Even more problematic, the CCDA may not be enforceable at all against most private employers, as the law may be preempted by the Employee Retirement Income Security Act of 1974 (ERISA). But no court has ruled on this issue ... at least not yet.

This blog answers basic questions about what the CCDA does and the options employers have, considering the law’s unsettled status.

Q: What does the CCDA require?

A: The CCDA requires employers (any person or entity that “gainfully” employs someone in Illinois) with “group health insurance” to provide a disclosure to all its eligible employees showing which of the state’s EHBs are covered benefits in the employer’s health plan.

To create a compliant employee disclosure, employers will have to look up the scope of each EHB, compare it to the coverage provided in the employer’s plan, and indicate either “No” (meaning the EHB is not a covered benefit), “Yes” (it is), or “Yes, partially” (explaining how the benefit is partly covered). Creating a compliant form will require some expertise in reading and interpreting health benefits and health plans, and it may be somewhat time-consuming.

Q: What are the EHBs?

A: The Illinois Department of Labor (IDOL) recently released a sample compliance form identifying all the EHBs that must be compared. There are 42 separate benefits in 10 different categories. The EHBs are not necessarily required to be covered by a health plan. Whether they are depends on a plan’s insured status (fully insured v. self-funded) and the size of the employer. IDOL simply tells employers to consult an attorney if they want to know what EHBs are actually required.

The disclosure may lead to considerable confusion when received by employees. For each “No” or “Yes, partially” response, employees may believe their employers are breaking the law or providing substandard coverage. But there may be absolutely nothing requiring the employer to provide the benefit in the first place, and the employer’s plan may provide superior benefits in other categories not included in the state’s EHBs.  

Q: When and how does the disclosure have to be provided?

A: The disclosure must be made to an employee when hired, annually, and upon request. The law does not specify a timeframe following each event in which the disclosure must be made (e.g., 30 days following date of hire). This makes it unclear at what point the failure to disclose actually becomes a violation of the CCDA. Fortunately, in addition to in person or via email, the disclosure may be provided to employees by simply posting it on a website they can access. That will easily take care of most disclosures.

Q: If an employer has more than one coverage option, how many forms have to be completed?

A: It is not clear. Employers often have multiple coverage options available to employees. Each option may cover different benefits or at different levels. If the different options can be adequately represented on a single form—e.g., the options provide almost the same coverage, with minor differences that can be adequately explained—then a single form is likely sufficient. But the differences among the options may become so significant that, at some point, it would be impracticable to try to represent that information in a single form, and separate forms will need to be created.

Q: Will health insurance companies complete the form for employers?

A: The CCDA is directed at employers. It does not apply to health insurers, and insurers are not required to help in any way. While insurance companies, brokers, third-party administrators, or other service providers may help an employer comply with the law (particularly a larger employer with leverage), many employers (especially smaller employers) may find that their insurers and service providers are not willing to help them, making compliance even more challenging. The employer will have to create it in-house or hire a third party (such as an attorney) to draft the disclosure, which could be expensive.

Q: What are the penalties for non-compliance?

A: IDOL may assess civil penalties against an employer as follows:

• Employers with three or fewer employees: up to $500 for a first “offense,” $1,000 for a second, and $3,000 for a third.
• Employers with four or more employees: up to $1,000 for a first offense, $3,000 for a second, and $5,000 for a third.

The CCDA states that the civil penalty shall take into account “the size of the employer, the good faith efforts made by the employer to comply, and the gravity of the violation.”

Q: That doesn’t sound too bad ... right?

A: Well, it could be bad. The law is vague enough that IDOL could assert that a separate penalty may be assessed for each employee who fails to receive a notice when required, as well as for each separate coverage option the employee is eligible for, which could lead to enormous potential penalties.

For example, suppose an employer with no prior “offenses” has 100 eligible employees with three coverage options, and the employer fails to provide any required disclosures. How many “offenses” is that? It could be treated as a single, combined offense leading to a small civil penalty of $1,000. Alternatively, it could be viewed as 100 or even 300 separate offenses, leading to a potential maximum penalty of $1,494,000 (i.e., $1,000 for a first offense + $3,000 for a second offense + $1,490,000 for 298 additional offenses at $5,000 each).

It appears IDOL has privately expressed its opinion that it would view all violations in a single year as one “offense,” but no official guidance or actions consistent with that position have been made. Hopefully, IDOL will soon publicly clarify how penalties will be calculated under the CCDA so employers can better understand the risks of non-compliance.

Q: How are violations and penalties determined?

A: IDOL has the right to conduct investigations of violations. IDOL will first notify an employer and ask it to demonstrate compliance with the CCDA. If the employer fails to do so, IDOL will issue a notice to show cause “giving the employer 30 days to comply.” In other words, an employer gets 30 days to fix the alleged violations. Which is good!

If the employer does not comply within 30 days, IDOL can impose a penalty after conducting a hearing on the matter. The employer has the option of appealing IDOL’s imposed penalty, while IDOL has the option of filing a lawsuit to collect the penalty. And, of course, given the likelihood of ERISA preemption, an employer could file a lawsuit in federal court seeking to enjoin the state from enforcing the law against sponsors of ERISA plans.

Q: What is ERISA preemption?

A: ERISA is a federal law that governs employee benefits, from retirement plans to health plans, and almost everything in between. Section 514 of ERISA (29 U.S.C. § 1144) contains a special “preemption” provision. It states that the provisions of ERISA “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” This means states cannot pass or enforce laws that “relate to” employee benefits governed by ERISA.

ERISA preemption typically plays out in federal court (including the U.S. Supreme Court on numerous occasions), where federal judges determine the boundaries of what states can and cannot do. There is a rich history of opinions delineating those boundaries.

Q: Are there limits to preemption?

A: For one, ERISA contains a “Savings Clause,” pursuant to which states can still regulate insurance. Many employers use insured plans for health, disability, and similar benefits, and those insurance policies may still be regulated by the states. However, ERISA also contains a “Deemer Clause,” pursuant to which uninsured plans (i.e., self-funded plans) cannot be regulated as insurance by states.

In addition, ERISA preemption does nothing to save plans that are not subject to ERISA. These plans include church plans and governmental plans, which are fully subject to state regulation.

Q: Is the CCDA preempted with respect to ERISA health plans?

A: IDOL has taken the position that the CCDA is not preempted, stating in its FAQs:

Because the Consumer Coverage Disclosure Act creates a benefits notification requirement for all Illinois employers, regardless of the type of insurance they provide, and does not mandate insurance provisions or otherwise have any direct impact on employer-provided group health insurance coverage, employers who provide self-insured plans and/or ERISA plans are subject to the provisions of the Act.

This is probably not a winning argument.

ERISA already extensively governs disclosures that are required to be given to participants in health plans. For example, certain documents must be furnished to participants that thoroughly explain their benefits and coverage, such as Summary Plan Descriptions and Summaries of Benefits & Coverage. Other types of formal plan documents must be furnished to participants upon request. ERISA governs what must be provided and when it must be provided.

The CCDA interferes in ERISA’s extensive regulation of plan disclosures. The Supreme Court’s words in a 2016 case—concerning a Vermont law that required plans to disclose certain data to state authorities—seem to apply equally well to the CCDA:

The State’s law and regulation govern plan reporting, disclosure, and—by necessary implication—recordkeeping. These matters are fundamental components of ERISA’s regulation of plan administration. Differing, or even parallel, regulations from multiple jurisdictions could create wasteful administrative costs and threaten to subject plans to wide-ranging liability. ... Pre-emption is necessary to prevent the States from imposing novel, inconsistent, and burdensome reporting requirements on plans.

The Secretary of Labor, not the States, is authorized to administer the reporting requirements of plans governed by ERISA. He may exempt plans from ERISA reporting requirements altogether. ... And, he may be authorized to require ERISA plans to report data similar to that which Vermont seeks, though that question is not presented here. Either way, the uniform rule design of ERISA makes it clear that these decisions are for federal authorities, not for the separate States.

Gobeille v. Liberty Mut. Ins. Co., 577 U.S. 312, 323–24 (2016).

Q: What about the Savings Clause?

A: The Savings Clause allows states to regulate the business of insurance. The CCDA does not look or act like an insurance law. It is not placed among insurance laws, it is not enforced by the Illinois Department of Insurance, and, most importantly, it is not directed at insurance companies or insurance policies. It is best described as a labor law directed at employers, not a bona fide insurance regulation. And, even if it were an insurance regulation, the CCDA would still not apply to self-funded health plans.

But again, no court has yet ruled on the preemption issue. It is possible that a federal court would uphold the law and find that it is not preempted.

Q: So, what should employers do?

A: There are two basic options: (1) comply now; or (2) wait and see.

Complying now is the least risky option, but it may be a little expensive and burdensome to create a compliant form, particularly for an employer that is not getting help from its insurer or other service provider.

The wait-and-see approach has some advantages. Even if IDOL notifies an employer of a violation, the employer would have 30 days to try to comply (in which case no penalty would be imposed), and/or decide to fight it. It is also possible that, in the meantime, a court may rule that the law is preempted (or that it is not). This option is not without risk, however, as it may be difficult complying with the law under a tight timeframe, and the potential penalties could be high, depending on IDOL’s interpretation.

But a wait-and-see approach is not unreasonable, given the likelihood that the law is preempted, the ability to comply within 30 days if notified of a violation, IDOL’s private statement that it will view all violations in a year as a single “offense,” and the time and expense of complying.

Of course, for an employer that sponsors a health plan that is not governed by ERISA, such as a church plan or governmental plan, the analysis is simpler, because there is no preemption argument. For these plans, it is advisable to comply with the CCDA now.

In contrast, in an MEP, the employees of unrelated employers — i.e., those falling in two or more controlled groups — may participate in a single plan. The entities may share some ownership or control, but not enough to be treated as a single employer.

There are often good business reasons for allowing non-controlled group members to participate in a single pension plan. But circumstances change, and the time may come when it’s appropriate for an unrelated employer to leave. It often makes the most sense for the MEP to distribute benefits to those employees, allowing the plan to cut ties with the unrelated employer, and avoid having to keep track of the employment status of all those unrelated employees.

Assuming there is no other distributable event, there are three options to consider:

1. Complete plan termination
2. Partial plan termination
3. Spinoff termination

Complete Plan Termination

A plan termination is a distributable event. Generally, an employer leaving an MEP does not constitute a plan termination, because there’s just one plan and it will still be around even after the unrelated employer leaves. However, it is possible under the Tax Code and the Employee Retirement Income Security Act of 1974 (ERISA) for an MEP to technically consist of a collection of separate plans, as opposed to a single plan. In such a case, the withdrawing employer could be treated as having its own individual plan, and that plan could be terminated and the assets distributed, provided such actions are consistent with the plan and trust documents.

Separate plans will exist under the Tax Code if the plan’s assets are not available to satisfy the benefits of all participants and beneficiaries. In other words, the assets must be segregated in some way, such that some assets are designated and may only be used to pay the benefits of the employees of the unrelated employer. This is not typically the case, however.

ERISA applies to most plans sponsored by private employers (but not to governmental plans and certain church plans). Under ERISA, if an MEP is a defined benefit plan, then separate plans may exist if either: (1) the assets are segregated and not available to pay the benefits of all participants and beneficiaries, just as with the Tax Code; or (2) the participating employers do not share common ownership, i.e., an “employment-based common nexus or other genuine organizational relationship that is unrelated to the provision of benefits.” With respect to defined contribution plans, the U.S. Department of Labor modified its regulations in late 2019 to make it easier for some otherwise unrelated businesses to form an MEP known as a “association retirement plan.” Generally, to be treated as a single plan, these employers need only form a bona fide organization that has a substantial business purpose and either the employers operate in the same trade, industry, or profession, or they have a principal place of business in the same geographic region. See 29 C.F.R. § 2510.3-55. If these loose restrictions are not met, separate plans will still exist.

Keep in mind, there may be numerous other issues to consider. For example, if the MEP should have been treated as a collection of separate plans under ERISA but has not been, then the participating employers could have potential liability for failing to comply with their reporting obligations, such as the filing an Annual Report (Form 5500). Also, notice to the Pension Benefit Guaranty Corporation (PBGC) may be required under Section 4043 of ERISA (29 U.S.C. § 1343), and it could result in an assessment of liability against the leaving employer under Section 4063 of ERISA (29 U.S.C. § 1363).

Partial Plan Termination

Assuming — in all likelihood — that an MEP constitutes a single plan, a partial termination could occur when an employer ceases participating in the plan. This is determined based on all the facts and circumstances. While there is no bright-line test, if 20 percent or more of the participants are excluded from further plan participation, a partial termination is likely to have occurred, although there may be disputes as to the most appropriate method of calculating the turnover percentage, or as to other relevant facts. While this 20-percent rule of thumb technically only applies to ERISA plans, it nonetheless provides a good framework for non-ERISA plans as well.

If it’s unclear whether a partial termination has occurred, the plan sponsor of the MEP could ask for the IRS’ opinion. This is accomplished by filing Form 5300 (Application for Determination for Employee Benefit Plan) with the IRS. The plan sponsor would provide the basic facts and a description of why it believes a partial termination has occurred (or might occur in the future).

If a partial termination occurs, then benefits for the affected employees must become nonforfeitable (to the extend funded), and any previously unallocated funds must be “allocated” to the affected employees. This allocation “may be in cash or in the form of other benefits provided under the plan.” See Treasury Regulations 1.401-6(b)(2)(ii), 1.411(d)-2(b)(2)(ii). Thus, the rules permit, but do not require, a distribution of benefits to affected participants upon a partial termination, so long as that distribution is consistent with the plan document. If the MEP does not provide for benefit distributions, it could likely be amended to so provide.

Just as with a complete termination, other issues may arise under the Tax Code and ERISA, such as notice to the PBGC (Form 10) and liability for the withdrawal of a “substantial employer.”

Spinoff Termination

If there is neither a complete termination nor a partial termination (and again, assuming there is no other distributable event), the only option is to spin off the withdrawing employer’s participants into a new plan (sponsored by the unrelated employer or another entity in its separate controlled group), which can then be terminated and assets distributed. This would likely be the most expensive option, as it would first require the creation and establishment of an entirely new plan, as well as additional coordination between the MEP and the unrelated employer leaving the plan. But it may be the only option.

In general, a report of an independent qualified public accountant must be filed with Form 5500 for employee benefit plans with 100 or more participants. U.S. Department of Labor (DOL) regulations require the report to include the opinion of the accountant as to the financial statements and schedules included in the report and the accounting principles and practices expressed in the report. However, there is an exception in the regulations for “limited-scope audits.” Under a limited-scope audit, plan management may choose to exclude any statement or information prepared and certified by an institution such as a bank, similar institution, or insurance carrier, with respect to the plan assets held by such institution. Due to the exception, it has been a generally accepted accounting industry practice for an auditor to disclaim an opinion on a limited-scope audit.  

After the DOL recommended that the limited-scope audit exception be repealed due to a large number of audit deficiencies, the AICPA issued new standards applicable to audits of employee benefit plan financial statements in the AICPA’s Statement on Auditing Standards (“SAS”) No. 136. As explained in our previous blog post, SAS No. 136 refers to limited-scope audits as “ERISA Section 103(a)(3)(C) audits.” Unlike limited-scope audits, ERISA Section 103(a)(3)(C) audits impose more obligations on auditors and do not permit an auditor to disclaim an opinion on an entire audit. In addition, ERISA Section 103(a)(3)(C) audits create new responsibilities for plan sponsors.

SAS No. 136 provides a description of a plan sponsor’s additional responsibilities with respect to an ERISA Section 103(a)(3)(C) audit, which include:

• Acknowledging plan management’s responsibility for:
  • maintaining a current plan document,
  • administering the plan, and
  • determining that the plan’s transactions presented and disclosed in the plan financial statements comply with the plan.
• Providing an auditor with written acknowledgement that:
  • an ERISA Section 103(a)(3)(C) audit is permissible with respect to the plan,
  • the investment information is prepared and certified by a bank, similar institution, or insurance carrier described in DOL regulations,
  • the certification meets DOL regulatory requirements, and
  • the certified investment information is appropriately measured, presented, and disclosed in accordance with the applicable financial reporting framework.
• Substantially completing a draft Form 5500 before engaging an auditor, including any related forms and schedules that could have a material effect on the audit.

Plan sponsors that elect an ERISA Section 103(a)(3)(C) audit beginning in 2022 need to carefully consider all legal and regulatory requirements applicable to auditors’ reports and other Form 5500 requirements and should consult legal counsel.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) prohibits group health plans and insurers from discriminating against individuals based on a health factor. In general, these “non-discrimination” rules under HIPAA do not permit group health plans and insurers to vary benefits or charge higher premiums based on health factors such as vaccination status. However, there is an exception to the HIPAA non-discrimination rules for wellness programs.

Wellness programs that meet various legal and regulatory requirements may vary benefits and premium costs based on whether an individual has met a certain standard, even if the standard is related to a health factor. Wellness programs that require individuals to meet a standard related to a health factor in order to obtain a reward (including avoiding a premium surcharge) are health-contingent wellness programs. Health-contingent wellness programs must meet several requirements to be excepted from the HIPAA non-discrimination rules, which in summary include (1) a once-per-year eligibility requirement, (2) a limit on the size of a reward, (3) a requirement to be reasonably designed to promote health or prevent disease, (4) a requirement to have reasonable alternative standards or waivers, and (5) a disclosure requirement.

Health-contingent wellness programs are either activity-only or outcome-based programs. Activity-only programs require an individual to perform or to complete an activity related to a health factor to obtain a reward, but they do not require the individual to attain or maintain a specific health outcome. Conversely, outcome-based programs require an individual to attain or maintain a specific health outcome. Examples of activity-only programs include walking, dieting or exercising programs, while examples of outcome-based programs include programs that require individuals to achieve specific standards on biometric screenings.

Until this week, there was some uncertainty as to whether COVID-19 vaccine premium surcharges are activity-only or outcome-based programs. The distinction is important because activity-only and outcome-based programs are required to waive a surcharge or provide a reasonable alternative standard for avoiding the surcharge for different groups of employees. For instance, if a COVID-19 vaccine premium surcharge is an activity-only wellness program, it must either waive the surcharge or provide a reasonable alternative standard to qualify for avoiding the surcharge only for individuals for whom receiving a COVID-19 vaccine is medically inadvisable or unreasonable due to a medical condition.

However, if a COVID-19 vaccine premium surcharge is an outcome-based program, it must either waive the surcharge or provide a reasonable alternative standard to qualify for avoiding the surcharge for any individual who does not meet the initial standard. Therefore, if a COVID-19 vaccine premium surcharge program is an outcome-based program, its ability to increase employee vaccination rates will be limited as the program must offer a waiver or a reasonable alternative standard to any individual who does not receive a COVID-19 vaccine.

This week, the Department of Health and Human Services, the Department of Labor, and the Department of the Treasury, which are the agencies that enforce wellness program regulations, issued guidance indicating that they consider wellness programs with a COVID-19 vaccine premium surcharge to be activity-only programs. While the agencies did not provide an explanation as to the reasons a COVID-19 vaccine premium surcharge program is activity-only and not outcome-based, it is possible that the agencies determined such programs are activity-only because they require individuals to engage in the health-related activity of receiving a vaccination but do not require individuals to attain or maintain a specific health outcome as a result of the activity, such as not contracting or transmitting the virus.

Based on the agencies’ guidance, wellness programs with a COVID-19 vaccine premium surcharge that comply with applicable regulations are activity-only programs and thus must provide a waiver or a reasonable alternative standard only to individuals for whom it is medically inadvisable or unreasonably difficult to receive a COVID-19 vaccine.

An employer that wishes to implement a COVID-19 vaccine premium surcharge through its wellness program must carefully consider other stringent legal and regulatory requirements that govern wellness programs and should consult legal counsel before implementing the program.

In general, U.S. Department of Labor regulations require that a report of an independent qualified public accountant be filed as part of an employee benefit plan’s annual reporting obligations, which also include filing a Form 5500. The audit report must include the opinion of the accountant as to the financial statements and schedules included in the report and the accounting principles and practices expressed in the report. However, the regulations do not require an auditor’s report to cover any statement or information prepared and certified by a bank, similar institution, or insurance carrier with respect to the plan assets that are held by such bank, similar institution, or insurance carrier. Audit reports that fall under this exception are known as “limited-scope audits.”

With limited-scope audits, an auditor may disclaim the opinion on plan financial statements prepared and certified by a bank, similar institution, or insurance carrier when a plan sponsor instructs the auditor not to perform an audit of such statements. Until recently, disclaiming an opinion complied with generally accepted accounting industry standards as set forth by the AICPA.

The ASB of the AICPA in 2018 voted to issue new audit standards for audits of financial statements of employee benefit plans subject to ERISA. These new standards follow an assessment by the U.S. Department of Labor reporting that a large number of audits of employee benefit plans contain major deficiencies with respect to generally accepted auditing standards and recommending that the limited-scope audit exception be repealed.

The new standards are set forth in Statement on Auditing Standards (SAS) No. 136, refer to limited-scope audits as “ERISA Section 103(a)(3)(C) audits,” and include a new audit report format. Instead of disclaiming an opinion, in an ERISA Section 103(a)(3)(C) audit an auditor must provide an opinion on audit areas that are not certified and perform limited procedures on investments. For instance, the new standards will require ERISA Section 103(a)(3)(C) audit reports to comply with more extensive content requirements and include sections that address the auditor’s opinion, the basis for her opinion, the responsibilities of plan sponsors for financial statements, and the responsibilities of the auditor for the audit of financial statements.

Plan sponsors that elect an ERISA Section 103(a)(3)(C) audit will likely have more responsibilities than plan sponsors have with respect to limited-scope audits. For example, before performing an ERISA Section 103(a)(3)(C) audit, an auditor must obtain acknowledgement from a plan sponsor that an ERISA Section 103(a)(3)(C) audit is permissible, that the investment information is prepared and certified by a bank, similar institution, or insurance carrier qualified under the regulations, that the certification meets regulatory requirements, and that the certified investment information is appropriately measured, presented, and disclosed in accordance with the applicable financial reporting framework.

Plan sponsors must also substantially complete a draft Form 5500 before an auditor may accept engagement to perform an ERISA Section 103(a)(3)(C) audit. A substantially complete Form 5500 means the forms and schedules that could have a material effect on the audit are completed.

On November 10, 2020, the U.S. Supreme Court held oral arguments in California, et. al. v. Texas, et. al., the most recent challenge to the Patient Protection and Affordable Care Act (ACA).

By way of brief background, the Supreme Court addressed the constitutionality of the ACA in 2012 in National Federation of Independent Business v. Sebelius. In the Sebelius case, the ACA provision that required most Americans to maintain “minimum essential coverage” (i.e., the individual mandate) was at issue. The Court held in Sebelius that the individual mandate was constitutional under Congress’s authority to lay and collect taxes.[1] In 2017, Congress amended the ACA through the Tax Cuts and Jobs Act, which as of January 1, 2019, reduced to zero an individual’s tax penalty for failing to maintain minimum essential coverage. Once the tax penalty was removed, litigation arose regarding whether the ACA was still constitutional.

In 2018 in Texas v. United States, the U.S. District Court for the Northern District of Texas declared the individual mandate unconstitutional. The court also held that the remaining provisions of the ACA were invalid because they were inseverable from the individual mandate. The U.S. Court of Appeals for the Fifth Circuit affirmed the district court’s decision regarding the individual mandate, but it remanded on the issue of severability. The Supreme Court granted certiorari to the case, consolidated as California v. Texas, and heard oral arguments on November 10, 2020.

More than half of the oral arguments related to a legal theory called standing. In layman’s terms, a person or legal entity must have an actual injury from a law to contest the law, and this is typically called standing. All nine justices asked at least one question regarding the states’ standing and the individual citizens’ standing, as there is no longer a tax penalty under the individual mandate for failing to purchase minimum essential coverage. The states had seven grounds to argue states were injured, but the clear focus at the hearing was injury to a state’s pocketbook due to numerous obligations under the ACA that cost states money. The individual citizens had several arguments, but the primary argument was the mandate to purchase insurance they did not desire to purchase.

Justices Breyer, Sotomayor, and Kagan made clear that they do not believe the petitioners have standing. Once the individual mandate was removed, no individual has been forced to purchase anything. Justice Breyer in particular argued the individual mandate is now really just a suggestion. Further, the states are required to meet obligations under the ACA that the states claimed caused injury, including paperwork, by provisions other than the individual mandate. Thus, the states are not injured by the individual mandate. The newest member of the court, Justice Amy Coney Barrett, gave indications that she agreed, at least partially, with the more liberal justices on standing. She had difficulty understanding how the individual mandate required any paperwork from the states. She used the word “traceable” and argued that the injury alleged by the states was not related to the individual mandate. Moreover, based on the questioning from Chief Justice Roberts and Justice Alito, it can be suggested that Justices Roberts and Alito may agree with Justice Barrett.

If five justices find that the parties have standing, then the court must address whether the individual mandate is unconstitutional, and, if the court holds it to be unconstitutional, whether it may be severed from the ACA. It seemed rather apparent that at least five justices believe the individual mandate is severable. Of course, oral arguments can be misleading. However, at face value, Justices Roberts, Breyer, Sotomayor, Kagan, and Kavanaugh indicated they are leaning toward finding the individual mandate severable from the rest of the ACA. Chief Justice Roberts went so far as to say it is not the court’s job to do that which Congress did not. He raised the fact that Congress had the chance to repeal the law, and it did not do so. Instead, Congress reduced the tax penalty related to the individual mandate to zero, with many members of Congress openly stating that they repealed the individual mandate. Justice Kavanaugh asked the attorney representing the respondents, “Isn’t it clear that the proper remedy is to sever the mandate?”

Justice Thomas indicated that he might not want to reach the question of severability at this time. The opinions of Justices Gorsuch, Alito, and Barrett on the severability question were difficult to interpret. The attorney for Texas and the other respondents and the attorney for the petitioners focused heavily on a clause or clauses in the original ACA, which they argued indicated the individual mandate could not be severed. There was tremendous discussion between the justices and the attorneys for the parties on whether Congress actually drafted a severability clause in the original ACA. Even if Congress did, some of the justices argued it was no longer relevant after the ACA was amended in 2017.

Finally, it must be noted, the last question asked at oral argument was whether the 2012 Sebelius case definitively resolved the issue of whether Congress had authority to enact the individual mandate under the Commerce Clause. This is important because there are three new justices to the Court since Sebelius was decided. Justices Breyer, Sotomayor, and Kagan clearly stated in Sebelius that they believed the individual mandate was a valid exercise of the Commerce Clause. If Justice Barrett and either Justice Gorsuch or Justice Kavanaugh agree, then the Commerce Clause may be an entirely new basis for upholding the individual mandate and the ACA.

[1] Four justices found the ACA to be constitutional under the Commerce Clause, but five disagreed.

Additional categories of “qualified individuals” for the purposes of coronavirus-related distributions and plan loans

“Qualified individuals” are individuals eligible under the CARES Act to elect coronavirus-related distributions and plan loans. Notice 2020-50 expands the definition of “qualified individuals” to those who experience adverse financial consequences as a result of:

• the individual having a reduction in pay (or self-employment income), a rescinded job offer, or a delayed job starting date due to COVID-19;
• the individual’s spouse or member of the individual’s household being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or a job starting date delayed due to COVID-19; or
• closing or reducing hours of a business owned or operated by the individual’s spouse.

A member of an individual’s household is someone who shares the individual’s principal residence.

A plan administrator’s reliance on certifications and a sample certification

A plan administrator may rely on an individual’s certification that he or she satisfies the conditions of a qualified individual, unless the administrator has actual knowledge to the contrary. The “actual knowledge” requirement does not require the administrator to inquire into whether the individual meets the qualified individual requirements. Instead, the “actual knowledge” requirement is limited to circumstances in which the administrator already possesses accurate information to determine the reliability of a certification.

Notice 2020-50 provides a sample notification that may be signed by an individual who claims to meet the requirements of a qualified individual.

Employer safe harbor for plan loans

The CARES Act provides for a one-year delay in the due date for a qualified individual’s repayment of a plan loan if the loan payment is due between March 27, 2020, and December 31, 2020. Notice 2020-50 provides a safe harbor for qualified employers who suspend a qualified individual’s loan due date. An employer will be treated as satisfying Code § 72 requirements if:

• The qualified individual’s obligation to repay an outstanding loan is suspended for any period not beginning earlier than March 27, 2020, and not later than December 31, 2020 (the “suspension period”).
• The loan repayment must resume after the end of the suspension period, and the term of the loan may be extended by up to one year from the date the loan was originally due.
• Interest accruing during the suspension period must be added to the remaining principal of the loan. This requirement is satisfied if the loan is reamortized and repaid in substantially level installments over the remaining loan period (for example, five years from the date of the loan, plus up to one year).
• If a qualified employer plan suspends loan repayments during the suspension period, the suspension will not cause the loan to be deemed distributed even if, due solely to the suspension, the term of the loan is extended beyond five years.

Qualified individuals may designate a distribution as a coronavirus-related distribution

Notice 2020-50 explains that a qualified individual is permitted to designate a distribution from an eligible retirement plan that does not exceed $100,000 and that is made on or after January 1, 2020, and before December 31, 2020 as a coronavirus-related distribution on his or her tax return without regard as to whether the plan treated the distribution as a coronavirus-related distribution. Similarly, a qualified individual may designate an eligible distribution as a coronavirus-related distribution even if the plan is not amended to provide for coronavirus-related distributions.

Employers’ decisions to amend plans to provide for coronavirus-related distributions and plan loans

An employer may choose whether to amend its plan to provide for coronavirus-related distributions and plan loans. Notice 2020-50 explains that, for instance, an employer may choose to provide for coronavirus-related distributions but also choose not to modify its plan’s loan provisions or loan repayment schedules. However, if a plan chooses to provide for coronavirus-related distributions, it must be consistent in its treatment of similar distributions.

An employer may choose whether to treat a plan distribution to a qualified individual as a coronavirus-related distribution. Nevertheless, as explained above, a qualified individual could designate a distribution that meets applicable requirements as a coronavirus-related distribution on his or her own tax return even if a plan is not amended to provide for coronavirus-related distributions.

Distribution limits on coronavirus-related distributions

The total amount of distributions to a qualified individual that are treated by an employer as coronavirus-related distributions under all of its retirement plans may not exceed $100,000. For purposes of this rule, “employer” means the employer maintaining the plan and those employers required to be aggregated with the employer. However, a plan will not fail to satisfy this requirement if a qualified individual’s total coronavirus-related distributions exceed $100,000 taking into account distributions from IRAs or other retirement plans maintained by unrelated employers.

As noted in the article, disability claimants regularly take the position that certain difficult-to-diagnose conditions cannot be proven through objective medical evidence. As such, they argue that it is unreasonable or arbitrary for an administrator of a disability plan governed by ERISA to require objective evidence of these disabling conditions.

The notion that subjective symptoms must be given at least some level of consideration has gained traction in the federal courts recently. However, there are ways to organize a defense to increase the likelihood of success on the merits. These include:

• focusing on the language in the plan;
• highlighting evidence in the record that demonstrates that subjective evidence was considered, even if was ultimately found to be insufficient;
• focusing on the lack of impairment evidence, rather than the diagnosis; and
• carefully considering the role of credibility in your arguments.

Read the full article by Amy Blaisdell and former Greensfelder associate Dan Ritter in For the Defense.

One possible approach for these employers is a disaster relief fund under Section 139 of the Internal Revenue Code. Section 139 disaster relief funds allow employers to make qualified disaster relief payments to employees to help with certain expenses they incur as a result of a qualified disaster.

Tax status of COVID-19 disaster relief funds

On March 13, 2020, President Trump declared the COVID-19 pandemic to be an emergency under Section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Although this declaration does not strictly fall within the definitions of “disaster” and “qualified disaster” in applicable Internal Revenue Code sections, the IRS has taken the position that a disaster includes an event declared a major disaster or an emergency.[1] Therefore, if a disaster relief fund is properly structured, payments under such a fund are likely excludable from recipient employees’ taxable income for federal tax purposes. The payment also will be excluded from taxable income in most states and will not be subject to employment taxes.

Scope of qualified disaster relief payments

Code § 139 defines “qualified disaster relief payments” to include payments for several possible types of expenses incurred as a result of a qualified disaster. In the context of the COVID-19 emergency, qualified disaster relief payments would include amounts paid by an employer to an employee for the employee’s reasonable and necessary personal, family, living or funeral expenses incurred as a result of the COVID-19 emergency. Payments to replace lost salary or wages will not qualify for favorable tax treatment under Code § 139.

Although Code § 139 does not set forth specific expenses that will qualify (other than funeral expenses), the following likely fall within the scope of qualified expenses:

• Expenses incurred in working from home as a result of the pandemic
• Additional or unexpected dependent care expenses incurred as a result of the pandemic
• Increased commuting costs resulting from a lack of access to public transportation
• Unreimbursed medical expenses incurred for treatment of COVID-19 or its symptoms
• Other extraordinary expenses resulting from an employee’s exposure to COVID-19, such as expenses for products to sanitize the employee’s home

Disaster relief fund requirements

There is little formal guidance on how disaster relief funds must be structured and what requirements such funds must meet. Although it is not strictly required, it is prudent to set forth the terms of a disaster relief fund in a written document or policy. Among other things, the document or policy should describe the scope of the policy, the duration of the disaster relief fund, eligibility requirements for receipt of disaster relief payments, procedures to apply for payments, the timing and method of making payments, and limits on the amount of payments, if any.

In order to receive favorable tax treatment under Code § 139 for payments they receive under a disaster relief fund, employees need not be required to provide proof of actual expenses. However, the employer providing the payments should take steps to ensure that the payments are reasonably expected to be commensurate with the amount of unreimbursed reasonable and necessary qualifying expenses. To meet this standard, the employer should, at a minimum, require employees to certify that they have incurred or will incur qualifying expenses and that the amount of payments that they will receive under the fund are reasonably expected to be commensurate with the amount of their qualifying expenses. In addition, employees should certify that the expenses are not reimbursable under any other plan, program or insurance policy.

Other considerations

A properly structured disaster relief fund will not be subject to ERISA. Therefore, it need not contain formal claim and claim review procedures. However, employers should consider adopting some basic administrative procedures to ensure that requests for payments from the fund are proper. In addition, employers should consider whether employees will have the ability to appeal denied payments. Appeals will add to the complexity of administering a disaster relief fund, which may not be desirable in a time of crisis. However, it can provide an added measure of protection in the event that payment requests are denied.

Link to COVID-19 Resources page

[1] The recent delay of the April 15 tax filing deadline is one example of this position.

Coronavirus-related distributions

• Participants may take “coronavirus-related distributions” from qualified retirement plans.
• A coronavirus-related distribution is exempt from the 10 percent penalty that otherwise applies to early distributions from qualified retirement plans.

• A “coronavirus-related distribution” is defined as a distribution taken by a participant:
  • Who is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDC),
  • Whose spouse or dependent is diagnosed with COVID-19 by a CDC-approved test, or
  • Who experiences adverse financial consequences as a result of:
    • Being quarantined,
    • Being furloughed or laid off or having reduced work hours due to COVID-19,
    • Being unable to work due to lack of child care because of COVID-19,
    • Closing or reducing hours of a business owned or operated by the participant due to COVID-19, or
    • Experiencing other factors determined by the Secretary of the Treasury.
• Plan administrators may rely on a participant’s certification that he or she satisfies the conditions of a coronavirus-related distribution.
• A coronavirus-related distribution must be taken during the 2020 calendar year, cannot exceed $100,000 per participant, and may be repaid within three years after the date of the distribution. If the distribution is not repaid within three years, taxes on the unpaid amount of the distribution may be paid over a three-year period.

Plan loan relief for “qualified individuals”

• The $50,000 limit on a plan loan is increased to $100,000 for a “qualified individual” during the 180-day period following the enactment of the CARES Act.
• A “qualified individual” is a plan participant who meets the definition of a “coronavirus-related distribution,” which is described above.
• If the due date of a loan to a “qualified individual” occurs between the enactment of the CARES Act and Dec. 31, 2020, the due date is delayed for one year and repayments of the loan are adjusted to reflect the delayed due date and any interest accrued during the delay. The delay in the due date is disregarded for determining the five-year time limitation for plan loans.

Waiver of required minimum distribution rules

• The CARES Act waives required minimum distributions that are required to be made during the 2020 calendar year from defined contribution 401(a), 403(a), and 403(b) plans, governmental 457(b) plans, and IRAs.

Delayed funding requirements for defined benefit plans

• Minimum required contributions to single-employer defined benefit plans that are due in 2020 may be delayed until Jan. 1, 2021.
• The amount of any delayed minimum required contribution will be increased by the interest that accrued during the period the contribution was delayed.

Plan amendments to implement CARES Act changes

• Plans are not required to adopt plan amendments that implement CARES Act provisions until the last day of the first plan year that begins on or after Jan. 1, 2022.
• Governmental plans are not required to adopt plan amendments until the last day of the first plan year that begins on or after Jan. 1, 2024.

The decision, Dorman v. Charles Schwab Corp., is significant in two ways: (1) in a published opinion, the Ninth Circuit Court of Appeals overruled its prior precedent regarding whether ERISA claims were subject to arbitration and (2) in an unpublished opinion, the court found that an arbitration provision in the plan document prohibiting class or collective action was enforceable against a participant seeking to bring ERISA fiduciary breach claims on behalf of the plan.

First, the Ninth Circuit held that Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. 1984) was no longer good law. Amaro held that ERISA claims were not arbitrable. In light of intervening U.S. Supreme Court cases finding that federal statutory claims are generally arbitrable and arbitrators can competently interpret federal statutes, the court held that it was appropriate for a three-judge panel to overrule Amaro. 

Second, the Ninth Circuit reversed the district court’s decision on whether Dorman’s claims were subject to arbitration, disagreeing with most of the court’s reasoning. The district court had first found that the provision was inapplicable to Dorman because it was added after he was no longer a participant. The Ninth Circuit disagreed with this conclusion, finding the provision was effective for almost a year while Dorman was a participant. Next, citing its recent decision in Munroe v. University of Southern California, 896 F.3d 1008 (9th Circuit 2018), the court found that the relevant question is whether the plan agreed to arbitrate. The court found the dispute fell within the scope of the arbitration provision in the plan. The Ninth Circuit criticized the lower court’s opinion for showing “judicial hostility” toward arbitration and found its reasoning was rejected by the Supreme Court’s intervening decision in Epic Systems Corp. v. Lewis, 138 S.Ct. 1612 (2018). Furthermore, the court found that although Ninth Circuit precedent dictates that a participant cannot agree to arbitrate ERISA § 502(a)(2) claims without the plan’s consent, here, the plan had consented.

In the final part of its decision, the Ninth Circuit applied Supreme Court precedent to find that plan’s arbitration provision that waives class-wide and collective arbitration must be enforced according to its terms. The court found this is even true for claims under ERISA § 502(a)(2) that seek relief on behalf of the plan.

The decision represents a major victory for employers. Adding arbitration provisions to plan documents may be a way to avoid class action claims, but there are many other factors plan sponsors should consider before taking this step.

HDHPs require covered individuals to pay all medical costs, except for preventive care, until the deductible is met. An individual must be covered by a HDHP and have no disqualifying health coverage to be eligible to use a health savings account.

In IRS Notice 2019-45, which was effective July 17, 2019, the Treasury Department and the Internal Revenue Service expanded the preventive care HDHPs may cover to include certain treatments for chronic illnesses. The IRS and Treasury used the following criteria to determine whether a treatment was preventive care:

• the medical service or item is low-cost;
• there is medical evidence supporting high cost efficiency of preventing exacerbation of the chronic condition or the development of a secondary condition; and
• there is a strong likelihood, documented by clinical evidence, that with respect to the class of individuals prescribed the item or service, the specific service or use of the item will prevent the exacerbation of the chronic condition or the development of a secondary condition that requires significantly higher cost treatments.

The appendix to the notice lists the following approved preventive care treatments:

The notice does not mandate that HDHPs cover the treatments as preventive care. Sponsors of HDHPs can choose whether they want to classify the treatments as preventive care that can be covered prior to an individual meeting his or her deductible.

The plaintiffs in Thole alleged that U.S. Bank breached its ERISA fiduciary duties by mismanaging its defined benefit plan. The defendants’ initial motion to dismiss for lack of Article III standing was denied. During the litigation U.S. Bank voluntarily contributed enough money to make the plan overfunded and again moved to dismiss. This time the district court dismissed the breach of fiduciary duty claims as moot because the plaintiffs lacked any concrete interest in relief.

On review, the Eighth Circuit upheld the dismissal but on different grounds. The court found that because the plan was overfunded, the plaintiffs no longer fall within the class of plaintiffs authorized to bring suit under ERISA. In doing so, the court relied on Eighth Circuit precedent, including Harley v. Minn. Mining & Mfg. Co., 284 F.3d 901 (8th Cir. 2002), which had concluded that a plaintiff could not bring an ERISA breach of fiduciary duty claim when a defined benefit plan is overfunded. The Eighth Circuit determined that Harley addressed statutory standing, not constitutional standing. The court reasoned that if a plan is fully funded, a breach of fiduciary duty causes no harm to the participant but allowing litigation does harm the plan. Therefore, such a participant is not in the class of plaintiffs allowed to sue under ERISA.

Although the Eighth Circuit notes that statutory standing and constitutional standing are often confused, the Thole decision adds to that confusion. By focusing on injury and harm to the plan, the Eighth Circuit addressed hallmark issues of constitutional standing in a decision that it said was based on statutory standing. Perhaps the Supreme Court added the Article III issue to help clear up this confusion.

But the Supreme Court may also believe that the issue of whether defined benefit plan participants have Article III standing needs resolution because of its reoccurrence, including in other petitions for certiorari that the Court denied. See, e.g., Lee v. Verizon Commc’ns, Inc., 837 F.3d 523, 546-47 (5th Cir. 2016), cert. denied sub nom. Pundt v. Verizon Commc’ns, Inc., 137 S. Ct. 1374, 197 L.Ed. 2d 568 (2017); see also Perelman v. Perelman, 793 F.3d 368, 375 (3d Cir. 2015) (finding a risk of future adverse effects on benefits is not an injury in fact); David v. Alphin, 704 F.3d 327, 338 (4th Cir. 2013) (“We find these risk-based theories of standing unpersuasive, not least because they rest on a highly speculative foundation lacking any discernible limiting principle.”)

There is no question that resolving this issue will have a dramatic impact on future ERISA breach of fiduciary duty claims involving defined benefit plans. The upcoming term will prove to be an important one for ERISA participants and plan sponsors as this is the third ERISA case the Supreme Court has added to its upcoming term.

Intel Corp. Investment Policy Committee, v. Sulyma, No. 18-1116:

Sulyma filed a putative class action alleging that the fiduciaries of Intel’s 401(k) plans breached their fiduciary duties by making imprudent investments and charging excessive fees. On summary judgment, Intel argued that the plaintiff’s claims were barred by ERISA’s three-year statute of limitations for breach of fiduciary duty claims, ERISA § 413(2), because the plans’ disclosures gave the participants “actual knowledge” of the breach. The U.S. District Court for the Northern District of California agreed, but the Ninth Circuit reversed. The Ninth Circuit found that a plaintiff must be actually aware of the nature of the alleged breach. In doing so, the court disagreed with the Sixth Circuit’s opinion in Brown v. Owens Corning Investment Review Committee, 622 F.3d 564 (6th Cir. 2010). The Supreme Court will resolve the issue of what it means to have “actual knowledge” of an ERISA fiduciary breach.

Retirement Plans Committee of IBM  v. Jander, No. 18-1165:

On June 4, the Supreme Court granted certiorari in this Second Circuit case regarding the “more harm than good” pleading standard enunciated in Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459 (2014) for when a fiduciary must disclose information related to employer stock. Since Dudenhoeffer and the Supreme Court’s reaffirmation of Dudenhoeffer in Amgen v. Harris, 136 S.Ct. 758, 759-760 (2016), most courts have found that plaintiffs have not met the high pleading standard in employer stock drop cases. The Second Circuit, in Jander, however, reversed dismissal of the complaint. This arguably created a circuit split with the Fifth and Sixth circuits. The Supreme Court will address the issue of whether generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increase over time satisfies the “more harm than good” pleading standard.

Thole v. U.S. Bank, 17-1712:

In this case from the Eighth Circuit addressing standing, the Supreme Court called for the view of the solicitor general, a move seen as showing the court’s interest in the case. The solicitor general recommended the Supreme Court grant certiorari to address the issue of whether a pension plan participant has standing to bring a claim for breach of fiduciary duty when he or she has not suffered a loss because the plan is overfunded. The district court found that once the plan became overfunded, there was no longer a live controversy. The Eighth Circuit upheld the dismissal but reasoned that if a participant was not injured, then the participant was not a member of the class of plaintiffs that Congress intended to be able to sue, i.e., the plaintiff did not have statutory standing. The solicitor general recommended the Supreme Court also address the issue of whether the plaintiffs have Article III standing in such an instance.

Putnam Investments, LLC v. Brotherston, 18-926:

In April, the Supreme Court also called for the view of the solicitor general in a case from the First Circuit. The case addresses the issue of which party bears the burden of showing loss causation in ERISA fiduciary breach cases. The First Circuit held that the defendant bears the burden, joining the Fourth, Fifth, and Eighth circuits. There is a true circuit split on the issue, as the Second, Sixth, Seventh, Ninth, Tenth, and Eleventh circuits have held that the plaintiff bears the burden of proving the losses to the plan resulted from the fiduciary breach. Given the depth of the circuit split and the request for the solicitor general’s views, it is likely the Supreme Court will decide to resolve this issue.

* Advocate Health Care Network v. Stapleton, 137 S. Ct. 1652, (2017)

Section 1557 prohibits discrimination on the basis of race, color, national origin, sex, age, or disability in health programs or activities. In May 2016, HHS issued final regulations defining “on the basis of sex” to include gender identity and termination of pregnancy. Many lawsuits challenged the regulation as going beyond Congress’s statute and the accepted legal definition of sex. On December 31, 2016, a federal district court issued a nation-wide injunction prohibiting the enforcement of the regulation in a case brought by several states and religious hospitals and providers. Franciscan All., Inc. v. Burwell, 227 F. Supp. 3d 660, 696 (N.D. Tex. 2016). HHS has not enforced this portion of the regulation since then.

Along with removing the definition of “sex,” HHS is proposing to repeal many other portions of the rule. In the Preamble to the proposed regulation, HHS states, “The Department believes that the Final Rule exceeded its authority under Section 1557, adopted erroneous and inconsistent interpretations of civil rights law, caused confusion, and imposed unjustified and unnecessary costs.” The proposed revisions seek to address these issues by:

• Returning to the “ordinary” meaning of “sex.” Discrimination based on gender identity is no longer expressly prohibited under the rule and instead “on the basis of sex” will have its “plain meaning.”
• Repealing certain language requirements. Covered entities will no longer need to mail beneficiaries, enrollees, and others, notices concerning non-discrimination and the availability of language assistance services (in 15 languages) with every “significant” publication and communication larger than a postcard or brochure.
• Limiting the scope of who is covered by the rule. Health insurance programs administered by entities not principally engaged in providing health care will only be covered by the rule to the extent those programs receive Federal financial assistance from HHS.
• Revising the enforcement structure. The regulations allowed for certain private rights of action. HHS proposes to return to the enforcement structure for each underlying civil right statute as provided by Congress.
• Expressly providing a religious and conscious exemption. The regulation did not contain a religious exemption but explained that religious entities could claim existing religious exemptions under federal law (for example, the Religious Freedom and Restoration Act). The revisions add such an exemption.

The proposed revised regulations do not mean the controversy on the subject is over. Other federal district courts have found that excluding transgender services violates Section 1557 without relying on the regulation. See Boyden v. Conlin, 341 F. Supp. 3d 979, 997 (W.D. Wis. 2018). In addition, on April 22, 2019, the U.S. Supreme Court granted petitions for writs of certiorari in three cases, which raise the question whether Title VII’s prohibition on discrimination on the basis of sex also bars discrimination on the basis of gender identity or sexual orientation.

Plan loan failures are common in 401(k) plans, and now many can be corrected without the need to seek formal IRS approval through the Voluntary Compliance Program. The following table summarizes the loan failures, correction methods and conditions:

Revenue Procedure 2019-19 also allows plan sponsors to self-correct an operational failure in which the plan was not operated according to its terms through retroactive amendment to conform the plan terms to its operations. However, to qualify for self-correction, the retroactive amendment must result in an increase in participants’ benefits, rights or features.

The rules for fixing plan mistakes are complex. Consult with your benefits counsel before proceeding with any correction method. Revenue Procedure 2019-19 is effective April 19, 2019.

Background

The employer mandate under the ACA requires that Applicable Large Employers (ALE) (those with 50 or more full-time employees or full-time employee equivalents) are required to offer minimum essential coverage to at least 95 percent of their employees, including their dependents (but not spouses). The coverage offered must also provide minimum value and be affordable to avoid the ACA penalties. Each of these determinations regarding ALE status and whether the coverage offers minimum essential coverage and minimum value are technical, and the company should consult an outside expert. If the employer mandate is not met, the employer will be subject to IRS 4980H penalties, known as the Employer Shared Responsibility Payments (ESRPs), which are detailed in 226J letters.

There are two types of ESRP penalties, subsection (a) and subsection (b) penalties. Subsection (a) penalties are assessed if the company did not offer minimum essential coverage to at least 95 percent of their full-time employees and dependents and at least one full-time employee obtained a premium-tax credit to purchase coverage on the exchange. If this occurs, then each month in which at least one employee received a tax credit, a penalty is assessed based upon the total number of full-time employees of the employer. If, however, the employer did offer coverage to 95 percent of its full-time employees, it may still be liable for subsection (b) penalties. The penalty applies if a full-time employee received a tax credit and that employee was not offered coverage, the coverage offered was not affordable, or the coverage did not meet minimum value. Subsection (b) penalties are much lower and are based only upon the number of employees who received a tax credit for the month.

How to respond

So if you receive one of these letters, what should you do? The most important thing to do is to make sure to provide a timely response. Therefore, look on the first page for the response date listed on the right-hand column. This date should be 30 days after the letter is issued. You can request a 30-day extension by contacting the 4980H Response Unit using the telephone number provided on the first page of the letter. It is vital that a response is provided by this date, as the IRS will issue a Notice and Demand after that date, which can be subject to lien and levy enforcement actions.

The next step is to quickly contact benefits counsel and the benefits advisor or firm you used for ACA reporting (filing of 1094-C with the IRS and providing 1095-Cs to the individual employees). These entities will need to help you gather the data necessary to evaluate and respond to the letter.

The following are some questions to consider in working with your service providers to respond to the letter:

• Was a corrected Form 1094-C filed with the IRS for the 2016 year, and if so, is the IRS using the corrected data? In some instances, an employer has filed corrected forms, but the IRS based the 226J off of the original form. Once the corrected form was brought to the attention of the IRS, the issues were resolved.
• Is the plan at issue a calendar year plan? If not, there is some transition relief that may be applicable to reduce or eliminate penalties.
• Was minimum essential coverage offered to at least 95 percent of full-time employees during each calendar month of the year? If not, check whether each person listed on the chart calculating the penalty in the 226J letter was in fact a full-time employee. Also note that the IRS defines a full-time employee as someone who works an average of 30 hours per week or 130 hours per month using the monthly measurement method or the look-back measurement method.
• If minimum essential coverage was offered to 95 percent of full time employees, did the coverage provide minimum value and was it affordable?
• Do any of the affordability safe harbors apply?
• For any person who received a premium tax credit for the month, was he or she in fact a full-time employee and was he or she in a limited non-assessment period?

Many of these questions are complex, and consultation with an expert is likely necessary. The attorneys in our Employee Benefits practice group can help employers navigate this process with the best possible results.

The case is styled New York v. United States Dep’t of Labor, No. CV 18-1747 (JDB), 2019 WL 1410370 (D.D.C. Mar. 28, 2019).

Background

The final rule expanded existing guidance from the Department of Labor (DOL). The old guidance allowed only a “bona fide” association of employers in a particular industry to provide health benefits, in order for those benefits to be treated as a single plan (as opposed to separate plans established by each individual employer). The new guidance allowed employers who are in completely unrelated industries to form a single plan, so long as they were all in the same state or metropolitan area, and it allowed sole proprietors without any common law employees to join, too.

The final rule caused a ruckus, since these association health plans could avoid many requirements under the Patient Protection and Affordable Care Act (ACA) and significantly cut back benefits. Importantly, however, states retained tremendous freedom to regulate association health plans. States could potentially mandate their own essential health benefits or ban association health plans altogether.

The final rule acknowledged the view of several commenters that the new rules were an invalid attempt to create a loophole through the ACA’s strict requirements for individual and small group health plans. The DOL went ahead despite those comments and was promptly sued by 11 states and the District of Columbia.

The decision

On March 28, 2019, the U.S. District for the District of Columbia ruled in favor of the states, vacating three critical subsections of the new regulation created by the final rule — specifically, subsections (b), (c), and (e) of 29 C.F.R. § 2510.3-5. The court held that:

• Allowing employers linked only by geography to constitute a single employer is inconsistent with ERISA, since such groups more “closely resemble entrepreneurial, profit-driven commercial insurance,” as opposed to an association acting as an “employer”;
• Counting sole proprietors as both employers and employees is inconsistent with the text and purpose of ERISA; and
• The final rule leads to absurd results under the ACA.

The court used colorful language in the opinion, stating that the “Final Rule is clearly an end-run around the ACA,” that it relies on a “tortured reading” of the ACA, and that the DOL’s legal reasoning is “pure legerdemain” (i.e., sleight of hand).

Technically, the case has been remanded to the DOL to determine what, if anything, survives the court’s ruling, and the decision is sure to be appealed. But, practically speaking, the final rule is dead for now. No associations or employers should rely on the final rule to form an association health plan.

Association health plans under old rules still valid

In the meantime, it is important to remember that the opinion did nothing to upset the DOL’s sub-regulatory guidance issued prior to the now-vacated final rule. These old rules are still in effect and can still be relied upon to form a “bona fide” employer association and provide a single health plan under ERISA. However, certain limitations will exist. For example:

• Sole proprietors will not be able to join the association;
• The association cannot be created for the purpose of providing health benefits; and
• All of the association’s members must have a “commonality of interest” — employers linked by nothing but geography cannot form a single association health plan.

Depending on what a group wants to do, the decision in New York v. United States Dep’t of Labor may or may not have a large impact.

Form 8950 (Application for Voluntary Correction Program) is used to file VCP submissions. In January 2019, the IRS updated the instructions to Form 8950 to reflect the new electronic filing procedures. To submit a VCP application on or after April 1, 2019, the applicant must first create an account at www.pay.gov. Next, the applicant must complete a Form 8950 using the website.  Third, documents relating to the VCP submission such as a description of failures, Form 14568 (Model VCP Compliance Statement), applicable schedules and other relevant items must be converted into a single PDF file and uploaded to www.pay.gov. Finally, the applicant must pay the applicable user fee via the website.

Although the new procedures don’t change the substantive requirements of the VCP, plan sponsors should be aware of the new electronic filing requirements to avoid having paper VCP submissions rejected, as the IRS will no longer accept paper submissions beginning April 1.

As a general rule, multiemployer plans are not well-funded. In 2015, for example, a federal study showed that 98.3 percent of multiemployer plans were underfunded. Collectively, that underfunding surpassed $560 billion. And nearly 40 percent of multiemployer plans are in the construction industry.

Under the Employee Retirement Income Security Act of 1974 (ERISA), when a construction employer exits an underfunded multiemployer plan, the employer must pay “withdrawal liability.” The withdrawal liability is based on the employer’s share of the plan’s underfunded liabilities, which can be calculated in different ways, but generally, the more a company has contributed over time, the more it will owe.

For small and mid-sized companies, this looming liability can be enormous, sometimes greater than the value of the company itself. This creates a significant problem that must be addressed.

Fortunately, there is an exemption that construction companies can take advantage of under ERISA. Specifically, employers in the “building and construction industry” can get out of withdrawal liability provided several requirements are met. I discussed those rules in more detail here, but most importantly: (1) the employer has to cease its obligation to make contributions under the collective bargaining agreement (CBA); and (2) the employer must not perform covered work under the CBA for at least five years thereafter.

Following are several options for how a construction company can address its withdrawal liability, including:

• Do nothing
• Pay it
• Use subcontractors
• A stock sale of the company
• An asset sale of the company
• Negotiate with the plan
• Terminate your obligations under the CBA

Do nothing

One option is to maintain the union work going forward and keep making required contributions to the multiemployer pension plan. It is possible the amount of withdrawal liability your company faces will go down over time, either as a result of your union work decreasing or the plan becoming better funded. It may be more likely, however, that the funding status of these plans will continue to deteriorate, resulting in your company’s potential withdrawal liability going up, not down. That, in turn, may narrow your company’s options going forward.

Pay the withdrawal liability

If the amount of the withdrawal liability is not prohibitive, it may make financial sense to just pay it while continuing to perform the same covered work with non-union employees. To make this determination, your company will need to request a withdrawal liability estimate from the multiemployer pension plan at issue. That will allow you or your attorney to determine (or estimate) the total amount of liability and the amount of annual installment payments you will have to pay. If it makes sense to pay withdrawal liability now, your company must first terminate its obligation to make contributions to the multiemployer pension plan (see below). The pension plan will then have to make a final assessment of withdrawal liability before it can be paid.

Use subcontractors

It may be possible to discontinue using employees to perform covered work under the CBA and instead use subcontractors to perform the same work. Whether or not this will work depends entirely on the CBA. If the CBA requires any subcontractors to also have an obligation to make pension contributions, then, practically speaking, it may be difficult to find a suitable subcontractor. And if the CBA is written in a way that your company could be held liable for a subcontractor’s delinquent contributions, then your company has not stopped performing covered work, and the five-year window on the building and construction industry exemption may not begin to run.

If you are considering this option, have an experienced attorney review your CBA and determine what your options are.

Stock sale of the company

This is an easy solution from the seller’s perspective, as the withdrawal liability just becomes the new buyer’s responsibility. However, the prospect of withdrawal liability may significantly drive down the value of the company in any sale, and if the seller remains part of the same controlled group — see here — the seller is still on the hook for the withdrawal liability if it gets triggered. So, depending on the circumstances, this may or may not be a feasible option.

Asset sale of the company

This is a good option for someone looking to retire. In an asset sale, the withdrawal liability stays with the seller, who can then dissolve. After five years of not performing any covered work, the building and construction industry exemption will eliminate the withdrawal liability.

One major pitfall of this option, however, is successor liability, in which the withdrawal liability travels from the seller to the buyer. This will occur if the buyer is “substantially continuing” the seller’s business. This might happen, for example, if a single buyer purchases and continues to use the seller’s name, building, phone numbers, employees, and management. Courts will look at all relevant factors to determine if a buyer has become the seller’s successor.

One issue the courts have not cleared up is whether the seller and its controlled group remain on the hook for withdrawal liability if there is a successor. For example, suppose the seller was part of a large controlled group of businesses. Even though the seller dissolves, the pension plan may go after the remaining members of the seller’s controlled group to pay any withdrawal liability.

As a result, the seller may continue to face a risk of liability within the five-year window for the building and construction industry exemption. To account for this, the terms of your sales agreement(s) must be carefully drafted to avoid inadvertently creating successor liability, and to deal with the fallout should a successor be created. For example, indemnity provisions could be drafted so the buyer would have to reimburse the seller and its controlled group for any assessment of withdrawal liability against them.

Negotiate with the plan

It might be an option, at some point, to negotiate with the plan over withdrawal liability, such as the total amount of liability and the amount of installment payments. A case-by-case analysis of whether it makes sense to approach the plan before any assessment of withdrawal liability should be done. But plans can be pragmatic. If it makes sense for each side to give a little in order to reduce their overall risks, a plan may be willing to negotiate.

Terminate your obligations

Whether you want to start the clock running on the building and construction industry exemption or just pay withdrawal liability, your company’s obligation to make contributions to a plan under all applicable CBAs must first be terminated. There are basically two options.

The first is to terminate or modify the CBA. Typically, CBAs are in effect for several years and can only be modified or terminated by providing notice to the union within a short window (e.g., 60 to 90 days) before the end of the CBA. If you fail to provide any required notice, the CBA will likely continue in effect for one-year periods until otherwise modified or terminated. This process is governed by federal labor laws, and an experienced labor attorney should be consulted on applicable requirements.

If there are multiple CBAs, your company will have to determine the feasibility and potential sequence of terminating the different CBAs. It is possible, for example, that if different CBAs must terminated at different times, partial withdrawal liability could be assessed against your company, if your company’s pension contributions are substantially reduced without being completely terminated.

The second option is to permanently discontinue all work covered by the CBA. This could take the form of terminating the entire business, or just the department that holds the union employees. If your company terminates a department, however, the same covered work cannot be transferred to a different department or a different member of the same controlled group; it must cease altogether.

One option that will not work is to just stop paying required contributions while a CBA is still in effect. That would not result in a withdrawal but would result in delinquent contributions. A union would likely sue to enforce the company’s obligation to make contributions, along with any applicable penalties and late charges.

Be careful

No matter what route your company decides to take with withdrawal liability, it is important to remember that this is a complex area of law. There are many other ways to potentially reduce or eliminate withdrawal liability, just as there are many other potential pitfalls. For example, Section 4212 of ERISA (29 U.S.C. § 1392) gives plans the right to ignore any transaction your company engages in if a “principal purpose” of the transaction is to “evade or avoid [withdrawal] liability.” And courts typically defer to a plan’s reasonable determination that an employer has engaged in such a transaction.

Play it safe and have an experienced attorney help guide your construction business through withdrawal liability.

More than a dozen lawsuits have been filed against prestigious colleges and universities claiming that they violated the Employee Retirement Income Security Act of 1974 (ERISA) in the operation of their Code Section 403(b) plans. Within the last year, University of Pennsylvania and Northwestern each won dismissal of their cases, and the University of Chicago settled its claims for $6.5 million. But NYU’s victory was the first to come after a trial, and the court’s finding of facts and conclusions of law provide lessons for ERISA fiduciaries — and not just those embroiled in their own fee cases.

Despite a total defense verdict and a finding that the committee members managing NYU’s plans did not violate their fiduciary duties, the trial court nonetheless found that some committee members who testified “displayed a concerning lack of knowledge.” Here are some tips for ERISA fiduciaries culled from the case:

• Know what an ERISA fiduciary is (and that you are one). The court was concerned that one committee member testified that she did not consider herself a fiduciary and that only the committee was a fiduciary. Consider annual trainings for committee members on the basics of ERISA. Not only will it help them serve the plan and participants better, but also it may save your company from embarrassing (and potentially damaging) testimony.
• Have an investment policy statement. One of the plaintiffs’ claims was that the committee failed as fiduciaries to adopt an investment policy statement. The court found the allegation was not supported by the facts. Written investment policies help guide fiduciaries’ selection and oversight of investment options. Fiduciaries should adopt and follow these policies.
• Learn about the plan’s investments and investing in general. The court criticized the committee’s chair for displaying “a surprising lack of in-depth knowledge concerning the financial aspects of managing a multi-billion dollar pension portfolio.” Not every committee member has to be an account, actuary, or CFO. But if your committee doesn’t know the different between a mutual fund and an annuity, it is time to call in someone who can teach them.
• Seek — and scrutinize — the advice of experts. The court’s opinion teaches that it is OK to ask an expert when you are not one yourself ... but don’t accept advice blindly. NYU hired a consultant to help monitor the investments, and the court found the consultant credible. But the court also criticized some committee members for not verifying his advice or scrutinizing his recommendations (while others did). Fiduciaries must exercise independent judgment and question the opinions given by third parties.
• Have a committee charter (if your plan is managed by a committee). Proving you are fulfilling your fiduciary duties requires documents, documents, documents. The charter helps define the committee’s role and responsibilities and provides a backbone for documenting its processes.
• Know and document who is on the committee. The court was rather appalled that one NYU executive (who did not regularly attend meetings) was not even sure if he remained a committee member after he changed jobs. (The next day he confirmed he did not.) Make sure the committee charter has a process for the appointment and removal of members (even if it is simply to indicate that some individuals serve ex officio). And make sure the committee follows that process. Document in the committee minutes when members join and leave.
• Regularly solicit RFPs. NYU’s consultant recommended soliciting requests for proposal from record keepers every five years. Although NYU did not follow the advice perfectly, the court found that the committee used a considered, careful, and prudent process when selecting vendors. It also routinely negotiated lower fees with its record keepers.

If you need help drafting a committee charter or investment policy or think your committee could benefit from an ERISA primer course, please contact any of the attorneys in our Employee Benefits group.

The plaintiff was a former employee of Henny Penny Corp. The family that owned the company sold all of its stock to an employee stock ownership plan (ESOP) on Dec. 31, 2014. The defendant served as trustee during the transaction and approved the $165 million stock purchase. In May 2015, the plaintiff left the company, and she cashed out her stock in November 2016. Effective Jan. 1, 2017, the ESOP added an arbitration provision, and later that year, the plaintiff filed her lawsuit against the trustee claiming the stock was overvalued.

The court found that the plaintiff’s claim was not subject to arbitration because the plaintiff did not agree to arbitrate and because her claim fell outside of the scope of the arbitration provision.

First, the court found that because the plaintiff had terminated and cashed out her benefit before the arbitration provision was added to the ESOP, she had not agreed to arbitrate. The court distinguished Smith v. Aegon Companies Pension Plan, 769 F.3d 922 (6th Cir. 2014), in which the Sixth Circuit had found that a forum selection clause added after the employee terminated applied to his claim. In Smith, the employee was still receiving pension benefits and, thus, was still a participant under the plan. Here, the plaintiff was no longer a participant under the language of the ESOP. The court found the case more similar to Dorman v. Charles Schwab & Co., Inc., 2018 WL 467357 (N.D. Cal. Jan. 18, 2018), in which the district court had refused to enforce the arbitration agreement under similar circumstances.

Second, the court found that the plaintiff’s claims fell outside of the scope of the arbitration agreement. The provision applied to claims asserted by claimants, which was defined to include employees, participants and beneficiaries. The court found under the ESOP’s language, the plaintiff was no longer a participant because she had been paid all of her benefit. Henny Penny and the trustee argued, however, that if she was not a participant, she did not have statutory standing to sue under ERISA. The court disagreed. Precedent and ERISA’s statutory definition of participant allowed former participants to allege breach of fiduciary duty claims, the court found.

Although Munro and Brown combined to create a bad day for employers seeking to arbitrate ERISA claims, there are lessons that can be learned. Both decisions turned on the language of the arbitration agreement and whether it covered the claim. If an employer wants to include ERISA breach of fiduciary within an employee arbitration agreement, it would be wise to include language covering claims brought by the employee on behalf of third parties, including employee benefit plans. And any arbitration provision in a plan document should include language that covers claims brought by former employees and former participants. The Brown and Dorman courts were troubled by the fact that the arbitration provisions were added after the former participants cashed out of the plans. But proper drafting of the plan and arbitration provision may allow employers to broaden the scope of who assents to the agreement as well.

USC and its employees entered into different iterations of an arbitration agreement that covered “all claims . . . that Employee may have against the University or any of its related entities . . . and all claims that the University may have against Employee” including those arising out of federal law. The Ninth Circuit limited its inquiry to whether the arbitration agreement encompassed the dispute at issue and found that it did not.

The court analogized the case to its recent decision in United States ex rel. Welch v. My Left Foot Children’s Therapy, LLC, 871 F.3d 791 (9th Cir. 2017). In Welch, the court found that an employment arbitration agreement did not cover qui tam claims brought by an employee on behalf of the government under the False Claims Act because the claim belonged to the government. Id. at 794. Here, the court reasoned that the breach of fiduciary duty claim is brought on behalf of the plan. Any relief would benefit the plan. Therefore, arbitration agreement does not cover the claim.

The court rejected USC’s argument that because the case involved a defined contribution plan with individual accounts, the relief could individually benefit the plaintiffs, and, therefore, their arbitration agreements covered the claims.

In a footnote, the court refused to reach the employees’ argument that ERISA breach of fiduciary duty claims are inarbitrable as a matter of law, a prior holding of the Ninth Circuit in Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. 1984). The court hinted that it may agree that intervening Supreme Court decisions indicate Amaro should be overruled, but it was unnecessary for the court to decide the issue given its holding.

The Ninth Circuit’s ruling creates an indirect conflict with a Tenth Circuit case, Williams v. Imhoff, 203 F.3d 758 (10th Cir. 2000). In Williams, the court held that ERISA breach of fiduciary duty claims were subject to arbitration. The case arose under the same factual context as USC: The employees and employer entered into a broad arbitration agreement, and then the employees sued under ERISA § 502(a)(2). Neither party raised the issue of whether the plan had consented to arbitration.

Following the U.S. Supreme Court’s ruling in Advocate Health Care Network v. Stapleton, 137 S.Ct. 1652 (2017), holding that a church plan need not be established by a church, the IRS has continued to issue rulings affirming its long-standing position that (1) tax-exempt organizations that are controlled by or associated with a church are appropriate entities to sponsor church plans and (2) that a retirement committee, established by the sponsoring organization and controlled by or associated with the church, can satisfy the requirement that the plan be “maintained” by an organization whose principal purpose is the administration or funding of a retirement plan. Most recently, on June 29, 2018, the IRS released a church plan ruling that confirmed these two points, but importantly also concluded that a plan was a church plan even though at some time during its existence it was operated as though it were subject to ERISA.

In PLR 201826009 (133791-17), a church-affiliated organization sponsored a defined benefit pension plan and voluntarily operated it as though it were subject to ERISA. The sponsor filed Form 5500s, paid premiums to the Pension Benefit Guaranty Corporation, and updated and amended the plan on a continuous basis, presumably to comply with rules applicable to plans subject to ERISA. The PLR states that the sponsor “voluntarily” operated the plan to comply with ERISA, but it is unclear whether this was a deliberate choice or inadvertent.

The IRS ruled that church plans that wish to be legally required to comply with ERISA and the Code requirements applicable to plans subject to ERISA must file an election prescribed under Code Section 410(d), commonly called a “410(d) election.” Section 1.410(d)-1(c)(3) of the regulations provides that the plan administrator of the church plan may make the election by attaching an affirmative statement to either (i) the plan’s Treasury Form 5500 filed for the first plan year for which the election is effective or (ii) a written request for a determination letter relating to the qualification of the plan. The IRS concluded, “Section 1.410(d)-1 does not provide for an alternative form of election. Accordingly, we conclude that the administration and operation of ... [the Plan], as if it were subject to Title I of ERISA, does not constitute an election under § 410(d).”

On June 19, 2018, the DOL released its final rule on AHPs, officially creating 29 C.F.R. 2510.3-5, as of Aug. 20, 2018. The final rule clearly makes it easier for employers and sole proprietors to come together to provide health benefits. But the extent to which AHPs will be able to restrict benefits remains to be seen, due to the far-reaching ability of states to regulate AHPs. In this article, I’ll take a look at the final rule, including:

• A description of the final rule, including what changed from the proposed rule and additional guidance offered by the DOL;
• The DOL’s guidance on the application of other federal laws; and
• The future of AHPs.

What changed?

The DOL received over 900 comments on the proposed rule and consulted with other federal agencies. Not surprisingly, the DOL made several important changes in the final rule.

Pre-rule guidance still good law. The DOL has clarified that it is not supplanting its prior guidance on bona fide employer groups, but supplementing such guidance. AHPs formed under the old law are still valid, and new employer groups can still be formed under such rules. The final rule merely sets forth an additional method of forming an employer group. AHPs established under the pre-rule guidance would face different requirements than those established under the final rule. For example, such groups cannot have membership based solely on geography, and they have greater flexibility to discriminate among employers through their premium rating.

Commonality of interest. In maybe its biggest change from pre-rule guidance, the proposed rule would have allowed employer groups to form based on either: (1) being in the same trade, industry, line of business, or profession, regardless of state boundaries; or (2) having a principal place of business within the same state or the same metropolitan area (even if the metropolitan area includes more than one state). Allowing employer groups to form based solely on geography was an entirely new concept. The final rule retained this basic approach with some important clarifications.

First, while the DOL refused to explicitly define “the same trade, industry, line of business, or profession,” it did state that it “intends for these terms to be construed broadly to expand employer and employee access to AHP coverage.” The DOL approved use of the following:

• North American Industry Classification System (NAICS) codes (also used in Form 5500 Annual Reports);
• Standard Industrial Classification codes (which precede the NAICS);
• The OECD International Standard Industrial Classification;
• Any other “generally-accepted classification system” of the same sort; and/or
• The “line of business” test set forth in Treasury Regulations governing membership in a voluntary employees’ beneficiary association (VEBA). Specifically, “employees of one or more employers engaged in the same line of business in the same geographic locale will be considered to share an employment-related bond for purposes of an organization through which their employers provide benefits.”

Second, for employer groups based on metropolitan areas, the DOL stated that “an area that matches a Metropolitan Statistical Area or a Combined Statistical Area, as defined by the OMB” suffices. But the DOL intentionally left the door open for other areas to qualify based on the facts and circumstances, “[f]or instance, the area from which a city regularly draws its commuters may qualify as a metropolitan area.”

Finally, the DOL clarified that subgroups of an otherwise bona fide employer group can also constitute a bona fide group and establish an AHP (provided it is not a pretext for discrimination on a health factor). For example, a subgroup might consist of employers owned by women minorities, veterans, or employee stock ownership plans (ESOPs).

Substantial business purpose now required. Under pre-rule guidance, employer groups could not form for the purpose of providing health benefits; they had to exist for an entirely different reason. The proposed rule would have allowed employer groups to form for the exclusive purpose of creating an AHP. The final rule walks that back a step and now requires an employer group to have at least one “substantial business purpose” other than establishing an AHP, although the AHP can still be the primary purpose of the group. The change was made to prevent fraudulent associations, as groups formed with a business purpose — such as more traditional industry and trade groups — “have strong incentives to maintain their good reputation.”

This will make it slightly more challenging to establish an employer group, as the member employers must decide what other business purpose the group will serve and what “substantial” activity it will perform in furtherance of that purpose. Notably, the DOL did not define “substantial business purpose,” but the regulation does provide some guidance:

[A]s a safe harbor, a substantial business purpose is considered to exist if the group or association would be a viable entity in the absence of sponsoring an employee benefit plan. ... [A] business purpose includes promoting common business interests of its members or the common economic interests in a given trade or employer community, and is not required to be a for-profit activity.

The preamble to the final rule includes several illustrations of the concept:

• Offering services to member employers, “such as convening conferences or offering classes or educational materials on business issues of interest to the association members”;
• Being “a standard-setting organization that establishes business standards or practices”;
• “[P]ublic relations activities such as advertising, education, and publishing on business issues of interest to association members unrelated to sponsorship of an AHP”; and
• Advancing the well-being of the members’ industry through substantial activity (other than providing an AHP).

Working owners. In another major break with pre-rule guidance, the proposed rule would have allowed certain sole proprietors and partners in a partnership (i.e., “working owners”) to join an employer group and enroll in the AHP, even though they have no common law employees. The final rule changed four aspects of the proposed rule.

First, under the proposed rule, the employer group could rely on a person’s written representation of his or her eligibility as a working owner. The DOL deleted this provision, believing it could be inconsistent with the fiduciary duty to act with reasonable care, skill, prudence, and diligence. In its place, the final rule requires a working owner’s continued eligibility to be “periodically confirmed pursuant to reasonable monitoring procedures.” The DOL declined to specify what these reasonable monitoring procedures must look like, except that reliance on a written representation might be reasonable, if there is nothing to question its accuracy.

Second, the proposed rule required that a working owner either: (1) work at least 30 hours per week or 120 hours per month providing personal services to the business; or (2) have earned income from the business that at least equals the cost of covering the owner and any of his or her dependents on the group health plan. To provide flexibility to industries that would make it difficult to satisfy the 30/120 rule, the DOL lowered it to a 20/80 rule. This can be shown by “evidence of a work history or [by] a reasonable projection of expected self-employment hours worked in a trade or business.”

Third, the proposed rule barred working owners from being eligible for the AHP if they were eligible to enroll in subsidized group health coverage maintained by another employer or through a spouse. This was opposed by many commenters and was deleted due to its harshness and the difficulty of enforcement.

Finally, if it is determined that a working owner participating in an AHP no longer meets the requirements, the working owner will be unable to participate in the AHP the following plan year (not the current year). However, assuming COBRA continuation coverage is available to the working owner (see below), he or she could still enroll in COBRA coverage under the AHP after his or her regular coverage expires.

Essential health benefits. Health plans in the individual and small group markets have to provide essential health benefits (EHBs) under the Affordable Care Act (ACA). Large group plans (more than 50 employees) do not have to provide EHBs. Under pre-rule guidance, if an employer group was formed based on geography or if such group included working owners, the sole proprietors and any small employers in the group would still be required to provide EHBs, even though the AHP covered more than 50 employees in the aggregate among all member employers.

One of the main purposes of the proposed rule was to allow AHPs based on geography and/or including working owners to still be treated as a single large plan, so that they will not have to provide EHBs at all. Many commenters opposed this. However, the DOL declined to change it. Besides being contrary to the purpose of the rule, the DOL noted that AHPs will face other coverage mandates under federal and state laws, including:

• To the extent an AHP chooses to cover any EHBs, the AHP will also have to comply with the ACA’s limit on maximum out-of-pocket costs and the prohibition on annual or lifetime dollar limits with respect to such covered EHBs.
• The ACA requires AHPs to cover certain preventive services for adults and children without cost-sharing.
• The ACA requires AHPs to provide “minimum value,” which means: (1) covering at least 60 percent of the cost of covered benefits; and (2) providing substantial coverage for inpatient hospitalizations and physician services.
• The Pregnancy Discrimination Act (PDA) requires pregnancy-related expenses for employees and their spouses to be reimbursed in the same manner as other medical conditions. The DOL asserted that the PDA would only apply to individual member employers with 15 or more employees (not the total number of employees covered by the AHP in the aggregate), but that the AHP could provide such benefits across all member employers for administrative simplicity.
• The Newborns’ and Mothers’ Health Protection Act requires an AHP covering hospital stays in connection with childbirth to cover hospital stays for at least 48 hours following a vaginal birth or 96 hours following a caesarian section.
• Applicable state-level mandates on AHPs also will require compliance.

ERISA pre-emption remains unchanged. An AHP is considered a multiple employer welfare arrangement (MEWA) under ERISA. In an effort to combat fraud and abuse by MEWAs, Congress gave states substantial authority to regulate such entities. Specifically, fully insured plans can be regulated with respect to certain aspects (e.g., contribution and reserve levels, licensing, registration, financial reporting, etc.), while self-insured and partially insured plans can be regulated in any manner so long as not inconsistent with ERISA. The final rule does nothing to change the ability of states to regulate AHPs. Neither was the DOL willing to opine on the enforceability of particular state laws.

Membership control. Similar to pre-rule guidance, the proposed rule required the member employers to control the employer group. The final rule slightly modifies the rule, consistent with such pre-rule guidance, by clarifying that control must exist in “form and substance.” The DOL will determine this based on all the relevant facts and circumstances, including:

• “[W]hether employer members regularly nominate and elect directors, officers, trustees, or other similar persons that constitute the governing body or authority of the employer group or association and plan”;
• “[W]hether employer members have authority to remove any such director, officer, trustees, or other similar person with or without cause; and
• “[W]hether employer members that participate in the plan have the authority and opportunity to approve or veto decisions or activities which relate to the formation, design, amendment, and termination of the plan, for example, material amendments to the plan, including changes in coverage, benefits, and premiums.”

The proposed rule also barred the employer group from being a health insurance issuer or being owned or controlled by a health insurance issuer. The final rule adds subsidiaries or affiliates of health insurance issuers to the list of banned entities but also clarifies that banned entities can still participate in an AHP in their capacity as member employers of a bona fide employer group.

In addition, the DOL emphasized in the preamble to the final rule that any employer group or AHP controlled by a “network provider, a healthcare organization, or some other business entity that is part of the U.S. healthcare delivery system” would not qualify as a bona fide employer group. However, such entities could provide administrative services to an AHP.

Nondiscrimination. To combat adverse selection, the proposed rule barred employer groups from discriminating against employers or individuals based on health factors with respect to membership or benefits. The final rule clarifies that AHPs may discriminate among member employers on non-health factors, such as “industry, occupation, or geography,” provided it is not a pretext for discriminating against one or more individuals. The DOL added several examples to the regulation illustrating this ability. At one point, the DOL also suggested that rating premiums on gender is permissible, such that young women, for example, could be charged significantly higher premiums than young men.

Under pre-rule guidance, there is nothing barring an AHP from treating individual member employers as distinct groups of similarly situated individuals. In other words, it is easier for individual employers to be excluded from the group and therefore be ineligible for the AHP, and also for benefits and premiums under the AHP to vary from one employer to another. To the extent employer groups choose to form under pre-rule guidance, it may increase adverse selection by pushing sicker individuals out of AHPs and back into the individual and small group markets.

Formal organizational structure. The proposed rule required the employer group to have a formal organizational structure, similar to pre-rule guidance. The final rule made no change to this requirement.

Guidance on other federal laws

Mental Health Parity and Addiction Equity Act (MHPAEA). The MHPAEA is a complicated law that generally bars group health plans from treating mental health and substance use conditions differently from medical conditions (although it does not require mental health and substance use conditions to be covered in the first place). However, the MHPAEA exempts certain small employers (up to 50 employees) from its requirements.

After consulting with the Department of Health & Human Services (HHS), the DOL determined that whether the small employer exception to the MHPAEA applies depends upon the aggregate size of the AHP — more specifically, the number of employees employed during the preceding calendar year by all member employers. As a result, as long as there are more than 50 employees in the aggregate, the AHP will have to comply with the MHPAEA.

COBRA continuation coverage. The preamble and the final rule are clear that AHPs must comply with COBRA continuation coverage requirements when applicable. But when are they applicable? COBRA does not apply to a group health plan if “all employers maintaining such plan normally employed fewer than 20 employees on a typical business day” in the preceding year. Because the COBRA rules are interpreted by the IRS, the DOL declined to opine on whether the employees of all employers in the employer group are aggregated or looked at individually. Most likely, the employees will be aggregated, but future guidance may provide differently.

Wellness programs. The DOL makes clear that an AHP can offer wellness programs to incentivize participants to choose healthy behaviors. The DOL notes that, under the wellness program regulations, rewards or penalties can be as much as 30 percent of the cost of coverage under the AHP, or up to 50 percent with respect to tobacco use.

Voluntary employees’ beneficiary associations. A VEBA is a tax-exempt entity that can be used to hold plan assets for health and welfare plans, including MEWAs. The VEBA requirements under Section 501(c)(9) of the Tax Code vary from the new rules for AHPs, which may make it difficult or impossible for some organizations creating AHPs to be funded through a VEBA. Nonetheless, to the extent a VEBA is used, the AHP and VEBA requirements would have to be met.

Other federal laws. The DOL declined to opine on the applicability of other federal laws, such as employer shared responsibility payments under the ACA, premium tax credit eligibility rules under the ACA, network adequacy standards, Medicare secondary payer rules, and other federal laws.

The future of AHPs

The Congressional Budget Office (CBO) estimates that 4 million new individuals will enroll in AHPs by 2023 under the final rule, including 400,000 who would otherwise be uninsured.

Litigation. The attorneys general for New York and Massachusetts have already announced their intent to sue to block the final rule, believing that it reduces consumer health protections and invites fraud, mismanagement, and abuse. Some commenters to the proposed rule argued that the final rule violated the ACA by undoing the definitions of the individual, small group, and large group markets. The DOL, in consultation with HHS, however, disagreed.

State and federal collaboration. MEWAs have a history of fraud and abuse. Since 1985, the DOL has pursued 968 civil enforcement cases and 317 criminal cases involving MEWAs, affecting over 3 million participants. Combined, the violations yielded more than $235 million in civil restitution and $173 million in court-ordered restitution in criminal cases. Simultaneously with expanding AHPs, the DOL was concerned about the potential expansion of fraud and abuse.

To give the DOL and state authorities more time to address these concerns before the rules go fully into effect, the final rule has a staggered effective date:

• Sept. 1, 2018: Fully insured AHPs.
• Jan. 1, 2019: Existing self-insured AHPs that seek to expand under the final rule.
• April 1, 2019: New self-insured AHPs complying with the final rule.

In addition, the DOL specifically stated its intent to “increase its focus on compliance guidance and enforcement in collaboration with the States.” As a result, expect ongoing activity at the state and federal levels to regulate and monitor new AHPs.

State EHBs? Also expect many states to enact new coverage mandates on AHPs, similar to EHBs. The DOL recognizes that, to the extent states adopt their own minimum benefit standards, “AHPs will have less opportunity to expand choices of more affordable coverage options for many small businesses.” AHPs spanning more than one state will face an especially difficult task of complying with multiple and sometimes conflicting sets of state requirements.

Harmful effect on other markets. Premiums in the individual and small group markets will rise due to the final rule, although it is not clear by how much. According to one report, premiums in the individual group market will rise 2.7 percent to 4 percent, while they will rise in the small group market between 0.1 percent and 1.9 percent. The CBO estimated that premiums will increase 2 percent to 3 percent. The chief actuary for the Centers for Medicare & Medicaid Services estimated a 6 percent increase.

But the overall effect on premiums in the marketplace will depend heavily on state regulation and the design of AHPs. For example, AHPs may use wellness programs to dissuade less healthy individuals from joining, which may increase adverse selection and intensify premium increases in the individual and small group markets.

In addition, beginning in 2019, Congress eliminated the tax on individuals for not having health insurance. This may cause some individuals to simply go uninsured rather than join an AHP.

Please contact any of the attorneys in our Employee Benefits group if you have questions about AHPs or are interested in forming an employer group or creating an AHP.

The case stems from a 1998 decision to offer 401(k) participants the option of moving their account balances into its cash balance defined benefit plan to be commingled with that fund. Bank of America believed it could obtain a higher return for participants than they could on their own. As part of the offer, Bank of America guaranteed that the participants’ balances would not fall below the amount they were at the time of transfer. Participants and beneficiaries transferred $2 billion as a result of the offer.

In 2005, the IRS concluded that the transfer violated ERISA’s anti-cutback provision because the assets no longer had their “separate account feature.” Three years later, Bank of America paid the IRS a $10 million penalty, set up a special purpose 401(k) plan to receive the transferred accounts, and made additional payments to certain participants’ accounts.

Simultaneously, participants filed a class action lawsuit, alleging a variety of equitable and statutory claims. All of the plaintiffs’ other claims were dismissed or not part of the appeal.

Plaintiffs argued to the lower court and on appeal that because their money was improperly commingled with other money, they should receive a proportionate share of the whole of the profits Bank of America made on the combined assets. Bank of America argued that relief was inappropriate because it did not profit. Bank of America closely tracked participants’ notational accounts and used a different investment strategy for their accounts than it did for the pension assets. Although the pension assets performed well, the participants’ investments underperformed.

Both courts rejected the plaintiffs’ argument that the district court was required to reward proportionate-share-of-the-whole relief. ERISA requires equitable relief to be “appropriate” and thus does not mandate a remedy. The Fourth Circuit also found that the district court did not clearly err when accepting factual evidence that Bank of America did not profit.

After 13 years of litigation and three trips to the Fourth Circuit, the plaintiffs were left empty-handed despite the IRS and district courts finding that Bank of America violated ERISA. By choosing to file an unpublished opinion and stressing that the opinion only applied to the facts of this case, the Fourth Circuit signaled that it did not necessarily agree with the lower court but was constrained by its standard of review. Judge Keenan, who dissented, did not feel so constrained and stated that the lower court abused its discretion. She agreed that the lower court was not mandated to award a proportionate share of Bank of American’s profits but disagreed with the opinion that Bank of America did not profit. She found that awarding a share of the profits would have been appropriate.

The lawsuit is one of more than 20 brought against prominent universities regarding their 403(b) plans. For a full article regarding litigation risks for 403(b) plans, click here. University of Pennsylvania also successfully defended its suit on a motion to dismiss. Judges, however, allowed suits to proceed against Columbia, Emory, Johns Hopkins, and Princeton. New York University recently completed a bench trial and is awaiting a ruling. University of Chicago became the first college to settle, inking an agreement to pay $6.5 million to its plan.

Similar to complaints against other universities, plaintiffs took issue with Northwestern’s use of TIAA-CREF and Fidelity as dual record-keepers. They alleged that inclusion of a CREF Stock fund was a breach of fiduciary duty because the fund underperformed and charged a high expense ratio. The court refused to find that including the fund was a breach of fiduciary duty. “The court also notes that the mere fact that plaintiffs believe index funds are a better long-term investment than the CREF Stock Account does not a fiduciary breach make.”

The plaintiffs also objected to the plans’ practice of paying record-keeping expenses through revenue sharing. The court found Seventh Circuit precedent precluded the claims. The court also rejected the plaintiffs’ allegation that offering too many funds was a breach of fiduciary duty, finding the plans offered them the types of funds they wanted — low-cost index funds.

The plaintiffs alleged that the same actions also constituted prohibited transactions, claims the court rejected because plan assets were not involved and because the fees paid, based on the information in the complaint, were reasonable as a matter of law.

The May 21, 2018, opinion in Epic Systems Corp. v. Lewis resolves a trio of cases before the Supreme Court in which employees brought suits against their employers alleging state and federal wage and hour violations. In each situation, the employees had signed contracts agreeing to resolve any employment-related disputes in individualized arbitration. Nevertheless, they sought to litigate their claims in class or collective actions. 

The Federal Arbitration Act (FAA) generally requires courts to enforce such arbitration agreements as written. Yet the employees argued that the National Labor Relations Act’s (NLRA) guarantee that employees may engage in concerted activities conflicts with the FAA’s directive. As a result, the employees argued that the class waivers in question were unenforceable.

The court disagreed, explaining that courts are only relieved of their obligation to give effect to arbitration agreements when a traditional rationale for the rescission of a contract is presented, such as fraud or duress. Additionally, the court found that the NLRA gives no indication that Congress intended to displace the FAA’s general scheme: The NLRA does not mention class or collective procedures and those methods of dispute resolution were, in fact, “hardly known” when the NLRA was adopted.

The court also explained that participation in class or collective actions does not qualify as “concerted activities” under the NLRA because that term only refers to actions that “employees ‘just do’ for themselves in the course of exercising their right to free association in the workplace.” In other words, the NLRA’s protection does not extend to the “highly regulated, courtroom-bound ‘activities’ of class and joint litigation.”

The court explained that its conclusion was entirely in line with its longstanding precedent of rejecting efforts to “conjure conflicts between the [FAA] and other federal statutes.” The court also emphasized that its decision is consistent with nearly 80 years of case law that remained largely untouched until the National Labor Relations Board asserted for the first time in 2012 that the NLRA nullifies the FAA in some cases.

As a result of this ruling, employers are free to incorporate class and collective action waivers into agreements with employees, although as Justice Gorsuch recognized, “Congress is always free to amend this judgment.”

If crafted properly, then such an agreement also would apply to claims employees may bring under the Employee Retirement Income Security Act of 1974 (ERISA). However, employees have successfully argued that claims for fiduciary breaches brought under ERISA § 502(a)(2), 29 U.S.C. § 1132(A)(2), are not subject to arbitration agreements with class action waivers. ERISA § 502(a)(2) claims, employees assert, are brought on behalf of the plan, and employees cannot waive the plan’s rights to litigation. The Ninth Circuit will soon decide this issue in Munro v. USC, and it is likely that issue will continue to be litigated in district and circuit courts.

For more information about this case or for assistance in drafting enforceable arbitration or other employment agreements, contact our attorneys in the Employment & Labor or Employee Benefits Practice Groups. 

The DOL reasoned that environmental, social and governance factors are not typically relevant economic factors that should be used to evaluate investment alternatives. In some situations, when they reflect business risks or opportunities, they can be treated as economic considerations and more than mere tie-breakers. However, ERISA fiduciaries must always put the economic interests of the plan first.

The DOL appears to concede that socially responsible investment options are less problematic in defined contribution plans. Plans that allow participants to direct their own investments, including plans complying with ERISA section 404(c), do not forgo other investment options by including a “a prudently selected, well managed, and properly diversified” fund with environmental, social, and governance factors among the plan’s diverse array of investment lineups.

However, the DOL cautions against using a fund with environmental, social, and governance factor goals as a qualified default investment option (QDIA). “In the QDIA context, the decision to favor the fiduciary’s own policy preferences in selecting an [environmental, social, and governance]-themed investment option for a 401(k)-type plan without regard to possibly different or competing views of plan participants and beneficiaries would raise questions about the fiduciary’s compliance with ERISA’s duty of loyalty.” If a fiduciary decides to consider socially responsible funds for a QDIA or target date fund, the fiduciary must ensure that the fund’s rate of return and risk profile would be comparable to or better than other funds that do not consider social factors.