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?”

The IRS has commenced a compliance initiative project (“CIP”) aimed at nonqualified deferred compensation arrangements subject to Section 409A of the Internal Revenue Code (“409A”). Although the project scope is limited, employers with arrangements that may be subject to 409A should take this regulatory action as a prompting to review their arrangements and make any corrections needed to ensure compliance with the law.

409A Audit Project. The IRS project was announced unofficially on May 9, 2014 and will involve limited-scope audits of nonqualified deferred compensation arrangements of no more than fifty employers. These employers have already been selected for the CIP from an existing population of employers that are undergoing employment tax audits based, in part, on the likelihood that they maintain 409A arrangements. An IRS official has indicated that these employers were not selected solely for this CIP. These employers will receive Information Document Requests (“IDRs”) from the IRS focusing on three major aspects of 409A compliance:

  1. Initial deferral elections. Initial elections to defer compensation and fix the time and manner of payment must generally be made before the taxable year in which the compensation is earned, unless an exception applies.
  2. Subsequent deferral elections. Subsequent elections to change the time or form of payment generally may not accelerate a distribution, and elections to delay a distribution generally may not take effect for 12 months and must delay the distribution for at least 5 years.
  3. Distributions. Distributions from 409A arrangements generally may only be made upon a specified date, separation from service, death, disability, change in control, or unforeseeable emergency. There may also be a six-month delay on distributions to “specified employees” of public companies.

The IDRs will ask employers to identify their top ten highly compensated individuals and report whether any of these individuals made deferral elections under, or received distributions from, a 409A arrangement during the years under examination in the employment tax audit. The IRS will then review any such elections and distributions for compliance with the above rules. The IRS will use the project to test compliance with 409A, determine whether the IDRs are effective in gathering information and refine its audit techniques, presumably in preparation for larger-scale 409A audits in the future. An IRS official has indicated that the CIP is expected to be completed within 12 months.

Takeaway for Employers. The limited scope of the project means that the vast majority of employers will not be audited just yet. However, signs are clear that IRS agents are “sharpening their pencils” and ramping up enforcement of 409A compliance. Employers should take this opportunity to review their nonqualified deferred compensation arrangements for documentary and operational compliance with 409A and promptly self-correct any violations under IRS correction programs (which are generally no longer available once an IRS audit has commenced).

The Department of Labor (DOL) has published proposed regulations containing amendments to the COBRA notice provisions.  The amendments are intended to align the model general and election notices with the Affordable Care Act provisions already in effect and to ensure that the DOL will have flexibility to modify the model notices going forward.

The proposed amendments will eliminate the current (outdated) versions of the model general and election notices contained in the appendix to current regulations and permit the DOL to amend the notices as necessary going forward without additional rulemaking.  The preamble to the proposed regulations indicates that these changes will eliminate the confusion that may result from multiple versions of the model notices being available in different locations.

Contemporaneous with issuance of these proposed regulations, the DOL has issued updated versions of the model general notice and model election notice (which election notice is an update of the version of the election notice made available as part of Technical Release No. 2013-02 (Guidance on the Notice to Employees of Coverage Options under Fair Labor Standards Act §18B and Updated Model Election Notice under the Consolidated Omnibus Budget Reconciliation Act of 1985)).  The updated notices reflect that coverage is now available in the Marketplace and the updated model election notice provides information on special enrollment rights in the Marketplace. The use of the model notices is not required and the model notices are provided solely for the purpose of facilitating compliance with the applicable notice requirements.

Until final regulations are issued and effective, the use of the model notices available on the DOL website, properly completed, will be considered good faith compliance with the notice content requirements of COBRA.

The US Treasury released the final regulations implementing the employer shared responsibility penalty provisions of the 2010 health care reform law on February 10, 2014.  In many ways, the final regulations resemble the proposed regulations issued over a year ago but there are several – mostly welcome – changes and transition provisions for employers.  (See our earlier post regarding the proposed regulations.)

Phased-in enforcement.  The penalty provisions were to apply, beginning this year, to employers with 50 or more fulltime equivalent employees.  Such “large” employers are subject to a tax penalty under Internal Revenue Code section 4980H for each month in which they fail to offer affordable minimum value coverage to 95% of fulltime employees (and their children up to age 26).  The Obama administration announced last summer that it would delay enforcement of the penalty provision until 2015 for all large employers.  These final regulations further delay the penalty provision until 2016 for large employers with fewer than 100 fulltime equivalent employees.  And, for a large employer with 100 or more fulltime equivalent employees, penalties can be avoided in 2015 as long as the employer offers affordable minimum value coverage to at least 70% (not 95%) of its fulltime employees.   

Fulltime employees for purposes of the penalty determination.  The final regulations retain the safe harbor look-back measurement/stability period method for determining fulltime status but provide some of general exceptions to who must be counted as a fulltime employee including most volunteers of government or tax-exempt entities and seasonal employees customarily working less than six months of the year.  In addition to the exceptions, the final regulations include some clarifying provisions for counting hours of other categories of employees (e.g., teachers, work-study students, and adjunct professors).    

Transition relief of proposed rules extended.  Certain transition relief that would have been available for 2014 is extended under the final regulations.  For example, an employer can use a six-month period in 2014 (instead of the whole year) to determine whether it has the threshold 100 fulltime equivalent employees for purposes of the 2015 penalty enforcement.  Also, an employer with a fiscal year plan generally will not be subject to the penalty provisions until the first day of its 2015 plan year.

As with the proposed regulations, the devil is in the details regarding the special exceptions and transition rules and a full treatment of all those details is well beyond the scope of this post. 

We will update our free webinar on the employer shared responsibility penalties and post a link to that webinar on the blog shortly.  Also, stay tuned for the final regulations implementing the employer information reporting provisions of the law which the IRS indicates will be “simplified” relative to the earlier proposed reporting regulations.

For compliance assistance or other guidance related to the health care reform law, contact a member of the firm’s Health Care Reform Task Force or the Jackson Lewis attorney with whom you normally work.

A U.S. Surgeon General’s Report issued this month marks fifty years since the Surgeon General’s landmark report in 1964 that set in motion a nationwide campaign to reduce and hopefully eliminate tobacco smoking in the United States. Also during this month, rules under the Affordable Care Act (ACA) go into effect, enhancing employers’ ability to provide financial incentives to employees to “kick the habit!” Employers proceed with caution, however, as the matrix of laws affecting so-called “wellness programs” present significant legal risks and practical obstacles.

Learn more about wellness programs: free webinar.

The 2014 Report is more than 900 pages and is full of information about the success America has experienced in reducing smoking, while noting the challenges that remain. The Report provides some information likely to be interesting to employers, such as:

A 2013 review of smoking and absence from work included several of the studies presented in the 2004 Surgeon General’s report along with more recent studies (Weng et al. 2013). In a meta-analysis of 17 of the studies, current smokers were 33% more likely to have an absence from work than nonsmokers (i.e., a group that combined never smokers and former smokers).

The Report also notes that:

Studies of contingency management interventions, in which quitting is rewarded with financial incentives, show promise, including higher quit rates (34% of women in the intervention arm quit compared to 7.1% of women receiving standard care) and improvements in infant birth weight (Higgins et al. 2010, 2012).

But for employers and their varied wellness programs, design and administration is fraught with risk as wellness programs sit at the crossroads of a range of federal and state laws. These include the American with Disabilities Act, the Health Insurance Portability and Accountability Act, the Age Discrimination in Employment Act, the Equal Pay Act and a host of others. Recent attention by the Equal Employment Opportunity Commission heightens these concerns.

Helping employees (and their dependents) stop smoking tobacco is a worthwhile goal. But some of the tools that can help achieve that goal, such as financial incentives designed to drive healthier behaviors, have significant risks associated with them. Employers should proceed with caution, but recognize that not doing anything also has risks.

The Departments of Labor, Treasury and Health and Human Services issued final regulations on June 3, 2013, that implement PHS Act section 2705, added by the Affordable Care Act (ACA), and existing provisions under ERISA and the Code. The preamble to those regulations stated that the Departments anticipated issuing future subregulatory guidance as necessary. Frequently asked questions issued on January 9, 2014, provide some of that additional guidance.

Some plan sponsors were uncertain as to how the final regulations applied when a participant, after declining an opportunity at initial or open enrollment to participate in a wellness program to avoid a tobacco surcharge, attempts to join the program in the middle of the plan year. Question 8 of the DOL’s FAQs confirm employers need not provide this “second bite at the apple” during the plan year:

No. If a participant is provided a reasonable opportunity to enroll in the tobacco cessation program at the beginning of the plan year and qualify for the reward (i.e., avoiding the tobacco premium surcharge) under the program, the plan is not required (but is permitted) to provide another opportunity to avoid the tobacco premium surcharge until renewal or reenrollment for coverage for the next plan year. Nothing, however, prevents a plan or issuer from allowing rewards (including pro-rated rewards) for mid-year enrollment in a wellness program for that plan year.

Some plan sponsors may desire to provide participants with more flexibility during the plan year to earn a wellness program reward or avoid a surcharge pertaining to tobacco cessation. However, other employers may find doing so creates a significant administrative burden, or they may believe multiple opportunities during the plan year weaken the influence of the incentive. Either way, this flexibility in design is likely to be welcomed by employers, even if not communicated before the 2014 calendar plan year.

 

 

Following the lead of the IRS  in Revenue Ruling 2013-17, the Department of Labor issued DOL Technical Release No. 2013-04 on September 18, 2013 providing that, where the Secretary of Labor has authority to regulate with respect to the limited provisions of ERISA where the term “spouse” is used, “spouse” will be read to refer to any individuals who are lawfully married under any state law, including same-sex spouses, and without regard to whether their state of domicile recognizes same-sex marriage. Thus, for ERISA purposes as well as federal tax purposes, an employee benefit plan participant who marries a person of the same sex in a jurisdiction that recognizes same-sex marriage will continue to be treated as married even if the couple moves to a state that does not recognize same-sex marriage.

Neither the DOL Technical Release, nor the IRS Revenue Ruling answered the question of the retroactive application of these rulings, although the IRS Revenue Ruling states that future guidance will address retroactivity. (See our earlier article regarding the IRS’ guidance.)

The Internal Revenue Service issued Revenue Ruling 2013-17 answering some, but not all, questions for employers in the wake of the US Supreme Court’s opinion that invalidated the federal law that confined marriage to a legal union between one man and one woman as husband and wife – United States v. Windsor, No. 12-307 (June 26, 2013) (see our earlier blog post regarding this decision).

The IRS ruled that same-sex couples, who are legally married in jurisdictions that recognize their marriages, will be treated as married for all federal tax purposes regardless of whether the couple currently lives in a jurisdiction that recognizes same-sex or in a jurisdiction that does not recognize same-sex marriage.

The ruling applies to all federal tax provisions where marriage is a factor, including tax filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, and claiming the earned income tax credit or child tax credit.

The ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.

The ruling provides that by September 16, 2013 employers must take the following prospective actions:  (1) recognize same sex spouses for payroll tax purposes, including with respect to the taxation of employer-provided group health coverage and other fringe benefits, and (2) implement the ruling with respect to qualified retirement plan spousal protections and benefits, including treating a same-sex spouse as a spouse for payment of death benefits and qualified joint and survivor annuity requirements.

The IRS stated that it will be issuing further guidance on the retroactive application of Windsor to benefits and retirement plans, and on plan amendment requirements (including timing of required amendments). The ruling and related FAQs issued simultaneously also mention procedures that individuals can follow claim refunds for prior open tax years. The ruling does not discuss whether employers will be required to take any retroactive actions for tax and benefit treatment of same-sex marriages prior to September 16, 2013.

Look for future Jackson Lewis articles for further analysis of post-Windsor issues and guidance.

The Patient Protection and Affordable Care Act requires employers to furnish employees a notice of the availability of coverage through public health insurance exchanges, i.e., the “Marketplace”. The Department of Labor requires that employers give employees the notice by October 1, 2013. As highlighted in our earlier blog post, Department of Labor Technical Release 2013-02  (http://www.dol.gov/ebsa/newsroom/tr13-02.html) provides temporary guidance and templates for the notice.

Who is subject to the notice requirement?

All employers that are covered by the Fair Labor Standards Act are subject to the notice requirement. That’s virtually all employers with annual sales or receipts of $500,000 or more as well as hospitals, schools, government entities, and other specified employers.

Which employees must be provided the notice?

Employers must provide the notice to each employee, regardless of plan enrollment status or part-time or full-time status. Employers should note that the definition of employee for this purpose is broader than the definition of employee for certain other purposes. For example, service providers classified as independent contractors for tax purposes may be employees for FLSA purposes and, if so, they must receive the notice.

What form must the notice take and what are the content requirements?

The notice must be in writing and must include information regarding the existence of the new marketplace/exchange and contact information and a description of the services provided by the marketplace/exchange.  

The notice must also inform the employee that the employee may be eligible for a premium tax credit under the Internal Revenue Code if the employee purchases a qualified health plan through the marketplace/exchange.

In addition, the notice must inform an employee that if the employee purchases a qualified health plan through the marketplace/exchange, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer and that all or a portion of such contribution may be excludable from income for federal income tax purposes.

How may the notice be delivered?

The notice may be provided by first class mail, electronically (if the Department of Labor’s electronic disclosure safe harbor is satisfied) or in person (although employers should be sure to document in-person delivery). For an employee hired on or after October 1, 2013 (the deadline for furnishing the notice to current employees), the employer must provide the notice within 14 days of the employee’s start date.   

Model notice

The Department of Labor also provided a model notice – one template for employers who do not offer a health plan and another template for employers who do. Employers should note that the model contains more information than is required to be provided by law and the Technical Release. Use of the model is not required. Employers should work with counsel in determining whether they want to use the model “as-is” or make modifications to it. The model language is available on the Department of Labor’s website at www.dol.gov/ebsa/healthreform.

Amendment to model COBRA election notice

Employers should note that the Technical Release also provides a revised model COBRA election notice which includes information about the marketplace/exchange. The model election notice is available in modifiable, electronic form on the Department of Labor’s website at www.dol.gov/ebsa/cobra.html.

The Department of Labor is allowing defined contribution retirement plan administrators to reset the timing for annual fee disclosures to participants (see our earlier blog post reminding readers of the disclosure requirement and contemplating possible relief). 

DOL has issued Field Assistance Bulletin 2013-02 announcing the temporary enforcement policy. The participant-level fee disclosure regulation, implemented last year, required administrators of 401(k)- and 403(b)-type plans to disclose information about plan investment options – including fees and investment performance information –to participants at least annually. Plans maintained on a calendar year basis were required make the first participant-level disclosures by August 30, 2012. Absent the relief provided by FAB 2013-02, plan administrators would be required to reissue updated versions of fee disclosures to participants by August 30, 2013 (or earlier, if the first fee disclosures were issued before August 30, 2012).  

Under FAB 2013-02, plan administrators may reset the deadline one time, for either 2013 or 2014, if the plan fiduciary determines plan participants will benefit from doing so and provided no more than 18 months pass before participants receive the next disclosure.

The temporary enforcement policy does not change any other requirements for plan administrators.