The Family and Medical Leave Act covers about 60 million private-sector employees; however, because firms with fewer than 50 employees are exempt from the law, roughly two in five private-sector workers are not covered. A new report from the Center for Economic and Policy Research indicates that an FMLA expansion would extend coverage to an additional 34 million working Americans without posing undue hardships on business.
Currently, FMLA gives covered employees job-protected and unpaid leave to bond with a new child, care for a seriously ill family member or military service member, or for their own serious illness for up to 12 weeks a year. Citing concerns that family and medical leave events would impose a heavy burden for smaller companies, business groups secured a carve-out to exempt firms with fewer than 50 employees from FMLA coverage.
The authors of the study, Helene Jorgensen and Eileen Appelbaum, said they found little evidence supporting the arguments against expansion of FMLA coverage to smaller worksites.
While not all the firms examined in the study offered the full 12 weeks provided by FMLA, the number of small firms offering some form of leave was significant. About 85 percent of these firms had a medical leave policy and 83 percent had a leave policy that allowed employees to take time off to care for family members. Roughly 87 percent of these worksites guaranteed the same or equivalent job upon return from leave.
Though technically exempt from FMLA, some small firms do have leave policies that meet the FMLA standards and the vast majority, according to the CEPR study, have not found the policies problematic. Less than one percent of small firm worksites characterized their experience complying with the FMLA standard as very difficult or even somewhat difficult.
“Our analysis found that small firms with leave policies that met the standards of the FMLA rarely reported any negative impacts on their business as a result of offering leave to their employees,” said Jorgensen.
While small businesses do face special challenges since fewer co-workers are available to cover work during leaves of absences due to their smaller size, they adjusted by adopting various methods, such as voluntary overtime and temporary replacement, said Jorgensen.
The FMLA survey revealed that a number of small business owners found the FMLA to have a positive effect on productivity, turnover and profitability.
“Family medical leave not only provides a safety net for small businesses and our employees in terms of healthcare and medical situations, it creates a dedicated workforce. That leads to greater productivity, boosting small businesses’ bottom lines,” Matt Grove, owner of Bagel Grove in Utica, N.Y. said in a CEPR press release announcing the results of the study. “It also shows workers we recognize they are not only contributing to the success of our businesses, but also to the well-being of themselves and their families.”
Jorgensen and Appelbaum's analysis yields valuable insights in the states that are pursuing their own family and medical leave policies as well as those seeking to expand recently adopted leave policies. Strengthening leave policies at the national level by extending FMLA coverage to all firms could help these efforts, the study contends.
The Family and Medical Leave Enhancement Act (H.R. 3999), introduced earlier this year by Rep. Carolyn B. Maloney, D-N.Y., would extend current FMLA protections to individuals employed by companies with more than 25 employees.
Beyond extending unpaid leave rights, FMLEA would provide up to 24 hours per year of unpaid Parental Involvement and Family Wellness leave. This would allow parents and grandparents to go to parent-teacher conferences or take their children, grandchildren or other family members to regular medical or dental appointments.
"The landmark protections of the Family and Medical Leave Act sadly do not apply to more than two in five private sector employees," Maloney said in response to the CEPR study results. "It's time for Congress to catch up to America's workforce needs and pass the Family and Medical Leave Enhancement Act … to expand these protections. As the Center for Economic and Policy Research has demonstrated, the vast majority of employers that have voluntarily adopted FMLA standards have seen no detrimental effect and found it easier to attract and retain strong employees."
In 2015, monthly play-or-pay penalties per employee will range from $173 to $260 for employers that either don’t offer health coverage, or offer coverage below health care reform’s standards, according to a recent forecast by Mercer LLC. The consulting firm predicted several other key figures for 2015, including limits on tax-deductible contributions to health savings accounts and out-of-pocket maximums for high-deductible health plans. A pro-reform organization posited that reform’s appeal and external review rules were increasing reversals of insurer and health plan claim denials by as much as 20 percent. Eight states and the District of Columbia extended open enrollment on state-run health insurance exchanges beyond April 15, media outlets reported. The U.S. Department of Health and Human Services made updated data available on rebates to individuals and small companies from insurers that did not comply with federal medical loss ratio rules. And HHS released physician that will help insurers and group health plan sponsors determine whether physician charges are reasonable for many services. For detailed information on the health care reform law, go to the New Health Care Reform Law: What Employers Need to Know.
Mercer Predicts Employer Pay-or-play Penalties
On April 15, employee benefits consultant Mercer released estimates of out-of-pocket limits and penalty amounts for 2015 in advance of an official IRS announcement. Limits on tax-deductible contributions to HSAs, out-of-pocket maximums for HDHPs and large-employer penalties for failing to offer health insurance are all adjusted for health inflation under federal rules.
While the IRS will issue the official 2015 assessment levels, Mercer projected that employers that do not to offer any health coverage next year will be charged $173.33 per eligible employee per month (up from $166.67 in 2014). Employers that offer health benefits that do not meet the reform law’s minimum value or affordability standards will be charged $260 (up from $250 in 2014) per employee per month, according to Mercer.
Employers can expect to be allowed to set their HSA maximum tax-deductible contributions at $3,350 for self-only coverage and $6,650 for family coverage in 2015, up from $3,300 and $6,550 in 2014, the benefits consultant said.
The out-of-pocket limit for HDHPs, self-only coverage, will be $6,450, up from $6,350 in 2014 and $6,250 in 2013. And the out-of-pocket limit for HDHPs, family coverage, will be $12,900, up from $12,700 in 2014 and $12,500 in 2013, Mercer predicts. The non-grandfathered group health plan out of pocket limit is not much different, at $6,600 for self-only, and $13,200 for family coverage in 2015, the firm estimated.
Beginning Jan. 1, 2015, employers with 100 or more full-time employees that fail to offer health benefits to at least 70 percent of their eligible employees will have to pay new taxes under the reform law’s employer mandate. The percentage increases to the statutory 95 percent in January 2016.
Meanwhile, the law firm Littler Mendelson P.C.’s health care consulting group provides the following penalty calculator for employers. The National Retail Federation offers this penalty calculator for companies in the retail industries.
Kaiser: Reform Increases Number of Reversed Claim Denials
The Kaiser Family Foundation says here that health care reform’s requirement that claims denials be referred to a third-party review organization is already increasing the number of overturned plan and insurer claims denials.
In an article, the organization gives an anecdotal account of a denial involving an insured person’s sleep apnea studies, which had been denied because his plan decided they were experimental and not medically necessary. He had his denial overturned through the California Department of Insurance.
To help make sure a patient's claims aren't improperly denied, the Affordable Care Act created national standards requiring plans to retain third-party reviewers in the event a denial was not resolved by the plan or insurer to the participant’s satisfaction.
The story indicates that the law may increase the percentage of claim denial reversals by as many as 20 percentage points. A spokesman for the insurance industry said insurers support the strengthening of the appeals process under the reform law.
Some States Extend Open Enrollment As Obama Says 8M Newly Covered
Enrollment in health plans through the health insurance exchanges likely will surpass 8 million enrollees because some state exchanges extended their open enrollment periods beyond April 15, which was itself an extension of the official March 31 deadline, The Hillreported on April 19.
According to recent news reports and an April 14 Avalere Health analysis, exchanges in at least eight states and the District of Columbia are still open for enrollment. The states include Nevada, Oregon, Connecticut and Rhode Island.
For example, the District of Columbia and Oregon prolonged their open enrollment deadlines to April 30, while Nevada extended its open enrollment deadline until May 30. Meanwhile, other states, such as Connecticut and Rhode Island, will grant extensions on a case-by-case basis probably based on whether people experienced difficulties in the signup process, The Hill said.
California officials announced that its exchange marketplace enrolled 1.4 million people in private health insurance plans, exceeding federal estimates by 800,000 enrollees, according to reports.
On April 17, President Obama announced that 8 million Americans have signed up for private health coverage on exchange websites set up under health care reform. He said 35 percent of those who signed up were younger than 35 years old, an important thing for the administration to emphasize because young inexpensive lives are seen as essential to keeping exchange health premiums affordable.
States Running Out of Time to Make Exchange Calls
In related news, the roughly three dozen states that chose not to run their own exchanges have just a few months left to decide whether they will change their minds for the 2015 open enrollment period, the Miami Heraldreported on April 18.
The states have until Nov. 14 to apply for federal grants to help fund the creation of and other costs related to running their own exchanges. Federal funding for the projects cannot be awarded after Jan. 1, 2015.
In order to apply for the funding, state legislatures must first pass legislation or governors must issue executive orders authorizing the state-run exchanges.
Updated Data on MLR Rebates Available on HHS Website
The site also details how much money in grants each state received to set up its health insurance exchange (also called health insurance marketplaces). These numbers came back to haunt states that botched website rollouts after spending tens of millions of dollars on websites that did not work.
The website touts how the government is protecting insured employer plans by outlawing “unreasonable” premium increases of more than 10 percent per year. And it gives state specific numbers on how much money federal authorities paid the states to monitor insurers and enforce the law on premium increases.
On April 11, HHS released new data on services and procedures provided to Medicare beneficiaries by physicians and other health care professionals. The new data also show payment and submitted charges, or bills, for those services and procedures by provider.
The data on more than 880,000 providers help fill an information gap by offering insight into the Medicare portion of a physician’s practice, giving employer-plan sponsors a new window into fee-for-service spending and physician practice patterns. Plans can use the data to get an idea of fair pricing on 6,000 different services and procedures, with the payments accepted by individual providers.
Plans can see how prices for the same procedure vary from provider to provider, and location to location, among other variables. Last May, the Centers for Medicare and Medicaid Services released hospital charge data allowing consumers to compare what hospitals charge for common inpatient and outpatient services across the country, CMS said.
Social media involves a lot of communication, but the National Labor Relations Board isn’t talking much about an agreement it reached with a company regarding its nationwide social media policy. On April 7, 2014, in response to a NLRB complaint, Valero Services agreed to rescind that policy.
The NLRB received an unfair labor practice charge from the United Steelworkers of America, alleging that Valero’s social media policy interfered with employees’ Section 7 rights under the National Labor Relations Act (see overview below). Valero provides employee leasing services to refineries and plants throughout the country.
In its suit, the NLRB claimed that Valero’s policy restricted employees’ ability to discuss terms and conditions of employment via social media. Both sides agreed upon a settlement, which was approved by Associate Chief Administrative Law Judge William N. Cates. The settlement terms require Valero to notify employees that it will rescind the policy, post NLRB notices in 52 facilities across the country and mail notices to employees informing them that they will not be prohibited from discussing terms and conditions of employment on social media.
The NLRB press statement about the agreement did not provide details on specifically what language in the social media policy violated the NLRB. Efforts to get more details and a copy of the complaint from the Board were unfruitful. The NLRB stated that the information could only be attained through a Freedom of Information Act request.
Social Media and Labor Law
Section 7 of the NLRA protects employees’ right to self-organization, to form, join or assist in labor organizations, collective bargaining, and engage in concerted activities. The right to discuss hour and wage information, as well as job terms and conditions is also protected. The Board has repeatedly found that social media is a protected platform for this kind of discussion.
The NLRB has an extensive case history dealing with social media policies. Following a few examples:
When the Board hears cases involving policy language that does not clearly prohibit Section 7 rights, it uses a test introduced in Lutheran Heritage Village-Livonia, 343 N.L.R.B. 646 (2004). The policy is in violation if: employees would reasonably construe the language to prohibit Section 7 activity; the rule was promulgated in response to union activity; or the rule has been applied to restrict the exercise of Section 7 rights.
In NLRB v. American Medical Response of Connecticut, Inc., 34-CA-12576 (2010), the social media policy in question prohibited “rude or discourteous behavior to a client or coworker. Use of language or action that is inappropriate in the workplace whether racial, sexual or of a general offensive nature.” An employee posted comments on her Facebook page, while off the clock and on her personal computer, complaining about her supervisor, stating that he was a “dick” and a “scumbag.” The employee was later fired for her comments and filed the complaint with the NLRB. The case settled and the employer agreed to revise its policy and committed to refrain from maintaining policies or enforcing rules that “improperly restrict employees from discussing their wages, hours and working conditions with co-workers and others while not at work.”
If an employer terminates an employee under an unlawful policy, it does not necessarily mean the termination was also a violation. In Lee Enterprises, Inc 28-CA-023267 (2010), the Board released an Advise Memorandum that explains the situation. Although the employer maintained an overly broad social media policy, it may still lawfully terminate an employee for violation of that policy as long as the misconduct does not involve protected Section 7 activity.
Several employers entered into multi-million dollar settlements last week to resolve Fair Labor Standards Act disputes involving compensable working time and commission payments, among other things. TD Bank agreed to pay $6 million to settle claims it required bank employees to complete security procedures before clocking in. Metlife has agreed to a $1.9 million settlement that will resolve allegations it withheld commissions and failed to pay overtime. And seven New York restaurants will collectively pay $1.6 million after U.S. Department of Labor enforcement efforts revealed that workers were being paid off the books. In addition, a Hawaii farm has been ordered by a court to pay $428,800 in back wages and liquidated damages to workers after a DOL investigation revealed minimum wage, overtime and recordkeeping violations.
Court Approves $6M Settlement in Compensable Working Time Suit
A Pennsylvania court has granted preliminary approval to a $6 million settlement between TD Bank and workers who allege the employer required them to perform work before clocking in.
If granted final approval, the agreement will settle claims that the bank required certain workers to arrive early and complete security procedures before opening the building for the day. They were able to clock in after about 15 to 20 minutes of work each day. They also alleged they were not compensated for similar duties after their shifts ended.
The settlement class includes employees in Connecticut, Delaware, the District of Columbia, Florida, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Vermont and Virginia.
MetLife Pays Almost $2M to Settle Charges it Withheld Commissions
MetLife, Inc., will pay $1,970,000 to settle claims it withheld commissions from financial services representatives, among other wage and hour violations.
In a putative class action, the employees alleged that MetLife kept portions of their commissions if their employment was terminated before a specified period of time and took a portion of their commissions business operating expenses. The workers also were not compensated for all overtime hours worked and were not fully reimbursed for their business expenses, according to the complaint.
The settlement class includes 431 current and former employees in California.
Court documents show that both parties have agreed to the settlement, but that MetLife denies any wrongdoing.
Seven NY Restaurants Owe Workers $1.6M
Seven Long Island, N.Y., restaurants have entered into consent agreements with DOL, agreeing to pay $1,693,507.22 to 363 workers for various FLSA violations. The restaurants also will pay $114,737.96 in civil penalties and interest for willful violations.
During investigations, the department’s Wage and Hour Division discovered minimum wage, overtime and recordkeeping violations. According to a press release, DOL found restaurants paying below the federal minimum wage; paying cash off the books; failing to pay overtime; maintaining illegal tip pools; failing to pay wages to certain employees; and not keeping records of hours worked and wages paid to employees.
“These wage recoveries, damages and fines serve as notice that the underpayment of employees is unacceptable. We will use all available tools to identify and root out such labor violations and make whole the affected workers,” said Irv Miljoner, director of the division’s Long Island office. “We plan to continue our enforcement effort in the Asian restaurant sector and other types of restaurants where underpayment cheats both employers and workers who follow the law.”
Hawaii Farm to Pay $428K in Back Wages, Penalties
A court has ordered Fat Law’s Farm, Inc., to pay $428,800 in back wages and liquidated damages to workers after a DOL investigation revealed minimum wage, overtime and recordkeeping violations.
The farm did not pay minimum wage for all hours worked and did not pay employees overtime for all hours beyond 40 in a workweek, according to a DOL press release. “The company employed two primary groups of workers,” DOL said. “Filipino workers were predominantly paid at $7.25 per hour, with overtime compensation. Workers, mainly from Laos, were paid $5 per hour in cash, without overtime, for 70 hours per week on average.”
DOL performed its investigation by obtaining a search warrant from the U.S. District Court for the District of Hawaii, it said. “With the warrant, we obtained unhindered access to employee and payroll documents reflecting names and payment disbursements to workers employed at the farm, including employees paid only in cash,” said Juan Coria, acting regional administrator for the Wage and Hour Division in the Western Region.
“This judgment makes clear that the department will not permit the creation of a second-tier workforce in which coercion … and underpayment of wages rule the day,” Janet Herold, the department’s regional solicitor in San Francisco, said in a statement.
An employer may require an employee returning from family and medical leave to undergo a second fitness-for-duty evaluation even after a health care provider has released the employee to return to work. So ruled the California Court of Appeal (Second Appellate District, Division Three) in White v. County of Los Angeles, et al, No. B243471 c/w B244798 (Calif. Ct. of Appeal, April 15, 2014).
The decision reversed a superior court’s writ of mandate that had prohibited the Los Angeles County District Attorney’s office from requiring a senior DA investigator with depression to undergo a medical reevaluation after reinstatement — or face discipline for failing to appear.
The case illustrates the oft confusing interplay between the Family and Medical Leave Act and the Americans with Disabilities Act — and what an employer is and is not permitted to do under each law when an employee has exhausted his or her 12-week FMLA leave allotment.
However, as written in FMLA regulations, after an employee returns from FMLA leave, “the Americans with Disabilities Act requires any medical examination at the employer’s expense by the employer’s health care provider be job-related and consistent with business necessity.”
Facts of the Case
Susan White works as a senior investigator with the Los Angeles County District Attorney’s Office. The essential functions of her job include personally serving arrest warrants, making arrests, interrogating suspects and booking prisoners.
On June 6, 2011, the DA approved White’s FMLA leave request for treatment of her severe depression. The approval indicated that White had the full 12 weeks of FMLA leave available, which would run through Aug. 5.
White’s treatment, however, took longer than expected, and upon the expiration of her FMLA leave, the DA’s office placed White on unpaid, but authorized medical leave.
On Aug. 18, White’s physician wrote a letter stating that White would be able to return to work and perform her essential job functions on Sept. 7.
On Sept. 6, the DA informed White that she would be placed on paid administrative suspension while it investigated alleged perjury testimony she provided at a criminal trial earlier in the year. The DA reassigned White to her home effective Sept. 7.
Three months later, the Occupational Health Programs of Los Angeles County consented to the DA’s request for an order compelling White to undergo a medical reevaluation. The reason for the order was White’s erratic conduct before her FMLA leave, not because of anything that occurred while she was on leave or after she returned from leave.
When White failed to appear for a medical reevaluation on Jan. 27, 2012, the DA informed her that her failure to appear was an act of insubordination that subjected her to discipline. The DA then gave White “another chance to comply” with the order and rescheduled her appointment for Feb. 28, 2012.
On Feb. 23, White filed the instant action with the Los Angeles County Superior Court, seeking injunctive relief prohibiting the DA from requiring her to appear for a medical reevaluation. White said the mandatory reevaluation violated her FMLA right to be restored to employment on her doctor’s certification alone.
Courts Weigh in
The appellate court ruled that if the employer is not satisfied with the employee’s health care provider’s certification, it may restore the employee to work, but then seek its own evaluation of the employee’s fitness for duty at its own expense.
The appellate court said it rejected White’s argument mainly because it concluded that an employer should be able to subsequently question a single health care provider’s opinion on whether an employee is fit for duty after he or she has returned to work.
It is “unlikely that Congress intended an employee’s health care provider’s opinion to be conclusive on the employee’s fitness for work,” the appellate court opined. Instead, a fitness-for-duty certification should allow the employee to immediately return to work, but it should not prohibit the employer from requiring a fitness-for-duty reevaluation, “if it has a basis to question the employee’s health care provider’s opinion.”
The appellate court agreed with the trial court that the DA was required to reinstate White to her job upon expiration of FMLA leave based only on her own doctor’s certification. However, the appellate court disagreed that this case implicated the FMLA return-to-work requirement. White, the court said, was, in fact, returned to work on Sept. 7, albeit on paid suspension.
“At that point, the FMLA’s fitness-for-duty regulation no longer applies” (73 Fed. Reg. 67934-01, 68036), the appellate court opined, citing the U.S. Department of Labor’s explanation of the interaction between the ADA and FMLA in relation to fitness-for-duty certifications in the revised 2008 FMLA regulations.
“[I]t is clear that the Department intended to clarify that a bright line exists at the employee’s return to work,” the court said. “Before the return to work, the employer must accept the employee’s physician’s certification and return the employee to employment; after the return to employment, the FMLA protections no longer apply, and the employer may require a fitness-for-duty examination consistent with the ADA.”
An employer may not require that an employee submit to a medical exam by the employer’s health care provider as a condition of returning to work. A medical examination at the employer’s expense by an employer’s health care provider may be required only after the employee has returned from FMLA leave and must be job-related and consistent with business necessity as required by ADA.
If an employer is concerned about the health care provider’s fitness-for-duty certification, the employer may, consistent with ADA, require a medical exam at the employer’s expense after the employee has returned to work from FMLA leave as stated in paragraph (h) in the final rule. The employer cannot, however, delay the employee’s return to work while arranging for and having the employee undergo a medical examination. (See 73 Fed. Reg. 67934-01, 68033.)
The White court ruling clearly indicates that employers have the latitude to request further certification after an employee returns from FMLA leave only if there is a legitimate reason to question the employee’s physician or there are other job-related concerns. The key is to first reinstate the employee to the original position and then request the re-examination.
FMLA itself acknowledges that medical professionals can disagree on whether an employee’s serious health condition renders the employee unable to work. An employer may request at its own expense a second opinion on whether an employee qualifies for FMLA leave (29 U.S.C. §2613(c)) and a third opinion if the first and second opinions are not in agreement (29 U.S.C. §2614(d)).
Writ of mandate is a judicial remedy — in the form of an order from a superior court, to any government subordinate court, corporation, or public authority — to do some specific act which that body is obliged under law to do.
As more 401(k) plan participants look for retirement savings options that resemble traditional pensions providing lifetime income, the U.S. Pension Benefit Guaranty Corp. issued proposed regulations that would make rollovers from defined contribution plans to defined benefit plans more attractive. These changes exempt rollover amounts from PBGC’s maximum guarantee limits and from five-year phase-in limits that can cap or reduce payouts.
The agency in early April released proposed regulations that would amend its rules on allocation of assets and benefits payable in terminated single-employer plans to clarify the treatment of benefits tied to a rollover distribution from a DC plan or other qualified plan, if the receiving DB plan is terminated for underfunding and taken over by PBGC. PBGC intends to define rules under which DC plans could offer participants the right to move their benefits from a DC plan to a company’s DB plan, if it offers one.
The current PBGC maximum guaranteed coverage limit for a 65-year-old retiree is $59,320 a year, but the proposal would not include those who had rolled DC assets into a terminated plan managed by PBGC. Also, partial guarantee by PBGC of benefit increases in place in the five years before a plan ended would be waived for DC rollover funds. These restrictions pay the increases over time to eligible participants in plans managed by PBGC.
This proposed clarification of so-called Title IV treatment of rollovers is part of PBGC’s efforts to enhance retirement security by promoting lifetime income options, the agency said.
Lifetime Income Proposals on Rise
Lifetime income calculators and illustrations are gaining favor among regulators and plan sponsors as ways to help participants visualize how much they will need to save for a comfortable retirement. In May 2013, the U.S. Department of Labor's Employee Benefits Security Administration issued an advance notice of proposed rulemaking that explained options being considered in upcoming proposed rules on lifetime income illustrations in pension benefit statements. It also solicited comments on those options or possible alternatives. (See May 2013 story.)
Another way that workers can mimic traditional — but now rare — monthly pension benefits is through in-plan annuities. These arrangements within their employer DC plans permit participants to make ongoing contributions toward the purchase of a future stream of retirement income payments, which are guaranteed by an insurance company. This gives a participant the ability to accumulate multiple small annuities over a career which, in the aggregate, could provide significant lifetime income, according to EBSA in its 2013 lifetime income proposal.
Because few private employer-sponsored retirement plans yet offer in-plan annuities, PBGC’s planned changes would become a way for some participants to achieve a similar result if their company had a DB plan accepting DC rollovers.
PBGC in its announcement of the proposed changes said, “rollovers to defined benefit plans also provide lifetime-annuity protection at a competitive cost” while eliminating “the fear that amounts rolled over would suffer under guarantee limits, should PBGC step in and pay benefits.”
Some forms of lifetime income arrangements can be costly to participants if they are set up amid a poorly performing financial market that later rises. They also are seen by some as risky, as they are exposed to potential failures by the insurers that pay the annuities. So the PBGC proposal is aimed at reducing such risks for recipients wishing to transfer 401(k) savings to gain lifetime income via a DB plan.
Comments on the proposed rule are due June 2, 2014; they may be submitted through the Federal eRulemaking Portal: http://www.regulations.gov; or by email to email@example.com.
PBGC protects the retirement benefits of more than 42 million workers and retirees, according to the agency.
The 5th U.S. Circuit Court of Appeals has denied a request from the National Labor Relations Board to rehear a case in which the court partially reversed an NLRB ruling, finding that arbitration agreements with class action waivers are enforceable.
The suit stemmed from a Fair Labor Standards Act dispute, in which a group of employees wanted to allege that D.R. Horton, a home builder, misclassified as exempt from the law’s overtime provisions. Horton’s agreement only permitted them to arbitrate their claims individually so the lead plaintiff filed an unfair labor practice charge, alleging that the waiver violated the National Labor Relations Act.
An apparent misunderstanding between NLRB and the court led the court to issue mandate, which set in motion the judgment. NLRB filed a motion to recall the mandate to allow for the 45-day period for petitioning for rehearing or rehearing en banc required under the Federal Rules of Appellate Procedure and local rules. The court granted the motion and the Board requested the full-court hearing but its request was denied April 16.
The best way to ensure that your self-funded health plan is running efficiently is with strong definitions of key plan document terms. Forward-looking definitions can stop problems before they turn into major plan costs, and the right definitions make the difference between getting taken for a ride and keeping your hands on the steering wheel.
These definitions will not only save you time in processing claims, they will ensure that plan claims are being paid in accordance with the plan sponsor’s wishes. In this column we will explain: clear assignment-of-benefit language; the right approaches to maximum payable amounts; and how to define a clean claim. Strong plan rights are rooted in language that has thorough explanations to cover more contingencies.
Ambiguous Definitions Will Hurt You
First, we assume that you have signed an administrative service agreement and decided to keep all fiduciary responsibility for the plan under your belt.
Unclear or ambiguous definitions in the plan document are the leading cause of claim processing errors and lawsuits. I could actually make a living doing nothing but litigating problems caused by unclear plan document definitions. Some provisions have five different interpretations. My attorneys and I disagree on what specific provisions mean all the time.
This leads to claims being processed differently by claims examiners, depending on the way they interpret the language. This can lead to discrimination lawsuits when the same types of claims are handled differently by various claim adjusters.
Clear, Concise Definitions
Think about it: you are the plan and the plan document is basically an instructional guide to the administrator telling them how to spend your money. You have a fiduciary duty to be prudent with plan assets and the right starting point is to ensure that everyone is on the same page when it comes to definitions.
Therefore your definitions must be clear and understood. The plan document should be a clear and concise guide on how money should be spent. Following are the most important definitions to focus on.
Definition that Reins in Providers: Assignment of Benefits
For plans and third-party administrators that either create a reference-based pricing model or want better options to fight against hospital and provider overcharges, it is vital to have a detailed definition for assignments of benefits. It means an arrangement by which the patient assigns his or her right to a provider to seek and receive payment of eligible plan benefits in strict accordance with plan document terms. If a provider accepts the arrangement, then its rights to receive benefits are equal to those of a plan participant, and are limited by plan document terms. A provider that accepts this arrangement indicates acceptance of an AOB as consideration in full for services, supplies and treatment rendered.
This definition arms the plan with a much better arsenal when attempting to reduce costs. The ability to rescind the AOB is crucial in any claim negotiation because if the AOB gets rescinded, the provider must return plan funds to the plan. Those funds would then be turned over to the patient, so the provider has the joy of dealing directly with the patient on any outstanding claim issues. Trust me, any medical facility would be crazy to allow a plan member to receive a check for $50,000 and then expect that he or she will just gladly send the funds to the facility. The risk that the member would use the funds to buy a new boat is just too big of a risk for the facility to turn that money over. The plan is in a much better bargaining position that way, so asserting that right in plan language and in the explanations of benefits is vital.
Definitions Relating to Fair Pricing
Provider pricing follows its own logic. There’s new patient versus established patient, there’s negotiated price versus non-negotiated price; there’s Medicare (and the dreaded Medicaid) price versus the price on the provider’s own fee list. Physicians bill based on their own assessment of the case’s complexity. Hospitals seem to live in an alternative reality where items like an aspirin pill or a single serving of mouthwash can cost the same as a fine dining experience. Add to this the fact that providers don’t like to talk about their prices, and plans and patients can be in for unpleasant surprises when bills turn up.
Maximum Allowable Charge
Understanding and explaining this important. It should be definedasthe benefit payable for a specific plan benefit that is the lesser of: (1) the usual and customary amount; (2) the allowable charge specified by the plan; (3) the negotiated rate established in a contractual arrangement with a provider; or (4) the actual billed charges for the covered services (as if that would ever be the lowest amount!).
As usual, the plan must have the discretionary authority to decide if a charge is U&C (and for a medically necessary and reasonable service).
For those not working with a network, the plan language must state that the plan can use Medicare and cost-based provider reimbursement data to establish the MAC.
First, the plan should state that facility and physician claims billed on UB92 or UB04 forms will be reimbursed at the greater of Medicare plus some percentage or cost plus an added percentage. If no Medicare pricing data or cost data is available, payment will be based on a percentage of a regional Medicare approximation provided by a third-party vendor. If is a pre-negotiated maximum allowable rate is established with the provider, the pre-established rate will create the MAC. Having this language will provide immediate dividends to the plan as claim costs will reduce immensely.
There’s a gap between providers’ and payers’ view of what this is. To me, hospitals think a clean claim is no more than a bill without any explanation of what they are charging and why. Must be a nice world they live in. I wish I could just bill my clients any amount I want without any actual explanation behind it.
We should avoid situations where the plan has to pay large claims that do not have any information on the bills except for a few diagnosis codes. The fact that a facility won't give you an itemized bill should scare you a little bit. So what can a plan do? While the battle continues over what makes a claim clean, the least you can do is define what you feel should be the necessary information needed in your plan document
In your plan document, you should define a clean claim as one that can be processed in accord with plan document terms without obtaining additional information from the service provider. It is a claim that has no defect or impropriety and stands on its own. A clean claim does not include claims under investigation for fraud and abuse, or claims under review for medical necessity and reasonableness of charges. The plan must retain the right to audit and review any claim to ensure it is clean or else it won’t be paid.
After clearly defining what a clean claim is, a plan must rely on its definition of covered expenses. This is vital since it defines what expenses the plan can spend on. In my opinion, it means the U&C charge for any medically necessary, reasonable and eligible items of expense. The best language ensures that covered expenses mean a reasonable, medically necessary service, treatment or supply meant to improve a condition. When more than one treatment option is available, and one option is no more effective than another, the covered expense must be defined as the least costly option that is no less effective than any other option. This last piece guarantees that the plan fiduciary is acting in way that ensures the most prudent use of plan assets. This is vital in an age where costs and charges continue to rise and facilities are willing to share less and less to justify their fees.
Definitions that Stop Abusive Claims
Providers have their own, usually well-considered view of what the patient needs. But some of them may see every patient who comes in their office as a candidate for the services they specialize in providing. That can put providers at odds with what a plan is willing to cover.
Experimental and Investigational
This area creates its share of litigation. Just what do these terms mean and how much discretion should the plan have in interpreting them? These types of treatments are typically the most expensive and can drag stop-loss insurers into the party. The best language says experimental and investigational services are not widely used or accepted by most practitioners or lack credible evidence to support positive short- or long-term outcomes from those services.
Your plan should exclude services that are not Medicare-reimbursable, and services, procedures and treatments that do not constitute accepted medical practice under the standards of a reasonable segment of the medical community or government insurers.
A drug, device or medical treatment or procedure is experimental if:
it lacks approval from the U.S. Food and Drug Administration when the drug or device is furnished; or
the drug, device or medical treatment or procedure is the subject of ongoing Phase I, II or III clinical trials.
You should accept only published reports and articles from authoritative medical and scientific literature that a procedure is not experimental and investigational.
I see much concern surrounding plan documents and stop-loss policies that attempt to exclude an entire treatment plan from coverage if any of the treatment is experimental. So if there is a $200,000 hospital stay for two months and $2,000 of it is for an experimental drug, then the plan can deny the entire stay. I have seen the same thing happen with stop-loss insurers and their ability to deny claims based on this same issue and the gaps in coverage. As a sponsor of a self-funded plan myself, I care about the well-being of my employees, so I cannot believe that employers exist that would deny an entire treatment plan just because a small piece of it was experimental.
Coordination of Benefits
Another often ignored provision of a plan document that has a very important role in reducing the overall plan claim costs involves coordination of benefits and deciding whether your plan is primary or secondary.
This features defines what the "other plan” is for COB purposes. It is vital that the other plan is defined as not being limited to any primary payer besides the plan; any other group health plan; or any other policy covering the participant. You want that definition to include any policy of insurance from any health insurance, workers' compensation or other liability insurance company, including personal injury protection and no-fault coverage, uninsured or underinsured motorist coverage. Rights should be asserted to cover any medical, disability or other benefit payments, including school insurance coverage. Even crime victim restitution funds must be included.
Provider Errors and Churning Are Unreasonable
I have left the best for last: The area of the plan document that can save you the most amount of money; the game changer.
Adding the term reasonable charges to a plan document has the most significant savings potential for a health plan. There is no doubt that this one term has changed the way claims are negotiated and paid. For charges to be reasonable, they first they must be necessary for the care and treatment of the illness and injury not caused by the treating provider. As we have shown with other definitions, a determination that the fee and services are reasonable will be made by the plan administrator. This will take into consideration unusual circumstances or complications requiring additional time, skill and experience in connection with a particular service or supply.
To be reasonable, services and fees must be in compliance with generally accepted billing practices for unbundling or multiple procedures. This ties right back into the definition of a clean claim. Services, supplies, care and treatment are not reasonable if they result from errors in medical care that are clearly identifiable, preventable and serious in their consequence for patients.. A finding of provider negligence or malpractice can cause fees to be deemed not reasonable.
Therefore, the plan must state that charges and services that result from provider errors or facility-acquired conditions — deemed “reasonably preventable” through the use of evidence-based guidelines, taking into consideration (but not limited to) Centers for Medicare and Medicaid Services guidelines — are not considered to be reasonable, and are not eligible for payment.
This is a good time to remind you that the plan must reserve the right to review and identify charges and services that are not reasonable and therefore not eligible for payment.
Nothing Unusual Here
When discussing reasonableness, the term U&C should not be far behind. It should be defined as man covered expenses identified by the plan administrator, taking into consideration:
the fees that the provider most frequently charges or accepts for most patients;
the cost to the provider for providing the services;
the prevailing range of fees charged in the same area by providers of similar training and experience; and
Medicare reimbursement rates.
To be U&C, fees must be in compliance with generally accepted billing practices for bundled or multiple procedures.
The term “usual” refers to the amount of a charges made or accepted for medical service. However, the charge should not exceed the common level of charges made by other medical professionals with similar credentials or health care facilities, pharmacies, or equipment suppliers of similar standing, which are located in the same geographic locale in which the charge was incurred.
The term “customary” should be defined as the form and substance of a service, supply or treatment provided in accord with generally accepted standards of medical practice to one individual, which is appropriate for the care or treatment of an individual of the same sex, comparable age and who has received such services or supplies within the same geographic locale.
I would recommend that U&C charges be determined by a plan using normative data such as Medicare cost to charge ratios, average wholesale price for prescriptions and/or manufacturer’s retail pricing for supplies and devices.
The right wording will reduce the overall cost of a self-funded plan. I have personally seen thousands of claims paid at a reduced amount just because a few words were outlined and defined in the plan document. Words are powerful in the world of self-funding, so choose them wisely.
Adam V. Russo, Esq. is the co-founder and CEO of The Phia Group LLC,a cost containment adviser and health plan consulting firm. In addition, Russo is the founder and managing partner of The Law Offices of Russo & Minchoff, a full-service law firm with offices in Boston and Braintree, Mass. He is an advisor to the board of directors at the Texas Association of Benefit Administrators and was named to the National Association of Subrogation Professionals Legislative Task Force. Russo is the contributing editor to Thompson's Employer's Guide to Self-insuring Health Benefits.
Employers and human resources professionals must analyze numerous situations on a daily basis. Some are easier than others and often require an analysis of only one discrete statute that governs an unfolding set of facts. However, most employment situations are much more complex and demand closer inspection, because multiple laws are probably at play.
This is especially true when an individual is at the end of a protected leave period for personal health reasons, and the employer wants medical documentation relating to the individual’s condition before he or she is placed back into the position previously occupied. Employers have many good reasons to institute and enforce a policy requiring a certification of “job readiness” before an individual returns from a protected leave. Job-readiness certification can:
confirm the individual’s condition (rather than relying exclusively on the employee’s own assessment or representation);
prevent employees from abusing medical leave time; and
provide some assurance of an employee’s ability to perform a particular job by a health care provider who is well-informed about the employer’s workplace and job functions.
When it comes to this broad category of certifications, however, employers should remain cognizant of rules under the Family and Medical Leave Act, as well as the Americans with Disabilities Act. Leave protections initially covered by FMLA can “expand” and fall under the ADA’s protection, given the appropriate fact pattern.
Fit for Duty?
From an FMLA perspective, employers must notify individuals at the outset of a protected leave period that a fitness-for-duty certification from a health care provider releasing the individual to work will be required by including that information in the FMLA designation notice. (See 29 C.F.R. §825.300(d)(3).) Failure to deliver this notification at the beginning of a protected leave period may mean that the employer forfeits its ability to obtain medical certification when the leave period expires.
One major constraint of the FMLA’s fitness-for-duty certification process is the fact that certifications only may be obtained with regard to the specific health condition that caused the individual’s need for FMLA leave, not all unrelated conditions that also may affect or limit the individual’s health and physical capabilities.
Moreover, employers may only obtain return-to-work certifications if they have a uniformly applied policy or practice that requires all individuals who take leave for such conditions to obtain certification from a health care provider that the individual is able to resume work. Accordingly, it is of utmost importance that when requiring medical certification to resume work, employers should be armed with a copy of the individual’s job description and prepared to seek the evaluation of the individual’s present ability to return to duty and perform the specific job’s essential functions. If the notice of the uniformly applied policy had been properly communicated to the individual, restoration can be delayed appropriately until certification is provided.
Proceed with Caution
FMLA regulations make clear that employers should be careful not to condition an individual’s return to work on his or her examination by a second physician or health care provider. Unlike certain other statutory or regulatory mechanisms (and other stages in the FMLA process), employers cannot require second or third opinions on return-to-work certifications. Only the health care provider selected by the employee is authorized to determine that a separate examination may be necessary to resolve whether the individual can fulfill the essential functions of his or her position.
However, if the certification is deemed unclear and the employer has properly obtained the individual’s authorization, then employer representatives may request clarification (as opposed to additional information) from the individual’s health care provider.
Right to Reinstatement
A common question that arises after protected FMLA leave is whether the employee can or should be reinstated to the job he or she occupied before the absence. Under FMLA, an individual generally has the right to reinstatement to the same or an “equivalent” position (that is, one that provides similar pay, benefits and terms and conditions and employment).
Under ADA protections, the return-to-work processes often includes a fitness-for-duty exam conducted by a physician of the employer’s choosing. An employee who has been away from work (for example, one who takes leave as a form of reasonable accommodation of a disability) has the right to return to the same or a comparable position unless the employer can demonstrate that doing so would impose an “undue hardship” as defined under ADA.
A fitness-for-duty examination may shed light on whether the employee’s condition would prevent the employee from performing the essential functions of his or her position and ultimately strengthens the employer’s position regarding any potential ADA claim.
Essential Job Functions
If the employer believes, based on objective evidence, that the individual currently poses a “direct threat” if placed back into his or her regular position, ADA would permit the employer to arrange for an examination, at its own cost, by its designated health care provider (who — for maximum guidance and persuasiveness — should be an expert in the individual’s specific condition). Once the provider knows the details of the job requirements, conducts an examination and gains some understanding of the individual’s relevant history and treatment, the provider is in a stronger position to assess the effects of the individual’s ability to safely perform the essential functions of the position.
If a disability is present, the employer then is likewise in a better position to assess if a reasonable accommodation is available, or not feasible without undue hardship, given the specific circumstances of the individual, the condition and the risks and essential functions of the job.
Employers in these situations should pay close attention, early in the interaction, to the submissions of the individual’s health care provider, and start their analysis and/or the interactive process, if it appears that the individual may have a disability.
Example. The individual has returned to work and the employer believes that he or she is not performing the individual’s essential job functions. The employer has further reason to believe that the individual’s performance or lack thereof is related to a medical condition for which protected leave was taken. Moreover, the individual has already completed a fitness-for-duty certification prior to returning to work. Here, an employer may be able to require a medical examination at the employer’s expense by the employer’s health care provider after the employee has returned so long as the examination is job-related and consistent with business necessity, as required by ADA. An employer may not prohibit the individual from working while the employer arranges for and has the individual under the medical examination. If an employer does go forward with this option, the employer should be cautious of tainting its perception of the individual and potentially setting itself up for an ADA discrimination/retaliation claim.
In recent cases, the position of the U.S. Equal Employment Opportunity Commission and the conclusions of at least some courts suggest that employers also should be cautious of policies that only allow individuals to return to work if they are “100% healed.” See, for example, Steffen v. Donahoe, 680 F.3d 738, 748 (7th Cir. 2012). These types of policies have been found to potentially be per se violations of ADA if applied to individuals with disabilities, because they interfere with the statute’s effective mandate that an “individualized assessment” be made of the applicant’s or employee’s ability to perform a job’s essential functions.
What Should Employers Do?
Employers should review their current policies and practices as they relate to fitness-for-duty examinations and ensure that their approaches are consistent with the constraints, or flexibility authorized by the applicable statute.
As in certain other areas, it should not be assumed that the two federal laws at issue are identical, with maximum employer discretion available in all circumstances. Thinking through policies in advance, consulting with experienced counsel, and careful consideration of required examinations and decisions on reinstatement should be a universal approach for all employers contemplating this important — and challenging — area.
Peter A. Susser, Esq., is a partner atLittler Mendelsonin Washington, D.C., and is the author of the Family and Medical Leave Handbook and a member of its editorial advisory board. His views are not necessarily those of Thompson Information Services.
Plan sponsors and administrators received some positive news in recent IRS clarifications on in-plan Roth rollover procedures, and related federal agency guidance. Now they will be able to confirm more easily valid rollovers from other qualified plans with less paperwork and need to contact the distributing plan. This is also positive for participants, who will be able to move retirement accounts from several kinds of qualified plans to a new employer to keep their savings momentum going more seamlessly. This column takes a deeper look at the recent rollover guidance, and examines procedures to help plan administrators ensure receipt of valid rollover contributions.
The IRS in early April issued Revenue Ruling 2014-9, “Rollovers to Qualified Plans,” in which the agency clarified the circumstances under which a qualified retirement plan administrator may reasonably conclude that a potential rollover contribution is valid under U.S. Treasury regulations. (This IRS guidance follows U.S. Department of Labor and SEC guidance that ensure rollover investment activity is occurring within Financial Industry Regulatory Authority guidelines.)
As a general rule, taking a lump-sum distribution from a qualified retirement plan is a taxable event. If the participant elects to receive the distribution in cash, a mandatory withholding of 20 percent of the distribution amount applies. However, the participant may avoid immediate taxation by taking the distribution in the form of a direct rollover for deposit into a traditional individual retirement account or another qualified retirement plan, if the plan permits.
While the rollover process has been around a long time, some plans were reluctant to accept rollover contributions from new participants because of the uncertainty about the source of the money. Questions would arise on whether the source of a potential rollover into the plan was money resulting from annual IRA contributions (which are after-tax), former 401(k) plan contributions (generally pretax) or a combination of both.
More recently, the retirement plan community’s view has become more favorable toward plan-to-plan rollovers, with the Pension Protection Act of 2006 and subsequent IRS guidance. Under PPA and through further agency guidance, rollovers have been positioned as a solution to prevent the “leakage” from retirement savings that often comes with an employment change. The types of retirement plans considered eligible for inclusion in rollovers were expanded, income and related limits for Roth rollovers were eliminated and provisions were enacted that protected a plan’s qualified status if an invalid rollover contribution was accepted.
Accepting Rollover Contributions
Accordingly, many plans were amended to allow participants to make rollover contributions from their prior employer’s 401(k) plan, which resulted in more of these coming into 401(k) plans. This plan feature was attractive both to newly hired employees with a 401(k) account from a prior employer, and longstanding employees looking to consolidate their retirement savings. Under the amended plan, they too could roll over their accounts from a prior employer’s plan to their new employer’s plan.
Past IRS guidance offered some protection for plan sponsors of receiving plans by outlining conditions under which rollover contributions may be accepted. As such, Regulation Section 1.401(a)(31)-1, Q&A-14(b)(2) provided that if a plan accepts an invalid rollover contribution, the contribution will be treated as if it were a valid rollover contribution if two conditions are met:
When accepting the amount from the employee as a rollover contribution, the plan administrator for the receiving plan must reasonably conclude that the contribution is a valid rollover contribution.
If the plan administrator for the receiving plan later determines that the contribution was an invalid rollover contribution, the plan administrator must distribute the amount of the invalid rollover contribution, plus any earnings attributable to it to the employee in a reasonable time after such determination.
A more recent requirement used an entry on Form 5500 annual reports from retirement plans to help plan administrators trying to assess rollovers into their plans. The 2012 instructions for Form 5500 contained a list of plan-characteristic codes to be used by a plan administrator in completing the annual report.
The new Rev. Rul. 2014-19 points practitioners to Code 3C, which indicates that a plan is not intended to be qualified under Code Section 401, 403 or 408, and demonstrates how this information may be used to make a reasonable conclusion about the qualified status of a potential rollover contribution. Specifically, Line 8A on Form 5500 and Line 9A on the Form 5500 Short Form may show information about the distributing plan. When Code 3C is entered, a plan administrator has indicated that the plan is not intended to be qualified under Code Section 401, 403 or 408. So when this code is absent, the receiving plan administrator may reasonably conclude that a potential rollover from such plan is a valid one.
Implementing Administrative Procedures
Now, plan administrators should implement procedures that demonstrate reasonable effort was made to determine the validity of any potential rollover contributions. These procedures may place the onus on the participants, prior plan administrators or receiving plan administrator, or some combination thereof. A few examples of reasonable steps include:
Self-certification by the participant that the amount of the rollover contribution is being withdrawn from a 401(k) plan intended to be qualified under Code Section 401(a).
Distributing-plan certification by the administrator of the previous employer’s 401(k) plan — a written statement that the plan is intended to be qualified under Code Section 401(a).
Receiving-plan verification by reviewing the entries on the distributing plan’s most recent Form 5500, the receiving plan may reasonably determine whether the distributing plan is intended to be a qualified plan.
Determination letter provided by the participant — this is a copy of the IRS determination letter for the distributing plan that states that the plan is qualified under Code Section 401(a).
The ability to roll over plan assets from one employer to the next is very beneficial for participants, and has been shown to reduce cash-outs that deplete retirement savings.
Rollovers coupled with immediate, or 30-day, eligibility may also have a few unintended, yet beneficial consequences. For example, the plan terms may allow a participant to roll over an outstanding plan loan, and may allow a new participant to take a plan loan, which would come primarily from amounts in his or her rollover source under the plan. Rollovers in these three scenarios help participants avoid having to pay tax on a rollover distribution, on an outstanding loan amount or on the new plan loan amount that might otherwise have been taken as a distribution.
For plan sponsors and administrators, these changes also should save time, reduce paperwork and give peace of mind about their own plans’ qualified status as they encourage greater retirement savings.
Finding out More
For more information about eligible rollover distributions, see ¶267 in the 401(k) Handbook.
Arris Reddick Murphy is an attorney with experience in the employee benefits and executive compensation practice area, and she is senior counsel with FedEx Corp.’s Tax & Employee Benefits Law group. Before joining FedEx, she held the position of associate with the law firm of Potter Anderson & Corroon, LLP, and worked in-house with The Vanguard Group and the City of Philadelphia as counsel to its Board of Pensions and Retirement.The views expressed in this column are strictly Ms. Murphy’s, and are not those of FedEx Corp.,any of its operating companies or affiliates. She is contributing editor of The 401(k) Handbook.
Financial advisers on TV and in reputable financial publications consistently encourage people who participate in an employer-sponsored retirement plan to contribute as much as possible. In many cases, retirement plan platforms offer online tools to assist plan participants in projecting how much they need to save to achieve high income-replacement levels when they get to retirement age.
The simple explanation for the unexpected refunds is that IRS wants to ensure that the contributions deposited in the accounts of non-highly compensated employees are proportional to contributions made for HCEs. Counterintuitive as it may seem to the surprised HCEs, the nondiscrimination rules apply to the elective 401(k) deferrals that they contribute out of their own salary (ADP test) as well as to the match contributions they receive from the employer (ACP test).
As the NHCEs contribute more into the plan, the HCEs are, in turn, allowed to contribute more into the plan, up to the legislative maximum limits.
Discrimination Test Refunds
The plan distributes the excess contributions to HCEs, to lower their average percentage contribution until the test is passed. The distributions are made first to HCEs who deferred the highest dollar amounts, not the highest percentage, and they must include earnings.
If distributed within 2½ months of the end of the plan year, there is no tax penalty to the employer. If returned after 2½ months, the employer is subject to a 10-percent excise tax. HCEs report the distribution as taxable income in the year in which the excess is distributed. The recipients of the excess contributions receive a Form 1099-R to facilitate their tax reporting.
It is important to note that 403(b) plans for nonprofit entities are not subject to the ADP test, but they are subject to the ACP test, which is the same as the ADP test described above, but computed using the employer match contributions. Excess match contributions are called excess aggregate contributions and they are refunds to the HCEs. They are processed in the same way as excess deferral contributions, except that excess match contributions that are not fully vested are reallocated to other participants or forfeited to an unallocated suspense account to reduce future contributions.
Plans can base the ADP and ACP percentages for NHCEs on either the current- or the prior-year contributions. The election whether to use current- or prior-year data is contained in the plan document. A plan can change from prior-year testing to current-year testing during any plan year, but once current-year testing is elected, the employer cannot change back to prior-year testing except under limited circumstances.
Other HCE Refunds
Refunds of excess contributions are not the only alternative available to employers whose plans have failed the ADP and/or ACP tests. Other options include additional vested contributions to the NHCEs and, prospectively, the plan’s third-party administrators and/or ERISA counsel can assist the plan sponsor in reviewing alternative plan designs that achieve the employer’s objectives in a more cost-effective manner.
In many cases, the HCEs receiving the refunds are not in a position to influence the corrective method selected by the employers. In cases when refunds of excess contributions are processed, plan officials have to be prepared to explain why contributing as much as possible is encouraged by the media, but the maximum limits allowable can be lower than expected if the plan does not pass the non-discrimination tests.
Finding out More
For an overview and more information on nondiscrimination testing rules, see ¶301 of the 401(k) Handbook.
Maria T. Hurd, CPA, is a shareholder and director of benefit plan audit services at Belfint Lyons & Shuman, P.A., the largest provider of retirement plan audits in Delaware, servicing a national client base. She is the treasurer of the American Institute of Pension Professionals and Administrators’ Benefits Council of Greater Philadelphia, belongs to the International Foundation of Employee Benefit Plans and speaks frequently on a variety of retirement plan audit topics.
Although not unexpected, the Supreme Court’s holding that severance payments are taxable under the Federal Insurance Contributions Act will be disappointing to some employers; however, others will breathe a sigh of relief. Most certainly, the federal government has the most to gain, because it now will not have to pay more than $1 billion of FICA tax refunds. Whether you, as an employer, consider yourself a winner or loser as a result of this ruling depends on the type of supplemental unemployment compensation benefits plan you have.
On March 25, the U.S. Supreme Court held that severance payments are taxable under FICA when made to employees whose employment is involuntarily terminated. The Court reasoned that FICA’s definition of wages encompasses severance payments and that the severance at issue in this case, which was not linked to the receipt of state unemployment benefits, was not exempt from FICA tax. United States v. Quality Stores, Inc., No. 12-1408 (S. Ct., March 25, 2014).
In the midst of entering into bankruptcy, Quality Stores, Inc., a specialty retailer, closed several plants or operations and discharged thousands of employees. The company paid the discharged employees severance payments pursuant to two termination plans based on seniority, job grade, and management level (among other factors). Quality Stores reported the severance payments as wages on W–2 tax forms, paid its share of FICA taxes, and withheld the employees’ share of FICA taxes. The company later asked its former employees to allow it to file FICA tax refund claims for them. As a result, the company filed a refund claim in the amount of $1,000,125 in FICA taxes, which the IRS neither allowed nor denied.
Quality Stores then initiated a proceeding seeking a refund of the amount in the bankruptcy court, which granted summary judgment in the company’s favor. On appeal, both the federal district court and the 6th U.S. Circuit Court of Appeals ruled in favor of Quality Stores. The 6th Circuit held that the severance payments were not subject to FICA taxes because they qualified as supplemental unemployment compensation benefits, or SUBs, as defined by tax Code Section 3402(o)(2)(A) — thereby creating a circuit split on the issue. The Supreme Court agreed to hear the case to decide whether severance payments made to employees whose employment is involuntarily terminated are taxable under FICA.
As an initial matter, Justice Anthony Kennedy, writing for a unanimous court (with Justice Elena Kagan recused from the case), noted that FICA’s definition of wages includes the severance payments that Quality Stores made to its employees. Under both FICA’s definition of “wages” (as “all remuneration for employment”) and the plain meaning of the terms, severance payments are wages.
Kennedy, in analyzing the statutory text, noted that the fact that FICA exempts some termination-related payments from the definition of wages shows that the severance payments at issue were purposely not exempted. For example, the Court noted that section 3121(a)(13)(A) exempts severance payments made because of retirement for disability from taxable wages. Moreover, FICA includes “a lengthy list of specific exemptions from the definition of wages.” “The specificity of these exemptions,” the Court found, “reinforces the broad nature of FICA’s definition of wages.”
The Court also took into account FICA’s statutory history noting that Congress amended the statute in 1939 to create an exception from “wages” for dismissal payments that employers are not required to make. However, in 1950, Congress repealed that exception, and according to the Court, “since that time, FICA has contained no exception for severance payments.”
Definition of “Wages” for Income Tax Withholding Purposes
The Court then addressed the question of whether Code Section 3402(o), which relates to income-tax withholding, limits the meaning of “wages” for FICA purposes. Quality Stores argued that because Section 3402(o) treats SUBs as wages for purposes of income tax withholding, the definition of wages for income tax withholding does not cover severance. Quality Stores argued further, if the definition of wages for income tax withholding purposes does not cover severance, then severance is not covered by FICA’s similar definition of wages. Quality Stores’ argument and the 6th Circuit’s decision was incorrect, Kennedy ruled, in using Section 3402(o) to conclude that severance payments are not included in the definition of wages for the purposes of income tax withholding and thus, are also not included in the definition of wages for FICA taxation purposes.
Kennedy again relied on statutory interpretation to find that the Code chapter on income tax withholding has a broad definition of “wages,” which, like FICA, specifically exempts some payments from its definition, but not severance pay. He also reasoned that the regulatory background of Section 3402(o) shows that it was enacted to solve a problem with employee withholdings — namely the prospect that involuntarily discharged employees who received SUBs would owe large payments in taxes at the end of the year as a result of the IRS’ administrative exemption of those payments from withholding. Congress enacted Ssection 3402(o), the Court found, to provide that “all severance payments — both SUBs as well as severance payments that the IRS considered wages — shall be ‘treated as if’ they were wages for purposes of income-tax withholding.” Because Section 3402(o) covers more than just severance payments that were excluded from income-tax withholding, the 6th Circuit’s and Quality Stores’ interpretation of the section “as standing for some broad definitional purpose” failed. Thus, the Court concluded that Section 3402(o) “does not narrow the term ‘wages’ under FICA to exempt all severance payments” from FICA tax.
Before concluding, the Court also noted that the severance payments at issue in the case were not linked to the receipt of state unemployment benefits. As a result, the Court expressly declined to consider whether the IRS’ current administrative position that severance payments tied to the receipt of state unemployment benefits are exempt from FICA taxation is consistent with its holding in this case.
Based on these considerations, the Court reversed the 6th Circuit decision and held that the severance payments at issue in this case — which had been made to employees who were discharged against their will, varied based on job grade and seniority, and had not been linked to the receipt of state unemployment benefits — constituted FICA taxable wages.
Although not unexpected, the Supreme Court’s holding that severance paid to involuntarily discharged employees is subject to FICA will be disappointing to the many employers that filed FICA-tax refunds following workforce reductions in response to changes in the economy over the last several years. It will also be disappointing to their discharged employees, who either participated in those refund claims or filed their own, and to future financially strapped employers and discharged employees.
On the other hand, the government will not be faced with paying out the more than $1 billion of FICA tax refunds relating to this issue. In addition, employers in all industries across the United States that implemented a SUB plan linking severance pay to the receipt of state unemployment benefits, in accordance with the IRS’ administrative rulings issued over the last half-century, are going to be relieved that the Supreme Court’s decision left the IRS’ rulings intact. Under the IRS’ current ruling position, which the IRS could change, severance paid pursuant to a SUB plan to involuntarily discharged employees that is linked to the receipt of unemployment benefits and that is not paid in a lump sum is FICA exempt.
About the Authors
Vicki M. Nielsen is of counsel in the employee benefits and executive compensation practice of the Washington, D.C. office of Ogletree Deakins. She has worked extensively in the areas of executive compensation arrangements, equity compensation and benefits provided to employees and independent contractors outside of qualified retirement plans. Ms. Nielsen advises clients regarding fringe benefit plans, severance plans, supplemental unemployment compensation benefit plans (SUBpay), worker classification, employment taxes and related reporting and withholding requirements and tax minimization strategies. She is a contributing editor to the Employer’s Guide to Fringe Benefit Rules.
Hera S. Arsen, J.D., Ph.D. is managing editor of firm publications in the Torrance, California office of Ogletree Deakins.
The market for individual retirement accounts is growing dramatically, partly as a result of plan participants in employer-sponsored retirement plans rolling over funds into an IRA upon leaving employment. But there are investment factors that participants should evaluate before choosing an IRA rollover. This column suggests best practices for plan administrators hoping to arm participants with useful information about rollovers.
IRAs have grown significantly and now amount to $5.4 trillion, compared with $5.1 trillion in defined contribution plans and $9 trillion held in other retirement plans, according to the Investment Company Institute.
In recognition of the increasing importance of IRA rollovers from employer-sponsored defined contribution retirement accounts, the U.S. Securities and Exchange Commission in late December 2013 issued Financial Industry Regulatory Authority Notice 13-45, which gives guidance on brokers’ responsibilities concerning IRA rollovers.
It followed Notice 13-23, which dealt with the possibility of misleading investors when a firm’s marketing materials claim that its IRA is “free” or has “no fee,” when investment and related fees do apply.
Notice 13-45 offers guidance on the activities involved in assisting a participant with an IRA rollover, and is intended to provide money management firms with policies and procedures designed to achieve compliance with FINRA rules.
After leaving an employer, a participant has options for how to handle any accumulated retirement plan assets. He or she can:
A participant who asks to take a 401(k) plan distribution must receive from the plan he’s departing an IRS 402(f) Special Tax Notice, which outlines applicable taxes for such a distribution. At present, the SEC’s focus is on broker-dealers and any securities recommendations they make to participants seeking guidance on rolling over 401(k) retirement plan assets to an IRA. However, it is also critical that broker-dealers be familiar with applicable taxes, in cases where the participant requests a partial rollover.
Best Practice: Plan administrators want to ensure that a participant receives the special notice before taking a withdrawal so that he fully understands the tax consequences of each plan distribution option.
Similarly, there are several factors to consider when deciding whether to leave assets deferred in an employer-sponsored plan or to roll over plan assets to an IRA. The SEC encourages financial professionals to discuss these factors with a participant before making a rollover recommendation.
Investment options may be limited to designated investment options under a plan, while the IRA offers much broader investment alternatives, including brokerage services.
Fees and expenses may differ, with institutional versus retail pricing for investment expenses. The employer plan has administrative and service fees, and the IRA investor will likely be subject to custodial fees.
Services, though similar, will vary, with education, investment advice and retirement planning being offered to plan participants, while the IRA offers brokerage, income and distribution services.
Permissible withdrawals in the plan include loans, hardships and penalty-free withdrawals after termination of employment with the sponsoring employer and attainment of age 55. Penalty-free withdrawals from the IRA may occur after age 59½.
Required minimum distributions have to be taken from both types of plans by age 70½. Generally, if the plan participant is actively employed with the sponsoring employer, he may delay distribution until the latter of age 70½ or termination of employment.
Asset protection in the plan regarding bankruptcy and lawsuits is broad. State law varies on protection of IRA assets in lawsuits.
Company stock paid to the participant in-kind is subject to tax at the ordinary income rate on the cost-basis amount, and a future sale results in tax on the appreciation at the long-term capital gains rate, which is usually more favorable. On the other hand, if the stock is rolled over to an IRA, when later sold the cost basis and appreciation will be taxed as ordinary income.
Best Practice: Plan administrators will want to incorporate the factors from FINRA Notice 13-45 into any retirement education materials and retirement planning seminars that are offered to plan participants.
Cross-selling Plan Participants
Many plan sponsors include limitations in their service provider agreements related to marketing directed toward plan participants. The plan administrator may fear potential fiduciary liability for a perceived endorsement of a particular service provider’s investments and services, especially after the participant terminates employment.
At the same time, the service provider will seek to develop a relationship with plan participants that will continue beyond retirement. This difference in objective may test existing plan sponsor-provider relations.
For example, a spokesman for Charles Schwab recently commented on the company’s frustration with plan sponsor clients that use Schwab’s recordkeeping services, yet disallow marketing efforts designed to attract rollover assets from their 401(k) plan participants.
Best Practice: Plan sponsors will want to check service-provider agreements and make sure they understand the terms related to marketing products and services to plan participants. (See related column on p. 5.) In addition, plan sponsors should inquire about incentive programs for their service providers’ employees that may influence their interactions with participants.
When a service provider is marketing additional services to plan participants, there is also the risk of a potential conflict of interest. As service providers seek to extend existing relationships, FINRA’s goal in its new notice is to ensure that broker-dealers review their investment services to ensure that conflicts of interest do not impair the judgment of their associates.
A financial adviser, who may receive compensation based on the number of IRAs opened, has a financial incentive to encourage a departing plan participant to roll plan assets into an IRA. Similarly, a retirement specialist who conducts education seminars for retiring participants may be rewarded for converting class attendees into IRA investors.
Monitoring Service Providers
In order to advise plan participants on the advantages and disadvantages of IRA rollovers, it is necessary for financial advisers to have a certain level of plan knowledge. For example, they should know the types of investments available under the plan, applicable fees and withdrawal options available to plan participants and applicable taxes on various plan distributions.
It is important that financial professionals consider the participant’s investment profile, age, financial needs, investment objectives, risk tolerance and other information that affects investment decisions. And it is equally critical that plan participants be armed by the plan sponsor with investment and distribution information needed to make an informed decision.
Best Practice: As it relates to financial services, plan sponsors will want to include a clause in the service provider agreement that requires suitability and fair dealing.
Last, FINRA also intends for investment firms to establish and maintain practices that promote suitability and fair dealing. Namely, the practices should entail confirming that rollover decisions are reasonable and investments are suitable in light of the investor’s objectives, time horizon and liquidity needs.
When the service provider’s financial professional provides education as well as IRA rollover services to participants, the plan administrator should actively monitor such offerings.
Model Rollover Notices
For sample rollover/withholding notices for participants, see ¶716 in the Handbook.
Arris Reddick Murphy is an attorney with experience in the employee benefits and executive compensation practice area, and she is senior counsel with FedEx Corp.’s Tax & Employee Benefits Law group. Before joining FedEx, she held the position of associate with the law firm of Potter Anderson & Corroon, LLP, and worked in-house with The Vanguard Group and the City of Philadelphia as counsel to its Board of Pensions and Retirement.The views expressed in this column are strictly Ms. Murphy’s, and are not those of FedEx Corp.,any of its operating companies or affiliates. She is contributing editor of The 401(k) Handbook.
As all plan administrators know, COBRA coverage must made available for up to the maximum COBRA coverage period. But coverage can terminate early under certain conditions, as provided under COBRA’s other coverage cut-off rule. This rule has been a source of a great deal of controversy in plan administration and in litigated court cases. It also been modified through several different legislative and IRS regulatory actions. Most recently, though, health care reform has indirectly had a significant impact on the rule’s operation. This column explains how and provides five tips that plan administrators should consider for their COBRA programs moving forward.
Early Termination of COBRA Coverage
Generally, the COBRA coverage period is up to 18 months if the qualifying event is a reduction in hours or a termination (other than for reasons of gross misconduct) of employment (plus another 11 months in cases of certain qualifying disabilities) or 36 months for other qualifying events. That maximum period may be terminated earlier, however, if (among other reasons) a qualified beneficiary first becomes covered under another group health plan after the date on which COBRA coverage was elected.
By contrast, if a qualified beneficiary first becomes covered under another group health plan on or before the date on which COBRA coverage was elected, the other coverage cannot be a basis for terminating the COBRA coverage. In other words, a qualified beneficiary’s right to COBRA coverage turns on the timing of when he or she obtains other group health plan coverage as compared to the date of the actual COBRA election.
the qualified beneficiary actually must be covered, not just eligible for coverage, under the other group health plan;
the other group health plan must be maintained by another employer (or another employee organization), other than the one maintaining the plan providing COBRA coverage; and
the other group health plan cannot contain any exclusion or limitation with respect to any pre-existing condition of the qualified beneficiary (other than an exclusion or limitation that does not apply to, or is satisfied by, the qualified beneficiary by reason of the provisions in HIPAA.
The ACA Provision that Affects the Other Coverage Rule
The Affordable Care Act has indirectly affected the other coverage cut-off rule due to the elimination of pre-existing condition clauses in group health plans.
Beginning Sept. 23, 2010, group health plans were no longer allowed to exclude from coverage those eligible individuals under age 19 based on their pre-existing conditions. For other eligible individuals age 19 and older, the elimination of pre-existing condition exclusions is effective for plan years (or insured policy years) beginning on or after Jan. 1, 2014. Thus, calendar year group health plans can no longer exclude coverage for pre-existing conditions.
This new ACA rule applies to grandfathered group health plans in the same way as non-grandfathered health plans. The rule also applies in the same way to collectively bargained and non-collectively bargained plans.
The only exception to the health care reform prohibition is that grandfathered health plans in the individual insurance market still may apply pre-existing condition exclusions.
DOL Model Notices Were Changed Due to ACA Rule
ACA’s new rule has a very important impact on COBRA administration of the other coverage cut-off rule. Before the ACA, other group coverage only would terminate COBRA coverage if that coverage did not contain a pre-existing condition exclusion affecting the qualified beneficiary. Once the ACA rule applies, no other group health coverage could impose such a limitation. Therefore, all other group health coverage could potentially terminate a qualified beneficiary’s COBRA coverage as long as that qualified beneficiary first becomes covered by that other coverage after making a COBRA election.
Anticipating this new ACA rule, the U.S. Department of Labor modified its model COBRA election notice in a couple of respects: (1) it added a new parenthetical explanation about the ACA rule; (2) it deleted a discussion comparing the benefit of electing COBRA as opposed to other plan coverage that had pre-existing condition clauses; and (3) it eliminated language on how not electing or exhausting COBRA coverage could affect coverage rights in the individual market.
The New Parenthetical Explanation
Before the ACA rule, the model notice referred to COBRA coverage being terminated under the other coverage cut-off rule if:
A qualified beneficiary becomes covered, after electing continuation coverage, under another group health plan that does not impose any pre-existing condition exclusion for a pre-existing condition of the qualified beneficiary.
Now, that reference includes a new parenthetical explanation reading:
(note: there are limitations on plans’ imposing a preexisting condition exclusion and such exclusions will become prohibited beginning in 2014 under the Affordable Care Act).
This new parenthetical explanation can be somewhat confusing for qualified beneficiaries because of the ambiguity of the 2014 date reference. Technically, the ACA rules are applicable for plan years or policy years beginning in 2014, which can vary by plan. To avoid that confusion, some employers have simply eliminated the reference to pre-existing condition exclusions altogether. In those cases, the notice would read that COBRA coverage would be terminated if “a qualified beneficiary becomes covered, after electing continuation coverage, under another group health plan.”
Discussion Deleted on COBRA Versus Other Plans
The DOL deleted a discussion concerning the benefits of electing COBRA coverage vis-à-vis pre-existing condition clauses in other plans. That is, under pre-ACA rules (since HIPAA), an individual can lose the right to avoid having pre-existing condition exclusions applied by other group health plans if the individual has more than a 63-day gap in health coverage. Electing COBRA coverage helped eliminate that gap. However, now that pre-existing condition exclusions are less common (and will be eliminated entirely once the 2014 plan years apply), this discussion is unnecessary.
For those plan administrators that feel it is still necessary, however (at least until all 2013 plan years end), the discussion could be added back. The DOL has provided a redlined version of its notice so plan administrators and employers may see the deleted text.
COBRA Language on Individual Market Eliminated
Finally, DOL also eliminated language explaining that failure to elect and exhaust COBRA coverage could cause someone to lose the guaranteed right to purchase individual health insurance policies without the imposition of a pre-existing condition exclusion. Although this is generally true of non-grandfathered individual policies, it still might be relevant for grandfathered policies. Nevertheless, DOL has deleted the language. Some plan administrators have decided to keep a modified explanation in their COBRA notices for grandfathered policies.
Time to Review How to Apply the Other Coverage Rule
Given these changes to the pre-existing condition clauses, plan administrators should review how they will apply the other coverage cut-off rule. Here are a few tips:
Remember that the rule specifically refers to other group coverage. Therefore, a person covered under an individual health insurance policy or other non-group coverage still can maintain COBRA coverage, regardless of when that individual or non-group coverage is obtained.
The rule is optional. A group health plan is not required to terminate COBRA coverage before the maximum period due to a qualified beneficiary’s obtaining other group health coverage. If the plan coverage continued and a qualified beneficiary wanted to pay for double coverage, the plans’ coordination-of-benefits rules would apply and, generally (but not always), the COBRA coverage would be secondary.
Once the cut-off rule applies, a plan needs to determine whether it will cause an immediate loss of COBRA coverage or a termination of coverage at the end of a month. COBRA does not mandate a rule in this case. Often plans are administered on a monthly basis and not a daily basis; so it can make sense to terminate coverage at the end of a month in which a qualified beneficiary first becomes, after the COBRA election, covered by other coverage.
Have a procedure in place to find out whether a qualified beneficiary has other coverage. Many group health plans require as part of any benefit claim that covered individuals identify any other coverage available. In the case of COBRA coverage, extra steps are often taken. For example, some plans will provide premium coupons for the payment of COBRA premiums. On each coupon, the plans will have a statement to the effect that the qualified beneficiary’s coverage is conditioned on not having other coverage in place. If that other coverage exists, the qualified beneficiary is required to notify the plan administrator. This type of provision can help emphasize to qualified beneficiaries the need to keep the plan administrator informed of any change in coverage status.
Plan administrators should make sure to review all their documentation. This includes COBRA notices, benefits booklets, summary plan descriptions, plan documents and training materials. All these documents should be amended to be up to date with the latest COBRA rules and the interplay with health care reform.