Employee Benefits & Executive Compensation Blog

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

Seventh Circuit Upholds Dismissal of 403(b) Plan Lawsuit Against Northwestern University in Apparent Split with Third Circuit

Since the beginning of 2016, the ERISA plaintiffs’ bar has filed nearly two dozen complaints targeting university-sponsored 403(b) plans.  The majority of these lawsuits assert that plan fiduciaries breached their duties and engaged in prohibited transactions by (1) “packing” a plan with too many investment options that underperformed and were more expensive relative to other investment options, and/or (2) retaining too many record-keepers and paying record-keepers unreasonable fees.  To date, these cases have had mixed results:  some have been dismissed at the initial pleading stage, others have settled after the denial of motions to dismiss, and one was dismissed after trial.  In a significant development, the Seventh Circuit recently issued its decision in the case against Northwestern University and, in doing so, became the first court of appeals to uphold the dismissal of such claims in their entirety.  Divane v. N.W.U., No. 18-2569, 2020 WL 1444966 (7th Cir. Mar. 25, 2020).

Participants in Northwestern University’s 403(b) plans had alleged that the plan fiduciaries breached their fiduciary duties by:  (1) entering a bundled service agreement with one of the plans’ record-keepers that mandated the inclusion of a suite of the record-keepers’ investment options, including some allegedly imprudent investment options; (2) maintaining multiple record-keepers and paying record-keeping fees through an asset-based arrangement instead of a flat per-participant fee; and (3) offering too many investment options where many underperformed readily available and cheaper alternatives.  The complaint also had alleged that each of these fiduciary decisions violated ERISA’s prohibited transaction rules.

On appeal, the Seventh Circuit affirmed the district court’s dismissal of all claims and concluded that plaintiffs’ claims did not assert plausible ERISA violations, but rather merely amounted to plaintiffs’ “preference” for certain investment options and record-keeping arrangements.  Before turning to the specific claims, the Seventh Circuit characterized plaintiffs’ 287 paragraph complaint as “massive” and observed that the majority of the allegations complained about common plan practices not specific to the defendants or the plans, including paying record-keeping fees through revenue sharing and the offering of a wide range of investment options.

Turning first to the “bundled service agreement” claim, the Court concluded that the complaint itself undermined plaintiffs’ claim that the plan fiduciaries breached their duties by entering into this agreement because the complaint acknowledged that one of the plans’ best investment options, a traditional annuity, would not have been available absent the bundled service agreement.  The Court also explained that nothing in the plans required participants to invest in the purportedly underperforming products and, moreover, plaintiffs failed to evaluate the decision to enter into a bundled service agreement against a relevant standard.  Rather than allege what a “hypothetical prudent fiduciary” would have done differently, the complaint merely criticized Northwestern for making a rational business decision.  The challenge to specific options included under the agreement also failed because, according to the Court, “it would be beyond the court’s role to seize ERISA” as a means to eliminate those options disfavored by individual litigants where the plans also included the lower-cost, conservative options they preferred.

Turning next to plaintiffs’ record-keeping fees claim, the Court explained that ERISA does not require (i) a plan to negotiate a record-keeping agreement that charges a fixed per-participant fee (as opposed to the asset-based agreement negotiated by Northwestern), or (ii) a plan to have one record-keeper or mandate a specific record-keeping arrangement.  Furthermore, plaintiffs did not explain how it was better to have a fixed per participant fee and conceded that the plans had “valid reasons” for maintaining multiple record-keepers, including that doing so allowed the plans to include the various options preferred by participants.

The Court then addressed plaintiffs’ claim that plan fiduciaries breached their duties by offering an investment lineup that contained an excessive number of expensive, underperforming options.  The Court concluded that, even if plaintiffs were correct that the plans offered retail share class options with “layers of fees,” this was not in and of itself sufficient to sustain a claim because plaintiffs failed to allege that the plans omitted their preferred low-cost index fund alternatives.  The Court also held that “the ultimate outcome of an investment is not proof of imprudence” and plan fiduciaries “may generally offer a wide range of investment options and fees without breaching any fiduciary duty.”

In reaching these conclusions, the Court briefly commented on plaintiffs’ reliance on the Third Circuit’s decision in Sweda v. Univ. of Penn., No. 17-3244, 2019 WL 1941310 (3d Cir. May 2, 2019) and, in particular, plaintiffs’ argument that the Third Circuit held that plan fiduciaries cannot satisfy their obligations by simply offering a wide range of investment options.  The Seventh Circuit observed that the Third Circuit’s ruling merely held that offering a wide range of investment options in and of itself did not insulate fiduciaries from misconduct and that, in addition to evaluating the plan as a whole, courts must also consider the prudence of the challenged actions.  Without assessing the specific allegations at issue in Sweda, the Seventh Circuit stated that the Third Circuit’s approach was “sound.”

Lastly, the Court held that plaintiffs’ prohibited transaction claims were properly dismissed because they were simply repackaged imprudence claims, and agreed with the district court that a jury trial would not be permissible for the claims asserted even if the case had proceeded.

Proskauer’s Perspective

The Seventh Circuit’s ruling in Divane appears to create a circuit split with the Third Circuit’s ruling in Sweda.  Although the Seventh Circuit purported to agree with the framework applied by the Third Circuit, the fact remains that many of the allegations in the case against the University of Pennsylvania that were allowed to proceed were nearly identical to those asserted against Northwestern and dismissed.  For instance, in both cases, plaintiffs claimed that the plans entered into a bundled service arrangement with the same record-keeper; paid unreasonable administrative fees by using two record-keepers; paid fees through an asset-based arrangement; offered numerous duplicative investment options; and retained expensive, underperforming funds, with many of the funds at issue being identical.  Not surprisingly, the University of Pennsylvania contended that the Seventh Circuit’s opinion opened a split in the Circuits, and filed a supplemental brief in support of its petition for certiorari with the Supreme Court.  The Supreme Court, however, declined to accept the case for review.

If the rationale applied by the Seventh Circuit becomes the prevailing view, it will create good opportunities for Plan sponsors and fiduciaries to prevent or defend future lawsuits challenging the administration of 401(k) and 403(b) plans.  To begin with, the case recognizes that the decision to offer a particular investment alternative is less likely to be assailable when other investment alternatives are offered with comparable investment strategies.  Secondly, the decision presents the opportunity for eliminating lawsuits of this type in the early stages, and thereby preventing discovery into the prudence of the decision-making process, based on the complaint’s failure to plead with plausibility that the challenged practices were different from what a “hypothetical prudent fiduciary” would have chosen.

EBSA FY 2019 MHPAEA Enforcement

The Employee Benefits Security Administration (EBSA) is charged with ensuring that plans comply with ERISA, including the Mental Health Parity and Addiction Equity Act (MHPAEA).  EBSA recently released its MHPAEA report for Fiscal Year (FY) 2019.  We provide below highlights from EBSA’s report and also note some comparisons to FY 2018.

In FY 2019, EBSA investigated and closed 186 health plan investigations (nearly all of the plans were subject to the MHPAEA) and cited 12 MHPAEA violations.  By comparison, in FY 2018, EBSA investigated and closed 285 health plan investigations (less than half of the plans were subject to the MHPAEA) and cited 21 MHPAEA violations.

EBSA reported that it in FY 2019 it investigated MHPAEA violations in the following six categories:

(1) Annual dollar limits on the total amount of specified benefits that may be paid in a 12-month period under a group health plan or health insurance coverage for any coverage unit (such as self-only or family coverage);

(2) Aggregate lifetime dollar limits on the total amount of specified benefits that may be paid under a group health plan or health insurance coverage for any coverage unit;

(3) The requirement that if a plan or issuer provides mental health or substance use disorder benefits in any classification described in the regulations, then such benefits must be provided in every classification in which medical/surgical benefits are provided;

(4) Financial requirements relating to deductibles, copayments, coinsurance, and/or out-of-pocket maximums;

(5) Quantitative and nonquantitative treatment limitations; and

(6) Cumulative financial requirements and quantitative treatment limitations that determine whether or to what extent benefits are provided based on certain accumulated amounts, including deductibles, out-of-pocket maximums, and annual or lifetime day or visit limits.

The cited violations included:  5 non-quantitative treatment limitations, 5 quantitative treatment limitations, 1 benefits in all classifications, and 1 in cumulative financial requirements and quantitative treatment limitations.

A copy of EBSA’s report is available at https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/laws/mental-health-parity/mhpaea-enforcement-2019.pdf.

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The uptick in EBSA investigations of plans subject to MHPAEA appears to be consistent with the uptick in litigation activity we have seen challenging plan rules as not being in compliance with MHPAEA.  As such, plan sponsors and fiduciaries are well advised to review their plan terms to ensure compliance with MHPAEA.

Minimizing the Risk of ERISA Litigation in a Turbulent Economic Climate

As recent history has shown, ERISA claims seeking recovery of investment losses tend to proliferate during times of market volatility.  The Coronavirus (COVID-19) pandemic presents a unique opportunity for plaintiffs to search for and bring fiduciary-breach claims based on the underperformance of company stock funds and other available investment options in 401(k) and 403(b) plans.  The pandemic has had an extraordinarily disruptive impact on the economic markets since spreading globally and into the United States.  Recent swings have seen historic losses in market prices, and although all investments are feeling the hit and some slightly rebounded after Congress passed the $2.2 trillion CARES Act, some will be more adversely affected than others.  This is precisely the environment in which plaintiffs can make hindsight accusations against ERISA plan fiduciaries for offering allegedly imprudent investment options.

Based on past litigation experience, we find that there are some types of investments that are considerably more likely to be the target of claims under ERISA.  We review these claims below, and also offer some thoughts on preventative measures that plan sponsors and fiduciaries can consider.

Company Stock Fund Claims

For decades, the ERISA plaintiffs’ bar has attempted to hold employee stock ownership plan (ESOP) fiduciaries liable for breaching their fiduciary duties when the price of a company stock declines.  The claims typically allege that the ESOP fiduciaries breached their fiduciary duties by allowing plan participants to continue to invest in company stock funds at a time when (i) such funds were artificially inflated as a result of some undisclosed event, or (ii) there were some “special circumstances” that made the company stock funds too risky to be a suitable investment option in a 401(k) plan.

ESOP fiduciaries may be particularly vulnerable to employer stock fund claims during this period of the COVID-19 pandemic in light of the risk of a substantial downward movement of the stock—one that is larger than the market generally.  This risk would seem to be particularly pronounced in the industries most impacted by the stay-at-home orders, such as the retail, airline, and hospitality industries.  The vulnerability to claims increases if the plan fiduciaries include corporate officials with knowledge of nonpublic information that could severely affect the stock price, such as whether their company plans to implement a significant reduction-in-force or file for bankruptcy protection.  The failure to protect plan participants against the anticipated drop in the price of the stock once these plans become public could give rise to a subsequent ERISA lawsuit.  While there would certainly be available defenses to such claims, plan fiduciaries who are looking to avoid them altogether may wish to consider at this time implementing changes to the fiduciary decision making structure that would remove senior executives who may be privy to nonpublic information, including the possible retention of an independent fiduciary to be responsible for the ESOP.

Other Investment Vehicles That May Become Litigation Targets

The plaintiffs’ bar also has brought suits challenging other investment offerings in 401(k) and 403(b) plans.  Certain types of funds have proven to be particularly vulnerable to challenge, and we can expect that to be even more so the case in this volatile environment.

  • Stable Value Funds. Stable value funds are typically offered as plan investment options to participants seeking capital preservation.  Plaintiffs have brought a variety of claims challenging the offering of these funds, including claims alleging that a stable value fund was not sufficiently diversified and, as a result, underperformed other available stable value funds.  In these volatile times, plan fiduciaries would be well advised to conduct a review of their capital preservation options, including their stable value funds, to determine whether they are in fact serving the objective of capital preservation, and whether more conservative options, like money market funds, should be offered as well.  As with all fiduciary conduct, the review and the rationale for any resulting decisions should be well documented.
  • Alternative Investments. Some plans offer as investment options alternative investments, such as hedge funds and private equity investments.  In many cases, these investments are offered because they can function as a hedge against declining prices in the domestic equity market.  Nevertheless, plaintiffs have challenged their use whenever they underperform and have contended that they are imprudent because of their high fees, volatility, or exotic nature.  We can expect the same to occur if it should turn out that, during this period of market volatility, alternative investments underperform other investment alternatives.  In anticipation of such claims, plan fiduciaries should pay particular attention to developing a clear record of the rationale for maintaining these investments, and that this rationale is clearly reflected in participant communications.
  • Actively Managed Funds. Some plans continue to offer actively managed funds in lieu of index funds.  Index funds are generally less expensive than actively managed funds and frequently have performed better during the steady gains of the S&P 500 during the last decade.  Depending on their investment philosophy or market sectors, actively managed funds may outperform index funds in these volatile times.  But those that do not may be the target of the ERISA plaintiffs’ bar.  If they are not already doing so, plan fiduciaries may wish to consider supplementing actively managed products with index fund alternatives in the same market sectors.
  • Proprietary Funds. Plans in the financial sector (and less frequently in other sectors) sometimes offer proprietary (or affiliated) investment options.  These funds have been particularly vulnerable to claims when they underperform, net of fees, since participants will argue that the funds were offered in order to enrich the corporate plan sponsor.  This will be particularly the case if a proprietary fund underperforms in this economic climate, when relative losses could prove to be very large.  Plan fiduciaries may want to consider supplementing their plan offerings with nonproprietary options as a means to reduce the risk of such challenges.

Proskauer’s Perspective

It would be truly unfortunate if companies that are already struggling to survive in the face of COVID-19 have to confront costly ERISA litigation over the retirement plans they sponsor.  There is no sure way to avoid such litigation.  But, at a time when plan sponsors and fiduciaries may be distracted by more emergent issues, it is important to keep in mind that ERISA fiduciary breach claims are best defended by a clear record of an objective decision-making process.  Whether or not a regularly scheduled meeting is coming up, plan sponsors and fiduciaries may wish to schedule one soon for the purpose of thoroughly reviewing their investment offerings and the decision-making process, and with an eye toward the potential risks outlined above.

Plan participant communications also should be reviewed to make certain that they fully inform participants of the rewards and risks presented by their investment options in a volatile market.  These reviews should be done in coordination with, and with the assistance of, competent service providers who are asked to fully review the alternatives available in these challenging times.  Any changes made to the plan as a result of these reviews, and the reasons why, should be clearly communicated to plan participants.

In sum, the best defense to anticipated litigation in this volatile market is a proactive approach that enhances the fiduciary decision-making process.

Executive Compensation Considerations for COVID-19 (Salary/Wage Reductions)

COVID-19 has had significant impacts on all aspects of business.  While employers are assessing how to handle immediate employee needs related to sick leave, family leave and benefits claims, employers should also consider the impact that changes in their workforce or economic conditions will have on their compensation plans and programs.

Click here to read the next post in a series addressing the impact that COVID-19 has had on executive compensation issues.  In their second post, our colleagues Andrea Rattner, Colleen Hart, Josh Miller, Seth Safra, Kate Napalkova and Katrine Magas discuss certain issues that employers should take into consideration before implementing salary and wage reductions.

Coronavirus Stimulus Deal’s Impact on Employee Benefit Plans

On March 27th, Congress passed a stimulus package in response to the Coronavirus/COVID-19 pandemic.  The package, which is entitled the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or the “Act”), contains several provisions that affect employee benefits.

Retirement Plans

  • Early “Coronavirus-Related Distributions”: The CARES Act allows plans to offer “coronavirus-related distributions” up to $100,000 (from all plans in the controlled group combined).  These distributions would be taken into income over three years (unless the participant elects otherwise) and are not subject to the 10% additional tax for withdrawal before age 59 ½.  To qualify, the distribution must be taken during 2020 (before December 31st), and the participant must (i) have been diagnosed or have a spouse or dependent who was diagnosed with SARS–CoV–2 or COVID-19 by a test approved by the CDC, or (ii) have experienced “adverse financial consequences” as a result of being quarantined, furloughed, laid off, unable to work due to lack of child care, experiencing a closing or reduction of hours of a business owned by the individual, or other factors determined by the Secretary of Treasury.   Similar to other recent qualified disaster relief and the adoption expense provision in the SECURE Act, these distributions may be repaid within three years after the distribution.
  • Increased Loans from Qualified Plans: The Act also increases the limit on loans from qualified employer plans from $50,000 to $100,000 if the individual is a “qualified individual” (meaning someone who meets the requirements for a coronavirus-related distribution, as described above).  The qualified individual’s full vested balance (rather than the usual cap of one-half of the balance) is available for this loan.  In addition, the Act delays by one year the deadline for qualified individuals to make loan repayments that are otherwise due between the date of enactment and December 31, 2020.  Unlike suspension of payments for other leaves, a suspension under the Act will extend the maximum permitted term of the loan (5 years for non-residence loans).
  • Waiver of Required Minimum Distributions (“RMDs”): The Act allows a temporary waiver for defined contribution plan RMDs that would otherwise have to be paid for calendar year 2020. The delay is available for section 401(a), 403(a), 403(b), and governmental 457(b) plans (in each case defined contribution only) and IRAs.
  • Plan Amendments: A plan sponsor could adopt the above changes immediately, but it will eventually need to adopt plan amendments to reflect the changes.  The deadline to adopt the amendments is extended to December 31, 2022 (or, for non-calendar year plans, the end of the plan year that starts in 2022).  For governmental plans, amendments reflecting the RMD change may be adopted as late as the end of the 2024 plan year.
  • Single-Employer Defined Benefit Funding Relief: The CARES Act allows sponsors of single-employer defined benefit plans to delay payment of minimum required contributions for calendar year 2020.  Delayed contributions must be made with interest by January 1, 2021.  A plan sponsor also has the option under the Act to use the plan’s adjusted funding target attainment percentage for the last plan year ending before January 1, 2020 as the percentage for plan years which include calendar year 2020.

Health Plans

  • Expansion of Tests Covered under Families First Act: The CARES Act amends the recent Families First Coronavirus Response Act (the “FFCRA”), which was discussed in a previous blog, to expand the types of SARS-CoV-2 and COVID-19 tests that group health plans and health insurance issuers must cover without cost-sharing, prior authorization, and other medical management requirements.  The new tests to be covered include tests for which the developer has requested “emergency use authorization” under the Federal Food, Drug, and Cosmetic Act and tests authorized and used by a state to diagnose patients.
  • Transparency in Pricing of Tests: The Act generally requires providers to publicize the prices of COVID-19 tests.  Plans and issuers paying for the tests under the FFCRA then have to reimburse the provider in accordance with the negotiated rate that it had with the provider before the COVID-19 public health emergency or, if no negotiated rate, whatever is the publicized cash price.
  • Coverage of Qualifying Coronavirus Preventive Services and Vaccines: The Act also directs the Secretaries of Health and Human Services, Labor, and Treasury to require plans and issuers to cover any coronavirus preventive services without cost-sharing.  Such services include vaccines and any other services that are determined by the CDC or U.S. Preventive Services Task Force to prevent or mitigate COVID-19.
  • Telehealth under a High-Deductible Health Plan (“HDHP”): Expanding on the IRS’s Notice with respect to HDHPs’ coverage of COVID-19 costs, the Act permits (but does not require) HDHPs to waive deductibles for all telehealth or remote care services in plan years beginning on or before December 31, 2021 (even if not related to COVID-19) without impacting the plan’s status as an HDHP.
  • Over-the-Counter Drugs and Menstrual Care Products: The Act eliminates the requirement to have a prescription for over-the-counter drugs to qualify for tax-favored reimbursement from health savings accounts (“HSAs”), health reimbursement accounts (“HRAs”), and health flexible spending arrangements (“FSAs”), effective as of January 1, 2020.  Menstrual care products likewise will be considered qualified medical expenses payable from those accounts.

Student Loans

The Act allows employers to reimburse or pay up to $5,250 of an employee’s student loan payments through a Code Section 127 education assistance plan.  This expansion applies only for loan payments (whether to the employee or directly to the lender) made by the employer after enactment and before January 1, 2021. The $5,250 limit is an aggregate limit for other permitted educational assistance and loan repayments combined.  Section 127 arrangements are subject to certain technical requirements, including nondiscrimination and a plan document.  For employers that already have Section 127 plans, this change can be implemented by an amendment to the definition of qualifying expenses.  The Act also prohibits “double-dipping” by employees: employees may not deduct amounts that are reimbursed or paid by the employer.

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Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns.  Visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take and resources to help manage ongoing operations.

D.C. Circuit Rules that ERISA Plan Participant’s Release Extends to Fiduciary Breach Claims On Behalf of The Plan

On March 24, 2020, the D.C. Circuit Court upheld a district court ruling that an ERISA plan participant’s broad release of claims includes breach of fiduciary duty claims against ERISA plan fiduciaries, notwithstanding the release’s carve-out for any “claims for vested benefits.”  The ruling extinguishes a participant’s class action claims under ERISA sections 502(a)(2) and (a)(3) that 403(b) plan fiduciaries breached their fiduciary duties of prudence and loyalty by paying excessive recordkeeping fees and allowing participants to invest in investment options that were more expensive and underperformed comparable options available in the market.

Two years before filing the lawsuit, plaintiff and George Washington University (GWU) agreed to resolve an unrelated suit and entered into a settlement agreement and general release wherein plaintiff agreed to release all “claims for violation of any federal statute.”  The release included a carve-out for any “claims for vested benefits under employee benefit plans.”  GWU moved to dismiss the lawsuit on the ground that the plaintiff lacked standing because she had released her claims under the terms of the settlement agreement.  The district court granted the motion and concluded that the carve-out “plainly” referred to plan-based claims for benefits typically brought pursuant to ERISA section 502(a)(1)(B) and not statutory ERISA claims for breach of fiduciary duty under ERISA sections 502(a)(2) and/or (a)(3).  In a brief per curiam order, the D.C. Circuit affirmed the district court decision ruling that plaintiff had “released her ERISA claims as part of a prior settlement.”

The case is Stanley v. George Washington University, et al., No. 19-7079 (D.C. Cir. March 24, 2020).

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Proskauer’s Perspective:  By upholding the district court ruling, the D.C. Circuit ruling provides assurances to Plan sponsors that the requirement to carve-out of general releases individual claims for vested benefits will not leave open the door to representative claims for fiduciary breach. The district court decision did not directly discuss other related questions that have been addressed by other circuit courts in similar cases, including whether an employee may lawfully release claims brought on behalf of the plan under ERISA section 502(a)(2).  But by implication, the decision may be viewed as authorizing such releases. The decision may likewise provide support to defendants seeking to enforce employee agreements containing class action waivers in favor of individual arbitration, in response to ERISA claims brought on behalf of the plan.

Executive Compensation Considerations for COVID-19 (Leave)

COVID-19 has had significant impacts on all aspects of business.  While employers are assessing how to handle immediate employee needs related to sick leave, family leave and benefits claims, employers should also consider the impact that changes in their workforce or economic conditions will have on their compensation plans and programs.

Click here to read the first post in a series addressing the impact that COVID-19 has had on executive compensation issues.  In their first post, our colleagues Andrea Rattner, Collen Hart, Kate Napalkova and Katrine Magas discuss whether a temporary leave of absence or furlough triggers forfeiture, payment, vesting, or other treatment under compensation arrangements.

Families First Coronavirus Response Act: From a Benefits Perspective

On March 18, 2020, the Senate passed and the President signed into law the Families First Coronavirus Response Act (the “Families First Act” or the “Act”) which was first drafted and passed by the House earlier in the week.  As noted in our Law and the Workplace summary of the Act, the new Act contains many important provisions regarding expanded family and medical leave and emergency paid sick leave as they relate to COVID-19.  The Families First Act, however, does not stop there.  It also mandates coverage of testing for COVID-19 without cost-sharing, prior authorization, or other medical management requirements.

The Act requires that both group health plans (including grandfathered plans) and health insurance issuers in the group and individual market cover the following:

  • In vitro diagnostic products for the detection of SARS–CoV–2 or the diagnosis of the virus that causes COVID–19 that are approved, cleared, or authorized under the relevant provisions of the Federal Food, Drug, and Cosmetic Act.
  • The administration of such in vitro diagnostic products.

Further, plans and issuers must provide coverage for all items and services furnished to an individual during a health care provider office, urgent care center, or emergency room visit that result in the ordering of the testing, the furnishing or administration of the testing, or the evaluation of an individual to determine whether testing is needed.  Other notable requirements of this coverage include the following:

  • The items and services must be covered to the extent they relate to the furnishing or administration of the testing or to the evaluation of the individual to determine the need for testing.
  • The coverage must be provided without cost-sharing, including deductibles, copayments and coinsurance.
  • Moreover, no prior authorization or other medical management requirements can apply.
  • Office visits include so-called “telehealth” visits. (This is important given the rise in telehealth utilization due, in part, to fear over the spread of the virus.)

The Act covers only testing and diagnostics, suggesting that plans can continue to impose deductibles and other cost-sharing requirements for treatment of COVID-19.  Of course, plan sponsors can elect to waive cost-sharing for treatment.  (See our blog regarding recent IRS guidance permitting a high deductible health plan to waive deductibles for COVID-19 testing and treatment, without affecting its status as a high deductible plan.)  Also, some state legislatures have proposed laws which, if enacted, would prohibit cost-sharing under covered plans with respect to treatment.

Some uncertainty remains as to how far the Act’s coverage mandate extends, including, for example, the following:

  • The scope of the provision on telemedicine, including, for example, whether telemedicine visits outside the plan’s existing telemedicine program must be covered.  (As the law is drafted broadly, the answer appears to be yes.)
  • Whether out-of-network claims must be covered without cost-sharing.  (The law is drafted broadly without exception for out-of-network services.)
  • Whether retiree only plans are exempt from the requirements.  (As we saw in connection with the passage of the Affordable Care Act, there was a fairly drawn out history related to the application of this exception.)

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For more information about the paid sick and family leave requirements of the Act, see our Proskauer Law and the Workplace blog.  For more information about tax credits available to employers providing this leave, see our Proskauer Tax Talks blog.

Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns.  Visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take and resources to help manage ongoing operations.

IRS Loosens HSA Rules for Coronavirus

On March 11, 2020, the IRS issued Notice 2020-15, to address an important coronavirus issue for high-deductible health plans that are coordinated with health savings accounts (“HSAs”).  The guidance paves the way for health plans to waive or reduce deductibles for any “medical care services and items purchased relating to testing for and treatment of COVID-19,” without affecting eligibility to make HSA contributions.

In general, employees may make and receive contributions to HSAs only if they are enrolled in a “high deductible” health plan.  With limited exceptions, covering medical expenses before the minimum deductible is reached would make employees ineligible to make or receive HSA contributions, and would subject employees who have made HSA contributions to an excise tax.  The HSA rules generally have an exception for “preventive” care, but not for services and items purchased to treat a disease.

The new guidance expands the scope of the “preventive” care exception, but is limited to testing and treatment of COVID-19.  Treatments for other conditions and diseases remain subject to the minimum deductible rules.

Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns. Visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take and resources to help manage ongoing operations.

[Podcast]: ERISA Plan Asset “Hard-Wired” Conduit Feeders

proskauer benefits brief podcast

For a number of ERISA, tax and other regulatory reasons, it may be desirable for the manager or sponsor of an investment fund or other structure to utilize what is often referred to as a plan asset “hard-wired” conduit feeder.  Tune in to this podcast as partner Ira Bogner and senior counsel Adam Scoll discuss more about these structures, and the advantages they can provide.

 Listen to the podcast

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