Now that oral arguments have concluded in U.S. Department of Health and Human Services, et al. v State of Florida, et al., we want your opinion! How do you think the Supreme Court will rule on the issues below. For more information on each of these, please see our prior posts from Monday (Anti-Injunction Act), Tuesday (Individual Mandate), and Wednesday (Severability/Medicaid). Feel free to leave a comment explaining how you voted!
Update (12:45 PM ET): Audio and transcript from this morning’s arguments is available here.
Update (3:12 PM ET): Audio from the afternoon arguments is available here.
Over the last few days we have posted brief descriptions of the arguments the Supreme Court will hear in U.S. Department of Health and Human Services, et al. v State of Florida, et al., the case challenging the landmark health reform law, the Patient Protection and Affordable Care Act (“PPACA”). As the audio of the oral arguments is released, we will post links to the audio here. Go to our prior posts for some background and a discussion of Monday’s and Tuesday’s arguments. As with Tuesday’s arguments, the individuals challenging the law are joined by the National Federation of Independent Businesses (“NFIB”). Additionally, similar to the arguments over the AIA described in Monday’s post, the Court appointed a special counsel to argue in favor of complete severability of the Individual Mandate.
Today, they will hear a total of two and a half hours of argument: 90 minutes on the issue of Severability, a break for lunch, and then 1 hour on PPACA’s expansion of Medicaid. We will take each argument separately.
What are they arguing about? If the Court determines that the Individual Mandate is unconstitutional (as discussed in yesterday’s post), then can the Mandate be removed from the law by itself with the rest of the law intact (i.e., can it be “severed”)? If the Mandate cannot be severed, then the entirety of PPACA must be invalidated. Severability is an issue of Congressional intent (to the extent 535 people can be said to have a single intent) as expressed in the text of the legislation, its purposes, and the path the legislation took to becoming a law.
What does the U.S. Government say? First, the Court does not even have to go here because the Individual Mandate is constitutional (we’re paraphrasing, but that’s the gist). But since that would have been a short brief, they go on to argue first that the individuals and states cannot challenge provisions of the law that do not impact them, so the Court can only consider the Individual Mandate and Medicaid provisions that are being challenged. If the Court nevertheless decides to conduct a severability analysis, only the community rating and guarantee issue provisions should be struck down (see yesterday’s post for more detail on those provisions). All the other provisions of PPACA, they argue, operate independently of the Individual Mandate and therefore can be left alone.
What do the Individual Parties/NFIB say? The issue could not be more clear. The version of PPACA passed by the House contained language that expressly said any part of the law that is unconstitutional can be severed from the rest of it (this language is sometimes, but not always, included in legislation). However, the final version of PPACA that was signed by the President did not contain any such clause; it was deleted. This means Congress considered the issue and decided that the law could not function without all of its provisions and, in particular, the Individual Mandate.
Furthermore, the Individual Mandate is so essential to PPACA’s stated purposes of lowering insurance costs and increasing coverage that to remove just the Mandate without striking down the whole law would cause a radical increase in premiums and the potential for insurers to exit the health insurance market. Additionally, based on the deal-making necessary to get the law passed, it is clear that it would not have been passed by both Houses of Congress without an Individual Mandate. Therefore, it is so integral to the law that to remove it alone, or to remove only some provisions with it, would not reflect Congressional intent. Finally, if the Court severs more than the Mandate, but does not strike down the whole law, it is essentially rewriting the law and substituting its judgment for that of Congress, which is not within the scope of constitutional powers reserved for the Court. In short, the entire Act must be declared invalid! [That whole Berlin Wall thing doesn’t do it for me. Besides, RR probably would have liked some provisions of the law! Sorry.]
What do the State Parties say? They make many of the same arguments as the Individual Parties/NFIB, but in different ways. As an interesting twist, they characterize PPACA’s reforms as falling into two buckets: “demand-side” reforms (i.e., the Individual Mandate to increase demand) and “supply-side” reforms (i.e., the community rating and guarantee issue provisions, other insurance reforms, and the Medicaid expansion). To remove only the demand-side reforms without removing the supply-side reforms would frustrate Congress’ intent to enact comprehensive health insurance reform.
What does the Special Counsel say? He argues that the mandate is severable. He points out, correctly, that the Court’s presumption is in favor of severability. He argues that the correct analysis is whether Congress would prefer (1) a PPACA without an Individual Mandate or (2) no PPACA at all and that it is clear that the broad-sweeping reforms have independent purpose from the Individual Mandate. He further argues that the absence of a severability clause is a poor indicator of Congressional intent.
Why does this matter?
Yesterday, today, and tomorrow we are posting brief descriptions of the arguments the Supreme Court will hear in U.S. Department of Health and Human Services, et al. v State of Florida, et al., the case challenging the landmark health reform law, the Patient Protection and Affordable Care Act (“PPACA”). As the audio of the oral arguments is released, we will post links to the audio here. Go to our first post for some background and a discussion of Monday’s arguments. Note that, in arguing over the constitutionality of the Individual Mandate, the individual respondents are joined by the National Federation of Independent Businesses (“NFIB”).
Today, the Court will hear two hours of argument on the Minimum Coverage Provision (a.k.a. the Individual Mandate).
What are they arguing about? Does Congress have the power to force you to buy health insurance or pay a penalty? The issue is fundamentally about Congress’s authority to regulate interstate commerce under the Commerce Clause of the Constitution (for an additional discussion of this point, see our October post on this issue). The Court will consider whether the Individual Mandate falls within Congress’ ability to regulate commerce among the states or to tax and spend for the general welfare.
What does the U.S. Government say? Of course Congress can do this, says the U.S. Government. The health care market accounts for 17.6% of the nation’s economy. Insurance pays for health care. Everyone, at some point needs health care and is, whether or not he or she buys insurance, engaged in an economic activity which has a cumulative, substantial effect on interstate commerce. Therefore, it is an economic activity that is part of interstate commerce and completely within Congress’s power to regulate. (We cut out a lot of statistics, but that’s basically the argument.) Alternatively, it is a proper exercise of Congress’s Constitutional taxing authority, i.e., Congress’ power to tax and spend for the general welfare.
What do the Individual Parties/NFIB say? The Mandate imposes a never before seen duty on Americans by forcing them to contract for a private product (health insurance). If Congress can compel the purchase of private insurance, there is no Constitutional principle that would prevent Congress from compelling the purchase of any product whatsoever. Congress can make you buy broccoli, if it chooses. “Buy it, you’ll like it,” Congress can say and you have to buy it, whether you like it or not. Furthermore, the Mandate is not really a tax, but an unequivocal requirement to purchase insurance that just so happens to also have a penalty attached to it. One of the interesting subparts of the tax issue is whether PPACA’s requisite payment is a tax or a penalty, and, if it is a penalty, does that make a difference when considering Congress’ power to tax. The individual parties and NFIB maintain that it is a penalty beyond the scope of Congress’ power to tax.
What do the State Parties say? They argue (similar to the individual parties/NFIB) that this is an unprecedented exercise of federal power to compel individuals to engage in interstate commerce. The minimum coverage provision is tantamount to an exercise of police power, not a regulation of commerce. They say that, if such a power exists in the Constitution, it is strange that Congress waited 220 years to take advantage of it. For example, why did Congress adopt the “cash for clunkers” incentive program if it could have just compelled individuals to buy new cars? Furthermore, such a broad reading of Congress’ power is inconsistent with the framework of a government of limited and enumerated powers.
Why does this matter?
Update: Audio of today’s arguments are now available here.
Over the next few days we are going to post brief descriptions of the arguments the Supreme Court will hear in U.S. Department of Health and Human Services, et al. v State of Florida, et al., the case challenging the landmark health reform law, the Patient Protection and Affordable Care Act (“PPACA”). As the audio of the oral arguments is released, we will post any links to the audio here.
By way of background, there are three parties to this litigation: (1) the U.S. Government who is defending the constitutionality of the law, (2) individuals (sometimes jointed by the National Federation of Independent Businesses) who are essentially arguing that they are harmed by the requirement to purchase insurance, and (3) 26 States, some of which are advocating that the individual mandate violates laws they have passed and some of which are advocating that the Medicaid expansion enacted under the health reform law is unconstitutionally coercive.
First up is the 90 minutes of argument on the Anti-Injunction Act.
What are they arguing about? The Anti-Injunction Act (the “AIA”) is a tax statute that prevents anyone from suing to preemptively prevent the collection or assessment of a tax. Its purpose is to keep all of us from suing about taxes we do not like until after the IRS has had a chance to determine how the tax will be enforced and assessed. Once the tax is assessed, we can either pay the tax and then sue to recover the tax or refuse to pay it and wait for the IRS to pursue collection action. In either case, we can then use our challenge to the collection of the tax to challenge its validity (constitutional or otherwise).
What does the U.S. Government say? Actually, it says the AIA does not prevent the suit because it is a penalty not a tax, and penalties are not subject to the AIA.
What do the Individual Parties say? They agree! They also argue that, even if the AIA applies to the penalty, their challenge is actually to the mandate requiring individuals to purchase insurance coverage, not the penalty that enforces it.
What do the State Parties say? They agree! They also argue that the AIA does not apply to them, but for different reasons. Most notably, because the States have a separate challenge on the grounds that the expansion of Medicaid in the health reform act is unconstitutionally coercive, they say the AIA should not reach their challenge either.
So who is arguing the AIA applies? The Supreme Court appointed a special counsel to argue in favor of the AIA’s application. Basically, the argument is that the penalty is not meaningfully different than a tax to which the AIA applies.
Why does this matter? If the Supreme Court finds that the AIA applies to the individual mandate, it means that the whole suit challenging the minimum coverage provision gets (temporarily) thrown out on its ear and we will have to wait for someone to be assessed the tax and sue in 2015.
Interesting fact: At the district court level, the U.S. Government argued the challenge was barred by AIA. However, they lost that argument and have now changed sides.
A recent South Carolina federal district court case underscores the importance of a robust anti-assignment clause in health plan documents. In the case, the court held that a hospital could not stand in the shoes of a plan participant and sue a health plan to force payment of benefits to the hospital. Prior to receiving treatment, the participant had signed a standard form assigning his benefits to the hospital. When the plan denied benefits, the hospital sued to force the plan to pay.
The plan in question had a strong anti-assignment provision. The court basically said that the plan’s anti-assignment clause governed and rendered the participant’s assignment invalid. The court said that the fact that the plan could, and did, pay benefits directly to providers on behalf of participants in other circumstances did not change the result. The court stated that the direct payment of benefits to providers was not inconsistent with the anti-assignment provision because payment to a third party (here, the hospital) made that party a beneficiary, not an assignee. The hospital had its own rights as a third-party beneficiary, but was not an assignee because it did not receive an assignment of the participant’s rights due to the anti-assignment provision in the plan.
This case highlights the need for plan sponsors to make sure their health plan documents and SPDs contain robust, unambiguous anti-assignment provisions. While this case involved a single provider and a single participant, there are circumstances where a single provider could acquire assignment from several employees and bring a case on their behalf (for example, where the provider provides treatment to several participants using a unique, but experimental, service that the plan sponsor does not intend to cover under the plan). That provider will have a much greater incentive to sue a plan to force payment than any individual participant.
Code Section 409A is, in part, a response to perceived deferred compensation abuses at companies like Enron and WorldCom. The story of Code Section 409A’s six month delay provision is inextricably tied to the Enron and WorldCom bankruptcies.
Under established IRS tax principles, participants’ rights under a non-qualified plan can be no greater than the claims of a general creditor. Because deferred compensation plans often pay out upon termination of employment, a plan participant with knowledge of a likely future bankruptcy could potentially terminate employment and take a non-qualified plan distribution to the detriment of the company’s creditors (a number or Enron executives with advance knowledge of Enron’s accounting irregularities did just this). This opportunistic cash out is obviously unfair to the company’s creditors. In addition, the cash out only helps hasten the likely bankruptcy because non-qualified plan payments come from the general assets of the company.
How did Congress solve this problem? By requiring that a payment of deferred compensation to any of the most highly compensated employees of public companies (called “specified employees”) be delayed at least six months if the payment is due to a separation from service. The thought was that for public companies (like Enron and WorldCom), plan participants would not have enough time to opportunistically terminate employment and receive payout if the payouts were delayed at least six months following termination.
Code Section 409A requires that the six month delay for specified employees of public companies be codified in the relevant plan document. Generally, plans are drafted so that payments due upon separation from service are delayed the required six months, but only if the terminating employee is a specified employee at the time of termination, and only to the extent such payments are “deferred compensation” within the meaning of Code Section 409A.
What should you do if you work for a public corporation and your high-level employment and severance agreements do not contain the required six month delay language?
In the event of a data security breach, evaluating the situation and taking action right away is important. One type of data security breach that employers need to be aware of and that has been receiving attention lately relates to the privacy and security of health information. Over the past year, enforcement of the HIPAA Privacy and Security Rules has become a priority for the Department of Health and Human Services (“HHS”) Office of Civil Rights (“OCR”), as seen by the amount of settlement fines related to violations and the recent flurry of HIPAA compliance audits. For example, last year, Massachusetts General Hospital was fined $1 million to settle potential HIPAA violations related to patient information left on a train by an employee commuting to work. Just this week, HHS announced that Blue Cross Blue Shield of Tennessee agreed to pay $1.5 million to settle possible violations of the HIPAA privacy and security rules, which was the first enforcement action which resulted from a breach report required by the Health Information Technology for Economic and Clinical Health (“HITECH”) Act Breach Notification Rule.
This increased activity in HIPAA enforcement is the result of provisions in the HITECH Act, which introduced new breach notification standards and requires OCR to develop procedures for auditing compliance with HIPAA.
The HITECH Act, enacted in 2009, addresses the privacy and security concerns associated with the electronic transmission of health information, in part, through several provisions that strengthen the civil and criminal enforcement of the HIPAA rules. In the event of a breach of any protected health information (“PHI”), covered entities have an obligation under HIPAA to mitigate, to the extent practicable, any harmful effects that are known to the covered entity as a result of the breach. In addition, under HITECH, if the breach involves “unsecured PHI” (or a reasonable belief of such breach), a covered entity must give certain required notifications of the breach. The required notifications must be made without unreasonable delay and in no case later than 60 calendar days after discovery of the breach (or when the breach would have been discovered had reasonable diligence been exercised).
The covered entity should notify the individual in writing by first-class mail (or e-mail if the individual indicated such preference). The covered entity may also telephone individuals (in addition to written notification) if the notice is deemed urgent because of possible imminent misuse of unsecured PHI. Notice must also be provided to HHS and, if the breach involves more than 500 individuals, prominent media outlets. The covered entity has the burden of proving that the required notifications were made or that the use or disclosure did not constitute a breach.
Other Data Security Breach Reporting Requirements
As benefits professionals we are especially aware of HITECH’s requirements but, in the event of any data security breach, employers need to consider whether other statutes apply. For example, since 2004, almost every state has adopted a statute that requires companies to notify consumers and/or employees if their sensitive information may have been obtained by an unauthorized third party. As another example, public companies should consider guidance from the Security and Exchange Commission issued last year regarding the disclosure of cybersecurity incidents in their disclosure statements.
As a convenience for our clients, Bryan Cave has launched a data breach hotline. An attorney from our Data Privacy & Security Team is available 24 hours a day to advise clients on what to do when their data may have been accessed by an unauthorized party, lost, or accidentally disclosed (including a breach of PHI). How our clients respond in the first 24 hours following any type breach has a dramatic effect on our ability to defend them in resulting investigations and litigation. When a security breach occurs, preventing liability often means analyzing the facts, identifying legal obligations, and taking steps to prevent or mitigate harm within the first minutes or hours. The Bryan Cave Data Privacy & Security Team launched the hotline to leverage our depth of knowledge and geographic platform to provide clients with immediate help.
For more information about the Bryan Cave Data Breach Hotline or the Bryan Cave Data Privacy and Security Practice please contact David Zetoony at 202-508-6030. For more information about the breach notification requirements of the HITECH Act, contact any of the benefits attorneys listed on the “Team” page of Bryan Cave’s Benefits Blog.
Your company sponsors an annual bonus program. Bonuses are tied to company calendar year performance. The bonus plan says that payments are to occur by March 15th of the year following the performance year. March 15th has always struck you as an odd date.
A friend at another company calls you up, very excited. Her company’s financial performance last year was stellar, and she’s expecting a large payment by March 15th. Another friend at a different company mentions that he’s buying new furniture on the 17th. The proximate cause? Annual bonuses are paid on March 15th.
It is no coincidence that companies often pay out annual bonuses around March 15th. In the case of a company with a calendar year tax year, paying bonuses by March 15 will generally allow the company to deduct the bonuses in the tax year which ends on the prior December 31. But there may be another reason for structuring bonus payouts in this manner: to comply with Code Section 409A.
Code Section 409A generally applies when the right to an amount arises in one year, but the amount can be paid in the next. So, for example, an annual bonus paid shortly after the end of a calendar year could potentially be subject to Code Section 409A.
However, amounts paid by the 15th day of the third month following the end of the year in which the amount “vests” are exempt from Code Section 409A as “short term deferrals.” Thus, March 15th.
But what happens if your company needs to delay scheduled annual bonus payments past March 15th? What if, for example, calculating the company performance for the bonus year takes longer than anticipated, and pushes the payments to March 20th? Surely Code Section 409A doesn’t care about short delays. . .
Code Section 409A cares about most short delays. If your payment is even one day late, it could fall out of the safe confines of the “short term deferral” exception and into the cold and hard rules of Code Section 409A proper. The only exceptions available are for unforeseeable exigent circumstances or because making the payment would jeopardize the company as a going concern. But these exceptions are limited – if there is a practice of regularly making payments after March 15th, there could be Code Section 409A issues.
There is a saving grace. You can structure your bonus plan to both be exempt from Code Section 409A and comply with Code Section 409A’s fixed payment rules. This would require, for example, using a fixed date (e.g. January 1) or period (e.g. January 1 through March 15th) for payment, but providing a March 15th outside payment drop dead date.
What does this approach buy you? If the payment occurs after March 15 but on or before the following December 31, there is no Code Section 409A violation (although there may be a contractual violation).
Let’s say that you are negotiating your CEO’s new employment agreement. Because she is preparing for retirement, the CEO would like to be entitled to a stream of monthly lifetime separation payments upon her voluntary termination. This type of lifetime benefit makes sense for your company, and, based on the CEO’s long and faithful service to the company, you agree.
The CEO then asks for a provision calling for an immediate lump-sum payment upon her involuntary termination. The amount of the payment would be the present value, using reasonable actuarial assumptions, of the monthly separation pay annuity. This request seems reasonable – the fact that things may go sour in the future doesn’t change the fact of the CEO’s long service. And in an involuntary termination situation, who would want to receive payments over a period of time rather than in a lump sum? Should you agree to this request?
No. And regular readers of this blog will not be surprised as to why – Code Section 409A.
Code Section 409A generally requires that payments be made in a single form following each permissible payment triggering event. This means, for example, that a plan couldn’t provide for payment of an amount in a lump-sum if a change in control occurs in a January and a one-year stream of payments if a change in control occurs in a February. Payment forms can differ, however, if the permissible triggering event differs. It is permissible to call for payment of an amount over five years upon separation from service, but call for an immediate lump-sum payment of the same amount upon an intervening change in control.
There are quite a few exceptions to this rule. First, a payment upon a triggering event other than a separation from service can be in different forms on either side of an objectively determinable pre-specified date. For example, a change in control benefit could be paid in a lump-sum if the change in control occurs prior to a plan participant’s attainment of age 55 and could be paid in a life annuity if the change in control occurs after age 55. In essence, this exception permits a plan to “toggle” between two (and only two) forms of payment.
Separation from service payments can potentially “toggle” between three different forms of payment: a normal form of payment, a separate form for separations within up to two years following a change in control, and a final form for separations that occur before or after a specified date (or combination of a date and years of service). For example, an employment agreement could call for the same amount of separation pay to be paid in 36 monthly installments upon separation before age 62, a life annuity upon separation on or after age 62, and in a lump-sum if separation occurs during the year following a change in control.
What to do if your plan impermissibly toggles between forms of payments? The IRS generally permits correction by amending the plan so that the longest permissible forms of payment apply. And if the problematic triggering event occurs within one year of the date of correction, penalties could apply. As always, certain correction documents must be filed with the IRS.
The employee benefit plan audit season is quickly approaching for calendar year plans. If the number of participants in your defined contribution plan, defined benefit plan, or employee stock ownership plan crossed the magical threshold of 100 or more participants in 2011, your annual Form 5500 filing responsibilities now include engaging an independent accounting firm to perform an audit of your plan. Form 5500s are due by the seventh month following the end of the plan year. Therefore, if you sponsor/administer a calendar year plan, you must file the Form 5500 by July 31; however, a 2½ month extension is automatically made available by filing IRS Form 5568. Even with an extension, it is important to get the audit process underway sooner rather than later (even if this isn’t your first plan audit).
As part of the audit process, the auditor will examine various documents to determine your adherence to the terms of the plan, timeliness of deposits (especially, 401(k) salary deferrals and loan repayments), accuracy and completeness of personnel files, and the handling of forfeitures. If plan assets are held by a trust company or an insurance company, your plan may qualify for a limited-scope exemption. Although you will still be required to have independent audit, the scope of the audit will not include an audit of plan investments.
Perhaps the most daunting task from the perspective of a plan administrator is gathering all the required documents – so start now. You don’t have to wait until you have formally engaged an auditor. Although the list of required documents may vary among auditors, below are the standard items that most auditors will generally need to conduct the audit:
- Plan document, including any plan amendments, and the summary plan description
- IRS determination letter
- Prior year’s Form 5500 (including the independent auditor’s report, if applicable)
- If your plan holds employer securities for which published market values as of the end of the plan year are not readily available or if your plan holds investments in limited partnerships, real estate, or other investments, an independent appraisal of such investments
- Annual census report, preferably including both eligible and ineligible participants
- Year-end summary of all participant loans
- If the plan’s financial statements are prepared on an accrual basis, a list of any employee and employer contributions that have not been deposited by the close of the plan year
- Annual administration report from the plan’s recordkeeper, including participant allocation reports and results of discrimination and coverage tests
- SSAE 16 report (formerly the SAS 70)
- Trust statements, or in the case of a limited-scope audit, certification of investments from the custodian or trustee
- Recordkeeper and trustee services agreements
Its a good idea to check with your plan’s service providers to determine what information, if any, they can provide. This may be as simple as requesting an “annual audit package” from the plan’s third party administrator and trust company.
Ideally, audit preparation is something that occurs throughout the year. As a matter of best practices to facilitate the audit process (and thereby potentially minimizing audit costs), a plan sponsor/administrator should:
- Work regularly with ERISA counsel and other service providers regarding plan changes, regulatory updates, and administrative challenges, as well as potential audit implications
- Keep contribution remittance schedules updated and immediately address any delinquent contribution issues
- Fully document all plan processes and controls
- Perform internal audits to ensure that any non-compliance is identified early and corrective measures taken in a timely manner and through IRS/DOL voluntary correction programs
- In the event of any mergers, acquisitions, or reductions in force, discuss any potential audit implications, as well as proper administrative steps, with ERISA counsel, auditor, and other services providers
- Involve ERISA counsel and auditors in discussions prior to a change in service providers to identify common pitfalls in the conversion process; loans, outstanding checks, certification of assets, reporting of earnings, etc.
An incomplete, insufficient, or delinquent audit may result in the assessment of penalty against you as the plan administrator. Therefore it is imperative that an experienced and reliable auditor is selected. Any accountant selected to conduct the audit should have specific experience auditing employee benefit plans so that he/she has familiarity with benefit plan administration and operations. You can visit the Department of Labor’s Employee Benefits Security Administration website and click “Fiduciary Education” for more information on selecting an auditor.