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.
Update: The post below has been updated. After discussing this post with an alert reader, we have concluded that the correct reading of the regulations is reflected in Q8-10 below. The good news is: we don’t think there is a hole in the play or pay regulations! However, this reading of the rules results in John Boy (in our example) not getting coverage for more than two full years! Please see below.
In a prior post we discussed the general rules for hours counting and what it means to be full time under the play or pay/shared responsibility rules under ACA (a.k.a. health care reform). In this post, we address the special rules for new hires/new employees and how those rules overlap with the rules for ongoing employees. As before, we retain our Q&A format.
Q1: Who is considered a new employee?
Someone who has not been employed for at least one standard measurement period (SMP) is a new employee. (See our prior post for more detail on SMPs).
Q2: Do I have to count hours for all my new employees?
You don’t have to count hours for anyone if you just offer coverage to all your employees. However, assuming you don’t want to do that, then to the extent you choose to count hours, you can only count hours for new employees who are either (1) seasonal employees or (2) variable hour employees.
Q3: Who is a seasonal employee?
Right now, we don’t know. The definition is “reserved.” The IRS has said any reasonable, good faith interpretation may be used. However, it is not reasonable to treat an employee of an educational organization (e.g. teachers/professors) as “seasonal” even though they may not work a full 12-month year. (Note that “seasonal employee” is different than “seasonal worker,” which is the term that applies for determining if an employer is subject to the play or pay/shared responsibility tax.)
Q4: Who is a variable hour employee?
Not this kind of imp.
A variable hour employee is someone who, as of his/her start date, you cannot tell whether that employee is reasonably expected to work an average of at least 30 hours per week during the initial measurement period (IMP). This is a “facts and circumstances” determination, which basically means you have to take all relevant information into account and the IRS is unlikely to provide much, if any, guidance on what facts and circumstances are relevant. However, the IRS has said that, beginning in 2015, you cannot take into account the likelihood that the employee may terminate employment before the end of the IMP, so at least you know that.
Q5: How long can an IMP be?
It can be between 3 and 12 months, as selected by the employer.
Q6: When does an IMP start?
It can start any time between date of hire and the first of the month following date of hire. You could even pick two days in a month. For example, you could say that the IMP for all employees hired on the first through 15th will be the 15th and the IMP for all employees hired after that will begin on the last day of the month.
Q7: What if I determine that my new seasonal or variable hour employee worked more than 30 hours/week or 130 hours/month during the IMP?
Then you have to treat her as full time (i.e. offer coverage for her and her non-spouse dependents) during the following stability period. The stability period has to be at least six months long and cannot be shorter than your IMP. However, there are special rules for when the person moves from being a “new” employee to an “ongoing” employee” discussed below.
Q8: And if I determine that he didn’t?
Then you can treat him as not full-time/not have to offer him coverage during the stability period. In this case, the stability period is subject to a few rules:
(1) it cannot be more than 1 month longer than the IMP
(2) it cannot exceed the remainder of the SMP (plus any administrative period) in which the IMP ends.
So for example, say you have an SMP of October 15 to October 14 and an administrative period that runs through December 31. Say you’ve also chosen an 12-month IMP and a 12-month stability period following the IMP. John Boy is hired on October 31, 2013 and he’s a variable hour employee. You measure JB’s hours from October 31, 2013 to October 30, 2014 and determine that he was not full-time. Under rule (2) immediately above, John Boy’s stability period cannot exceed the remainder of the SMP (plus any administrative period) in which the IMP ends. Shall we read this to mean that the period in which the IMP ends includes the associated administrative period, or that it does not? October 30, 2014 falls in the administrative period following the 2013-2014 SMP, but it also falls within the 2014-2015 SMP that begins on October 15, 2014. While the regulations are a bit unclear, we think the better reading is that the period in which the IMP ends does not include the associated administrative period, and therefore, that John Boy’s initial stability period does not end December 31, 2014, but can last the full 12 months.
Q9: Do I get any kind of administrative period for new employees?
Yes, it can also be up to 90 days, but there are a couple of catches. First, you do not have to start your IMP on a date of hire (as noted above). But if you pick a later date (like first of the month following date of hire), any days between date of hire and that later date count against the 90-day period.
Perhaps more important, however, is that the combination of your IMP and the administrative period for new employees cannot extend beyond the last day of the first calendar month beginning on or after the first anniversary of date of hire. So in the example above with John Boy, the combined IMP and administrative period could not extend beyond November 30, 2014. This creates an incentive to hire employees early in the month but after the first of the month to provide as much time as possible for the administrative period. This is particularly true for employers who choose a date other than date of hire to start the IMP.
Q10: You mentioned some rules about new hires transitioning to ongoing employees. Can you talk about that some more?
Basically, once an employee has been employed for one full SMP, he or she is an ongoing employee. This means there could be significant overlap between the SMP and IMP and their respective stability periods. There are essentially 4 scenarios:
(1) Employee determined to be full-time during IMP and SMP – This is an easy one. The employee must be offered coverage for the stability period following the IMP and the stability period following the SMP. Going back to the John Boy example, assuming you took the maximum administrative period (through November 30), he would have to be offered coverage for the month of December 2014 and all of 2015.
(2) Employee determined to be full-time during the IMP, but not during the SMP – This employee has to be offered coverage for the entire stability period following the IMP. In the John Boy example, he would be offered coverage through November 30, 2015.
(3) Employee not full-time during IMP, but is full time during SMP – The employee does not have to be offered coverage until the stability period following the SMP. In the John Boy example, the initial stability period would go through November 30, 2015. At that point, JB has been through an SMP (October 15, 2014 – October 14, 2015), but his coverage (if elected) does not need to begin until January 1, 2016. Note that under our facts, John Boy is not offered coverage for more than two years from his date of hire (October 31, 2013)!
(4) Employee not full-time during either measurement period – This result is the one you think it is – no coverage during either period.
Q11: Can I have different IMPs and IMP stability periods, like I do for SMPs, for different categories of employees?
Yes, and they’re the same categories as we detailed in the prior post.
Q12: What if I determined that John Boy was full-time during the IMP and during the stability period he tells me he wants to go back to the prairie and only work part-time (because of the long commute)?
The same rules as we described in the prior post apply: he still must be considered full-time and eligible for coverage during the stability period.
Q13: Does the same rule apply if he is not full-time, but then I promote him to a full-time position during the IMP?
Here it’s a bit different. Under these rules, you have to treat John Boy as a full-time as of the earlier of:
(1) the first day of the fourth month following his promotion; or
(2) The first day of the first month after the end of the IMP and any administrative period.
However, other health reform rules currently require you to offer coverage within 90 days of when someone becomes full-time, which will likely be less than the first day of the fourth month following the promotion. Failure to comply with the 90-day rule could result in other penalties being assessed on the employer. It’s not yet clear how these rules interact, so the safest bet is to make the offer no later than 90 days following the promotion or the period described in (2), at least until the IRS clears up this confusion.
Q14: What if John Boy quits and then I rehire him? How do I count hours? What about leaves of absence? I still have so many questions left unanswered!
This is already getting kind of long, so we’ll address those in a future post.
Related Links
Technical Corrections to Proposed Regulations
IRS Q&A on Employer Shared Responsibility Penalties
Other Health Care Reform Posts
Disclaimer/IRS Circular 230 Notice
ERISA requires that all plans have a written plan document and summary plan description. In addition to describing the benefits, the written plan document must also establish: a funding policy, a procedure for allocating administrative and management responsibilities, a procedure for amending the plan, and the scheme for payment of contributions and benefits.
For welfare plans, plan sponsors have customarily relied on the benefit booklets prepared by the insurer (for insured plans) or the third party administrator (for many self-insured plans) as both the plan document and the summary plan description. The benefit booklets and the schedules of benefits usually provide a full and detailed description of the benefits that are covered and excluded as well as requirements for preauthorization of treatment, filing claims and appeals, and the costs (deductibles, co-pays, out of pocket maximums) that participants pay. But, the booklets, which are not prepared by the plan sponsor, generally do not include certain required ERISA provisions such as identification of fiduciaries, allocation of responsibilities, funding, claim procedures, or provisions that protect the employer such as those provisions that reserve the plan sponsor’s right to amend or terminate the plan, provide for subrogation and recovery of overpayments, address lost participants, and stipulate the absence of any guarantee of employment. Similarly, the benefits booklets do not typically include all of the information that the DOL regulations require to be included in a summary plan description (e.g., name, address and employer identification number of the plan sponsor, name and address of the plan administrator and others who have fiduciary and administrative responsibilities, plan number, agent for service of legal process).
Plan sponsors can fill in the gaps in the benefit booklets by adopting a wrap plan document that contains the missing information required for both the plan document and the SPD. The wrap plan document also incorporates by reference the detailed terms of the benefit booklets and certificates, which are included attachments. In this way, the wrap document can satisfy both the plan document and summary plan description requirements. If the document is intended to serve as both the plan document and the SPD, it is advisable to state clearly that the wrap document is intended to be both the plan document and the SPD.
A wrap document can also be used when a plan sponsor wants to treat several welfare benefit plans or programs as a single plan. Many plan sponsors treat different welfare plans, such as group health (medical, dental and vision), long and short-term disability, group term life insurance, as a single plan and file one Form 5500 although each program has a separate insurance policy or contract. A wrap document permits the sponsor to incorporate the several contracts and certificate into a single plan document and establish that it has a single plan for Form 5500 reporting purposes.
Plan sponsors should review their documents to determine whether they need a wrap document to satisfy ERISA’s plan and summary plan description requirements.
Whenever an employer wants to implement a wellness program, we are always compelled to advise them that the Equal Employment Opportunity Commission (EEOC) has yet to give us official guidance on the application of the Americans with Disabilities Act to wellness programs. The issue under the ADA is that, generally speaking, wellness programs usually involve disability-related inquiries, as that term is defined under the ADA. As such, to satisfy the ADA’s requirements, in the EEOC’s view the programs have to be voluntary. A program is voluntary for this purposes as long as the employer neither requires participation, nor penalizes employees who do not participate.
There was a 2009 informal discussion letter that was released and then subsequently revised wherein the EEOC, in the first version, said that compliance with the HIPAA nondiscrimination rules would make a program compliant with the ADA. The letter was subsequently revised to say that the EEOC has not ruled on whether compliance with HIPAA would meet compliance with the ADA.
The EEOC recently released a letter from January of this year involving a wellness program for employees with diabetes. The program waived the annual deductible for employees who met certain requirements, such as enrollment in a disease management program or adherence to a doctor’s exercise and medication recommendations. The EEOC said that reasonable accommodations would have to be made for those who could not meet the wellness program’s standard due a disability (as broadly defined in the ADA). This is, of course, similar to the reasonable accommodation standard under the HIPAA nondiscrimination rules. The EEOC yet again did not express an opinion on what level of inducement would cause a wellness program to be involuntary.
In fairness, these discussion letters are not official, binding guidance, so they would make a bad place for the EEOC to provide an opinion on such an important issue. However, their failure to address it through formal regulation remains somewhat troubling.
Interestingly, when courts have considered wellness programs under the ADA, they analyzed wellness programs differently. They have generally held that the wellness programs are part of a bona fide benefit plan, and thus fall under a separate ADA exemption that does not implicate the voluntariness issue. Of course, there are limitations to those holdings, as described in our prior post on one of those cases.
The bottom line is that, in designing a wellness program, employers should always consider the ADA risk involved before proceeding.
For plan years beginning on or after January 1, 2014, a health plan cannot impose a waiting period of more than 90 days. Earlier this month, the Departments of Labor and Health and Human Services and Treasury (the “Departments”) followed up their prior guidance on the 90-day waiting period maximum with a joint set of proposed regulations.
90-Day Maximum Waiting Period
Consistent with prior guidance, the proposed regulations define a waiting period as the period of time that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of the health plan can become effective. For counting purposes, all calendar days are counted beginning on the enrollment date (including weekends and holidays). If an employee has satisfied the eligibility requirements under the plan, coverage must begin once 90 calendar days has elapsed (subject to the employee’s completion and submission of the appropriate enrollment forms).
The Departments confirm that no de minimis exception exists that would permit employers to equate three months with 90 days. Therefore, plans with a three-month waiting period will need to be amended for the 2014 plan year. In addition, plans with a 90-day waiting period in which coverage begins on the first day of the month immediately following satisfaction of the waiting period will have to be amended. Employers that continue to prefer a first day of the month start date for coverage rather than random dates throughout the month could consider implementing a 60-day waiting period. Any coverage that begins on the first day of the month following the completion of the 60-day waiting period will never exceed the 90-day maximum.
The imposition of other eligibility criteria remains permissible as long as they are not designed to avoid compliance with the 90-day maximum limitation. For example, a plan can provide that the employee must attain a specific job category before becoming eligible to participate in the health plan. However, in cases where eligibility is contingent upon an employee completing a certain number of hours of service within a specified period, the hours of service requirement cannot exceed 1,200 hours and must be applied only on a one-time basis.
In the case of variable hour employees, the proposed regulations provide that an employer can take a reasonable period of time, not to exceed 12 months and beginning on any date between the employee’s start date and the first day of the next calendar month to determine whether an employee meets the plan’s eligibility requirements. The employer will be deemed to be in compliance with the 90-day maximum limit if the employee’s coverage (if determined eligible for coverage during the measurement period) is effective no later than 13 months from the employee’s start date, plus the time remaining until the first day of the following month if the employee’s start date is not the first day of the month.
Note; however, that employers should be aware that compliance with the proposed regulations governing application of a 90-day waiting period does not necessarily preclude the imposition of the play or pay penalty for failure to provide coverage to full-time employees within three months of their date of hire under the employer mandate. Accordingly, any waiting period should be designed to take into account the requirements under the proposed regulations on waiting periods as well as the regulations applicable to the employer play or pay mandate.
Certificates of Creditable Coverage
With the elimination of pre-existing condition exclusions for plan years beginning on or after January 1, 2014, the Departments also announced that HIPAA Certificates of Creditable Coverage will be phased out by 2015. However, plan sponsors must continue to provide Certificates through December 31, 2014 since individuals enrolling plans with plan years beginning later than January 1 may still be subject to pre-existing condition exclusions up through 2014.
Related Links
Proposed Regulations on 90-Day Waiting Period Rules
Other Health Care Reform Posts
Disclaimer/IRS Circular 230 Notice
This post has been updated. Please see the updated version here.
Yesterday, the Ninth Circuit issued an opinion in Tibble v. Edison International (Case: 10-56406, 03/21/2013), affirming the Central District of California district court’s ruling in a 401(k) fee case brought under ERISA. The district court had rejected most claims but had entered judgment totaling just over $300,000 for the plaintiff beneficiaries on claims regarding the selection of certain mutual fund investment options, where lower-priced share classes were available in the same funds. Highlights from the decision include:
Statute of Limitations
- The Ninth Circuit rejected a “continuing violation theory” in favor of a bright-line rule that the act of designating an investment for inclusion starts the running of ERISA’s six-year SOL.
- Beneficiaries did not have “actual knowledge” of the alleged deficiencies in the process for selecting retail class mutual funds for the plan’s investment line-up, and, therefore, ERISA’s three year SOL does not apply.
- The panel also held that Section 404(c) (a “so-called” safe harbor that can relieve a plan fiduciary from liability arising from the investment choices made as a direct and necessary consequence of a participant’s exercise of control) did not preclude a merits consideration of plaintiffs’ claims.
Class Certification
- The panel declined to consider defendants’ arguments that class certification was improper since this issue was raised for the first time on appeal.
Revenue Sharing and Standard of Review of Fiduciary Breach Claims
- The Ninth Circuit panel affirmed the district court’s grant of summary judgment to defendants on the claim that revenue sharing between mutual funds and the administrative service provider violated the plan’s governing document and was a conflict of interest. Looking to the Supreme Court’s prior holdings (Firestone Tire & Rubber Co. v. Bruch, Metropolitan Life Insurance Co. v. Glenn and Conkright v. Frommert) on standard of review and agreeing with the holdings of the Third and Sixth Circuits (and rejecting the rulings of the Second Circuit), the Ninth Circuit panel held that, as in cases challenging denials of benefits, a “usual” abuse of discretion standard of review applied to this case which concerns potential violations of fiduciary duties and conflicts-of-interest because the plan granted interpretive authority to the administrator.
Use of Mutual Funds, Short-Term Investment Fund and Unitized Stock Fund
- The Court also ruled that defendants did not violate their duty of prudence under ERISA by including in the plan’s investment menu (i) mutual funds, (ii) a short-term investment fund “akin” to a money market fund, and (iii) a unitized company stock fund.
Finally, the panel affirmed the lower court’s holding, after a bench trial, that the defendants were imprudent in deciding to include retail-class shares of three specific mutual funds in the plan menu because Edison failed to investigate the possibility of institutional-class alternatives.
This post has been updated. Please see the updated version here.
Target date retirement funds generally refer to a related group of investment funds that automatically rebalance and become more conservative as a participant moves towards a designated retirement year. Many 401(k) and profit sharing plans use target date retirement funds as the qualified default investment alternative (QDIA). In that case, when a participant fails to make an affirmative election regarding how his or her qualified defined contribution plan accounts should be invested, contributions are allocated to a target date fund based on the date the participant will attain retirement age, usually designated as age 65. Use of a QDIA relieves a plan fiduciary of liability related to the return generated on the investment fund. Also, participants who do not want to actively manage their accounts are increasingly using target date retirement funds.
In February 2013, the Department of Labor (DOL) issued tips for ERISA plan fiduciaries regarding the selection and monitoring of target date retirement funds in an ERISA plan. The fact sheet can be found on the DOL’s website. The list of tips includes the following:
- Establish a process for comparing and selecting the target date retirement funds
- Establish a process for the periodic review of selected funds
- Understand the fund’s investments – the allocation in different asset classes, individual investments, and how these will change over time
- Review the fund’s fees and investment expenses
- Inquire about whether a custom or non-proprietary target date fund would be a better fit for your plan
- Develop effective employee communications
- Take advantage of available sources of information to evaluate the fund and recommendations you received regarding the fund selection
- Document the process
The DOL fact sheet explains each of these tips in greater detail and provides a roadmap for complying with ERISA’s fiduciary duty requirement for selecting and monitoring these types of funds. You can use these tips to ensure compliance by your ERISA plan fiduciaries.
