FOCUS on Benefits EMPLOYEE BENEFITS February 2008 EEOC RELEASES FINAL REGULATIONS ON RETIREE HEALTH The Equal Employment Opportunity Commission (EEOC) has released long-awaited final regulations clarifying that the well- established practice of coordinating employer-provided retiree health coverage with eligibility for Medicare or a state-sponsored retiree health benefit program is not age discriminatory and does not violate the Age Discrimination and Employment Act (ADEA). While enjoying strong support from the business community, this practice has been challenged for several years by the American Association of Retired Persons (AARP). BACKGROUND Last summer, the U.S. Court of Appeals for the Third Circuit ruled in favor of an EEOC regulation governing the ADEA. (See the July 2007 issue of FOCUS on Benefits.) In AARP v. Equal Employment Opportunity Commission, the court ruled that the EEOC “reasonably exercised” its exemption authority under the ADEA when the commission proposed regulations permitting the coordination of retiree healthcare benefits with Medicare eligibility. The EEOC first proposed its regulation in 2003 to exempt from the ADEA the practice of altering, reducing or eliminating employer- sponsored retiree health benefits when retirees become eligible for Medicare or a state-sponsored retiree health benefits program. The proposal was made in response to Erie County Retirees Association v. County of Erie, 220 F.3d 193 (3d Cir. 2000). In Erie County, the Third Circuit court ruled that a retiree medical plan discriminated in favor of younger retirees and therefore violated the ADEA. The Supreme Court later declined to hear this case, allowing the Third Circuit’s decision to stand as the rule in that jurisdiction. In Erie County, the plan in question required retirees who were eligible for Medicare to accept a coordinated plan provided by a combination of an HMO and Medicare. Younger retirees had coverage under a point- of-service plan, so they could choose between traditional indemnity and HMO coverage at the time of service. In Erie County the court held that, since younger retirees were being treated differently than older retirees, unless the employer could prove that the plan met the equal benefit or equal cost test, the plan violated ADEA. (Note: Other courts have rejected the Third Circuit’s analysis, arguing, among other things, that the plain language of the ADEA statute limits protections to apply only to active employees.)
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FOCUS on BenefitsEMPLOYEE BENEFITS
February 2008
EEOCRELEASES FINALREGULATIONS ONRETIREE HEALTHThe Equal Employment OpportunityCommission (EEOC) has released long-awaitedfinal regulations clarifying that the well-established practice of coordinatingemployer-provided retiree health coverage witheligibility for Medicare or a state-sponsoredretiree health benefit program is not agediscriminatory and does not violate the AgeDiscrimination and Employment Act (ADEA).While enjoying strong support from thebusiness community, this practice has beenchallenged for several years by the AmericanAssociation of Retired Persons (AARP).
BACKGROUNDLast summer, the U.S. Court of Appeals for the Third Circuit ruled infavor of an EEOC regulation governing the ADEA. (See the July 2007issue ofFOCUS on Benefits.) InAARP v. Equal EmploymentOpportunity Commission, the court ruled that the EEOC “reasonablyexercised” its exemption authority under the ADEAwhen thecommission proposed regulations permitting the coordination ofretiree healthcare benefits withMedicare eligibility.
TheEEOC first proposed its regulation in 2003 to exempt from theADEA the practice of altering, reducing or eliminating employer-sponsored retiree health benefitswhen retirees become eligible forMedicare or a state-sponsored retiree health benefits program. Theproposalwasmade in response toErie CountyRetirees Association v.County of Erie, 220F.3d 193 (3dCir. 2000). InErie County, theThirdCircuit court ruled that a retireemedical plan discriminated in favor ofyounger retirees and therefore violated theADEA. The SupremeCourtlater declined to hear this case, allowing theThirdCircuit’s decision tostand as the rule in that jurisdiction.
InErie County, the plan in question requiredretireeswhowere eligible forMedicare toaccept a coordinated plan provided by acombination of anHMOandMedicare.Younger retirees had coverage under a point-of-service plan, so they could choose betweentraditional indemnity andHMOcoverage atthe time of service. InErie County the courtheld that, since younger retireeswere beingtreated differently than older retirees, unlessthe employer could prove that the planmet theequal benefit or equal cost test, the planviolatedADEA. (Note: Other courts haverejected theThirdCircuit’s analysis, arguing,among other things, that the plain language oftheADEA statute limits protections to applyonly to active employees.)
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AARPCHALLENGEPublication of the final regulationwasblockedwhen the AARP challenged theEEOC’s authority to issue the exemption. Inthe decision described above, the ThirdCircuit held that the ADEA clearly andunambiguously grants to the EEOC theauthority to provide narrow exemptions fromthe ADEA. The court stated, “Because [theADEA statute] expressly grants the EEOC thepower to implement such exemptions, thereis no question that a limited exemptionshown by the agency to be reasonable,necessary and proper falls within the agency’sauthority under the statute.”
As a result, the initial injunction barring theEEOC rule was lifted. The AARP's legalchallenge next shifted to the SupremeCourt –but the high court denied the AARP's requestto stay the Third Circuit ruling. Meanwhile,an AARP petition for the SupremeCourt toreview the case is still pending.
EEOC RULEThe EEOC regulations are intended to help level the health benefitsplaying field. Specifically, the EEOC rule adds an exemption to thegeneral ADEA rule as applied to employer-sponsored retiree healthplans. The exemptionwould permit coordinating employer-providedretiree health coverage with eligibility forMedicare or state-sponsored retiree health benefits.
The EEOC acknowledged that it took this step in light of:� Rising healthcare costs� The fact that employers arenot required toprovidehealthcare at all� The practical burden of demonstrating compliance with the
ADEA’s equal benefit/equal cost rule when coordinating benefitswithMedicare
The EEOC’s exemption to the general ADEA rule is intended to allowemployer-provided retiree health coverage to coordinate witheligibility forMedicare or state-sponsored retiree health benefits.The EEOC determined that this shows due regard for the purposes ofADEA and permits employers to offer a valuable benefit to earlyretirees whomight not be able to afford the benefits and still providea valuable benefit to retirees who are eligible forMedicare.
Willis, through itsmembership participationwith the AmericanBenefits Council, has consistently urged the EEOC to finalize theproposed rule exempting from the ADEA the coordination ofemployer-sponsored retiree health benefits withMedicare. Thisissue has been critically important to retirees, particularly early orpre-Medicare eligible retirees whowould likely have faced significantreductions in their early retiree health benefits if the commissionhad not acted. The Third Circuit comprises Delaware, New Jersey,Pennsylvania and theU.S. Virgin Islands.
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NEW HAMPSHIRENewHampshire legislators havemade several changes to the state’sinsurance laws. These new lawswill affect employers that offer insuredplans inNewHampshire, but do not affect self-insured plans.
NewHampshire has extended the age limit in its definition ofdependent from 18 to 26. The definition provides that a dependent isa participant’s child who is:� Less than 26 years of age� Unmarried� A resident of NewHampshire or is enrolled as a student at a
public or private institution of higher education� Not covered under any other group or individual health plan or
entitled to benefits under certain governmental programs
TheNewHampshire Insurance Department has prepared a bulletinthat provides additional guidance on the application of this law.
Effective January 1, 2008, former spouseswill be entitled tocontinuation coverage under the policy andwill remain eligible forcoverage until the earliest of the following events:� Remarriage of the former spouse� Remarriage of themember participant� Death of themember participant� Three-year anniversary of the final divorce decree or legal
separation� Such earlier time as provided by the final decree of divorce or
legal separation
TheNewHampshire Insurance Department has prepared a bulletin,avaiable to the public, that provides additional guidance on this law’sapplication.
Also effective January 1, 2008, is NewHampshire’s recognition ofcivil unions. The law grants couples entering civil unions the samerights, responsibilities and obligations asmarried couples. In a recentbulletin the NewHampshire Insurance Department confirmed thatthese rights extend to insurance coverage. The law requires allinsurance plans that include dependent coverage to be amended toinclude coverage for civil union couples.
STATE OF THESTATES: SELECTEDUPDATES
MASSACHUSETTSUnder theMassachusetts Health CareReformAct, employers are required toprovide employees who reside inMassachusetts and are covered by theemployer’s health planwith anMA 1099-HCform by January 31 of each year. This is a taxform thatMassachusetts taxpayers need tocomplete their state income tax returns. Forinsured plans written inMassachusetts, thecarriers will prepare and provide the form.For insured planswritten outside ofMassachusetts, aswell as self-insured plans,the responsibility falls on the employer.
According to theMassachusetts Departmentof Revenue, there is no standardized formatfor FormMA 1099-HC, but they released asample form for the 2007 tax year.
DEADLINEIn order to keep their state personal incometax exemption (about $219 in 2007), residentswere required by theMassachusetts HealthCare ReformAct to have insurance byDecember 31, 2007. The individual healthcoveragemandate could be satisfied throughproof of qualifying employer group coverage,a qualifying individual health insuranceproduct or other qualifying type of coverage.Mandating that residents hold healthinsurance was intended to address theroughly 372,000 uninsured residents. To helpmeet this requirement, the state offersresidents (whose incomes fall within certainguidelines) subsidized health plans calledCommonwealth Care. According to figuresrecently released by the state, approximately160,000 people have enrolled. The state alsooffers residents un-subsidized plans calledCommonwealth Choice, in which only about63,000 residents have enrolled – amuchlower number than expected. Compliancewith the individualmandate will likelyimprove in 2008when the penalty increasesto half the cost of the lowest-pricedCommonwealth Choice plan for eachmonththat the individual does not have coverage.
UNCERTAIN FUTURE:SAN FRANCISCO’SMANDATED COVERAGEORDINANCEA federal district court initially rejected the San FranciscoHealth CareSecurity Ordinance (HCSO) as preempted by ERISA, but almostimmediately on appeal theNinth Circuit ruled in favor of the city’srequest to allow the law to go into effect. Meanwhile, this spring the fullpanel of Ninth Circuit judges will review the legal challenge on the ERISApreemption issue. Until then the situation remains extremely fluid, andmany employers are now left to wonder what their legal obligationwillultimately look like.
SOME BACKGROUNDON THE HCSOIn addition to establishing a healthcare program, SanFrancisco’sHCSOrequires thatmedium-sized and large businessesmake certainminimumcontributions toward their SanFrancisco employees’ healthcare. Under thisprovision, an employermay either contribute at least theminimumamountto amedical plan or other health benefits, or pay that amount into thepublicly available programestablished by theHCSO. (SeeWWiilllliiss EEmmppllooyyeeeeBBeenneeffiittss AAlleerrtt,, Issue 112 for additional details on the HCSO’s requirements.)Other courts that have examined similar "play or pay" requirements in otherjurisdictions have generally regarded such laws as preempted by ERISA.
A CLOSER LOOK ATTHE EFFECTIVE DATEDue to the Ninth Circuit’s ruling, the San Francisco mandate went intoeffect on January 9, 2008. The deadline for employers’ first complianceobligation under the HCSO is April 30, 2008. That is, the employer mustmeet the minimum contribution requirements for the first quarter of 2008by April 30. If an employer plans to do so by providing benefits, the time toimplement necessary plan changes would be January 1 in most cases.
As an alternative to changing its plans, an employer can comply withrespect to some or all of its employees by contributing the minimumamount to the publicly available program established by the HCSO.Moreover, contributions for the first quarter of 2008 are not requireduntil April 30. An employer that wants to take a wait-and-see approach fora few more months could adopt this strategy. Any strategy an employerultimately adopts should be coordinated and implemented after carefulconsideration with legal counsel.
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IRS SETS 2008STANDARD MILEAGERATES: RATE FOR BUSINESS50.5 CENTS/MILE The Internal Revenue Service has published the 2008 optional standard mileage rates used tocalculate the deductible costs of operating an automobile for business, charitable, medical ormoving purposes. As of January 1, 2008, the standard mileage rate for the use of a motorvehicle is:� 50.5 cents per mile for business miles driven� 19 cents per mile driven for medical or moving purposes � 14 cents per mile driven in service of charitable organizations
The new rate for business miles compares to a rate of 48.5 cents per mile for 2007. The newrate for medical and moving purposes compares to 20 cents in 2007. The rate for milesdriven in service of charitable organizations has remained the same.
The standard mileage rate for business is based on an annual study of the fixed and variablecosts of operating an automobile; the standard rate for medical and moving purposes is basedon the variable costs as determined by the same study. The mileage rate for charitable milesis set by law. Revenue Procedure 2007-70 contains additional information on these standardmileage rates.
MISCLASSIFIED WORKERSTO FILE NEW SOCIALSECURITY TAX FORM The Internal Revenue Service has developed a new form for employees who have been misclassified as independentcontractors by an employer. Form 8919, Uncollected Social Security and Medicare Tax on Wages, will now be used tocalculate and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation.
Generally, a worker who receives a Form 1099 for services provided as an independent contractor must report theincome on Schedule C and pay self-employment tax on the net profit, using Schedule SE. However, sometimes theworker is incorrectly treated as an independent contractor when they are actually an employee. Form 8919 will be usedbeginning for tax year 2007 by workers who performed services for an employer when the employer did not withholdthe worker’s share of Social Security and Medicare taxes. A copy of the form can be downloaded from the IRS site.
SPOTLIGHT ON:ERISA AND“PAYROLLPRACTICES”Some types of benefits, which appear to be “employee welfare benefitplans” and which would otherwise be subject to ERISA, are exemptfrom ERISA if they fall within the payroll practices exemption. Thefour conditions the DOL has established for an exemption are:� No contributions are made by an employer or employee
organization.� Participation in the program is completely voluntary for
employees or members.� The functions of the employer or employee organization with
respect to the program, without endorsing the program, are limitedto 1) permitting the insurer to publicize the program to employeesor members, 2) collecting premiums through payroll deductions ordues check-offs and 3) remitting them to the insurer.
� The employer or employee organization receives noconsideration in any form (cash or otherwise) in connection with
WORKPLACEBLOGGING:BLESSINGOR BURDEN?Loosely defined, a “blog” (short for weblog) is a shared on-line journal where people post diary-type entries on theirpersonal experiences relative to a particular topic. Growing in popularity, blogs provide an easy means ofcommunication that, for employers, can range from useful and informative to irksome and illegal.
Some companies may be obligated to save and store blog posts and comments permanently, thereby creating a wealth ofinformation that can be used as evidence should a workplace lawsuit be filed. A unique feature of blogs is theemployment of permanent linking. Perma-linked posts can last forever. Blogs also have the potential to createchallenges under applicable HIPAA and ERISA rules.
Under ERISA, electronic records related to employee benefit plans must be kept indefinitely. Benefits-relatedstatements posted to a company’s internal blog would have to be permanently stored, because privacy requirementsunder HIPAA require healthcare organizations to safeguard electronic documents containing protected healthinformation.
A written policy that addresses content, language, online etiquette and confidentiality for blogs is one way to minimizerisk. Developing rules that meet the company’s legal, regulatory and security needs is also advisable. Commerciallyavailable blog software (unlike most free software) allows for greater editorial control and may be worth consideration.
the program, other than reasonablecompensation, excluding any profit, foradministrative services actually renderedin connection with payroll deductions ordues checkoffs.
Some “employee-pay-all” arrangements fail toqualify for this exemption because theemployer directly or indirectly endorses theprogram as its own. But in situations where aprogram fits the exemption by satisfying therequirements to be considered a payrollpractice, what happens if the employerinadvertently labels the program an ERISAplan? Would employer conduct convert apayroll practice that would otherwise escapeERISA applicability into one that is fullysubject to all ERISA obligations?
Just such a situation occurred in the SixthCircuit where a court examined a disabilityprogram that would have met the definition of“payroll practice” – except for the fact that theplan sponsor lumped its disability programinto a summary plan description (SPD) along
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with its bona fide ERISA plans. Langley v. DaimlerChryslerCorporation et al., No. 06-3219 (Sixth Cir. Sept. 18, 2007). Theemployee argued that mingling those programs pushed the payrollpractice arrangement out of the ERISA exemption and into ERISA’sprotective sphere. Should such a plan be considered subject toERISA, or not?
BACKGROUNDThe case originated with an employee that was involved in a job-related dispute with another worker. After a company investigationfound no misconduct, the complainant felt that she was unable toreturn to work, took a leave of absence due to “stress factors” andattempted to collect short-term disability benefits through heremployer’s disability program. After her claims were denied, theemployee filed suit alleging a number of claims, including ERISAviolations.
EVALUATING THEDISABILITY PLAN A lower court immediately dismissed the worker’s ERISA claims afterfinding that her disability plan was not an ERISA-governed plan. Onappeal, the Sixth Circuit considered the plaintiff’s ERISA claim forbenefits under the plan. The lower court initially concluded that theplan was not an ERISA plan but rather a payroll practice. The highercourt agreed, describing a three-part test to determine whetherERISA covers a particular plan or practice:
1. Does a safe harbor exception apply?2. If not, do the “surrounding circumstances” suggest that “a
reasonable person could ascertain the intended benefits, theclass of beneficiaries, the source of financing and the proceduresfor receiving benefits?”
3. Has “the employer established or maintained the plan with theintent of providing benefits to its employees?”
The Sixth Circuit court’s reasoning centered on DOL regulations thatset forth a safe harbor exception for “normal compensation” paid toan employee as a result of disability when paid from “the employer’sgeneral assets.” If established in accord with the safe harborrequirements, then a disability program will not be considered anemployee welfare benefit plan but is instead deemed a payrollpractice. Other evidentiary factors, such as the fact that the plansponsor used the same claim denial form it used for ERISA-governedbenefits in responding to short term disability claims, did nothing topreclude the employer’s ability to use the payroll practice exceptionfrom ERISA.
Even though the Sixth Circuit court agreedwith the lower court that the plan met thedefinition of a payroll practice, the highercourt did not end its analysis. Instead, theSixth Circuit court went farther to address theemployee’s argument that the companyidentified the plan as an ERISA-governed planin the summary plan description (SPD) andthereby “converted” the arrangement into aprogram subject to ERISA. Ultimately, thecourt concluded that “mere labeling by a plansponsor or administrator is not determinativeon whether a plan is governed by ERISA.” Thus,in this case, the court found that the disabilityarrangement remained a payroll practice,despite the statements in the SPD.
The Sixth Circuit’s decision may be a littlesurprising to some observers. Althoughhistorically the courts have tended to applyERISA protections broadly, some employersmay welcome the idea that a court willevaluate facts and circumstances first beforedetermining whether a plan should fall underERISA protections.
Of course it’s important to recognize thatERISA applicability can be extremelyadvantageous for employers as, among otherthings, it ensures access to a federal forum,which tends to produce better and morepredictable outcomes; nevertheless, someemployers prefer to avoid the ERISA duties,which would otherwise apply. Although we areonly speculating, it seems probable that othercourts may have been more concerned aboutfinding a way to apply ERISA (for example,through an argument that employer actionsdeemed ERISA protections do apply), but inthis particular situation the employee’sconduct and generally unsympatheticbehavior may have had something to do withthe outcome. The Sixth Circuit includesKentucky, Michigan, Ohio and Tennessee.
