In ACS Recovery Services, Inc. v. Griffin (2013 CA5), the Fifth Circuit recently allowed fiduciaries of an ERISA group health plan to seek reimbursement from a special needs trust established for a participant through a personal injury settlement. The key to this decision was the court’s interpretation of the leading Supreme Court cases in this space – Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204 (2002) and Sereboff v. Mid-Atlantic Medical Services, Inc. 547 U.S. 356 (2006).
In this case, Mr. Griffin was employed by FKI Industries and was a participant in its ERISA group health plan when he was injured in a car accident. Mr. Griffin entered into a settlement with a third party for $294,440, but did not reimburse the ERISA group health plan for the $50,076 in medical expenses it paid. After segregating attorneys’ fees, additional medical expenses and amounts for Mr. Griffin’s ex-spouse, the settlement required the defendant to purchase an annuity from an unrelated insurer. The annuity made monthly payments to Mr. Griffin’s special needs trust. Mr. Griffin’s attorney indicated that the settlement was specifically structured to avoid any equitable lien claimed by the ERISA group health plan.
The Fifth Circuit’s en banc decision did not allow the plan’s equitable lien to be defeated by the structure of the settlement. In Knudson, the ERISA plan sued the participant directly, and the Supreme Court held that an action for restitution against the participant, when the settlement funds were held in a special needs trust, was a legal cause of action for breach of contract. Since Section 502(a)(3) of ERISA only allows equitable relief, the plan’s claim against the participant could not proceed. However, in this case, the plan sued the trustee of the plan participant’s special needs trust. Since Mr. Griffin had an agreement with the plan to reimburse the plan from any third party settlement, his settlement agreement created an equitable lien against the settlement money. Therefore, the Fifth Circuit concluded that it was appropriate equitable relief under ERISA to impose a constructive trust on the settlement amounts, which include the proceeds from the annuity as they are paid into the special needs trust.
Mr. Griffin and the other defendants argued that the equitable lien was not proper because none of the defendants possessed the settlement funds. The funds were held by Hartford, the insurer of the annuity, not the plan participant, and they argued that Mr. Griffin was never in control of the funds. However, the Fifth Circuit did not interpret Sereboff to require a strict tracing requirement to funds that were at one time in the possession of the plan participant, but instead permitted an equitable lien by agreement to attach to the settlement funds held by the defendant trustee.
Plan language describing subrogation and reimbursement from third party litigation amounts can always be improved. In order to put the plan in a better litigation position, the language should clearly describe that the ERISA group health plan has an equitable lien by agreement to any settlement amounts, no matter who holds such amounts, and that the lien is created upon payment of any medical expenses under the plan.
Earlier today, the U.S. Supreme Court held that Section 3 of the Defense of Marriage Act (“DOMA”) is unconstitutional. Section 3 contained the definition of “marriage” for federal law purposes and restricted the definition to include only marriages between a man and a woman. [Additional background information may be found here.] Now, the federal government must look to state law to determine whether a couple is legally married for the purpose of more than 1,000 federal laws, including ERISA, the Internal Revenue Code, COBRA, and FMLA. The Court explained “DOMA’s unusual deviation from the usual tradition of recognizing and accepting state definitions of marriage here operates to deprive same-sex couples of the benefits and responsibilities that come with the federal recognition of their marriages.”
What Does This Mean for Employers? It means that in states that recognize same-sex marriages, same-sex spouses are immediately eligible for the same federal benefits as opposite-sex spouses, including laws related to retirement accounts, qualified pension plans, and tax return filings and withholding. For example, under a qualified retirement plan, the default beneficiary for death benefits is the employee’s spouse, unless the spouse consents. Until today, the definition of spouse excluded legally married same-sex couples.
What Next? The holding raises a number of issues that will need to be clarified in the upcoming months and possibly years. What happens if a same-sex couple is legally married in one state, but then moves to another state that does not recognize same-sex marriage – is the couple not married for federal law purposes? What if one spouse lives in a state that recognizes same-sex marriage and the other doesn’t – is one spouse married and the other is not? Can they file a federal joint tax return? In states where same-sex marriage is legal, will employers still be permitted to define marriage to exclude same-sex spouses for purposes of providing health and welfare benefits? If Section 2 of DOMA is also overturned, many of these questions will be answered, but what happens until then?
Employers need to familiarize themselves with the federal laws that provide benefits to spouses and stay on their toes since this decision will impact a number of benefit plans. We will provide further analysis on this topic and others in a series of posts over the coming days and weeks.
[Many thanks to our summer associate Michael Lanahan for his assistance in researching and drafting this post]
Tomorrow, Wednesday June 26th, the Supreme Court is expected to release two opinions related to same-sex marriage: Windsor v. United States – a constitutional challenge to Section 3 of DOMA and Hollingsworth v. Perry – a constitutional challenge to Prop 8. [Additional background information may be found here.]
While same-sex marriage supporters wait anxiously for the rulings, employers are also waiting to see how these rulings may affect employee benefit offerings. A broad ruling could mean that employers would need to provide benefits and protections to same-sex spouses immediately, though many commentators believe that the court will not rule broadly in either case (i.e. both cases could be dismissed for lack of standing).
If the court does overturn Section 3 of DOMA, many uncertainties for employers would still exist, such as what benefits and protections must be provided to same-sex spouses that married in one state but now live in a state that does not recognize same-sex marriage. Due to Section 2 of DOMA (this section is not at issue in the current case), states are able to avoid recognizing same-sex marriages performed in other states under the Full Faith and Credit Clause. If Section 3 is overturned, will Section 2 still be valid and enforceable? Will employers need to keep track of what states their employees were married in and what states they currently reside in and change benefits accordingly? We’ll just have to wait and see what SCOTUS says.
Among other things, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires a company with securities listed on a national exchange to:
- Have a compensation committee of independent directors;
- Provide the committee with authority and funding to retain its own advisers; and
- Have the committee assess the independence of its advisers (other than in-house counsel) before retaining the adviser or receiving the advice.
As previously announced in our January 29, 2013 client bulletin (available [here]), the NYSE and Nasdaq have adopted rules implementing the Dodd-Frank requirements.
Effective July 1, 2013, under applicable NYSE and Nasdaq rules, the compensation committee is required to consider the independence of its compensation consultant, outside legal counsel and other advisers before selecting or receiving advice from them. There is no requirement that the committee hire or receive advice from solely independent advisers, only that it consider their independence before selecting or receiving the advice.
The independence assessment requirement is triggered not only when the committee is directly responsible for the appointment and oversight of the adviser, but also potentially when the committee receives advice indirectly from a compensation consultant, legal counsel or other adviser retained by management.
Management and in-house counsel often assist the compensation committee with its responsibilities by providing information and other assistance to the committee. As part of this process, management may seek guidance regarding best practices, and technical tax or securities law requirements from its compensation consultant or outside counsel. Based on informal guidance from the SEC staff, it would be advisable to consider whether outside counsel may be deemed to be providing indirect advice to the committee, based on the particular facts and circumstances, thereby triggering the independence assessment requirement.
Some examples of potential indirect advice to the committee may include advice regarding: design of stock or bonus plans and awards for executives, preparation of executive employment or severance agreements, assistance with proxy statement compensation disclosures or compensation plan proposals and other regular securities or tax law advice. The SEC has stated that the independence assessment is required of any consultant, outside counsel or adviser that provides advice to the committee, whether or not limited to advice on executive compensation.
The committee must review and assess the independence of its advisers by considering the following six factors (in the case of NYSE companies, in addition to any others deemed relevant):
- The types of services provided by the advisory firm to the company;
- The amount of fees received by the advisory firm as a percentage of the total advisory firm revenue;
- The policies and procedures the advisory firm has in place that are designed to prevent conflicts of interest;
- Any business or personal relationship of the individual adviser with a member of the compensation committee;
- Any stock of the company owned by the individual adviser (and his or her immediate family members); and
- Any business or personal relationship of the individual adviser or the advisory firm with an executive officer of the company.
Note, that “smaller reporting companies” and certain other categories of companies are exempt from these requirements. In addition, the independence assessment is not required for a compensation adviser whose role is limited to (i) consulting on any non-discriminatory broad-based plan or (ii) providing information that is not customized for a particular company or customized based on parameters not developed by the adviser and about which the adviser does not consult.
In approving the new rules, the SEC indicated that it anticipates that committees will conduct their independence assessments at least annually.
In anticipation of the July 1, 2013 effective date of this new listing requirement, many compensation consultants, outside legal counsel and other advisers are gathering data to assist compensation committees of their public company clients with such requirement. Some commentators recommend that compensation committees preemptively consider the independence of the company’s regular outside counsel at the committee’s next scheduled meeting, in order to avoid risk of delays in case of an unanticipated need to consider such outside counsel’s advice later in the year.
Action Items: We recommend that each NYSE and Nasdaq company:
- Ensure that its compensation committee is aware of this new requirement;
- Assist the committee by preparing a list of compensation consultants, legal counsel and other advisers directly retained by the compensation committee;
- Assist the committee and/or management in determining whether and when it would be advisable to evaluate the independence of advisers retained by management or in-house counsel that could be deemed to provide indirect advice to the committee and, if so determined, provide the committee with a list of such indirect advisers;
- Gather any information provided by the advisers for review by the committee; and
- Assist the committee with obtaining any additional information necessary to complete the independence assessment before retaining the adviser or receiving advice.
On Friday, the Centers for Medicare and Medicaid Services (“CMS”) issued a proposed rule addressing various issues relating to exchanges, small business health options program (“SHOP”) and qualified health plan (“QHP”) issuers. Most of the 250+ pages detail proposed standards intended to ensure the oversight and financial integrity of such entities. This post focuses on the provisions addressing consumer protections, applications for individual coverage, and administration of premium tax credits and cost-sharing reductions.
Qualified Health Plan Issuers
Beginning October 1, individuals will be able to shop for QHPs offered by issuers through state-based marketplaces (“Exchange”). QHP issuers that seek to directly enroll individuals through an Exchange will be required to meet certain minimum consumer protection requirements, including ensuring that their websites provide standardized comparative information on each available QHP offered and premium and cost-sharing information, providing summaries of benefits and coverages, identifying whether a plan is a bronze, silver, gold or platinum metal level or a catastrophic plan, disclosing the results of any enrollee satisfaction survey, notifying applicants of the availability of other QHP products through the Exchange, etc. The issuer’s website must clearly distinguish between the QHPs for which the individual is eligible and non-QHPs that the issuer may offer and display a link to or describe how to access the Exchange website. A QHP issuer seeking to directly enroll applicants must also enter into an agreement with the Exchange before its customer service representatives may assist individuals in the individual market with applying for an eligibility determination or redetermination, applying for financial assistance or facilitating the selection of a QHP offered by the issuer. The premium that a QHP issuer charges an enrollee must be the same as was accepted by the Exchange in its certification of the QHP issuer.
QHP issuers will be required to accept a variety of payment formats, including but not limited to, paper checks, cashier’s checks, money orders and replenishable pre-paid debit cards in order to accommodate individuals without a bank account or credit card.
CMS anticipates providing each QHP issuer with a monthly payment and collections report that will include advance payments of the premium tax credit and advance payments of cost-sharing reductions that the Department of Health and Human Services (“HHS”) is paying to the issuer for each policy as well as any amounts owed by the issuer as adjustments from prior payments. Issuers will have 15 days from the date of the report to confirm the accuracy of the report or describe any discrepancies.
Exchange Eligibility Standards
Individuals who are interested in obtaining health coverage with or without financial assistance (i.e., premium tax credit and cost sharing reductions) through their State Exchange must complete a Health Insurance Marketplace Application. If an applicant does not provide sufficient information on an application for the Exchange to conduct an eligibility determination for enrollment in a QHP or for financial assistance, the Exchange will provide written notice indicating that the information necessary to complete an eligibility determination is missing, specifying the missing information and including instructions on how to provide the missing information. CMS proposes to provide an applicant with between 15 to 90 days to provide the necessary information.
Administration of Advance Payment of Premium Tax Credit and Cost-Sharing Reductions
If a State Exchange that facilitates the collection and payment of premiums to QHP issuers discovers that it did not reduce an enrollee’s premium by the amount of an advance premium tax credit payment, it must refund the excess premium paid by the enrollee within 30 days after discovery of the failure. The Exchange can provide a refund to the enrollee by reducing the enrollee’s portion of the premium in the following month, as long as the reduction is provided within the requisite 30-day period. The same rules apply to a QHP issuer who collects premiums directly from an enrollee and fails to apply the advance payment of the premium tax credit to the enrollee’s portion of the premium. In addition, a QHP issuer who fails to apply a cost-sharing reduction when the cost-sharing is collected must notify the enrollee and refund any excess cost-sharing paid by or for the enrollee within 30 days after discovery of the improper application.
The provisions of the proposed rule are generally effective for 2014.
While the EEOC continued to grapple with what level of financial incentives is acceptable under nondiscrimination laws (e.g., GINA and ADA), the DOL, HHS and Treasury (the “Departments”) issued final regulations addressing incentives for nondiscriminatory wellness programs in group health plans. The final regulations generally follow the proposed regulations issued by the Departments last November (see our prior post here), including increasing the maximum incentive threshold for health-contingent wellness programs from 20% to 30% (50% in the case of tobacco related programs) of the total cost of coverage, and provide numerous clarifications. For an overview of the new wellness rules, which are effective for plan years beginning on or after January 1, 2014, please see our recent client alert.
In addition to the usual commentary, the preamble to the regulations include a report of the findings of a study of wellness programs sponsored by the DOL and HHS and conducted by the Rand Corp. Seventy-three percent of respondents that offered wellness programs believed that they improved employee health and 52% believed that they reduced costs. Larger employers were more positive in believing that wellness programs reduced costs (68% versus 51%).
Although the evidence on the effectiveness of wellness programs was, in some previous studies, found to be promising, it was not conclusive and may not be supported by the Rand survey. In a 2010 survey conducted by Buck Consultants, 40% of employers measured the impact of their wellness program, and of these, 45% reported a reduction in the growth trend of their health care costs (between two to five percentage points per year). A recent article in the Harvard Business Review cited positive outcomes reported by employers in health care savings, reduced absenteeism and employee satisfaction. In studies evaluating the impact of smoking cessation programs (typically education and counseling), participation decreased the smoking rate among participating smokers by 30% in the first year. In the Rand survey, however, only approximately 50% of employers with wellness programs formally evaluated their program’s impact, and only 2% reported actual cost savings. Further, an in-depth evaluation of an extensive wellness program involving a hospital system found that although the wellness program reduced inpatient hospitalization costs, these cost savings were cancelled out by increased outpatient costs. A recent article in Health Affairs also found that employer savings from wellness programs may result more from cost-shifting, rather than healthier outcomes and reduced health care usage. In another study investigating the effectiveness of a smoking cessation program, significant differences in smoking rates were found at a one-month follow-up, but showed no significant differences in quit rates at six months. Nonetheless, employers generally seemed satisfied with their wellness programs, even those who did not know their programs’ return in investment.
Over two-thirds of Rand survey respondents use incentives to promote employee participation in wellness programs with the completion of a health risk assessment as the most commonly utilized incentive program. In contrast, only 10% of employers with more than 50 employees use incentives tied to health standards, only 7% link the incentives to health premiums and only 7% administer results-based incentives through their health plans. Not surprisingly, the most common form of outcome-based incentives were for smoking cessation, with almost the same percentage of employers rewarding actual smoking cessation (19%) as rewarding mere participation in a smoking cessation program (21%). The value of incentives varied widely with the average annual value ranging between $152 and $557, or between three and eleven percent of the average cost of individual coverage. According to the Rand survey, maximum incentives averaged less than 10% of the total cost. In light of employers’ relatively low use of incentives in wellness programs, the Departments determined that the increase to the maximum reward for participating in a health-contingent wellness program is unlikely to have a significant impact.
Of course, the remaining question is whether the new 30% total cost threshold under the recently issued final regulations (or even the 20% threshold under the prior 2006 regulations) will pass muster with the EEOC. Although the EEOC held a public meeting last month, it sill has provided no guidance on the level of wellness program incentives which an employer may offer without causing the program to be deemed impermissibly mandatory under nondiscrimination provisions other than the HIPAA nondiscrimination provisions.