Benefitting You is a comprehensive resource providing the latest updates on employee benefits and executive compensation issues, as well as insight on how these updates impact our clients. We offer analysis, practical insight on new challenges, standards, and best practices as well as critical information necessary for our clients to be successful and compliant under the evolving legal framework.
Breaking News – Final Regulations Delay Employer Mandate Provisions of ACA
On February 10, 2014, the Internal Revenue Service and Department of Treasury issued final regulations for the employer shared responsibility provisions of ACA, commonly referred to as the “employer mandate.” The final regulations are 227 pages in length and include a number of provisions intended to ease the burden on the business community with respect to compliance with the employer mandate, including a staged implementation of the “pay or play” penalty. For employers with 100 or more full-time employees, the employer mandate remains effective 2015, but compliance has been softened. Specifically, to avoid the “pay or play” penalty for 2015, such an employer must offer affordable health coverage that provides minimum value to only 70% of its full-time employees (as opposed to 95%, as otherwise required). For employers with 50 to 99 full-time employees, the “pay or play” penalty has been delayed until 2016, provided that an employer meets transition requirements, including restrictions against certain reductions in the employer’s workforce (except for bona fide business reasons) or health coverage as in effect on February 9, 2014.
Today, the IRS and Department of Treasury issued FAQs on these provisions. Stay tuned for a separate Benefits Alert which will address the final regulations in greater detail.
It has long been common for the Department of Labor (“DOL”) to request and review fiduciary committee charters, investment policy statements, and meeting minutes in the course of routine DOL audits of retirement plans subject to ERISA. Over the past several months, however, we have noticed a focus on ERISA fiduciary training as well during such audits. The DOL is now asking employers whether and when their retirement plan fiduciaries have received training on their fiduciary duties and, in some cases, is requesting copies of training materials. ERISA does not require that fiduciaries receive training, but it does require that fiduciaries act with the “care, skill, prudence and diligence” that a prudent expert would in administering an ERISA plan and investing plan assets. Training will assist fiduciaries in that regard, as they will better understand their duties under ERISA.
We recommend that employers provide training to their ERISA fiduciaries and periodically reevaluate any existing training program. Employers should keep in mind that anyone who exercises discretionary authority or control over the administration of an ERISA plan or the management or disposition of its assets is considered a fiduciary and should be included in the training. The components of an appropriate training program will vary and should be tailored to an employer’s plan and governance structure. Training should be provided periodically to ensure that fiduciaries stay informed of any changes in the applicable law. For example, some employers provide an annual fiduciary training session while other employers include a brief fiduciary training session as a part of each fiduciary committee meeting. In addition, employers should retain documentation of training provided to fiduciaries and be prepared to produce such documentation in a DOL audit.
Both the United States Court of Appeals for the Sixth Circuit and the Supreme Court of the United States have recently ruled that ERISA does not bar a plan from imposing a contractual statute of limitations on benefit claims.
In the Sixth Circuit case,1 an insurance company terminated the plaintiff’s long-term disability benefits when he failed to complete mandatory vocational rehabilitation for his knee injury. When the plaintiff, relying on Indiana’s statute of limitations for breach of contract, sued the insurance company three and a half years after it denied his appeal, the company cited the plan’s three-year statute of limitations. The Sixth Circuit held that while the absence of an ERISA-imposed claims filing period usually means that state statutes of limitations should be relied upon, it is only appropriate to do so when the claim is not otherwise time-barred by the parties’ reasonable contractual agreement. The Sixth Circuit concluded that the plan’s three-year statute of limitations was a reasonable contractual agreement.
The Supreme Court recently upheld a plan-imposed three-year statute of limitations in another case.2 The unanimous Court stressed the importance of honoring the explicit terms of the plan document as written, unless its terms proved unreasonable or another “controlling statute” applied. Finding the three-year statute of limitation reasonable and ERISA’s provisions inapplicable or otherwise unaffected, the Court affirmed the enforceability of the plan’s limitation provision. Unfortunately, the Supreme Court declined to define how short a reasonable statute of limitations may be.
In the wake of these decisions, employers should consider amending their benefit plans to impose a contractual statute of limitations. Any such contractual statute of limitations should be disclosed in summary plan descriptions and any other materials that discuss claims and appeals procedures.
The Departments of Labor, Treasury and Health & Human Services have issued final regulations regarding wellness programs in group health plans effective for plan years beginning on or after January 1, 2014 (the “Wellness Regulations”).3 The Health Insurance Portability and Accountability Act (“HIPAA”) generally prohibits group health plans and insurers from discriminating within a group of similarly-situated individuals on the basis of health factors. Wellness programs are an exception to this nondiscrimination rule, provided that such programs meet certain requirements. The Wellness Regulations expand and clarify these requirements, requiring group health plan providers and insurers to re-evaluate their existing wellness programs to ensure compliance.
Consistent with the prior regulations, the Wellness Regulations divide wellness programs into two categories: participatory and health-contingent. Participatory wellness programs are those that either do not provide a reward or do not include any conditions for obtaining a reward that are based on an individual satisfying a standard that is related to a health factor. Health-contingent wellness programs are those that require an individual to satisfy a standard related to a health factor in order to obtain a reward. The Wellness Regulations subdivide health-contingent wellness programs into two categories (activity-only and outcome-based), both of which are required to comply with five re-designed statutory requirements. Among other changes, employers with outcome-based wellness programs are required to offer a reasonable alternative standard if an employee cannot satisfy the criteria to receive the reward regardless of the reason. In addition, an employer may not require a doctor’s verification of the employee’s inability to satisfy the criteria. Furthermore, the Wellness Regulations increase the limits for rewards under health-contingent wellness programs to 30% of the total cost of employee-only coverage (50% for certain tobacco-related programs).
We recommend that employers review their wellness program materials, as some of the expansions and clarifications made by the Wellness Regulations (particularly the reasonable alternative rules for outcome-based wellness programs) were commonly overlooked by employers. Please note that the Wellness Regulations provide new safe harbor language for disclosure of the reasonable alternative standard.
New FAQs, released January 9, 2014, by the Departments of Health and Human Services, Labor and Treasury, provide helpful guidance on a grab bag of ACA requirements.4 We recommend that employers review the new FAQs as they offer new flexibility for compliance planning in the following areas:
- Wellness Programs – the FAQs confirm that if a participant declines to participate in a tobacco cessation program during open enrollment or at the time of initial eligibility, the plan is not required (but is permitted) to offer the participant a second chance to avoid the tobacco surcharge prior to the next open enrollment period.
- Out-of-Pocket Maximum (“OOPM”) Requirements5 – the FAQs confirm that ACA’s OOPM requirements do not apply to non-Essential Health Benefits, out-of-network benefits or non-covered benefits. The FAQs add flexibility in applying the OOPM requirements to the plans with multiple service providers. An employer is permitted to divide and allocate the OOPM among the different providers, in amounts the employer deems appropriate, provided that the combined total does not exceed the aggregate OOPM limit.
- Preventative Services6 – the FAQs explain special timing rules for implementing preventative services which are recommended by the U.S. Preventative Task Force (USPTF) in the future (generally, not earlier than one year after the recommendation).
- Insured Expatriate Health Plans – employers that provide health insurance to expatriate employees will need to understand new requirements to qualify for the delayed enforcement date for full compliance with ACA. To qualify for the delayed enforcement date (January 1, 2017, for calendar-year plans), the plan must be insured and limit coverage to employees who are expected, in good faith, to reside outside their home country or outside the U.S. for at least six months of a twelve-month period.
- Excepted Benefits – employers that offer “voluntary benefits” intended to be exempt from ERISA will need to understand the new requirements for a fixed indemnity insurance policy to qualify as an “excepted benefit” under ACA. The FAQs confirm that exemption from ERISA does not necessarily mean that the benefit is excepted from ACA.
For several years, 401(k), 403(b), and governmental 457(b) plans have been allowed to permit participants to convert distributable pre-tax funds to a Roth account within the same plan (“in-plan Roth rollovers”). Late last year the IRS published Notice 2013-747 (the “Notice”) which expanded the availability of in-plan Roth rollovers to non-distributable pre-tax funds and answered several questions related to in-plan Roth rollovers. The following is a brief overview of some of the key questions answered by the Notice:
- In-plan Roth rollovers may be made from all of a participant’s vested accounts (including earnings), e.g., elective deferrals under a 401(k), 403(b), or governmental 457(b) plan, matching contributions, profit sharing contributions, and safe harbor contributions.
- A plan sponsor may limit the timing of and the accounts eligible for in-plan Roth rollovers on a nondiscriminatory basis.
- Withholding is not required with respect to in-plan Roth rollovers of non-distributable amounts, nor is voluntary withholding permitted. As a result, a participant who desires to make an in-plan Roth rollover will need to consider increasing his or her withholding from other amounts or make estimated tax payments to avoid any underpayment penalty.
- With respect to an optional change in plan design, a retirement plan generally must be amended by the end of the plan year in which the amendment is to be effective. However, the Notice provides a transition amendment period through December 31, 2014 in order to permit the expansion of in-plan Roth rollovers for 2013 for 401(k) and governmental 457(b) plans. In addition, 403(b) plans are permitted to adopt the amendment by the later of the plan’s remedial amendment period or the last day of the first plan year in which the amendment is effective. The Notice provided that the amendment also may include the following related amendments (i) an amendment to permit Roth contributions and (ii) an amendment permitting the plan to accept Roth rollovers.
- If a participant’s first designated Roth contribution to the plan is in the form of an in-plan Roth rollover, the 5-year distribution clock begins running on the first day of the participant’s taxable year in which the rollover occurs.
In-plan Roth rollovers are an attractive feature for many plan participants and the Notice gives plan sponsors a great deal of flexibility to add this feature.
If you should have questions related to any of the topics above, please contact one of the Employee Benefits attorneys.
1 Williams v. Metro Life Ins. Co., No. 12-4006, slip op. (6th Cir. Sept. 26, 2013) .
2 Heimeschoff v. Hartford Life and Accident Ins. Co.,134 S. Ct. 604 (2013).
3 The Regulations are available here
4 The FAQs are available here
5 Applicable to non-grandfathered plans.
6 Applicable to non-grandfathered plans.
7 Notice 2013-74 is available here