Employee Benefits

New York's Same-Sex Marriage Law: The Employee Benefits Impact, Part II

July 11, 2011

In yesterday’s post, we began a discussion of how New York’s Marriage Equality Act may impact employee benefit plans. We continue the discussion here with Part II.

How Does the Legislation Affect Self-Insured Health Plans and Other Self-Insured Welfare Benefit Plans?

Self-insured health plans and other self-insured welfare benefit plans that are subject to ERISA will not be subject to the new requirements imposed by the Legislation. ERISA preempts the Legislation insofar as it applies to self-insured ERISA plans (ERISA’s preemption provisions, however, generally do not apply to insured plans, which is why the Legislation will affect insured plans differently than self-insured ERISA plans). If no changes are desired in how a self-insured ERISA plan operates, an employer should still review any definition of spouse that appears in that plan in order to make sure it does not need to be revised. ERISA plans are required to be administered in accordance with their written terms, and employers will want to make sure any definition of spouse conforms to how each such plan is operated.

Even though a self-insured ERISA plan is not subject to the requirements of the Legislation, an employer with such a plan can voluntarily decide to provide comparable benefits to same-sex spouses. The tax status of such benefits generally will not be identical to the tax status of the benefits provided to opposite-sex spouses under such a plan, because the Code provides favorable tax treatment for eligible opposite-sex spouses but not for same-sex spouses (an exception applies if the same-sex spouse satisfies the Code requirements for being a dependent of the participating employee, but that exception can be difficult to satisfy). If an employer does decide to provide comparable benefits to same-sex spouses, the language of the applicable plan should be revised accordingly.

Certain governmental and church self-insured plans are exempt from ERISA. Such plans will not be covered by ERISA’s preemption provisions and, therefore, will have to comply with the Legislation (subject to a possible exception for plans maintained by Religious Organizations). Such plans should, therefore, be reviewed to determine whether the definition of spouse may need to be amended to include same-sex spouses who are married in New York State.
 

What Impact Does the Legislation Have on Other Benefit-Related Rights That Arise Out of Federal Law?

Under DOMA, any other benefit-related right that arises out of federal law generally will not be subject to the requirements of the Legislation, as long as the applicable federal law does not incorporate the definition of spouse used under state law. This would mean, for example, that the COBRA health continuation coverage rights for spouses generally will apply to eligible opposite-sex spouses rather than same-sex spouses. An exception to the preceding sentence could apply if an employer voluntarily decides to provide similar rights to the extent permitted by COBRA.

How Does the Legislation Affect Other Benefits That Are Exempt From ERISA?

  • If a benefit is exempt from ERISA, it generally will have to comply with the new requirements imposed by the Legislation (subject to any requirement in the Code or other federal statute that provides otherwise). Examples include, but are not limited to:
  • certain governmental and church plans that are exempt from ERISA (subject to a possible exception for plans maintained by Religious Organizations);
  • plans without any employees (e.g., a plan that only covers a sole proprietor and his or her spouse, or that only covers partners and their spouses);
  • certain voluntary group or group-type insurance plans that are paid for solely by participating employees;
  • unfunded educational benefit programs (e.g., unfunded tuition reduction programs at universities and colleges that cover spouses, and other unfunded educational benefit programs that benefit spouses);
  • employee discount programs that provide benefits for spouses;
  • on-premise recreation or dining facilities;
  • expense reimbursement programs that cover certain spousal expenses; and
  • remembrance funds.

Such benefit plans and programs should, therefore, be reviewed to determine whether the definition of spouse may need to be amended to include same-sex spouses who are married in New York State.

Will the Legislation Change How Benefits For Same-Sex Spouses Are Taxed?

Under DOMA, a same-sex spouse will not be treated as a spouse for Code purposes. Therefore, even if a same-sex spouse becomes eligible for benefits as a result of the Legislation, he or she generally will not be eligible for any favorable tax treatment that applies to spouses under the Code (an exception will apply if the same-sex spouse qualifies as a “dependent” of the participating employee under the Code). Guidance is still pending on the extent to which the tax status of same-sex spouses under New York’s tax laws will change as a result of the Legislation. Section 607(b) of the New York State Tax Law currently provides that a taxpayer’s marital status for New York State tax purposes will be the same as the taxpayer’s marital status “for purposes of establishing the applicable federal income tax rates.” As a result of this statute, same-sex spouses generally are treated the same for New York State income tax purposes as they are treated for federal income tax purposes under the Code. However, Section 2 of the Legislation provides that “[t]he legislature intends that all provisions of law which utilize gender-specific terms in reference to the parties to a marriage, or which in any other way may be inconsistent with this act, be construed in a gender-neutral manner or in any way necessary to effectuate the intent of this act.” It is anticipated that the New York State Department of Taxation and Finance will be issuing guidance on how same-sex spouses should be treated for New York State Tax Law purposes, and employers should wait until that guidance is issued before changing how same-sex spouses are taxed for New York State tax purposes.
 

New York's Same-Sex Marriage Law: The Employee Benefits Impact, Part I

July 10, 2011

On June 24, 2011, Governor Cuomo signed the Marriage Equality Act  which will allow same-sex couples to be married in New York and to have, with certain exceptions, the same legal protections available to opposite-sex couples married in New York. The effective date of the Legislation is July 24, 2011, giving New York employers only a month to comply. For that reason, New York employers should immediately take the following steps to ensure their employee benefit plans, programs and policies (collectively, “Benefit Plans”) will comply with the Legislation:

  • review the requirements imposed by the Legislation to determine how they will affect your existing Benefit Plans;
  • determine what, if any, changes must be made to your Benefit Plans
  • Begin implementation of necessary changes by preparing any necessary amendments to the affected Benefit Plans, coordinating with any applicable insurer or third party administrator about the changes being made, obtaining any necessary approval from the applicable Board of Directors or Board of Trustees, and preparing any necessary summary of material modification(s) or revised summary plan description(s);
  • continue implementation by revising all other materials describing employee benefits (benefit summaries, benefit web pages, benefit forms, employee handbooks, etc.); and
  • review any domestic partner policy, and any other employer policy that might be affected by the Legislation, (including an analysis of whether any changes are needed to help address potential discrimination claims, such as those that might be brought by opposite-sex domestic partners in certain circumstances).

What Are the Major Changes Made By the Legislation?

The major changes made by the Legislation include the following:

  • no application for a marriage license in New York State will be denied on the ground that the parties are of the same sex;
  • a marriage that is otherwise valid will be valid regardless of whether the parties to the marriage are of the same sex or different sex; and
  • no government treatment or legal status, effect, right, benefit, privilege, protection or responsibility relating to marriage in New York State will differ based on the parties to the marriage being or having been of the same sex rather than a different sex.

The law contains special compliance exceptions for religious entities, benevolent organizations, and not-for-profit corporations that are operated, supervised or controlled by religious entities as defined in the Legislation
 

How Does the Legislation Affect Retirement Plans?

Spouses of participants in certain types of retirement plans that are subject to the requirements of the Internal Revenue Code (“Code”) and the Employee Retirement Income Security Act (“ERISA”) are entitled to special protections. These protections include the right to receive a qualified joint and survivor annuity or a qualified pre-retirement survivor annuity, if specified requirements are satisfied. With the enactment of the Legislation, an issue arises as to whether these spousal protections must be provided to a same-sex spouse of a New York participant in such retirement plans. For the reasons described below, the answer currently is no.
The Federal Defense of Marriage Act (“DOMA”) provides that, for purposes of all federal laws, the term “spouse” only refers to a person of the opposite sex who is a husband or wife. Under DOMA, the term “spouse” for Code and ERISA purposes will not include a same-sex spouse. In addition, ERISA generally preempts state laws, other than insurance laws and certain other laws.

Retirement plans that are subject to the requirements of the Code and ERISA, therefore, will not be subject to the new requirements imposed by the Legislation. However, employers still should verify that any definition of spouse in such plans will not inadvertently include same-sex spouses in a manner that creates issues under the Code or ERISA. Such retirement plans are required to be administered in accordance with their written terms, and employers with such plans will want to make sure that the change in the definition of spouse in the Legislation will not result in any inconsistency between how spouse is defined in the plan and how that definition is administered.

What Impact Does the Legislation Have on Insured Health Plans and Other Insured Welfare Benefit Plans?

In 2008, the New York State Insurance Department (“Insurance Department”) issued a Circular Letter and an opinion directing that same-sex spouses legally married outside of New York State must be treated the same as opposite-sex spouses for purposes of insured health, group long-term disability, group short-term disability, and group term life insurance plans that are subject to the requirements of the New York Insurance Law (collectively, “Insured Plans”). Effective July 24, 2011, same-sex spouses who are married in New York State will have the same rights under Insured Plans that were provided in 2008 to same-sex married spouses legally married outside of New York State.

Employers with Insured Plans, therefore, should review the language in their plan documents, summary plan descriptions, and insurance policies to see whether the definition of spouse will need any revision to include same-sex spouses who are married in New York State.

In tomorrow’s post, Part II, the Marriage Equality Act’s impact on self-insured health and welfare benefit plans, on non-ERISA plans, and on tax treatment.

DOL Proposes Limited Delay Of Initial Disclosures Required Under Participant Disclosure Regulation

June 29, 2011

By John C. Godsoe

Effective for plan years beginning on or after November 1, 2011, fiduciaries of participant-directed individual account based retirement plans will be required to provide plan participants and beneficiaries with certain fee, expense and investment-related information. These rules are part of a final regulation issued by the United States Department of Labor ("DOL") on October 20, 2010. In a proposed regulation issued on June 1, 2011, the DOL proposed a 60-day extension of the time period that a plan administrator has to provide certain initial disclosures, once the final regulation becomes applicable to the plan. Given the limited duration of the delay, however, plan administrators should begin or continue to take steps to comply with the requirements of the final regulations.

Background

To the extent that a plan assigns investment responsibilities to participants and beneficiaries, the DOL takes the position that pursuant to ERISA’s fiduciary obligations such individuals should be provided with sufficient information regarding plan fees, expenses and designated investment alternatives so that they can make informed investment decisions. Participant-directed individual account plans that elect to comply with ERISA Section 404(c) in order to protect plan fiduciaries from liability based on the investment choices made by participants are currently required to disclose certain investment-related information. The final regulation expands on the current disclosure requirements in the current ERISA Section 404(c) regulation. Significantly, the new disclosure rules apply to all individual account participant-directed plans covered by the final regulation, regardless of whether such plan is intended to comply with ERISA Section 404(c).
 

Plans Affected By The Final Regulations

All participant-directed individual account plans subject to ERISA are covered by the final regulation, except for plans providing for individual retirement accounts or individual retirement annuities under Sections 408(k) or 408(p) of the Internal Revenue Code (i.e., simplified employee pension plans and simple retirement account plans).

Disclosures Required By The Final Regulations

The regulation divides the required disclosures into two general categories: (i) plan-related information; and (ii) investment-related information. A plan administrator will not be liable for the completeness or accuracy of information used to satisfy the disclosure requirements, if the plan administrator reasonably and in good faith relies on information provided by a plan service provider or the issuer of a designated investment alternative. The disclosure must be made available to all eligible employees, regardless of whether the employee has enrolled in the plan (all such individuals are considered participants for purposes of the final regulation), and to all beneficiaries who have the right to direct the investment of their accounts.

With some exceptions, the required information must be provided to plan participants and beneficiaries on or before the date on which they can first direct their investments and at least annually thereafter. With respect to plan-related disclosures, if there is a change to the information disclosed, each participant and beneficiary must be furnished a description of the change at least 30 days, but not more than 90 days, in advance of the effective date, unless the inability to provide such advance notice is due to unforeseeable events or circumstances beyond the control of the plan administrator, in which case the notice must be provided as soon as reasonably practicable. Under the recently issued proposed regulation, a plan administrator may delay the initial disclosure until 120 days after the final regulation first becomes applicable to a plan. For calendar year plans, this means the initial disclosure may be delayed until April 30, 2012. For a summary of the types of information which must be disclosed click here.

Recommended Action

Plan administrators subject to the requirements of the final regulations should begin to prepare for the implementation of the new disclosure requirements. Plan administrators will need to coordinate with investment providers, record-keepers, and other service providers in order to obtain required information for the disclosure and to organize and prepare the information in accordance with the requirements of the final regulation. Due to the breadth and complexity of these disclosure requirements, plan administrators should begin the process of developing compliant disclosure materials as soon as possible to ensure compliance by the effective date of the final regulation (for calendar year plans, January 1, 2012). Plan administrators also should be aware that compliance with the disclosure requirements of the final regulation does not relieve a plan fiduciary from its duty to prudently select and monitor plan service providers and designated investment alternatives.
 

Health Care Reform Update

April 27, 2011

The Departments of Health and Human Services (“HHS”), Labor (“DOL”), and Treasury (“IRS”) recently issued additional guidance regarding the implementation of certain Patient Protection and Affordable Care Act of 2010 (“PPACA”) requirements, including: the rapidly approaching deadline for employers planning to apply for early-retiree funding from HHS; additional details on implementing the grandfathered plan rules; and the procedures for reporting the cost of employer-provided health coverage to employees. The DOL has also provided updated information on the status of the automatic enrollment requirement for large employers.

Deadline For Early-Retiree Health Insurance Funding
Pursuant to the PPACA, $5 billion was appropriated to establish a temporary program for partial reimbursement of the cost of providing health coverage to early retirees (including the spouses, dependents, and surviving spouses of early retirees). The program, which was implemented on June 1, 2010, began accepting applications on June 29, 2010. On March 31, 2011, HHS announced that it will stop accepting applications as of May 5, 2011, based on the amount of remaining program funds and the rate at which the funding is being disbursed. A copy of the application and instructions can be found at http://www.errp.gov. All applications must be physically received by HHS (i.e., not postmarked) on or before May 5, 2011.
 

Additional Guidance For Grandfathered Health Plans
On April 1, 2011, the Departments issued a sixth set of FAQs regarding the implementation of the PPACA .

Form W-2 Cost Of Coverage Reporting
On March 29, 2011, the IRS issued interim guidance (Notice 2011-28) regarding the PPACA requirement that employers report the “aggregate cost of applicable employer-sponsored coverage” to employees on IRS Form W-2. Included in the interim guidance is a set of Q&As that addresses, among other things: (1) which employers are subject to the reporting requirement; (2) methods of cost-reporting in specific circumstances (e.g., termination from employment, successor employers, retirees, etc.); (3) how to determine the aggregate cost of applicable employer-sponsored coverage; (4) the coverage required to be reported; and (5) calculating the dollar amount of reportable coverage costs. The IRS emphasizes that cost of coverage reporting to employees is for informational purposes only, and will not cause otherwise excludable employer-provided health benefits to become taxable income.

Although voluntary for the 2010 and 2011 tax years (Notice 2010-69), most employers that provide health coverage to their employees are required to report cost information beginning with the 2012 tax year. (Note, employers that choose to report the cost of coverage for 2010 and/or 2011 may rely on Notice 2011-28.) Transitional relief may be available, however, for: (1) small employers (i.e., employers that file less than 250 Forms W-2 for the 2011 tax year); (2) terminated employees to whom Forms W-2 are provided before the end of the year; (3) multiemployer plans; (4) health reimbursement arrangements; (5) stand-alone dental and vision plans; and (6) self-insured plans not subject to COBRA continuation coverage or other federal law requirements (e.g., church plans).

Automatic Enrollment Requirement For Large Employers
The PPACA requires large employers (those with more than 200 full-time employees) that are subject to the Fair Labor Standards Act to automatically enroll new full-time employees (or continue enrollment for current employees) in one of the employer’s health benefit plans. Employers are not required to comply with the automatic enrollment provisions until regulations are issued and effective, which the DOL intends to complete by 2014. To assist in the development of proposed regulatory guidance, the DOL hosted a public forum (held April 8, 2011) for individual and organizational stakeholders to exchange information and ideas regarding the automatic enrollment requirements. Forum topics included the definition of “full-time employee,” selecting the appropriate plan/benefit package (for employers that maintain multiple health plans or benefit packages) and type of coverage (e.g., single or family) in which employees would be automatically enrolled, and notice requirements for employees who wish to opt out of coverage. A transcript of the forum will be available on the DOL’s website at www.dol.gov/ebsa/healthreform.
 

Who Is A Fiduciary? DOL Proposes An Expansion Of The Definition

March 27, 2011

The U.S. Department of Labor ("DOL") has proposed regulations that more broadly define the circumstances under which a person or entity will be considered to be a plan "fiduciary" by reason of giving investment advice to an employee benefit plan or to a plan's participants or beneficiaries. If the proposed regulations are made final in their current form, the number of plan service providers that will be considered plan "fiduciaries" will increase significantly. Plan sponsors need not take any current action with respect to the proposed regulations, but should be aware that agreements with service providers may need to be reviewed and modified to conform to the regulations.

Background

Under the Employee Retirement Income Security Act ("ERISA"), a person is a fiduciary with respect to an employee benefit plan to the extent that the person: (i) exercises any discretionary authority or discretionary control respecting the management or disposition of the plan's assets; (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of the plan, or has any authority or responsibility to do so; or (iii) has any discretionary authority or discretionary responsibility in the administration of the plan.
Individuals and entities, including plan service providers, who are considered plan "fiduciaries" are subject to a number of strict duties and responsibilities and are prohibited from engaging in a number of specific acts with respect to the applicable plan. Among other consequences, fiduciaries who fail to satisfy their plan-related duties, or who engage in plan-related prohibited transactions, can be subject to personal liability for losses suffered by the plan.
 

The Proposed Regulations

The DOL's proposed regulation addresses the circumstances under which a person or entity is considered to be a plan "fiduciary" by reason of (ii) above; that is, by giving investment advice for a fee or other compensation to an ERISA-covered plan, to a plan fiduciary, or to the plan's participants or beneficiaries. Two of the key elements of the proposed regulations are the scope of the terms "investment advice" and "fee or other compensation".

"Investment Advice"

The proposed regulations generally provide that a person renders "investment advice" if the person:

  • Provides advice, or an appraisal or fairness opinion, concerning the value of securities or other property;
  • Makes recommendations as to the advisability of investing in, purchasing, holding, or selling securities or other property; or
  • Provides advice or makes recommendations as to the management of securities or other property.

In addition to one or more of the activities noted above, a person renders "investment advice" only if the person also: 

  • Represents or acknowledges fiduciary status within the meaning of ERISA with respect to giving advice or making recommendations;
  • Has or exercises discretionary authority or control with respect to the purchase or sale of investments for a plan, with respect to management of the plan, or with respect to the administration of the plan;
  • Is an "investment adviser" under the Investment Advisers Act of 1940 (which generally includes any person who, for compensation, engages in the business of advising others as to the value of securities or the advisability of investing in, purchasing, or selling securities, or who promulgates analyses or reports concerning securities); or
  • Provides advice pursuant to an agreement, arrangement or understanding, oral or written, between such person(s) and the plan, a plan fiduciary, or a plan participant or beneficiary, that such advice may be considered in connection with making investment or management decisions with respect to plan assets, and will be individualized to the needs of the plan, a plan fiduciary, or a participant or beneficiary.

This part of the proposed regulations modifies current law in a number of ways, including the addition of appraisals and fairness opinions in the definition of advice. The DOL believes this change will align the duties of those who provide these opinions with those of plan fiduciaries who rely on them. Among other things, this brings valuations of closely held employer securities for purchase by an employee stock ownership plan, and appraisals of real property considered for purchase by a plan, into the realm of "investment advice." The proposal also specifically includes advice and recommendations as to the management of securities or other property. This could include, for example, advice in connection with the exercise of stock rights (e.g., voting proxies), and advice in the selection of plan investment managers. Another significant change from current law would be that the "advice" need not be provided on a "regular basis."

Limitations

Even if the person's activities with respect to a plan may suggest that the person is a fiduciary, a person will not be considered a fiduciary under the following circumstances:

  • Where it can be demonstrated that the recipient of the advice knows, or reasonably should know, that person is, or represents, a person whose interests are adverse to the interests of the plan or its participants or beneficiaries, and that the person is not undertaking to provide impartial investment advice;
  • The person provides only investment education information and materials, pursuant to other DOL regulations;
  • The person provides general financial information and data to assist a plan fiduciary in the selection or monitoring of securities or other property as plan investment alternatives, if the provider discloses in writing to the plan fiduciary that the person is not undertaking to provide impartial investment advice; and
  • The person prepares a general report or statement that merely reflects the value of an investment of a plan, unless such report involves assets for which there is not a generally recognized market and serves as a basis on which a plan may make distributions to plan participants and beneficiaries.

Fee Requirement

In order to be a fiduciary, the provider must provide investment advice "for a fee or other compensation, direct or indirect." The proposal defines this fee requirement to include fees or compensation for advice received by the person from any source and any fee or compensation incident to the transaction in which the investment advice has been, or will be, rendered.

Effective Date and What's Next?

The proposal will be effective 180 days after publication of the final regulations in the Federal Register. Thus, the expansion of the fiduciary definition will not apply for some time. The DOL has reportedly received many comments, some favorable, some not; these rules may change prior to being finalized. Stay tuned.
 

Federal Agencies Release Fifth Set Of FAQs On Health Care Reform And Mental Health Parity

January 30, 2011

On December 22, 2010, the Departments of Labor, Health and Human Services, and Treasury (collectively, the "Departments") issued their fifth set of answers to several frequently asked questions ("FAQs") about the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act ("PPACA"). The FAQs also address the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 ("MHPAEA") and the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") nondiscrimination rules for wellness programs. The FAQs are described below.

The Patient Protection and Affordable Care Act

The PPACA encompasses many different approaches to reducing the number of Americans with little or no health insurance coverage. The legislation includes mandates on employers, individuals, and providers, amendments to the Internal Revenue Code, and many other changes.

Cost Control for Preventive Care Benefits

The PPACA generally requires that group health plans cover recommended, in-network preventive services without any employee cost sharing. The Departments issued interim final regulations on July 14, 2010 addressing the requirement, but there have been lingering issues about a plan's ability to control costs. The FAQs confirm that the PPACA allows plans to steer enrollees toward more cost-efficient service providers through value-based insurance designs ("VBID"). The FAQs provide an example of a permissible VBID. The PPACA would allow a group health plan to have no copayment for preventive services performed at an in-network ambulatory surgery center, but have a $250 copayment for the same services performed at an in-network outpatient hospital, because the outpatient hospital is a higher-value setting. The Departments add that further guidance is forthcoming.
 

Automatic Enrollment for New Employees

The PPACA requires employers with more than 200 full-time employees to automatically enroll new full-time employees in the employer's health plan. However, the FAQs clarify that employers are not required to comply with this mandate until the Employee Benefits Security Administration promulgates regulations, which will be sometime before 2014.

Notice of Plan Modifications

The PPACA requires group health plans to provide 60 days notice to enrollees before making material modifications to the plan's terms or coverage if they were not reflected in the most recent summary of benefits and coverage. However, the FAQs explain that employers are not required to comply with this mandate until the Departments issue standards for plans to follow for compiling and providing a summary of benefits and coverage.

Varying Coverage Based on Age

The PPACA provides that group health plans providing dependent coverage for children cannot vary such coverage based on age (except if they are 26 or older). The FAQs point out, however, that the PPACA permits varying coverage based on age that applies to all enrollees, including employees, spouses, and dependent children. An example in the FAQs suggests that a plan could charge a copayment for non-preventive care to all enrollees age 19 and over, but waive it for those under 19. However, it could not charge a copayment to dependent children age 19 and over, but waive it for those under 19.

Grandfathered Health Plans

The PPACA provides that group health plans existing as of March 23, 2010, called "grandfathered plans," are not subject to certain PPACA provisions as long as they do not make specific plan changes outlined in PPACA regulations. A plan that makes such changes would lose its grandfather status. The FAQs address the scenario where a grandfathered plan has a fixed cost-sharing requirement other than a copayment, such as a deductible or out-of-pocket spending limit, which is calculated based on a formula that includes a fixed percentage of an employee's compensation. The FAQs conclude that, if the formula remains the same as it was on March 23, 2010, a compensation increase that causes a cost-sharing increase under the formula would not cause the plan to lose grandfather status, even where the cost-sharing increase exceeds the PPACA regulatory threshold.

Mental Health Parity and Addiction Equity Act of 2008

If plans provide mental health and substance use disorder benefits, the MHPAEA generally requires that financial requirements and treatment limitations for such benefits cannot be more restrictive than for medical and surgical benefits.

Small Employer Exemption

Group health plans subject to ERISA and the Internal Revenue Code are exempt from the MHPAEA as a "small employer" if they have 50 or fewer employees, preempting any State insurance law definition of small employer. The FAQs note, however, that for nonfederal government plans the PPACA applies, and it defines "small employer" as one that has 100 or fewer employees.

Increased Cost Exemption

The Departments explain in detail how the cost exemption works. The MHPAEA provides that if a plan makes changes to comply with the MHPAEA and incurs a 2% or greater cost increase in the first year the MHPAEA applies to it, or a 1% or greater cost increase in any year after the first year, then the plan is exempt from the MHPAEA the following year (that is, the year after the cost increase was incurred). The exemption lasts for one year, and then the plan must comply again. However, the plan could incur another cost increase of 1% or greater due to compliance-related changes and be exempt the following year. When calculating the cost increase percentage, the plan should include increases in the plan's portion of cost sharing as well as non-recurring administrative costs (for example, adjusting computer software), which should be appropriately amortized. Plans must further demonstrate that cost increases are directly attributable to MHPAEA compliance rather than utilization or price trends, random claim experiences, or seasonal variations in claims processing. The FAQs clarify that, until the Departments issue regulatory guidance on how the increased cost exemption will be implemented, plans can follow the procedures outlined in their earlier 1997 regulations to claim the exemption.

HIPAA and Wellness Programs

HIPAA regulations generally prohibit discrimination in eligibility, benefits, or premiums based on employee health. Where wellness programs require employees to meet a certain health standard (such as losing weight) to obtain a reward (such as lower premiums), they must satisfy HIPAA's nondiscrimination requirements. There are five requirements: (1) the total reward cannot exceed 20% of the total cost of coverage; (2) the program must be reasonably designed to promote health or prevent disease; (3) the program must provide employees an opportunity to qualify for the reward at least once per year; (4) the reward must be available to all similarly situated employees, which means there must be a reasonable alternative standard for employees with a health condition that makes it unreasonably difficult for them to satisfy the original standard; and (5) the alternative standard must be published in all plan materials. The PPACA incorporates these nondiscrimination rules, except that it changes the maximum reward from 20% of the total cost of coverage to 30%. The Departments intend to propose regulations before 2014 that implement this percentage change, as well as consider other nondiscrimination rules.

Independent Wellness Programs

The FAQs clarify that the nondiscrimination rules only apply to wellness programs that are part of a group health plan and not those that are operated independently as a separate employment policy. The FAQs list examples of independent programs, which include subsidizing healthier cafeteria food and gym memberships, providing pedometers (to encourage walking and exercise), and banning smoking in the workplace. Note, however, that these independent programs may still be subject to Federal or State nondiscrimination laws.

Meeting Health Standard as Condition of Reward

The FAQs explain that the nondiscrimination rules only apply to wellness programs that require employees to meet a certain health standard to obtain a reward. The FAQs provide two examples of programs that do not contain such a standard and thus are not subject to the nondiscrimination rules. In the first example, a group health plan offers, as part of its wellness program, an annual premium discount of 50% of the cost of coverage to employees that attend a monthly health seminar. The FAQs conclude that, because employees do not have to meet a health standard to obtain the discount, the nondiscrimination rules are inapplicable -- including the rule limiting the reward amount to 20% of the cost of coverage. In the second example, a group health plan offers, as part of its wellness program, to reimburse employees for their monthly gym membership fee. The FAQs conclude that the nondiscrimination rules are inapplicable because the employees are not required to meet a health standard to obtain the reimbursement.
Application of the Nondiscrimination Rules

The FAQs provide an example of how to apply the nondiscrimination rules. The example is a group health plan that offers, as part of its wellness program, a discount of 20% of the cost of coverage to employees that achieve a cholesterol count of 200 or lower. The plan also states that if the employee has a health condition making it unreasonably difficult for them to satisfy the cholesterol count within a 60-day period, then the plan will create a reasonable alternative standard. The FAQs conclude that, although the plan requires employees to meet a health standard and is therefore subject to the nondiscrimination rules, it does not violate them because the total reward does not exceed 20% of the total cost of coverage, and the reward is available to all similarly situated individuals because it includes a reasonable alternative standard.

 

Tax Break Extension Legislation Includes Employee Benefits Provisions

December 28, 2010

By Aaron M. Pierce

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Tax Relief Act”), which generally extended the Bush-era tax reductions through December 31, 2012. The Tax Relief Act also includes several employee benefits-related extensions of interest to employers.

Educational Assistance Programs

Section 127 of the Internal Revenue Code (“Code”) permits an employer to maintain a program to provide tax-free educational assistance to its employees, provided that certain eligibility and nondiscrimination requirements are satisfied. A qualified educational assistance program may provide up to $5,250 in tax-free educational assistance for the payment of tuition and related expenses for undergraduate and graduate level coursework. Code Section 127 was scheduled to expire on December 31, 2010. The Tax Relief Act extends the application of Code Section 127 through December 31, 2012, allowing employers to continue to provide tax-free educational assistance to their qualifying employees for an additional two years.

Adoption Assistance Programs

Code Section 137 permits an employer to provide tax-free adoption assistance benefits (up to $13,360 per eligible child for 2011) to its employees, subject to the satisfaction of certain eligibility and nondiscrimination rules. Code Section 137 was scheduled to expire on December 31, 2011. However, the Tax Relief Act extends the application of Code Section 137 through December 31, 2012.

Mass Transit and Vanpool Benefits

Under current law, an employee may exclude from income up to $230 per month in qualified employer-provided mass transit and vanpool benefits (along with employer-provided parking benefits), provided that the program satisfies the requirements of Code Section 132(f). However, the permitted exclusion amount for mass transit and vanpool benefits was scheduled to be reduced to $120 per month after December 31, 2010. The Tax Relief Act extends the $230 monthly exclusion amount for employer-provided mass transit and vanpool benefits through December 31, 2011. The exclusion for employer-provided parking benefits is not subject to this sunset provision.
 

IRS Delays Compliance with Nondiscrimination Rules for Insured Group Health Plans

December 23, 2010

In a move akin to delaying Christmas after all the hard work of shopping, wrapping and baking is done, the IRS (and the Departments of Labor and Health and Human Services) have delayed compliance with the nondiscrimination requirements of the Affordable Care Act until after regulations or other administrative guidance are issued (IRS Notice 2011-1).  The nondiscrimination rules would otherwise apply to insured, non-grandfathered group health plans for plan years beginning after September 23, 2010. Grandfathered insured plans are required to comply beginning with the first plan year grandfathered status is lost.

Section 2716 of the Affordable Care Act (the preferred moniker for the Patient Protection and Affordable Care Act, or “Healthcare Reform”) requires insured group health plans to satisfy the requirements of section 105(h)(2) of the Internal Revenue Code (“Code”). Code Section 105(h)(2) prohibits discrimination in favor of highly compensated individuals as to eligibility to participate, and benefits provided. A highly compensated individual is defined as one of the five highest paid officers of the employer, a 10 percent or greater shareholder, or (with some exclusions) an individual among the highest paid 25% of all employees when ranked by compensation. Section 2716 also provides that “rules similar to” the nondiscriminatory eligibility classification test, nondiscriminatory benefits test and the controlled group rules of Code Section 105(h)(3), (4) and (8), respectively, shall apply. Failure to satisfy these requirements could result in a hefty excise tax being imposed on the employer: $100 per day per individual discriminated against.

In September, Notice 2010-63 requested comments about the guidance needed in order to satisfy the nondiscrimination requirements. In addition to guidance concerning the meaning of “rules similar to” Code Section 105(h), commentators noted that compliance prior to 2014, when the State Exchanges and individual and employer responsibility and penalty provisions take place, would be difficult without substantial guidance. The Notice acknowledges that guidance is required with respect to such questions as whether the rate of employer contribution is a “benefit” that must be provided on a nondiscriminatory basis, whether the nondiscrimination standards can be applied separately to distinct geographic locations, how the rules apply to expatriates and inpatriates, treatment of employees who voluntarily waive coverage, and whether paying for the coverage of highly compensated individuals on an after-tax basis affects the nondiscrimination requirements, among other things.

Comments will be accepted by the IRS on the application of the nondiscrimination requirements until March 11, 2011. It seems unlikely we will see proposed regulations until close to the end of 2011, at best.

Employers who have already adjusted health plan eligibility and premium contributions in an effort to comply with the Affordable Care Act may wish to re-evaluate the changes made. Keep in mind, however, the Code Section 125 rules for changing pre-tax premium payments once the plan year has begun: changes in elections are only permitted in limited circumstances -- unless, of course, we get Section 125 relief in connection with this 11th hour nondiscrimination reprieve.
 

Courts Split on Constitutionality of "Individual Mandate" in Health Care Reform Legislation

December 21, 2010

By Larry P. Malfitano

To date, three federal courts have ruled on the constitutionality of the section of the Patient Protection and Affordable Care Act (“PPACA”), which, beginning in 2014, imposes a monetary penalty on individuals who are not covered by adequate health insurance. The coverage requirement is commonly known as the individual mandate.

On December 13, 2010, Judge Henry E. Hudson of the United States District Court for the Eastern District of Virginia ruled that the individual mandate is unconstitutional and not enforceable. This decision conflicts with two prior Federal court decisions, one from the Eastern District of Michigan and one from the Western District of Virginia. In those cases, the courts held that the individual mandate is constitutional.

Most recently, on December 16, 2010, the constitutionality of the individual mandate was argued before Judge Robert Vinson in the Northern District of Florida. The Northern District of Florida case, which has not yet been decided, was brought by twenty states and challenges the PPACA on several grounds, including the constitutionality of the individual mandate. The constitutionality of the individual mandate is likely to be determined eventually by the United States Supreme Court.

Despite the current uncertainty created by the conflicting court decisions, senior White House officials have said that the Obama Administration will continue to work vigorously to implement the PPACA. With respect to those PPACA provisions that become effective before 2014, employers and group health plan sponsors should do the same thing. Even though the individual mandate is not scheduled to become effective until 2014 (and may not become effective at all), employers and group health plan sponsors should continue to implement applicable PPACA requirements that took effect in 2010 or that will take effect beginning in 2011.
 

Departments Clarify Health Care Reform Grandfather Rules

November 29, 2010

By John C. Godsoe

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (“PPACA”), provides that group health plans existing as of March 23, 2010 (grandfathered plans) are not subject to certain provisions of PPACA, including the preventative care mandate, certain nondiscrimination requirements, mandatory internal and external appeal rules, and restrictions on pre-authorizations for OB/GYN, pediatric and emergency care services. On June 17, 2010, the Departments of Labor, Health and Human Services and Treasury (the “Departments”) issued interim final regulations addressing what constitutes a grandfathered plan and what changes to such a plan might result in the loss of grandfathered plan status. The interim final regulations generally provide that grandfathered plan status could be lost by a group health plan if the plan’s insurer is changed, benefits are eliminated, participant cost-sharing requirements are increased, participant co-payments and contribution requirements are increased by more than a permissible level, or annual limits are imposed on the dollar value of all benefits below specified amounts. Special grandfathering rules apply for collectively bargained plans. In addition to other PPACA mandates, a plan that loses grandfathered status is subject to the preventative care, external appeal and other mandates noted above.

Recently, the Departments amended the interim final regulation to provide that a change in a group health plan’s insurer, in and of itself, will not cause an otherwise grandfathered plan to lose grandfathered status if certain requirements are satisfied. Additionally, the Departments issued answers to frequently asked questions (“FAQs”) that, among other things, clarify the application of the grandfathered plan rules. The amendment to the interim final regulation and the FAQs are described below.
 

Amendment to Interim Final Regulations

Under the interim final regulations, a group health plan could lose grandfathered status if the plan changed from one insurer to another after March 23, 2010. This restriction only applied to insured group health plans. A self-insured plan may change third-party administrators without losing its grandfathered status (provided the plan otherwise satisfies the grandfathered plan requirements). The amendment to the interim final regulations provides generally that a group health plan does not cease to be a grandfathered plan merely because the plan (or plan sponsor) enters into a new policy, certificate, or contract of insurance after March 23, 2010. However, grandfathered plan status can be maintained, notwithstanding a change in insurers, only if the plan does not make coverage or cost-sharing changes that would result in the loss of grandfathered plan status. To maintain status as a grandfathered health plan, a group health plan entering into a new policy, certificate, or contract of insurance must provide the new health insurance issuer with documentation of the plan terms that is sufficient to determine whether the health plan has lost grandfathered status based upon the otherwise applicable grandfathered plan rules.

The interim regulation does not apply to a group health plan that entered into a new policy, certificate, or contract of insurance after March 23, 2010, that is effective before November 15, 2010 (the effective date of the regulation). Such a plan would cease to be a grandfathered plan based upon a change in insurers.

FAQs

Changes That Result In Loss of Grandfathered Status:  The FAQs confirm that the six specific changes identified in the interim final regulations are the only changes that a plan existing on March 23, 2010 needs to consider when evaluating its grandfathered status. In general, the six changes are described in the FAQs as:

1. the elimination of all, or substantially all, benefits to diagnose a particular condition;

2. an increase in a percentage cost-sharing requirement (e.g., raising an individual’s coinsurance requirement from 20% to 25%);

3. an increase in a deductible or out-of-pocket maximum by an amount that exceeds medical inflation plus 15 percentage points;
 

4. an increase in a copayment by an amount that exceeds medical inflation plus 15 percentage points (or, if greater, $5 plus medical inflation);

5. a decrease in an employer’s contribution rate towards the cost of coverage by more than 5 percentage points; and

6. the imposition of annual limits on the dollar value of all benefits below specified amounts.

Multiple Benefit Packages: The FAQs provide that the grandfathered plan analysis applies on a benefit-package-by-benefit-package basis. Accordingly, if a single group health plan offers three benefit packages (e.g., a PPO, a POS arrangement, and HMO), and only one of the benefit packages loses grandfathered status, that fact alone does not affect the grandfathered status of the other benefit packages.

Tiers of Coverage: As noted above, one of the ways a group health plan may lose grandfathered status is if the employer decreases its contribution rate towards the cost of coverage by more than 5 percentage points. The interim final regulations indicated that this analysis applies on a tier-by-tier basis. The FAQs clarify that, if a group health plan modifies the tiers of coverage it had in effect on March 23, 2010 (e.g., from employee-only and family to employee-only, employee-plus one, employee-plus-two), the employer contribution for any new tier is tested by comparison to the corresponding tier on March 23, 2010. Accordingly, if the employer contribution rate for family coverage was 50 percent on March 23, 2010, the employer contribution rate for any new tier of coverage other than employee-only (i.e., employee-plus-one, employee-plus-two, employee-plus-three or more) must be within 5 percentage points of 50 percent.

However, if a plan adds one or more new coverage tiers without eliminating or modifying previously tiers, and those new coverage tiers cover classes of individuals not previously covered, the new tiers would not cause the plan to lose grandfathered status. For example, if a plan that previously offered employee-only coverage (i.e., did not offer family coverage) added a family tier, the level of contribution toward the family tier would not cause the plan to lose grandfathered status.

Different Copayment Levels: The Departments clarified that if a plan sponsor raises the copayment level for one category of services (e.g., outpatient primary care) by an amount that exceeds the permissible copayment increase standards, but retains the copayment for other categories of services, the change in the copayment for the one category of services will cause the entire plan to lose grandfathered status. Each change in cost sharing is tested against the applicable grandfathered standard in the interim final regulations.

Wellness Programs: The FAQs indicate that penalties (such as cost-sharing surcharges) imposed by wellness programs may implicate the grandfathered rules and should be analyzed carefully (e.g., the imposition of a surcharge could result in a decrease in the employer’s contribution rate by more than 5 percent in violation of the grandfathering rules).

Disclosures: Under the interim final regulations, in order to maintain grandfathered status, a group health plan must include a statement that the plan is intended to be a grandfathered plan in materials provided to a participant or beneficiary describing the benefits provided under the plan . The FAQs provide that such a statement need not be provided each time a plan sends an explanation of benefits to a participant. The Departments do indicate that plan sponsors should attempt to identify other plan communications (such as a plan’s summary plan description) in which the disclosure of grandfathered plan status would be appropriate.

Recommended Actions

Plan sponsors that are in the process of evaluating changes to their group health plans should consider the grandfathered plan rules as part of that process. In undertaking the grandfathered plan analysis, plan sponsors will need to decide whether the additional mandates imposed by PPACA for non-grandfathered plans outweigh the ability of the plan sponsor to modify plan cost-sharing, premiums, and other provisions without constraint.
 

IRS Announces 2011 Pension and Related Limitations

November 8, 2010

On October 28, 2010, the Internal Revenue Service announced that the dollar limitations for pension plans and other items, beginning January 1, 2011, would remain generally unchanged from the limits in effect in 2010.  Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. These limitations usually are adjusted annually to reflect cost-of-living increases. Many other limitations applicable to retirement plans are adjusted at the same time and in the same manner as the Section 415 limit. Some of the limits to be applied in 2011 are listed below.
 

Maximum Annual Compensation taken into account for determining benefits or contributions to a qualified plan -- $245,000

Basic Elective Deferral Limitation for 401(k), 403(b) and 457(b) Plans -- $16,500

Catch-up Contribution Limit for Persons Age 50 and Older in 402k, 403(b) or SARSEP Plans -- $5,500

Limitation on Annual Additions to a Defined Contribution Plan -- $49,000

  • Note, in no event may annual additions exceed 100% of a participant's compensation.

Limitation on Annual Benefits from a Defined Benefit Plan -- $195,000

  • Note, in no event may a participant's annual benefit exceed 100% of the participant's average compensation for the participant's high three years.

Highly Compensated Employee Compensation Threshold -- $110,000

  • Note, Generally an employee is considered "highly compensated" if the employee: a) was a five-percent owner of the employer at any time during the current or preceding year; or (b) received compensation from the employer in the preceding year of more than the applicable dollar limit for that year.

SEP Compensation Threshold -- $550

Social Security Taxable Wage Base for Social Security Tax (6.2%) -- $106,800 

  •  For Medicare Tax (1.45%) -- No limit

Health Savings Accounts

  • Individual Contribution Limit -- $3,050
  • Family Contribution Limit -- $6,150
  • Catch-Up Contributions -- $1,000

 

IRS Issues New Guidance on Coverage of OTC Medicines and Drugs

October 19, 2010

The Internal Revenue Service ("IRS") recently issued guidance on the new requirements for over-the-counter medicines and drugs ("OTC Drugs") that will apply generally to employer-provided health plans and certain health accounts on January 1, 2011. Those requirements are summarized below.

  • To comply with the new requirements on OTC Drugs, employers should:make sure that any employee who administers the applicable health plan or account is familiar with the new requirements;
  • inform participants in the applicable health plans and accounts in 2010 about the new requirements, so they can (1) consider the new requirements for OTC Drugs when making health coverage elections for 2011, and (2) properly administer any tax-favored health accounts they have in 2010 with respect to expenditures for OTC Drugs;
  • review whether any amendments are needed to their health plan(s), health accounts, and cafeteria plan(s) to comply with the new requirements; and
  • make any necessary changes to applicable summary plan descriptions, web pages, and other materials regarding the new requirements.
     

What Restriction is Imposed on the Coverage of OTC Drugs?

The Patient Protection and Affordable Care Act that was enacted on March 23, 2010 provides that a medicine or drug expense may only be paid or reimbursed by an employer-provided health plan, including a health flexible spending arrangement ("Health FSA") and a health reimbursement arrangement ("HRA"), if it is: for a medicine or drug that requires a prescription; for an OTC Drug, and the covered individual has obtained a prescription for that OTC Drug; or for insulin.

This restriction on the coverage of an OTC Drug without a prescription ("OTC Drug Restriction") also applies in the same general manner to a distribution from a health savings account ("HSA") or an Archer Medical Savings Account ("Archer MSA") for an OTC Drug.

For purposes of the OTC Drug Restriction, the new IRS guidance defines a prescription as "a written or electronic order for a medicine or drug that meets the legal requirements of a prescription in the state in which the medical expense is incurred and that is issued by an individual who is legally authorized to issue a prescription in that state."

Does the OTC Drug Restriction Apply to Over-the-Counter Medical Equipment, Supplies, and Diagnostic Devices?

The new IRS guidance provides that the OTC Drug Restriction does not apply to medical care items that are not medicines or drugs, and therefore does not cover (among other things): equipment, such as crutches; supplies, such as bandages; and diagnostic devices, such as blood sugar test kits.

If each piece of equipment, supply or diagnostic device satisfies the general tax requirements for medical care expenses (i.e., it generally must be an expense for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body), it is still eligible for payment or reimbursement on a tax-favored basis as long as the terms of the applicable health plan or account permit such payment or reimbursement.

What is the Effective Date of the OTC Drug Restriction?

The OTC Drug Restriction generally applies to OTC Drug expenses incurred after December 31, 2010. The December 31, 2010 effective date applies even if an employer's cafeteria plan provides for reimbursement of qualifying expenses incurred in a 2½ month grace period after the end of a calendar year.

If an expense for an OTC Drug without a prescription is incurred in 2010, but is paid or reimbursed in 2011 in accordance with the terms of the applicable plan or account and pursuant to the applicable tax requirements, such payment or reimbursement will still be allowed. However, if an expense for an OTC Drug without a prescription is incurred after December 31, 2010, it generally may no longer be paid or reimbursed on a tax-favored basis. However, the new guidance states that the IRS will not challenge the use of Health FSA or HRA debit cards for OTC Drug expenses incurred through January 15, 2011, if the use of the debit cards otherwise satisfies the applicable tax requirements.

What is the Amendment Deadline for a Cafeteria Plan?

The new IRS guidance has a special transition rule for any necessary amendment to a cafeteria plan. Although cafeteria plan amendments generally must be effective only prospectively, the new IRS guidance allows a cafeteria plan to be amended for the OTC Drug Restriction by June 30, 2011, as long as that amendment is made effective retroactively for expenses incurred after December 31, 2010 (or January 15, 2011, for qualifying Health FSA and HRA debit card purchases).

May Health FSA and HRA Debit Cards be Used for OTC Drug Purchases Made After January 15, 2011?

The new IRS guidance generally provides that Health FSAs and HRA debit cards may not be used for OTC Drug purchases made after January 15, 2011, with a limited exception for "90 percent pharmacies" (a pharmacy will be a "90 percent pharmacy" if at least 90 percent of its gross receipts during the prior taxable year consists of items which qualify as expenses for medical care under the applicable tax requirements or as expenses for OTC Drugs) and where certain substantiation requirements are satisfied.

What Substantiation Requirements Will Apply?

Before a prescribed OTC Drug purchased after the applicable effective date may be paid or reimbursed, it must be properly substantiated. Such substantiation includes submission of a copy of a prescription (or other appropriate documentation evidencing the prescription), and information from an independent third party that satisfies the applicable tax requirements (e.g., a customer receipt issued by a pharmacy that identifies the buyer, the date, the amount of the purchase, and the applicable Rx number).