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

Employers who self fund their medical plans often have contracts with their third party administrators about claims processing. Some of those contracts provide that the claims processor has discretion to decide claims; others provide that the claims processor is simply acting in a ministerial fashion so that the employer ultimately retains discretion to decide contested claims. Under ERISA, if a claims processor has discretion to decide claims, then a court will overturn the decision only if it is arbitrary and capricious. This standard of review is quite favorable to the plan, and employers often take steps to ensure that they have the benefit of that standard of review.

A recent federal circuit court decision emphasizes the importance of properly providing for that discretion. The case involved an employee whose son incurred claims for a stay at a residential/educational mental health care facility. Blue Cross Blue Shield of Massachusetts denied payment of the claims for treatment in the facility based on a failure to show medical necessity. The parent employee challenged the denial which the plan upheld. The district court noted that the administrative services contract between the employer and Blue Cross Blue Shield had a clear designation of discretionary authority to Blue Cross to decide claims. The plan certificate, which was the only document delivered to the employee participant, was less clear. It simply said that Blue Cross Blue Shield “decides which health care services and supplies you receive (or you are planning to receive) are medically necessary and appropriate for coverage.” While the district court found that this language was sufficient to grant discretion to Blue Cross, the appeals court disagreed. According to the appeals court, the grant of discretion must be explicit. The certificate and the contract could not be read together to give Blue Cross the discretion to decide claims. The contract was not part of the plan document and the employee did not receive a copy of it.

The appeals court found that Blue Cross had complied with the claims procedure and had provided a full and fair review of the claim. However, because the district court reviewed that claim denial under an arbitrary and capricious standard and because that standard was inappropriate, the case was remanded back to the district court. The district court will need to review the claim denial under a “de novo” standard which will not give deference to the decisions that Blue Cross made.

Employers often rely on their third party administrators to decide claims and to generate documents that are delivered to participants describing the plan and the claims procedure. Employers may wish to check their documents to make sure that they understand whether their third party administrator is given discretion to decide claims or whether the employer itself has that obligation. If the employer does not want to decide claims and expects its third party administrator to assume that obligation, the employer should make sure that the contract with the third party administrator so provides. The employer should also check to make sure that both the summary plan description and the formal plan documents give an explicit grant of discretionary authority to the third party administrator to decide claims. Only in that way can the employer be confident that the courts will review denied claims using the favorable (to the plan) arbitrary and capricious standard.

Sun Trust Bank was sued in a class action challenging its COBRA notice. The plaintiffs who brought the lawsuit claimed that the COBRA notice was materially deficient in that it failed to provide the name and address of the party responsible under the plan for COBRA administration and that it failed to provide an adequate explanation of the plan’s procedures for electing COBRA. Instead, the notice directed plan participants to a general human resources website and phone number. In order to settle the litigation, Sun Trust has agreed to modify its notice to identify “My HR” as the party responsible for administering COBRA benefits and to identify the specific location on the My HR website where information regarding COBRA coverage and a COBRA election form can be found. The notice also provides an alternative means to obtain an election form, specifically saying that it will be mailed to a participant upon request.

In addition to making the changes to the COBRA notice, Sun Trust has agreed to fund a settlement fund of $290,000 which will be used to compensate class members and to pay attorneys’ fees, expenses and special awards to the class representatives. The attorneys have agreed to seek no more than $110,000 in fees, plus expenses. The class representatives may receive up to $5,000 in a special award, with the balance to be split among the class members, who are all persons sent a COBRA notice by or on behalf of Sun Trust between June 1, 2014 and January 6, 2016. The parties expect the class to consist of approximately 9,000 individuals. Individuals can choose to opt out of the class, but typically few class members opt out in these situations because the cost of bringing a separate lawsuit generally exceeds what expected benefits would be.

The lawsuit was filed April 1, 2015. Sun Trust’s motion to dismiss was denied on September 18, 2015, and on October 2, 2015 Sun Trust received a comprehensive set of written discovery requests to which Sun Trust responded on November 5, 2015. While we do not know the amount of attorneys’ fees expended by Sun Trust, it is reasonable to think that its fees would be in the same order of magnitude as class counsel’s fees. Presumably Sun Trust determined that the cost of settlement would be less than the cost of continued litigation, including the risk of loss and penalty exposure.

The changes that will be made to the COBRA form seem relatively minor. Employers may wish to review their own forms, particularly forms that direct employees and their family members to websites to make sure that it is clear where within the website the COBRA information lies. That change may save the employer the cost and headache of a class action lawsuit.

 

Employers know that they must honor qualified domestic relations orders (QDROs) that assign a portion of a retirement benefit to a participant’s former spouse, known as an alternate payee, when the participant and alternate payee divorce. Those orders by law are not allowed to provide greater benefits than were otherwise provided under the plan. A recent federal district court case ignored that provision when it recognized a retroactive QDRO.

The case involved the divorce of Henry and Ardella. Their divorce became final in September of 1993. The divorce decree awarded Ardella half of her former husband’s pension benefits. He began receiving his benefits in April of 1994 and died in November of 2007.

Ardella first submitted her QDRO in December of 1994, which is after Henry began receiving retirement benefits. According to the plan’s records, Ardella was told by phone that the order would not be qualified and a sample order was mailed to her counsel. It seems that the same 1994 order was submitted again in early 2008 after Henry had died. That order was formally determined not to be a QDRO on February 28, 2008. The plan concluded that because the participant had elected a single life annuity and had died, no remaining benefits were available to be paid to Ardella.

Ardella tried again in 2012 to get the order accepted and when that was rebuffed, she sought a new order from the family court “nunc pro tunc,” which is an order that is retroactive to an earlier date. The family court issued an order in 2012 that was said to be retroactive to 1993, when the original divorce decree was entered. That order was sent to the plan which again said that there were no benefits remaining to be divided and so rejected the order. Ardella then sued for her benefits.

The district court found in favor of Ardella, noting that there is a split of authority as to the validity of nunc pro tunc QDROs. Some courts accept the legal fiction that the order relates back to the original date; others do not. The district court decided that it would accept the order as having been entered in 1993 so that at the time it was entered there was a benefit to be split. As of that date, if the order had been implemented it would not have provided for increased benefits. Therefore, the plan was required to pay a survivor benefit to Ardella, the alternate payee, even though the participant had elected – and been paid – a life annuity that was larger in amount than the benefit that would have been paid to him if he had elected a survivor annuity for Ardella’s benefit.

Employers will need to monitor the cases in the jurisdictions in which they operate to determine whether courts will allow retroactive QDROs. Unfortunately, the fiction of a nunc pro tunc order can result in the reality that the plan must pay more actuarially than it would have had to pay if the order had been presented in a timely fashion. Had the order been processed before Henry began receiving his benefit, he would have had to elect a benefit that provided a survivor annuity for Ardella. In that case, the monthly amount paid to him during his lifetime would have been lower than the amount paid to him under the single life annuity he in fact elected. Ultimately, the plan must pay an actuarially increased benefit to Ardella and Henry – which is not supposed to happen with a QDRO.

I blogged a few days ago about the U.S. Supreme Court decision making it harder for plans to recover from a third-party settlement fund for the amount the plan paid when a participant is injured by that third-party. A recent federal district court decision highlights the need to provide appropriate notice of the plan’s reimbursement/subrogation provisions. The case involved a health plan maintained under a master plan document which incorporated the summary plan description. Only the summary plan description contained the subrogation provision. The master plan document did not. The court held that although the summary plan description was incorporated into the master plan document and therefore was part of it, the subrogation provision was not enforceable because the plan document itself did not repeat the subrogation provision. The court said that the presence of the subrogation provision in the summary plan description, but not in the plan document, created a conflict between the two documents. Since the plan document said that in the event of a conflict, the plan document controlled, the summary plan description provisions on subrogation were not unenforceable.

It may be that this problem could be overcome by stating in both the plan document and in the summary plan description that provisions contained only in the summary plan description are enforceable as if stated in the plan document. Nevertheless, like the U.S. Supreme Court case on which I previously blogged, this case also makes it more difficult for plans to enforce reimbursement obligations. In light of these cases, plan sponsors should review their plan and summary plan description language around reimbursement and subrogation and make any changes necessary to bolster their enforceability.

 

Most self-funded ERISA medical plans provide that participants who have been injured by other people (think car accidents) must reimburse the plan if the participant recovers from the other person for those injuries. In order to obtain that reimbursement, a plan document must contain appropriate reimbursement/subrogation language and the plan must pay attention to the cause of injuries in order to make sure that it receives its share if the participant recovers money for the injuries.

The U.S. Supreme Court recently made it harder for plans to collect in those situations. In Montanile v. Board of Trustees of National Elevator Plan, the plan participant incurred over $100,000 in medical claims and recovered a $500,000 settlement. The participant’s attorney and the plan negotiated for reimbursement for the plan, but the negotiations fell through. The attorney then gave the plan 14 days’ notice that he planned to release the funds to the participant. The plan took no action but six months later sued the participant for reimbursement. Based on a technical reading of ERISA which allows only “equitable” remedies, the U.S. Supreme Court held that the plan could not recover amounts that the participant had already spent on services or non-durable goods. Under historic views of equity, general claims for money damages are not allowed.

Under this decision, employers must be diligent in monitoring possible third-party claims to protect the plan once the employer determines that there could be a third-party settlement. Failure to do so may jeopardize the plan’s ability to recover from settlement funds.

Note that the decision would apply not just to medical plan claims, but also to disability plan overpayments or even pension plan overpayments. Plans will have to work quickly and carefully to enforce their rights.

In my last blog post, I discussed a recent loss by the EEOC in its efforts to limit the ability of employers to require employees to complete health risk assessments (HRAs) or biometric screenings in order to enroll in the employer’s health plan. I said that I would discuss an Affordable Care Act (ACA) reason why employers should think twice before adopting that approach.

Under the ACA, applicable large employers (ALEs) – those with at least 50 full-time equivalent employees – must offer health plan coverage to employees or can be liable for a penalty if they fail to do so. If the employer offers coverage to at least 95% of its full-time workforce, then the employer will pay a penalty of $3,240 (for 2016, indexed annually) for each employee who obtains subsidized coverage on a health care exchange. If the employer fails to offer coverage to at least 95% of its full-time workforce, then the employer will pay a penalty of $2,160 (for 2016, indexed annually) multiplied by all its full-time employees – even those who have been offered coverage – if at least one employee obtains subsidized coverage on the exchange. Although the second penalty is smaller per employee, the cost is much more significant because it applies with respect to all full-time employees. Employers particularly want to avoid this penalty, sometimes called the “(a)” penalty because it is imposed under Section 4980H(a) of the Internal Revenue Code. The other penalty, the $3,240 penalty, is called the “(b)” penalty because it is imposed under Section 4980H(b) of the Internal Revenue Code.

An employee who enrolls in the employer’s plan is not eligible for subsidized coverage on the exchange. In addition, an employee who does not enroll in the employer’s plan but who is offered affordable, minimum value coverage is also not eligible for subsidized coverage on the exchange. Coverage is “affordable” if the least expensive employee-only coverage offered does not exceed 9.66 % (for 2016, indexed annually) of the employee’s household income.

The IRS has taken the position that for affordability purposes, only tobacco incentives or penalties can be taken into account in determining the cost of coverage that the employer offers. Regardless of whether an employee qualifies for a wellness incentive, the employee is treated as not qualifying for any incentive other than one granted in connection with tobacco cessation. All employees are treated as qualifying for that incentive.

If an employee is not permitted to enroll in a plan for failure to complete an HRA or biometric screening, it is not clear that the IRS will treat that employee as having had an offer of coverage for purposes of the 4980H penalties. This is because the penalty – non-enrollment – is not related to tobacco use or cessation so under the standard rules, employees would be treated as not qualifying for the incentive (i.e., enrollment). If the employee is treated as not qualifying for the incentive – enrollment – then if any employee obtains subsidized coverage on the exchange, the employer is likely to be exposed to penalties. If the IRS views the forced HRA and biometric screening as causing coverage not to be “offered” for ACA purposes, that may result in a failure to offer coverage to at least 95% of the employer’s full-time workforce. In that case, the employer’s exposure will be to the full (a) penalty, rather than to the smaller (b) penalty relating only to the employee who received the subsidized coverage. Thus, even if the EEOC is unable to require that an employer make HRAs and biometric screenings optional for enrollment, the ACA penalties may discourage employers from adopting that approach – depending on the position the IRS takes with respect to those penalties.

The EEOC has been bringing lawsuits against employers challenging wellness programs. A recent case involved a company that had previously provided a credit to employees enrolled in the health plan who participated in a health risk assessment (HRA) and biometric screenings. The company had eliminated the credit and instead conditioned health plan enrollment on participation in the HRA and the biometric screenings. In other words, instead of costing an employee more to decline the HRA and biometric screening, an employee who failed to complete the screenings was no longer eligible for coverage. According to the court’s decision, the company used aggregate health data to establish premium contributions, assess the need for stop loss insurance, adjust co-pays, and develop other programs to address the risks identified through the wellness program. The EEOC sued the employer, Flambeau, Inc., taking the position that conditioning health plan coverage on biometric screening violated the provisions of the Americans with Disabilities Act (ADA) that require medical examinations to be voluntary unless they are required by business necessity. While biometric screenings may assist employers in identifying medical risks or encouraging employees to adopt healthier behaviors, the screenings are not likely to be considered “necessary” to the business of the employer.

The EEOC has proposed regulations governing wellness programs that would allow certain incentives or penalties tied to an employee’s participation in a wellness program. One provision of those proposed regulations would preclude an employer from conditioning enrollment in a medical plan on completing biometric screenings. The court in the Flambeau decision, however, rejected the EEOC’s position and upheld the ability of the employer to deny enrollment to an employee who failed to participate in the wellness program. The Court concluded that a provision in the ADA that allows employers to establish the terms of a bona fide benefit plan based on underwriting risks, classifying risks, or administering risks acted as a safe harbor that trumped the requirement that the biometric screenings be “voluntary.” The employer claimed that its wellness program was a term of its health benefit plan and that the purpose of the program was underwriting, classifying and administrating health insurance risk.

The court accepted that argument, thereby allowing the employer to condition coverage under the plan on completion of the HRA and biometric screening. This conclusion undermines the EEOC’s position and would give employers great leeway in establishing wellness programs. So long as the results of the wellness program are used to classify or underwrite risks, employers could require that participants complete the programs in order to enroll in the health plan. On the other hand, if the employer simply wanted to have an incentive or penalty, the incentives or penalties would be limited to 30% of the cost of the coverage (50% for tobacco cessation programs) otherwise contained in wellness regulations under the Affordable Care Act.

One would expect that the EEOC will appeal this decision since it provides employers with the ability to impose much more severe consequences for failure to participate in wellness programs than the EEOC would like. The decision might also cause the EEOC to rethink its proposed regulations to better justify its position that employees should not be required to participate in wellness programs to obtain health plan coverage from the employer.

In my next blog post, I will address an issue under the Affordable Care Act that employers should consider before deciding to condition health plan coverage on completion of HRAs and biometric screenings.

I have previously blogged (here and here) about a lawsuit brought by participants in a nonqualified deferred compensation plan where the employer failed to report and pay FICA (social security) taxes in the most tax advantageous way. The employer had tried to get the lawsuit dismissed on the grounds that the FICA tax payments were required by the federal government. The court concluded that while the tax payments may be required by the federal government, the employer could have used a different method for determining payment of those taxes, which would have saved the plan participants millions of dollars in FICA tax payments.

The case has now settled. According to reports, the settlement amount is $3,350,000, including attorneys’ fees and litigation expenses. The settlement also provides for indemnification of participants and surviving spouses relating to FICA tax assessments against them.

As I mentioned in my earlier blog posts, FICA taxation of nonqualified deferred compensation plans can be complicated. Failure to report and withhold FICA taxes when the deferred compensation first becomes vested can result in increased FICA tax payments for participants when deferred compensation is later paid. Employers should review their procedures to make sure that they are reporting and paying FICA taxes on deferred compensation plans as required under the tax code.

 

This article is for employers who sponsor defined benefit plans that are subject to Pension Benefit Guaranty Corporation (PBGC) coverage. Those employers pay premiums to the PBGC and also are required to report certain events to the PBGC. Some events must be reported in advance; others are reportable after the event has occurred. Some events relate to the plan itself; others relate to the plan sponsor or the plan sponsor’s controlled group. Failure to provide the reports can subject the employer to penalties of up to $1,100 per day, depending on the failure.

In 2013, the PBGC proposed rules to change the reportable events structure to focus more on risk‑based concepts, establishing safe harbors that would exempt many companies and plans from a number of the reportable events filings. These regulations were finalized in October of 2015, effective January 1, 2016. The focus of this blog post is on one reportable event, the loan default.

Under the old reportable events rule, a loan default of $10,000,000 or more was a reportable event unless the default was cured within certain time frames to avoid advance reporting or post-event filings. Post-event filings were also waived if the plan was not required to pay a variable PBGC premium, if the plan underfunding was less than $1,000,000 or if certain other criteria of reasonable funding were met.

Under the new rules, a loan default is a reportable event when the loan has an outstanding balance of $10,000,000 or more. The loan may be to the plan sponsor or may be to another member of the plan sponsor’s controlled group. A reportable event includes an acceleration of payment or default under a loan agreement or the lender’s waiving or agreeing to an amendment of any covenant of the loan agreement, the effect of which is to cure or avoid a breach that would trigger a loan default. Notice of the event is waived if the debtor is a noncontributing sponsor and the debtor represents a de minimus 10% or less segment of the plan’s controlled group. Notice is also waived if the debtor is a foreign entity other than the foreign parent company. Notice is not waived simply because the default was cured or the lender waived the default.

Advance notice is required if there is an acceleration of payment, a default, a waiver, or an amendment to a loan agreement as described above. In other words, if a plan sponsor or member of the controlled group renegotiates loan covenants in order to avoid default under a loan, that renegotiation can result in a reportable event without a default having occurred.

Even the Participant and Plan Sponsor Advocate of the PBGC highlights this reportable event as concerning in her 2015 report. Employers who sponsor defined benefit plans will need to keep these rules in mind when they negotiate and renegotiate loan covenants.