Health Plan Sponsors – Have You Updated Your Vendor Agreements for Substance Use Disorder (SUD) Confidentiality Regulations?

Employers that sponsor group health plans (medical, dental, vision, HFSA) are used to negotiating detailed administrative services agreements with vendors that provide services to those plans. Many also are familiar with “business associate agreements” required under HIPAA that must be in place with certain vendors, such as third-party claims administrators (TPAs), wellness program vendors, benefits brokers, etc. However, many plan sponsors may not be aware of a contract requirement with respect to the confidentiality of patient records relating to a substance use disorder (SUD).  If applicable, these contract provisions must be in place by February 2, 2020.

Federal regulations (42 C.F.R. Part 2) provide specific protections for SUD patient records. In general, these are records held by certain SUD treatment programs, those that receive federal funding. The arm of the Department of Health and Human Services that regulates SUD programs, Substance Abuse and Mental Health Services Administration (“SAMHSA”), issued final regulations in 2018 concerning the confidentiality of SUD patient records. In a number of respects, these rules strengthen protections already in place under the HIPAA privacy and security rules.

How do the new SUD regulations affect contracts with health plan vendors?

Under Section 2.33 of the regulations, when a patient consents to a disclosure of their SUD patient records for payment and/or health care operations activities, the records may wind up with a “lawful holder” of those records (a plan sponsor, for example), and then on to the lawful holder’s third-party vendors to carry out the payment and/or health care operations on behalf of such lawful holder.  When this happens, lawful holders must have in place a written contract with the third party obligating the third party to be bound by 42 C.F.R. Part 2.

The contract should require the third-party recipients of these records to implement appropriate safeguards to prevent unauthorized uses and disclosures, and to report any unauthorized uses, disclosures, or breaches. The contract also should prohibit the third party from re-disclosing the records unless the disclosure is to a contracted agent of the third party that is helping the third party provide services described in the contract, and any further disclosures are back to the third party or the lawful holder (plan sponsor).

In addition to the contract requirement, lawful holders must provide to such third parties a statement in connection with the disclosure, which may be as simple as “42 CFR Part 2 prohibits unauthorized disclosure of these records.”

What to do next?

Plan sponsors receiving SUD patient records in connection with their group health plan and sharing that information with a third-party service provider, or where the service provider is receiving such information on behalf of the plan sponsor, should review the provisions of their services agreements and, if applicable, business associate agreements. For plan sponsors not currently receiving SUD patient records, it may make sense to update these third-party contracts in the event such records are received. While updating these agreements, it may also be a good time to revisit other provisions to ensure strong contractual protections such as adding specificity on response to data incident, indemnification, limitation of liability, and other contractual protections.

Northrop Grumman Agrees to Settle 401(k) Excessive Fee Suit

Northrop Grumman has agreed to pay $12,375,000 to settle a class action brought under the Employee Retirement Income Security Act (“ERISA”) by participants in its 401(k) plan. The parties reached the initial terms of this settlement last year minutes before the start of the trial.

The plaintiffs alleged in their complaint that the company’s administration of the 401(k) plan harmed the plan’s participants by using a costly management strategy for a risky investment fund and by using plan assets to overpay for administrative services.

Please find the rest of this article on our California Workplace Law Blog.

2nd Circuit Pension Liability Ruling Is A Big Win For Employers

As published by Law360 (January 13, 2020, 5:43 PM EST)

Following oral arguments that were held in February 2018, in a long-anticipated decision in the National Retirement Fund v. Metz Culinary Management Inc., the U.S. Court of Appeals for the Second Circuit held that a multiemployer pension fund’s use of a lower interest rate that was adopted after the statutory withdrawal liability measurement date violated the Employee Retirement Income Security Act. The decision will greatly benefit certain employers who (as Metz did) withdrew from the National Retirement Fund, or NRF, during 2014 and may also impact other employers and funds.

Under the withdrawal liability rules set forth in ERISA as amended by the Multiemployer Pension Plan Amendments Act, or MPPAA, an employer who withdraws from a multiemployer pension fund is responsible for its allocable share of the fund’s unfunded vested benefits. At issue in Metz was the interest rate that was used to calculate the fund’s unfunded vested benefits and therefore Metz’s withdrawal liability.

According to court documents, Metz withdrew from the NRF in 2014. Under the MPPAA, withdrawal liability is calculated as of the last day of the plan year preceding the plan year of the withdrawal. Since the NRF operates on a calendar-year basis, the applicable measurement date for calculating Metz’s (and all other employers who withdrew from the NRF in 2014) withdrawal liability was Dec. 31, 2013.

In October 2013, the NRF replaced Buck Consultants LLC, who had been the NRF’s actuary for many years. Buck had used an interest rate assumption of 7.25% for withdrawal liability purposes for many years prior to its ouster. In June 2014, the NRF’s new actuary announced to the NRF trustees that the interest rate assumption was being changed from the prior 7.25% rate to a floating rate based on interest rates published by the Pension Benefit Guaranty Corp., or PBGC.

As of Dec. 31, 2013, that PBGC rate was 3%. Since future liabilities are discounted back to present value to calculate unfunded vested benefits, the interest rate assumption bears an inverse relationship to withdrawal liability; that is, a lower interest rate will result in higher withdrawal liability, and vice versa. Accordingly, the interest rate assumption change had a dramatic effect on Metz’s (and others’) withdrawal liability, increasing it from approximately $254,000 (at Buck’s prior 7.25% rate) to nearly $1 million (using the revised 3% rate).

The NRF issued a demand for the higher withdrawal liability amount, and Metz challenged NRF’s demand under the MPPAA’s mandatory arbitration regime. Metz argued in arbitration that the retroactive application of the lower interest rate assumption (adopted in 2014 and applied as of the Dec. 31, 2013, measurement date) violated the MPPAA.

The arbitrator decided in favor of Metz, finding that “there is no dispute that [the new actuary] did not adopt the PBGC rates as the interest rate assumption for withdrawal liability purposes until some time in 2014” and that the NRF’s decision to apply this rate “retroactively so as to increase the withdrawal liability assessed to Metz and other employers who withdrew from the Fund after December 31, 2013, was violative of MPPAA.”

The NRF appealed the arbitral holding to the U.S. District Court for the Southern District of New York and the district court reversed, vacating the arbitral award. The district court held that ERISA does not require actuaries to calculate withdrawal liability based on interest rate assumptions used prior to the statutory measurement date.

The district court further held that the withdrawal liability interest rate assumption must be affirmatively decided each year and that (contrary to the arbitrator’s finding) the rate in effect during the prior year does not remain in effect unless changed, holding that MPPAA “does not allow stale assumptions from the preceding plan year to roll over automatically.”

On appeal, after noting that the parties had used “copious amounts of ink in argument” over the applicable standard of review and other minutia, the Second Circuit succinctly stated the legal issue as “whether, under the MPPAA, a fund may select an interest rate assumption after the Measurement Date and retroactively apply that assumption to withdrawal liability calculations.”

The court first noted that the MPPAA (specifically, ERISA Section 4213) is silent as to whether the interest rate assumptions must be affirmatively elected, or whether the rate in effect during a given year automatically remains in effect for the next year absent an affirmative change.

As noted, the district court had held that Section 4213 does not allow assumptions from the prior year to roll over. The Second Circuit expressly rejected this finding, concluding that “there is no statutory or caselaw support for that proposition, and we do not agree with it.”

The Second Circuit then turned to Section 4214 of ERISA, which requires multiemployer plans to provide notice to employers prior to implementing any withdrawal liability plan rule or amendment. Citing legislative history, the Second Circuit concluded that Section 4214 was intended to protect employers from the retroactive application of rules relating to the calculation of withdrawal liability.

The Second Circuit found that the retroactive selection of interest rate assumptions for withdrawal liability purposes (the position advocated by the district court) was inconsistent with Congress’ stated intent, concluding that withdrawal liability interest rate assumptions do not “remain open forever and subject to retroactive changes in later years.”

In reaching its decision, the Second Circuit correctly recognized the “significant opportunity for manipulation and bias” that would result if funds were allowed unfettered discretion in retroactively selecting interest rate assumptions after the measurement date. The court feared that under such a rule:
Nothing would prevent trustees from attempting to pressure actuaries to assess greater withdrawal liability on recently withdrawn employers than would have been the case if the prior assumptions and methods actually in place on the Measurement Date were used.

The Second Circuit then noted that this “opportunity for manipulation and bias [was] particularly great where [as was the case here] the funds use different interest rate assumptions for withdrawal liability than those used for other purposes such as minimum funding.” The Second Circuit concluded that the retroactive application of the interest rate change represented the type of situation that could be attacked as presumptively unreasonable under the U.S. Supreme Court’s decision in Concrete Pipe and Products of California Inc. v. Construction Laborers Pension Trust for Southern California.

In an area where the law is extremely skewed in favor of funds, Metz represents a significant win for employers. Certainly, the numerous employers who withdrew from the NRF in 2014 and are currently contesting their withdrawal liability demands in arbitration will benefit greatly from the decision, since their withdrawal liability should (as the Second Circuit ordered) be recalculated using the higher 7.25% rate that was in effect on the Dec. 31, 2013, measurement date.

While other employers who withdrew from the NRF in 2014 and did not demand arbitration will likely not be benefit in the same way (since withdrawal liability becomes fixed and payable absent an employer timely demanding arbitration), the case serves as a good example of the need for experienced counsel in this area. Metz could also impact other multiemployer plans and employers who have withdrawn from such plans, since NRF is likely not the only plan to have changed the withdrawal liability interest rate assumption in this manner.


Redesigned 2020 IRS Form W-4

The IRS has substantially redesigned the Form W-4 to be used beginning in 2020.

New employees first paid wages during 2020 must use the new redesigned Form W-4.  In addition, employees who worked for an employer before 2020 but are rehired during 2020 also must use the redesigned 2020 Form W-4.

Continuing employees who provided a Form W-4 before 2020 do not have to furnish the new Form W-4.  However, if a continuing employee who wants to adjust his/her withholding must use the redesigned Form.

IRS FAQs for Employers

The IRS has issued the following FAQs for employers about the redesigned 2020 Form W-4:

  • Are all employees required to furnish a new Form W-4?

No, employees who have furnished Form W-4 in any year before 2020 do not have to furnish a new form merely because of the redesign. Employers will continue to compute withholding based on the information from the employee’s most recently furnished Form W-4.

  • Are new employees first paid after 2019 required to use the redesigned form?

Yes, all new employees first paid after 2019 must use the redesigned form. Similarly, any other employee who wishes to adjust their withholding must use the redesigned form.

  • How do I treat new employees first paid after 2019 who do not furnish a Form W-4?

New employees first paid after 2019 who fail to furnish a Form W-4 will be treated as a single filer with no other adjustments.  This means that a single filer’s standard deduction with no other entries will be taken into account in determining withholding.  This treatment also generally applies to employees who previously worked for you who were rehired in 2020 and did not furnish a new Form W-4.

  • What about employees paid before 2020 who want to adjust withholding from their pay dated January 1, 2020, or later?

Employees must use the redesigned form.

  • May I ask all of my employees paid before 2020 to furnish new Forms W-4 using the redesigned version of the form?

Yes, you may ask, but as part of the request you should explain:

 »   they do not have to furnish a new Form W-4, and

 »   if they do not furnish a new Form W-4, withholding will continue based on a valid form previously furnished.

For those employees who furnished forms before 2020 and who do not furnish a new one after 2019, you must continue to withhold based on the forms previously furnished.  You may not treat employees as failing to furnish Forms W-4 if they don’t furnish a new Form W-4. Note that special rules apply to Forms W-4 claiming exemption from withholding.

  • Will there still be an adjustment for nonresident aliens?

Yes, the IRS will provide instructions in the 2020 Publication 15-T, Federal Income Tax Withholding Methods, on the additional amounts that should be added to wages to determine withholding for nonresident aliens. And nonresident alien employees should continue to follow the special instructions in Notice 1392 when completing their Forms W-4.

  • When can we start using the new 2020 Form W-4?

The new 2020 Form W-4 can be used with respect to wages to be paid in 2020.

Additional Information

This Publication includes the income tax withholding tables to be used by automated and manual payroll systems beginning in 2020 regarding both (i) Forms W-4 from 2019 or earlier AND (ii) Forms W-4 from 2020 or later.

  • IRS FAQs on the 2020 Form W-4

The SECURE Act, at Last

On December 19, 2019, the Senate passed, as part of the Further Consolidated Appropriations Act 2020 (Public Law No. 116-94), the Setting Every Community Up for Retirement Enhancement (SECURE) Act (Division O pg. H.R. 1865-604).  It is touted as the most significant retirement act since the Pension Protection Act of 2006.  President Trump signed the bill December 20, 2019.

The SECURE Act implements several key changes to the retirement landscape, including, but not limited to:

  • Tax credits for employers starting employer-sponsored retirement plans and incentives for auto-enrolling employees;
  • Simplification of the rules and notice requirements related to qualified nonelective contributions in safe harbor 401(k) plans;
  • Allows unrelated businesses to join together to create multi-employer 401(k) plans (also called pooled employer plans), reducing the costs and administrative duties that each individual employer would otherwise bear alone;
  • Allows retirees to delay taking required minimum distributions until age 72 (up from age 70 ½);
  • Requires that employers include long-term part-time workers as participants in defined-contribution plans (eligible part-time employees must work 500 hours per year for three consecutive years and be age 21 years or older);
  • Requires that plan sponsors annually disclose on 401(k) statements an estimate of the monthly payments the participants would receive if their total account balance were used to purchase an annuity for the participant and the participant’s surviving spouse;
  • Imposes a 10-year distribution limit for most non-spouse beneficiaries to spend down inherited IRAs and defined contribution plans;
  • Increases IRS penalties for failing to submit or untimely submitting forms and notices; and
  • Provides penalty-free withdrawals from retirement plans of up to $5,000 within a year of a birth or adoption.

Importantly, the SECURE Act provides for an extended remedial amendment period. Although plans must comply with the SECURE Act’s provisions in operation starting with the effective dates, the “plan documents can be updated to incorporate the required plan provisions by a later date—the last day of the first plan year beginning on or after Jan. 1, 2022, unless the Secretary of Treasury provides an extension.”

The SECURE Act would implement numerous additional changes and alterations to the retirement landscape.  Many employer-sponsored 401(k) plans will require an update or amendment within the required deadlines.  For more information on the SECURE Act, please contact a Jackson Lewis attorney.

Employers in Union-Related Group Health Plans Must Still Comply with ACA Reporting Requirements

Employers who provide health benefits to their union workforce through a multiemployer group health plan must satisfy all the Affordable Care Act (ACA) reporting requirements regarding their union employees… More

Building and Construction Industry Exemption from Withdrawal Liability

Since its passage late in 1980, the Multiemployer Pension Plan Amendments Act (MPPAA) has proven to be a hindrance to the profitable operations of employers that contribute to multiemployer pension funds by imposing a surprise, and often expensive, obligation (the “withdrawal liability”) on employers across many industries. However, the construction industry is one of a few industries in which the impact of withdrawal liability upon employers has been eliminated… More

When to Amend: Deadline for Compliance with Hardship Distribution Regulations Clarified

The Bipartisan Budget Act of 2018 and the Tax Cuts and Jobs Act of 2017 liberalized the hardship distribution rules applicable to 401(k) and 403(b) plans. On September 23, 2019, the IRS issued final regulations — which we discussed in a previous blog — implementing the new hardship distribution rules. While some of the new rules were discretionary, there are several mandatory provisions that will take effect on January 1, 2020, including:

• Plans are prohibited from suspending employee deferral contributions following hardship distributions that occur on or after January 1, 2020; and

• Employees must represent in writing (including electronic representations) that they have insufficient cash or other liquid assets reasonably available to satisfy the need giving rise to hardship distribution requests that are made on or after January 1, 2020.

On December 12, 2019, the IRS issued Rev. Proc. 2020-9, clarifying when 401(k) plans must be amended to comply with the elimination of deferral suspension and written representation rules described above: December 31, 2021 for both individually designed and pre-approved 401(k) plans, which aligns with the deadline the IRS established for non-governmental 403(b) plans in Rev. Proc. 2019-39.

Key Takeaway: Although plan documents do not need to be amended immediately, plan sponsors should ensure that they are in operational compliance with all mandatory hardship distribution rules that become effective on January 1, 2020.

PBGC Approves Revisions to AAA’s Withdrawal Liability Arbitration Rules; Employer Fees Reduced

For years, steep arbitration fees have made many employers think twice about contesting a questionable withdrawal liability determination. The Pension Benefit Guaranty Corporation’s (PBGC) approval of a lower fee schedule may ease that hurdle.

ERISA, as amended by the Multiemployer Pension Plan Amendment Act of 1980 (MPPAA), requires all disputes between an employer and a multiemployer pension plan concerning a withdrawal liability determination to be resolved by arbitration. Arbitration is conducted under arbitration procedures approved by the PBGC or, absent such procedures, under regulations promulgated by the PBGC.

In 1981, the American Arbitration Association (AAA) promulgated rules known as the Multiemployer Pension Plan Arbitration Rules for Withdrawal Liability Disputes. These rules were approved by the PBGC in 1985 and subsequently amended (and approved by PBGC) in 1986. The AAA then amended its fee schedule in 2013 and applied to PBGC for approval of the 2013 AAA rules. On December 9, 2019, the PBGC approved a modified version of the AAA’s application.

The 2013 AAA Rules significantly increased the fees charged to an employer wishing to contest a withdrawal liability determination. For example, fees charged by the AAA (these do not include the arbitrator’s fees) in disputes involving amounts between $1 million and $5 million typically exceeded $10,000 and often hit the $14,400 maximum. Under the new AAA fee schedule approved by PBGC, these disputes will carry a maximum AAA fee of $3,750. Similarly, AAA fees for disputes involving amounts over $5 million (not atypical in today’s climate) are reduced from a maximum of $77,500 to $5,000 under the new rules. (There are relatively de minimis fees for hearing rescheduling and for matters held in abeyance for over one year under the new rules.) The new rules also clarify that AAA fees, while paid by the party initiating arbitration (e.g., the employer) are to be shared equally (subject to the arbitrator’s discretion).

The new rules (which become effective January 1, 2020) also change the default rules for designating an arbitrator where the parties cannot agree on one. Under the AAA’s previous rules, the AAA had the authority to designate an arbitrator absent mutual consent by the parties. The new rules adopt the rule from the PBGC’s arbitration procedures, whereby either party may seek the designation and appointment of an arbitrator in federal court.

In an area where the law favors the fund in nearly every instance, the new rules may level the playing field by providing less of a financial disincentive for employers faced with a questionable withdrawal liability determination to contest the determination in arbitration.

If you have questions about withdrawal liability matters, please contact the author or the Jackson Lewis attorney with whom you work.

Republicans Propose Wholesale Reform of Multiemployer Pension Plan System

In a white paper and technical explanations, Republican Senators Charles E. Grassley (Chairman of the Senate Committee on Finance) and Lamar Alexander (Chairman of the Senate Committee on Health, Education, Labor and Pensions) have proposed reforms to the multiemployer pension plan system.

If implemented, the proposed reforms (not yet introduced as a bill) would represent dramatic and far-reaching changes to the multiemployer pension plan system. The white paper describes the current system as “in crisis” and warns that failure to act now will leave over 1.3 million multiemployer pension plan participants without the pension benefits they have been promised and earned.

The proposed reforms would attempt to finance improvements and strengthen the Pension Benefit Guaranty Corporation (PBGC) (the federal agency that guarantees certain pension benefits) by creating a new premium structure, including increasing the annual per-participant premium from $29 to $80 and imposing a copayment on active employees and most retirees.

Among other things, the proposed reforms would:

  • Expand PBGC’s authority to partition plans to carve out liabilities attributable to employers who have exited a plan without paying their full share of liabilities;
  • Increase the level of benefits guaranteed by PBGC from $12,870 a year to approximately $20,000 a year;
  • Require plans to use more conservative interest rate assumptions to value liabilities for funding, capped at six percent;
  • Require plans to use these funding assumptions for withdrawal liability determinations;
  • Increase the annual withdrawal liability payment amount (essentially, by using a 20-year lookback);
  • Replace the 20-year cap with a sliding scale based on funding status, but in no event over 25 years of payments; and
  • Eliminate mass withdrawal liability.

The proposed reforms would drastically affect the withdrawal liability of most contributing employers. While many believe it unlikely these proposed reforms will be enacted, some of the proposed reforms could become part of the Rehabilitation for Multiemployer Pensions Act (also called the Butch Lewis Act) that was passed by the House of Representatives on July 24, 2019, and introduced to the Senate.

We will continue to monitor this and other reform efforts in Congress. Please contact the author or any other Jackson Lewis attorney with questions.