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Proskauer's ERISA Practice Center Blog

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

DOL’s New Audit Focus? Health Plan Claims and Appeals and Hard to Value Assets

Posted in Department of Labor, DOL

In recent talks and appearances, representatives of the U.S. Department of Labor have issued a warning about new areas of focus of DOL audits and enforcement actions.  While there are a number of different enforcement priorities, we discuss two of them—health plan claims and appeals and valuation of hard to value assets— here because these are areas in which the DOL has traditionally not spent significant time on audit.   In addition, these issues share the common characteristic of being able to be “cleaned up” in advance of an audit if plan fiduciaries take some common sense steps.

Health Plan Claims and Appeals

As most know, the DOL has been paying careful attention to ACA, HIPAA and mental health parity compliance in its audits of late.  In fact, just the other day the DOL issued updated compliance tools for these laws.

What is perhaps more interesting is that we are likely to see an expansion of scrutiny to other health plan matters, particularly claims and appeals.

DOL representatives have expressed concern that the complexity of health and welfare benefits adjudication creates an inherent risk of error (or, worse, fraud).  The DOL is also concerned that benefits are being systematically denied at the initial claim level, because, more often than not, participants do not appeal the initial claims determinations.  Further, the DOL is questioning whether plans are providing sufficient and understandable information regarding the reasons for denial of a claim, such that participants can adequately avail themselves of the appeals process.

Based on these DOL statements, we anticipate that DOL investigators may begin to spend more time reviewing whether claims and appeals are being handled on a timely basis in accordance with the plan’s claims and appeals procedures.  In the case of health plans that are subject to an annual audit, we would not be surprised if the DOL starts looking to confirm that the independent auditor is sampling the claims payment process with a focus on this issue.

The good news is that it appears that there are common sense action steps that can be taken before the DOL comes knocking on the door.  For example:

  • Review your plan documents/summary plan descriptions to confirm that they accurately describe the claims and appeals process.
  • Confirm that claims and appeals are being addressed in practice in a timely manner, whether you have an insured plan or use an “administrative services only” arrangement.
  • Consider conducting review of a sample claim and appeal denial letters to ensure that the letters are understandable and clearly explain the reasons for denials.

Hard to Value Assets

Completely switching gears, we note that another area in which the DOL appears to be focused relates to hard to value assets.  Recently, the DOL sent letters to a number of plans in the New York metropolitan area who reported on their Forms 5500 that they held assets whose value was neither “readily determinable on an established market” nor set “by an independent third party appraiser.”  These letters noted that the plans had reported such hard to value assets and “reminded” recipients of the existence of the DOL’s Voluntary Fiduciary Correction Program.

On first glance, one might conclude that the letter was much ado about nothing, because the DOL had not actually concluded that any particular recipient of this letter had violated any rules. However, we would not be quite so dismissive.  Rather, we view these letters as a reminder of the DOL’s position on the fiduciary obligations of a plan administrator with respect to the valuation of hard to value assets.

In that regard, some readers will recall that several years ago the Boston office of the DOL issued an enforcement letter to a plan concluding that it violated its fiduciary obligations by uncritically accepting the value reported by the general partner of a partnership in which the plan had invested, without any further inquiry (the reported value happened to be at cost).

While the DOL has not focused heavily on the issue of plan fiduciaries’ valuation of hard to value assets in recent years, it looks like the DOL’s approach may be about to change.  The combination of the New York “reminder” letter and some recent comments by DOL representatives regarding the DOL’s enforcement priorities suggests that the DOL will be taking a much closer look at whether and how plan administrators are confirming the valuation of hard to value assets.

That being the case, it may be advisable for plan administrators to get ahead of this issue by taking a fresh look at how plan assets are being valued.  Rather than blindly accepting the reported value of an asset, plan administrators should implement procedures—presumably something between blind acceptance and formal annual third party appraisals of every asset in every complex investment vehicle—that will satisfy the DOL.  For example, plan administrators should consider asking, among other questions:

  • Does the fiduciary (or someone such as an investment consultant advising the fiduciary) review valuation procedures of the manager/general partner of hard to value investments for reasonableness?
  • Does the procedure identify specific methodologies for each type of investment?
  • Are the valuation policies reviewed regularly?  Are exceptions reported?
  • Is there any inquiry into who serves as the auditor for the investment vehicle?  Is the entire process documented?

An additional resource for other ideas in evaluating valuation procedures is the American Institute of CPAs’ (AICPA) publication titled “Valuing and Reporting Plan Investments,” available here.

We should ask these questions of ourselves before the DOL asks them of us.

Contributing Employers to Multiemployer Plans Are Not Off the Hook – Tracking the Full-Time Status of Employees

Posted in ACA, Affordable Care Act, Multiemployer Plans

Contributing employers to multiemployer plans were relieved by the Treasury Department’s interim guidance stating that they will not be subject to the employer shared responsibility payments under the Affordable Care Act (“ACA”) with respect to employees for whom they contribute to a multiemployer plan that provides minimum value, offers dependent child coverage and is affordable.  (See our blog posting here.)  Since relief is provided for all employees for whom contributions are made to a multiemployer plan, regardless of whether coverage is offered, the question of whether an employee is full-time is largely irrelevant to the relief.  That led many employers to believe mistakenly that they do not have to determine the full-time status of these employees, allowing these employers to avoid the administrative complications associated with tracking employees who, in many industries, are variable hour employees.  Unfortunately, this belief is not well-grounded. Continue Reading

ISS, Glass Lewis Release 2015 Proxy Voting Updates; Espouse Nuanced Review of Equity Compensation Practices

Posted in Executive Compensation

Proxy advisory firms Institutional Shareholder Services, or ISS, and Glass Lewis released their 2015 executive compensation proxy voting updates that may be particularly relevant for public companies that intend to submit new or amended equity compensation plans for stockholder approval in the coming proxy season.  Overall, the updated guidelines suggest that ISS and Glass Lewis will engage in a more nuanced review of equity compensation plan design and grant practices than in prior years.  Continue Reading

SCOTUS to Review Subsidy Issue

Posted in ACA, Affordable Care Act, Premium Tax Credits, Supreme Court

On November 7, the U.S. Supreme Court announced it was going to review King v. Burwell.  At issue in the case is whether Fourth Circuit correctly determined that the IRS did not exceed its authority when it released a rule in 2012 providing that federal subsidies under the Affordable Care Act are available in both state and federally operated exchanges, but rather was simply clarifying the statute by also providing subsidies in federal exchanges.

While the Supreme Court often waits for a true “split in the federal circuits” to review a case, it has the authority, when it deems appropriate, to hear cases that present important national issues.  The administration had asked the Supreme Court to wait until further action was taken in the lower courts on the issues, particularly in the Halbig v. Burwell case, where the entire Federal Circuit Court for the District of Columbia has agreed to review an earlier ruling by a three-judge panel that the IRS had exceeded its authority.  The Administration was hopeful that after the Halbig en banc review the full panel would reverse the Halbig decision and there would be no split in the circuit (at least for now).

But the Supreme Court has elected not to wait.  It will hear King in the current term.  This means that unless the President and Congress can work together to craft a compromise to affect a fix to the statutes, the Supreme Court will decide whether federal subsidies are available in the 36 federal exchange states.

A Supreme Court decision ruling that the IRS had exceeded its authority by authorizing subsidies in federal exchanges would be disastrous for the Affordable Care Act and the millions of lower paid people who are currently receiving subsidies under federal exchanges.  It also would mean that pay-or-play penalties, which are triggered only if subsidies are received by full-time employees, would not apply with respect to individuals residing in those 36 states.

We will provide future updates as they become available.

New Agency FAQs Drive a Stake Further into the Heart of Premium Reimbursement Arrangements and Eliminate a Common Executive Perk

Posted in ACA, Affordable Care Act, HIPAA/HITECH

In clear and unambiguous terms, the U.S. Departments of Labor (“DOL”) and Health and Human Services and the Internal Revenue Service (“IRS”) (the “Agencies”) drove a stake into the heart of two suspect health insurance strategies that have been promoted to business owners across the country.    In addition, the guidance may spell trouble for a common reimbursement strategy used by employers for executives and other key employees.

Building upon prior guidance, the Agencies have eliminated any reasonable argument that employers can (i) establish any arrangement in which they reimburse employees for obtaining individual insurance coverage either on the Marketplace or directly from an insurer or (ii) provide incentives to high-cost claimants to drop employer coverage and obtain individual insurance.  The guidance, issued on November 6, was released as DOL FAQs Part XXII.

Premium Reimbursement Arrangements

With the advent of Marketplace access for individuals, certain promoters of benefits products pitched to employers an idea that sounded “too good to be true”:  eliminate employer sponsored health insurance and establish accounts to reimburse employees for the cost of individual insurance coverage.  An employer subject to the “pay-or-play” requirements of the Affordable Care Act (“ACA”) would be subjected to the so-called “A Penalty” of $2,000 per full-time employee, but even factoring in the cost of the non-deductible penalty with the amount of the premium reimbursed, the employer would save premium subsidy and administrative costs.

In September 2013, the DOL and IRS addressed this idea and said that health reimbursement arrangements (HRA) not integrated with a group health plan or employer payment plans (collectively, “premium reimbursement arrangements”) are themselves group health plans and therefore violate the ACA because, among other things, the preventive services and annual limitations requirements could not be met.  See DOL Technical Release 2013-03, IRS Notice 2013-54.  The September 2013 guidance left open the idea that employers could reimburse individual coverage on a post-tax basis.

The new guidance, however, states that premium reimbursement arrangements are group health plans whether payment or reimbursement is provided on a pre-tax or post-tax basis.  Therefore, employers are no longer permitted to reimburse employees or pay insurers directly for individual health insurance policies.

We note that this guidance has far-reaching implications.  While the Agencies’ clear focus was on the marketeers who continued to promote these reimbursement strategies after the previous guidance, the inclusion of post-tax arrangements into the mix may well spell trouble for employers who routinely reimburse executives and others for their individual insurance costs.  This happens in a number of situations, including when an executive or sales person or other employee lives or has family that lives in a part of the country where the group health plan does not provide good coverage.

 Marketplace Dumping

Another suspect recommendation to employers (especially with self-insured plans) is that they identify high-cost claimants and provide a cash incentive for them to drop employer coverage and obtain individual insurance coverage on the Marketplace.  Proskauer has been asked to comment on this approach in the past and has noted our belief that the suggestion would violate various federal laws, including ERISA’s nondiscrimination rules (added by HIPAA in 1996).  In the FAQ, the Agencies note that this practice discriminates based on one or more health factors for two reasons.  First, the offer of cash actually increases the premium because the individual with an adverse health factor must forgo the cash to elect group health coverage.  Thus, the individual with an adverse health factor effectively pays a higher premium than those without the adverse health factor.  Second, although the HIPAA nondiscrimination rules allow “benign discrimination” (i.e., discrimination that helps individuals with adverse health factors), this practice discourages enrollment in the group health plan and is, therefore, not benign.

What Employers Should Do

  1. Reject any proposal that involves (i) incurring the “A Penalty” and reimbursing  individual premium costs or (ii) identifying high-cost claimants and incenting them to move to Marketplace  insurance;
  2. Those who have are in the process of implementing these strategies should immediately stop and consider consulting with qualified counsel as to whether they might be able to recoup costs incurred; and
  3. Immediately evaluate any arrangement in which an executive or other employee is reimbursed (on a pre- or post-tax basis) for individual insurance coverage (Note, however, that reimbursements on a pre- or post-tax basis for premiums for other group health insurance such as a spouse’s plan or COBRA coverage are still permitted).

IRS to Close “Loophole” on “Sub-Standard” Plans without Hospitalization or Physician Services Coverage

Posted in ACA, Affordable Care Act

On November 4, 2014, the Internal Revenue Service (“IRS”) announced that it intends to close a perceived “loophole” in health care reform.  This so-called loophole allows employers to offer low cost health plans that don’t cover inpatient hospitalization services or physician services (or both).  If that coverage were treated as “minimum value” coverage, then employers could avoid all pay-or-play penalties with low cost coverage and covered individuals would not be able to benefit from premium assistance or subsidies in the health insurance Marketplace.

In Notice 2014-69, the IRS announced that it will be closing this loophole so that these types of plans (called “Non-Hospital Plans” or “Non-Physician Services Plans”) would not be treated as “minimum value” coverage for health care reform purposes.

Here’s what that means.

Background

Under health care reform’s “pay-or-play” penalty scheme, applicable large employers (generally those with 50 or more full-time employees or employee equivalents) are subject to two penalties: the “A” penalty which applies if an employer makes no offer of “minimum essential coverage” to at least 95% (70% in 2015) of full-time employees; and the “B” penalty which applies if the employer offers minimum essential coverage that is unaffordable or does not provide “minimum value.”

Separately, if an employee is covered by affordable “minimum value” coverage, the employee is not eligible for a premium tax credit or subsidy to purchase insurance coverage in the health care reform Marketplace.

“Minimum value” coverage refers to coverage where the plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of those costs.  Generally, employers may determine whether a plan meets the minimum value requirement by applying a minimum value (MV) calculator provided by the Department of Health and Human Services or by fitting within a safe harbor defined by HHS.

The “Non-Hospital Plans” or “Non-Physician Services Plans” which are the subject of the latest IRS announcement were designed and promoted to provide “minimum value” coverage under the MV calculator without covering inpatient hospitalization and physician services.

Intended Approach

The bottom line is that the government agencies have all determined that Non-Hospital Plans and Non-Physician Services Plans do not provide minimum value for health care reform purposes.  This is because the agencies believe that inpatient hospitalization services are “fundamental benefits that are nearly universally covered, and historically have been considered integral to coverage, under typical employer-sponsored group health plans.”

According to Notice 2014-69, this government position will be included in new regulations coming out in 2015.  Once regulations are finalized, employers won’t be allowed to use the MV calculator (or any other permitted method) to demonstrate that a Non-Hospital/Non-Physician Services Plan provides minimum value.

What does this IRS Notice Mean?

Once this new rule is final, it means that Non-Hospital/Non-Physician Services Plans will not be treated as “minimum value” plans for premium subsidy purposes or pay-or-play purposes.  Therefore, even if individuals have this coverage, they could go to the Marketplace and get a premium tax credit or subsidy. In turn, that could subject an employer to a “B” penalty (the $3,000 “unaffordable coverage” penalty), as the plan will not provide minimum value.  Employers presumably could still avoid the “A” penalty for failing to offer coverage to at least 95% of full-time employees (70% in 2015).

What about “skinny” plans?

Although this IRS announcement is sometimes reported as targeting “skinny” plans, that is not entirely true.  Non-Hospital/Non-Physician Services Plans are low cost plans, like the so-called “skinny” plans.  However, unlike Non-Hospital/Non-Physician Services Plans, skinny plans do not purport to provide “minimum value” and thus are unaffected by the Notice.  Skinny plans, along with Non-Hospital/Non-Physician Services Plans, may continue to be offered as a method for employers to avoid the mandate’s “A” penalty (i.e., by offering “minimum essential coverage”); however, neither skinny plans nor Non-Hospital/Non-Physician Services Plans will qualify for purposes of avoiding the “B” penalty.  Employers considering offering Non-Hospital/Non-Physician Services Plans or skinny plans should consult with legal counsel prior to implementation.

Transition Relief

Because this is a new rule, the IRS is providing some transition relief.  The new rule won’t apply to an employer’s plan for plan years beginning on or before March 1, 2015 if the relief applies.  Transition relief generally applies if an employer has entered into a binding written commitment before November 4, 2014, to adopt a Non-Hospital Plan or Non-Physician Services Plan based on the employer’s reliance on results generated by the CMS minimum value calculator (available online).  The relief also applies to an employer that has begun enrolling employees in a Non-Hospital/Non-Physician Services Plan prior to November 4, 2014.

Moreover, to qualify for transition relief, employers cannot explicitly state or imply that a Non-Hospital/Non-Physician Services Plan precludes an employee from obtaining a subsidy, and must timely correct any prior disclosures that made such a statement or implication.

Employers that are contemplating Non-Hospital Plans or Non-Physician Services Plans should carefully consider the guidance contained in the Notice before entering into a new contract to offer these types of plans.

View From Proskauer: The Availability of Surcharge as Relief for Individual ERISA Fiduciary Breach Claims

Posted in Remedies

Three years ago, the U.S. Supreme Court identified three forms of appropriate equitable relief — reformation, equitable estoppel and surcharge — that are available under Section 502(a)(3) of the Employee Retirement Income Security Act (‘‘ERISA’’). See Cigna Corp. v. Amara, 131 S. Ct. 1866, 50 EBC 2569, 2011 BL 128629 (2011). This article focuses on the availability of surcharge and, in particular, a division among the lower courts on whether surcharge is available to plaintiffs seeking monetary recovery for personal loss as opposed to a loss to the plan. Continue Reading

Eighth Circuit Says That Considerations Of Health Care Cost Savings Could Be Proxy For Age In ADEA Suits

Posted in Reduction in Force

The Eighth Circuit recently concluded that an employer may violate the ADEA by terminating an older employee in order to reduce its health care premiums.  Tramp v. Associated Underwriters, Inc., 2014 WL 4977396 (8th Cir. 2014).  Plaintiff Marjorie Tramp brought claims of discrimination and retaliation under the ADEA, arguing that Defendant Associated Underwriters, Inc. terminated her to reduce its health care costs and in retaliation for her refusal to rely on Medicare benefits in lieu of employer-sponsored benefits. Continue Reading