ACA Cadillac Tax: Cruising Toward Proposed Regulations


Effective 2018, Section 4980I of the IRC — the so-called “Cadillac Tax,” which was added to the IRC by the ACA — will impose a 40% nondeductible excise tax on the aggregate cost of applicable employer-sponsored health coverage that exceeds an annually-adjusted statutory dollar limit. For 2018, the dollar limits are $10,200 for self-only coverage and $27,500 for other than self-only coverage, subject to any potential upward adjustment based on age and gender characteristics of an employee population or other applicable adjustment factors. The cost of coverage that exceeds the dollar limit is referred to as the “excess benefit.”

Notice 2015-52

On July 31, 2015, IRS and Treasury issued Notice 2015-52, describing, and inviting comment concerning, potential approaches to Section 4980I issues for anticipated incorporation into proposed regulations. Notice 2015-52 supplements Notice 2015-16, which was issued earlier in 2015 and which described potential implementation approaches to other and related Cadillac Tax issues.

Public comments concerning Notice 2015-52 must be submitted to the IRS by October 1, 2015.

Notice 2015-52 highlights include:

Who pays the tax?

The coverage provider is liable for the tax. Who is the coverage provider? That depends on the type of plan at issue: with an insured plan, it’s the insurer; with an HSA or Archer MSA, it’s the employer; and for all other applicable coverage, it’s “the person who administers the plan benefits” — a term that is not defined in the ACA or elsewhere. IRS and Treasury are considering defining “the person who administers the plan benefits” as the person responsible for the day-to-day administration of the plan (processing claims, etc.) — generally, the third party administrator of a self-insured plan — or, in the alternative, as the person that has ultimate authority or responsibility for administration of plan benefits (eligibility determinations, etc.) — which is determined based on the terms of the plan document and is typically the employer.

At the end of each calendar year, the employer will calculate the tax that applies for each employee. Then, the employer will notify each coverage provider and the IRS concerning the amount of excise tax the coverage provider owes on its share of the excess benefit. Each coverage provider will then pay its portion of the excise tax.

IRS and Treasury are considering the designation of a particular quarter of the calendar year as the time for payment of the excise tax.

Who’s the employer? 

Related employers will be aggregated and treated as a single employer, consistent with IRC Section 414 provisions. This creates special issues regarding how to identifying: the applicable coverage; the employees to be taken into account for age, gender and high-risk profession adjustments to the applicable dollar limits; the employer responsible for calculating and reporting the excess benefit; and the employer liable for any penalty for improper calculation of the tax.

How is the Cost of Applicable Coverage Determined?

The cost of applicable coverage is determined using rules similar to those that apply in calculating COBRA premiums. Many plans, however, may face timing issues when calculating the cost of applicable coverage: self-insured plans may need to wait for the expiration of a run-out period before the actual cost of coverage can be determined and experience-rated insured plans may need to reflect subsequent period premium discounts back to the original coverage period. With regard to account-based plans with employee contributions that can fluctuate from month to month — such as HSAs, MSAs and FSAs — a safe harbor is being considered under which total annual employee contributions would be allocated on a pro-rata basis over the plan year, without regard to when the contributions are actually made. Safe harbor treatment is also being considered for FSAs with carry-forward salary features: employee annual salary reductions would be included in the cost of applicable coverage only in the year the salary reductions occur, without regard to any carry-forward that happens.

To the extent a coverage provider — other than an employer — incurs liability for the excise tax and passes through some or all of that liability to the employer, the reimbursement from the employer is taxable income to the coverage provider. It is anticipated that any reimbursement of the excise tax — and reimbursement of any associated income tax — could be excluded from the cost of applicable coverage only if separately billed.

Employer takeaways: The Cadillac Tax is highly complex and employers will play a key role in compliance. Although repeal is always possible, employers should start preliminary planning for their role in administering the tax.

Is Your Health Plan Affordable? If You Offer an Opt-Out Payment, You Better Check Again

An “applicable large employer” is subject to a penalty if either (1) the employer fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan and any full-time employee obtains a subsidy for health coverage on a government exchange (Section 4980H(a) liability) or (2) the employer offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan, but one or more full-time employees obtains a subsidy on an exchange because the employer’s coverage was not affordable or does not provide minimum value (Section 4980H(b) liability).

What does “affordable” mean for this purpose? Affordable means that an employee’s required contribution for individual coverage under his employer’ plan may not exceed 9.5 percent (indexed) of the employee’s household income. As employers do not generally have the household income information of their employees, the regulations under Internal Revenue Code Section 4980H provide three separate safe harbors under which an employer may determine affordability based on information that is readily available to the employer – (1) the Form W-2 wages safe harbor, (2) the rate of pay safe harbor, and (3) the federal poverty line safe harbor.

  • For example, if an employer uses the Form W-2 safe harbor, health coverage will be deemed to be affordable for Section 4980H(b) liability purposes if an employee’s required contribution is no more than $190 per month and his Form W-2 compensation is $2,000 per month ($190 is 9.5% of $2,000).

However, if the employer also offers employees an “opt-out” payment for those who decline coverage, then this opt-out amount must be counted as part of the employee contribution, according to informal discussions with Internal Revenue Service representatives (speaking in their individual rather than official capacities).

  • Therefore, using the previous example, if the employer offers employees a $100 per month opt-out payment, the employee contribution amount would be deemed to be $290 per month, rendering the insurance unaffordable under the Form W-2 safe harbor ($290 is 15.5% of $2,000).

While this impact of cash opt-out payments on affordability is not clearly articulated in the Section 4980H regulations, the Internal Revenue Service’s informal position described above is consistent with the final regulations relating to the requirement to maintain minimum essential coverage and makes sense from an economic standpoint. We note that the Internal Revenue Service also stated informally that it may treat similar cash payments to Service Contract Act and Davis-Bacon Act employees differently.

Employer takeaway: If you have analyzed affordability without taking into account any opt-out payments you offer, you should take another look at whether your plan is affordable.


Are Employee Life Insurance Benefit Plans Worth the Risk of Litigation After CIGNA Corp. v. Amara?

Five years ago, Chief Justice Roberts observed: “People make mistakes. Even administrators of ERISA plans.” Conkright v. Frommert, 559 U.S. 506, 509 (2010). Four years ago, searching for a mechanism to provide monetary relief for such mistakes under ERISA, the Supreme Court reached into the desiccated maw of early 19th century trust law and pulled out the make-whole remedy of surcharge. CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011). While the contours of the surcharge remedy are still being worked out in the lower courts, it currently appears to have only two elements – (1) a breach of fiduciary duty (2) that results in actual harm.

Since this important change in ERISA jurisprudence, we have noticed a significant increase in ERISA breach of fiduciary duty claims against employers alleging errors in the administration of life insurance plans in particular. Many such cases seem to involve conversion, porting, and/or continuation of coverage provisions. (Hereafter, “conversion” provisions.) Plaintiffs are blaming denied life claims on their employers – for instance, in failing to provide accurate or timely information about conversion issues that allegedly caused the rejection of an application for conversion. As even the Chief Justice recognizes, plan administration mistakes – sooner or later – are inevitable. Given this inevitability, employers – especially small to medium-sized employers – may have cause to reconsider whether the liability risks outweigh the value of providing life insurance benefit plans to their employees.

While there are fiduciary liability risks associated with the administration of any kind of plan, surcharge claims under life insurance plans seem to provide a particularly tempting variety of low-hanging fruit for the ERISA plaintiffs’ bar. First, there is often a substantial – and relatively undisputed – amount of money at issue. Benefits under such plans commonly reach six figures. Claims of a quarter to a half million dollars are not at all uncommon. Second, life insurance policies are often complex documents, particularly when it comes to conversion provisions. Far too often, small to medium-size employers simply are not attuned to the specialized language of insurance. Indeed, in our experience, such employers are often surprised to learn that the full weight of fiduciary responsibility may rest upon their shoulders – and not upon the insurance companies – to ensure employees are properly informed about when and how to exercise conversion rights. See Brenner v. Metropolitan Life Ins. Co., 2015 U.S. Dist. LEXIS 36044 at * 21 (D. Mass. Mar. 3, 2015) (insurer, “in general … would not be considered liable for failing to send an individual notice of conversion or to otherwise advise the [insureds] of their rights”). We suspect the combination of high damages and fertile ground for mistakes creates a tempting target for the ERISA plaintiffs’ bar.

In recent months, more than one client – after facing expensive litigation over alleged conversion administration issues – has expressed to us a concern that group life insurance plans may no longer be worth the risk of litigation. In our view, it is a legitimate question. Sooner or later, mistakes will be made. If any mistake, in the eyes of ancient trust law, is a breach of fiduciary duty (see, e.g., Stiso v. Int’l Steel Grp., 604 Fed. Appx. 494 (6th Cir. 2015) (misleading statements were a breach of fiduciary duty, whether “made intentionally or negligently”)), it seems to follow that a large court award – if not inevitable – is at least a highly probable risk. Perhaps judge-made exceptions will ameliorate the risk over the years to come. But that possibility will be of little comfort to employers watching their litigation budgets in the meantime.

Almost twenty years ago, the Supreme Court noted the “competing congressional purposes” of ERISA, “such as Congress’ desire to offer employees enhanced protection for their benefits, on the one hand, and, on the other, its desire not to create a system that is so complex that administrative costs, or litigation expenses, unduly discourage employers from offering welfare benefit plans in the first place.” Varity Corp. v. Howe, 516 U.S. 489, 497 (1996) (emphasis added). One wonders, will the newly minted ERISA surcharge remedy – while providing significant monetary relief for a few plaintiffs – ultimately result in the complete loss of some kinds of benefit plans – such as life insurance plans – for employees generally? Your comments are welcomed.


IRS Prohibits Future Annuity-to-Lump Sum Conversions for Defined Benefit Plan Retirees Currently Receiving Benefits

On July 9, 2015, the IRS released Notice 2015-49 (the “Notice”) informing taxpayers that the Service and the Treasury intend to amend the required minimum distribution regulations to eliminate the recent defined benefit (“DB”) plan risk management strategy of offering lump sum payments to replace annuity payments to retirees currently receiving joint and survivor, single life, or other life annuity benefit payments. The regulations will provide that DB plans generally will not be permitted to offer retirees an option to replace any annuity currently being paid with a lump sum payment or other accelerated form of distribution. According to the Notice, the amendments to the regulations will be effective as of July 9, 2015, with limited exceptions aimed solely to protect those employers who have already taken sufficient action to announce or establish a limited lump sum payment conversion program for existing in-pay status retirees. The proposed amendments were motivated by growing concerns over the prevalence of these lump sum conversion programs that transfer the investment and life longevity risk from the plan to retirees and whether participants were adequately advised and understood the financial tradeoffs when electing to forego the lifetime annuity for the lump-sum payment.


Over the last few years, since the modest rebound in market conditions and limited increase in interest rates, DB plan sponsors have been exploring affordable options to reduce or transfer risk out of their DB pension plans. One risk management strategy has been to amend their pension plans to offer a limited period (“window”) during which retirees who are currently receiving annuity payments from those plans may elect to convert the annuity into an immediately payable lump sum. This particular, so-called “de-risking” strategy emerged only within the last few years, after the IRS had sanctioned the practice in a couple high-profile private letter rulings (PLRs) that generated significant media attention in light of the notable plan sponsors involved, the number of plan participants affected, and the value of the benefits transferred off the balance sheet. Before these PLRs, the practice of offering retirees an option to convert in-pay status annuities to lump sums was almost nonexistent because of uncertainty over whether these conversion offers to retirees would violate required minimum distribution (RMD) rules under Code Section 401(a)(9). The PLRs eliminated much of the uncertainty by approving these retiree lump-sum conversion offers as falling within a broad RMD regulation exception for post-retirement “increases in benefits.”

IRS Announces Intent To Revise RMD Regulations

Now, with Notice 2015-49, the IRS has announced a change in policy marked by an intent to amend the RMD regulations retroactive to July 9, 2015 that will significantly narrow the RMD regulations to foreclose future use of these retiree lump-sum conversion programs. Accordingly, the Notice explains that the proposed amendments will provide that the types of permitted post-retirement benefit increases described in the RMD regulations will include only those that increase ongoing annuity payments, and do not include those that accelerate annuity payments, as is the case with the conversion of annuity payments to lump sum payments to retirees who are currently receiving benefits.

 Announcement Has No Impact On Other Lump Sum De-Risking Programs

It is important to note that Notice 2015-49 has no impact on the ability to offer DB plan lump sum de-risking programs to either terminated vested (non-retired) participants, or to actively employed participants upon plan termination. The Notice indicates only that the IRS will amend the minimum required distribution regulations so as to prohibit a defined benefit plan from offering immediate lump sum payment conversions (or similarly-styled accelerated payments) to defined benefit plan retirees currently in pay status receiving a form of life contingent annuity.


There are a wide range of corporate financial and plan funding reasons for choosing and designing a lump sum distribution window program. Those factors remain relevant for employers seeking to “de-risk” their pension liabilities by removing liability through payment of lump sums at any time for terminated vested participants, and for active participants only at plan termination. The IRS Notice’s reach is limited; it only forecloses future use of these pension de-risking programs to allow for consensual lump sum cash out of in-pay status retirees.

Reducing Employee Hours to Avoid ACA Obligations to Offer Coverage Violates ERISA § 510, Class Action Suit Alleges

One strategy for minimizing exposure to the employer shared responsibility penalties under the Affordable Care Act (ACA) is to minimize the number of “full-time employees” – that is, the number of employers working 30 or more hours per week on average. Employers can accomplish this through reducing the number of hours certain current and future employees work so that they will not be considered to be “full time” as defined by the ACA, requiring coverage to be offered to a smaller group or none at all. One company’s alleged attempt to do just that is the central claim in a class action lawsuit by an employee alleging the company has interfered with her rights to benefits under ERISA. (Marin v. Dave & Buster’s, Inc., S.D.N.Y., No. 1:15-cv-03608)

The claims are based on Section 510 of ERISA. The relevant section of that law provides:

It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan, this title, section 3001 [29 USC §1201], or the Welfare and Pension Plans Disclosure Act, or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan, this title, or the Welfare and Pension Plans Disclosure Act.

Put simply, the law makes it unlawful for any person to discriminate against a participant or beneficiary for exercising a right granted (or interfering with the attainment of a right) under ERISA or an ERISA employee benefit plan. In this case, the plaintiff is claiming that the employer reduced her hours of work to below that which the ACA would cause her to be a “full-time employee.” In doing so, the defendant avoided the requirement under the ACA to offer her coverage, as well as any the corresponding penalty under Internal Revenue Code Section 4980H if she were a full-time employee. In other words, the essence of the plaintiff’s claim is that by reducing her hours of employment, the employer interfered with her attainment of a right under the plan to be eligible to be offered coverage under the medical plan.

So, plan documents say that if you work 30 or more hours per week on average you will be offered coverage, and that by lowering your hours per week, triggering a loss of eligibility for coverage, the employer has impermissibly interfered with your right to eligibility for benefits. Could this be right? Employers have historically modified their workforces in this manner – trimming work hours and consequently eligibility for welfare benefits – as business needs dictated. COBRA, for example, recognizes this ebb and flow of the workplace providing protection for workers who experience a “qualifying event” when they have a reduction in their hours of employment that leads to a loss of coverage under a group health plan. If successful, one effect of plaintiff’s argument may be that once an employer hires an employee in an eligible classification under an ERISA plan, that employee has a right under ERISA and the plan to be eligible, and any change by the employer in that classification, or what causes the employee to be in that classification, is an impermissible interference with that right.

ERISA 510 claims, however, are not simple to establish and win. For example, a plaintiff generally must show that the employer acted with a specific intent to violate ERISA §510 in order to interfere with the plaintiff’s attaining a right under the plan. This intent can be difficult to prove and, absent direct evidence to the contrary, the defendant may be able to show that its motivation for reducing hours of certain employees was not to interfere with any rights the employees may have had under the medical plan, but was for legitimate, non-discriminatory reasons. In addition, plaintiffs have generally had a difficult time succeeding under ERISA § 510 in regard to welfare benefit plans because of the broad power employers have to amend or terminate benefits under those plans, which typically do not vest like benefits do under retirement plans.

We believe this is the first case in which a court will address this issue and an important case for employers to watch, especially those employers that have taken or are thinking about taking similar steps to address their employer shared responsibility obligations under the ACA.

IRS Makes it Riskier to Maintain Individually-Designed Retirement Plans

The Internal Revenue Service just made it riskier to maintain a tax-qualified individually-designed retirement plan by eliminating the five-year determination letter remedial amendment cycle for these plans, effective January 1, 2017.

Although determination letters are not required for retirement plans to maintain tax-qualified status under the Internal Revenue Code, virtually all employers sponsoring individually-designed retirement plans have long relied on the Internal Revenue Service’s favorable determinations that their plans meet the Code’s and the IRS’ vexingly complex – and ever-changing – technical document requirements. A plan risks losing tax-qualified status (and all the favorable tax treatment that goes along with that status) if the plan document is not timely amended to reflect frequent, sometimes obscure, Code and regulatory changes. In light of that, the IRS has long offered a program for reviewing and approving those plan documents – often conditioning its favorable determination letter on the employer’s adoption of one or more corrective technical amendments. The current program, established in 2005, has provided for a five-year remedial amendment cycle which effectively extended the period of time during which a plan could be amended under certain circumstances to retroactively comply with the ever-changing qualification requirements. Under this determination letter program, employers have filed for determination letters for their individually-designed plans every five years and had an opportunity to fix plan document issues raised by the IRS on review.

The IRS announced elimination of the five-year determination letter remedial amendment cycle in Announcement 2015-19 and said that determination letters for individually-designed plans will be limited to new plans and terminating plans. A transition rule applies for certain plans currently in the five-year cycle (i.e., employers with “Cycle E” or “Cycle A” plans may still file for determination letters) but, effective July 21, 2015, the IRS will not accept off-cycle applications except for new plans and terminating plans.

The IRS said that plan sponsors will be permitted to submit determination letter applications “in certain other limited circumstances that will be determined by Treasury and the IRS” but did not give a hint as to what those circumstances might be. The IRS intends to periodically request comments from the public on what those circumstances ought to be and to then identify those circumstances in future guidance.

In addition, the IRS said that it is “considering ways to make it easier for plan sponsors to comply with the qualified plan document requirements” which might include providing model amendments, not requiring amendments for irrelevant technical changes, or permitting more liberal incorporation by reference.

Comments on the issues raised in the Announcement – e.g., what changes should be made to the standard remedial amendment period rule, what considerations ought to be taken into account regarding interim amendments, and what assistance should be given to plan sponsors wishing to convert to pre-approved plans – may be submitted to the IRS until October 1, 2015. We anticipate submitting comments on behalf of clients who want to continue to sponsor individually-designed plans rather than resigning themselves to the limitations of pre-approved plans.


Frequently a plan sponsor’s operational failure to follow the terms of its 401(k) or other qualified plan can be corrected under the IRS’s Employee Plans Compliance Resolution System (“EPCRS”) (described at with a retroactive amendment instead of a sometimes expensive financial correction. This possibility should not be surprising, given that the maintenance of qualified plans depends heavily on IRS rules and procedures that permit plan sponsors to keep plan documents in compliance with all legally required written provisions by retroactively adopting required restatements and amendments. Apart from what the plan document states, however, the IRS also considers any uncorrected failure to follow the terms of the plan to constitute a qualification defect that threatens the current income exemption and other tax benefits of the plan.

Under EPCRS, a few operational failures, such as making hardship distributions or plan loans from a plan that has no plan terms allowing such distributions or loans, may be self-corrected by the plan sponsor with a retroactive amendment. In general, however, a retroactive amendment fix will require the employer or other sponsor to submit an application to the IRS under the Voluntary Correction Program (“VCP”) to get IRS approval.

As a threshold requirement, the way the plan was actually operated must have been permissible under the law and regulations in order to obtain approval for a retroactive amendment conforming the plan terms to that operation. For example, a retroactive amendment can be considered if a 401(k) plan actually allowed deferrals on bonuses even though the plan’s definition of compensation did not include bonuses, because the plan could have so provided under the law. If the plan was a prototype or volume submitter, then the amendment must also be permitted under the vendor’s pre-approved document.

IRS standards for approving a retroactive amendment fix are not formally set out anywhere. In practice, however, the IRS normally needs to see some convincing documentary evidence indicating that the way the plan was actually operated was the way the sponsor, participants and any relevant TPAs or vendors assumed the plan was written. A summary plan description (“SPD”) that provides for the particular event or practice that occurred is usually considered the best evidence. However, other good evidence might be emails, internal memoranda or correspondence that reflect the way some or all parties thought the plan actually read.

A retroactive amendment is often appropriate to correct a failure to follow plan terms that occurs after a sponsor restates its plan on the pre-approved form of a new vendor as part of a change in plan investments and/or administrative services. In such cases, even though it is clear from the record that no plan design change was intended in conjunction with the vendor change, the plan is sometimes incorrectly mapped over to the new document. The IRS frequently approves a retroactive amendment in such cases as long as the amendment is permissible under the vendor’s document.

New Regulatory Guidance Issued on Plan Benefit Suspensions and Plan Partitions for Multiemployer Pension Plans at Risk of Insolvency

As part of on-going efforts to prevent the collapse of financially troubled multiemployer pension plans, the Pension Benefit Guaranty Corporation (“PBGC”) and Internal Revenue Service (“IRS”) have issued regulatory guidance under the Multiemployer Pension Reform Act of 2014 (“MPRA”). Together, the Treasury Proposed and Temporary Regulations, a new Revenue Ruling, and PBGC interim rule prescribe how multiemployer pension plans in critical and declining status can apply for plan partitions and plan benefit suspensions.

Plan Partitions

A partition order provides for the transfer of an original multiemployer pension plan’s liabilities to a successor plan backed by the PBGC. The amount transferred from the original plan is the minimum amount necessary to keep the original plan solvent. Prior to the MPRA, partitions were not available to multiemployer plans unless a participating employer member was involved in bankruptcy. The PBGC’s authority to partition plans has been expanded under the MPRA and implemented under the interim final rule, which sets forth partition application and notice requirements under ERISA § 4233 (29 USC § 1413).   Partitions may now be sought by “eligible multiemployer pension plans.” Under ERISA, a plan is an “eligible multiemployer plan” if:

  • The plan is in critical and declining status (as defined under ERISA, The plan sponsor has demonstrated all reasonable measures have been taken to avoid insolvency (including “maximum benefit suspensions”);
  • The PBGC has determined a partition is necessary for the plan to remain solvent and will reduce the PBGC’s expected long-term loss with regards to the plan;
  • The PBGC can meet its existing financial obligations to assisting other plans (as certified to Congress); and,
  • Costs for partition are paid entirely from PBGC’s fund for basic benefits guaranteed for multiemployer plans.

The PBGC will not recognize an application as complete until all required information is provided, which includes plan information, partition information, financial and actuarial information about the plan (including its most recent actuarial report and certification of critical and declining status), plan participant census data used for actuarial and financial projections, and any additional information related to the plan’s request for PBGC assistance. Once an application is deemed complete, the PBGC provides notice to the plan sponsor and has 270 days to review. The plan sponsor must provide notice to interested parties within 30 days of receiving notice that a complete partition application has been accepted.

Since a partition applicant must show it has taken “all reasonable measures”—including benefit suspensions—to avoid insolvency, the PBGC expects that plans seeking partitions will also apply for proposed suspension of benefits. Therefore, the PBGC strongly recommends that plan sponsors file concurrent applications for partition and suspension of benefits. If a plan seeks both a suspension of benefits and a plan partition, the partition must occur first.

Suspension of Benefits

Multiemployer pension plans in “critical and declining status” may seek approval for proposed benefit suspensions in certain situations under the Treasury’s Temporary Regulations, Proposed Regulations, and the new Revenue Procedure 2015-24. Plan proposals for suspension of benefits must satisfy certain statutory requirements (i.e., actuarial certification and plan-sponsor determinations). Additionally, certain limitations and exemptions apply; for example, benefits may not be suspended for certain categories of individuals based upon age or for benefits based upon disability. Applications for benefit suspensions must be certified by an authorized trustee on behalf of the board of trustees, and each application with supporting material is to be published for public disclosure on the Treasure Department website.

Public Comment

Partition application requirements issued by the PBGC apply to applications received as of June 19, 2015. The PBGC is seeking comments on its interim final rule. Comments may be submitted on or before August 18, 2015. Although the IRS has begun accepting applications for proposals of suspension of benefits, the Treasury will not approve proposal applications until regulations are finalized. Public comment on the Treasury’s proposed regulations is set for September 10, 2015.

What the Supreme Court’s Decision on Affordable Care Act Subsidies Means for Employers

The Internal Revenue Service was authorized to issue regulations extending health insurance subsidies to coverage purchased through health insurance exchanges run by the federal government or a state, the U.S. Supreme Court has ruled in a 6-3 decision. King v. Burwell, No. 14-114 (June 25, 2015).

This means employers cannot avoid employer shared responsibility penalties under Internal Revenue Code section 4980H (“Code § 4980H”) with respect to an employee solely because the employee obtained subsidized exchange coverage in a state that has a health insurance exchange set up by the federal government instead of by the state. It also means that President Barack Obama’s 2010 health care reform law will not be unraveled by the Supreme Court’s decision in this case. The law’s requirements applicable to employers and group health plans continue to apply without change.

What Was the Case About?

Internal Revenue Code section 36B (“Code § 36B”), created by the Patient Protection and Affordable Care Act of 2010 (“ACA”), provides that an individual who buys health insurance “through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act” (emphasis added) generally is entitled to subsidies unless the individual’s income is too high (or too low, in which case, the individual is entitled to Medicaid or another subsidized health program). Thus, the words of the statute conditioned one’s right to Code § 36B subsidies on one’s purchase of ACA § 1311 state-run exchange coverage.

Since 2014, an individual who fails to maintain health insurance for any month generally is subject to a tax penalty under Code § 5000A unless the individual can show that no affordable coverage was available. The law defines affordability for this purpose in such a way that, without a subsidy, health insurance would be unaffordable for most people.

The plaintiffs in King, residents of one of the 34 states that did not establish a health insurance exchange under ACA § 1311 (hereinafter called a “1311 exchange”), argued that if subsidies were not available to them, no health insurance coverage would be affordable for them and they would not be required to pay a penalty for failing to maintain health insurance. The IRS, however, made subsidized exchange coverage available to them just as if they resided in a state with a 1311 exchange.

It is ACA § 1311 that established the funding and other incentives for “the States” to each establish a state-run exchange through which residents of the state could buy health insurance. Section 1311 also provides that the Secretary of the Treasury will appropriate funds to “make available to each State” and that the “State shall use amounts awarded … for activities (including planning activities) related to establishing an American Health Benefit Exchange.” Section 1311 describes an “American Health Benefit Exchange” as follows:

Each State shall, not later than January 1, 2014, establish an American Health Benefit Exchange (referred to in this title as an “Exchange”) for the State that (A) facilitates the purchase of qualified health plans; (B) provides for the establishment of a Small Business Health Options Program … and (C) meets [specific requirements enumerated].

Section 1311 further provides for the Secretary of the Treasury to impose certain administrative and operational requirements on each state in order for the state to receive funding for its 1311 exchange. An entirely separate section of the ACA provides for the establishment of a federally-run exchange for individuals to buy health insurance if they reside in a state that does not establish a 1311 exchange. That section – ACA § 1321 – also withholds funding from a state that has failed to establish a 1311 exchange.

Notwithstanding the statutory language Congress used in the ACA (i.e., literally conditioning an individual’s eligibility subsidized exchange coverage on the purchase of health insurance through a state’s 1311 exchange), the Supreme Court determined that the language is ambiguous. Having found that the text is ambiguous, the Court stated that it must determine what Congress really meant by considering the language in context and with a view to the placement of the words in the overall statutory scheme.

When viewed in this context, the Court concluded that the plain language could not be what Congress actually meant, as such interpretation would destabilize the individual insurance market in those states with a federal exchange and likely create the “death spirals” the ACA was designed to avoid. The Court reasoned that Congress could not have intended to delegate to the IRS the authority to determine whether subsidies would be available only on 1311 exchanges because the issue is of such deep economic and political significance. The Court further noted that “had Congress wished to assign that question to an agency, it surely would have done so expressly” and “[i]t is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort.”

What Now?

“Move along – nothing to see here, folks!” Regardless of whether one agrees with the Supreme Court’s King decision, the decision obviates any practical purpose for further discussion about whether the IRS had authority to extend taxpayer subsidies to individuals who buy health insurance coverage on federal exchanges.

Move on to the ACA’s next major compliance requirements for employers: Employers with fifty or more fulltime and fulltime equivalent employees need to ensure that they are tracking hours of service and are otherwise prepared to meet the large employer reporting requirements for 2015 (due in early 2016) ). (For details, see our article, Health Care Reform: Employers Should Prepare Now for 2015 to Avoid Penalties.) Employers of any size that sponsor self-funded group health plans need to ensure that they are prepared to meet the health plan reporting requirements for 2015 (also due in early 2016). All employers that sponsor group health plans also should be considering whether and to what extent the so-called Cadillac tax could apply beginning in 2018.

If you have any questions about this or other workplace developments, please contact the Jackson Lewis attorney with whom you regularly work.

A Look Ahead to The Supreme Court’s 2015-16 Term

As the Supreme Court winds down its 2014-15 term, the Benefits Law Advisor looks ahead to the ERISA cases and issues the Supreme Court may confront in its next terms. The Supreme Court’s recent ERISA jurisprudence has touched on issues such as remedies (CIGNA Corp. v. Amara and US Airways v. McCutchen), retiree entitlement to healthcare benefits (M&G Polymers v. Tackett), time-based defenses to ERISA claims (Tibble v. Edison Int’l and Heimeshoff v. Hartford Life & Accident Ins.), and the now-defunct “presumption of prudence” that lower courts had applied to ERISA plans’ decision to offer employer stock as an investment option (Fifth Third Bank v. Dudenhoeffer).

As of this writing, the Court has only granted certiorari in one ERISA case for next year’s term, Montanile v. Board of Trustees, No. 14-723, cert. granted Mar. 30, 2015. The Montanile case arose from the familiar situation where an ERISA plan seeks to recover medical benefits paid to an injured participant, after that participant receives a tort recovery for those injuries. Both lower courts granted summary judgment to the plan, with the additional proviso that the plan could impose an equitable lien (under the terms of the plan) on Montanile’s settlement proceeds, even if those monies have been dissipated.

In granting Montanile’s petition, the Court interprets, once again, the term “equitable relief” in ERISA §502(a)(3) – an issue the Court has repeatedly revisited. In particular, the Montanile case gives the Court a chance to address an open question from its equitable-remedies jurisprudence: is there an “equitable tracing” requirement that obligates ERISA plaintiffs to identify a specific sum of money that may be the subject of an equitable recovery?

The existence of an equitable-tracing requirement has been hotly debated since at least 2003, when the Court’s decision in Great West Life & Annuity v. Knudson firmly established that equitable relief under ERISA was limited to those forms of relief traditionally available in the courts of equity. Since Knudson, many ERISA defendants have successfully argued that equitable relief was only available where plaintiff could identify a particular asset or sum of money that could be made subject to a restitutionary recovery, constructive trust or equitable lien. As a result, the Court has struggled (in this author’s view) with how to apply traditional “tracing” rules, because the Court’s answer could have far-reaching implications both for plans seeking reimbursement, and for participants invoking ERISA §502(a)(3) for redress in fiduciary-breach claims or other violations of ERISA.

It seems that the Court is ready to answer that question in Montanile, judging from the question presented in the Court’s writ. Another similar case, Elem v. AirTran Airways, No. 14-1061 (cert. pet. filed Feb. 27, 2015). is pending before the Court on the participant’s petition.

Beyond Montanile, the Court has several other writ petitions pending, including three cases where the Court has invited the Solicitor of Labor to weigh in with an amicus brief. These cases include:

  • Smith v. Aegon Cos. Pension Plan – In this case, the lower courts dismissed benefits claims on grounds of improper venue. In doing so, the lower courts held that an exclusive-venue provision in the plan required the participant to bring his benefits suit in the specified venue. The Department of Labor (DOL) had submitted an amicus brief to the Sixth Circuit, arguing that venue-selection provisions ran afoul of ERISA’s goal of providing participants with ready access to the courts. The Sixth Circuit, however, rejected DOL’s position and enforced the plan’s venue provision. A Supreme Court decision on this issue would likely be significant, because many plan sponsors are using the plan document to “hard wire” certain defenses to benefits claims – for example, the Court’s recent Heimeshoff decision approved a limitations period established by the plan.
  • Gobeille v. Liberty Mut. Ins. Co. – This case presents a pre-emption question – specifically, whether ERISA pre-empts a Vermont law requiring healthcare payors (including ERISA plans) to submit certain claims data to the state. A split panel of the Second Circuit held the Vermont law was pre-empted because it imposed additional reporting requirements on those already imposed by ERISA. At the Court’s invitation, DOL filed an amicus brief opining that ERISA does not pre-empt the Vermont statute because it applies to non-ERISA entities, as well, and does not impose significant reporting burdens. The DOL brief added, however, that the Court’s review was not currently warranted, and suggested that “further percolation” of the issue in the appellate courts would be beneficial. Given that the Court’s last decision on ERISA pre-emption was over 10 years ago, the Court may nevertheless be signaling its readiness to take the case, and to issue further guidance on ERISA’s pre-emptive reach.
  • RJR Pension Inv. Comm. v. Tatum – The Tatum case arose from a dispute over plan fiduciaries’ decision to divert the plan of company stock, at a time when the stock was distressed. After the company stock recovered dramatically, participants asserted ERISA claims that plan fiduciaries had acted imprudently in selling the stock at a time when the price was down significantly. The Fourth Circuit held, among other things, that (1) the burden of proving loss causation shifted to plan fiduciaries, upon a showing that the fiduciaries had breached their duty of prudent investment; and (2) plan fiduciaries must show a hypothetical prudent fiduciary “would have” (as opposed to “could have”) made the same investment decision, where there was no evidence that the plan’s fiduciaries had undertaken robust deliberations before divesting the plan’s holdings in company stock. The Court invited the DOL to brief both issues. If the Court takes the case, its decision could be significant. On the former issue, a decision from the Court would resolve diverging lower-court decisions on whether the plaintiff bears the ultimate burden of proof (including loss causation), or whether the burden-shifting approach of trust law – requiring a trustee, upon a showing of a breach of duty, to demonstrate that the breach did not cause the loss – is more appropriate for ERISA cases. On the latter issue, a decision from the Court could provide much-needed guidance on the proper scope of judicial review of fiduciary decision-making.

Although the Court has taken no action yet on the petition, it may be worth watching to see whether the Court takes up the case of UnitedHealthcare of Arizona, Inc. v. Spinedex Physical Therapy USA, Inc., No. 14-1286 (cert. pet. filed April 24, 2015). There, the Ninth Circuit held that a claims administrator is a proper party defendant in a medical benefits claim, even though it otherwise had no obligation as the benefits payer. Because ERISA §502(a)(1)(B) only authorizes suit for “benefits due … under the terms of his plan,” the Ninth Circuit’s reading of the statute – which purports to make claims administrators liable for benefits in a manner not contemplated by “the terms of the plan” – clearly seems overbroad. If left unaddressed, the Spinedex decision could ultimately prove counter-productive, in that it will inevitably raise costs for service providers, which in turn, will be passed along to the plans, and ultimately to the participants in the form of higher premiums, larger deductibles, or less-generous coverage.

The Supreme Court has demonstrated some enthusiasm for ERISA in recent years. The Montanile case represents a significant beginning to the Court’s ERISA work for the next term. Given the cases and issues before it, however, the odds are that the Court will consider more ERISA cases in the next twelve months. The Benefits Law Advisor will continue to monitor the Court’s docket, and report on significant developments.