plan to enroll when the become eligible for Medicaid/CHIP or when they become eligible for a premium subsidy from Medicaid/CHIP, regardless of whether such an event occurs during the plan's open enrollment period.

The law permits states to offer a premium subsidy for qualified employer-sponsored coverage to all employees or dependents who are Medicaid of CHIP eligible.  Plans in these stats must provide notice of the availability of federal assistance for coverage beginning the first plan year after February 4, 2010.  The plan will also, upon request, be required to disclose to the state information about the plan sufficient to determine whether providing a subsidy for coverage is more cost effective that providing Medicaid or CHIP coverage.

The premium assistance and special enrollment provisions are effective as of April 1, 2009, though notices are not yet required.  So as of April 1, 2009, employees and dependents who are eligible for coverage under the plan but not enrolled can enroll now if (1) their Medicaid of CHIP coverage is terminated as a result of loss of eligibility or (2) they become eligible for the premium assistance subsidy.  They must request enrollment within 60 days of either of these events.

Though no model notice has yet been issued, and the formal notice requirement has not kicked in, plans are required to inform participants about the availability this special enrollment provision.  Plan sponsors should notify participants about this special enrollment option now before the April 1, 2009 deadline.

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Attached here is a link to an Alert our firm issued on the COBRA subsidies in the American Recovery and Reinvestment Act signed into law today.  It is going to create some change to COBRA administration that require some attention very soon.  It provides for a 65% employer paid subsidy for COBRA premiums for 9 months.  Read the alert, then read this action plan set out below as a starting point for your company's response to the new law.

There is a 60-day implementation window for employers, during which time we will get a model notice from the Treasury Department explaining to participants the impact of the Act and how they may be eligible for the subsidy. We also anticipate additional guidance from the IRS and Department of Labor on implementation of the subsidy and its impact on taxes and other components of COBRA administration. While we are waiting further instruction, there are some things that we recommend employers do to prepare for the final implementation of these changes.

1.         Make Sure You Know Who Will Be Responsible for Preparing and Sending Notices

Within 30 days, we will be getting a model notice from the governmental agencies and that notice must be issued to plan participants and beneficiaries within 60 days of the enactment of the Act. Employers should make sure they have confirmation from their service providers as to who will take responsibility for preparing and issuing the notice. It might be the insurance company, the third-party administrator, a benefits broker or an outside COBRA administrator. It may also be that the employer or plan sponsor takes on the responsibility themselves. But be sure you have confirmation who will be preparing and sending the notices so when the 60-day window closes, the notices have been sent.

2.         Know Who Is Getting the Notices

The subsidy applies to those who suffered an involuntary loss of coverage between September 1, 2008, through December 31, 2009. But the Act does not specify what it will consider an involuntary loss, and it also provides that all qualified beneficiaries, regardless of the reason for their qualifying event, must get the notice. Employers and plan sponsors should go back to September 1, 2008, and review records to determine everyone (including dependents) who had a qualifying event and confirm that these individuals will get notice. This can be for voluntary or involuntary termination or reduction of hours, but it also applies to those made eligible as a result of divorce, death or aging out of coverage. They may not get the subsidy, but you must be prepared to send them the notice.

3.         Find Out How Much COBRA Coverage Costs

Find out what your plan was charging for continuation premiums from September 2008 through the present plan year. A surprising number of employers are not aware of the actual amount of COBRA premiums charged, either by their insurance company or their third-party administrator. It is impossible for a company to evaluate the actual financial impact of the 65% subsidy requirement without first knowing what underlying cost will be.

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Qualified Medical Child Support Orders (QMCSOs) occur very frequently in divorce cases and often times, they require things that cannot be done, or terms with which the plan cannot comply.  We know that ERISA provides that a QMCSO can require plans to extend coverage to children.  However, it is not uncommon for the court or regulatory agency (or even the attorney negotiating the divorce settlement) to daft orders that are not "qualified."  Qualified means that it satisfies the provisions of the federal code and regulations that make it a valid instruction to the plan.

On December 11, 2008, the U.S. Department of Labor issued Compliance Guidance for Qualified Medical Child Support Orders.  You can get a copy here.  It is rather lengthy but it does lay out in specific detail those things that have to be in a QMCSO for it to be valid, and what things cannot be included.  It also clearly reminds everyone that it is the responsibility of the plan administrator to determine whether or not the order is "qualified."  It is not enough for the parties to agree or for a court or agency to simply declare something will happen.  The plan administrator, who has the authority to operate the plan, must confirm that it is correct.  If not, the parties can be given an opportunity to correct it so that it would be "qualified."

If you have issues dealing with continuing health coverage for dependent children, whether you are a plan administrator, an attorney, a parent or a judge, it would be worthwhile to review this guidance to see how it applies to plans and to help you understand what "qualified" really means in the benefits world.

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"Michelle's Law" was enacted on October 9, 2008, and provides for continuity of medical coverage for college students under their parent's coverage when they take a medically necessary leave of absence from college.  It is named after a student who would have lost coverage under her parent's plan if she reduced her course-load to treat cancer and ceased being a "full-time" student.  It now prohibits a group health plan from terminating coverage of a dependent child due to a medically necessary leave of absence, if that dependent is enrolled in post-secondary education.

Generally, the law provides that the plan cannot terminate coverage prior to the earlier of the date that is one year after the first day of the medically necessary leave of absences or the date on which such coverage would otherwise terminate under the terms of the plan.  A medically necessary leave of absence must commence while the child is suffering from a serious illness or injury, be medically necessary and cause the child to lose student status as defined by the plan.  A plan can require certification of the condition from a treating physician.

I make note of it here because it is effective for plan years beginning after October 9, 2009, and, more importantly, the plan must include a description of the requirements as part of any notice or provision regarding a requirement for certification of student status for coverage under the plan.  For those sponsors preparing for 2009 plan notices, Michelle's Law is something that should be included in plan documentation.

We are expecting guidance on things like interaction with COBRA which should come out before the effective date. 

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On November 21, 2008, the New York Department of Insurance issued Circular Letter No. 27(2008) that acts as the New York State department of Insurance recognition of same-sex marriages performed in other jurisdictions.  The letter is in response to Martinez v. Monroe Community College, recognizing a Canadian same-sex marriage as valid in New York.  Governor Patterson issued a memo requiring state agencies to formulate policies to comply with this ruling and the department of insurance has now done so.

The letter has the effect of requiring that policies of insurance written in New York and insurers of those policies provide that the terms "spouse," "husband," "wife," and "married" encompass marriages of same-sex couples married in jurisdictions outside of New York.  Employers who offer health insurance are obligated to provide same-sex benefits but it does not require employers who sponsor self-insured or self-funded plans to provide that same coverage.  So if your plan is an insured plan from a New York insurer, your plan now provides same-sex couples benefits if they are married outside of New York.

While not unexpected, this letter did cause me a little pause mostly because it does not in any way deal with dependents of same-sex spouses or make any mention of the definition of "dependent" or "child."  How would New York treat the child of a same-sex couple married outside of New York, when the status of the child as a dependent of both parents has not been established?  Say, for example, partner A has a child and marries partner B.  They move to New York.  Partner B has health insurance through his or her employer but never adopts the child.  The child may not qualify as a dependent of B under the terms of the policy, leaving the child with no coverage while both A and B are insured.

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As Monty Python would say, now for something completely different. I usually write about retirement or health plans but this particular benefit caught my eye. As of October 3, 2008, a bicycle commuter benefit is added to IRC 132(f), meaning employers can reimburse certain expenses for employees who commute to work via bicycle and the amounts of the reimbursement are excluded from gross income.

Employees may be reimbursed on a tax-free basis for "reasonable expenses" incurred by the employee during the calendar year for the purchase of a bicycle, bicycle improvements, repair and storage provided the bicycle is regularly used to travel between work and the employee's residence. An employee is considered a bicycle commuter if he or she uses the bicycle during any month for a "substantial portion" of their commute. Of course there is no definition in the code of "substantial portion" or "regularly used" so employers are expected to use their own interpretations of those terms.

The employer may reimburse the employee up to $20 per month for each month of the year that the employee qualifies as a bicycle commuter (that is regularly uses for a substantial portion), but the employee may not receive any bicycle commuter benefits in the same month as he or she receives any other qualified transportation benefits (such as transit passes or parking reimbursement). The reimbursement may be paid any time during the year in which the employee commuted by bicycle, or within 3 months after the end of that year for expenses incurred within the year. The employer must require proof that the expenses were incurred and must establish a bona fide reimbursement arrangement (some form of written document) though a formal written plan is not required. Plans can be effective beginning January 1, 2009.

In light of the efforts to promote "going green," this type of arrangement may be something of interest to your employees, particularly if they do not already take advantage of other commuter fringes. Obviously it is more likely to be of use in warmer months or warmer climates, but for your cycling employees, it might be of some value.

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After many years of debate, the mental health parity requirements for group health plans became permanent on October 3, 2008.  These new required provisions will apply to plan years beginning after October 3, 2009.  For calendar year plans, the effective date is January 1, 2010.  Collectively bargained group health plans with agreements ratified prior to October 3, 2008, are subject to the requirements in either January 1, 2009, or the date on which the last collective bargaining agreement relating to the plan terminates, whichever is later.  It applies to plans with coverage for 50 or more employees.

The Act generally requires equity in treatment of mental health and substance abuse treatments under a plan.  The key components of the Act are as follows:

1. Plans cannot generally cannot impose more restrictive lifetime or annual limits on mental health or substance use disorder benefits that those imposed on medical or surgical benefits.
2. Plans cannot generally impose more restrictive financial requirements, such as co-pays, deductibles, coinsurance or out-of-pocket expenses, on treatment for mental health or substance use disorder benefits than apply to medical or surgical benefits.
3. Plans cannot generally impose more restrictive limitations on the frequency or total use of mental health or substance use disorder benefits that medical or surgical benefits.
4. The Plan must provide similar in-network and out-of-network benefits for all coverages.
5. The Plan must clarify and make available to participants the criteria used for determining medical necessity of mental health and substance use benefits.

Mental health and substance use disorder benefit are broadly defined to mean benefits with respect to services for mental health conditions and substance use disorders.  If a plan offers two or more benefits packages, the requirements apply separately to each package.

There is a limited exception.  A plan can be exempted from the Act if it experiences an increase in actual total costs of 1% (2% in the first plan year that the Act applies).  However, any request for exemption to the Department of Labor or Department of Health & Human Services will require actuarial certification of the cost increase associated exclusively with the implementation of the Act and it is not anticipated that most plans will qualify for an exemption.

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Frequently I am asked if it is good enough to just publish the new SPDs through the company intranet, making them available on-line.  I usually say no because it does not cover former employees on COBRA or dependents.  Now apparently I have a Court case that makes me right.

In Gertjejansen v. Kemper Insurance Companies, the 9th circuit recently held that posting the SPD to the company intranet site alone is insufficient.  As a rule, ERISA requires SPDs to be distributed to plan participants in a manner reasonably calculated to ensure actual receipt by participants.  Mailing them or delivering them electronically can satisfy this requirement.  if you rely on electronic distribution, you would have to make sure that all employees have regular access to a computer at work and that non-employee participants are provided a copy through other means. 

In this case, the Court found that a mere posting is not sufficient delivery because it was not an actual distribution.  Making an SPD available on the company intranet did not constitute a "distribution."  Plus, because all employees did not have regular access to a computer at work, the company could not verify that it was distributed to all participants. 

DOL Reg 2520.104b-1(c) gives a safe harbor for electronic distribution, but it definitively requires a transmission of the SPD, not merely a posting.  So in the future, make sure you are actually DISTRIBUTING the documents, not merely making them available.

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On May 21, 2008, the Genetic Information Nondiscrimination Act was signed into law.  Generally, this new law prohibits genetic discrimination in employment and health insurance benefits.  It does so by amending several laws, including HIPAA, ERISA, the Public Health Service Act and Medicare.  Clearly it will have an impact on employers and what follows is a general summary of the Act.  With the increasing ability to test for genetic causes for health conditions, there is rising concern that people with adverse genetic makeup will be the victim of discrimination.  To protect against that eventuality, the Act is designed to not just protect information, but preclude the misuse of information.  The Act is not clear on how an employer might get the information, but if it does, then the Act applies. 

Title One of the act prohibits group health plans from discriminating on the basis of genetic information with respect to eligibility, premiums and contributions.  So genetic makeup cannot be a consideration when setting rate, contribution levels or eligibility.  However, the Act does not preclude an increase in group rates for the manifestation of a disease or disorder commonly linked to genetic makeup, though manifestation of a disease or disorder cannot be used as "genetic information" to further increase rates for specific family members or dependents.  There are also certain prohibitions on the ability of health insurers to request genetic information or require testing.  Obviously HIPAA medical privacy rights also apply to information a plan obtains regarding genetic information.

"Genetic Information" is defined as information about an individual's genetic tests, information about genetic tests of family members and the manifestation of a disease or disorder linked to genetic information.  a "genetic test" is an analysis of an individuals DNA, RNA, chromosomes, proteins or metabolites that detect genotypes, mutations and chromosomal changes. 

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Frequently, I am asked whether an employee wellness program or an employee assistance program should be treated as a "welfare" plan for ERISA purposes.  As most good lawyers, I say "maybe."  But there are some guidelines for understanding whether these plans should be treated as ERISA plans.

Generally, in order for these programs to be considered as health plans under ERISA, the benefits provided would have to be "benefits in the event of sickness" or "medical benefits."  Simple reference to medical services is not enough to make it a "health plan."  But it might still be a welfare plan.  In order to be considered as a welfare benefit plan, the program would have to satisfy the requirements of ERISA section 3(1).  It would have to be a plan or program, established or maintained by an employer for the purpose of providing certain specific benefits to employees.  Many wellness or assistance programs meet these criteria and would appear to be ERISA governed.  As such, they would be subject to HIPAA and other ERISA rules governing plans.

However, the American Bar Association recently asked the Department of Labor for some guidance which came in the form a an agency staff opinion.  While not specifically binding on the DOL, it did provide some clarification.  If the program is an employment policy separate from the group health plan, it would not be subject to ERISA health plan rules.  Prior DOL advisory opinions have confirmed that assistance programs would not be plans if they do not require direct administration by the employer.  For example, paying for the program but not directly monitoring enrollment or participation may be sufficient to keep it out of ERISA status.

So the answer is still maybe, but it is a little clearer.  If the program is provided apart from the health plan and is not directly administered by the employer, it is more likely the program will not be considered as an ERISA plan.  If you do have a wellness program or assistance plan, it would be worthwhile to review it with your benefits counsel to make sure your are properly treating your program and that it is doing what you really intended it to do.

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In an article published today on CNN.com, the National Federation of Independent Business' reports that the monthly index of Small Business Optimism fell one point to 88.2, which shows a continued decline.  One particular cost concern area was the increasing costs of health care.  This is consistent with other articles I have read about the concerns small businesses have with providing benefits to employees.  Of course I have also read a variety of article and surveys about employees and their concerns over dwindling benefits and wages, so there is uniform frustration on the topic.

Recently I have written about the importance of auditing 401(k) fees, but the same holds true for other benefits offered.  Too often I see employers overlook the importance of developing a welfare benefits package tailored to their employee base, and they overlook the wide variety of cost control options that can be used to provide benefits.  There is an assumption that the old standards, like premium purchased insurance, is the best way to go and the only thing employees are interested in.  Potential long term savings are forfeited in favor of avoiding the short term costs of a benefit plan review and audit.

Take high deductible health plans.  Depending on who you speak to, they are either a boon or a bust.  But an HDHP can certainly reduce health care costs.  There are more retirement plan options then an off-the-shelf 401(k) plan purchased from an institution.  Life insurance and disability insurance can be structured in increasing more cost-effective ways.  But employers AND employee have to buy into the options.  In this economy, I think it is even more important for employer to undertake a critical analysis of the benefits packages they offer and find ways to not only control costs, but also to tailor those packages to their employee base.

Attorneys can be good source of counseling on these issues because they work with a variety of service providers that offer a wider variety of options.  I personally work with benefit plans that use all types of structures and my job is to make sure what the employer and the benefit professional put together is legal.  Consider your lawyer as a benefits "counselor," a logical starting point for the discussion of managing benefits costs.  The long term results should prove to be worth it.

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Frequently the coordination of COBRA coverage in conjunction with Medicare eligibility or disability can be confusing.  This particular case, from the Middle District of Pennsylvania, addressed the failure of a plan to provide COBRA to an employee who was determined to be disabled.

The employee in this case was placed on short-term disability when he failed to provide medical clearance to return to work as a result of his medical condition.  When he applied for unemployment, his employer interpreted that as a termination and ended his health coverage.  The employee eventually applied for and received Social Security Disability (SSDI).  The employee then sued his former employer for failing to provide a COBRA notice.  The employer acknowledged that it did not send the COBRA notice, but argued that receipt of SSDI made the former employee ineligible for COBRA coverage.

 The Court found for the employee, clarifying that only Medicare benefits obtained would preclude COBRA.  SSDI benefits do not in an of themselves terminate the right to continuation coverage.  A qualified beneficiary who becomes entitled to Medicare coverage may have his or her COBRA coverage terminated in favor of Medicare, but the mere receipt of SSDI benefits does not have the same effect.

This case demonstrates how important it is for a plan administrator to understand the nature of Social Security benefits received and how Medicare and Social Security interact.  As a plan administrator, one cannot simply assume that because an former employee is receiving SSDI, there is no COBRA obligation.

See Carstetter v. Adams County Transit Authority (2008 WL 2704596, M.D. Pa. 2008)

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Some useful guidance has come out recently on Health Savings Accounts (HSAs) from the IRS so I thought they would be worthwhile to briefly summarize and pass on.

Notice 2008-52 gives us considerable guidance on the impact of amendments to Code Section 303 and 305 as they relates to HSAs. First,there is guidance on determining the maximum contribution limits for years 2007 and later. It is defined as the greater of (1) the sum of the limits determined separately for each month under Section 223(b)(2), based on eligibility for HDHP coverage on the first day of each month, plus catch-up contributions for each month, OR (2) the maximum annual HSA contribution under Section 223(b)(2(A) of (B) based on the individual's HDHP coverage (self or family) on the first day of the last month of the individual's taxable year, plus catch-up contributions, if applicable. For 2008, the self coverage (Section 223(b)(2)(A)) is $2,900. For family (Section 223(b)(2)(B)), the limit is $5,800.

2008-52 is also useful for determining when HSAs may be established and has 15 examples dealing with timing and funding.

Notice 2008-51 provides guidance on qualified HSA funding from an individual's IRA or Roth IRA.  Code Section 408(d)(9) generally provides that funding an HSA from an IRA or Roth IRA is not included in gross income, provided eligibility requirements are met.  There are maximum amounts of funding that can occur based on the limits established by the Code.  Those would include the limits set forth in Notice 2008-52 above.  What I found most useful about this notice is explanation of the procedures for making the transfer and the testing for eligibility.  The notice provides us with 10 examples of various funding scenarios to test the applicable limits of the funding.

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Frequently I get calls about offering COBRA coverage when an employee is terminated and an employer wants to deny coverage for "gross misconduct."  I have written about this before but the topic fascinates me because it is not what everyone thinks it is.  It's not simply "misconduct."  It has to be "gross."

Prior to 1986, it was assumed that any time a worker lost or changed jobs, health benefits coverage was lost.  That changed with the passage of the provisions of The Consolidated Omnibus Budget Reconciliation Act (COBRA) that governed continuation rights for plan beneficiaries.  COBRA has been amended, with some of the most recent amendments going into effect in 2005.  Under COBRA, employees and their families that suffer certain defined qualifying events may be able to continue coverage under the employer’s group health plan except when an employee is terminated for “gross misconduct.”  Because the Act does not specifically define “gross misconduct,” it is left to judicial determination.  Unfortunately, this can create confusion over what is gross misconduct for COBRA purposes and what employers should do to deal with terminated employees for COBRA administration purposes.

So what is “gross misconduct” for COBRA purposes and how is it handled?

In Boudreaux v. Rice Palace, Inc., a district court was asked to consider a case where an employee was denied COBRA because of alleged “gross misconduct.”  The employer observed several instances where the employee had overmedicated to the point of becoming incoherent.  After several warnings, the employer determined that the employee represented a hazard to herself and other employees.  She was terminated denied the ability to elect COBRA coverage.  The Court ultimately determined that the employee’s termination was as a result of her deliberate violation of the employer’s standards and she showed carelessness or negligence to such a degree or recurrence as to show wrongful intent to cause harm, either to the employer or to other employees.

Three things are very important about this decision.  First, the court did not find that any “criminal” conduct was required to meet the “gross misconduct” definition.  Gross misconduct can be an intentional, deliberate, extreme and outrageous that “shocks the conscience.”  It can be “reckless or in deliberate indifference to an employer’s interests.”  Thus, employees that routinely engage in unauthorized activities that are contrary to the interests of the employer or jeopardize the safety of other employees could be engaging in “gross misconduct.”

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As part of uniform "regulation of insurance," states are permitted to establish certain mandates in health benefits.  These mandates can be fairly extensive, covering everything from the common such as birth control (required in New Jersey but not New York) to the more extreme, such as surgical treatment for morbid obesity (required only in Maryland, Indiana and Florida).  Mandates can also define who must be included as covered persons.  For example, New York mandates that adopted children be defined as a covered person, while New Jersey has no such mandate.  This is not to say that other laws may not impact the nature of benefits provided (since adopted children are "dependents covered under New Jersey insurance laws), but rather to point out that state insurance regulation is very complex and it is important for employers with facilities in multiple states to be aware of what they may be required to provide.

Self-insured ERISA plans routinely contend that they are not subject to state mandates because of the impact of ERISA preemption.  However, employers sponsoring these plans should be aware of the mandates of the jurisdiction where they operate if for no other reason then to evaluate the effect of their own plan in comparison to others offered (particularly union sponsored plans if union avoidance is a concern). 

To review the Council for Affordable Health Insurance's 2008 report on state mandates, client here.

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In anticipation of the April 15 tax deadline, CNN.com had an article titled "Gay couples face higher tax bills."  The content of the article came from Mount Laurel, New Jersey and it addressed how same-sex couples in a civil union in New Jersey paid higher taxes because they could not file jointly for federal purposes.

I thought it was particularly interesting that there was no mention of the tax consequences of not being able to use a cafeteria plan to pay for health insurance premiums or reimbursement of medical expenses from a flexible spending account.  Clearly these would create a higher tax burden as well.  But political and social implications aside, I am always concerned that employers in New Jersey properly treat same-sex couples in their benefit plans.

First, because of the impact of the Defense of Marriage Act on federal tax laws, the employer paid cost of providing coverage for same sex partners who are not “dependents” under the Internal Revenue Code would be considered regular compensation and would be taxable as income.  Moreover, that portion of the premium that an employee pays that is attributable to the same-sex partners coverage would not be eligible for pre-tax treatment under a cafeteria plan.  Plus, the medical expenses of the same-sex partner could not be paid with money from a Flexible Spending Account unless the partner otherwise qualified as a dependent under federal tax law. This means that employers who have employees who take advantage of the new civil union will have to make sure the value of the partner’s benefit is properly treated for federal tax purposes.

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In the world of employee health plans, subrogation (and its partner, reimbursement) might be one of the most misunderstood concepts in plan administration.  Subrogation exists where the plan steps into the shoes of the injured party by virtue of the payment of benefits.  The plan takes over the ability of the injured participant to sue the person or entity that cause the injury.  Reimbursement, on the other had, is an obligation on the part of the injured participant to pay back the plan benefits paid from a recovery source.

For example, a participant is injured in a fall at a store.  The participant sues the the store owner for his injuries.  The participant's medical bills are paid by the plan.  Subrogation means that the plan has the ability to assert a claim against the store for the medical bills paid.  Reimbursement means that when the participant recovers from the store, the participant must pay back the plan for the covered medical expenses.

One basic way to control plan costs is to enforce subrogation and reimbursement provisions.  By recovering claims paid from another responsible party, the plan limits its own expenses.  But a plan has to be clear about what right is has and how it intends to enforce that right.  If it is relying on subrogation alone, the plan must be prepared to pursue a claim against the responsible party directly.  If reimbursement is implicated, then the plan must be prepared to make demand for reimbursement from the participant. 

Whichever right a plan has, I believe it could be considered a breach of fiduciary duty for a plan to not pursue subrogation or reimbursement to recoup plan expenses.  Since the fiduciary obligation is to protect the plan as a whole, the fiduciary has an obligation to pursue those funds the plan is entitled to receive, either from the original tortfeasor through subrogation, or from the participant through reimbursement.

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