On November 10, 2014, the U.S. Department of Health and Human Services (HHS) issued a bulletin reminding covered entities and business associates of how they may disclose patient information for public health activities or in emergency situations. This bulletin was published in response to the Ebola outbreak and other recent events.
On September 18, 2014, the IRS issued Notice 2014-55, which expands permissible mid-year election changes under “cafeteria plans” to address two specific situations that have arisen in connection with the implementation of healthcare reform. Specifically, the notice states that a participant may revoke an election for employer-provided health coverage in two situations, provided certain conditions are satisfied:
(1) Where the participant’s regular working hours are reduced during the plan year, but for whom the reduction does not affect his eligibility for employer-provided health coverage, and
(2) Where the participant has a special or annual enrollment opportunity in the Health Insurance Marketplace (formerly, the Exchange) and desires to replace employer-provided health coverage with qualified plan coverage in the Marketplace.
With respect to the first scenario, a participant who has experienced a reduction of hours to less than an average of 30 hours of service per week may be permitted to prospectively revoke an election for employer-provided health coverage, but only if the participant enrolls in another plan (including qualified plan coverage in the Marketplace) that provides minimum essential coverage. The replacement coverage must be effective no later than the first day of the second month following the month that includes the date on which the coverage is revoked. It is irrelevant, for these purposes, whether the participant continues to be eligible for employer-provided health coverage following the reduction of hours. Note, however, this does not mean that employees who forfeit an employer subsidy as a result of a change in employment status (i.e. the cost of participating increases) can revoke an election for such employer-provided health coverage without replacing it.
With respect to the second scenario, a participant who has become eligible for a special enrollment opportunity in the Marketplace or who is currently enrolled in a non-calendar plan year plan but wants to participate in the annual enrollment period in the Marketplace may be permitted to prospectively revoke an election for employer-provided health coverage if the participant enrolls in qualified health plan coverage in the Marketplace. The replacement coverage must be effective no later than the day immediately following the last day of the coverage that is revoked.
These elections may only be made with respect to health plans that provide minimum essential coverage. The replacement coverage must also provide minimum essential coverage and cover the participant and all dependents whose prior coverage ceases as a result of the revocation. For these purposes, the cafeteria plan may rely on the reasonable representation of the participant that he (i) has timely enrolled or intends to timely enroll in such coverage and, (ii) if applicable, is eligible for a special enrollment period on the Marketplace. It’s not clear, however, what is the effect on the cafeteria plan of a participant’s untimely enrollment in such replacement coverage.
Employers should consider permitting mid-year election changes in accordance with Notice 2014-55. These changes will provide employees more flexibility in selecting coverage on the Marketplace, without increasing the employer’s exposure for the “play or pay” penalty to the employer. (Recall, the penalty does not apply if a full-time employee voluntarily elects to forego employer-provided coverage that satisfies the minimum value and affordability requirements of healthcare reform.)
To allow the new permitted election changes under this notice, however, a cafeteria plan must be amended and the employer must notify the participants of the amendment. Generally, the amendment must be adopted on or before the last day of the plan year in which the elections are allowed and may be effective retroactively to the first day of that plan year, provided the cafeteria plan is operated in accordance with this guidance. However, an amendment relating to the 2014 plan year may be adopted at any time on or before the last day of the plan year that begins in 2015. Although the amendment may be adopted retroactively to the first day of the plan year, the cafeteria plan may not allow a participant to make a retroactive election to revoke coverage.
On June 30, 2014, the United States Supreme Court held, in a 5-4 decision, that the contraceptive mandate included under the Patient Protection and Affordable Care Act (“PPACA”) violates federal law. The Court’s holding in Burwell v. Hobby Lobby Stores, Inc., et. al., provides limited relief to closely-held companies whose owners have religious objections to the requirement to provide contraceptives, without cost-sharing, to female participants in their health plans.
Under PPACA, group health plans and health insurers are required to provide preventive health services without cost-sharing, including but not limited to, coverage for contraceptive care. A regulatory exception to the contraceptive mandate exists, however, for plans or policies maintained by certain religious employers and religious nonprofit organizations with religious objections to the mandate. No exception was provided under the regulations to for-profit companies that had similar objections.
It was this lack of regulatory relief that sparked a number of lawsuits around the country by several companies, including Hobby Lobby. In general, these companies claimed that the contraceptive mandate violated the Religious Freedom Restoration Act of ’93 (“RFRA”), which prohibits the government from substantially burdening a person’s exercise of religion even if the burden results from a rule of general applicability unless the government “demonstrates that application of the burden to that person is (a) in furtherance of a compelling governmental interest and (b) the least restrictive means of furthering that compelling governmental interest.” At the crux of the case, was the issue of whether a for-profit company constituted a “person” under the RFRA.
The majority concluded that the RFRA applied to for-profit closely-held companies. The Court warned, however, that the holding is limited to the contraceptive mandate and is not intended to be broadly applied to other provisions of PPACA that conflict with the religious beliefs of business owners. Further, it is applicable only to companies owned by a single family, and does not provide relief to public companies or companies with unrelated shareholders.
It is important to remember that the exemption from the contraceptive mandate is not automatic. A company that seeks to rely on this exemption is currently required to file a form with the government in order to claim the exemption. For female participants in an “exempt plan”, such coverage will be indirectly available through the insurer.
The United States Supreme Court issued a unanimous opinion on June 25, 2014 in the case of Fifth Third Bancorp v. Dudenhoeffer. While the Supreme Court’s holding substantially affects the fiduciaries of all employee stock ownership plans (ESOPs), as well as fiduciaries of other individual account plans (such as 401(k) plans) that invest in employer stock, it does not signal the end of employer stock investments in qualified plans. In fact, the Court provided a brief outline of defenses for fiduciaries of certain plans investing in employer stock.
Under the Employee Retirement Income Security Act of 1974 (ERISA), each fiduciary of a retirement plan is required to discharge his or her duties in a prudent manner and solely in the interests of the participants and beneficiaries. Generally, plan fiduciaries are also required to diversify the plan’s asset to prevent large losses; however, a specific exception is provided from the diversification requirement for certain plans that are invested in employer stock.
Many courts of appeals, however, have given ESOP fiduciaries a “presumption of prudence” for their decisions to hold or buy employer stock. This presumption, often referred to as the “Moench presumption” (named after the infamous Third Circuit case in which it was initially created) was deemed necessary to further the corporate financing and investment goals of ESOPs.
The Supreme Court agreed to hear this case as a result of a conflict between the circuit courts on whether the Moench presumption should be applied at the pleading stage (in support of a motion to dismiss) or as a defense in the substantive case. Noteably, the circuit courts were not in disagreement as to whether the Moench presumption existed, only as to which stage of litigation it applied.
In a surprising twist, the Supreme Court concluded that the Moench presumption did not exist at all because it was not supported by the statutory language under ERISA. As a result, fiduciaries of plans that permit or require the investment in employer stock will have to defend their actions to invest or continue to invest in the stock of a company whose value has decreased. The Supreme Court did provide some comfort, however, that the fiduciary’s responsibilities under ERISA do not require it to violate securities laws (such as insider trading laws). Of course, this defense is of little assistance to fiduciaries of plans sponsored by privately held companies, as is the case for many ESOPs. It remains to be to seen as to whether Congress will step in and provide explicit relief in these situations. Until then, all plan fiduciaries should be diligent in periodicially reviewing plan investments in employer stock and adequately documenting their decisions to make or retain such investments – regardless of whether the plan document requires such investment.
Many employee benefit professionals are aware of the deferential standard of review provided to plan fiduciaries in accordance with the 1989 United States Supreme Court ruling in Firestone Tire & Rubber Co. v. Bruch. That is, a court will not question the decisions of a fiduciary of an ERISA plan to whom discretionary authority to interpret the plan’s terms has been delegated, unless there is evidence of an abuse of discretion by the plan fiduciary. Hence, where a plan confers on plan fiduciaries such discretionary authority, the court will not review the underlying facts of the claim unless the claimant submits sufficient evidence to support a finding that the fiduciary abused his or her discretion.
Questions remain, however, on the scope of the Firestone standard. Is the standard limited to benefit denials under an ERISA plan? Does it extend to a fiduciary’s actions in accordance with the plan’s terms? In Futral v. Chastant, the Fifth Circuit joined the Second Circuit in concluding that that Firestone standard does not apply to breach of fiduciary duty claims. On the contrary, the Third, Sixth, Seventh, Eighth and Ninth Circuits have concluded that deferential review should be applied to both benefit denial and breach of fiduciary duty claims. Interestingly, this issue was raised in the Tibble v. Edison Int’l case that is currently in front of the United States Supreme Court and could be settled in the next couple months. Limiting the Firestone standard to benefit denial claims could result in increased liability to fiduciaries, as well as increased litigation costs for plan sponsors.
On April 4, 2014, the Internal Revenue Service (the “Service”) published Notice 2014-19, in which it describes amendments required to be made to retirement plans qualified under Section 401(a) of the Internal Revenue Code of 1986 (the “Code”) to reflect the application of the decision in United States v. Windsor and the subsequent holdings of Revenue Ruling 2013-17. Recall, prior to the Windsor decision, the term “spouse” (or similar terms) for Federal tax purposes referred only to a person of the opposite sex. As a result, same-sex spouses were not recognized for purposes of the Code – including, for purposes of qualified retirement plans. Following the Windsor decision and subsequent IRS guidance, however, the term “spouse” (or similar terms) includes same-sex individuals who have validly entered into a marriage in a state that recognizes such marriage even if the married couple is domiciled in a state that does not recognize such marriage (e.g. such as Texas).
In Notice 2014-19, the IRS reiterated the requirement explained in Revenue Ruling 2013-17 that qualified retirement plans recognize same-sex marriage as of June 26, 2013; however, the sponsor is permitted to limit this application until September 16, 2013 to married same-sex couples who reside in a state that recognizes the marriage. As of September 16, 2013, all qualified retirement plans must recognize same-sex spouses, even if the couple resides in a state that does not recognize the marriage. The Service indicated that sponsors are permitted to recognize same-sex marriage for any or all purposes prior to June 26, 2013, but cautions that such an amendment to a single employer defined benefit plan could affect the sponsor’s funding obligations under the plan.
Notwithstanding the required application of the Windsor decision in 2013, the Service has provided an extended deadline to amend plan documents to reflect this operation. Specifically, sponsors have until the later of the otherwise applicable deadline for required amendments (i.e. tax return filing deadline for the sponsor) or December 31, 2014. For governmental plans, this deadline is further extended to the close of the first regular legislative session of the legislative body with the authority to amend the plan that ends after December 31, 2014.
Note, however, an amendment may not be required in all cases. For example, if the plan document refers generally to the term “spouse” as defined under the Code, no amendment would be necessary. On the other hand, if the plan document defined “spouse” as an individual of the opposite sex (or with respect to similar restrictions) or if the sponsor has recognized same-sex marriages for any period prior to June 26, 2013, a plan amendment is required to be adopted by the applicable deadline. This is a good time to review your plan documents to determine if an amendment is, in fact, required to be adopted this year.
On March 26, 2014, Region 13 of the National Labor Relations Board (Chicago) held that Northwestern University football players are employees of the university and have the right to unionize. Relying on the broad common law definition of “employee,” the NLRB ruled that football players that receive scholarships are employees because of the university’s right to control the players, the significant time the players devote to football, and the fact that they receive “compensation” in the form of scholarships. Northwestern University has already stated that it intends to appeal this decision to the Seventh Circuit. If the decision is affirmed, not only will the players have the right to unionize, but collegiate athletic programs will likely be the next target of the NLRB’s aggressive attacks on employer workplace rules.
Technically, this decision impacts only Northwestern University football players, but it has the potential to have significant consequences for collegiate sports. First, this creates a precedent on which other student athletes at private universities could rely in their efforts to unionize. In addition, the NLRB’s broad definition of “employee” (if applied by other government agencies or courts) could raise a number of significant questions, some of which include:
- Will the NLRB’s determination that scholarships are “compensation” impact the IRS’s analysis of whether scholarships are subject to FICA, social security, Medicare and other taxes? And if so, will those withholding obligations apply in prior years that are still open resulting in universities having a springing liability for failure to withhold and remit those taxes?
- Can an athlete’s on-the-field injury be a basis for a workers’ compensation claim?
- Will athletes that are cut from the team be eligible for unemployment benefits?
- Will athletes who do not receive scholarships or who receive more limited scholarship funds have a claim under the Fair Labor Standards Act or state wage and hour laws for unpaid wages failure to comply with minimum wage laws?
- Will athletes be entitled to participate in employee benefit plans if they are employees of the university?
Right now, there appear to be more questions than answers regarding this decision, so it is an issue that is worth monitoring.
A copy of the NLRB’s decision can be found at http://mynlrb.nlrb.gov/link/document.aspx/09031d4581667b6f.
The State of Texas is the latest jurisdiction under scrutiny for its ban on same-sex marriage. On Wednesday, February 26, 2014, U.S. District Judge Orlando Garcia ruled that the state law banning same-sex marriage results in a violation of the equal protection and due process clauses of the U.S. Constitution. Notwithstanding the holding, however, the judge stayed the effect of his ruling to permit an appeal to the Fifth Circuit Court of Appeals (located in New Orleans, Louisiana) and, possibly, to the U.S. Supreme Court. Accordingly, there is no immediate effect of the ruling on the existing ban on same-sex marriages in Texas.
This ruling falls on the heels of similar challenges in Kentucky, Oklahoma, Ohio, Utah and Virginia following the U.S. Supreme Court’s decision in U.S. v. Windsor in June 2013. Recall the Windsor court held that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional and, thereby, required the federal government to recognize same-sex marriage for purposes of a number of federal laws.
The effect for employee benefit plans, generally, is that a same-sex couple that is married in a state that recognizes same-sex marriage will be treated as “married” for purposes of the Internal Revenue Code and the Employee Retirement Income Security Act. Nonetheless, the Windsor decision does not require employers located in states that do not recognize same-sex marriage to provide health or other coverage to such couples. This is not to say, however, that same-sex couples may be denied mandatory federal rights – e.g., spousal rights under a qualified retirement plan – or that the exclusion of same-sex coverage could not implicate other laws, such as nondiscrimination requirements applicable to health plans or rights under Title VII of the Civil Rights Act of 1964. If, however, the Texas ban on same-sex marriage is ultimately determined to be unconstitutional, employers located in Texas will no longer be permitted to exclude same-sex couples from coverage under their employee benefit plans.
In the “IRS Retirement News” published by the Internal Revenue Service (the “Service”) on February 24, 2014, the Service reminds us that the failure of a safe harbor 401(k) plan to provide an annual notice to participants constitutes a failure to operate the plan in accordance with its provisions. In order to protect the qualified status of the plan, it is imperative that the plan sponsor take appropriate steps to correct this operational failure. The method of correction, however, will depend on how the failure affects the participants.
The safe harbor 401(k) plan notice informs the eligible employees of their rights and obligations under the plan, including, if applicable, the fact that the plan sponsor intends to make a matching contribution with respect to salary deferral elections made under the plan. Such notices are required to be sent within a reasonable period before the beginning of each plan year (generally, at least 30 days but no more than 90 days before such plan year) and, with respect to newly eligible employees, within the 90-day period ending on the date of such employee’s eligibility to participate in the plan.
With respect to a participant who has received a prior year’s safe harbor notice and, based on the facts and circumstances, is considered by the plan sponsor to be informed of the plan’s features, the failure to provide the notice may be treated as an administrative error that would be corrected by revising procedures to ensure that future notices are provided to employees in a timely manner. On the contrary, if the missing notice results in an employee not being able to make elective deferrals to the plan (either because he was not informed about the plan, or informed about how to make deferrals to the plan), then the employer may need to make a corrective contribution that is similar to what might be required to correct an erroneous exclusion of an eligible employee under the Employee Plans Compliance Resolution System (Rev. Proc. 2013-4). That is, the employer must contribute 50% of the excluded employee’s missed deferral, which is calculated as the greater of 3% of compensation or the maximum deferral percentage for which the employer matches at a rate at least as favorable as 100% of the elective deferral made by the employee, plus 100% of the missed matching contribution (adjusted for earnings). Under no circumstance, however, can a plan sponsor correct this failure merely by “opting-out” of safe-harbor status (i.e. by satisfying the actual deferral percentage (ADP) and/or actual contribution percentage (ACP) tests for the plan year of the failure).
On Monday, February 9, 2014, the Agencies issued regulations that provide additional guidance regarding the employer mandate (i.e. the “play or pay” penalty) under Healthcare Reform. But, the most surprising aspect of the guidance was the delay on the implementation of the mandate for certain employers to provide health coverage to their full-time employees.
Under Healthcare Reform, applicable large employers (i.e. businesses that normally employ at least 50 full-time employees or full-time equivalents each year) are required to offer their full-time employees minimum essential coverage that satisfies certain criteria, or face a penalty if a full-time employee receives coverage from the Marketplace and is eligible for a subsidy for such coverage. Initially, this mandate was supposed to go into effect as of the first plan year beginning on or after January 1, 2014. In July, 2013, however, the Agencies issued a notice that delayed the implementation of the employer mandate until the first plan year that begins on or after January 1, 2015. The purpose of that delay was to allow the government more time to finalize its guidance on the reporting requirements for applicable large employers. No similar delay was provided to individuals. As a result, individuals are generally required to have minimum essential coverage as of January 1, 2014 or pay a penalty.
According to the regulations issued yesterday, employers with less than 100 full-time employees and full-time equivalents will now have until the first plan year that begins on or after January 1, 2016 to comply with the employer mandate. The purpose cited for this delay was to allow employers more time to transition to a 30-hour workweek (which is the threshold for an employee to be considered “full-time” for purposes of healthcare reform). Notably, this transition relief is NOT automatic.
An employer that intends to rely on this transition relief will be required to certify to the Internal Revenue Service that it has not reduced the size of its workforce or the overall hours of service of its employees during the period commencing on February 9, 2014 and ending on December 31, 2014, other than for bona fide business purposes (such as a sale of a division or changes in the economy), and, further has not otherwise eliminated or materially reduced its health coverage during such period. An employer that fails to satisfy these conditions will not be entitled to rely on this transition relief and, therefore, will be subject to the employer mandate as of the first plan year beginning on or after January 1, 2015.
In addition, employers with 100 or more full-time employees and full-time equivalents will have a phase-in period for compliance with the mandate. The mandate for this group remains effective as of the first plan year beginning on or after January 1, 2015. However, an employer in this group will be treated as complying with the mandate in the 2015 plan year if the employer covers at least 70% of its full-time employees (which, ironically, is a threshold that currently applies for determining whether a self-insured health plan is discriminatory under Section 105(h) of the Internal Revenue Code) and will be treated as complying with the mandate in the 2016 plan year and thereafter if the employer covers at least 95% of its full-time employees. Recall, the “substantial compliance” threshold of 95% was provided for in regulations issued by the Agencies in early 2013 and is not new.
While the delay may be appreciated by those employers eligible to take advantage of it, it is limited in nature. Employers with less than 100 full-time employees (and full-time equivalents) will need to weigh the advantages of making changes to their employee population and health coverage against the usefulness of the transition relief. Interestingly, an employer in this group that fails to satisfy the conditions for transition relief will be entitled to rely on the reduced compliance standards that are otherwise provided for employers with larger employee populations (i.e. provide coverage to at least 70% of the full-time employee population in the 2015 plan year).