Understanding Employee Benefits and key developments in the employee benefits field and items of interest to our clients. MORE

The IRS issued recently FAQs relating to W-2 reporting of employer-provided health care coverage, a health care reform requirement that employers must first meet for the 2012 calendar year. We have previously discussed these requirements [Link to earlier health care reform posts]. These FAQs largely restate prior guidance.

The IRS also released an article on its website that contains a chart showing the types of employer-sponsored health coverage and whether that coverage must be reported on the W-2. The chart is a useful summary of the reporting requirements. Employers may want to review the chart to make sure that they are prepared to report the proper amounts on the 2012 Form W-2s to be filed in January of 2013.

I blogged recently about an Eighth Circuit decision where the court concluded that a deferred compensation agreement with a single employee did not constitute an ERISA plan. I warned employers that courts do not always accept an employer’s characterization of a plan or program as being covered by ERISA. Another example of this phenomenon is Behjou v. Bank of America Group Benefits Program.

In Behjou, the employee sued the Bank of America claiming that he was improperly denied long term disability benefits and underpaid short term disability benefits. His claims included state law claims for failure to pay salary and intentional infliction of emotional distress. The Bank of America claimed that both the long term disability plan and the short term disability plan were ERISA plans so any state law claims were preempted.

The court looked at the Department of Labor’s regulation under ERISA that distinguishes payroll practices from ERISA plans for short term disability arrangements. Even though the Bank of America’s program was an integrated program of short and long term disability benefits, the court concluded that the short term disability program met the requirements of a payroll practice and therefore it was not an ERISA plan and state law claims were not preempted.

Unfortunately, for a typical short term disability arrangement, the only way that an employer can be certain that the program is not a payroll practice is to insure the benefit, rather than having it paid from the employer’s general assets. That is typically more expensive than self-funding the benefit. The employer can also ask the Department of Labor for an advisory opinion on the status of the employer’s short term disability arrangement. However, those requests are typically for rulings that the arrangement is not an ERISA plan. Thus, even if the employer treats the program as an ERISA plan, including filing Form 5500s and following ERISA claims procedures, there is no guarantee that the courts will agree that the arrangement is subject to ERISA.

The Office for Civil Rights, which is the arm of the Department of Health and Human Services that enforces HIPAA privacy and security rules, recently announced the settlement of an enforcement action against a small cardiothoracic surgery practice. The practice reportedly posted protected health information (PHI) on an internet-based publically accessible calendar and transmitted PHI from corporate e-mail accounts to workforce personal accounts. The entity had not identified a security officer nor conducted a security risk assessment or otherwise met its HIPAA obligations.

OCR required the entity to pay $100,000 as a fine and to comply with a corrective action plan. That action plan requires the entity to perform a risk assessment and develop a plan, including appropriate policies and procedures, to protect and secure PHI. The plan must address security measures sufficient to reduce risks and vulnerabilities to PHI in text messages – an indication that unsecured text messages can also be a HIPAA violation.

This enforcement action shows that even small covered entities must comply with HIPAA and that the enforcement agencies are not limiting their investigations to large institutions.

If an employer withdraws from a multiemployer plan and is assessed withdrawal liability, all members of the employer’s controlled group are liable for that assessment. The controlled group rules look at the extent of common ownership among various trades or businesses, whether or not incorporated. The determination of controlled group status can be complicated and I will not discuss those complexities in this blog post. Instead, I want to talk about the trade or business requirement. In Central States, Southeast and Southwest Areas Pension Fund v. Ray C. Hughes, Inc., the U.S. District Court for the Northern District of Illinois concluded that various related companies were part of a controlled group and therefore liable for the withdrawal liability of one of the companies. The court noted that to be a trade or business, the taxpayer’s activity had to be different from “investment activities or hobbies.”

The business in question was a corporation established for estate planning purposes that held securities and notes – “well recognized passive investments” – and a single piece of real estate. The court looked at the company’s articles of incorporation which stated that its purpose in part was carrying on a general trucking and contracting business and looked at its tax returns where the corporation noted its principal business activity as “lessor.” The company’s ownership of the land was intentional and it made improvements to the land over time. It built a commercial office building on the property and leased the offices. Its activities were continuous and regular; it earned rental income and claimed business related deductions on its income tax return. The company had no employees but paid a management fee to a company to manage the property. That management company was also the company that had withdrawn from the pension fund. Because services were required with respect to the property, the company that owned the property was considered to be in a trade or business despite the relatively passive nature of its investments.

This trade or business issue also arises with respect to hedge funds. Hedge funds with portfolio companies sometimes take the position that they are not in a trade or business, but rather are passive investors in their portfolio companies, so that even companies that are 100% owned by the hedge fund are not part of a controlled group of trades or businesses. Hedge fund operators may wish to review closely this withdrawal liability decision to determine whether their activities, including the receipt of management fees from its portfolio companies, call into question whether the hedge fund itself is conducting a trade or business. If the hedge fund is considered to be in a trade or business then all its portfolio companies could be considered part of a controlled group of trades or businesses. A conclusion that the portfolio companies were part of a single controlled group would have implications for the benefit plans of all portfolio companies. Under the controlled group rules all members of the controlled group are treated as a single employer so separate benefit plans of the different companies would need to be tested together for certain purposes. A conclusion that a hedge fund’s portfolio companies are part of a single controlled group could create tax problems for the benefit plans of the hedge fund, the portfolio companies and all the participants.

Blue Cross of Northeastern Pennsylvania (“Blue Cross”) insured New Life Homecare, Inc. (“New Life”) under a group health insurance contract. The insurance contract required New Life to enroll at least 75% of its eligible participants in the plan and provided that no more than 15% of the eligible employees could reside more than 20 miles outside the service area where Blue Cross operated. New Life fell below these limitations and Blue Cross declined to renew the coverage for the following year. New Life offered to cure the violation by terminating coverage for some of the individuals who lived outside the service area but Blue Cross refused to allow the correction. Both New Life and some of the employees who lost coverage sued Blue Cross claiming that Blue Cross should have allowed New Life to correct the violation. The U.S. District Court for the Middle District of Pennsylvania disagreed and dismissed New Life’s action on a summary judgment motion.

The message to employers is that the employer’s policy with the insurance company is an enforceable contract. The insurer is allowed to cancel coverage if the employer does not follow the terms of the policy even if that leaves employees without coverage. Employers should make certain that they know and understand the terms of their insurance contracts and get permission from carriers before deciding not to follow those terms.

I previously blogged on a case where a purchaser who did not try to assume withdrawal liability in a purchase transaction learned that it could nevertheless be responsible for that liability as a successor employer. In another recent case, a seller who tried to structure a transaction so that the buyer assumed the withdrawal liability nevertheless learned that the multiemployer pension fund could hold the seller responsible for the withdrawal liability.

Employers who participate in multiemployer pension funds know that if they withdraw from the fund they may be required to pay withdrawal liability if the plan is underfunded. Employers who sell their assets to unrelated buyers can avoid that withdrawal liability if the buyers agree to assume an obligation to contribute to the pension fund for substantially the same number of contribution base units (CBUs) as the seller was contributing and to meet certain other requirements. In the case of HOP Energy LLC v. Local 553 Pension Fund, the seller did just that: In its sale agreement with the buyer the buyer assumed the obligation to contribute to the plan for substantially the same number of CBUs as the seller had contributed and met all the other requirements for that transfer of liability. However, in addition to stating in the asset purchase agreement that the buyer would make contributions for substantially the same number of CBUs as the seller, the asset purchase agreement also stated: “Notwithstanding the previous sentence and except as otherwise provided in Section 12.1, nothing in this Section shall impair or limit the Purchaser’s right to discharge, layoff, or hire employees or otherwise to manage the operations of the Business, including the right to amend, revise or terminate any collective bargaining agreement currently in effect and, as a consequence, reduce to any extent the number of contribution base units with respect to which [buyer] has an obligation to contribute to any plan.”

The U.S. Court of Appeals for the Second Circuit interpreted this provision to mean that despite the previous statement that the buyer would contribute to the fund for substantially the same number of CBUs as the seller had contributed, the quoted language negated the obligation – meaning that the buyer had not in fact assumed the required obligation. Therefore, despite the fact that the buyer continued to contribute to the pension fund, the seller was hit with withdrawal liability in an amount that constituted approximately one-third of the purchase price for the seller’s assets.

One of the judges dissented from the opinion, concluding that the quoted language states the obligation of any participating employer, namely that the employer’s obligation to contribute is always subject to negotiation with the union and to complete or partial withdrawal liability if such negotiation results in a sufficient reduction in the number of CBUs for which contributions are made.

The majority opinion did not discuss the fact that by assuming the obligation, the buyer also assumed part of the contribution history of the seller so that if the CBUs were sufficiently reduced, the buyer would also owe withdrawal liability to the pension fund, based at least in part on the seller’s contribution history. To that extent, the fund was protected in the event that the buyer’s CBUs later declined.

This is another decision that will make selling a business with potential withdrawal liability more difficult.

If an arrangement is subject to ERISA, state law claims relating to that arrangement are preempted. In some situations, therefore, employers try to argue that a particular arrangement is subject to ERISA. In a recent decision involving a state law breach of contract claim, the Eighth Circuit Court of Appeals determined that a deferred compensation agreement with a single employee could not constitute a plan under ERISA. Therefore, when the employer ceased paying deferred compensation otherwise owed under the agreement to the widow of a deceased employee, the court concluded that state law breach of contract claims were not preempted.

 Not all courts have ruled this way. Some have found agreements with a single employee to be ERISA covered plans. Employers wanting to rely on ERISA preemption and to take advantage of ERISA’s favorable standard of review should be aware that courts may not always agree with the employer’s characterization of an arrangement as an ERISA plan. Particularly in the Eighth Circuit, an arrangement that consists of an agreement with a single employee might be found not to be an ERISA plan.

In previous blogs here, here and here, I discussed generally the recently published proposed regulations on which taxpayers may rely regarding the new fee imposed under the Patient Protection and Affordable Care Act (PPACA) to fund the Patient-Centered Outcomes Research Trust Fund. The fee is considered an excise tax but is not reported on the Form 5330, the excise tax return relating to certain qualified plan excise taxes, nor on the Form 8928 which is used for reporting excise taxes relating to failures to meet COBRA and HIPAA requirements. Instead, this tax is reported and paid on a Form 720 Excise Tax Return. That excise tax return is typically due quarterly. However, the IRS has determined that insurance companies and plan sponsors need pay and report this fee only once a year. Regardless of policy year or plan year, the form is due July 31 with respect to all policies or plans that ended during the prior calendar year. Therefore, the first return would be due July 31, 2013 for policy years and plan years that ended between October 1, 2012 (when the fee becomes effective) and December 31, 2012.

For fully insured plans, the insurance company must pay the fee. For self-funded plans, the plan sponsor must pay the fee. In this regard, if a plan covers more than one employer, each employer must report and pay its own fees unless the plan states or designates a lead employer whose employees are covered under the plan as responsible for paying and reporting the entire fee. For these purposes, the normal controlled group rules that treat all related employers as a single employer do not apply. Therefore, if a parent company and its five subsidiaries are in a single health plan, the parent company and each of the five subsidiaries must file a separate Form 720 unless the plan designates one of the entities as the plan sponsor to make that filing. Employers with plans covering multiple entities will need to determine how they wish to meet this filing requirement and appropriately designate the entities for the filings.

As noted in my two earlier blogs here and here, the Patient Protection and Affordable Care Act (PPACA) imposes a new fee to fund a Patient-Centered Outcomes Research Institute that will research effective medical treatments. The fee is paid by insurance companies for fully insured plans and by plan sponsors for self-funded plans. The fee is based on the average number of participants in the plan during the year. On April 17, 2012, the IRS published proposed regulations on which taxpayers can rely, addressing a number of issues, including the method of determining the average number of participants covered under a policy or plan during the year.

Under the proposed regulations, insurance companies will be permitted to choose one of four methods for determining the average number of participants covered under the plan. The four methods are an actual count method, a snapshot method, a method based upon a filing with the National Association of Insurance Commissioners (NAIC), and a method based upon a similar state filing. Insurance companies must use the same method for all policies reported in a single filing, which will occur once a year. (My next blog post will discuss the mechanics of paying the fee.) Insurers using the method based on NAIC or state filings are required to continue to use that method during the years the fee is imposed and cannot change the method. Insurance companies using the actual count or snapshot method can change from year to year.

Because the insurance company is required to use the same method for all its policies for a year, an employer will undoubtedly have no say in the method used by the insurance company to determine the average number of participants under the plan. The employer will be required to pay its portion of the fee as calculated and determined by the insurance company – assuming that the insurance company passes through the fee to the employer, which seems likely. Because the employer is likely to have no input on the use of the insurance company’s calculation method, I will not discuss them in this blog post, but will discuss the methods available to a sponsor of a self-funded plan.

An employer with a self-funded plan has three choices regarding the method of calculating the average number of participants in the plan. One is an actual count method, where the employer actually counts the number of lives covered for each day of the plan year and divides that total by the number of days in the plan year. The number of lives covered includes not only employees, but also spouses and dependents. The second method is a snapshot method where the employer can add the total number of lives covered on one date in each quarter or more dates if an equal number of dates are used in each quarter and then divide that total by the number of dates on which the count was made. The date or dates used in each quarter must be the same, for example, the first day of the quarter, the first day of each month, etc. The employer can use either the actual number of lives on those dates or the employer can add the number of plan participants with self only coverage to the number of participants with coverage that is other than self only, multiplying the latter number by 2.35. In other words, the employer can use a simplifying factor rather than tracking the actual number of dependents on any given day.

The third method is the Form 5500 method. That method requires using the numbers reported on the Form 5500 to determine the average number of participants. An employer that offers only self only coverage would add the number of participants on the first day of the year and the number of participants on the last day of the year and divide by two to get the average number. An employer that offers coverage other than self only coverage would simply add together those two numbers and that would be the average for the year. Of course, this is available only with respect to an employer who files a Form 5500 for the plan, which is required only of plans with 100 or more participants. On the other hand, most smaller employers have fully insured plans and so therefore would not be required to pay the fee directly in any case.

In many cases, health flexible savings accounts and health reimbursement arrangements might not be subject to the fee. See my earlier blog post discussing this issue. If, however, they are, an employer is allowed to treat each participant as having self only coverage so that the employer does not have to take into account any spouses or dependents who could receive benefits under those programs.

For the first year that this fee is in effect, an employer can use any reasonable method for determining the average number of participants.