The Department of Health and Human Services’ Centers for Medicare & Medicaid Services (CMS) has issued a final rule (pdf) that imposes a new reporting requirement on health insurance issuers in the group and individual markets that meet or exceed the applicable medical loss ratio (MLR) standard for the 2011 reporting year. The Affordable Care Act requires 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 law also imposes certain reporting requirements for insurers. Final regulations implementing 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.

When the December MLR rule was released, the CMS requested comments as to whether an issuer that meets or exceeds the applicable MLR threshold would have to send a notice to policyholders and subscribers with information about the MLR standard and its own MLR as a performance measurement. In addition, the agency sought comments as to whether it would be useful to include information about the issuer’s MLR for the prior year in these notices. After reviewing comments submitted in response to this request – and reportedly weighing the interests of consumer transparency and competition with the issuer’s compliance burden – the CMS has determined that it would require issuers that meet or exceed the MLR standard to send a “simple, straightforward” notice to policyholders, but only for the 2011 reporting year. To this end, the rule establishes this basic notice requirement, and outlines the standard language that issuers will use to inform policyholders and subscribers of group health plans, and subscribers in the individual market, that the issuer has met the minimum MLR standard. The notice will not include the issuer’s MLR for the current or prior reporting years, nor will it need to include other specific measures of the issuer’s performance. An issuer must provide the notice with the first plan document that the issuer provides to enrollees on or after July 1, 2012.

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The Department of Labor’s Employee Benefits Security Administration (EBSA) along with the Departments of Health and Human Services (HHS) and the Treasury have released a ninth set of Frequently Asked Questions (FAQs) on the Affordable Care Act’s implementation. This most recently issued guidance addresses questions regarding the health care reform law’s summary of benefits and coverage (SBC) requirement. The Affordable Care Act requires group health plans and health insurance issuers to provide consumers with a 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. This SBC must be provided during certain times, such as when potential enrollees are shopping for coverage, when they actually apply for coverage, at each plan year, and upon request. In addition, a notice must be sent to enrollees and policyholders informing them of any significant changes in coverage at least 60 days before such changes take effect. A uniform glossary of common healthcare-related insurance terms must also be provided to consumers at various points in the enrollment process. Final regulations implementing the SBC and uniform glossary requirements were issued in February 2012.

The new set of 14 FAQs provides guidance on a number of SBC issues, and details several temporary enforcement amnesty periods related to certain SBC provisions. Such information includes the following:

• A plan or issuer may provide the SBC electronically to participants and beneficiaries in connection with their online enrollment or online renewal of coverage under the plan, and to those who request a SBC online. In each instance, a written copy must be provided upon request.
• An issuer does not need to provide an individual (or a plan or its sponsor) who received a SBC prior to applying for coverage with another SBC upon application, so long as the information has not changed. However, if by the time the application is filed, there is a change in the information required to be in the SBC, the issuer or plan must update and provide a current SBC to the individual (or plan or its sponsor) as soon as practicable following receipt of the application, but in no event later than seven business days following receipt of the application.
• If the coverage terms are in negotiation after the application has been filed and the information in the SBC changes during that period, a new SBC need not be provided (unless specifically requested) until the first day of coverage.
• Some plans or issuers provide web-based or print materials to illustrate the differences between benefit package options (including comparison charts and broker comparison websites). It is permissible to “combine” SBCs or SBC elements to provide a side-by-side comparison, however, the full SBC for all the benefit packages included in the comparison view/tool must be made available in accordance with the regulations and other guidance.
• Although an entity that willfully fails to provide the SBC or uniform glossary is subject to a fine, during this first year of applicability the agencies will not impose penalties on plans and issuers that are working diligently and in good faith to comply.
• The agencies are developing a calculator that plans can use as a safe harbor for the first year of applicability to complete the coverage examples portion of the SBC.
• The agencies will impose a temporary enforcement amnesty period on plans that use “carve out” arrangements. An issuer is not obligated to provide coverage information for benefits that it does not insure. Specifically, the guidance explains that “a plan administrator that uses two or more insurance products provided by separate issuers with respect to a single group health plan may synthesize the information into a single SBC, or may contract with one of its issuers (or other service providers) to perform that function. Due to the administrative challenges of combining benefit package information from multiple issuers, during the first year of applicability, for enforcement purposes, with respect to a group health plan that uses two or more issuers, the Departments will consider the provision of multiple partial SBCs that, together, provide all the relevant information to meet the SBC content requirements.” In such circumstances, the plan administrator should take steps (such as a cover letter or a notation on the SBCs themselves) to indicate that the plan provides coverage using multiple different insurers and that individuals who would like assistance understanding how these products work together may contact the plan administrator for more information. The agencies will not take any enforcement action against a plan or issuer for failing to provide an SBC before September 23, 2013 with respect to an insured product that is no longer being actively marketed for business, provided the SBC is provided no later than September 23, 2013.
• The agencies will not take any enforcement action against a group health plan or group health insurance issuer for failing to provide an SBC with respect to expatriate coverage during the first year of applicability.

The agencies have also made available a corrected Summary of Benefits and Coverage Template (pdf); a corrected Sample Completed SBC (pdf) and HHS Guidance on Inputs for Coverage Example Calculator.

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The Department of Labor’s Employee Benefits Security Administration (EBSA) has issued a new set of Frequently Asked Questions (FAQs) on the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA). This law generally requires private group health benefit plans that provide mental health and/or substance use disorder benefits through a group health benefit plan that also offers medical and surgical benefits to do so on an equivalent basis. The Act imposes several plan design requirements on group health benefit plans that offer mental health and/or substance use disorder benefits including equity in cost sharing, treatment limitations, and coverage decision requirements. For example, the MHPAEA and its implementing regulations stipulate that plans and issuers may not impose a lifetime or annual dollar limit on mental health or substance use disorder benefits that is lower than the lifetime or annual dollar limit imposed on medical/surgical benefits.

The recently-issued guidance includes a set of 10 FAQs covering such topics as which agencies oversee the MHPAEA’s implementation, whether certain plan designs violate the MHPAEA, and how to seek redress if an individual believes his or her plan is in violation of the law.

Among other points, the FAQs explain that:

• A plan that provides medical/surgical benefits on an outpatient basis may not limit mental health or substance use disorder benefits to inpatient care only.
• The MHPAEA requires that mental health and substance use disorder benefits be covered and managed in a manner that is no more stringent than medical/surgical benefits, but does not require that insurance arrangements be organized in any particular way. Therefore, a health plan that uses a separate managed behavioral health organization to provide utilization review and other services with respect to mental health and/or substance abuse benefits (a “carve-out” arrangement) would not necessarily violate the MHPAEA.
• Nonquantitative treatment limitations (NQTLs) such as medical management standards are not analyzed in the same way as are financial or quantitative treatment limitations on mental health/substance use disorder benefits. According to the FAQs, the interim final regulations on the MHPAEA explain that with respect to NQTLs, “under the terms of the plan as written and in practice, any processes, strategies, evidentiary standards, or other factors used by a plan or issuer in applying an NQTL to mental health or substance use disorder benefits must be comparable to, and applied no more stringently than, the processes, strategies, evidentiary standards, or other factors used in applying the limitation to medical/surgical benefits, unless recognized clinically appropriate standards of care may permit a difference.”
• States generally may impose stricter requirements regarding mental health benefits on health insurance issuers.
• The MHPAEA does not apply to employers who have fewer than 51 employees.

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The Departments of Treasury, Health and Human Services, and Labor are soliciting input from group health plans and their sponsors regarding the use of stop loss insurance. Stop loss insurance protects against catastrophic or unpredictable health insurance claims and provides coverage to self-insured group health plans once a certain level of risk has been assumed by the plan. According to the request for information, the agencies lack sufficient data on the incidence or terms of stop loss insurance among self-insured employers’ group health plans. The concern, as discussed in the request, is that small employers with healthy employees might self-insure and purchase stop-loss insurance policies with relatively low attachment points (the specified dollar amount above which the stop-loss coverage pays for claims) to avoid triggering certain requirements under the Affordable Care Act. According to the agencies, “this practice, if widespread, would worsen the risk pool and increase premiums in the fully insured small group market, including in the Small Business Health Options Program (SHOP) Exchanges that begin in 2014.”

In order to examine this issue further, the agencies seek responses on the following questions:

1. How common is the use of stop loss insurance in connection with self-insured arrangements? Does the usage vary (and, if so, how) based on the size of the underlying arrangement or based on other factors? How many individuals, if known, are covered under stop loss insurance (either nationally or on a state-specific basis)? What are the trends? Are past trends expected to be predictive of future trends? Is the Affordable Care Act expected to affect these trends (and, if so, how)?
2. What are common attachment points for stop loss insurance policies, and what factors are used to determine these attachment points? What are common attachment points by employer size (e.g., for plans with fewer than 50, between 50 and 100, or between 100 and 250 employees, and how do these compare to attachment points used by larger plans)? What are the lowest attachment points that are available? What are the trends?
3. Are employee-level (“specific”) attachment points more common, or are group-level (“aggregate”) attachment points more common? What are the trends? What are the common attachment points for employee-level and group-level policies?
4. How do insurers work with small employers to integrate stop loss insurance protection with self-insured group health plans? What kinds of options are generally made available? Are policies customized to meet the needs of different employers? How are the attachment points for a stop loss policy determined for an employer? Do self-insured group health plans purchase stop loss insurance anticipating that they will purchase it every year?
5. For a given attachment point, what percentage of total medical costs incurred by the employees is typically paid for by the employer and what percentage is typically paid for by the stop loss insurance policy? How much do the relative percentages vary for different attachment points? What are the loss ratios associated with stop loss insurance policies?
6. What are the administrative costs to employers related to stop loss insurance purchased for the employers’ self-insured group health plans? How do these costs compare to the administrative costs related to purchasing a health insurance policy from an issuer?
7. Is stop loss insurance more prevalent in certain industries or sectors? Are there any minimum employee participation requirements for a small employer to be offered stop loss insurance?
8. What types of entities issue stop loss insurance? How many small entities issue stop loss insurance policies?
9. Do stop loss issuers increase fees for groups below a certain size or exclude those groups? If so, how?
10. How do stop loss insurers evaluate the plans seeking coverage and how is this evaluation reflected in the coverage or premiums offered? Does the profile of the plan have an effect on the attachment points available?
11. How do States regulate stop loss insurance? In States that are regulating this insurance, what are the licensing processes and standards? Have States proposed laws, regulations, or best practices with regard to stop loss insurance? Do such proposals focus on attachment points, size of the group, percent of total claims paid by the stop loss insurer, or other criteria? What are the issues States face in regulating stop loss insurance?
12. What effect does the availability of stop loss insurance with various attachment points and other particular provisions have on small employers’ decisions to offer insurance to employees?
13. What impact does the use of stop loss insurance by self-insured small employers have on the small group fully insured market?

Comments must be received on or before July 2, 2012. Comments may be submitted electronically through the federal eRulemaking Portal or via email to: E-OHPSCA-STOPLOSS.EBSA@dol.gov. Written comments may also be sent or hand delivered 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, Attention: Stop Loss Comments.

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The Centers for Medicare & Medicaid Services (CMS) has issued new guidance (pdf) on the medical loss ratio (MLR) requirement 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 law also imposes certain reporting requirements for insurers. Final regulations implementing 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.

The new technical guidance, which is in question and answer format, responds to inquiries on the following topics: applicability of the MLR to certain types of plans; employer groups of one; counting employees for determining market size; individual association policies; offering policyholders a “premium holiday”; reinsurance and reporting; insurance exchange user fees; states with a higher medical loss ratio standard; application of the adjustment to “mini-med” plans; and the form of the rebate to be provided.

With respect to the application of the MLR to certain types of plans, the Q&A document clarifies that the MLR reporting and rebate requirements are applicable for health insurance issuers offering group or individual health insurance coverage only. These requirements are not applicable to self-funded plans, health insurance benefits provided through a Medicaid managed care organization (MCO) contract with a State Medicaid agency to provide benefits to Medicaid beneficiaries, nor for health insurance benefits provided through a contract with CMS that offers health insurance coverage through Medicare, such as Medicare Advantage plans (Medicare Part C) and Medicare prescription drug plans (Medicare Part D).

As for employer groups of one, the guidance explains that “where a sole proprietor and/or a spouse-employee are the only enrolled employees, the health plan would not be considered to be a group health plan.” The guidance explains further, however, that if “a sole proprietor enrolls a non-spouse employee, the experience of that plan is part of the small group market for MLR purposes. Even if the only enrollee is an employee who is not an owner or spouse, the plan is part of the small group market for MLR purposes.”

Another question asks what method should be used in counting employees to be covered under a group policy that does not cover all employees. In response, the guidance states that “at the time of sale, issuers should make every attempt to accurately count the number of employees employed by the group policyholder so as to accurately categorize the group as belonging in the small or large group market.” In certain circumstances, however – such as when a policyholder does not make the policy available in all states in which it does business – it is more difficult to ascertain market size. In such a situation, the guidance explains, “the issuer may determine the group size for MLR reporting purposes and the minimum MLR standard based on the information available to the issuer.”

In terms of reporting MLR data for individual or non-group association policies, the Q&A explains that issuers should report such data “in the state where the individual resides at the time the certificate of coverage is issued.”

In response to another question about whether “premium holidays” are permissible in lieu of providing rebates if an issuer finds that its MLR is lower than the standard required, the guidance explains that this is a state regulatory issue not addressed by the MLR regulations.

The guidance also notes that insurance exchange user fees “should be included in the licensing and regulatory fees that are subtracted from premium in the MLR calculations.”

Finally, the Q&A guidance lists the conditions that must be met before an issuer may provide MLR rebates in the form of a pre-paid debit card.

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The Internal Revenue Service has issued three new guidance documents related to certain requirements the Affordable Care Act imposes on employer-provided health plans. The Department of Health and Human Services (HHS) also issued a bulletin regarding verification of access to employer-sponsored coverage.

IRS Notice 2012-31

The first guidance document, Notice 2012-31, (pdf) suggests various possible ways for determining whether the coverage offered through an employer-sponsored health plan constitutes “minimal value” under the health reform law. Beginning in 2014, the Affordable Care Act will permit certain eligible individuals who purchase health insurance through insurance exchanges to receive a premium tax credit unless they are eligible for other minimum essential coverage, including affordable employer-sponsored coverage that also provides minimum value. A plan lacks minimum value if “the plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs.” An applicable large employer, one with 50 or more full-time employees or equivalents, will be subject to a penalty if any full-time employee receives a tax credit because the employer-sponsored plan does not provide minimum value.

Notice 2012-31 sets forth three possible approaches for determining minimum value, and requests input on these methods. Under anticipated future guidance, an employer-sponsored plan would be able to use one of the following alternative approaches to ascertain whether the plan provides minimum value. Specifically, these three assessment possibilities are:

• The actuarial value calculator (AV calculator) or a minimum value calculator (MV calculator) to be made available by the Department of Health and Human Services (HHS) and the Treasury Department. The calculator would permit an employer-sponsored plan to enter information about the plan’s benefits, coverage of services, and cost-sharing terms to determine whether the plan provides minimum value. The data underlying the MV calculator (which would be designed for use by employer-sponsored self-insured plans and insured large group plans) are expected to be claims data reflecting typical self-insured employer plans.
• An array of design-based safe harbors in the form of checklists that would provide a simple, straightforward way to ascertain that employer-sponsored plans provide minimum value without the need to perform any calculations or obtain the assistance of an actuary.
• For plans with nonstandard features that preclude the use of the AV calculator or the MV calculator without adjustments, an appropriate certification by a certified actuary, in accordance with prescribed continuance tables, recognized actuarial standards, and other conditions that may be prescribed in administrative guidance, that the plan provides minimum value.

The Notice discusses each method in detail, and requests comments “on issues plan sponsors, issuers, and employers may face in evaluating plan designs that will cover part or all of 2014, including suggestions for transitional relief for plan years that start before and end in 2014.” The notice also confirms that employer-sponsored self-insured and insured large group plans are not required to conform their plans to any of the essential health benefit (EHB) benchmarks that the Department of Health and Human Services (HHS) intends to propose to apply to Qualified Health Plans (QHPs) offered through the exchanges. HHS issued an actuarial value bulletin explaining that the actuarial value of QHPs offered through an Exchange (and of non-grandfathered plans in the individual and small group insurance markets) is determined by computing the ratio of (1) the total expected payments by the plan, computed in accordance with the plan’s cost-sharing rules (deductibles, co-insurance, co-payments, out-of-pocket limits), toward the costs a standard population is expected to incur at standard pricing for EHBs; over (2) the total costs a standard population is expected to incur at standard pricing for the EHBs. The notice states that actuarial value with respect to self-insured plans and insured large group plans will be determined in the same manner, but with appropriate modification.

The notice also seeks comments on a series of questions, including how the actuarial value initially generated by the AV calculator or the MV calculator could be adjusted to take into consideration benefits provided under the plan other than the four core categories of benefits (physician and mid-level practitioner care; hospital and emergency room services; pharmacy benefits; and laboratory and imaging services).

IRS Notice 2012-32

The second guidance document (Notice 2012-32) (pdf) requests comments on the related reporting requirements for health insurance issuers, employers that sponsor self-insured plans, and other entities that provide minimal essential coverage to an individual. As discussed in the Notice, Section 6055 of the Internal Revenue Code – which was added under the Affordable Care Act – requires every health insurance issuer, sponsor of a self-insured health plan, government agency that administers government-sponsored health insurance programs and other entity that provides minimum essential coverage to file annual returns reporting information for each individual for whom minimum essential coverage is provided. The reporting requirements apply to health care coverage on or after January 1, 2014. If health insurance coverage is provided by a health insurance issuer and consists of coverage provided through a group health plan of an employer, it is anticipated that the regulations would make the health insurance issuer responsible for the reporting.

Effective for years beginning after 2013, Section 6056 of the IRC directs every applicable large employer that is required to meet the shared employer responsibility requirements to file a return with the Service that reports the terms and conditions of the health care coverage provided to the employer’s full-time employees for the year. The return also is required to include information on the employer’s full-time employees, including those who received the coverage and when they received it.

Notice 2012-32 discusses these requirements, and solicits comments on the following questions:

• How to determine when an individual’s coverage begins and ends for purposes of reporting the dates of coverage.
• How to minimize duplication between the reporting by health insurance issuers and employers under § 6055 and the reporting by Exchanges under § 36B(f)(3).
• How to coordinate and minimize duplication between the reporting under § 6055, § 6056, and any other applicable Code provision for employers that sponsor self-insured plans.
• When minimum essential coverage is provided through a voluntary employees’ beneficiary association or other type of welfare benefit fund, who is required to report under § 6055 and what, if any, special rules should apply.
• Whether there are any specific concerns that should be taken into account in any of the following circumstances: (a) In the case of electronic information reporting and delivery of statements to individuals and the Service; (b) If a third party administrator has information that is relevant to reporting for a self-insured plan; (c) If an individual is covered under one type of coverage for part of the year and another type of coverage for another part of the year; and (d) When minimum essential coverage is provided under a multiemployer plan.
• Whether any difficulties exist in identifying the person responsible for administering information reporting for governmental coverage, for example in state-administered programs such as Medicaid.
• Any additional suggestions for minimizing burden on entities reporting information under § 6055.

IRS Notice 2012-33

IRS Notice 2012-33 (pdf) requests comments on the reporting requirements applicable to large employers regarding health insurance coverage under employer-sponsored plans under Section 6056 to the IRC, as added by the Affordable Care Act. The IRS and Treasury Department will issue regulations to implement these reporting requirements, and also issue guidance to minimize the administrative burden of doing so. To this end, the Notice seeks comment “on issues arising under § 6056 that would be helpful for the regulations to address, including how to coordinate and minimize duplication between the data employers must report under § 6056 and the data they must report under § 6055 (which provides for annual reporting by employers that sponsor self-insured plans) or other applicable Code or Affordable Care Act provisions.”

Comments on any of these Notices must be received on or before June 11, 2012, and sent to Internal Revenue Service, CC:PA:LPD:PR (Notice 2012-31, 2012-32, or 2012-33, whichever is applicable), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044, or electronically to Notice.Comments@irscounsel.treas.gov. The specific Notice number for which the individual is providing comment should be included in the subject line. Alternatively, comments may be hand delivered between the hours of 8:00 a.m. and 4:00 p.m. Monday to Friday to CC:PA:LPD:PR (Notice 2012-31, -32, or -33), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, D.C.

Verification of Access to Employer-Sponsored Coverage Bulletin

The HHS bulletin (pdf) addresses the verification of access to employer-sponsored coverage as a necessary part of the process for determining eligibility for advance payments of the premium tax credit available to support the purchase of qualified health plans through Exchanges. The bulletin requests comments on a proposed interim strategy and potential regulatory approach for verification of an applicant’s access to qualifying coverage in an employer-sponsored plan.

The August 17, 2011 Exchange Eligibility notice of proposed rulemaking sought comment on optimal way for Exchanges to interact and communicate with employers to verify information regarding employer-sponsored coverage. The proposed rule requested comment on two proposed interim strategies: (1) a sample template that could be used voluntarily by employers and employees to assist applicants in filling out the Exchange application; and (2) a database that employers could voluntarily populate with relevant information and that Exchanges could access.

After considering stakeholder comments, HHS proposes to provide a standardized way for employees and employers to voluntarily collect and communicate employer-sponsored coverage information needed to complete an Exchange application., HHS proposes to allow Exchanges to verify employer-sponsored coverage for the 2014 and 2015 plan years through use of limited pre-enrollment verification based on data sources available to an Exchange and a post-enrollment verification screening process where data sources are not available during the eligibility determination process. The bulletin notes that when pre-enrollment verification is possible, this is the preferred approach. HHS also seeks comments on long-term verification strategies.

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The so-called “say-on-pay” provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act are beginning to make headlines as more domestic public companies grapple with shareholder advisory votes on executive compensation.  In 2011, the Securities and Exchange Commission (SEC) adopted final rules implementing Dodd-Frank section 951’s requirement that SEC-registered issuers provide shareholders at least once every three calendar years with a separate non-binding say-on-pay vote regarding the compensation of the company’s named executive officers, the chief executive officer, the chief financial officer, and the company’s three other most highly compensated officers.  Although the vote on compensation is non-binding, the company must include a statement in the Compensation Discussion and Analysis of the proxy statement whether and, if so, how its compensation policies and decisions have taken into account the results of the shareholder say-on-pay vote.  As a result, the vote of the shareholders will be taken seriously not only by the company, but other companies in the same marketplace.

Amidst negative media attention on executive compensation packages, approximately 1.5% to 2% of the many non-binding say-on-pay votes occurring in the 2011 proxy season failed to secure shareholder approval.  In some cases where a majority of shareholders voted against the say-on-pay resolutions of a company, a shareholder derivative lawsuit against the Board of Directors has  followed.  In Teamsters Local 237 v. McCarthy, No. 2011-cv-197841 (Sup. Ct. Fulton County Ga. Sept. 16, 2011) (slip op.), a Georgia state court dismissed a shareholder derivative suit because, among other things, a negative say-on-pay vote failed to create a reasonable doubt that the challenged compensation decisions were valid exercises of business judgment. 

However, an Ohio federal court declined to dismiss a derivative suit against the Board of Cincinnati Bell – brought after 66% of the company’s shareholders voted against the 2010 executive compensation package.  More recently, in the financial services industry, shareholders of a large financial institution voted against the pay package of the CEO.  There were concerns that the compensation package lacked significant and important goals to provide incentives for improvement in the shareholder value of the institution.  Consequently, a shareholder filed a derivative lawsuit against the CEO, the Board of Directors, and other directors and executives for allegedly awarding excessive pay to its senior officers. 

Practical Tips

While shareholder disapprovals remain uncommon, it is clear that compensation and the manner in which it is awarded should be carefully considered before subjecting the compensation to a shareholder vote.  CEOs often engage counsel to advocate for a compensation package.  It is increasingly obvious, however, that compensation committees must also receive independent counsel to evaluate performance objectives and analyze executive compensation in similarly-situated companies.  Without an independent assessment and in a media-focused environment, negative reaction from shareholders is a growing concern.  Once shareholders register their disapproval through the say-on-pay vote, the company and the Board of Directors are at risk for a shareholder derivative lawsuit.  Thus, the implications and risks of the Dodd-Frank rules on say-on-pay reverberate beyond the advisory, non-binding shareholder vote.

The Internal Revenue Service (IRS) has issued a proposed rule addressing the fees imposed by the Affordable Care Act on issuers of certain health insurance policies and plan sponsors of certain self-insured health plans to fund comparative effectiveness research. These fees are designed to support the Patient-Centered Outcomes Research Trust Fund (“Trust Fund”). The Affordable Care Act includes provisions establishing the Patient-Centered Outcomes Research Institute (the “Institute”), a private, nonprofit corporation whose purpose is to “assist, through research, patients, clinicians, purchasers, and policy-makers in making informed health decisions by advancing the quality and relevance of evidence-based medicine through the synthesis and dissemination of comparative clinical effectiveness research findings.” The Institute is to be paid for by the Trust Fund, which, in turn, will be partly financed by fees paid by issuers of specified health insurance policies and sponsors of applicable self-insured health plans.

The Affordable Care Act imposes a fee on an issuer of a specified health insurance policy for each policy year ending on or after October 1, 2012, and before October 1, 2019 to support the Trust Fund. The fee is two dollars (one dollar in the case of policy years ending before October 1, 2013) multiplied by the average number of lives covered under the policy. For policy years ending on or after October 1, 2014, the fee is increased based on increases in the projected per capita amount of National Health Expenditures. With respect to applicable self-insured health plans, the fee will be paid by the plan sponsor. In the case of (1) a plan established or maintained by two or more employers or jointly by one or more employers and one or more employee organizations, (2) a multiple employer welfare arrangement, or (3) a voluntary employees’ beneficiary association described in section 501(c)(9), the plan sponsor is the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan.

The proposed rule incorporates comments received in response to IRS Notice 2011-35 released in June 2011, which discussed how these fees should be calculated and paid, as well as possible rules and safe harbors. The proposed rule considers in detail various comments submitted in response to this Notice. Generally, the proposal lays out which health insurance policies are considered “specified” health insurance policies subject to the fee; which self-insured health plans and plan sponsors are subject to the fee; whether and to what extent health FSAs and HRAs are excluded from the definition of an applicable self-insured health plan; how employee assistance programs, disease management programs, and wellness programs are to be treated; how the applicable fees are to be calculated, and applicable filing requirements.

With respect to fee calculation, the fee imposed on an issuer of a specified health insurance policy and that imposed on a plan sponsor of an applicable self-insured health plan is to be based on the average number of lives covered under the policy or plan. The proposed regulations direct an issuer to apply a single method in determining the average number of lives covered under the policy or plan for the year. The proposed rule contains various examples as to how this calculation would work under differing circumstances.

The term “specified health insurance policy” includes only accident and health insurance policies that are issued to an individual residing in the United States. The proposed regulations clarify that for purposes of this fee, “an individual residing in the United States” means an individual who has a place of abode in the United States.

These proposed regulations provide that an applicable self-insured health plan “is a plan that is established or maintained by a plan sponsor for the benefit of employees, former employees, members, former members, or other eligible individuals to provide accident and health coverage . . . any portion of which is provided other than through an insurance policy and that meets certain other conditions.” The proposed rule states that an applicable self-insured health plan does not include an exempt governmental program but does include retiree-only plans.

With respect to FSAs and HRAs, the proposed regulations do not exclude all such plans from the definition of an applicable self-insured health plan, but do provide that multiple self-insured arrangements established and maintained by the same plan sponsor and with the same plan year are subject to a single fee. Accordingly, an HRA is not subject to a separate fee under section 4376 if the HRA is integrated with another applicable self-insured health plan that provides major medical coverage, provided that the HRA and the other plan are established or maintained by the same plan sponsor. A specified health insurance policy does not include any insurance if substantially all of its coverage is of excepted benefits. The proposed regulations provide that a health FSA that satisfies the requirements of an excepted benefit is excluded from the definition of an “applicable self-insured health plan” and therefore is not subject to the fee. The proposed regulations does contain a special rule permitting the plan sponsor to assume one covered life for each employee with an HRA and for each employee with a health FSA that is not an excepted benefit.

An employee assistance program, disease management program, or wellness program if the program does not provide significant benefits in the nature of medical care or treatment would not be considered an “applicable” self-insured plan, and, therefore, would not be subject to the fee.

The IRS will hold a public hearing on these regulations on Wednesday, August 8, 2012 at 10:00 a.m. in the IRS Auditorium at the Internal Revenue Building, 1111 Constitution Avenue, N.W., Washington, DC. Requests to speak and submission of outlines of topics to be discussed at the public hearing must be received by July 30, 2012. Speakers will be allotted 10 minute timeslots in which to comment. Submissions may be made electronically via the federal eRulemaking portal using code: IRS REG-136008-11 or sent to CC:PA:LPD:PR (REG-136008-11), Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington DC 20044. Written requests and submissions may also be hand-delivered to the Courier’s Desk Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC.

Comments on the information collection requirements contained in the proposed regulations must be received by July 17, 2012. Such comments are to be sent to: Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224.

Photo credit: Andriy Solovyov

In Northwest Airlines Inc. v. Phillips, (pdf) an employer/plan sponsor and union sought a declaratory judgment that the following planned contribution scheme for a money purchase plan did not violate ERISA or the ADEA:  The company would make no contribution if the employee is 55 or older, a contribution of 0-17% of pay if the employee is 50-54, up to 25% of pay if the employee is 40-49, and one of 9-21% of pay if the employee is 30-39.  The defendant participants counterclaimed alleging that the scheme violated ERISA, the ADEA and state laws prohibiting age discrimination.  The Eighth Circuit affirmed the district court’s holding that the planned contributions did not violate ERISA or the ADEA.The money purchase plan contribution scheme was developed post-bankruptcy by Northwest Airlines, Inc. (Northwest)  and the Air Line Pilots Association (ALPA) using a “stovepipe” model, which projected a hypothetical career for each pilot in order to determine final average earnings at retirement.  Based on a pilot’s age and years of service, the plan then calculated a “target percentage” of the pilot’s projected final average earnings to be provided as a retirement benefit.  Contributions to the target benefit plan, in combination with the pilot’s benefit under a frozen defined benefit pension plan, were designed to achieve a retirement benefit equal to 50% of projected final average earnings.  Northwest and ALPA sought a determination that ERISA § 204(b)(2)(A) and the parallel provisions of ADEA § 4(i)(1)(B) were not violated.

Defendant participants, generally older pilots, alleged that allocations to their accounts were reduced or ceased because of age.  In their counterclaim they argued that certain of the elements of the contribution formula (seniority, years of service, age) were “inextricably linked to age.” 

The Eighth Circuit acknowledged that projecting final average earnings necessarily involves the use of age, but that any reduction or cessation of contributions was not “because of” age.  The use of years of service was analytically distinct from the use of age.  It noted that nothing in the law indicated that Congress set out to legislate against the fact that younger workers have more time to grow their pension benefit.  Moreover, any offset of the target benefit due to one’s service ratio or one’s frozen pension benefit was due to “pension status” not age. Again, these reductions were not “because of” age and not based upon a stereotype about the work capacity of older workers relative to younger ones which the ADEA sought to eradicate.

Lessons Learned … 

If your company has undergone dramatic changes, a target benefit plan may be an appropriate means of integrating prior benefit arrangements and providing a benefit that satisfies reasonable benefit expectations and goals of the company and employees.

Courts recognize that retirement plans do not need to be age neutral or age-blind in order to avoid running afoul of the ADEA.  Plan designs can employ age and age-affected elements so long as they are not animated by an intent to discriminate because of age.

Recently, the Internal Revenue Service (IRS) published Revised Audit Guidelines for use by IRS auditors in examining group health plans for COBRA compliance.  The revised Guidelines incorporate changes to account for laws that have affected COBRA since the previous guidelines were developed, such as the Health Insurance Portability and Accountability Act (HIPAA) and the Family and Medical Leave Act (FMLA).  The Guidelines appear to herald a new COBRA compliance audit effort by the IRS. 

The Guidelines provide a general overview of the requirements, limitations, and exceptions of COBRA and the excise tax.  Notable highlights from the Guidelines include:

• Some insight into the IRS’s approach to COBRA enforcement.  By way of example, the Guidelines provide that when an employer contends that an employee was ineligible for COBRA rights because he was terminated for “gross misconduct,” an auditor may consider whether the employee was granted unemployment compensation benefits, whether the employee grieved his termination under a collective bargaining agreement and the results of any proceedings related thereto, and in some circumstances witness accounts regarding the alleged gross misconduct.  If the employee was awarded unemployment compensation benefits and/or won an arbitration regarding his termination, the Guidelines note that the employer may have failed to comply with COBRA.
• A list of documents to be requested by an auditor during a COBRA audit.
• A list of interview questions for an auditor to ask of the responsible parties in order to examine and address specific areas for noncompliance.

COBRA penalties and related damages may arise in two ways. First, potential notice-related penalties of up to $110 per day, per violation, that may be imposed by the federal courts under ERISA’s civil enforcement provisions, plus attorneys’ fees, and possible recovery by the complaining individual in the main enforcement action. Second, the employer or administrator may be subject to COBRA’s excise tax of $100 for each day that a violation continues.  These excise taxes may be substantial – and are effectively capped at $500,000 for employers and $2 million for third party administrators. 

Employers and administrators should prepare now to structure their COBRA compliance practices and procedures to avoid getting bitten by COBRA’s civil penalties and/or excise tax.  In doing so, it is recommended that employers and administrators conduct self-audits, following the Guidelines, to rectify any potential mistakes or problems with their practices and procedures before the IRS selects them for an audit.