Beginning in 2020, Employers May Reimburse Health Insurance Premiums as an Alternative to a Traditional Group Health Plan (Subject to Several Requirements)

Many employers have contacted us over the years asking whether they may offer an “employer–payment plan” rather than offer a traditional group health insurance plan.  An employer-payment plan is a type of account-based plan that provides an employee reimbursement for all or a portion of the premium expense for individual health insurance coverage or other non-employer hospital or medical insurance.  Until now, the answer has generally been no.  But beginning in 2020, subject to the satisfaction of several requirements, employers may offer employer payment plans as an alternative to traditional group health insurance plans.

Under final regulations, beginning in 2020, employers may offer individual coverage health reimbursement accounts (“ICHRAs”) that reimburse employees for individual health insurance premiums, subject to satisfaction of several conditions.

To fulfill these conditions:

  • The participant and any dependents must actually be enrolled in qualifying individual coverage for each month the individuals are covered by the ICHRA.
  • The employer may not offer a traditional group health plan to the same participants covered by the ICHRA for the same plan year. A traditional group health plan is any group health plan other than an account-based group health plan or a plan consisting solely of excepted benefits.
  • If an employer offers an ICHRA to a class of employees, all employees in that class must receive the same terms for the ICHRA, subject to specific exceptions. These exceptions include permitted variation in the benefit because of the number of dependents and age of the participant.  That said, the maximum dollar amount provided to the oldest participant may not exceed three times the maximum available to the youngest participant.  Special rules apply to new hires and there may be a variation related to HSA and non-HSA compatible ICHRAs.
  • Otherwise eligible participants must be able to opt-out of the ICHRA annually.
  • The ICHRA must implement and comply with reasonable procedures to confirm that participants and dependents have coverage under the ICHRA. To accomplish this, the employer may require that a participant provide either a document from a third-party showing coverage or an attestation to having other coverage.  The DOL created a model “Attestation” for employers to use.  And after the initial substantiation, the participant must confirm coverage with each reimbursement.
  • The employer must provide certain information about the ICHRA in a written notice to each participant, generally at least 90 days before the plan year begins. The employer may use the model notice provided in the regulations for this purpose.

While an employer may not offer the same “class” of employees both an ICHRA and a traditional group health plan, an employer may offer one or more classes of employees an ICHRA and another class(es) a traditional group health plan. The delineated classes include:

  • Full-time employees
  • Part-time employees
  • Employees paid on a salaried basis
  • Employees paid on an hourly basis
  • Employees whose primary site of employment is in the same rating area
  • Seasonal employees
  • Employees covered by a particular collective bargaining agreement
  • Employees who have not satisfied a waiting period
  • Non-resident aliens with no U.S. source income
  • Employees who are employees of a staffing agency
  • A combination of the foregoing.

To prevent discrimination, the final regulations include minimum class size requirements if the class is based on full or part-time status, salaried or hourly status, or location within the same rating area, subject to certain exceptions.   The minimum class size requirement does not apply to the classes of employees offered traditional coverage or no coverage.

Generally, if the minimum class size applies, the minimum number of employees that must be in a class is based on the number of employees in the class before the plan year begins and is:

  • 10 employees, if the employer has fewer than 100 employees
    • 10% of the total number of employees, if the employer has between 100 to 200 employees, and
    • 20 employees, if the employer has over 200 employees

As to how the employer pay or play penalties apply to employers who offer ICHRAs rather than traditional group health coverage, IRS Notice 2018–88 explains how Section 4980H of the Internal Revenue Code (which imposes the employer “pay or play” penalties) applies to an applicable large employer that offers an ICHRA, describes potential additional affordability safe harbors and requests comments. The IRS intends to issue proposed regulations under Section 4980H to address these issues.

Employer Takeaway

Ultimately, the ICHRA presents new and exciting planning opportunities for those employers who wish to provide premium reimbursements rather than a traditional group health plan to some or all of their employees.  Employers generally must provide ICHRA notices at least 90 days before the plan year begins.  Thus, employers who wish to implement ICHRAs in 2020, should make this decision soon.

Benefits Outside the Box: Using a Charitable Foundation to Enhance Your Culture and Community

If your Company leadership is looking for an innovative employee benefit – something outside the standard employee benefit package of retirement, health, and welfare benefits, a Company-sponsored charitable foundation might be your answer.   A charitable foundation not only can further your Company culture while serving the community, but it also has tax benefits to boot.

A Company’s culture is the tie that binds.  No matter how much pay or how lucrative the benefits package, if the employee feels like just a number or that the employee’s opinion does not matter, that employee will forever be on the lookout for a better fit.  The world is changing, and social causes are all over the news.  Imagine the impact it would have if you could put your employees in the driver’s seat of choosing from a litany of social causes that matter most to them.  Imagine the positive public relations that would come from the Company’s foundation making sizable gifts of support in the community.

What does a Company-Sponsored Charitable Foundation Do?

Most are designed as grant-making organizations, as opposed to operational entities.  The purpose of the charitable foundation could be:

  • To make grants to other 501(c)(3) charities or governmental entities in the community who are furthering causes that are important to the Company. For example, a manufacturing company might choose to focus on environmental causes.  A company in the healthcare field might choose to focus on healthcare education or support causes combatting the opioid crisis.
  • To make grants to individuals in the community who have experienced a severe financial hardship. For example, if a family in the community loses their home to a fire or a flood, or the breadwinner in the family dies unexpectedly while in the line of duty leaving behind 4 little hungry mouths to feed, the Company’s foundation could be there to provide financial support.
  • To provide educational scholarships to employees and their family members. Note that, unlike the two foregoing, there are additional, rigid tax law requirements in IRS Revenue Procedure 76-47 with which the charitable foundation must comply to get this type of entity to work.  For example, the selection committee must be unrelated to the employer and foundation (e.g., no employees, former employees, officers, directors may serve on it).

How Could Employees Be Involved?

Absent a foundation, when the Company wants to support an identified cause, funds are raised and provided directly to that charity.  Once given, control over the ultimate expenditure of the funds is ceded to the charitable organization.

With a Company-sponsored charitable foundation, your employees can be more involved in the promotion of the foundation and have more say in how and when the charitable funds are used.

For example, the Board of Directors of the non-profit corporation could consist of your employees.  They could have oversight responsibility over the foundation and have the ultimate say in which charities or individuals are chosen for support.  Employees could serve on a selection or nominating committee or simply promote the foundation in its giving efforts.

How Is the Foundation Funded?

Employees also can be involved by providing financial support to the foundation.  For example, the Company could do one or more of the following:

  • Allow employees to have a percentage of their after-tax pay payroll deducted and contributed to the foundation;
  • Offer to match employee contributions according to a specified formula or up to a certain amount;
  • Have all unused paid time off that normally would be forfeited at year-end converted to a charitable contribution to the foundation, giving employees the feel-good knowledge that if they work more, they also will do more for the community.

Amounts contributed to the foundation would be tax-deductible up to the legal limits allowed under Section 170 of the Internal Revenue Code.  Company-sponsored charitable foundations often are classified as “private foundations,” rather than “public charities,” which simply means additional tax rules apply, and the deduction limit is reduced.  Even so, this reduced deduction limit applies only with those giving substantial amounts to charity.

Unlike your normal charitable giving, a Company-sponsored foundation is different.  Here, funds can be raised, but do not all need to be expended each year.  Some distributions will have to comply with applicable tax law.  However, the foundation could serve as a charitable endowment that grows over time so that when the right cause comes your way, the foundation will have the resources to make a substantial impact.

What is Involved in Setting One Up?

Charitable foundations are like most corporate entities.  First, the separate legal entity would need to be formed under applicable state law.  Typically, non-profit corporations are the best fit for the entity form.  The charitable foundation would need to abide by all the requirements under state law to be a viable entity and for its corporate separateness to be respected.  This means that the foundation should have bylaws, regular board meetings with minutes, and separate bank accounts, to name a few.

The foundation also would file an exemption application with the Internal Revenue Service using the Form 1023 series to seek a determination that the foundation is exempt from taxation under Section 501(c)(3).

And the foundation may be subject to state charitable registration requirements if it will be soliciting charitable donations.   It also may need to register in other states if its activities will be crossing state lines.  Foundations, like other corporate entities, are subject to annual filing and reporting requirements with the state and federal governments.

Thus, like all other employee benefits that require on-going maintenance and attention, a charitable foundation is no different.  There are start-up costs, and on-going costs.  But, for your employees, this atypical “benefit” really could make a difference both inside and outside your Company.

Third Circuit Joins Majority in Rejecting “De Facto Administrator” ERISA Theory

The U.S. Court of Appeals for the Third Circuit joins the Second, Seventh, Eighth, Ninth, and Tenth Circuits in declining to impose liability on alleged de facto plan administrators.  Under Section 502(c) of ERISA, a plan administrator may be liable and subject to penalties for failing to comply with a participant’s request for information which the administrator must provide within 30-days from the request.  The Third Circuit addressed whether a participant could sue a “de facto plan administrator” for failing to provide information timely.

Under ERISA, “administrator” is defined as “the person specifically so designated by the terms of the instrument under which the plan is operated.”  In this case, the plan administrator was the board of trustees, who delegated to its executive pension director (“director”) the authority to process and approve all non-disputed applications for benefits and to begin timely payment of benefits.  The board, however, specifically noted that all actions and decisions by the director were subject to board ratification.

The participant claimed that the director’s failure to respond adequately to document requests violated Section 502(c) of ERISA, arguing that the director appeared to function as the plan administrator in responding to questions, providing summary plan descriptions, and most notably, never disavowing the plan administrator title.

After acknowledging the weight of authority from its sister courts denying the de facto theory, the Third Circuit rejected the de facto administrator theory for three reasons.  First, the Supreme Court advises courts to avoid reading remedies into ERISA’s carefully crafted enforcement statute.  Second, as a penal provision, Section 502(c) of ERISA should be leniently and narrowly construed.  Finally, the Third Circuit noted that it has consistently construed this statutory provision narrowly and that it saw no reason to depart from that approach.  The Third Circuit thus concluded that it “must restrict application of the title ‘administrator’ to those who fit the statutory definition and not stretch the term to authorize penalties against others whom a disappointed participant might like to reach.”

Although most circuits align with the Third, the de facto administrator theory remains jurisdictionally sensitive, as the First and Eleventh Circuits have accepted the theory in some capacity.

The case is:  Bergamatto v. Bd. of Trs. of the Nysa-Ila Pension Fund, No. 18-2811 (3d Cir. Aug. 6, 2019).

Employers Beware: SC Abolishes Common-Law Marriage

On July 24, 2019, South Carolina joined the ranks of Alabama, Pennsylvania, and others in abolishing future recognition of common law marriages in the state.  The state will continue to recognize all common law marriages in effect before this date, but they will be subject to a higher standard of proof.  On and after July 25, 2019, all South Carolina marriages will require the issuance of a marriage license.

This ruling from the South Carolina Supreme Court came after many legislative attempts at abolishing common law marriage failed.  The court determined the paternalistic reasons behind the original recognition of a common law marriage, e.g., the stigma of unwed mothers, children out of wedlock, and the logistics of the “circuit minister” or other official required to cover a large territory, no longer apply.  With the elimination of future common law marriage recognition, the court also handed down a new standard of proof parties must meet to continue to be considered married under common law.  Probate cases in South Carolina use the “clear and convincing evidence” standard to prove marriage, and now this standard applies to the living too.

Our workforce is transient.  Employees residing in South Carolina often move across state lines for work and personal reasons.  And many companies with principal offices outside South Carolina choose to open locations in South Carolina.  For that reason, this ruling reaches beyond state lines, and it is important for all employers to understand its implications upon benefit plans and leaves of absence.

After July 24, 2019, it no longer is enough for employees claiming an employee is a “spouse” for employee benefit plan purposes simply to establish they were married under the common law of South Carolina.  Now, the critical factor is the date as of which that marriage was established.  The documents submitted to prove the marriage (e.g., tax returns, documents filed under penalty of perjury, introductions in public, contracts, and checking accounts) must also reflect this timing.

This Court decision will also have implications for employees in South Carolina seeking to take a leave of absence under the Family and Medical Leave Act to care for a spouse with a serious health condition.  Before July 25, 2019, eligible employees could take a leave of absence under the FMLA to care for a common law spouse with a serious health condition.  Yet after this Court ruling, employees can only take FMLA leave to care for a common law spouse if that common law marriage was established on or before July 24, 2019.  Employers should remember that under the Department of Labor’s FMLA Regulations, employees can be required to provide reasonable documentation evidencing the existence of a valid marriage.

Jackson Lewis can help you establish practices and procedures to distinguish between grandfathered common law marriages, marriages recognized in other states, and those that will now not be recognized.

A Deadline is a Bright Line: How Fessenden Narrows “Substantial Compliance” in the Seventh Circuit

Last week the U.S. Court of Appeals for the Seventh Circuit ruled that the deadline imposed under ERISA for plan administrators to decide on benefit claims is a “bright line” rule. The court held that when a plan administrator misses this deadline, the “substantial compliance” exception to statutory compliance does not apply and the plan administrator loses the benefit of deference, causing a de novo standard of review to apply to the court’s analysis of the plan administrator’s determination.

Donald Fessenden sued Reliance Standard Life Insurance Co. after Reliance denied his claim for long-term disability benefits. Fessenden argued that because Reliance did not enter a final decision denying his claim for long-term disability benefits until after the statutory 45-day deadline for deciding, the plan administrator forfeited its right to a favorable review standard due to the statutory violation. The Seventh Circuit agreed with Fessenden and held that when a plan administrator misses a statutory deadline the administrator is no longer in “substantial compliance” with the statute and the district court should review the administrator’s decision de novo rather than under a deferential standard of review.

Although the court held that a plan administrator that misses a statutory deadline cannot be in “substantial compliance” with the statute, the Seventh Circuit rejected the Second Circuit’s holding in Halo v. Yale Health Plan, 49 F.3d 24 (2d Cir. 2016) and refused to abrogate entirely the doctrine of “substantial compliance.” Rather, the court narrowly held that the doctrine does not apply to the violation of regulatory deadlines, so “when that time is up, it’s up.”

The case is Fessenden v. Reliance Standard Life Ins. Co., 7th Cir., No. 18-1346, 6/25/19.

Key Takeaway: Plan sponsors who want the deferential arbitrary and capricious standard of review to apply to their benefit determinations must remain conscious of, and comply with, applicable claim review deadlines.

How Multiemployer Pension Plans Continue To Extract More From Contributing Employers Than What They Bargained For

Contributing employers to multiemployer pension plans (“MEPPs”) are commonly surprised that their obligations to such a plan can extend well beyond the contributions required under a collective bargaining agreement (“CBA”) negotiated with a union.  The most significant extra-contractual obligation is withdrawal liability, a statutory exit fee imposed on employers that leave a plan that has unfunded vested benefits.

However, even before a withdrawal, an employer’s potential liability can also be affected by the plan rules adopted by the MEPP’s trustees and other federal laws intended to encourage proper funding of the MEPPs as shown by the 4th Circuit case of Bakery & Confectionary Union & Indus. Int’l Pension Fund v. Just Born II, Inc., 888 F.3d 696 (4th Cir. 2018).

The Just Born Case

In the Just Born case, the underfunding of the Bakery and Confectionary Union and Industry International Pension Fund (the “Pension Fund”) required it to be classified in critical status under the Pension Protection Act of 2006 (“PPA”).  As required for MEPPs in critical status, the Pension Fund’s Board of Trustees adopted a rehabilitation plan which is generally a revised schedule of reduced benefits for participants and increased contributions by employers intended to return the plan to financial stability.

While Just Born contributed under the rates of the rehabilitation plan for the term of the CBA in effect at the time, the company demanded that the new CBA being negotiated include terms that contributions for newly hired employees be made to a separate 401(k) plan instead of the Pension Fund.  The union refused those terms, and Just Born under the principles of federal labor law declared a good-faith impasse and unilaterally implemented the terms of its last, best offer to the union.  As a result, Just Born stopped contributing to the Pension Fund for newly hired employees.  The Pension Fund disagreed with Just Born’s actions and sued for the alleged delinquent contributions for new employees.

The 4th Circuit ruled in favor of the Pension Fund, affirming the district court’s ruling for Just Born to pay delinquent contributions, and interest, statutory damages, and attorneys’ fees.  The court found that specific language under the PPA, as amended by the Multiemployer Pension Reform Act of 2014, required Just Born to continue contributing under the terms of the expired CBA (which required contribution for all employees) pending the adoption of a new CBA in compliance with the Pension Fund’s rehabilitation plan, a withdrawal from the Pension Fund, or some other statutorily required act.

Required Minimum Distributions

The aging of the baby boomer generation has increased the level of scrutiny with which the Department of Labor, Employee Benefits Security Administration (“EBSA”) will review the efforts of pension plans to locate missing plan participants who did not receive reported benefits.  The focus of the EBSA which began with a review of the efforts of defined benefit plans to find and pay benefits to participants has now expanded to include defined contribution plans.

Specifically, the EBSA is reviewing efforts of those plans to locate participants who reached age 70 ½ and failed to take a required minimum distribution (“RMD”) as of April of the year after which they turned 70 ½.

There are three areas of review by the EBSA:

  1. The locating of missing participants;
  2. The informing terminated, vested participants that a retirement benefit was due to be taken; and
  3. Beginning benefit payments when the participant attained the age of 70 ½.

Unlike most EBSA initiatives which begin with the hierarchy of the EBSA, the increased interest in retirees over the age of 70 ½ began in the Philadelphia regional office because social security advised new recipients of entitlement to possible benefits from long forgotten retirement plans.  Those individuals were primarily, terminated participants who had left employment after vesting.  More than half a billion dollars of unpaid retirement benefits were discovered in only six defined benefit plans.

The discovery of these long-forgotten pension entitlements was also a victory for the Internal Revenue Service.  Distributions over the age of 70 ½ known as Required Minimum Distributions (“RMD’s”) are subject to taxation.  Failure of a participant to take his RMD can expose that participant to penalties in addition to taxation.

The EBSA is intent on policing efforts to locate those participants.  Ironically, despite the initiative, the EBSA, the PBGC, and the IRS have been reluctant to issue guidelines for locating participants.  Plan Sponsors have been left to their own devices to structure these programs.  Programs which seem to have the greatest probability of approval are those that can demonstrate formal procedures, maintenance of accurate participant data, and continued efforts to find participants.

A plan must send a letter to a participant at age 70 ½ and each year thereafter until the participant takes a distribution.  The EBSA is demanding proof that employers are sending the letters every year.

A plan must demonstrate efforts to use all available data tools.  Several companies specialize in research services, databases for postal services, obituary searches, and social security death index.  A plan must use those services regularly to reflect that the plan is moving in a pro-active manner.

It is important to understand that liability does not end with the participant.  Recent efforts by the EBSA have resulted in the opening of investigations against trustees, plan administrators and Third Party Administrators.  The focus is on the efforts made at age 70 ½ and each year thereafter until the participant takes the RMD.  The proof must consist of “hard proof”, such as the address of participant and proof of mailing that communications were regularly sent to terminated, vested participants.

The investigations by the EBSA are cumbersome because of a lack of guidance, thereby requiring an enormous amount of work by the plan and forcing the plan to incur professional fees.

The initiative which began on the east coast with the Philadelphia office has now migrated to west coast offices.  Trustees, plan administrators, and TPAs should take these investigations seriously.

IRS Releases Proposed Form W-4 Redesign

On Friday, May 31, 2019, the IRS released a new proposed design of the IRS Form W-4 to be used starting in 2020.  The goal is to make it easier for employees to calculate accurate withholdings under the 2017 Tax Cuts and Jobs Act.  Employees who already have completed a Form W-4 will not be required to submit a new Form W-4 simply due to the redesign.  However, once finalized, the new Form will be required for employees hired on or after January 1, 2020.  More information is available here.

To Withhold or Not to Withhold on Pension Distributions: A New Proposed Regulation Clarifies Obligations

On May 31, the IRS issued a proposed regulation — presented in Q & A format — concerning income tax withholding obligations on non-rollover distributions from employer-sponsored plans — including pension, annuity, profit sharing, stock bonus and any other deferred compensation plan — to destinations outside the U.S. Unlike U.S. payees, non-U.S. payees cannot elect to forego income tax withholding on such distributions.

Current Guidance

Notice 87-7 provides current guidance concerning withholding obligations on non-rollover distributions. The Notice provides:

• If the payee provides the payor with a residential address outside the U.S., the payor is required to withhold.

• If the payee provides the payor with a residential address within the U.S., the payor is required to withhold unless the payee has elected no withholding.

• If the payee does not provide any residential address, the payor is required to withhold.

Proposed Regulation

The proposed regulation is based on, and provides clarification concerning, the guidance provided in Notice 87-7. The proposed regulation provides:

• Withholding obligations apply and cannot be waived where the payee provides a U.S. residential address but provides payment instructions indicating the funds are to be delivered outside of the U.S.

• Withholding obligations apply and cannot be waived where the payee provides a non-U.S. residential address, without regard to the delivery instructions — including an instruction to deliver the distribution to a financial institution located in the U.S.

This clarification is an acknowledgement of the ease with which funds deposited in a U.S. financial institution can be withdrawn by a person located outside the U.S. and of the fact that a payee’s residential address is most likely the location of ultimate distribution.

• Withholding obligations apply and cannot be waived where the payee has not provided a residential address.

• Withholding obligations apply and can be waived where the payee provides a military or diplomatic post office address.

Proposed Applicability Date

The new withholding rules will apply to distributions that occur after the proposed regulation is finalized, at which point it will supersede Notice 87-7. Until then, payors can continue to rely on Notice 87-7 as well as the proposed regulation’s rule concerning military and diplomatic post office addresses.


The list of the federal courts of appeals enforcing unambiguous anti-assignment provisions in ERISA health benefit plans continues to grow:  almost exactly one year ago, the Third Circuit joined its sister circuits in holding “that anti-assignment clauses in ERISA-governed health insurance plans as a general matter are enforceable.” As the Third Circuit opinion noted, every circuit court to address the issue – seven to date (the First, Second, Third, Fifth, Ninth, Tenth, and Eleventh) – has reached this same conclusion of law.

This very issue was recently addressed by the Eastern District of New York in Long Island Neurological Assocs., P.C. v. Highmark Blue Shield, No. 2:18-cv-81 (DRH)(AYS), 2019 U.S. Dist. LEXIS 46176 (E.D.N.Y. Mar. 20, 2019).[1] But, in that case, the court concluded the otherwise unambiguous anti-assignment provision at issue was unenforceable.

The problem was not that the district court went against precedent.  The problem was the document in which the anti-assignment provision appeared.  It was not in a formal plan document, nor in a Summary Plan Description or a Statement of Material Modification. It was contained in the Administrative Services Agreement (“ASA”) between the plan insurer and the plan sponsor. The court determined that, for purposes of enforcing a provision against plan participants, the provision must appear in a “plan document.” The court explained, “For ERISA-purposes, a plan document is one which a plan participant could read to determine his or her rights or obligations under the plan.” Because the ASA at issue was not a document designed to inform participants of their rights and obligations, and as, apparently, there was no language in the formal plan document that arguably incorporated the ASA by reference, the court held the anti-assignment provision was unenforceable.

This decision demonstrates the importance of keeping the formal plan document properly updated, as opposed to attempting to utilize ancillary documents to modify controlling plan terms.  To be sure, the use of ancillary documents to establish the terms of a plan can be appropriate, but only if the formal plan document expressly anticipates and authorizes the expansion of plan terms through incorporation of other documents, such as summary plan descriptions or insurance policies, or, possibly, administrative services agreements.  It appears there were no such provisions in the plan at issue in Long Island Neurological Assocs., P.C. v. Highmark Blue Shield. As a result, an otherwise proper anti-assignment provision was ruled ineffective.


[1] At the time of posting, the caption for this case in Lexis identified the Plaintiff as “Long Island Neurological Assocs.” We note the caption for the matter reported on PACER reads “Long Island Neurosurgical Assocs.”