Department of Labor Issues Proposed New Rules Governing Whistleblower Proctections Under the Affordable Care Act

By Douglas L. McSwain

The interim Final Insurance Market Reform Rule under the Affordable Care Act (ACA) came out this past week, and included the employment non-discrimination/whistleblower protection provisions.  This rule could very well become one of the most litigious employment law developments in some time. Employers are prohibited from discriminating against any employee who complains in good faith that an employer is not providing healthcare coverage benefits in compliance with the ACA.  Employers and their insurers are also prohibited from discriminating against employees who participate in any complaint to a state or federal official about the perceived inadequacies of the employer’s coverage of health benefits, and, critically important, against any employee who chooses to go into the insurance exchange to purchase individual health coverage (thereby triggering, for any “large” employer, exposure to a tax penalty if it has failed to provide its employees “affordable” and at least 60% actuarially-valued, coverage). 

Employees may bring a complaint of discrimination (i.e., “blow the whistle” on an employer) within a 180-day limitations period by lodging an oral or informal written complaint (in letter-form or otherwise) with the U.S. Occupational Safety and Heath Administration (“OSHA”).  Under the new rule, reinstatement or front pay is available as remedies, as well as backpay, attorneys fees, expert fees, costs, etc.  If reinstatement is ordered, it must be done immediately pending appeal unless infeasible, in which event, front pay is awardable.  If a prima facie discrimination case is made out by an employee, the employer bears a “clear and convincing burden,” in effect, to disprove that any adverse employment action would have been taken in any event (interesting burden-shift here, and perhaps of questionable validity).  On the other hand, for frivolous or bad faith employee-filings, employers may be awarded up to, but no more than, $1,000 in attorneys fees against a frivolous-filing employee. OSHA filings are exhausted in the administrative setting before an Administrative Law Judge, and appeals are to the U.S. Court of Appeals. However, if a complaint remains unaddressed by OSHA for over 210 days, the case may be initiated by a filing in federal district court, subject to de novo review. 

These are significant developments in employment and employee benefits law. You may find the proposed new employment rules on the DOL’s website regarding the non-discrimination/whistleblower regulations: http://www.dol.gov/find/20130222/OSHA2013.pdf

SIXTH CIRCUIT REJECTS RETIREES’ CLAIMS TO FIXED LIFETIME HEALTHCARE BENEFITS

by Leila G. O’Carra

The Sixth Circuit recently issued two opinions addressing retired employees’ claims to lifetime, unchangeable healthcare benefits. In both cases, the Sixth Circuit rejected the retirees’ claims.  In Reese v. CNH America LLC, Nos. 11-1359/1969, the parties’ collective bargaining agreement (CBA) promised healthcare benefits to eligible retirees and their spouses for life.  The lawsuit arose when the employer, CNH, attempted to modify the scope of the retirees’ healthcare plan.  The retirees claimed that CNH could not alter their vested benefits without union approval. 

In rejecting the retirees’ claims, the Sixth Circuit held that healthcare benefits, unlike other kinds of benefits, cannot be “fixed” because of the constant evolution of medical advances and the fluctuation of healthcare costs attendant to such improvements.  Accordingly, the court reasoned, the employer necessarily retains the right to make unilateral “reasonable” changes to the retirees’ healthcare plan.  Furthermore, the court noted, the retirees had not complained about prior to changes to the plan.

The Sixth Circuit remanded the case to the district court to determine whether the changes proposed by CNH were reasonable considering the following:

• Does the modified plan provide benefits “reasonably commensurate” with the old plan?
• Are the proposed changes “reasonable in light of changes in health care?”
• Are the benefits “roughly consistent with the kind of benefits provided to current employees?”

Judge Bernice B. Donald dissented from the majority opinion, writing that the retirees’ vested right to receive health care benefits for life precluded CNH from making unilateral changes to the level of benefits provided.  Judge Donald agreed with the district court’s holding that any changes to the plan “must be reached though negotiation and agreement between the union and the employer.”

Four days after deciding Reese, the Sixth Circuit, in Wittmer v. Acument Global Technologies, Inc., No. 11-1793, permitted the employer, Acument, to eliminate retirees’ health benefits based on reservation-of-rights language found in the parties’ CBA.  The AcumentCBA promises “continuous health insurance” to retirees and their spouses “during the life of the retiree.”  However, the document also specifies that the employer “reserves the right to amend, modify, suspend, or terminate the Plan.”  Relying on this language, Acument terminated plan benefits in 2008.  A class of 64 retirees sued, claiming that Acument violated the Labor Management Relations Act and the Employee Retirement Income Security Act.  The Sixth Circuit viewed the matter as purely contractual, and determined that pursuant to the terms of the contract, Acument reserved the right to terminate benefits at any time. 

In so holding, the Court rejected the plaintiffs’ argument that the grant of “continuous” benefits “during the life of the retiree” created “vested, unchangeable benefits.”  The Court reasoned that, in context, the term “continuous” meant simply that benefits would not terminate automatically when the CBA expired.  The Court also rejected plaintiffs’ assertion that the reservation-of-rights clause applied only to pension benefits, finding that the CBA dealt with healthcare and pension benefits together, and used the term “pension plan” and “plan” interchangeably to cover all benefits.      

Dissenting Judge David Dowd, Jr., (United States District Judge for the Northern District of Ohio, sitting by designation) found ambiguities in the benefits provision of the CBA and would have remanded the case to the district court and allowed extrinsic evidence to prove the intent of the parties with respect to vesting of benefits. 

Medical Loss Rebates Received By Employer-Sponsors of Insured Health Care Plans

By Mark C. Blackwell

The medical loss ratio (“MLR”) rule under the Patient Protection and Affordable Care Act (the “ACA”) is now in effect and over the next few weeks many of our clients will be receiving rebate checks from their health insurers.  These checks will “come out of the blue” for many clients and will surely raise questions – - for example, what is this for, what can I do with the money, does any go to employees, is it taxable?  Guidance by the U.S. Department of Labor (DOL) and Internal Revenue Service (IRS) has been provided for employers, summarized below.

[Note that this summary applies primarily to private employers who provide health insurance to their employees through a policy with an insurer who is subject to the MLR   Plans of governmental employers, churches and non-ERISA plans are not included in this summary.]

Background

Generally, the MLR rule requires health insurers to issue “rebates” to policyholders if the insurer’s MLR ratio exceeds 85 percent for the large group market, and 80 percent for the small group and individual market.  The MLR is basically the ratio of the insurer’s (i) claims and quality improvement expenses to (ii) total premium dollars earned (adjusted for certain taxes and fees).

An MLR rebate is required to be allocated by the sponsor of an applicable health care plan between the policyholder (usually the employer) and each enrollee covered by the policy insuring the employer health care plan (usually the employees participating in the plan) “in amounts proportionate to the amount of premium paid.”  DOL recently issued Technical Release 2011-4 which provides guidance for how such rebates may be used by sponsors of ERISA-covered plans, and the IRS subsequently issued FAQ’s that provide information on the federal tax consequences of rebate payments.

How Can the Sponsor of an ERISA Group Health Plan Use the Rebate?

DOL guidance provides generally that if the employer pays the entire cost of insurance coverage, the rebate may be retained by the employer.  If the employer and plan participants each contribute a portion of the premium, the employee share is treated as a plan asset and must be used within 3 months of receipt for a permitted purpose, which may include:

• Distribute rebate to participants;

• Enhance benefits provided by the applicable plan; or

• Reduce future participant premiums.

In deciding on how to apply the rebates to plan participants, the DOL guidance notes that a plan “may properly weigh the costs to the plan and the ultimate plan benefit as well as the competing interests of participants or classes of participants provided such method is reasonable, fair and objective.”  For example, if the cost of distributing the rebate to former participants approximates the amount of proceeds, the employer may decide to allocate the proceeds to current participants using a reasonable, fair and objective allocation method.  Or, again for example, if the payments would be de minimus in amount, the employer may use the rebate for other permissible purposes including applying the rebate to future participant premium payments or benefit enhancements.

 For plans that are exempt from ERISA’s trust and annual audit rules (i.e., unfunded group health plans that are insured), MLR rebates normally remain exempt from ERISA’s trust, annual audit and reporting requirements.

 Is a Rebate of Amounts Paid with Employee After-tax Dollars Taxable?

An employee is taxed on the rebate only to the extent the employee received a tax benefit from deducting the premiums.  Thus, if the employee did not deduct the premiums on his or her tax return, the rebate is not taxable.  And,  regardless of any prior deduction of premiums, no taxable income results (although any deduction for current year premiums is reduced) if the employer provides the rebate to all current employees participating in the health plan, without regard to who participated in the year the rebate relates.  In no event is the rebate allocated in this manner subject to employment taxes.

Is a Rebate on Amounts Paid with Employee Pre-Tax Dollars (e.g., 125 Plans) Taxable?

If the rebate is distributed as a premium reduction for the employee, then the amount paid for the coverage is less, resulting in increased taxable wages.  If the rebate is distributed in cash, then the rebate is treated as taxable wages, subject to income and employment taxes.

401(k) Automatic Deferrals With a Safe Harbor Twist

By G. Alexander Hamilton

Memo to 401(k) Plan Sponsors –

Do you hate dealing with the ADP/ACP nondiscrimination tests each year?

Does your plan have trouble passing the tests?

Does the automatic enrollment/deferral feature that the government encourages interest you?

If the answer to any of these questions is “yes,” you may want to consider modifying your plan to make it a “Qualified Automatic Contribution Arrangement” or “QACA.” The QACA rules were enacted as part of the Pension Protection Act of 2006 (PPA) and are effective beginning in 2008. Final regulations were adopted in 2009. The QACA combines automatic enrollment/deferrals with certain minimum employer contributions — either across the board contributions or matching contributions — such that the annual ADP/ACP nondiscrimination rules are automatically satisfied and no testing is necessary. This is one of two “safe-harbor” design options that are available for 401(k) plan sponsors who want to avoid the annual ADP/ACP testing requirements.

“Affordable Care Act” Update

By Mark C. Blackwell

Group health plans that are in place as of March 23, 2010 are “grandfathered” and many of the new health plan mandates applicable to new plans either do not apply, or do not apply until future years.  However, a number of new rules apply effective the first plan year that starts after Sept. 23, 2010, even if the group plan is grandfathered.  The primary rules that apply to grandfathered plans on January 1, 2011 (for calendar year plans) include:

 Extension of Dependent Coverage.  If the plan covers dependents, coverage for adult children is extended until age 26 (i.e., through age 25), unless the child is eligible to enroll in another eligible employer-sponsored health plan (until 2014).

 Prohibition on Lifetime Limits.  Applies to all group health plans.  An individual whose coverage ended due to a lifetime limit is eligible to reenroll when the new rule takes effect.

 Prohibition on Annual Limits.  Applies to all group health plans, subject to (i) a transition rule and (ii) possible “waiver”  where the transitional rule “would result in a significant decrease in access to benefits” or “would significantly increase premiums.”  The “transition rule” permits an annual limit no lower than $750,000 for 2011 plan year; $1.25 million for 2012 plan year; and $2 million for 2013 plan year.  The “waiver” is available by application to HHS and must be made no later than 30 days before the start of the plan year.  It is primarily available to so-called “limited benefit” plans or “mini med” plans that are made available to part-time employees, seasonal workers, etc.

 Pre-existing Condition Exclusion (under age 19).  Applies to enrollees under age 19; applies to all covered individuals effective 2014.

 Prohibition on Rescissions.  Coverage cannot be rescinded after enrollment, except for fraud or intentional misrepresentation of a material fact.