The Fifth Circuit concluded that a plan’s three-year contractual limitations period began to accrue when a beneficiary received a letter in 2008 that prominently displayed on the first page the monthly earnings used to calculate his long term disability benefits. The Court held that the claim was time-barred because the beneficiary failed to bring his miscalculation claim until 2017. In so holding, the Court explained that the alleged discrepancy in monthly earnings of almost $3,000 was so large and fundamental that its effect on the beneficiary’s plan benefits was apparent, and the discrepancy was not of a type that required him “to decipher complex formulae or piece together inferences from incomplete information.” The case is Faciane v. Sun Life Assurance Co. of Canada, No. 18-30918, 2019 WL 3334654 (5th Cir. July 25, 2019).
Back to Basics: IRS Issues Ruling About Failure to Cash a Distribution Check from a Qualified Retirement Plan
In Revenue Ruling 2019-19, the IRS answered three basic questions about the consequences of an individual’s failure to cash a distribution check from a qualified retirement plan. Uncashed checks arise in a number of contexts and questions on the taxation of uncashed checks should be carefully considered.
In the hypothetical posed by the IRS, Individual A received a fully taxable distribution check from a qualified retirement plan in 2019. Individual A took no action with respect to the distribution check (and did not make a rollover contribution with respect to any portion of the distribution check). The IRS confirmed the following consequences:
- Gross income inclusion: As expected, the IRS confirmed that the amount of the distribution is includible in Individual A’s gross income in 2019, explaining that Individual A’s failure to cash the distribution check does not permit her to exclude the amount from gross income. The IRS noted that, for purposes of the revenue ruling, it is irrelevant what actually happens to the check (e.g., whether Individual A keeps the check, sends it back, destroys it, or cashes it in a subsequent year). This conclusion makes it clear that recipients are not allowed to manipulate the year of income inclusion by simply holding distribution checks until a later tax year.
- Withholding and reporting obligations: The IRS confirmed that the plan administrator’s obligation to withhold tax under IRC § 3405(d)(2) from Individual A’s distribution is not altered by Individual A’s failure to cash the distribution check. Likewise, the plan administrator is required to report the distribution to Individual A on a Form 1099-R for 2019. Because the plan administrator is usually unaware of precisely when a distribution check is cashed, altering the plan administrator’s withholding and reporting obligations to align with the time the check is cashed, rather than when the check is issued, would prove very burdensome for plan administrators.
Perhaps the most interesting part of this ruling is the final sentence, in which the IRS alludes to continuing to analyze issues arising in other situations involving uncashed checks – “including situations involving missing individuals with benefits under those plans.” So stay tuned for (potential) further guidance from the IRS regarding missing participants.
District Court Denies Motion to Dismiss Mental Health Parity Act Putative Class Action
In the latest volley between participants and group health plans over mental health services coverage, a federal district court in California denied United Healthcare’s motion to dismiss a putative class action challenging the reimbursement rates for out-of-network mental health services. In this case, the plaintiffs alleged that UHC reduced reimbursement rates for out-of-network services by 25% for services provided by a psychologist and by 35% for services provided by a masters level counselor in violation of the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (the “Parity Act”).
The Parity Act, which we have blogged about previously, requires that, if a group health plan or health insurance issuer provides medical/surgical benefits and mental health and substance use disorder (MH/SUD) benefits, the financial requirements and treatment limitations applicable to MH/SUD benefits cannot be more restrictive than those that apply to medical/surgical benefits.
The court ruled that plaintiffs stated a plausible claim under the Parity Act. In so ruling, the court first concluded, over UHC’s objections, that plaintiffs could pursue multiple theories as to how the reimbursement adjustment violated the Parity Act—including alleging that the restriction was an impermissible financial requirement, quantitative treatment limitation and nonquantitative treatment limitation. Next, the court rejected UHC’s argument that plaintiffs failed to state a claim because the complaint did not identify a medical/surgical benefit comparable to the MH/SUD benefits at issue and did not allege that the reimbursement policy was applied more stringently to the MH/SUD benefits than the comparable medical/surgical benefit. The court explained that it was sufficient for the complaint to allege that the defendant had singled out MH/SUD services for disparate treatment by applying the reimbursement adjustment to MH/SUD services only. According to the court, plaintiffs did not need to identify a medical/surgical analogue that was not subject to a comparable reimbursement adjustment.
The case is Smith v. United Healthcare Insurance Co., No. 18-cv-06336-HSG (N.D. Cal. July 18, 2019).
[Podcast]: Worker Classification after Dynamex, Not as Simple as ABC
In its 2018 decision in Dynamex Operations West v. Superior Court of Los Angeles County, the California Supreme Court upended decades of precedent by setting out a new, stringent, three-factor test to determine proper worker classification for purposes of California’s wage order rules. Then, this year, the Ninth Circuit first applied Dynamex retroactively and then wiped out that ruling and returned the question to the California Supreme Court. In the meantime, Assembly Bill No. 5, which seeks to codify the Dynamex test, is before the California Senate. In light of these developments, employers with workers in California are increasingly faced with conflicting information about the practical impact of Dynamex.
In this episode of The Proskauer Benefits Brief, Kate Napalkova and Pietro Deserio discuss Dynamex and its broader meaning for employers and other stakeholders in the compliance and transaction arenas.
Digging into the New HRA Regulations Part 4: Excepted Benefit HRAs
New regulations issued by the Departments of Labor, Treasury, and Health and Human Services (the “Departments”) have expanded the use of health reimbursement arrangements (“HRAs”), including permitting the use of HRAs to reimburse premiums for individual health insurance coverage. As part of this expansion, and recognizing that some employers might want the flexibility to offer a limited scope HRA alongside traditional group health plan coverage, the Departments established a new type of excepted benefit – an “Excepted Benefit HRA.”
Prior to the new regulations, HRAs could be designed to excepted benefits (such as limited scope vision and dental coverage) only. Unlike those HRAs, Excepted Benefit HRAs can be used to reimburse expenses that are not necessarily related to excepted benefits (e.g., cost sharing, deductibles, and other non-covered medical expenses). However, Excepted Benefit HRAs must satisfy the following requirements in order to reimburse these medical expenses:
- Otherwise Not an Integral Part of the Plan: To satisfy this condition, the employer must offer traditional group health plan coverage (i.e., coverage that is not limited to excepted benefits and that is not an HRA or other account-based group health plan) to the participants offered the Excepted Benefit HRA. However, unlike Individual Coverage HRAs discussed in prior blogs, there is no requirement that the participant be enrolled in the traditional group health coverage in order to participate in an Excepted Benefit HRA.
- Limited in Amount: The amount made newly available in an Excepted Benefit HRA for a plan year cannot exceed $1,800 (indexed for inflation for plan years beginning after December 31, 2020). Recognizing that plan sponsors need time to prepare and implement changes relating to the annual limit, the IRS and the Department of Treasury committed to publishing the adjusted amount for plan years no later than June 1 of the preceding calendar year.
- Limitations on Reimbursement for Certain Types of Coverage: An Excepted Benefit HRA cannot reimburse premiums for Medicare Parts A, B, C and D, individual health insurance coverage, or coverage under a group health plan (other than COBRA), although it can reimburse premiums for excepted benefits (such as dental and vision coverage). The agencies recognized concerns from commenters that reimbursing short-term limited duration insurance (STLDI) premiums could destabilize the ACA Marketplace, but the final regulations nevertheless allow reimbursement of STLDI premiums. However, if evidence later shows that the insurance marketplace has been adversely impacted, the agencies could issue guidance prohibiting STLDI premium reimbursement.
- Uniform Availability: The employer must make an Excepted Benefit HRA available under the same terms to all similarly situated individuals, without consideration of health status. For purposes of this rule, “similarly situated individuals” is defined by reference to the definition of “similarly situated individuals” in the HIPAA nondiscrimination rules. Generally, this means that the terms of Excepted Benefit HRAs can vary among distinct groups of participants, provided that the distinction is based on a bona fide employment-based classification consistent with the employer’s usual business practice (e.g., full-time versus part-time status).
- Cannot be Offered with an Individual Coverage HRA. Employers may only offer Excepted Benefit HRAs to employees if traditional group health coverage is also offered to the employees who are eligible to participate in the Excepted Benefit HRA. In contrast, employers cannot offer Individual Coverage HRAs to employees who are also eligible for traditional group health coverage sponsored by their employers. Therefore, employers cannot offer both Individual Coverage HRAs and Excepted Benefit HRAs to the same employees.
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Addition of the Excepted Benefit HRA gives employers the ability to offer a flexible, limited-scope HRA to employees. Although the amount available for each plan year is limited, amounts in an Excepted Benefit HRA may be rolled over and accumulated from year-to-year (unlike health care flexible spending accounts, which are “use it or lose it” accounts, subject to limited designed-based carryovers or grace periods). Further, employees covered by Excepted Benefit HRAs are eligible to make contributions to health savings accounts, assuming the individual does not otherwise have disqualifying coverage.
Life Insurer Compelled to Produce Attorney-Client Communications
A federal district court in Ohio concluded that internal communications between a plan administrator and in-house counsel about a beneficiary’s first-level benefit claim remained protected by the attorney-client privilege, and that ERISA’s fiduciary exception to the attorney client privilege did not apply. In so ruling, the court explained that once the beneficiary’s counsel submitted a “strongly worded, evidence-based letter along with [a doctor’s] opinion letter, [defendant] faced more than a mere possibility of future litigation if it continued to deny benefits,” and thus the relationship was clearly adversarial and litigation was a near-certainty. The court did, however, compel the production of communications between the plan administrator and in-house counsel before and after the initial claim denial, but only up to the point when the beneficiary’s counsel submitted the “strongly worded, evidence-based letter.” The case is Charlie Duncan, Ex’r of the Estate Of Paul W. McVay, et al. v. Minnesota Life Ins. Co., No. 17-cv-25, 2019 WL 3000692 (S.D. Ohio July 10, 2019).
SDNY Rejects Class Standing and Fiduciary Breach Claims In Connection With Alleged Double-Charging Scheme
A New York federal district court concluded that a defined benefit plan participant lacked standing to seek relief on behalf of plans other than the one in which he was a participant. In this case, plaintiff claimed that defendants breached ERISA fiduciary duties and engaged in prohibited transactions by charging undisclosed markups for securities trades. The court concluded that plaintiff could pursue his claim only with respect to the plan in which he participated because the defendants’ alleged improper charges for that plan would not resolve whether, when, and in what amount defendants charged undisclosed markups to other plans.
The court also dismissed the plaintiff’s fiduciary breach claims, finding that he failed to plausibly allege that the defendants had discretion over the disposition of plan assets such that they could be deemed functional fiduciaries. In so ruling, the court rejected plaintiff’s argument that the defendants became fiduciaries with respect to the markups by virtue of the discretion they exercised over their own compensation. The court concluded that the markups depended on a number of factors outside the defendants’ control, such as the type of customer, time of day, the time and amount of securities being traded, and the market price. The case is Fletcher v. Convergex Group LLC, No. 13-cv-9150, 2019 WL 3242586 (S.D.N.Y. July 2, 2019).
Tenth Circuit Upholds Denial of Residential Mental Health Treatment
The Tenth Circuit upheld a claims administrator’s decision denying a claim for residential mental health treatment as not medically necessary. In so holding, the Court rejected plaintiff’s argument that the claims administrator’s refusal to produce data on its historical denial rates for mental health treatment warranted a de novo review because that information was not relevant to whether the benefit denial was made in accordance with the plan document. The case is Mary D. v. Anthem Blue Cross Blue Shield, No. 16-cv-00124, 2019 WL 3072468 (10th Cir. July 15, 2019).
Quick Tips for ERISA Plan Administrators When Something Goes Wrong
In 2010, after nearly two centuries of legal jurisprudence, the U.S. Supreme Court (in Conkright v. Frommert), concluded that “People make mistakes.” The Court even acknowledged that administrators of ERISA plans make mistakes!
So what do you do if you find that someone made a mistake in plan administration? When we work with clients to help fix problems, here are the seven (really six because number 7 is a repeat) basic correction steps we use.
For more on this topic, you can visit our previous blog post here.
Digging into the New HRA Regulations, Part 3 – Premium Tax Credit and Employer Mandate Impact on Individual Coverage HRAs
As part of our ongoing series on the final regulations expanding the availability of health reimbursement accounts (“HRAs”), we discussed the newly-created Individual Coverage HRAs, which generally allow for employers to reimburse employees’ premiums for health coverage purchased on the individual market. As noted in the final regulations, the new Individual Coverage HRA is a group health plan subject to ERISA and the Affordable Care Act (“ACA”). Therefore, Individual Coverage HRAs can impact employees’ access to premium tax credits (“PTCs”) available on the ACA Marketplace and play a role in an employer’s compliance with the ACA’s employer shared responsibility mandate. These issues are described more fully below.
ACA Marketplace Impact
In general, the ACA Marketplace provides access to individual market health insurance coverage, and depending on household income, an individual could get an advance PTC to reduce the cost of coverage. In addition to meeting income requirements, to be eligible for the PTC, an individual generally cannot have access to employer-sponsored minimum essential coverage that is affordable (i.e., the self-only cost is less than 9.86% (in 2019) of household income) and has minimum value (i.e., the plan pays at least 60% of covered services under the plan). If an individual actually enrolls in his or her employer’s group health plan, even if it is not affordable or does not have minimum value, he or she will not be eligible for a PTC on the ACA Marketplace.
Individual Coverage HRAs are group health plans. They are also considered minimum essential coverage under the ACA. Therefore, if an employee enrolls in an Individual Coverage HRA, he or she will be ineligible for a PTC on the ACA Marketplace. If the employee opts out of the Individual Coverage HRA and seeks coverage on the ACA Marketplace, eligibility for a PTC depends on whether or not the Individual Coverage HRA is affordable.
Under the regulations, an Individual Coverage HRA is affordable for purposes of the PTC if the “employee’s required HRA contribution” for the month does not exceed 1/12 (a) the employee’s household income for the taxable year multiplied by (b) the “required contribution percentage.” An employee’s required HRA contribution amount is determined by subtracting the monthly HRA contribution for self-only coverage by the lowest cost silver-level plan available on the ACA Marketplace. The required contribution percentage is adjusted annually and is set at 9.86% for plan years beginning in 2019. As a technical matter, affordability of an Individual Coverage HRA, and thus an employee’s eligibility to claim the PTC, is determined on a monthly basis. However, the regulations state that if, at the time the employee enrolled in a qualified health plan, the ACA Marketplace determines the Individual Coverage HRA is not affordable, the HRA will be considered not affordable for the entire year.
The final regulations require that employers and plan sponsors provide written notice when an Individual Coverage HRA is made available to employees. That notice must contain information regarding the availability of the PTC, an explanation of the right to opt out of the HRA and potentially receive a PTC for any month the HRA is considered “unaffordable,” and a statement that opting out of an affordable HRA would make the participant ineligible for a PTC. The Department of Labor’s model notice for Individual Coverage HRAs issued concurrently with the final regulations contains the required language. The use of the model notice will generally be considered to be good faith compliance with the notice requirement.
The final regulations also establish a new ACA Marketplace special enrollment event for Individual Coverage HRA eligibility. Open enrollment in the ACA Marketplace currently spans November and December. Outside of that period, individuals need a special enrollment event (i.e., loss of other coverage, birth of a child, etc.) to enroll in Marketplace coverage. Recognizing that Individual Coverage HRAs will first become available on January 1, 2020, and most likely each January 1st thereafter as employers and plan sponsors adopt these HRAs, individuals will have an ACA Marketplace special enrollment event when they obtain access to an Individual Coverage HRA.
ACA Employer Mandate Impact
Under the ACA, applicable large employers, or “ALEs” (generally those that have 50 or more full-time employees and equivalents on a controlled-group basis) must offer an eligible employer-sponsored health coverage (i.e., “minimum essential coverage”) to at least 95% of its full-time employees and their dependent children or pay a significant penalty. Even if an ALE meets the 95% requirement, if the coverage that is offered is not affordable or does not have minimum value, the ALE could face a smaller penalty. In order for either penalty to be triggered, at least one employee would need to opt out of available employer-sponsored coverage and receive a PTC.
The final HRA regulations contain very little substantive guidance regarding the impact that Individual Coverage HRAs will have on employer mandate compliance. Instead, the regulations point to IRS Notice 2018-88 as setting the groundwork for future proposed regulations. Notice 2018-88 provides that Individual Coverage HRAs are minimum essential coverage, and therefore, as long as these HRAs or other forms of minimum essential coverage are made available to 95% or more of the full-time workforce, the massive ACA penalty (under Section 4980H(a) of the Internal Revenue Code (the “Code”)) should be avoided.
However, the smaller, individualized penalty (under Section 4980H(b) of the Code) can still be triggered if the Individual Coverage HRA is not affordable (minimum value is assumed if the HRA is affordable). Although Notice 2018-88 explains that the same affordability methodology applied for purposes of the PTC can be used for purposes of the employer shared responsibility mandate, that methodology can be problematic for employers. For one thing, the “required HRA contribution” is based on a formula that includes household income, which is information that employers are unlikely to have. Further, the lowest-cost silver plan available to employees on the ACA Marketplace varies on an employee-by-employee basis, depending on age and place of residence. Given these challenges, Notice 2018-88 requested comments on various affordability safe harbors, including the ability to use the existing employer mandate affordability safe harbors (i.e., W-2, rate of pay, and federal poverty line) when determining Individual Coverage HRA affordability. The Treasury Department is expected to issue proposed regulations on these safe harbors in the coming months.
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Individual Coverage HRAs are a welcome addition to the health insurance space. With this addition comes the potential for missteps, however. For example, the final regulations provide that an offer of an Individual Coverage HRA will qualify as an offer of minimum essential coverage under the ACA’s employer shared responsibility mandate. However, employer mandate penalties are still possible if the Individual Coverage HRA is not affordable. Although determining affordability for PTC purposes is generally straightforward, applying the same affordability methodology to the employer shared responsibility mandate can be problematic. The IRS has indicated that future proposed regulations may (1) propose allowing the use of existing affordability safe harbors to Individual Coverage HRAs and (2) propose new affordability safe harbors for Individual Coverage HRAs.
