Employee Benefits

Legal Risks Associated With a Retirement Plan's "Missing Participants"

July 2, 2018

By Robert W. Patterson

Administrators of qualified retirement plans have always had to deal with the problem of “missing participants” – that is, terminated vested participants for whom the administrator does not have a current mailing address or other contact information, and participants who refuse to respond to communications from the administrator.  This problem frequently comes to light when a terminated participant nears retirement age or otherwise becomes entitled to receive a plan distribution, because at that time the administrator must contact the participant about distribution options, beneficiary designations, and other matters.  And when a terminated participant approaches age 70½, the necessity of locating him or her becomes more urgent, because plan distributions generally must begin shortly after that age is reached.

Besides being an administrative problem, the inability to locate terminated participants can represent legal risks.  The U.S. Department of Labor (DOL) has asserted that a plan’s inability to locate terminated participants can constitute a breach of duty on the part of the plan’s fiduciaries, in violation of ERISA.  Lost or missing participants can also lead to plan disqualification risks; for example, if “required minimum distributions,” mandated under the Internal Revenue Code, cannot be made.

Read More >> Legal Risks Associated With a Retirement Plan's "Missing Participants"

#MeToo Meets the Internal Revenue Code

February 19, 2018

By Lisa A. Christensen

The "Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for the fiscal year 2018" a.k.a. the Tax Cuts and Jobs Act of 2017 (the "Tax Act") will, among other things, likely make negotiations in connection with sexual harassment or sexual abuse claims more difficult, and settlements for such claims more expensive for employers.

Read More >> #MeToo Meets the Internal Revenue Code

Help Us (and the Code) Help You! Helping Employees/Co-Workers in a Crisis

October 9, 2017

By Lisa A. Christensen

In response to disasters such as hurricanes and earthquakes, the general community comes together to assist those in need — donating our blood, time, money, and belongings.  We respond similarly when one of our co-workers experiences an illness, death, accident, fire, or other severe financial hardship.  Employers often ask us:  “What can we do?”

Helping your employees and co-workers can be as easy as 1-2-3, once you crack the Code.  The Internal Revenue Code, that is.  If you know where to look, you can find some real win-win options.

  1. Tax-Free Employer Payments:  Employers may make direct payments (i.e., “qualified disaster relief payments”) that are tax-free to employees AND deductible by employers.
  2. Employer-Sponsored Public Charities:  Another more flexible (and perpetual) option is to form a public charity in as little as a single day.  An emergency assistance fund backed up by an employer-sponsored public charity can boost workplace morale and enhance an employer’s familial culture.  The employer and employees may make tax-deductible donations which are provided (directly and tax-free) to other employees/former employees affected by disasters and other hardships.
  3. Leave-Based Donation Programs:  Employers can adopt leave-based donation programs whereby employees donate leave time to be paid by the employers to a charity.  The employees will not be taxed on the donated leave, nor will they be able to claim a charitable deduction on their individual tax returns.  Employers may take a deduction for the employees’ contributions without regard to the normal limitations on corporate charitable donations.

In addition to the above, the IRS, DOL, and PBGC have granted multiple forms of relief to taxpayers impacted by the hurricanes and other disasters, and President Trump recently signed the “Disaster Tax Relief and Airport and Airway Extension Act of 2017,” which, among other things, provides emergency tax relief for individuals and employers.

Watch for an upcoming Bond Client Alert providing more detail on all of these relief programs.

We want to send our best wishes to the entire Bond family (all of our friends, colleagues, and clients) already affected by the recent storms and those currently in the path of Hurricane Nate.  Our thoughts are with you and we are ready to help.

Author’s Note:  Many thanks to first-year Bond associate Stephanie Fedorka for her assistance with this blog article.  Her research time does not constitute a charitable donation to anyone other than the author.


Cybersecurity and Employee Benefit Plan Fiduciary Duties: Going Beyond HIPAA

April 26, 2016

By Lisa A. Christensen
It seems as though we hear about new cybersecurity issues every day -- from traditional hacking incidents to the increasingly sophisticated phishing, malicious apps and websites, social engineering, and ransomware attacks.  Employee benefit plan sponsors likely have a fiduciary duty to ensure participant information and plan assets are protected from the growing number of cyber threats (to the extent possible, given the ever-changing cybersecurity landscape), AND, perhaps more importantly, that there is a plan in place to respond to a data breach and mitigate any associated damages. For many years now, health plan sponsors have been subject to a variety of privacy and security rules under the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”).  Health plan sponsors are (among other things) required to enter into contracts with TPAs and other service providers called “business associate agreements” that spell out the parties’ obligations under HIPAA in connection with the plan’s HIPAA-protected information or “PHI.” Notwithstanding HIPAA’s broad scope, it is important to note that HIPAA only establishes the floor (i.e., the bare minimum requirements) when it comes to privacy and security of PHI.  Health plan sponsors also should consider including references to state data breach notification laws and cyber liability insurance in business associate agreements (or related services agreements) in addition to the HIPAA minimums. Although HIPAA does not extend to retirement plans, and retirement plan sponsors are not required to enter into specific agreements with TPAs governing the privacy and security of participants’ personally identifiable information or “PII,” ERISA’s fiduciary duties nonetheless likely apply.  Although the DOL has yet to weigh in on fiduciary duties raised by cybersecurity issues, retirement plan sponsors should consider including both “HIPAA-like” and expanded cybersecurity provisions in contracts with TPAs that govern the privacy and security of participants’ PII and plan assets.  Examples include, but are not limited to, provisions that:  (1) address the TPA’s data security policies and procedures; (2) restrict the use of and access to PII; (3) explain the TPA’s obligations in the event of a data breach or security incident (i.e., investigation, notification of the plan sponsor and participants, mitigation, remediation, etc.); (4) specify liability for cybersecurity incidents, including the requirement to maintain adequate cyber liability insurance; and (5) provide for the ability to terminate the applicable services agreement, without additional or early termination fees, in the event of a data breach or other security incident, at the discretion of the plan sponsor. Finally, in recognition of the fact that participant information also needs to be protected while in the hands of the plan sponsors (including from their employees as well as external cyber threats), plan sponsors should include any plan-related PHI or PII in their organizational cybersecurity efforts.

Reduce Fiduciary Risk With An Effective Investment Policy

January 5, 2016

Human resource officers and managers are often asked to chair or sit on a retirement plan committee responsible for administrative tasks.  In this role, a committee member takes on fiduciary responsibilities to plan participants and beneficiaries, and can be held personally liable for fiduciary breaches under Federal law.  As legal counsel, we endeavor to manage this risk for our clients through guidance on good governance, indemnification protection, and the adoption of effective policies.  Effective management of employee benefit plans will meet this fiduciary duty to participants while at the same time improving results for employees and minimizing potential liability exposure of plan managers. We are sometimes asked to review a proposed investment policy statement or IPS related to a 401(k) or 403(b) retirement plan.  Although these plans are not required to have an IPS, we recommend having one as a guide for prudent plan administration.  Most plan service providers and record keepers will have a standard form or model available for use by the employer adopting the plan.  Models can be useful, but any model should not be adopted without discussion and agreement with its terms.  Because an IPS is a policy of the employer in its role as plan administrator, and not one of the outside record-keeper or financial consultant, it’s important for a plan committee to discuss and “own” its policies.  Furthermore, a carefully-designed policy will not create additional responsibilities for a plan committee or officer beyond those imposed by law. An effective IPS will describe the roles and duties of a plan committee, other responsible officers, or plan service providers.  It provides a framework and process for investment decisions as well as indemnification for employees who are charged with fiduciary duties.  In many cases, there may be a financial advisor or consultant who is engaged to carry out the policy in some capacity.  Once a policy has been discussed and adopted, it is an aid in running efficient committee meetings and in working effectively with outside service providers.  Adopting a well-crafted IPS is an important element of prudent plan administration. An IPS should not dictate how many investment choices will be available for participants or the asset categories to be covered by plan options.  Using factors described in the policy, a plan committee can handle the tasks of monitoring current options, assessing their potential for future performance, and making changes in a plan’s fund options.  By creating and following a disciplined investment policy, a plan committee greatly reduces its risk of fiduciary liability when investment markets become volatile. There is a downside in adopting an IPS and then ignoring it.  Our experience has been, however, that once discussed and adopted, an IPS brings better focus and engagement by committee members, more efficient meetings, and a higher level of fiduciary performance on behalf of plan participants.  We have developed model policies that, together with proposals from plan service providers, can form the basis for your own policy.

ACA 2015 Reporting Delayed (Slightly)

December 29, 2015

Under the heading of “better late than never,” the IRS has recognized that “some employers, insurers, and other providers of minimum essential [i.e., health] coverage need additional time to adapt and implement systems and procedures to gather, analyze, and report” the information required on Forms 1094-B, 1095-B, 1094-C, and 1095-C for the 2015 calendar year.  It has delayed the due dates for providing the required forms to both individuals and the IRS as follows:
  • The due date for providing forms to individuals on 1095-B and 1095-C is extended from February 1, 2016 to March 31, 2016.
  • The due date for filing with the IRS is extended from:
    • February 29, 2016 to May 31, 2016 if not filing electronically (for employers who filed fewer than 250 W-2s in the prior year), and
    • March 31, 2016 to June 30, 2016 if filing electronically.
Employers or other coverage providers who do not comply with the extended due dates are subject to penalties, which may be abated for reasonable cause based on facts and circumstances. Because of the delay, individuals who file tax returns based on other information from their employers about their offers of coverage for purpose of determining whether they are eligible for a premium tax credit for health insurance marketplace coverage will not be required to file amended tax returns once they receive their Forms 1095-C or any corrected 1095-C.

For-Profit "Religious Employers" May Exclude Certain Contraceptives From Preventive Care Requirement Under the Affordable Care Act

June 30, 2014

On June 30, 2014, the U.S. Supreme Court held, in Burwell v. Hobby Lobby Stores, Inc., that a for-profit corporation is a “person” that has religious rights under the Religious Freedom Restoration Act of 1993 ("RFRA").  Therefore, guidance under the Affordable Care Act ("ACA") that requires all 20 FDA-approved contraceptive measures to be covered with no employee cost sharing as a part of women’s “preventive services” does not apply to closely-held businesses where this mandate interferes with the ability to conduct business in accordance with their religious beliefs.  The Court determined that the $100 per day, per person, penalty that applies under the ACA for failure to satisfy the contraceptive mandate was a “substantial burden” on those corporations.  That burden could not be relieved by dropping health coverage and paying the (also substantial) $2,000 per employee annual penalty that would apply if even one employee got subsidized coverage on a state or federal exchange, according to the Court. The Court had difficulty reconciling ACA regulations that provide employees of nonprofit religious corporations access to contraceptives by requiring that insurers provide a contraceptive rider at no cost to the employer or employees.  This, the Court noted, provides a path to satisfying the government’s compelling interest in guaranteeing cost-free access to the challenged contraceptive methods.  However, the economies of this measure (saving the insurance companies the cost of undesired pregnancies) does not translate to self-funded health plans where the third-party administrator obtains no cost savings.  Third party administrators have no economic interest in the performance of self-funded plans, because all claims are paid from the general assets of employers, or from trusts. In New York, the Hobby Lobby decision would apply only to self-funded plans.  New York Insurance Law Sections 3221(l)(16) and 4330(cc)(1) require health insurance contracts to include a rider covering all FDA-approved contraceptive drugs and devices.  The exception for “religious employers” is both narrow and specific, requiring that all of the following conditions be met:

  • The inculcation of religious values is the purpose of the entity;
  • The entity primarily employs persons who share the religious tenets of the entity;
  • The entity primarily serves persons who share the religious tenets of the entity; and
  • The entity is a nonprofit organization.

One day after issuing its decision in Hobby Lobby, the Supreme Court issued orders in six other cases that were decided by various federal appellate courts relating to religious objections to covering contraceptive measures in employee health plans.  Those orders signify that the Court’s reasoning in Hobby Lobby may not necessarily be limited to the four methods of contraception that were challenged in that case (two “morning-after” type drugs and two intrauterine devices), and may extend to all 20 FDA-approved contraceptive methods. It remains to be seen how employees in a self-funded health plan maintained by a religious employer can obtain contraceptive coverage without cost, as the Supreme Court suggests.  Undoubtedly, the Obama Administration and the Department of Health and Human Services are puzzling over changes to the ACA guidance to achieve this goal without violating the RFRA.  

Court of Appeals Issues Decision Regarding Vesting of School District Retiree Health Insurance Benefits

March 19, 2014

By Robert F. Manfredo
On December 12, 2013, the New York Court of Appeals issued a decision in Kolbe v. Tibbetts, in which the Court addressed whether the Newfane Central School District could unilaterally alter the health insurance benefits of certain retirees of the District.  The Court held that the retirees had a vested right to the same health insurance coverage until they turned 70 years of age that was in place under the collective bargaining agreements ("CBAs") that were in effect at the time of their retirement.  The Court also rejected the District's contention that it was entitled to change retiree health insurance benefits under the New York Insurance Moratorium Law, holding that the Insurance Moratorium Law does not apply to health insurance benefits that have vested under CBAs. While they were employed by the District, the plaintiffs were part of a non-instructional bargaining unit represented by the CSEA.  The CBAs in effect at the time of their retirement provided for certain health insurance benefits, including a two-tiered prescription drug coverage co-pay system and an option to participate in a flexible spending benefit program.  Each of the plaintiffs’ CBAs contained an identical section related to health insurance benefits for retirees, stating that “[t]he coverage provided shall be the coverage which is in effect for the unit at such time as the employee retires” and “full-time employees who retire . . . shall be entitled to receive credit toward group health insurance premiums” until they reach age 70.  In January 2010, after each of the plaintiffs had retired, the District executed a successor CBA which implemented changes to the co-pay system and flexible spending benefit program, and the District informed the retirees that those changes for current bargaining unit employees would also be applied to the retirees. The plaintiffs commenced an action against the District alleging breach of contract and seeking declaratory relief.  The plaintiffs moved for summary judgment on their claims and the District cross-moved for summary judgment, arguing, in part, that its modification to the retirees’ health insurance benefits was permitted under the Insurance Moratorium Law.  The Supreme Court granted the plaintiffs’ motion for summary judgment.  The Appellate Division reversed the Supreme Court's decision (with two judges dissenting), and granted the District's cross-motion for summary judgment. The Court of Appeals reversed the decision of the Appellate Division.  Although the Court recognized that contractual obligations do not ordinarily survive beyond the termination of a collective bargaining agreement, the Court held that “[r]ights which accrued or vested under the agreement will, as a general rule, survive termination of the agreement.”  In considering the specific language set forth in the CBAs, the Court held that the plaintiffs had a vested right “to the ‘same coverage’ during retirement as they had when they retired, until they reach 70.” The District argued that it was permitted under the Insurance Moratorium Law to modify the retirees' health insurance benefits because a corresponding modification was made to the health insurance benefits for active employees.  The Insurance Moratorium Law provides, in relevant part, that a school district is prohibited from “diminishing the health insurance benefits provided to retirees . . . unless a corresponding diminution of benefits or contributions is effected . . . from the corresponding group of active employees for such retirees.”  The Court held that the Insurance Moratorium Law only applies in those instances where a school district attempts to change health insurance benefits that were voluntarily conferred, not where the benefits were “negotiated in the collective bargaining context.”  Accordingly, the Court held that the Insurance Moratorium Law did not permit the District to reduce retiree health insurance benefits simply because it negotiated a corresponding change to the health insurance benefits of active employees. In light of the Court’s decision in Kolbe v. Tibbetts, school districts and municipalities should make sure to review the retiree health insurance provisions in their CBAs before making a decision that could impact the health insurance benefits of retirees, and should consult with their legal counsel before implementing changes to retiree health insurance benefits.

United States v. Windsor: What Federal Recognition of Same-Sex Marriage Means for Employee Benefits

July 10, 2013

By Aaron M. Pierce

On June 26, 2013, the United States Supreme Court issued its highly anticipated decision in United States v. Windsor.  The Court ruled that a portion of the Defense of Marriage Act (“DOMA”) is unconstitutional.  DOMA, which was enacted in 1996, restricted the definitions of the terms “marriage” and “spouse” for purposes of any federal law to include only opposite-sex marriages.  The effect of this provision was to deny recognition of same-sex marriages for purposes of all federal laws, including the laws governing taxation and employee benefits.  As a result, same-sex couples married in a jurisdiction permitting same-sex marriage, while treated as legally married for state law purposes, were not treated as married under any federal law.

In a 5-4 decision, the Supreme Court in Windsor found that this provision of DOMA is “unconstitutional as a deprivation of the liberty of the person protected by the Fifth Amendment of the Constitution.”  In explaining its decision, Justice Kennedy, writing for the majority, stated that:

DOMA instructs all federal officials, and indeed all persons with whom same-sex couples interact, including their own children, that their marriage is less worthy than the marriages of others.  The federal statute is invalid, for no legitimate purpose overcomes the purpose and effect to disparage and to injure those whom the State [New York], by its marriage laws, sought to protect in personhood and dignity.  By seeking to displace this protection and treating those persons as living in marriages less respected than others, the federal statute is in violation of the Fifth Amendment.

As a result of the decision in Windsor, the federal government will now recognize same-sex marriages in those states where same-sex marriages are permitted.  Same-sex marriage is permitted in the following jurisdictions:  California (effective June 28, 2013, as a result of the Supreme Court’s Proposition 8 decision in Hollingsworth v. Perry); Connecticut; Delaware (effective July 1, 2013); Iowa; Maine; Maryland; Massachusetts; Minnesota (effective August 1, 2013); New Hampshire; New York; Rhode Island (effective August 1, 2013); Vermont; Washington; and Washington, D.C.  Therefore, at least for same-sex couples legally married and residing in one these jurisdictions, their marriages will now be recognized as legal marriages for the purposes of all federal laws.

Federal recognition of same-sex marriages will have a significant impact on employee benefit plans and arrangements.  As a result of the decision in Windsor, for purposes of employee benefit plans and arrangements governed by the Internal Revenue Code (“Code”) and the Employee Retirement Income Security Act (“ERISA”), a spouse will include a same-sex spouse, at least with respect to those jurisdictions within which same-sex marriage is legal.

Summarized below are the principal effects of the decision on common employee benefit plans and arrangements for legally married same-sex spouses:

  1. Health Benefits – The value of health coverage (including dental and vision) for a same-sex spouse no longer will be imputed in the employee’s taxable income.  In addition, any employee premium contributions in connection with coverage for a same-sex spouse may now be made on a pre-tax basis pursuant to a Code Section 125 cafeteria plan.
  2. Health FSAs, HRAs and HSAs – Employees may use amounts available under a health flexible spending account, a health reimbursement account or a health savings account to reimburse the medical expenses of a same-sex spouse.
  3. Cafeteria Plan Change of Status Rules – Generally, an employee may only change a cafeteria plan election mid-year (i.e., outside of an open enrollment period), if a “change of status” event has occurred.  A change of status for a same-sex spouse will now be considered a change of status under the cafeteria plan rules.
  4. COBRA/Special Enrollment Rules – A same sex spouse will be treated as a qualified beneficiary under the federal COBRA continuation coverage rules.  The HIPAA special enrollment rules also will apply with respect to same-sex spouses.
  5. FMLA – Covered employers must now provide leave to eligible employees to care for an FMLA-qualifying condition of a same-sex spouse, if the covered employee resides in a state where same-sex marriage is legally recognized.
  6. Retirement Plans – A same-sex spouse will be treated as a spouse for purposes of retirement plans governed by ERISA and the Code, including 401(k) plans, 403(b) plans, defined benefit plans, and 457(b) plans.  As a result, a same-sex spouse generally will have the same spousal rights as an opposite-sex spouse.  For example:
  • A same-sex spouse will be the beneficiary of the employee participant, unless the spouse consents to the designation of a different beneficiary.  Further IRS guidance will be required regarding the continued validity of prior beneficiary designations that likely were made without a requirement that the consent of a same-sex spouse be obtained.
  • Benefits paid under certain types of plans (defined benefit plans, money purchase pension plans and other defined contribution plans providing for annuity forms of payment) generally must be paid in the form of a 50% joint and survivor annuity with the same-sex spouse as the co-annuitant, unless the spouse consents to a different form of payment.
  • A same-sex spouse will be allowed to roll over an eligible distribution from a plan to an IRA or other retirement plan.
  • A same-sex spouse will be treated as a spouse for purposes of the qualified domestic relations order rules.
  • Hardship distributions under certain types of plans (generally, defined contribution plans that permit such distributions) will be available to pay for medical care, tuition and burial expenses with respect to a same-sex spouse.
  1. Other Fringe Benefits – With respect to other benefit arrangements governed by the Code, benefits provided to a same-sex spouse generally should be treated for tax purposes in the same manner as benefits provided to an opposite-sex spouse.

Many plans were drafted to specifically incorporate the DOMA definition of spouse to avoid any confusion regarding the treatment of same-sex spouses under the terms of the plan.  Therefore, plan documents will need to be reviewed to determine if the DOMA definition of spouse is reflected.  If it is, an amendment to the plan may be required.  With respect to qualified retirement plans, any required amendment generally will need to be adopted by the last day of the current plan year, unless the IRS provides for a delayed amendment due date.

At present, it is unclear how couples who were legally married in a jurisdiction recognizing same-sex marriage, but who are residing in a jurisdiction that does not recognize the validity of the marriage, will be treated under federal law.  For example, if an employee was legally married to a same-sex spouse in New York, but is residing in Pennsylvania (where same-sex marriages are not recognized), it is unclear if that employee would be considered to be legally married under federal law.  Further guidance on this issue will be required.  Finally, the Windsor decision has no impact on unmarried same-sex domestic partners.

The IRS has indicated that it will be moving swiftly to provide guidance on the impact of the Windsor decision.  Therefore, we anticipate that the IRS and other federal agencies will be issuing guidance on many of the issues noted above in the near future.

Implementation of the Employer Mandate Provisions of the Affordable Care Act Delayed Until January 1, 2015

July 8, 2013

By Aaron M. Pierce

The Treasury Department has announced that the implementation date for the employer mandate provisions of the Patient Protection and Affordable Care Act (“ACA”) (i.e., the provisions requiring employers with 50 or more full-time employees to provide affordable, minimum value health coverage to full-time employees or pay a penalty to the federal government) has been delayed until January 1, 2015.  The employer mandate provisions had been scheduled to take effect on January 1, 2014.  In its announcement, the Treasury Department indicated that the delay was in response to concerns regarding the complexity of the rules and the administrative challenges posed by the reporting requirements.  The Treasury Department stated that the delay would afford the administration additional time to issue simplified reporting rules and give employers time to adapt their health coverage and reporting systems to conform to the rules.

As a result of the implementation delay, employers will not be subject to any penalties for the failure to provide affordable, minimum value coverage to their full-time employees for 2014.  However, the delay applies only to the employer mandate portion of ACA.  Other ACA changes scheduled to be fully effective in 2014 (including the individual mandate, the required employer-provided notice regarding the availability of exchange coverage, the 90-day waiting period rules, the prohibition on pre-existing condition limitations for all individuals, the out-of-pocket and cost-sharing limitations, and the prohibition on any annual and lifetime benefit limits) will take effect without delay, unless the agencies provide further relief.

While some employers might consider taking a “breather” from some of their ACA compliance efforts, the delay isn’t broad enough to ignore ACA altogether until 2014.  Indeed, some employers should view the delay as a renewed opportunity to do some compliance planning, without the pressure of a looming effective date.

The Treasury Department has indicated that formal guidance regarding the delayed employer mandate implementation date will be issued soon.

With the Supreme Court Upholding Most of Health Care Reform, Employers Must Focus on Immediate Compliance Deadlines

July 16, 2012

By Thaddeus J. Lewkowicz

On June 28, 2012, the United States Supreme Court issued its landmark decision on the constitutionality of the Patient Protection and Affordable Care Act (“Act”), and ruled that all of the challenged health care reform provisions in the Act are constitutional other than a portion of a Medicaid expansion provision.  Although future challenges to the implementation of some or all of the Act will occur through the electoral process, additional litigation, and the legislative process, those challenges are unlikely to result in any significant changes in the requirements of the Act before the end of this year at the earliest.  In the meantime, there are a number of new requirements in the Act that covered employers will need to comply with in the near future, including:

  • finalizing the Summary of Benefits and Coverage that most employers will be required to provide on the first day of open enrollment this fall;
  • taking the steps necessary to comply with the $2,500 annual limit that will apply to health flexible spending accounts beginning in 2013, including making sure that open enrollment materials that will be distributed to eligible employees prior to the beginning of the 2013 plan year accurately describe the new limit;
  • implementing any procedures necessary to track and record health coverage costs in 2012 to prepare for the new Form W-2 reporting requirement for group health plan coverage costs that will apply to Forms W-2 that will be issued by certain employers in January of 2013; and
  • coordinating with any applicable insurer or administrator to make sure that the research fees that will be imposed by the Act on specified issuers of health insurance policies and plan sponsors of self-insured health plans starting with the first plan or policy year ending on or after October 1, 2012 are timely paid in 2013.

In addition to these requirements, the Act will impose numerous other requirements on covered employers in the next few years that should be planned for in advance of the applicable deadlines. Some of the more important of those requirements are described below:

  • preventive care requirements for women that certain health plans will have to implement starting with plan years that begin on or after August 1, 2012;
  • medical loss ratio rebate requirements that will apply to certain insured health plans starting in August of 2012 (certain insurers that fail to spend a specified percentage of premiums received on covered medical claims and quality improvement-expenses will have to provide rebates to the applicable health plans starting in August of 2012, and employers that have such plans will have to decide how to handle such rebates);
  • 2013 increases in Medicare payroll taxes and FICA taxes for certain highly compensated individuals;
  • certain employers will be required to provide a notice to their employees in March of 2013 about the health insurance exchanges that will become operational in 2014 (in addition to this notice requirement, certain employers will want to do an analysis in 2013 about how the health insurance exchanges might impact the health coverage they provide);
  • the employer mandate requirement (commonly referred to as the “pay or play” requirement) that will apply in 2014 to certain employers having at least 50 full-time equivalent employees, which will require those employers to decide whether they will provide minimum essential health coverage to their full-time equivalent employees in 2014 or pay a financial penalty;
  • nondiscrimination requirements for certain insured group health plans that will apply after the applicable regulations are issued; and
  • numerous other requirements that will apply to many group health plans in 2014 or later, including expanded dependent coverage rules for “grandfathered” health plans, new preexisting condition exclusion requirements, a restriction on eligibility waiting periods that exceed 90 days, a requirement to eliminate all annual dollar limits for covered group health plans, new incentive/penalty requirements for wellness incentives, new minimum essential coverage requirements, new clinical trial coverage requirements, new provisions regarding guaranteed availability and renewability of insured health coverages, changes to Medicare Part D coverage, new automatic enrollment requirements that will apply to certain employers after the applicable regulations are issued, and a new “Cadillac” plan excise tax that will apply in 2018 if the aggregate value of certain health coverages exceed a specified amount.

Considerable guidance is going to be issued by the applicable governmental agencies to help employers implement the requirements described above, and that guidance should be monitored carefully to help ensure timely compliance with those requirements.

Proposed Regulations Issued for the Group Health Plan Summary of Benefits and Coverage

November 21, 2011

By Aaron M. Pierce

Section 2715 of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (“PPACA”), mandates that group health plans provide a summary of benefits and coverage (“SBC”) to all participants and beneficiaries. The SBC is a brief description intended to provide a consistent and accurate description of benefits and coverage so that participants can easily compare different plans. On August 22, 2011, the Departments of Labor (“DOL”), Health and Human Services (“HHS”), and Treasury (“IRS”) (collectively, the “Departments”) issued proposed regulations to implement the SBC requirement, along with a proposed SBC template, instructions, and a uniform glossary of key terms.

The PPACA states that plans will be required to furnish SBCs beginning March 23, 2012. However, the Departments stated in their seventh set of PPACA frequently asked questions (“FAQs”) that plans are not required to comply with the SBC requirement until final regulations are issued. The FAQs also provided assurances that the effective date of the final regulations will afford sufficient time to comply with the SBC requirements.

Furnishing the SBC

All group health plans must provide SBCs, including insured, self-insured, and grandfathered plans. The plan sponsor or administrator (or third-party administrator) must provide the SBC for self-insured plans, and the insurer or plan administrator must provide it for insured plans. The SBCs must generally be provided without charge in connection with initial eligibility, renewal, HIPAA special enrollment, and upon request. The SBC is a stand-alone document in addition to ERISA’s other disclosure requirements. However, the Departments are soliciting comments on how the SBC can be coordinated with other disclosures (for example, open-enrollment materials), and whether the SBC should be provided within a summary plan description.

SBC Contents and Appearance

The SBC must include:

  • Uniform definitions of standard insurance and medical terms;
  • A coverage description, including cost sharing;
  • Exceptions, reductions, and limitations on coverage;
  • Cost-sharing provisions, including deductible, coinsurance, and copayment obligations;
  • Renewability and continuation of coverage provisions;
  • A “coverage facts label” that includes examples of common benefits scenarios;
  • For coverage on or after January 1, 2014, a statement of whether the plan provides “minimum essential coverage” and meets the “minimum value requirements”;
  • A statement that the SBC is only a summary and that the plan document, policy, or certificate should be consulted for further information about coverage;
  • A contact number for consumers to call with questions, and a web address for obtaining a copy of the plan document or policy;
  • A web address for obtaining a list of network providers (for plans maintaining one or more provider networks);
  • A web address for obtaining more information about any prescription drug formulary; and
  • Information on premiums for insured plans, or cost of coverage for self-insured plans.

The SBC must be presented in a uniform format, contain terminology the average plan participant can understand, be no more than 4 double-sided pages (i.e., 8 pages), and be printed in at least 12-point font. The SBC must also be presented in a culturally and linguistically appropriate manner. In counties where at least 10% of the population is only literate in the same non-English language, (1) plans must provide interpretive services and written SBC translations upon request in the relevant non-English language, and (2) an English version of the SBC must disclose that language services are available in the relevant non-English language. This rule is similar to the PPACA notice requirements for claims and appeals procedures.  

The SBC may be transmitted in paper or electronic form. If electronic, plans subject to ERISA and the Internal Revenue Code must meet the DOL’s electronic disclosure requirements.

Notice of Material Modifications

Plans must provide notice to enrollees of midyear material modifications to SBC content at least 60 days before the effective date. The notice rule is inapplicable to modifications made during coverage renewal or reissuance. The requirement may be satisfied either by providing a separate notice describing the modification or an updated SBC. A timely SBC also satisfies ERISA’s summary of material modifications (“SMM”) requirement. For both the SBC and SMM requirements, “material modification” means any coverage modification that, independently or in conjunction with other contemporaneous modifications, an average plan participant would consider an important change in coverage. The change could be a coverage enhancement or reduction. Without a timely SBC, an SMM must be provided no later than 210 days after the close of the plan year in which the modification was adopted, or, if it is a material reduction in covered services or benefits, no later than 60 days after the date on which the modification was adopted. 

Uniform Glossary

The plan must make a “Uniform Glossary” of insurance and medical terms available to participants and beneficiaries within seven days of their request. The SBC template and instructions on the DOL’s website contain all required definitions. A request may be satisfied by providing an internet address where participants can review the glossary, including the plan sponsor’s, HHS’s, or the DOL’s website. A paper copy, however, must also be made available upon request.

Recommended Action

Despite the effective date uncertainty, final regulations will probably be issued in the near future. Therefore, plan administrators and sponsors should begin working with their providers and third-party administrators to compile the information needed to meet the SBC requirements.