Compliance Corner Archives
Federal Updates 2017 Archive
On Nov. 20, 2017, the DOL published advance information copies of the 2017 Form 5500 return/report, which includes Form 5500-SF and corresponding instructions. These advance copies are only for informational purposes and may not be used for 2017 Form 5500 or 5500-SF filings, but employers should familiarize themselves with the changes in preparation for 2017 plan year filings. Important modifications to the Form 5500 and Form 5500-SF instructions and schedules are summarized below.
First, for the 2017 plan year forms, the IRS has removed the “IRS-only questions” that filers weren’t required to complete in 2016. As background, in 2016, the IRS instructed filers to omit the “Preparer’s Information” on Form 5500, questions on lines 4o, 6a through 6d of Schedules H and I, and the “Part VII – IRS compliance Questions” of Schedule R. Similarly, filers using Form 5500-SF should skip the “Preparer’s Information” section, “Part VIII – Trust Information” and “Part IX – IRS Compliance Questions.” This year’s forms have removed those questions all together.
Second, the instructions have been updated to reflect the fact that authorized service providers can now sign the Form 5500 on the plan sponsor line.
Third, the instructions have been updated to reflect an increase in the administrative civil penalties assessable under ERISA, which have increased to a maximum of $2,097 per day for a plan administrator’s failure or refusal to file a complete and/or accurate Form 5500 report.
Fourth, line four has been changed to provide a field for filers to indicate that the name of the plan has changed.
While many employers outsource the preparation and filing of these forms, employers should also familiarize themselves with the new requirements and work closely with outside vendors to collect the applicable information.
On Oct. 31, 2017, the IRS issued guidance related to qualified small employer health reimbursement arrangements (QSEHRAs), which were created by the 21st Century Cures Act in December 2016. As a reminder, small employers with fewer than 50 full-time equivalent employees who are not subject to the employer mandate may implement a QSEHRA. A QSEHRA is 100 percent employer funded and is generally the only way that a small employer may reimburse or pay the cost of an individual policy for an employee.
To be eligible, the employer must not sponsor a group health plan to any employees. The new guidance, issued in IRS Notice 2017-67, clarifies that “group health plan” includes dental, vision and health FSA coverage. However, an employer may sponsor a retiree health plan and not affect its eligibility to provide a QSEHRA for active employees. In addition, if one employer member of a controlled group sponsors a group health plan for employees, all employer members are ineligible to provide a QSEHRA. However, an employer may sponsor a retiree health plan without impacting its eligibility to provide a QSEHRA for active employees.
A participant cannot waive QSEHRA coverage. The QSEHRA cannot provide reimbursement unless the participant provides proof of minimum essential coverage or provides an attestation thereof. The guidance includes a sample attestation.
Expenses must be substantiated prior to reimbursement. The rules regarding reimbursement of a mistaken or unsubstantiated expense are quite severe. If the participant doesn’t reimburse the QSEHRA for the expense (by the following March 15), the plan essentially is disqualified, with all subsequent reimbursements being treated as taxable earnings.
The employer must provide a notice to each existing eligible employee 90 days prior to the beginning of the plan year or the first day on which a new employee is eligible to participate. Failure to comply with the notice requirement could result in a penalty equal to $50 per employee (maximum $2,500 per year). There is transition relief available for the 2017 and 2018 plan years as long as the notice is distributed by Feb. 19, 2018, or 90 days before the first day of the plan year, whichever is later. The notice may be distributed electronically in compliance with the DOL’s electronic disclosure rules. Sample language is provided in the guidance.
A QSEHRA is not subject to Section 6055 Reporting (Form 1095-B), but it is subject to PCOR reporting and payment.
The IRS intends to formalize this guidance in proposed regulations, followed by a comment period and eventually final regulations. Until then, QSEHRA’s may rely upon Notice 2017-67.
Similar to action taken a few weeks ago in response to other recent disasters, the IRS recently published guidance containing certain relief for those individuals and businesses affected by Hurricane Maria and the 2017 California Wildfires.
The IRS offered extensions in relation to certain tax filing deadlines because of the California Wildfires (CA-2017-06). The extensions apply automatically to any individual or business in an area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance. Specifically, in California, individuals who reside or have a business in Butte, Lake, Mendocino, Napa, Nevada, Sonoma and Yuba Counties may qualify for tax relief. As a result, if a form was due on or after Oct. 8, 2017, and before Jan. 31, 2018, additional time to file the form through Jan. 31, 2018, is available. The relief would apply to quarterly payroll/employment/excise tax filings due, as well as for any employers that may have previously applied for a Form 5500 filing extension.
For retirement plans, IRS Announcement 2017-15 permits retirement plans to provide loans and hardship distributions for those impacted by Hurricane Maria and the California Wildfires, so long as certain requirements are met. Specifically, to be eligible for such a loan/distribution, on Sept. 16, 2017, in the case of the U.S. Virgin Islands; Sept. 17, 2017, in the case of Puerto Rico; or Oct. 8, 2017, in the case of California, the individual must have had a principal residence or place of employment in an area designated by FEMA for individual assistance due to these disasters. Alternatively, an individual is eligible if they have a lineal ascendant or descendant (i.e., grandchild, parent or grandparent), dependent or spouse with a principal residence or place of employment in the affected area. The loan/distribution must be made no later than March 15, 2018. While loans/distributions made pursuant to Announcement 2017-15 are excused from some IRS rules, others – including maximum amounts and other loan requirements – remain in place. Plans that want to make disaster-related loans/distributions have until the end of the first plan year beginning after Dec. 31, 2017, to make appropriate plan amendments.
Additionally, on Nov. 9, 2017, the IRS released Notice 2017-70, which provides guidance for the treatment of cash payments made by employers under leave-based donation programs to assist victims of the 2017 California Wildfires. This notice is similar to previous IRS guidance released for Hurricanes Harvey, Irma and Maria.
In general, under leave-based donation programs, employees may elect to forego sick, vacation or personal time off in exchange for cash payments the employer makes to charitable organizations. According to the notice, cash payments made under leave-based donation programs won’t constitute income or wages for employees as long as the payments are made to charitable organizations for the relief of the 2017 California Wildfires victims prior to Jan. 1, 2019.
Therefore, employers who participate in leave-based donation programs for the relief of the 2017 California Wildfires victims should work with their tax professional or tax counsel to determine applicable tax accounting and reporting.
On Oct. 19, 2017, the IRS issued Revenue Procedure 2017-58, which relates to certain cost-of-living adjustments for a wide variety of tax-related items, including transportation benefits, qualified parking benefits, health FSAs, QSEHRAs and other limitations for tax year 2018.
According to the revenue procedure, the annual limit on employee contributions to a health FSA will be $2,650 for plan years beginning in 2018 (up $50 from 2017).
Some changes impact the small business health care tax credit, since the maximum credit is phased out based on the employer’s number of full-time equivalent employees in excess of 10. For 2018, the average annual wage level at which the credit phases out for small employers is $26,700 (up $500 from 2017). The maximum average annual wages to qualify for the credit as an “eligible small employer” for 2018 will be $53,400 (a $1,000 increase from the 2017 amount).
A relatively new option for certain small employers is the Qualified Small Employer HRA (QSEHRA). For 2018, the maximum amount of reimbursements under a QSEHRA may not exceed $5,050 for self-only coverage and $10,250 for family coverage (an increase from $4,950 and $10,050 in 2017).
Another change is that the maximum amount an employee may exclude from his or her gross income under an employer-provided adoption assistance program for the adoption of a child will be $13,840 for 2018 (a $270 increase from the 2017 maximum of $13,570).
Regarding qualified transportation fringe benefits, the monthly limit on the amount that may be excluded from an employee’s income for qualified parking benefits increases to $260 in 2018 (from $255 in 2017). The combined monthly limit for transit passes and vanpooling expenses also increases to $260 in 2018 (up from $255 in 2017).
Sponsors and administrators of benefits with limits that are changing (i.e., adoption assistance plans, health FSA, transportation fringe benefits) will need to determine whether their plans automatically apply the latest limits or must be amended (if desired) to recognize the changes. Any changes in limits should also be communicated to employees.
NFP has updated the Employee Benefits Annual Limits white paper to reflect these changes. Please ask your advisor for a copy.
On Oct. 6, 2017, the IRS released Notice 2017-62, which provides guidance for the treatment of cash payments made by employers under leave-based donation programs to assist victims of Hurricane Maria. This notice is similar to previous IRS guidance released for Hurricanes Harvey and Irma.
In general, under leave-based donation programs, employees may elect to forego sick, vacation or personal time off in exchange for cash payments the employer makes to charitable organizations. According to the notice, cash payments made under leave-based donation programs will not constitute income or wages for employees as long as the payments are made to charitable organizations for the relief of Hurricane Maria victims prior to Jan. 1, 2019.
Therefore, employers who participate in leave-based donation programs for relief of Hurricane Maria victims should work with their tax professional or tax counsel to determine applicable tax accounting and reporting.
On Oct. 4, 2017, HHS withdrew the proposed rules requiring certification of compliance with HIPAA Standard Transactions. As background, those rules implemented the PPACA's statutory requirement for health plans to certify compliance with HIPAA's electronic transaction standards and operating rules. Specifically, health plans that are “controlling health plans” (CHPs) had to certify compliance (on behalf of themselves and their sub-health plans) with the standards and operating rules for electronic transactions by obtaining one of two credentials from the Council for Affordable Quality Healthcare Committee (CAQH) on Operating Rules for Information Exchange (CORE).
HHS indicated that they "decided to withdraw the January 2014 proposed rule in order to reexamine the issues and explore options and alternatives to comply with the statutory requirements." This withdrawal is likely due to the Trump administration’s commitment to reviewing the rulemaking process.
Although the rule is now withdrawn, it remains to be seen whether HHS will revise it or propose it again in the future. We’ll continue to monitor any developments pertaining to this rule.
The IRS and DOL have issued further guidance regarding relief available to those individuals impacted by Hurricane Irma. The IRS had offered extensions in relation to certain tax filing deadlines for any individual or business in an area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance. Previous notices had identified parts of Florida, Puerto Rico and the U.S. Virgin Islands as being eligible. This has now been expanded to include all of Florida and Georgia (for Georgia, the relief began on Sept. 7, 2017).
In addition, DOL FAQs (originally issued to address Hurricane Harvey) mentioned in our hurricane-related article in the last edition of Compliance Corner have been updated to reflect the parallel guidance related to those impacted by Hurricane Irma.
On Sept. 25, 2017, the IRS released special per diem rates for travel away from home expenses incurred on or after Oct. 1, 2017. Per diem rates are essentially fixed amounts paid to employees to compensate for expenses incurred while traveling instead of itemizing actual expenses. If employers use these rates to set per diem allowances, they can treat the amount of certain categories of travel expenses as substantiated without making employees prove the actual amounts they’ve spent. However, for the amount to be considered substantiated, it has to be the lowest of the allowance actually paid or the per diem rate for the same type of expenses.
Specifically, this notice provides rates under the optional high-low substantiation method, special rates for employers in the transportation industry, and the rate for taking a deduction only for incidental expenses.
First, the optional high-low method defines one per diem rate for all high-cost locations (e.g., New York, Boston, San Francisco, Oakland, D.C., etc.) and another rate for all other locations in the continental U.S. Employers may use the defined high-low rates for either lodging, meals and incidentals, or for meals and incidental expenses only (M&IE). As of Oct. 1, 2017, the high-low per diem rates that can be used for lodging, meals and incidentals will increase to $284 for travel to high-cost areas and $191 for travel to all other areas. Interestingly, seven locations have been added to the high-cost area list, four have been removed and several others are now only considered high-cost for a certain part of the year (e.g., Aspen, Denver, Telluride, Nantucket, etc.).
Second, employers in the transportation industry have special M&IE rates for travel inside and outside the continental U.S. Those M&IE rates remain the same at $63 for travel expenses incurred within the continental U.S. and $68 for travel locations outside the continental U.S.
Lastly, the per diem rate for incidental expenses only is set at $5. These include fees and tips paid at lodging, which includes porters and hotel staff. This per diem rate may be used on or after Oct. 1, 2017.
If an employer offers a more generous allowance that exceeds the defined per diem rates, then the employer must require proof of the employee’s travel expenses, and then require return of any excess or treat the excess as taxable income. Otherwise, the entire allowance could become taxable to the employee. Therefore, employers should work with their tax advisor or legal counsel to ensure compliance with these rules.
On Sept. 20, 2017, the U.S. Court of Appeals for the Seventh Circuit ruled in Severson v. Heartland Woodcraft, Inc., No. 15-3754 (7th Cir. Sept. 20, 2017), that an employer who failed to provide long-term leave as an accommodation did not violate the Americans with Disabilities Act (ADA). Instead, the Court reasoned that “a long-term leave of absence cannot be a reasonable accommodation” under the ADA.
As background, the plaintiff in the case was a former employee of Heartland who exhausted his FMLA leave due to back problems. Heartland terminated him after the end of his leave, inviting him to reapply for his job after he was able to return to work. The plaintiff then sued Heartland, claiming that they did not reasonably accommodate him under the ADA.
The District Court ruled in favor of Heartland, and the Seventh Circuit affirmed that decision. Specifically, they pointed out that the ADA is about discrimination, not medical-leave entitlement. They further explained that reasonable accommodations are limited to those accommodations that will enable an employee to actually work, not those that would allow the employee not to work.
Although the Court’s opinion was pretty straightforward, the EEOC actually disagrees with the Court and takes the position that an extended leave of absence could be a reasonable accommodation. Other courts have also agreed with the EEOC, so the circuits are currently split on this issue.
While this case is based on an employment law issue, employers should be aware of the possible intersection of the ADA with non-FMLA leave. Ultimately, this case underscores the importance of obtaining outside counsel in situations where an employee may have exhausted FMLA leave and is dealing with a disability.
Similar to action taken a few weeks ago in response to Hurricane Harvey, the IRS and DOL both recently published guidance containing certain relief for those individuals and businesses in Hurricane Irma’s path.
The IRS offered extensions in relation to certain tax filing deadlines. The extensions apply automatically to any individual or business in an area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance. Parts of Florida, Puerto Rico and the U.S. Virgin Islands are currently eligible, but taxpayers in localities added later to the disaster area, including those in other states, will automatically receive the same filing and payment relief. As a result, if a form was due on or after Sept. 4, 2017 (as for Florida) or Sept. 5, 2017 (as for Puerto Rico and the U.S. Virgin Islands), the form is now due on Jan. 31, 2018. The relief would apply to quarterly payroll/employment/excise tax filings due, as well as for any employers that may have previously applied for a Form 5500 filing extension.
The IRS also published Notice 2017-52, which provides guidance on the treatment of cash payments made by employers under leave-based donation programs to aid Hurricane and Tropical Storm Irma victims. Generally, under leave-based donation programs, employees can elect to forego vacation, sick or personal leave in exchange for cash payments that the employer makes to a charitable organization. According to the notice, the IRS will not assert that cash payments made under leave-based donation programs constitute income or wages of the employees if the payments are made to the charitable organizations for the relief of victims of Hurricane and Tropical Storm Irma and are made before Jan. 1, 2019. Employers should work with tax counsel or their CPA in determining the appropriate tax accounting and reporting for those types of cash payment contributions.
In a press release, the DOL introduced Hurricane Irma-related employee benefit plan compliance guidance and relief that parallels guidance and relief provided regarding Hurricane Harvey. Referencing that relief, employers and plans are encouraged to make reasonable accommodations to prevent the loss of benefits for participants and beneficiaries affected by Hurricane Irma. Examples include a delay on filing a benefit claim or in providing a COBRA election notice. The DOL also explained that its compliance enforcement strategy will emphasize compliance assistance where the situation proves impossible or difficult due to the aftermath of Hurricane Irma. In other words, the DOL will be understanding in compliance challenges and delays that arise out of complications from the hurricane.
Following Hurricane Harvey, the DOL published FAQs for plan participants and beneficiaries that offers advice for those who may have complications with their health insurance or retirement plans in the face of Hurricane Harvey. That Harvey-specific FAQ document is also referenced as a useful resource in the DOL’s Irma-related press release. Employers with employees impacted by Hurricane Irma may want to refer to the FAQs to help address questions from employees attempting to recover.
For retirement plans, IRS Announcement 2017-13 permits retirement plans to provide loans and hardship distributions for those impacted by Hurricane Irma, so long as certain requirements are met. Specifically, to be eligible for such a loan/distribution, on Sept. 4, 2017 (as for Florida) or Sept. 5, 2017 (as for Puerto Rico and the U.S. Virgin Islands), the individual must have had a principal residence or place of employment in an area designated by FEMA for individual assistance due to Hurricane Irma. Alternatively, an individual is eligible if they have a lineal ascendant or descendant (i.e., grandchild, parent or grandparent), dependent or spouse with a principal residence or place of employment in the affected area. The loan/distribution must be made no later than Jan. 31, 2018. While loans/distributions made pursuant to Announcement 2017-13 are excused from some IRS rules, others – including maximum amounts and other loan requirements – remain in place. Plans that want to make disaster-related loans/distributions have until the end of the first plan year beginning after Dec. 31, 2017, to make appropriate plan amendments.
The IRS and DOL guidance is particularly helpful for Florida, Puerto Rico and U.S. Virgin Island employers that may have been impacted by Hurricane Irma. Those employers should work with their advisor/account management team and, in some instances, outside counsel for specific questions relating to the guidance and relief.
On Sept. 8, 2017, the U.S. Court of Appeals for the Ninth Circuit ruled in King vs. Blue Cross and Blue Shield of Illinois; UPS of American, Inc.; UPS Health and Welfare Plan for Retired Employees, No. 15-55880, 2017 WL 3928339 (9th Cir. Sept. 8, 2017), that a retiree-only plan is not subject to the ACA’s prohibition on lifetime annual dollar limits. This was the previous interpretation, so the ruling does not indicate a change in case law. However, please note that the ruling would have been different if the plan included both active and retired participants. The same exclusion does not apply to those plans.
This case is particularly interesting because of its other findings. Once the court determined that the retiree-only health plan could indeed impose a lifetime limit, it then turned to the plaintiff’s two other claims. These claims were that the plan had violated ERISA’s disclosure requirements; and that her employer, United Parcel Service (UPS), and Blue Cross and Blue Shield of Illinois (BCBSI) breached their ERISA fiduciary duties.
As background, in 2012, Linda King incurred $949,755 in claims related to a back infection. She was informed by Blue Cross and Blue Shield of Illinois (BCBSI) that she had reached her plan’s $500,000 lifetime limit and that only $133,601 would be covered by the plan. BCBSI had first informed her that she had reached the limit in November 2012, and then changed that date to January 2013. Based on these facts, the court found that BCBSI indeed breached its fiduciary duty because it had made misrepresentations about the lifetime benefit maximum.
BCBSI argued that they were not an ERISA fiduciary of the client’s self-insured plan. This has long been a debate in the area of benefits compliance. A fiduciary is defined as one who exercises any discretionary authority or control over plan management or administration. The court found that the insurer was indeed a fiduciary because it has the authority to grant, deny and review any denied claims; and determines whether to pay claims.
In regards to the claims that the plan had violated ERISA’s disclosure requirements, the court examined the plan’s SPD and SMM very carefully. The 2006 SPD stated that the retiree plan had a $500,000 lifetime limit. Over the next six years, UPS issued 12 SMMs revising the SPD’s provisions. One of the SMMs issued in 2010 stated that the plan’s lifetime dollar limits were to be eliminated on Jan. 1, 2011. The problem is that the SPD included both the active employee plan and the retiree-only plan. The SMM was not clear as to which plan the amendment applied. Thus, the court ruled that the plan had violated ERISA’s disclosure requirement because it failed to provide sufficiently accurate and comprehensive information in a manner that reasonably apprised participants of their rights and benefits under the plan. The court also noted that UPS had failed to update the SPD in a timely manner. The SPD must be amended to include any and all SMMs every five years.
The court asked the plaintiff to specify what type of equitable remedy is sought. After that information is received, the case will be sent back to the lower district court to determine the appropriate remedy, which may include payment of some of the denied claims.
While the court ruled that ACA’s prohibition on lifetime limits does not apply to retiree-only plans and the court also ruled that the insurer was indeed an ERISA fiduciary, the main takeaway from this case for an employer plan sponsor is that they should be very careful in drafting their SMMs and SPDs. If the plan documents and communications had been clear as to the retiree-only plan’s lifetime limit, this case would not have had the decision it did. Therefore, employers should make sure that any plan design changes are clearly communicated and timely adopted into the SPD. Because of the complexities and importance of these legal documents, we always recommend that they be reviewed by outside counsel.
The IRS and DOL both recently published guidance containing some relief for those individuals and businesses in designated Texas counties that have been impacted by Hurricane Harvey. Specifically, the IRS offered extensions for certain tax filing deadlines that applies automatically to any individual or business who resides with the affected Texas counties (as outlined in the notice). As a result, if a form was due on or after Aug. 23, 2017, the form is now due on Jan. 31, 2018. The relief would apply to those employers that may have previously applied for a Form 5500 filing extension (either automatically or via Form 5558), as well as for any quarterly payroll/employment/excise tax filings due. Employers should work with their broker and/or professional accountant (or outside tax counsel) when it comes to appropriately filing extensions.
The IRS also published Notice 2017-48, which provides guidance on income and employment tax purposes on the treatment of cash payments made by employers under leave-based donation programs for the relief of Hurricane and Tropical Storm Harvey victims. Generally, under leave-based donation programs, employees can elect to forego vacation, sick or personal leave in exchange for cash payments that the employer makes to a charitable organization. According to the notice, the IRS will not assert that cash payments made under leave-based donation programs constitute income or wages of the employees if the payments are made in conjunction with Hurricane and Tropical Storm Harvey and are made before Jan. 1, 2019. Employers should work with tax counsel or their CPA in determining the appropriate tax accounting and reporting for those types of cash payment contributions.
According to the guidance, disaster extensions permitted by the IRS are also permitted by the DOL — meaning the DOL will not impose penalties where a Form 5500, for example, is filed by the relief extension due date. The related guidance specifically states that the postponement does not apply to most information return filings, such as Forms W-2, 1094 and 1095. Those forms will still be due on the relevant deadlines in 2018.
In a press release, the DOL encouraged employers and plans to make reasonable accommodations to prevent the loss of benefits for participants and beneficiaries affected by Hurricane Harvey. Examples include a delay on filing a benefit claim or in providing a COBRA election notice. The DOL also explained that its compliance enforcement strategy will emphasize compliance assistance where the situation proves impossible or difficult due to the aftermath of Hurricane Harvey. In other words, the DOL will be understanding in compliance challenges and delays that arise out of complications from the hurricane.
The DOL has also published FAQs for plan participants and beneficiaries which offer advice for those who may have complications with their health insurance or retirement plans in the face of Hurricane Harvey. The FAQs may serve as a helpful resource for employers with employee questions on those issues as they try to recover from the hurricane’s impact in Texas.
For retirement plans, IRS Announcement 2017-11 permits retirement plans to provide loans and hardship distributions for those impacted by Hurricane Harvey, so long as certain requirements are met. Specifically, to be eligible for such a loan/distribution, on Aug. 23, 2017, the individual must have had a principal residence or place of employment in an affected Texas county. Alternatively, an individual is eligible if they have a lineal ascendant or descendant, dependent or spouse with a principal residence or place of employment in the affected area. The loan/distribution must be made no later than Jan. 31, 2018. While loans/distributions made pursuant to Announcement 2017-11 are excused from some IRS rules, others – including maximum amounts and other loan requirements – remain in place. Plans that want to make disaster-related loans/distributions have until the end of the first plan year beginning after Dec. 31, 2017, to make appropriate plan amendments.
The IRS and DOL guidance is particularly helpful for Texas employers that may have been impacted by Hurricane Harvey. Those employers should work with their advisor/account management team and, in some instances, outside counsel for specific questions relating to the guidance and relief.
On Aug. 22, 2017, the U.S. District Court for D.C. issued a ruling in AARP v. EEOC, Civ. No. 16-2113 (D.D.C., Aug. 22, 2017). The AARP sued the EEOC in relation to its wellness program regulations, which took effect for plan years starting on or after Jan. 1, 2017. The regulations apply to employer-sponsored wellness programs that involve disability-related inquiries and medical examinations. They permit such programs to provide incentives up to 30 percent of the cost of coverage to participants meeting a certain health standard. If the participation is voluntary and the program meets other requirements, it will be considered in compliance with the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA).
The AARP’s argument is that the 30 percent incentive is too punitive considering the high cost of health coverage. The result, they argue, is that the wellness program would no longer be considered voluntary and leads to the discrimination of older Americans. The EEOC argues that the incentive is appropriate and in harmony with the HIPAA wellness regulations, which permit wellness incentives up to 30 percent for non-tobacco related programs.
Specifically, the issue is whether the EEOC provided meaningful justification as to how the 30 percent incentive still meets the voluntary standard of the ADA and GINA regulations. The ruling stated “the Court can find nothing in the administrative record- or the final rule- to indicate that the agency [EEOC] considered any factors that are actually relevant to the voluntariness question.” Thus, the court ordered the EEOC to reconsider their regulations citing "serious concerns about the agency's reasoning regarding the GINA and ADA rules.”
This ruling could lead the EEOC to clarify the meaning of a “voluntary” wellness program or they could provide greater justification for the existing regulations. While it is unlikely, it is possible that the EEOC could redesign the 30 percent standard for wellness programs.
We’ll continue to monitor this issue and report any developments in Compliance Corner. In the interim, the EEOC regulations related to wellness programs, as well as the HIPAA regulations, continue to apply to employer sponsored programs. Therefore, employers should continue with their compliance efforts, including maximum incentive amounts and required notifications, until any change is announced.
On Aug. 1, 2017, the U.S. Court of Appeals for the Ninth Circuit, in Mull v. Motion Picture Indus. Health Plan, No. 15-56246 (9th Cir., Aug. 1, 2017), provided a reminder to employer plan sponsors on the importance of complying with ERISA’s plan document and SPD requirements.
As background, ERISA requires a plan to be established and maintained according to a written plan document. ERISA also requires the plan sponsor to develop and distribute to covered participants an SPD, which is meant to be a summary of the material terms of the written plan document. Employers often rely on the carrier contract (in the case of a fully insured plan) or the service (ASO) agreement (in the case of a self-insured plan, which usually engages a third-party administrator) as evidence of compliance with the written plan document and SPD requirements. Importantly, the carrier or ASO contracts/agreements generally do not contain all of the terms and provisions required under ERISA.
One big risk to not having an ERISA-compliant plan document or SPD (or having inconsistent plan documents/SPDs) is that an employer (as plan sponsor) may have a more difficult time establishing plan terms, policies and processes, should a dispute arise regarding plan benefits. This risk is highlighted in the Mull case.
In the Mull case, the plaintiff is a covered dependent under a self-insured, multi-employer health plan sponsored by the Motion Picture Industry. The plaintiff was injured in a car accident, and as result received close to $150,000 from the plan to treat her related injuries. The dependent/plaintiff later received $100,000 from a third party involved in the accident. The defendant (the health plan) requested reimbursement based on the third-party payment, but the plaintiff declined. The plan then invoked its overpayment procedures, which included recoupment of future benefits payable to the dependent and other beneficiaries (including the employee through which the dependent was covered). The plaintiff sued to stop the plan from recouping the over payment from future benefits. The plan then filed a counterclaim seeking to recover the $100,000 received by the plaintiff from the third party.
Before getting to the holdings of the courts, it’s important to understand the plan’s SPD and trust agreement. The plan based its initial reimbursement request and the recoupment on the terms of the SPD, which was previously adopted (along with a trust agreement) by the Motion Picture Industry’s board of directors. Generally, the SPD outlined plan details, including eligibility, benefits, conditions for the receipt of benefits, and the amount and duration of benefits provided to participants and their dependents. Specifically, the SPD stated that no benefits will be payable in a third-party liability claim unless the participant or dependent agreed to reimburse the plan for any benefits previously paid upon receipt of a third-party recovery, and that the plan would deduct the amount of benefits paid from all future benefits payable to the participant and his or her dependents (if the participant/dependent refused to reimburse the plan).
The district court held for the plaintiff, reasoning that because the reimbursement and recoupment provisions were found only in the SPD (and not in any formal or official document that constituted the plan), the reimbursement and recoupment provisions were not enforceable under ERISA. The district court relied on language from a U.S. Supreme Court case (CIGNA Corp. v. Amara, 563 U.S. 421 (2011)), which held that summary documents (such as SPDs) do not themselves constitute the terms of the plan for purposes of ERISA — they are meant to serve a different purpose of providing communication with plan participants and beneficiaries. Under Amara, an SPD itself was not part of the plan and therefore could not create terms that are not consistent with, or part of, governing plan documents (although an SPD could be adopted into and made a part of the plan). Because the formal plan documents (the trust agreement) did not establish the reimbursement and recoupment provisions, those provisions were not enforceable (and therefore the plan could not seek reimbursement or invoke its recoupment provisions on the dependent).
On appeal, though, the Ninth Circuit disagreed, saying that the district court erred in holding that the SPD was not part of the plan. The Ninth Circuit admitted that the trust agreement (the plan’s official written plan document) did not specify the basis on which payments would be made to and from the plan; it did not by itself meet all of ERISA’s requirements for a written plan document. However, the trust agreement stated that the basis on which payments would be made to/from the plan would be outlined in writing by a board resolution. The Ninth Circuit reasoned that the SPD – a document created and adopted by the board – detailed the basis for payments. Based on that reasoning, the Ninth Circuit concluded that the ERISA plan consisted of two documents: The trust agreement and the SPD. As a result, the plan’s reliance on the SPD’s reimbursement and recoupment attempts was justified by the plan’s written plan document, and should therefore be allowed. The Ninth Circuit’s decision appears to be consistent with Amara, since the SPD was part of the plan itself and did not conflict with the trust agreement.
For employers, the Mull case is a reminder of the importance of ERISA’s plan document and SPD requirements. Employers should review their carrier and/or ASO contracts, alongside any SPDs, with outside counsel to determine if the documents are consistent and constitute an enforceable written plan document. Employers hoping to have their SPD serve as a plan document should ensure that the SPD actually satisfies the specific and substantive requirements for both documents as required under ERISA. Lastly, for those employers using so-called ‘wrap’ documents, the wrap document should describe its intent to constitute the plan document, and that should be consistent with any information contained in an SPD (or other communication) distributed to plan participants and beneficiaries.
On June 30, 2017, the U.S. Court of Appeals for the Sixth Circuit, in Perkins v. Rock-Tenn Servs., Inc., 2017 WL 2829100 (6th Cir. 2017), affirmed a ruling from the U. S. District Court for the Western District of Michigan, holding that a COBRA Election Notice had been properly sent to a former employee. The case was an employment discrimination lawsuit. In the district court case, the employee (Perkins) also claimed that the employer (Rock-Tenn) failed to send her an election notice allowing her to continue her health insurance benefits, as is required under COBRA. Rock-Tenn moved for summary judgment, which the district court granted as to all claims. Perkins appealed the decision to the U.S. Court of Appeals for the Sixth Circuit.
In affirming the lower ruling, the court found that even though neither hard copies of sent notices nor certificates of mailings were retained, there were sufficient computer and business records to demonstrate that the required notice had been provided.
In order to refute a claim for failure to offer COBRA, the employer must be able to show that an election notice was sent. In proving that the notice was sent, the DOL has said that the focus is on the reasonableness of the procedures used to furnish COBRA notices, and the analysis doesn’t require guaranteed delivery. Rather, plan administrators need only prove that the election notice was sent to the qualified beneficiary by a method that’s reasonably calculated to reach the qualified beneficiary.
With that in mind, the best proof would consist of a copy of the notice actually sent to the beneficiary, bearing each qualified beneficiary’s name or status and showing the address to which the notice was sent, plus proof that the notice was mailed to the address shown on the retained copy of the notice on a particular date. As this case demonstrates, however, this isn’t necessarily required. If an employer doesn’t keep a hard copy of the notice and proof of mailing, it would be wise to maintain significant business records (including possibly computer records) of the process used when issuing COBRA notices.
On July 5, 2017, the IRS issued Form 14581-A, which is a tool for public employers (federal, state and local governments) to conduct self-assessments of their fringe benefits. Form 14581-A includes a total of 11 questions and has fillable check box and text fields so that the form can be completed electronically or printed and completed manually. This self-assessment tool is a general guide to the most common tax issues that public employers may encounter based on IRS audits, and it directs those entities to additional information as necessary.
As background, public employers have unique legal requirements for compliance with federal tax and Social Security laws. These employers need to be aware of the rules that apply to them and their workers (both employees and independent contractors).
Overall, the content of Form 14581-A is not completely unique to public employers; any employer seeking to conduct a self-assessment of its fringe benefits may find it helpful.
HHS recently published its June cyber newsletter, which discusses security concerns that HIPAA-covered entities and business associates (BAs) must take into account when implementing file-sharing and collaboration tools.
As a reminder, HIPAA’s security rule requires covered entities (and their BAs) to implement security measures with respect to protected health information (PHI) that is stored electronically. Covered entities (and BAs) must implement a security management process, which includes conducting a risk analysis to identify threats and vulnerabilities to electronically stored PHI (ePHI), and implementing mitigation procedures.
In the newsletter, HHS provides examples of how cloud computing and file sharing services can introduce additional risks to the privacy and security of ePHI — risks that employers subject to HIPAA’s security rule must identify as part of their risk analysis process and mitigate as part of their risk management process. Specifically, misconfigurations of file sharing and collaboration tools, as well as cloud computing services, are common issues that can result in the disclosure of sensitive data, including ePHI.
Finally, the newsletter includes a summary of HHS’s cloud computing guidance (covered in our Oct. 18, 2016, Compliance Corner article entitled “HHS Provides Guidance on Cloud Computing in Relation to HIPAA Privacy and Security”) and links to HIPAA and cloud computing resources.
In summary, the newsletter contains no new employer obligations, but it can serve as a great resource for employers and their BAs when it comes to HIPAA security rule compliance. Employers should work with outside counsel and their technology partners in developing HIPAA security practices and procedures, and should incorporate the HHS’s monthly cyber newsletters with respect to specific practices relating to cybersecurity.
HHS recently published a quick-response checklist on cyberattacks, which outlines the steps for a HIPAA-covered entity or its business associate (BA) to take in response to a cyber-related security incident. In the event of a cyberattack or similar emergency, an entity:
- Must execute its response and mitigation procedures and contingency plans;
- Should report the crime to other law enforcement agencies;
- Should report all cyber threat indicators to federal and information-sharing and analysis organizations; and
- Must report the breach to OCR as soon as possible, but no later than 60 days after the discovery of a breach affecting 500 or more individuals.
As a reminder, HIPAA’s security rules require covered entities (and their BAs) to implement security measures with respect to protected health information (PHI) that is stored electronically. Covered entities (and BAs) must implement a security management process, which includes conducting a risk analysis to identify threats and vulnerabilities to electronically stored PHI, and implementing procedures to guard against and detect malicious software. The measures also require the covered entity to train users on malicious software protection so they’re able to assist in detecting malicious software (and report on any such detection).
The checklist contains no new employer obligations, but can serve as a great resource for employers and their BAs when it comes to HIPAA security rule compliance. Employers should work with outside counsel and their technology partners in developing HIPAA security practices and procedures, and should incorporate the checklist with respect to specific practices relating to cyberattacks.
On June 16, 2017, the DOL, HHS and the Treasury (“the Departments”) released “FAQs About Mental Health and Substance Use Disorder Parity Implementation and the 21st Century Cures Act Part 38.” As background, the Mental Health Parity and Addiction Equity Act (MHPAEA) requires that the financial requirements and treatment limitations imposed on mental health and substance use disorder (MH/SUD) benefits cannot be more restrictive than the predominant financial requirements and treatment limitations that apply to substantially all medical and surgical benefits. MHPAEA also imposes several disclosure requirements on group health plans and health insurance issuers.
Specifically, the 21st Century Cures Act (enacted Dec. 13, 2016) contains provisions that are intended to improve compliance with MHPAEA by requiring the Departments to solicit feedback from the public on how to improve disclosure of the information required under MHPAEA and other laws. After requesting comments on the disclosure requirements for nonquantitative treatment limitations (NQTLs), the Departments received feedback seeking additional guidance on ways to streamline, simplify and create uniformity in the disclosure procedures. In fact, various stakeholders recommended the use of model forms that would be used to request relevant disclosures.
While the Departments are still accepting comments on MHPAEA’s disclosure requirements, they also released a draft model form that participants, enrollees or their authorized representatives could use to request information from their health plan regarding NQTLs that may affect their MH/SUD benefits. Comments on the disclosures (and on the draft model form) will be accepted until Sept. 13, 2017.
The FAQ confirms that the MHPAEA applies to benefits provided for treatment of an eating disorder. Specifically, eating disorders are mental health conditions, and treatment of an eating disorder is a mental health benefit for purposes of MHPAEA. Finally, the Departments are also seeking comments on how MHPAEA applies to eating disorder treatment.
On June 5, 2017, the Supreme Court of the United States unanimously ruled (with Justice Gorsuch abstaining) that religiously affiliated hospitals need not have been established by churches in order to qualify for ERISA’s “church plan” exception. The Court’s decision in Advocate Health Care Network v. Stapleton et. al, Nos. 16-74, 16-86 and 16-258, (June 5, 2017) reverses decisions from the U.S. Courts of Appeals for the Third, Seventh and Ninth Circuits.
Employee retirement and health plans established and maintained by churches are generally exempt from ERISA. At issue in these cases was ERISA Section 3(33)(C)(i):
- “A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches.”
The circuit courts had ruled that in order for a church-affiliated plan to be exempt from ERISA, the plan must initially be established by the church, meaning the plan could not be established by the church-affiliated entity.
The Court disagreed, ruling that “a plan maintained by a principal-purpose organization qualifies as a ‘church plan,’ regardless of who established it.” For these purposes, a principal-purpose organization is one whose principal purpose or function is the administration or funding of a welfare or retirement plan for the benefit of employees of a church (or church-affiliated organization) and that it is controlled by or associated with a church.
With this decision, plans established and maintained by principle-purpose organizations escape additional ERISA compliance requirements such as funding, vesting, Form 5500 filing and the distribution of SARs and SPDs.
On May 30, 2017, the United States Court of Appeals for the Fifth Circuit ruled in favor of the plan administrators in Rhea v. Alan Ritchey, Inc. Welfare Benefit Plan. In this case, a dependent on the Alan Ritchey Welfare Benefit Plan received a settlement under a medical malpractice claim. After Rhea received her settlement, the plan sought reimbursement for the claims they had paid for her injuries. Specifically, the SPD contained reimbursement and subrogation language that required reimbursement of any funds paid by the plan in the event that a third party paid a settlement for causing such injuries.
However, Rhea refused to reimburse the plan, claiming that the plan did not have an enforceable written plan document. Rhea argued that the SPD was unenforceable because it had a clause that referenced an official plan document, and the plan did not have an official plan document.
The court disagreed with Rhea’s argument and reaffirmed the fact that an SPD can serve as a written plan document. Since the SPD contained the elements necessary under ERISA and there was no conflicting plan document, the court found that the SPD was enforceable. As a result, they affirmed the lower court’s decision by ruling in favor of the plan.
Although this case doesn’t provide new guidance, it does provide a couple takeaways for employees and employers. First, the case underscores the widely held understanding that an SPD will be enforceable as a plan document in the courts. So, participants should consider the terms of the SPD as terms that the plan will be justified in following. Second, the case reminds employers of the importance of having a sufficient SPD. Employers should ensure that their SPD meets ERISA’s requirements so that they can limit their liability in the event that a participant disagrees with plan terms.
On April 13, 2017, the U.S. District Court for the Western District of Pennsylvania (the Court) ruled in favor of the plaintiff in Erwood v. WellStar Health Sys, Inc., 2017 WL 1383922 (W.D. Pa 2017). In this case, the widow of a Wellstar employee (Erwood) sued WellStar because they had failed to provide a notice of Erwood’s right to convert his life insurance upon termination. As background, Erwood discovered that he had terminal brain cancer in 2012. Wellstar offered 36 weeks of FMLA coverage during which Erwood could keep his benefits. During that 36 weeks, Erwood and his wife communicated with Wellstar HR employees multiple times, and even had a meeting to discuss how they could keep all their benefits in place should Erwood be terminated.
After the end of the FMLA leave, Erwood was terminated, and Wellstar did not provide any life insurance conversion information at termination. Since the Erwoods had met with Wellstar about continuing all benefits, they assumed they were covered. However, upon filing the life insurance claim following Erwood’s death, the claim was denied since Erwood was not an employee at his death and had not continued the policy through conversion.
The interesting thing about this case is that there is no specific obligation under ERISA to provide employees with post-termination information about life insurance conversion rights. It is worth noting that some states require an employer policyholder of a group term life insurance policy to provide a notice of conversion rights to terminated employees. However, the court approached this situation as a violation of ERISA’s fiduciary duty to act in the best interest of participants and beneficiaries.
The facts reflected that the insurer had provided a manual to Wellstar that stated that it was a fiduciary duty for Wellstar to notify terminated employees of their right to conversion by 15 days after termination. The insurer had even provided a Conversion Brochure and a form entitled “Notice of Right to Convert Group Life Insurance” that WellStar could have provided to the Erwoods. However, WellStar had not provided any additional notice to Erwood beyond a mention of the right to convert that was placed in the SPD.
The court even found the notice in the SPD to be insufficient because the SPD had been placed on the employer portal, and Erwood’s access to the portal expired when he was terminated. Additionally, WellStar claimed that they had provided a notice of conversion when they gave Erwood a packet before his FMLA leave. However, the notice did not clearly state the time within which a severely ill and mentally compromised employee must apply for conversion.
As such, the court held that WellStar failed to adequately inform the Erwoods regarding the necessary steps required to keep their life insurance benefits, and this failure was a material one upon which the Erwoods detrimentally relied. As a result, the court found for the Erwoods and entered a verdict against WellStar in the amount of $750,000 (which constituted the amount of the life insurance proceeds that would have been due them if the claim had been properly filed).
Since this verdict was rendered in a district court, it is not necessarily precedent for most employers. However, it does underscore the need for employers to ensure that they diligently administer their plans in a way that is compliant with their plan documents, insurer contracts and state requirements. Additionally, all HR staff who work with employees should be trained to accurately discuss benefits and the requirements employees must meet to access those benefits.
On May 12, 2017, the IRS Office of Chief Counsel released Memorandum Number 201719025, which was written April 24, 2017. The memo provides guidance related to certain wellness programs and fixed indemnity coverage.
As background, in the Feb. 7, 2017, edition of Compliance Corner, we discussed Office of Chief Counsel Memorandum 201703013, which was released Jan. 20, 2017. That memo also provided guidance related to wellness programs and fixed indemnity coverage. It’s important to understand the interaction of the guidance provided in both memos.
Wellness Programs
Under the earlier memo, if employees pay pre-tax contributions to participate in a wellness program and that program provides an incentive (i.e., payment) for performing certain activities that are not considered medical care, the incentive/payment is considered taxable income. Examples of such activities include reading a health-related article or completing a survey. That guidance remains the same.
The new memo expands the guidance to address a very specific type of wellness program that is being marketed to employers. Under this design, employees make after-tax contributions to a self-insured health plan and receive fixed cash payments for no-cost activities such as attending a health seminar or calling a telephone number and hearing health information. In many of the programs offered, the vendor claims that the payments will far exceed the employees’ contribution, therefore increasing the employee’s take home wages. In order for such payments to qualify for tax exemption, the arrangement must be insured or have the effect of insurance. This means that the arrangement must involve risk shifting and a risk of economic loss. Since the specified activities involve no risk of economic loss (such as the occurrence of a medical condition or an out-of-pocket medical expense), the office found that no risk was involved in the arrangement. Thus, the payments are taxable, to the extent that they exceed the premiums paid.
The second type of wellness program discussed in the new memo involves an employer offering employees the opportunity to make pre-tax contributions to a wellness program. The contributions are treated as payments to a flex bank. The employee can then use the flex contributions/credits to purchase other benefits such as a gym membership or whole life insurance. If the flex contributions are not used to purchase Section 125 qualified benefits (such as accident, health, medical, dental, vision, disability or group term life coverage), then the contributions are not excluded from gross income and are taxable. This includes contributions to whole life insurance and gym memberships, as these are not qualified benefits.
Fixed Indemnity Coverage
In regards to fixed indemnity coverage, the earlier memo released in January 2017 stated that benefits paid under such a policy would be taxable if the cost of the policy (i.e., premiums) was paid by the employer or by the employee with pre-tax salary reductions.
The new memo clarifies that such benefits would be taxable to the extent that they exceed the participant’s actual unreimbursed medical costs. Alternatively, if the cost of the policy is paid 100 percent by an employee with post-tax contributions, the entire benefit is excludable from gross income, even if it exceeds the participant’s actual medical expense.
On May 10, 2017, HHS issued a press release announcing a settlement with Memorial Hermann Health System (MHHS) for $2.4 million based on the impermissible disclosure of a patient’s protected health information (PHI). The announcement is significant because MHHS is a not-for-profit health system located in Texas, comprised of 16 hospitals and specialty services.
The specifics of the situation, which involve an HHS compliance review of MHHS based on multiple media reports suggesting that MHHS disclosed a patient’s PHI without an authorization, may be reviewed in the press release and resolution agreement issued by HHS. This settlement should serve as a reminder that all covered entities, including employers who self-insure their group health plans, must have sufficient policies and procedures in place to comply with the federal standards that govern the privacy and security of individually identifiable health information.
The covered entity in this situation cooperated with law enforcement without violating HIPAA, but did not continue to protect patient privacy when making statements to the public and elsewhere. MHHS also failed to timely document the sanctioning of its workforce members for impermissibly disclosing the patient’s information. In addition to the settlement, HHS will also require MHHS to comply with a corrective action plan going forward to update its policies and procedures on safeguarding PHI from impermissible uses and disclosures and to train its workforce members.
- HHS Press Release »
- Resolution Agreement (Previously linked website content is no longer available.)
- More Information (Previously linked website content is no longer available.)
On May 4, 2017, the IRS published Rev. Proc. 2017-37, which provides the 2018 inflation-adjusted amounts for HSAs and HSA-qualifying HDHPs. According to the revenue procedure, the 2018 annual HSA contribution limit will increase to $3,450 (up $50 from 2017) for individuals with self-only HDHP coverage and to $6,900 (up $150 from 2017) for individuals with family HDHP coverage (i.e., anything other than self-only HDHP coverage).
For qualified HDHPs, the 2018 minimum statutory deductibles have increased to $1,350 (up $50 from 2017) for self-only coverage and $2,700 (up $100 from 2017) for family coverage. The 2018 maximum out-of-pocket limits also increased to $6,650 (up $100 from 2017) for self-only HDHP coverage and $13,300 (up $200 from 2017) for family HDHP coverage (i.e., anything other than self-only HDHP coverage). Out-of-pocket limits on expenses include deductibles, copayments and coinsurance, but not premiums.
The 2018 limits may impact employer benefit strategies, particularly for employers coupling HSAs with HDHPs. Employers should ensure that employer HSA contributions and employer-sponsored qualified HDHPs are designed to comply with the 2018 limits.
On April 24, 2017, HHS issued a press release announcing a settlement with CardioNet for $2.5 million based on the impermissible disclosure of unsecured electronic protected health information (ePHI). The announcement is significant because it is the first settlement involving a wireless health services provider, as CardioNet provides remote mobile monitoring of and rapid response to patients at risk for cardiac arrhythmias.
The specifics of the situation, which involve an employee’s laptop being stolen from a parked vehicle outside of their home, may be reviewed in the press release and resolution agreement issued by HHS. This settlement should serve as a reminder that all covered entities, including employers who self-insure their group health plans, must have sufficient risk analysis and risk management processes in place. The covered entity in this situation was unable to produce any final policies or procedures regarding the implementation of safeguards for ePHI, including those for mobile devices. In addition to the settlement, HHS will also require the covered entity to comply with a corrective action plan going forward.
- HHS Press Release »
- Resolution Agreement »
- More Information (Previously linked website content is no longer available.)
On April 4, 2017, the U.S. Court of Appeals for the Seventh Circuit, in Hively v. Ivy Tech Community College of Indiana (No. 15-1720), held that discrimination based on sexual orientation is protected under Title VII of the Civil Rights Act of 1964. The case involves an openly gay woman who is a part-time adjunct professor at a college. The woman had unsuccessfully applied for full-time positions on several occasions between 2009 and 2014, when the college declined to renew her contract. The woman brought suit against the college, claiming discrimination based on her sexual orientation. The district court agreed with the college, which argued that sexual orientation is not a protected category under Title VII (relying on Seventh Circuit precedent). The Seventh Circuit took the case on appeal, and originally agreed with the district court and its own precedent. However, the case went before the full Seventh Circuit (called an en banc review), where the court held that Title VII does extend to protections for discrimination based on sexual orientation.
The Seventh Circuit explained that it was not adding sexual orientation as a new protected class. Rather, the court concluded that adverse employment actions based on sexual orientation should be considered as actions taken on the basis of sex, which is a protected Title VII class. The court reasoned that the woman in Hively was punished for not conforming with the stereotype of female heterosexuality (i.e., that women should be involved in intimate relationships only with men). Therefore, any employment discrimination that is based on sexual orientation by necessity involves the employee’s sex, and so for an employer to punish a female employee for having intimate relations with a same-sex partner was no different than punishing a female employee for dressing or speaking differently than other female employees. Either way, the decision was based on sex.
The court also stated that any law that discriminates against a person because of the protected characteristics of one with whom she associates also discriminates against that person for her own traits. Lastly, the court reviewed the U.S. Supreme Court’s progression on court holdings relating to sexual orientation, observing the gradual and steady extension of protections under the Constitution, noting that it is impossible to discriminate on the basis of sexual orientation without discriminating on the basis of sex.
Until the Seventh Circuit’s ruling, no federal court of appeals has taken the position that sexual orientation is protected under Title VII, and just last month the U.S. Court of Appeals for the Eleventh Circuit came to the opposite conclusion: That Title VII did not extend to such protection. Further, the EEOC has historically taken the position that sexual orientation is protected under Title VII. With the courts’ split decision, the issue may be headed to the U.S. Supreme Court.
For employers, the case serves as a reminder of the risks in making any employment or benefit decision based on sexual orientation of an employee. This case sheds light on the federal risks under Title VII, but there are also state discrimination laws to consider. Overall, employers should review their employment and benefit practices to ensure they are treating all employees equally, including offering benefits for transgender-related services and items. Employers should work with outside counsel in developing compliant employment and benefit strategies.
On April 5, 2017, the EEOC announced that it has entered into a settlement to resolve its lawsuit against Orion Energy Systems Inc., a Wisconsin lighting company. The EEOC was challenging Orion’s wellness program under the ADA and alleging that the employer retaliated against an employee who objected to the program.
Specifically, the EEOC filed its lawsuit in U.S. District Court for the Eastern District of Wisconsin (EEOC v. Orion Energy Systems, Inc., 208 F.Supp.3d 989 (E.D. Wis. 2016)) and contended that Orion instituted a wellness program that unlawfully required medical examinations and made disability-related inquiries. Additionally, when an employee declined to participate in the wellness program, Orion shifted responsibility for 100 percent of the monthly premium payment to the employee. Thereafter, the EEOC alleged that Orion terminated the employee when she objected to the program.
The district court rejected the employer's argument that the insurance safe harbor provision in the ADA immunizes wellness plans from ADA scrutiny (see Q/A 6 for more information). The court concluded that the EEOC's recently issued regulations on the ADA's safe harbor provision were within the EEOC's authority, and further held that the safe harbor provision did not apply even without regard to the new final regulations. As quick background, the safe harbor provision does not generally apply to employer wellness programs, since employers are not collecting or using information to determine whether employees with certain health conditions are insurable or to set insurance premiums. The final rule adds a new provision explicitly stating that the safe harbor provision does not apply to wellness programs even if they are part of an employer's health plan. The court found that the wellness plan was lawful in this case because it concluded that the employee's decision whether to participate was voluntary under that law existing prior to the final regulations, which were not applicable in the case.
The court also held that there was uncertainty regarding whether the employee was actually terminated because of her opposition to the wellness plan, and indicated that the case would be set for trial. The EEOC and Orion agreed to a settlement to resolve these issues.
Under the settlement, Orion agreed to pay $100,000 to the employee. The company further agreed that it will not maintain any wellness program in the future that poses disability-related inquiries or seeks a medical examination that is not voluntary within the meaning of the ADA and its regulations. Orion also agreed not to engage in any form of retaliation, including interference or threats, against any employee because he or she has raised objections or concerns as to whether the wellness program complies with the ADA. Finally, Orion will conduct employee training on the ADA and its regulations as they pertain to wellness programs.
It is important to note that this case was not governed by the final EEOC wellness regulations, which were effective Jan. 1, 2017. Under those rules, an employer’s wellness reward/incentive cannot exceed 30 percent of the total cost of health plan coverage when a medical examination or disability-related inquiry is involved. Thus, charging an employee 100 percent of the health plan coverage is not permissible under the final rules.
On April 3, 2017, CMS issued an announcement and press release relating to Medicare Part D benefit parameters for 2018. As background, employer plan sponsors that offer prescription drug coverage to Part D-eligible individuals must disclose to those individuals and to CMS whether the prescription plan coverage is creditable (as compared to Part D coverage).
In the announcement, CMS released the following parameters for the defined standard Medicare Part D prescription drug benefit, which will assist plan sponsors in making that determination:
- Deductible: $405 (a $5 increase from 2017)
- Initial coverage limit: $3,750 (a $50 increase from 2017)
- Out-of-pocket threshold: $5,000 (a $50 increase from 2017)
- Total covered Part D spending at the out-of-pocket expense threshold for beneficiaries who are not eligible for the coverage gap discount program: $7,508.75 (a $83.75 increase from 2017)
- Estimated total covered Part D spending at the out-of-pocket expense threshold for beneficiaries who are eligible for the coverage gap discount program: $8,417.60 (a $346.44 increase from 2017)
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Minimum copayments under the catastrophic coverage portion of the benefit:
- $3.35 for generic/preferred multi-source drugs (a 5-cent increase from 2017)
- $8.35 for all other drugs (an 10-cent increase from 2017)
The IRS recently released IRS Information Letter 2016-77 relating to cafeteria plan forfeitures. As background, IRS information letters are not considered formal guidance, but do provide insight into how an IRS representative may view or rule on a certain issue.
The letter is in response to an individual who asks what is done with the funds remaining in a Section 125 cafeteria plan if the plan terminates in its entirety. The IRS explains that the plan document must be reviewed for any governing terms. Specifically, the sponsoring employer or board of directors must have reserved the right to amend the plan in the written plan document, and the amendment terminating the plan must be adopted in writing and participants notified.
The letter also addresses a specific employee’s health FSA contributions, which are forfeited upon termination of employment. A plan may provide for a run-out period during which the participant may submit claims that have already been incurred. If the account is underspent at termination, the participant should be offered the opportunity to continue coverage through COBRA. If COBRA is not elected and the run-out period has been exhausted, the employee would forfeit any remaining balance. The employer may use any forfeitures to provide benefits under the plan or to pay for plan administration costs.
The letter does not go into detail regarding ERISA requirements, but it is worth noting that ERISA may apply to the underlying benefits in the cafeteria plan such as medical, dental, vision and health FSA. ERISA requires that any remaining plan assets, which include participant contributions, be used for the exclusive benefit of participants and beneficiaries or to defray administrative costs. Please remember, though, that governmental and church employers are generally exempt from ERISA.
While the letter does not necessarily provide new information, it may still be helpful to employer plan sponsors.
The IRS recently published Notice 2017-20, which extends the period for employers to provide written notice to employees regarding a qualified small employer health reimbursement arrangement (QSEHRA). As background, late in 2016 Congress enacted the Cures Act, which allows smaller employers (generally speaking, those with fewer than 50 full-time employees/equivalents—those not subject to PPACA’s employer mandate) that do not offer a group health plan to any of its employees to instead offer a QSEHRA.
A QSEHRA is an arrangement whereby the employer pays or reimburses eligible employees for individual health insurance policy premiums incurred by the employee or his or her family members, so long as certain requirements are met. (More information on QSEHRAs can be found in a DOL FAQ, here.) One of those requirements is that the employer must provide a written notice to its eligible employees at least 90 days before the beginning of a year for which the QSEHRA is provided (or, for those that become eligible after the beginning of the plan year, such as a new hire, the date on which the employee is first eligible). So, for a plan year beginning in early 2017 (such as a calendar year plan), the notice requirement may have been difficult to meet. However, according to Notice 2017-20, employers will not be treated as failing to timely furnish this initial written notice if the notice is furnished to employees no later than March 13, 2017 (which is 90 days after the enactment of the Cures Act).
Importantly, the notice must include a description of the maximum amount available for reimbursement under the QSEHRA, a statement that the employee should provide the QSEHRA information to any exchange in which the employee applies for advance payment of the premium tax credit and a statement that the employee may still be subject to the individual mandate penalty (if the employee does not have other MEC). Employers should work with their advisor and/or outside counsel if they are considering offering a QSEHRA as an option.
The IRS recently issued an information letter detailing the interaction between an individual’s retroactive enrollment in Medicare Part A and eligibility for HSA contributions. Information letters are not official guidance, but they do provide insight into how the IRS views certain issues.
As background, individuals are only eligible for HSA contributions for a month if they have qualified HDHP coverage on the first day of that month and no impermissible coverage (i.e., non-HDHP coverage). An individual who enrolls in any part of Medicare becomes ineligible for HSA contributions on the first day of the month in which Medicare is effective.
Individuals aged 65 or older are eligible to enroll in Medicare. If they enroll during the three-month period before their birthday, Medicare is effective on the first day of their birthday month. As the letter explains, if an individual enrolls after that, Medicare Part A is effective retroactively to the first day of the birthday month or 6 months, whichever is less. Please note that this retroactive coverage rule only applies to those who receive free Medicare Part A. Those who have to pay a premium for Medicare Part A are restricted in when they may enroll and receive Part A.
Thus, an individual enrolling in free Medicare Part A after his/her 65th birthday could be enrolled in Medicare up to 6 months retroactively. If the individual contributed to an HSA during any month in which Medicare was in effect, the funds are considered excess contributions. The excess contributions will need to be withdrawn from the account by April 15 of the following year (or later if the individual files an income tax extension). The amount will need to be reported as taxable income. If the excess contributions are not withdrawn in a timely manner, they will be subject to a six percent excise tax in addition to income tax.
Although this information letter is not presenting new information, we thought it important to highlight the IRS’ view of this issue so that employers can keep this in mind when administering their HSAs.
On Feb. 10, 2017, the IRS released an updated version of Publication 969 for use in preparing 2016 individual federal income tax returns. While there are no major changes to the 2016 version (as compared to the 2015 version), the publication provides a general overview of HSAs, HRAs and health FSAs, including brief descriptions of benefits, eligibility requirements, contribution limits and distribution issues.
Minor changes include the updated 2016 limits for HSA contributions (the single-only contribution limit remained at $3,350, while the family contribution limit increased to $6,750) and the updated annual deductible and out-of-pocket maximums for HSA-qualifying HDHPs. While the deductible limit remains $1,300 for single-only coverage and $2,600 for family coverage, the out-of-pocket maximum limit increased to $6,550 for single-only coverage and $13,100 for family coverage. The publication also reminds employers that for plan years beginning in 2016, salary reduction contributions to a health FSA cannot be more than $2,550 per year. The publication serves as a helpful guide for employers with these types of consumer reimbursement arrangements.
The IRS recently released the updated versions of Publications 502 (Medical and Dental Expenses) and 503 (Child and Dependent Care Expenses).
Publication 502 describes what medical expenses are deductible on taxpayers’ 2016 federal income tax returns. For employers, Publication 502 provides valuable guidance on what expenses might qualify as IRC Section 213(d) medical expenses, which is helpful in identifying expenses that may be reimbursed or paid by a health FSA, HSA, HRA or other employer-sponsored group health plans. However, employers should know that Publication 502 does not include all of the rules for reimbursing expenses under those plans.
Publication 503 describes the requirements relating to the dependent care tax credit (DCTC). It is directed primarily at taxpayers to help determine their eligibility for the credit. Employers should know that the rules relating to the DCTC are different from those relating to employer-sponsored dependent care assistance programs (DCAPs or dependent care FSAs).
The recently released Publications 502 and 503 are substantially similar to the 2015 versions. Regarding Publication 502, information about the health coverage tax credit has been updated. Dollar amounts under both publications have also been updated, where appropriate, to account for inflation (e.g. the standard mileage rate for use of an automobile to obtain medical care).
On Jan. 20, 2017, White House Chief of Staff Reince Preibus issued a memorandum to federal agencies outlining Pres. Trump’s regulatory process. Under the memorandum, any new regulations must be reviewed and approved by a department or agency head appointed or designated by the President. Any regulations sent to the Office of Federal Register, but not yet published, must be withdrawn for review and approval. For any regulations that have been published, but have not yet become effective, the effective date is temporarily postponed for 60 days from the date of the memo. There are limited exceptions for emergency situations or other urgent circumstances related to health, safety, financial, or national security matters.
Further adjusting the regulation issuance process, on Jan. 30, 2017, Pres. Trump signed the Executive Order on Reducing Regulation and Controlling Regulatory Costs. The order restricts the scope and cost of new regulations issued by federal agencies. The stated reasoning is both to manage and reduce the associated cost imposed on taxpayers when complying with federal regulations, and also to manage the federal budget and funds.
The order specifically directs that for every one new regulation issued, the agency must also identify at least two prior regulations for elimination. For fiscal year 2017, there must be no cost to implementing a new final regulation. The cost of a new regulation may be offset by the elimination of existing costs and prior regulations. For future fiscal years, each agency will need to stay within an identified cost for newly issued regulations and repealed regulations. Lastly, no regulation shall be issued if it was not included on the most recent version of the Unified Regulatory Agenda. There are limited exceptions for emergencies and other circumstances which may justify a waiver.
The full impact of these actions remains to be seen. This may result in fewer regulations being issued in the coming months. Among the rules that are in proposed form are those related to opt-out arrangements impacting affordability and expanding Form 5500 filing to smaller plans. Until directed otherwise, employers should continue their compliance efforts in all areas such as IRC Section 6056 reporting, employer mandate, ERISA plan documents, Form 5500 filings, Section 125 cafeteria plan administration and offers of COBRA. Please watch future issues of Compliance Corner for any developments.
- Executive Memorandum (Previously linked website content is no longer available.)
- Executive Order on Reducing Regulation and Controlling Regulatory Costs (Previously linked website content is no longer available.)
- Unified Regulatory Agenda »
- Guidance, Executive Memorandum, Regulatory Freeze (Previously linked website content is no longer available.)
- Interim Guidance, Executive Order (Previously linked website content is no longer available.)
On Jan. 20, 2017, the Office of Chief Counsel for the IRS released a memorandum regarding the tax treatment of benefits paid by fixed-indemnity plans. As background, fixed-indemnity health plans typically pay a set dollar amount for certain health-related occurrences such as office visits, days in the hospital, and certain diagnoses (such as cancer or other specific illnesses). However, the set dollar amounts paid are generally considered disconnected from permissible IRC Section 213(d) medical expenses incurred by the employee, so taxation of these fixed benefits has always been the subject of controversy.
This memo confirms that if premiums for a fixed-indemnity plan are paid either by the employer or pre-tax by the employee through a cafeteria plan, the benefits received must be included in the employee’s gross income. Conversely, if premiums are paid entirely by the employee with after-tax dollars, payments from the indemnity plan would be tax free.
In addition, the memo addresses wellness programs paid for with pre-tax salary reductions that offer a specific reward or incentive for certain activities that are not considered medical care under 213(d). Under these types of programs, the memo confirms the amount of the reward or incentive must also be included in the employee’s income.
Therefore, employers should work with their advisor and tax professional to review any fixed-indemnity health plans or wellness programs offered to employees to ensure proper tax treatment of fixed-indemnity benefits (especially employer-paid plans or those paid with pre-tax salary reductions).
On Jan. 25, 2017, the U.S. Court of Appeals for the Seventh Circuit dismissed the EEOC’s appeal in EEOC v. Flambeau, Inc., 2017 WL 359664 (7th Cir. 2017), but interestingly, did not do so on the merits of the case. As background, the EEOC sued Flambeau, Inc. on behalf of an employee whose health coverage was terminated for failure to complete a health risk assessment. While the ADA generally prohibits employers from requiring medical examinations (which would include a health risk assessment), the trial court held for Flambeau, deciding that the examination could be a condition of health plan enrollment under the ADA’s bona fide benefit plan safe harbor. The EEOC disagreed with the result and appealed to the Seventh Circuit arguing that the safe harbor should not be applicable to wellness programs.
The Seventh Circuit dismissed the EEOC’s appeal because the relief the EEOC is seeking is either unavailable or moot. The employee resigned several years ago, the employee’s health plan coverage was ultimately restored retroactively (the employee is not entitled to damages), and Flambeau has since abandoned its wellness program requirements that are at issue in this case. The court did indicate that the case addressed important issues regarding employer-provided wellness programs. However, it ultimately found that those issues should be resolved in a case where the parties have a stake in the result.
Since the EEOC’s position, as established in their final ADA and GINA wellness program regulations, is in conflict with the Eleventh Circuit (in Seff v. Broward County), further litigation on wellness incentives is likely (another appellate court decision on the merits would have provided more clarity). While the matter is being resolved in the courts, employers sponsoring wellness programs should adhere to the relevant ADA and GINA regulations, beginning with plan years commencing on or after Jan. 1, 2017.
On Jan. 19, 2017, the IRS published proposed regulations on the definition of “dependent” as that term is used in IRC Section 152. The proposed regulations are meant to formalize several changes made by prior law, including the Working Families Tax Relief Act of 2004 and the Fostering Connections to Success and Increasing Adoptions Act of 2008. Those prior pieces of legislation amended the IRC for purposes of claiming dependent status and federal income taxation by adding the terms “qualifying child” and “qualifying relative.” The proposed regulations update existing regulations to reflect those changes and other related guidance previously published by the IRS.
Tax dependent status is important for employer-sponsored benefits, since only employees and their tax dependents may receive such benefits on a tax-advantaged basis (such as major medical care, dental, vision, group term life insurance, dependent care assistance, etc.).
The proposed regulations include a description of determining a taxpayer’s gross income under the so-called ‘tiebreaker’ rules (where one dependent can be claimed as a qualifying child by more than one taxpayer). The regulations also describe the treatment of governmental payments when it comes to determining an individual’s support. With respect to determining ‘qualifying child’ status, the regulations include information on certain statuses, including relationship, income and support (such as determining the sources of an individual’s support and whether an individual resides for more than half of the year with the taxpayer). The regulations include examples to help illustrate these points.
The proposed regulations do not have a major impact for employers—the guidance formalized in the regulations has been effective for some time, and some of the guidance impacts individuals only on their respective individual federal income tax returns. Regardless, employers still must identify the dependent tax status of any non-employee to determine whether the employer can offer benefits to non-employees on a tax-advantaged basis. Employers should work with their advisors and accountants in properly making those determinations. In addition, as a result of Pres. Trump’s executive order relating to federal regulatory action (see our article above), it’s unclear whether and when these proposed regulations will be finalized.
The IRS recently published the 2017 version of Publication 15-B, Employer’s Tax Guide to Fringe Benefits. Publication 15-B contains information for employers on the tax treatment of certain fringe benefits, including accident and health coverage, employer assistance for adoption, dependent care and educational expenses, discount programs, group term life insurance, moving expense reimbursements, HSAs, FSAs and transportation benefits. The 2017 version is substantially similar to the 2016 version, but includes the 2017 dollar amounts for various benefit limits and definitions, including the maximum out-of-pocket expenses for HSA-qualifying HDHPs, maximum contribution amounts for HSAs and the monthly limits under qualified transportation plans.
Specifically, for plan years beginning in 2017, salary reduction contributions to a health FSA are limited to $2,600. In addition, for 2017, the monthly exclusion for qualified parking is $255 and the monthly exclusion for commuter highway vehicle transportation and transit passes is $255. Finally, the publication states that the business mileage rate for 2017 is 53.5 cents per mile (it was 54 cents per mile in 2016).
Publication 15-B is a useful resource for employers on the tax treatment of fringe benefits. Employers should familiarize themselves with the publication, as well as other IRS notices and publications referenced in Publication 15-B which further describe and define certain aspects of those benefits.
2017 Publication 15-B, Employers’ Tax Guide to Fringe Benefits »
On Jan. 18, 2017, the DOL published a final rule adjusting for inflation civil monetary penalties under ERISA. As background, federal law requires agencies to adjust their civil monetary penalties for inflation on an annual basis. The DOL last adjusted certain penalties under ERISA in July of 2016 (as discussed in the July 12, 2016, edition of Compliance Corner).
Among other changes, the DOL is increasing the following penalties that may be levied against sponsors of ERISA-covered plans:
- The penalty for a failure to file Form 5500 will increase from a maximum of $2,063 per day to a maximum of $2,097 per day.
- The penalty for a failure to furnish information requested by the DOL will increase from a maximum of $147 per day to a maximum of $149 per day.
- The penalty for a failure to provide CHIP notices will increase from a maximum of $110 per day to a maximum of $112 per day.
- The penalty for a failure to comply with GINA will increase from $110 per day to $112 per day.
- The penalty for a failure to furnish SBCs will increase from a maximum of $1,087 per failure to a maximum of $1,105 per failure.
- The penalty for a failure to file Form M-1 (for MEWAs) will increase from $1,502 to $1,527.
The regulations also increased penalties resulting from other reporting and disclosure failures.
These new amounts will go into effect for penalties assessed after Jan. 13, 2017, for violations that occurred after Nov. 2, 2015. The DOL will continue to adjust the penalties no later than Jan. 15 of each year, and will post any changes to penalties on their website.
For more information on the new penalties, including the complete listing of changed penalties, please consult the final rule below. Additionally, see your advisor if you have questions about the imposition of these penalties.
In January 2017, the EBSA issued the FY 2016 MHPAEA Enforcement Fact Sheet. This fact sheet summarizes EBSA’s enforcement activities related to the Mental Health Parity and Addiction Equity Act (MHPAEA) over the 2016 fiscal year (FY).
As background, the MHPAEA requires employer-sponsored group health plans and health insurance issuers to ensure that financial requirements and treatment limitations applied to mental health or substance use disorder (MH/SUD) benefits are no more restrictive than the predominant requirements or limitations applied to substantially all medical/surgical benefits.
The 2016 fact sheet outlines the main types of MPHAEA violations that resulted from the EBSA’s closed health investigations. The MPHAEA investigations primarily originated from participant complaints believing their MH/SUD benefits were incorrectly denied. As a result of the investigations, the main areas of MPHAEA noncompliance found include incorrect application of annual dollar limits, financial limits and qualitative treatment limitations (QTLs), and cumulative financial requirements. In addition, the fact sheet provides several examples of MHPAEA enforcement, which illustrate common areas of noncompliance and subsequent actions taken by EBSA Benefits Advisors to work with issuers to correct MPHAEA violations.
Given recent enforcement activity, employers should work with outside counsel on specific questions and plan designs, and also with their fully-insured carrier or ASO provider (if self-insured) to ensure MH/SUD benefits are compliant with all MHPAEA provisions.
The IRS recently issued the 2016 version of Form M-1. As background, Form M-1 must be filed by MEWAs and certain entities claiming exception (ECEs). The Form M-1 allows those entities to report that they complied with ERISA’s group health plan mandates.
While very few substantive changes to the Form M-1 have been made, this year’s Form M-1 instructions have been updated to reflect changes in the maximum civil penalties that can be applied for failure to file. Specifically, the maximum penalty for a MEWA administrator who fails to file a complete and accurate Form M-1 has been increased to $1,502 per day.
On Dec. 12, 2016, the EEOC issued a resource document that explains workplace rights under the ADA for individuals with mental health conditions. The publication is entitled “Depression, PTSD, and Other Mental Health Conditions in the Workplace: Your Legal Rights.”
While the publication’s intended audience is employees and applicants, it contains helpful guidance for employers regarding reasonable accommodation requirements under the ADA. As a reminder, the ADA applies to employers with 15 or more employees and prohibits discrimination against an employee or applicant who is able to perform his/her job with reasonable accommodation. A reasonable accommodation may include a leave of absence, altered break and work schedules, quiet office space or devices that create a quiet work environment, changes in supervisory methods, shift assignment and working from home.
The publication explains that a mental health condition should be given the same consideration under the ADA as other conditions. The condition may be temporary or permanent. An employer cannot discriminate against or harass an individual because of a mental health condition. An employer must have objective evidence that the individual cannot perform job duties or that he or she poses a significant safety risk before taking employment action.
An employee or applicant may ask for a reasonable accommodation by informing a supervisor, HR manager or other company representative. The employer may ask for the request to be in writing with documentation that describes the condition generally (without specific diagnosis) and how it affects the individual’s work. The employer may also request documentation from a health care provider. An employer must provide a reasonable accommodation unless it would cause undue hardship for the employer.
Employers are reminded that employees who request a leave accommodation under the ADA may also have rights under FMLA. This may include employees with mental health conditions such as major depression, post-traumatic stress disorder (PTSD), bipolar disorder, schizophrenia and obsessive compulsive disorder. Employers should work with outside counsel with respect to ADA and other leave issues.