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

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.

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).