Client Advisory - Winter 2016
This Client Advisory highlights certain developments regarding the Affordable Care Act (most significantly, the delay of the ACA reporting requirements and the "Cadillac" tax), discusses the EEOC's proposed rules for wellness programs and the outcome of recent EEOC wellness program litigation, reviews important cases recently decided by and pending before the U.S. Supreme Court, and provides updates regarding church plan litigation and the Department of Labor's proposed fiduciary rule. We also offer thoughts about what employers can expect to see in 2016 in the way of agency enforcement activities. Since 2016 is a presidential election year, few observers expect to see much, if any, significant legislation enacted by Congress. But regulatory agencies, entering the final year of the Obama administration, may be more active and productive in 2016.
Affordable Care Act Reporting Requirements and the "Cadillac" Tax Delayed
Extension of Deadlines for ACA Information Reporting
To the great relief of employers and insurance carriers, the Internal Revenue Service (IRS) extended the deadlines for key Affordable Care Act information reporting forms. IRS Notice 2016-4, released on December 28, pushed back the deadline for furnishing Forms 1095-B and 1095-C (the statements of employer provided health plan coverage) to employees from January 31 to March 31, 2016. The filing deadline for Forms 1094-B and 1094-C (the related IRS transmittal forms) is now May 31, 2016, if filing by paper form, or June 30, 2016 if filing electronically.
Notice 2016-4 encourages employers and carriers to furnish statements and file transmittals even if they fail to meet the new deadlines. Specifically, the Notice states that the IRS will take into account an employer or carrier's reasonable attempts to comply with the reporting requirements when determining whether reasonable cause exists to waive or reduce penalties. The Notice indicates that gathering and transmitting necessary data to a vendor for filing, engaging in the testing of systems to prepare data for submission to the IRS, and active preparation for the 2016 reporting year will be considered in determining whether an employer's actions merit a waiver or reduction of the penalty. Finally, the Notice explains that the IRS will not grant requests for individual extensions of the reporting deadlines for the 2015 plan year as the new relief is more generous than the 30 day extension afforded by an individual extension request.
Delay of the "Cadillac" Tax
Section 4980I of the Internal Revenue Code imposes a 40 percent nondeductible excise tax on the aggregate cost of health coverage that exceeds certain dollar limits for self-only and family coverage. This so called "Cadillac" tax was to apply in tax years beginning after 2017. The Protecting Americans from Tax Hikes (PATH) Act of 2015, signed by President Obama on December 18, 2015, delays the imposition of the Cadillac tax for two years, until 2020. The PATH Act also provides that the Cadillac tax will be deductible. Legislative efforts to repeal the Cadillac tax, a goal that has bipartisan appeal, are expected to continue into 2016.
EEOC Finally Proposes Wellness Program Rules – Future Unclear
After enduring harsh criticism for initiating lawsuits targeting employer-sponsored wellness programs prior to issuing wellness program guidance, the Equal Employment Opportunity Commission (EEOC) finally issued proposed regulations in 2015 addressing the application of the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA) to employer-sponsored wellness programs.
The EEOC has received extensive comments regarding the proposed rules, and final rules may be forthcoming in 2016. Although the rules prescribe significant ADA and GINA requirements for wellness programs, an important U.S. District Court decision (discussed below) recognizes an alternate route to ADA compliance for certain wellness programs.
Proposed Rules under the ADA
The 2015 proposed ADA rules affirm the EEOC's view that the ADA prohibits medical exams or inquiries that are not job related unless employee participation is "voluntary," and attempt to define what type of programs the EEOC considers "voluntary" under the ADA. Through the proposed ADA rules the EEOC also reasserts its position that the statutory safe harbor exempting bona fide benefit plans from the ADA prohibition on medical exams and inquiries is without effect.
According to the EEOC a program will not be considered "voluntary" unless it is reasonably designed to promote health or prevent disease, is not overly burdensome, and is not a subterfuge for violating laws concerning employment discrimination. Moreover, a wellness program will be considered voluntary only if the employer does not require participation, does not deny coverage under any of its group health plans or benefits packages for nonparticipation, and does not take any adverse employment action or retaliate against employees who refuse to participate. In addition, where a wellness program is a part of a group health plan, the proposed ADA rules require that employees be provided with a notice describing the medical information to be obtained as part of the program, how the medical information will be used, who will receive it, the restrictions on its disclosure, and the methods the holding organization must employ to prevent improper disclosure of the medical information.
The proposed ADA rules hew fairly close to existing HIPAA requirements for wellness programs but, in addition to the notice requirement, differ in a few significant ways. For example, the proposed ADA rules cap financial rewards for wellness programs that are part of a group health plan and include medical inquiries or exams at 30 percent of the total cost of self-only coverage, rather than 30 percent of the total cost of family coverage if family members are permitted to participate. The proposed ADA rules also extend this 30 percent limit on rewards to participatory wellness programs that ask an employee to respond to a disability-related inquiry or undergo a medical examination, even if no reward is provided to the employee based on the outcome. Finally, this 30 percent limitation applies to wellness programs that target tobacco use and include disability-related inquiries or medical examinations (in contrast to the 50 percent reward amount available under the HIPAA requirements).
Proposed Rules under GINA
The EEOC issued a separate set of proposed rules in 2015 for wellness programs under GINA. In litigation initiated by the EEOC to challenge certain employer-sponsored wellness programs, the EEOC suggested that wellness programs that incentivize participation by an employee's spouse would violate GINA. The EEOC retreated from this position in the proposed rules by stating that voluntary wellness programs are permitted to offer limited incentives to employees to encourage covered spouses to complete health risk assessments so long as the program is reasonably designed to promote health or prevent disease and the employee's spouse gives prior, knowing, and voluntary authorization in writing.
The proposed GINA rules prevent employers from incentivizing employees to share information about the past or current health status of their children, but allow employers to ask questions about a child's health status as part of offering health or genetic services to an employee's children through a voluntary program. Like the HIPAA regulations, the proposed GINA rules allow employer incentives of up to 30 percent of the total cost of family coverage, implying that future EEOC guidance may alter the "self-only coverage" incentive limit under the proposed ADA rules.
Court Recognizes Bona Fide Benefit Plan Exception
In EEOC v. Flambeau, Inc., Civil Action No. 14-638 (W.D. Wis.), the EEOC asserted that an employer-sponsored wellness program violated the ADA because it required employees to participate in health risk assessments and medical examinations prior to allowing employees to enroll the employer's self-insured health plan. The U.S. District Court for the Western District of Wisconsin disagreed and found that the employer's program was part of a bona fide insurance benefit plan exempt from the ADA prohibition on medical examinations under ADA Section 12201(c)(2). Specifically, the Court concluded that the wellness program requirements were a "term" included in the employer's health insurance plan for purposes underwriting, classifying, and administering health insurance risks and, as a result, the plan could require medical examinations as condition of enrollment.
The Flambeau decision marks the second time a court has recognized the bona fide benefit plan safe harbor when finding in favor of an employer whose wellness program was challenged under the ADA. The first was the Sixth Circuit Court of Appeals in Seff v. Broward County. The fact that the employer clearly intended the wellness program to be part of its health plan (rather than a stand-alone arrangement) was critical to each employer's success in court. Despite the EEOC's continued rejection of the bona fide benefit plan safe harbor, the results of litigation thus far appear to support a range of methods for encouraging participation in wellness programs that are part of employer health plans. It remains to be seen whether this additional precedent will cause the EEOC to change its position in the proposed rules.
Notable U.S. Supreme Court Cases Affecting Employee Benefit Plans and Sponsors
Continuing its recent interest in employee benefits matters, the U.S. Supreme Court issued four notable decisions in 2015 and is hearing two cases during its current term that should interest employers and benefits professionals. Below is a brief summary of those cases.
M&G Polymers USA, LLC v. Tackett
In a unanimous decision the Court held that the absence of an explicit provision in a collective bargaining agreement allowing for the termination of retiree medical benefits described in the agreement should not give rise to the inference that retirees have a vested right to such benefits for their remaining lifetimes. This ruling reverses the oft-cited Yard-Man inference created by the Sixth Circuit.
Tibble v. Edison International
In another unanimous decision the Court held that a claim challenging high-cost investment options and alleging that fiduciaries failed to properly monitor investments and remove imprudent ones may be brought by participants in a 401(k) plan if the failures continued during the six year period preceding the commencement of the lawsuit. This ruling rejected the view adopted by three U.S. Courts of Appeals, which found that participants were not permitted to challenge the selection of high cost investment funds once ERISA's six year statute of limitations had expired following the initial selection of the funds. The decision acknowledges an ongoing fiduciary duty to monitor fund selections but leaves it to lower courts on remand to determine how the duty to monitor should be fulfilled.
Obergefell v. Hodges
In a 5-4 decision the Court held that it is unconstitutional for a state to refuse to recognize same-sex marriages performed in other states and that the Due Process and Equal Protection Clauses of the Fourteenth Amendment guarantee couples of the same sex the right to marry. Although this decision does not materially impact benefits matters beyond the changes required by the Court's 2013 decision in United States v. Windsor and subsequent guidance issued by the IRS and Department of Labor (DOL), the ruling may encourage antidiscrimination claims against employers that do not offer equal benefits to same-sex and opposite-sex spouses.
King v. Burwell
In this controversial 6-3 decision the Court held that state and federal health insurance exchanges should be treated equally for purposes of the premium tax credit and cost-sharing subsidy available to individuals enrolled in coverage through the exchanges. By finding that the general language of the ACA evidences Congressional intent to make premium tax credits and cost-sharing subsidies available to individuals enrolled in federally facilitated exchanges, the Court preserved the status quo with respect to the availability of affordable coverage for individuals enrolled through the federally facilitated exchanges.
Gobeille v. Liberty Mutual Insurance Co.
The U.S. Supreme Court recently heard oral arguments in this case that may determine the fate of state health-care databases. An increasing number of states have considered or created "all-payer claims" databases that collect information about medical services paid for by third-parties to assist in improving the cost, quality, and utilization of medical services. The issue presented to the Court is whether ERISA preempts a Vermont law requiring third party administrators of self-insured ERISA plans to file reports with the State containing information about medical services provided, patient demographics, and cost-sharing. No one appears to doubt the value of collecting this claims information; however, a ruling upholding state reporting (rather than encouraging unified federal reporting) may result in increased administrative burdens and costs for health plan carriers and third party administrators that will likely trickle down to employers.
Priests for Life v. HHS
On November 6th the Court simultaneously granted seven petitions requesting review of whether the existing accommodation to except non-exempt nonprofit religious organizations from the ACA's mandate to provide contraceptive coverage violates the Religious Freedom Restoration Act. Although churches are exempt from the ACA's contraceptive mandate, the existing accommodation for non-exempt nonprofit religious organizations (such as church-affiliated hospitals and schools) requires the organizations to notify the Department of Health and Human Services (HHS) of their religious objection to providing contraceptive coverage so that the DOL and HHS may, in turn, notify the appropriate health insurers and third party administrators to provide contraceptive coverage without cost-sharing. The outcome of this case will have significant consequences for religious organizations that object to various contraceptive methods.
Church Plan Litigation Update: The Divide Deepens
We continue to follow developments in the numerous class action lawsuits filed over the past two years attacking the church plan status of defined benefit plans sponsored by religiously-affiliated employers. Most of the defendants in these suits are Catholic hospitals and health care systems with underfunded pension plans. The plaintiffs in these cases allege that a pension plan maintained by a health system cannot qualify for the church plan exemption – and therefore should be subject to ERISA – because the plan was not established by a church. The stakes in these suits are high, because compliance with the requirements of ERISA that apply to pension plans (including the minimum funding obligations and the requirement to pay Pension Benefit Guaranty Corporation premiums) would impose potentially ruinous financial obligations on the affected employers.
Section 33(A) of ERISA defines "church plan" to mean "a plan established and maintained . . . for its employees (or their beneficiaries) by a church . . . which is exempt from tax" under Section 501 of the Internal Revenue Code. The statute also provides that the term "includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church . . . if such organization is controlled by or associated with a church." The issue in these church plan cases, therefore, is whether a plan must be established by a church in order to be considered a church plan or whether a church plan may be maintained by a church controlled organization and still qualify for the exemption.
A few weeks ago the federal District Court in Colorado became the first court to issue a ruling on the merits of a church plan case when it granted summary judgment to the defendant, Catholic Health Initiatives, and dismissed all of the plaintiff's claims in Medina v. Catholic Health Initiatives, et al., Civil Action No. 13-CV-01249 (D. Colo.). In reaching its conclusion, the Court held that the Catholic Health Initiatives plan was a church plan – exempt from ERISA – even though it was not established by a church. On the core legal issue, the Court found that a plan: (1) need not be established by a church in order to satisfy the statutory qualification requirements; and (2) can qualify as a church plan if it is maintained by a tax-exempt organization controlled by or associated with a church whose principal purpose or function is the administration or funding of a benefits plan. The Court then reviewed the facts in detail – from the elements of church control to the administrative framework of the plan – and confirmed that the Catholic Health Initiatives plan satisfied the statutory requirements.
Even more recently, on December 29th, the U.S. Court of Appeals for the Third Circuit became the first Court of Appeals to rule on the merits of the church plan exemption issue. Contrary to the Colorado District Court, the court in Kaplan v. Saint Peter's Healthcare System, No. 15-1172 (3d Cir.) found in favor of the class of plan participants, holding that a defined benefit pension plan established and maintained by a church-affiliated hospital was ineligible for the church plan exemption from ERISA. The Court's analysis turned on statutory construction and the plain meaning doctrine – which asks whether the words in the statute have a plain and unambiguous meaning with regard to the dispute in the case – to conclude that Section 33(A) of ERISA requires that a church plan be established by a church even though such a plan may be maintained by a church-affiliated organization. Although it found this plain meaning analysis dispositive, the Court went further and concluded that neither the legislative history of Section 33(A) nor the IRS's issuance of exemptions to plans that were not established by churches (including the St. Peter's plan) provided a reason to deviate from its decision.
Many cases challenging the church plan status of certain defined benefit pension plans remain pending around the country and the outcome of the Medina and Kaplan cases suggested that the split of authority will only deepen. Indeed, most observers agree that the issue ultimately may be settled by the U.S. Supreme Court. For now, religiously-affiliated employers are advised to take note of the current law in their jurisdiction as we continue to ride this wave of litigation.
The Future of the DOL's New Fiduciary Rule
The scope, and fate, of the Department of Labor's proposed definition of "fiduciary" and rules relating to investment advice and conflicts of interest dominated employee benefits news throughout 2015. The rule has been the object of scorn (in the securities industry) and of attack (in Congress) since it was first proposed in 2010, and the reproposed rule issued by the DOL in April 2015 has not fared much better than the original. Much has been written about the broad reach of the rule's definition of "fiduciary" (and the limited carve-outs from fiduciary status), the scope of investment advice that would be covered by the rule (and the slippery slope created by many key concepts within the rule), the appropriateness of the "best interests" of the investor standard for investment recommendations (versus the "suitability" standard), and more.
Despite the considerable amount of energy expended by members of Congress from both parties, who threatened to block, delay, or alter the fiduciary rule, no action was taken by Congress in 2015. A flurry of activity in recent weeks led to speculation that Congress might limit spending on the new rule as part of the appropriations bill for Fiscal Year 2016, but ultimately the spending package was approved without any rider affecting the fiduciary rule. Two stand alone bills that would require a Congressional vote to allow the DOL to finalize the fiduciary rule were introduced near the end of the session – H.R. 4293 (the Affordable Retirement Advice Protection Act) and H.R. 4294 (the Strengthening Access to Valuable Education and Retirement Support Act of 2015) – and they are likely to be reintroduced in 2016. While many observers question the ability of Congress to take decisive action on anything during an election year, there may be enough interest on this issue to produce legislative action of some kind.
In the meantime the DOL continues to review the voluminous comments it has received regarding the fiduciary rule and appears determined to issue a final rule next spring or early summer. Absent dramatic Congressional action or a challenge in federal court, the final rule could take effect as early as fall 2016.
IRS to Target 403(b) and Cash Balance Plans in 2016
Earlier this month the IRS Office of Employee Plans shared its examination priorities for the Fiscal Year 2016. Those priorities include audits of: (1) large (2,500 or more participants) defined contribution and defined benefit plans; (2) cash balance plans, which continue to grow in popularity; (3) multiemployer plans; and (4) Section 403(b) plans, where the IRS believes many employers fail to meet the universal availability requirement that applies to elective deferrals. Facing major budget challenges, the IRS expects to supplement traditional examination activity with less expensive remote examinations in which agents request information from the employer and review it without a site visit (or, in some cases, with only a single visit when the examination begins).
The Employee Plans Compliance Unit also will continue to use the Compliance Check program that has been expanded in recent years. Compliance Checks, which seek voluntary cooperation from employers in answering a relatively small number of questions regarding a specific topic, have helped the Employee Plans office assess the state of compliance in certain areas at a very high level and have often shaped the office's examination activities. Both 403(b) plans and 457(b) plans have been the subject of Compliance Checks in recent years, and the data gained by the IRS through that process likely influenced the development of enforcement activity targeting those types of plans.
We already have seen direct evidence of the increase in examination activity with respect to 403(b) and 457(b) plans. In early December some of our New England clients received IRS examination notice letters containing Information Document Requests running up to 15 pages, which cover both the employer's 403(b) plan and 457(b) plans. Tax exempt employers should stay tuned for more on this front.