During the past 14+ years practicing employee benefits law, I’ve seen many changes, not the least of which has been the Affordable Care Act (ACA). However, with all of the recent changes flowing from the ACA, it is important not to forget some very basic and long-standing aspects of plan compliance, design, drafting and administration, particularly those rooted in significant part in a law enacted 40 years ago, the Employee Retirement Income Security Act, affectionately known as “ERISA.”
This post will discuss a basic ERISA requirement that if left unaddressed can have significant consequences under the ACA – defining who is eligible to participate in an employee benefit plan. Of course, defining who is eligible is not specific to group health plans, and is critically important for all employee benefit plans, including retirement plans, although, here, we are focusing on group health plans.
In short, plan documents that employers receive from their insurance carriers and third party administrators often do not drill down on which employees are eligible to participate. Adding to the long-standing requirement under ERISA to describe the rules for eligibility in plan documents furnished to employees, the employer shared responsibility penalties under Internal Revenue Code § 4980H, added by the ACA, and related regulations, make it critically important to ensure that eligibility provisions are carefully drafted. For many employers, a “wrap-document” may be a useful tool for addressing this and other provisions concerning the plan.
Section 101 of ERISA requires plan administrators to furnish summary plan descriptions (“SPDs”) to plan participants and beneficiaries. DOL regulations provide a laundry list of content requirements for SPDs, which include that the SPD must describe “the plan’s requirements respecting eligibility for participation.” DOL Reg. § 2520.102-3(j). To this day, many continue to believe that the insurance certificate they receive from their insurance carriers (or plan description in the case of a self-funded plan) are compliant “SPDs.” In most cases, they are not.
Does this look familiar:
You are eligible to participate in the plan if you are actively employed by the employer at least 20 or more hours per week and meet the requirements established by your employer.
This is language one might typically find in an insurance certificate for group health insurance. It is not uncommon to find that no additional requirements were specifically established by the employer, or if established, they might be found in an employee handbook, which is not the SPD or a plan document. However, many employers attempt to clarify this basic language, such as by including the following in the SPD – an employee is eligible to participate in the plan if the employee is regularly working 30 or more hours per week.
But what does this really mean? Under the ACA, a large employer (generally one with 50 or more full time equivalent employees) could incur significant penalties if it fails to offer minimum essential coverage to its full-time employees. IRS regulations provide extensive guidance concerning how to determine which employees are “full-time” employees for purposes of the employee shared responsibility penalties (in general, a full-time employee is one that on average works 30 or more hours per week). For those employers seeking to avoid the shared responsibility penalties under IRC 4980H, they must be offering the right kind of coverage to the right kind of “full-time” employees.
Offering coverage to all employees “regularly working 30 or more hours per week,” may result in the employer avoiding 4980H penalties, but it also could result in the company offering coverage to more employees than necessary to avoid the penalties, or not enough, depending on how the language is applied. For employers that have a significant part of their workforce on variable hour schedules, it can be a challenge to determine when employees are “regularly working” the minimum number of hours required for eligibility. This challenge is heightened when employees take leaves of absence, change positions or make other changes in their employment.
In addition to concerns about ACA penalties, employers should also consider that employees may be more likely to closely scrutinize plan documents for eligibility as they seek to avoid penalties of their own under the ACA individual mandate. A variable hour employee may feel she has been “regularly working” 30 hours per week after working 30 hours per week for two or three months, even though her employer is using a twelve-month initial measurement period permitted under IRS regulations to determine her full-time status. Under the terms of a plan stating the eligibility requirement as “regularly working 30 or more hours per week,” she might have a claim under ERISA, regardless of the ACA penalty issues.
The IRS regulations referenced above provide safe harbors to determine when employees are “full-time” employees for purposes of the 4980H penalty. Under one method, employers can “look back” over a period of months (as few as three, but not more than 12) to determine if an employee worked on average more than 30 hours per week, and for an employee that does, treat that employee as a full-time employee during a future period, the “stability period,” even if the employee’s hours worked in some weeks during that future period go below 30. Many employers are following those rules to determine who is eligible under their plans, believing that if they then offer the appropriate level of affordable coverage to those employees, they will avoid the penalties. However, their plan documents and SPDs may not describe these rules; that is, the rules to comply with the IRS safe harbors.
Simply incorporating the IRS regulations into the SPD by reference may not be a practical approach, and may not comply with ERISA and the DOL regulations above. However, employers will want to consider what additional language they need in their plan documents, particularly their SPDs, to appropriately reflect how eligibility is determined for purposes of ACA and to meet the DOL’s content requirements for SPDs.
So, as employers scramble to comply with the ACA employer shared responsibility mandate for 2015, they need to remember their ERISA basics and ask themselves, “What does the plan say?”