DOL Issues Additional Guidance After District Court Invalidates AHPs Formed Under New Rules
On May 13, 2019, the DOL issued Part Two in a series of questions and answers they’ve provided after a federal district court invalidated their final AHP rules. As background, in New York v. DOL , the U.S. District Court for the District of Columbia invalidated the DOL’s rules relating to association health plans (AHPs). Since then, the DOL has issued a statement indicating that they intend to appeal the decision. They also provided a set of questions and answers that essentially reiterates the information they provided in their statement.
Part Two of those questions and answers provides additional clarification on the DOL’s stance. Specifically the questions and answers provide the following:
- Pathway 1 AHPs (which is the DOL’s term for AHPs that were formed pursuant to the old rules) are not affected by the district court’s decision. The DOL also briefly reminds readers of the requirements for AHPs formed under those rules.
- Pathway 2 AHPs (which is the DOL’s term for AHPs that were formed pursuant to the new rules) cannot market to or sign up new employer members. Existing employer members can sign up special enrollees, though, and will fall under enforcement relief the DOL provided through their statement.
- Pathway 2 AHPs with a contract term of more than one year can also avail themselves of the enforcement relief, if, for example, their coverage doesn’t end until after the end of the current plan year.
- Pathway 1 AHPs that would like additional guidance on meeting their requirements or would like to possibly request an advisory opinion indicating that they meet those requirements can reference the guidance EBSA has already provided (found here ).
As we mentioned in previous articles on this subject, PPI Benefits Compliance will continue to monitor the lawsuit and any related developments.
HHS Reduces HIPAA Violation Penalties
On April 30, 2019, HHS exercised its discretion in how it applies the regulations related to HIPAA privacy and security violations. As background, in 2009, the HITECH Act set penalty limits based on four tiers of knowledge and intention. Each tier had a maximum penalty of $1.5 million per calendar year when the violations were of an identical requirement or prohibition. The new guidance, found in the Federal Register, reduces the maximum annual penalty to the following amounts per tier:
- No knowledge: The covered entity did not know, and by exercising due diligence, would not have known they violated a provision. Maximum annual penalty is now $25,000.
- Reasonable cause and not willful neglect: The covered entity had knowledge of the violation, but lacked conscious intent and reckless indifference. Maximum annual penalty is now $100,000.
- Corrected willful neglect: The covered entity had knowledge of the violation, acted with conscious intent or indifference, and corrected the violation within 30 days of having knowledge. Maximum annual penalty is now $250,000.
- Willful neglect and not corrected: The covered entity had knowledge of the violation, acted with conscious intent or indifference, and did not correct the violation within 30 days of having knowledge. Maximum annual penalty remains $1.5 million.
The changes are effective immediately. HHS expects to issue revised regulations in the future.
IRS Expands Determination Letter Program for Hybrid and Merged Plans
On May 1, 2019, the IRS released Revenue Procedure 2019-20, which expands the determination letter program to allow statutory hybrid plans and merged plans to request a determination letter outside of initial qualification and plan termination. As background, back in 2016, the IRS changed the determination letter program to only require individually designed retirement plans to seek determination letters upon plan creation/qualification and termination (instead of at certain intervals, as in the past). When that change occurred, the IRS also contemplated leaving the determination letter program open for certain specified circumstances.
Rev. Proc. 2019-20 comes after the IRS solicited and received comments on those “specified circumstances.” The guidance allows for employers that sponsor statutory hybrid plans (which are plans that have a feature which pays out a lump sum, like a cash-balance plan) to apply for a determination letter even if the plan sponsor has already received one. The guidance also allows for employers merging plans to request a determination letter. Specifically, a plan sponsor can submit a determination letter application if a plan merger is completed no later than the end of the plan year that includes the date of the transaction.
The IRS is also providing sanction relief to any entities that apply for a determination letter pursuant to this guidance. If the IRS discovers any plan document failures while reviewing the determination letter application for these plans, they will apply a reduced sanction equal to the user fee under the Employee Plans Compliance Resolution System (EPCRS).
Pursuant to this guidance, employers sponsoring these types of plans (hybrid or merged) should consider whether they should avail themselves of the opportunity to confirm the compliance of their plan documents. Most defined contribution plans that have not merged will not need to take advantage of this guidance; plan sponsors to which this guidance could apply should consult with their advisers.
IRS Requests Comments on Form 5500-EZ Filing Process
On May 8, 2019, the IRS published a request for information, titled “Comment Request for the Annual Return/Report of Employee Benefit Plan,” in the federal register. The request for comments relates to the method in which Form 5500-EZ is filed; the IRS is proposing to make Form 5500-EZ available on the EFAST2 system for direct electronic filing rather than using Form 5500-SF. Either way, Form 5500-EZ could still be filed via paper copy.
As background, Form 5500-EZ is an annual return filed by a one-participant (owners/partners and their spouses) retirement plan or a foreign plan to satisfy the Form 5500 filing requirement. While Forms 5500 and 5500-SF are generally filed electronically through the web-based EFAST 2 system, Form 5500-EZ is generally filed by paper with the IRS or through answering questions on Form 5500-SF itself (also filed electronically via EFAST2).
According to the request, the IRS is seeking comments on a few things. Specifically, they are soliciting comments on:
- Whether the collection of information is necessary for the proper performance of the functions of the IRS, including whether the information has practical utility
- The accuracy of the agency’s estimate of the burden of the collection of the information on Form 5500-EZ
- Ways to enhance quality, utility, and clarity of the information collection
- Ways to minimize the burden of the collection information on respondents, including through the use of automated collection techniques or other forms of technology
- Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information
Employers are not required to respond — this is merely the IRS requesting comments relating to Form 5500-EZ. Comments should be submitted to the IRS on or before July 8, 2019.
What is required for FSA substantiation and what steps should the employer/administrator follow if substantiation is not provided?
The Section 125 health FSA regulations require all health FSAs offered through a Section 125 cafeteria plan to have adequate claims substantiation to ensure that it pays only for legitimate health and medical expenses. This means that reimbursements must: 1) Be substantiated by an independent third party (describing the service/product, the date of service/sale, and the amount of the expense), and 2) have a statement from the participant that the medical expense has not been reimbursed by any other health coverage (and that he/she won't seek reimbursement).
If the substantiation requirements are not satisfied, the IRS could potentially treat all health FSA reimbursements as taxable, whether or not they were properly substantiated. In addition, the health FSA and the Section 125 cafeteria plan that funds it could be disqualified, causing a loss of favorable tax treatment for the employer and the employees.
So, when an employee has not provided adequate claims substantiation (including claims that qualify for after-the-fact-substantiation but for which proper substantiation is not subsequently provided), employers and administrators should ensure that there are collection procedures in place to recoup these improper payments. These recoupment procedures should be addressed in the governing plan document. Most plan documents have general provisions regarding the powers of the employer, but the best practice is for the plan document to expressly provide for recoupment of improper benefit payments. The SPD should also explain that the employer will recoup improper payments from the participant.
As to the specific procedures to follow, the IRS guidance provides multiple steps for recoupment. These initial steps, outlined below, can be taken in any order, as long as they are consistently applied for all participants.
Step one, the administrator should first follow the debit card correction procedures (if applicable), and deactivate the debit card until the amount of the improper payment is recovered. This step ensures that no further violations will occur.
The next step is to attempt to correct the error by “demanding” repayment from the participant. This generally involves a letter being sent to the participant as soon as possible that identifies the amount to be displayed, the reasons for requiring repayment, and the timeframe in which repayment must be made. The participant can write a check to the employer (or to the plan, if the plan is funded) in the amount of the mistaken reimbursement, or if properly authorized and allowed under state law, the employer can withhold that amount from the participant’s pay or other compensation on an after-tax basis. If the employer seeks to withhold the amount from pay or other compensation, the plan document must provide for this action and the administrator must be mindful that the withholding is compliant with the applicable state wage withholding laws. It is also important to keep in mind that, if the amount to be recouped is large (or the participant’s pay rate is low), repayment may need to occur in installments to avoid a cash-flow hardship to the participant.
Alternatively, the administrator could apply a substantiation or offset approach against subsequent valid FSA claims, up to the amount of the improper payment. The IRS has informally commented (in the context of the debit card correction procedures) that improper health FSA payments can be offset against other health FSA claims. The recouped amounts can be used for other eligible expenses incurred before the end of the plan year (or other period of coverage).
If the above steps are unsuccessful, the IRS guidance states that the improper payment should be treated as any other business indebtedness. Under this step, the employer must request payment consistent with its collection procedures for other business debts (depending on the amount, this might even include a lawsuit). If the improper payment is not recovered, it should generally be treated as a forgiven debt and reported as wages on Form W-2 for the year in which the indebtedness is forgiven, so that the reported amount becomes subject to withholding for income tax, FICA, and FUTA.
Please keep in mind that the IRS has indicated that treating improper payment as uncollectible “should be the exception, rather than a routine process” and that repeatedly including such payments in participants’ income suggests the plan lacks proper substantiation procedures or may be cashing out unused health FSA amounts. So, the steps detailed above should be the normal practice for recoupment and treating the payment as a business debt a last resort.
If the improper payment occurred in a prior year, then guidance from the IRS and Treasury Department is conflicted as to the available options for recoupment. In 2010, a Treasury Department representative indicated that an improper health FSA reimbursement could be offset against future claims in the second plan year (in which the overpayment was discovered). However, in 2014, the Office of Chief Counsel issued an Advice Memorandum which indicated that if an offset of claims could not be accomplished in year one (the year the overpayment occurred), the offset could not be done in year two. So, in light of the conflicting guidance, the conservative position would likely be to treat the improper payment as business indebtedness and that, if forgiven, must be reported as wages and an amended Form W-2 be made for the year in which the debt is forgiven (as described above).
Conditional Renewal for Non-ACA-Compliant Plans Extended
On April 4, 2019, Idaho Department of Insurance Director Cameron released Bulletin No. 19-02 related to the extension of non-ACA compliant small group and individual policies and plans. As background, on March 25, 2019, CMS provided guidance for a transition policy extension that allows insurers the option to renew non-grandfathered non-ACA-compliant plans, as long as the state allows. Such transition policies are not required to be in compliance with certain ACA mandates including community rating, coverage of essential health benefits, prohibition on pre-existing condition exclusions, and the annual out-of-pocket maximum limit.
Transitional relief for these “grandmothered” plans has been extended several times before, and this bulletin applies the most recent federal extension to ID and allows insurers to renew policies in the individual market and the small group market according to the extended transitional policy through December 31, 2020. Please note, however, that such carriers must continue to abide by requirements outlined in Bulletin 16-03 (meaning that all grandmothered plans will be on a calendar-year renewal schedule).
Additionally, carriers are required to provide a notice at renewal which informs the individual or small employer of the option to renew the existing coverage or to enroll in a new plan on or off the ID marketplace. The notice must also inform them that some ACA market reforms are not included in their current plans. There is a model notice available on the department’s website that must be used without modification, and must be mailed without any other materials except for a cover letter, which may include the renewal premium.
Small employers that are interested in renewing their non-ACA-compliant plan should work with their advisors and insurers.
Guidance on Rx Drug Copayments that Exceed the Drug’s Cost and PBM Gag Clauses
On April 30, 2019, the New York Department of Financial Services (DFS) published Circular Letter No. 7 (2019). The letter provides guidance on prescription drug copayments that exceed the cost of the drug and on pharmacy benefit manager (PBM) so-called “gag clauses.” According to the letter, DFS has become aware that some individuals may be paying a copayment for a prescribed drug that is more than the price of the drug, and that the problem is compounded due to gag clauses that some carriers and/or PBMs may be attempting to impose on their health care provider contracts that seek to prohibit participating pharmacies from discussing drug prices with individuals.
The letter reminds carriers that under NY law, where an individual’s copayment for a medication exceeds the corresponding retail price for the same medication on the pharmacy’s drug retail price list, the individual shall only be responsible to pay the retail price for the drug. If the medication that the individual is purchasing is not on the drug retail price list, then the individual may only be charged the lesser of the individual’s copayment or the pharmacy’s usual and customary price for that drug (the price the pharmacy charges an individual who purchases the drug without insurance).
The letter also reminds carriers and PBMs that NY law (insurance and public health law) prohibits clauses in health care provider contracts with pharmacies that prohibit a pharmacist from disclosing to the individual that the price of the drug is less than the required copayment. According to the letter, carriers are required to take immediate steps to ensure their health care provider contracts with pharmacists (either directly or through a PBM) contain no gag clauses, and to ensure they are otherwise complying with NY law in regards to prescription drug cost-sharing.
The letter imposes no new requirements or action items for employers, but employers should be aware of the letter as it relates to the prescription drug cost sharing under fully insured plans for employees and their dependents.
Update to NY Position on Religious Employer Exemption from Providing Contraceptive Services
On May 1, 2019, the New York Department of Financial Services (DFS) published Supplement No. 2 to insurance Circular Letter No. 1 (2003). The updated letter relates to a narrow exemption for religious employers from providing coverage for contraceptive items and services. The letter states that in NY, a religious employer may request a carrier to issue a group or blanket policy or contract without contraceptive coverage where contraceptive items or services are contrary to the employer’s religious tenets, provided that the employer meets all the criteria of being a “religious employer.”
Under NY law, an employer is a “religious employer” if they meet four criteria:
- The inculcation of religious values must be the employer’s purpose.
- The employer must primarily employ persons who share the employer’s religious tenets.
- The employer must serve primarily persons who share the employer’s religious tenets.
- The employer must be a non-profit organization (as described in IRC Section 6033(a)(3)(A)(i) or (iii)).
Religious employers opting not to include contraceptive coverage have to provide written notice of that decision to employees prior to enrollment in the plan (with a list of contraceptive items/services that the employer refuses to cover for religious reasons). The carrier also must notify enrollees of the contraceptive coverage limitations, and must allow an individual to purchase the contraceptive coverage from the carrier directly (via rider). The carrier can choose to charge an additional premium or cover it automatically for no additional cost.
The letter states that the New York Court of Appeals (NY’s highest court) has upheld the religious employer exemption generally. The letter reminds carriers, though, that the scope of the exemption is narrow, and that there are limitations on the types of employers that can qualify. Specifically, employers such as religious schools, religious nursing homes, and religious health care facilities were found not to qualify as “religious employers.” Carriers must ensure that an employer is in fact a religious employer that meets all of NY’s criteria before granting the exemption from providing contraceptive coverage, even if that means requiring the employer to submit additional proof.
As for impact on employers, the letter is narrow in its scope. It would impact only religious employers: those that want or are attempting to be considered religious employers for purposes of providing contraceptive coverage. Employers that are hoping to meet that narrow exemption should work with outside counsel to ensure the employer is appropriately complying with both NY state and federal law.
On April 3, 2019, Gov. Grisham signed SB 123 into law. The law is effective June 14, 2019. It applies to all sized employers who have at least one employee performing work in New Mexico. The new law requires employers who are already providing sick leave to permit NM-based employees to use that time for an absence related to the illness of a spouse, domestic partner, or a family member by blood, marriage, or legal adoption (a parent, grandparent, great-grandparent, child, foster child, grandchild, great-grandchild, brother, sister, niece, nephew, aunt or uncle of an eligible employee).
An employer is not required to create a new bank of accrued leave. The law simply applies to sick leave already provided by an employer. Sick leave is defined as accrued paid time off that an employee is provided for an absence related to their own injury or illness. Thus, an employer with a leave program which does not require the employee to give a reason for the leave would align with the new requirement. Employers should work with outside counsel to update their leave policies and handbook, as appropriate.
Conditional Renewal for Non-ACA Compliant Plans Extended
On April 18, 2019, Division of Insurance Director Deiter issued Bulletin 19-01, permitting health insurance carriers in the individual and small group market to continue transitional health insurance plans that renew for a policy year starting on or before October 1, 2020, as long as the coverage comes into compliance by January 1, 2021. As background, on March 25, 2019, CMS provided guidance for a transition policy extension that allows insurers the option to renew non-grandfathered non-PPACA-compliant plans, as long as the state allows. Such transition policies are not required to be in compliance with certain ACA mandates including community rating, coverage of essential health benefits, prohibition on pre-existing condition exclusions and the annual out-of-pocket maximum limit.
Transitional relief for these “grandmothered” plans has been extended several times before, and this bulletin applies the most recent federal extension to South Dakota and allows insurers to renew policies in the individual market and the small group market according to the extended transitional policy for a policy year starting on or before October 1, 2020. This bulletin reflects the Center for Consumer Information and Insurance Oversight’s guidance allowing states the option to extend transitional policies for individual and small group health insurance plans that have continually been renewed since 2014.
Carriers must submit an information filing of their intention to either operate under this transition guidance or discontinue their transition policies to the division by May 15, 2019.
Small employers that are interested in renewing their non-ACA-compliant plan should work with their advisors and insurers.
On April 23, 2019, the Vermont Department of Financial Regulation (DFR) published Insurance Bulletin No. 204. The bulletin is meant to provide guidance for association health plans (AHPs) and multiple employer welfare arrangements (MEWAs) operating in VT on the regulatory impact of the U.S. District Court for the District of Columbia’s decision in New York v. DOL, issued on March 28, 2019. In that case, the court found that the DOL’s AHP rule, which modified the definition of “employer” to allow more employer groups and associations to form AHPs, exceeded its rulemaking authority under ERISA. The court vacated the DOL’s rule and sent it back to the DOL for reconsideration. The DOL has subsequently appealed the decision (albeit without requesting a stay, meaning the DOL’s AHP rule is currently invalid).
The bulletin states that VT DFR takes the position that insurers must honor existing AHP policies and pay valid claims. Until such time as the court’s decision is stayed or vacated, though, the bulletin states that DFR lacks a legal basis on which to approve AHPs or MEWAs seeking to form on the basis of the final AHP rule, and that existing AHPs and MEWAs do not have the authority to enroll new employer groups or offer market coverage to potential new groups under the rule. On that basis, AHPs and MEWAs operating in VT are prohibited from advertising to or enrolling new employer groups and must post a public-facing notice prominently on their websites stating as such.
The bulletin is directed toward the AHP/MEWA, so there’s no additional employer obligations under the new bulletin. Employers that are part of an AHP/MEWA in VT, however, should work with their adviser and/or outside counsel in determining next steps.
Bulletin No. 01-2019
On April 19, 2019, Commissioner Glause issued Bulletin No. 01-2019 to clarify state law regarding mental health parity as it relates to autism spectrum disorder services. As we discussed in the last edition of Compliance Corner, WY passed the Mental Health and Substance User Disorder Insurance Parity Act on February 27, 2019, requiring all individual and group insurance policies to meet the requirements of the Federal Mental Health Parity and Addiction Equity Act of 2008.
This bulletin clarifies that, even though not all non-ACA plans include mental health services, for those that do, treatments for autism spectrum disorder cannot be excluded from the mental health services in an insurance policy. In addition, if the policy includes both medical/surgical benefits and mental health/substance use disorder benefits, the financial requirements and treatment limitations must be no more restrictive for mental health/substance use disorder benefits than medical/surgical benefits. Finally, the bulletin expressly prohibits an exclusion of the applied behavior analysis therapy to treat children with autism spectrum disorder on the basis that such therapy is experimental or investigative treatment.
While this requirement will largely fall on insurers, fully-insured plan sponsors should keep this guidance in mind.
This material was created by PPI Benefit Solutions to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The service of an appropriate professional should be sought regarding your individual situation. PPI does not offer tax or legal advice. "PPI®" is a service mark of Professional Pensions, Inc., a subsidiary of NFP Corp. (NFP). All rights reserved.
Industry news topics covered in the Compliance Corner are chosen based on general interest to most employers and may include articles about services not available through PPI.
What is required for FSA substantiation and what steps should the employer/administrator follow if substantiation is not provided?