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

Many employers are offering wellness programs to employees in connection with their health plans and are aware of the HIPAA regulations that govern such programs. Although employers design their wellness programs to conform to the HIPAA guidance, they sometimes forget that the Americans with Disabilities Act (ADA) might also affect the wellness program.

Employers covered by the ADA may not make medical inquiries of their employees except under certain circumstances and must offer reasonable accommodations to employees who are disabled. One exception to the prohibition on medical inquiries is voluntary participation in a wellness program. In an informal discussion letter, the Equal Employment Opportunity Commission (EEOC), which enforces the ADA, recently applied ADA concepts to a wellness program.

Under the program described in the letter, employees with certain adverse health conditions, such as diabetes, could voluntarily enter the wellness program. If the employee met certain requirements, such as enrollment in a disease management program or adherence to a doctor’s exercise and medication recommendations, the employee’s reward would be reduced or eliminated co-pays and deductibles. The employer who requested the guidance suggested that the program would not be subject to the ADA.

The EEOC concluded that the program was a wellness plan under which a disability related inquiry is permitted if voluntary. According to the EEOC, a wellness plan is voluntary if the employer neither requires participation nor penalizes employees who do not participate. The EEOC noted the reward for participation and stated that it has not taken a position on whether and to what extent the availability of a reward could be considered either a requirement to participate or a penalty for failure to participate that would render the program involuntary.

The EEOC did say that even if the program was voluntary, the employer was nevertheless required to provide reasonable accommodation, absent undue hardship,  to individuals who were unable to meet program requirements or engage in specific activities because of a disability. For example, the program required that participants maintain a certain level of medication adherence to remain in the program. According to the EEOC, if an employee is unable to maintain that adherence because of a disability, the employer would need to provide a reasonable accommodation (absent undue hardship) to allow the employee to participate in the program and to earn the reward. The EEOC said that in any case in which a participant may be removed from a program for failure to adhere to its requirements, a participant with a disability must be provided reasonable accommodation (absent undue hardship).

Employers who are designing their wellness programs should take into consideration the extent to which participants will need to be offered reasonable accommodations to meet program requirements — even if the employer otherwise believes that providing such accommodation undermines program goals.

Most employers know that a married participant in a qualified retirement plan must name a spouse as beneficiary for at least a portion of the benefit unless the spouse signs a notarized written consent or the spouse cannot be located. A recent U.S. District Court decision, Gallagher v. Gallagher, involved a participant who named his son, rather than his wife, as his sole beneficiary under his 401(k) plan. The participant had married in 1974 and separated in 1989 under a separation agreement and a court order of separate support. The participant paid spousal support for the rest of his life although he and his estranged wife never again lived together. They filed separate tax returns and had not spoken for years before the participant’s death. However, they had never finalized a divorce. The participant designated his son as beneficiary in 2005, while he was separated, but not divorced, from his wife. The court decision says that the participant did not know that his wife needed to consent to the beneficiary designation so she was not asked to do so. The participant died in 2011 survived by his estranged wife and his son.

Both the wife and the son claimed the participant’s 401(k) account. The court noted that the participant’s intention was clear: he wanted his 401(k) account to go to his son. However, because the participant was still legally married to his estranged wife, she was the one who was entitled to a survivor benefit under the terms of the plan.

The lesson for participants: so long as you are legally married, your spouse will be entitled to your plan benefit unless your spouse consents. The lesson for employers: to the extent you can, assist participants in this regard by reminding them that spousal consent is needed even in situations in which husband and wife have been separated for many years.

Beginning in 2014, the employer shared responsibility mandate of the Patient Protection and Affordable Care Act requires applicable large employers (those employing on average at least 50 full-time equivalent employees on business days during the preceding calendar year (also see previous blog on determining if you are an applicable large employer) to offer minimum essential, affordable coverage to their full-time employees or be subject to penalties. Penalties will be computed and assessed on a monthly basis, and will be assessed separately for each employer within a controlled group.

The applicable large employer’s health plan must provide minimum essential coverage to at least 95% of its full-time employees and their dependents (children under age 26). If the employer doesn’t offer any coverage, or the coverage offered is not minimum essential coverage and if at least one employee enrolls in an exchange plan and receives a premium tax credit, the employer could be responsible for a penalty of $2,000 x each full-time employee, ignoring the first 30 employees. If the employer offers minimum essential coverage to at least 95% of its full-time employees but the coverage is not affordable or doesn’t offer minimum value, the employer could be responsible for a penalty of $3,000 x each full-time employee who enrolls in an exchange plan and receives a premium tax credit.

A full-time employee is an employee who is employed on average at least 30 hours of service/week. The regulations state that if an employer offers health coverage to all but 5% (or 5, if greater) of its full-time employees, it will be treated as offering coverage to all full-time employees. Hours of service include each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer, including vacation, holiday, illness, layoff, jury duty, military duty or leave of absence. For employees not paid on an hourly basis, employers can use 1 of 3 methods to count hours of service: counting actual hours of service, using a days-worked equivalency method, or using a weeks-worked equivalency method. Hours of service generally do not include services performed outside of the United States.

Regulations adopt the look-back measurement method for determination of full-time employee status as an alternative to a month-by-month method of determining full-time employee status. The regulations describe different look-back periods for ongoing and new employees. The regulations also discuss how to address changes in employment status, rehiring employees, short-term employees, and employees hired into high turnover positions.

For ongoing employees (employees who have been employed for at least one complete standard measurement period), an employer may look back at a standard measurement period (a defined period between three and 12 consecutive months chosen by the employer). If an employee was employed on average at least 30 hours/week during this standard measurement period, the employer treats the employee as a full-time employee for the subsequent stability period regardless of the employee’s actual hours of service, so long as he or she remains an employee. The stability period is a period that is the greater of six consecutive calendar months or the length of the standard measurement period. An employer may also choose to add an administrative period of up to 90 days between the measurement and stability periods so it has time to determine which employees are eligible for coverage, and notify and enroll such employees. The standard measurement period and stability period generally must be uniform for all employees. However the regulations allow an employer to choose different lengths for each group of collectively bargained employees covered by a separate collective bargaining agreement; collective and non-collectively bargained employees; salaried and hourly employees; and employees whose primary places of employment are in different states. 

The regulations offer transitional rules for purposes of stability periods beginning in 2014 – employers may adopt a transition measurement period that is shorter than 12 months but that is no less than six months long, and that begins no later than July 1, 2013 and ends no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2014. For example, an employer with a calendar year plan could use a measurement period from April 15, 2013 – October 14, 2013, followed by an administrative period ending on December 31, 2013.

Different measurement requirements apply to new employees (those who have not been employed for a complete standard measurement period), depending on whether they are full-time, variable or seasonal. New full-time employees are those reasonably expected to work on average 30 hours/week when they are hired. New variable hour employees are those that employers cannot determine whether they are reasonably expected to work on average at least 30 hours/week. Seasonal employees are not defined. 

New full-time employees must be offered health coverage at or before the conclusion of the employee’s initial three calendar months of employment.  

For new variable hour and seasonal employees, an employer may use an initial measurement period of between three and 12 consecutive calendar months, and an administrative period of up to 90 days. The initial measurement period and administrative period combined cannot extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee’s start date. If a variable or seasonal employee works on a full-time basis during the initial measurement period, then the employee must be treated as a full-time employee during the subsequent stability period. The stability period for these employees must be the same length as the stability period for ongoing employees, and must be a period of at least six consecutive calendar months that is no shorter in duration than the initial measurement period. If a variable or seasonal new hire is not considered to work on average 30 hours/week, the employer does not have to offer the employee coverage during the stability period that follows the initial measurement period. This stability period must not be more than one month longer than the initial measurement period and must not exceed the remainder of the standard measurement period and associated administrative period in which the initial measurement period ends. 

Counting new hires hours will be cumbersome for employers, because each new variable hour and seasonal employee will have his/her own initial measurement period.

ERISA requires that plans contain a reasonable claims procedure. Courts have generally required claimants to exhaust that claims procedure before filing a lawsuit. In addition, if the plan gives the plan administrator discretion to interpret the plan and decide claims, a court will often give deference to the plan administrator’s decision. These rules should encourage employers to include robust claims procedures in their plans.

ERISA itself does not have a statute of limitations for participant claims. A statute of limitations is a time period during which a claimant may bring a lawsuit and can range from one or two years to as many as ten years or longer depending upon the claim. Because ERISA does not have its own statute of limitations, courts borrow from the states’ statutes of limitations. For example, in Minnesota courts may look to the two year statute of limitation on wage claims and apply that statute to certain ERISA plan benefit claims.

In a recent decision regarding long term disability benefits, the court upheld a three year limitations period that was not imposed by state law, but instead contained in the employer’s plan. The limitations period was written into the plan document but not reiterated in the letter that the claimant received when the claim was denied. The court held that the contractual limitation in the benefit plan was enforceable because it was a reasonable time limit.

It seemed from the description in the case that the summary plan description did not detail the requirements for filing a claim for benefits although it did prescribe the procedure for the claimant to obtain plan documents. Because the plan document described the contractual limitation and because the summary plan description described how to get a copy of the plan document, the court said that the claimant was on constructive notice of the limitations period. Because the case was filed more than a year after that limitations period expired, the case was dismissed.

Under this decision, an employer would not be required to describe a contractual limitation in detail either in the summary plan description or in a claim denial letter. Despite the fact that the court gave the employer the benefit of the limitations period without requiring that it be in the summary plan description and claim denial letter, not all courts may be that forgiving. The better practice would be to include the contractual limitation in the plan document, the summary plan description, and any claim denial letters.

My colleague Jeff Cairns blogged about a recent court case confirming the IRS’s position that discounted stock options can be considered noncompliant nonqualified deferred compensation arrangements under Section 409A of the Internal Revenue Code. Unless structured to be exercised only on a fixed date or an allowable 409A event, discounted stock options will result in adverse tax consequences to the employee who receives the options. As Jeff noted in his blog, privately held companies would be well advised to use the safe harbor valuation methods available under the 409A regulations to avoid being viewed as having issued discounted options.

I also found the case interesting because of the time periods involved and the role of the taxpayers in the stock issuance. The case involved actions taken during the 409A transition period, the period of time between January 1, 2005, when the statute became effective, and January 1, 2008, when final regulations became effective. During that transition period, employers and employees had a certain amount of leeway to fix arrangements that had not violated tax laws at inception but now were caught by the broad sweep of Section 409A.

The stock options in the court case had been granted in 2003 (before section 409A had even been passed) at an exercise price that was supposed to have been equal to the fair market value of the stock, and were exercised in January of 2006, just over a year after the statute was effective. The investigation of the corporate stock granting practices was not begun until May of 2006, after the options had been exercised. Some time thereafter the corporation concluded that it had mispriced the options and taxpayers paid an additional amount representing the increased exercise price required so that the option exercise price was the fair market value of the stock on the date the option was granted. Although the taxpayers (husband and wife) were two of the three cofounders of the corporation and the husband had been the president, chief executive officer and chairman of the board of the corporation, it was the executive compensation committee of the board that determined the stock option awards. The committee was comprised solely of independent directors and neither of the taxpayers was a member of the committee. While it is certainly possible that the taxpayers were complicit in the issuance of options that may have been discounted, the process did not directly implicate the taxpayers in the improper grant. Thus, in this situation, despite a relatively new statute, and an option that purportedly was issued at fair market value, the taxpayers will bear the burden if the option was improperly granted.

As Jeff mentioned in his blog, the court has not yet determined whether the options were in fact discounted so the taxpayers may yet win on that point. However, in the meantime, the IRS has won a clear victory that discounted options are subject to Section 409A and executives are on notice that they can be the ones who suffer even if they are not the ones who set the discounted price for the options.

The Department of Labor has published two checklists that plan sponsors can use to test their compliance with group health plan requirements. One checklist addresses the Affordable Care Act (ACA or health care reform) provisions, including a plan’s status as a “grandfathered” plan exempt from some ACA requirements, and such ACA requirements as limitations on rescission and annual and lifetime limits and the new Summary of Benefits and Coverage. The other checklist addresses HIPAA portability and other law provisions, such as preexisting conditions exclusions, certificates of creditable coverage, special enrollment rights, wellness programs, mental health parity and others. The check-the-box tools do a good job explaining these compliance requirements.  Employers may want to review the self-compliance tools to make sure that their plans meet these ACA and HIPAA requirements.

Many plan sponsors have selected so-called “target date” funds as the default investment under the plan sponsor’s 401(k) or other qualified plan. A target date fund is one that includes investments in different asset classes (e.g., stocks, bonds, money market) where the balance among the asset classes becomes more conservative as the participant gets older. A 2030 target date fund would be designed for use by a participant planning to retire in or near to 2030.

Plan sponsors should monitor the performance of target date funds as they would any other investment option under the plan. However, target date funds raise unique challenges, including the lack of an established index against which to measure performance and differences among target date funds in their “glide paths,” the period of time over which the fund moves to its most conservative investment allocation. Some target date funds continue substantial equity exposure after the target retirement date; others have moved to their most conservative asset allocation by the target retirement date. This difference in glide paths is sometimes called managing “to” or “through” the target retirement date.

The Department of Labor has posted on its website a short tip sheet describing target date funds and providing fiduciaries with guidance on how to select and monitor such funds. Plan sponsors offering such funds may wish to review that guidance.

Only applicable large employers may be assessed a penalty under the employer shared responsibility mandate of the Affordable Care Act.  An applicable large employer is defined by the regulations as one that has employed an average of at least 50 full-time employees (taking into account full-time equivalent employees or FTEs) on business days during the preceding calendar year.

An employee is defined using the common law standard – an employment relationship exists when the person for whom the services are performed has the right to control and direct the individual who performs the services. Leased employees, sole proprietors, partners in a partnership, members (owners) of an LLC taxed as a partnership, and 2% S-corporation shareholders are not employees.

A full-time employee is an employee who was employed on average at least 30 hours of service per week.  Hours of service include not only hours worked, but also all hours for which employees are paid or entitled to payment even when no work is performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Hours of service generally do not include hours worked outside of the United States. However, all hours of service for which an individual receives U.S. source income are counted as hours of service for purposes of the employer shared responsibility mandate.

All employees of a controlled group or affiliated service group are taken into account in determining whether the group together constitutes an applicable large employer. In general, this means if a parent owns 80% or more of the equity in a subsidiary, or if the same 5 or fewer persons own 80% or more of the equity in another company and collectively own more than 50% of both companies, the companies will be considered controlled groups and all employees of the controlled group must be combined together for purposes of calculating whether an employer is above or below the 50 full-time equivalent employee threshold.

The identification of full-time employees for purposes of determining status as an applicable large employer is performed on a look-back basis using data from the prior year, taking into account the actual hours of service of all employees employed in the prior year (full-time and non-full-time employees). This means to determine if you are an applicable large employer on January 1, 2014, your counting period started last month (January, 2013).

To determine if you are an applicable large employer, for each month in the preceding calendar year calculate:

1.  the number of full-time employees, including seasonal workers  (those working an average of 30 hours of service per week)  [for example, you employed 39 full-time employees in January]

2.  the number of FTEs, including seasonal workers (which takes into account the total number of hours of service – but not more than 120 hours of service for any one employee – for all employees not employed on average 30 hours of service per week for that month / 120) [for example, all of your non-full-time employees worked 1,260 hours in January / 120 = 10.5 FTEs in January]

3.  Add 1 and 2 to determine your total full-time employees (including FTEs) for the month [39 + 10.5 = 49.5 FTEs in January]

4.  Do this calculation for each month, then add all of the FTEs for the entire year and divide by 12, dropping the fraction.  If this number is 50 or more, you are an applicable large employer and will be responsible for complying with the employer shared responsibility mandate.

Seasonal worker exception.  If your workforce exceeds 50 full-time employees for 120 days or less during the preceding calendar year, and the employees in excess of 50 who were employed during that period of no more than 120 days were seasonal workers, you are not an applicable large employer.  Seasonal workers are defined in the regulations as workers who perform labor or services on a seasonal basis and retail workers employed exclusively during the holiday seasons.  The regulations also state that for purposes of this particular exception, four calendar months may be treated as the equivalent of 120 days, and that the four calendar months and 120 days are not required to be consecutive.

An employer not in existence during an entire preceding calendar year is an applicable large employer for the current calendar year if it is reasonably expected to employ an average of at least 50 full-time employees (taking into account FTEs) and does employ least 50 full-time employees on business days during the current calendar year.

In summary, make sure you understand the controlled group rules and take employees of controlled groups into account when determining if you are an applicable large employer under the Affordable Care Act.  If your organization employs close to 50 employees now and you want to avoid being an applicable large employer for purposes of the employer shared responsibility mandate, keep a careful eye on your full-time hiring and the number of hours your non-full-time employees work throughout 2013.

The Affordable Care Act requires most health plans to cover certain women’s preventive services, including contraception, without charging a co-pay or deductible. On January 30, 2013, the Obama Administration released proposed rules that continue to implement provisions in the health care law providing women contraceptive coverage without cost sharing, while at the same time respond to religious objections to contraceptive services by certain religious organizations.

Exemption for Religious Employers

Group health plans of “religious employers” are exempted from having to provide contraceptive coverage, if they have religious objections to contraception. The proposed rule simplifies the existing definition of a “religious employer” as it relates to contraceptive coverage by eliminating criteria that a religious employer: (1) have the inculcation of religious values as its purpose; (2) primarily employ persons who share its religious tenets; and (3) primarily serve persons who share its religious tenets. The simple definition of “religious employer” for purposes of the exemption would primarily include churches, other houses of worship, and their affiliated organizations, including hospitals, schools and universities.

Accommodations for Non-Profit Religious Organizations 

The rule proposes accommodations for additional non-profit religious organizations, while also separately providing those organizations’ enrollees contraceptive coverage with no co-pays.  The proposed regulations define an eligible organization as an organization that: (1) opposes providing coverage for some or all of any contraceptive services required to be covered under Section 2713 of the Public Health Services Act, on account of religious objections; (2) is organized and operates as a nonprofit entity; (3) holds itself out as a religious organization; and (4) self-certifies that it meets these criteria and specifies the contraceptive services for which it objects to providing coverage. Under the proposed accommodations, such eligible organizations would not have to contract, arrange, pay or refer for any contraceptive coverage to which they object on religious grounds. Plan participants would receive contraceptive coverage through separate individual health insurance policies, without cost sharing or additional premiums.  The issuer would work to ensure a seamless process for plan participants to receive contraceptive coverage.

With respect to insured group health plans, the eligible organization would provide self-certification to the health insurance issuer, which in turn would provide separate, individual market contraceptive coverage at no cost for plan participants. The regulations state that issuers generally would find that providing such contraceptive coverage is cost neutral because they would be insuring the same set of individuals under both policies and would experience lower costs from improvements in women’s health and fewer childbirths. With respect to self-insured group health plans, the eligible organization would notify the third party administrator, which in turn would work with a health insurance issuer to provide separate, individual health insurance policies at no cost for participants. The regulations state that the costs of both the health insurance issuer and third party administrator would be offset by adjustments in federally-facilitated Exchange user fees that insurers pay.

The rule also proposes that eligible religious non-profit organizations that are institutions of higher education that arrange for student health insurance coverage may take advantage of an accommodation comparable to that for an eligible organization, and not provide contraceptive coverage if they object on religious grounds.

The proposed rule does not provide any exemptions or accommodations for secular organizations owned by individuals who object on religious grounds to providing employees with contraceptive coverage, so we should expect to see those court challenges continue.

My colleague, Jessica Kracl, has written an Alert  for our health care clients about the recently issued privacy and security regulations under the Health Insurance Portability and Accountability Act (HIPAA). Employer group health plans are covered entities under HIPAA and therefore must comply with the new regulations. Jessica’s Alert is a good summary of the HIPAA compliance issues now facing covered entities.