Even though health reform’s legal status is up in the air, plan sponsors are still taking cautious steps forward to make sure they are ready if it survives the Supreme Court challenge. One of those steps, which is coming soon, is the Summary of Benefits and Coverage requirement, which has to be initially provided for the first open enrollment period beginning on or after September 23, 2012.
Many plan sponsors mistakenly assume that their employee assistance programs (EAPs) or wellness programs are not subject to these requirements. However, as we discussed in our post on W-2 reporting of health coverage, EAPs that provide counseling (even for only a few sessions) and wellness programs that provide medical care are technically group health plans under ERISA. Among other implications, this means they are subject to SBC requirements.
That said, plan sponsors do have some structuring alternatives that may help ease compliance with this requirement and avoid the need for a separate SBC. For example, if a plan sponsor documents the EAP or wellness program as part of its group health plan, a separate SBC for the EAP or wellness program may not be required. However, the plan sponsor may need to tweak the SBC disclosures to take into account these additional benefits. The EAP or wellness provider may not be equipped to help complete the SBC, and any insurer or TPA (for a self-funded plan) may not be aware that EAP or wellness services are being offered separately. Plan sponsors should be mindful of this in putting SBCs together which only serves as further proof of the axiom that no good deed (such as providing EAP or wellness services) goes unpunished.
On May 7, 2012 (and updated May 17), the Department of Labor issued Field Assistance Bulletin 2012-02, consisting of 38 questions and answers that clarify some of the issues raised since the issuance of the final regulations on participant fee disclosures with respect to designated investment alternatives in individual account plans. The Q&As cover a range of issues, including:
Brokerage Windows. The participant fee disclosure regulations (§2550.404a-5(h)(4)) provide that brokerage windows are not “designated investment alternatives,” but do not provide specific guidance on how the regulation applies to brokerage windows and what disclosures are required. The FAB clarifies that brokerage windows are covered by the regulations, but that they are subject only to plan-related disclosures of administrative fees and expenses under §2550.404a-5(c). The disclosures include (1) a description of the window (how and to whom to give investment directions, account balance requirements, limitations or restrictions on trading, how the window differs from the plan’s designated investment alternatives) and whom to contact with questions; (2) a general statement that there may be investment fees and charges associated with the participant’s investment selections (such as fees and expenses for opening, accessing, maintaining, and terminating the window, commissions and fees for trading) and directions on how to obtain information on those fees for any particular investment; and (3) the fees actually charged against a participant’s account in connection with the window during the preceding quarter.
Broad-Based Investment Platforms. Some plans provide an investment platform comprised of a large number of registered mutual funds, but the plan fiduciary has not designated any funds as designated investment alternatives. The Department observed that there is a question whether the plan’s fiduciary has satisfied its obligations under section 404. It observed that, if through a brokerage window or other alternative, non-designated investment alternatives are selected by a significant number of participants, the plan fiduciaries have an affirmative obligation to review the alternatives and determine whether any of them should be treated as designated for purposes of the fee disclosure regulation. As a matter of enforcement policy, until the Department issues further guidance, the FAB provides that where a platform (including a brokerage window) holds more than 25 investment alternatives, the Department will not require that all of the available alternatives be treated as designated investment alternatives if the plan administrator
- Makes the required disclosures for 3 of the alternatives that satisfy the “broad range” requirements of §404(c), and
- Makes the required disclosures for all other alternatives on the platform in which at least 5 participants (or if the plan has more than 500 participants, at least 1%) are invested on a date that is not more than 90 days preceding each annual disclosure.
Revenue Sharing. Where some or all of the plan’s administrative expenses are paid through revenue sharing, the disclosure need not identify the specific expenses that are paid through revenue sharing or the designated investment alternative making the payment. Even if all of the plan’s administrative expenses are paid through revenue sharing so that no expenses are charged to participants’ accounts, the plan-level fee disclosure must still include a statement that the administrative fees were paid from revenue sharing from the plan’s investment alternatives to avoid giving participants the misleading impression that there were few or no administrative expenses.
Expenses Paid from Forfeitures and General Assets. If the plan document requires that administrative expenses be paid from forfeitures or the employer’s general assets, and does not require them to be charged against participants’ accounts, those expenses need not be disclosed. Even if the plan administrator has the discretion to pay administrative expenses from participants’ accounts, but it does not intend to do so and the employer obligates itself to pay administrative expenses not covered by forfeitures, disclosure is not required.
Comparative Return Charts. The regulations require that investment performance over 1-, 5- and 10-year periods be furnished in a chart or similar format to facilitate comparisons. The plan administrator may furnish more than one chart (for example, where there are multiple issuers of designated investment alternatives) so long as the charts are provided at the same time and in consistent formats so that participants can make meaningful comparisons. Separate distribution of the charts by the issuers or service providers will not satisfy this requirement. Performance data can be reported as of the end of the most current month or quarter, but the data for all designated investment alternatives and associated benchmarks must use the same time period to permit participants to compare. Only one chart need be provided per year, although updated information on expenses must be available on a Web site as soon as reasonably possible following a change, and in extraordinary circumstances ERISA’s prudence rule may require a notice of mid-year changes.
403(b) Plans. Generally, the regulations cover 403(b) plans. The Department will not take enforcement action against a plan administrator that does not make the disclosures for annuity contracts or custodial accounts issued before January 1, 2009 to which the employer made no contributions on or after January 1, 2009, that are fully vested and fully enforceable by the employee with no employer involvement. This follows the guidance in FABs 2009-2 and 2010-01 and §2550.408b-2(c)(1)(ii).
Early Disclosures. Although the participant-level fee disclosures are not due until August 30, 2012, some plan administrators and service providers have already begun providing participant disclosures. The Department observed that some of these disclosures may not be consistent with the advice in the FAB. The Department acknowledged that it may be difficult or expensive for them to make further adjustments to their systems before the August 30 deadline and the July 1, 2012 deadline for service provider disclosures to plan fiduciaries. Although the Department is not extending the deadlines, it stated that, for enforcement purposes, it will consider whether service providers and plan fiduciaries have “acted in good faith based on a reasonable interpretation” of the regulations. If so, then the Department stated that enforcement action would be unnecessary if the service provider or plan administrator establishes a plan for complying with the FAB for future disclosures. The Department did not clarify how quickly the plan should be in place.
On May 18th, two famous, photogenic Olympians found themselves almost $300 million richer. A banner day for anyone, and yet they may have felt at least a twinge of regret. Why? They contend that 409A should have made them much richer, to the tune of as much as $1.2 billion.
At this point, Hollywood has made the story almost old-hat. In December 2002, then Harvard students Tyler and Cameron Winklevoss had an idea. They would develop a web site that connected Harvard students. If successful, they would expand the concept to other campuses. In November of 2003, after several false starts, the Winklevoss twins retained the services of a young, talented programmer to implement their vision. Three months later, without the knowledge of the Winklevoss twins, Mark Zuckerberg gave birth to Facebook. After a successful run at Harvard, the social networking site spread to other campuses, and then took over the world.
In 2004, the Winklevoss twins (and their company ConnectU) filed suit against Facebook, claiming that Mark Zuckerberg had copied their social networking ideas and source code and used them to create Facebook. In 2008, the parties settled, reportedly for $65 million – $20 million in cash and a specified number of shares of Facebook. The problem was the valuation of Facebook stock at the time of the settlement.
Around the time of the settlement, Microsoft made an investment in Facebook. This investment valued Facebook at $15 billion. The Winklevoss twins apparently used this valuation, with a per share price of $35.90, when determining that the number of shares provided as part of the settlement.
How does 409A come in to this story? Like many illiquid startup firms, Facebook made substantial option grants to its employees. For an option to be exempt from Code Section 409A, the option must be granted with an exercise price no less than the fair market value of the underlying stock on the date of grant. Most private start-up companies, particularly ones growing very quickly, regularly engage experienced valuation firm to establish the Company’s fair market value for 409A option grant purposes. Facebook was no exception. In fact, Facebook had come up with an $8.88 per share 409A valuation shortly before the settlement.
After learning of the 409A valuation, the Winklevoss twins sought to invalidate the settlement agreement. Among other things, the twins argued that Facebook’s failure to disclose the $8.88 409A valuation constituted fraud. Had Facebook disclosed the 409A valuation and had that valuation been used in the settlement, the twins would have ended up with more than four times the number of shares they actually received.
Ultimately, the twins lost their appeal to invalidate the settlement, which, after Facebook’s recent IPO, left them with stock purportedly worth around $300 million. Had they used the 409A valuation at settlement, however, their settlement stock could have been worth as much as $1.2 billion.
What’s the moral of this story? Private company stock valuations are inherently speculative, and can be appropriated for purposes other than that for which they are intended. For private companies that issue stock options, 409A can create a paper trail of valuations that can at least raise issues for potential investors, employees, and litigants. Prudence may dictate that companies clearly qualify the limited purpose for which a 409A valuation is obtained (i.e., compliance with 409A). Further, it may be advisable to include confidentiality provisions in stock option agreements and to take such other measures as are necessary to keep private company 409A valuations … well, private.
As we have posted about previously, the IRS has requested comments on the determination of “minimum value” (discussed here) and reporting on “minimum essential coverage” (discussed here). In this, our final post of the series, we summarize the IRS’s request for comments regarding reporting by employers subject to “play or pay” penalties in Notice 2012-33.
Beginning in 2014, employers who could be subject to PPACA’s “pay or play” penalties must file returns with the IRS that include the following information:
- Name and EIN;
- The date the return is filed;
- A certification of whether the applicable large employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan;
- If so, a certification of:
- The duration of any waiting period;
- The months during the calendar year when coverage under the plan was available;
- The monthly premium for the lowest cost option in each enrollment category under the plan; and
- The employer’s share of the total allowed costs of benefits provided under the plan.
- The number of full-time employees for each month of the calendar year;
- For each full-time employee, the name, address, and taxpayer identification number (TIN) of the employee and the months (if any) during which the full-time employee (or any dependents) were covered under the eligible employer-sponsored plan; and
- Such other information as may be required by the Secretary of the Treasury.
Companion returns with the above information (except EIN) and employer address and contact information must be provided to full-time employees.
The IRS has requested comments on how to minimize the reporting burden and coordinate. In view of the substantial overlap between this reporting and the minimum essential coverage reporting, it makes sense that the IRS would want to try to coordinate the two reporting requirements.
Comments are due by June 11. (You can also leave us a comment in the fields below, but we won’t promise the IRS will read it.)
In addition to requesting comments on the determination of “minimum value” (discussed in our prior post here), the IRS is also asking for comments regarding the information reporting requirements regarding “minimum essential coverage” under PPACA and for reporting by employers subject to “play or pay” penalties.
Minimum Essential Coverage Reporting. Under PPACA, every health insurance issuer, self-funded plan sponsor, governmental agency administering governmental health insurance programs, and any other entity that provides minimum essential coverage is required to file annual returns reporting who is covered under its plan or policy. For insured plans, the IRS intends to require the insurer to report.
The reporting must include, name, address, taxpayer ID number (usually a social security number) of each covered person, dates of coverage during the calendar year, and any other information Treasury may require. Additional reporting is required for policies offered through an exchange.
An employer must also separately report its own name, address, and EIN, the portion of the premium that it pays, and any other information Treasury may require.
Reporting is made to the IRS with a copy provided to each individual. It will be effective for coverage on or after January 1, 2014.
Why do we have to report this? Employers will want to report this information to avoid being hit with “play or pay” (or “shared responsibility”) penalties. Employees eligible for minimum essential coverage are not eligible for the tax credit to help them defray the cost of health insurance from the exchange. If an employee is not eligible for the tax credit, then the employer will not be penalized under the “play or pay” provisions, even if the employee obtains insurance through the exchange. Therefore, the reporting will help avoid assessments of play or pay penalties by the IRS.
The IRS is requesting comments on ways to minimize the reporting burden and duplication of reporting items by June 11. Notice 2012-32 lists seven specific areas of IRS interest. (You can also leave us a comment in the fields below, but we won’t promise the IRS will read it.)
The IRS and Treasury Department recently issued Notice 2012-29, which provides new guidance for the final “normal retirement age” regulations relating to governmental plans. The Notice provides that the IRS and the Treasury intend to further extend the effective date for governmental plans to comply with the final regulations to annuity starting dates that occur in plan years beginning on or after the later of:
- January 1, 2015, or
- the close of the first regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date that is three months after the final regulations are published in the Federal Register.
The Notice also provides that the IRS and Treasury will make two important clarifications in the final regulations:
- The final regulations will clarify that governmental plans that do not provide for in-service distributions before age 62 do not have to have a definition of normal retirement age that complies with the final regulations or even define normal retirement age; and
- The final regulations will expand the age-50 safe harbor rule, which currently applies only for plans in which substantially all of the participants are qualified public safety employees, to also apply to a group substantially all of whom are qualified public safety employees. This means that a governmental plan could satisfy the normal retirement age requirement by using a normal retirement age as low as 50 for qualified public safety employees, and a later normal retirement age that otherwise satisfies the requirements in the final regulations for other participants.
Governmental plan sponsors may rely on Notice 2012-29 for the extension until the final normal retirement age regulations are amended. The IRS and Treasury Department are requesting comments by July 30, 2012, relating to this guidance, as well as information on the overall retirement patterns of other employees in government service to assist them in determining the earliest age that is reasonably representative of the typical retirement ages for such employees.
Both the Center for Consumer Insurance Information and Oversight (CCIIO – a division of the Centers for Medicare and Medicaid Services) and the IRS have recently issued guidance related to the Medical Loss Ratio requirement under the Patient Protection and Affordable Care Act (“PPACA” or “health reform”). As you may know, the MLR requirements generally mandate that insurers spend a certain percentage of premiums (85% for “large group” plans, 80% for “small group” and individual plans) on (1) claims and (2) healthcare quality improvement activities. If they do not, they must provide rebates to enrollees. Insurers are also required to report on MLR compliance to CCIIO. Employers must properly allocate such rebates between the employer and employees, and satisfy applicable reporting and withholding obligations.
The FAQs released on April 20, provide very few surprises, but provide some helpful answers. They confirm that self-funded plans, Medicaid MCOs, and Medicare Advantage and Part D plans are not subject to the MLR requirements. The FAQs also state that insurance coverage labeled as “blanket” coverage may be subject to the requirements if it qualifies as coverage in the group market or individual market under the Public Health Service Act. Additionally, the FAQs state that coverage issued to a sole proprietor covering the proprietor and his/her spouse is considered individual market coverage.
Under health reform guidance, whether a policy is considered to be part of the “small group” or “large group” market turns on the number of employees of the employer purchasing the policy, rather than the number of enrollees. Insurers had raised with CCIIO that they might not always know the number of employees an employer may have when it issues a policy. This could happen, for example, where separate insurance policies are issued for employees employed in separate states. CCIIO advised that insurers should make every effort to obtain the information on the number of employees. If the information cannot be obtained, then the insurer may report based on the information it has (essentially, the number of employees to whom the policy is available). Employers with insured health plans should make sure insurers are given information on the total number of employees (even if some of them are not eligible for the policy) and should be on the look out for this information request from insurers.
The FAQs also state that insurers may satisfy MLR rebate requirements by providing a premium holiday, if state law permits premium holidays and the holiday is provided on a nondiscriminatory basis. Employers should be aware, however, that the Department of Labor previously issued guidance on how employers should handle MLR rebates. That guidance did not address premium holidays (although the IRS FAQs discussed below mention them). Employers should consult benefits counsel if they seek to apply analogous principles in determining how to provide premium holidays to their employees.
The IRS recently updated its audit guidelines for field agents conducting reviews of employers COBRA programs.
In these updated guidelines, the IRS has advised agents that any COBRA audit should consist of a review of the following minimum level of documentation: (i) the employers procedure manual; (ii) form letters; (iii) internal audit procedures; (iv) the underlying group health plan documents; and (v) details of any past or pending COBRA-related litigation. If any of the foregoing materials appear deficient or problematic, agents are advised to make follow-up inquiries relating to the number of qualifying events, the method of notifying qualified beneficiaries, the method of notifying the plan administrator in connection with qualifying events, qualified beneficiary elections and the amount of premiums paid by COBRA beneficiaries. In performing more comprehensive reviews, the IRS advises agents to request an employer’s federal and state employment tax returns; lists of individuals affected by qualifying events; and lists of individuals covered by each group health plan and to compare those lists against the employer’s personnel records.
In outlining these materials, the IRS appears to have the expectation that agents will be seeking to confirm that an employer is offering COBRA coverage under all of the group health plans that are legally required to offer COBRA coverage, that all participants terminating employment are being offered COBRA coverage; that those being offered COBRA coverage are being provided the opportunity to elect any and all appropriate coverages and that the cost of those coverages are in conformance with applicable law. For qualified beneficiaries denied COBRA coverage for the reason of gross misconduct, the IRS advises agents to review unemployment records to determine whether the employer took an inconsistent position regarding an employee’s termination of employment for purposes of collecting unemployment benefits.
As part of the revised guidelines, the IRS also notes that COBRA excise tax penalties may be waived upon a showing of reasonable cause and the IRS indicates that a showing of reasonable cause may be supported by an employer showing that it maintains an active compliance program; relies upon professional advice; and has an auditing process in place for monitoring compliance.
The issuance of revised audit guidelines suggests that the IRS may be undertaking an initiative to increase its COBRA audit activity period for employers. An employer should contemplate the possibility of such audits and take affirmative steps to insulate itself by making sure either the employer or its third party recordkeeper maintains a detailed COBRA procedure manual that is compliant with applicable law and has a process for conducting periodic internal audits to monitor compliance with the COBRA program in operation.
On April 26, the IRS released three “requests for comment” on various provisions under the Patient Protection and Affordable Care Act (“PPACA” or “health reform”). While the IRS is soliciting comment, it also gave some indication of how it was leaning on each of the issues it addressed. This first post (of three) discusses the comments on the determination of “minimum value.”
Under PPACA, if an employer plan does not provide “minimum value,” then an employee may be eligible for a premium tax credit through the state-based insurance exchanges, if he or she meets the other applicable requirements. If an employee takes advantage of that tax credit, the employer will be subject to “pay or play” penalties under health reform. Therefore, “minimum value” matters. (It is worth noting that HHS previously found that about 98% of individuals covered by employer-sponsored plans were enrolled in plans providing minimum value as described in the IRS guidance.)
In Notice 2012-31, the IRS basically outlined three approaches it may use to determine minimum value:
- The use of an actuarial value or minimum value calculator that will be provided by HHS and the IRS. Using either calculator, employers would enter certain plan information into the calculator (such as benefits, cost-sharing, etc.) and the calculator would determine if the plan provides minimum value.
- Self-funded plans and insured large group plans would be allowed to use the minimum value calculator, which is expected to use claims data reflecting typical self-insured employer plans.
- An array of design-based safe harbors in the form of checklists. Basically, if the employer checks enough boxes on the checklist of available benefits and cost-sharing terms, the plan will be deemed to provide minimum value. The items on the checklists would provide minimum cost-sharing terms for different benefits and the employer could “check the box” if its cost-sharing terms were at least as generous as those on the list.
- For plans with nonstandard features (like quantitative limits on certain “core” benefits, like hospital days) that cannot use the calculators, the employer can obtain a certification by an enrolled actuary.
Actuarial value will be determined based on the health expenses expected to be incurred by a standard population, rather than the population the plan actually covers. Contributions to HSAs and HRAs will be included in determining actuarial value (but apparently not FSAs).
Why the two calculators? HHS is going to establish the methods for determining actuarial value. HHS previously issued an Actuarial Value and Cost-Sharing Bulletin outlining its expected approach in these areas, but regulations will provide final guidance. Those rules will apply to qualified health plans offered in the exchanges and to plans in the individual and small group markets because all of those plans will need to cover all the “essential health benefits” (EHBs) mandated by PPACA. The actuarial value calculator will measure value based on the methods HHS will use to determine value for plans required to cover EHBs.
However, self-insured plans and insured plans in the large group are not required to cover any of the essential health benefits. Therefore, HHS and the IRS will develop the minimum value calculator so that the actuarial value of those plans can be determined without regard to whether or not they cover all of the EHBs. The minimum value calculator will focus on the four categories of benefits that HHS has determined make up the lion’s share of a plan’s actuarial value: (1) physician and mid-level practitioner care, (2) hospital and emergency room services, (3) pharmacy benefits, and (4) laboratory and imaging services.
The IRS has requested comments on these methodologies (including a few specific areas) by June 11, 2012 at the contact information in the Notice. (You can also leave us a comment in the fields below, but we won’t promise the IRS will read it.)
The Fourth Circuit Court of Appeals recently joined five other judicial circuits in ruling that a district court’s remand of a benefits claim to the plan administrator is not immediately appealable. A copy of the Fourth Circuit’s decision in Dickens v. Aetna Life Ins. Co. (4th Cir. Apr. 20, 2012) can be viewed by clicking here. The ruling comes on the heels on a similar ruling by the Eleventh Circuit in Young v. Prudential Ins. Co. of Am., 671 F.3d 1213 (11th Cir. Feb. 21, 2012), which we summarized earlier.
In Dickens, the plaintiff applied for long-term disability benefits after being diagnosed with clinical depression, anxiety, insomnia, among other conditions. A predecessor plan administrator granted the LTD benefits in 2004. Four years later, the successor plan administrator, Aetna, terminated the benefits on the grounds that the plaintiff no longer suffered from a debilitating illness. (The Social Security Administration (“SSA”), which had previously determined the plaintiff to be disabled, continued to pay disability benefits.) After exhausting his administrative appeals, the plaintiff sued to have his LTD benefits restored. The district court ruled that Aetna’s decision to terminate the LTD benefits was “arbitrary and unreasonable” because it failed to consider relevant evidence relating to the SSA’s award of disability benefits. The district court expressed no opinion as to whether the plaintiff was disabled under the definition in the LTD plan, and it never issued a final judgment. Aetna filed a direct appeal to the Fourth Circuit.
In a ruling short on analysis, the Fourth Circuit ruled that it did not have appellate jurisdiction under 28 U.S.C. § 1291 because the district court’s remand order was not a “final decision.” In so ruling, the Court adopted the rationale of its sister courts from the First, Sixth, Eighth, Tenth and Eleventh Circuits, and it specifically rejected the reasoning of converse rulings by the Seventh and Ninth Circuits.
The Fourth Circuit also rejected the argument that appellate jurisdiction was present under the “collateral order” doctrine. That doctrine permits immediate appellate review of decisions “collateral to” rights asserted in the action too important to be denied review until the whole case is adjudicated below. Aetna had argued that the collateral order doctrine applied because if it gave substantial weight to the SSA’s disability determination, then it would be compelled to award LTD benefits and thereby forfeit judicial review. The Fourth Circuit dismissed that argument and noted that the district court’s order did not compel Aetna to grant an award of LTD benefits upon remand. Even if Aetna’s reconsideration results in an award of benefits, the Fourth Circuit added, it would not be foreclosed from seeking an appeal from a final judgment.
With the Fourth and Eleventh Circuits having ruled that remand orders are not immediately appealable, it is now safe to characterize that as the clear “majority view” among the judicial circuits. Three circuit courts – the Second, Third and Fifth – have yet to weigh in on the issue.