LEGAL UPDATE
Susan J. Freed
Davis Brown Law Firm
Overview
 Recent Case Law
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COBRA
Wellness
ERISA
Health Care Reform
 Health Care Reform Changes
 New regulations
 New guidance
 Plan fiduciary regulations
Recent Case Law- COBRA
 Gomez v. St. Vincent’s Health (7th Circuit)
 Two employees sued employer after an internal audit performed by
the employer revealed employees had not received timely COBRA
election notices. Employer provided the notices and gave the
employees the opportunity to retroactively elect coverage with
negotiated payment plans. Employees declined the offer and sued.
 District Court denied statutory penalty but awarded one of the
employees damages for out of pocket medical damages.
 7th Circuit: statutory penalty not appropriate where no evidence of
bad faith or gross negligence or harm/prejudice to employees.
What to do if you fail to provide
COBRA election notices?
 Immediately provide
 Make retroactive
 Payment plans
 Put in writing, signed by parties, with guidelines
on payment due dates
 Some employers will waive COBRA premium for
the months prior to provision of election notice
 Review processes
Recent Case Law- Wellness
 Seff v. Broward County
 Broward County implemented a wellness program administered by an
outside third party. Employees in health plan were required to
complete a health risk assessment and have a biometric screening.
Employees declining to participate were charged an additional $20.00
per paycheck. Employees sued claiming policy violated ADA
 District Court rejected ADA claim based on exemption for bona fide
employee benefit plans
 Did not address whether policy violated EEOC rule that wellness
programs be “voluntary”
DOL Adv. Op. – Plan Assets
 2011-05A
 Employer received $800,000 in demutualization proceeds from
Prudential. The proceeds were attributable to voluntary life and
disability insurance policies. These insurance premiums were paid
entirely by the employees.
 Employer wants to use the proceeds to fund a wellness program for
health plan participants.
 DOL approved of the use
 Fact that employer may incidentally benefit by lower health costs
does not factor into analysis
 Employer not required to consider interests of employees who
contributed to premiums that are no longer participants
Demutualization Proceeds
 Portion of proceeds attributable to employee
contributions are plan assets and must be
used for exclusive benefit of plan participants
 Need only use them for the benefit of current
participants but could provide funds to prior
participants
 Can be used to pay plan expenses provided
they are not “settlor functions”
Recent Case Law- ERISA
 Cigna v. Amara (US Supreme Court)
 Cigna substituted its defined benefit plan with a cash balance plan.
When announcing plan to employees, CIGNA described the new plan
significantly enhancing the retirement program and being an overall
improvement. Further told employees their opening account balance
would represent the full value of the benefit employee earned prior to
the change and CIGNA would not realize any cost savings. SPD
distributed to employees was incomplete and inaccurate. In reality,
CIGNA recognized $10 million annually in savings and employees’
initial account balances did not represent the full value of the benefits
employees earned prior to the change. Employees sued under ERISA
Section 502.
 District Court found in favor of the employees and ordered CIGNA to
amend the plan.
Cigna v. Amara
 Supreme Court:
 ERISA 502 does not allow court to amend plan, only to
enforce plan terms
 SPD was not a plan document under ERISA
 Other equitable relief may be available to participants
harmed by misrepresentations. District courts can award
damages based on following theories:
 Reform trust document to correct fraud or mistake
 Surcharge fiduciary for breaches
 Equitable Estoppel
Recent Case Law - ERISA
 DM&E v. Schieffer (8th Circuit)
 Employer entered into an employment agreement with executive
containing a number of severance provisions. Employer terminated
agreement without cause triggering severance provisions. A dispute
arose over the amounts the employer owed under the agreement.
Executive initiated arbitration under the agreement. Employer moved
to enjoin arbitration as preempted by ERISA claiming employment
agreement was an employee benefit plan.
 8th Circuit: Individual contract providing severance benefits is not an
ERISA benefit plan
 Need ongoing “scheme”
 “class” of participants (i.e. more than one)
 Contrary to other Circuit Court Opinions
Health Care Reform Challenges
 Court Challenges
 11 cases have resulted in decisions
 Federal District Courts:
 6 ruled individual mandate constitutional
 5 ruled individual mandate unconstitutional
 Only 2 judges sided with the party that did not appoint
them
 Appellate Courts:
 6th Circuit rules constitutional
 11th Circuit rules unconstitutional
Health Care Reform Challenges
 If unconstitutional, what happens to the Act?
 10 courts have ruled only the individual mandate
provision is stricken, remainder of the Act
enforceable (including 11th Circuit)
 1 district court ruled entire Act unconstitutional
 Realistically, individual mandate crucial for
other elements of the Act to be workable
Reform’s New Requirements
 External Review
 New Iowa law effective 7/1/11
 Summary of Benefits and Coverage
 Effective March 23, 2012
 Preventative Care Coverage Expanded
 Plan years starting after 8/2012
External Review
 Applicable for non-grandfathered health plans
 Requires plan to pay for an independent, third
party review of an adverse benefit
determination if requested by participant
after exhaustion of internal appeals
 Iowa adopted new external review legislation
effective 7/1/11
 Question as to whether self-insured plans can opt
in and satisfy requirements
Summary of Benefits & Coverage
 Effective 3/23/12, employers must provide
employees with new summary of benefits and
coverage (“SBC”)
 Proposed rules require employers to distribute to
participants/beneficiaries:
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When enrolling in coverage (including special enrollees)
When renewing coverage
Upon a change in SBC
Upon a change in coverage
Upon request of participant
Summary of Benefits & Coverage
 Distribution requirements apply to insurers
and plan administrators as well
 To avoid duplication, HHS allows one party to
satisfy the disclosure requirements for the
others
 Talk to your insurer or plan administrator and
coordinate distribution
 All parties liable if not correctly distributed
 $1000 per participant
Summary of Benefits & Coverage
 Proposed rules also discuss 60 day prior notice
of material modification to SBC contents
 Does not apply to changes made to SBC as result
of renewal
 Should not apply to changes made at open enrollment
Preventative Care Expanded
 Definition of preventative care services non-grandfathered
health plans must cover was expanded on August 1, 2011 to
include:
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Well-woman visits
Contraceptives
Gestational diabetes screening
HPV testing
STD counseling
Breastfeeding support, supplies, counseling
Domestic violence support/counseling
 Applies first plan year on or after 8/1/12
Reform’s New Guidance
 HRAs & Annual Limit Restrictions
 W-2 Reporting Requirements
 Employer Penalty Provisions
HRAs & Annual Limit Restrictions
 The Problem: HRAs are considered group health plans subject
to a majority of ACA’s provisions, including the annual limit
restriction
 Previous HHS guidance provided integrated HRAs (reimbursing
services not entirely covered by major medical plan coverage) met
annual limit restrictions if underlying medical coverage complied.
 Stand-alone HRAs required to comply but by their nature they have
annual reimbursement limit much lower than that allowed under ACA
 The Solution: Apply for annual limit waiver
 Recent Guidance: Stand-alone HRAs in effect prior to 9/23/10
exempt from waiver requirements, will not be subject to
sanctions for having annual limits
 Only protects HRAs until 1/1/14
W-2 Transitional Relief
 IRS Transitional Relief for 2012 W-2 Reporting:
 Employers who issue fewer than 250 W-2 forms in the
preceding calendar year (2011) are not required to report
cost of health coverage
 Employers issuing a W-2 mid-year at the request of a
terminated employee
W-2 Transitional Relief
 “Coverage” that must be reported does not
include:
 Limited scope dental/vision
 Health Reimbursement Arrangements
 Health Savings Accounts
 Heath Flexible Spending Accounts – EE contributions
only (Employer contributions must be reported)
 LTC Insurance
 Archer MSAs
Employer Penalty Provisions
 Penalty if employer does not provide
affordable health insurance or health
insurance isn’t of a minimum value and one
employee receives federal subsidy
 What’s “minimum value”
 Insurance does not have actuarial value of at least 60%
 Will it be required to cover “essential health benefits”
 IRS currently says “no”
Employer Penalty Provisions
 What’s “affordable coverage”
 “Affordable” defined as coverage costing FTE 9.5% or less
of FTE’s household income
 ACA does not define “coverage”
 If it includes family, much more likely coverage not
affordable and employer penalized as family coverage is
more expensive making it more likely it is more than
9.5% of FTE’s household income and employers
typically pay smaller % of premium than single
coverage
Employer Penalty Provisions
 Good News!
 IRS announces it will interpret “coverage” for
purposes of “affordable” definition as only the
single coverage
 Much less likely employer penalized
 Estimated that this interpretation will save federal
government $50 billion in premium subsidies as
many fewer Americans will qualify for assistance
Impact of “Coverage” Definition
 Employer offers single coverage with a total premium of $400
per month. Employer’s family coverage is $1000 per month.
Employer pays 80% of single coverage ($320) but only 50% of
family coverage ($500).
 FTE has household income of $50,000 for family of 3 (under
400% of FPL). FTE elects family coverage and pays $6000
annually for coverage which is 12% of her household income.
 Employer is not penalized because had FTE elected single
coverage she would have paid only $960 for the year towards
coverage or 1.92% of household income.
 Employer would likely have been penalized if “coverage” included
family coverage as FTE would qualify for subsidy
Employer Penalty Provisions
 What if Employer paid nothing toward the
cost of insurance?
 Total cost of $4800 for single coverage falls solely
on employee
 FTE elects family coverage and pays $12,000 per
year
 In determining whether employer is penalized,
look at single coverage cost of $4800. Single
coverage cost is 9.6% of FTE’s household income.
 Employer penalized
Employer Penalty Provisions
 More Good News!
 IRS also announces “minimum value” does not
necessarily require employer coverage to cover all
essential health benefits as listed in the ACA to
avoid penalties
 Look for regulations defining “minimum value”
Free Choice Vouchers
 Even More Good News!
 Free choice voucher requirement repealed
 Employers will no longer have to offer employees
whose insurance is between 8% and 9.8% of
household income a voucher to purchase
insurance on the Exchange
New Problems
 Compliance with Iowa Dependent Mandate
 Self-insured local government employers
 Requires coverage for dependents up to age 25
regardless of availability of other employer
coverage
New Problems
 New Stand-Alone HRAs
 Annual limit waiver program only available to
plans in effect before 9/23/10
 Small employer tax credit
 In 2014 small employer must purchase coverage
on Exchange to claim credit
 What if you want to keep coverage you have?
DOL Plan Fiduciary Definition
 Proposed regulations revise definition of “fiduciary”
for ERISA and IRC
 Person must provide advice for compensation
 Compensation includes insurance commissions
 Includes direct and indirect compensation
 “Advice” includes
 Recommendations as to the advisability of investing in,
purchasing, holding, or selling securities or other property
 Advice or recommendations as to the management of securities or
other property
Thank-You
(515) 246-7891
susanfreed@davisbrownlaw.com
http://healthlawiowa.wordpress.com/