The Employee Benefits practice group is pleased to present the Benefits Developments Newsletter for the month of August, 2017. Click through the links below for more information on each specific development or case.
Affordable Care Act – “I’m not dead yet!”
The Patient Protection and Affordable Care Act (ACA) remains in place despite numerous recent attempts to repeal and/or replace it. Employers qualifying as “Applicable Large Employers” under the Shared Responsibility provisions of the law continue to be responsible for offering affordable coverage to their full-time employees (or face potential penalties) and for complying with the annual ACA reporting obligations. Responding to recent inquiries, the IRS Office of Chief Counsel issued two letters reaffirming its commitment to enforcing these rules. Referring to President Trump’s Executive Order directing federal agencies to reduce potential burdens imposed by the ACA, the IRS letters note that “the Executive Order does not change the law; the legislative provisions of the ACA are still in force until changed by the Congress, and taxpayers remain required to follow the law and pay what they may owe.” Also, employers preparing for open enrollment season will continue to be responsible for the distribution of Summary of Benefits and Coverage (SBCs) for their medical benefits. For 2017, the Department of Labor has updated the SBC model to include a statement indicating whether the plan provides minimum essential coverage and meets the minimum value standard. The new SBC template also contains additional information on cost sharing and a new coverage example for a simple fracture. A copy of the new model SBC notice can be found here.
Major Changes to IRS Determination Program for Individually Designed Plans
Effective this year, the IRS has overhauled its determination letter program in a revenue procedure (2016-37) that sweeps away the staggered five-year remedial amendment periods previously used to gauge whether individually designed retirement plan documents conformed to the requirements of the Code. The IRS will no longer periodically review and issue determination letters for individually designed plans. IRS determination letters will only be available for individually designed plans upon commencement and termination of the plan. Going forward, individually designed retirement plans may not seek a determination from the IRS for any interim amendments. The IRS will provide an annual “Required Amendments List” and “Operational Compliance List” to help plan sponsors track their plan’s conformity to changes in the law.
With this guidance, individually designed plans can continue to rely upon an existing favorable determination letter only respecting plan provisions that are not amended or altered through subsequent changes in the law. Future legislation or design changes will eventually erode the plan sponsor’s ability to rely upon its existing determination letter. As determination letters are essential legal compliance documents for employers who sponsor tax qualified retirement plans, plan sponsors should consider carefully whether they wish to adopt a pre-approved plan, or maintain the qualified status of their customized document through active review and management utilizing the annual IRS lists. That decision may hinge on the extent to which custom formulas, legacy benefits or other unique features can be accommodated in a pre-approved plan format.
Alongside its decision to dismantle the determination letter program for individually designed retirement plans, the IRS has issued a revenue procedure (2017-41) substantially restructuring the opinion letter process for pre-approved plans (i.e. prototype plan documents, volume submitter plan documents, etc.). The restructured opinion letter process broadens the availability and flexibility of pre-approved plans, which may encourage some sponsors of individually designed plans to convert to pre-approved plans. For plan sponsors electing not to convert to a pre-approved plan format, it is essential to develop a process for monitoring the annual IRS lists and demonstrating both the qualified status of the plan document and the internal controls in place to ensure operational compliance.
The discontinuation of the determination letter program for individually designed plans creates uncertainty and risk for plan sponsors. The inability to definitively demonstrate the qualified status of a retirement plan document may affect plan sponsors in many circumstances, including mergers and acquisitions, obtaining and maintaining credit facilities, responding to auditors, utilizing voluntary compliance programs, and responding to potential IRS examination. Plan sponsors of individually designed plans should work with their legal advisors to develop a strategy to address the significant changes brought about by the elimination of the IRS determination letter program.
Medical Plan Administrator Settles with the Department of Labor
The U.S. Department of Labor (DOL) and a third-party administrator of self-insured group health plans recently agreed to settle a lawsuit in which the DOL alleged that the third party administrator breached its fiduciary duties and committed prohibited transactions in violation of ERISA in connection with certain undisclosed “Network Management Fees” it charged to ERISA-covered plans, its handling of emergency room claims, and its procedure for third party recoveries (i.e., so-called subrogation claims). In addition to the payment of $16,000,000, consisting, in large part, of the return of the undisclosed network management fees to the affected health plans, the third party administrator agreed to improve its claims procedures and communications with health plans. The settlement is memorialized in a consent order. Additional details are in the complaint and consent order.
The facts set forth in this article are derived from allegations contained in the DOL’s complaint and the consent order, and should not be taken as true.
Undisclosed Network Management Fees
According to the complaint, the third party administrator unilaterally imposed a fee – a surcharge – that was added to the charges paid by the health plans to certain medical providers in the administrator’s network. While the existence of the fee was disclosed in the administrative services agreement, the services agreement did not disclose the amount of the fee. Furthermore, the administrator’s monthly invoices and year-end fee summaries did not identify the fee or disclose the amount of the fees. If true, the administrator’s clients had no way of knowing what the medical provider received and what the administrator kept as its so-called network management fee. The complaint alleges that the lack of transparency with respect to the fee enabled the administrator to unilaterally increase the fees without the advance consent of the health plan and prevented the ERISA-covered health benefit plans from filing accurate federal Form 5500 financial reports with the government.
To resolve these allegations, the administrator agreed, among other things, to the following:
To return at least $14.5 million in network management fees to ERISA health benefit plans, and provide complete and accurate disclosures regarding its fees.
To offer to all of its health plan clients, the option of a fixed fee arrangement, with no network management fee or other embedded fee.
For clients who do not choose the fixed fee arrangement, to reprice prospective actual claims over a period not to exceed one year or provide an up-front estimate of the network management fees that a client could expect to incur in a calendar year (or both).
To provide prospective clients that have not chosen a fixed fee arrangement with access to network provider fee schedules for each CPT code and the administrator’s network fee for each CPT procedure.
To amend its administrative services agreement so that it clearly discloses the existence of the network management fee.
To not increase any network management fee without giving the health plan at least 90 days advance written notice and the opportunity to terminate the arrangement if it does not agree with the fee hike.
To disclose totals of network management fees no less frequently than quarterly, and to provide cumulative network management fees on an annual basis for 5500 reporting purposes.
To provide each health plan a report covering the past three years that separately states for each year the amount of the network management fees.
Emergency Room Claims
In its complaint, the DOL alleged that the administrator’s claims processing procedures and disclosures were inadequate. Among other things, the complaint alleges that the administrator’s EOB denials did not reference the standard for determining whether an illness or injury qualified for emergency room coverage; did not explain that the claim was denied for lack of sufficient information demonstrating an emergency medical condition; did not reference the specific plan provisions on which the adverse benefit determination was based; and did not describe the Plans' review procedures, applicable time limits, or that the participant or beneficiary has a right to bring a civil action under ERISA. The administrator agreed to take various steps (detailed in the consent order) to remedy these alleged violations.
Third Party Recovery (i.e., Subrogation)
The complaint alleges that the administrator often did not administer the health plan’s third party recovery provisions in compliance with the plan document or the DOL’s claims procedure regulation. To settle these allegations, the administrator agreed to take a number of detailed and specific steps that are described in detail in the consent order.
What Employers Can Learn From This Settlement
Self-insuring medical benefits is a major undertaking, and involves a significantly greater commitment to the details of plan administration than what is required in connection with the oversight of a plan that is fully insured. Employers that self-insure have a fiduciary duty to supervise their third party administrators to ensure that they are performing their services in compliance with the terms of the plan and ERISA requirements. In this case, the hard work was done by the government. Along with a number of other responsibilities, employers must be sure that they are receiving accurate fee disclosures so that they can make informed decisions when selecting a service provider and comply fully with important 5500 reporting responsibilities. ERISA regulations contain detailed requirements regarding the manner in which claims are to be administered, including, most importantly, requirements that detail the timing and content of claim denial notices. In this case, the DOL alleged that the EOB forms did not meet ERISA requirements. It is likely that by the standards of this settlement, many EOB forms that communicate denials fail to meet the standards set forth in the consent order. Employers should undertake a review of their health plans claims procedures to ensure compliance with ERISA.
Equitable Estoppel; If You Tell Someone Something Regarding a Plan, in the Right Situations it Becomes True
Deschamps v. Bridgestone Ams. Inc. (6th Cir. 2016)
Andres Deschamps worked for 10 years at a Bridgestone Tire plant in Canada. Deschamps was then offered a position at a Bridgestone facility in the United States. Deschamps was concerned about losing credit for his 10 years of service if he transferred to the United States. As part of his negotiation of benefits during the hiring process, Deschamps spoke with the plant manager, a human resources manager, a director of manufacturing, and the plant controller. Deschamps believed these individuals when they told him that he would be given pension credit for the U.S. pension plan for his service back to 1983 when he started working in Canada. Deschamps did not receive anything in writing until 1994 when he received a benefits statement which reflected the ten years of service in Canada. During his years of employment in the U.S., he received benefit summaries and materials which were consistent with the crediting of these 10 years of service.
In 2009 or 2010, Bridgestone began to investigate service crediting for various individuals who had transferred employment. In 2010, Deschamps discovered that his service date had been changed from 1983 to 1993 causing him to lose his 10 years of service in Canada. The governing Bridgestone U.S. retirement plan describes five classifications of employees who are eligible employees. As written the individual must have been in one of the five classifications to be eligible. The first classification was United States salaried employees. Bridgestone appears to have interpreted this provision as requiring that anyone who was in any of the five covered groups must have be a United States employee to be a participant in the plan. This was the basis for Bridgestone’s denial of the 10 years of service credit.
The District Court for the Middle District of Tennessee and, on appeal, the U.S. Sixth Circuit Court of Appeals found that the plan language only required that a person in any of the five categories would receive service credit. Both Courts found that Deschamps fit into one of the other five categories and therefore, the limitation of being a United States salaried employee did not preclude Deschamps from receiving credit under the Plan. The Courts then examined Deschamps's claim of breach of fiduciary duty and equitable estoppel. Again the Courts found that the individuals speaking on behalf of Bridgestone in the negotiations were acting as fiduciaries with respect to the Plan when they informed Deschamps that he would receive the ten years of service credit. Additionally, the Court was sympathetic to Deschamps's claim of equitable estoppel in that Bridgestone provided materials from 1994 through 2009 indicating that he was to receive credit for the ten years of service in Canada. The Court found that the lengthy period of time in which Bridgestone continued to make these statements overcame the disclaimers in the documents of that they only were an estimate of the pension benefit and the pension plan documents were controlling.
Employers should remember that statements made to an individual regarding their retirement benefits may be made in a fiduciary capacity and that if the individual relies on those statements, the plan may be obligated to provide benefits consistent with those statements. Deschamps v. Bridgestone Ams. Inc. (6th Cir. 2016)
DOL Scores Only Partial Victory in an Investment Manager Case
Perez v. WPN Corporation (W.D. Pa. 2017)
The U.S. Department of Labor (DOL) filed a lawsuit in a Pennsylvania federal court alleging that a retirement plan committee and its members violated their ERISA fiduciary duties because qualified retirement plan assets were not properly invested for a period during which the committee believed it had a valid agreement in place with an ERISA Section 3(38) investment manager. The DOL further alleged the retirement plan committee and its members were liable as co-fiduciaries for the investment manager’s mismanagement of plan assets that resulted in millions of dollars in losses, and were also liable for failing to comply with the duty to monitor the appointed investment manager.
The plan committee and its members filed a motion to dismiss the DOL claims. As to allegations of failing to invest plan assets and co-fiduciary liability, the Committee asserted that because an investment manager had been appointed and was responsible for investing plan assets, they were relieved from any such liability under ERISA Section 405(d)(1) for the acts or omissions of the investment manager and from any obligation to invest the plan assets. The DOL argued, among other things, that the language of ERISA Section 405(d)(1) only insulates “trustees” and that none of the defendants were in fact plan trustees. The defendants countered by arguing that it is a reasonable reading of ERISA to conclude that any plan fiduciary with the authority to control and manage plan assets (including the authority to appoint a 3(38) investment manager) is entitled to the protection of ERISA 405(d)(1), regardless of whether the fiduciary is a “trustee.”
With respect to the DOL’s claims relating to failure to invest and co-fiduciary liability, the court sided with the plan committee and ruled that named fiduciaries who have the authority to control plan assets and who have properly appointed an investment manager are protected from liability by ERISA Section 405(d)(1), even though they are not the appointed plan trustees. Because ERISA allows for the possibility that a named fiduciary other than the plan trustee will have the power to control or manage the assets of a retirement plan, the court found it is logical to conclude that whoever had control over the plan assets prior to the appointment of the investment manager should obtain the benefit of the protections afforded by ERISA Section 405(d)(1).
The court, however, was unwilling to dismiss the DOL’s claim based on the plan committee’s failure to properly monitor the appointed investment manager. In deciding that the DOL properly stated a claim of failure to monitor, the court determined that an appointing fiduciary is required to put reasonable procedures in place and follow the procedures so that the fiduciary can review and evaluate whether an investment manager is properly discharging its responsibilities. While the record before the court was not sufficient to evaluate the committee’s conduct with respect to its monitoring of the investment manager in this case, the court found that the DOL had properly stated its failure to monitor claim.
The court’s rulings in this case provide an important reminder of the potential advantages of using an investment manager to shield the appointing plan fiduciary from liability associated with appointing an investment manager to invest plan assets. However, the appointing fiduciary is not totally without responsibility once the investment manager has been appointed – the appointing fiduciaries are required to have procedures in place that will allow them to review and evaluate whether the investment fiduciaries (in this case, the investment manager) are properly discharging their investment responsibilities. Perez v. WPN Corporation (W.D. Pa. 2017)