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

A recent Eighth Circuit Court of Appeals decision considered the situation of a participant covered under a self‑funded ERISA plan who sustained injuries in a slip and fall accident. The plan paid health benefits for that accident. The participant also obtained compensation by settling a civil lawsuit. Like many self‑funded medical plans, this plan required a participant who received such a settlement to reimburse the plan for the benefits it paid. However, the participant declared bankruptcy so did not repay the plan.

In connection with the civil suit, the plan had notified the participant’s attorney of the plan’s subrogation right. The attorney had twice acknowledged that right. However, the attorney did not sign a subrogation agreement with the plan. When the attorney received the settlement money, it retained the amount that was to be reimbursed to the plan for about a month but then paid the amounts to the participant. Because the plan was unable to obtain reimbursement from the participant, the plan sued the attorney for the money.

The Eighth Circuit Court of Appeals determined that the plan could not recover and in fact required the plan to pay the attorney’s fees of the attorney who was sued. Recent U.S. Supreme Court decisions have addressed the extent to which plans can recover damages from their participants. The Supreme Court has emphasized the fact that plans are entitled to “equitable relief,” which does not generally include money damages. The court of appeals found that the plan did not have an equitable claim against the attorney because the attorney had already disbursed the settlement amount to the participant. There was no specific fund that the plan could claim equitably belonged to it.

The plan also was not permitted to enforce its subrogation right directly against the attorney because the attorney had never agreed to it. Although the attorney had acknowledged the plan’s right to subrogation, the attorney had not signed a subrogation agreement so was not contractually bound by the subrogation obligation.

The message for self‑funded plans is to be diligent in protecting their subrogation rights. One alternative is to attempt to have attorneys representing plan participants in a civil suit sign an agreement to reimburse the plan from settlement proceeds. However, an attorney may decline to do so. Another alternative would be for the plan to join the civil suit so that it is involved directly in settlements and judgments. If the civil suit is not in federal court, the plan may bring its own federal court action to protect its subrogation rights.  While intervention will protect the plan, it may also result in higher costs to a plan to enforce its subrogation rights. It will be more difficult, at least in the Eighth Circuit, for plans to sit back, wait for the participants and the participants’ attorneys to recover from third parties, and then try to collect amounts that the plans have paid as medical benefits on behalf of participants.

The Supreme Court has accepted for review in its upcoming term a case that raises issues about subrogation and the right of an ERISA plan to recover from participants who are not fully compensated for their injuries. Plans that aggressively enforce their subrogation rights should watch for developments in this rapidly changing area of law.

A recent Sixth Circuit Court of Appeals decision concluded that severance pay provided to employees as a result of layoff or discontinuance of a plant, operations or other similar condition is exempt from FICA taxes. According to the court of appeals, it does not matter whether the severance is paid in a lump sum or in installments, nor does it matter whether the individual is eligible for state unemployment compensation benefits. This case upheld a decision from the Western District of Michigan about which I wrote in 2010.

This decision is quite technical in its reading of the applicable statutes and conflicts with a 2008 decision of the Federal Circuit Court of Appeals. The decision also conflicts with IRS revenue rulings and private letter rulings that interpret the FICA exclusion for what are called supplemental unemployment benefits or SUB benefits. According to the IRS, FICA-exempt SUB payments must be made on account of layoff, plant closure or similar event; must be paid in installments; and must be paid only to individuals eligible for state unemployment compensation benefits. Only the first of those criteria was required by the Court of Appeals.

Because two circuit courts have now reached different conclusions about the FICA taxation of severance pay, it is possible that the Supreme Court will review the decision. If it does not, it seems likely that the IRS will accept the decision only for employers in the Sixth Circuit. However, those employers can take advantage of the decision and file for FICA tax refunds on severance pay. Employers in other circuits might also consider similar action and either bring their own lawsuit challenging the IRS’s position if the IRS does not grant a refund or hope that their claim is still pending if some other employer is successful in a challenge.

In one of the few cases that has considered the legality of an employer wellness program, the Eleventh Circuit Court of Appeals considered a challenge by an employee of Broward County, Florida to the county’s imposition of a $20.00 bi-weekly charge on employees enrolled in the group health insurance plan who refused to participate in the employee wellness program. The wellness program required the employee to complete an on-line health risk assessment questionnaire and a biometric screening including a finger stick blood test for glucose and cholesterol. The information was used to identify employees with certain chronic diseases who then were given the opportunity to participate in a disease management program. Employees who participated in that program were eligible for co-pay waivers for certain medications. The employee challenged the imposition of the charge and attempted to have the case certified as a class action on behalf of all county employees. The employee claimed that requiring the blood test and questionnaire violated the prohibition in the American With Disabilities Act (ADA) on nonvoluntary medical examinations and disability related inquiries.

The ADA contains an exemption for insurance plans from the prohibition on medical examinations and disability related inquiries. Under that exemption, the ADA is not to be construed as prohibiting an employer from “establishing, sponsoring, observing or administering the terms of a bona fide benefit plan that are based upon underwriting risk, classifying risk, or administering such risks that are based on or are not inconsistent with state law.” The federal district court had concluded that the employee wellness program was a term of a bona fide benefit plan and therefore permissible under the ADA exemption. The employee challenged that conclusion on the basis that the county’s plan documents did not contain the wellness program provisions.

The Eleventh Circuit Court of Appeals upheld the district court’s decision. The court of appeals determined that the terms of a bona fide plan are not limited to the terms in the physical document labeled group health plan. In this case, the terms of the wellness program were included in at least two employee handouts so were communicated to the participants as terms of the plan. Therefore, the court denied any recovery to the employee.

As it happens, the county had already stopped imposing the additional charge. Of course, in light of the case, the county could decide to reinstate it.

Under the court’s reasoning, there would be few limits on structuring a wellness program under the ADA so long as the program’s terms are included under the bona fide medical plan. (Of course, an employer would also have to make sure that its wellness program met other legal requirements such as those imposed by the Department of Labor under the HIPAA portability rules.) The ADA also prohibits medical examinations or disability-related inquiries unless they are voluntary or required by business necessity. Many practitioners have been concerned that if the penalties for failure to participate in a wellness program are too severe or the rewards too high, then the program will not be viewed as voluntary. If the program includes a health risk assessment or biometric screening, an employee could claim that the program components are medical tests or disability related inquiries. In many cases, it would be difficult to justify a health risk assessment or biometric screening under a business necessity standard. The EEOC has stated informally that requiring a health risk assessment as a condition to obtaining coverage violates the ADA as a disability related inquiry that is not voluntary. Under the court’s reasoning, so long as the requirement is part of a bona fide benefit plan, it would be permissible.

Although employers can take comfort from this ruling, they should understand that the EEOC may still challenge wellness programs on a voluntariness standard. While employers in the Eleventh Circuit may have some protection, employers in other circuits should still evaluate their programs to make sure that they meet all legal standards.

I am presenting a webinar on October 9, 2012, at 9:00 a.m. for Minnesota CLE, entitled “Workplace Wellness Programs – Legal Issues and Risks.”  Employers interested in this topic can check at www.minncle.org for further information about the webinar. Registration and other information should be posted soon.

I recently blogged about an employer who continued health insurance coverage for an employee on short term disability in contravention of the health plan document. The employer lost its stop-loss coverage for health claims incurred by the disabled employee because the health plan document did not specifically allow for continued coverage during disability. Today’s blog post concerns another scenario involving disability and health insurance but with a different twist. Today’s case involves an employee who became unable to work in 2004 as a result of knee problems. He applied for long term disability coverage and was denied, but ultimately sued the LTD carrier and recovered benefits. That lawsuit was settled in 2008. The employee also had a worker’s compensation claim that was being evaluated in 2004 and 2005. In connection with that claim, the carrier videotaped the employee building a barn in 2005 during the time that he was supposedly disabled. Based on the videotaped evidence, the employer terminated the employee in 2005 for dishonesty. The employee’s health coverage terminated at the same time. The case does not explain why the LTD carrier agreed to pay benefits to the employee in light of the worker’s compensation evidence that he was less disabled than might otherwise appear.

The employer had an unwritten policy that it would waive health insurance premiums for employees on long term disability. In 2005 when the employee was terminated for dishonesty, the employer had sent COBRA information but the employee had not elected COBRA or if he elected COBRA did not continue it during the COBRA continuation period. In 2009, the now former employee sued the employer claiming that the employer should reinstate him to health plan coverage and should waive the health insurance premiums since he was on LTD.

The employer’s insurance contract with Blue Cross Blue Shield contained an eligibility requirement that an employee be “a full-time Employee of the Group who is Actively At Work” to be eligible to enroll in the plan. The definition of “Actively At Work” included a proviso to the effect that someone not at work due to health-related factors is considered actively at work for purposes of determining eligibility for coverage.

The court concluded that the former employee did not meet the eligibility requirements for coverage because the reason he was not at work was his termination for dishonesty, not his disability. Therefore, regardless of whether the unwritten policy would otherwise have covered the employee, he was not eligible for the benefit.

From the employer’s point of view, the result of this case was a win. The employer did not have to reinstate the former employee to health coverage and did not have to cover the former employee’s health insurance premium. However, the employer is now in a position where it may need to provide coverage for employees on long term disability on an indefinite basis based upon the court’s interpretation of the insurance contract and the employer’s unwritten policy regarding waivers of insurance premiums.

Because of HIPAA portability rules, employers with eligibility requirements that provide that employees must complete a period of service, for example, 30 days, before becoming eligible for coverage under a health insurance policy must not use that requirement to deny coverage to someone who is not at work as a result of a health condition. It is for that reason that health insurance contracts often include an “actively at work” requirement and waive that requirement for someone not at work because of a health condition. The health contracts also typically have provisions that provide for loss of coverage in the event the employee no longer meets eligibility requirements. Although this employer may have intended the result in this case ‒ that employees on LTD be able to continue coverage indefinitely ‒ many employers do not want or expect disabled employees to continue their coverage for so long. Instead, they expect that employees no longer able to work because of disabled status will be able to elect COBRA, including the 11 month extension of COBRA if the employee becomes eligible for social security disability benefits. During that 11 month extension, employers are permitted to charge up to 150% of the normal employer and employee premium for the coverage.

The lesson for employers in this case is twofold. First, employers should document their policies relating to subsidization of coverage for situations such as disability. With a written policy, there are fewer instances where lawsuits could be brought and it is more clear to the employer, the employee and the insurance carrier who is entitled to coverage. The second lesson is that employers should review provisions of their plans relating to eligibility and loss of coverage to make sure that the coverage begins and ends when the employer expects coverage to begin and end. Otherwise, employers could find themselves required to provide coverage they did not want to provide. Particularly if the unwritten policy is not one accepted by the insurance carrier, the employer could find itself having promised health insurance coverage without an insurance carrier backstopping that promise.

A recent Sixth Circuit Court of Appeals decision considered whether a third party administrator of a self-funded medical plan was a fiduciary under ERISA. Under ERISA, fiduciaries owe strict duties of loyalty and prudence to plan participants and beneficiaries and can be personally liable for losses if they are not. Many third party administrators of medical plans take the position that they operate without discretion and therefore are not fiduciaries.

The Guyan International v. Pritchard Mining Company decision considered a third party administrator that was contractually obligated to use the funds to pay medical claims but instead used the funds for its own purposes, causing hundreds of thousands of dollars worth of claims to go unpaid. It comingled those funds and used the funds for its own purposes, clearly a violation of its contract with the employer. The third party administrator claimed that it was not a fiduciary because it was not permitted to exercise discretionary authority or discretionary control over the management of the plan and did not exercise authority or control over the plan’s assets, as would be required under ERISA’s definition of fiduciary.

Because the third party administrator in fact took funds and used them for its own purposes, the court had no trouble concluding that the TPA had exercised control over the assets of a plan. The court noted that the TPA had authority to write checks on the plan’s accounts and had control over where the plan’s assets were deposited and when and how they were disbursed. The TPA exercised “practical control” despite the fact that its conduct was in derogation of its contracted authority. Therefore, the third party administrator was a fiduciary and liable for the misused contributions. The court distinguished mere possession or custody of assets, such as that of a bank that merely holds deposits, from actual control and use of plan funds by an entity for its own purposes.

Third party administrators who exercise control over the manner in which plan assets can be paid should take steps to insure that they meet their obligations under ERISA to use plan assets only for proper plan purposes.

Employers participating in multiemployer plans should be well aware of the funded status of those plans. Annually the employer must receive notice from the plan about its funded status including whether it is in “endangered” or “critical” status. Under the Pension Protection Act of 2006, a multiemployer pension plan is endangered if among other criteria, it is less than 80% funded and is in critical status if among other criteria, it is less than 65% funded. If a plan falls into critical status, participating employers must contribute an additional surcharge and the plan must adopt a rehabilitation plan aimed at improving the plan’s funded status.

The Second Circuit Court of Appeals recently decided a case involving an employer who withdrew from a multiemployer plan in critical status, an action that resulted in the employers owing withdrawal liability. What the employer did not expect, however, was that the multiemployer plan took the position that the employer was not permitted to withdraw from the plan once the plan was in critical status. According to the plan, the employer would have to remain in the plan until the plan was better funded.

The district court concluded that the Pension Protection Act did not prohibit an employer from withdrawing from a multiemployer plan in critical status and the court of appeals affirmed that decision.

We have been assisting a number of employers faced with increased contributions to multiemployer plans and reduced benefits for covered plan participants as the multiemployer plans try to become better funded. With this decision, we know that one tool still in the employer’s toolbox is negotiating with the union for withdrawal from the plan in situations where paying the withdrawal liability makes more sense to the employer than continuing to participate in the plan.

A recent Sixth Circuit Court of Appeals case considered a situation that we have seen in our practice: An employee gets sick, goes out on FMLA leave, and then is placed on short term disability. The employer’s health plan provides that employees are eligible for the plan if they are regularly scheduled to work at least 40 hours a week. The employer does not bother to send a COBRA notice until after the short term disability period ends (which is after the FMLA period has ended) and in the meantime simply treats the employee as having regular coverage, deducting the employee cost of the health insurance from the short term disability payments.  That is the good deed – keeping the employee on regular medical coverage through the end of the short term disability period, despite the fact that the employee no longer met the weekly hours requirement for coverage under the health plan.

In the case considered by the Sixth Circuit, the employer’s health plan was self-funded and the employer had a stop loss contract in place to cover health claims for a single participant in excess of $250,000. That stop loss contract contained an exclusion we have seen in other stop loss contracts, namely, that the stop loss contract excludes expenses for a COBRA continuee “whose continuation of coverage was not offered in a timely manner or according to COBRA regulations.”

In this case, COBRA should have been offered after the employee’s FMLA leave expired because that is when regular coverage ended under the terms of the plan. The COBRA notice was not given until after the short term disability period ended. The employee’s claims exceeded the $250,000 limit that allowed the employer to seek reimbursement under the stop loss coverage. The stop loss carrier declined to reimburse the employer and – the “punishment” for the good deed — the district court and court of appeals upheld the stop loss carrier and denied coverage to the employer because of the irregularities in the timing of offering COBRA to the participant.

Had the COBRA notice been properly given (after the end of the FMLA period) and the employer simply subsidized the COBRA premium for the employee during the short term disability period, the employer might not have lost its stop loss coverage (although the employer would have needed to make certain that the health plan did not preclude the employer from subsidizing COBRA coverage for the employee). The excess health claims were incurred well within the 18 month COBRA continuation period that the stop loss carrier should have expected that its insurance would cover. Nevertheless, because the employer decided to offer COBRA at the end of the short term disability period, instead of at the end of the FMLA period, the employer found itself truly self-insured without any stop loss covering the large claim.

Employers should remember that their health insurance coverage is typically not something that they offer on their own even if their plan is “self-funded.” A fully insured plan is offered under the terms of an insurance contract and a self-funded plan typically has a third party administrator and stop loss carrier also involved in the coverage. The employer should make certain that any policies that it wishes to put in place regarding continuation of coverage, for example, during leaves of absence or in connection with employment separations, are reflected in the health plan document and accepted by the insurance carrier or stop loss carrier. The employer should also make sure that there are no stop loss exclusions inconsistent with the health plan’s terms. The last thing an employer typically wants is a truly “self-funded” plan.

A recent federal court decision from the Eastern District of Wisconsin dealt with a situation of an employer who failed to provide a former employee proper COBRA notices and failed to accept a premium payment for the COBRA coverage. The employer had sent the required COBRA notice when the employee terminated employment but had not sent the employee and spouse the initial COBRA notice required when the employee and his spouse first became covered under the plan. When the employee sent a COBRA premium later than its due date, the employer refused to accept the payment and cancelled the coverage. The employee sued the employer claiming various COBRA violations.

The employer had an employee benefits liability insurance policy with Travelers Insurance and the employer tried to get Travelers to pay for defending the action. Travelers declined on the grounds that the policy excluded a loss for which the employer “is liable because of liability imposed on a fiduciary by [ERISA].”

The court determined that the COBRA notice violations would constitute violations by the plan administrator who is an ERISA fiduciary. Because a core duty of the fiduciary is to disclose appropriate information, the employer’s failure to advise the employee of the initial COBRA notice would result in liability imposed on the fiduciary under ERISA. The court also concluded that the plan administrator would be acting as a fiduciary in refusing to accept the COBRA premium payment. Therefore, despite having an employee benefits liability insurance policy in place, the employer found itself without coverage.

The lesson for employers: Review your insurance policies and riders — fidelity bonds, fiduciary liability coverage, directors and officers liability coverage, and employee benefits errors and omissions coverage. Get advice from an experienced consultant or attorney to make sure you have the coverage you need and want – and thought you had.

An employer who wishes to terminate a defined benefit pension plan must make sure that the plan is fully funded in order to do so. Sometimes the employer must contribute funds to the plan in order to provide sufficient assets to pay all the benefits on plan termination. A recent private letter ruling addressed the situation of an employer who over contributed to the plan on plan termination.

Generally speaking, on plan termination, an employer can take a reversion of assets not needed to pay benefits if the plan so provides. However, the amount of the reversion is subject to an excise tax of 50 percent (20 percent if a qualified replacement plan is established) under Section 4980 of the Internal Revenue Code. Therefore, employers are often careful to make certain that they do not over contribute to the plan, particularly as the time for final payout approaches.

In the private letter ruling, the employer selected an insurer to provide an annuity to fund the benefits for the plan participants. Based on the data provided to the insurer, the employer made an initial and a subsequent contribution to the plan in order to make sure that the plan had sufficient assets to fully pay for the annuity. However, because of changes in the participant data, the insurer later revised the premium amount and issued a refund to the plan. The refund was less than the amount of the final contributions that the employer made to fund the annuity. The employer asked the IRS if it could take the reversion without having to pay the reversion tax.

The IRS first determined that the refund was in effect a contribution made under a mistake of fact. The mistake was an error in the calculation of the amount of the annuity premium. Under ERISA and the tax code, contributions made under a mistake of fact can be returned within one year of when they were made. However, more than a year had passed since the employer had requested the private letter ruling so the employer could not take advantage of that rule. The IRS then concluded that a reversion does not include an amount distributed to an employer by reason of a mistake of fact. The IRS concluded that the refund fit in that category and so therefore was not a reversion subject to the reversion tax.

In the situation described in the private letter ruling, because the final contributions were clearly in excess of what was needed to fund the annuity, the IRS could easily conclude that the excess contribution was a mistake of fact. In a more typical situation, a reversion might be attributable to actuarial assumptions that resulted in plan overfunding (not a typical situation in these days of low interest rates, but in years past, there were overfunded plans). An employer might argue that contributions based on erroneous actuarial assumptions are contributions based on a mistake of fact – the mistake being the actuarial assumptions that turned out to be incorrect.

The reversion tax was added to the Internal Revenue Code to prevent employers from taking deductions for contributions not needed to fund a plan, which allowed the assets of the plan to grow tax free, and then which also allowed the employer to take back the excess assets on plan termination. In this case, it was clear that the employer was not attempting to use the plan as a way to build tax free assets since the excess amounts were contributed only on plan termination and only in an amount necessary to pay the insurer what the insurer had requested. However, the logic could be used by employers where the reversion may have been based on “mistaken” contributions made long before the plan termination.

Employers should remember that only the taxpayer who requests and receives the private letter ruling can rely upon it. An employer would not want to rely upon this ruling to avoid a reversion tax without its own legal opinion or its own private ruling from the IRS.