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 5

The Senate’s health care reform bill was released today, and we will report on that separately. In the meantime, below are key health care reform developments from the week of June 12th.

  • CMS Estimates Impact of the AHCA. The Office of the Chief Actuary at the Center for Medicare and Medicaid Services issued a memorandum estimating that, under the American Health Care Act (“AHCA”), the number of insured will be approximately 13 million higher by 2026. Much of the difference from the CBO estimate of 23 million appears to result from differing assumptions regarding its impact on Medicaid enrollees. The memorandum also concluded that while the AHCA is estimated to reduce the average gross premium in the individual insurance market by 13% by 2026, premiums will be approximately 5% higher as a result of the loss of government subsidies.
  • AHCA Add-On Legislation Passed by the House. The House of Representatives passed three bills amending the AHCA. These bills – The Verify First Act, The Veterans Equal Treatment Ensures Relief and Access Now (VETERAN) Act, and The Broader Options for Americans Act – were discussed in prior weekly roundups.
  • Legislation Introduced to Make ACA Coverage More Affordable for Middle Class Families. Currently under the Affordable Care Act (“ACA”), families making any amount greater than 400% of the federal poverty level receive no financial assistance in the form of premium credits or cost-sharing subsidies for coverage purchased on the Marketplace. New Legislation, The Affordable Health Insurance for the Middle Class Act, would strike this income cap and, as a result, no individual or family would pay more than 9.69% (indexed for inflation) of their monthly income toward health insurance premiums.
  • New FAQ Says Eating Disorders are a Mental Illness for MHPAEA Purposes and Requests Comments on Model Forms. Continuing efforts to provide guidance on health care reform issues, the Departments of Labor, Health and Human Services, and the Treasury (collectively, the “Agencies”) have issued a new FAQ related to mental health parity. In general, the Mental Health Parity and Addiction Equity Act of 2008 (“MHPAEA”), as amended by the ACA and the 21st Century Cures Act provides that quantitative and nonquantitative treatment limitations applied to mental health and substance abuse services cannot be more restrictive than the limitations that apply to substantially all medical and surgical benefits. The FAQ answers one question – whether services for eating disorders must be provided in parity with medical and surgical benefits. The Agencies answer that eating disorders are mental health conditions, the treatment of which is subject to the MHPAEA requirements.Additionally, regulations under MHPAEA and subsequent-related guidance provide that plans are required to disclose information regarding mental health and substance abuse benefits, including nonquantitative treatment limitations and how they are applied to the benefits. In an effort to make required disclosure easier, the FAQ requests comments on whether model forms would be helpful and whether different forms should be created for various types of nonquantitative treatment limitations.  The Agencies also released draft disclosure and information request forms and requested comments on those forms.

Health Care Reform Weekly Roundup – Issue 4

After a brief recess, Congress is back in session and health care reform negotiations continue. Below is a summary of a few, relatively minor, developments that took place during recess and the week of June 5th.

  • Senate Optimism.  Following closed-door meetings shortly after returning from recess, Senate Republicans indicated that progress had been made on Affordable Care Act (ACA) repeal efforts. Although nothing concrete has been released, comments from various Senators indicate that phased-in, rather than all at once, Medicaid changes and a cap on income exclusion for employer-provided health care benefits may be on the table. Either way, the Senate GOP has very little margin of error. Senator Rand Paul has already indicated that he would vote against the current proposed repeal legislation, leaving only 51 GOP Senators (and the Vice President if a tie-break is necessary) available to pass legislation.
  • AHCA Add-On Legislation Scored. The add-on legislation (see Issue 3 of our roundup) to the American Health Care Act (AHCA) was scored by the Congressional Budget Office (CBO). The CBO estimated that the three pieces of legislation would not have a material revenue impact.
  • Cadillac Tax Guidance Coming. IRS officials informally indicated that guidance under Section 4980I of the Internal Revenue Code (the excise tax on high-cost health care, or “Cadillac Tax”) remains on its to-do list. The IRS has previously issued Cadillac Tax guidance with Notices 2015-16 (described here) and 2015-52 (described here). The Cadillac Tax was originally set to become effective in 2018, but legislation delayed the effective date to 2020. The AHCA, if enacted in current form, would further delay the effective date to 2026. Given the current opposition to the Cadillac tax on both sides of the aisle, it is unclear whether the Cadillac Tax will ever become effective.
  • HHS Requests Health Care Reform Comments. The Department of Health and Human Services (HHS) released a request for comments titled “Reducing Regulatory Burdens Imposed by the Patient Protection and Accordable Care Act & Improving Healthcare Choices to Empower Patients.” In this release, the HHS requests comments on promoting consumer choice, stabilizing the individual, small group, and non-traditional insurance markets, improving affordability, and affirming state authority with respect to health insurance regulation. The requests appear to be consistent with President Trump’s health care policy objectives and, in particular, Executive Order 12765 (“Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal”). Nevertheless, the ACA is still the law, and as long as that remains true, any regulations issued in connection with this request for comments would need to take the ACA into account.

Out-of-Network Physician’s Claim Against Insurer Not Preempted by ERISA

The Second Circuit concluded that a promissory estoppel claim by an out-of-network provider against an insurer was not completely preempted by ERISA and thus remanded the claim to state court for further proceedings. The provider’s claim was predicated on its assertion that the insurer made certain representations about coverage for the insured. The Court held that the provider was not the type of party that can bring an ERISA benefit claim because the plan at issue bars assignments of an insured’s right to benefits to out-of-network providers. In so ruling, the Court rejected several arguments.  First, the Court ruled that a determination about whether the purported assignment was valid under the terms of the plan is not an issue that must be decided under ERISA. Second, the Court determined that the provider’s claim could not be construed as a claim for benefits because the provider had no pre-existing relationship with the insurer and was not a valid assignee of benefits. Third, the Court found inapplicable its prior conclusion that a provider’s pre-approval telephone call to an insurer can never “give rise to an independent legal duty” enforced outside of ERISA. Here, unlike in previous cases, the provider’s lack of a contractual relationship with the plan or the insurer meant that it was not required to call the insurer to receive pre-approval; rather, the provider called the insurer for its own benefit. Thus, the provider’s suit to enforce the alleged promises made during the call is one to enforce its own rights that exist independent from the plan. The case is McCulloch Orthopaedic Surgical Services, PLLC v. Aetna Inc.,  2017 WL 2173651 (2d Cir. May 18, 2017).

The United States Supreme Court Rules in Favor of Hospitals on “Church Plan” ERISA Exemption

The United States Supreme Court unanimously ruled in favor of religiously-affiliated hospitals and healthcare organizations in holding that a pension plan need not be established by a church in order to qualify for ERISA’s church plan exemption. Petitioners are religiously affiliated non-profit healthcare organizations appealing decisions by the Third, Seventh, and Ninth Circuit Courts of Appeal that a church must establish an ERISA-exempt church plan. Respondents are current and former employees of these organizations.

Justice Kagan explained that the plain language of the statutory text clearly supported petitioners’ view that a pension plan need not be established by a church to qualify for the exemption. Rather, a pension plan can qualify as a church plan if it is maintained by an organization whose principal purpose is to administer or fund a benefits plan or program for church employees if the organization is controlled by or associated with a church (“principal purpose organization”) regardless of who established the plan. The Supreme Court’s decision left unresolved several key questions, including whether petitioners and similar organizations are sufficiently church-affiliated to qualify for the exemption and whether these organizations’ benefit committees are principal-purpose organizations. Justice Sotomayor agreed with the decision and its reasoning but she concurred to note her concern about the potential consequences of leaving employees of these organizations unprotected by ERISA. Justice Gorsuch took no part in the decision. The case is Advocate Health Care Network v. Stapleton, No. 16-74 (2017).

Fifth Circuit Enforces Reimbursement Provision in One-Page Welfare Plan

The Fifth Circuit upheld the reimbursement and subrogation terms found in a welfare benefit plan’s one-page SPD that also served as the plan document. Plaintiff, a plan beneficiary, received $71,644.77 from the plan to cover medical expenses incurred as a result of injuries sustained during a laparoscopic exam. Plaintiff’s injuries were allegedly the result of medical malpractice for which she received a settlement for more than the amount of her medical expenses. The plan sought to recover the $71,644.77 pursuant to the plan’s reimbursement and subrogation clause. Plaintiff refused and instead sought a declaratory judgment that she was not required to reimburse the plan because the plan did not have an ERISA-compliant written instrument in place when the plan paid the medical expenses. The plan countersued seeking reimbursement for the medical expenses and attorneys’ fees. Plaintiff first argued that in order for the plan to comply with ERISA it had to have both an SPD and a written instrument and provide detailed information on how the plan is funded and amended. The Fifth Circuit rejected both arguments explaining that: (i) plans commonly use a single document as both the SPD and written instrument and that the practice is widely accepted by courts; and (ii) the plan’s brief description of the funding and amendment procedures was sufficient to satisfy ERISA. The Court likewise rejected plaintiff’s argument that the plan misrepresented material facts because the SPD referenced a nonexistent “official plan document” noting that such an errant disclaimer does not rise to the level of misrepresentation that would invalidate a plan document. The case is Rhea v. Alan Ritchey, Inc. Welfare Benefit Plan., No. 16-41032 (5th Cir. May 30, 2017).

Health Care Reform Weekly Roundup – Issue 3

Below are key health care reform developments from the week of May 22nd.

  • CBO/JCT Estimate for AHCA Released. The Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) released an updated cost estimate for the American Health Care Act (“AHCA”). The latest estimate considered the AHCA as passed by the House of Representatives on May 4, 2017. See our May 26, 2017 blog entry for a summary of key findings in the CBO/JCT report.
  • AHCA Add-On Legislation. The House of Representatives Ways and Means Committee released three new pieces of legislation that would modify the AHCA – the Broader Options for Americans Act (“BOA Act”), the Veterans Equal Treatment Ensures Relief and Access Now Act “Veterans Act”), and the Verify First Act (the “Verify Act”). The BOA Act would modify the AHCA by allowing individuals enrolled in unsubsidized COBRA coverage to receive a tax credit. This feature was in the draft AHCA that was first released in March but was not included in the AHCA as passed on May 4th. The Veterans Act would codify existing Affordable Care Act (ACA) regulations and amend the AHCA to permit veterans to choose health coverage provided through the Department of Veterans Affairs or private health coverage eligible for a tax credit. The Verify Act would require relevant government agencies to first verify that a person is a citizen or legally within the US before awarding a premium subsidy to that person.
  • Contraceptive Coverage Opt-Out Regs Coming. The Office of Management and Budget indicated last week that it is reviewing “interim final regulations” regarding religious-based objections to contraceptive coverage. The ACA requires that health plans treat contraceptives as preventive care, and thus, cover contraceptives without cost-sharing. Exceptions have been made for religious institutions and private companies objecting to the mandate on religious grounds. The key issues are the procedures these organizations must follow to opt-out of the mandate and whether employees of the organizations will be able to obtain free contraceptives through other means.

CBO Releases Updated Cost Estimate of American Health Care Act of 2017

On May 24, 2017, the Congressional Budget Office (“CBO”) and the staff of the Joint Committee on Taxation (“JCT”) released a cost estimate for H.R. 1628, known as the American Health Care Act of 2017 (the “AHCA”).  The CBO and the JCT issued cost estimates for prior versions of the AHCA on March 23, 2017 and on March 13, 2017.  A summary of the key CBO and JCT estimates is provided below.

Federal Deficit Estimated to Decrease, But Not as Significantly as in Prior AHCA Versions

The CBO and the JCT estimated that enacting the version of the AHCA passed by the House of Representatives on May 4, 2017 would result in a net reduction of the cumulative federal deficit of $119 billion over the course of the 10-year period from 2017 to 2026.

This estimate results in $31 billion less in savings than the March 23, 2017 CBO estimate (which estimated a $150 billion deficit reduction) and $218 billion less in savings than the March 13, 2017 CBO estimate (which estimated a $337 billion deficit reduction).  As was the case in prior estimates, the primary source of deficit reduction is the curtailment of outlays for Medicaid and the replacement of premium and cost-sharing subsidies under the Affordable Care Act (“ACA”) with a new tax credit program for nongroup health coverage.  The primary source of deficit increase is the repeal of ACA-related taxes.

Number of People Uninsured Estimated to Increase, But Not as Significantly as in Prior AHCA Versions

The CBO and the JCT estimated that, in 2018, 14 million more individuals will be uninsured under the AHCA than under the ACA.  Further, it is estimated that the number of uninsured individuals will rise to 19 million in 2020 and to 23 million in 2026.  These numbers are equal to or slightly less than the prior CBO estimates, as shown in the chart below:

  May 24, 2017 CBO Estimate of Number of Uninsured Individuals March 23, 2017 CBO Estimate of Number of Uninsured Individuals March 13, 2017 CBO Estimate of Number of Uninsured Individuals
2018 14 million more than under ACA 14 million more than under ACA 14 million more than under ACA
2020 19 million more than under ACA 21 million more than under ACA 21 million more than under ACA
2026 23 million more than under ACA 24 million more than under ACA 24 million more than under ACA
  • The CBO and the JCT indicated that the small reduction of expected uninsured individuals would stem, in part, from employers viewing the nongroup insurance market as less favorable to employees, which would lead more employers to offer group health coverage.

States Would Have the Flexibility to Waive “Essential Health Benefits” and “Community Rating” Requirements, Resulting in Significantly Different Coverage, Premium, and Out-of-Pocket Experience Based on State Residency

As enumerated in our May 4th blog entry on the passage of the AHCA, the legislation would allow states to waive the ACA provision that restricts how insurance providers determine premium rates (under the ACA, insurers in the individual and small group market can only take into consideration the coverage tier, community rating, age (as long as the rates do not vary by more than 3 to 1), and tobacco use).

In addition, the legislation would allow states to waive the essential health benefits (“EHBs”) requirement under the ACA.  Waiver of the EHBs requirement could result in higher out-of-pocket costs to individuals, according to the CBO and the JCT, because the ACA’s prohibition on annual and lifetime limits only apply to EHBs.  Thus, a less restrictive definition of EHBs means that more services can be subjected to annual or lifetime limits.

The AHCA’s impact on nongroup insurance premiums would depend on whether the states waive ACA requirements.  For the 2020 to 2026 period, the CBO and the JCT estimate that:

  • Approximately 1/2 of the population will reside in states that will not seek waivers to the EHBs requirement or the community rating requirement.  As was noted in the prior CBO estimates, premiums in these states are expected to be approximately 10% lower on average than under current law after 2020.
  • Approximately 1/3 of the population will reside in states that will make moderate changes to the EHBs requirement and/or the community rating requirement.  Premiums in these states are expected to be approximately 20% lower on average than under the ACA after 2019, since the coverage is expected to generally be less comprehensive than under current law.
  • Approximately 1/6 of the population will reside in states that will seek waivers to the EHBs requirement and/or the community rating requirement.  Premiums in these states are expected to vary significantly depending on a person’s health condition and level of benefits coverage.  Premiums would be significantly lower for individuals with low expected health care costs, but “less healthy people would face extremely high premiums,” according to the CBO and JCT report.  This premium disparity could result in a highly volatile nongroup insurance market, which would ultimately cause many individuals to forego insurance coverage.

The CBO and the JCT highlighted that the above percentages of estimated state activity remain uncertain and are subject to a number of key factors.  These include the actions and coverage decisions of states prior to the enactment of the ACA, current market conditions, and the concerns of state insurers and market participants.

Impact on Employer-Sponsored Plans Minimal

The CBO and JCT report indicates that the AHCA impact on employer-sponsored plans will be minimal.  Nevertheless, the AHCA may lead to greater flexibility in employer-sponsored benefit design because employers with large group and self-insured plans could design their EHBs package on a state that has waived the ACA’s EHBs requirement.  See our May 4th blog entry for more information on the EHBs requirements for large group and self-insured plans.

Next Steps for the AHCA

Although the AHCA has been passed in the House and a cost estimate has been provided by the CBO and the JCT, there remains a considerable amount of uncertainty surrounding the legislation.  The AHCA is now being reviewed by the Senate, which will likely take the CBO cost estimate into account when analyzing the legislation.

We will continue to monitor and report on AHCA developments and other health care reform efforts.

Department of Labor’s New Fiduciary Rule Will Go Into Effect June 9th

The Department of Labor has announced that the new fiduciary conflict of interest rule and related exemptions will begin taking effect on June 9, 2017, ending speculation of further delay. At the same time, the Department announced a relaxed enforcement standard for the rest of 2017.  See our blog post on the delayed effective date here.

The effect of the Department’s announcement is that the new standard for when communications rise to the level of fiduciary advice will go into effect at 11:59 p.m. on June 9th.  After that time, service providers who are deemed to provide investment advice—for example, by suggesting a particular investment or strategy, or recommending a rollover—will be subject to ERISA’s duties of prudence and loyalty, as well as ERISA’s prohibited transaction rules.

This is the first time that ERISA’s requirements of prudence and loyalty will expressly apply for advisers to IRAs, HSAs, and other non-ERISA accounts that are subject to the prohibited transaction rules under the Internal Revenue Code. At least for now, however, there will continue to be no private right of action against advisers to non-ERISA accounts for breach of the duty of prudence or loyalty.  The consequence of non-compliance will be a self-reporting excise tax under Section 4975 of the Internal Revenue Code.

Between now and the end of the year, the Department will continue to review the fiduciary rule and related exemptions. The Department announced that it intends to publish a Request For Information and that it will be receptive to comments related to the new rule’s requirements.  Secretary Acosta has also indicated (in a Wall Street Journal op-ed) that the Department is hoping to collaborate with the Securities and Exchange Commission on a more uniform standard.

Through the end of the year, the Department “will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions.” This relaxed approach to enforcement is consistent with the Department’s emphasis on compliance rather than penalties.

Health Care Reform Weekly Roundup – Issue 2

Below are key health care reform developments from the week of May 15th.

  • ACA Repeal Efforts. Efforts to repeal and replace the Affordable Care Act (ACA) continue despite slowing down as the House of Representatives’ American Health Care Act (AHCA) is being considered by the Senate. The Senate has formed a bipartisan working group to explore the possibility of passing bipartisan ACA repeal legislation. No details have been provided as to what a Senate ACA repeal bill would look like, but Senate leadership has indicated that at least some of the ACA-related tax provisions may need to remain in place.
  • CBO Estimate Coming. On a related note, reports last week indicated that the House of Representatives has not yet formally sent the AHCA to the Senate. The House is waiting for the Congressional Budget Office (CBO) estimate of the AHCA as passed in early May. The CBO announced that the estimate should be publicly released on May 24th.
  • New Legislation. As more and more insurance carriers are electing to leave the ACA Marketplaces, individuals are finding that coverage eligible for premium and cost-sharing subsidies is unavailable. A new bill introduced in the House of Representatives, the Freedom from the ACA Tax Penalty Act, would provide relief from the individual mandate tax penalty for people who cannot purchase Marketplace coverage because there are no options available.
  • Direct Enrollment under SHOP. Data shows that enrollment in Federal-facilitated Small Business Health Options Program (SHOP) Marketplaces is far below that previously estimated by the CBO. As a result, the Centers for Medicare and Medicaid Services (CMS) announced that it intends to propose regulations that would permit direct SHOP Marketplace enrollment though insurance carriers or with the use of an agent or broker. Currently, in order to have access to the Small Business Health Care Tax Credit, employers must enroll in the SHOP Marketplace through HealthCare.gov.
  • ACA Cost-Sharing Reduction Payments At Risk. House of Representatives v. Price (formerly House of Representatives v. Burwell) is again in the news as the Justice Department was required to determine whether to continue defending the lawsuit by May 22nd. This litigation, brought by the House of Representatives, claims that the cost-sharing reduction payments permitted under the ACA are unconstitutional because they were not specifically appropriated by Congress. A district court ruled in favor of the House of Representatives last year. In February, the House and Justice Department filed a joint motion to place the proceedings on hold. On Monday, the Justice Department requested another 90-day abeyance. While the proceedings are on hold, the cost-sharing reduction payments will continue.

The Time is Right to Contact Recordkeepers About Hardship Substantiation

If your 401(k) plan recordkeeper has not talked to your company lately about hardship distributions, it may be time to reach out to the recordkeeper.  The short story is that the IRS recently issued an internal memorandum (found here https://www.irs.gov/pub/foia/ig/spder/tege-04-0217-0008.pdf) providing guidance to its employee plans examination group on the substantiation requirements for hardship distributions from a section 401(k) plan.  While this is not binding on the IRS as a statement of the law, it is useful in that it provides some indication of how the IRS would approach this issue in an audit.

By way of background, the law provides a list of expenses and costs for which a distribution would be considered on account of immediate and heavy financial need.  Historically, plan administrators and recordkeepers have struggled to find a balance between ensuring compliance with the need requirement and making the process more efficient for plan participants. A number of recordkeepers allowed participants to “self-certify” electronically and required little substantiation of the expenses, but IRS officials informally questioned whether self-certification was sufficient—most recently in a 2015 post in Employee Plans News that said plan sponsors should retain documentation and that “electronic self-certification is not sufficient documentation of the nature of a participant’s hardship.”

The latest guidance maintains the position that self-certification alone is not enough, but offers an acceptable alternative to full substantiation.

Specifically, the guidance seems to provide two substantiation options.

First, the recordkeeper could require that a participant provide full underlying documentation (or what it calls source documents) substantiating the claim, such as estimates, contracts, bills and statements from third parties.

Second, the recordkeeper could require that the participant provide a summary of the information contained in the source documents.  The summary could be in paper or electronic form or in telephone records.  But if the summary is used, there are additional requirements:

  • The summary information provided by the participant must include (i) the participant’s name; (ii) the total cost of the hardship event; (iii) the amount of distribution requested; and (iv) certification by the participant that the information provided is true and accurate.
  • The summary from the participant must also include additional information that depends on the type of hardship.  For example, for medical expense hardship, the information must include (i) the name of the person incurring the expense; (ii) the relationship to the participant; (iii) the general category of the purpose of the medical care (e.g., diagnosis, treatment, prevention, associated transportation, long-term care); (iv) name and address of the service provider; and (v) the amount of medical expenses not covered by insurance.  Each type of hardship has its own enumerated list.
  • The recordkeeper must notify the participant that (i) the hardship distribution is taxable and additional taxes could apply; (ii) the amount of the distribution cannot exceed the immediate and heavy financial need; and (iii) hardship distributions cannot be made from earnings on elective contributions or from qualified nonelective or qualified matching contribution accounts (if applicable). Of these requirements, only item (ii) is directly related to the form of substantiation.
  • The participant must also agree to preserve source documents and to make them available at any time, upon request, to the employer or recordkeeper.

In addition to the substantiation requirements, the IRS expects the recordkeeper to provide to the employer reports or other access to data on hardship distribution at least annually.

The guidance further suggests that IRS auditors might be skeptical of hardship distributions when summary documentation is used. In particular, the IRS is concerned about cases where an employee has more than two hardship distributions in a plan year.  Absent an adequate explanation (e.g., tuition on a quarterly calendar), the IRS might ask for source documents.  Auditors might also ask for source documentation if the employee’s summary is incomplete or inconsistent on its face.

The IRS’s openness to substantiation in a summary form will be welcome news to many administrators and plan sponsors. But accepting summary substantiation will require careful review by the recordkeeper and, even with that review, administrators and sponsors will have to rely on participants to maintain records.

Recordkeepers have now had a few months to process this recent guidance and react. Thus, now is a good time for plan sponsors to contact their recordkeepers to review their processes for approving hardship distributions and decide how best to proceed.  Plan sponsors should consider whether the efficiency from reduced documentation is worth the potential for headaches in an IRS audit.