While we have not heard it first-hand, we have heard through the grapevine that some insurance carriers are out there offering to their clients the ability to “renew early.” Part of the strategy is, apparently, to delay the application of health care reform provisions. The following discussion addresses some risks associated with reliance on such a strategy as a means of complying with the employer mandate and the insurance mandates.
EMPLOYER MANDATE: At the outset, let’s be clear about one fact: this does not get an employer out of play or pay. The employer mandate rules specifically say that a plan year can only be changed for a valid business purpose and that, in this case, avoiding the shared responsibility tax is not a valid business purpose. Renewing early is (assuming other legal niceties are satisfied) a change in plan year. Without a business purpose, the mandate will still apply to that employer effective January 1, 2014.
Note that this restriction also applies to fiscal year plans. A non-calendar year plan cannot now change its plan year (absent a valid business purpose) and delay the application of the play or pay penalty. In our view, such an employer would risk losing its ability to rely on the transition relief (which is already fairly skinny to begin with) by engaging in such a practice. Frankly, even if the employer has a valid business purpose, it is unclear whether changing the plan year would delay the application of the penalty.
INSURANCE MANDATES: Often times, the early renewal option is “sold” as a way to delay application of the insurance mandates. The guidance is unclear as to whether the insurance mandates can be delayed by using this tactic. Even assuming they could be, there are other issues to consider, including:
- The risk an employer takes with such an approach is getting hit with a $100/day penalty for each instance of noncompliance. Given the number of insurance mandates becoming effective in 2014 and the fact that the penalty would apply for each employee in the employer’s workforce, the penalties could add up quickly.
- Plans and plan related documents would need to be amended to reflect the short plan year
- Plans filing Forms 5500 would need to file a Form 5500 for the short plan year that ends on the early renewal.
- While the agencies have said that they plan to take a more compliance assistance-oriented approach to enforcement, that attitude may not last if a regulator finds an employer has been playing games with its plan year.
The bottom line is that taking an early renewal of health insurance coverage is not a health care reform compliance “strategy” that should be entered into lightly.
Some fiscal year plans may have extra time to comply with the play or pay mandate under either of two special transition rules for fiscal year plans (that is, plans with a plan year other than the calendar year). There are two transition rules for fiscal year plans. However, neither is a complete pass and both are highly specific, so employers with fiscal year plans should carefully consider the extent to which they may (or may not) qualify for the relief.
If the employer qualifies for the first transition rule, its compliance obligations will only be delayed for certain of its employees; other employees can trigger penalties.
If the employer qualifies for the second transition rule, transition relief has the potential to apply with respect to a broader spectrum of employees. The rules are described below.
Relief is available on an entity-by-entity basis. In other words, each entity in your controlled group needs to qualify independently for relief.
First Fiscal Year Rule
With respect to any employee, regardless of when hired, an employer is not subject to a penalty if
- The employer maintained a fiscal year plan as of December 27, 2012; and
- Under the eligibility terms of the plan in effect on December 27, 2012, the employee would be eligible for coverage; and
- The employer offers that employee affordable, minimum value coverage as of the first day of its first fiscal plan year that begins in 2014;
In other words, if the employer offers affordable, minimum value coverage to that employee (who would have been eligible for the plan under its December 27, 2012 terms) that is effective no later than the first day of the 2014 fiscal plan year, the employer will not be assessed either of the two PPACA penalties under the employer mandate for the period of time before its 2014 fiscal plan year starts just because that same employee goes out and gets subsidized coverage on the Exchange.
However, penalties could still be triggered if an employee who was not eligible under the terms of the plan in effect December 27, 2012 (“outside the scope of transition relief”) gets subsidized coverage on the Exchange.
- The large penalty ($2,000 x #FT employees less 30) could be triggered by employees who are outside the scope of transition relief who get subsidized coverage on the Exchange. It appears that the number of FT employees used to calculate this penalty would exclude those who would have been eligible for coverage under the terms of the plan in effect December 27, 2012.
- The smaller penalty ($3,000 x #FT employees who get subsidized Exchange coverage) could be assessed for each employee who is outside the scope of the transition relief and gets subsidized coverage on the Exchange
Second Fiscal Year Rule
If the employer can meet the requirements for this second fiscal year rule, transition relief has the potential to apply with respect to a broader spectrum of employees. Under this rule, the employer will not be liable for any play or pay penalties for months before the first day of its 2014 plan year with respect to a full-time employee if ALL of the following apply:
- The employer maintained a fiscal year plan as of December 27, 2012,
- The employer did not also maintain a calendar year plan as of December 27, 2012 for which that employee would have been eligible
- The employer offers that employee affordable, minimum value coverage that is effective no later than the first day of its first fiscal year plan that begins in 2014
- At least 1/4 of its employees are covered under one of more fiscal year plans that have the same plan year as of December 27, 2012; OR the employer offered coverage under those plans to at least 1/3 of its employees during the most recent open enrollment period before December 27, 2012
- The employer may determine the percentage of its employees covered under the fiscal year plan as of the end of the most recent open enrollment period or any date between October 31, 2012 and December 27, 2012
- In calculating whether the 1/4 or 1/3 thresholds are met, it appears that the employer must consider all employees – not just full-time employees
If the employer does not maintain a calendar year plan for which that employee would be eligible, it could be excused from all penalties until the first day of the fiscal year plan year if it meets the above-stated requirements.
Note that with respect to both transition rules, if the employer does not offer its full-time employees affordable, minimum value coverage that is effective as of the first day of the 2014 fiscal year (in other words, it decides to “pay” rather than “play”), it can still be subject to penalties for the months of 2014 that precede the first day of the 2014 fiscal year, even if it meets the other criteria above.
As noted in our client alert, the DOL recently released guidance on the Exchange/Marketplace notice required to be issued to existing employees no later than October 1, 2013. Followers of PPACA developments will recall that this notice was originally scheduled for distribution in March 2013, but was delayed at the last minute. In connection with this guidance, the DOL also revised the model COBRA election notice. Links to the DOL guidance and model documents are provided below.
The alert describes the requirements of the guidance, but the highlights are summarized below:
- All employers subject to the Fair Labor Standards Act are required to provide this notice, regardless of whether they provide health coverage or not. Generally, you’re subject if (i) you employ one or more employees who are engaged in, or produce goods for, interstate commerce or (ii) you are a hospital; a resident care institution for the sick, disabled, and aged; a school; or a state and local government agency. Additional details are in the alert.
- There are separate model notices for employers that offer coverage and those that do not.
- If you offer coverage, your notice must state whether the coverage provides “minimum value.”
- All employees, regardless of whether they have health coverage or are full- or part-time must receive the notice.
- Existing employees must receive the notice by October 1, 2013.
- Employees hired on or after October 1, 2013 must receive it on date of hire.
- For 2014, the DOL will consider the notice provided “on date of hire” if it is provided within 14 days of the date of hire, but as the guidance is written, this does not necessarily apply for October 1, 2013 through December 31, 2013. Additional clarification from the DOL would be appreciated here.
- The new model COBRA notice advises employees of the availability of coverage (and possibly subsidized coverage) through the Exchange/Marketplace.
Links to relevant documents:
For this purpose, the facts at issue in McCutchen are quite simple:
An ERISA plan participant suffered severe injuries in a car accident caused by a third party, and his employer, US Airways, paid nearly $67,000 toward his medical expenses through the company’s group health plan. By its terms, the plan entitled US Airways to reimbursement of amounts paid if the participant later recovered money from the third party. After filing suit, the participant was awarded $110,000 in damages attributable to his injuries – of which the participant retained $66,000 after deducting the lawyers’ 40% contingency fee and expenses. US Airways sought reimbursement of the full amount it had paid.
When the participant refused to reimburse the plan, US Airways filed suit in the U.S. District Court for the Western District of Pennsylvania against both the participant and his attorney seeking to enforce the reimbursement provision of the plan pursuant to ERISA Section 502(a)(3) which, on its face, authorizes civil actions by fiduciaries “to obtain…appropriate equitable relief…or…to enforce…the terms of the plan.”
The district court rejected the participant’s argument that the common fund doctrine should apply to require US Airways to contribute to the costs of recovery and, instead, granted summary judgment to US Airways holding that plan terms required reimbursement from “any monies recovered.” On appeal, the participant argued under a couple of different theories that it would be “inequitable” to reimburse US Airways in full when he had not been fully reimbursed for all his medical expenses. The Third Circuit agreed and reversed the lower court. In its decision, the Third Circuit held “Congress purposefully limited the relief available to fiduciaries under [ERISA] Section 502(a)(3) to appropriate equitable relief.” The appellate court found that it would be inequitable for US Airways to be fully reimbursed when the participant received less than full payment for his medical expenses.
The Supreme Court granted US Airways’ petition for certiorari and ultimately reversed the Third Circuit decision. In doing so, the high Court majority concluded that the participant could not rely on equitable defenses to trump the plan’s clear reimbursement provision. However, since the plan at issue was silent with respect to the allocation of attorneys’ fees, it was appropriate to apply the common fund doctrine The Court reinforced that US Airways could have provided in the plan that the common fund doctrine did not apply to the application of the reimbursement provision, but since it did not, “the common-fund doctrine provides the best indication of the parties’ intent.” The majority’s analysis indicates that the well-established application of the common fund doctrine in equity cases supports the conclusion that the parties must have intended for this default rule to govern “in the absence of a contrary agreement.”
A brief dissent (authored by Justice Scalia and joined by Chief Justice Roberts and Justices Thomas and Alito) disagreed with the majority’s use of the common fund doctrine, finding that this issue was not properly before the court. The dissenting opinion, however, agreed with the portion of the majority’s opinion concluding that equity cannot override unambiguous plan terms.
Suggested Steps for Employers
The holding of this case provides a good reminder that the reimbursement language in health plans should be dusted off and carefully reviewed. Most notably, the issue of whether a participant’s attorneys’ fees will reduce the reimbursement obligation should be specifically addressed, with express language indicating whether the common fund doctrine or any other equity doctrine may be applied to reduce the plan’s reimbursement right. Scrutiny should be placed on the reimbursement provision with other aspects of third party litigation in mind to ensure that the reimbursement the plan expects is what the plan ends up with.
Following its December 22, 2011, ruling we discussed previously that retired Kelsey-Hayes (“Company”) union members must arbitrate their claims for fully-paid lifetime retiree medical benefits, the Eastern District of Michigan handed a victory to different class of union retirees facing similar changes to their healthcare coverages. United Steelworkers of America v. Kelsey-Hayes Co.
Plaintiffs worked at the now closed automobile parts manufacturing plant in Jackson, Michigan. Under the collective bargaining agreements (“CBAs”) with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, the Company was required to establish healthcare coverage for retirees and their dependents and surviving spouses and to contribute the full premium for such coverages. Before and after the plant closing in 2006, the Company paid all retirees’ healthcare coverage costs. In September 2011, the Company announced plans to replace the retiree medical plan with individual health reimbursement accounts funded by the Company and to be used by retirees to purchase of individual healthcare policies. On January 1, 2012, the Company discontinued healthcare coverage for retirees age 65 and older and made a one-time contribution of $15,000 for each retiree and spouse for 2012 and provided for an additional $4,800 credit for 2013. Any future contributions would be at the discretion of the Company. Retirees filed suit alleging that the Company’s unilateral modification of their health benefits constituted a breach of the terms of the CBAs in violation of ERISA.
Citing a line of cases addressing the vesting of retiree benefits, including Int’l Union v. Yard Man, 716 F.2d 1476 (6th Cir. 1983), the court held that the CBAs’ promised “continuance” of the healthcare coverages employees had “at the time of retirement” and that such coverages “shall be continued thereafter” for retirees, their spouses and eligible dependents and that any changes could be made “by mutual agreement between the Company and the Union” was unambiguous language demonstrating the plaintiffs’ right to vested lifetime retirement healthcare coverage. In granting summary judgment for in favor of the plaintiffs, the court noted that it had previously held that identical CBA terms unambiguously promise vested, lifetime retiree healthcare benefits. The court further noted that an arbitrator recently considering virtually identical CBA terms found that those Kelsey-Hayes’ retirees had vested rights to medical plan coverages for their lifetime.
Effective January 1, 2014, the Affordable Care Act “play or pay” rules become effective for employers subject to the rules. These “play or pay” requirements are also referred to as the employer mandate or the shared responsibility requirements of the Affordable Care Act. Whatever label is applied to the requirements, the law requires that covered employers offer affordable coverage to full-time employees. View a brief description of these requirements provided by Lisa A. Van Fleet, a partner in the Employee Benefits and Executive Compensation Group at Bryan Cave LLP.
The Affordable Care Act requires that employers offer affordable health care coverage to full-time employee beginning January 1, 2014 (or pay a penalty). Coverage is affordable if the employee’s contribution toward self-only coverage does not exceed 9.5% of his or her household income. Until now, it was not clear how wellness plan surcharges would impact the affordability calculations.
Based on the pre-release of guidance that is expected to be published today (May 3), wellness plan surcharges must be included in the premium for purposes of the affordability calculation. Two exceptions are provided for arrangements that satisfy the wellness plan rules: (1) surcharges based on tobacco use; and (2) for any plan year beginning prior to January 1, 2015, surcharges for any wellness arrangement, but only to the extent the terms of the wellness arrangement were in effect on May 3, 2013. Under this guidance, the premium that applies to non-tobacco users is used to test affordability for all employees regardless of tobacco use; however, any other wellness surcharge (except those described above in the transitional relief provision) must be included in the employee’s share of the premium when calculating affordability.