Emerging Issues and Trends in Employee Benefits Litigation and - - PowerPoint PPT Presentation

Emerging Issues and Trends in Employee Benefits Litigation and Regulations

Jeffrey J. Wedel Ryan A. Sobel Matthew A. Secrist June 11, 2014

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Overview of Presentation

• ERISA Cases of Interest in 2013
• U.S. Airways, Inc. v. McCutchen, 113 S. Ct. 1537 (Apr. 16, 2013):

Plan Language vs. Equitable Doctrines

• Heimeshoff v. Hartford Life & Accident Ins. Co., 134 S. Ct. 604 (Dec.

16, 2013): Setting limitations periods through plan language

• On the Horizon in 2014/2015…
• Fifth Third Bancorp v. Dudenhoefer, No. 12-751 (Argument 4/2/14):

Application of Moench presumption of reasonableness on motion to dismiss

• Tackett v. M&G Polymers USA, LLC, No. 13-1010 (expected 2015):

legal standard for finding that parties to CBA intended retiree health- care benefits to vest

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Overview of Presentation

• Notable Appellate Decisions from 2013/2014
• McClain v. Eaton Corp. Disability Plan, 740 F.3d 1059 (6th Cir. Jan.

24, 2014): Proper standard for arbitrary/capricious review of administrative benefits decisions

• Kenseth v. Dean Health Plan, Inc., 722 F.3d 869 (7th Cir. June 13,

2013): post-Cigna equitable relief and money damages for misrepresentation

• Thurber v. Aetna Life Ins. Co., 712 F.3d 654 (2d Cir. Mar. 13, 2013):

post-Sereboff applicability of Knudson’s strict tracing requirement for equitable lien

• Rochow v. Life Ins. Co. of Am., 737 F.3d 415 (6th Cir. Dec. 6, 2013):

disgorgement of profits from wrongfully-denied disability benefits

• Non-ERISA Cases that may Impact ERISA
• Comcast Corp. v. Behrend, 133 S. Ct. 1426 (March 27, 2013): Class

actions and proof of class-wide damages

• United States v. Windsor, 133 S. Ct. 2675 (June 26, 2013): Defense of

Marriage Act (DOMA) Case

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ERISA Cases of Interest in 2013

• U.S. Airways, Inc. v. McCutchen, 113 S. Ct. 1537 (Apr. 16, 2013)
• Issue: Can beneficiary use equitable defenses to avoid plan

reimbursement clause that applied to beneficiary’s recovery from third party?

– Defense counsel have feared that past Sup. Ct. decisions opened a

Pandora’s box of equitable theories, which 502(a)(3) claimants can use to circumvent plan language or obtain money damages

» Cigna v. Amara, 131 S. Ct. 1866 (2011) – reformation and “surcharge” can serve as “other appropriate equitable relief” under 502(a)(3)

– Many viewed McCutchen as a canary-in-the-coal-mine for how broad a

view of “other appropriate equitable relief” Court will take

• The clause in question:

– If [the plan] pays benefits for any claim you incur as the result of

negligence, willful misconduct, or other actions of a third party, ... [y]ou will be required to reimburse [the plan] for amounts paid for claims out of any monies recovered from [the] third party, including, but not limited to, your

• wn insurance company as the result of judgment, settlement, or otherwise.

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ERISA Cases of Interest in 2013

• McCutchen, cont.
• Beneficiary received $66,866 from Plan for treatment of MVA injuries
• Subsequently, Beneficiary received $110,000 under his auto

insurance policy and from tortfeasor in lawsuit

• Beneficiary owed his attorneys 40% of recovery ($44,000), only had

$66,000 left for himself

• Plan sued Beneficiary to recover $66,866 under reimbursement

clause, based on “equitable lien by agreement” theory (allows money damages as equitable relief under 502(a)(3))

• Beneficiary’s Equitable Defense Theories for Unjust Enrichment:
• (1) Entire recovery not subject to the lien; only portion related to

medical expenses paid by Plan (“double recovery” doctrine);

• (2) Plan reimbursement should be reduced by attorney’s fees from

Beneficiary’s suit vs. MVA tortfeasor, as Plan benefited from the legal services (the “common fund” doctrine).

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ERISA Cases of Interest in 2013

• McCutchen, cont.
• Sup. Ct. held: the double-recovery rule and common-fund doctrine

cannot override express terms of an ERISA plan

– Because the reimbursement provision is explicit, it trumps these unjust

enrichment theories – Plan is entitled to reimbursement from amounts recovered from insurance company and tortfeasor

– BUT…because the Plan is silent on the allocation of attorney’s fees, the

common-fund doctrine may apply as a “gap filler” for the apportionment of some responsibility for those fees to the Plan

» District Court must sort that out

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ERISA Cases of Interest in 2013

• Heimeshoff v. Hartford Life & Accident Ins. Co., 134 S. Ct. 604

(Dec. 16, 2013)

• Facts:

– Group LTD Plan – Walmart Sr. Mgr. Public Relations suffered lupus, fibromyalgia – Plan terms: No suit more than 3 years after time written proof of loss due – Claim for LTD benefits denied administratively – Plaintiff sued less than 3 years after denial, but more than 3 years after

proof of loss due

• U.S. Dist. Conn. dismissed claim as time-barred, 2d Cir. affirmed
• Sup. Ct. Holds: Plan and participant can agree to both length of

limitation and time of commencement, as long as:

– (1) Not unreasonable – (2) Not preempted by controlling statute to contrary

• Considerations that were important to Sup. Ct.:

– Plaintiff still had a year to bring suit after denial of claim – Plaintiffs won’t shortchange administrative process – they need a record – Administrators won’t delay administrative process – risk immediate judicial,

de novo review

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ERISA Cases of Interest in 2013

• Take-Aways from McCutchen and Heimeshoff
• ERISA and this Court favor enforcing written plan terms (absent public

policy, fraud, misrepresentation-based reason to disregard or reform)

• Silence in plan terms opens the door to equitable theories
• So…review your plan documents to make sure you’ve

addressed the issues that can give you a leg-up in litigation

– Subrogation, recoupment and reimbursement, attorney’s fee allocation, and

lien issues

– Limitations periods – Discretion of fiduciary/plan administrator to interpret plan terms, determine

eligibility

» Avoid a de novo review in denial of benefits claim » Receive judicial deference for fiduciary’s interpretation of ambiguous terms

– Diversification restrictions for ESOPs

» White v. Marshall & Ilsley Corp., 714 F.3d 980 (7th Cir. Apr. 19, 2013) – Moench presumption defeats stock-drop claim where plan language required investment in employer securities even in “dire” economy – Court skeptical of stock-drop theories that place fiduciaries in lose-lose situation vis-à-vis market fluctuation

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On the Horizon in 2014/2015…

• Fifth Third Bancorp v. Dudenhoefer, No. 12-751 (Argument

4/2/14)

• ESOP Stock Drop Case: Does plaintiff who claims ESOP fiduciary

breached duty by continuing to invest in employer stock need to

• vercome Moench presumption of reasonableness at pleading stage?
• Facts:

– Plaintiffs were former Fifth Third Bancorp employees and participants in

Fifth Third Bancorp Profit Sharing Plan (a type of ESOP)

– Plaintiffs allege ESOP fiduciaries breached duty by continuing to hold onto

Fifth Third stock from 2007 – 2009, when it switched from conservative lending practices to subprime lending

– By end of 2009, Fifth Third stock had decreased in value by 74% – Plaintiffs claim ESOP fiduciaries knew or should have known about risks of

subprime lending, through watchdog warnings, expertise, etc.

• Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995)

– ESOP fiduciaries are encouraged (in many cases required) to invest in

employer stock, and thus are entitled to a presumption that they acted prudently under ERISA. This presumption can only be overcome by a showing that fiduciary abused discretion by continuing to invest in (or retain) employer stock.

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On the Horizon in 2014/2015…

• Dudenhoefer, cont.
• Circuit split on two key issues:

– Most circuits: presumption must be overcome at pleading stage

» 6th Circuit: must only satisfy ordinary notice pleading standard

– Most circuits: presumption must be overcome through proof that the

company faced a dire situation, something short of the brink of bankruptcy

• r an impending collapse, but continued to invest in/hold employer stock

» 6th Circuit: plaintiff need only prove that “a prudent fiduciary acting under similar circumstances would have made a different investment decision”

• District Court dismissed lawsuit for failure to satisfy Moench

presumption, 6th Circuit reversed based on ordinary notice pleading standard

• Issue on cert to Sup. Ct.: Does the Moench presumption apply at the

pleading stage?

• Oral Argument: April 2, 2014: Justices questioned whether any special

presumption should apply

– “Coach-class” fiduciary standard? – How to reconcile ESOP fiduciary’s inherent conflict?

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On the Horizon in 2014/15…

• Tackett v. M&G Polymers USA, LLC, No. 13-1010 (decision

Spring 2015)

• Circuit split on CBA language necessary for retiree healthcare benefits

to vest and continue indefinitely:

– 6th Cir.: courts should presume that silence concerning duration of retiree

healthcare benefits means the parties intended those benefits to vest (Yard-Man presumption)

– 3rd Cir.: a clear statement that healthcare benefits are intended to survive

the termination of the CBA is required

– 2nd and 7th Cir.: there must be some language that can reasonably

support an interpretation that healthcare benefits should continue indefinitely

• 2007: M&G (WV chemical company), demands contributions toward

health premiums from all retirees.

– Retirees claim CBA with predecessor owners guaranteed "full company

contribution" for pensioner healthcare

• UAW v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983): retiree

healthcare benefits in CBA carry inference that they are vested/guaranteed to continue for life where CBA is silent as to duration

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On the Horizon in 2014/15…

• Tackett, cont.
• District Court: entered permanent injunction for retirees requiring

company to continue to pay the full cost of the retirees’ health benefits

• Sixth Circuit affirmed; District Court’s judgment consistent with Yard-

Man presumption

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Notable Appellate Decisions from 2013/2014

• McClain v. Eaton Corp. Disability Plan, 740 F.3d 1059 (6th Cir.
• Jan. 24, 2014) – Defanging arbitrary/capricious review of

administrative benefits decisions

• Cozzie v. Metropolitan Life Ins. Co., 140 F.3d 1104 (7th Cir. 1998):

arbitrary/capricious standard “is not . . . without some teeth,” and court should not merely “rubber stamp” plan administrator decisions

• McClain: “though standard is not without some teeth, it is not all teeth.”

– Concern over courts treating arbitrary/capricious standard like de novo

standard

– Arbitrary/capricious review “must actually honor an ‘extreme’ level of

‘deference’ to the administrative decision.”

– Administrative decision must be upheld if it results from a “deliberate

principled reasoning process” and is supported by “substantial evidence.”

– "When it is possible to offer a reasoned explanation, based on the

evidence, for a particular outcome, that outcome is not arbitrary or capricious.”

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Notable Appellate Decisions from 2013/2014

• Kenseth v. Dean Health Plan, Inc., 722 F.3d 869 (7th Cir. June

13, 2013) – post-Cigna equitable relief may include money damages for misrepresentation

• Plaintiff went forward with surgery based on insurance customer

service representative’s statement of $300 co-payment; insurer denied coverage, billed Plaintiff $77,974

• Under Cigna, plaintiff may seek money damages for fiduciary’s

misrepresentation in form of surcharge, restitution, and disgorgement

• Fiduciary won’t be liable because of non-fiduciary agent giving

incorrect advice, IF plan documents are clear and non-fiduciary was properly trained

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Notable Appellate Decisions from 2013/2014

• Thurber v. Aetna Life Ins. Co., 712 F.3d 654 (2d Cir. 2013) –

strict tracing requirement of Knudson not required for equitable lien post-Sereboff

• STD plan allowed lien in amount of overpayment on proceeds of other

income received

• Plaintiff received no-fault insurance payments of $1,202.32 per month

while on STD

• Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002):

money recoverable as “equitable relief” if clearly traceable to particular funds in defendant’s possession

• Sereboff v. Mid Atl. Med. Servs., Inc., 547 U.S. 356 (2006): can

recover money as “equitable relief” through equitable lien on funds

• Thurber: if plan specifically identifies particular share of particular

funds to return (i.e., creates equitable lien), strict tracing not required

– Joins majority of other circuits in rejecting strict tracing for equitable lien

(1st, 3d, 6th, 7th, 8th)

– 9th Circuit still requires strict tracing for equitable lien – Bilyeu v. Morgan

Stanley LTD Plan, 683 F.3d 1083 (9th Cir. 2012)

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Notable Appellate Decisions from 2013/2014

• Rochow v. Life Ins. Co. of Am., 737 F.3d 415 (6th Cir. 2013) –

claimant entitled to disgorge $3.8 million in profits earned on wrongfully denied disability benefits

• Claimant (Company President) denied disability benefits, brought

claims for wrongful denial of benefits and breach of fiduciary duty

– District Court found denial was “arbitrary and capricious,” awarded full

benefits under ERISA § 502(a)(3); 6th Circuit affirmed

• On remand, District Court made additional award under ERISA §

502(a)(3), for disgorgement of $3.8 million in profits earned off wrongfully-retained benefits

• 6th Circuit affirmed!!!

– Rejected argument that 502(a)(3) remedies available only where 502(a)

does not otherwise provide adequate remedy—held that 502(a)(3) can provide “a separate remedy on top of a benefit recovery”

– Dissent: majority’s ruling is “an unprecedented and extraordinary step to

expand the scope of ERISA coverage” that is “contrary to clear Supreme Court and Sixth Circuit precedent.”

• The good news…6th Circuit will review en banc this year

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Non-ERISA Cases that may Impact ERISA

• Comcast Corp. v. Behrend, 133 S. Ct. 1426 (March 27, 2013)
• Anti-Trust Class Action
• Facts:

– Class of Comcast subscribers in Philadelphia area allege Comcast

“clusters” operations in particular region by swapping systems outside region for competitor system inside region

– Class alleges practice undercuts competitive pricing, violates anti-trust laws

• Sought certification of class under Fed. R. Civ. P. 23(b)(3):

– Questions of law or fact common to class members predominate over

questions affecting only individual members

• District Court certified class on only one of four theories of anti-trust

impact:

– Practice lessened competition by “overbuilders,” i.e. cable companies that

build competing networks in areas where incumbent cable company already operates

– Court found that damages from overbuilder deterrence could be calculated

• n a class-wide basis

» BUT…Damage expert’s model did not isolate damages resulting from

• verbuilder deterrence; model was based on all four theories of anti-trust impact
• 3d Cir. rejected appeal based on issues with damages model because

that would get into merits of damages claim at class-certification stage

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Non-ERISA Cases that may Impact ERISA

• Comcast, cont.
• Sup. Ct. reversed and held:
• Courts should go beyond allegations and evaluate evidence of

damages to determine if common questions predominate, regardless

• f whether examination overlaps with merits of case
• 3d Circuit should have reversed class certification because damages

model didn’t measure damages based only on an overbuilder- deterrence theory

• Sup. Ct. passed on opportunity to decide whether Daubert

applies at class certification stage

• Scalia’s majority opinion in Dukes suggested Daubert could apply
• It remains to be seen what impact Comcast will have on ERISA

class actions

• ERISA benefits claims involve regulations and plan terms that are

applied uniformly across class

• BUT…it could impact claims based on misrepresentation or estoppel

theories, where individualized examinations are required

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Non-ERISA Cases that may Impact ERISA

• United States v. Windsor, 133 S. Ct. 2675 (June 26, 2013)
• DOMA § 3: Marriage = Man + Woman for purposes of federal tax

benefits, employment protections, and federal rights and entitlements

• Facts:
• Edith Windsor and Thea Spyer married in Canada in 2007, lived in

N.Y., which recognized their marriage under state law

• Spyer died in 2009, left estate to Windsor
• Windsor sought, was denied federal estate tax exemption for surviving

spouse; must pay significant estate tax

• Sup. Ct. Holds:
• DOMA § 3 unconstitutional, violates 5th Amendment Due Process

Rights

• Marital status must be determined under state law

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Non-ERISA Cases that may Impact ERISA

• Windsor, cont.
• How does this impact ERISA/benefits? Same-sex couples may

now get:

• COBRA coverage
• Spousal healthcare coverage and related tax benefits
• Tax benefits on FSA’s and HSA’s
• HIPAA special enrollment right
• Direct rollover into own IRA or plan rather than “inherited IRA”
• QDRO apportioning pension in divorce
• Much more…
• Open questions:
• Who is “married” under state law?

– DOMA § 2 (one state doesn’t need to recognize marriage from another

state) vs. Equal Protection and Due Process Clauses

• Is ruling retroactive? No, IRS Notice 2014-19 provides that plans must

follow outcome in Windsor as of June 26, 2013 ruling date

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Employer Mandate Tax – Overview

Generally applies in 2015 to employers with 50 or more FTEs (special transition rule - 2016 for certain employers with less than 100 FTEs). Two ways to be taxed

• Tier 1

Employer does not offer a plan that has “minimum essential coverage” to all Full-Time Employees and their dependents

• Annual tax of $2,000 for each Full-Time Employee in

excess of 30 Full-Time Employees (80 Full-Time Employees for 2015).

• Tier 2

Employer does offer a medical plan that has “minimum essential coverage” to all Full-Time Employees and their dependents– potential annual tax of $3,000, but only for certain Full-Time Employees who elect to buy coverage under an Exchange. Note: Taxes are actually calculated each month. Monthly tax amounts are $166.67 and $250.00. 21

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Employee Determinations

Employee status will be determined under common law rules – the employer of a worker is the person who has the right to direct and control the rendition of the services.

• The real life facts and circumstances pertaining to control will

determine who is the employer.

• Under this standard, an employee leasing agency or

“professional employer organization” (PEO) might not be considered the employer.

• Partners in partnerships, directors and 2% shareholders in S

Corporations are not considered to be employees.

• In general, expatriate employees will not have to be considered

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Special Rules for PEOs and Staffing Firms

• Applies if the worker is the common law employee of the client

employer

• Coverage under the staffing firm plan will count as coverage
• ffered by the client only if the client has to pay a higher fee to the

staffing firm on account of the employee’s enrollment in the staffing firm health plan

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Employer Mandate Tax - Applicable Large Employers

Applicable Large Employer Test.

• Determined on a calendar year basis
• Average of 50 full-time employees on business days in the

preceding calendar year.

• Controlled Group Rules. Apply solely for purposes of counting

to 50 full-time employees. Code Section 414(b), (c), (m) and (o). This aggregates all employees within a controlled group

• f corporations or trades or businesses under common

control.

• Employees working outside of the U.S. are not counted. Thus,

small U.S. operations of foreign companies may be exempt.

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• Predecessor Employers. Rules will require counting the

employees of predecessor employers.

• New Employers. If employer not in existence for all of the

preceding calendar year, base it on reasonable expectations for the current year.

Employer Mandate Tax - Applicable Large Employers

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Employer Mandate Tax - Applicable Large Employers

Calculating 50 Full-Time Employee Equivalents (FTEs)

• Note: this is the method for determining if the employer

has less than 100 employees and is exempt for 2015. Count all full-time employees. Then add in part-time employees as FTEs. Part-time employees are credited as fractions of FTEs.

• Calculations are done monthly.
• An employee is full-time for a month if the employee has 130
• r more hours.
• For all part-time employees, add their total hours for the month

and divide by 120. The result is the FTE equivalent that is to be added in to the full-time employee total for that month.

• For employees whose hours are not counted, use 8 hours per

day worked or 40 hours per week worked.

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Employer Mandate Tax - Applicable Large Employers

• Once the FTE total is determined for each month in the

prior calendar year, add all months together, and divide by 12.

• If the result is 50 or more, the employer is an Applicable Large

Employer for the current year.

• It If the result is less than 50, the employer is NOT an

Applicable Large Employer for the current year.

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Employer Mandate Tax - Applicable Large Employers

Seasonal Worker Exception (IRS Proposal).

• Employer’s workforce is over 50 FTEs for not more than 120

days in the preceding calendar year (including seasonal employees)

• Can use four calendar months instead of 120 days
• Days and months need not be consecutive
• All employees in excess of 50 during that time were “seasonal

workers”.

• Seasonal relates to the nature of the work throughout the year
• Holiday retail workers are seasonal
• Reasonable good faith interpretations

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Determination and Imposition of the Tax

• The tax will be applied separately to each member of a

controlled group of companies. However, there is no liability of other controlled group members for non- payment of the tax.

• The tax will be applied to employers that otherwise are

disregarded entities for tax purposes.

30

Full-Time Employee Determinations

The tax only applies with respect to employees who are “full- time employees”.

• A full-time employee is one who averages 30 hours or more per

week.

• This requirement is separate from the “FTE” calculation that is

done to determine “Applicable Large Employer” status.

31

Full-Time Employee Determinations Two Options

• Monthly Measurement Method
• Measure in real time each month
• Look-Back Measurement Method
• The employer looks back to a previous “Standard Measurement

Period” to determine hours of service and Full-Time Employee status.

• The result (full-time or not full-time) is applied going forward for

a “Stability Period”.

• Detailed Discussion is provided below.

32

Employer Mandate Tax – Tier 1 No Plan Offered

Potential annual tax is $2,000 for each Full-Time Employee in excess of 30.

• To avoid the tax, the must offer a medical plan that provides

minimum essential coverage (MEC) to all Full-Time Employees and their dependents.

• This provision of the law will be satisfied if coverage is offered

to 95% of the full-time employees. For 2015, the percentage is reduced to 70%.

• The 30 employee exemption is split among the members of a

controlled group of corporations or other organizations, based on their Full-Time Employee counts. For 2015, the exemption number is raised to be the first 80 employees

• “Grandfathered Plans” are subject to the tax. They may avoid

the tax only if they have minimum essential coverage.

33

Dependent Issues

• The term dependent only includes an employee's children

under age 26.

• Biological children
• Adopted children and children placed for adoption
• Coverage does not have to be offered to step-children or

foster children

• Coverage does not have to be offered to spouses
• Special rules apply for children who are not U.S. citizens
• r U.S. nationals. They must reside in the U.S. or a

contiguous country.

Employer Mandate Tax – Tier 1 No Plan Offered

34

Minimum Essential Coverage

• Generally, a comprehensive set of medical benefits
• Includes prescription drug coverage
• Does not include dental or vision coverage

Employer Mandate Tax – Tier 1 No Plan Offered

35

$3,000 annual tax for certain employees who opt out of the employer plan and buy coverage through the Exchange. Calculated monthly - $250.00 per month.

• The employee must be a Full-Time Employee
• Based on the employee’s household, the employee’s household

income must be over 100% of the poverty line (now 138% in certain states) and not over 400% of the poverty line

• It is only the employee’s coverage that is examined for the

second tier tax. The tax is not triggered if dependents are covered under an Exchange or under a spouse’s plan.

Employer Mandate Tax – Tier 2 No Plan Offered

36

2014 Poverty Line

• Family Baseline
• Size

Amount 400% Limit

• 1

$ 11,670 $ 46,720

• 2

$ 15,730 $ 62,920

• 3

$ 19,790 $ 79,160

• 4

$ 23,850 $ 95,400

• 5

$ 27,910 $111,640

• 6

$ 31,970 $123,880

• 7

$ 36,030 $127,880

• 8

$ 40,090 $160,360

Employer Mandate Tax – Tier 2 No Plan Offered

37

2014 Poverty Line

• Family Baseline
• Size

Amount 400% Limit

• 1

$ 11,170 $ 44,680

• 2

$ 15,130 $ 60,520

• 3

$ 19,090 $ 76,360

• 4

$ 23,050 $ 92,200

• 5

$ 27,010 $108,040

• 6

$ 30,970 $123,880

• 7

$ 34,930 $139,720

• 8

$ 38,890 $155,560

Employer Mandate Tax – Tier 2 No Plan Offered

38

• 2014 Poverty Line – Medicaid Expansion States
• Family Baseline

Expansion Sate

• Size

Amount 133% Limit

• 1

$ 11,670 $ 15,521

• 2

$ 15,730 $ 20,921

• 3

$ 19,790 $ 26,321

• 4

$ 23,850 $ 31,721

• 5

$ 27,910 $ 37,120

• 6

$ 31,970 $ 42,520

• 7

$ 36,030 $ 47,920

• 8

$ 40,090 $ 53,320

Employer Mandate Tax – Tier 2 Plan Offered

39

Safe Harbor Plan Design to avoid the tax

• The Employer plan pays 60% of the plan costs
• The “minimum value” requirement
• The employee is not charged more than 9.5% of the employee’s

household income for the coverage.

• The “affordability” requirement.

Employer Mandate Tax – Tier 2 Plan Offered

40

Three Safe Harbor methods for Affordability

The amount being charged to the employee does not exceed 9.5% based on either:

• W-2 wages
• Standard Rate of Pay
• Poverty Line

Employer Mandate Tax – Tier 2 Plan Offered

41

Affordability Safe Harbor – W-2 Wages

• Cost to the employee per month does not exceed 9.5%, based on

the employee's taxable wages in Box 1 of the Form W-2.

• This determination is made after year end
• Note: Box 1 of the W-2 is reduced by pre-tax salary reductions

(e.g. under a Section 401(k) Plan or Section 125 plan)

• Examples

Annual Salary 9.5% Monthly Amount

• $20,000

$1,900 $158.33

• $30,000

$2,850 $237.50

• $50,000

$4,750 $395.83

• $100,000

$9,500 $791.66

Employer Mandate Tax – Tier 2 Plan Offered

42

Affordability Safe Harbor – Standard Rate of Pay

• Cost to the employee per month does not exceed 9.5%, based on

the employee's standard rate of pay for the month.

• Salaried employees use the base salary.
• Standard rate of pay for an hourly employee is the hourly wage

rate x 130 hours.

• Examples

Hourly Rate x130 9.5%

• $8.00

$1,040 $98.80

• $10.00

$1,300 $123.50

• $15.00

$1,950 $185.25

• $25.00

$3,250 $308.75

Employer Mandate Tax – Tier 2 Plan Offered

43

Affordability Safe Harbor – Poverty Line

• 9.5% x 1/12 x the federal poverty line (2014 = $11,670) = $92.38

per month

• Medicaid Expansion States - 9.5% x 1/12 x the federal poverty

line (2014 = $15,521) = $122.87 per month

Employer Mandate Tax – Tier 2 Plan Offered

44

Full-Time Employee Determinations

A special look back rule is provided for determining “Full- Time Employee” status

• The employer looks back to a previous “Standard Measurement

Period” to determine hours of service and Full-Time Employee status.

• The result (full-time or not full-time) is applied going forward for

a “Stability Period”.

• Example: Measure hours from July 1, 2013 to December 31,
• 2013. Employee’s status as full-time or not full-time is fixed

from January 1, 2014 to June 30, 2014. Note: This only applies for purposes of administering the employer mandate tax. It does not affect an employee’s entitlement to premium credits or cost-sharing reductions at an Exchange.

45

Full-Time Employee Determinations

Permitted Employee Categories

• Salaried and Hourly
• Bargaining and Non-bargaining
• Separate collective bargaining agreement groups
• Primary places of employment in different states

46

Monthly Measurement Method

• Calculate in real time for each month in the year
• 130 Hours of Service = Full-Time Employee
• Option to use weeks beginning or ending in a month
• 4 weeks – 120 Hours = Full-Time Employee
• 5 weeks – 150 Hours = Full-Time Employee

Advantage – Simplicity of recordkeeping Disadvantage – Might not be able to make Plan eligibility adjustments in advance to solve a problem with the Tier 1 Tax. Until the month is over, the employer may not know if the Plan was

• ffered to 95% or more of the Full-Time Employees.

Full-Time Employee Determinations

47

Monthly Measurement Method

• Special Rules for New Hires who are Full-Time employees
• Do not have to be counted for purposes of the tax until the first

day of the month after being employed for three months. Example: Hired January 15, do not count until May 1

• Conditions:
• The employee is eligible to participate in the plan, except for

satisfying a permissible waiting period. Note: This apparently means that the employee’s position of employment is one normally covered by the plan.

• The employee is offered coverage with minimum value by the

first day of the month after being employed for three months

Full-Time Employee Determinations

48

Hours Counting Rules

• Count all hours with all members of the same controlled group
• Do not count hours rendered outside of the United States

Leaves of Absence

• Paid leaves – Credit hours based on paid time
• Unpaid Special Leave – Either ignore the leave time in calculating

average hours or give credit for hours during the leave

• USERRA (federal law military leave)
• FMLA (Family and Medical Leave Act)
• Jury duty
• Other unpaid leaves – zero hours

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Salaried Employees - Hours not Counted Choices

• Use actual hours worked from records of hours worked
• 8 hours per day worked
• 40 hours per week worked

IRS still considering special rules for various professions. Employers are directed to use reasonable methods. The preamble provides some suggested rules for:

• Adjunct Faculty – 2.25 hours per class + hours for required time
• utside of class (e.g. required office hours or faculty meetings)
• Layover hours for airline employees – 8 hours per day
• On-call hours. Must count if paid, required to be on premises of

employer or employee’s personal time is substantially restricted.

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Monthly Measurement Method

Breaks in Employment - Terminations/Rehires

• General Rule – Treat as a new employee if rehired after 13

consecutive weeks with no hours of service

• Optional Rule for employees with less than 13 weeks of service.

Can treat a break of less than 13 consecutive weeks with no hours of service as a termination if:

• The break is at least 4 weeks
• Number of weeks with no hours is more than number of

weeks previously employed

• This rule is modified to require 26 consecutive weeks for

employers that are educational organizations.

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Breaks in Employment - Terminations/Rehires

International Transfers

• Expats - Can treat as terminated if the transfer is outside of the

U.S. and is anticipated to be indefinite or for at least 12 months.

• No Hours are counted for services rendered outside of the U.S.
• Inpats – May treat as a new hire, depending on the number of

week abroad treated as weeks with no hours.

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Look-Back Measurement Period

• Measure a past period of employment to determine Full-Time

Employee status presently (the Look-Back Period)

• Apply the result to a following period of time (the Stability Period).

The result does not change in the Stability Period no matter how many hours the employee works. Advantage – Allows an employer to always have certainty as to who its Full-Time Employees are. Avoid an inadvertent violation of the Tier 1 Tax that might occur by not covering 95% or more of the Employees who for a month actually average 30 or more hours of service. Disadvantage - Very complicated rules that require extensive recordkeeping and hours tracking. Might only do for hourly employees and not salaried employees.

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Look-Back Measurement Period

Standard Measurement Period

• Minimum 3 months
• Maximum 12 months

Note: Looking at calendar year 2014 for purposes of 2015.

Stability Period

• Minimum 6 months
• Maximum 12 months
• Not shorter than Standard Measurement Period

Administrative Period

• Not longer than 90 days
• Between Standard Measurement Period and Stability Period. Use

to enroll or dis-enroll employees.

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Look-Back Measurement Period

Example 1 – Assume Calendar Year Plan Year Standard Measurement Period – December 1, 2013 to November 30, 2014. Administrative Period – December 1, 2014 to December 31, 2014. Stability Period – January 1, 2015 to December 31, 2015 Example 2 – Assume October 1 Plan Year Standard Measurement Period – September 1, 2013 to August 31, 2014 Administrative Period – September 1, 2014 to September 30, 2014. Stability Period – October 1, 2014 to September 30, 2015. Note: The mandate tax is determined on a monthly basis and is reported and paid on a calendar year basis, irrespective of the timing of the Stability Period.

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Look-Back Measurement Period New Hires - Categories of employees:

• Seasonal

Customary annual employment is six months or less

• Full-Time Employee

Employee is not seasonal and a reasonable determination is that the employee will average 30 hours per week. The expected length of employment is not considered. All facts and

• circumstances. Treat as Full-Time Employee immediately.
• Variable Hour Employee (Part-Time)

Not seasonal and cannot reasonably be determined to be a Full- Time Employee.

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Look-Back Measurement Period New Hires – Full-Time Employee Determinations

• After Full-Time Employee is employed through a full Standard

Measurement Period, use the Plan’s regular Stability Period rules.

• Do not have to be counted for purposes of the tax until the first

day of the month after being employed for three months. Example: Hired January 15, do not count until May 1

• Conditions:
• The employee is eligible to participate in the plan, except for

satisfying a permissible waiting period. Note: This apparently means that the employee’s position of employment is one normally covered by the plan.

• The employee is offered coverage with minimum value by the

first day of the month after being employed for three months

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Look-Back Measurement Period Special Rules for New Hires – If not Full-Time Employees

Initial Measurement Period – 3 months to 12 months. Do not have to be calendar months. Measure from start date or following month. Average hours worked over the entire period to determine 30 hours per week average. Administrative Period – maximum 90 days. However, cannot end later than last day of first month that begins after one-year anniversary of date of hire (not longer than 13 months after date of hire). Stability Period

• 6 month minimum
• Not shorter than Initial Measurement Period

Note: A longer Initial Measurement Period (e.g. 12 months) may effectively work to exclude limited duration employees and seasonal employees who are not hired next season.

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Look-Back Measurement Period Special Rules for New Hires – Not Full-Time Employees

Transition onto rules for Ongoing Employees

• If a full-time employee during Initial Measurement Period:
• Keep full-time classification during entire following Initial

Stability Period.

• Test under regular rules for first Standard Measurement Period

fully employed in. If not full-time, do not change until end of the initial Stability Period.

• If not a full-time employee during Initial Measurement Period:
• Must test in the first Standard Measurement Period fully
• employed. If full-time, immediately switch over to the ongoing

employee rules

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Look-Back Measurement Period Example - Variable Hour Employee hired September 1, 2014

• Calendar year plan
• Standard Measurement Period - 12 months
• Stability Period – 12 months
• New Hire Initial Measurement Period - 12 months
• New Hire Stability Period - 12 months
• Measure hours – September 1, 2014 to August 31, 2015.
• If not full-time:

 Determination is good through December 31, 2015.  Measure hours from January 1, 2015 to December 31, 2015. Apply results from January 1, 2016 to December 31, 2016.

• If full-time:

 Determination applies through August 31, 2016.  Measure hours from January 1, 2015 to December 31, 2015  Apply results on from September 1, 2016 to December 31, 2016.

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Look-Back Measurement Period Payroll Period Rules

If payroll periods are weekly, bi-weekly or semi-monthly Options to either:

• Include all payroll periods ending in the measurement period
• Include all payroll periods beginning in the measurement period

Calculating the 30 Hour Per Week Average

• Regulations are not clear
• If payroll is weekly and payroll periods ending or beginning in the

determination period are to be used, use the number of weeks for the payroll periods included in the calculation

• If payroll is semi-monthly, or the determination period is simply

stated in months, it appears that an average of 130 hours per month (1,560 per year) will be considered to be an average of 30 hours per week.

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Look-Back Measurement Period Special Unpaid Leave Rules

• Family and Medical Leave Act (FMLA)
• Uniformed Services Employment and Reemployment Rights Act

(USERAA)

• Jury duty

When calculating average hours, exclude these periods or credit hours based on the average hours. Special Rules for Educational Organizations

Full-Time Employee Determinations

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Look-Back Measurement Period Special Rules for Educational Organizations Apply if:

• An Employee has an Employment Break Period (i.e. 4

consecutive weeks with no hours of service or special unpaid leave), and

• The Employee is not treated as a new employee when rehired

unless the employee had no hours of service for 26 consecutive weeks When calculating average hours, exclude an employee’s Employment Break Period unless the employee is treated as a new employee when rehired.

• Example: A teacher leaves on June 6 and returns to work August
• 5. The period between June 6 and August 5 is an Employment

Break Period that is excluded when calculating average hours.

Full-Time Employee Determinations

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Employer Mandate Tax – IRS Reporting Requirements for Employers

• Applies for calendar year 2015 (delayed until 2016 for certain

small employers under 100 FTEs)

• Applies to “Applicable Large Employers” who may be subject to

the mandate tax

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Reporting to the IRS will include:

• A certification as to whether an employer plan that has minimum

essential health benefits is offered to all full-time employees and their dependents

• If so, certify to the following:
• The months such coverage was provided
• The monthly premium for the lowest cost option
• The employer’s share of the total plan costs
• The duration of any waiting period in the plan

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65

Report the following:

• The number of full-time employees for each month in the year
• For each full-time employee:
• Name, address and social security number (or other taxpayer

ID number)

• Number of months the employee was covered under the plan.

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66

Report by the following January 31, to each employee that is to be included in the IRS report:

• The name and address of the employer
• Contact information at the employer
• The information regarding plan coverage that is required to be

reported to the IRS

Employer Mandate Tax – IRS Reporting Requirements for Employers

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Questions

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Contact Information

Squire Patton Boggs (US) LLP

Ryan A. Sobel 4900 Key Tower, 127 Public Square Cleveland, OH 44114 216-479-8489 (office) ryan.sobel@squirepb.com Jeffrey J. Wedel 4900 Key Tower, 127 Public Square Cleveland, OH 44114 216-479-8767 (office) jeffrey.wedel@squirepb.com Matthew A. Secrist 4900 Key Tower, 127 Public Square Cleveland, OH 44114 216-479-8006 (office) matthew.secrist@squirepb.com