Trying to Sort Through Retirement Plan Operational Issues? February 1: IRS Offers Discounts on Some Fees for Employer’s Voluntary Compliance Submissions

Here are some of the types of issues that cross my desk and upon which I advise:

• An HR manager allowed a 10 percent employer contribution into the 401(k) using inaccurate Box 1 W-2 amounts;

• Another HR manager failed to automatically enroll new employees who were part of a recent company acquisition;

• A 401(k) plan failed its Average Deferral Percentage (ADP) tests since 2010 and still has not corrected for the failure;

• A non-profit allowed terminated executives to make an employee deferral into the 403(b) plan off the settlement proceeds they received when they signed a general release at termination;

• A group of what seemed to be four unrelated employers turned out to be part of a control group, making them a “single employer” for ERISA/tax purposes (even for Affordable Care Act group health plan purposes, but we won’t discuss the implications here); one member had offered a 401(k) plan its employees, but the other members offered no retirement plan to their employees.

When plan fiduciaries eventually unravel these problems, they must also analyze whether — to preserve the plan’s tax qualification — they may simply self-correct and avoid the review and scrutiny of (and filing and application fee to) the Internal Revenue Service or whether they must submit an application under the voluntary correction program (VCP) that is part of the Employee Plans Compliance Resolution System (EPCRS), Rev. Proc. 2016-8 (Jan. 4, 2016) requesting approval of the correction.

Typically, an employer may self-correct if plan issues are “insignificant,” an analysis that examines the administration procedures in place, type of error, participants and dollars involved, how many years the mistake occurred, the reason behind the mistake. “Insignificance” tends toward issues where there has been a failure to follow the terms of the plan, exclusion of eligible participants, and improper allocations of contributions. Where issues are “significant” (which will always include plan document failures), however, the employer should consider the VCP route. In addition, Employers may generally self-correct both significant and insignificant failures if errors are corrected shortly after they occur.

In efforts to ease the financial burden of filing under the VCP, effective February 1, 2016 (this week), the IRS will charge significantly reduced compliance fees for certain issues under EPCRS, which is the IRS’s program for correcting plan document, demographic, and operational failures that retirement plans experience. The newly-reduced fees (not retroactive for submissions prior to the February effective date) reflect the IRS’s desire to encourage employers to self-audit their plans to self-disclose to the IRS the compliance issues encountered and the corrections the employer takes. The IRS already discounts fees for certain plan failures (e.g., if the plan fails to pay required minimum distributions, loan failures, late adoption of certain good faith/interim/optional law changes, and non-amenders). Submitting through VCP allows the IRS and the employer to collaborate on the corrections, with the common goal and hope of preserving the plan’s tax-qualified status.

The chart below compares user fees (pre-February 1, 2016) under Revenue Procedure 2013-12, as amended, to the new user fees in effect starting this week:

Number of Participants Old Fee New Fee Number of Participants
20 or fewer $750 $500 20 or fewer
21 to 50 $1,000 $750 21 to 50
51 to 100 $2,500 $1,500 51 to 100
101 to 500 $5,000 $5,000 101 to 1,000
501 to 1,000 $8,000
1,001 to 5,000 $15,000 $10,000 1,001 to 10,000
5,001 to 10,000 $20,000
More than 10,000 $25,000 $15,000 More than 10,000

What with self-correction always a possibility and lower fees when disclosure to and approval from the IRS is necessary, employers – and their plan fiduciaries — should seize the opportunity to identify and remedy plan failures.

Contact any member of the ERISA and Employee Benefits practice group at our firm if you need assistance related to corrections involving your retirement plan.

More Permissible Mid-Year Changes to Safe Harbor Plans and Safe Harbor Notices

An employer can adopt what is called a “safe harbor” 401(k) plan. Such a plan requires an employer to commit to making a specific contribution to each plan participant. In doing so, the plan is deemed to pass the annual Actual Deferral Percentage (ADP), the Actual Contribution Percentage (ACP), and the Top Heavy tests, which generally are annually-required discrimination tests that ensure that contributions do not impermissibly favor highly-compensated employees.

An employer must define what type of contribution it will make (for example, at least a non-elective 3 percent of pay contribution to employees; a basic match; or an enhanced match). The safe harbor regulations under Treas. Reg. §§ 1.401(k)-(3) and 1.401(m)-3 require the employer to issue a notice to participants prior to the beginning of the plan year informing them of which safe harbor contribution the employer has selected, as well as other details about plan features that remain in effect generally over the 12-month plan year.

The IRS typically restricts an employer from making mid-year changes to amend a safe harbor plan, which has been a source of frustration for employers who need to make mid-year changes for business reasons, but IRS Notice 2016-16, to be published in IRB 2016-07 (Feb. 16, 2016), provides guidance on limited, but permissible, mid-year changes:

The notice provides that a mid-year change either to a safe harbor plan or to a plan’s safe harbor notice does not violate the safe harbor rules merely because it is a mid-year change, provided that applicable notice and election opportunity conditions are satisfied and the mid-year change is not a prohibited mid-year change, as described in the notice.

While the IRS Notice is technical, the examples offered seem to offer a clear view on what the IRS deems a permissible mid-year change in many of the examples. For instance:
Example 1 discusses an employer who chooses to raise its safe harbor non-elective contributions from 3 to 4 percent for all employees; employees receive an updated notice that describes the increased contribution (and an option for the employee to make a change to receive cash or alter deferred elections (“election opportunity”)).

Example 3 discusses an employer who, similar to Example 1, raises the safe harbor matching contribution from 4 to 5 percent (calculated no longer per payroll period, but rather on a plan-year period). The employer does this on August 31, with a retroactive effective date to January 1 of the same plan year and distributes an updated safe harbor notice (with the appropriate election opportunity).

Example 4 discusses an employer who makes a mid-year amendment to allow an age 59 ½ in-service withdrawal feature. The employer distributes the requisite updated safe harbor notice and election opportunity.

• It appears these above Example mid-year changes are permissible because the participants benefit with the plan amendments that the employer contemplates (and there is sufficient notice with the election opportunity). While an employer contemplating mid-year changes should evaluate the IRS Notice more closely, the rationale seems to borrow heavily from the anti-cutback analysis that the IRS uses to determine if a participant’s accrued benefits have been adversely affected under IRC § 411(d)(6)). The IRS Notice even makes reference to anti-cutback restrictions, general non-discrimination rules, and anti-abuse provisions.

In fact, in Example 2, where an employer wishes to decrease its safe harbor non-elective contributions from 4 to 3 percent, unless that reduction is tied generally to the employer’s economic loss or reservation of a right to reduce or suspend safe harbor contributions under Treas. Reg. § 1.401(k)-3(g), then the plan is no longer a safe harbor plan and, accordingly, must meet the nondiscrimination tests. Moreover, if the reduction does not meet the treasury regulation’s criteria, the plan as amended will not meet the ADP test under IRC § 401(k)(3).

The IRS Notice seeks comments from those 401(k) plan sponsors interested in additional guidance regarding mid-year changes to safe harbor plans, with a particular emphasis on those who might need guidance in the mergers and acquisition context or with plans having automatic contribution arrangements.

Contact any member of the ERISA and Employee Benefits practice group at our firm if you need assistance related to this IRS Notice.

“The Beat Goes On!” Third Multi-Employer Pension Plan Seeks to Reduce Core Benefits

The third multi-employer pension plan since September 2015 has filed an application with the Department of the Treasury in which it is seeking to reduce core benefits under the Multiemployer Pension Reform Act of 2014 (“MPRA”). The Teamsters Local 469 Pension Plan (“469 Fund”) which is administered in Hazlet, New Jersey has now joined the Central States Southeast and Southwest Area Pension Fund (“Central States”) and the Iron Workers Local 17 Pension Fund (“Iron Workers Fund”) in efforts to cut retirees’ core benefits by asserting that it is in “critical and declining” status, the standard which was promulgated in the MPRA.

The demographics of the 469 Fund seem to be akin to those of the Iron Workers Fund as its 2014 Form 5500 reported current assets of $122.6 million and liabilities of $279.9 million. The application, if approved, would impact approximately 1,781 participants.

Notably, the Department of the Treasury still has not ruled on the first application that was filed by Central States.

This disturbing trend further underscores the importance of employers’ vigilance in monitoring the status of these multiemployer pension funds. For contributing employers, these applications only add insult to the injury of withdrawal liability because the benefits upon which employer’s withdrawal is being assessed will not even be paid to the participants!

We will continue to monitor the multiemployer fund landscape and keep you advised.


For the second time in Amgen Inc. v. Harris, the Supreme Court reversed the Ninth Circuit because of its failure to apply the proper pleading standard for claims alleging breach of the duty of prudence against fiduciaries who manage employee stock ownership plans (ESOPs). The Supreme Court’s opinion sets forth a specific, stringent pleading standard for such claims – though questions remain as to how strictly lower courts will interpret that standard. The opinion also shows that it will be strategically advantageous for defendants to attack claims against ESOP fiduciaries at the pleading stage.

The plaintiffs were former Amgen employees who participated in an ESOP holding Amgen’s common stock. After the value of Amgen’s stock dropped, the employee-stockholders filed a class action alleging that the plan’s fiduciaries had breached their duty of prudence under the Employee Retirement Income Security Act (ERISA). Specifically, they alleged that the plan’s fiduciaries had inside information that investing in Amgen’s stock was imprudent but nevertheless (1) allowed the plan’s participants to continue investing, and (2) failed to disclose the inside information to the public. The district court dismissed the complaint for failure to state a claim, but the Ninth Circuit reversed. The plan fiduciaries petitioned to the Supreme Court.

While that petition was pending, the Supreme Court issued its decision in Fifth Third Bancorp v. Dudenhoeffer, which addressed the duty of prudence owed by ERISA fiduciaries who manage ESOPs. In Dudenhoeffer, the Supreme Court held that ESOP fiduciaries are not entitled to a presumption of prudence. The elimination of this presumption was widely viewed as a negative development by those who manage and represent ESOPs. However, in Dudenhoeffer, the Supreme Court did include fiduciary-friendly language recognizing the unique challenges of ESOP fiduciaries who are blamed for failing to act on inside information about the employer’s stock. Specifically, the Supreme Court stated:

To state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.

[L]ower courts faced with such claims should also consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases—which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment—or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.

This pleading standard acknowledges that freezing investments into an ESOP and disclosing negative information about company stock to the public will usually do more harm than good. The Supreme Court intended the standard to separate plausible from meritless claims.

Following the issuance of Dudenhoeffer, in 2014 the Supreme Court granted the fiduciaries’ petition for review in Amgen I, vacated the judgment, and remanded for further proceedings consistent with Dudenhoeffer. On remand, the Ninth Circuit again reversed dismissal of the complaint against Amgen and denied rehearing en banc over a strong dissent by Judge Kozinski. The fiduciaries again petitioned for Supreme Court review.

In a short, per curiam decision (Amgen II), the Supreme Court on January 25, 2016, held that the Amgen complaint did not contain sufficient factual allegations to state a claim for breach of the duty of prudence against the ESOP fiduciaries. The Supreme Court emphasized that the Ninth Circuit did not correctly apply the Dudenhoeffer standard. The Ninth Circuit assumed it was plausible that freezing investments into Amgen’s ESOP would not harm plan participants. However, the complaint did not allege that a prudent fiduciary “could not have concluded” that freezing the investments into the ESOP would have done more harm than good. Accordingly, the Court reversed and remanded (again). The Supreme Court noted that the district court could decide whether to allow the plaintiffs to amend the complaint to attempt to meet this standard.

The plaintiffs on remand following Amgen II, as well as plaintiffs in other actions, might simply allege that a prudent fiduciary “could not have concluded” that alternative actions, such as freezing investments into the ESOP and public disclosure of negative inside information, would have done more harm than good. It remains to be seen whether such a conclusory allegation, devoid of a factual basis, will meet muster under Amgen II. There exists a strong argument that the Supreme Court intended to require the allegation of specific facts demonstrating how a prudent fiduciary could not have reached such a conclusion. Given that public disclosure of negative insider information (even if permitted by securities laws) and freezing ESOP investments will typically do harm by causing the value of the employer’s stock to drop, the lower courts will also have to decide what types of factual allegations and special circumstances will suffice under this stringent standard.

While decided in the context of an ESOP, Amgen I and II are also important decisions for 401(k) plans that offer employer stock as an investment option, particularly those plans with ESOP features. Although we will need to await future litigation for complete certainty, we expect that Amgen pleading standards will likely apply in 401(k) plan stock drop litigation. 401(k) plan fiduciaries should continue to carefully monitor company stock as a prudent investment option for their participants and be prepared to substantiate — through appropriate documentation and otherwise — compliance with the fiduciary duty to periodically review and update investment offerings and possible consideration of inside information in accordance with the securities laws.

Supreme Court: ERISA Plan Cannot Recover Settlement Funds That Have Been Spent

The U.S. Supreme Court has narrowed, ever so slightly, the ever-changing definition of “appropriate equitable relief” under ERISA Section 502(a)(3). In Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan,[1] the high court addressed whether a plan fiduciary can recover medical payments made on behalf of a participant when the plan fiduciary has not identified third-party settlement funds still in the participant’s possession at the time the plan fiduciary asserts its reimbursement claim. Yesterday, the Supreme Court held in an 8-1 ruling that when a plan participant has spent — on nontraceable items such as fees for services or travel — all the settlement proceeds that could have been used to reimburse the plan, the plan fiduciary may not reach the participant’s other assets as a broader means of recovery.

The facts of Montanile were mostly undisputed by the parties.[2] Plaintiff, Board of Trustees of the National Elevator Industry Health Benefit Plan (the “Plan”), was an employee welfare benefit plan, which reserved for itself in its summary plan description (“SPD”) “a right to first reimbursement out of any recovery.” Montanile, a plan participant, was injured in a car accident, and the Plan paid out more than $120,000 in medical expenses on his behalf.[3]

Meanwhile, Montanile retained counsel to pursue personal injury damages and ultimately settled for $500,000. When the Plan attempted to enforce its right to reimbursement and subsequent negotiations broke down, Montanile’s attorney notified the Plan that he would distribute the settlement funds to Montanile unless the Plan objected within 14 days. After the Plan failed to respond by the deadline, the funds were distributed to Montanile.  The Plan then waited six months before suing under Section 502(a)(3)(B) of ERISA to enforce an equitable lien on the settlement funds, during which time Montanile spent most of the money.[4]

The district court in Montanile was facing a situation where restitution could theoretically expose Montanile’s general assets to a judgment: the third party settlement funds earmarked to reimburse medical expenses paid by the Plan had either been spent or comingled by Montanile by the time the Plan filed suit. Acknowledging the lack of Eleventh Circuit authority on point, the district court found that the Plan had a right to reimbursement on the grounds that “a beneficiary’s dissipation of assets is immaterial when a fiduciary asserts an equitable lien by agreement.”[5] The Eleventh Circuit easily affirmed the decision in Montanile[6] relying on its recent holding in AirTran Airways, Inc. v. Elem, 767 F.3d 1192 (11th Cir. 2014).[7]

In the Supreme Court, the issue became whether spending settlement funds could destroy the enforcement of a lien. Justice Thomas, writing for the majority, explained that — where a defendant has already spent proceeds that are subject to reimbursement — a restitution claim may only be asserted where funds or property in the defendant’s possession are clearly traceable back to the proceeds that were subject to reimbursement[8] and, where such traceable funds or property exist, the plan can create and enforce an equitable lien over such funds or property.[9] Rejecting the Plan’s arguments that ERISA’s general objectives, concepts of fairness and the fact that the equitable lien was by agreement – by virtue of being set forth the in SPD – justified a recoupment, Justice Thomas clarified that enforcing an equitable lien over a participant’s general assets is not “typically available” relief under the principles of equity. The majority remanded the case back to the district court to determine “how much dissipation there was” and whether Montanile mixed the settlement funds with his general assets. So, there is still some possibility of recovery by the Plan.

From a public policy and legal theory perspective, the broad question put to the Court in Montanile — what is “appropriate equitable relief”? — was unlikely to spawn a new “tracing” rule for all types of reimbursement claims. Instead, the Montanile decision demonstrates that all but one of the justices — Justice Ginsburg, who dissented in the case — are unwilling to turn ERISA Section 502(a)(3) into a damages free-for-all. At the end of the decision, Justice Thomas explained that the Plan should have acted more expeditiously to secure the settlement proceeds before they were dissipated. That statement is the complete scope of Montanile: equitable tracing rules for plan reimbursement remain in place and plans need to act promptly if they want to be repaid.

What Does the Montanile Decision Mean to Plan Fiduciaries?
A narrow decision of this nature has two practical impacts for plan fiduciaries.

  • First, SPDs should include language that puts participants on notice of the plan’s reimbursement rights in the case of a tort recovery and the obligation of participants to guard and not spend any medical expense funds received in a tort recovery that may be subject to the plan’s claim for reimbursement.
  • Second, plan fiduciaries must anticipate the need to enforce and monitor the plan’s subrogation rights when plan assets are paid related to personal injury scenarios and should establish administrative procedures to carry out such enforcement and monitoring.

As an example of the importance of the second point, in AirTran, the plan only learned of the defendants’ full recovery — $425,000 instead of $25,000 — by accident when the defendants put a copy of the wrong check in the mail! It is incumbent upon plans to communicate with all parties in a tort suit, calendar important deadlines, and consult with outside counsel when third-party settlement funds are on the horizon.

Please follow this link to a comprehensive Jackson Lewis article concerning Montanile:

[1]               577 U.S. ___ (2016).

[2]               Board of Trustees of National Elevator Industry Health Benefit Plan v. Robert Montanile, No. 12-80746, 2014 U.S. Dist. LEXIS 36309, at *5 (S.D. Fla. March 17, 2014).

[3]               Id. at *7.

[4]               Id. at *8.

[5]               Id at *30-31.

[6]               Board of Trustees of the National Elevator Industry Health Benefit Plan v. Robert Montanile, 593 Fed. App’x 903, 907 (11th Cir. 2014).

[7]               In a curious case of certiorari leapfrog, Airtran’s petition is still pending before the Supreme Court and will most likely be denied based on the Montanile decision. The Supreme Court (most likely) chose to decide Montanile instead of AirTran because it could address the issue of dissipated, third-party settlement funds without getting mired in AirTran’s peculiar facts.

[8]               Great-West Life & Annuity Ins. Co. Knudson, 534 U.S. 204, 214 (2002).

[9]               Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356, 363 (2006); US Airways, Inc. v. McCutchen, 569 U.S. __ , 133 S.Ct. 1537 (2013).

ACA Treatment of Fringe Benefits Provided Under Federal Contracts

Last month the IRS issued Notice 2015-87, providing further guidance for applicable large employers on the employer shared responsibility provisions of Code § 4980H. For federal contractors required to provide a certain amount of health and welfare fringe benefits to employees, the Notice brought some welcome relief, at least for the time being.

Employers with benefit obligations governed by the McNamara-O’Hara Service Contract Act (“SCA”) or the Davis-Bacon Act and related acts (“DBRA”) typically meet those obligations by providing employees working under government contracts with benefits, cash in lieu of benefits, or a combination of both. Federal contractors with fifty or more employees (full-time or full-time equivalents) in a calendar year are considered applicable large employers who are thus subject to the ACA’s employer shared responsibility provisions and employer informational reporting requirements concerning offers of minimum essential coverage.

Notice 2015-87 addresses how fringe benefits mandated under the SCA or DBRA may be treated for purposes of determining whether an applicable large employer has made an offer of affordable minimum value coverage under an eligible employer-sponsored plan. The Notice provides that for plan years beginning before January 1, 2017, such fringe benefits — including flex credits, flex contributions, or cash payments made in lieu of benefits — will be treated as reducing the employee’s required contribution for participation in the plan for purposes of the Code § 4980H(b) penalty to the extent the payment amount does not exceed the fringe benefit amount required under the applicable federal contract. Furthermore, these same amounts may be treated by the employer as reducing the employee’s required contribution for purposes of employer reporting obligations under Code § 6056 (Form 1095-C), to the same extent that the payment amount does not exceed the fringe benefit amount required under the applicable federal contract. However, individual taxpayers are not required to consider these amounts in reducing the employee’s required contribution for purposes of Code §§ 36B — concerning premium tax credit eligibility — and 5000A — concerning the individual mandate affordability exemption.

To illustrate, the Notice provided the following example:

Facts: Employer offers employees subject to the SCA or DBRA coverage under a group health plan through a § 125 cafeteria plan, which the employees may choose to accept or reject. Under the terms of the offer, an employee may elect to receive self-only coverage under the plan at no cost, or may alternatively decline coverage under the health plan and receive a taxable payment of $700 per month. For the employee, $700 per month does not exceed the amount required to satisfy the fringe benefit requirements under the SCA or DBRA.   Conclusion: Until the applicability date of any further guidance (and in any event for plan years beginning before January 1, 2017), for purposes of §§ 4980H(b) and 6056, the required employee contribution for the group health plan for an employee who is subject to the SCA or DBRA is $0. However, for purposes of §§ 36B and 5000A, that employee’s required contribution for the group health plan is $700 per month.

Employers subject to the SCA or DBRA must keep in mind that while monetary contributions to fringe benefits are taken into account for purposes of the “affordability” requirement under the ACA, applicable large employers must continue to meet the ACA’s mandate to offer minimum essential coverage that is affordable and provides minimum value to full-time employees in order to avoid ACA penalties.

For more information on the impact of this guidance outside the context of government contracts, see the recent Benefits Law Advisor article by Kathleen Barrow and Stephanie Zorn, here.

Second Multiemployer Pension Plan Seeks to Reduce Core Benefits

On October 28, 2015, we reported that the Central States Southeast and Southwest Area Pension Fund (“Central States”) — one of the largest multiemployer pension plans in the country — had filed an application with the Department of the Treasury (“Treasury”) seeking to reduce core benefits under the Multiemployer Pension Reform Act of 2014 (“MPRA”) and had sent a notice of the application to its approximately 400,000 participants. Central States was also required to provide participants with an individualized estimate of reduced benefits.

On January 8, 2016, the Iron Workers Local 17 Pension Fund (the “Iron Workers Fund”) — which operates from Cleveland, Ohio — became the second multiemployer pension plan to file an application with Treasury to reduce core benefits. In its application, the Iron Workers Fund trustees advised that the Fund’s actuary had certified that the Fund was in “critical and declining status” for the plan year beginning May 1, 2015. Moreover, without approval of the application, the Fund was projected to become insolvent by 2025.

The application stated that the Iron Workers Fund’s most recent Form 5500 for the plan year ending April 30, 2014 reflected assets of $85.7 million and liabilities of $223.2 million, which means that the Fund had approximately 38 cents to pay for every dollar of vested benefits.

This filing demonstrates that the underfunding plight impacts both large and smaller plans, as the Iron Workers Fund has 2,021 participants of which 641 are active.

With regard to the Central States application, the deadline for the MPRA-required opportunity on the part of participants and beneficiaries to submit comments has been extended until February 1, 2016.  In addition, Treasury has announced that public comment sessions would be conducted in regions that would be most impacted by any benefit reduction. Such sessions were scheduled in Greensboro, North Carolina on January 11, 2016 and in Peoria, Illinois on January 14, 2016, with members of the public invited to attend.

Before core benefits can be reduced, Treasury must review the application and has 225 days from the date of receipt of the application to reject it. Otherwise, the application will be considered approved. If Treasury were to approve the application, it would then have 30 days to administer a vote for the participants and beneficiaries on the benefit reduction.

This second filing within less than four months should underscore the need for employers with collective bargaining agreements requiring contributions to multiemployer defined benefit pension funds to be vigilant and proactive. Such employers should conduct an annual “benefits due diligence,” which should take two forms:  (1) a review of the pension fund’s annual Form 5500; and (2) an annual request to the pension fund seeking a written estimate of the employer’s withdrawal liability and an explanation of the methodology used in calculating any such withdrawal liability.

We will continue to advise concerning the progress of these two applications and other developing issues involving multiemployer defined benefit pension funds.

Health Coverage Made Available ONLY to Wellness Program Participants, OK under ADA “Safe Harbor” Says District Court

With final ADA and GINA wellness program regulations expected this year from the Equal Employment Opportunity Commission (EEOC), 2016 looks to be an important year for regulation of these programs. However, program features like health risk assessments (HRAs) and biometric screenings have already become popular components of employer-sponsored health plans. In many cases, employers incentivize employees to participate through premium discounts, reductions in cost sharing or other inducements. In a recent case, an employer went a little further, designing its self-funded plan to be available only to those employees who participated in an HRA and biometric screenings (regardless of the results). Challenged by the EEOC, this employer prevailed under the Americans With Disabilities Act’s “safe harbor” exception. EEOC v. Flambeau, Inc., W.D. Wis., No. 3:14-cv-00638 (12/31/15).

The Program

In 2011, Flambeau, Inc. provided a $600 credit to employees enrolled in its health plan who participated in its HRA and biometric screening features. In the following two years, the company eliminated the credit and conditioned health plan enrollment on participation in the HRA and biometric screening. The company used aggregate information obtained from the wellness program to establish premium contributions, assess the need for stop-loss insurance, adjust co-pays, and sponsor other programs designed to address the risks identified in the wellness program aggregate data.

The “Safe Harbor”

According to the EEOC, Flambeau, Inc.’s wellness program violated the ADA because it required employees to complete medical examinations – the HRA and screenings – in order to enroll in its medical plan. The EEOC based its complaint on Section 12112(d)(4)(A) of the ADA which prohibits an employer from requiring a medical examination unless such examination is shown to be job-related and consistent with business necessity.

The District Court disagreed and found, as Flambeau, Inc. argued, that such programs are protected by the ADA’s “safe harbor” for insurance benefit plans set forth in ADA Section 12201(c)(2). This section protects employers from liability for acts that would otherwise violate the ADA if such acts were in the course of establishing or administering the terms of a bona fide benefit plan that are based on underwriting risks, classifying risks, or administering such risks.

The court found support for its position in Seff v. Broward County, an Eleventh Circuit decision, in which the “safe harbor” was applied to uphold a similar program in which an employer imposed a $20 bi-weekly surcharge for employees who did not participate in its wellness program requiring biometric testing and completion of an HRA.

Take Aways For Employers

There are now at least two cases in which employers have used the ADA “safe harbor” to fend off ADA claims. However, employers will have to proceed carefully as the EEOC mulls final ADA wellness program regulations. In its proposed regulations, the agency took issue with the decision in Seff v. Broward County and provided a clearer position on the reach of the “safe harbor” in the final rule. It is unclear what effects that would have on future court decisions.

When an employer intends a wellness program to be a part of its health plan, it should include the terms of the wellness program in its summary plan description (SPD). The EEOC raised this issue when challenging the application of the “safe harbor” because the employer’s SPD did not have express terms related to the program. The court determined this was not dispositive, but it is recommended that the SPD contain wellness program terms, particularly where those terms affect eligibility to participate in the plan.

The “safe harbor” does not apply solely if the wellness program is necessary for the employer to classify, underwrite or administer participants’ health risks under the plan, as the court held in Flambeau, Inc. However, using certain program data to classify health risks and calculate projected insurance costs and cost-sharing amounts, among other things, will help support an argument that the “safe harbor” applies and, hopefully, enhance the results of the program.

Late-Breaking Benefits News for 2016

While taxpayers were completing their holiday shopping and preparing to spend time with their families, Congress and the Internal Revenue Service (“IRS”) were busy changing laws governing employee benefit plans and issuing new guidance under the Patient Protection and Affordable Care Act (“ACA”). The results of that year-end governmental activity include the following:

Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”)

The PATH Act, enacted by Congress and signed into law by President Obama on December 18, 2015, made the following changes to federal statutory laws governing employee benefit plans:

  • The ACA’s 40% excise tax (“Cadillac Tax”) on excess benefits under applicable employer sponsored coverage — so called “Cadillac Plans,” due to the perceived richness of such coverage — is delayed from 2018 to 2020.
  • Formerly a nondeductible excise tax, any Cadillac Tax paid by employers will now be deductible as a business expense.
  • Commencing with plan years after November 2, 2015, employers with more than 200 employees will not be required to automatically enroll new or current employees in group health plan coverage, as originally required under the ACA.
  • The rules governing the circumstances under which church plans will be treated as sponsored by a single employer for purposes of Code section 414’s aggregation rules have been modified. These new provisions, in particular, clarify the circumstances under which church organizations will be deemed a single employer for purposes of Code section 403(b) plans.
  • After December 31, 2015, individual taxpayers who purchase private health insurance via the Healthcare Exchange will not be eligible to claim a Health Care Tax Credit on their tax returns.

IRS Notice 2015-87

On December 16, 2015, the IRS issued Notice 2015-87, providing guidance on employee accident and health plans and employer shared-responsibility obligations under the ACA. Guidance provided under Notice 2015-87 applies to plan years that begin after the Notice’s publication date (December 16th), but employers may rely upon the guidance provided by the Notice for periods prior to that date.

Written in a Q & A format, Notice 2015-87 covers a wide-range of topics from employer reporting obligations under the ACA to the application of Health Savings Account rules to rules for identifying individuals who are eligible for benefits under plans administered by the Department of Veterans Affairs. Following are some of the highlights from Notice 2015-87, with a focus on provisions that are most likely to impact non-governmental employers.

  • Guidance applicable to Health Reimbursement Arrangements (“HRAs”)
    • Funds held in an HRA that covers two or more participants who are current employees (as opposed to retirees or other former employees) may not be used to purchase an individual insurance policy on the marketplace, without regard to whether the participants have the opportunity to purchase coverage under an integrated group health plan sponsored by their employer.
    • An HRA that covers an employee’s spouse or dependents (i.e., a family HRA), may not be integrated with a group health plan that covers only the employee (i.e., self-only coverage).   To satisfy market reform requirements under the ACA, an HRA may only reimburse medical expenses of those individuals (employee, spouse, and/or dependents) who are also covered by the employer’s group health plan providing minimum essential coverage (“MEC”) that is integrated with the HRA.  Realizing that many HRAs do not currently restrict employees from reimbursing family member medical expenses if the family members are not enrolled in the employer’s MEC plan, the IRS and Treasury will not treat such HRAs — if otherwise integrated with an employer’s MEC plan as of December 16, 2015 — as non-integrated for plan years beginning prior to January 1, 2017. Thus, employers who currently sponsor HRAs that are properly integrated with a MEC plan have until the first day of the plan year commencing on or after January 1, 2017 to amend their HRAs to condition HRA benefits on enrollment in and coverage under the MEC plan.
    • For the purpose of determining “affordability” under the ACA, employer contributions that are required by the terms of a MEC-integrated HRA and that are permitted to be used by employees to pay premiums, to meet cost-sharing requirements under the MEC plan, or to pay for medical expenses not covered by the MEC plan are treated as reducing the employee’s required contribution — without regard to whether the employee in fact uses the HRA to pay his or her share of contributions under the MEC plan. Thus, the price of lowest cost, self-only coverage is reduced by the employer’s required contribution amount under the terms of the HRA.
  • Guidance applicable to Cafeteria (Code §125) Plans and Other Arrangements
    • Employer flex contributions to a cafeteria plan will reduce the price of lowest cost, self-only coverage for ACA affordability purposes if: (i) the employee may not elect to receive wages in lieu of the employer contribution; (ii) the employee may use the employer contribution to purchase MEC; and (iii) the employee may only use the employer contribution to pay for medical care as defined under Code § 213.
    • Employer opt-out payments, i.e., wages paid to an employee solely for waiving employer-provided coverage may, in the view of Treasury and the IRS, effectively raise the contribution cost for employees who desire to participate in a MEC plan. Treasury and the IRS intend to issue regulations on these arrangements and the impact of the opt-out payment on the employee’s cost of coverage. Employers are put on notice that if an opt-out payment plan is adopted after December 16, 2015, the amount of the offered opt-out payment will likely be included in the employee’s cost of coverage for purposes of determining ACA affordability.
  • Guidance Under the ACA
    • Treasury and the IRS will begin to adjust the affordability safe harbors to conform with the annual adjustments for inflation applicable to the “9.5% of household income” analysis under the ACA. For plan years beginning in 2015, therefore, employers may rely upon 9.56% for one or more of the affordability safe harbors identified in regulations under the ACA, and 9.66% for plan years beginning in 2016. For example, in a plan year commencing in 2016, an employer’s MEC plan will be “affordable” if the employee’s contribution for lowest cost, self-only coverage does not exceed 9.66% of the employee’s W-2 wages (Box 1).
    • To determine which employees are “full-time” under the ACA, “hours of service” are intended to include those hours an employee works and is entitled to be paid, and those hours for which the employee is entitled to be paid but has not worked, such as sick leave, paid vacation, or periods of legally protected leaves of absence, such as FMLA or USERRA leave. However, “hours of service” are not intended to include hours not worked by the employee but for which an employer may be required to make a payment for the employee’s benefit, such as workers’ compensation leave, periods during which an employee is receiving unemployment compensation, or periods during which an employee is receiving disability income.
    • Treasury and the IRS have observed that certain educational organizations are using staffing agencies to avoid the rule that an employee must have a break in service of at least 26 consecutive weeks before that employee may be treated as a new hire — thereby subject to a new eligibility waiting period or a new initial measurement period. In order to address this perceived abuse, Treasury and the IRS anticipate issuing amended regulations to require that staffing agency employees who primarily provide services to educational organizations during an entire year (including employees in bus driving or janitorial positions) be treated as employees of the educational organizations for purposes of the 26 week break in service rule.
    • For purposes of ACA penalties, an offer of TRICARE coverage by an applicable large employer to an eligible full-time employee for any month will be deemed to be an offer of MEC for that month.
  • Guidance concerning COBRA obligations and Flexible Spending Accounts (“FSAs”)
    • An FSA is not required to offer COBRA coverage to an employee who experiences a qualifying event unless the amount the employee is entitled to receive from the FSA from the date of the qualifying event to the end of the plan year exceeds the amount the FSA could require as premiums for COBRA continuation coverage for the remainder of the plan year. The amount the employee is entitled to receive from the FSA includes any $500 carry-over amount to which the employee may be entitled.
    • For purposes of determining the cost of COBRA continuation coverage under an FSA, amounts carried-over from a prior plan year are not included in the 102% of applicable premium determination.
  • Guidance concerning ACA reporting obligations
    • The Treasury and IRS remind applicable large employers that they will provide relief from penalties for failing to properly complete and submit Forms 1094-C and 1095-C if the employers are able to show that they made good faith efforts to comply with their reporting obligations.


Happy New Year!

A Holiday Gift to Applicable Large Employers – 2015 ACA Reporting is Delayed

In Notice 2016-4, the IRS has extended the due dates for certain 2015 Affordable Care Act information reporting requirements.

Specifically, the Notice extends:

  • the due date for furnishing to individuals the 2015 Form 1095-B and Form 1095-C from February 1, 2016, to March 31, 2016, and
  • the due date for filing with the IRS the 2015 Form 1094-B, Form 1094-C and Form 1095-C from February 29, 2016, to May 31, 2016, if not filing electronically, and from March 31, 2016, to June 30, 2016 if filing electronically.

For detailed information about these Forms, please see our earlier article.

In the Notice, the IRS also grants special relief to certain employees and related individuals who receive their Form 1095-C or Form 1095-B, as applicable, after they have filed their returns:

  • For 2015 only, individuals who rely upon other information received from employers about their offers of coverage for purposes of determining eligibility for the premium tax credit when filing their income tax returns will NOT be required to amend their returns once they receive their Forms 1095-C or any corrected Forms 1095-C.
  • For 2015 only, individuals who rely upon other information received from their coverage providers about their coverage for purposes of filing their returns will NOT be required to amend their returns once they receive the Form 1095-B or Form 1095-C or any corrections.

Thus, generally, employers should not be concerned that furnishing these Forms on a delayed basis in accordance with the Notice will force employees to file amended 2015 income tax returns.

Finally, the extensions do not require the submission of any request or other documentation to the IRS and have no effect on information reporting provisions for other years.