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

Clients sometimes like to ease the transition for employees who are retiring or whom the client would like to encourage to leave. One strategy is to continue the employee “on payroll” for a period of time with the expectation that all benefits will remain in place. However, the practice makes benefits lawyers nervous because the benefits that are supposed to continue may be offered under plans that do not recognize an employee who has stopped working as eligible for continued benefits.

Consider the situation of this recent federal appeals court decision. On November 3, Edward retired as an executive. He had accrued several weeks of PTO that the employer continued to pay through November 27. On November 8 he injured his back deplaning from his private aircraft and was later diagnosed with multiple myeloma. Edward applied for short-term and long term disability under the employer’s plan. The insurance carrier denied both claims on the grounds that Edward was no longer in “Active Service” at the time of the injury and so was not eligible for benefits. His “vacation” did not extend benefit eligibility.

Under the insurance policy, “Active Service” was defined to mean that the Employee was working on a full-time basis or was on a vacation or holiday if the Employee was working on the preceding regularly scheduled work day. Edward agreed that he was not working on the day of his injury, but said that he was on vacation and had worked on the preceding scheduled work day.

The insurance company had the right to decide claims under the policy and concluded that Edward was not on vacation. Rather, by November 8 he had retired. There was no expectation that he would return to work after the vacation so he was not in “Active Service” and did not have coverage for the injury.

I counsel my clients to remember that they typically do not provide benefits such as health, life, and disability on their own. There is typically an insurance carrier involved. Even if a health plan is self-funded, there is usually a stop loss carrier to pay high claims. Employers promising continued coverage to retirees or other terminating employees should make sure that the language of the insurance policies and plans support the promise. (Side note: Sometimes tax code provisions can also affect continued coverage. For example, a retirement like that described above is likely to be considered a “separation from service” under Section 409A of the tax code, which may affect when deferred compensation payments should begin.)

In this case, Edward did not recover from the insurance carrier and had not sued the employer. If the employer had promised continued benefit coverage, it is possible that the employer could have been found liable to Edward for the benefits that the carrier was not obligated to pay.

Lesson to employers: Do not promise benefits beyond what your plan documents and insurance policies provide. If you do, you may find yourself paying those benefits without the insurance coverage you were expecting.

Employers need to make sure that their employees know when benefits shift from one plan to another as illustrated by this case from Utah:

Martin Marietta Corporation (Martin) operated a cement plant that it later decided to lease to Southwestern Portland Cement Company (Southwestern). The employees operating the plant became covered by a Southwestern pension plan. When Martin later terminated the lease, many employees began working for Martin and became covered under the Martin pension plan. In connection with the lease termination, Southwestern and Martin agreed that Southwestern’s pension plan would transfer to Martin’s pension plan the assets and liabilities relating to employees who became employed by Martin. Although the pension transfer occurred, Southwestern plan participants were not notified of the transfer. Some years later, Martin employees went back to Southwestern, now owned by CEMEX, Inc. asking for their pension benefits. Southwestern said that the employees were not entitled to benefits because the assets and liabilities had been transferred to the Martin plan. In fact, some of the employees were already receiving benefits from the Martin plan, including benefits based upon their service with Southwestern. The employees then sued CEMEX, Inc., seeking their pension benefits.

The federal district court said that the Southwestern plan (now the CEMEX plan) had to pay benefits to the employees. Because the employees had been participants in the Southwestern plan and had not received notice of the transfer, the transfer was void with respect to them. Thus, participants may receive double benefits for some of their service.

CEMEX/Southwestern claimed that it was not required to give notice. However, CEMEX did not raise that question early in the litigation, relying instead upon an argument that the transfer of pension assets and liabilities was sufficient to terminate the employees’ rights under the CEMEX/Southwestern plan. The court expressed concern that the participants had no knowledge of what had happened to their benefits, noting that one purpose of ERISA was to ensure that participants knew where they stood with respect to a plan. The court refused to allow the employer to argue late in the litigation that notice to participants of a plan merger was not required.

The lesson for employers: If assets and liabilities of one plan are transferred to another plan, make sure the participants are given notice. Otherwise, an employer may find itself paying twice for the benefits.

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.)