The Department of Health and Human Services’ Center for Consumer Information and Insurance Oversight (CCIIO) has issued additional guidance (pdf) on the approach the agency plans to take in defining the essential health benefits (EHB) that non-grandfathered insured health plans in the individual and small group markets must cover under the Affordable Care Act. In December 2011, the agency issued an essential health benefits bulletin that described its proposed regulatory approach in determining which benefits will be deemed essential. Generally, as of January 1, 2014, non-grandfathered plans in the individual and small group market and those in the future insurance exchanges will be required to provide coverage of benefits or services that fall into 10 separate categories, including emergency services, prescription drugs, and maternity and newborn care.

The December bulletin explained that HHS will propose that EHB be defined by a benchmark plan selected by each state, which could be modified as needed so long as the value of coverage is not reduced. The bulletin proposed four separate plan types that could be used as a benchmark: the largest plan by enrollment in any of the three largest small group insurance products in the state’s small group market; any of the largest three state employee health benefit plans by enrollment; any of the largest three national federal employee health benefit plan (FEHBP) options by enrollment; or the largest insured commercial non-Medicaid Health Maintenance Organization (HMO) operating in the state. If the state opts not to use one of these four plan types as its benchmark, HHS intends to propose that the default benchmark plan per state “be the largest small group market product in the state’s small group market.” HHS defines a “product” as a package of benefits an issuer offers that is reported to state regulators in an insurance filing.

The new guidance bulletin is in the form of 22 Frequently Asked Questions (FAQs) that supplement the December guidance. Among other points emphasized by the new bulletin is that while self-insured group health plans, large group market health plans, and grandfathered health plans are not required to offer EHB, they still must adhere to the Affordable Care Act’s prohibition on imposing annual and lifetime dollar limits on EHB. Such plans are, however, allowed to impose non-dollar limits on such benefits, provided that they comply with other statutory requirements. Moreover, these plans are permitted to impose annual and lifetime dollar limits on covered benefits that do not fall within the definition of EHB.

The December bulletin left questions about how the EHB policy would impact self-insured plans, large group market plans and grandfathered plans. In response, the new guidance explains that, in order to determine which benefits are EHB for purposes of the lifetime and annual limit prohibition, the Departments:

consider a self-insured group health plan, a large group market health plan, or a grandfathered group health plan to have used a permissible definition of EHB under section 1302(b) of the Affordable Care Act if the definition is one that is authorized by the Secretary of HHS (including any available benchmark option, supplemented as needed to ensure coverage of all ten statutory categories). Furthermore, the Departments intend to use their enforcement discretion and work with those plans that make a good faith effort to apply an authorized definition of EHB to ensure there are no annual or lifetime dollar limits on EHB.

The guidance explains that for plans that cover employees in more than one state, “the applicable EHB benchmark for the State in which the insurance policy is issued would determine the EHB for all participants, regardless of the employee’s State of residence.”

As for selection of the benchmark plan, the guidance clarifies that a state must choose one EHB benchmark plan only that will apply to plans offered in the individual and group markets and in the insurance exchanges. If a state mandates certain health benefits but selects as its benchmark plan one that does not include such required benefits, the state would defray the cost of offering the extra benefits. Moreover, if the benchmark plan does not cover one of the 10 categories of EHB, the HHS intends to propose that the state supplement the benchmark plan by referencing another benchmark plan that does include the missing category of benefits.

If a state were to select a benchmark plan that included a dollar limit, the benefit would be incorporated into the EHB definition without the limitation. Plans would be allowed, however, to make “actuarially equivalent substitutions” to the dollar limitations within each of the 10 coverage categories. Plans would also be able to make such substitutions per category and still maintain the requisite level of benefits deemed essential. For example, the guidance explains that:

a plan could offer coverage consistent with a benchmark plan offering up to 20 covered physical therapy visits and 10 covered occupational therapy visits by replacing them with up to 10 covered physical therapy visits and up to 20 covered occupational therapy visits, assuming actuarial equivalence and the other criteria are met. The benchmark plan would provide States and issuers with a frame of reference for the EHB categories.

While a plan must offer coverage substantially equal in both scope and benefits to that provided by the benchmark plan, “any scope and duration limitations in a plan would be subject to review pursuant to statutory prohibitions on discrimination in benefit design.”

Other regulations and guidance materials offered by the CCIIO on the Affordable Care Act can be found here.

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The U.S. Department of Health and Human Services (HHS) has issued proposed notices that health insurance companies may use for compliance with the new Medical Loss Ratio (MLR) requirements under the Affordable Care Act. The new health care law mandates that health insurers, depending on the size of the insurance market, spend between 80 and 85% of premium revenue on reimbursement for clinical services or activities that improve health care quality, or provide a rebate to their enrollees. The rebates must be paid by August 1 of each year, beginning in 2012. The law also imposes certain reporting requirements for insurers. Interim final regulations on the MLR requirement were issued in November 2010. Final regulations on the MLR requirement, including its application to mini-med plans and distribution of rebates to enrollees in group health plans, were issued in December 2011.

Specifically, the HHS has made available the following documents:

• MLR Annual Reporting and Rebate Calculation 
• Notice to Subscribers in the Individual Market (pdf)  
• Notice to Group Policyholders and Their Subscribers, Rebate Sent to the Policyholder  (pdf)
• Notice to Subscribers of Group Policyholders, Rebate Sent to the Subscribers (pdf) 
• Instructions for Notices 1, 2 and 3 (pdf) 
• Sample Notice to Policyholders and Subscribers When MLR Standard is Met (pdf) 
• Sample Instructions for Notice to Policyholders and Subscribers When MLR Standard is Met (pdf) 

In a press release, HHS Secretary Kathleen Sebelius said:

With today’s notice, we’re taking a big step toward making insurers accountable to consumers. Some of these insurance companies have already changed their behavior by lowering premiums or spending more on medical care and quality improvement, while the remainder will need to refund this money to their customers this year.

According to the press release, the HHS is seeking comments on these model notices, and “is considering requiring insurers notify consumers if their insurer did meet the 80/20 standard.”

More information on the MLR requirements can be found here.

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The Departments of Labor, Health and Human Services, and the Internal Revenue Service have issued a final rule that adopts without change interim final regulations that exempt group health plans and group health insurance coverage sponsored by certain religious employers from having to cover certain preventive health services under provisions of the Patient Protection and Affordable Care Act. The interim final rule issued in August 2011 expands the types of women’s health preventive services – including birth control – that must be covered without any cost-sharing by non-grandfathered health plans as required under the Affordable Care Act. The rule exempts from this requirement those employers whose “primary purpose” is to instill religious values. For the purposes of this exemption, a religious employer is one that: (1) has the inculcation of religious values as its purpose; (2) primarily employs persons who share its religious tenets; (3) primarily serves persons who share its religious tenets; and (4) is a non-profit organization.

On January 20, 2012, the HHS announced that it would give other non-exempt religious-affiliated employers – such as religious schools and hospitals – that provide health coverage to their employees an extra year to comply with the requirement that their plans include coverage for birth control. Specifically, the HHS announcement stated that non-exempt religious employers will have until August 1, 2013 to ensure that their plans include contraceptive coverage and do not charge co-pays, co-insurance or deductibles for FDA-approved birth control methods.

As discussed in the final regulations, during this temporary enforcement safe harbor period, the HHS plans to “develop and propose changes to these final regulations that would meet two goals—providing contraceptive coverage without cost-sharing to individuals who want it and accommodating non-exempted, non-profit organizations’ religious objections to covering contraceptive services.” The agency explains that it will initiate a rulemaking:

to require issuers to offer insurance without contraception coverage to such an employer (or plan sponsor) and simultaneously to offer contraceptive coverage directly to the employer’s plan participants (and their beneficiaries) who desire it, with no cost-sharing. Under this approach, the Departments will also require that, in this circumstance, there be no charge for the contraceptive coverage.

With respect to self-insured plans, the Departments “intend to develop policies to achieve the same goals for self-insured group health plans sponsored by non-exempted, non-profit religious organizations with religious objections to contraceptive coverage.”

The rule notes that it will examine and take into consideration the existing policies and practices of issuers and religious organizations in the 28 states where contraception coverage requirements already exist. In Hawaii, for example:

state health insurance law requires issuers to offer plan participants in group health plans sponsored by religious employers that are exempt from the State contraception coverage requirement the option to purchase this coverage in a way that religious employers are not obligated to fund it. It is our understanding that, in practice, rather than charging employees a separate fee, some issuers in Hawaii offer this coverage to plan participants at no charge. The Departments will work with stakeholders to propose and finalize this policy before the end of the temporary enforcement safe harbor.

This rule becomes effective on April 16, 2012.

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In Nationwide Life Insurance Co. v. Haddock, No. 10-4237 (2d Cir. February 6, 2012) [pdf], the Second Circuit reversed a district court order granting class certification.  The plaintiffs in Haddock assert that Nationwide breached its fiduciary duty under ERISA by allegedly collecting “revenue sharing payments” from mutual funds that Nationwide selected as investment choices for its annuity holders.  The district court previously granted class certification under Fed. R. Civ. P. 23(b)(2), which permits certification of class actions where “injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.” 

Prior to the United States Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011) [pdf], it was common for similar “hidden fees” cases to be certified as class actions.  The Second Circuit even went out of its way to state that the district court’s order granting class certification was correct under the Second Circuit’s analysis that predated Dukes.  However, the Second Circuit recognized that, under the Supreme Court’s holding in Dukes, “a class complaint alleging numerous individual claims for monetary relief may not be certified under Rule 23(b(2) ‘at least where … the monetary relief is not incidental to the injunctive or declaratory relief.’” Slip op. at 4 (quoting Dukes at 2557.)   

Analyzing the suit before it, the Second Circuit concluded that the plaintiffs’ claims for monetary relief were not merely incidental to the claim for equitable relief.  Specifically, the Second Circuit observed that should the plaintiffs be successful in establishing liability, the district court would need to determine the specific monetary recoveries to which each individual plaintiff would be entitled. The Second Circuit then recognized that “[t]his process would require the type of non-incidental, individualized proceedings for monetary awards” that the Supreme Court said are impermissible under Rule 23(b)(2).  The Second Circuit has remanded the case back to the district court to determine whether certification is appropriate under Rule 23(b)(3), which permits certification of claims for monetary relief where common issues predominate over individualized issues.

Lessons Learned . . .

When faced with an ERISA class action, Dukes may be helpful in defeating class certification where members of the purported class are each seeking separate monetary recoveries, which are more than merely incidental to the injunctive relief pursued by the class.  While pre-Dukes precedent often afforded certification of “hidden fees” cases, the post-Dukes litigation landscape is different and should be accounted for in planning for the strategy of defending and/or pleading a Rule 23 class action premised on claims under ERISA.

The Department of Labor has issued a new technical release document that provides responses to frequently asked questions (FAQs) about the Affordable Care Act’s automatic enrollment, employer shared responsibility, and the 90-day limitation on waiting periods provisions. In addition to providing guidance on these topics, the document discusses possible approaches under consideration for future regulations and guidance materials.

Automatic Enrollment

The Affordable Care Act amends Section 18A of the Fair Labor Standards Act (FLSA) to require most very large employers (those with more than 200 full-time employees) to automatically enroll new full-time employees in the employer-provided health plan, and to renew coverage for those already enrolled. Earlier guidance explained that until the DOL developed regulations on this new section, employers are not required to comply with the automatic enrollment mandate.

According to the latest set of FAQs, guidance on this requirement will not be ready to take effect by 2014, as was the previous goal. The agency states that it “remains the Department of Labor’s view that, until final regulations under FLSA section 18A are issued and become applicable, employers are not required to comply with FLSA section 18A.”

Shared Responsibility

Under the health care reform law, large employers (those who have 50 or more full-time employees and full-time equivalents) must offer affordable coverage that meets certain minimum coverage requirements, or pay a penalty. Full-time employees are defined as those who work 30 or more hours a week calculated on a monthly basis.

In previously-issued guidance, the Treasury Department and the Internal Revenue Service (IRS) solicited input on a proposed affordability “safe harbor” for employers under the shared responsibility provisions that would make it easier for employers to determine whether their health care plan is affordable. Among other aspects of this proposal, the suggested safe harbor provision would enable an employer to make this affordability calculation based on each employee’s W-2 wages instead of on each employee’s household income. The new guidance document reiterates the IRS’s intention to allow employers to use this safe harbor.

As for who would qualify as a full-time employee, the guidance document states that the IRS and Treasury Department plan to issue proposed regulations and other guidance materials under Code section 4980H, the shared responsibility provision. Among other things, the future regulations and/or guidance will:

provide that, at least for the first three months following an employee’s date of hire, an employer that sponsors a group health plan will not, by reason of failing to offer coverage to the employee under its plan during that three-month period, be subject to the employer responsibility payment under Code section 4980H. The guidance is also expected to provide that, in certain circumstances, employers have six months to determine whether a newly-hired employee is a full-time employee for purposes of section 4980H and will not be subject to a section 4980H payment during that six-month period with respect to that employee. Treasury and the IRS intend to propose an approach under which the period of time that an employer will have to determine whether a newly-hired employee is a full-time employee (within the meaning of section 4980H) will depend upon whether, based on the facts and circumstances, (a) the employee is reasonably expected as of the time of hire to work an average of 30 or more hours per week on an annual basis and (b) the employee’s first three months of employment are reasonably viewed, as of the end of that period, as representative of the average hours the employee is expected to work on an annual basis.

FAQ No. 5 in the new guidance provides a detailed discussion of this approach, as well as illustrative examples.

In addition, the FAQs note that the IRS plans to issue a proposal, as discussed in IRS Notice 2011-36, that would permit applicable large employers, at their option, to use a look-back/stability period safe harbor that would provide certainty as to which employees would be considered full-time for a particular coverage period. According to the IRS, such an approach “would be designed to give effect to the statutory provisions while accommodating a wide variety of current eligibility and enrollment practices in group health plans.”

90-Day Waiting Period

Changes made by the Affordable Care Act to Section 2708 of the Public Health Service (PHS) Act stipulate that in plan years beginning on or after January 1, 2014, a group health plan or group health insurance issuer shall not apply any waiting period that exceeds 90 days. The FAQs explain that under prior regulations, the agencies defined a waiting period as “the period that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of a group health plan can become effective.” The agencies acknowledge that some uncertainty exists regarding this 90-day waiting period, as the Section 2708 provisions – unlike those under the employer responsibility provisions – do not distinguish between full-time and part-time employees. The new FAQs explain that the agencies intend to issue new guidance that that will address this discrepancy, and likely will “provide that, at least for the first three months following an employee’s date of hire, an employer that sponsors a group health plan will not, by reason of failing to offer coverage to the employee under its plan during that three-month period, be subject to the employer responsibility payment under Code section 4980H.”

In addition, the new guidance emphasizes that Section 2708 of the PHS Act prohibits requiring an otherwise eligible employee to wait more than 90 days before coverage is effective, but does not require employers to offer coverage to any particular employee or class of employees, including part-time employees. The guidance further explains that nothing in the Affordable Care Act penalizes small employers for choosing not to offer coverage to any employee, or large employers for choosing to limit their offer of coverage to full-time employees, as defined in the employer shared responsibility provisions.

In response to a question about how the agencies intend to address the application of the 90-day waiting period limitation to an offer of coverage by an employer, the guidance explains that “the Departments intend to retain, for purposes of PHS Act section 2708, the definition in existing regulations that the 90-day waiting period begins when an employee is otherwise eligible for coverage under the terms of the group health plan.” Future guidance will also likely address:

situations in which, under the terms of an employer’s plan, employees (or certain classes of employees) are eligible for coverage once they complete a specified cumulative number of hours of service within a specified period (such as 12 months). It is anticipated that, under the upcoming guidance, such eligibility conditions will not be treated as designed to avoid compliance with the 90-day waiting period limitation so long as the required cumulative hours of service do not exceed a number of hours to be specified in that guidance.

The agencies invite comments regarding any of the topics discussed in the latest technical release. Such comments must be received by April 9, 2012, and may be sent electronically to: e-ohpsca-er.ebsa@dol.gov, or via mail or hand delivery to: Office of Health Plan Standards and Compliance Assistance, Employee Benefits Security Administration, Room N-5653, U.S. Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.

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The Departments of Health and Human Services, Labor, and the Treasury have issued final regulations (pdf) under the Affordable Care Act to implement the requirement that group health plans and health insurance issuers provide consumers with a summary of benefits and coverage (SBC) that “accurately describes the benefits and coverage under the applicable plan or coverage” to enable enrollees and participants to better compare plan terms and benefits. The rule also includes details about the notice of modifications that must be sent to enrollees and policyholders informing them of any significant changes in coverage that will occur in the middle of the plan year at least 60 days before such changes take effect. Finally, the rule provides requirements for the uniform glossary – which includes common medical terms such as “deductible” and “co-pay” – that must also be provided to consumers at various points in the enrollment process. In conjunction with the final rule, the agencies have issued a template for the SBC instructions, sample language, a guide for coverage example calculations, the uniform glossary, and other related guidance materials. (pdf)

Generally, the SBCs will be required to summarize, in plain language, key features of the plan or coverage, including covered benefits, cost-sharing provisions, and coverage limitations and exceptions. The SBC must be provided when potential enrollees are shopping for coverage, when they actually apply for coverage, at each plan year, and upon request. In most instances, participants and beneficiaries who are already covered under the group health plan may receive an SBC electronically if certain regulatory requirements are met. Those who are eligible for but not enrolled in coverage may receive the SBC electronically so long as the format is readily accessible and a paper copy is provided free of charge upon request.

The final rule details the standards regarding who is required to provide an SBC, to whom, and when. The rule summary explains that “there are three general scenarios under which an SBC will be provided: (1) by a group health insurance issuer to a group health plan; (2) by a group health insurance issuer and a group health plan to participants and beneficiaries; and (3) by a health insurance issuer to individuals and dependents in the individual market.” The final rule sets forth the list of 12 SBC required elements, including uniform standard definitions of medical and health coverage terms, a description of the coverage including the cost sharing requirements such as deductibles, coinsurance, co-payments; information regarding any exceptions, reductions, or limitations under the coverage; renewability and continuation of coverage provisions; a contact number to call with questions and an Internet address (or other contact information) for obtaining a list of the network providers; and an Internet address (or similar contact information) where an individual may find more information about the prescription drug coverage under the plan or coverage. The final rule does not require the SBC to include premium or cost of coverage information.

One highlighted feature in the SBC is a new standardized comparison tool – akin to nutrition labeling – called “coverage examples.” The coverage examples will set forth the degree of coverage and costs associated with having a baby (normal delivery) and managing Type II diabetes, in order to facilitate health plan comparisons. Future SBCs will include additional coverage examples detailing other common medical scenarios.

Regarding expatriate plans, the final rule includes a special provision that provides that in lieu of summarizing coverage for items and services provided outside the United States, a plan or issuer may provide an Internet address (or similar contact information) to allow participants to obtain information about benefits and coverage provided outside of the U.S. To the extent the plan or policy provides coverage available within the United States, however, the plan or issuer is required to provide an SBC for coverage offered within the U.S.

To the extent a plan or policy implements a mid-year change that is a material modification that affects the content of the SBC, and that occurs other than in connection with a renewal or reissuance of coverage, the final regulations require a notice of modification to be provided 60 days in advance of the effective date of the change.

Unlike in the proposed regulations, the final rule does not mandate that the SBC for a group health plan be a standalone document. Although plans or issuers may provide the SBC as a separate document, they are permitted under the rule to provide it in combination with other summary materials, such as a summary plan description (SPD), so long as the SBC information is “intact and prominently displayed at the beginning of the materials,” such as after the Table of Contents in a SPD. SBCs issued pursuant to a plan in the individual market, however, must be provided as a standalone document. Details about the form, content, sample language, uniform glossary, and related items are set forth in the guidance document published along with the final rule.

The materials and information in the guidance document are to be used for the first year of applicability only. For example, the guidance does not provide language regarding whether the plan provides minimal essential coverage or meets minimum value requirements, as this information is not yet required. The agencies state that they will issue updated materials next year.

Willful failure to provide the required disclosures subjects plans or issuers to fines up to $1,000 for each such failure.

In addition to the guidance materials to be published in the February 14, 2012 edition of the Federal Register, the agencies are making available “the specific information necessary to simulate benefits covered under the plan or policy for the coverage example portion of the SBC (including relevant medical items and services, dates of service, billing codes, and allowed charges).” While the final rule becomes effective 60 days after it is published in the Federal Register, the requirements to provide an SBC, notice of modification, and uniform glossary apply for disclosures to participants and beneficiaries who enroll or re-enroll in group health coverage through an open enrollment period (including re-enrollees and late enrollees) beginning on the first day of the first open enrollment period that begins on or after September 23, 2012. For disclosures to participants and beneficiaries who enroll in group health plan coverage other than through an open enrollment period (including individuals who are newly eligible for coverage and special enrollees), these requirements apply beginning on the first day of the first plan year that begins on or after September 23, 2012. For disclosures to plans, and to individuals and dependents in the individual market, these requirements are applicable to health insurance issuers beginning on September 23, 2012.

In a press release, HHS Secretary Kathleen Sebelius claimed: “All consumers, for the first time, will really be able to clearly comprehend the sometimes confusing language insurance plans often use in marketing,” adding, “This will give them a new edge in deciding which plan will best suit their needs and those of their families or employees.”

For more information on this rule, see Littler’s ASAP: Agencies Issue Final Rule Regarding Summary of Benefits and Coverage.

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On February 3, 2012, the Internal Revenue Service (IRS), published its Interim Report on Section 401(k) Compliance Check Questionnaire (“Interim Report”).  The Interim Report is significant because, according to the IRS, 401(k) plans have become the most prevalent form of retirement plans in the United States – with more than 500,000 401(k) plans covering approximately 60 million Americans. 

The Interim Report is based on responses to the 401(k) Compliance Check Questionnaire Project (“Project”) by 1,060 401(k) plan sponsors who were contacted at random and answered an online questionnaire.  Highlights from the Interim Report relating to employer and employee contributions include the following:

Employer Matching Contributions

• Matching contributions on elective deferrals are provided by 68% of the plans. Of these, 88% provide matching contributions on the basis of the percentage of deferred compensation.  The other 12% of plans match contributions on the basis of the dollar amount deferred.
• The majority of plans, 58%, have a one year service requirement for matching contributions and 77% of plans have age requirements related to matching contributions.
• A minimum hours of service requirement is applicable to employee eligibility for a matching contribution in 28% of the plans and 22% of the plans require an employee to be employed on the last day of the plan year to be eligible for a matching contribution.
• From 2006 to 2008, 4% of plans suspended or discontinued the employer matching contributions, with 1% of plans reducing employer matching contributions each year from 2006 to 2008.

Employee Pretax Contributions

• A service requirement is applicable to employee eligibility to make elective deferrals in 87% of plans, with a one-year service requirement being required by 54% of plans.
• The majority of plans, 80%, have an age requirement related to employee eligibility to make elective deferrals.
• In 41% of the plans, participants may change their elective deferrals at any time.
• The vast majority of plans, 96%, allow participants who are 50 or over to make catch-up contributions as permitted under Section 402(g) of the Internal Revenue Code.

In addition to the foregoing highlighted statistics, the Interim Report also provides key findings on a large number of topics, including:  (a) changes in employee deferrals and contributions; (b) top heavy plans; (c) nondiscrimination testing; (d) Safe Harbor 401(k) plans; (e) SIMPLE 401(k) plans; (f) distributions from 401(k)plans; (g) hardship withdrawals and participant loans; (h) trust assets; (i) awareness of the employee plans compliance resolution system; (j) the determination letter program; (k) customer education and outreach; and (l) plan administration.

While the IRS anticipates that a final report on the Project will be published in December 2012, 401(k) plan sponsors may find the Interim Report helpful in comparing their plan to the results of the Project and analyzing potential modifications to their 401(k) plan. According to the IRS, 401(k) plan sponsors are encouraged to “use the Questionnaire as an internal control tool to review your plan for compliance issues.”  The IRS notes that if mistakes are found, it offers a 401(k) Fix-It Guide to help correct them as well as a correcting plan errors page with additional information.

Plan sponsors may find more information about the Project and the Interim Report on the IRS’ webpage entitled 401(k) Compliance Check Questionnaire Interim Report.  Finally, the IRS will hold a phone forum on the Interim Report on March 6, 2012.

On February 3, 2012, the U.S. Department of Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued proposed regulations that would exempt the purchase of a “Qualified Longevity Annuity Contract” (“QLAC”) from the account balance that would have to be distributed under the minimum distribution rules of Internal Revenue Code Section 401(a)(9).  This writer first heard about longevity insurance at a Joint Committee on Employee Benefits governmental conference where one speaker described this new product as a way to protect plan participants whose primary retirement vehicle is a defined contribution plan rather than a defined benefit plan.  The concept is that if a retiree takes a portion of his/her account balance at retirement (between age 55 and 65) and invests it in an annuity that doesn’t commence until age 80 or 85, the cost of the annuity would be low enough to be affordable for most retirees.  And if the retiree then lives to that age (as so many retirees now do), the annuity would kick in to provide income by the time the original account has been depleted.  Of all of the ideas promoted at that session, longevity insurance appeared to be the most attractive and least disruptive to plan administration.

The idea continued to percolate in the retirement community and, particularly, among the regulators at IRS.  The biggest impediment to implementation was Section 401(a)(9).  While Section 401(a)(9) is quite complex, by way of a concise description, this section requires distributions to commence on April 1 after attainment of age 70½ (the required beginning date), and to continue at a minimum level for the life expectancy of the retiree (and spouse or beneficiary, if any), and no more than 50% of the balance can be deferred past the retiree’s expected lifetime (except for a spouse). Essentially, if a retiree and spouse have a 25-year life expectancy in a given year, 1/25 of the account must be distributed that year, and 1/24 of the account the next year.  Life expectancies can be fixed at the commencement of the required minimum distribution period, or can be recalculated each year. If life expectancies are not recalculated, the account will be depleted at the end of the original life expectancy (the distribution ratio becomes 1/1 in the last year).  But if life expectancies are “average,” half of all retirees can be expected to outlive the original life expectancy.  Recalculation allows the account to be stretched out past the initial life expectancy, but then at death, the entire account must be distributed because the life expectancy is now zero, while with no recalculation, the distribution can continue at the original rate. 

The concern that these rules created for longevity insurance is that because distributions do not commence until well after the required beginning date, the annuity contract has to be linked to the original account for purposes of determining the required minimum distribution each year.  If the original account is depleted (by distributions in excess of the minimum) before the annuity commences, the retiree has to take an early distribution from the insurance contract (or cash it in) in order to satisfy the minimum distribution requirement applicable to the original account.  This potential for early distribution has to be factored into the pricing of the contract, even if it is extremely unlikely that an early distribution will be required.

The proposed regulations exempt a QLAC from the minimum distribution rules as currently constituted, and essentially create a new category of minimum distribution rules applicable only to QLACs.  The QLAC, if the proposed regulations are adopted, would allow a participant or IRA account holder to apply up to 25% (but not more than $100,000) of the account (at or before the required minimum distribution date) to the purchase of an annuity contract that defers commencement to age 85 (or earlier).  The contract can allow the purchaser to commence before age 85 (or not), but age 85 was selected as the latest possible commencement date because that is the current life expectancy of an age-65 retiree.  Just as the $100,000 maximum purchase limit would be indexed for inflation, the preamble indicates that the age 85 limit might be revised if life expectancies continue to increase.  Note that the $100,000 maximum purchase limit applies to all accounts covering the individual – an employer plan must keep track of this limit for all accounts maintained by the employer or an affiliate, but an IRA provider can accept the purchaser’s representation as to prior purchases of QLACs.  An IRA purchaser can combine IRAs to satisfy the 25% limit (so that one IRA can be used to purchase the QLAC if the owner has other IRAs worth three times as much in the aggregate).

There are complicated rules included for survivor annuities associated with QLACs – generally, it is simpler to have a spouse beneficiary than a non-spouse beneficiary, and distributions to a spouse beneficiary can be delayed to the original expected commencement date (thereby reducing the cost of the survivor annuity).  Because of the 25% account limit, it is unlikely that the QLAC would be subject to an employer plan’s requirement to offer a qualified joint and survivor annuity because the qualified joint and survivor annuity requirement applies to only half of a defined contribution plan’s account balance (most defined contribution plans are exempt from this requirement).  No other post-death options are available (such as return of premium or period certain).

As a practical matter, of course, employer plans rarely distribute defined contribution accounts over a life expectancy – more and more have moved to a “lump sum only” mode because it minimizes administrative costs.  The required minimum distribution rules are of interest mostly for those who administer IRAs (and those who own them), and for smaller plans in owner-operated businesses.  We predict that the availability of QLACs will not change the employer plan preference for lump sums only.  Unless the plan’s third party administrator is already offering annuities upon distribution (common only in plans administered by insurance companies), it is unlikely that the QLAC would become a common feature.  But it could become attractive for rollovers of large IRA balances, if there are enough insurers willing to offer these policies at competitive rates.  What has kept the employer plans away from annuities has been a perception that the fees and expense loads associated with annuity contracts do not meet the standards expected from other plan investment providers, particularly in an environment where fees must be disclosed and plaintiff lawyers are filing lawsuits over allegedly-excessive fees in defined contribution plans.

The preamble to the proposed regulation indicates that if the insurer is offering annuities at a 3% rate of return, an annuity purchased for $100,000 at age 70 could offer an annual benefit of up to $42,000 per year (without taking into account any expense load).  If the insurance community in fact offers QLACs in this range, the product could become an attractive option, particularly for retirees with a family history of longevity.  The challenge is that most employers have been focused on educating employees to make better investment decisions, but have not been focused on educating retirees (or those soon to retire) on preparing for life after retirement.  Many retirees have a distorted perception of their life expectancy and may not recognize that they are reasonably likely to live past age 85.  Even if an employer plan does not offer QLACs, the availability of such products may serve as a reminder to include retirement planning in employee benefit educational programming.

On February 3, 2012, the Department of Labor (“DOL”) published final regulations setting out the fee disclosure rules for persons or entities providing services to retirement plans governed by ERISA.  See Treas. Reg. §2550.408-2; 77 Fed. Reg. 023 (Feb. 3, 2012) pgs. 5632-5659. These regulations detail the disclosures that a covered service provider must furnish to a covered plan fiduciary before that fiduciary may enter into or extend contracts for services to the plan under a new prohibited transaction class exemption.  The exemption was previously issued by the DOL in tandem with the regulation when issued in proposed form.  Under this exemption, if the requirements of the fee disclosure regulation are not satisfied, the expenses associated with the contract or service arrangement will not be treated as exempt from ERISA’s prohibited transaction rules and may be subject to excise taxes.

The final regulation’s disclosure requirements apply to any covered service provider with respect to:  (a) a defined benefit or defined contribution pension plan subject to ERISA or a “plan asset” vehicle in which the plan invests; (b) an investment advisor registered under state or federal law; (c) a record keeper or broker who makes investment alternatives available to the plan; and (d) a provider of services to the plan who receive “indirect compensation” for such services (including accounting, auditing, actuarial, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, securities brokerage, third party administrators, or valuation services).  The requirements apply to covered service providers who reasonably expect to receive fees of at least $1,000.

The final regulation is similar in form and substance to the proposed regulations and interim regulations previously issued by the DOL, except as follows.  The final regulation:

• Extends the effective date of the service provider disclosure rules from April 1 to July 1, 2012.
• Requires that disclosures of changes in investment related information be provided “at least annually,” rather than within the 60-day period set forth in the proposed regulations.  All changes to information not related to investment information (such as the description of the services to be provided, the amount of compensation to be received, the cost of recordkeeping , etc.) are still required to be disclosed within 60 days from the date on which the service provider is informed of the change. 
• Provides a Sample Guide that can be used voluntarily by service providers to summarize where the required initial disclosures are to be found in multiple documents.
• Allows errors in previously disclosed changes in information to be corrected within 30 days.
• Clarifies that the disclosure rules do not apply to simplified employee plans (SEPs), SIMPLE retirement accounts, IRAs and certain “frozen” annuity contracts and custodial accounts established under Code Section 403(b).  The DOL will separately publish rules relating to fee disclosure for welfare benefit plans.
• Provides that information regarding “indirect compensation” must also include a description of the arrangement between the payer and the service provider.
• Requires additional disclosure of an investment fund’s annual operating expenses expressed as a percentage of total annual operating expenses, as well as other information relating to such investments that is within the control or reasonably available to the service provider and is a required disclosure under the rules for participant-directed investments under ERISA Section 404(c).
• Allows investment-related disclosures relating to designated investment alternatives to be provided by certain service providers in the form of the investment alternative issuer’s own current disclosure materials, or information replicated from such materials, regardless of whether the disclosure materials themselves are regulated, provided that the issuer is regulated, and the service provider acts in good faith, does not know that the materials are incomplete or inaccurate, and provides no representations as to the accuracy and completeness of such materials. This is helpful for service providers who provide recordkeeping or brokerage services that include designated investment alternatives independently selected by the plan fiduciary (e.g., “off-platform” investment alternatives).  See Preamble to Final Regulation Section B(4)(f), p. 5640.
• Expands the definition of “compensation” for disclosure purposes to allow the use of reasonable and good faith estimates to describe compensation if the service provider cannot otherwise describe the compensation or cost required to be disclosed, and clarifies the descriptions that may be made of the compensation or cost, as expressed in dollar amounts, formulae, percentages, per capital charges or other reasonable methods.
• Requires that regardless of when the fiduciary makes a written request for the reporting and disclosure information, the service provider may provide the information “reasonably in advance of the date upon which” the plan fiduciary states that it must comply with the applicable reporting requirement (rather than within 30 days of a request by the plan fiduciary under the proposed rule).

The class exemption is also modified under the final regulation.  Under the exemption, if a service provider fails to disclose required information, the plan fiduciary must request the information in writing from the service provider.  If the service provider fails to comply within 90 days, the plan fiduciary must decide whether or not to terminate the contract or arrangement.  The interim rule has been modified in the final regulation to emphasize that determinations by the plan fiduciary in this regard must be made in accordance with the prudence standards of Section 404 of ERISA.  Thus, if the information relates to future services and is not promptly disclosed within 90 days, the plan fiduciary must terminate the service arrangement “as expeditiously as possible,” consistent with its duty of prudence.  The class exemption puts the onus on plan fiduciaries to determine whether the information is of sufficient scope and quality to satisfy the final regulation. 

Lastly, the final regulation extends the deadline for providing participant disclosures.  For calendar year plans, the initial disclosure of plan and investment related information must be made by August 30, 2012.  The first quarterly statement must be provided to participants by no later than November 14, 2012, and must reflect expenses only during the third quarter. 

Covered service providers and plan fiduciaries should take steps to familiarize themselves with the final regulations to ensure that they do not inadvertently run afoul of ERISA’s prohibited transaction rules.  In addition to the final regulations themselves, the DOL has published a fact sheet regarding the final regulations and a list of changes to the final fee disclosure rule.

The House of Representatives on Wednesday voted to rescind another portion of the Affordable Care Act. The chamber approved by a 267-159 margin the Fiscal Responsibility and Retirement Security Act of 2011 (H.R. 1173), a measure that would repeal the Community Living Assistance Services and Supports (CLASS) Act, (pdf) the Affordable Care Act’s long-term care program. The Department of Health and Human Services (HHS) already had announced that it was abandoning the program. The CLASS Act would have created a national, voluntary program for individuals to purchase long-term care benefits in the event they become functionally disabled. Adults would have been able to make premium contributions to this program directly or through payroll deductions. Under the terms of the CLASS Act, individuals who made such payments for at least five years and had been employed for at least three of those years would be entitled to cash benefits to purchase needed health and support services – and even certain non-medical needs – based on their degree of disability. The amount of benefits would have varied according to need, but would have averaged no less than $50 per day. The program was slated to begin providing such benefits in 2017.

From its inception the long-term care program has been the subject of sustained criticism, particularly regarding its perceived lack of economic sustainability. Opponents to the program argued that it would not be viable for the long term if employers did not enroll their employees and/or if not enough individuals under age 40 participated. Critics also questioned the affordability of the program’s premiums. According to House Report (pdf) on the CLASS Act repeal legislation, HHS had projected that premiums would exceed earlier estimates. As stated in the Report, HHS estimated that the basic CLASS benefit plan could cost “$235 and $391 a month, and may cost as much as $3,000 per month.”

The Affordable Care Act required HHS to design a plan that would be actuarially sound and financially solvent for at least 75 years. Realizing that the program, as is, would be fundamentally unworkable, HHS Secretary Kathleen Sebelius announced in October 2011 that the agency would not pursue its implementation. In a letter to Congress, Sebelius stated that she does “not see a viable path forward for CLASS implementation at this time.” Sherry Glied, HHS’s Assistant Secretary for Planning and Evaluation, reiterated this position while testifying before a House subcommittee hearing on October 26, 2011. During that hearing, conducted by the House Subcommittee on Oversight and Investigations, Glied acknowledged that HHS has “not identified a way to make CLASS sustainable, legal and attractive to potential buyers at this time.”

Administration officials had expressed hope, however, that the program could be retooled in the future. Because the Fiscal Responsibility and Retirement Security Act of 2011 would excise this program from the Affordable Act entirely, the measure is not without its detractors. The dissenting views contained in the House Report explain that

While a ‘‘timeout’’ for CLASS may be fitting at this juncture in the Program’s brief history, ‘‘throwing in the towel’’ completely simply is not the answer. HHS and Congress should instead learn from experts about how best to make CLASS work and then take the necessary steps to ensure that happens. And until then, CLASS should remain on the law books.

The bill next moves to the Senate for consideration.