As we do every month, we have provided below a comprehensive alert that highlights the most important employee benefits legal developments during May of 2015. We hope that our “Monthly Benefits Updates” continue to be a resource for busy benefits professionals who need to stay on top of developments in the benefits area. Our Updates continue to be focused on the clients we serve—namely, employers and other plan sponsors.
Supreme Court Rules That Fiduciary Breach Claims Related to 401(k) Investment Options Not Time-Barred by ERISA’s Six-Year Limitations Period
The United States Supreme Court unanimously ruled in Tibble v. Edison Int’l that a suit alleging a breach of fiduciary duty for failure to properly monitor investment options in a 401(k) plan was not time-barred because it was brought more than six years after the investment options in question were added to the plan. The Employee Retirement Income Security Act of 1974 (ERISA) contains a six-year statute of limitations with respect to suits alleging breaches of fiduciary duty. The Court stated in its decision that, under trust law, a fiduciary generally has a continuing duty to monitor investment options and remove imprudent ones. The Court held that a lawsuit alleging fiduciary breach is not time-barred so long as the alleged breach occurred within six years of the suit’s filing (even if more than six years have passed since the investment option was added to the plan). The Court, however, did not articulate the scope of a plan fiduciary’s continuing duty to monitor plan investments, leaving this question for lower courts.
The Court’s ruling in Tibble overturned a Ninth Circuit ruling that rejected the suit as time-barred, because it was brought more than six years after the investment options in question were added to the plan. Other federal circuits, including the Fourth and Eleventh Circuits, had issued rulings similar to the Ninth Circuit.
Although the decision in Tibble is not surprising, it may make it easier for plaintiffs to bring fiduciary breach claims related to plan fiduciaries’ monitoring of (or failure to monitor) investment options that were first added to a defined contribution plan many years prior, based on the theory that the fiduciaries failed to adequately monitor the investment options after the options were initially selected.
Aside from the potential for more litigation activity generally, the practical impact of the Tibble decision on plan fiduciaries depends largely on how involved and active the fiduciary is today. Sophisticated plan fiduciaries that have a formal fiduciary governance structure in place that select and regularly monitor plan investment options with the assistance of expert investment and other professionals, and that thoroughly document their selection and monitoring process may not be materially impacted by this decision. Although lower courts and plaintiffs may interpret Tibble to somehow add to the sophisticated plan fiduciary’s obligation to continually monitor plan investments, the Supreme Court’s decision does not on its face alter the monitoring requirement that ERISA already imposes on fiduciaries.
On the other hand, the decision is a loud wake up call for defined contribution plan sponsors that do not have a formal fiduciary governance structure in place. Plan sponsors and fiduciaries that do not regularly monitor investment options in their plans or that do not properly document their monitoring activities with the assistance of experts should strongly consider a more active approach to plan governance in response to the Tibble decision.
EBSA Releases Plan Audit Quality Report, Recommends Stricter Plan Audit Standards
The DOL’s Employee Benefits Security Administration (EBSA) released a report assessing the quality of audit work performed by certified public accountants with respect to financial statement audits of retirement and welfare plans subject to ERISA. Benefit plans subject to ERISA must conduct annual financial audits as part of their annual Form 5500 filings unless they qualify for an exemption. The EBSA report is based on a sample of 400 plan audit reports filed in the 2011 filing year (according to the report, more than 81,000 audit reports were filed by more than 7,300 licensed CPAs for the 2011 filing year).
The EBSA study found that 39 percent of the audits reviewed contained major deficiencies with respect to one or more relevant Generally Accepted Auditing Standards (GAAS) requirements, putting $653 billion dollars in plan assets and 22.5 million plan participants and beneficiaries at risk, according to the report. The report stated that these numbers reflect an increase in the amount of plan assets and participants at risk compared with prior EBSA studies. The remaining 61 percent of audits, according to the study, complied with auditing standards or contained only minor deficiencies.
The study also found a correlation between the number of plan audits performed by the CPA and the quality of the audit work performed. CPA firms who performed only one or two plan audits during the 2011 filing year had a 76 percent deficiency rate, while CPA firms who performed the most plan audits had a deficiency rate of only 12 percent, according to the EBSA study. In addition, the EBSA study found that CPAs who were members of the American Institute of CPAs’ (AICPA) Employee Benefit Plans Audit Quality Center tended to have lower deficiency rates.
As a result of the study’s findings, the EBSA report made 11 recommendations related to enforcement, legislation, regulations, and outreach. Notably, the report recommended targeting CPA firms with smaller auditing practices that audit plans with large amounts of plan assets, and coordinating with AICPA and state accounting boards to improve investigation and sanctioning of CPAs whose work is significantly deficient. In addition, the report recommended amending ERISA to make sure civil penalties associated with annual reporting focus on the responsible party. Specifically, the report proposed authorizing the Secretary of Labor to assess a penalty of up to $1,100 per day against an accountant who performed an ERISA plan audit that was rejected due to a deficient audit. Other notable recommendations made in the report include amending the definition of “qualified public accountant” to include additional requirements and qualifications related to ensuring the quality of plan audits, amending ERISA to repeal the limited-scope audit exemption (applicable to plans with assets held in regulated entities such as financial institutions), and amending ERISA to authorize the Secretary of Labor to establish additional accounting principles and audit standards related to audit quality.
Plan administrators and plan sponsors should be aware of the EBSA report and its recommendations because it may result in plan auditors significantly increasing the rigor of their annual audit procedures.
IRS Makes Permanent Late Filing Relief for “One-Participant” and Certain Foreign Retirement Plans
The IRS issued guidance making permanent a program providing relief to certain retirement plans from penalties associated with late filings of Form 5500s. The IRS had previously made the program available on a temporary basis about one year ago. Only “one-participant” plans and certain foreign plans are eligible for the relief. One-participant plans include retirement plans maintained by small businesses that cover only the owner or the owner and the owner’s spouse, and plans maintained by partnerships with one or more partners that only cover the partners of the businesses and their spouses. Foreign plans eligible for the relief include retirement plans maintained outside of the United States primarily for nonresident aliens. These plans can be maintained by domestic or foreign employers with income derived from sources within the United States and that deduct contributions to their plans from their U.S. income tax return. No plan that is subject to Title I of ERISA is eligible for the relief.
Unlike the temporary program, the permanent program requires a payment of $500 per delinquent return for each plan, with a maximum of $1,500 per plan. Because of the payment requirement, applicants may not combine returns for multiple plans in a single submission as they could in the temporary program, but will be able to combine multiple returns for a single plan in one submission. Applicants utilizing the relief program must also submit delinquent returns on the Form 5500-EZ for the year in which the return was delinquent. For years prior to 1990, for which returns are difficult to obtain, applicants may use a Form 5500-EZ for the current year and identify the beginning and end dates of the plan year for which the return was delinquent. Finally, applicants must also submit a Form 14704 Transmittal Schedule with each submission. The program goes into effect June 3, 2015.
Health & Welfare Plans
Class Action Suit Alleges Dave & Buster’s Cut Employee Work Hours to Skirt ACA Obligation to Offer Health Coverage
In the first lawsuit of its kind, a purported class of approximately 10,000 workers at Dave & Buster’s, the restaurant chain, filed a lawsuit in the Southern District of New York (Marin v. Dave & Buster’s, Inc., S.D.N.Y., No. 1:15-cv-03608) alleging that their employer reduced the workers’ hours to keep them from attaining full-time status for the purpose of avoiding the requirement to offer them health coverage under the Affordable Care Act’s (ACA’s) employer mandate. The ACA’s employer mandate generally requires large employers to offer affordable and minimum value health coverage to their full-time employees (employees who regularly work an average at least 30 hours per week). Employers are not generally required to offer coverage to employees working less than 30 hours per week on average. After the employer mandate took effect, many employers have been moving employees to part-time status to avoid triggering penalties under the employer mandate.
The theory in this case is that ERISA Section 510, which prohibits employers and plan sponsors from interfering with an employee’s attainment of benefits, effectively prohibits employers from reducing work hours for the purpose of avoiding the requirement to offer health coverage under the ACA. For several years, commentators have been predicting that plaintiffs would eventually file lawsuits like this one, and that ERISA Section 510 would be the basis for those lawsuits. This case is significant because many other employers have implemented similar strategies striving to limit work hours for certain groups of employees for the purpose of avoiding penalties under the ACA. Although we would argue that this type of strategy, if structured properly, does not interfere with employees’ attainment of benefits under ERISA Section 510, at least one court may now weigh in on the issue. Employers should therefore watch this case closely, as it will impact the now-common practice of structuring employee work hours so as to manage financial exposure under the ACA.
Departments Issue Additional Guidance on Preventive Services
The Departments of Labor (DOL), Health and Human Services (HHS), and Treasury (collectively, the Departments) issued guidance in the form of FAQs on the ACA’s preventive services mandate. The ACA requires non-grandfathered plans to cover certain preventive services, including contraceptive coverage and BRCA testing (screening and genetic counseling for breast cancer susceptibility genes), among others, at no cost to participants. The FAQs provided guidance on the following preventive services topics.
The guidance provided that plans must cover without cost-sharing at least one form of contraception in each contraceptive method identified by the Food and Drug Administration (FDA). The FDA has currently identified 18 separate contraceptive methods in its Birth Control Guide. The coverage must also include clinical services, such as patient education and counseling, as needed for each contraceptive method.
The FAQs stated that plans may utilize “reasonable medical management techniques” within each contraceptive method, which includes imposing cost-sharing on some items and services to encourage individuals to use other specific items and services within the contraceptive method. However, the guidance provided, if an individual’s physician recommends a particular service or FDA-approved item based on a determination of medical necessity, the plan must cover that service or item without cost-sharing.
The FAQs clarified that non-grandfathered plans must cover BRCA testing and genetic counseling for women who have not been diagnosed with BRCA-related cancer, but who previously had breast cancer, ovarian cancer, or other cancer.
Coverage of Sex-Specific Preventive Services
Regarding coverage of preventive services for transgender individuals, the guidance stated that non-grandfathered plans cannot restrict coverage of sex-specific preventive services (e.g., mammograms or pap smears) based on an individual’s sex at birth, gender identity, or sex of the individual otherwise recorded by the plan.
Coverage of Women’s Preventive Services for Dependent Children
The FAQs stated that if a non-grandfathered plan provides coverage for dependent children, it must also cover certain women’s preventive care services, including services related to pregnancy, preconception and prenatal care, without cost-sharing, as developmentally appropriate.
Coverage of Anesthesia During Colonoscopy Screenings
The ACA’s preventive services mandate requires that non-grandfathered plans cover colonoscopy screenings without cost-sharing. The guidance states that plans must also cover anesthesia services performed in connection with preventive colonoscopies if the attending physician determines that anesthesia would be medically appropriate.
IRS Publishes FAQs Related to ACA Reporting for Employers
The Internal Revenue Service (IRS) recently published a set of questions and answers on its website providing additional guidance on ACA reporting obligations for employers. As we have written in previous alerts, these reporting rules are set forth under Internal Revenue Code Sections 6055 (for sponsors of self-insured plans) and 6056 (for large employers).
Notably, the IRS clarified that an applicable large employer (ALE)—generally an employer with at least 50 or more full-time equivalent employees—that did not have any full-time employees in any month of the calendar year is not required to report whether it offered health coverage that provides minimum value and is affordable under the ACA; however, if such an employer sponsors a self-insured health plan, it is still required to file a Form 1094-C and Form 1095-C. The guidance also states that an ALE is required to report under Code Section 6056 for a full-time employee who was not offered health coverage, and must furnish a copy of the reporting (which is generally Form 1095-C) to the employee. In addition, the IRS clarified that a non-ALE employer that sponsors a self-insured health plan is not subject to reporting under Code Section 6056, but is subject to Code Section 6055 reporting obligations; such an employer must therefore file a Form 1094-B and Form 1095-B with respect to its self-insured health plan.
The question and answer set contains guidance on many other ACA reporting topics, including timing and methods of reporting; the 98 percent offer method, furnishing returns to employees and former employees; and potential penalties.
These reporting rules, as we have previously discussed, went into effect at the beginning of 2015, and the first reports will be due in early 2016. Given the complexity of these reporting requirements and the fact that ACA employer mandate penalties will be assessed to employers based on the these reports, employers of all sizes need to be planning now in order to be ready to fulfill their reporting obligations at the end of the year.
Departments Issue FAQs on Cost-Sharing and Restated Enforcement Approach on Provider Nondiscrimination Rules under ACA
The Departments issued FAQs clarifying prior guidance on the ACA’s cost-sharing limitations applicable to non-grandfathered plans, and restating their enforcement approach with respect to the ACA’s provider nondiscrimination rules.
The ACA imposes maximum annual dollar limitations on participant out-of-pocket costs in non-grandfathered plans. The dollar limitations for plan years beginning in 2015 are $6,600 for self-only coverage and $13,200 for other than self-only coverage. For plan years beginning in 2016, the limitations are $6,850 for self-only coverage and $13,700 for other than self-only coverage. The FAQs clarify that the maximum annual limitation on cost-sharing for self-only coverage applies to each individual, regardless of whether the individual is enrolled in self-only coverage or in other than self-only coverage (e.g. family coverage). For example, for a family of four individuals who are enrolled in family coverage in a non-grandfathered plan, each individual’s annual out-of-pocket costs may not exceed the limit for self-only coverage ($6,850 for 2016). In addition, the four individuals’ combined out-of-pocket costs cannot exceed the dollar limit for coverage other than self-only ($13,700 for 2016).
The guidance states that this requirement will be enforced for plan years starting in 2016. The guidance also clarifies that this requirement applies to all non-grandfathered plans, whether self-insured or fully insured, including high-deductible health plans.
Provider Nondiscrimination Rules
The ACA’s provider nondiscrimination rules, set forth in the Section 2706(a) of the Public Health Service Act (PHSA), provide that that health plans “shall not discriminate with respect to participation under the plan…against any health care provider who is acting under the scope of that provider’s license or certification under applicable State law.” Importantly, the rules do not require health plans to “contract with any health care provider willing to abide by the terms and conditions for participation established by the plan” or prevent plans from “establishing varying reimbursement rates based on quality or performance measures.” In the FAQs, the Departments restated their enforcement approach with respect to the ACA’s provider nondiscrimination rules, stating that until further guidance is issued, the Departments will not take any enforcement action with respect to these rules as long as a plan is using a “good-faith, reasonable interpretation” of the statutory provisions containing the rules (Section 2706(a) of the PHSA).
The Departments stated in the FAQs that the revised enforcement approach was in light of more than 1,500 comments received in response to a request for information issued by the Departments in March 2014 on the ACA’s provider nondiscrimination rules, and documents from the Senate and House appropriations committees directing the Departments to clarify the rules.