New Jersey Requires Employers to Offer Employees Pre-tax Commuter Benefits

Last month, New Jersey Governor Phil Murphy signed S.1567 into law, making the Garden State the first state to mandate a commuter benefit law, joining cities such as New York and San Francisco that have similar laws. In short, this law requires employers in the state to offer pre-tax commuter benefits to employees. While the law is currently in effect, it is not operative until the earlier of (i) 365 days following the date of enactment (March 1, 2019), or (ii) the effective date of rules and regulations that the law directs the Commission of Labor and Workforce Development to adopt.

Federal law. Before digging in further to New Jersey’s new law, let’s revisit some of the commuter benefits provisions under federal law, including a change made under the Tax Cuts and Jobs Act (passed in late 2017).

Under the Internal Revenue Code, the value of a “qualified transportation fringe” benefit provided by an employer to an employee is treated as tax-free, subject to monthly limits. A “qualified transportation fringe” is defined as:

  • transportation in a commuter highway vehicle for travel between the employee’s residence and place of employment;
  • transit passes;
  • qualified parking; and
  • qualified bicycle commuting reimbursement.

In late 2018, the IRS released new monthly contribution limits for 2019:

  • Parking – $265
  • Mass Transit – $265

Employers can still provide tax-free qualified transportation fringe benefits to employees (although qualified bicycle commuting reimbursements cannot be provided tax-free). Under the Tax Cuts and Jobs Act, an employer can no longer deduct the expenses for providing tax-free transportation fringe benefits. However, employers that treat the transportation fringe benefits as taxable W-2 wages to the employee are able to deduct the expenses of providing those benefits.

New Jersey. The state’s new commuter benefits law requires employers that employ at least 20 persons to offer a pre-tax transportation fringe benefit to all of the employer’s employees that are not subject to a collective bargaining agreement. For purposes of this law, an employee means anyone hired or employed by the employer and who reports to the employer’s work location (this follows the definition under the state’s unemployment compensation law). A pre-tax transportation fringe benefit is a benefit that allows an employee to set aside wages on a pre-tax basis, which is then only made available to the employee for the purchase of certain eligible transportation services, including transit passes and commuter highway vehicle travel.

Employers can expect the Commissioner of Labor and Workforce Development to adopt rules and regulations, in consultation with transportation management associations, transit agencies in New Jersey, and third-party transit benefit providers concerning the administration and enforcement of the law’s requirements in a manner that is “most compatible with current practices for providing pre-tax transportation fringe benefits.”

Employers that fail to comply with the law are subject to a penalty of between $100 to $250 for the first violation. Before a penalty is imposed, however, employers will have 90 days from the date of the violation to offer the pre-tax transportation fringe benefit program. If, after the 90-day cure period, the employer does not adopt a pre-tax transportation fringe benefit, it will be subject to a $250 penalty for each additional 30 day period in which an employer fails to offer the benefit.

New Jersey employers should begin thinking about the steps they will need to take to provide this benefit. Areas for consideration include the specific features of the pre-tax transportation fringe benefit program, developing a document to communicate the program to employees, and coordinating the administration of requirements in other jurisdictions, if applicable. Of course, employers will want to be on the lookout for guidance from the Commissioner of Labor and Workforce Development.

Could This Be Your Retirement Plan?

Image result for cardboard box record storageAs reported by CBC, B.C. Pension Corporation announced a data breach involving pension plan records after discovering a box containing microfiche could not be found following a recent office move. The box contained personal information (names, social insurance numbers and dates of birth) on approximately 8,000 pension plan participants. The company employed those participants during the period 1982 to 1997. Learning of this incident, persons responsible for pension plan administration might be wondering how secure are their facilities (or their service provider’s facilities) for remote storage. And, pension plan participants might be wondering why do plans need this information and for so long.

In the U.S., the Employee Retirement Income Security Act (ERISA) governs the administration of pension plans, and the law includes specific record retention requirements. For example, persons who are responsible for filing plan reports must “maintain records to provide sufficient detail to verify, explain, clarify and check for accuracy and completeness.” ERISA Section 107. In addition, ERISA requires employers to maintain sufficient records to determine benefits due to employees. ERISA Section 209. Because employees may not retire for many years after accruing benefits under the pension plan, plans need to maintain records until plan participants retire and the records must be sufficient to determine benefits under the plan.

These record retention requirements present important issues for employers, plan administrators, and pension plan service providers. We have written about pension plans experiencing data breaches caused by malicious attackers. But, relatively straightforward administrative recordkeeping activities also can result personal information being compromised.  In late 2016, the ERISA Advisory Council, a 15-member body appointed by the Secretary of Labor to provide guidance on employee benefit plans, shared with the federal Department of Labor some considerations concerning cybersecurity. To date, the DOL has not issued any formal guidance on these recommendations, however, employers, plan administrators, and pension plan service providers should revisit their procedures for handling sensitive personal information maintained in their pension plan records.

According to the Council’s recommendations, there are four major areas for effective practices and policies: (i) data management; (ii) technology management; (iii) service provider management; and (iv) people issues. This is a good list to work from. However, while not an exhaustive list, the following action items may help to avoid incidents like the one discussed above:

  • Retain only the data that is needed; if certain data elements can be redacted, removed them;
  • Maintain an inventory of records that are retained regardless of format, and where to find them;
  • Outline a clear process for moving records, and track location and inventory during the move; and
  • Delete records that are no longer needed; confirm service providers have done so, as applicable.

Of course, no set of safeguards for protecting personal information will prevent all kinds of compromises to it. Mistakes happen, so employers and plan administrators should be prepared by developing and maintaining incident response plans and practice them.

IRS No Longer Forbids Pension Plans From Offering Lump Sum Payouts To Retirees Currently Receiving Payments

Over the past several years, sponsors of defined benefit pension plans have examined and implemented ways to reduce their pension liabilities. This is sometimes referred to as “de-risking.” One de-risking option is for a plan to offer a limited-duration window where participants who normally do not have the option to do so can elect to receive the value of their benefits in a lump sum (rather than a stream of payments over an extended time-period).

Most often we see lump-sum windows being offered to participants who have terminated employment but are not yet eligible to commence benefits. However, in the not so distant past, the IRS issued some private letter rulings to companies allowing them to offer lump-sum windows to retirees already receiving annuity payments. In the wake of these rulings, according to the IRS, several plan sponsors that were not subject to the private letter rulings chose to amend their plans to provide for lump-sum windows for retirees receiving annuity payments.

This caught the attention of the IRS, which in 2015 announced its intention to adopt regulations (to be effective as of July 9, 2015) to prevent pension plans from offering lump sum windows to retirees who are already receiving annuity payments. (See our prior blog post on this topic by clicking here). This put an end to this de-risking practice.

Recently, the IRS unexpectedly reversed course and announced that it no longer intends to introduce those regulations. This effectively ends the IRS ban on a plan’s ability to offer lump sum windows to retirees receiving annuity payments. Plan sponsors now have a renewed opportunity to examine whether offering a lump-sum window to retirees makes sense for their plan.

Notwithstanding, offering a retiree lump-sum window is an endeavor that requires extensive analysis and planning for several reasons, such as:

• Several decisions need to be made by the plan sponsor. For instance, who will be offered the window and how long will the window last?
• The plan document will need to be precisely amended to allow for the window.
• Communications to participants who are offered the opportunity to participate in the window must be carefully crafted and include several required legal disclosures.

If you are interested in learning more, please contact your preferred Jackson Lewis attorney.

Severance Agreements for Executives at Tax-Exempt Organizations:  Beware Unintended Consequences of Excise Taxes, Early Inclusion, and Intermediate Sanctions

When it’s time for tax-exempt organizations such as colleges/universities, museums, and hospital systems to part ways with their senior executives, these institutions are most often considering how to best transition these executives off into the sunset rather than a morass of special tax rules (I will mention Internal Revenue Code citations just once for reference) under the unholy quartet of IRC Sections 409A, 457(f), 4958, and new(ish) Section 4960.

While one could write a dissertation on each of these beauties, I will introduce just enough high-level concepts as to make anyone circumspect in negotiating new or modified severance agreements with key executives at tax-exempt organizations.  Notably, these rules apply to new and continuing employment agreements, but I am focusing on severance agreements (and the severance provisions in employment agreements) since this is where I have most consistently seen potential risk of adverse tax consequences, imposition of penalties, and other sanctions.

First, it is important to carefully draft severance arrangements for employees of tax-exempt organizations to avoid early inclusion of income and imposing a 20% excise tax and interest on executives, taking into account special rules about vested deferred compensation and the timing and manner of payment.  This is especially true where, as is commonly the case, the organization is modifying existing arrangements.

Second, I will call your attention to so-called “intermediate sanctions” imposed on excess compensation and benefits paid to key executives of tax-exempt organizations—i.e., to preserve the tax-exempt status of an organization if the IRS finds an excess benefit transaction, the executive found to be receiving unreasonable compensation must disgorge the excess amount and pay a 25% and potentially a 200% second-tier excise tax on such amount.  Additionally, an organizational manager such as an officer, director, or trustee who participated in the excess benefit will be personally liable for a 10% excise tax up to $10,000 for each year of over-payment.  The institution itself can be tagged as well for a penalty for failure to report the excess benefit transaction on Schedule J of its 990(s).  Happily, if a proper process is followed, the parties can establish a rebuttable presumption that the compensation and benefits are reasonable.  If not, the IRS will review the circumstances on a de novo basis.

Finally, I call your attention to a new 21% excise tax on certain “excess compensation” paid to executives of tax-exempt organizations and public institutions—i.e., on compensation over $1,000,000 and certain excess parachute payments.  These are tricky rules, especially taking into special timing rules that apply to deferred compensation, particularly for fiscal year entities.  Our earlier article elaborates on this issue.

Employer Takeaway:  Although executive transitions from tax-exempt organizations can be fraught with numerous non-tax considerations, it pays to properly consider the design and implementation of any executive severance arrangement to avoid some surprising adverse ramifications.


In 2008, the IRS established a voluntary correction program aimed at plan sponsors and administrators to encourage resolution of plan document or operational failures as soon as they are discovered. The Employee Plans Compliance Resolution System, or “EPCRS” as it is most often called, stresses the importance of established administrative practices and procedures to avoid Internal Revenue Code failures that may arise from a lack of such practices and procedures. EPCRS consists of three programs, Self-Correction Program (SCP), Voluntary Correction Program (VCP), and the Audit Closing Agreement Program (Audit CAP). Each of the correction principles and methodologies in EPCRS apply to all three programs.

EPCRS has been a much-welcomed reprieve for plan sponsors and administrators. Compliance statements (an agreement between the Plan Sponsor and IRS that the proposed correction of plan failures is acceptable) have been granted to plans for over a decade in exchange for conforming amendments, corrective contributions and distributions, lost earnings calculations, and revisions to administrative practices and procedures. The EPCRS program is no stranger to updates over the years as several have resulted in an expansion of correction methodologies, additional SCP opportunities, and user fee adjustments.

The IRS introduced the most recent EPCRS transformation in September 2018, through Revenue Procedure 2018-52, which becomes effective next month, on April 1, 2019. The biggest change is to the VCP submission procedures. The IRS will no longer accept VCP submissions through the mail in hard-copy form; instead, Plan Sponsors must use the website for VCP submissions.

While the contents of a VCP submission have not changed, the submission follows a new process:

  • Applicant creates a account.
  • If the plan sponsor authorizes a Jackson Lewis attorney to sign and file the VCP on its behalf, a cover letter with a signed penalty of perjury declaration must accompany the submission.
  • The Form 8950, Application for Voluntary Correction Program Submission, will now be completed directly on the website.
  • All VCP submission documents (Model Forms, failure explanations, correction computations, plan documents, etc.) must be converted into one PDF file and uploaded to If the file exceeds 15 MB, the excess must be faxed to a dedicated IRS VCP fax number.
  • After the Plan Sponsor files a VCP, the system automatically generates a payment confirmation. The “ Tracking ID” on the receipt serves as the IRS control number for the submission. The IRS no longer issues a separate acknowledgment letter confirming receipt of the submission.

Any new procedure can seem daunting and time-consuming until it becomes familiar. Yet the efficiency that comes from a single uploading of documents, immediate generation of an IRS control number, and not having to bother with certified mailings will far outweigh any initial learning curve. Hopefully, plan sponsors will not make VCP submissions a habit, but when they are necessary, this new procedure will make the process nearly painless.

Contact your preferred Jackson Lewis attorney for assistance with all of your Voluntary Compliance needs or concerns.

As The ACA Landscape Shifts Again, What’s an Employer to Do?

As employers and their third-party administrators begin to wrap-up their Patient Protection and Affordable Care Act (“ACA”) reporting for the 2018 tax year, we’ve started to receive questions about what comes next.  As we discussed here, with the implementation of the Tax Cuts and Jobs Act of 2017 (the “Act”), the ACA’s “individual mandate” effectively lost its teeth—while the ACA still contains a requirement that individuals obtain health insurance coverage, the Act reduced the penalty for not doing so to $0.

This led to confusion initially for individuals who assumed the reduced penalty would become effective immediately (i.e., for 2018); however, this provision of the Act did not become effective until 2019.  Still, confusion remains, and for employers.  We’ve received several questions from clients about whether, given the Act’s changes, ACA reporting will be required for the 2019 tax year and beyond.  This is partly due to the effective end of the individual mandate, and partly due to uncertainty over whether the ACA’s other penalty provisions remain intact.  In short, with respect to the latter, they do.  As of this writing, employers with 50 or more full-time or full-time equivalent employees must continue to provide minimal essential overage that is affordable and provides minimum value to their full-time employees, or risk penalties under the ACA’s “employer mandate”.  (Similarly, the ACA’s insurance mandates for coverage of dependents until age 26, no exclusions for pre-existing conditions, etc. also remain in place.)  Certain states also have their own individual mandates that remain in effect.

The implementation of, and effective dates for, the various provisions of the ACA have been a moving target since its adoption, and it appears the ACA is poised to continue its evolution based on the federal election results in the coming years.  We also understand that the Internal Revenue Service is looking at whether there will be changes regarding the requirement to provide employees with their annual Form 1095-Cs going forward (i.e., the reporting of offers of coverage to employees that employees may use to prepare their individual tax returns).  Regarding the 2019 reporting, however, we are advising employers that the ACA remains the “law of the land”, and to assume that reporting for 2019 will look a lot like the 2018 reporting until we hear differently.

We will, of course, provide an update if new guidance on the future of ACA reporting is provided this year, and remain available for any past, present, or future ACA reporting questions our clients may have.

The IRS is on the Case – “Expansion of the Gig Economy Warrants Focus on Improving Self-Employment Tax Compliance”

The nature of work is changing with more and more individuals choosing to be “gig” workers rather than employees. This change fundamentally alters the availability of employee benefits, as well as the applicable taxation reporting and withholding requirements. It is no surprise to us that the Treasury Department has found that the underreporting of self-employment tax is a growing problem. Payers should keep a lookout for changes in reporting regulations – they are coming.

UPDATED – Did You Know California has a State Mandated Retirement Plan?

Frequently Asked Questions About CalSavers


What is CalSavers?


CalSavers is a new California law designed to encourage employees to save for retirement. CalSavers was originally called California Secure Choice and was approved by the State Legislature in 2016.

CalSavers provides employees a retirement savings program without the administrative complexity, fees, or fiduciary liability of existing options for employers. Most employers with at least five employees, that do not already offer an employer-sponsored retirement plan, will be required to begin offering a retirement plan or provide their employees access to CalSavers.

When an employer participates in CalSavers, the employer will deduct a default rate of five percent (5%) of pay from the paycheck of each employee at least eighteen (18) years or older and deposit it into the employee’s CalSavers account.  The deduction amount will automatically escalate one percent (1%) each year to a maximum of eight percent (8%), unless the individual employee elects a different amount, elects out of auto-escalation, or completely opts-out of the program.  A CalSavers account is a personal IRA account overseen by the CalSavers Retirement Savings Investment Board.


Which employers must participate?


Every California employer must participate in CalSavers if it has:

  • No retirement plan; and
  • Five (5) or more full or part-time California employees (with at least one employee eligible for CalSavers).

Employers that maintain employer-sponsored “retirement plans” to benefit their employees will be exempt from CalSavers. For the exemption, “retirement plans” will include 401(k) plans, qualified profit sharing plans, defined benefit plans, cash balance plans, and 403(a) and 403(b) plans, and arrangements under Section 457(b), 408(k) and 408(p) of the Internal Revenue Code (the “Code”). Employers participating in or contributing to union multiemployer pension plans will also be exempt from CalSavers.

The number of employees, for eligibility for CalSavers, is determined based on the average number of employees as reported to the California Employment Development Department for the quarter ending on the most recent December 31, and the previous three-quarters of available data from the reports.

Non-profit employers must comply with CalSavers, but certain employers are exempt, such as governmental entities.


When is it effective?


An ongoing pilot phase launched on Nov 19, 2018. The mandatory participation dates for employers subject to the mandate will phase-in yearly, based on the number of full-time and part-time employees working for the employer.

June 30, 2020, is the deadline for employers with at least 100 employees, and smaller employees will phase-in :

June 30, 2021:
50-99 employees

June 30, 2022:
5-49 employees

Early participation is also permitted, so beginning July 1, 2019, employers with at least five employees can voluntarily register for CalSavers if they wish to participate before their required registration date.


What are the advantages of participating in the CalSavers program?


  • Employers will have no liability for an employee’s decision to participate in, or opt out of, CalSavers;
  • Employers will have no liability for the investment decisions of participating employees;
  • Employers will not be a fiduciary of CalSavers; and
  • Employers will not bear responsibility for the administration, investment performance, or the payment of benefits earned by participating employees.


What are the drawbacks of the CalSavers law?


Employers may be concerned when they receive notices from the CalSavers Retirement Savings Investment Board stating that they must register with CalSavers. The CalSavers program will notify those employers that, based on available information, appear to be required to participate in CalSavers by the applicable registration deadlines and require those employers that have not previously registered for CalSavers to do so on or before the deadlines. However, there appears to be no way of preemptively establishing that an employer is exempt from CalSavers because it sponsors a retirement plan. In addition, there is no requirement that the CalSavers program search the Department of Labor’s database of Forms 5500 filings to determine which California employers already sponsor a retirement plan. For that reason, employers that already sponsor retirement plans, which are erroneously identified as employers required to participate in CalSavers, may inform CalSavers of their exemption from the program using procedures that still need to be established.


How does an employer participate in CalSavers?


  1. Register for CalSavers here;
  2. Upload their employee roster to enable enrollment of all employees;
  3. If applicable, designate a payroll services provider to facilitate on the employer’s behalf.; and
  4. Transmit the payroll contribution to a third-party administrator to be determined by the program.


What are the penalties for failing to comply with CalSavers?


Penalties of $250 per employee if the employer does not comply within 90 days of receiving a notice requiring registration and $500 per employee if the employer does not comply within 180 days of receiving the notice may be imposed.


What is the status of CalSavers?


The law is still in flux, and implementation may be subject to delays and changes.

In addition, there is a lawsuit seeking to strike down the law because the Employee Retirement Income Security Act (“ERISA”) (a federal law that governs employee benefits) preempts it. The State of California argues that CalSavers is not preempted because it is not established or maintained by an individual employer, but is established by the State of California, and because the program is completely voluntary for the employees.


Do any other states or cities have similar laws?


Connecticut, Illinois, Maryland, Oregon, and Seattle also have state or city-run retirement programs.


What is the takeaway?


Employers in California that do not want the administrative burden and expense of sponsoring a retirement plan can participate in CalSavers in order to give their employees an opportunity to save for retirement on a tax-free basis.

Employers that already sponsor their own retirement plans may receive notices that they must register for CalSavers when in fact they are exempt and need not register or participate.

Court Finds Union’s Withdrawal Liability Indemnification Obligation of Limited Duration

Congress enacted the withdrawal liability provisions of the Multiemployer Pension Plan Amendments Act (MPPAA) with the ultimate goal of protecting participants and beneficiaries entitled to benefits from multiemployer pension plans.  Congress observed that such plans are financially burdened whenever an employer withdraws and permanently ceases to pay contributions and decided that the burden should be borne by the withdrawn employer.  Consistent with this remedial purpose, the statute often produces seemingly harsh and/or unfair results (at least from the employer perspective.)  The Third Circuit’s recent non-precedential decision in Nitterhouse Concrete Products, Inc. v. Glass, Molders, Pottery, Plastics & Allied Workers International Union aptly illustrates this principle.

The employer in Nitterhouse had entered into a series of collective bargaining agreements with the union over a period of forty-four years, during which time it was obligated to contribute to a union-affiliated multiemployer pension plan.  Five days before the expiration of the final CBA in February 2014, the union disclaimed interest in represented the employer’s bargaining unit members and notified the employer it would not be renewing the CBA upon its expiration.  This resulted in the employer permanently ceasing to have an obligation to contribute to the plan, resulting in a withdrawal from the plan and the assessment of withdrawal liability against the employer in excess of $680 thousand dollars.

This alone would seem to be an unfair and inequitable result, with the union’s unilateral actions (in disclaiming interest) directly resulting in imposing significant withdrawal liability.  It gets worse, however.

For much of the parties’ collective bargaining history through its conclusion, the CBA contained the following provision:

Section 17.07 – Company Indemnification. The Company shall have no liability for the payment of benefits other than to make contributions to the Plan as above required. The parties hereto recognize that, as between the Union, and the Company, the operation of the Pension is within the control of the Union. Therefore, the Union specifically agrees that the structure and operation of the Pension Plan shall comply with all laws applicable to it, including by way of example, and not limitation, the Employee Retirement Income Security Act of 1974, as amended from time to time and further agrees to indemnify and save harmless the Company from any claim or liability which may arise by reason of the existence of the Plan.

In reliance on this provision, the employer sued the union, claiming that the indemnification provision covered the withdrawal liability incurred.  The district court first looked at whether withdrawal liability fell within the scope of the union’s indemnification obligation, concluding that “any claim or liability which may arise by reason of the existence of the Plan” is broad enough to include withdrawal liability under the MPPAA.

The district court next considered the duration of the union’s indemnification obligation, specifically whether it survived the expiration of the CBA.  Citing the general principle of contract law regarding a collective bargaining agreement that contractual obligations will generally cease upon termination of the bargaining agreement and the lack of any recognized exception, the district court concluded that the union’s indemnification obligation ended when the contract expired.  Since the withdrawal liability accrued after this (“even if by a mere nano-second”), the district court found for the union.

The sole issue before the Third Circuit on appeal was whether the district court properly held that the union’s indemnification obligation did not cover withdrawal liability imposed after the expiration of the CBA.  The Third Circuit affirmed.  The Court found that the employer could not withdraw and trigger withdrawal liability until it “permanently ceased to have an obligation to contribute,” and that such cessation could not occur until the termination of the CBA.  The Court analogized withdrawal liability to a chain of dominoes, with liability only imposed when the obligation to contribute ceased.  The court also found that the obligation to contribute only ceased when the CBA expired, which only happened if the CBA was not renewed after expiration.  As a result, the chain of dominoes came crashing down on the employer.

What can we learn from Nitterhouse?  It is easy to envision how the case could have been decided differently.  The withdrawal liability incurred by the employer seems to be a “claim or liability which may arise by reason of the existence of the Plan,” and the reference to the plan “being within the control of the union” at least arguably should encompass withdrawal liability triggered by the union’s unilateral conduct in disclaiming interest.  Unfortunately for the employer, the Court did not so find.  In sum, Nitterhouse highlights the pro-fund skew of MPPAA and the seemingly unfair results it often generates.  The case further illustrates the importance of good contract language drafting, since the result almost certainly would have been different had the indemnification provision been better crafted.

Wellness Programs Continue to Face Compliance Challenges

The rules for employer-sponsored wellness programs continue to be a moving target; most recently, regulations issued by the Equal Employment Opportunity Commission (“EEOC”) intending to address issues under the Americans with Disabilities Act (“ADA”) and the Genetic Information Non-Discrimination Act (“GINA”). Many employers are already well aware of the wellness regulations under the Affordable Care Act that for some years now have permitted incentives for certain health contingent programs, such as biometric screenings and tobacco cessation programs, in some cases allowing incentives of up to 50% of the applicable premium. But some of the same wellness incentives permissible under the ACA raise issues under the ADA and GINA. The EEOC tried to address some of those issues through regulation, but wound up losing in court against the AARP (formerly the American Association of Retired Persons) which challenged the EEOC’s methods for developing the regulations. So, we are basically back where we started, namely, what to do with wellness programs that are permissible with the ACA regulations, but may not be consistent with rules under the ADA or GINA (or programs that do not raise ACA issues at all, but still have compliance requirements under the ADA and/or GINA).

What’s the problem? We focus here on the ADA. In general, the ADA prohibits employers from subjecting employees to disability-related inquiries or medical examinations. One exception from this rule is that the inquiry or examination is part of a voluntary health program. However, the EEOC had not formally defined the term “voluntary” or explained what constitutes a “health program.” Thus, it had been unclear whether employers could offer incentives to encourage employees to participate in programs that involved such inquiries or examinations, something the ACA clearly permitted. The EEOC finally issued regulations to permit certain incentives for employees to answer disability-related questions or undergo medical examinations that would not cause the program to be involuntary. As noted, those regulations have been vacated.

EEOC modifies its regulations. On December 20, 2018, in response to the AARP decision, the EEOC revised its regulations to remove the incentives that had been permitted.  What remains in the regulations presently is that a health program that includes disability-related inquiries or medical examinations (such as a health risk assessment or biometric screening) is voluntary as long as the program meets certain requirements:

  • Employees may not be required to participate;
  • The employer may not deny coverage or limit the extent of benefits under any of its group health plans or package options for employees who do not participate;
  • The employer does not take any adverse employment action or retaliate against, interfere with, coerce, intimidate, or threaten employees; and
  • The employer provides employees with a confidentiality notice that: (i) is understandable; (ii) explains the type of medical information that will be obtained and the specific purposes for which the medical information will be used; and (iii) describes the restrictions on the disclosure of the employee’s medical information, the employer representatives or other parties with whom the information will be shared, and the methods that the covered entity will use to ensure that medical information is not improperly disclosed (including whether it complies with the HIPAA privacy and security regulations).

What remains unclear is whether offering an incentive to an employee to participate in a disability-related inquiry or medical examination as part of an otherwise compliant program would be viewed by the EEOC to be impermissible. Notably, prior to issuing its wellness program regulations, the EEOC had sued employers over the design of their health plans, including in cases where the programs appeared to be more consistent with typical program offerings and incentives.

Note that the EEOC made similar changes to its regulations under GINA that had permitted inducements to an employee for the employee’s spouse to provide his or her current health status information as part of a health risk assessment administered in connection with an employee-sponsored wellness program. Employers should review their wellness programs carefully, and not just those that are tied to their group health plans, to see whether they are compliant with the ADA and GINA.