I. TAX-QUALIFIED PLANS
IRS Determination Letter Program for Tax-Qualified Retirement Plans
As we have explained in our previous newsletters, the Internal Revenue Service (“IRS”) processes applications for determination letters for individually-designed retirement plans using a staggered five-year system. A determination letter is the method by which a plan sponsor seeks the IRS’s approval that the form of a plan complies with all legal requirements. Under this system, each individually-designed retirement plan is assigned to one of five “cycles” (12-month periods starting on February 1 and ending the following January 31) based upon the last digit of the plan sponsor’s federal employer identification number (“EIN”).
The initial round of cycles under the IRS’s system, which was referred to as the “EGTRRA remedial amendment period,” closed as of January 31, 2011. The second round of cycles under the IRS’s system opened as of February 1, 2011; the following are the 12-month periods that apply to each of the cycles in the current remedial amendment period:
|EIN ends in:
|First day of cycle:
|Last day of cycle:
|1 or 6
|February 1, 2011
|January 31, 2012
|2 or 7
|February 1, 2012
|January 31, 2013
|3 or 8
|February 1, 2013
|January 31, 2014
|4 or 9
|February 1, 2014
|January 31, 2015
|5 or 0
|February 1, 2015
|January 31, 2016
The first cycle in the second remedial amendment period, Cycle A2, ended on January 31, 2012. If you sponsor an individually-designed qualified retirement plan that has not been submitted for a determination letter, or if your EIN ends in “1” or “6” and you did not submit an application for a determination letter by January 31, 2012, please contact our office as soon as possible to discuss your options. Although an election may be made by members of a controlled group that maintain more than one plan for the group to file determination letter filings for all of the plans during a particular cycle (for example, a Cycle A2 plan might be submitted during a later cycle under such an election), there are important requirements that must be followed for the election to be effective.
If your EIN ends in “2” or “7” and you sponsor an individually-designed qualified retirement plan, the deadline to submit your plan for a determination letter is January 31, 2013. In addition, a multiple employer plan (i.e., a plan that covers employers that are not members of the same controlled group) also must be submitted for a determination letter during Cycle B2 even if the lead sponsor’s EIN ends in a number other than “2” or “7.”
An application for a determination letter generally requires payment of a fee to the IRS. The IRS increased the fees it charges to review almost every kind of determination letter request, effective as of February 1, 2011, as follows:
|Type of Filing
|Old User Fee
|New User Fee
|Single employer plan (Form 5300)
|Single employer plan – termination filing (Form 5310)
|Multiple employer plan (Form 5300 or Form 5310)
|— Two to ten employers
|— 11 to 99 employers
|— 100 or more employers
A multiple employer plan with a large number of adopting employers may realize significant cost savings by submitting its application in accordance with the “Simplification Option” provided in Section 10.02(1) of Revenue Procedure 2011-6 and Announcement 2001-77, as described in the EP Determinations Quality Assurance Bulletin dated April 18, 2007. By submitting the plan in accordance with this guidance, a single application may be filed on behalf of the lead plan sponsor for a determination as to the form of the plan only, and the other adopting employers may rely on that determination letter without having to submit their own applications.
The protection provided by a plan’s favorable determination letter is limited to the required plan provisions in effect at the end of each of its remedial amendment cycles. Thus, it is important for plan sponsors of individually-designed plans to amend their plans as required and to apply for new determination letters during the applicable 12-month remedial amendment cycle.
Because this firm, and more importantly the IRS, believes that having a current determination letter represents a best practice for all plan sponsors, we strongly recommend that we apply on behalf of our clients for updated determination letters during the appropriate cycle. The determination letter system anticipates that plans will file for a new determination letter only once every five years, but plans must still be amended from time to time as the law and regulations governing tax-qualified plans change.
DOL Creates New Consumer Assistance Webpage
The Department of Labor (“DOL”) has recently created a new consumer assistance webpage that provides easy access to useful information about retirement and health plans.
The webpage provides users with access to various tools and publications with information on benefit plans, as well as answers to questions on “hot topics.” For example, the website addresses retirement plan issues, such as how to file a claim for benefits as well as explaining fees and expenses involved in 401(k) plans. It also addresses health plan issues, such as COBRA eligibility and HIPAA special enrollment rights. Users may also search and view Forms 5500 that have been filed with EFAST2, DOL’s electronic Form 5500 filing system.
Webpage users may also submit inquiries and complaints to DOL via the website by clicking on “Ask a Question,” “Submit a Complaint,” or “Report a Problem.” Inquiries or complaints filed via the website are sent directly to DOL benefits advisers, who will respond as soon as possible but no later than three business days. Additionally, the system automatically routes the requests to the appropriate DOL regional office based on the user’s zip code.
The webpage is available at: http://www.dol.gov/ebsa/contactEBSA/consumerassistance.html
DOL Issues Final Regulations on Investment Advice for Participants
The DOL has issued final regulations enabling financial service firms (e.g., banks, insurers, mutual fund families, registered investment advisers, and broker-dealers) to provide investment advice to participants in 401(k) and other defined contribution plans that allow participants (or beneficiaries) to direct the investment of their account balances. Although the final regulations primarily affect the financial services firms that provide investment advice to participants, plan fiduciaries (e.g., plan sponsors) selecting them should also be familiar with their oversight responsibilities and the conditions imposed on the financial services firms. The final regulations became effective December 27, 2011.
Although participant-directed plans are commonplace today, many plan participants are unwilling or unable to apply fundamental investment principles in directing the investment of their own accounts. The Pension Protection Act of 2006 added two new prohibited transaction exemptions under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), to encourage financial services firms to offer investment advice to plan participants. The two new prohibited transaction exemptions-one based on fee-leveling and another based on computer modeling-address potential conflicts of interest of fiduciary advisers that provide investment advice to plan participants under the exemptions and clarify the responsibilities of plan fiduciaries (e.g., plan sponsors) that select and monitor them.
Fee Leveling Exemption
Under the fee-leveling exemption, the compensation received by the fiduciary adviser, whether received directly or indirectly, must not vary depending on the particular investment alternative selected by the participant. Under the exemption, however, the fee-leveling requirement does not apply to an affiliate of a fiduciary adviser. For example, if the fiduciary adviser is affiliated with a mutual fund, the compensation of the mutual fund’s investment manager may vary depending upon the investment alternative selected by the participant so long as the compensation of the fiduciary adviser does not vary.
Investment advice provided by a fiduciary adviser via a fee-leveling arrangement must:
- be based on generally accepted investment theories that take into account the historic returns of different asset classes over defined periods of time;
- take into account, to the extent furnished by a participant, information relating to age, time horizons, risk tolerance, current investments in designated investment alternatives, other assets or sources of income, and investment preferences of the participant; and
- consider investment management and other fees and expenses related to the recommended investments.
Computer Modeling Exemption
Under the computer modeling exemption, numerous requirements are imposed to ensure that the investment advice provided using computer modeling is objective. Computer models must be designed and operated as follows:
- apply generally accepted investment theories that take into account the historic risks and returns of different asset classes over defined periods of time;
- take into account investment management and other fees and expenses related to the recommended investments;
- request from a participant and, to the extent furnished, use information relating to age, time horizons, risk tolerance, current investments in designated investment alternatives, other assets or sources of income, and investment preferences;
- use appropriate objective criteria to provide asset allocation portfolios comprised of investment alternatives available under the plan;
- appropriately weigh factors used in estimating future returns of investment alternatives;
- avoid investment recommendations that may generate greater income for the fiduciary adviser or that inappropriately favor investment alternatives offered by affiliates of the fiduciary adviser over other investment alternatives; and
- take into account all designated investment alternatives offered under the plan without giving inappropriate weight to any investment alternative, except that the model may exclude: (1) any investment alternative the participant specifically requests be excluded; or (2) an in-plan annuity option if the fiduciary adviser provides an explanation of how the in-plan annuity option works simultaneously with the computer generated advice.
Fiduciary advisers who intend to rely on the computer model exemption must first prudently select an “eligible investment expert” to certify that the model is compliant with the requirements described above. If, after being certified, the computer model is altered in a way that could impact its ability to satisfy the above requirements, the fiduciary adviser must obtain a new certification stating that the altered model meets the requirements. In either instance, the final regulations require that the certification be signed by the expert and contain an explanation regarding how the expert reached the conclusion that the model satisfies the requirements of the final regulations.
Each individual that is involved in the computer model’s development and marketing will be deemed a fiduciary adviser unless an election is made to name one person to this position. The election must identify this sole fiduciary adviser, the computer model, and the financial services firm using the computer model to provide investment advice to plan participants. The election must include an acknowledgement and signature of the sole fiduciary adviser. This election applies only for purposes of limiting fiduciary status which results from developing or marketing a computer model. For example, the election would not permit a fiduciary adviser who actually provides investment advice to plan participants using the computer model to limit fiduciary status.
The following additional requirements apply to both fee-leveling and computer modeling exemptions:
Annual Audit. At least annually, the fiduciary adviser must prudently engage an independent auditor to: (1) audit the investment advice arrangement for compliance with the requirements of the final regulations; and (2) within 60 days of the audit, issue a written report to the fiduciary adviser and to the plan fiduciary (e.g., plan sponsor) that authorized the investment advice arrangement.
Authorization by a Plan Fiduciary. A plan fiduciary (e.g., plan sponsor) must expressly authorize any investment advice to plan participants offered under either the fee-leveling or computer model exemptions. However, the authorization cannot be provided by the following fiduciaries:
- The fiduciary adviser providing the investment advice to plan participants;
- Any person providing designated investment alternatives options under the plan (e.g., mutual fund or its investment manager); or
- An affiliate of either.
It should be noted that a plan sponsor is not treated as a person providing a designated investment alternative under the plan simply because participants may invest in the plan sponsor’s securities as one of the investment alternatives offered under the plan.
Written Notification to Authorizing Fiduciary. The final regulations require disclosure of certain information to the plan fiduciary (e.g., plan sponsor) that authorizes investment advice under the exemptions. In particular, a fiduciary adviser must provide the authorizing fiduciary with written notification that:
- the fiduciary adviser intends to comply with the conditions of a prohibited transaction exemption for providing investment advice to plan participants;
- the fiduciary adviser’s investment advice arrangement will be audited annually by an independent auditor for compliance with the requirements of the applicable exemption; and
- the auditor will furnish the authorizing fiduciary with a copy of the auditor’s findings within 60 days of its completion of the audit.
Written Notification to Participants. Fiduciary advisers must also provide plan participants with written notification of the following information, free of charge, before providing investment advice under the exemptions:
- The past performance and historical rates of return of the designated investment alternative available under the plan to the extent this information is not otherwise provided.
- The fiduciary adviser is acting as a fiduciary of the plan in connection with the provision of the investment advice.
- The types of services provided by the fiduciary adviser in connection with the provision of the investment advice.
- All fees or other compensation that the fiduciary adviser, or any of its affiliates, will receive in connection with: (1) the provision of the investment advice; (2) the sale, acquisition, or holding of the security or other property pursuant to such advice; or (3) any rollover or other distribution of plan assets or the investment of distributed assets in any security or other property pursuant to such advice.
- Any material affiliation or material contractual relationship of the fiduciary adviser or its affiliates in any investment alternative available under the plan.
- The role of any party that has a material affiliation or material contractual relationship with the fiduciary adviser in the development of the investment advice program and in the selection of investment alternatives available under the plan.
- A participant may separately arrange to receive investment advice from another adviser that receives no fees or other compensation, or has no material affiliation, in connection with investing in any investment alternative available under the plan.
- The manner, and under what circumstances, any participant information provided under the investment advice arrangement will be used or disclosed.
The fiduciary adviser must provide participants with this written notification at least annually and upon request. In addition, the fiduciary adviser must timely notify participants of any material changes to the information provided in the notification. The notification, which may be provided in either written or electronic form, must be presented in a clear and conspicuous manner that is calculated to be understood by the average plan participant. The appendix to the final regulations contains a model written notification.
Other Conditions. The following conditions apply to investment advice provided under the fee-leveling and computer model exemptions:
- Any sale, acquisition, or holding of an investment alternative under the plan must occur solely at the direction of the participant receiving the investment advice.
- The fiduciary adviser must provide appropriate disclosure in connection with the sale, acquisition, or holding of an investment alternative in accordance with applicable securities laws.
- The compensation received by the fiduciary adviser and affiliates in connection with the sale, acquisition, or holding of an investment alternative must be reasonable.
- The terms of the sale, acquisition, or holding of the investment alternative must be at least as favorable to the plan as an arm’s length transaction would be.
Retention of Records. The final regulations require fiduciary advisers to maintain, for at least six years after providing investment advice, any records necessary for determining whether the requirements contained in the final regulations have been satisfied.
Noncompliance. The final regulations make it clear that the fee-leveling or computer modeling exemptions will not apply to any transaction that fails to satisfy the requirements contained in the final regulations. Further, in cases where a fiduciary adviser has engaged in a pattern or practice of noncompliance with the conditions of the final regulations, the exemptions will not apply to any investment advice provided by the fiduciary adviser.
The majority of the conditions in the final regulations impose compliance obligations on fiduciary advisers that wish to provide investment advice to plan participants under the fee-leveling or computer modeling exemptions. However, plan sponsors have fiduciary oversight responsibility regarding the fiduciary advisers providing investment advice under the exemptions.
The attorneys at The Wagner Law Group are available to discuss the final regulations with you and answer any questions you may have relating to the selection of a fiduciary adviser to provide investment advice to plan participants.
DOL and IRS Increase Worker Misclassification Enforcement
Given the current economic climate, employers of all types and sizes are trying to reduce expenses in an effort to improve profits. Some employers may attempt to do this by hiring independent contractors rather than employees to eliminate the need to provide employee benefits, make Social Security and Medicare contributions, or pay unemployment and workers’ compensation premiums. However, employers caught misclassifying employees as independent contractors, whether intentionally or not, face serious legal and financial penalties.
Employers that misclassify workers are exposed to significant risks, including liability for unpaid overtime wages, taxes, penalties and legal fees to defend civil and criminal actions. Worker misclassification additionally impacts employee benefit matters, often requiring costly corrections by an employer to preserve the tax-qualified status of its retirement plans or to comply with health and welfare plan provisions regarding employee eligibility.
Increased Enforcement Activity
There is no better time than the present for employers to conduct a compliance audit to ensure that their workers are properly classified and to correct any discovered misclassifications.
In 2011, the DOL was allotted $25 million specifically to prosecute employee misclassifications; the agency believes that, over the next decade, it will generate $7 billion in revenue from such prosecutions. Statistics available on the DOL’s website reveal that the agency recently conducted 68,644 enforcement actions (i.e., audits) related to worker classification. Of these, the DOL found violations in 50,364 cases, or approximately 73% of the employers audited (50,364/68,644 = 73.4%), which resulted in findings of back wages due totaling $681,151,513, or approximately $13,524.57 per case.
The DOL is not the only enforcement agency concerned with worker misclassification. The IRS recently received $6 million to create a National Research Program to combat employee misclassification and target 6,000 businesses for audits over the next three years. Moreover, in view of the need for additional tax and unemployment revenue in the wake of ever-increasing budget deficits, state-level worker classification enforcement efforts have also dramatically increased.
In September 2011, the DOL and IRS signed a memorandum of understanding to improve the agencies’ coordination of efforts to combat employee misclassification. Several states subsequently signed a similar memorandum with the DOL and IRS. This new interagency cooperation underscores the need for employers with independent contractors to be prepared for increased scrutiny.
Under the new agreements, states will now share information with the DOL about employers that fail to remit unemployment insurance or workers’ compensation premiums, and such referrals may result in the DOL targeting such employers for worker classification audits. The IRS would also receive information about potential violations, which would allow the agency to conduct its own audit, seeking to recover unpaid taxes and associated penalties for worker misclassification violations. Consequently, employers may now simultaneously face scrutiny and enforcement proceedings from three separate agencies for the same, possibly inadvertent, violation.
Steps to Consider Now
The determination of whether a worker is an independent contractor or an employee can be quite technical and vary based upon the applicable law. In many cases, the line between the classification as independent contractor and employee can be blurred, leaving employers susceptible to inadvertent classification mistakes. It should be noted that even if the written agreement states that the workers are independent contractors, government agencies and courts can ignore the agreement and determine worker status based on the actual nature of the relationship.
Because worker misclassification is now a high priority on the DOL and IRS agendas, as a best practice, employers that utilize independent contractors should implement the following action steps to ensure proper worker classifications:
- Carefully review the classification status of workers at the outset of the work relationship to ensure that, under applicable law, they are properly classified as independent contractors or employees.
- Provide training to Human Resources professionals regarding worker classification, including the tests and factors the DOL, IRS and the courts use to determine independent contractor status.
- Engage qualified professionals to conduct a worker classification compliance audit to determine whether workers currently classified as independent contractors are properly classified as such.
- Review employee benefit plan documents to determine the treatment of independent contractors or those designated as independent contractors by the plan sponsor.
Employers must be aware of the significant liability now attached to worker misclassification and the need to correctly classify workers as either employees or independent contractors. With expertise in both employee benefits and employment law, The Wagner Law Group is uniquely qualified to assist employers with worker classifications, conduct compliance audits, as well as train Human Resources professionals. Moreover, The Wagner Law Group can leverage its experience representing employers in enforcement actions to ensure that all issues that may arise during worker classification audits are resolved in a favorable manner with as little impact as possible.
Please contact one of the attorneys at The Wagner Law Group today to discuss your questions about worker classifications, compliance audits, training, or legal representation against actions alleging worker misclassification.
II. WELFARE BENEFIT PLANS
Supreme Court Hears PPACA Case
The U.S. Supreme Court recently heard oral arguments on the constitutional challenges to the Patient Protection and Affordable Care Act (“PPACA”). These arguments spanned three days and lasted more than six hours, making it the longest amount of time the Court has allocated for a single case in the past 40 years.
The primary focus in the Court’s review is PPACA’s individual mandate, which requires virtually all Americans to obtain health insurance by 2014 or pay a penalty. In particular, the Court must determine whether Congress overstepped its authority under the Constitution by enacting the individual mandate and, if so, what portions of PPACA can survive if the mandate is found to be unconstitutional. The Court is also reviewing whether a federal tax law, known as the Anti-Injunction Act, prevents challenges to the individual mandate before its effective date in 2014. Finally, the Court is reviewing a challenge brought by 26 states that asserts that PPACA is unconstitutional because it requires states to either expand Medicaid eligibility to more lower-income people, or lose federal matching funds.
To be sure, it is impossible to predict how the Supreme Court will rule on any of these PPACA challenges. However, based on the questions posed by the Justices during oral arguments, the following observations can be made:
Anti-Injunction Act. None of the Justices indicated that it would be premature for the Court to decide whether the individual mandate is constitutional.
Individual Mandate. Justice Kennedy, the likely swing vote on this issue, voiced concern that the individual mandate significantly impacts individual liberty, and that the federal government must meet a “very heavy burden of justification” for the mandate to be upheld. Nonetheless, Justice Kennedy did suggest that the unique dynamics attendant to the health insurance market may justify upholding the constitutionality of the individual mandate. Towards the conclusion of oral arguments, Chief Justice Roberts commented that the key to the government’s pro-PPACA argument is that everyone eventually participates in the health care market, which makes health insurance different from other products.
Severability. The Court appeared divided on whether any other PPACA provisions could survive if the individual mandate is declared unconstitutional. Justices Kagan, Breyer, Ginsburg and Sotomayor expressed doubt that PPACA, as a whole, should be invalidated if the mandate is found to be unconstitutional. In contrast, Justices Kennedy, Scalia, Alito and Roberts asked questions indicating that they were considering whether any PPACA provisions could survive without the individual mandate.
Expansion of Medicaid. The Court also appeared divided on whether PPACA’s expansion of Medicaid eligibility is constitutional. Justices Kagan, Breyer, Ginsburg and Sotomayor asked opponents of PPACA skeptical questions about how the law forces states into expanding Medicare. Conversely, Justices Roberts, Scalia, Alito and Kennedy expressed concerns that the federal government could eventually place such onerous conditions on the states so that it impermissibly coerces the states into participating in the Medicaid program.
On March 30, the Justices held a private conference to vote on the outcome of the PPACA challenges and to assign responsibility for drafting the Court’s written opinion. The Court is expected to issue its opinion by the end of its current term, which concludes in June.
Unlike other branches of government, the U.S. Supreme Court is renowned for preventing leaks of its decisions.
Agencies Issue Final Regulations on PPACA’s Summary of Benefits and Coverage
PPACA requires group health plans or their health insurers to distribute a uniform explanation of benefits and coverage (“Summary of Benefits and Coverage” or “SBC”) to plan participants and beneficiaries, and other individuals eligible to enroll in the plan. In particular, SBCs are intended to provide a better understanding of the health care coverage offered, and a basis of comparison with other health plans.
The IRS, DOL and the Department of Health and Human Services (“HHS”) have issued final regulations that-with certain changes-mirror the previously issued proposed regulations. Here are some highlights:
- Effective Date. Originally slated to take effect March 23, 2012, the effective date of the final regulations has been pushed back at least six months. Under the final regulations, SBCs are not required for those enrolling or re-enrolling in group health plan coverage until the first open enrollment period beginning on or after September 23, 2012. For enrollments occurring outside open enrollment, SBCs are not required until the first plan year beginning on or after September 23, 2012.
- SBC Template and Uniform Glossary. The SBC template has been finalized, along with sample instructions and language, coverage examples, and a uniform glossary. (These materials are available at http://www.dol.gov/ebsa/healthreform/.) These documents are authorized for use only with respect to coverages beginning before January 1, 2014, as revisions to the health coverage rules will take effect on January 1, 2014.
- Application to “Excepted” Benefits. The final regulations clarify that the SBC rules do not apply to excepted benefits, which include stand alone dental and vision plans, as well as many Health Flexible Spending Arrangements and Health Reimbursement Arrangements. In addition, the final regulations explain that Health Savings Accounts are generally not subject to the SBC rules because they are usually not group health plans.
- Required Content. Unlike the proposed regulations, the final regulations: (1) do not require the SBC to include premium or cost of coverage information, and (2) only require the SBC to provide two coverage examples (the breast cancer example contained in the proposed regulations has been removed). Plans and insurers are advised to use the full SBC template. However, when a plan’s terms cannot adequately be described in a manner consistent with the template and instructions, the plan or insurer must accurately describe the relevant terms while using “best efforts” to maintain consistency with the format of the template and sample instructions.
- Appearance. The final regulations require SBCs to be presented in a uniform format, use terminology understandable by the average plan enrollee, not exceed four double sided pages in length, and not include print smaller than 12-point font. SBCs for group health plan coverage can be distributed either on a stand-alone basis or with other summary materials (e.g., an SPD), if certain conditions are met.
- Language Requirements. The SBC must be provided in a “culturally and linguistically appropriate manner.” If at least 10 percent of the population in a county are literate only in a particular non-English language (as determined by the U.S. Census Bureau), then each SBC sent to a recipient with an address in that county must contain a statement in that non-English language informing the recipient of the availability of language services provided by the plan. To help plans meet this requirement, written translations of the SBC template, sample language and uniform glossary will be made available in various non-English languages, including Spanish, Tagalog, Chinese and Navajo.
- Distribution Requirements. In distributing the SBC, group health plans must follow a number of rules, including the following:
- In addition to providing SBCs with enrollment materials, an SBC must be provided within 7 business days after a request from a participant or beneficiary.
- Material mid-year changes must be disclosed at least 60 days in advance.
- Disclosure may be made electronically in appropriate circumstances, with paper copies being available on request.
With the finalization of the SBC regulations, templates, and other materials, plan sponsors now face the formidable task of fulfilling this substantial disclosure requirement.
HHS Provides States with Flexibility on Essential Health Benefits under PPACA
HHS recently issued a bulletin outlining proposed policies that will give states more flexibility and freedom to implement the PPACA. Specifically, the bulletin outlines the approach that HHS intends to take in developing regulations defining essential health benefits (“EHBs”).
As background, PPACA requires health plans offered in the small group and individual markets, both inside and outside of the state-based health insurance exchanges, to offer a comprehensive package of items and services known as EHBs. EHBs must include at least the following ten statutory categories:
- Ambulatory patient services
- Emergency services
- Maternity and newborn care
- Mental health and substance use disorder services
- Prescription drugs
- Rehabilitative and habilitative services and devices
- Laboratory services
- Preventive and wellness services and chronic disease management, and
- Pediatric services, including oral and vision care.
HHS proposes that EHBs be defined using a benchmark approach, which will provide flexibility to states in selecting a benchmark plan that reflects the scope of services offered by a typical employer. States may choose to use one of the following benchmark options:
- one of the three largest small group plans in the state;
- one of the three largest state employee health plans;
- one of the three largest federal employee health plan options; or
- the largest health maintenance organization plan offered in the state’s commercial market.
States that do not select a benchmark would be assigned a default benchmark, which would be the small group plan with the largest enrollment in the state.
The new guidance clarifies that HHS intends to require health plans to offer benefits that are “substantially equal” to the benchmark plan selected by the state. Additionally, plans could modify coverage within a benefit category, including both the specific services covered and any quantitative limits, as long as they continue to offer coverage for all ten statutory categories and do not reduce the value of coverage.
DOL Issues Final Rules on PPACA’s Medical Loss Ratio Provision
In an effort to maximize the use of medical premiums for actual medical care, the PPACA contains a provision called the Medical Loss Ratio (“MLR”). The MLR is a measurement used to determine the percentage of total health care premiums that are actually spent on heath care and quality improvement activities (“QIA”) of the insurer (as opposed to administration, marketing and profit activities of the insurer).
Under PPACA, insurers of individual and small group plans must spend 80% of premiums on health and QIA, while large group plans must hit a MLR of 85%. If an insurer fails to meet its MLR, it must provide its customers with a rebate equal to the amount by which it fell below the required MLR.
The final MLR rules provide:
- Brokers’ commissions are included as administrative cost, not health care or QIA amounts.
- Expatriate policies must report their MLR annually and are subject to a special circumstances adjustment to the numerator of the MLR calculation to account for the added complexity and administration of expatriate plans.
- Mini-med plans must continue to report their MLR experience separately, but they also can apply a special circumstance adjustment to the numerator of the MLR calculation.
- With regard to rebates by the insurers for failure to meet the MLR ratio, the new rules clarify that the rebate can be made, in the case of group health plans, to the policyholder, rather than the individuals insured under the policy, provided the policyholder uses the rebate to reduce cost, premiums or provide other health benefits. Furthermore, there are separate standards for ERISA-covered plans, governmental plans and other non-ERISA plans due to the unique nature of each type of plan.
The DOL has now issued Technical Release 2011-04 (the “Release”), which describes how these rebates should be handled by plan fiduciaries.
The Release states that the first step is to look at the plan provisions, insurance contracts and procedures to determine which portion of the rebate, if any, can revert to the employer and which portion is a plan asset protected under ERISA. In the absence of express plan provisions, this determination will sometimes depend on the ratio of employer and participant contributions. For example, if the plan is funded entirely through employer contributions, any rebate will be property of the employer. If, on the other hand, the plan calls for fixed percentages of the premiums to be contributed by the employer and participants, then the rebate would be divided under the same contribution ratio.
Finally, if the plan calls for participants to pay a specified dollar amount and the employer is responsible for paying any additional costs, then the portion of the rebate that does not exceed the total amount of prior employer contributions during the relevant period would be considered to be employer contributions.
The Release also states that while the portion of the rebate attributable to participant contributions would generally be plan assets and, therefore, subject to ERISA’s trust requirements, a trust would not be needed for these rebates if they are used within three months of receipt. These plan assets can be used for any purpose permitted under ERISA, such as rebates to individual participants, benefit improvements, or a temporary reduction or elimination of required participant contributions.
DOL Responds to Questions on PPACA
The DOL has issued Technical Release 2012-01 (the “Release”) in response to questions and comments it has received on various provisions of the Patient Protection and Affordable Care Act (“PPACA”). Specifically, the Release provides updates on three key areas of the PPACA that impact employers: Automatic Enrollment, Waiting Periods, and Employer Shared Responsibility.
Automatic Enrollment. This provision of PPACA requires large employers with 200 or more full time employees to automatically enroll new employees in one of the employer’s health benefit plans (subject to waiting period rules discussed below) and to continue the coverage of existing employees in a health plan, unless an employee opts out. Previously, DOL had indicted that employers would not be required to conform to this rule until regulations were issued and that these regulations would be completed by 2014.
The Release states that regulations on this issue will not be ready by 2014 and that employers will not be required to comply with the automatic enrollment provision until these final regulations are effective.
Waiting Period. PPACA mandates that, beginning in 2014, a group health plan cannot apply a waiting period that exceeds 90 days. The Release clarifies that the 90-day provision will not require employers to provide health coverage to otherwise non-covered employees (e.g., part-time employees). Further, it will not require employers to eliminate otherwise bona fide eligibility criteria, as long as the other criteria are not imposed solely to avoid compliance with the 90-day waiting period limitation.
For example, many employers determine their employees’ eligibility to participate in their group health plans based on the cumulative hours worked by such employees. In these situations, employees would become eligible after satisfying the cumulative service condition. The 90-day waiting period would become applicable on the date the employee met the cumulative service time requirement. The Release further indicates that future guidance may impose a maximum service rule for this type of eligibility condition.
Employer Shared Responsibility. Under the shared responsibility provisions of PPACA, large employers with 50 or more full time employees will be subject to a penalty if any full-time employee is certified to receive a premium tax credit or cost-sharing reduction on their health coverage and either: (1) the employer fails to offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan; or (2) the employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan that, for a full-time employee who is certified to receive a premium tax credit or cost-sharing reduction, either is unaffordable or does not provide “minimum value” as defined under the PPACA.
In the Release, DOL clarifies that an employer will not be subject to the shared responsibility payment simply because it does not offer coverage during the waiting period. And, in fact, the regulations may allow for a six-month waiver of the shared responsibility payment with regard to certain newly hired employees.
Agencies Issue New Guidance on Mental Health Parity Requirements
In November 2011, the IRS, DOL and HHS issued Part VII of their Frequently Asked Questions About Affordable Care Act Implementation (“FAQs”). In particular, the FAQs provide guidance on the Mental Health Parity and Addiction Equity Act (“MHPAEA”) requirement that the limits applicable to mental health and substance abuse benefits offered through a group health plan cannot be more restrictive than the financial, treatment, and non-quantitative limits of the plan’s medical and surgical benefits.
Under MHPAEA, financial limitations include deductibles, co-pays, out-of-pocket maximums and co-insurance. Treatment limitations include quantitative limits such as number of out-patient visits and in-patient stays. Non-quantitative limits include medical management standards, network provider admission requirements and prior authorization requirements for treatment.
The FAQs state that the standard for determining the maximum co-pay for mental health and substance abuse benefits offered under a plan must be based on the predominate co-pay that applies to the medical and surgical benefits in the same specific classification (e.g., generalist versus specialist).
With regard to treatment limitations, the FAQs make it clear that a plan cannot impose conditions on mental health and substance abuse benefits that are not imposed on medical and surgical benefits. For example, a plan cannot:
- require prior authorization for treatment of mental health and substance abuse if no prior authorization is required for medical and surgical benefits; or
- impose a more restrictive limitation on mental health and substance abuse benefits authorization (e.g., medical authorization is required for one day of mental health and substance abuse treatment but only for seven or more days of medical and surgical treatment).
However, the FAQs indicate that plans may use medical management formulas and clinically recognized standards of care to determine what treatments will require prior authorization. If such formula and standards are applied comparably to mental health and substance abuse treatments then the MHPAEA standard will be met, even if a greater number of mental health and substance abuse treatments are determined to require prior authorization.
DOL Proposes New Enforcement Procedures and Reporting Requirements for MEWAs
DOL has issued proposed regulations for multiple employer welfare arrangements (“MEWAs”). The new guidance implements PPACA provisions that grant the DOL new enforcement authority, and impose new reporting requirements, on MEWAs.
A MEWA is a plan or other arrangement offering health or welfare benefits to employees of two or more separate employers. Properly operated, MEWAs can provide small employers with a low-cost alternative to traditional forms of health insurance. However, there were a number of cases where self funded MEWAs became insolvent as a result of mismanagement or fraudulent operation, leaving employees with millions of dollars in unpaid medical bills. Therefore MEWAs, unlike other ERISA programs, were made directly subject to state insurance laws.
Despite this additional level of state supervision, MEWAs are still subject to fraud and mismanagement. Therefore, PPACA and the proposed regulations grant the DOL power to: (1) issue a cease and desist order against a MEWA to stop its operation if it appears to have engaged in fraudulent or dangerous activity; and (2) issue a summary seizure order to transfer a MEWA’s assets to a receiver if it appears to be in a financially hazardous condition. Both orders would be effective upon service, not require prior court authorization, and remain in effect unless modified or set aside by the DOL or a reviewing court.
DOL will also implement new reporting requirements for MEWAs that are intended to protect participants by enhancing the DOL’s ability to monitor MEWAs. In particular, all MEWAs that provide medical care benefits must now:
- register with the DOL by filing a Form M-1 before operating in a state, and
- annually report compliance with the group health plan requirements under ERISA (including HIPAA’s portability and nondiscrimination requirements and the extensive new compliance obligations imposed under PPACA).
The proposed regulations would make substantial revisions to Form M-1 and its instructions, including:
- requiring more extensive custodial and financial information reporting,
- imposing stricter filing deadlines for MEWA registration, and
- requiring all Forms M-1 to be filed electronically.
Finally, the proposed regulations would change Form 5500 and its instructions, by:
- requiring all MEWAs subject to the Form M-1 reporting to file a Form 5500, regardless of size, and
- adding a new Part III to Form 5500 that would ask whether an employee welfare benefit plan is a MEWA subject to Form M-1 reporting, and if so, whether it is in compliance with the Form M-1 filing requirements.
HHS Begins HIPAA Privacy Audits
HHS recently began auditing covered entities for compliance with the HIPAA Privacy and Security Rules and Breach Notification standards. HHS’s audits are intended to examine mechanisms for compliance, identify best practices, discover risks and vulnerabilities that may not have otherwise been found, and assist in developing technical assistance.
Covered entities include: (1) health care providers that conduct certain transactions in electronic form, (2) health care clearinghouses, and (3) group health plans.
Initial audit selections will cover a broad cross section of covered entities. These covered entities will receive a notification of audit and be asked to respond, generally within 10 days, to questions on their privacy and security compliance efforts. An on-site visit will then be scheduled. On-site visits are estimated to last between 3 and 10 days, depending on size and complexity of the covered entity. After the on-site visit, HHS will issue a preliminary audit report. Covered entities will then have 10 days to review and respond to HHS’s preliminary audit report. Thereafter, HHS will issue a final report.
2012 Penalties for Violations of Massachusetts Health Care Reform Act’s Individual Mandate
The Massachusetts Department of Revenue has issued Technical Information Release 12-2, which provides the 2012 penalties for non-compliance with the Massachusetts Health Care Reform Act’s individual health insurance coverage mandate. The penalty is based on one-half of the lowest cost Commonwealth Choice Bronze plan available through the Connector.
The maximum individual penalty in 2012 for failure to have “creditable” insurance coverage will be $105 per month (or $1,260 per year). The penalty varies based on age and income; individuals age 26 or less face a maximum penalty of $83 per month (or $966 per year) while individuals with incomes less than 150% of the federal poverty level (i.e., $16,344 for an individual in 2012) will not be subject to any penalty.