As if compliance with the ACA’s market reforms and complex plan design rules (including an assessment of affordability and minimum value), hasn’t caused enough headaches – now you have to prepare to track and report detailed information about your compliant offers of coverage? Unfortunately, the answer is “yes”. Time spent now tracking information and making decisions about how an employer plans to report in early 2016 (for the 2015 plan year) will make completion of those yet-to-be-released forms more feasible in the future.
ACA reporting may not be required until the first quarter of 2016, but employers need to get prepared now to comply with those requirements due to the detailed information required. While tracking hours may be inevitable for certain employers (by use of hour tracking software or internal systems) either for assessing who must be offered coverage and/or affordability of coverage, even those employers who are comfortable with their plan designs and cost structures for these purposes may still need to track hours in order to report the information mandated by applicable large employers under Code Section 6056.
What reporting is required that could cause employers to need to track hours?
The annual reports that must be filed with the IRS pursuant to Code Section 6056 (on yet to be released IRS Forms in the 1095 series) are intended to assist the IRS in administering and enforcing the Employer Mandate (also called the Play or Pay) rule. Under the rules finalized by the IRS earlier this year, the general method for reporting requires an employer to list the number of full-time employees for each month during the calendar year and the name, address and other information for each full-time employee during the year. Use of this method would, therefore, requires an employer to specifically know who was considered full-time in order to accurately complete the report. This means that tracking hours may be required….
There has to be a better way…
The IRS has set forth an alternative reporting method that an employer may use in lieu of the standard report, that does not require separate identification of full-time employees. There’s a catch – In order to use this alternative method, the employer must certify that it offered coverage that provides minimum value and is affordable to at least 98 percent of the employees who it lists on its report. It need not certify that coverage is affordable for part-time employees. Thus, this alternative method may be useful for the employer who offers coverage to all or almost all of its common law employees and who has a fairly good idea of who works at least 30 hours per week.
When deciding whether to track hours and/or use the alternative reporting method, an employer will need to closely scrutinize its level of comfort that 98% of all reported employees (which generally should be full-time employees) have been offered ACA-compliant coverage. Remember, collectively bargained employees and leased employees present special issues that should be carefully vetted.
But what if I don’t track and a part-time employee gets subsidized coverage on the exchange?
If the decision is made not to track hours and, the filing of the Form 1095 report required by Code Section 6056 triggers assessment of a Code Section 4980H(b) penalty (i.e., $3,000 per employee who receives subsidized exchange coverage) because coverage was not affordable for a certain employee, the employer is left to defend against a penalty by proving that the employee in question was not “full-time”. In that case, the employer will need to retroactively “recreate” the records and track hours for that employee in order to refute a claim that he/she was “full-time.”
Plan designs and corresponding systems should be put in place soon to facilitate compliance with these rules in 2015 and the Q1 2016 reporting cycle.
As a child, you may have sung “do you know the Muffin Man?,” but as an employer you should make sure you know the Yard-Man inference.
The “Yard-Man inference” comes from the Sixth Circuit’s decision in Auto Workers v. Yard-Man, Inc. In that opinion, the Sixth Circuit created a presumption that retiree welfare benefits vest on retirement, unless a collective bargaining agreement clearly states otherwise.
However, the inference that these types of benefits vest has not been well received in all courts. For example, the Third Circuit has held the exact opposite: that retiree welfare benefits granted under a CBA expire with the CBA unless the agreement explicitly states otherwise. Auto Workers v. Skinner Engine Co..
The split between the Circuits has likely contributed to the Supreme Court’s recent decision to review the case of M&G Polymers USA, LLC v. Tackett, which directly addresses the “Yard-Man inference.”
Enter Sen. Rockefeller (D-WV), with the “Bankruptcy Fairness and Employee Benefits Protection Act of 2014” which aims to turn the “Yard-Man inference” into a rebuttable presumption and to require employers to include information about modification of benefits in their summary plan descriptions, among other items. The Act has been seen by some as an effort to get out in front of the Supreme Court’s review of the “Yard-Man inference.” The Act would:
- Require employers to include in their SPDs whether the employer may unilaterally modify or terminate benefits.
- If the employer’s rights are not clearly communicated to employees, there will be a presumption that benefits have “fully vested and cannot be modified or terminated for the life of the employee or, if longer, the life of the employee’s spouse.” This presumption will apply to both retired employees and employees who have served twenty (20) or more years. And, this presumption may not be easily overturned. “Clear and convincing evidence” must show that the plan allows modification or termination of benefits and that employees were “made aware, in clear and unambiguous terms” of the employer’s ability to modify or terminate benefits.
- Make it an “unfair labor practice” to change the terms of a CBA that governs retired employees’ benefits.Only allow reductions in benefits that are “necessary to prevent the liquidation of the debtor.”
- Require reductions in officers’ and directors’ benefits that are comparable to reductions in employees’ benefits.
- Provide a right to sue to retirees whose benefits are reduced; this right is in addition to a requirement that the employer provide the equivalent of two (2) years of benefits even if the employer has filed for bankruptcy.
- Increase employees’ priority claims for unpaid wages or benefits from $10,000 in the last 180 days to $25,000 in the last year.
- Prohibit a change in venue for bankruptcy proceedings from the district with “the largest share of employees, retired employees, physical assets, and operations” unless the change is to the district where the employer’s principal place of business is located.
- Extend rights to municipal employees and retirees that mirror rights given in corporate bankruptcies.
- Disallow any interruption in “required pension contributions” even after the employer has filed for bankruptcy.
- Commission from the Comptroller General of the United States a report about strategies that employers use “to avoid obligations to pay promised employee and retiree benefits.” The report should include suggestions to prevent this evasion from continuing.
Even if the Act does not pass, the Supreme Court may still make the “Yard-Man inference” law. Either way, this underscores the importance of clearly stating the ability to modify welfare benefits in all relevant plan documents, SPDs, and CBAs because clarity is the enemy of litigation.
Many thanks to our Summer Associate, Meredith Silliman, for her assistance in preparing this post.
Late Friday afternoon, the Departments of Treasury, Labor and Health and Human Services (the “Departments”) issued final regulations (the “Final Rule”) clarifying the interaction between a reasonable and bona fide employment-based orientation period and the 90-day waiting period limitation under the Affordable Care Act (“ACA”).
For plan years beginning on or after January 1, 2014, ACA prohibits a group health plan from applying a waiting period of more than 90 days. Contemporaneous with the February 24, 2014 issuance of final regulations on the 90-day limitation, the Departments issued proposed regulations addressing employee orientation periods. Such proposed regulations provide that conditioning plan eligibility on an employee’s completion of a reasonable and bona fide employment-based orientation period would be permissible if the orientation period does not exceed one month and the maximum 90-day waiting period begins on the first day after the orientation period.
The Final Rule adopts the proposed orientation period rule and offers some additional clarification. Although a plan may impose substantive eligibility criteria (i.e., being in an eligible job classification, achieving job-related licensure requirements specified in the plan, or satisfying a reasonable and bona fide employment-based orientation period) , it may not impose conditions that are mere subterfuges for the passage of time.
Under the Final Rule, the conditioning of plan eligibility on an employee’s completion of a reasonable and bona fide employment orientation period will not be considered to be designed to avoid compliance with the 90-day waiting period limitation; provided the orientation period does not exceed one month (not 30 or 31 days). For this purpose, one month is determined by adding one calendar month and subtracting one calendar day, measured from an employee’s start date in a position that is otherwise eligible for coverage. For example, if an employee’s start date in an otherwise eligible position is May 3, the last permitted day of the orientation period is June 2. In the absence of a corresponding date in the next calendar month upon adding a calendar month, the last permitted day of the orientation period is the last day of the next calendar month. Thus, if the employee’s start date is January 30, the last permitted day of the orientation period is February 28 (or February 29 in a leap year).
After an individual is determined to be otherwise eligible to enroll (i.e., has satisfied the plan’s substantive eligibility conditions), the plan cannot apply any waiting period that exceeds 90 days. For purposes of calculating this 90-day period, all calendar days are counted beginning on the enrollment date, including weekends and holidays. The enrollment date refers to the first day of coverage or, if there is a waiting period, the first day of the waiting period. The Final Rule also notes that a plan that imposes a 90-day waiting period may, for administrative convenience, choose to permit coverage to become effective earlier than the 91st day if the 91st day is a weekend or holiday.
Pursuant to Code section 4980H, an applicable large employer must offer full-time employees affordable minimum value coverage by the first day of the fourth full calendar month of employment to avoid the possibility of an assessable penalty tax (the “Employer Mandate”). This requirement must be satisfied separate and apart from compliance with the Final Rule (i.e., the requirements relating to orientation and waiting periods). In other words, compliance with the Final Rule is not determinative of an applicable large employer’s compliance with Code section 4980H.
An applicable large employer that has a one-month orientation period may comply with both the 90-day waiting period limitation and the Employer Mandate by offering coverage no later than the first day of the fourth full calendar month of employment. For example, a full-time employee hired on January 6 is offered plan coverage on May 1. However, an applicable large employer will not be able to impose both a full one-month orientation period and a full 90-day waiting period. Thus, if coverage starts on May 6, which is one month plus 90 days after date of hire, the employer may be subject to an assessable payment under Code section 4980H.
The inconsistent coverage obligations under the Final Rule and the Employer Mandate may seem confusing. It may help to bear in mind that some employers will be subject to the Final Rule – but not the Employer Mandate. In that case, the employer would simply comply with the Final Rule. However, an applicable large employer is subject to the Employer Mandate and must comply with its more stringent requirements.
The Final Rule is effective on August 24, 2014 (60 days after publication in the Federal Register) and applies for plan years beginning on or after January 1, 2015. Until then, adherence to the proposed rule will constitute compliance.
One of my law school professors and now good friends, Professor Burt Brody, has been contemplating beneficial changes to the Affordable Care Act. I think he is on to something beneficial.
Professor Brody has written an op-ed piece published in the Desert Sun on May 21, 2014. In the column, he supports the notion of having the health insurance industry participate fully in the correction, and he eschews the notion of “national health care” in its pejorative sense. Professor Brody, without saying so, realizes that the Act is a health insurance reform act, not truly a health care reform act.
His suggestion is to take the amount that the federal government spends today on health care, and dole it out to everyone with a Social Security card – that’s every legal American – based on age brackets and veteran status that reflects perceived need for health insurance. The funds would be used to buy health insurance. Professor Brody assumes that younger people are going to pay less for health insurance than older Americans, and, based on age cohorts, the amounts would increase with age. Note that this does not require that there be any tax increase to implement, although there would likely be administrative costs in setting up and running the system, probably through the Social Security Administration since it already has our social security numbers, addresses, and dates of birth.
Next, the professor suggests using the “commerce power as it was intended,” i.e., to prevent state barriers to interstate commerce. This means that insurance companies could sell their health policies across state lines thus creating a national market for health insurance and elimination of the state and federal “exchanges.” Professor Brody suggests that this would allow the free market to work since the carriers would want to attract people to their products in order to collect the stipend-related premiums. If a stipend were not used, it would be added to next year’s stipend pool with the expectation of getting more people to buy insurance. Of course, everyone would have the option to buy better coverage with their and/or their employer’s money.
The program would allow families to pool stipends in order to acquire family coverage, and it would allow employers to purchase supplemental plans as an employment attraction tool.
Professor Brody suggests that this approach keeps the government out of the doctor-patient relationship, eliminates the need for a health care bureaucracy, and maybe best of all, puts Congress in the position it is intended to be in: passing laws regarding funding and revenue.
I assume that Professor Brody would want to retain those aspects of health insurance coverage that seem to please people, e.g., no pre-existing condition limitations, no annual or lifetime coverage limits, coverage for children, etc. Of course, these are items that have increased premium costs.
Although there have been suggestions to “fix” the Act in both Houses of Congress, no one seems to have embraced a program that would change the landscape and retain the beneficial aspects of health insurance reform. As a market-based suggestion, maybe Professor Brody is on to something.
We would love to hear your suggestions for improving the current system.
The Bankruptcy Code allows debtors to exempt from their bankruptcy estate certain “retirement funds”, including amounts held in an individual retirement account (IRA) or Roth IRA. The Code is silent, however, on whether amounts held in an inherited IRA are subject to creditors’ claims in bankruptcy. The U.S. Supreme Court resolved that issue recently in Clarke v. Rameker, holding that funds held in inherited IRA accounts are not exempt from creditors’ claims.
The debtor in this case inherited her mother’s IRA and was receiving periodic distributions from the account. At the time of the debtor’s bankruptcy filing, the inherited IRA had just over $300,000 left in it. The debtor claimed that the exemption under the Bankruptcy Code for “retirement funds” covered her inherited IRA. Her creditors challenged this assertion, and ultimately, the U.S. Supreme Court agreed with them. The exemption for “retirement funds” does not apply to amounts in an inherited IRA.
An IRA, whether personal or inherited, may be one of the only sources of assets of the debtor in a bankruptcy proceeding. Creditors now have a clear means of attacking an attempt to exclude inherited IRA assets from the bankruptcy estate.
Presently, the federal government uses different rules for different purposes when determining whether a same sex marriage will be recognized. The IRS and the majority of other government agencies use the state of celebration rule for purposes of determining whether a same sex marriages will be recognized. Under this rule, a same sex marriage is recognized so long as it was recognized in the state in which is was performed. However, the DOL uses the state of residence rule for Family Medical Leave Act (FMLA) purposes. Under this rule, a same sex marriage is recognized only if it is recognized in the state in which the couple resides. The resulting inconsistency is confusing and complicates administration of employee benefits.
Secretary of Labor Thomas E. Perez announced on Friday that the Department of Labor (DOL) is proposing a rule to revise the definition of spouse under the FMLA to include all eligible employees in same-sex and common-law marriages. “Under the proposed revisions, the FMLA will be applied to all families equally, enabling individuals in same-sex marriages to fully exercise their rights and fulfill their responsibilities to their families,” states Perez. The proposal is in keeping with the Supreme Court’s June 26, 2013 ruling to strike down Section 3 of the Defense of Marriage Act in the Windsor decision.
The main highlights of the DOL’s proposal are as follows:
- Moving from the current state of residence rule to place of celebration rule; and
- Revising the definition of spouse to include same-sex marriages, common law marriages, and same-sex marriages entered into abroad that could have been entered into in at least one State.
The proposal has not yet been published in the Federal Register and will be subject a 45-day public comment period. However, employers should be mindful of this pending change.
The entire proposed definition reads as follows:
Spouse, as defined in the statute, means a husband or wife. For purposes of this definition, husband or wife refers to the other person with whom an individual entered into marriage as defined or recognized under State law for purposes of marriage in the State in which the marriage was entered into or, in the case of a marriage entered into outside of any State, if the marriage is valid in the place where entered into and could have been entered into in at least one State. This definition includes an individual in a same-sex or common law marriage that either (1) was entered into in a State that recognizes such marriages or, (2) if entered into outside of any State, is valid in the place where entered into and could have been entered into in at least one State.
On June 6th, a Wisconsin federal district court held that state laws prohibiting same-sex marriage are unconstitutional in the matter of Wolf v. Walker. This decision is the latest in a series of rulings in favor of same-sex marriage since the Supreme Court overturned section three of the Defense of Marriage Act in United States v. Windsor, nearly one year ago. Since Windsor, judges in eight states (AR, ID, MI, OK, TX, UT, VA, and WI) have overturned same-sex marriage bans, and judges in four other states (IN, KY, OH, and TN) have issued more limited rulings in favor of same-sex marriage. On June 13th, the district court judge issued an injunction against enforcement of the ban, but stayed the order pending the outcome of the defendant’s appeal to the Seventh Circuit Court of Appeals.
For the employee benefits community, this decision will have an impact on the eligibility of Wisconsin employees to take job-protected leave to care for their seriously ill spouse under the Family Medical Leave Act (FMLA). Current FMLA guidance from the Department of Labor applies a “place of residence” rule that does not require employers to permit employee leave to care for a same-sex spouse if the employee resides in a state that does not recognize same-sex marriage. If upheld on appeal, the decision would mean that an employee who resides in Wisconsin and was legally married in another state would be eligible for FMLA leave to care for her same-sex spouse.
For employers with Wisconsin employees, documents such as HR manuals, policies, procedures, and payroll systems should be earmarked where a change to reflect similar treatment of both opposite-sex and same-sex married couples may be necessary. While reviewing their FMLA policy, employers should pay attention to their plan’s definition of “son or daughter” for purposes of FMLA leave to ensure that definition applies equally to children of the same-sex spouse of an employee. With similar cases pending in the 4th, 5th, 6th, 7th, 9th, and 10th Circuit Courts of Appeals, expect more updates in the coming months as these appeals are decided.
We would like to thank our Summer Associate, Craig Pacheco, for his assistance in preparing this post.
ERISA Plans. Plan administrators who fail to timely file an annual report on Form 5500 are subject to penalties under both ERISA and the Code. In 1995, the Department of Labor (DOL) adopted the Delinquent Filer Voluntary Compliance program (DFVC), which permits late filers to file delinquent Forms 5500 (including all required schedules) and pay a reduced penalty. The IRS announced, in Notice 2002-23, that it will not impose penalties under the Code on plan administrators who are eligible for and follow the DFVC procedures. Since 2002, the Department of Labor revised its procedures to require electronic filing of all Form 5500s beginning with the 2009 plan year. Last year the DOL revised the DFVC program to require electronic filing for delinquent filings. In addition, beginning with the 2009 plan year Schedule SSA was replaced by Form 8955-SSA, which is a standalone form that is filed only with the IRS. In its most recent guidance on DFVC, the DOL announced that delinquent filers may not submit a Schedule SSA or a Form 8955-SSA under the DFVC program, even for 2008 and prior years.
In light of these changes in procedure, the IRS recently issued Notice 2014-35 to provide that a plan administrator who has not timely filed Form 5500 and all schedules and Form 8955-SSA for a year or years will not be subject to penalties under the Code if the plan administrator:
- Is eligible for and satisfies all of the requirements of the DFVC program for the applicable year or years, and
- Files separately with IRS a Form 8955-SSA for the year or years to which the DFVC filing relates. The filing with the IRS must be on paper.
The filing with the IRS must be completed by the later of the 30th calendar day after the plan administrator completes the DFVC filing or December 1, 2014. For example, if a plan administrator previously used the DFVC program to correct a delinquent filing for 2008, but did not file Form 8955-SSA, the plan administrator must file Form 8955-SSA with the IRS on paper no later than December 1, 2014 to be eligible for waiver of the Code’s late filing penalties for the 2008 plan year.
Non-ERISA Plans. The procedure described in Notice 2014-35 and its predecessor does not apply to non-ERISA plans. In Notice 2014-32, the IRS announced a one-year pilot program to provide penalty relief for non-ERISA plans. The program opened on June 2 2014 and will end on June 2, 2015.
The pilot program is available to (a) one-participant plans, defined as plans that cover only the owner of a business (and the spouse), one or more partners (and their spouses), and does not cover anyone else (such as common law employees) and (b) foreign plans. There is no fee for submitting delinquent filings under the pilot program. The submission is to be filed on paper at the addresses specified in Notice 2014-35 and include the following:
The Form 5500 for the applicable year and all required schedules, reports, and attachments. For returns for 2008 and earlier years, the filer should submit the Form 5500 for that year. For returns for 2009 and later years, the filer should submit the Form 5500-EZ for that year. Prior year forms are available online at www.irs.gov or by calling 1-800-TAX-Form.
Each delinquent return must include the following in red letters at the top of the first page above the title: “Delinquent return submitted under Rev. Proc. 2014-32, Eligible for Penalty Relief.”
- The filer must attach the Transmittal Schedule (Attachment A to Notice 2014-32) to the front of each delinquent return. For example, if there are 3 delinquent returns, the filer must complete 3 Transmittal Schedules, one for each return.
The Notice states that the failure to follow the procedures, for example, not marking the first page in red or failing to attach a Transmittal Schedule to each return) may cause the IRS to treat the submission as ineligible for relief and to assess all of the penalties.
A few weeks ago, we discussed audits from the perspective of the Employer as the audit target. Today our discussion is from the perspective of the Employer as auditor rather than audit target.
For many companies, the sheer size and complication of the task of Family and Medical Leave Act (“FMLA”) administration has led to a decision to outsource the work to a third-party administrator. Whew, you can rest easy now that someone else is in charge of the hassle of FMLA forms, notices, tracking, etc., right?
As the employer, it will be you that is on the hook for FMLA violations, even when such violations occur as a result of a third-party administrator failing to properly perform FMLA administration. You may have an indemnity clause, but such clauses may have limits and, in any event, won’t prevent the costs of fighting a claim in the first place.
Given this potential liability, have you taken steps to ensure that your third-party administrator is handling FMLA matters correctly? Have you audited the administrator’s process? Asked tough questions about how complicated situations are handled? Inquired into the administrator’s training process for the representatives assigned to your account? Ensured that the administrator is knowledgeable concerning your policies and preferences with respect to leave issues?
You have a right to expect your third-party administrator to be an FMLA expert and to follow the current regulations and proper procedures. For example:
- Is the administrator sending the eligibility and rights & responsibilities notice within five business days of receiving a request for FMLA leave?
- Is the administrator sending the designation notice within five business days of receiving enough information to determine whether leave is being taken for a FMLA-qualifying reason?
- Is the administrator reviewing medical certifications closely to ensure they are complete and sufficient? If certifications are not complete and sufficient, is the administrator communicating properly with the employee and providing an opportunity for cure?
- Is the administrator obtaining HIPAA-compliant authorizations before communicating with a health provider concerning clarification of medical certifications?
- If the administrator is responsible for tracking FMLA hours available and used for each employee, is the administrator appropriately counting overtime hours? Leave over holidays and shutdowns?
- Is the administrator requesting recertifications and new certifications at appropriate intervals?
Consider sitting down with your third-party administrator periodically to discuss the above and similar topics, as well as your indemnity provisions, to ensure that you are not risking unnecessary exposure.
In a recent decision, the Federal District Court for Idaho found that a grocery store employee who took a stale cake and shared it with her coworkers was properly denied COBRA for her “gross misconduct.” (The decision does not say, but we assume “gross” does not refer to the quality of the stale cake.)
The employee alleged that she had been terminated because she was a woman, but the court disagreed finding no substantial evidence that the alleged basis for her termination was a pretext for gender discrimination.
Instead, the court said that she was terminated for “theft and dishonesty” in violation of company policy. With regard to the claim that her termination was not for gross misconduct, the Court said:
Stealing from and/or lying to one’s employer, regardless of the value of the item, constitutes a willful and intentional disregard for the interests of one’s employer and is properly considered “gross misconduct” under COBRA….Ms. Mayes has made allegations that she should not have been fired for theft because she had permission to take cakes from the bakery and allegations regarding WinCo’s investigation….Whether or not Ms. Mayes had permission to use the cakes as she did or the taking of cakes was a commonly accepted practice is disputed. Regardless, WinCo’s written policy, which Ms. Mayes agreed to, is clear and provides that theft and/or dishonesty are considered gross misconduct.
There are relatively few cases involving gross misconduct, so each one is a helpful data point. Even so, whether the grounds are gross misconduct is a very fact-specific inquiry. Employers should be careful in trying to rely on gross misconduct as a basis for denying COBRA and consult counsel to make sure their basis is as solid as it can be in this relatively undeveloped area.
As for employees, perhaps it is better (to butcher a line from The Godfather) to leave the cake, and take COBRA.