This newsletter briefly discusses several recent developments in employee benefits and executive compensation that may be of interest to our clients. For more details on any item reported herein, please contact any member of Blank Rome's Employee Benefits and Executive Compensation Group.

IRS Publishes Potential Approaches to Shared Responsibility and Other Health Care Reform Requirements

The IRS recently issued IRS Notice 2011-36 ("Notice"), which includes potential regulatory approaches to the shared responsibility and other requirements set forth in the Patient Protection and Affordable Care Act ("PPACA" or "Health Care Reform").

Effective January 1, 2014, Health Care Reform's shared responsibility provisions (also known as the "pay or play rules") impose a monthly penalty on any "applicable large employer" who has one or more "full-time employees" who enroll in a health plan through a state health care exchange and receives a premium tax credit or cost-sharing reduction. These provisions apply to employers with 50 or more "full-time employees." The potential employer penalty directly correlates to an employer's number of full-time employees for a calendar month. Generally, an employee is a "full-time employee" if he or she works at least 30 hours per week.

The Notice solicits comments on several issues that will be addressed in future guidance relating to Health Care Reform's shared responsibility provisions. The Notice also includes the following potential approaches applicable to these rules:

Definition of Employer, Employee, and Hours of Service

  • "Employer" and an "Employee" will be defined using the common-law test and the controlled group rules in the Internal Revenue Code.
  • An employer not in existence in a prior calendar year will be considered an applicable large employer for the current calendar year if it is reasonably expected to employ an average of at least 50 full-time employees on business days during the current calendar year.
  • An employee could be considered a full-time employee for a month (and thus satisfy the rules that a full-time employee is an employee who has an average of at least 30 hours of service per week) if the employee has at least 130 hours of service in a calendar month.
  • Consistent with existing Department of Labor regulations, an hourly employee could be credited with an hour of service for each hour that the employee is paid or entitled to payment, and for each hour the employee performs no services, up to 160 hours for any continuous period of nonperformance. Hours for non-hourly employees may be calculated using one of three methods: (1) actual hours of service; (2) a days-worked equivalency; or (3) a weeks-worked equivalency modeled on the existing DOL regulations.

Determination of Whether an Employer is an "Applicable Large Employer"

  • An ongoing employer will be considered an "applicable large employer" for a calendar year if the sum of the employer's full-time employees and full-time equivalent (FTE) employees for each month in the prior calendar year when divided by 12 is at least 50. Full-time employees are those who work on average at least 30 hour or service per week, or under the proposed approach, at least 130 hours a month. FTE employees are determined by calculating the number of hours of service for all employees who are not full-time employees for the month (including seasonal employees) and dividing the resulting number by 120.
  • An employer who employs seasonal workers that would otherwise be an applicable large employer will not be considered as such if the employer's full-time employees and FTEs, excluding seasonal employees, exceeds 50 for no more than four months in the preceding calendar year.

Comment: Employers with large part-time and seasonal workforces should be particularly mindful of the impact of FTEs with respect to Health Care Reform mandates. Failure to consider FTEs could result in unanticipated penalties under Health Care Reform.

Potential Methods for Determining Full-Time Employees

  • Recognizing that it may be challenging for employers to make a determination of full-time employee status on a month-to-month basis, the Notice describes a look-back/stability period safe harbor approach. This optional approach would allow employer to designate a measurement period for determining full-time status, the result of which could be used in a subsequent "stability period."  

Coverage of All Full-Time Employees

  • A penalty will not be payable if an employer covers all, or substantially all, of its full-time employees. The Notice requests comments regarding categories of full-time employees whose exclusion from acceptable coverage should not result in a penalty.

The Notice further invited comments on the interpretation of the rule under Health Care Reform prohibiting waiting periods in excess of ninety (90) days. These comments will help shape future guidance regarding which employees are subject to the limitation, when a waiting period may apply consistent with the limitation, and how the limitation should be calculated.

Comment: While both the shared responsibility and prohibition on waiting period rules under Health Care Reform do not take effect until January 1, 2014, employers should act now to assess the impact these rules will have on their workforces and their bottom lines. Many employers, for example, are running calculations to determine if they will be subject to the shared responsibility rules and, if so, the cost of the penalty for violating Health Care Reform's coverage mandates against the cost of providing employer-sponsored health coverage.

Supreme Court Ends SPD-Based Benefit Claims, But Expands Potential Lawsuits For ERISA Plaintiffs

Recently, the U.S. Supreme Court in CIGNA Corp. v. Amara, issued an opinion which effectively ends benefit claims based on language found in a summary plan description (SPDs), but expands the types of equitable relief that may be available to plaintiff's under ERISA Section 502(a)(3).

Amara centered on the plan communications following CIGNA's conversion of its defined benefit pension plan to a cash balance plan. The trial court found that (i) CIGNA had failed to give the plan participants proper notice of changes to their benefits as a result of the conversion, in violation of the ERISA disclosure requirements; (ii) there was "likely harm" to plaintiffs; and (iii) Cigna's failure properly to communicate the benefit changes justified a reformation of the plan by the court and enforcement of the plan as reformed under Section 502(a)(1)(B). The Second Circuit affirmed.

The Supreme Court reversed, finding that a claim for benefits under ERISA Section 502(a)(1)(B) may not be made based on inaccurate or misleading statements found in an SPD. The Court held that the terms of the actual plan document, and not summaries about plan terms, must form the basis for a claim for benefits.

Nevertheless, the Court found that fiduciaries may not be completely insulated from liability where communications about the plan are flawed. The Court remanded the case to the District Court to determine, whether, as an alternate remedy, the plan participants in Amara may receive a remedy under Section 502(a)(3) which permits "appropriate equitable relief". The Court discussed three types of relief that should be available under Section 502(a)(3): (1) reformation of contract to remedy fraud or mistake, (2) estoppel to remedy fraudulent misrepresentation, and (3) compensation for a loss resulting from a fiduciary's breach or to prevent a fiduciary's unjust enrichment (i.e., a "surcharge"). The Court suggested that a plaintiff need not always show detrimental reliance on flawed plan communications in order to obtain such equitable relief.

Comment: The full impact of Amara will unfold over time. In the meantime, employers and plan fiduciaries should take certain practical steps to avoid fiduciary liability for improper plan communications, including:

  • Being candid with participants about plan changes that may result in a reduction of benefits or modified benefits.Z
  • Keeping SPDs simple and straightforward and avoiding the temptation to use the SPD as a way to restate the plan.
  • Reviewing current SPDs and other plan documentation to determine if there are any errors which could result in participant claims.
  • Considering which individuals make communications about the plan and determining if any adjustments should be made. Employers should regularly reexamine internal procedures to ensure that individuals are not inadvertently acting in a fiduciary capacity.

Recent Victory For Wellness Programs

In Seff v. Broward County, the Southern District of Florida held that a wellness program sponsored by Broward County for its employees did not violate the Americans with Disabilities Act ("ADA").

While the popularity and utility of wellness programs has been increasing in recent time, employers who have instituted these programs have had to do so despite concerns that such programs violate the ADA. The ADA prohibits employers from requiring employees to undergo a medical examination or from making medical inquires unless necessary to determine an employee's ability to perform the job. With respect to wellness programs, the Equal Employment Opportunity Commission ("EEOC") has indicated that medical examinations and inquiries may be made if they are part of a "voluntary wellness program". A wellness program is "voluntary" according to the EEOC if the employer neither requires participation nor penalizes employees who do not participate. Strictly construed, the EEOC's interpretation would mean that any wellness program that provides an incentive for completing a health risk assessment or completing medical screenings would be in violation of the ADA.

Whether a wellness program violated the ADA was the central issue in Seff. In response to rising health care costs, Broward County decided to implement a wellness program that required employees to pay an additional $20 for group health plan coverage unless they completed a health risk assessment and submitted to certain biometric screenings. The wellness program was administered by the County's health plan provider. Seff challenged this program on the basis that that the program violated the ADA's prohibition of involuntary medical examinations and inquiries because it effectively penalized anyone who did not participate. The case was later certified as a class action.

In granting summary judgment for Broward County, the court found that its wellness program did not violate the ADA. The Court held that the program was valid under the ADA's exemption for "bona fide benefit plans" because: (1) the wellness program was part of a bona fide benefit plan; and (2) the wellness program was based on underwriting, classifying or administering risk and was not used as a subterfuge for discrimination.

Comment: While Seff represents an important development for wellness programs, it does not completely eradicate concerns with respect to the ADA. Seff is not binding on the EEOC and may not persuade other judges.. It also leaves open the question of when a wellness program is "voluntary" under the ADA. Moreover, every wellness program is structured differently, which opens the door for challenges to Seff as case law in this area develops.

Going forward, employers should continue to consider the ADA when structuring wellness programs. In addition, wellness programs must also comply with the Genetic Information Nondiscrimination Act ("GINA"), the nondiscrimination provisions of the Health Insurance Portability and Accountability Act ("HIPAA"), ERISA, the Internal Revenue Code, Title VII, the Age Discrimination in Employment Act ("ADEA"), and similar state laws.

New State Marriage And Civil Union Laws Impact Employee Benefits

Effective July 24, 2011, marriage for same-sex partners will become legal in New York. Effective January 1, 2010, civil unions for same-sex partners will be legal in Delaware and Hawaii. The New York, Delaware and Hawaii laws entitle same-sex couples who marry (New York) or who enter into a civil union partnership (Delaware and Hawaii) to all the legal rights and obligations afforded to opposite-sex married individuals under existing New York, Delaware and Hawaii law. These laws may impact employee benefit plans.

New York Marriage Equality Act

The New York Marriage Equality Act ("MEA") amends New York's marriage laws to specifically recognize any valid marriage entered into between two persons regardless of gender. The MEA provides same-sex spouses with the same rights, protections and responsibilities as opposite-sex married individuals.

Comment: As a result of MEA, employers with employees located in New York may be obligated to provide continued coverage under New York's mini-COBRA provisions to same-sex spouses.

Delaware Civil Unions and Equality Act of 2011

The Delaware Civil Unions and Equality Act of 2011 ("Delaware Act") provides for the same rights, protections and responsibilities for a civil union partner as those afforded an opposite-sex married individual. However, the Delaware Act only applies to same-sex unions. Under the Delaware Act, individuals desiring to enter into a civil union must obtain a license from the appropriate authority and go through a ceremony before the civil union will be recognized. The Delaware Act also recognizes same-sex civil unions legally entered into in another state. In addition, the Delaware Act provides that a "legal parent" of a child shall be entitled to have his or her name entered on the original birth certificate as a birth parent of that child.

Comment: Although the Delaware Act does not obligate an employer with employees in Delaware to provide employee benefits to a civil union partner, such an employer may be obligated to provide employee benefits to a child born during the civil union to the extent dependent coverage is made available.

Hawaii Civil Union Law—Senate Bill 232

Hawaii's civil union law provides for the same rights, protections and responsibilities for a civil union partner as those afforded an opposite-sex married individual. Similar to the Delaware Act, individuals desiring to enter into a civil union must obtain a license from the appropriate authority and go through a ceremony before the civil union will be recognized. The Hawaii law also recognizes same-sex civil unions legally entered into in another state.

Under the MEA, Delaware Act and the Hawaii legislation, the treatment of a civil union partner as a "spouse" will result in the coverage and value of any employee benefits, such as health care coverage, being excluded for state tax purposes.

Comment: Prior to January 1, 2012, employers may need to update their payroll systems to accommodate the state tax consequences of the new laws.