Monthly Archives: April 2016
Wednesday, April 27, 2016

Top Hat“Top hat” plans are plans employers maintain for a “select group of management or highly compensated employees.” These plans are exempt from many of ERISA’s protections, including eligibility, vesting, fiduciary responsibility and funding. Thus, they are often used to provide benefits to management employees over and above those provided under the company’s broad-based retirement plans.

Choosing which employees may participate in a “top hat” plan is an important decision, as selecting employees who are ineligible for this type of arrangement may lead to violations of ERISA, penalties, increased taxes, and other liabilities. For years companies, courts, and even the Department of Labor (DOL) have struggled with defining the group of employees who can participate in a “top hat” plan. Two recent federal court cases provide insight into the current state of the law and the factors courts consider when assessing “top hat” status.

In Bond v. Marriott International, Inc., Nos. 15-1160, 15-1199 (4th Cir. 2016) (Unpublished Opinion), the Fourth Circuit held that the plaintiff’s claims were time barred, thus avoiding a decision on whether Marriott’s deferred stock bonus awards program was a “top hat” plan. The Maryland district court, however, had determined that the plan was indeed a “top hat” plan (Bond v. Marriott Int’l, Inc., 296 F.R.D. 403 (D. Md. 2014). Former employees of Marriott asserted that a retirement awards program was not a “top hat” plan and thus subject to the ERISA vesting requirements. The plan used a prorated vesting formula based on each participant’s service until he or she reached age 65. The plaintiffs in the case, who did not fully vest in their benefits as they terminated employment before reaching age 65, argued that this reduction in benefits violated ERISA. The district court accepted Marriott’s reliance on the plan prospectus which stated the plan was “exempt from the participation and vesting, funding and fiduciary responsibility provisions” of ERISA, and Marriott’s granting of retirement awards to less than 2 percent of their total workforce each year.

The plan sponsor also prevailed in another recent case, Sikora v. UPMC (12/22/15 W.D. PA), in which the court was called upon to review the criteria for “top hat” status. In Sikora, the district court made clear to be considered a “top hat”, a plan must plainly “cover relatively few employees…and…cover only high level employees.” A former vice president at UPMC sought benefits from his former employer’s non-qualified supplemental benefit plan. Upon his voluntary termination, the plaintiff sought a lump sum payout, but instead received a written decision from the plan administrator informing him that he forfeited his fully vested account balance. Plaintiff filed suit alleging various causes of action while the defendant’s contention was that the plan was a “top hat” plan and exempt from ERISA’s vesting and non-forfeiture provisions. The court granted summary judgment for UPMC based on a plan participation rate of 0.2% and the titles and high compensation of the eligible participants.

Courts have received a variety of arguments discussing factors to be considered for when a plan should meet the “top hat” definition. For instance, in an amicus brief filed in Bond, the DOL asserted the Court should rely on its “bargaining power” interpretation. In 1990, the DOL released an Opinion Letter on this subject which set forth the last official statement of its view, which is that only those employees who “by reason of their position or compensation level, have the ability to affect or substantially influence, through negotiation or otherwise, the design and operation of their deferred compensation plan” are eligible to participate in a “top hat” plan. Remember, an Opinion Letter is not legal precedence, but merely expresses the DOL’s view of how the law should be interpreted.

Bond does not accept the DOL’s views nor expressly reject them. Instead, for a more thorough examination of the factors courts should entertain (and a vigorous repudiation of the DOL’s “bargaining power” view), look no further than the decision in Sikora. There, the court relied on both quantitative and qualitative factors. First, in determining what is a “select group” hinges primarily on the percentage of the workforce participating in the plan. The court noted that several courts have found plans with less than 15% participation to be “select.” Next, the court determined whether the “select group” consists exclusively of high-level employees by considering the following factors: (1) purpose of the setting up the plan, (2) plan eligibility criteria, (3) job titles of participants, (4) average compensation of participants, and (5) whether participants are eligible to participate in other key management or incentive plans.

More than 40 years after ERISA was enacted there is still no bright-line standard for determining “top hat” status. The area remains ripe for litigation as these recent cases demonstrate and a fertile field for employee counsel. Accordingly, we recommend regular review of top-hat plans to ensure they meet regulatory requirements and these outlined factors.

Tuesday, April 26, 2016

Question Mark ManOn April 20, the “Big Three” agencies (DOL, Treasury/IRS, and HHS) released another set of FAQs (the 31st, for those of you counting at home). Consistent with earlier FAQs, the new FAQs cover a broad range of items under the Affordable Care Act, Mental Health Parity and Addiction Equity Act, and Women’s Health Cancer Rights Act. The authors are admittedly curious about how “Frequently” some of these questions are really asked, but we will deal with all of them in brief form below.

1. Bowel Preparation Medication – For those getting a colonoscopy, there is good news. (No, you still have to go.) But the ACA FAQs now say that medications prescribed by your doctor to get you ready for the procedure should be covered by your plan without cost sharing. Plans that were not already covering these at the first dollar will need to start.

2. Contraceptives – As a reminder, plans are required to cover at least one item or service in all the FDA-approved contraceptive methods. However, the FAQs also hearkened back to earlier FAQs reminding sponsors that they could use medical management techniques to cover some versions of an item (such as a generic drug) without cost sharing while imposing cost sharing on more expensive alternatives (like a brand name drug). However, plans must have an exception for anyone whose provider determines that the less expensive item would be medically inappropriate. None of this is news. However, the FAQs did acknowledge that plans can have a standard form for requesting these kinds of exceptions. They referred issuers and plan sponsors to a Medicare Part D form as a starting point. While the Medicare Part D form is a useful starting point, it would likely need significant customization for anyone to use it properly for these purposes.

3. No Summer Recess for Rescission Rules – As most people know by now, ACA prohibits almost all retroactive cancellations of coverage. The FAQs confirm that school teachers who have annual contracts that end in the summer cannot have their coverage retroactively cancelled to the end of the school year (unless one of the limited circumstances for allowing rescissions applies, of course).

4. Disclosure of the Calculation of Out-of-Network Payments is Now Required – The ACA requires that plans generally provide a certain level of payment for out-of-network emergency services that is designed to approximate what the plan pays for in-network emergency services. The regulations provide three methods a plan may choose from to determine the minimum it has to pay. Out-of-network providers are permitted to balance bill above that. The FAQs confirm that plans are required to disclose how they reached the out-of-network payment amount within 30 days of a request by a participant or dependent and as part of any claims review.   The penalties associated with failing to provide such information on request (up to $110/day) are steep. Additionally, failing to strictly follow the claims procedures can allow a participant or dependent to bypass the process and go straight to court or external review. Given these consequences, insurers and plan sponsors should make sure they have processes in place to provide this information.

5. Clinical Trial Coverage Clarifications – The FAQs confirm that “routine patient costs” that must be covered as part of a clinical trial essentially include items the plan would cover outside the clinical trial. So, if the plan would cover chemotherapy for a cancer patient, the plan must cover the treatment if the patient is receiving it as part of a clinical trial for a nausea medication, for example. In addition, if the participant or dependent experiences complications as a result of the clinical trial, any treatment of those complications must also be covered on the same basis that the treatment would be covered for individuals not in the clinical trial.

6. MOOPing Up After Reference-Based Pricing – Non-grandfathered plans that use a reference-based pricing structure are generally required to make sure that participants and dependents have access to quality providers that will accept that price as payment in full. However, the FAQs say that if a plan does not provide adequate access to quality providers, then any payment a participant or dependent makes above the reference price has to be counted toward the maximum out-of-pocket limit that the participant or dependent pays.

7. Mental Health Parity and Addiction Equity Analysis Must be Plan-by-Plan – The Mental Health Parity and Addiction Equity Act (MHPAEA) tries to put mental health and substance abuse benefits on par with medical/surgical benefits by providing that the cost-sharing and other types of treatment limitations must be the same across particular categories of benefits. Where these types of limitations vary, the MHPAEA rules look at the “predominant” financial requirement that applies to “substantially all” medical/surgical benefits in a particular category. For purposes of determining which limitations are “predominant” and apply to “substantially all” the benefits, the rules generally require that a plan look at the dollars spent by the plan on those benefits. In other words, the determination is not based on how many types of services a particular cost-sharing requirement or limitation (like a copayment) applies to, but how much money is spent on the various services. These types of analysis require looking at claims experiences. The FAQs confirm that an issuer may not look at its book of business to make these determinations. Instead, the determinations must be made plan-by-plan. As a practical matter, most plans that provide mental health and substance abuse benefits try to apply as uniform of levels of cost sharing and treatment limitations as they can to help simplify this analysis.

8. Playbook for Authorized Representatives Requesting Information about MHPAEA Coverage – The FAQs also provide a list of items that a provider may request in an effort to determine a plan’s compliance with the MHPAEA provisions or in trying to secure treatment for an individual. Plan sponsors and issuers would be well-advised to peruse the FAQs to look at the types of documents since these will likely find their way into a form document request that plan sponsors and issuers are likely to see. The FAQs also list items that the agencies say a plan must provide. Plans and issuers should review their processes to determine if all the relevant information is being provided in response to these types of requests.

While not relevant for group plan sponsors, the FAQs also confirm that individuals applying for individual market coverage are required to receive a copy of the medical necessity determination the issuer uses for mental health and substance abuse benefits on request.

9. Going to the MAT – The FAQs confirm that Medication Assisted Treatment (MAT) for opiod use disorder (think: methadone maintenance) is a substance use disorder benefit that is subject to the MHPAEA limitations on cost-sharing, etc. described above.

10. Nipple/Areola Reconstruction Coverage Required to Be Covered – Under the Women’s Health Cancer Rights Act, health plans and health insurance coverage must cover post-mastectomy reconstruction services. The FAQs confirm that this includes reconstruction of the nipple and areola, including repigmentation.

Thursday, April 21, 2016

Changes AheadEarlier this month, the Department of Labor finally released the long-awaited “Definition of Fiduciary; Conflict of Interest Rule.”

This blog post is intended to do two things:

  1. Provide a brief history of the proposal, and
  2. Provide an overview of the key points of the final rule and how it differs from the 2015 proposal.

For additional materials and information on the Final Rule, visit the DOL webpage. In addition, you can access all 200 plus pages of the final rule here.

I.  The “Conflict of Interest” Rule’s History

Since the adoption of ERISA, the governing regulations have mandated use of a five-part test that dictates whether an individual will be considered an investment advice fiduciary. In order to rise to the level of an investment advice fiduciary, the five-part test required that a person give investment advice: (1) about the value or advisability of investing in securities or other property; (2) on a regular basis; (3) pursuant to an agreement with the plan; (4) individualized to the specific plan; and (5) with the mutual understanding that such advice will serve as a primary basis for investment decisions.

The DOL initially proposed rulemaking to change the definition of an investment advice fiduciary back in October of 2010. The 2010 proposal generally did the following:

  • suggested eliminating the five-part test and, more specifically, the requirement that investment advice be provided on a regular basis;
  • indicated that a paid advisor would have been treated as a fiduciary if the advisor provided one of the three types of advice defined in the proposal and either: (1) represented that s/he was an ERISA fiduciary; (2) was already an ERISA fiduciary to the plan by virtue of having control over plan assets or discretionary authority over plan administration; (3) was already an investment advisor under the Investment Advisers Act of 1940; or (4) provided advice pursuant to an agreement, arrangement or understanding that the advice may be considered in connection with plan investment or asset management decisions and would be individualized.

This 2010 proposal was withdrawn, and the Employee Benefits Security Administration (EBSA) announced in September 2011 that it would repropose the rule.

It wasn’t until spring of 2015 that the DOL released for public comments its revised proposal, which incorporated various comments received on the original 2010 proposal. These resulting changes included a “Best Interest Contract Exemption,” “Principal Transactions Exemption,” a carve-out for investment education provided to IRA owners as well as plan sponsors and plan participants, and a change to focus on the advice rendered when determining who constitutes a fiduciary rather than on title/designation. Despite the many differences from the 2010 proposal, the revised proposal still eliminated the five part test and eliminated the requirement that the advice must be provided “on a regular basis.” Instead, a single act of advising could render an individual an investment advice fiduciary.

As discussed in our two prior posts, the 2015 proposal would include in the definition of fiduciary anyone who (1) receives compensation, directly or indirectly, for the requisite type of advice (e.g., advice, appraisals, or fairness opinions about the value of any investment; recommendations to purchase, hold, or sell any investment; or recommendations as to the management of any investment) and (2) meets one of the following conditions:  (i) is or represents his or herself to be an ERISA fiduciary, or (ii) provides the advice pursuant to an agreement or understanding that the advice may be considered in connection with investment or management decisions with respect to plan assets and will be individualized to the needs of the plan. Accordingly, much if not all of the full-service and discount brokerage services that broker-dealers offer to plan sponsors and plan participants would be subject to a fiduciary duty under the proposed rule.

Like the 2010 proposal before it, the 2015 revised proposal received many comments and concerns. Unlike the 2010 proposal, the 2015 revised proposal was not withdrawn. Instead, a final rule was published in the Federal Register on April 8, 2016.

II. Third Time’s the Charm? The Final Rule

Below we describe some of the key provisions and significant ways in which the Final Rule differs from the 2015 revised proposal.

A.  Applicability Date

Unlike the 2015 proposal which stated that the rules should be applicable eight months following publication, the Final Rule adopts a phased implementation approach. First, the revised definition of fiduciary investment advice as well as the new and amended exemptions become applicable on April 10, 2017. This means that the current five-part test remains in effect for roughly the next year. The Best Interest Contract Exemption and the exemption for the Principal Transactions become fully applicable later as a transition period under which more limited conditions will apply until January 1, 2018.

B.  Fiduciary Investment Advice

1.  Investment Advice Definition

The Final Rule adheres to the general structure of the 2015 revised proposal. It states that individuals provide investment advice if they provide, for a fee or other compensation, certain specified types of information, including:

  • A recommendation as to the advisability of acquiring, holding, disposing of, exchanging, rolling over, transferring, or distributing securities or other investment property of the plan or IRA; or
  • A recommendation as to the management of securities or other investment property including investment, portfolio composition, or recommendations with respects to rollovers, transfers, or distribution from a plan or IRA.

In addition to providing a perquisite type of information, the individual must also (i) represent or acknowledge that they are acting as a fiduciary within the meaning of ERISA or the Internal Revenue Code; (ii) provide advice rendered pursuant to a written or verbal agreement, arrangement, or understanding that the advice is based on the particular investment needs of the recipient; or (iii) provide recommendations directed to a specific advice recipient or recipients regarding the advisability of a particular investment or management decision. Again, the “on a regular basis” requirement is not included in the Final Rule.

A notable difference between the Final Rule and the 2015 revised proposal is that the Final Rule does not consider appraisals, fairness opinions, or similar statements concerning the value of securities or other property to constitute investment advice. All appraisals and valuations, not just those for ESOPs, are excluded from the rule. The DOL has also made it clear that advice regarding “investment property” does not include health, disability, and term life insurance policies and other assets to the extent they do not contain an investment component.

2.  What Constitutes a Recommendation?

The Final Rule makes clear that whether a communication constitutes a “recommendation” depends on its content, context, and presentation. If the content, context, and presentation would reasonably be viewed as a suggestion that the recipient of such advice engage or refrain from taking a particular course of action, then the communication is likely a recommendation. In addition, the more individually tailored the communication, the more likely that it will constitute a recommendation.

The Final Rule also provides a non-exhaustive list of what does not constitute a recommendation. Examples on the list include:

  • marketing or making available to a plan fiduciary a platform of investments;
  • providing selection and monitoring assistance such as identifying investment alternatives (provided that the person identifying the investment alternatives discloses in writing whether the person has a financial interest in any of the identified investment alternatives and the precise nature of such interest) or providing objective financial data and comparisons with independent benchmarks;
  • furnishing or making available general communications to a plan, plan fiduciary, plan participant, beneficiary, IRA, or IRA owner; and
  • furnishing or making available investment education to a plan, plan fiduciary, plan participant, beneficiary, IRA, or IRA owner.

3.  What Constitutes Investment Education?

The Final Rule still recognizes the same general four categories of investment education (plan information, general financial/investment information, asset allocation models, and interactive investment materials).

Unlike the 2015 revised proposal, the Final Rule still allows asset allocation models and interactive investment materials to identify specific designated investment alternatives available under the plan without being considered fiduciary investment advice. However, doing so comes with additional requirements. Specific alternatives may be identified if: (1) the alternative is a designated investment alternative under an employee benefit plan; (2) the alternative is subject to fiduciary oversight by a plan fiduciary who is independent of the person developing/marketing the investment alternative; (3) the asset allocation models and interactive investment materials identify all the other designated investment alternatives available under the plan with similar risk and return characteristics; and (4) the asset allocation models and interactive investment materials are accompanied by a statement that identifies where information on the alternatives included may be obtained.

Since the Final Rule requires that an independent fiduciary have oversight of the specific designated investment alternatives, this exception does not apply to any presentations of asset allocation models or interactive investment materials to IRA owners. Presentations to IRA owners may not include specific alternatives without being considered investment advice.

4.  Carve-Outs

The Final Rule includes a list of additional activities that will not be considered investment advice, even if the activities otherwise meet the recommendation and investment advice criteria. These carve-outs include: transactions with independent fiduciaries with financial expertise, swap and security-based swap transactions, and advice provided by an employee to a plan fiduciary, other employee, or an independent contractor if the advice is provided in connection with the individual’s role as an employee.

C.  The Best Interest Contract Exemption

1.  Who Requires a Contract, and When Must it be Executed?

The Best Interest Contract Exemption requires a financial institution to acknowledge it and its advisors’ fiduciary status in writing in order to receive compensation that would otherwise be prohibited. The contract requirement for ERISA plans has been dropped, but the Final Rule requires an enforceable contract in writing for IRAs and other non-ERISA plans. In addition, the contract also no longer requires a contract signed the customer, financial institution and adviser. Instead, only the financial institution and the customer need to sign the contract.

The Final Rule also allows the contract to be incorporated into other account opening documents. The contract no longer needs to be entered into prior to the time that any advice is provided. Instead, the contract may be entered into before or at the same time the recommended transaction is executed.

2.  Covered Assets

The Final Rule eliminated the list of covered assets included in the 2015 revised proposal. This means that the Best Interest Contract Exemption may be available for any asset type so long as the advisor meets the impartial conduct standards (advice in client’s best interest, avoid misleading statements, receive no more than reasonable compensation) and other conditions of the exemption.

3.  Level Fee Fiduciaries

The Final Rule added a special exemption for level fee fiduciaries. This special exemption covers a recommendation to roll over assets from a plan into a fee-based account, or transfer assets from a commission-based account to an account that charges a fixed percentage of assets under management, if the financial institution and adviser are “level fee fiduciaries” and other conditions are satisfied.

D.  The Principal Transaction Exemption

The Final Rule does not require that the pricing of the principal transaction be at least as favorable as the price offered by two unaffiliated counterparties. Instead, advisers and financial institutions must seek to obtain the best execution reasonably available under the circumstances

The Final Rule also includes a broadened list of the types of assets that may be traded on a principal basis under this exemption. These assets include:

  • purchases by a plan of Certificates of Deposit (CDs), interests in Unit Investment Trusts (UITs), and “debt securities,” and
  • sales by a plan of “securities or other property,” which the DOL indicates corresponds to “the broad range of assets that can be recommended” by fiduciary advisers.

Though the DOL expanded the Principal Transaction Exemption to cover more types of assets, it did not expand the exemption to cover purchases of other types of investments, including municipal securities, currency, asset-backed securities, equities, derivatives, and bank note offerings.

Thursday, April 14, 2016

Org ChartPreviously, we wrote about the First Circuit decision that a private equity fund constituted a “trade or business” under ERISA as amended by the Multiemployer Pension Plan Amendments Act (“MPPAA”). That dry description is actually very significant since it would mean that private equity funds and their other portfolio companies could be responsible for withdrawal liability, potentially in the millions of dollars, when a portfolio company withdraws from a multiemployer plan. Based on a recent District Court case in that same dispute, it may be even harder for private equity funds and their portfolio companies to escape liability, which could have implications for those companies and the companies that buy them.

By way of background, multiemployer pension plans are pension plans into which (as the name implies) many employers contribute pursuant to collective bargaining agreements. If a multiemployer plan is underfunded, and an employer withdraws, the plan is allowed to assess liability on that employer pursuant to a formula to help make up the underfunding. As we detailed previously, MPPAA imposes liability on any “trade or business” that is under “common control” with the withdrawing employer.
In prior iterations of this case, Sun Capital Partners had alleged that none of the three investing funds (Sun Fund IV, Sun Fund III, and Sun Fund III QP) was a trade or business since each was merely a passive investor. The First Circuit rejected this approach and applied an “investment plus” analysis (without giving much in the way of a standard) to Sun Fund IV based on certain economic benefits it received in connection with the management of the portfolio company by its affiliated advisors that were different from benefits a merely passive investor would usually receive. However, it remanded the case back to the District Court to determine if the other funds were also trades or businesses.

It turned out that the facts on which the First Circuit relied were twisted around and it was actually Sun Fund III and Sun Fund III QP that received economic benefits. However, that turned out not to matter to the District Court.

As noted above, most of the analysis by the courts had been focused on the “trade or business” prong, but the District Court, on remand, also examined whether the Sun Funds were under “common control.” On its face, based on corporate formalities, the answer was no. Sun Fund IV owned 70% of the ultimate parent of the withdrawing company and the other two funds together owned 30%. None of them owned the requisite 80% necessary to be treated as a parent entity under the “common control” test. The Sun Funds actually admitted that they kept their ownership percentage below 80% specifically to avoid withdrawal liability.

However, looking at actions of the Sun Funds, the Court concluded that the Sun Funds had formed a partnership-in-fact. The Court found that the Sun Funds created an ultimate parent LLC to invest in the withdrawing company and, prior to investment, engaged in joint activity leading to the two funds’ decision to coinvest. These actions were sufficient, under the Court’s analysis, to form a partnership-in-fact. The fact that their organizing documents disclaimed any intent to form a partnership was not sufficient to overcome the Court’s view of the existence of the partnership. Further, given the First Circuit’s conclusion that an “investment plus” test should apply, it was easy for the District Court to conclude that the partnership was a “trade or business.”

The distinction is important because, as partners in a partnership invested in a withdrawing company, each Sun Fund would be liable for its proportionate share of the liability. This is because the partnership itself would be under “common control” with the withdrawing company (as a parent) and its liability would pass through to its partners.

Private equity funds should examine this decision closely. While this dispute may not be over, this precedent casts significant doubt on the long-standing position of private equity funds that they are not liable for the withdrawal liability of their underlying portfolio companies.

Acquirers of portfolio companies from private equity funds should also take note. If the funds are under common control with their portfolio companies, then under the applicable ERISA and tax rules, those portfolio companies could also be considered under common control with one another. This would mean a withdrawal liability in Portfolio Company A, for example, could be assessed against Portfolio Company B and Portfolio Company C. Depending on the structure of any sale of Portfolio Company B or C, that liability could follow the sold portfolio company to its new owner.

Wednesday, April 6, 2016

Earlier today, the Department of Labor (DOL) released the Conflict of Interest Final Rule.   Click here to explore all 200+ pages.  Among other things, this rule expands the definition of fiduciary, and requires that persons who give investment advice to retirement investors act in the best interests of those investors.

The DOL released significant additional guidance in connection with the Final Rule, including the best interest and principal transaction exemptions, a chart illustrating changes from the proposed rule, and FAQs.  To access that additional guidance click here.  We will examine the Rule in further detail, as well as the industry’s reaction to it, in future posts.

Tuesday, April 5, 2016

SecurityNearly two years after the Office of Civil Rights (“OCR”) first announced its preparation for another round of HIPAA audits, Phase II of OCR’s HIPAA audit program is finally underway.

On March 21, OCR began emailing various types of entities to verify their e-mail addresses and contact information.   OCR acknowledged that its email communication may be treated by email filters as spam, but has advised that it expects entities to check their junk or spam email folder for emails from OCR. Recipients have 14 days to verify their email address or provide OCR with updated primary and secondary contact information.

A pre-screening questionnaire will follow seeking details regarding the entity’s size, geographic location, services and scope of operations. Covered entities will also be asked to identify their business associates. Presumably, OCR will use this information to identify and begin emailing business associates to verify their contact information and follow-up with a pre-screening questionnaire.

OCR is looking at a broad spectrum of audit candidates and will be considering size of the entity, affiliation with other healthcare organizations, the type of entity and its relationship to individuals, whether an entity is public or private and geographic factors. The only entities safe from selection are those with an open complaint investigation or currently undergoing a compliance review. Failure to respond to any contact or information request will not prevent an entity from being selected for audit; but rather, OCR will simply rely on available public information.

Audit Process

OCR audited 115 covered entities in Phase I. For Phase II, OCR expects to conduct more than 200 audits with a balance between covered entities and business associates. Phase II will consist of three rounds with a primary emphasis on desk audits.

  • Round 1: Desk Audits of Covered Entities
  • Round 2: Desk Audits of Business Associates
  • Round 3: On-site Audits of Covered Entities and Business Associates

Desk Audits

Desk audits will focus on compliance with particular provisions of the Privacy, Security and Breach Notification Rules. Requested documents and data must be submitted within 10 business days through OCR’s online portal. Auditors will review submitted documentation and furnish draft findings to the audited entity, which will have 10 business days to review and respond with written comments. OCR will issue a final audit report within 30 business days. Desk audits are expected to be completed by the end of 2016.

On-site Audits

An entity may be selected for on-site audit even if it has undergone a desk audit. On-site audits will be 3-5 days and cover a wider range of compliance requirements under the HIPAA Rules. As in the case of desk audits, the audited entity will still only have 10 business days to review OCR’s draft findings and provide written comments, and a final audit report will be issued by OCR within 30 business days.

OCR does not intend to post a list of audited entities or the findings of individual audits but such information may be subject to disclosure under the Freedom of Information Act.

Next Steps

Spam Folder. If you haven’t done so already, check your spam or junk email folder (and advise your colleagues to do the same) and include OCR ( as an approved sender. To the extent multiple individuals from your organization receive the initial email communication from OCR, coordinate responses so that OCR is notified of the correct primary and secondary contact.

Business Associate Contacts. If you are a covered entity, compile a comprehensive list of business associates and their contact information. It would also be a good idea to also confirm that a business associate agreement is in place with each service provider on the list.

Internal Audit. While OCR is developing its audit pool, take this time to ensure that your HIPAA compliance documents are in order (and remedy any deficiencies). OCR is still drafting its protocols for Phase II, which are expected to be available prior to the start of on-site audits. However, the Phase I protocols remain available on the Department of Health and Human Services website but keep in mind that they do not reflect changes under the 2013 Final Omnibus Rule. Focus your immediate attention on the documentation relevant to the areas targeted for attention under the desk audits.

After Phase I of the audit program revealed widespread noncompliance with various aspects of the HIPAA Rules, OCR indicated that Phase II and future audits would be more focused on enforcement (i.e., imposition of civil monetary penalties or resolution agreements) but recently, OCR Director, Jocelyn Samuels stated the audits are not intended to be punitive. Instead, OCR views the audits as an opportunity to discover risks and vulnerabilities faced by entities in different sectors and geographic regions of the industry and to get out in front of potential problems before they result in breaches. However, OCR has warned that if a serious compliance issue is uncovered during the audit a compliance review may be initiated.

Friday, April 1, 2016

Hullabaloo: noun: a commotion, a fuss.

In recent years, almost every change to health care has caused a hullabaloo. Today, we thought you might enjoy reading about a few recent and proposed changes that, although important, have not caused quite the uproar to which we have become accustomed.

The Department of Health and Human Services has finalized the annual in-network out-of-pocket maximums for non-grandfathered health plans for 2017:

An enrollee in self-only coverage may not pay more than $6,850 for essential health benefits in 2016; for 2017, that number has increased to $7,150.

An enrollee in any coverage other than self-only may not pay more than $13,700 for essential health benefits in 2016; for 2017, that number has increased to $14,300.

Section 1411 of the Patient Protection and Affordable Care Act requires federally facilitated marketplaces (but not state facilitated marketplaces) to provide notice to employers when it is determined that an employee is eligible to receive a subsidy. The final rule, however, only requires these marketplaces to provide notice to employers when an employee actually enrolls in coverage.

And, the Departments of Labor, Health and Human Services, and the Treasury will be working together to finalize the updated requirements of the Summary of Benefits and Coverage (SBC) after the comment period closes March 28, 2016. The proposed changes to the SBC include a revised template, instructions, and an updated uniform glossary (see here). The new SBC requirements must be satisfied by the first day of the first open enrollment period for plan years beginning on or after April 1, 2017 (or, the first day of the first plan year beginning on or after April 1, 2017 if the plan does not use an open enrollment period).

The next health care hullabaloo may be just around the corner. For now, enjoy the calm!