What is a plan administrator’s obligation under ERISA to seek and obtain information potentially relevant to a participant claim where the participant has not provided it? The Fourth Circuit recently provided guidance on that issue in the case of Harrison v. Wells Fargo Bank, N.A. A copy of that opinion is available here.
Nancy Harrison was an online customer service representative for Wells Fargo Bank. In 2011, she underwent a thyroidectomy to remove a large mass that had extended into her chest and which caused chest pain and tracheal compression. She was unable to work and received short-term disability benefits under the Wells Fargo plan. While she was recovering and waiting for a second, more invasive surgery, her husband died unexpectedly, triggering a recurrence of depression and post-traumatic stress disorder (PTSD) related to the death of her children in a house fire a few years before.
Approximately three weeks after Ms. Harrison’s first surgery, Wells Fargo determined that she had recovered and it discontinued her short-term disability benefits. (It later provided short-term disability benefits after Ms. Harrison’s second surgery.) Ms. Harrison submitted a claim for reinstatement of the short-term disability benefits due to her depression, PTSD and related physical ailments. The outside claims administrator denied that claim. Ms. Harrison submitted an administrative appeal to Wells Fargo, supported by documentation from two of her physicians and a detailed letter from a relative who was her primary caretaker. She also disclosed that she was under the care of a psychologist and provided the psychologist’s contact information, as well as a signed medical release.. Wells Fargo submitted the administrative appeal to an independent peer review. The peer review physician contacted Ms. Harrison’s primary care physician, but he did not contact the psychologist. The peer reviewer ultimately concluded that in the absence of psychological records, it could not be determined whether Ms. Harrison’s psychiatric status limited her functional capacity. Wells Fargo denied Ms. Harrison’s administrative appeal and upheld the prior claim denial.
Ms. Harrison filed a lawsuit for benefits under ERISA. The district court found there was insufficient evidence of disability under the plan to conclude that Wells Fargo had abused its discretion in denying Ms. Harrison’s claim. On appeal, the Fourth Circuit reversed.
The Fourth Circuit held that by not contacting Ms. Harrison’s psychologist, Wells Fargo “chose to remain willfully blind” to readily available information that might have confirmed her claim of disability. The court noted that ERISA requires that an administrator use a “deliberate, principled reasoning process” in claims determination. It does not require that the plan administrator “scour the countryside in search of evidence” to bolster a participant’s claim. But where potentially relevant information is readily available, the court noted, ERISA does not permit an administrator to “shut his eyes” to that information.
In light of this appellate court opinion, plan and claims administrators are well-advised to affirmatively pursue all readily available information in the claims determination process, even where the claimant has not provided it as part of the original claim or appeal. Otherwise, a court may determine that the administrative claims process was deficient, resulting in a remand of the claim for further consideration. Furthermore, after the Supreme Court’s ruling in Hardt v. Reliance Standard Life Ins. Co., 532 U.S. 598 (2009), such a remand could be considered “some degree of success on the merits” in the litigation, entitling the claimant to an award of attorneys’ fees.
Back in 2010, the ACA enacted a new rule prohibiting insured group health plans from “discriminating” (on the basis of eligibility or provision of benefits) in favor of highly compensated individuals (called “HCIs”). This rule generally became effective January 1, 2011 for calendar year plans; however, there is and has been an enforcement delay pending issuance of IRS regulations. We’ve heard through the grapevine that this is a “high priority” item for the Service, but to date we’ve seen nothing.
Once guidance is issued, we expect a flurry of changes in group health insurance plans and separation practices. The days of “one-off” arrangements for the benefit of separating executives (i.e., terminated exec can stay on active plan and/or receive contributions like an active employee) are likely going to be a thing of the past.
Unless a plan has and continues to have “grandfathered status” (as defined under the statute and governing regulations) and is, therefore, exempt from this requirement, the employer maintaining the plan will need to react to the issuance of these regulations, and get its plan and practices in conformance with the law. Query whether and how employers will revisit existing arrangements that turn out to be problematic under the forthcoming regulations.
Our recommendation is to be proactive now – this means adopting policies and practices that comply with the basic guidance we have to better position the organization to comply with the expected rules.
What does this look like ?
Well, pre-ACA, self-insured group health plans were already prohibited from discriminating in favor of HCIs – as far as eligibility to participate or benefits provided under the plan. For this purpose, HCIs include: (i) the top five highest-paid officers; (ii) any shareholder who owns more than 10% of the value of stock of the Company’s stock; and (iii) the highest-paid 25% of all Company employees (other than excludable employees who are not participants).
Enforcement of this law was historically lax and many employers adopted questionable practices that arguably violated the terms of the regulations. Nevertheless, these nondiscrimination regulations for self-insured plans provide a baseline of what we expect to see. While we expect (and sincerely hope) that the new rules have more clarity, flexibility and workability, we know that there is likely to be a prohibition in discriminating in favor of HCIs as far as eligibility to participate in the plan and in receipt of benefits/contributions under the plan.
Under the existing guidance, there is no blanket prohibition on providing coverage to any particular HCI (e.g., a terminated executive); however, the plan must meet one of three eligibility tests (which largely mirror the coverage test applicable for retirement plans under Internal Revenue Code (“Code”) Section 410(b)).
According to the IRS regulations, benefits received by a retired employee who was a HCI are discriminatory benefits unless the type, and the dollar limitations, of benefits provided retired employees who were HCIs are the same as for all other retired participants.
It is unclear how exactly the term “retiree” is defined (including whether it applies to any former employee or only those who meet specified retirement criteria) and how this special retiree rule applies, including whether the retiree rule implicates the eligibility test, benefits test, or both; whether former employees are tested separately from active employees; and, whether all former employees must be considered for testing purposes.
In response to practitioner questions, the IRS has informally indicated that an extension of eligibility to former employees who are HCIs would raise an eligibility discrimination issue, and all former employees should be considered in the test. See ABA Joint Committee on Employee Benefits, Meeting with IRS and Department of Treasury Officials (May 9, 2003), Q/A-6, available at http://www.abanet.org/jceb/2003/qa03irs.pdf (as visited December 15, 2014). Specifically, the informal guidance provided as follows:
It is not unusual for former employees to be allowed to continue to participate in their employer’s health plan for a limited period of time as if they were still active employees. Often this is done as part of a RIF or a termination agreement with a particular employee. If the plan is self-insured and some of the former employees were highly compensated individuals (“HCIs”), does this raise an eligibility discrimination issue, a benefits discrimination issue, both or neither under [Code] § 105(h)?
Proposed response: It raises an eligibility discrimination issue, not a benefits discrimination issue. Thus, § 105(h) does not prohibit such an extension of coverage as long as it does not cause the plan to violate § 105(h)(2)(A) (requirement that plan not discriminate in favor of HCIs as to eligibility to participate).
IRS response: The IRS agrees with the proposed answer, but notes that providing a benefit to former employees will require that all former employees must be considered in testing for eligibility.
If the IRS does not change its position when it issues new guidance, then we believe that all former employees will need to be aggregated and tested in a group distinct from active employees. Thus, if the group of former employees extended continued coverage benefits all or mostly HCIs, it will not pass the eligibility test.
What to do now?
In the absence of future guidance, employers may wish to discontinue the practice of entering into arrangements where HCIs are allowed to continue to participate in the active employee plan post-termination. Alternatively, employers might consider including a “reopener” and/or “claw-back” provision wherein the employer will revisit or terminate the practice, if future guidance from IRS indicates that it may be discriminatory. It is unclear whether paying for the COBRA coverage of terminated HCIs (either in full or in part) will violate the rules; however, this may be deemed discriminatory as well.
It may be prudent to avoid the issue of subsidizing health care coverage for terminated executives entirely. As outlined in our earlier post, the employer can simply increase the amount of severance pay payable to the executive so that the executive can use the funds to pay for COBRA or an individual insurance policy. In such an instance, the employer must not condition the receipt of such additional severance pay upon enrollment in COBRA or a policy, or otherwise reimburse the employee for the cost of insurance.
Why does it matter?
The consequences of an insured plan’s failure to comply with the nondiscrimination rules are different from the consequences for a plan that is self-insured. In fact, if an insured plan is determined to be discriminatory, the penalty for the employer would be much more severe than the penalty for a discriminatory self-funded plan. An insured plan that fails to comply with the nondiscrimination rules is subject to a civil action to compel it to provide nondiscriminatory benefits and, for each day that the plan fails to comply, the plan or plan sponsor is subject to excise taxes or civil money penalties of $100 per day per individual discriminated against. In this case, this penalty would presumably apply for each non-HCI who terminated employment and did not receive the same benefits provided to HCIs. In contrast, if a self-insured plan fails to comply with the rules, then amounts paid to HCIs that are considered to be “excess reimbursements” will be taxable to the HCI
As mentioned above, historically the IRS has not exerted much effort in identifying discriminatory self-insured plans; however, with the addition of the same nondiscrimination rules in the fully-insured context, we should almost certainly expect increased scrutiny sometime in the future. While we hope for a transition period after issuance of regulations before the IRS takes any aggressive enforcement actions, we believe that actions taken now to discontinue or curtail potentially discriminatory arrangements may protect employers from penalties in the future.
Just before Thanksgiving, the IRS issued final regulations on the individual mandate under the Affordable Care Act (“ACA”). The individual mandate requires individuals to maintain health insurance (i.e., “minimum essential coverage”) or pay a penalty.
The regulations adopt in part, and clarify proposed regulations addressing how affordability of employer-sponsored coverage is determined for purposes of the regulations and certain types of exemptions from the individual mandate for individuals who cannot afford coverage. This matters to employers because it could impact whether they will be required to pay a play or pay penalty. If employer-sponsored coverage is unaffordable, and the employee does not enroll in it, then the employee may be eligible for a premium tax credit for ACA Marketplace/Exchange coverage. Receiving that tax credit could trigger a play or pay penalty for the employer.
We say “could” because the employer play or pay regulations do have safe harbors for determining affordability that we have discussed previously. If the employer’s coverage meets one of those safe harbors, it should not matter if the coverage is affordable under the individual mandate regulations. However, if the IRS determines that an employer’s coverage is not affordable under the individual mandate regulations, it may at least trigger an inquiry, and possibly an assessment, from the IRS regarding the employer’s play or pay penalty. Therefore, employers should be familiar with these rules if only to be able to understand the IRS’s position when it attempts to assess play or pay penalties.
Regarding affordability, the regulations say the following:
Employer Contributions to a Cafeteria Plan ( Flex Contributions)
In determining whether employer-sponsored coverage is affordable, cafeteria plan flex contributions will be treated as reducing an employee’s required contribution for employer-sponsored coverage if the contribution:
- May not be taken as a taxable benefit,
- May be used to pay for minimum essential coverage, and
- May be used to pay for medical care.
Health Reimbursement Arrangements
– Amounts newly made available under a health reimbursement arrangement (“HRA”) count toward an employee’s required contribution for purposes of whether employer-sponsored coverage is affordable if the HRA would have been integrated with an eligible employer-sponsored plan if the employee had enrolled in an employer-sponsored health planof the same employer.
– These include amounts that an employee may use to pay premiums for the employer-sponsored plan only, or to pay cost-sharing or benefits not covered by the plan in addition to premiums. HRA contributions that can only be used to pay for cost-sharing do not count toward affordability.
– Employees who enroll in eligible employer-sponsored coverage cannot claim the premium tax credit for their coverage in an ACA Marketplace/Exchange plan. Also, employees must be able to determine the amount of their annual required contribution before deciding whether to enroll in eligible employer-sponsored coverage.
– The employer HRA contributions only count in determining if the employer-sponsored coverage is affordable to the extent the amount of the annual contribution is required under the terms of the plan or is otherwise determinable within a reasonable time before the employee must decide whether to enroll.
Wellness Program Incentives
– The only incentives from nondiscriminatory wellness programs that are treated as earned in determining affordability are those related to tobacco use. A nondiscriminatory wellness program is a wellness program that does not violate the wellness plan regulations issued by the IRS, DOL, and HHS.
– The regulations clarify that where separate incentives are offered for completing a program unrelated to tobacco use and completing a program related to tobacco use, the incentive related to tobacco use may be treated as earned.
In addition, the regulations addressed hardship exemptions that would allow individuals not to pay the individual mandate penalty, even if they do not have coverage. The regulations no longer have a list of hardship exemptions, but now allow the IRS to list additional exemptions in other guidance. The most current list is in Notice 2014-76 which was issued around the same time as the final regulations.
What, you may ask? That’s right. It no longer works to reimburse employees for the purchase of an individual health insurance policy. I know, many of you have always done this. Well, not any longer under guidance issued under the Affordable Care Act (ACA). Beginning with an IRS Notice issued in September 2013 and most recently in November 2014 DOL FAQs, the federal government has made it clear that this practice does not work under the ACA. While it flew under the radar for some, this rule became effective in 2014.
Why, you may ask? When an employer reimburses an employee for an individual health insurance premium, or pays the premium directly to the insurer, it has (perhaps inadvertently) established a “group health plan” which is subject to the so-called Public Health Service Act mandates of ACA. One of these mandates is the requirement that group health plans cannot impose annual dollar limitations on essential benefits, and such a reimbursement arrangement by its very nature imposes an annual dollar limit (the cost of the premiums); guidance provides that this arrangement cannot be “integrated” with an individual policy to satisfy the Public Health Service Act mandates. Another mandate is the requirement to provide preventive care at no cost to participants. A reimbursement arrangement such as that described here does not and cannot provide preventive care.
So, what’s the harm? The consequences for violation of the Public Health Service Act mandates (for self-funded plans such as a typical reimbursement arrangement) are nondeductible excise taxes of $100 per day for each affected individual (that’s $36,500 per year per impacted employee) which are supposed to be self-reported to the government, as well as potential enforcement action by the Department of Labor or participant lawsuits.
But this shouldn’t apply to me since I tax my employees on the amount of the premium I reimburse/send to the insurer, right? Actually, this rule still applies. The November FAQ makes it abundantly clear that characterizing the payment or reimbursement as taxable wages does not “undo” its group health plan status, and thus, the arrangement can still not satisfy the Public Health Service Act mandates.
What am I supposed to do? I don’t want to buy a group health plan for my employees but I don’t want them to go without health insurance/need to offer this benefit to attract employees. The answer is simple, although not as advantageous from a tax perspective. Employers can simply increase an employee’s wages so that the employee can purchase an individual insurance policy. An employer cannot condition the receipt of those additional wages on the employee’s purchase or maintenance of such a policy, as that then becomes an after-tax impermissible reimbursement arrangement.
There has to be an exception, right? Not really. Any employer-sponsored plan subject to the ACA market reforms – generally any plan with more than one current employee participating – is subject to this prohibition. This applies regardless of whether the employer is an “applicable large employer” subject to the employer mandate (i.e., the “pay or play rules”).
In Notice 2014-74, the Internal Revenue Service (“IRS”) issued amendments to the safe harbor eligible rollover distribution notices – one of which describes the rollover options available to distributions from non-Roth accounts and the other of which describes the rollover options that apply to distributions from designated Roth accounts – for changes in the law and other clarifying changes. Several of the changes in the non-Roth account notice address the tax effects of in-plan Roth rollovers. Other changes to both notices incorporate guidance from IRS Notice 2014-54, which provides an explanation of the allocation of pre-tax and after-tax amounts between distributions to multiple destinations – direct rollover, indirect rollover, directly to participant, traditional IRA and/or Roth IRA.
The descriptions in the safe harbor notices of the tax effects of in-plan Roth rollovers and other distribution choices can be helpful language for participant communications, including summary plan descriptions. Plan administrators may begin to use these updated model safe harbor notices immediately to satisfy the notice requirements under Section 402(f) of the Internal Revenue Code that apply to eligible rollover distributions.