ACA Survives Another Supreme Court Challenge

The Supreme Court, in a 7-2 ruling, held that the Plaintiffs did not have standing to challenge the constitutionality of the Affordable Care Act’s (ACA’s) minimum essential coverage provision. When the ACA was enacted, individuals could face a tax penalty if they did not obtain minimum essential health coverage. This provision is sometimes referred to as the “individual mandate.” In 2017, the penalty for individuals who failed to obtain this coverage was reduced to $0, effectively nullifying the penalty. In this case, Texas (along with several states and two individuals) brought suit against federal officials, claiming that without the ACA’s minimum essential coverage penalty, the individual mandate provision is unconstitutional. The Supreme Court held that the Plaintiffs did not have standing because they did not show a past or future injury traceable to the enforcement of the individual mandate. To have standing, a plaintiff must allege personal injury fairly traceable to the defendant’s allegedly unlawful conduct. This marks the third time the ACA has survived a challenge in the Supreme Court since it was enacted.

California v. Texas, U.S. Supreme Court (2021).

Recordings of Phone Calls Made for Quality Assurance Purposes Must Be Disclosed to ERISA Benefit Claimants

The U.S. Department of Labor on June 14, 2021 responded to an attorney’s request for guidance about whether ERISA’s claims regulations require a plan to turn over recorded phone calls and transcripts of conversations between her client and the plan’s insurance carrier regarding the denial of a claim for disability benefits.

Viewing the issue as having broad application, the DOL issued an information letter, opining that recorded phone calls made for quality assurance purposes must be provided to benefit claimants upon request for the plan’s claims procedures to satisfy ERISA’s full and fair review requirements. In particular, the DOL rejected the plan’s position that the audio recordings need not be disclosed because the conversations were not recorded to administer benefit claims, but for “quality assurance purposes.”

In addition, the DOL rejected the plan’s argument that the recordings were not part of the administrative record because the recordings were not relied upon in administering the disability claim. ERISA’s regulations provide that a plan does not satisfy the requirement of full and fair review unless the claims procedures provide a claimant may receive upon request copies of “all documents, records, and other information relevant to the claimant’s claim for benefits.” The DOL emphasized that a document or record is “relevant” if it was “generated” in the course of making the benefit determination, even if it was not “relied upon” in making the claims decision. Finally, the DOL clarified that audio, video and other electronic or digital records are subject to disclosure under ERISA’s claims procedure rules.

Plan administrators should work with their carriers or third party administrators to ensure that such recordings are retained for the relevant limitations period, and are disclosed upon request, even if the recordings were not relied upon in denying the claim.

DOL Information Letter 06-14-2021 - https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-14-2021

Beneficiary in ERISA Plan Must Exhaust Administrative Procedures Before Filing a Lawsuit

Mrs. Yates’ husband died from a heroin overdose. Mr. Yates was a participant in an ERISA employee benefit plan that provided group life insurance policy coverage and also accidental death and dismemberment coverage. After Mr. Yates’ death, Mrs. Yates filed a claim under both coverages. The insurance company paid the life insurance benefit but denied the accidental death benefit on the grounds that the death was excluded from coverage because it was caused by an intentional self-inflicted injury. Mrs. Yates filed a lawsuit under ERISA claiming the accidental death benefit. The insurance company moved to dismiss, stating that Mrs. Yates had failed to follow all administrative procedural remedies.

The insurance contract and plan did not spell out all of the procedures that needed to be followed following a claim denial. However, the claim denial indicated that Mrs. Yates could file an appeal of the claim denial. The denial letter language on filing an administrative appeal was permissive and non-mandatory.

The District Court for the Eastern District of Missouri held that Mrs. Yates must complete the appeal of the initial claim denial before filing a lawsuit under ERISA. The court held that allowing a lawsuit to proceed on the administrative record that exists following the initial claim denial would not be the best record. The court also found that the usual exception to claim exhaustion, that an appeal would be futile, was not present.

Yates v. Symetra Life Ins. Co., (E.D. Mo. 2021)

Fifth Circuit Construes Ambiguous Disability Plan Terms in Favor of Plan Participant

The Fifth Circuit held that an insurance company must provide long-term disability benefits to a plan participant, despite the fact the participant was on short-term disability leave when the insurance company took over his employer’s policy.

In this case, a Louisiana ship pilot was out on short-term disability leave when Reliance Standard Life Insurance Company took over his employer’s insurance plan. A short while later, the ship pilot briefly returned to work, but he was reinjured and went back on short-term disability. When those benefits expired, the ship pilot applied for long-term benefits which was denied by Reliance.

Reliance denied the claim based on their policy’s transfer provision, which they said showed the ship pilot’s coverage under the plan took effect on the first of the month after he returned to work instead of when they took over the plan (despite the fact Reliance approved his second short-term disability benefits). As such, Reliance denied the claim as an excluded preexisting condition based on how they defined it in their plan. When the ship pilot sued, the district court agreed with Reliance and granted summary judgement in their favor.

On appeal, the Fifth Circuit reversed the district court and found in favor of the ship pilot. Its decision was largely based on the maxim contra proferentem which stands for the principle that contracts should be construed against the drafter when they are ambiguous. Here, it meant the insurance contract should be given its ordinary and generally accepted meaning, but ambiguous terms should be construed in favor of the ship pilot.

The Fifth Circuit found that the transfer provision drafted by Reliance was ambiguous in multiple respects. For example, the Court noted that the term “active”—a term that was undefined but critical to interpreting the transfer provision—could mean that a party is able and available to work, but not present on that day or it could also mean non-retired. Further, the court found that the definition of “Full-time” and its reference to a “regular work week” was also ambiguous. Hence, when all of these terms were interpreted in favor of the ship pilot, the Court found that the ship pilot was entitled to long-term disability benefits.

This case illustrates the importance of vigilant drafting. A court is going to interpret any ambiguous contract against the drafter, so it is crucial to make sure terms are defined properly and carefully.

Miller v. Reliance Standard Life Ins. Co., 999 F.3d 280 (5th Cir. 2021).

IRS Rules Assets of an Inherited IRA May Not Be Transferred to a Non-IRA Account and then Back to the Inherited IRA Account

When an individual died, the individual's IRA became an inherited IRA for the benefit of a trust. The IRA custodian advised the trustees of the trust that they could not trade stocks in the IRA and that the assets of the IRA would have to be transferred to another account in order to trade stocks. Following the custodian's advice, the trustees transferred substantially all of the IRA assets to a non-IRA account held by the custodian for the benefit of the trust. Several months after the transfer of the IRA assets to a non-IRA account, the trust requested an IRS ruling that it be permitted to reverse the transfer so that the assets in the non-IRA account may be transferred to an inherited IRA account for the benefit of the trust. The IRS ruled the assets may not be transferred from the non-IRA account to an IRA account. Assets in an inherited IRA for the benefit of a trust are not permitted to be rolled over under Internal Revenue Code section 408(d)(3). The only permitted method of transferring assets from an inherited IRA to another inherited IRA is via a trustee-to-trustee transfer, which requires a direct transfer from one IRA to another IRA. Therefore, once the assets were distributed from an inherited IRA, there is no permitted method of transferring them back into the IRA. The trust may not transfer the IRA assets held in the non-IRA account into any IRA account, and the IRA assets transferred to the non-IRA account generally must be included in gross income for the year in which the IRA assets were distributed (i.e., transferred to the non-IRA account). While this ruling is directed only to the taxpayer that requested it and may not be used or cited as precedent, the ruling illustrates how strictly the IRS interprets and applies the inherited IRA rules.

IRS Private Letter Ruling 202125007.