This Employer Webinar Series program is presented by ... · Plan document – See “Compliance...
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Kansas City Omaha Overland Park St. Louis Jefferson City www.spencerfane.com www.UBAbenefits.com This Employer Webinar Series program is presented by Spencer Fane Britt & Browne LLP in conjunction with United Benefit Advisors
Transcript of This Employer Webinar Series program is presented by ... · Plan document – See “Compliance...
This Employer Webinar Series program is presented by Spencer Fane Britt & Browne LLP
in conjunction with United Benefit Advisors
Kansas City Omaha Overland ParkSt. Louis Jefferson Citywww.spencerfane.com
www.UBAbenefits.com
This Employer Webinar Series program is presented by Spencer Fane Britt & Browne LLP
in conjunction with United Benefit Advisors
Copyright 2009 2
Agenda Understanding When Welfare “Plan Assets”
Must be Held in Trust ERISA Preemption Claims and Appeal Procedures and Judicial
Review of Denied Claims Cafeteria Plan Compliance Issues Fiduciary Duties Plan Discrimination Issues After Health Care
Reform
Copyright 2009 3
Key ERISA Requirements
Plan document – See “Compliance 101” SPD, SMM – See “Compliance 101” Participant disclosures – See “Compliance
101” Form 5500 and SAR – See “Compliance
101” Plan assets held in trust Fidelity bond Reasonable claim/appeal procedures Fiduciary standards
Copyright 2009 4
Funding of Welfare Plans
No ERISA funding standards for welfare plans
Four primary funding methods: General assets of employer Insurance Separate funds set aside for plan
purposes Contributions from participants
Copyright 2009 5
Why Does Funding Matter?
ERISA’s trust requirement applies only to “funded” plans (those with “plan assets”)
ERISA’s exclusive benefit and fiduciary requirements apply to arrangements with “plan assets”
Bonding requirement applies when there are “plan assets”
Funding method dictates extent of state regulation
Copyright 2009 6
What Are “Plan Assets”?
ERISA does not define “plan assets” Generally, two categories of “plan
assets”: Participant/beneficiary contributions are
always plan assets
Use of separate funds to pay benefits may create plan assets (e.g., trust, separate account in plan’s name)
Copyright 2009 7
ERISA’s Trust Requirement
General Rule: Section 403(a) of ERISA requires plan assets to be held in trust
Trust options: VEBA
Taxable trust
Copyright 2009 8
Exceptions to Trust Requirement
Exemption for assets held by insurance company DOL nonenforcement policy (Technical Release 92-
01) for participant contributions Under cafeteria plan, if such contributions are sole source
of plan assets and contributions held as general corporate assets
Under insured plan accepting participant contributions, if: Benefits paid exclusively through insurance policies Premiums paid directly by employer from general assets Participant contributions forwarded within 3 months Certain insurance refunds returned to participants
Also applies to after-tax and COBRA contributions
Copyright 2009 9
Examples of Nonenforcement Policy
Insured Plan – Employer Contributions Only No employee contributions; no cafeteria
plan
Employer sends premiums directly to insurer from corporate checking account
No plan assets; no trust required
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Examples of Nonenforcement Policy
Insured Plan – Employer Contributions Only COBRA contributions paid to employer,
who pays all premiums to insurer out of corporate checking account
COBRA premiums are plan assets; trust requirement subject to nonenforcement policy
Copyright 2009 11
Examples of Nonenforcement Policy
Insured Plan – Employee Contributions Through Payroll Deduction or 125 Plan After-tax or pre-tax employee contributions
Employer sends one check for employee and employer contributions to insurer
Employee contributions are plan assets; trust requirement subject to nonenforcement policy
Copyright 2009 12
Examples of Nonenforcement Policy
Insured Plan – TPA Collects and Forwards Employee Contributions Employees pay premiums through payroll
deduction, collected by employer, who forwards to TPA in single corporate check
TPA forwards premiums to insurer Employee contributions are plan
assets; trust may be required
Copyright 2009 13
Examples of Nonenforcement Policy
Insured Plan – Premium Payments from VEBA Employee and employer contributions
made to VEBA
Premium payments to insurer made by VEBA
Employee contributions and VEBA assets are “plan assets”; trust present
Copyright 2009 14
Examples of Nonenforcement Policy
Self-Insured Plan – Benefits Paid from Checking Account in Plan’s Name Employer contributions only; no
employee contributions Employer pays benefits from checking
account in plan’s name Plan assets due to employer’s transfer
to checking account in plan’s name; trust required
Copyright 2009 15
Caveats to Nonenforcement Policy
Exclusive benefit rule still applies
Fiduciary duties still apply
Participants and beneficiaries may still sue to enforce
Copyright 2009 16
ERISA Preemption
Primary purpose of ERISA is uniform, national system of enforcement
ERISA contains a broad “preemption” clause, superseding application of most state laws
State laws (statutes or common law) that “relate to” ERISA plans are preempted (i.e., do not apply)
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The “Savings Clause”
Many state insurance laws are “saved” from preemption
State insurance laws governing insurance policies (e.g., to require mandated benefits) still apply
Fully-insured plans therefore remain subject to indirect state regulation
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ERISA Preemption – So What?
Preemption protects employers and fiduciaries
Self-insured plans not subject to mandated benefits
State causes of action for benefits are preempted Bad-faith refusal to pay Claims for punitive and compensatory damages Generally no jury trials
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Claims and Appeals
ERISA requires “reasonable” procedures Rules/time frames differ by benefit
Group health
Disability
Other (severance, life, AD&D, etc.)
Formal claim/appeal procedures must appear in SPD (or be furnished in separate document with SPD)
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Who is Responsible?
Insured Plans – Insurer typically decides all claims and appeals Employer may retain responsibility for
distributing claims and appeals procedures with SPD
Make sure policy and certificate accurately reflect who decides claims and appeals
Self-Insured Plans – Plan fiduciaries decide claims and appeals
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Compliance Affords Protection
Compliance with reasonable procedures affords protection to plan sponsors Claimants must “exhaust” administrative procedures
before suing Unreasonable procedures, or failure to follow them, allows
immediate resort to courts
Courts defer to decisions made under such procedures unless arbitrary and capricious 1989 Supreme Court decision in Firestone Tire & Rubber
v. Bruch But plan (and SPD) must afford plan administrator or
fiduciary the discretionary authority to interpret plan
Copyright 2009 22
Judicial Deference
Even conflicted decision makers entitled to deference Metropolitan Life v. Glenn (S. Ct. 2008) – when
“dual role” administrators both fund plan and decide claims, conflict of interest is just one factor courts must weigh
Conkright v. Frommert (S. Ct. 2010) – if administrator’s first decision is rejected by court, administrator still entitled to deference on second review
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Steps to Preserve Deferential Review
Wall off claims from financial departments Avoid placing CFO on claims committee
Have two committees; one to hear claims, and one to review plan finances
Document and follow procedures for claim/appeal processing
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Steps to Preserve Deferential Review
Produce thorough, carefully reasoned claim decisions Denial letters should articulate all
grounds on which claim is being rejected Include citations to applicable plan
provisions Describe appeal process (for claim
denials) or right to bring suit (for appeal denials)
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Steps to Preserve Deferential Review
Do not weigh economic consequences of claim decisions Don’t ask about extent of benefits that may be
paid
Minimize incentives for claim denials Ensure that claims examiners aren’t paid more
for denying claims
Make sure the party to whom the plan gives discretionary authority is the party deciding claims/appeals
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What is a Cafeteria Plan? Choice between taxable benefits (e.g., cash)
and non-taxable benefits (e.g., health care coverage)
Section 125 is the exclusive means by which employer can offer a choice without the choice itself resulting in taxable income to the employee (under “constructive receipt” doctrine)
A plan offering a choice between only taxable benefits (cash or paid time off), or only non-taxable benefits (e.g., a “flex plan”) is not a cafeteria plan
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Qualified Benefits Employer-provided health coverage Health flexible spending account (“FSA”) Dependent care FSA Group-term life insurance AD&D insurance STD and LTD insurance Adoption assistance HSA contributions 401(k) contributions
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Impermissible (But Tax-Favored) Benefits
Scholarships Educational assistance benefits Dependent life insurance Long-term care insurance Fringe benefits 403(b) deferrals
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Eligibility
Current employees Former employees (so long as plan
is not maintained predominantly for them)
But not self-employed individuals, sole proprietors, partners, directors, or 2% shareholders of S-corporations
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Written Plan Document
Must have a written plan document Program must be operated in
accordance with plan’s terms Plan must be adopted and effective on
or before first day of plan year Any amendments must be made
through formal written instrument
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Value to Employees
Advantages for employees: No income tax No FICA or Medicare tax Generally, no state or city tax Allows choice among benefits (or cash)
Disadvantages for employees: Irrevocable elections “Use-it-or-lose-it” rule Possibly lower Social Security benefits
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Value to Employers Advantages for employers:
No FICA or Medicare tax Cushion blow of premium increases Non-comparable employer HSA
contributions
Disadvantages for employers: Set-up and administration costs “Uniform coverage” rule (under health
FSAs)
Copyright 2009 33
Election Rules
General Rule: Elections must be made – and irrevocable – before beginning of coverage period (generally, 12 months)
Several exceptions specified in IRS regulations
Exceptions apply only if also set forth in plan document
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Cafeteria Plans and Health Care Reform
OTC medicines (other than insulin) may not be reimbursed from FSA, HRA, HSA, or Archer MSA – unless prescribed by a physician (effective in 2011)
Excise tax on non-medical distributions from HSA increased from 10% to 20% (effective in 2011)
Health FSA contributions capped at $2,500 (effective in 2013)
Copyright 2009 35
Fiduciary Basics
Who Are Fiduciaries? Discretionary authority or control
concerning management or administration of plan
Any authority or control over management or disposition of plan assets
Renders investment advice for a fee
“Named” fiduciary
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Fiduciary Duties
Exclusive Benefit Rule… fiduciaries must discharge their duties solely in the interests of participants and beneficiaries, and for the exclusive purpose of: providing benefits, or
defraying reasonable expenses of plan administration
Copyright 2009 37
Fiduciary Duties
Prudent Expert Rule . . . fiduciaries must discharge their duties: With the care, skill, prudence, and
diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims
Copyright 2009 38
Fiduciary Duties
Comply with Plan Documents . . . fiduciaries must discharge their duties:
In accordance with the documents and instruments governing the plan
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Fiduciary Duties
Duty to Monitor . . .
“At reasonable intervals the performance of … other fiduciaries should be reviewed by the appointing fiduciary in such manner as may be reasonably expected to ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan.”
Copyright 2009 40
Minimizing Fiduciary Risk
Carefully Review Plan Documents Watch What You Say to Plan
Participants Identify and Educate Fiduciaries Document Plan Governance Structure Hold Regular Meetings Choose Service Providers Carefully Review Fiduciary Liability Insurance
Copyright 2009 41
Discrimination Issues
As part of health care reform, fully insured plans must comply with nondiscrimination requirements of Code Section 105(h)
These are the same rules to which self-funded plans are already subject
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Discrimination Issues
Plans may not discriminate in favor of “highly compensated individuals” in terms of eligibility to participate or benefits
HCI = five highest paid officers, any 10% or more owners, and the highest paid 25% of all employees
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Discrimination Issues
Effective for plan year beginning on or after September 23, 2010 (January 1, 2011 for a calendar-year plan)
Grandfathered plans exempt Unclear whether renewal or change in
carriers will destroy grandfathered status
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Discrimination Issues
Consequences of noncompliance fall on the plan (in the form of a $100 daily penalty)
In contrast to self-funded plans, where consequences of noncompliance fall on the highly compensated individuals (in the form of taxable benefits)
