Monthly Benefits Update - July 2014
August 3, 2014
By Hrishi Shah
Health & Welfare Plans
Federal Appeals Courts Issue Contradictory Rulings on Federal Marketplace Subsidies under Affordable Care Act
Two federal appeals courts issued contradictory rulings on the validity of subsidies for the purchase of health insurance under the federal marketplace established pursuant to the Affordable Care Act (ACA). On July 22, a panel on the Court of Appeals for the District of Columbia ruled by a 2-1 margin that the subsidies under the federal marketplace were invalid; on the same day, a panel on the Fourth Circuit Court of Appeals unanimously upheld the subsidies. The subsidies available under the federal marketplace are a key component in the implementation of the ACA’s individual mandate and employer shared responsibility provisions.
Thirty-six states have opted not to establish their own health insurance marketplaces. Consequently, individuals living in these states who wish to purchase marketplace health coverage must do so from the federal marketplace, and may take advantage of the federal subsidies if they qualify. The ACA provides that premium subsidies are available to qualifying individuals who purchase health insurance “through an Exchange [marketplace] established by the State” (emphasis added). Plaintiffs challenging the validity of the federal subsidies claim that the statutory language only permits state-run insurance marketplaces, not the federal, to provide such subsidies. The dispute in the statutory interpretation, which has resulted in contradictory decisions, is whether the federal government is “standing in the state’s shoes” when establishing an insurance marketplace in a state unwilling to establish its own.
The Obama Administration stated that it planned to appeal the D.C. Circuit decision “en banc” to the entire D.C. Circuit panel.
In states that have a federal marketplace (such as Illinois), the outcome of these decisions could significantly impact the viability of the “employer shared responsibility” (“pay or play”) rules that apply to employers. If subsidies are found to be unavailable to individuals who receive coverage through a federal marketplace, employers in states with federal marketplaces would potentially not be liable for any of the “pay or play” tax penalties that otherwise begin to apply to employers in 2015.
Supreme Court Grants Injunction to Religious University Barring Strict Enforcement of Accommodation Scheme for ACA Contraception Mandate
The United States Supreme Court granted Wheaton College, a religious non-profit college in Illinois, an injunction permitting the college to opt into the ACA contraception mandate’s accommodation scheme available to certain religious non-profits without strictly complying with the accommodation’s terms.
The ACA’s contraception mandate requires employers with 50 or more employees to offer contraceptive coverage and related services to its employees at no charge. Certain religious entities, such as churches, are completely exempt from the mandate. The Department of Health and Human Services (HHS) also provided an accommodation scheme for certain other eligible non-profits that do not qualify for a complete exemption, but object to providing contraceptive services on religious grounds (such as colleges and universities, hospital systems, and religious charities). The accommodation scheme permits such eligible non-profits to comply with the contraception mandate by arranging with an insurer or third-party administrator to provide stand-alone contraceptive coverage at no cost to either the entity, or to its employees and beneficiaries.
The accommodation scheme requires the eligible entity to fill out a form informing the government that it objects to the mandate on religious grounds and wants to opt into the accommodation scheme. Wheaton College contended that even completing the form violates its religious beliefs, as doing so would make it complicit in the provision of contraceptive services. The Court agreed, reasoning that Wheaton College had already informed the government that it qualified for the accommodation scheme, and need not fill out the form to opt into it.
As covered in detail in our Supreme Court review, in June, the Court struck down the contraception mandate under the Religious Freedom Restoration Act of 1993 (RFRA), as applied to closely held, for-profit corporations. Several religious non-profits around the country have challenged the validity of the accommodation scheme under the First Amendment and the RFRA. Some plaintiffs have successfully obtained temporary injunctions against the accommodation scheme while a decision was pending on the merits, and some have not. Although the Court insisted that the injunction granted to Wheaton College was temporary while its challenge was being decided on the merits by a lower court, the Supreme Court may eventually agree to hear such a challenge if federal circuit courts end up issuing contradictory decisions on the merits.
DOL Issues Post-Hobby Lobby Guidance for Closely Held For-Profits Making Changes in Contraception Coverage
The Department of Labor (DOL) issued guidance for closely held for-profit corporations that wish to exclude coverage of any contraceptives under their health plans in the wake of the Burwell v. Hobby Lobby Supreme Court decision issued in June (the decision is covered in much greater detail in our Supreme Court review). Not surprisingly, any changes made by the plan sponsor in the plan’s benefit coverage, including for contraception coverage, must comply with ERISA’s disclosure requirements. The plan sponsor must issue an updated summary plan description (SPD) or summary of material modification (SMM) reflecting the coverage changes. In addition, consistent with ERISA’s requirements for disclosure of material benefit reductions, the SPD or SMM reflecting the change must be provided to beneficiaries no later than 60 days after the changes have been adopted.
In addition, if any changes need to be made to be plan’s Summary of Benefits and Coverage (SBC), which is provided pursuant to the ACA, an updated SBC must be distributed no later than 60 days prior to the effective date of the coverage change.
IRS Issues Draft Forms for Coverage Reporting Requirements under the Affordable Care Act
The Internal Revenue Service (IRS) has released draft versions of forms that will be used by employers to report health coverage information required under the ACA’s employer shared responsibility rules. As we have written in a previous alert, the ACA requires plan sponsors to begin reporting certain health coverage information to help the IRS enforce the employer shared responsibility and individual mandate components of the law. The reporting requirements are set forth under Internal Revenue Code Sections 6055 and 6056.
Under Code Section 6055, health insurers and employers (regardless of size) that sponsor self-insured health plans are required to report information regarding individuals covered under their health plans. This information must be reported using Form 1095-B, indicating the months for which each family member had coverage during the previous calendar year. Each primary insured person under the plan must be provided a copy of Form 1095-B with his or her pertinent information. All Forms 1095-B must be transmitted to the IRS in a single package using Form 1094-B as an accompanying transmittal form.
Code Section 6056 requires employers with 50 or more full-time employees to report whether they offered “minimum essential coverage” to their full-time employees and dependents, and if coverage was offered, what the employee’s share of the lowest cost monthly premium for self-only coverage was. Form 1095-C must be used to report this information, indicating offers of coverage and employee’s premium share information for each month of the previous calendar year. Each primary insured person must be provided a copy of Form 1095-C with his or her pertinent information; all Forms 1095-C must be transmitted to the IRS in a single package using Form 1094-C as an accompanying transmittal form. Form 1094-C also requests additional information regarding other members of the reporting employer’s controlled group.
The IRS has delayed the effective date of the reporting rules under both Code Sections 6055 and 6056. Reporting for the 2014 calendar year is optional; the first required filings must be submitted for the 2015 calendar year in early 2016.
Because these forms are still in draft form, they should be used for preparation purposes only, and not for an actual filing or reporting. The forms may undergo some changes before they are released in final form. Instructions for these forms are expected to be published soon. The IRS is also seeking comments on the draft forms, which may be submitted here.
IRS Modifies Required Minimum Distribution Rules to Permit Purchase of Longevity Annuities in Defined Contribution Plans
The IRS has issued final regulations modifying the required minimum distribution rules that apply to defined contribution retirement plans to accommodate the purchase of annuities known as qualifying longevity annuity contracts (QLACs). Although defined contribution plans require minimum distributions on April 1 of the calendar year after the retiree turns 70 ½, QLACs permit tax deferral of account balances up to the first of the month following the retiree’s 85th birthday.
The final regulations, which are substantially similar to the proposed regulations issued in February 2012, permit defined contribution plans to collect “premiums” for QLACs by reducing the account balances that are used to calculate the required minimum distributions after age 70 ½ by the lesser of (i) $125,000 (to be adjusted for inflation every year in increments of $10,000); or (ii) 25% of the account balance. The QLAC premiums are annuitized for distribution no later than age 85. QLACs are also permitted, but not required, to offer a “return of premium” feature, which would permit the beneficiary of a QLAC annuitant to receive any excess premiums that were not distributed before the annuitant’s death.
QLACs must also comply with certain other rules identified in the guidance. Among other requirements, QLACs may not provide increasing payments after the required distribution date (which is applicable to all annuity payments) or contain cash or surrender value, and the contract language must explicitly state that the annuity is intended to be a QLAC. Under transitional relief provided in the guidance, annuities issued before January 1, 2016 that are intended to be QLACs but not explicitly identified as such in the contract language must comply with this requirement (for example, by issuing a rider or endorsement to the contract) no later than December 31, 2016.
PBGC Issues Enforcement Moratorium on 4062(e) Cases through End of 2014
In response to plan sponsor concerns, the Pension Benefit Guaranty Corporation (PBGC) announced a moratorium on the enforcement of ERISA Section 4062(e) cases through the end of 2014.
Under ERISA Section 4062(e), when a company ceases operations at a facility through a shut-down or sale and at least 20 percent of workers who are pension plan participants lose their jobs, the company is effectively treated as if it is subject to withdrawal liability. To protect the pensions of the laid-off workers, the PBGC is permitted as part of its enforcement authority to ask the company to increase the pension plan’s funding. The plan administrator is also required to report such liability to the PBGC. The PBGC is in the process of reevaluating the 4062(e) enforcement process, in light of commentary from the plan sponsor community regarding the appropriateness of 4062(e)’s requirements for financially-healthy plan sponsors.
The moratorium is effective from July 8, 2014 through December 31, 2014. The PBGC stated that companies should continue to report new Section 4062(e) events during the moratorium.
IRS Seeking Comments on Business Hardship Rules for Safe Harbor Defined Contribution Plans
The IRS is seeking comments on rules that permit sponsors of 401(k) plans to reduce or suspend safe harbor contributions in the middle of the plan year. As we wrote in a previous alert, under rules issued in November of 2013, such midyear changes to safe harbor non-elective or matching contributions are permitted if: (1) the employer is operating at an economic loss; or (2) the employer provides notice to participants before the start of the plan year that such contributions may be reduced or suspended during that upcoming plan year and provides a supplemental notice to participants at least 30 days before making such midyear contribution changes. The IRS is accepting comments until September 15, 2014.
Illinois Supreme Court Rules that Public Sector Retiree Health Subsidies are Constitutionally Protected Benefits
As covered in more detail in a separate alert, the Illinois Supreme Court ruled in Kanerva v. Weems by a 6-1 margin that state-subsidized retiree health coverage premiums are subject to the pension protection clause of the Illinois Constitution. As a result, the Court held, such benefits may not be retroactively diminished or impaired by the legislature.
In 2012, the legislature passed the State Employee Group Insurance Act of 2012 (Public Act 97-695), which required current retirees to contribute towards the cost of their health coverage based on a formula. The Supreme Court remanded the case back to the trial court to determine whether the benefit reductions effected by Public Act 97-695 violate the pension protection clause of the Illinois Constitution.
As explained in our prior alert, it is unclear what impact the Kanerva decision will have on the impending legal challenge to Senate Bill 1, passed in December of 2013, which made various benefit reductions to public pensions, including for current pensioners.