2015 Mid-Year Client Advisory
At this time of year many employers finalize welfare plan designs for 2016 and gear up for open enrollment. And this summer, many employers are in the process of reviewing updated pre-approved defined contribution plan documents provided by their record keeping firms. With those efforts in mind, this Client Alert is devoted to three benefit plan design and documentation topics driven by the recent release of EEOC proposed rules for wellness programs, recent cases that suggest ways to limit exposure to benefit claims through plan language, and best practices in reviewing pre-approved defined contribution plan documents.
Wellness Program Design and Documents
In April the EEOC released proposed rules for wellness programs that depart significantly from the final regulations issued under the Health Insurance Portability and Accounting Act (HIPAA) in 2013, published jointly by the Health and Human Services, Labor, and Treasury Departments. The proposed rules reflect the EEOC's position that a wellness program that includes a health risk assessment or a medical exam implicates the Americans with Disabilities Act (ADA), which prohibits medical exams that are not job related unless the exam is part of a bona fide benefit plan or participation is "voluntary." (Much has been written about the proposed rules, and our summary can be found here.)
In revising or designing and implementing a wellness program for the coming year, employers should note and plan to address a few key differences between the EEOC proposed rules and existing HIPAA regulations.
Program must be voluntary. According to the EEOC, a wellness program cannot be considered "voluntary" unless it meets several criteria. First, employees cannot be required to participate in the program. Second, the employer cannot retaliate against, coerce, or interfere with employees who refuse to participate in the program. As with the HIPAA regulations, the EEOC proposed rules state that the program must not be overly burdensome, a subterfuge for violating ADA nondiscrimination provisions, or highly suspect in the method it uses to promote health or prevent disease. Finally, an employee cannot be denied coverage under any of the group health plan's benefit packages, or otherwise have his or her coverage limited, if the employee fails to participate in the program or does not satisfy the health criteria for obtaining a reward under the program. This last requirement seems to prohibit any wellness program design that would limit the health plan options available to employees who decline to participate in the wellness program or who exhibit certain unhealthy behaviors, such as tobacco use. Accordingly, an employer who limits participation in the most favorable health plan option to non-smokers and employees who submit to a health risk assessment would be open to challenge by the EEOC under the new proposed rules.
Limits for Participatory Programs. Both the HIPAA regulations and the EEOC proposed rules state that participatory programs (i.e., programs that do not offer a reward or do not require participants to satisfy a health standard to receive a reward) must be reasonably designed to promote health or prevent disease and be available to all similarly situated employees. The EEOC proposed rules, however, limit rewards available through participatory programs that require an employee to respond to a disability-related inquiry or undergo a medical examination to 30% of the total cost of employee-only coverage (i.e., the sum of employee and employer contributions), even if no reward is provided to the employee based on the outcome. In addition, participatory wellness programs that require completion of a health risk assessment (or biometric screening) without providing follow-up advice or any recommendations regarding health-risk factors may be viewed by the EEOC as failing the reasonable design requirement.
Incentives Limited. Under the EEOC proposed rules rewards available as a result of participation or satisfying health factors (e.g., low blood pressure or a negative test for nicotine) cannot exceed 30% of the total cost of employee-only coverage. Unlike under the HIPAA regulations, this 30% maximum is calculated based on self-only coverage, not on the cost of coverage in which the employee is enrolled (such as self-plus-one or family coverage). In addition, instead of the 50% cap imposed by the HIPAA regulations, programs that test for tobacco use are subject to the same 30% maximum under the EEOC proposed rules. (Programs that involve self-reporting of tobacco use may continue to provide rewards up to the 50% limit under the HIPAA regulations.)
Notice Required. Finally, the EEOC proposed rules require an employer to provide written notice to employees if the wellness program is part of a group health plan and includes a disability-related inquiry or medical examination. The notice must explain the medical information that will be obtained as part of the program, who will receive the medical information, how the information will be used, any restrictions on the disclosure of the information, and the method that will be used to prevent improper disclosure. It appears that this notice must be provided in advance of employees deciding whether to participate.
The EEOC has stated that a wellness program that complies with the proposed rules is unlikely to violate the ADA. Thus, in designing wellness programs for the coming year employers should hew closely to the proposed rules if they wish to minimize the threat of attack by the EEOC. In particular, employers with wellness programs that involve any type of health risk assessment or medical examination, regardless of whether a reward is contingent on the results, should consider modifying their existing wellness programs to the extent necessary to reflect the EEOC rules.
Limiting Liability through Plan Language
Recent cases highlight the efficacy of plan language that places limits on litigated claims either as to time, standing to sue, or venue. Welfare benefit plan documents increasingly include a contractual limitations period and anti-assignment and venue selection provisions. And retirement plans can include the same kind of language, with the exception of anti-assignment provisions.
Contractual Limitations Periods
In Heimeshoff v. Hartford Life & Accident Ins. Co., 134 S. Ct. 604 (2013), the Supreme Court held that "[a]bsent a controlling statute to the contrary, a participant and a plan may agree by contract to a particular limitations period, even one that starts to run before the cause of action accrues, as long as the period is reasonable." In the wake of this important decision, many employers have moved to include contractual limitations periods in the terms of their benefit plans and SPDs, and several courts have enforced limitations periods that began running prior to the conclusion of the plan's internal administrative appeals period. More recently, however, some courts have held that to be "reasonable" a limitations period must be long enough to allow a lawsuit to be filed after the administrative claims review process is complete. For example, in Nelson v. Standard Ins. Co., No. 13CV188-WQH-MDD, 2014 WL 4244048 (S.D. Cal. Aug. 26, 2014), the United States District Court for the Southern District of California refused to enforce a limitations period that allowed only 100 days for a participant to file suit following the conclusion of the administrative claims appeal period.
If a plan sponsor intends to apply a contractual limitations period, the limitations period should be described in both the plan document and the SPD. Although circuit courts are split on the question of whether the limitations period must also be included in the final adverse benefit determination notice, it is a best practice to do so.
Bottom line: a contractual limitations period can help limit exposure to a lawsuit following a benefit claim denial and provide uniformity for employers doing business in several states. In drafting these provisions, it is important to clearly identify the date that the period begins to run and allow adequate time (probably several months) after the conclusion of the appeals process for a claimant to initiate a suit. Also, the SPD and final adverse benefit determination notice should disclose the limitations period in order to avoid the argument that a participant or beneficiary was unaware of how to protect his or her rights.
Provisions that prohibit a plan participant or beneficiary from assigning to another person his or her right to sue for benefits ("anti-assignment clauses") are common in welfare benefit plans and have been broadly enforced by federal courts. A recent case from the Southern District of New York, however, suggests that not all anti-assignment clauses are created equal. In Neuroaxis Neurosurgical Associates, PC v. Costco Wholesale Co., 919 F. Supp. 2d 345 (S.D.N.Y. 2013), a health care provider sought payment from several Aetna-administered group health plans for surgical procedures performed for plan members. The provider claimed that it had standing to sue for reimbursement at a "reasonable and customary" rate based on various assignments of members' ERISA rights.
The court ultimately dismissed the provider's claims under plans containing anti-assignment clauses that categorically prohibited assignment, stating that rights under those plans are personal to the plan participants. The court also dismissed the claims against plans that prohibited assignment except in limited circumstances or when permitted by the plan, finding that the provider did not allege any such circumstances. The court did not, however, dismiss claims brought under plans with anti-assignment clauses that allowed participants to assign benefits with the consent of the benefits administrator (Aetna) or that merely prohibited the contract holder (the employer or plan sponsor) from assigning rights. The court concluded that a plan provision preventing a plan sponsor from assigning rights would not impact a participant's ability to assign rights under the plan and allowed further discovery in matters involving plans that permitted assignment with the consent of the benefits administrator.
Bottom line: recent case law suggests that a well drafted anti-assignment provision in a welfare benefit plan document should identify the right to sue as personal to the participant or beneficiary and expressly prohibit a participant or beneficiary from assigning his or her ERISA rights under the plan to any other person. Welfare benefit plans should also contain language stating that payments made to a provider will not constitute a waiver of the anti-assignment provision.
Venue Selection Provisions
Several federal courts have upheld plan provisions that limit the geographic location within which a suit for benefits may be brought under ERISA. For example, the Court of Appeals for the Sixth Circuit in Smith v. AEGON Companies Pension Plan, 769 F.3d 922 (6th Cir. 2014) recently affirmed the dismissal of a suit filed in Kentucky because the subject benefit plan contained a provision requiring all complaints to be filed in the Federal District Court in Cedar Rapids, Iowa. This result is at odds with the Department of Labor's view that venue selection clauses are incompatible with ERISA, but the Court explained that if Congress had wanted to prohibit venue selection clauses in ERISA plans it could have done so. The Court also found that venue selection clauses further ERISA's goal of establishing a uniform administrative scheme. The United States Supreme Court currently is waiting for an opinion from the U.S. solicitor general as to whether this dispute merits review.
Bottom line: the enforceability of venue selection provisions is still an open question, but a majority of Federal District Courts and at least one Circuit Court of Appeals have held that ERISA does not preclude venue selection clauses in ERISA plans. The inclusion of such a provision may reduce the costs associated with litigating benefits matters and enhance the uniformity of judicial decisions regarding the administration of a particular plan. For most employers, inclusion of a venue selection provision in its benefits plans is a prudent drafting decision.
Pre-Approved Pension Documents
Pre-approved defined contribution plan document vendors are currently in the process of distributing document restatement packages to employers. At a minimum these restatement packages will include an adoption agreement (containing the specific design and features of the employer's plan) and the "base" or "basic" plan document (containing all legally required provisions and permitted alternatives, which are activated by the adoption agreement). A thorough review of the new adoption agreement in combination with a review of plan administrative practices can help ensure that the restated plan documents are accurate and complete, and can also help identify operational issues to avoid costly problems in the future. Employers should focus on the following:
Preserve the plan design. The most important part of the restatement process is to ensure that all of the design elements in the employer's plan are thoroughly and accurately transferred from the current plan documents onto the updated pre-approved plan documents. Changes in the formatting of the new adoption agreement and even changes in the substantive provisions of the agreement may make the process of mapping existing plan terms to the new adoption agreement quite challenging. Provisions relating to eligibility, covered compensation, contributions, and service credit (for vesting and other purposes) may appear in a grid or chart form and create special challenges for employers. Therefore, there is no substitute for a careful line by line comparison of the old and new adoption agreements.
Do not overlook administrative terms. When reviewing the terms of the plan, employers should not skip provisions that appear to be simply administrative or do not directly relate to the preservation of the selected plan design. Provisions describing the status of the employer (for example, as a member of a controlled group), the coverage of related employers, and the inclusion of participating employers (which often will require the execution of a participating employer agreement or addendum) are critical to ensuring the proper administration of the plan. Bear in mind that the document vendor may be unaware of significant structural changes that may have occurred with respect to the sponsoring employer since the last time a plan document was prepared.
Cross check operations. The restatement of the plan document offers an important opportunity to confirm that plan operations and administration are consistent with the written terms of the plan document. In many instances a careful review of the plan by the right players within an employer organization may reveal ways in which the administration of a plan has departed or may in the future depart from the written terms of the plan. Only a careful review of the plan document will allow employers to take advantage of an opportunity to capture terms accurately or avoid a pitfall if plan terms do not square with current operations.
In addition to the adoption agreement, the pre-approved restatement package may include such important documents as administrative services agreements, trust agreements, or other materials that require the attention of plan fiduciaries. Employers are well served by including these documents in their review process rather than assuming that they are fit for execution in the form they were received from the document vendor. As always, a careful, thoughtful, and prudent approach to a review of plan documents will yield the best results.