Category: Erisa

Mintz Levin has provided a good summary (which you can access here) of the principal features of H.R. 4850, Massachusetts’ Health Care Reform Bill. See previous posts on the legislation here.

Massachusetts Governor Mitt Romney signed into law the health care bill previously reported on here. You can access a press release here and Governor Romney’s comments here. He did veto some items in the bill, one of which calls for employers with 11 or more workers to provide health coverage or pay an annual fee of $295 per worker. The Boston Globe reports that “[t]he vetoes promise to be more symbolic than meaningful, because the House and Senate passed the bill overwhelmingly and are expected to override all the vetoes.”

KaiserNetwork.org reports here.

Another state is making some benefits history. Massachusetts has passed legislation (House No. 4850) that would require most of its citizens to purchase health insurance. The legislation would also require employers with 11 or more employees to contribute towards the cost. I am sure that the legislation will give rise to a lot of discussion over ERISA preemption issues just as the Maryland legislation did when it was passed late last year (discussed here and here).

The Wall Street Journal in an article yesterday provided this summary of the Massachusetts legislation:

Under the plan approved yesterday, uninsured residents who don’t buy new, low-cost plans — some subsidized by the state — would face financial penalties beginning in July 2007. In the first year, those who don’t buy insurance — provided the state makes available one deemed affordable — forfeit their personal state tax exemption, now worth about $150. In the second year, those who don’t buy would have to pay a fine equal to half of the monthly premium cost of an affordable plan. For a full year, the fine could total about $1,200 for a young adult who would be eligible for an individual plan. There are no criminal penalties for not buying insurance.

In another provision that stirred unease among some businesses, the proposed law would require companies with 11 or more employees to provide health coverage or pay a per-employee annual fee of $295. In addition, employers whose uninsured workers make multiple use of emergency room care — “free riders,” in the bill’s parlance — would have to pay between 10% and 100% of the portion of those medical bills exceeding $50,000.

The Wall Street Journal also reports that “Massachusetts faced a July federal deadline to show that it was working to cover more of the uninsured or face losing $385 million in funding for Medicaid, the federal-state insurance plan for the poor and disabled” and that “[o]ther states — schedules vary from state to state — are expected to face similar pressure in coming years.”

You can access links to the legislation at the website of the The 184th General Court of The Commonwealth of Massachusetts:

• Full text of legislation
• Conference Committee Report, Section-by-Section Summary
• Summary and Fact Sheet

One of the most interesting parts of the legislation is that every employer with 11 or more employees would be required to adopt a 125 plan. Employers who don’t comply would be faced with a fine. Bill section 48 provides as follows:

Section 2. Each employer with more than 10 employees in the commonwealth shall adopt and maintain a cafeteria plan that satisfies 26 U.S.C. 125 and the rules and regulations promulgated by the connector. A copy of such cafeteria plan shall be filed with the connector.

If you are wondering what the term “Connector” means like I did, here’s what the Fact Sheet says about that term:

The bill creates the Commonwealth Health Insurance Connector, to connect individuals and small businesses with health insurance products. The Connector certifies and offers products of high value and good quality. Individuals who are employed are able to purchase insurance using pre-tax dollars. The Connector allows for portability of insurance as individuals move from job to job, and permits more than one employer to contribute to an employee’s health insurance premium. The Connector is to be operated as an authority under the Department of Administration and Finance and overseen by a separate, appointed Board of private and public representatives.

Health savings accounts have also been allowed to play a roll in the legislation. The bill would apparently enable HMOs to offer coverage plans that are linked to health savings accounts.

Some pertinent links:

• Kaisernetwork.org reports here on the legislation.
• Professor Secunda discusses ERISA preemption at the WorkforceProf Blog.
• NCSL is keeping tabs on “Pay or Play” legislation here.
• More links at Affordable Care Today.

Kenni Merritt has written an article for the Oklahoma Bar Journal which is a primer on ERISA Section 510 claims: “Interference with ERISA-Protected Rights: Making a Federal Case Out of a Wrongful Discharge Action.” Excerpt:

ERISA does not provide a statute of limitations for suits under Section 510. Therefore, courts select the most analogous state law limitations period. The courts that have considered ERISA Section 510 claims have almost unanimously concluded that the most analogous state law cause of action under Section 510 is wrongful termination or retaliatory discharge, state law causes of action encompassing an employee’s claim that he was discharged in violation of public policy. . . To reduce exposure to liability, some plan sponsors include a limitations period in their benefit plan documents and summary plan descriptions. A number of courts have recognized such plan-imposed limitation periods as being valid and enforceable under ERISA.

The whole March 11th issue of the Oklahoma Bar Journal is devoted to employment discrimination.

DOL has announced:

• A new mailing address for the DFVC Program. Read the News Release here. The new address takes effect April 11, 2006.
• A technical amendment extending the interim final rules under the Mental Health Parity Act (“MHPA”) to December 31, 2006. Late last year, the Employee Retirement Preservation Act (P.L. 109-151) extended MHPA’s sunset date under ERISA, the Code, and the Public Health Service Act to December 31, 2006. This interim amendment conforms the regulatory sunset date to the new statutory sunset date.

(The MHPA requires that annual or lifetime dollar limits for mental heath benefits be no lower than the dollar limits for medical/surgical benefits offered by a group health plan. The act applies to group health plans or health insurance coverage offered by issuers in connection with a group health plan that offers both mental health and medical/surgical benefits. However, it does not require plans to offer mental health benefits.The MHPA provisions in ERISA generally apply to all group health plans other than governmental plans, church plans, and certain other plans.)

The Ninth Circuit Court of Appeals has issued an opinion overturning a lower court decision and siding with the U.S. attorney in a case involving a writ of garnishment issued against a pension plan. The case is U.S. v. Novak and specifically holds that the Mandatory Victims Restitution Act of 1996 (“MVRA”), 18 U.S.C. § 3663A, in conjunction with 18 U.S.C. § 3613, constitutes a statutory exception to ERISA’s anti-alienation provision. The participant in the case had pleaded guilty to certain conspiracy charges and was ordered to pay restitution in the amount of $3,360,051.67. Of course, focus turned to a pension plan where the participant had accrued a sizable pension which was, however, a drop in the bucket compared to the total restitution ordered. At the government’s request, the Clerk of the district court issued a post-judgment writ of garnishment to the plan sponsor of the plan for amounts owed to the participant under the pension plan. The writ was issued pursuant to the garnishment provisions of the Federal Debt Collection Procedures Act (“FDCPA”), 28 U.S.C. § 3205. On March 5, 2004, the district court had issued an order quashing the writ of garnishment, which order was overturned by the Ninth Circuit. Excerpt from the opinion:

We determine that with the passage of the MVRA, Congress did what the Supreme Court in Guidry indicated it could do: enact a statutory exception to ERISA’s anti-alienation provision. We find that Congress enacted a statutory exception because (a) the MVRA is a specific collection statute designed to provide victims with restitution, and (b) Congress provided for restitution orders to be enforced like tax liens, which are enforceable against ERISA pension benefits.

Circuit Judge Fletcher issued a dissent in the case, arguing that, for there to be a statutory exception to ERISA’s anti-alienation provisions, Congress must “issue a clear statement of its intent to abrogate ERISA.” Fletcher noted that neither the MVRA nor 18 U.S.C. § 3613 contain such a directive:

This statutory scheme does not evidence a clear statement to abrogate ERISA’s anti-alienation provision. Although the statutory text does mandate restitution, it lacks any express statement (as it does for Social Security, see 18 U.S.C. § 3613(a)) that restitution owed to victims can be collected from ERISA pensions. And, as noted previously, there is nothing within ERISA calling for an exception for orders of restitution. Without an express directive in the restitution statute to seize ERISA pensions or a specific carve-out within ERISA’s anti-alienation provision, we should not create one through judicial fiat.

The majority’s decision is consistent with IRS’s view of the subject which you can read about in two previous posts: U.S. Attorneys Seeking To Levy Against Qualified Plan Assets Under the FDCPA and When the U.S. Attorney Comes Knocking . . . The majority also cites district court cases in Oklahoma, Virginia, Michigan, Louisiana, and North Carolina which are in accord with its decision. The U.S. Attorney, as well as plan sponsors, plan administrators and fiduciaries who would like to comply with such directives, but were concerned about the ERISA anti-alienation provisions, are now armed with this Ninth Circuit opinion as well.

(Query: Can payment be compelled prior to a participant’s right to receive payment under the plan? The IRS had said in a PLR (as discussed in a previous post) that the U.S. Government cannot garnishee or otherwise collect against a plan participant’s or beneficiary’s benefit until the participant or beneficiary has a right to a distribution under the terms of the plan. The Ninth Circuit doesn’t appear to address the issue in the Novak case.)

Thank you to the mysterious Pension & Benefits Blogger (previously Beneblogger) for alerting us last week to the IRS’s recent Employee Plans Determinations Quality Assurance Bulletin entitled “Part-Time Employees Revisited.” The Bulletin is an item that every benefits lawyer should have at his or her fingertips. Most enlightening, in my opinion, are the examples which clearly show the IRS’s strong aversion (which has become even stronger now as indicated under this Bulletin) to any exclusion of employees by classification that looks and smells like an “indirect service requirement that could result in the exclusion of an employee that completes 1,000 hours of service.” In other words, a qualified plan cannot exclude folks as a class from participating by classifying them as “part-time” or “seasonal” because they might end up working at least 1,000 hours during the year, resulting in an improper exclusion under the rules.

Also, the Bulletin makes it clear (Example 3) that a plan cannot exclude a group of employees under a generic name like “Class B Employees” without defining in the Plan the specifications for such Class. This is because the IRS wants to make sure that the classification will not be making an “end-run” around the service requirements of the Internal Revenue Code and ERISA, i.e. that the employees are not being improperly excluded because of service.

The IRS even goes on to provide a definition that would meet the rules. The IRS says that “Class B Employees” could be defined as an “employee who is a member of the substitute workforce of the Employer, as distinguished from regular full-time and part time employees, that is a separate employment classification based upon availability to work” and the classification would be acceptable.

See this previous post–Employers Utilizing More Temp and Part-time Employees: Be Wary of Qualified Plan Issues–for a discussion of how improperly excluding part-time employees from a qualified plan can result in the need to make corrections. The post goes on to discuss the correction methods mentioned in Rev. Proc. 2003-44 for making an excluded employee whole. However, please note that the correction method for making improperly excluded employees whole in a 401(k) plan has been softened somewhat since I wrote that post. IRS has been indicating for some time at various conferences and meetings that they will issue a new Revenue Procedure which will provide revised correction procedures for replacing contributions of missed pre-tax deferrals of improperly excluded employees in a 401(k) plan. The new procedures will no longer require making up the full average deferral percentage (“ADP”) contribution for the excluded employee, but instead will only require a make-up contribution of 50 percent of the ADP contribution amount. However, the full match will still be required based upon the full ADP amount.

Also, as BNA reports this week in their Pension & Benefits Reporter, the IRS is also saying that the new Rev. Proc. will provide that replacement contributions for missed after-tax employee contributions will be equal to 40 percent of those missed contributions.

As many of you already know, the Retail Industry Leaders Association (“RILA”) filed a challenge to Maryland’s Fair Share Health Care Fund Act — the so-called Wal-Mart bill — in U.S. District Court last week. You can access the complaint filed here. You can also access a web page here by RILA devoted to its opposition to state health care mandates as well as this document discussing their arguments in favor of ERISA preemption: “Legal Overview: Discriminatory Health Care Mandates.” Excerpt:

Union supporters also will argue that their proposed laws are not mandated health care laws because they give employers the

Portion of the President’s State of the Union address on health care:

“Keeping America competitive requires affordable health care. (Applause.) Our government has a responsibility to provide health care for the poor and the elderly, and we are meeting that responsibility. (Applause.) For all Americans — for all Americans, we must confront the rising cost of care, strengthen the doctor-patient relationship, and help people afford the insurance coverage they need. (Applause.)

We will make wider use of electronic records and other health information technology, to help control costs and reduce dangerous medical errors. We will strengthen health savings accounts — making sure individuals and small business employees can buy insurance with the same advantages that people working for big businesses now get. (Applause.) We will do more to make this coverage portable, so workers can switch jobs without having to worry about losing their health insurance. (Applause.) “

Allan Hubbard, Assistant to the President for Economic Policy and Director, National Economic Council, and Roy Ramthun, Special Assistant to the President, National Economic Council, followed up with a special press briefing today with more details on the President’s health-care initiative. You can access the transcript of the briefing here. Excerpts from the transcript:

“Now, as you know, the President spent much of last night, when he talked about health care, talking about enhancing and improving health savings accounts. These accounts are working extremely well. We had — a million people had health savings accounts a year ago; today there are 3 million. This is an opportunity for people to have, as they say, more skin in the game. The better consumers and the frustration that we’ve heard from the people with HSAs is that they don’t have as much — they don’t have the information they need to be good consumers. And that’s why the President is going to be talking about this, and working with employers and insurance companies to encourage them to work with us to insist that providers provide this information.

With respect to HSAs, what the President wants to do is level the playing field so people who buy insurance, themselves, have the same tax advantages as people who get the HSAs through employers. Right now if you buy the — literally, the same insurance policy, the same HSAs, you pay 30 percent to 50 percent more than you would if you got it through your employer. That is not fair, and the President wants to fix that. He also wants to allow people to contribute significantly more to the HSA up to their out-of-pocket max. And, finally, he wants to give employers and insurance companies the options of making HSA’s portable.

Now, you know, some people say, well, HSAs are just for the rich and the well. As it turns out, of the 3 million people who have taken up HSAs, 37 percent were previously. . . uninsured. . Forty percent earn less than $50,000 a year. So, obviously, HSAs are very attractive to people in the lower side of income scale — and for good reason, because HSAs are less expensive. And they also are a better way to control costs. The costs of HSAs went up 2 percent this past year, while the cost of regular insurance went up 7 percent.”

The briefing also talked about ERISA:

Q Could you then maybe talk a little bit more about on the portability question — what types of rule changes might need to be made, or legislative changes would need to be made to achieve this kind of portability you’re talking about?

DIRECTOR HUBBARD: Absolutely. And, again, what we’re talking about is making this optional for insurance companies and for employers. But the way it would work would be for a portable HSA insurance policy to be ERISA-based, so it would not be tied to any particular state, which would allow someone to leave his or her employer, take that policy with him or her, and know that it would not be underwritten for health reasons. So you can keep that policy with you as long as you want it. And you can take it anywhere in the country.

So, again, it would make it where people would not have job lock, they would not — if they have illness in their family, they would not have to worry about leaving their job, losing their insurance and not be able to find affordable insurance. And this is good for those individuals, and it’s also good for the economy. Because what makes our economy so strong is the ability of people to move from job to job to find the best situation for them.

Q So would that require legislative change, then?

DIRECTOR HUBBARD: That definitely would require —

Q And it would be a change to the HIPAA law or the ERISA law?

DIRECTOR HUBBARD: It would be a change to — I’m going to let Roy answer that.

MR. RAMTHUN: Well, the ERISA law, which was amended by HIPAA, and there’s all kinds of things that we’re going to have to figure out those details.

Q We’ve heard a lot about leveling the playing field in terms of tax breaks, and I’m wondering if we’re giving new tax preferences to HSAs and not to other forms of insurance? Aren’t we, in effect, giving HSAs preference, and doesn’t that keep the insurance industry from sort of doing its market thing and working things out and giving consumers choice?

DIRECTOR HUBBARD: Well, we are giving the preference to HSAs. We think — but, by the way, there’s a lot of flexibility with HSAs in terms of the size of the deductible, the co-insurance provisions and other provisions. But we think HSAs are the prudent way for people to insure themselves in America, because you have catastrophic insurance and then you put into your health savings account money to deal with lower cost health care needs. So you’re absolutely right, this is a bias towards health savings accounts because it’s going to make it where individuals who buy health savings account get the tax advantage that employers get when they provide insurance.

See also this Whitehouse press release here: Affordable and Accessible Health Care.

KaiserNetwork.org has a a whole webpage here devoted to the President’s health-care initiative and more relevant links here.

An article showing negative and positive reaction to the agenda: “President’s Health Reform Agenda Draws Mixed Reviews.”

What actions have pension consultants taken after the SEC’s release last year of its “Staff Report Concerning Examinations of Select Pension Consultants” as well as the “Tips for Plan Fiduciaries.” Lori Richards, Director, Office of Compliance Inspections and Examinations, for the SEC gave a speech December 5, 2005, in which she provided some insight into how pension consultants have responded. Excerpt:

Since we issued our examination Report and the “Tips for Plan Fiduciaries” in May, we’ve sought to determine how pension consultants were reacting to the recommendations in the Report — we wanted to see what steps they had taken to address the conflicts of interest and the disclosure issues we had raised. We asked a number of the firms we had examined what steps they were taking in response to the Report.

In general, we found that most pension consulting firms we examined have taken positive steps to reevaluate, revise, and implement changes to their policies and procedures. . . .

Here’s what many pension consultants said that they were doing in light of our three recommendations, which were:

• To insulate the consultant’s advisory activities from its other business activities to eliminate or mitigate conflicts of interest;
• To disclose all conflicts of interest to prospective and existing clients to fulfill fiduciary duties; and
• To implement policies and procedures to prevent conflicts of interest or disclose material conflicts of interest, especially concerning brokerage, gifts, donations, contributions and other financial benefits.

Richards then goes through a laundry-list of specific actions pension consultants have taken in implementing these three goals. While the speech is preceded by the disclaimer that the “speaker’s views are her own, and do not necessarily reflect those of the Commission, the Commissioners, or other members of the staff,” it does provide some insight into what actions the SEC might deem acceptable in addressing the concerns in the Staff Report. Plan fiduciaries will likely find this information somewhat useful in selecting, monitoring, and evaluating the pension consultants who assist them.

For instance on the obligation of disclosing conflicts, here are some of the “positive” actions being taken by pension consultants that she listed in her speech:

• All consultants use Part II of Form ADV or a separate brochure to disclose conflicts of interest, and most strengthened their disclosures.
• In addition to Form ADV, several consultants also provide clients with a separate conflict of interest document that includes discussions about the consultant’s business relationships with money managers and how the consultant manages potential conflicts.
• A consultant provides specific disclosure to individual clients about conflicts it has with particular money managers it recommends to its clients.
• A consultant adopted new procedures under which advisory clients can request specific financial information related to the consultant’s business relationships with individual managers.
• Some consultants advised that they have distributed their own responses to the SEC Staff Report and the DOL/SEC “Tips” to individual clients.

In regards to the implementation of policies and procedures to prevent conflicts of interest, Richards gave the following advice to plan fiduciaries:

On a less encouraging note, it did not appear to us that all pension consultants had implemented policies governing the payment of their fees with directed brokerage. And, more than a handful of consultants failed to offer to provide a copy of the firm’s Code of Ethics to clients in Part II of Form ADV, as required. Plan trustees may find that reviewing a pension consultant’s Code of Ethics may help in answering some of the questions outlined in the SEC/DOL “Tips for Plan Fiduciaries.”