Employee Benefits & Executive Compensation Blog

The View from Proskauer on Developments in the World of Employee Benefits, Executive Compensation & ERISA Litigation

Health Care Reform Weekly Roundup – Issue 1

Efforts to repeal and replace the Affordable Care Act (“ACA”) are in full swing as the U.S. Senate considers whether to modify the House of Representative’s American Health Care Act (“AHCA”) or draft its own ACA repeal legislation.  In the meantime, employers and other plan sponsors are still required to comply with the ACA.  To keep our readers up to date, Proskauer’s Health Care Reform Task Force will monitor and report on health care reform developments on a regular basis.  In that regard, below is our first Health Care Reform Weekly Roundup.

This past week was generally quiet in terms of ACA repeal developments. However, there were a few developments under the ACA.

  • ACA Repeal Efforts. As we previously reported, the House of Representatives passed the AHCA and sent the legislation to the Senate for consideration. Almost immediately, Senators indicated that the AHCA would not be passed as written and that the Senate preferred to draft its own legislation. Nevertheless, it is likely that many components of the AHCA will find their way into Senate legislation. See our May 4th and March 9th blog entries for descriptions of the AHCA provisions most relevant to employers and plan sponsors.
  • ACA Affordability Percentage Adjustment. To avoid an employer shared responsibility penalty, the ACA requires that applicable large employers (i.e., generally those with more than 50 full-time employees and equivalents) offer minimum essential coverage that is affordable and has minimum value to their full-time employees. Under the statute, the affordability threshold is set at 9.5% of household income, but the IRS has issued regulations providing for alternative methods of determining affordability. The 9.5% threshold is indexed for inflation, with the 2017 threshold being 9.69%. The IRS recently issued Rev. Proc. 2017-36, which (among other things) set the affordability threshold for 2018. Interestingly, the 2018 affordability threshold will decrease to 9.56%. Employers and other plan sponsors should consider this lower threshold when determining employee contribution rates.
  • ACA Preventive Care Recommendations. The United States Preventive Services Task Force (“USPSTF”) recently issued two new recommendations regarding preventive coverage services. Under the ACA, non-grandfathered group health plans must cover preventive services without cost-sharing (this does not apply to out-of-network services). Among the various definitions of preventive services are those that the USPSTF recommends with an “A” or “B” rating. On April 25, 2017, the USPSTF gave a “B” rating to screening for preeclampsia in pregnant women. This recommendation would require non-grandfathered plans to cover without cost-sharing preeclampsia screening for plan years beginning on or after April 25, 2018. Additionally, on May 9, 2017, the USPSTF gave a “D” recommendation to thyroid cancer screening for patients who exhibit no symptoms of the disease. A “D” recommendation means that this screening does not need to be covered without cost-sharing.

New Class Action Lawsuits Asserting Violations of the MHPAEA

Banner Health and the Kaiser Foundation  were recently hit with separate class action lawsuits challenging their denials of certain mental health care coverage. In the case against Banner Health, plaintiffs challenge Banner Health’s exclusion of applied behavior analysis therapy from coverage for autism spectrum disorder as “experimental or investigational.” Plaintiffs allege that the failure to provide such coverage violates the Mental Health Parity and Addiction Equity Act (“MHPAEA”). The case against Kaiser Foundation challenges the denial of coverage for residential treatment and hospitalization for eating disorders. Plaintiff alleges that physicians determined that hospitalization was needed to treat his severe eating disorder, but he could not get the required authorization from the Kaiser Foundation and the denial violates the MHPAEA. The cases are Etter v. Banner Health, D. Ariz., No. 2:17-cv-01288 (filed May 1, 2017) and Moura v. Kaiser Foundation Health Plan, Inc., N.D. Cal., No. 3:17-cv-02475, (filed May 1, 2017).

First Circuit Enforces Arbitration of ERISA Dispute

The First Circuit concluded that, pursuant to the applicable collective bargaining agreement, it was for an arbitrator, not the court, to decide whether the union’s claim that the employer failed to properly fund a defined benefit pension plan was preempted by ERISA. The First Circuit explained that the arbitration clause in the CBA clearly applied to the dispute and there is no prohibition on the arbitration of ERISA claims. The case is Prime Healthcare Servs.–Landmark LLC v. United Nurses & Allied Prof’s, 848 F.3d 41 (1st Cir. 2017).

Protecting Your Qualified Retirement Plan Now that the IRS Determination Program is (Mostly) Closed

A lot has been written over the last few months about what to do now that the IRS has closed its determination letter program for ongoing individually designed tax-qualified retirement plans. Some see this as cause for celebration because we no longer have to go through the trouble of collecting documents, filling out forms, and negotiating with the IRS over renewals of qualification determinations.  Another “positive” result of the IRS position is that existing determination letters will no longer expire—although they will become stale as time passes, due to plan changes and legal developments.

But most of the focus seems to have been on fear: as time passes, how will we know whether a retirement or 401(k) plan is still qualified? The answer to this question is important because plan sponsors and administrators have historically relied on determination letters for a host of purposes, including:

  • Representations for M&A, financing, and other corporate transactions;
  • Representations to auditors;
  • Representations to investment trustees and fund managers;
  • Government audits; and
  • Rollovers and other plan asset transfers.

We have seen a range of ideas, from moving to a prototype or volume submitter plan to obtaining a law firm or consulting firm “opinion” that is marketed as analogous to an IRS determination letter. In our view, a more practical solution is to continue the discipline forced by the old determination program and use that discipline for systematic reviews of ongoing compliance.  This does not mean constant full-scale review, but rather setting up a system to ensure that key elements of the plan document and administration will be reviewed periodically (perhaps a little at a time to keep things manageable).

We have developed tools to help clients with this process, ranging from self-help diagnostic checklists (at no cost) to larger-scale compliance reviews with specific analysis and recommendations, all designed to manage compliance risk, add value, and protect confidentiality—think of it as the Proskauer Compliance Resolution System (PCRS).

In considering a prudent path forward, it is important to think about what an IRS determination letter is, and what it isn’t. An IRS determination letter reflects the IRS’s binding determination that a plan’s written document satisfies the formal requirements for tax qualification.  An IRS determination letter is binding on the IRS; it precludes the IRS from retroactively disqualifying a plan because of a defect in the plan’s language.

But even if a plan has a favorable determination letter, the IRS can still disqualify the plan for many reasons, including:

  1. If the IRS discovers that the plan is not operating in accordance with its terms;
  2. If the IRS finds that a once-compliant plan document was not amended to comply with a change in law or was amended in a way that violates a technical qualification requirement; or
  3. If the IRS finds that the language in a previously approved plan was impermissible and should not have been approved. In this case, a prior determination letter protects against disqualification retroactively; but the IRS would still require a change going forward, and dealing with the IRS tends to be complicated if the change involves a potential cut-back of benefits or rights.

Separately, a favorable IRS determination letter generally does not help in defense of claims by participants and beneficiaries under Title I of ERISA, such as a claim for benefits owed or a breach of fiduciary duty. So even with an up-to-date determination letter, plan sponsors and administrators need to stay on top of plan document and operational compliance.

Given these limitations, the real question for plan sponsors and administrators is how best to manage ongoing plan qualification and compliance risk. A formal opinion letter from a private third party, like a law firm or consulting firm, might seem like an attractive way to make up for losing the determination letter piece of the puzzle.  It is undoubtedly worthwhile to review the plan document—and ideally its administration too—and to correct any defects before the IRS or a disgruntled plan participant discovers them.

But the value in any qualified plan compliance exercise is found more in the quality of the review and steps taken to mitigate risk than in what is written into a third party’s formal written opinion. For example, when the IRS audits a qualified plan, the existence of a third-party opinion letter is not likely to affect the auditor’s independent findings and may have little or no bearing on the penalties that the IRS may assess if it concludes there is an error. Similarly, in a benefit claim or litigation, a third party’s written opinion is not likely to persuade a fact-finder.  To the contrary, an opinion can potentially cause harm if it leaves a discovery trail of issues that were identified but not adequately corrected, or issues that were spotted but ultimately resolved without action due to a plan-favorable interpretation of the law.

In most cases, the best value is to emphasize substance over form by working with reliable and pragmatic counsel, and by continuing to allocate resources to proactive plan compliance efforts. Systematic ongoing review is the best way to mitigate risks that arise from a technical web of constantly changing rules and an ever-more-creative plaintiffs’ bar.

Compliance reviews come in many varieties. For example, when merging a small and simple plan into a larger, more complex plan, a quick review of required documents and basic processes might be enough.  In other cases, a more detailed review is warranted.  The important point is that every plan needs to be reviewed periodically to stay up to date and to ensure that operations remain consistent with plan terms and best practices.

At Proskauer, we are partnering with our clients to develop cost-effective compliance review programs. We have developed self-help tools, and we work with clients to understand and manage risk, while maintaining confidentiality and focusing on the needs of their particular organizations.

Claims Against Investment Adviser in ERISA Fee Litigation Case Dismissed

A federal district court in North Carolina dismissed claims by BB&T Corp.’s 401(k) plan participants that Cardinal Investment Advisors, LLC, the plan’s outside investment advisor, breached its ERISA fiduciary duties by allowing the plan to invest in BB&T proprietary funds. The proprietary funds, according to plaintiffs, charged excessive fees and underperformed non-proprietary funds. The court dismissed the complaint against Cardinal because plaintiffs alleged only that Cardinal gave BB&T general investment advice and failed to allege any specific facts that Cardinal breached its fiduciary duty to the plan. The case is Bowers v. BB&T Corp., No. 1:15-cv-00732, ECF No. 150 (M.D.N.C. Apr. 18, 2017). Last year, the court summarily denied the BB&T defendants’ motion to dismiss because plaintiffs’ complaint adequately alleged claims for which relief may be granted. Bowers v. BB&T Corp., No. 1:15-cv-00732, ECF No. 58 (M.D.N.C. Apr. 18, 2016). The case against the BB&T defendants is ongoing.

Sixth Circuit Issues Trilogy on Retiree Health Benefits

In three decisions issued on the same day, the Sixth Circuit held that Meritor retirees were not entitled to lifetime health benefits, while retirees at Kelsey-Hayes and CNH Industries were entitled to contractually vested health benefits. In the first case, a group of former Meritor employees filed suit after the company reduced their healthcare benefits. The CBAs provided that retiree healthcare coverage “shall be continued,” but also set forth a general durational clause terminating the CBAs after three years and provided that healthcare benefits would remain in effect until the termination of the CBAs. The CBAs also stated that pension benefits were vested and did not say anything similar for retiree health benefits. Taking into account all of these terms, the Sixth Circuit held that the CBAs were unambiguous and that retirees were guaranteed benefits for only the three-year term of the CBAs. Cole v. Meritor, Inc., No. 06-2224, 2017 WL 1404188 (6th Cir. 2017). However, in cases against Kelsey-Hayes Co. and CNH Industrial N.V., the Sixth Circuit ruled against the employers. The principal difference in UAW v. Kelsey-Hayes was that the CBA contained a general durational clause that required mutual action to terminate the agreement. The Court determined that there was ambiguity when applying the general durational clause and, after looking at extrinsic evidence, concluded that the CBA vested employees with lifetime healthcare benefits. UAW v. Kelsey-Hayes Co., No. 15-2285, 2017 WL 1404189 (6th Cir. 2017). Similarly, in CNH Industrial, the Sixth Circuit found the CBA to be ambiguous because it was silent on the duration of health care coverage and the general durational clause carved out other benefits. Furthermore, the Court observed that eligibility for healthcare benefits was tied to pension eligibility. After looking at extrinsic evidence, the Court determined that the parties intended for retiree healthcare benefits to vest. Reese v. CNH Indus. N.V., No. 15-2382, 2017 WL 1404390 (6th Cir. 2017).

District Court Dismisses Allegations That Stable Value Fund is Too Conservative

A district court in Rhode Island dismissed claims by participants in the CVS Employee Stock Ownership Plan that plan fiduciaries imprudently invested plan assets in the plan’s stable value fund. Plaintiffs argued that the stable value fund had an excessive concentration of investments with ultra-short durations and excessive liquidity, both of which caused the fund to underperform comparable stable value funds. The court dismissed the complaint because the stable value fund “was invested in conformance with its stated objective and whether that strategy was prudent cannot be measured in hindsight” simply by judging its performance against industry averages. The case is Barchock v. CVS Health Corp., No. 16-601, slip op. (D.R.I. Apr. 18, 2017).

Sixth Circuit Dismisses ERISA Stock Drop Action Against Cliffs Natural Resources

The Sixth Circuit affirmed the dismissal of ERISA stock drop claims by participants in the Cliffs Natural Resources’ 401(k) Plan. The participants alleged fiduciary breach claims based on public and non-public information arising out of the collapse in iron ore prices that caused the company’s stock price to decline 95%. With respect to the public information claim, the Court held that a “fiduciary’s failure to investigate the merits of investing in a publicly traded company” is not the type of “special circumstance” that can support a claim based on public information, and that plaintiffs also must plead “what, if anything, the fiduciaries might’ve gleaned from publicly available information that would undermine reliance on the market price.” With respect to the non-public information claim, the Court rejected plaintiffs’ allegations that a prudent fiduciary could not have concluded that disclosing the inside information or halting additional contributions would do more harm than good. In so ruling, the Court determined that the plan fiduciaries could have concluded that divulging inside information would have caused the company’s stock price to collapse, further harming participants already invested in the fund. The Court also determined that closing the fund without explanation might be even more harmful: “It signals that something may be deeply wrong inside a company but doesn’t provide the market with information to gauge the stock’s true value.” The case is Saumer v. Cliffs Natural Resources, Inc., No. 16-3449 (6th Cir. Apr. 7, 2017).

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