Monthly Archives: June 2016
Thursday, June 16, 2016

Regulations Compliance Puzzle PiecesOn Monday, May 16 the Equal Employment Opportunity Commission (“EEOC”) issued two final regulations providing guidance on how employer-sponsored wellness programs work with the general antidiscrimination requirements of Title I of the Americans with Disabilities Act (“ADA”) and Title II of the Genetic Information Nondiscrimination Act of 2008 (“GINA”). These rules were published in the May 17th Federal Register.

This blog post is designed to provide background information on wellness programs and the antidiscrimination protections of the ADA and GINA, to highlight the final regulations and note two action items relating to smoking cessation programs and tiered health plan benefit or cost-sharing structures.

What is a Wellness Program?

The term “wellness program” generally refers to programs intended to promote health and disease prevention and activities offered to employees as part of an employer-sponsored group health plan. Wellness programs may also be offered separately from as a benefit of employment. Wellness programs may ask employees to answer a health risk assessment, to undergo biometric screenings for risk factors, or may provide educational health-related programs that may include nutrition classes, weight loss programs, smoking cessation programs, or even onsite exercise facilities.

Health-contingent wellness programs may require an employee to satisfy some standard related to a health factor in order to obtain an incentive. These health-contingent programs may be either activity-only or outcome-based, requiring, for example, that an employee exercise a certain amount of exercise weekly or reduce their cholesterol level in order to earn an incentive.

Background on the ADA and GINA Antidiscrimination Protections

Title I of the ADA prohibits employers from discriminating against individuals on the basis of disability and generally restricts employers from obtaining medical information from employees. However, the ADA allows employers to inquire about employee health and authorizes medical examinations as part of a voluntary employee health program. This includes employer-sponsored wellness programs. Title I requires that all wellness programs must be made available to all employees, that reasonable accommodations must be made for employees with disabilities and that all medical information obtained through the wellness program be kept confidential.

Title II of GINA protects job applicants and current and former employees from discrimination on the basis of genetic information. It prohibits covered employers from using genetic information when making decisions about employment. GINA limits the circumstances in which covered employers may disclose any genetic information. Specifically, GINA generally restricts employers from requiring, purchasing, or requesting genetic information, unless one of six narrow exceptions applies. One such narrow exception applies when an employee voluntarily accepts health or genetic services offered by an employer, including such services that are offered as part of a wellness program.

The Final Regulations

A.  Maximum Incentives Offered Under a Wellness Program

The final ADA regulation addresses the voluntary standard for health-contingent wellness programs that require individuals to satisfy a standard related to a health factor in order to obtain a reward. To be considered a voluntary program, the incentives offered with health-contingent wellness programs generally must not exceed 30 percent of the total cost of self-only health coverage. The regulations also clarify how to calculate the 30% limit on incentives offered to employees participating in health-contingent programs.

The final GINA regulation sets the same standards for spouses providing health information. That is, the value of the maximum incentive attributable to a spouse’s participation in a wellness program may not exceed 30 percent of the total cost of self-only coverage. This is the same incentive allowed for employees.

B.  Notice Required Under the Regulations

The ADA regulation includes a notice requirement. For all programs that ask employees to respond to disability-related questions or to undergo a medical examination, an employer must provide a notice. This notice must clearly explain

(1) what information will be obtained,

(2) how the information will be used,

(3) who will receive the information, and

(4) the restrictions on disclosure.

Notably, the ADA regulation does not include a requirement that the employer receive prior, written, and knowing authorization for the collection of such information.

Though not available yet, the EEOC will provide a sample notice on its website that satisfies the necessary requirements of this regulation within 30 days of the publication of these rules.

The final GINA regulation does not include a notice or authorization requirement.

C.  Confidentiality Requirements

Both the final ADA regulation and the final GINA regulation make it clear that the protection of confidential, individual information is a priority. The two rules state that information collected through wellness programs may be disclosed to employers only in aggregate terms. This aggregate disclosure must be in a form that does not disclose, and is not likely to disclose, identities of individuals.

Both rules also prohibit employers from requiring that employees or their family members agree to the sale, or waive the confidentiality, of their health information as a condition to participating in a wellness program or receiving an incentive.

D.  Reasonably Designed Programs

Both the final ADA regulation and the final GINA regulation require that an employee wellness program must be “reasonably designed to promote health or prevent diseases.” This prevents an employer from requiring an overly burdensome amount of time for participation, using unreasonably intrusive procedures, or requiring employees to incur significant costs for medical examinations in connection with the wellness program.

E.  Applicability Date

Both regulations are effective July 18, 2016. The final regulations are applicable beginning on January 1, 2017.

The provisions of the final regulation concerning the notice requirements and limits on incentives apply only prospectively to wellness programs as of the first day of the first “plan year” that begins on or after January 1, 2017. The “plan year” refers to the plan year of the health plan used to determine the level of incentive permitted under this regulation.

Action Items for Employers with Wellness Programs

For the reasons described below, employers should reevaluate their smoking cessation programs and any tiered health plan benefit structures.

Smoking Cessation Programs

Though the final ADA rule provides the general limit of incentives up to 30 percent of the total cost of self-only health coverage, smoking cessation programs may permit an incentive up to 50% of the cost of self-only coverage. In order to use this higher limit, the smoking cessation program must be structured correctly. The ability to use the higher 50 percent limit hinges on whether the program merely asks employees whether or not they use tobacco or whether the program is structured to actually test for use.

Programs that merely ask employees whether or not they use tobacco or have ceased using tobacco upon completion of the program are not considered wellness programs that include disability-related inquiries or medical examinations. As such, the incentive offered by the smoking cessation program is not capped by the 30 percent limit. Instead, these programs may offer up to 50 percent of the cost of self-only coverage as an incentive.

Programs that include any biometric screening or other medical procedure that tests for the presence of nicotine or tobacco are not afforded this higher limit. These programs are considered a medical examination under the ADA and are only permitted to provide up to the 30 percent limit as an incentive.

Tiered Health Plan Benefits and Cost-Sharing Structures

Employers sponsoring tiered health plan benefit and cost-sharing structures (or “gateway plans”) will need to reevaluate their plans in light of these final regulations. Generally, gateway plans base eligibility for a particular health plan on completion of a health risk assessment or biometric screenings. For example, gateway plans may allow employees who participate in a wellness program to enroll in a richer or more comprehensive health plan. The final ADA regulation clarifies that such plan designs are not ADA compliant.

Employers may still offer incentives of up to 30 percent based on participation in a wellness program. Thus, an employee who chooses a more comprehensive health plan and participates in a wellness program could pay less for the same comprehensive health plan than an employee who declines to participate in the wellness program. Eligibility, however, may not be denied based on participation in the wellness program.

Take-Away Action Items

Employers should review their smoking cessation programs to determine whether the program constitutes a medical examination under the ADA. If that is the case, the incentive offered must not exceed the 30 percent limit.

Employers should also review their group health plan eligibility rules and practices to determine if a tiered health plan benefit and cost sharing structure exists. If so, an employer will need to evaluate the plan to prevent discrimination in violation of the ADA by the January 1, 2017 applicability date of these regulations.

Wednesday, June 15, 2016

200270748-001The United States Department of Labor recently issued a Final Rule updating the Fair Labor Standards Act (the “FLSA”) that includes an increase in the standard salary level and that will take effect December 1, 2016. Under the FLSA, certain employees may be exempted from overtime pay for working more than 40 hours per week if their job duties primarily involve executive, administrative, or professional duties and their salary is equal to or greater than the required salary levels.

Among other changes made by the Final Rule, the threshold salary levels have been dramatically increased and will continue to be automatically updated every three years in the future. Prior to the Final Rule, the standard salary level was $455/week or $23,660/year.  As of December 1, 2016, the standard salary level will be $913/week or $47,476/year.  Highly compensated employees are subject to a less stringent job duties test than lower compensated employees; the salary threshold for highly compensated employees was $100,000 and will increase to $134,004.

The Final Rule also revises prior FLSA regulations by permitting up to ten percent (10%) of the salary thresholds to be met with nondiscretionary bonuses and incentive compensation (including commissions).

Employers may face many other decisions in addition to whether to increase pay or limit overtime hours as a result of the Final Rule. Many employers offer certain benefits, like long-term disability or paid time off, to employees on the basis of whether the employee is exempt or non-exempt under the FLSA.  As employees’ classifications change, their benefits will change accordingly unless employers decide to make corresponding changes to benefits eligibility.

Employers will also need to revisit their retirement plans to confirm whether overtime pay is eligible for employer contributions, including matching contributions; if so, employers should plan ahead for increased contributions. Further, if overtime pay is excluded, employers should be aware of potential nondiscrimination testing issues (as a result of non-highly compensated employees becoming newly eligible for and receiving overtime pay).

Finally, increased overtime costs may require employers to reduce other employee benefits or require greater employee contributions for such benefits to stay on budget for the year. Regardless of its exact impact on your business, the Final Rule is sure to require some changes.  Start planning now; December 1st will be here before you know it!

Tuesday, June 14, 2016

Wellness Word CloudIn a recently released IRS Chief Counsel Memo, the IRS confirmed that wellness incentives are generally taxable. The memo also, indirectly, confirmed the tax treatment of wellness programs more generally.

As to the incentives, the IRS held that a cash payment to employees for participating in a wellness program is taxable to the employees. The memo did not deal with incentives paid to dependents, but we presume those would be taxable to the applicable employee as well.  The IRS did say that certain in-kind fringe benefits (like a tee shirt) might be so de minimis as to be exempt as fringe benefits.  Confirming the IRS’s long-standing position, however, cash does not qualify for this exception and is taxable.

This tax treatment also applies to premium reimbursements if the premiums were paid for on a pre-tax basis through a cafeteria plan. Therefore, if employees who participate in a wellness program receive a premium reimbursement of premiums that were originally paid on a pre-tax basis, those reimbursements would be taxable to the employee.  This is logical since, if an employee was simply allowed to pay less in premiums (as opposed to being reimbursed), the amounts not paid as premiums would increase his or her taxable compensation.  There is no reason to expect that a reimbursement would be treated any differently for tax purposes.  While the memo focused on a reimbursement of premiums that were paid for the wellness program, we do not expect the result would be any different if the reimbursement was for premiums under the major medical plan.

This brings us to the more subtle point in the memo. The memo stated that services provided under the wellness program, such as health screening, cause the wellness program to be treated as a group health plan under the tax code.  While this is not news from a legal perspective, it is an important reminder that wellness programs may be group health plans.  If they are, there are broader, potentially substantial, implications, such as the need to have a plan document and SPD, the need to file Forms 5500, and the need to comply with the ACA (not to mention all of the various wellness-related rules themselves under HIPAA, ADA, and GINA).  The extent to which the program needs to comply with these rules depends on the nature of the wellness program and whether it is part of a group health plan or offered separately.

In short, the IRS Memo confirms that wellness incentives are generally taxable and reminds us that that wellness compliance is both complex and multi-faceted. Implementing a wellness program takes careful planning to ensure full legal compliance with a number of applicable laws.

Monday, June 6, 2016

Gavel and ScalesIt was bound to happen. For several years, the plaintiffs’ bar has sued fiduciaries of large 401(k) plans asserting breach of their duties under ERISA by failing to exercise requisite prudence in permitting excessive administrative and investment fees.  It may be that the plaintiffs’ bar has come close to exhausting the low-hanging lineup of potential large plan defendants, and, if a recent case is any indication, the small and medium-sized plan fiduciaries are the next target.  See, Damberg v. LaMettry’s Collision Inc., et al. The allegations in this class action case parallel those that have been successful in the large plan fee dispute cases. Now that the lid is off, small and medium sized plan fiduciaries should be forewarned of the need to employ solid plan governance to avoid, or at least well defend, a suit aimed at them.

Exceptional plan governance means that, at a minimum, plan sponsors (and designated fiduciaries) should consider the following items to help demonstrate that they are primarily operating their plans to the benefit of participants and their beneficiaries and then to reduce liability exposure for themselves:

  • Understand and exercise procedural prudence – process, process, process
  • Identify plan fiduciaries and know their roles and duties
  • Seek and obtain fiduciary training for all plan fiduciaries
  • Adopt a proper plan committee charter or similar document
  • Appoint fiduciaries and retain service providers prudently and monitor them
    • Know the difference between a 3(16), 3(21) and a 3(38) fiduciary and make prudent decisions with respect to retaining them
    • Utilize a qualified administrative committee of no fewer than three members that meets regularly and memorializes its decisions properly
  • Utilize a corporate trustee/custodian
  • If you adopt an investment policy statement (as you probably should), follow it
  • Understand and properly evaluate plan fees and 408(b)(2) disclosures and services and service contracts
  • Monitor plan administration
  • Memorialize actions taken and the reasons for doing so
  • Retain a qualified independent investment advisor (although it may not make financial sense for small plan sponsors to pay for this service)
    • Engage in periodic comparisons of fees and services being charged for similar plans (RFPs, RFIs, benchmarking)
    • Address participant concerns promptly and, if necessary, seek advice of counsel in responding to participant complaints
  • Understand and evaluate a proper operational structure for your plan
    • Know the difference between a bundled structure and an unbundled one – with a really good record keeper
    • Appreciate the nature of services to be provided
    • Evaluate cost to participants and reasonable of fees for needed services
    • Determine cost that the plan sponsor is willing to share
    • Identify parties that will be making statements regarding the plan and its operation (like the plan’s TPA) and how there is control to avoid misstatements
    • Determine responsibility for keeping plan documents current and confirm that it is ongoing
    • Determine responsibility for claims processing and confirm that it is ongoing
  • Verify that a proper ERISA bond is in place
  • Procure fiduciary insurance
  • Seek assistance of counsel as needed
  • Evaluate the investment platform regularly, and, if a brokerage window is made available, be certain to understand it, how it works, and what its limitations might be
  • Assure 404(c) compliance, if applicable
  • Understand target date funds and how they work in your plan
  • Establish solid internal controls
    • Review current systems to confirm segregated responsibilities and that the IT systems being used for the plan (particularly payroll) are effective
    • Confirm that those maintaining plan records are knowledgeable
    • Confirm “good transfers” regularly
    • Make certain that the proper definition of compensations is being used for example, by reviewing payroll coding against the plan document
    • Be certain someone is responsible to verify data, particularly for nondiscrimination testing

While this list does not address every possible governance practice, following the applicable items appropriately should result in good plan governance. It will also be of value to your participants by demonstrating that you have their best interests at the forefront of plan operation. Additionally, the result should be better liability protection for you and the other plan fiduciaries. While the list may seem daunting, once you understand each of the steps and implement them, it will become easier and, with regularity, can become second nature.

Friday, June 3, 2016

Challenges AheadIn its preamble to the final regulations under the Americans with Disabilities Act (“ADA”) published May 17, 2016, which will be the topic of an upcoming blog post, the Equal Employment Opportunity Commission (“EEOC”) once again reiterated its disagreement with the district courts’ application of the bona fide plan safe harbor to the wellness programs in Seff v. Broward County and EEOC v. Flambeau, Inc. (discussed in a prior post).

Seff and Flambeau

In both Seff and Flambeau, plaintiffs brought suit arguing that the wellness programs violated the ADA’s prohibition on mandatory medical examinations and inquiries. Both courts disagreed and held that the wellness programs fell under the safe harbor provision, which in pertinent part state that an insurer or any entity that administers benefit plans is not prohibited from “establishing, sponsoring, observing or administering the terms of a bona fide benefit plan based on underwriting risks, classifying risks, or administering such risks that are based on or not inconsistent with state law.”

In Seff, Broward County offered a wellness program that included a biometric screening and health risk assessment questionnaire. This information was used by Broward County’s health insurer to identify employees who had certain diseases to offer them the opportunity to participate in disease management or coaching programs. To encourage participation, Broward Country imposed a $20 per pay-period surcharge on health plan premiums on those who did not participate in the wellness program. The court held that the wellness program was a “term” of Broward County’s group health insurance plan. As such, the court said, the wellness program fell within the safe harbor provision.

In Flambeau, Flambeau, Inc. established a wellness program that included a biometric screening and health risk assessment questionnaire for employees that wanted to enroll in its self-funded group health plan. In 2011, Flambeau gave a $600 credit to employees who completed both the biometric screening and risk assessment. However, in 2012 Flambeau eliminated the credit and adopted a policy of only offering health insurance to those employees who completed both. The court looked to the Seff decision and also found that the biometric screening and risk assessment fell within the ADA safe harbor.

EEOC’s Reaction to Seff and Flambeau

The EEOC asserts that the courts’ application of the safe harbor went far beyond its intended purpose of protecting the ability, now rendered otherwise illegal under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), of group health plans to charge individuals higher rates based on increased risks associated with medical conditions. The safe harbor provision allows this practice to continue, as long as it is based on real risks and costs associated with those conditions. Under the safe harbor, the insurance industry and sponsors of insurance plans may treat individuals differently based on disability only if the differences can be justified by increased risks and costs based on sound actuarial data.  This was not the case in either Seff or Flambeau.

Although the EEOC conceded that it is arguable that wellness programs are used by employers to make employees healthier and that this may, ultimately, reduce the employer’s health care costs, it expressed its opinion that this does not constitute underwriting or the risk classification protected by the insurance safe harbor. The EEOC noted the lack of evidence in either case that the surcharge or decision to exclude an employee from coverage was based on the actual risks non-participating employees posed.  In the EEOC’s opinion, continuing application of the safe harbor as in Seff and Flambeau would essentially permit any medical inquiry as part of a health plan as long as there is some possibility, whether real or theoretical, that the information might be used to reduce the risks.  The EEOC further points out that there is already an explicit exception that allows employers to make disability related inquiries or conduct medical examinations as part of a voluntary employee health program. Applying the safe harbor to the same scenario would, according to the EEOC, permit incentives in excess of what the existing voluntary employee health program exception permits and would essentially render the exception irrelevant.

So once again the EEOC has reinforced its position that the safe harbor provision does not apply to employer decisions to offer rewards or impose penalties in connection with wellness programs that include disability related inquiries or medical examinations.  We will have to wait and see whether any of the district courts in which similar challenges to wellness programs remain pending are listening.

Wednesday, June 1, 2016

By now, you’re likely aware (and if you’re not, you should be) that, in April, the U.S. Department of Labor (“DOL”)issued a new “Employee Rights Under The Family And Medical Leave Act” poster, to replace the prior poster on this subject.

The DOL has made clear that the old poster (revised Feb. 2013) is still sufficient – until further notice – to meet the posting requirement under the FMLA regulations. Thus, you’ve probably already given some thought as to whether and when to proceed with updating your posters.

As you consider this step, however, have you also considered whether the new poster impacts your policy?

The FMLA regulations provide that, if an FMLA-covered employer has any FMLA-eligible employees, and if the employer has a written policy on the subject of leave/benefits, then the employer must ensure that its policy contains the same information that is in the FMLA poster. (The notice requirements are discussed at pp. 12-13 of the helpful new publication from the DOL, “The Employer’s Guide to The Family and Medical Leave Act”.)

Accordingly, now is a good time to review your FMLA policy to ensure that it contains all of the information that is in the new poster. Of course, it is to your benefit to include additional provisions in your policy, such as a prohibition on the misuse of FMLA leave. But at a minimum, all of the information that is in the poster must be included.

Note that “all” means “all”; your policy must include, for example, not only information about the employee’s rights and responsibilities, but also the information in the poster regarding the employer’s responsibilities, along with enforcement information such as the employee’s right to file a complaint with the U.S. Department of Labor (“DOL”) and the DOL’s contact information.

For this reason, some employers choose to comply with the FMLA notice regulations by attaching a copy of the FMLA poster to their handbook, instead of incorporating all of the language in the poster into their policy. If that’s your approach, just ensure that you update the attachment in light of the new poster.

Either way, however, you should make sure that your policy is compliant.  And because the information in the poster represents basic FMLA information, you should take steps to review and, if necessary, revise your FMLA policy now, even if you wait to hang up the new FMLA poster.