Understanding Employee Benefits and key developments in the employee benefits field and items of interest to our clients. MORE

Back in 2013 I blogged about a class action lawsuit brought against Henkel Corporation for improper Social Security (FICA) tax withholding from nonqualified deferred compensation benefits. I am blogging now on an update to that case. To understand that case we need to review the taxation of nonqualified deferred compensation benefits. Nonqualified deferred compensation benefits are generally taxed for income tax purposes at the time the benefits are paid or made available to the participant. In contrast, those benefits are taxed for FICA tax purposes at the earlier of when the amounts are paid or when they vest. Thus, if benefits under the plan vest when a participant reaches retirement age, FICA taxation applies at that time to the present value of the entire benefit. If that taxation occurs in a year in which the participant has already been paid as wages an amount equal to the FICA wage base (e.g., $118,500 in 2015), then the employee is required to pay only the Medicare portion of the FICA tax (1.45% of the benefit), a relatively small amount.

The class action suit against Henkel Corporation was filed in 2012 by a former employee who claimed harm because his deferred compensation benefit vested on his retirement, but the employer failed to withhold and pay the FICA taxes at that time. Once the employer realized its error, the employer then withheld FICA taxes from each benefit payment as it was made and also paid the missed FICA taxes, reimbursing itself by reducing the deferred compensation payments to the employee. Withholding FICA taxes from each payment as it is made to the former employee will result in the former employee paying a higher amount of FICA taxes, but is required under the FICA rules for employers who fail to withhold the FICA taxes when the benefit vests. That additional FICA tax is the damage amount claimed by the former employee.

A year after the district court refused to dismiss the claims of the former employee, the court certified a class action, allowing the suit to proceed on a class basis. A few months later the court ruled that the employer was liable to the former employees for damages resulting from the withholding error. The court must still determine the amount of those damages – and attorneys’ fees incurred by the former employees in prosecuting the lawsuit.

As I mentioned in my earlier blog post, FICA tax withholding from a qualified deferred compensation plan can be tricky. Employers should take care to follow the rules. Failure to do so can result in liability to affected employees.

Cash balance plans often provide a pay credit and an interest credit in determining a participant’s accrued benefit. The pay credit is often a percentage of compensation. The interest credit is established in the plan and can be a fixed rate or a formula. Recently the Duke Energy Retirement Cash Balance Plan was sued by a participant who claimed that the plan’s decision to round the interest rate to five decimal points violated ERISA. The participant claimed that the plan should round to 15 to 17 decimal points.

The federal district court in North Carolina said no, the rounding decision is a discretionary decision that the plan administrator can make and that choosing to round to five decimal places was not an abuse of discretion.

The amounts involved were small. The participant argued that the rounding discrepancy resulted in an underpayment of interest credits that totaled $41.80 between January 2006 and October 2012, but even that amount omitted months in which the plan’s rounding convention in fact benefited the participant. Of course if the suit were expanded to all plan participants, the damages would be much higher given the many participants in the Duke Energy plan. The participant would also be entitled to attorney’s fees if he won his suit.

Employers can hope that this decision will discourage other participants from bringing lawsuits challenging rounding conventions.

Employers know that since the 1980s they have been required to check the lawful work status of employees that they hire through the I-9 process. Employers also know that Immigration and Customs Enforcement (ICE) can audit their workplaces, as can the Department of Labor, and impose fines and other sanctions for failure to comply with those requirements. However, employers may not realize other collateral consequences that can occur if an undocumented employee is hired.

Our tale begins with an employee covered under a multiemployer health and welfare plan for health benefits. The employee enrolled his newborn twins under the plan. The twins, born in the United States and therefore citizens of the United States, were born prematurely and incurred substantial medical expenses, over $250,000 for one twin and $450,000 for the other. The self‑funded plan had a stop loss contract in place to cover large claims. The stop loss carrier investigated the claim and discovered that the employee had submitted an invalid Social Security number when hired and consequently might be illegally employed in the United States. The stop loss carrier then concluded that the employee was therefore not an “eligible employee” under the terms of the plan and denied coverage for the claim. Instead, the stop loss carrier refunded the $2,700 in premiums that the plan had paid for coverage for the employee and his family. Not surprisingly, a lawsuit ensued.

The parties filed motions for summary judgment. The stop loss carrier claimed that the employee was not eligible for coverage under the plan because he was not eligible to work in the United States. The plan claimed that the employer had received from the employee a facially valid permanent resident card which the employer believed made the employee eligible to work in the United States. The court concluded that the question was one of contract interpretation under federal and state (California) law. California has a statute that explicitly provides certain protections and benefits to employees who are undocumented. Based on that statute, the court found that the stop loss carrier could not deny benefits based solely on the undocumented status of the worker.

The case must still proceed to trial on various questions, including punitive damages and covenants of good faith. Thus, the case is not yet over.

Not all states have statutes like the California statute explicitly protecting undocumented workers. In addition, because the court’s analysis was largely based on the terms of the stop loss contract, stop loss carriers in the future may be able to deny benefits for undocumented workers by including such a limitation in their stop loss contracts. Employers who self-fund their plans and use stop loss contracts to protect themselves from high claims should carefully review those stop loss contracts for any inconsistencies between the plan provisions and the stop loss contracts. If a stop loss contract excludes claims that the plan otherwise covers, the employer may find itself truly self-insured for that claim.

The EEOC recently sued Honeywell International, Inc., claiming that Honeywell’s wellness program violated the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA). Although the EEOC sued two other employers for wellness program violations before it sued Honeywell, this is the first case where the agency seems to be challenging a fairly mainstream program, albeit one with somewhat hefty penalties. On the other hand, there is no reason to think that the penalties violate wellness guidelines under the Affordable Care Act (ACA) (penalties generally of no more than 30% of premium costs, with penalties of up to 50% of premium costs allowed for tobacco use).

The EEOC is particularly concerned about Honeywell’s biometric screenings, characterizing the screenings as medical tests that are permissible only if voluntary or required by business necessity. Honeywell does not seem to claim that there is a business necessity for the tests. Instead, it relies either on the tests being considered voluntary or on there being a bona fide health plan exception under the ADA that allows the screening. The EEOC does not agree that there is an exception to the ADA that permits this type of screening. The EEOC also claims that the program violates the ADA because the size of the penalties (total of $4,000 for participant and spouse, if family coverage is elected) makes the program not “voluntary.” According to news reports, the judge asked the EEOC more than once where the line was drawn on the size of penalties and the EEOC answered that it did not know where to draw the line, but that Honeywell had stepped across it.

The EEOC is also claiming that the screening violates GINA, at least with respect to the testing of spouses, because the screening can provide information that is protected genetic information.

The legal proceeding so far has been a hearing on a temporary restraining order (TRO), an injunction motion brought by the EEOC to stop Honeywell from imposing penalties on participants for failure to undergo the screenings. The EEOC argued that the privacy invasion could not be remedied after the fact; the bell could not be “unrung” once the data was collected.

The court denied the TRO. I have not seen a written decision, but news sources reported that the judge concluded that it would be easier for Honeywell to refund penalties imposed if the court should conclude that the program violated the law than it would be for Honeywell to try to collect the penalties after the fact if the program is upheld but the court issued the TRO. The judge did say that the decision was not one on the merits, nor on the likelihood of success on the merits. She said that the case raises difficult issues that will be explored as the case proceeds.

Employers will want to see how this case unfolds. Given the claims against Honeywell, employers most at risk for EEOC challenge are those that impose high penalties (thousands of dollars), those that require biometric screening, and those that include spouses in the biometric screening required for the incentives. Under Honeywell’s program, $2,000 of the $4,000 reported penalties related to smoking status, $1,000 for the employee and $1,000 for the spouse. Individuals who declined the biometric screening (which tested for smoking status among other things) were treated as smokers regardless of actual status.

Members of Congress have spoken out on the case, challenging the EEOC to engage in rulemaking on the topic. Trade groups have done the same. The lack of clear guidelines may have influenced the judge when she ruled against the EEOC on its request for a TRO.

The EEOC has included proposed regulations on the ADA and GINA in a recent list of guidance on which it is working. The timing of those regulations is uncertain. However, interested employers should watch for the proposal and consider commenting, either separately or through trade associations, if the EEOC guidance would undermine standard wellness programs that employers would like to maintain.

The Centers for Medicare and Medicaid Services (CMS) has postponed to 11:59 pm on December 5, 2014, the deadline for health insurance issuers and self funded plans to submit their annual enrollment count for the transitional reinsurance program. The deadline was otherwise November 15, 2014. The payment deadlines of January 15, 2015 and November 15, 2015 have not been extended.

The Internal Revenue Service has released the 2015 cost of living adjustments affecting dollar limits on benefits and contributions under qualified retirement plans. http://www.irs.gov/uac/Newsroom/IRS-Announces-2015-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$18,000-to-their-401(k)-plans-in-2015 The following chart summarizes 2015 retirement plan limits and other benefit plan limits. The 2014 limits are also listed for reference purposes.

 

2014 2015

 

Elective Deferral Limit 401(k), 403(b), 457(b)

 

$17,500

 

$18,000

 

Catch-up Limit (age 50+)

 

$5,500

 

$6,000

 

Defined Benefit Limit

 

$210,000

 

$210,000

 

Defined Contribution Limit

 

$52,000

 

$53,000

 

Dollar Limit – Highly Compensated Employees

 

$115,000

 

$120,000

 

Officer-Key Employee

 

$170,000

 

$170,000

 

Annual Compensation Limit

 

$260,000

 

$265,000

 

SEP Eligibility Compensation Limit

 

$550

 

$600

 

SIMPLE Deferral Limit

 

$12,000

 

$12,500

 

SIMPLE Catch-up Limit (age 50+)

 

$2,500

 

$3,000

 

Social Security Taxable Wage Base

 

$117,000

 

$118,500

 

ESOP 5 Year Distribution Extension

Account minimum

Additional amount for 1 year extension

 

 

$1,050,000

$210,000

 

 

$1,070,000

$210,000

 

HSA (self/family)

Maximum annual contribution

HDHP minimum deductible limits

Out-of-pocket expense annual maximum

 

 

$3,300/$6,550

$1,250/$2,500

$6,350/$12,700

 

 

 

$3,350/$6,650

$1,300/$2,600

$6,450/$12,900

 

On Tuesday, September 30, federal Judge Ronald White of the Eastern District of Oklahoma ruled in Pruitt v. Burwell that the plain text of the Patient Protection and Affordable Care Act (“PPACA”) does not allow for the provision of subsidies to individuals purchasing health coverage through a federally-facilitated exchange. The court ruled that the Internal Revenue Service (“IRS”) rule allowing for the disbursement of subsidies to enrollees in all exchanges, not just those established by a state, was an abuse of discretion and invalid. The ruling has no immediate effect, however, as it is stayed pending an expected appeal from the federal government.

Judge White’s opinion follows two rulings, from different circuits, issued this past summer. In the case King v. Burwell, a three judge panel from the U.S. Court of Appeals for the Fourth Circuit unanimously held that the PPACA does allow for subsidies for policies purchased through federally facilitated exchanges. On the same day, a three judge panel for the U.S. Court of Appeals for the District of Columbia Circuit reached the opposite conclusion in a 2-to-1 ruling in the case Halbig v. Burwell, ruling that subsidies are only available through state-established exchanges.

On September 4, the D.C. Circuit announced that the entire court would rehear Halbig v. Burwell, with new arguments scheduled for December 17, 2014. Judges appointed by Democrats outnumber those appointed by Republicans on the D.C. Circuit, thus some commenters have suggested that the entire court will overrule the decision of the three judge panel.

In response to the Halbig and King decisions, the IRS released a statement saying that the rulings would not impact the availability of subsidies to individuals through both federal and state exchanges. Judge White’s new ruling is not anticipated to alter the IRS’s position.

It is unlikely that Judge White’s ruling will have any impact on the operation of the exchanges or PPACA implementation in the near term. The Pruitt decision will likely be appealed to the U.S. Courts of Appeals for the Tenth Circuit. Seven of the twelve active judges on the Tenth Circuit bench were appointed by Democrats, leading some pundits to opine that the appeals court will overturn Judge White’s ruling.

Judge White’s ruling also does not markedly increase the likelihood that the United States Supreme Court will hear a case challenging the provision of premium tax credits on federally facilitated exchanges. The Supreme Court generally takes cases when there is a split among the federal appeals courts. If the rulings proceed as expected, the Tenth, Fourth, and D.C. Circuits will likely uphold the provision of premium tax credits and no circuit split will exist. However, the Supreme Court can decide to hear a case even in the absence of a circuit split, and the plaintiffs in the King case have petitioned for Supreme Court review.

The bottom line for employers is that as challenges to the IRS rule allowing subsidies to enrollees on state and federal exchanges work their way through the courts, nothing is likely to change and employers should continue to implement strategies to comply with the Employer Shared Responsibility (“Play or Pay”) rules. The IRS is expected to continue to offer subsidies to individuals in all states, meaning the same triggers for the Employer Shared Responsibility penalties remain in place.

Almost two years ago I blogged about a federal district court decision from Alabama that imposed a penalty of $37,950 ($75 a day) on an employer that failed to provide a COBRA notice for a dental plan to a former employee. With attorneys’ fees and costs, the employer owed a total of $83,063.45. That case has now been affirmed by the 11th Circuit Court of Appeals. (The wheels of justice can turn slowly at times.) In the process of that affirmance, the court of appeals sent back to the district court the question of whether the employer might owe an additional $2,460.67 in costs.

The appeals court decision broke no new ground on the law of COBRA violations. I mention the case so that readers will know what happened at the appeals court level. (The case also addressed Family & Medical Leave Act (FMLA) issues and could be interesting reading for employers covered under that law.)

Many employers offer group term life insurance, including supplemental life. Often an employee who wants to buy coverage above a particular level after an initial open enrollment period must show evidence of insurability. This requirement is present to protect the plan from adverse selection so that employees do not wait until they develop a medical condition before purchasing a policy. A recent Eighth Circuit Court of Appeals decision highlights the dangers to employers and insurers that fail to monitor these enrollment requirements.

In that case, an employee waited several years before applying to purchase supplemental life insurance benefits through his employer’s plan. The enrollment was done on line and the employee requested coverage equal to five times his salary, a total of $429,000. He made this election during the annual open enrollment period and the policy appeared on his benefit election package on the employer’s intranet. The employer then began withholding the applicable premium for the coverage.

At the time that the employee was first eligible to enroll for coverage, he signed a statement stating that if he declined coverage, but later decided to enroll he would be required to provide evidence of good health satisfactory to the insurance company. Although the employer said that there should have been a text box alerting the employee to the evidence of insurability requirement during the enrollment process, there was no evidence that the box in fact appeared nor did the employer introduce the language of the text box or the insurability form that would need to be completed. Six months after enrollment the employee died although there was also no evidence that he was ill at the time that he enrolled for the additional coverage.

The beneficiary sought the life insurance benefits and was told that the coverage did not go into effect because no evidence of insurability form had been filed and approved. During the course of the lawsuit, the beneficiary learned that approximately 200 employees had never filed evidence of insurability but had premium payments for coverage withheld from their paychecks. The insurer allowed those employees to submit that evidence of insurability in order to allow the continued coverage. The beneficiary who sued was not permitted to make the same showing for the deceased employee.

The trial court had found in favor of the insurance company and the employer. The Court of Appeals reversed and remanded the case to the District Court to reconsider. The Court of Appeals reached some conclusions that may cause employers to look more closely at their enrollment provisions:

  • The court found that the 100 page policy was not a sufficient summary plan description because it was technical and complicated and did not explain the plan in simple terms. (This conclusion could call into question medical plan summary plan descriptions which also tend to be long, technical and complicated.)
  • The court suggested that employers should explain better in the summary plan description what evidence of insurability is and how it is shown.
  • It can be a breach of fiduciary duty for an employer to accept the premium payments without making sure that there is in fact coverage under the plan. In other words, the employer and the insurance company should be monitoring late enrollments for proof that evidence of insurability has been filed and accepted. Failure to do so, particularly while accepting premium payments, may result in a finding of liability for the requested coverage.

Employers may wish to review both their summary plan descriptions and their processes for enrollment with respect to late enrollments under the term life insurance policies. Failure to monitor and enforce an insurability requirement may result in an employee being treated as having coverage despite having never shown evidence of good health.

Parents have searched for effective therapies for children with autism spectrum disorder. One therapy that has shown promise, at least for some children, is applied behavior analysis (“ABA”), which is an intensive behavioral interaction health service. However, ABA is expensive, in some cases requiring many hours of therapy weekly. Insurance carriers and self-funded health plans have been concerned about covering ABA because of those costs. A recent federal district court decision from Oregon found that the failure of an insured health plan to cover ABA for children with autism spectrum disorder violated the federal mental health parity and addiction equity act as well as similar Oregon state laws. The federal parity act requires ERISA plans to cover mental health and chemical dependency disorders on the same basis as medical and surgical treatments are covered. The insurance company had denied coverage for ABA based on a developmental disability exclusion. The court found that exclusion to violate both the state and federal laws.

Employers whose health plans do not cover ABA will want to monitor this case and others challenging the exclusion of ABA to determine whether their plan designs must change to include that therapy.