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Vol. 4 9 | No. 1 2 | De c e m b e r 2 0 1 2
education | research | information
MAGAZINE
Ahead in New
Medical Technologies:
Transformations or Mirages? p 14
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benefits
inside
december 2012
14
Ahead in New Medical Technologies: Transformations or Mirages?
Technological advances with the potential to transform health care come at high cost—at a time when plan
sponsors are concerned about increasing demand and controlling costs. Benefit managers will have to make
choices that will affect the availability of new technologies.
by | J. Russell Teagarden
20
Not Your Average Health Fair
Don’t think you can attract thousands of plan participants to a health fair? The author and other leaders
of Minneapolis-area health and welfare funds have
done it. He shares tips to planning an event that will
motivate and educate participants.
by | James J. Hynes
26
Multiemployer Plan Compliance
With Health Care Reform
This article provides a health care reform time line
for multiemployer plans. Plans must be ready to act
in the next year to comply with some provisions,
while loooking at cost and design implications of
other provisions over the next five years. The author
points out where more guidance is expected.
by | Ann M. Caresani
34
State Pension Reform Should Also Aim
to Attract, Retain the Best Workers
By focusing on changes in pension benefits for
state employees in New Jersey, the authors warn
that some pension reforms may make it difficult for
states to attract young workers and retain experienced ones.
by | Richard W. Johnson, C. Eugene Steuerle
and Caleb Quakenbush
40
eACOs—The Next Generation
of Health Plans
Accountable care organizations (ACOs) are rapidly
growing in popularity as a new health care delivery
model for health systems and provider groups. This
article explores the possibility of employers contracting directly with an ACO.
by | Eric M. Parmenter, CEBS
december 2012 benefits magazine
3
education | research | information
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February 18-23, 2013
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MAGAZINE
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www.ifebp.org/certificateseries
4
benefits magazine december 2012
The International Foundation of Employee Benefit Plans is a nonprofit
organization, dedicated to being a leading objective and independent
global source of employee benefits, compensation and financial literacy
education and information.
benefits
inside
departments
6contributors
51
public plan news
7
from the CEO
53
legal & legislative reporter
8conversation with
71
foundation news
72
plan ahead
74
fringe benefit
Cathye L. Smithwick
11benefit basics:
reciprocity
12
quick look
48
industry briefs
next issue >>
Infrastructure Investing and
Multiemployer Pension Plans
by | Glenn Ezard
29M/1112
MK121087
©2012 International Foundation
of Employee Benefit Plans, Inc.
18700 W. Bluemound Road
Brookfield, WI 53045
(262) 786-6700
All rights reserved.
This publication is indexed in:
EMPLOYEE BENEFITS INFOSOURCE™.
ISSN: P rint 2157-6157
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Employee Benefit Plans
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The International Foundation is a nonprofit, impartial
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benefit and compensation plans. Benefits Magazine is
published 12 times a year and is an official publication of the
International Foundation of Employee Benefit Plans. With the
exception of official International Foundation announcements,
the opinions given in articles are those of the authors. The
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The Foundation does not endorse, sponsor or promote any of
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advertisers nor their products or services have been
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should exercise caution and due diligence to ascertain the
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Publication Excellence
5
in this issue
contributors
New medical technology and exciting
research discoveries have the power to
transform health care. But J. Russell
Teagarden, D.M.H., warns that health
plan sponsors will have to make
choices as both costs and demand
increase—choices that could make the
advances in medicine only a mirage.
Teagarden recently was vice president of
scientific affairs, advanced clinical science
and research at Medco Health Solutions,
Inc. He previously was a clinical pharmacist
in Chicago teaching hospitals and a visiting
scholar at the National Institutes of Health
Department of Bioethics.
What plan participant—and his or her
kids—wouldn’t jump at the chance to
walk through a huge plastic colon?
And win valuable prizes from medical
vendors? Labor health fairs are a great
place to kick off a wellness program
and engage whole families in their
health. James J. Hynes, executive
administrator of the Twin City Pipe Trades
Service Association in St. Paul, Minnesota,
writes about how Minneapolis-area health
and welfare funds have grown their very
successful annual health fair.
Health care reform and how its
many separate pieces will affect
multiemployer health and welfare
funds is coming into sharper focus for
trustees. Attorney and CPA Ann M.
Caresani, an employee benefits partner
in the Cleveland, Ohio office of Porter
Wright Morris & Arthur LLP, provides
a compliance time line. She also notes where
trustees need to watch for further guidance
from the government and where—to prepare
for changes still a few years away—they
6
need to be thinking strategically. Caresani
works with employers on the design and
administration of benefit plans and defends
employers, plan administrators, trustees and
other fiduciaries in ERISA litigation.
pg 14
pg 20
pg 26
The changes many states are making
in their pension benefits may have
unintended consequences. While
traditional defined benefit pensions
have made states desirable employers,
many of the new reforms likely will
have the opposite effect, write three
researchers from The Urban Institute.
Young workers may not see a benefit
of working for states, while older,
experienced and hard-to-replace
workers may see no reason to stay on
the job. Richard W. Johnson, Ph.D.,
directs the institute’s Program on
Retirement Policy. C. Eugene Steuerle,
Ph.D., is the Richard B. Fisher Chair at
the Urban and formerly served as deputy
assistant secretary of the Treasury for tax
analysis. Caleb Quakenbush is a research
assistant who studies policy and federal
and state taxation.
As accountable care organizations
(ACOs) become a new model for
delivering health care, employers may
want to investigate contracting directly
with ACOs—forming an eACO. Eric
M. Parmenter, CEBS, vice president of
employer services for Evolent Health in
Nashville, Tennessee, writes about what
ACOs are, how they’re intended to work
and what additional qualities an eACO
would need to include. Parmenter is
a former vice president at HighRoads and a
senior consultant and principal with Towers
Watson. pg 34
pg 34
pg 34
pg 40
from the
ceo
Dear Members:
December is always a tough month. It’s the end of the year, there’s a lot to
be done for year-end reports, the start of many new projects is just around
the corner, and you were hoping to take a few days off for the holidays.
While we can’t help you with the reports or shopping, we can
help you with your 2013 planning. If you are interested in starting or tweaking your wellness program, the Foundation has
great resources for you. Benchmarking studies help gauge your
plan’s progress. Supplemental articles, which are compiled and
e-mailed to you for free with your membership, help stir ideas.
This type of personalized research is not limited to just wellness. Contact our Information Center for any benefits topic,
and the information specialists will be happy to pull together
pertinent information. Or, choose the “express lane” of information by perusing the InfoQuick section at www.ifebp.org/
infoquick. Here, you’ll find the most frequently requested
topics. Just click what you’d like, and you’ll instantly have
informative articles e-mailed to you.
Members have consistently told us that the personalized
research service has saved them an average of three hours
per request. Who couldn’t use an additional three hours in
their day?
To use any of the free Information Services, please visit www.
ifebp.org/infocenter or call (888) 334-3327, option 5.
Sincerely,
Michael Wilson
7
conversation
with
Cathye L. Smithwick
Although dental benefits account for a small portion of an employer’s total health care
cost, they are one of the most visible, highly utilized and valued benefits in today’s
health economy. Yet the industry is surprisingly varied, with numerous vendors and
niche players involved in a complex chain of delivery. Cathye L. Smithwick thought a
definitive book on the subject was needed. The International Foundation published
her book, Dental Benefits: A Guide to Managed Plans, Third Edition, this year.
Smithwick, a health economist and consultant, currently is an advisor to health care
organizations. Her broad range of industry experience includes serving as group vice
president of dental affairs at Delta Dental of California and its holding company affiliates; co-founding the dental consulting practice of Mercer Health and Benefits, later
serving as national practice leader; and working for more than 20 years as a dental
hygienist, specializing primarily in pediatrics. Smithwick recently spoke about her new
book with Benefits Magazine editor Chris Vogel, CEBS.
Cathye L. Smithwick
Author, Why, and for whom,
Dental Benefits: did you write the book?
I’ve been involved in the dental field
A Guide to Managed Plans all of my life, with wide-ranging experiences representing the many intricacies of our industry. As an author and
communicator, I believed that creating
a definitive book was the best approach
for bringing a new and needed perspective on today’s dental benefits industry.
Health care markets suffer from a
high degree of asymmetrical information, also known as an information gap.
This gap exists not only between dentists and their patients, but also between
provider networks and carriers. Today,
a growing gap also exists between market stakeholders and the various levels
of government. This information gap
creates market distortions by placing a
wedge between buyers and sellers that
can be expressed in terms of prices.
This has led to the development of a
8
vibrant business-to-business marketplace comprised of firms that specialize
in providing the needed symmetry to
the industry as a whole. For example,
some firms specializing in dealing with
this endemic problem would include
all knowledgeable and professional
brokers, consultants, auditors, underwriters and actuaries, and all firms specializing in analyzing dental networks,
provider reimbursement, quality of
care and service delivery.
Similar efforts are occurring on the
provider side. Dentists, for example,
are very aggressive about adopting new
technologies that allow them to differentiate their practices, expand service
offerings and develop new methods of
financing their operations. This edition
of the book is an attempt to penetrate
the information barrier on all levels of
the dental benefits market. It focuses on
trends in a changing industry.
conversation
How did you choose
the contributors?
In the book, you devote a chapter to how dental
is different from medical. What are some of the
Over more than 35 years, I have collaborated with many more important ways dental care differs from
professionals who are outstanding practitioners in their medical care, and how do these impact dental
fields of specialty. Each contributor to the book was hand- plan design?
picked for his or her ability to provide rare insight, knowledge and perspective that readers would find beneficial. The
result is a unique resource for dental plan sponsors, consultants, insurance brokers, public entities and providers for
whom dental benefits play a part in their professional or
personal lives.
What are some significant changes in dental
benefits over the last several decades?
Changes in consumer preferences; globalization; the shift in
the United States from a manufacturing-based to a service sector-based economy (placing greater emphasis on knowledge
workers); evolving perspectives by employers regarding offering health care benefits to employees (subject to company philosophy and budgetary constraints); changes in health care delivery systems; productivity improvements; advances in health
care informatics; and a whole host of administrative process
improvements are the ultimate drivers of change in dental benefits. With the majority of the U.S. workforce now employed
in service sector jobs, physical appearance is being viewed as
paramount to professional success. Having that perfect smile
has become a highly sought-after attribute.
Also, the advances in dental technology have been simply
amazing. Materials are lasting longer, and are more biocompatible and cosmetically pleasing than, say, those in use 30
years ago. The patient experience has become more pleasant, healing times have been reduced, and clinical outcomes
have improved immensely. Also, the implementation of new
dental technology is far less expensive than in the medical
field, so dentists tend to be early adopters of new materials,
technologies and procedures. Many of these advances are being incorporated at some point into dental plans, leading to
increased choices for purchasers and consumers.
Dental involves the utilization of generally low-cost, highfrequency procedures. For example, exams, cleanings and
radiographs typically account for over 70% of services by
incidence, or about one-third of charges. It is important for
members to visit their dentist and hygienist at least annually
(or more, depending on risk profile) for dental “tune-ups” to
prevent the need for more expensive and invasive procedures
down the road. This keeps premiums stable and affordable.
Well-designed dental benefits provide first-dollar coverage
for these necessary oral health maintenance procedures.
Also, dental disease on average is not as costly to treat as
medical, nor does it deal with catastrophic, or life-threatening, events. This makes dental cost and utilization easier to
predict and to manage.
And there is a dramatic difference with respect to the
properties of an insurance policy. While health (medical)
insurance functions more like traditional insurance—that
is, by protecting against the financial consequences of a catastrophic event—dental benefits strive foremost to provide
a stable financing mechanism for routine, highly utilized
services that have been shown to reduce the future need for
more costly restorative care.
9
conversation
Given these and many other differences, plan sponsors
need to be careful with respect to plan design incentives and
cost-sharing structures used in their dental programs. One
precautionary note: Little things done with the best of intentions can have large, unintended consequences.
Connections between dental health and overall
health have been in the news in recent years.
How does that figure into the dental benefits
landscape?
We have been aware of potential links between oral health
and systemic health for quite
some time, but now, because
of advances in technology and
our ability to capture, quantify
and analyze these relationships,
scientific research has increased
and expanded on this connection. Links have been found between oral health and chronic
conditions such as diabetes, cardiovascular disease, osteoporosis and pregnancy complications, such as low birthweight
or preterm births.
Several forward-thinking professionals explore these connections in the book. A physician specializing in endocrinology and metabolic disorders explains the inflammatory
process and potentially serious health risks associated with
sustained inflammation, such as atherosclerosis, cardiovascular disease in general, and the risk of (or ability to manage)
Type II diabetes through glycemic control. Also discussed
are ways in which medical and dental professionals can work
together to comanage such patients. Recent estimates are
that chronic oral inflammation may affect as much as 50% of
the adult population. Individuals may have a potentially serious chronic systemic condition and not know it. Due to high
utilization of services, the dental profession is in a unique
position to look for early warning signs that may warrant a
referral to a physician.
The use of data warehousing and informatics helps identify people who aren’t using dental benefits. Programs can
be designed with incentives to motivate them to visit the
dentist. Beyond this, the cutting edge of modern disease
10
management, also covered in the book, involves merging
data from medical, dental, vision and pharmacy to more accurately group employees into various risk categories. This
knowledge can be applied to developing new treatments and
also to developing new types of dental benefit designs customized for these unique populations. We’re finding that if
we can identify nonutilizers and get them to visit a dentist,
we might identify some previously undiagnosed bigger problems—early rather than later—ultimately leading to a healthier population and lower health care costs.
What are some of the challenges purchasers face
in selecting a dental plan?
The first challenge is to determine what type of plan is
best, given one’s goals, budgetary constraints and the virtual smorgasbord of choices available. A greater challenge is
understanding what is being analyzed to ensure that comparisons across different plans and suppliers are done on an
apples-to-apples basis. Two, three or four plans might look
the same on the surface, but when you peel back the layers,
they could have very different cost structures. For example,
is there a difference in provider reimbursement between network and nonnetwork dentists? If so, what is it and how does
it impact premium and consumer out-of-pocket cost? Other
subtle differences may be in hidden plan design or administrative features. For example, preventive and diagnostic may
be covered at 100%, but 100% of what? And which procedures are covered under preventive and diagnostic (given the
propensity today to reduce premium by shifting services into
higher classes, resulting in greater out-of-pocket cost)?
The book includes many tips to help individuals, large and
small employers, and multiemployer health and welfare plans
unravel such complexities, not only in plan design, but also
in comparing networks, access to care, effective discounts
and more—all the things one needs to look at to analyze and
compare the true value of plans.
What do you consider one of the greatest myths
about dental benefits?
I would say the most common one is the belief that dental plans are just tiny medical plans. This viewpoint and its
consequences are a common theme running throughout the
book. basics
benefit
reciprocity
S
ome multiemployer health and welfare and
pension plans enter into reciprocity agreements
with other trust funds in the same or similar industries, especially when the workforce is very
mobile and participants often work for several
different employers.
Reciprocity is accomplished in one of several ways. Pension funds A and B might agree to give reciprocity for vesting
credits. Let’s say that Mary Smith works three years in pension fund A and two years in pension fund B. Under reciprocity, both fund A and fund B give Mary the full five years
of pension vesting credit. However, fund A gives Mary only
three years of pension benefit credit, and fund B gives Mary
only two years of pension benefit credit.
A common health and welfare plan reciprocity agreement
is for fund B to permit a participant to maintain health and
welfare benefit eligibility under fund A even though the person is working in fund B’s jurisdiction.
Consider Joe Doe, who is a resident of Seattle, Washington and a participant in the Washington State Construction
Workers’ Plan. Joe travels with his employer, Heavy-Duty
Construction Company, to work on a bridge construction
project in Portland, Oregon. Even though Joe Doe is working in the jurisdiction of the Oregon Construction Workers’
Plan, the Oregon plan permits Heavy-Duty Construction to
submit contributions on behalf of Joe Doe to the Washington
state plan. The Washington plan pays all benefit claims submitted by Joe Doe or his dependents. (Note: The construction company submits contributions to the Oregon state plan
for all Oregon union members hired to work on the Portland
construction project. For some reciprocity agreements, the
contractor submits all contributions to the local plan, and
the local plan administrator sends the contributions to the
employee’s home plan.)
If an Oregon plan participant travels to Washington for a
construction job, the Washington plan permits the Oregon
participant to continue coverage under the Oregon plan
through the same reciprocal agreement. This excerpt is from Chapter Five of Multiemployer Plans:
A Guide for New Trustees, Second Edition, by Joseph A.
Brislin. The International Foundation published the book in
2010. It is available at www.ifebp.org/books.asp?6733.
11
quick look
health care
care
health
premiums
premiums
This year we witnessed the lowest health care premium rate increases in six years. But Aon Hewitt
expects average costs to jump again in 2013.
By Metropolitan Area
By Plan Type
H
M
O
P
P
O
4.5%
7.4%
P
O
S
San Francisco
3.6%
4.5%
Cincinnati
Denver
7.2%
New York City
Los Angeles
3.4%
7.4%
6.5%
Dallas
Austin
San Antonio
Above Average
Increases
Below Average
Increases
Employees Only
Premium Costs Per Employee
TOTAL
EMPLOYEE PORTION
$2,090
$10,034
$10,522
$2,204
$11,188
(projected)
$2,385
(projected)
Employee Out-of-Pocket Costs*
Add employee
premiums to
out-of-pocket
costs, and costs
have jumped
more than 50%
from $3,199 in
2008 to $4,814
in 2013.
$2,072
$2,200
$2,429
*Copayments, coinsurance and deductibles
12
Source: Aon Hewitt
60% of eMployers
expect their
benefit costs to
rise over the next
tWo years as a
result of health
care reforM.*
Managing benefit costs,
complexity and compliance
has never been more critical
to your organization’s success.
What’s your go-forWard strategy?
When you partner with Mercer, you can
expect comprehensive, best-in-class benefit
administration solutions that meet your
challenges today – and an adviser you can
rely upon to anticipate the ones you’ll face
tomorrow. All this from a trusted global
leader for HR advice in talent, health,
retirement and investments.
*Mercer survey, August 2012.
Let Mercer be your advocate
for the road ahead.
Visit www.mercer.com to contact
your local representative.
Ahead in New
Medical Technologies:
Technological advances with the
potential to transform health care
come at high cost—at a time when
plan sponsors are concerned about
increasing demand and controlling costs.
Benefit managers will have to make
choices that will affect the availability
of new technologies.
14
Transformations
or Mirages?
by | J. Russell Teagarden
A
nyone who is involved in the design and delivery of health care benefits these days must
surely be feeling the force of technology
advances and the whirlwind of health care
system reforms. We can try to convince ourselves that our current plight is nothing out of the ordinary
or so different from the plights those who came before us
faced and those who will come after us will face. We just
need to press on as best we can.
Or we can see our plight as the result of momentous
changes requiring that we come to understand the significance of changes taking place and react to them for immediate and future needs. In this article, I suggest that we may
very well be in the midst of changes of the likes we haven’t
experienced for a long, long time. I further suggest that the
costs attending new and future medical technologies could
make them unavailable and render them mere mirages.
Health benefit plan managers have a role in determining whether new and transformational technologies become reality or mirages. I offer some thoughts on how
health benefit plan managers can help make the new and
future technologies available to their plan members.
Astounding and Amazing, and Maybe Historical
Advances in medical sciences and health care technologies are constant. We are accustomed to hearing about
new drug discoveries and new medical procedures all the
time. But there are moments when these advances change
in form from evolutionary to revolutionary—They change
from producing refinements to current practices to alter-
15
medical technologies
ing the course of individual lives and
even improving the human condition
more broadly. These moments come
rarely, and when they come, they are
astounding and amazing. Our current
moment could be historical as well.
A notable astounding and amazing
example from the past is the transformation in medical practice that occurred in the early 1800s when particular illnesses were first linked to
particular problems with an organ or
bodily function. The process of linking
a health problem to a specific organ became known as pathological anatomy.
Pathological anatomy led to illness
categories based on the place in the
body causing the problems: appendicitis, stomach ulcers, heart failure, lung
cancer. Prior to pathological anatomy,
illnesses were often tied to vague imbalances in the body’s “humors” (phlegm,
blood, yellow bile, black bile), and only
general support and comfort measures
were provided to sick people. Pathological anatomy transformed medical care
from these general support measures to
systematic approaches based on the underlying causes of illnesses.1 This transformation has been the basis of medical
research and clinical practice ever since.
Over time, many refinements have
been made to this approach with improvements in anesthesia, antisepsis,
imaging, drug therapies, rehabilitation
and the like but, in general, the approach has been based on the part of
the body where the cause of the illness
is located.
As the 20th century was coming to
a close and the 21st century was ramping up, breakthrough technologies have
promised a change in health care as
significant and important as pathological anatomy did 200 years ago. Among
many others, three particular breakthroughs are good representatives of
what could make our time momentous:
molecular biology, nanotechnology
and sensor technology.
Getting So Personal
Molecular biology is the science concerned with how atoms and molecules
affect life processes. Many life processes
are basically the complicated and intricate steps required to create, destroy
and interconnect various molecules
(e.g., proteins). Scientists often refer
to a collection of steps in a particular
process as a pathway. Some pathways
keep us healthy; other pathways make
learn more >>
Education
February 22-23, 2013, Lake Buena Vista (Orlando), Florida
For more information, visit www.ifebp.org/certificateseries.
Health Care Management Conference
March 11-13, 2013, Rancho Mirage, California
For more information, visit www.ifebp.org/healthcare.
From the Bookstore
Health Insurance Answer Book, Tenth Edition
John Garner. Aspen Publishers. 2011 with 2013 supplement.
For more details, visit www.ifebp.org/books.asp?8869.
16
us sick. Recent advances in molecular
biology have uncovered pathways that
cause illnesses and, as a result, have
opened up new ways to treat them.
We have long known, for example,
that cancers of all types result from
uncontrolled growth of certain cells or
from cells functioning incorrectly. Now,
scientists and clinicians can identify
some of the molecular pathways that
cause cells to malfunction or grow out
of control. Therefore, where some cancers were once distinguished by their
location in the body and by tumor cell
characteristics seen through a microscope, a particular molecular pathway
now distinguishes them. Lung cancer is
a case in point. Lung cancers that were
classified by visible cell features as adenocarcinoma, large cell and squamous
cell are further classified by pathways
distinguished as KRAS, EGFR, EML4ALK, BRAF and PI3K, among others.
When a pathway causing an illness
can be found, treatments can be designed to disrupt the pathway rather
than at the broader disease class. Using
lung cancer again as an example, before
particular pathways causing certain
lung cancers were known, treatments
were designed to destroy cancer cells
but, in so doing, also destroyed healthy
cells. When a pathway for a lung cancer can be found, then treatments can
target the particular pathway to alter
it or neutralize it so cancer cells are no
longer produced while sparing healthy
cells. For example, crizotinib (Xalkori®/
Pfizer) is a biologic agent that works by
targeting the EML4-ALK pathway only.
These pathways permit much greater
precision in treatment decisions.
In addition to bringing more precision to treatment selection, advances
in molecular biology have also brought
more precision to managing treatments. For example, testing
is now available that can show how well a particular person’s
body can handle certain drugs—that is, whether a person is
more or less sensitive to a drug’s adverse effects or whether
higher or lower doses are required. This type of testing leads
to treatment decisions based on an individual’s profile rather
than on what can be expected from the averages of a group.
Genetics often play a role in the molecular pathways causing illnesses and in the way a person’s body handles drugs.
People can inherit genes or genes can mutate during a person’s life. Therefore, genetic testing is an important component in molecular biology advances.
takeaways >>
Getting So Small
• Transformative medical advancements are coming at the same
time that demand for health care is rising and health plan managers are having to consider setting reasonable limits on care.
As molecular biology advances were leading to greater
precision in diagnosis and treatment, nanotechnology was
applied to further enable the benefits of molecular biology.
Nanotechnology refers generally to the use of chemical structures and devices that are measured on the nanometer scale.
A nanometer is a very, very small measure of length; we can’t
see something that is a nanometer in length; we can’t see
something that is 100,000 nanometers in length. Atoms are
less than a nanometer, small molecules are one to ten nanometers, and viruses and bacteria are 100 to 1,000 nanometers.
Anything measured in nanometers can fit about anywhere
in the body. Scientists and engineers have designed particles
just nanometers in length that can be directed to targeted
areas in the body, such as a particular organ or even a tumor.2
They are then able to use these particles to deliver drugs to
very precise locations, which allows for lower doses of drugs
and protects other parts of the body from potentially harmful effects. Drugs that target particular pathways in lung cancer, for example, could be attached to a particle measured in
nanometers and engineered to seek and bind only to lung
cancer cells so that the drug is delivered to where it is needed
to work and nowhere else.
Getting So Much Information
Also getting so much smaller are the sensors that can
collect and send information of all kinds. We have become
accustomed to sensors in our cars that tell us when tire pressure is low or when coolant temperatures are high, when we
aren’t close enough to a curb or when we are too close to another car. We can now start to get more accustomed to sen-
• Medical technologies that were only dreamed of are becoming
realities, but their costs may make them unavailable.
• Molecular biology, nanotechnology and sensor technology are
among the important breakthrough technologies.
• Scientists can identify molecular pathways that cause cells to
malfunction or grow out of control, resulting in cancers. Genetic
testing is a component in molecular biology advances.
• Sensors provide information for managing illnesses and conditions
but require new health care delivery arrangements.
• Although individually important, new technologies offer more
benefits when used together.
sors giving us information we need to manage our illnesses
and conditions.
Sensors are now available in medications we swallow that
signal to whoever needs to know whether a person has taken
his or her medicine on time, or at all. Sensors are in various
devices such as scales to record and transmit body weight
and in contact lenses to measure eye pressures in people with
glaucoma. Sensors are inside bodies to measure blood pressures and cardiac functions as well as to retrieve and transmit
all sorts of other vital information.
While sensors provide important information in managing a whole variety of illnesses and conditions, the technology may be out in front of health care delivery mechanisms
that are suited to use the information sensors generate. Office-based physician practices struggle enough with reacting
to the limited amount of information they receive now. How
will those practices deal with data transmitted on a frequent
basis for each of several functions measured and for each of
the thousands of patients in a practice? Achieving the full
benefit of sensor technologies will require new health care
delivery arrangements that incorporate immediate triage
processes.
Meshing Them Together
These three examples of new and important medical
advances—molecular biology, nanotechnology and sensor technology—also illustrate how many of the recent innovations today are interdependent. While each of them
17
independently represents significant advancements in
health care, they offer even more benefits when used together. Molecular diagnostics can determine which drugs
work against particular illness pathways, nanotechnology
can deliver effective drugs to the precise place in the body,
and sensors can monitor the effects of drugs on a continual basis.
Health benefit managers will need to consider how to
structure their benefits in ways to facilitate the integration of
these and other new technologies, especially those typically
managed through different plans and policies. For example,
if a molecular diagnostic test is required to know whether a
particular drug will work against a particular target, then the
health benefit plan manager should make coverage policy
decisions that account for both the drug and the “companion
diagnostic test.” Devices like sensors will become increasingly important to the use of particular drugs and will have
to be considered in drug coverage policies. These and other
new medical technologies will make managing benefits sepa-
rately for drugs, devices and laboratory tests fragmented, inefficient and incoherent.
If Only Medical Advancements
Didn’t Cost So Much
As a rule, significant medical advancements—and even
many not-so-significant medical advancements—increase
costs. The advancements transforming health care also come
at a time when the demand for health care is increasing as
the baby boomer generation moves into its high health care
consumption years. Therefore, as exciting as it is to be in a
period of medical advancements rare in its transformative
significance, the accompanying costs can seriously dampen
enthusiasm.
In practical terms, the increasing costs of health care technologies and the rising demands for health care will require
health care benefit managers to think even harder about
how to allocate benefits and, in particular, how to set limits to them. Indeed, although seemingly paradoxical, justice
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18
requires limits to care. Limits set fairly will result in better
resource distribution and efficiency, which will, in turn,
provide equal access across all plan members and also better enable plans to cover newer technologies through limits
applied to older, less effective technologies. However, given
the rapid rate of cost increases plan managers are seeing
and will continue to see, they will have to set more limits
in more ways for more people than ever before. As a result,
plan managers who are making these decisions will be asked
by those who are affected by them why they should consider
these managers as legitimate and why they should consider
the limits they set as fair.3
Plan managers can address these questions and concerns
through the process they use to set limits. Health policy experts recommend that the limits set and the reasons for the
limits be made known to the people who are affected by
them (that is, plan members). They also recommend that
the limits set be relevant to the health care needs of affected
people and that the limits be revised or appealed when new
information or further considerations warrant changes.4,5
between costs and resources in health care animates the rationale of setting limits fairly to broaden access to new technologies. Setting limits requires plan managers to adopt fair
processes, plan members to accept the idea of limits, and
both to participate in good faith. Where bold and thoughtful health care benefit plan policies cannot be designed and
implemented, the new and transformative changes health
care is seeing today will be just shadows in the distance. Endnotes
1. E. R. Kandel. The Age of Insight: The Quest to Understand the Unconscious in Art, Mind, and Brain. New York: Random House, 2012.
2. S. Parveen, R. Misra and S. K. Sahoo. “Nanoparticles: A Boon to
Drug Delivery, Therapeutics, Diagnostics and Imaging.” Nanomedicine:
Nanotechnology, Biology, and Medicine 2012;8:147-166.
3. N. Daniels and J. E. Sabin. Setting Limits Fairly: Learning to Share
Resources to Health. Oxford, UK: Oxford University Press, 2008
4.Ibid.
5. E. J. Emanuel. Justice and Managed Care: Four Principles for the Just
Allocation of Health Care Resources. Hastings Center Report 2000;30(3):816.
We are arguably in a momentous period for medical technology advances. Alas, they come at a time when costs already hinder access to health care. Thus, while these advances astound and amaze, they also disillusion and dishearten. It
can seem that as new and wondrous technologies get closer
to us, their costs actually make them look further away—
they can seem more like mirages than miracles.
Health benefit plan managers—private and public—carry
some of the burden of making new medical technologies
available because they cost more than almost any individual
can afford. Plan managers can best enable access to these
new technologies by setting reasonable limits to their plans
through fair processes. Plan members themselves carry some
of the burden of making new technologies available as well.
Their responsibilities involve accepting the need for limits
and participating in limit-setting processes in good faith and
with the interests of the whole plan membership in mind.
Plan member obligations also extend to limiting their demands on the plan to important health care needs so that
they do not consume plan resources that could be used to
expand access to new technologies.
The pace at which health care costs outstrip available
funds is increasing in dramatic fashion. This widening gap
<< bio
The Need to Be Brave in the New World
J. Russell Teagarden, D.M.H., most
recently served as vice president of
scientific affairs, advanced clinical
science and research at Medco
Health Solutions, Inc. During 19
years at Medco, he was chiefly involved in drug
technology assessment, coverage policy development, clinical programming development, clinical
oversight and clinical support for Medco clients
and internal departments. Teagarden also was
involved in leadership roles for Medco research
initiatives. He previously served as a clinical
pharmacist in critical care and drug information
in Chicago teaching hospitals. Teagarden has a
B.S. degree in pharmacy from the University of
Illinois College of Pharmacy, a master of arts
degree in research methodology from Loyola
University of Chicago and a doctor of medical
humanities degree from Drew University. He
completed a residency in hospital pharmacy at
Northwestern University Medical Center and was
visiting scholar at the NIH Bioethics Department.
19
Don’t think you can attract thousands of plan participants to a health fair? The
author and other leaders of Minneapolis-area health and welfare funds have done
it. He shares tips to planning an event that will motivate and educate participants.
by | James J. Hynes
20
W
hat do you think of
when you hear the
words “health fair?”
There are many different visions of what a
health fair looks like, but it’s not likely most
people would immediately picture 5,300 plan
participants filling a major league baseball
stadium for an entire Saturday.
But that is exactly what happened at this
year’s LaborCare Health Fair. On May 5,
members of six multiemployer health and
welfare funds spent the entire day meeting with high-quality health care providers at Target Field in Minneapolis, home
of the Minnesota Twins. These members
received biometric screenings, body fat
analyses and lung-function tests and
spent time speaking with health coaches
and asking questions of onsite pharmacists and physicians, to name just a few activities. This was a health fair of epic proportions.
How did we get here, what makes a health fair
well-attended and what makes it successful? This
article tries to answer those questions and provide a road
map for designing and implementing a successful health fair.
21
health fair
After attending the fair and seeing
how active and engaged the members
were, five additional funds—the Minnesota and North Dakota Bricklayers
and Allied Craftworkers Health Fund,
the Minnesota Cement Masons Health
and Welfare Fund, the Minnesota Laborers Health and Welfare Fund, the St.
Paul Electrical Workers and the Rochester Plumbers and Steamfitters—embraced the health fair concept. With
additional groups on board we were
able to leverage the size of our memberships and grow the fair to 4,000
members in the third year, 4,500 in the
fourth year, 5,000 in the fifth year and
5,300 this year.
The Big Picture
A Little History
The 2012 LaborCare Health Fair
was not the first. Six years ago, a single
fund—the Twin City Pipe Trades Welfare Fund—started the health fair with
450 attendees. That was a great start.
In the second year, the fund worked
closely with the apprenticeship programs to promote the fair to younger
members and make sure they understood this was a family-friendly event.
More than 1,000 members attended the
second fair. Leaders from a number
22
of other building trades unions were
invited as guests to see if they would
be willing to band together in future
years to help make the event bigger and
better for those attending. We did this
based on the reality and in the belief
that “health is health” and that “we can
do more together than we can apart.”
In other words, promoting health
for a pipefitter, a plumber, a bricklayer,
a cement mason or an electrician is going to encompass the same topics, medical testing and health care providers.
First and foremost, the event should
be member driven, meaning it should
be focused on the member. Members
should be involved from the very beginning. Initially, the idea for the
health fair was floated and discussed
in member focus groups. The Twin
City Pipe Trades fund surveyed a mix
of apprentices, retirees, spouses and
active participants to get their views
and ideas on a number of initiatives. A
health fair was on the top of everyone’s
idea list.
Second, “begin with the end in
mind.” Answer the question: What do
we hope to accomplish? The goal this
year was for every member attending the fair to change one thing in his
or her life to improve that member’s
health. The fair’s motto was FAME,
standing for fun, activation, motivation
and education.
The first attempt at anything new
can be scary. The following tips can
help a fund and its participants achieve
success with a health fair.
health fair
The Details:
Tips for a Successful Fair
In discussing the details of what makes a health fair successful, organizers of the LaborCare fair came up with a topten list of details and takeaways that help make a health fair
successful:
1. Establish a sense of urgency. Make the case for why a
health fair is important and valuable. That shouldn’t
be too hard based on the following:
—Rising health care costs
—Chronic conditions
—Diabetes and obesity
—Tobacco use
2.Create a group of leaders committed to making a
change.
—LaborFair leaders came from six Taft-Hartley welfare funds that were tired of the status quo and
wanted to make a difference.
—Put together the planning team, made up from the
fund leadership, and set a meeting schedule. The
LaborFair group met monthly.
—Keep the forum open, with honest discussion; allow
for brainstorming.
—Aligned thinking around health, along with passion
and great energy, will emerge.
3. Leverage this leadership group. Commitment to the
event by this group is critical.
—It is important that dedicated leaders report back to
the other trustees and the membership on progress
before the event and about outcomes after the event.
4. Develop a vision and a strategy.
—Branding, logo and information surrounding the
marketing of the event. See www.lchealthfair.com
for examples.
5. Develop a communication strategy.
—Select a date for the event and then back up to the
current date, selecting communication milestones
along the way.
—Among the ways to communicate are save-the-date
cards, newsletter articles, a reminder mailing, e-mail
blasts, website updates and member surveys following the fair.
6. Make sure you have the right venue.
—Start with something comfortable. The Twin City
Pipe Trades used its training center for the first year
takeaways >>
• The LaborCare Health Fair grew from 450 participants attending
the first year to 5,300 attending the sixth year.
• Several funds joining together to put on a fair makes it a more
attractive to the health care providers and vendors.
• A group of committed leaders is critical.
• A fair should be promoted as a family-friendly event and have
something for everybody.
• Although prizes aren’t a focus, they help draw members to the fair
and engage them.
• A health fair motivates and educates members and is a chance to
launch programs for the new year.
because it was a place members were used to coming
to and was large enough for that first year. Subsequently, the fair moved to the Minneapolis convention center and then to Target Field.
—Allow for online registration ahead of time or a
postage-paid return card to get an idea of how many to
expect. You may need to accommodate a lot of people
and sponsors.
7. Create a budget early and stick to it.
—The venue, pipe and drape, prizes, healthy snacks,
printing and postage are a few of the major cost
learn more >>
Education
Trustees and Administrators Institutes
For more information, visit www.ifebp.ort/trusteesadministrators.
March 11-13, 2013, Rancho Mirage, California
Communicating Health Care
International Foundation videocast from June 2012.
For more information, visit www.ifebp.org/books.
asp?BLUE-9769.
From the Bookstore
Healthy Employees, Healthy Business: Easy, Affordable
Ways to Promote Workplace Wellness, Second Edition
by Ilona Bray. Nolo. 2012.
23
<< bio
health fair
James J. Hynes is executive administrator of the Twin City Pipe Trades
Service Association in St. Paul,
Minnesota. The association is a
nonprofit corporation that provides
administrative services to pension and welfare
trusts in the piping industry. Hynes is responsible
for the overall administration of the benefit funds’
day-to-day operations. He is also a member of
Minneapolis Pipefitters Local #539 and is a
certified instructor of journeymen and apprentices in the plumbing and pipefitting industry.
Hynes serves on the board of directors of Gillette
Children’s Hospital and served on the board of the
Federal Reserve Bank of Minneapolis. He is a past
member of the Actuaries and Consultants
Committee for the International Foundation for
Employee Benefit Plans.
items. Calculate the cost and get a commitment
from each fund on a pro-rata share contribution.
—Once the budget is established, partner with quality
medical providers in the area that will pay to participate in the event.
—The more that is raised in sponsorship, the less the
funds will have in direct costs. The last two years
there have been no out-of-pocket costs to the welfare funds for putting on this event. The cost of the
event was covered fully by the sponsorship of quality
medical providers!
—Find a partner to help with fund-raising and event
management. These may or may not be the same entity.
8. Make the fair a family event with something for everyone.
—Health topics geared specifically for men, women
and children
—A children’s area with games and activities to engage
kids in fun and learning
—Make the event interactive. Providers are not allowed to simply hand out a brochure; they must
24
come up with ways to engage the membership and
present it to the planning committee. The providers
will amaze you with their creativity. In addition to
the various screening tests, we had health care quizzes, putting contests, interactive video games and a
ten-foot-high, 20-foot-long inflatable colon that attendees could walk through to learn about colon
cancer screening.
—Provide biometric screening tests that allow for
tangible outcomes—blood pressure, BMI, cholesterol, glucose, etc.
9.Use prizes. Although prizes aren’t the focus, it’s a
fact that prizes draw people to an event and, depending on how members become eligible for prizes,
can help support engagement with vendors and providers at the fair.
—In addition to providing financial support, have
vendors also provide prizes.
—Focus on healthy prizes (workout equipment, gym
discounts, etc.) if possible or desirable prizes
(iPads, flat-screen TVs, trips, etc.) to draw attention and attendance at the fair.
10.Create an early win. Make it a fun day—one that
will be remembered by those in attendance, so they
will come back again next year and will be excited
to tell their co-workers all about it.
It’s important to remember that a health fair is not a
one-time endeavor. Each year do your best to take feedback and constructive criticism, ask for members’ opinions, be honest with yourselves about what worked and
what didn’t work, make changes and adapt. The fair will
grow and grow.
A health fair is a great way to motivate, educate and
pull all of a fund’s wellness programs together once a year.
It shows that the fund is committed to making a difference in the lives of its membership and gives them the
tools to make changes in their lives and the lives of their
family members. It provides a venue to summarize the
last year and launch programs into the new year. It’s a
great setting for the fund to engage with members, spouses and children in a different way than anything else it
has done. Trustee Handbook: A Guide to Labor-Management
Employee Benefit Plans
Seventh Edition
Claude L. Kordus, Editor and Contributor
Widely regarded as the indispensable tool
for every multiemployer plan trustee and
administrator, the Trustee Handbook: A
Guide to Labor-Management Employee
Benefit Plans has been fully revised and
updated to include essential fiduciary
information without the legalese.
More than 40 industry experts have contributed to
this handbook, covering:
• Fiduciary responsibility under ERISA
• Health care benefits, including PPACA and COBRA
• Retirement benefits
• Investment management (expanded section)
• Administration
• New! Apprenticeship and training programs.
This comprehensive book also includes practical
tips and checklists, sample materials and short
summaries of important legal decisions. Get
yours today at www.ifebp.org/trusteehandbook!
(International Foundation)
2012. Item #7068. $87 (I.F. Members $65).
“Every responsible trustee should buy the
Trustee Handbook. You will come to consider
it your operating manual for life as a trustee.”
Peter F. Castellarin
M&O Insulation Company
www.ifebp.org/trusteehandbook
Multiemployer Plan
With
by | Ann M. Caresani
This article provides a
health care reform time
line for multiemployer plans.
Plans must be ready to act in
the next year to comply with some
provisions, while looking at cost and
design implications of other provisions
over the next five years. The author
points out where more guidance
is expected.
26
Compliance
Health Care Reform
W
hile regulatory guidance on many of the
health care reform law’s provisions is
limited, multiemployer health care plan
trustees are advised to move ahead with
planning and implementation and to be
alert to new guidance as it is issued.
Significant cost pressures are anticipated, and plans that
fail to comply with health care reform provisions can expect
to incur substantial nondeductible excise taxes. Trustees and
employers will need to continue to analyze their demographics, costs, risks and alternatives, and to make decisions regarding benefit structure and approach to compliance. This
article includes important dates for multiemployer health
plans, notes where guidance still is needed and describes factors that might increase costs.
This article was written before the November elections
and presumes that the Patient Protection and Affordable
Care Act (PPACA) will remain in place.1 Even if the law is
repealed or revised, numerous aspects of health care reform
already are effective (such as coverage of adult children until
the age of 26, and preexisting-condition exclusion for children under the age of 19).2 Eliminating those benefits may
be difficult at this point.
Following is a time line of the most pertinent requirements that are expected to become effective over the next
several years.
Late 2012 and 2013
A number of provisions already are effective, and if grandfathered plans lose their grandfathered status, they will be required to comply with additional requirements. For example,
nongrandfathered plans must provide certain benefits, such
as preventive services, comply with emergency services payment rules and comply with internal and external review
procedures.3 To maintain grandfathered status, plans must
comply with disclosure requirements and ensure that any
27
health care reform
most recent SBC must be provided 60
days before any such modification takes
effect. This notice is required only for
changes other than in connection with
a renewal or reissuance of coverage.7
tice will need to describe the services
provided by the exchange and how an
employee may contact the exchange.
The notice also must explain that employees may be eligible for premium assistance and cost reductions through the
exchange if the plan’s share of benefits is
less than 60%, and that if the employee
chooses exchange coverage, he will lose
the employer’s contribution (if any), all
or part of which may be excludable from
taxable income for federal income tax
purposes. PPACA requires HHS regulations implementing this provision, but
regulations had not been issued at the
time of this writing. Guidance is critical, given that the notice likely will be
required before an exchange exists.
Patient-Centered Outcomes
Institute Fee
Additional Medicare
Hospital Insurance Tax
Effective for plan years ending on
or after October 1, 2012, health insurers and self-funded plans must report
and pay with Form 720 a fee of $1 per
covered life, increasing to $2 per covered life in 2014. This fee is intended to
fund the Patient-Centered Outcomes
Research Institute.8
The Medicare hospital insurance tax
rate increases by .9% (from 1.45% to
2.35%) on wages exceeding $200,000
for single filers or $250,000 for joint filers, effective for tax years beginning on
or after January 1, 2013.11 IRS has issued
frequently asked questions (FAQs) explaining the withholding requirements
that apply regardless of whether the tax
is actually owed. Employers are not required to match the additional tax.12
takeaways >>
• Plan sponsors that fail to comply with health care reform provisions can expect to have
to pay nondeductible excise taxes.
• Compliance is important for maintaining grandfathered status.
• For now, plan participants must be notified by March 2013 of the existence of a health
insurance exchange—even though most states won’t yet have an exchange.
• W-2 reporting on the value of employer-sponsored health care coverage remains voluntary for employers contributing to multiemployer plans.
• Guidance is needed on many aspects of PPACA, including how and when employer
excise taxes will be computed, paid and reconciled.
• Some health care practitioners believe the substantial Cadillac tax will hit many plans.
plan changes do not cause the loss of
that status.4
Medical Loss Ratio Rebates
The administrator of an insured plan
that receives a rebate because the issuer failed to provide value for premium
payments must decide how to handle
the rebate and participant communications in accordance with Department
of Labor (DOL) guidance.5
Early Retiree Reinsurance Program
A plan that previously had received
reimbursements under the Early Retiree Reinsurance Program must ensure
that recordkeeping and use-of-money
rules are followed,6 as audits are being
conducted.
Summary of Benefits and Coverage
Plans that conduct open enrollment
must provide the summary of benefits
and coverage (SBC) with open enrollment materials during the first enrollment period that begins on or after
September 23, 2012. Plans that do not
conduct open enrollment are required
to comply by the first day of the plan
year beginning on or after September
23, 2012. Notice of a material modification of information contained in the
28
Health Flexible Spending Account
Contribution Limitation
Annual contributions to health care
flexible spending accounts will be limited to $2,500.9 IRS Notice 2012-40
provides guidance, including a clarification that this requirement is effective for plan years beginning on or after
January 1, 2013.
Explanation of Exchange
Employers are required to provide all
employees with notice of the existence
of an exchange by March 1, 2013, or at
their subsequent date of hire.10 The no-
Form W-2 Reporting
Form W-2 must report the value of
employer-sponsored coverage.13 IRS
modified the form accordingly and issued guidance that made reporting voluntary at first.14 The 2012 Forms W-2
(due by January 31, 2013) generally
must indicate the value of employersponsored coverage, though reporting
remains voluntary for employers contributing to multiemployer plans and
health reimbursement arrangements.
health care reform
Given the variations in how this figure may be computed,
the information may not be too meaningful. It may, however,
open a dialogue between employers and employees regarding the value and future of health care benefits.
Medicare Part D Retiree Subsidy
Employers that provide prescription drug coverage to Medicare-eligible retirees no longer will be eligible for a tax deduction for the amount for which they receive a federal subsidy.15
Enforcement Date to Be Determined
Nondiscrimination Requirements
The nondiscrimination requirement for insured plans16 is
a critical new provision. Under this provision, an employer
sponsoring an insured plan is prohibited from discriminating in favor of highly compensated individuals. The Code already prohibits such discrimination in self-funded plans, but
most practitioners agree that the guidance is outdated and
ambiguous and that the prohibition has not been rigorously
enforced. Many questions exist about how the guidance will
be applied, in both insured and self-funded plans. Given this
uncertainty, IRS has announced it will not enforce this new
provision until after it issues guidance.17 To the extent that
employees covered by a collective bargaining agreement are
excluded from this analysis, an employer’s “pay or play” decision, discussed below, can differ for this group.
Automatic Enrollment
Employers that are subject to the Fair Labor Standards Act,
have more than 200 full-time employees, and provide health
care coverage must enroll new full-time employees in their
health plan automatically.18 New full-time employees must
be notified that they can opt out of coverage. DOL apparently
does not anticipate issuing guidance and enforcing this requirement by 2014, given the need to coordinate with other
health care reform and tax requirements (e.g., 90-day waiting
period, employer penalties and cafeteria plan rules prohibiting
changes in elections except for specified circumstances).19
Other Administrative Requirements and Developments
After guidance is issued, plans will be required to comply
with requirements regarding providing data, certifying compliance with the Health Insurance Portability and Accountability Act, and transferring electronic funds.20
Plan or Policy Year Beginning
on or After January 1, 2014
Exchange Implementation
PPACA provides that effective January 1,
2014, individuals and small employers will be
able to buy health care insurance that provides essential health coverage through a state exchange.21
An individual who is not eligible for Medicaid and has income up to 400% of the federal poverty level might be eligible for a premium tax credit to reduce required monthly
premium contributions and cost reductions.22 HHS must
certify to the exchange whether the individual appears to
be eligible for the credit, either because his employer does
not provide coverage or because it appears that the employer provides coverage that either fails to provide minimum
value (i.e., plan pays 60%, on average, of covered health care
expenses) or is unaffordable. Coverage is unaffordable if the
“required contribution” exceeds 9.5% of household modified adjusted gross income for the tax year.23 Individuals
who do not have minimum essential coverage (e.g., through
an exchange, Medicaid or similar program, or an employersponsored plan) will be subject to penalties.24
Employer Shared Responsibility: Pay or Play,
or Employer Mandate to Provide Minimum
Essential Coverage, at Minimum Value
Commencing in 2014, applicable large employers are required to “pay or play.”25 For this purpose, a large employer
means any employer having an average of at least 50 fulltime-equivalent employees on business days during the
preceding calendar year. Full-time is 30 hours per week, and
employees working fewer hours are combined to create fulltime equivalents on a monthly basis when determining if the
50 full-time employee threshold is reached. The employer is
defined under the Code-controlled group rules (i.e., certain
related companies are required to be combined).
Applicable large employers will be required to provide
health care coverage that is affordable (as described above)
and that provides minimum value to their full-time employees (and their dependents), or they potentially will owe penalties.26 The agencies are working to define mechanisms for
measuring minimum value.27
A large employer that does not provide coverage will be
subject to a nondeductible excise tax if even one full-time
29
health care reform
employee receives a premium credit. The monthly tax is
the number of full-time employees minus 30, times onetwelfth of $2,000, with the tax indexed after 2014.28
A large employer that does provide coverage will be
subject to a nondeductible excise tax for each full-time
employee who receives a premium credit.29 The monthly
tax is one-twelfth of $3,000 for each employee who receives a premium, limited to the total number of fulltime employees of the employer minus 30, times onetwelfth of $2,000.30
Reporting Requirements
and Determination of Excise Taxes
Many questions remain regarding how and when
employer excise taxes will be computed, paid and reconciled. IRS Notice 2011-36 requested comments regarding
employer shared responsibility and made some assumptions about how employees would be counted. The examples use 2014 data to determine whether an employer
is a large employer in 2015. It appears, however, that an
employer that wants to avoid being treated as an applicable large employer may need to start documenting its full-time employee and full-time-equivalent employee counts as early as January 1,
2013.31
PPACA contemplates a procedure for an
employer to dispute an individual’s assertion that
the employer does not provide affordable coverage, but
this occurs at initial application (e.g., fall 2013, for coverage commencing January 1, 2014).32 Whether an individual who receives a premium credit actually would be
eligible for that credit (and the employer thus would owe
excise taxes) will not be known until much later. Health
insurance issuers, employers that sponsor self-funded
plans, and other persons that provide minimum essential
coverage to an individual are required to report specified
information about the past year to IRS, and to the individuals, by January 31 (e.g., by January 31, 2015 for 2014).33
Individuals are required to provide certain information,
including a reconciliation relating to any premium credit,
with their tax returns (e.g., assuming no extensions, by
April 15, 2015 for 2014).
PPACA allows the Treasury to require penalties on an
annual, monthly or periodic basis. The act also requires
the Treasury to establish rules for the repayment of pay-
30
ments later determined to be inaccurate.34 This suggests
that an employer might make payments in advance,
based on initial assumptions.
To determine whether an employee actually was eligible for a premium credit, and to compute the amount
of any excise taxes an employer is required to pay, someone will have to assemble extensive amounts of data from
many sources and do numerous computations. Typically,
that would be done by the person liable for the tax (e.g.,
the employer), but PPACA provides for this information
to flow to the Treasury and seemingly prohibits the employer from obtaining the necessary information.35 That
suggests a substantial amount of work for the Treasury,
which has not yet indicated that it is gearing up for work
of this magnitude.
PPACA directs the Secretary of HHS to consult
with the Secretary of Treasury and report, by January 1, 2013, what procedures and/or law changes are
necessary to protect both the individual taxpayers’
privacy rights and the employers’ rights to adequate
due process. It will be interesting to see how the agencies propose resolving these issues, given that due process seemingly requires that a taxpayer have access to
information necessary to challenge the accuracy of a
penalty assessed and an opportunity to make this challenge.
No Preexisting-Condition Exclusions
The preexisting-condition exclusions that have been in
effect for minors for plan years beginning on or after September 23, 2010 will be extended to all individuals in 2014.36
Complete Prohibition on Annual and Lifetime Limits
on “Essential Health Benefits”
Plans no longer will be able to put lifetime limits on
essential health benefits. The phaseout of limits began
with plan years beginning on or after September 23,
2010.37 Under that phaseout, the applicable lifetime limit
for 2012 calendar-year plans is $1.25 million and the applicable lifetime limit for 2013 calendar-year plans is $2
million.
New Cost-Sharing Limitations
PPACA limits cost-sharing provisions such as deductibles and maximum out-of-pocket expenses, at
least for nongrandfathered small-group coverage.38 It is
unclear whether these limits apply to large-group insured
plans and to self-funded plans. Guidance in this area will
be critical as employers seek to limit health care costs and
comply with potentially inconsistent mandates. For example, many employers have sought to control costs by shifting to high-deductible health plans with health savings accounts (HSAs).
Restrictions on Waiting Periods
Eligibility waiting periods for group health care plans
(insured and self-funded, grandfathered and nongrandfathered) will be limited to 90 days.39 IRS Notice 2012‑59
provides some initial guidance effective through at least the
end of 2014. In the case of a plan that provides for eligibility
on the first day of the month following 90 days of service, it
appears the eligibility requirement will have to be revised.
Questions remain regarding how this requirement will interact with other requirements. IRS and Treasury stated that
upcoming guidance is expected to provide that the employer
penalty for failure to provide coverage will not apply during
the permitted waiting period.40
Reinsurance Assessment
PPACA requires states to establish a transitional reinsurance program to help stabilize premiums for coverage in the
individual market during the first three years the exchanges
are operational. The program is funded through a reinsurance assessment. All health insurance issuers, and third-party administrators on behalf of self-funded plans, are required
to make quarterly payments, generally on a per capita basis,
to support a transitional reinsurance program to establish a
high-risk pool for the individual insurance market.41 Given
that the minimum amounts total $25 billion or more in three
years, health care premiums can be anticipated to increase
accordingly.
Annual Health Insurer Provider’s Fee
Issuers of individual and group health insurance coverage will be required to pay substantial amounts to help with
health care reform. The aggregate fee will be $8 billion in
2014, increasing to $14.3 billion in 2018. After 2018, the fee
will increase based on premium trends.42 Again, health care
premiums can be anticipated to increase for this amount.
Significantly, self-funded plans are exempt from this tax.
2018
Cadillac Tax
Effective January 1, 2018, a nondeductible 40% excise tax applies to multiemployer plans (including governmental plans) that offer health
coverage valued at more than $27,500.43 Value is the actual
premium for insured plans and is computed essentially the
same way as a COBRA premium for a self-funded plan. Multiemployer plans can use the average cost of single and family
coverage for this purpose. The dollar amount will be indexed
to inflation and possibly increased due to health care cost
escalation. The dollar amount will also be adjusted for retirees aged 55 and over who are ineligible for Medicare, and for
employers where the majority of employees are in a high-risk
profession. The amount will not be adjusted for areas that
have the highest cost of health care. The tax is computed and
paid by the plan administrator if self-funded, or by the insurer if the plan is insured. The tax is paid on the value in excess
of the threshold. Contributions to a health savings account,
flexible spending account or health reimbursement arrangement count toward value, which means that employers and
employees may be surprised at a Cadillac tax applying to a
plan that might not otherwise look like a Cadillac.
Given escalating health care costs and other provisions
of PPACA, such as mandated benefits, the health insurance
learn more >>
Education
March 11-13, Rancho Mirage, California
From the Bookstore
Employer’s Guide to Health Care Reform, 2012-2013 Edition
Brian M. Pinheiro, Jean C. Hemphill, Clifford J. Schoner,
Jonathan M. Calpas and Kurt R. Anderson. Aspen
Publishers. 2012.
The New Health Care Reform Law: What Employers Need
to Know—A Q&A Guide, Third Edition
James R. Napoli and Paul M. Hamburger. Thompson
Publishing Group, Inc. 2012.
31
health care reform
provider’s fee and cost-sharing limitations, some health care
practitioners anticipate this substantial tax will hit many
plans. This is likely to be an important issue in collective bargaining negotiations leading up to 2018. This tax, and the exchanges, may pose existential threats to multiemployer plans.
Accordingly, multiemployer plan trustees need to carefully
analyze alternative designs to try to minimize the impact of
this tax, and they should be prepared to address the questions of employers and unions preparing for negotiations.
In summary, multiemployer plan trustees have a lot of work
to do in the coming years and need to be attuned to developing
guidance as health care reform is more fully implemented. Endnotes
<< bio
1. PPACA is codified in various statutes, including the Internal Revenue
Code and Employee Retirement Income Security Act (ERISA). The Treasury, Internal Revenue Service (IRS), Department of Labor (DOL), and Department of Health and Human Services (HHS) are required to collaborate
on much of the guidance under PPACA, and much of the guidance is published in virtually identical form by two or three of the agencies. For consistency, this article primarily refers to the Internal Revenue Code (Code) and
IRS guidance.
2. Significant excise taxes may apply with respect to any failure to comply. See Code Sections 4980B, 4980D, 4980E and 4980G.
3. PPACA Sections 2713, 2719A and 2719.
4. PPACA provisions that became effective in prior years, and special
grandfather rules that apply in the context of multiemployer plans and
collectively bargaining are presumed to have been addressed.
32
Ann M. Caresani is an employee
benefits partner in the Cleveland, Ohio office of Porter
Wright Morris & Arthur LLP.
She counsels employers
regarding the design, administration and
termination of employee benefit programs,
including tax-qualified retirement plans,
health and welfare plans, and executive
compensation arrangements. She also defends
employers, plan administrators, trustees and
other fiduciaries and service providers in a
broad range of ERISA litigation matters.
Caresani, an attorney and certified public
accountant, earned her J.D. degree from the
Cleveland-Marshall College of Law and holds
M.B.A. and B.B.A. degrees from Cleveland
State University. She can be contacted at
[email protected].
5. PPACA Section 2718 and DOL Technical Release 2011-04.
6. PPACA Section 1102.
7. PPACA Section 2715 and 26 CFR 54.9815-2715, 29 CFR 2590.7152715, and 45 CFR 147.200, published February 14, 2012 at 77 FR 8668.
8. PPACA Section 6301; Code Sections 4375, 4376 and 4377; Treasury
proposed regulations (April 17, 2012) available at www.gpo.gov/fdsys/pkg/
FR-2012-04-17/pdf/2012-9173.pdf.
9. PPACA Section 9005 added Code Section 125(i).
12. Available at www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Questions-and-Answers-for-the-Additional-Medicare-Tax (June
2012).
14. IRS Notices 2010-69, 2011-28 and 2012-9, and http://www.irs.gov/
uac/Employer-Provided-Health-Coverage-Informational-ReportingRequirements:-Questions-and-Answers.
15. PPACA Section 9012 and Code Section 139A.
17. IRS Notice 2011-1.
19. IRS Notice 2012-27.
20. PPACA Sections 1104, 1302, 3101, 4303.
21. Significant questions remain about whether each state will comply
with PPACA’s mandates imposed on them, and the consequences if individual states do not comply. For example, PPACA requires states to expand their
Medicaid programs, providing that the federal government would withdraw
existing Medicaid funding from states that opt out of the expansion. National
Federation of Independent Business v. Sebelius, 567 U.S. ___ (June 28, 2012),
the U.S. Supreme Court concluded that this was unconstitutionally coercive.
22. PPACA Section 1401 and Code Sections 36B(c) and 5000A(f).
23. Questions have arisen regarding a number of issues, including
whether the 9.5% refers to the cost of individual coverage or family coverage.
24. PPACA Sections 1501 and 10106, and Code Section 5000A. In National Federation, the U.S. Supreme Court held that this “shared responsibility payment” or “individual mandate” was constitutional under the taxing
authority of Congress, and upheld this provision. However, PPACA did not
grant IRS enforcement mechanisms such as liens that apply with respect to
other taxes. Accordingly, projections regarding individual payments, employer excise taxes and premiums may need to be revised.
25. PPACA Section 4980H.
26. Code Section 4980H.
27. Notice 2012-31.
29. This is slightly oversimplified; e.g., affordable coverage may be determined differently for premium credit and employer excise tax purposes.
31. IRS Notice 2012-58 provides some guidance regarding identifying
full-time employees, in the context of whether penalties might apply with
respect to a particular employee of an applicable large employer. For ongoing employees, employers may use a look-back/stability period safe harbor.
The notice also provides a safe harbor for newly hired variable hour and
seasonal employees.
32. Under a safe harbor proposed by IRS, an employer could determine
affordability based on the employee’s Form W-2. However, if the employee’s
household income is higher than the employee’s income, or if the employee
does not actually purchase coverage on an exchange every month, then the
employer might pay penalties the statute does not require.
33. Code Sections 6055 and 6056, and Notice 2012-32.
34. Code Section 4980H(d).
35. PPACA Section 1411(f)(2).
40. IRS Notice 2012-17.
41. PPACA Sections 1341, 1342 and 1343.
43. Code Section 4980I.
Trustees and Administrators Institutes
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State Pension Reform
Should Also Aim to
Attract, Retain the
Best Workers
By focusing on changes in pension benefits for state employees
in New Jersey, the authors warn that some pension reforms
may make it difficult for states to attract young workers
and retain experienced ones.
by | Richard W. Johnson, C. Eugene Steuerle and Caleb Quakenbush
34
35
pension reform
figure
Average Annual Addition to Lifetime Pension Benefits From Working an Additional Five Years,
New Jersey Public Employees Retirement System
80%
72%
Most Current
Employees (tier 1)
Percentage of Salary
60%
20%
20%
0%
New Hires (tier 5)
36%
40%
0% 0%
25
4%
0%
8%
30
12%
10%
0%
0%
1%
35
40
45
2%
50
-20%
55
60
70
-16%
-28%
-40%
-60%
65
-27%
-40%
Age
-37%
-53%
Notes: Tier 1 covers general employees of the state of New Jersey hired before July 1, 2007, and tier 5 covers those hired on or after June 28,
2011. Estimates are net of employee contributions. They assume that workers were hired at the age of 25, tier 1 employees contribute 5.5% of
their salaries to the plan (the rate in effect from 2007 to 2011), tier 5 employees contribute 7.5% of their salaries (the rate being phased in by
2018), and retirees elect single life annuities. The analysis also assumes a nominal interest rate of 5%.
I
t’s no secret that state pension
plans are facing a financial crisis. The Center for Retirement
Research at Boston College recently estimated that the funding
shortfall for all state plans combined
might now exceed $2.7 trillion. Many
states have responded by cutting benefits promised to new hires and raising
the amounts that all employees in the
plan must contribute.
However, these reforms ignore another problem that may be just as serious—traditional state pension plans
have fallen behind the needs of a modern, mobile workforce. They provide
little incentive for young workers to
join the state’s workforce, lock in middle-aged workers even if the job is no
longer a good fit, and encourage older
workers—a growing share of the work-
36
force—to retire from the public sector
even if they can and want to stay on the
payroll. Recent cost-cutting efforts fail
to address these larger recruitment and
retention problems.
New Jersey: A Case Study
New Jersey’s Public Employees Retirement System, which covers general
state employees, makes a good case
study of how pension benefits grow
unevenly over an employee’s career and
distort recruitment and retention.
Like nearly every other state, New
Jersey offers its workers a traditional
defined benefit retirement plan that
pays benefits equal to a percentage
of the employee’s final salary times
years of service, while payments last
until the pensioner (or pensioner and
spouse) dies. General state employees
hired by New Jersey before July 1, 2007
belong to the plan’s first tier, which
promises a pension equal to 1.82% of
final average salary for each year of
service. Benefits may begin at the age
of 60 after at least ten years on the job.
Alternatively, employees may retire
as soon as they complete 25 years of
service, but their benefits will be permanently reduced each year that they
begin collecting before the age of 55.
Until contribution rates rose in 2011,
employees also had to contribute 5.5%
of their salaries.
New Jersey’s state legislature has
trimmed pension benefits five times
since 2007, including a major 2011
overhaul that created a fifth tier for
new hires, reducing the generosity of
the benefit formula, raising the age for
full benefits to 65 and limiting early
pension reform
retirement to those with at least 30 years of service. It also
gradually increases the contribution rate for all employees
to 7.5%.
The figure shows how additional work changes the value
of lifetime pension benefits provided to most existing employees (who participate in tier one) and new hires (who
participate in tier five), assuming both groups were hired
at the age of 25. Even for most of those currently employed,
pension benefits were trivial pieces of compensation early
in careers, adding nothing at the ages of 25 to 30 (because
employees aren’t entitled to benefits until they complete ten
years of service), only 4% of compensation between the ages
of 30 and 35, and only 8% between the ages of 35 and 40.
Young workers don’t accumulate much because the benefit formula does not adjust for inflation or interest while
separated employees wait to collect benefits, akin to leaving money in a savings account earning no interest. This
arrangement offers little to young workers who want the
flexibility to accommodate family obligations and changing
work opportunities and who do not stay with the state their
entire careers.
Once those employees begin collecting early pensions
at the age of 50, however, the value of future benefits soars,
nearly doubling cash compensation between the ages of 45
and 50. This spike locks middle-aged employees into their
jobs—even if they aren’t good fits—because workers stand
to reap enormous pension windfalls by staying until they
qualify for early retirement.
Once employees are eligible to retire, however, incentives reverse. Workers forfeit an entire year’s worth of
benefits for every year they continue working. Annual
benefits continue to grow with additional years of service,
but that growth slows over time, especially once employees have worked long enough to avoid the early retirement penalty. For those existing tier one employees hired
at the age of 25, the value of future benefits falls by their
late 50s with additional work. This decline reduces effective compensation by about a quarter in their early 60s
and two-fifths in their late 60s, making it difficult for the
state to retain experienced older workers, many of whom
have specialized skills and deep institutional knowledge
that are hard to replace. With the workforce aging and
the supply of younger adults expected to stagnate soon,
inducing still-productive older workers to retire early
makes little sense.
takeaways >>
• Many states are cutting benefits promised to new hires and raising
the amounts that all employees in the plan must contribute.
• Some pension reforms discourage older workers, many of whom
have specialized skills and deep institutional knowledge that are
hard to replace, from continuing to work.
• The state assumes for new employees that it will take in more in
employee contributions and earnings on those contributions than
it will eventually pay back in total benefits, giving increasingly
mobile workers less incentive to join the state payroll.
• Although they have drawbacks, cash balance plans attempt to
strike a balance by combining features of 401(k) plans and traditional pensions.
• As they reform pensions, states may want to try to combine the
best features of different plan types.
Impact of Recent Reforms
Although New Jersey’s latest pension reforms save money
and delay retirement incentives to later ages, they maintain
the traditional pension structure and make it even harder to
recruit new workers. Under this latest tier, the state’s most
recent 25-year-old hires accumulate virtually no pension
benefits net of their own contributions until the age of 50.
Indeed, under the state’s own return assumptions, young
hires who separate before they’ve spent about three decades
on the job end up as net contributors to the plan. That is, the
state assumes for new employees that it will take in more in
employee contributions and earnings on those contributions
than it will eventually pay back in total benefits when they
leave. Potentially mobile workers have even less incentive to
join the state payroll. At the other end of the age spectrum,
the value of future pension benefits still falls at older ages,
and net additional pension benefits from working are negative after the age of 65.
New Jersey’s is only one example of state pension reforms occurring across the United States. The incentives
present throughout New Jersey’s retirement system, including the most recent round of reforms, are not unique
to that state. Rather, they are endemic to traditional pension plans and make reform especially difficult in states
that assume high rates of return that later lead to significant underfunding.
Because benefits are essentially frozen when workers
leave—earning no real interest return and further eroding
with inflation—these plans penalize those who quit years
37
<< bios
pension reform
Richard W. Johnson, Ph.D., is a
senior fellow at the Urban Institute,
where he directs the Program on
Retirement Policy. His research
focuses on income and health
security at older ages. He is an expert on older
Americans’ employment and retirement decisions
and has written extensively about retirement
preparedness, job loss at older ages and the impact
of the financial crisis on future retirement security.
Prior to joining the Urban Institute in 1998,
Johnson was an assistant research professor at the
Institute for Health, Health Care Policy, and Aging
Research at Rutgers University. He received an
A.B. degree from Princeton University and a Ph.D.
degree from the University of Pennsylvania, both
in economics.
C. Eugene Steuerle, Ph.D., is the
Richard B. Fisher Chair at the Urban
Institute and author of a column and
blog, The Government We Deserve
(http://blog.governmentwedeserve.
org). He has served as deputy assistant secretary
of the Treasury for tax analysis, president of the
National Tax Association, chair of the Technical
Panel advising Social Security on methods, vice
president of the Peter G. Peterson Foundation,
economic coordinator of the Treasury Department’s efforts leading to the Tax Reform Act of
1986 and co-founder of the Urban-Brookings Tax
Policy Center, the Urban Institute Center on Nonprofits and Philanthropy, and Act for Alexandria,
a community foundation. Steuerle received his
Ph.D. degree in economics from the University of
Wisconsin‒Madison.
Caleb Quakenbush is a research
assistant at the Urban Institute. His
fields of study there include retirement policy and federal and state
taxation. He holds a bachelor of
science degree in economics from American University in Washington, D.C.
38
before retirement. Thus, they don’t particularly appeal to
young mobile workers, those likely to interrupt their careers to raise children or care for other family members, or
those who simply want to consider more than one career in
one state pension system over their lifetimes. Older workers eligible to retire forfeit a year of benefits for every year
they remain on the payroll, providing them with strong incentives to cash in their pensions as soon as possible. As
workers respond to these retirement incentives, they deprive the public sector of talented, seasoned employees.
This talent drain is becoming increasingly problematic as
the workforce ages and the pool of younger workers stagnates, rendering older workers the largest source of underused human capital.
Pension Designs to Reward Work
and Provide More Equal Pay for Equal Work
While traditional pension plans continue to cover nearly all government workers, private sector employers—particularly those in high-growth industries—recognized long
ago that these plans prevent them from attracting and retaining the best workers in today’s aging and increasingly
mobile labor force. The more flexible 401(k)-type plans
have many problems, but they do provide real value to
young mobile workers because they don’t penalize shortterm employment. Unlike traditional retirement benefits,
401(k) account balances continue earning interest after
employees leave their jobs. And 401(k)s don’t penalize
older employees who work past some arbitrary retirement
age because their account balances can continue to grow
as long as they work and contribute. In fact, workers with
401(k) plans tend to retire much later than those with traditional pension plans.
By the same token, workers in 401(k) plans are exposed
to investment risk, leaving them vulnerable to fluctuations
in the stock and bond markets. Moreover, if they choose to
convert their balances to annuities, their payouts can fluctuate dramatically depending on the interest rates in effect
when they annuitize. The majority of participants who don’t
annuitize run the risk of depleting their accounts before
they die.
Researchers and plan administrators have attempted
to strike a balance between the pros and cons of 401(k)
s, perhaps along the lines of cash balance plans—hybrids
that combine features of 401(k)s and traditional plans.
pension reform
Cash balance plans set aside a given percentage of salary
each year for each employee and credit them with interest,
usually based on some benchmark like the U.S. Treasury
bill rate. Benefits are expressed as an account balance, as
with 401(k)s, but pay benefits (either as a lump sum or an
annuity) from commingled funds invested in a pension
trust on behalf of all participants. Typically, cash balance
plans provide annuities at much more favorable rates than
are available to 401(k)-type participants, and annuities for
surviving spouses are often subsidized. Unlike traditional
plans, cash balance plans accumulate benefits more evenly
over a career. Younger workers value these benefits because
they are not back-loaded late in their careers. Older employees don’t forfeit benefits when they remain on the job
into their 60s and 70s, because the account balance keeps
growing. At the same time, cash balance plans in the private sector could (but often do not) allow workers to share
in any returns from investing in stocks and similar risky
assets.
There are also drawbacks to cash balance plans. Covered
employees in the private sector who leave their employers
before retirement often cash out and spend their benefits immediately, leaving themselves financially vulnerable in old
age. And transitioning from a traditional retirement plan to
a hybrid can be expensive for states if not done carefully.
There is no perfect single pension instrument, and transitions always create winners and losers. Still, states in the
process of pension reform would do well to try to combine
the best features of these different plan types, including annuities to protect against outliving savings, and equal pay
for equal work to avoid discriminating against the younger
and the more-seasoned employees. States even enjoy certain
advantages over the private sector; they are subject to less
learn more >>
Education
Benefits Conference for Public Employees
April 16-17, Sacramento, California
For more information, visit www.ifebp.org/peconference.
Public Fund Plan Sponsors: Valuable Insight Into Possible
Solutions to Rising Pension Costs
December 2010 Webcast.
For more information, visit www.ifebp.org/webcast.
From the Bookstore
2013 Pension Answer Book
Stephen J. Krass. Aspen Publishers. 2013.
regulation and, because they are permanent institutions, can
better share some risks across generations.
The dilemma today for many states is that they are
forced to remedy bad pension compensation and funding decisions made in the past that have left liabilities to
many taxpayers and workers who were not responsible for
those decisions. To work through this economic and political maze, state employers and their employees should fully
understand the effects of their current system and of alternative reforms on how benefits accrue over time, how accumulations depend on age and when each employee begins
and leaves employment, and how employee benefits relate
to total compensation.
Regardless of the cost states decide they can afford, such
efforts could provide employees with both more equal total
compensation for equal work and better retirement protections, while simultaneously preparing states to compete in
the labor markets of the 21st century. december 2012 benefits magazine
39
Accountable care organizations (ACOs) are
rapidly growing in popularity as a new health
care delivery model for health systems and
provider groups. This article explores the
possibility of employers contracting
directly with an ACO.
eACOs—
The Next Generation
of Health Plans
40
by | Eric M. Parmenter, CEBS
T
he Accountable Care Act (ACA) is transforming
the way hospitals and health systems deliver care
by shifting how providers get paid from volume
to value-based care. It is also influencing the way
large employers are thinking about delivering
health benefits to employees over the next several years. Regardless of political efforts to modify the health care reform
law passed in 2010 and largely upheld by the U.S. Supreme
Court in July, the die has been cast with respect to health care
delivery in the years to come.
In the short run, over half of the hospitals and health systems, as surveyed by SullivanCotter and HighRoads, expect
a decrease in revenue and are being asked to consolidate and
operate in a leaner environment.1 In addition, employers are
ramping up their focus on employee health plans and looking for ways to reduce costs and improve employee health in
order to comply with the new law.
ACA is estimated to cut $155 billion in Medicare payments to hospitals and increase the burden on hospitals and
health systems to:
• Modernize infrastructure
• Install electronic medical records
• Attract and retain good talent
• Integrate across clinical functions, acquiring physician
practices and other facilities
• Increase patient flow with insurance coverage to reduce bad debt
• Implement pay for performance requiring new skills,
41
eACOs
better measurement and tighter
management.2
As hospitals and health systems
strive to do more with less and rethink
their role in an evolving health care
marketplace, many are looking to accountable care organization (ACO)
models. ACOs are viewed as a solution
to more cost-effective management
of care. It is hoped they will improve
clinical outcomes, soften the impact of
decreasing fee-for-service reimbursement and shift the axis of power away
from large insurance companies to the
health system, the provider of care.
One bold view, espoused by Ezekiel
Emanuel and Jeffery Liebman of the
New York Times, suggests that “By 2020,
the American health insurance industry will be extinct. Insurance companies will be replaced by accountable
care organizations—groups of doctors,
hospitals and other health care providers that come together to provide the
full range of medical care for patients.”3
Regardless of whether health insurance
companies are ultimately replaced by
ACOs, there is little doubt that ACOs
are emerging as a viable new form of
health care delivery.
This article describes ACOs at a
high level, discusses the critical success factors for ACOs and explores a
unique opportunity for employers to
form partnerships directly with health
systems through ACO-like models for
employer-sponsored health plans.
ACO Basics
The hallmark of an ACO is the provider taking on risk. Elliott Fisher, director of the Dartmouth College Center
for Population Health, coined the term
accountable care organization in 2006.4
ACOs have been compared to the elusive unicorn: “Everyone seems to know
what it looks like, but no one has actually seen one.”5 While some view an ACO
as a recycled idea from the managed
care era of the 1980s—like an HMO
in disguise—its flexible structure and
approach to compensating providers
makes it a new form of health care delivery. The massive ACA gave a booster
shot to the new form of delivery; however, ACOs don’t depend on health care
reform legislation to grow and thrive.
Hospitals, physician practices and other entities can form ACOs, which can
compensate providers through fee-for-
learn more >>
Education
For more information, visit www.ifebp.org/certificateseries.
Population Health: Moving From Theory to Engagement With Successful
Outcomes Change Agent Work Group Webcast download.
For more information, visit www.ifebp.org/books.asp?DL1060.
From the Bookstore
The New Health Care Reform Law: What Employers Need to Know—A Q&A Guide,
Third Edition
by James R. Napoli and Paul M. Hamburger. Thompson Publishing Group, Inc. 2012.
42
service, capitation, “shared savings”6 or
a mix of methodologies.
The primary target population of
ACOs initially is Medicare beneficiaries.
As the model succeeds, it is expected to
be adopted more broadly in a variety of
settings, including Medicaid, commercial group health plans and insurance
exchanges. The ACO model, at its highest level, is a business model that:
• Attempts to change provider incentives
• Rewards quality patient care in an
efficient, cost-effective manner
• Reduces overutilization of health
care resources
• Improves patient handoffs and
transitioning between providers.
The new models essentially shift performance and financial risk from purchasers and payers to providers. What
characterizes an ACO more than anything else are doctors who are accountable for the results that come from working collaboratively with other health care
providers across the care continuum to
manage the patterns of how patients use
health care services, striving to reduce
the total cost of care.7 Figure 1 illustrates
the spectrum of financial risk that providers are taking on under ACO models.8
The Centers for Medicare and Medicaid Services (CMS) has a three-part
aim, with four domains, for ACOs:
1. Better care for individuals
—Patient/caregiver experience
—Care coordination
—P reventive health/patient
safety
2. Better health for populations
—At-risk population
3. Lower growth in expenditures.
This three-pronged approach will
require meeting quality standards in
four domains—the subcategories to
eACOs
Figure 1
Payers Shifting Financial Risk Onto Providers
Accountable Payment Models
Performance Risk
Cost of Care
Bundled Pricing
• Bundled payments for care
improvement program
• Commercial bundled
contracts
Utilization Risk
Quality of Care
Pay for Performance
• Value-based purchasing
• Readmissions penalties
• Quality-based
commercial contracts
Volume of Care
Shared Savings
• Medicare shared
savings program
• Pioneer ACO program
• Commercial ACO
contracts
Source: Health Care Advisory Board.
the three-part aim—by utilizing 33 quality and performance
standards (the author calls this model the 3-4-33 framework).9
Under the final ACO regulations, released on October 20,
2011, in the formal CMS ACO model, ACOs can and will
take many different forms and encompass various provider
groups that commit to participate in the Shared Savings Program for three years. It is beyond the scope of this article to
describe in detail the requirements of the final ACO regulations, and the details of shared savings, as extensive resources
exist in the public domain.
A number of health systems and medical clinics have adopted an ACO-like structure. It seems that every month an
announcement is made of another organizational merger or
change in structure for clinics or health systems to become an
ACO or ACO-like entity. Several health systems are at various stages of ACO development. Some have applied to CMS
to become formal ACOs beginning in 2012 while others are
assembling all the necessary components to later become an
ACO. The table lists 59 organizations that are at various stages
of ACO development. The organizations in bold-faced type
have joined the Pioneer ACO initiative as sponsored by the
Department of Health and Human Services (HHS).10
Under the Pioneer ACO initiative, 32 leading health care
organizations from across the country will participate with
HHS, through the CMS Innovation Center, on an accelerated path to forming ACOs. These organizations already have
some level of ACO experience, and a significant portion of
their revenue is tied to the delivery of value-based care.
In addition to the Pioneer organizations, 27 organizations
were selected by CMS on April 1, 2012 as the first participants
in the Medicare Shared Savings Program that will provide
care to nearly 375,000 beneficiaries in 18 states and include
more than 10,000 physicians, ten hospitals and 13 physiciandriven organizations in both urban and rural areas.11
Paying ACO Providers
There are many reasons why physicians and health systems form ACOs. ACOs present an opportunity for growth
and expansion into new markets and for offering additional
products and services.
43
eACOs
Table
Organizations at Various Stages of ACO Development
OrganizationRegion
Atrius Health
Advocate Health Care
Agnesian HealthCare
Allina Hospitals & Clinics
Atlantic Health System
Banner Health Network
Bellin-Thedacare Healthcare Partners
Beth Israel Deaconess Physician Organization
Blue Shield of California
Bronx Accountable Healthcare Network (BAHN)
Brown & Toland Physicians
Castle Health Group
Catholic Medical Partners
Cigna Medical Group
Dartmouth-Hitchcock Medical Center
Eastern Maine Healthcare System
Fairview Health Systems
Franciscan Alliance
Geisinger Clinic
Genesys PHO
Gonzaga Medical Group
Healthcare Partners Medical Group
Healthcare Partners of Nevada
Heritage California ACO
Holston Medical Group
Integrated Solutions Health Network
Intermountain Health
JSA Medical Group, a division of HealthCare Partners
Medical Clinic of North Texas
MedStar Health
Memorial Hermann
Providers that join ACOs will be compensated primarily in two ways: traditional fee-for-service (FFS)
reimbursement under Medicare Parts A and B, as they
are currently, and a bonus for managing patient costs
against a historical benchmark projected forward. This
bonus will derive from any savings that are generated
against the benchmark and will be distributed between
CMS and the ACO. The shared savings model contains
two tracks:
• Track One: Providers will receive up to 50% of the
shared savings with no downside risk.
44
Eastern and central Massachusetts
Illinois
Wisconsin
Minnesota and western Wisconsin
New Jersey
Phoenix, Arizona metro area
Northeast Wisconsin
Eastern Massachusetts
California
New York City (the Bronx) and lower Westchester County, New York
San Francisco Bay area, California
Hawaii
New York
Arizona
New Hampshire
Central, eastern and northern Maine
Minneapolis, Minnesota metro area
Indianapolis and central Indiana
Pennsylvania
Southeastern Michigan
Texas
Los Angeles and Orange Counties, California
Clark and Nye Counties, Nevada
Southern, central and coastal California
Tennessee
Tennessee
Utah
Orlando, Tampa Bay and surrounding South Florida
Texas
Texas
Maryland
• Track Two: Providers will receive up to 60% of the
shared savings but with downside risk all three years.
The maximum bonus will be limited to 10% of the CMS
benchmark costs per beneficiary, per year under Track One
and 15% under Track Two.12 It is unlikely that ACOs will hit
the maximum bonuses, but the targets become a compelling
motivator.
Slicing up the shared savings pie will be one of the significant challenges with ACOs, but enormous potential exists.
For most ACOs, some of the bonus dollars will first be used
to offset the investments in infrastructure needed for success.
eACOs
Table
Organizations at Various Stages of ACO Development (cont.)
Mercy Medical Group
Missouri
Michigan Pioneer ACO
Monarch Healthcare
Orange County, California
Montefiore Medical Center
New York
Mount Auburn Cambridge Independent
Practice Association (MACIPA)
New West Physicians
Colorado
North Texas ACO
Tarrant, Johnson and Parker Counties in North Texas
Norton Healthcare
Kentucky
OSF Healthcare System
Central Illinois
Palmetto Health Quality Collaborative
South Carolina
Park Nicollet Health Services
Minneapolis, Minnesota metro area
Partners Healthcare
Pendulum Health
Illinois
Physician Health Partners
Denver, Colorado metro area
Piedmont Physicians Group
Georgia
Presbyterian Healthcare Services – Central New Mexico
Pioneer Accountable Care Organization
Central New Mexico
Primecare Medical Network
Southern California (San Bernardino and Riverside Counties)
ProHealthConnecticut
Renaissance Medical Management Company
Southeastern Pennsylvania
Seton Health Alliance
Central Texas (11-county area including Austin)
Sharp Healthcare System
San Diego County
Southeast Michigan Accountable Care
Michigan
Southeast Texas Accountable Care Organization
Texas
Steward Health Care System
TriHealth, Inc.
Northwest central Iowa
University of Michigan
University of Pittsburgh Medical Center
Pittsburgh, Pennsylvania
Note: Organizations in bold-faced type have joined the Pioneer ACO initiative sponsored by the Department of Health and Human Services (HHS).
Source: Author’s compilation and the U.S. Department of Health and Human Services, “Affordable Care Act helps 32 health systems improve care for
patients, saving up to $1.1 billion,” December 19, 2011.
Critical Success Factors for ACOs
ACOs are a transformational endeavor to create a business
model that focuses on complex case management, particularly
for patients with chronic disease and multiple comorbidities.
The goal is to keep these patients, who are often repeat visitors
to the emergency department, outside of the perimeter of the
acute care hospital in lower cost community settings.
If this goal is achieved, delivery of care is transformed
from a physician-centric approach to a patient-centered
focus. As shown in Figure 2, successful ACOs essentially
must construct a “medical perimeter” around the acute care
environment, working to provide as much care as possible
within its lower cost, lower acuity settings. The ideal perimeter serves as a high-functioning ambulatory care network—
a system of resources and processes designed to improve
chronic disease management, prevent unnecessary inpatient
utilization, reduce readmissions, identify opportunities for
preventive intervention and coordinate care across the continuum, from physician office to postacute provider.13
This strategy creates patient-centered medical homes (PCMHs) that are built on primary care physician (PCP) access.
Electronic medical records provide the analytics needed to
45
eACOs
Figure 2
The Medical Perimeter
Medical Management Investments
Patient
Activation
Postacute
Alignment
Disease
Management
Programs
Medical Home
Infrastructure
Primary Care
Access
Electronic
Medical Records
Population
Health
Analytics
Health Information
Exchanges
Source: Health Care Advisory Board interviews and analysis.
<< bio
help the PCP reduce patient utilization through coordinating
care. Patients are engaged in managing their own health and
coached so that they comply with their treatment programs.
This model shifts the focus from reactive intervention to proactive prevention and management. ACOs are intended to
reorient the delivery system to expand access for patients in a
PCMH environment. Because medical and mental conditions
46
Eric M. Parmenter, CEBS, is vice
president of employer services for
Evolent Health in Nashville, Tennessee. He is a former vice president at
HighRoads and a senior consultant
and principal with Towers Watson. Parmenter has
worked in the employee benefits business for over
25 years. He specializes in designing total rewards
and benefit programs for large health systems in
the United States. Parmenter holds a B.A. degree
from the University of Illinois and an M.B.A.
degree from the University of Chicago.
are comorbid in over 50% of patients, mental and behavioral
health coordination are essential.14
Physician incentives must be aligned, particularly for the
growing number of employed doctors, which suggests that
incentives will be different for PCPs than for specialists.
Many health systems are feeling a capacity crunch, and the
ACO structure lets hospitals focus on sicker patients by successfully moving those who are less acutely ill to the perimeter around the acute care facility.
The ACO Opportunity for
Employer-Sponsored Health Plans
With the advent of ACOs, an opportunity exists for hospitals and health systems to partner with employers in their
communities to develop an ACO-like structure that leverages the providers and clinical resources of the health system
to provide care directly to employers. That cuts out the large
insurance carrier as an intermediary. This employee ACO, or
eACO, mirrors that of a true ACO but is part of an employee
benefit plan offering and not subject to CMS rules and regulations. It does, however, remain governed by the Employee
Retirement Income Security Act of 1974 and other regulations for self-funded plans and state regulations for fully insured plans.
In converting the employer’s traditional PPO or HMO
plans to an eACO provided directly by the health system, all
of the fundamental building blocks described above would
need to be established, with seven additional adjustments:
1. Formation of a direct partnership with the health system to build the eACO within a robust culture of health
that focuses on the well-being and productivity of employees and offers decision-support structures such as
health risk assessments and biometric screenings and a
broad spectrum of health improvement programs
2. An optimized health and prescription benefit design
promoted through meaningful financial incentives
3. Utilization of a narrow network of health system facilities, PCPs and other specialists and providers that deliver coordinated care, with a wraparound rental network to plug gaps
4. The proper balance between clinical resources that are
part of the health system and outside partnerships to
optimize care for employees and their families
5. Development of a provider compensation model that
would be funded in part out of the employee health plan
eACOs
budget, containing elements of shared savings as envisioned under the more formal Medicare ACO model
6. Marketing and promotion of the program within the
employee population to grow membership and engagement (an activity that is limited under the formal
Medicare ACO model). The eACO could be offered as
an option in addition to traditional PPO or HMO
plans, assuming a sufficiently large population, or as a
full-replacement plan.
7. Incentives to participants to engage with their PCPs
and comply with treatment plans and healthy lifestyle
behaviors.
Conclusion
According to the 2012 Deloitte Survey of U.S. Employers: Opinions About the U.S. Health Care System and Plans
for Employee Health Benefits, employers believe that direct
contracting with provider organizations will be a viable
cost-containment strategy.15 Furthermore, according to the
same survey, CEOs and CFOs are more inclined to think
that direct contracting is favorable compared to HR and
benefits staff.16 Finally, not only are ACOs a viable alternative for employer-sponsored health plans but employers
believe that health insurance exchanges are a viable channel for employer benefit strategies.17 ACOs can be packaged
inside of individual and small-group products and sold on
exchanges. A significant opportunity exists for employers to
cut out a layer of the health care cost spectrum by contracting directly with health systems through eACOs. Author’s note: The author thanks Rob Lazerow, senior
consultant, research and insights at The Advisory Board
Company, for his invaluable assistance with research for this
article, and Rose Gantner, senior director of health promotion, consumer education, training and innovation at UPMC
Health Plan, for her insights and inspiration around improving the health of health care workers.
Endnotes
1. 2012 SullivanCotter/HighRoads Survey of Employee Benefit Practices
in Hospitals and Health Systems. Executive summary available at www.sullivancotter.com/benefits-survey.
2. American Hospital Association (AHA) Environmental Scan 2011.
3. E. J. Emanuel and J. B. Liebman. “The End of Health Insurance
Companies,” New York Times, January 30, 2012.
4. E. Fisher, M. McClellan, J. Bertko, S. Lieberman, J. Lee, J. Lewis and J.
takeaways >>
• Many hope ACOs will improve clinical outcomes, soften the impact
of decreasing fee-for-service reimbursement and shift power from
insurance companies to the health system.
• In an ACO, doctors are accountable for the results of working
collaboratively with other health care providers to manage how
patients use health care services, striving to reduce total costs.
• Successful ACOs try to manage care so that chronically ill people
receive most of their care in lower cost, lower acuity settings.
• ACOs present an opportunity for growth and expansion into new
markets and for offering additional products and services.
• Providers in ACOs are paid through traditional fee-for-service
reimbursement under Medicare Parts A and B and a bonus for
managing patient costs against a historical benchmark. This bonus
is from savings resulting from better care management.
• An employee ACO is part of an employee benefit plan offering and
not subject to CMS rules and regulations. It is governed by ERISA
and other regulations for self-funded plans and state regulations
for fully insured plans.
Skinner. “Fostering Accountable Health Care: Moving Forward in Medicare.” Health Affairs Web exclusive, 2009.
5. J. Gold. “ACO is the hottest three-letter word in health care.” Kaiser
Health News, March 31, 2011.
6. The term shared savings is the name given by the Department of
Health and Human Services: Medicare Program; Medicare Shared Savings
Program: Accountable Care Organizations proposed regulations, March 31,
2011.
7.
Playbook for Accountable Care, Lessons for the Transition to Total Cost
Accountability, Health Care Advisory Board, 2011.
8.Ibid.
9.The 3-4-33 framework is a phrase given by this author to the three key
aims of ACOs, the four quality standards, and the 33 quality and performance
measures as outlined in the final Shared Savings Program regulations.
10. “Affordable Care Act helps 32 health systems improve care for patients, saving up to $1.1 billion,” U.S. Department of Health and Human
Services press release, December 19, 2011. Available at www.hhs.gov/news/
press/2011pres/12/20111219a.html.
11. “New Affordable Care Act Program To Improve Care, Control
Costs, Off To A Strong Start,” CMS news release, April 17, 2012, available
at www.cms.gov/apps/media/press/release.asp?Counter=4333&intNumPer
Page=10&checkDate=&checkKey=&srchType=1&numDays=3500&srchO
pt=0&srchData=&keywordType=All&chkNewsType=1%2C+2%2C+3%2C
+4%2C+5&intPage=&showAll=&pYear=&year=&desc=false&cboOrder=
date.
12. CMS Final ACO Regulations, October 20, 2011.
13.
The Medicare Shared Savings Program Rulebook—Analysis of the Final Rule and Strategic Implications for Providers, Health Care Advisory
Board, 2011.
14. B. Druss and E.R. Walker, Mental Disorders and Medical Comorbidity,
The Robert Wood Johnson Foundation, February 2011.
15.
2012 Deloitte Survey of U.S. Employers: Opinions about the U.S. Health
Care System and Plans for Employee Health Benefit. Available at www.deloitte.com/view/en_US/us/Insights/centers/center-for-health-solutions/21c
1f310fb8b8310VgnVCM3000001c56f00aRCRD.htm.
16.Ibid.
17.Ibid.
47
industry
briefs
Determining Hours Worked
Identifying the start and end of the workday is central to compensation, the core of numerous
legal cases and a potential source of risk for employers. The Fair Labor Standards Act does
not define work, but court cases refer to physical or mental exertion and time required to be
at a workplace. Minimal time on work activities, minutes that would be hard to track, are
not compensable. For teleworkers, time checking voicemail or e-mail, planning schedules or
doing paperwork is compensable, and on-call workers must be paid if their normal activity
would be limited. Orientation and training time count as working time. Court rulings generally have disallowed time for commuting and travel and security screenings. Many factors apply to the question of changing work clothes. Attendance policies that round off time must be
applied neutrally. The employer is responsible for accurate recordkeeping, informing workers
on policies and having a process to resolve disagreements.
Patrick M. Madden and Mark A. Shank | HR Advisor: Legal & Practical Guidance
July-August 2012 | pp. 5-24 | #0162617
Information specialists selected
these summaries from EMPLOYEE
BENEFITS INFOSOURCE™ developed
by the Information Center staff.
Employment-Based Health Benefits:
Recent Trends and Future Outlook
Despite the soaring cost of providing health
insurance, most employers still see it as a
competitive necessity and investment in
workers’ health and productivity. The rising
expense and the coming of health insurance
exchanges as an alternative source are changing the landscape. Cost sharing in its many
forms is on the rise, and the take-up rate of
insurance through employment is slipping
due to the expense. The prevalence of selffunding has grown, especially among large
employers. Adoption of consumer-driven
health plans with high deductibles continues
to expand, and the move toward defined contribution pension plans sets a model for covering health benefits. The mandate for employers to account for retiree health benefit
costs prompted many to trim or drop those
benefits. Overall, fewer people have health
benefits through work and those who do
must pay more. Further change in employersponsored health benefits is inevitable.
New PBGC Enforcement Strategy
for Section 4062(E)
Facility Shutdown Liability
Paul Fronstin | Inquiry
The PBGC is changing its ERISA Section
4062(e) enforcement approach in the context of plant shutdowns, scaling back financial security requirements for financially
strong and moderately strong companies.
ERISA identifies a shutdown resulting in
over 20% of plan participants being terminated from employment as a triggering event
for withdrawal liability. The PBGC modified its enforcement strategy to consider financial stability when determining liability.
Plan sponsors should carefully consider the
effect on plan participation of any business
changes that could be viewed as a triggering
event. The PBGC’s enforcement was lax until
a regulatory liability formula was instituted
in 2006. A proposed rule of 2010 regarding the range of triggering events prompted
negative response from the American Benefits Council, the ERISA Industry Committee and others, leading to the PBGC’s plan to
revise the rule.
Summer 2012 | pp. 101-115 | #0162590
Mark S. Weisberg | Employee Benefit Plan Review
August 2012 | pp. 21-22 | #0162586
48
industry briefs
Hay Group Data Projects 3 Percent
Pay Raises in 2013
New Law Authorizes Increase
in Multiemployer PBGC Premiums
Based on data for nearly 2,900 companies surveyed from
March to June 2012, the Hay Group forecasts a median 3%
increase in base salaries for 2013 across most industries. Exceeding the norm, the oil and gas sector is expected to see a
3.3% increase while the median increase for luxury retail is
projected at 3.5%. More organizations are turning to variable
pay and nonfinancial compensation, such as career development opportunities, better job design and other recognition.
The hope is that these efforts will combat employees’ lack of
confidence in chances for career advancement and learning
and ongoing frustration with meager raises.
The Moving Ahead for Progress in the 21st Century Act, a
highway transportation funding law, includes provisions affecting the Pension Benefit Guaranty Corporation (PBGC).
The law increases PBGC premiums for multiemployer plans
from $9 to $12 per participant in 2013 and later ties it to wage
inflation. Authorization to use defined benefit plan surplus
funds for postretirement health benefits was extended from
2013 through December 31, 2021. A surplus can also fund
group term life insurance premiums. The law also changes
the PBGC’s governance structure. More changes to multiemployer plan rules may take place in the 2014 legislative year.
Report on Salary Surveys
Segal Company: Bulletin
August 2012 | pp. 6-8 | #0162631
August 2012 | 2 pp. | #0162538
Medicare Beneficiaries Less Likely to Experience
Cost- and Access-Related Problems Than Adults
With Private Coverage
Data from the Commonwealth Fund 2010 Health Insurance Survey and supplementary phone interviews with
2,550 adults were used to compare health insurance experiences for those on Medicare and those with individual or
employer-sponsored coverage. Researchers found those on
Medicare had fewer problems accessing care due to cost,
lower premiums and lower out-of-pocket costs and were less
likely to experience financial problems due to medical bills.
They were more likely to give their insurance plan a positive
rating and feel they received excellent quality of care. They
were also more likely to have a single primary care provider,
a medical home. Medicare Advantage members were more
likely to downgrade their insurance than traditional Medicare members and to assert cost-related access problems.
Those with individual coverage are much more likely to cite
high cost and low satisfaction than those with employersponsored coverage. The findings are directly relevant to
policy discussions involving shifting Medicare recipients to
private coverage.
Phased Retirement: Challenges for Employers
Under phased retirement, older employees continue working on a reduced schedule, maintaining some income and
benefits beyond normal retirement age. But technical constraints in qualified pension plans and legal uncertainties
limit flexibility. IRS prohibits plan participants from retiring, receiving a distribution and promptly returning to work
for the same employer. Defined benefit plans could have one
annuity start date for phased retirement and one for actual
retirement, but any suspension-of-benefit rules must be resolved. Defined contribution plan distributions also require
separation from service for those aged 55 or older. Other issues to consider are ERISA and IRS nondiscrimination rules
directed at highly paid individuals, health benefit eligibility
for part-time workers, the Medicare secondary rule and the
appearance of age discrimination.
Anne E. Moran | Employee Relations Law Journal
Autumn 2012 | pp. 68-74 | #0162607
Karen Davis, Kristof Stremikis, Michelle M. Doty and Mark A. Zezza |
Health Affairs | August 2012 | pp. 1866-1875 | #0162610
49
industry briefs
Great Integrations
Watch Plans for Undue Influence
Total retirement outsourcing (TRO) is shifting all pension plan
services to an external provider, covering defined benefit and
defined contribution plans, employee stock ownership plans
and deferred compensation. A TRO arrangement provides
a single point of contact and economic efficiency but, more
importantly, integrated information outputs for sponsors and
participants. Among TRO providers, the TRO service represents about 10% to 20% of their total business. This buyer’s
guide includes comparative information on 31 TRO providers,
including their market focus and range of capabilities.
Employers should periodically take a close look at their relationships with employee benefit plan advisors to review
the services, fees and potential conflicts, ideally establishing a formal ERISA fiduciary gift policy. DOL expanded its
enforcement for reporting requirements in the union environment to a consultant advisor program, focusing on undisclosed compensation by investment advisors, improper
advisor selection and monitoring. Employers should examine their plan service providers and fees charged to be sure
there is no undue influence and prohibit any direct or indirect solicitation or receipt of gifts from vendors. Certain
exclusions may apply, such as gifts under $250 in value in a
calendar year, invitations to widely attended gatherings, honorary awards or gifts rising from a personal friendship.
PLANSPONSOR | July 2012 | pp. 44, 46-49 | #0162525
Rethinking Health Care Strategy in a Dynamic
Environment
The totality and speed of change affecting employer-sponsored health care demand a reassessment, considering health
care and support as part of total rewards and essential to
organizational success. A strategic reevaluation and plan
must start with clearly defined objectives, an understanding of precipitating issues, such as unsustainable costs and
uncertain results, and of the baseline status. This status and
future planning demand recognition of internal and external
influences and competitive data. Effective benchmarking depends on the comparability of the sample and granularity of
data. All aspects of plan design features must be considered,
including the average total employee cost and variance by industry, region and more. The gap between the baseline and
goal must be identified, as well as decision criteria and constraints, before real planning can start. The product should
be a multiyear action plan recognizing priorities, time, other
conditions and communication needs.
Randall K. Abbott | Journal of Compensation and Benefits
July-August 2012 | pp. 34-38 | #0162625
For free copies of the full articles, members can call the
Bookstore at (888) 334-3327, option 4, or e-mail bookstore@
ifebp.org.
Need a benefits topic researched? Our experienced information specialists will do the looking for you—a service
exclusively for members. Contact our Information Center at
(888) 334-3327, option 5; e-mail [email protected]; or fill
out a request form at www.ifebp.org/specialist.
50
Frank Palmieri | Employee Benefit News
August 2012 | p. 30 | #0162611
The Business Case for Offering Domestic Partner
Benefits
In the United States 1.2 million lesbian, gay, bisexual and
transgender individuals report living with a domestic partner, and they represent from 3% to 17% of the workforce.
Though federal public employers are constrained by the
Defense of Marriage Act, many other employers question
whether and how they might accommodate this population with domestic partner benefits (DPB). Employers must
consider the costs of providing DPB, including current and
anticipated enrollment, and any public perception response.
These issues are weighed against significant advantages in
talent recruitment and retention. Employers must consider
what benefits would be offered, dependent eligibility and tax
implications. The trend toward offering DPB has been slow
but steady with rising numbers of corporations extending
benefits and states and municipalities supporting same-sex
marriage.
Cynthia L. Cordes | Compensation and Benefits Review
March-April 2012 | pp. 110-116 | #0162528
public plan
news
403(b) Plans Embrace Target-Date Funds
A survey by the Plan Sponsor Council of America finds 72.5% of 403(b) plan sponsors offered target-date funds in 2011, up from 69.1% in 2010. For the 14.9% offering automatic
enrollment, target-date funds were the most common default option at 47.2%, with lifestyle
funds following at 26.4%. Plans offering Roth contributions increased from 10.9% in 2007
to 21.7% in 2011. The survey found automatic enrollment was up from 11.5% in 2009 to
almost 15% in 2011, and 93.3% of plans allowed catch-up contributions, with 13% of eligible
savers taking advantage of the option in 2011. Hardship withdrawals were permitted by 77%
of plans with 1.6% of members taking withdrawals. The average number of fund options for
organization contributions was 27, and 28 for participant contributions.
Hung Tran | Employee Benefit News
August 2012 | p. 20 | #0162612
Anticipating the Compliance
Crackdown
Circuits Split on Definition
of a “Disability-Related Injury”
The Department of Labor is beefing up its
enforcement staff overseeing defined contribution plans including 403(b) ERISA
plans. Seven in ten plans audited in 2010
faced fines, penalties or corrections with an
average cost of $450,000. Financial advisors
can alert plan sponsors to common trouble
spots, starting with the necessity of administering the plan as plan documents dictate.
The documents must reflect changes in laws
and the definition of compensation must be
consistently applied. Other points concern
matching contributions, nondiscrimination
testing, participant loans and hardship distributions. Management of elective deferrals
must be proper in terms of eligibility, annual
limits and timely deposits. Form 5500 must
be filed annually with IRS with a summary
report provided to all participants.
Courts agree that employers may not make
inquiries of an employee about a disability
under the Americans with Disabilities Act
and the Rehabilitation Act of 1973. However,
there is no agreement on the definition or
limits of such an inquiry to document an employee’s medical absence. In Conroy v. Swingle, the Second Circuit Appeals Court ruled
requiring a general diagnosis was excessive
and established or reinforced a perception
of disability. In Lee v. City of Columbus, the
Sixth Circuit ruled a statement of the nature
of illness or general diagnosis was supported
under the Rehabilitation Act, which applies
to federal employers or contractors. In EEOC
v. Dillard’s Inc., the District Court for Southern California found a rule to state the nature
of an absence is similar to the Conroy case.
Depending on their location, employers may
be wise to limit their questions to the medical
necessity and expected dates of absence.
E. Thomas Foster Jr. | 403(b) Advisor
Summer 2012 | pp. 50, 52 | #0162597
Howard S. Lavin and Elizabeth E. DiMichele |
Employee Relations Law Journal
Autumn 2012 | pp. 80-86 | #0162609
For free copies of the full articles, members can call the Bookstore at (888) 334-3327, option 4, or e-mail [email protected].
51
public plan news
From K-12 to the Nonprofit ERISA 403(b) Market:
Passport Required
The story of how Cammack LaRhette Consulting transitioned from serving school systems’ 403(b) plan needs to
an expanded nonprofit ERISA 403(b) market presents useful lessons for those contemplating such a change. Over 20
years, the firm moved from focusing on individual participants to supporting the plan regarding governance and best
practices. It was important to view the employer as the client,
develop positive relationships with decision makers, become
subject matter experts and to make clear that they provided
services rather than products. Success depended on unlearning many traditional concepts related to non-ERISA plans
and embracing new ideas.
Michael Webb | 403(b) Advisor
Summer 2012 | pp. 27-28 | #0162595
Governmental Plans: Nearly All Connecticut State
Employees Get Health Screenings, Comptroller Says
Connecticut Comptroller Kevin Lembo announced that over
99% of state employees, new retirees and dependents have
signed up for health screenings, and he expects this impressive compliance to lead to substantial cost savings. A reduction in emergency room use and some costly acute care has
already been observed. Under the state’s Health Enhancement Program, those who schedule screenings by May 31
and complete them by December 31 get lower premiums and
waived deductibles. Only 2% of state employees declined to
sign up for the program.
Martha Kessler | BNA’s Pension & Benefits Reporter
July 31, 2012 | p. 1450 | #0162532
How Well Are Government Employees Paid?
While most people think government workers’ salaries
should be comparable to private sector employees’ pay, studies back to the 1970s have suggested otherwise. But study results have drawn on incomplete and disparate data unfit for
comparative analyses, leading to invalid conclusions. Simple
census-based salary comparisons are an inappropriate basis
for employers’ pay strategies. The National Compensation
Survey methodology is unsuitable to compare government
and private sector jobs, with government positions spanning
52
occupations with unique job requirements and educational
demands in varied locations. There is pressure to replace the
government’s pay system with more emphasis on performance over tenure, distinctions by education and differential
pay increases. This will require high-quality market data by
area, labor market size and occupation and integrated consideration of benefits in total compensation.
Howard Risher | Compensation and Benefits Review
March-April 2012 | pp. 73-79 | #0162517
Institutions Still in Love With Secondary Market
While financial institutions were the most active sellers of private equity interests on the secondary market in the first half
of 2012, pension plans were second, representing 20% of total
transactions and 31% of total value on the secondary market in
that period. In July 2012, The California Public Employees’ Retirement System, Ontario Municipal Retirement System and
the New York City Retirement Systems sold over $3.3 billion in
private equity collectively on the secondary market. Experts attribute the secondary market growth on a spike in fundraising
from 2004 to 2007, leading to an excess of private equity being
sold off as plans trim portfolios. While more organizations are
selling, the same ten to 15 large investment managers are buying the bulk of the funds sold on the secondary market.
Arleen Jacobius | Pensions & Investments
August 6, 2012 | pp. 6, 29 | #0162577
More State Plans Cutting Assumed Return Rates
With tight budgets and feeble investment performance, public employee benefit plans are adopting a more conservative
stance. The National Association of State Retirement Administrators’ Public Fund Survey showed 43 of 126 plans cut
return assumptions, most commonly to 8.0%, though larger
plans lean toward 7.75%. The California teachers’ and public
employees’ plans dropped from 7.75% to 7.5%, while Baltimore County’s plan assumption fell from 7.85% to 7.25%. For
many plans, lowering the expected rate of return is a matter
of facing reality and had been under consideration for some
time. Corporate plans’ return assumptions have fallen from
an average 9.17% in 2000 to 7.6% in 2011.
Hazel Bradford | Pensions & Investments
July 23, 2012 | pp. 6, 25 | #0162515
&
legal
legislative
reporter
54Court Permits Claim to Proceed for Determination
of Lifetime Retiree Health Care Benefits
The Sixth Circuit considers the plaintiffs’ appeal regarding the applicable statute of limitations and
claim for early retirement benefits.
55Employer Intended to Provide Lifetime Retiree and Spousal Health Care Benefits
56Court Assesses Interest Rates Used in Calculating Withdrawal Liability
58Retiree Health Benefits Are Not Vested Lifetime Benefits
60Court Considers Deductibility of Life Insurance Contributions
61Stepsons Are Not Children Under Terms of Plan
62Court Affirms Denial of Lifetime Retiree Health Benefits
63Court Considers Application of Balancing-of-the-Equities Test
The Sixth Circuit considers extrinsic evidence to determine whether retiree and spousal health care
benefits are lifetime vested benefits.
The Seventh Circuit upholds an arbitrator’s decision finding that a multiemployer plan failed to
follow the actuary’s best estimate for interest rates in calculating funding amounts and withdrawal
liability.
The Eighth Circuit finds that retiree health benefits were not lifetime vested benefits under the
terms of the collective bargaining agreement.
The Second Circuit finds that the plaintiffs’ contributions to a life insurance plan were not ordinary
and necessary business expenses.
The Fifth Circuit upholds the plan administrator’s decision to deny benefits to the deceased’s stepsons.
The Second Circuit dismisses the plaintiffs’ claims alleging entitlement to lifetime health care benefits.
in Bankruptcy Proceedings
The Eighth Circuit finds that a separate balancing-of-the-equities test is inappropriate in determining whether retirement benefits can be recouped in a bankruptcy proceeding.
64Court Dismisses Alleged Claims of Breach of Fiduciary Duty
in Mismanagement of 401(k) Funds
A district court dismisses the plaintiffs’ claims alleging breach of fiduciary duty for mismanagement
of investment funds in a 401(k) plan.
65Court Compels Arbitration of Retiree Health Benefit Claims
66Washington Update: Guidance on the Shared Responsibility
67 Other Recent Decisions
A district court compels arbitration of the plaintiffs’ claims regarding retiree health benefits.
and 90-Day Waiting Period Under PPACA
53
Court Permits Claim to Proceed for Determination
of Lifetime Retiree Health Care Benefits
T
retiree
health benefits
54
he United States Court of Appeals for the
Sixth Circuit considers the plaintiffs’ appeal
regarding the applicable statute of limitations and claim for early retirement benefits.
The plaintiffs retired from the defendant company and began receiving benefits under its pension plan (the plan). Until 1998, the plan was a defined benefit plan that allowed employees to retire
early once they had completed five years of service
and reached the age of 55. Employees who chose
early retirement would receive subsidized benefits
that were nearly as large as those they would have
received if they were 65.
By 1998, all nine plaintiffs had performed five
years of service, but none had reached the age of
55. The plan was then converted into a cash balance plan. The plaintiffs claimed that the amended
plan failed to give them the full value of their accrued benefit. Specifically, the plaintiffs claimed
they did not receive credit for the full value of the
original plan’s early retirement subsidy.
Upon their retirement and following the conversion, the plaintiffs took single lump-sum payments of their plan benefits. One of the plaintiffs
filed an administrative challenge to the amount of
his distribution less than five years after receiving
his benefit. The other plaintiffs each filed similar
claims more than five years after receiving their
benefits. The plaintiffs all lost their administrative
claims for benefits and initiated an action against
the company and the plan. The district court dismissed eight of the plaintiff ’s claims as untimely.
The district court dismissed the remaining claim
because the early retirement subsidy was not an
accrued benefit when it was altered. The plaintiffs
then filed this appeal.
The Sixth Circuit first considers the plaintiffs’
claim that the district court erred in finding their
claims time-barred. The Sixth Circuit notes that
the district court applied “the most analogous
state law statute of limitations,” which was the
five-year statute of limitations for “[a]n action
upon a liability created by statute, when no other
time is fixed by the statute creating the liability.”
Under this time period, the plaintiffs’ causes of action must have accrued within five years of when
they filed suit. The court also recognizes that an
ERISA cause of action accrues “when a fiduciary
gives a claimant clear and unequivocal repudiation of benefits.”
The district court determined that the plan’s payment of a single lump sum “represented the plan’s
determination of all the benefits that each plaintiff
was entitled to receive, and thus unequivocally repudiated any claim to additional benefits.” Because
those payments occurred more than five years before eight of the plaintiffs filed their administrative
claims, the district court held that their claims were
time-barred. The Sixth Circuit upholds the district
court’s reasoning and its decision.
The Sixth Circuit then considers the claim of
the remaining plaintiff who filed less than five
years after receiving his lump-sum payment. The
Sixth Circuit agrees with the district court that
upon filing his administrative claim, the plaintiff ’s
statute of limitations began tolling and, therefore,
his claim was not time barred.
Turning to the merits of the claim, the Sixth
Circuit notes that the plaintiff alleges that the
plan’s amendment to the early retirement benefit
continued on next page
&
legal
legislative
reporter
For members of the International Foundation of Employee Benefit Plans
Editorial Board
Harry W. Burton, Esq.
Havilah Gebhart, Esq.
Founding Editor
William J. Curtin, Esq.
(1931-1995)
Production Assistants
Megan R. Murphy, Esq.
Simon J. Torres, Esq.
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave., Washington, DC 20004, (202) 739-3000
Employer Intended to Provide Lifetime
Retiree and Spousal Health Care Benefits
T
Sixth Circuit considers extrinsic evidence to determine whether retiree and
spousal health care benefits are lifetime vested
benefits.
The defendant—a privately held, familyowned company—entered into two collective
bargaining agreements (CBAs) between 1994
and 2002. The CBAs contained several provisions addressing health care benefits available to
employees and their spouses. The plaintiff employees each retired at the age of 62; three retired
under the 1994 CBA and one retired under the
1997 CBA. Prior to retiring, some of the plaintiffs allege they spoke to human resources representatives who assured them that the company
would be funding lifetime health care insurance
benefits for them and their spouses. Following
retirement, the plaintiffs and their spouses continued to have their health care insurance premiums paid without interruption through October 2006.
In October 2006, however, the company informed the plaintiffs that it was altering the retiree benefits and would no longer cover 100% of
Court Permits Claim for Benefits
continued from previous page
violated ERISA’s anticutback rule. The Sixth Circuit agrees with the district court’s assessment that
a benefit accrues only after a participant has met
all of the plan’s criteria for that benefit. In this case,
to be entitled to the early retirement benefit, the
plaintiff had to have five years of service and have
reached the age of 55. At the time of the amendment, the plaintiff had five years of service but was
not 55. The court finds that case law establishes
that the age requirement of an early retirement
benefit can be satisfied after the amendment and
the early retirement benefit can accrue when the
the health care premiums. The plaintiffs initiated
a lawsuit claiming violations of the Labor-Management Relations Act (LMRA) and ERISA. The
parties filed cross motions for summary judgment, and the district court granted the plaintiffs’
motion in part and the company’s motion in part.
The district court concluded that the plaintiffs
were entitled to lifetime health care coverage but
the plaintiffs’ spouses were not. Both parties then
filed appeals.
In reviewing the district court’s decision,
the Sixth Circuit notes that health care coverage “is considered a ‘purely contractual’ welfare
benefit that an employer typically may alter or
even terminate at its will.” However, the court
also notes that an “employer that contractually
obligates itself to provide vested healthcare benefits renders that promise ‘forever unalterable.’ ”
The court further notes that where, as here, the
health care benefits are the product of collective bargaining, the court will apply “ordinary
principles of contract interpretation.” Where
the court finds “explicit contractual language or
retiree
health BENEFITS
continued on page 57
service requirement is met. Accordingly, the court
finds that the plaintiff ’s early retirement benefit
under the original plan was accrued at the time
of the amendment. Nonetheless, the Sixth Circuit
remands to the district court with instructions to
determine whether the plan amendment actually
reduced the plaintiff ’s benefits.
The Sixth Circuit also instructs the district
court to determine whether the benefit sought
by the plaintiff was an “early retirement benefit,”
which could be protected from elimination or reduction, or an “optional form of benefit,” which
would only be protected from elimination.
Fallin et al. v. Commonwealth Industries Inc. Cash Balance Plan et al., No. 09-5139 (6th Cir. Aug. 23, 2012).
55
Court Assesses Interest Rates Used
in Calculating Withdrawal Liability
T
multiemployer
plans
56
Seventh Circuit upholds an arbitrator’s decision finding that a multiemployer pension plan (the plan) failed to follow the actuary’s
“best estimate” for interest rates in calculating
funding amounts and withdrawal liability.
The defendant company withdrew from the
plan and was assessed withdrawal liability. The
company challenged the withdrawal liability
through mandatory arbitration, and the arbitrator
ruled that the plan had overassessed the withdrawal liability by $1,093,000—almost one-third of its
total $3.4 million assessment. The plan challenged
the decision, and the district court upheld the arbitrator’s ruling. The plan then filed this appeal.
The Seventh Circuit notes that withdrawal liability is based on a pro-rata share of the funding
shortfall that must be borne by the withdrawing
employer. To determine withdrawal liability, the
plan must estimate an interest rate at which the
plan’s assets are expected to grow. In addition, an
interest rate must be estimated for determining
whether employers are contributing the minimum amount required by ERISA to avoid funding liabilities that could be assessed by the Pension
Benefit Guaranty Corporation (PBGC).
In this case, the plan hired an actuarial firm to
determine whether it met its minimum funding
requirements for avoiding the tax penalty imposed
by PBGC and also to determine the liability of
any withdrawing employers. The Seventh Circuit
notes that these calculations “depended critically
on the interest rate used to estimate the plan’s ability to meet its future obligations.” Under ERISA, a
plan actuary is required to use assumptions that
“in the aggregate, are reasonable,” and “which, in
combination, offer the actuary’s best estimate of
anticipated experience under the plan.” This provision of ERISA applies to determining both the
adequacy of funding to avoid the tax penalty and
withdrawal liability.
The Seventh Circuit notes that despite the
identical statutory language, the actuary used two
different formulas to arrive at its “best estimate” of
the interest rates. The actuary used the “funding
rate” for tax purposes and the “blended rate” for
withdrawal liability purposes. The Seventh Circuit notes that a prior U.S. Supreme Court opinion “could be read to suggest that having different
interest-rate assumptions—one for withdrawal
liability and one for avoiding the tax penalty—
might make a plan vulnerable to claims that with
or both were ‘unreasonable’ within the meaning
of [ERISA].” Presumably in response to this decision, the actuary told the plan’s trustees that they
could direct it to ignore the blended rate and use
the funding rate to calculate withdrawal liability.
The actuary, however, did not say that the funding
rate was as good an estimate as its own “best estimate” for withdrawal liability purposes.
The trustees instructed the actuary to calculate
both the blended rate and the funding rate, and
then use the higher of the two for calculating withdrawal liability. From 1996 to 2004, the funding rate
was higher every year. In 2004, the trustees directed
the actuary to revert to using the blended rate for
calculating withdrawal liability. The Seventh Circuit
notes that at this time “the plan’s priorities apparently had changed, from attracting more employers with the prospect of low withdrawal liability (by
assuming a high interest rate and therefore a rapid
growth in the fund’s assets) to extracting higher exit
prices from employers who withdrew (by assuming
a low interest rate and in consequence a sluggish
rate of asset growth and so a larger shortfall).” The
court notes that the reversion to the blended rate
in 2004 was “a major factor” in causing the plan’s
unfunded vested benefits to jump from $67 million
to $117.2 million in 2004, and in turn, increasing
the defendant’s withdrawal liability by $1,093,000.
The Seventh Circuit reiterates that ERISA requires trustees to base their calculation of withcontinued on page 59
Employer Intended to Provide Lifetime Benefits
continued from page 55
extrinsic evidence” indicating an intent to vest,
it will apply an inference in favor of vesting in
close cases addressing collectively bargained
benefits.
Applying this standard, the Sixth Circuit reviews the specific provisions of the CBAs. The
court notes that under the 1994 CBA, the parties offer conflicting interpretations of the term
employees, with the plaintiff contending that
the term should be interpreted to mean “retired
employees” and the defendant claiming that the
term only refers to “active employees.” The court
concludes that neither interpretation is definitely
correct as the provision is ambiguous. The court
also determines that the document is ambiguous
as to spousal retiree health care benefits. Accordingly, to determine whether the parties intended
to provide health care benefits to employees who
retired during the term of the 1994 CBA and their
spouses, the court finds that it must consider extrinsic evidence.
The Sixth Circuit reviews the terms of the 1997
CBA and concludes that it unambiguously shows
an intent to vest health care benefits in retirees.
The court cites language in the document stating
that “the company will provide medical coverage
through [the plan] for persons retiring at or after
age 65. Persons retiring at age 62 will pay 20% of
the premium for this coverage between the ages
of 62 & 65.” The court agrees that the lack of limitations in the provision means that there are no
limitations. The court, however, finds the 1997
CBA ambiguous as to spousal coverage and again
turns to extrinsic evidence.
The court examines the company’s summary plan descriptions (SPDs), oral statements from human resources representatives,
letters updating retirees on their health care
coverage, insurance documents and pattern
of conduct. Based on this information, the
Sixth Circuit agrees with the district court that
“[t]hough it is possible that defendant’s pay-
ments resulted solely from goodwill,” the extrinsic evidence “strongly suggest that the
payments resulted from a sense of obligation.”
Thus, the court finds that both CBAs intended
to vest the plaintiff retirees and their spouses
with lifetime health care benefits.
In coming to this conclusion, the Sixth Circuit notes that the inference in favor of vesting is
appropriate because there were no specific durational limitations on the vesting retiree and spousal health care coverage, while there were such
limitations in other provisions of the CBAs.
The court finds that the reservationof-rights clauses in the SPDs cannot
contradict the terms of the CBAs,
and even if they do, the bargainedfor terms of the CBAs trump the
reservation-of-rights provisions
in the SPDs.
The court also dismisses the company’s argument that the reservation-of-rights clauses in
the SPDs preserved its right to unilaterally alter
or terminate coverage. The court finds that the
reservation-of-rights clauses in the SPDs cannot
contradict the terms of the CBAs, and even if they
do, the bargained-for terms of the CBAs trump
the reservation-of-rights provisions in the SPDs.
Accordingly, the court finds in favor of the plaintiffs on all claims and remands for judgment in
their favor.
Moore et al. v. Menasha Corporation, Nos. 2171/2173
(6th Cir. Aug. 22, 2012).
57
Retiree Health Benefits Are Not
Vested Lifetime Benefits
T
Eighth Circuit finds that retiree health benefits were not lifetime vested benefits under
the terms of the collective bargaining agreement
(CBA).
The plaintiff company negotiated CBAs with
the defendant union for more than 50 years. Each
CBA included a supplemental insurance agreement setting forth health benefits for active members and retirees. Each agreement was an employee benefits plan under ERISA.
retiree
health Benefits
. . . when the applicable summary
plan description is devoid of vesting
language and explicitly reserves
the right to modify the retiree
medical benefit at any time, then
the beneficiaries “have not met the
burden of proving vesting language”
and extrinsic evidence “may not be
considered.”
The company was acquired in 2006 and the
purchaser assumed its obligations under the 2004
CBA, which was due to expire July 31, 2008. In
2007, the purchaser closed several facilities and
laid off all but 30 of more than 900 active employees. In May 2008, the union gave the purchaser
notice that it would be terminating the 2004 CBA
upon its expiration.
In the summer of 2008, the plaintiff altered the
health benefits of salaried retirees. The then company met with the union to begin negotiating a
new CBA for hourly workers. The company proposed several models, but the union negotiator re-
58
plied that retiree health care benefits were “carved
out” during the 2004 negotiations and would not
be bargained for in 2008.
The company initiated an action against the
union and three individuals, as representatives of
a purported class of more than 3,000 retirees. The
complaint sought a declaration that the company
had “the right to change the retiree medical benefit schedule effective January 1, 2009.” The company then gave notice to affected retirees that their
health benefits would change. Five retirees subsequently filed a “mirror image” class action alleging
that the company’s changes violated the 2004 CBA.
The district court denied the union’s motions
to dismiss for lack of Article III case or controversy. The district court ruled in favor of the company and granted its motion to certify a class. The
defendants then filed this appeal.
On appeal, the defendants first contend that
the company’s complaint should have been dismissed for lacking “actual controversy.” The defendants contend that there was no Article III case
or controversy when the company filed its lawsuit
because the company had not yet disclosed its
plan to modify retiree benefits, the union had not
taken a position opposing unilateral modification,
the union had no cause of action regarding such a
hypothetical change and, therefore, the company
failed to show the requisite injury in fact.
The Eighth Circuit recognizes that in a dispute
between parties to a contract, the declaratory judgment remedy “is intended to provide a means of
settling an actual controversy before it ripens into a
violation of the civil or criminal law, or a breach of
a contractual duty.” Furthermore, the court notes
that if there is “a real, substantial, and existing controversy . . . a party to a contract is not compelled
to wait until he has committed an act which the
other party asserts will constitute a breach.”
In this case, the Eighth Circuit notes that the
Court Assesses Interest Rates
drawal liability on the actuary’s best estimate. Yet,
the court notes that the actuary maintains, and the
plan does not dispute, that the blended rate, not
the funding rate, was its best estimate for calculating withdrawal liability. Accordingly, the court
concludes that the plan failed to follow ERISA in
applying the interest rate to its withdrawal liability calculations. In addition, the court disagrees
with the plan’s argument that there is a statutory
safe harbor that insulates its use of the funding
rate from challenge. The court finds that the safe
harbor provision does not override the statutory
requirements that the calculation of withdrawal
Retiree Health Benefits Are Not Vested
company had contractual obligations to the retirees and to the union, statutory responsibilities to
the retirees under ERISA, and statutory responsibilities to the union under federal labor laws. The
court also notes that the company knew from decades of negotiations that the union considered
retiree health benefits to be vested. Because the
company “knew litigation was inevitable if it unilaterally modified benefits,” the court finds that the
company reasonably concluded that the contractual dispute was “real, substantial, and existing”
and the dispute was “ripe for immediate judicial
resolution.” The Eighth Circuit agrees with the district court’s assessment that a case or controversy
existed at the commencement of the lawsuit.
The Eighth Circuit then considers whether the
members of the retiree class have vested rights
to health care benefits. The court recognizes that
ERISA does not mandate vesting of employee
welfare benefits but permits employers to con-
liability be based on reasonable actuarial assumptions and the plan actuary’s best estimate.
Finally, the Seventh Circuit also disagrees with
the company’s contention that its calculation of withdrawal liability is shielded by the limited scope of
the arbitrator’s review of determinations by a plan’s
trustees. The court finds that the trustees were not
entitled to disregard a statutory directive and, therefore, the determination was reversible by the arbitrator. The Seventh Circuit affirms the district court’s
decision upholding the arbitrator’s recalculation of
the company’s withdrawal liability based on the actuary’s best estimate interest rate assumptions.
Chicago Truck Drivers, Helpers and Warehouse Workers Union (Independent) Pension Fund et al. v. CPC
Logistics Inc., No. 11-3034 (7th Cir. Aug. 20, 2012).
tractually agree to provide vested retiree health
benefits. The defendants contend that each new
supplemental insurance agreement negotiated
since 1961 provided vested retiree medical benefits. However, the defendants also concede that
the 2004 agreement did not contain unambiguous
vesting language. In lieu of such language, the defendants contend that the parties’ bargaining history provides “overwhelming extrinsic evidence”
of their intent to vest retiree medical benefits. The
court concludes, however, that when the applicable summary plan description is devoid of vesting
language and explicitly reserves the right to modify the retiree medical benefit at any time, then the
beneficiaries “have not met the burden of proving
vesting language” and extrinsic evidence “may not
be considered.” Thus, the Eighth Circuit affirms
the judgment of the district court permitting the
company to alter retiree benefits.
Maytag Corporation et al. v. International Union,
United Automobile, Aerospace & Agricultural Implement Workers of America et al., No. 11-2931 (8th Cir.
Aug. 7, 2012).
59
Court Considers Deductibility
of Life Insurance Contributions
T
tax deductions
60
Second Circuit finds that the plaintiffs’ contributions to a life insurance plan (the plan)
were not “ordinary and necessary” business expenses within the meaning of the United States Tax
Code and were not deductible business expenses.
The plan was established in 1997 as a designated
multiple employer welfare benefit plan. It provided
death benefits “funded by individual life insurance
policies for a select group of individuals chosen by
the employer to participate in the plan.” Participating
businesses made contributions, and the plan used
these contributions to acquire policies on the lives of
covered employees. The plan advertised several “advantages” including (1) “virtually unlimited deductions for the employer,” (2) “benefits can be provided
to one or more key executives on a selective basis,”
(3) “no need to provide benefits to rank and file employees” and (4) tax-free accumulation of funds.
Various parties became participants in the plan.
Two of the plaintiffs (Plaintiff A and Plaintiff B)
owned several car dealerships together, which they
valued at $12 million. They also entered into a buysell agreement which provided that if one partner
died, the other would buy the deceased partner’s
50% stake. To fund the purchase if it became necessary, each partner agreed to take out an insurance
policy on the other’s life. Plaintiff A and Plaintiff B
each bought a whole life policy with a $9 million
death benefit. Their business entities contributed
premiums to the plan, and each business claimed
a tax deduction for the entirety of its contribution.
Plaintiff A and Plaintiff B stated the deduction was
based on the advice of their accountant.
Two other plaintiffs (Plaintiff C and Plaintiff D)
were also participants in the plan, and their respective companies deducted plan contributions as a
business expense. Plaintiff C was the sole owner of
a construction company. Although the company
had 35 to 40 employees, it chose to insure only
Plaintiff C through the plan. Plaintiff D was the
sole owner of a company providing mortgage bro-
ker services. The company provided a policy under
the plan to Plaintiff D and his stepson.
In 2007, the Internal Revenue Service (IRS)
sent notices of deficiency to the plaintiffs. The IRS
disallowed the deduction of plan contributions as
they were not “ordinary and necessary” business
expenses. The IRS also assessed a 20% accuracyrelated penalty on each of the plaintiffs. The plaintiffs
objected to the assessment and the penalty. The cases
were consolidated and the tax court found that the
contributions were not ordinary and necessary business expenses and, therefore, should not have been
deducted. The tax court also approved the assessed
penalties after finding that the improper deductions
and corresponding underpayment of tax were the result of negligence or disregard for the tax rules and
regulations. The plaintiffs then filed individual appeals which were subsequently consolidated.
In reviewing the plaintiffs’ appeal, the Second
Circuit notes that Code Section 162(a) provides
that a business may deduct “all the ordinary and
necessary expenses paid or incurred” during the
taxable year in carrying out that trade or business.
Courts have found an ordinary expense to be one
that is “normal, usual, or customary in the type
of business involved,” and a necessary expense to
be one that is “ ‘appropriate and helpful’ for the
development of the taxpayer’s business.” The determination is based on whether the facts and
circumstances indicate that the taxpayer made
the expenses “in furtherance of a bona fide profit
objective independent of tax consequences.”
The Second Circuit further notes that the IRS
has specifically indicated that a contribution to a
welfare benefit plan is deductible if it is an ordinary and necessary expense. If this threshold is
met, there are then further analyses to determine
whether any limitations on deductibility apply.
In this case, the Second Circuit agrees with the
tax court that plan contributions were not ordinary
Stepsons Are Not Children
Under Terms of Plan
T
Fifth Circuit upholds the plan administrator’s decision to deny benefits to the deceased participant’s stepsons.
A pension plan (the plan) participant died October 2005. Under the terms of the plan, the participant was allowed to designate a primary and secondary beneficiary. The participant designated his
wife as the primary beneficiary, who died in 2004,
and did not designate a secondary beneficiary.
The plan provided that in the case of a participant who died without designating a valid beneficiary, the decedent’s benefits would be distributed
in the following order: (1) the decedent’s surviving spouse, (2) the decedent’s surviving children,
(3) the decedent’s surviving parents, (4) the decedent’s surviving brothers and sisters, and (5) the
executor or administrator of the decedent’s estate.
Following the participant’s death, the defendant
plan administrator considered and rejected the
possibility that the participant’s stepsons might
be entitled to benefits. The plan administrator ultimately awarded benefits to the participant’s six
siblings.
Two years after the participant’s death, the
stepsons challenged the distribution. The stepsons
alleged that they were the participant’s children
and should have been given priority over the participant’s siblings. The plan administrator upheld
its determination, and the stepsons filed suit. The
district court found in favor of the stepsons, concluding that the plan administrator “abused her
discretion by failing to consider [the stepsons’]
claims of adoption by estoppel.” The plan administrator then filed this appeal.
The Fifth Circuit notes that where the plan
grants discretionary authority to the plan administrator, the plan administrator’s interpretation is
reviewed for an abuse of discretion. Under this
standard, the court will ask whether the plan administrator’s interpretation was “legally correct.”
To determine whether an interpretation is legally
correct, the court will consider whether the plan
administrator has given the plan uniform construction, whether the plan administrator’s interpretation is consistent with a fair reading of the
plan, and whether different interpretations of the
plan will result in unanticipated costs. Only if
it was not legally correct will the court then ask
whether the plan administrator’s decision was an
abuse of discretion.
After applying these factors to the facts of the
case, the Fifth Circuit concludes that the plan administrator did not err in finding that the stepsons
were not entitled to benefits. The plan administrator determined that the term children meant
biological or legally adopted children based on
(1) the need for a uniform standard under the
plan, (2) the need for a practical and objective
mechanism for plan administration, and (3) the
determination that exclusion of stepchildren was
most likely to align with expectations of plan participants. The plan administrator also determined
that including “equitably adopted” individuals
would create “substantial uncertainties and additional expenses for the plan by giving rise to disputes about whether individuals had been ‘equitably adopted.’ ”
The Fifth Circuit concludes that the plan administrator properly considered and applied the
factors relevant to its determination. The court
notes that the plan administrator focused on providing a uniform interpretation of the plan and
avoiding unanticipated costs. The court also finds
that the doctrine of “equitable adoption” does not
create a legal parent-child relationship and, furthermore, it was not required to be applied to the
plan’s definition of children. Accordingly, the Fifth
Circuit affirms the plan administrator’s interpretation of the term children and reverses the judgment of the district court.
beneficiary
designation
Herring et al. v. Campbell, No. 11-40953 (5th Cir. Aug.
7, 2012).
61
Court Affirms Denial of Lifetime
Retiree Health Benefits
T
retiree
health benefits
Second Circuit dismisses the plaintiffs’
claims alleging entitlement to lifetime
health care benefits.
The plaintiffs initiated a putative class action
on behalf of former employees of the defendant
company who participated in one of three health
plans. The plaintiffs allege that the defendants repeatedly promised lifetime health care benefits
but then revoked that promise in violation of
ERISA Section 502(a)(1)(B). The district court
considered the plaintiffs’ claims and granted the
defendants’ motion to dismiss for failure to state a
claim. The plaintiffs then filed this appeal.
The Second Circuit notes that for the plaintiffs
to succeed on their claim under Section 502(a)(1)
(B), they must demonstrate existence of “specific
Court Considers Deductibility of Contributions
and necessary business expenses. The court notes
that the contributions were not made in furtherance
of a profit objective or for any viable business purpose. Rather, the court finds that the contributions
were “a mechanism by which [the plaintiffs] could
divert company profits, tax-free, to themselves, under the guise of cash-laden insurance policies that
were purportedly for the benefit of the businesses,
but were actually for [the plaintiffs’] personal gain.”
Specifically, the Second Circuit notes that plan
contributions on behalf of Plaintiff A and Plaintiff
B “were not made in furtherance of a business objective, but rather to relieve [Plaintiff A or Plaintiff
B] from having to use personal funds to pay for
his partner’s share of the business in the event the
partner died.” Plaintiff C admitted that the contributions were made on his behalf for the purpose
of “retirement planning,” and Plaintiff D’s contri-
62
written language” contained in a plan document
“that is reasonably susceptible to interpretation as
a promise to vest the benefits.” The plaintiffs allege that the defendants promised lifetime health
care benefits in documents dating back to at
least the 1950s. However, the court finds that the
plaintiffs have failed to establish that the alleged
documents constituted plan documents. Moreover, the court finds that none of the relevant
plan documents can reasonably be interpreted
to create a promise of vested lifetime benefits. Finally, the court finds that even if a plan document
had contained a promise of lifetime health care
benefits, it likely would have been unenforceable
based on the plans’ reservation-of-rights provicontinued on page 70
butions eventually became a personal asset with a
significant cash component.
The Second Circuit also notes that although the
plan contributions in this case were not ordinary
and necessary expenses, “paying for life insurance
for one’s employees can be an ordinary and necessary business expense if the purpose is to compensate, incentivize, and retain key employees.”
After upholding the tax court’s decision, the
Second Circuit addresses the accuracy-related penalties. The court finds that the plaintiffs’ decision to
deduct plan contributions despite “clear statutory
language could reasonably be classified as negligent
behavior.” The court notes that reliance on professional advice, such as that given by the plaintiffs’
accountants, is not an absolute defense to negligence. Accordingly, the Second Circuit also affirms the tax court’s imposition of penalties.
Curcio et al. v. Commissioner of Internal Revenue, Nos.
10-3578-ag, 10-3585-ag, 10-5004-ag and 10-5072-ag
(2nd Cir. Aug. 9, 2012).
Court Considers Application of Balancingof-the-Equities Test in Bankruptcy Proceedings
T
Eighth Circuit finds that a separate “balancing-of-the-equities” test is inappropriate in determining whether retirement benefits
can be recouped in a bankruptcy proceeding.
The plaintiff had a long-term disability policy (the
plan) issued by the defendant company. In August
2006, the company began paying the plaintiff benefits under the plan. The plan provided that benefits
to a disabled employee are to be reduced by any Social Security disability benefits. The plaintiff authorized the company to automatically withdraw from
his bank account any retroactive Social Security disability benefits. In 2008, the plaintiff received a lumpsum payment of $45,316.54 in retroactive Social Security disability benefits. The company withdrew the
money from the plaintiff’s account a week later.
Shortly thereafter, the plaintiff filed Chapter 7
bankruptcy. The bankruptcy trustee categorized the
$45,316.54 payment as a voidable preference under
the Bankruptcy Code. The bankruptcy trustee demanded that the company return the money, and the
company complied. It then, however, began deducting $430.20 each month to recover the retroactive
benefits. The bankruptcy court expressed concern as
to the company’s actions, and the company stopped
the deductions. It repaid the amounts to the plaintiff
but expressly reserved the right to reinstate deductions if a court determined they were permissible.
The company filed a claim for recoupment,
which the bankruptcy court rejected. The company appealed, and the bankruptcy appellate court
reversed and remanded the issue for a determination on whether it was equitable for the company
to recoup payments from the plaintiff. On remand,
the bankruptcy court weighed the equities and determined that the company could not recoup the
payments. The company then filed this appeal.
The company argues that there should not be
a separate weighing of the equities in determining
whether it is entitled to recoup payments made to
the plaintiff. In considering the appeal, the Eighth
Circuit notes that recoupment “allows a defendant
to deduct its claim from the amount the plaintiff
would otherwise recover if the claim arises out of
the same transaction or subject matter on which the
plaintiff sued.” The court also notes that recoupment
is an equitable principle and that “to justify recoupment in bankruptcy, ‘both debts must arise out of
single integrated transaction so that it would be inequitable for the debtor to enjoy the benefits of that
transaction without also meeting its obligations.’ ”
The plaintiff contends that a creditor who
meets the same-transaction test can be denied
recoupment based on a balancing of the equities. The Eighth Circuit, however, finds that while
a balancing of the equities arises in applying the
same-transaction test, a separate balancing of the
equities cannot also be applied to the recoupment
consideration. The court concludes that the cases
cited by the plaintiff do not require the courts to
perform an independent balancing-of-the-equities test apart from the same-transaction analysis.
Based on its analysis, the Eighth Circuit finds
that a creditor who meets the same-transaction test
cannot be denied recoupment based on a separate
balancing-of-the-equities test. The Eighth Circuit
notes that the bankruptcy appellate court erred by
introducing a separate balancing-of-the-equities
test into the doctrine of recoupment and “by invoking these equitable principles to deny [the company] a right of recoupment after finding that the
obligations at issue arose out of the same transaction.” The Eighth Circuit further notes that “fairness and equity may influence whether two competing claims arise from the same transaction, but a
court should not impose an additional ‘balancingof-the-equities’ requirement once a party meets the
same-transaction test.” The Eighth Circuit reverses
the case to the bankruptcy court for proceedings
consistent with its ruling.
bankruptcy
Terry v. Standard Insurance Company, No. 11-2582 (8th
Cir. Aug, 3, 2012).
63
Court Dismisses Alleged Claims of Breach of
Fiduciary Duty in Mismanagement of 401(k) Funds
T
fiduciary duties
64
he United States District Court for the
Southern District of New York dismisses
the plaintiffs’ claims alleging breach of fiduciary duty for mismanagement of investment
funds in a 401(k) plan.
The named plaintiff initiated a putative class action against the defendant 401(k) plan (the plan) and
its board of trustees. The defendants had selected a
company to provide investment services to the plan
and had selected the funds available for investment.
Plan participants had the option of self-directing investments among 14 alternative funds or allowing
their funds to be invested in the default fund.
The plaintiffs’ initial complaint included two
claims—a claim for breach of fiduciary duty for
“selecting and continuing to offer an inappropriate and poorly performing menu of investment
choices to plan participants” and a claim for “causing and allowing [the plan] to pay unreasonable
fees and expenses.” The district court granted the
defendants’ motion to dismiss but granted the
plaintiffs leave to re-plead their complaint. The
plaintiffs then filed this amended action.
The plaintiffs’ amended complaint first alleges
that the defendants breached their fiduciary duties by failing to implement a prudent procedure to
evaluate and monitor the default fund. The Southern District of New York dismisses this claim. The
plaintiffs’ allegations are based on eight comparable
funds that outperformed the default fund over a
five-year period; however, the court notes that “the
ultimate outcome of an investment is not proof of
imprudence or breach of fiduciary duties.” Moreover, the court notes that expense ratios cited by the
plaintiffs were not notably excessive for the default
fund. The court also finds that the plaintiffs’ “mere
conclusions” of alleged “clear incompetence” do not
establish allegations of self-interest that would help
establish a breach-of-fiduciary-duty claim. The
court concludes that the default fund “is not significantly different from any of the many funds that
lost money during the worldwide financial crisis”
and finds no breach of fiduciary duty.
The court then considers the plaintiffs’ allegation that the defendants breached their fiduciary
duty by failing to monitor the alternative funds.
The plaintiffs allege “poor and inappropriate investment fund selection.” The court also dismisses
this claim as it notes that “nothing in the statute
. . . requires plan fiduciaries to include any mix
of alternative investment vehicles in their plan.”
The court also differentiates case law cited by the
plaintiffs because it included allegations of clear
self-interest in the selection of investment alternatives. As there are no such allegations in this case,
the court finds no breach of fiduciary duty in the
defendants’ offering of the alternative funds.
Laboy et al. v. Board of Trustees of Building Service 32
BJ SRSP et al., No. 11 Civ. 5127 (S.D.N.Y. Aug. 8, 2012).
Court Compels Arbitration of
Retiree Health Benefit Claims
T
he United States District Court for the
Eastern District of Michigan compels arbitration of the plaintiffs’ claims regarding
retiree health benefits.
The plaintiffs, retirees of the defendant company, were represented by the union during their
employment. The union and the company entered
into a series of collective bargaining agreements
(CBAs), the last of which provided for retiree
health care benefits and set forth a grievance procedure that culminated in arbitration.
In 1996, the company entered into a termination agreement that provided for a permanent
shutdown of its facility. The agreement discontinued the CBA but provided for retiree health
care benefits to continue “as though the CBA . . .
remained in effect.” The agreement also included a
broad arbitration clause that covered “any alleged
violation of the CBA, its changes and [the] termination agreement.” The agreement provided that
should any inconsistencies arise between it and
the CBA, the agreement shall govern.
In 2010, the plaintiffs received a notice that
their health care coverage would be changing. The
plaintiffs then initiated this action claiming that
the changes to their health care coverage breached
the company’s obligations under the CBA and the
termination agreement. The defendants maintain
that the plaintiffs’ claims are subject to mandatory
arbitration and filed a motion to compel arbitration.
The Eastern District of Michigan notes that the
Sixth Circuit has found a presumption in favor of
arbitration under national labor policy. The plaintiffs, however, contend that this presumption does
not apply to retirees. The plaintiffs cite the Sixth
Circuit’s statement that unlike active employees,
“retirees face no restrictions whatsoever in seeking fulfillment of contractual benefits directly
from their former employer.” The Eastern District
of Michigan concludes that the plaintiffs have
misinterpreted this statement and notes that the
Sixth Circuit has since explicitly stated that “the
presumption of arbitrability applies to disputes
over retirees’ benefits if the parties have contracted for such benefits . . . and if there is nothing in
the agreement that specifically excludes the dispute from arbitration.” Thus, the Eastern District
of Michigan finds that the presumption of arbitrability applies to retirees disputes and, specifically,
to the plaintiffs’ claims in this case.
The court then considers whether the plaintiffs’ benefits arise under the CBA or the termination agreement. The plaintiffs contend that their
benefits derive from the CBA and that this right
to benefits became vested and unalterable at the
time they retired. The court notes, however, that
an intent to vest cannot be inferred in the absence
of explicit contractual language. Because there is
no such language in the CBA, the court finds that
the benefits were not vested in the CBA and the
plaintiffs can only rely on the CBA “to the extent
that it was not later abrogated by the termination
agreement.”
The plaintiffs argue that they are not bound to
the termination agreement’s arbitration clause because they did not expressly consent to it and were
not parties to it. The court dismisses both claims.
The court finds that the plaintiffs are treated as
third-party beneficiaries to the agreement and,
therefore, also are bound by the agreement’s arbitration clause. The court concludes that the arbitration clause, which explicitly states that it applies
to “retirees and employees” and covers “all alleged
violations” of the agreement, imposes mandatory arbitration on the plaintiffs’ claims. The court
stays the plaintiffs’ claims pending arbitration.
retiree
health BENEFITS
Van Pamel et al. v. TRW Vehicle Safety Systems Inc. et
al., No. 12-CV-10453 (E.D.Mich. Aug. 1, 2012).
65
Washington Update
Guidance on the Shared Responsibility
and 90-Day Waiting Period Under PPACA
O
n August 31, 2012, the government issued
guidance on the shared employer responsibility provision and the limitation on
health care coverage eligibility waiting periods under the Patient Protection and Affordable Care
Act (PPACA).
The Internal Revenue Service (IRS) issued Notice 2012-58, which describes safe harbor methods that employers may use to determine which
employees must be treated as full-time employees
for purposes of the shared responsibility penalty
(known as the “pay or play” penalty tax provision)
under Section 4980H of the Internal Revenue
Code of 1986, as amended (the Code).
The IRS also issued Notice 2012-59, while the
Department of Labor, Department of Health and
Human Services and the Department of the Treasury concurrently released the almost identical DOL
Technical Release 2012-2. This guidance addresses
the 90-day waiting period limitation under Section
2708 of the Public Health Services Act (PHS Act).
Shared Responsibility—Notice 2012-58
In general, Section 4980H of the Code provides that employers with 50 or more full-time
employees are subject to the shared responsibility payment if their full-time employees receive
subsidized health coverage through an exchange.
Notice 2012-58 expands upon previously issued guidance on the safe harbor provisions a
plan sponsor may use to determine which employees qualify as full-time employees for the
purpose of Section 4980H. Under previously issued guidance (Notice 2011-36), an employer
may choose a measurement period of between
three and 12 consecutive calendar months to determine whether an employee averaged at least 30
hours of service per week in order to be deemed
66
a full-time employee. If the employee qualified
as a full-time employee during the measurement
period, then the employee would be treated as a
full-time employee during the subsequent stability (look-back) period. The stability period must
be at least six months long and cannot be shorter
than the measurement period.
Notice 2012-58 confirms that employers may
use look-back periods of up to 12 months for ongoing employees. Notice 2012-58 provides employers more flexibility as to the measurement periods and stability periods for certain categories of
employees. Specifically, employers may use measurement periods and stability periods that differ
either in length or in the starting and ending dates
for (1) collectively bargained and non-collectively
bargained employees, (2) salaried and hourly employees, (3) employees of different entities and (4)
employees located in different states.
Notice 2012-58 also includes several provisions regarding variable hour and seasonal employees. A variable hour employee is an individual for whom it cannot be determined whether he
or she is reasonably expected to work, on average, at least 30 hours per week. A seasonal employee is a worker who performs labor or services
on a seasonal basis. Notice 2012-58 sets forth a
safe harbor for new variable hour and seasonal
employees, such that those employers that offer
health coverage only to full-time employees may
use a measurement period of between three and
12 months and an administrative period (time allowed for employers to determine which employees should be considered full-time employees)
of up to 90 days for variable hour and seasonal
employees.
Other Recent Decisions
Benefits Denial
Christoff et al. v. Ohio Northern University
Employee Benefit Plan
The plaintiff received health care coverage for
himself and his dependents under his employer’s
health benefits plan (the plan). The plaintiff ’s
son was denied coverage for cognitive retraining therapy and neuropsychological testing for
attention deficit hyperactivity disorder. The
plaintiff initiated an action seeking coverage,
and the district court ruled in favor of the plan.
The plaintiff then filed this appeal. The plaintiff
claims he was denied a full and fair review due
to five alleged procedural errors in the processing of his claim. First, the plaintiff claims that the
plan administrator was affected by a conflict of
interest because it also served as a vice president
of the employer and therefore had a financial incentive to deny claims. The Sixth Circuit finds,
however, that even if it were to assume that the
plan administrator’s position could create a potential conflict of interest, there is no “significant
evidence that the conflict actually affected or motivated the decision at issue.” The court finds the
allegation that the plan administrator received
prejudicial documents unsupported by the evidence, especially given that the plan administrator used independent reviewers and considered
evidence the plaintiff submitted on remand. The
court also dismisses plaintiff ’s second argument
that the file reviewers acting on behalf of the
plan administrator were not independent because they were prejudiced by seeing previously
issued reports. The court notes that this is routine practice and does not present grounds for a
finding of arbitrary or capricious conduct. Third,
the court considers the plaintiff ’s challenge to
the qualification of the reviewing physicians and
finds that because the plan administrator relied
on four other reports, its reliance on these allegedly unqualified reports does not make its actions arbitrary and capricious.
Fourth, the court finds that the plan administrator was not required to consider evidence from
the plaintiff ’s son’s treating physician, especially
because there is no evidence to suggest that the
treating physician could have provided information that would have altered the reviewers’ decisions on this issue. Finally, the court upholds the
plan administrator’s decision to rely on a paper
review of the plaintiff ’s son, rather than conduct
a physical examination. The court finds that the
plan administrator’s decision was based on an
objective inquiry that did not rely on any subjective reports about the patient’s condition. Accordingly, the Sixth Circuit affirms the judgment
of the district court dismissing the plaintiff ’s
claims. No. 11-3887 (6th Cir. Aug. 22, 2012).
Benefits Interference
Berry et al. v. Frank’s Auto Body Carstar Inc.
et al.
The plaintiff worked for the defendant company
for five years and received benefits under its
health care plan (the plan). During the plaintiff ’s
employment, his infant son was diagnosed with
quadriplegic cerebral palsy, a condition that required medication and daily physical therapy.
The plaintiff was involved in a verbal altercation
with another employee at the workplace, during which he used offensive phrases and hand
gestures. Both of the employees involved in the
altercation were suspended for three days. The
company investigated the incident and terminated
the plaintiff. The company’s human resources
consultant recommended the termination after
finding that the plaintiff “established a hostile
work environment based upon his profanitylaced vile tirade toward an employee of the opposite sex in a public area of the facility in the
presence of two independent witnesses.” The
plaintiff initiated an action claiming that he was
67
terminated in retaliation for exercising his right
to seek health benefits for his disabled son. The
plaintiff also claimed that the company failed to
provide proper notice of his COBRA rights upon
termination. The district court dismissed the
plaintiff ’s claims. The plaintiff then filed this appeal. The Sixth Circuit assumes that the plaintiff
has established a prima facie case of retaliation
under ERISA. The court also finds that the company has offered a legitimate, nondiscriminatory
reason for the plaintiff ’s termination. Accordingly, the court considers whether the plaintiff
has established that the company’s reason for
the termination was pretextual. The court notes
that to show pretext, the plaintiff must produce
evidence that other employees engaged “in acts
. . . of comparable seriousness [but] were nevertheless retained. . . .” The court finds that the
plaintiff ’s claim that other employees also used
profanity in the workplace and engaged in
shouting is insufficient to meet this burden. The
court finds no evidence of comparable alterca-
Washington Update
Notice 2012-58 will remain in effect through
the end of 2014 and the associated subsequent
stability period.
90-Day Limit on Waiting Period—Notice
2012-59/DOL Technical Release 2012-02
Under Section 2708 of the PHS Act, for plan
years beginning on or after January 1, 2014, a
group health plan or health insurance issuer may
not apply an eligibility waiting period longer than
90 days. Notice 2012-59 defines a waiting period as
68
tions presented by the plaintiff. The plaintiff also
claims that statements made by the owner of the
company are sufficient to show that the termination was pretextual; however, court finds that
“[i]solated and ambiguous comments are too abstract, in addition to being irrelevant and prejudicial, to support a finding of . . . discrimination.”
Thus, the Sixth Circuit affirms the dismissal of
the plaintiff ’s retaliation claim. The Sixth Circuit
also affirms the dismissal of the plaintiff ’s COBRA claim after finding that the plaintiff ’s termination for “gross misconduct” precluded him
from receiving notification of his COBRA rights.
No. 11-4150 (6th Cir. Aug. 20, 2012).
Workers’ Compensation
Matthews v. National Football League
Management Council et al.
The plaintiff was a professional football player
for 19 years in Texas and Tennessee, and retired
in 2002. In 2008, the plaintiff filed a workers’
compensation claim in California alleging that
he suffered pain and disability from injuries incurred during his football career. The plaintiff ’s
“the period of time that must pass before coverage
for an employee or dependent who is otherwise
eligible to enroll under the terms of the plan can
become effective.” Plan eligibility provisions that
are based solely on the lapse of a time period are
allowed for no more than 90 days. In contrast,
other conditions for eligibility are generally permissible, unless those conditions are designed to
avoid compliance with the 90-day limitation. Notice 2012-59 will remain in effect through 2014.
Comments on both Notice 2012-58 and 201259 were due by September 30, 2012.
Notices 2012-58 and 2012-59 can be found at
www.irs.gov/pub/irs-drop/n-12-58.pdf and www
.irs.gov/pub/irs-drop/n-12-59.pdf, respectively.
claim did not allege that he sustained any particular injury in California. The football league
and the plaintiff ’s most recent team filed a grievance claiming that by applying for workers’
compensation benefits in California, the plaintiff breached his employment agreement which
provided that all workers’ compensation claims
would be decided under Tennessee law. Pursuant
to a binding arbitration clause in the applicable
collective bargaining agreement, the parties arbitrated their dispute. The arbitrator determined
that the plaintiff ’s filing in California violated the
employment agreement and ordered the plaintiff
to “cease and desist.” The district court denied
the plaintiff ’s motion to vacate the arbitrator’s
decision. The plaintiff then filed this appeal. The
Ninth Circuit notes that “[j]udicial scrutiny of
an arbitrator’s decision is extremely limited,” but
also notes that a court cannot enforce an arbitrator’s award which violates public policy. The
plaintiff contends that California has an “explicit,
well-defined and dominant public policy militating against agreements that purport to waive an
employee’s right to seek California workers’ compensation benefits before a California tribunal,
no matter how tenuous the connection between
California and the employer and the employee.”
The Ninth Circuit, however, does not read California’s policy so broadly. The court finds that
“the workers’ compensation statute establishes a
rule that an employee who is otherwise eligible
for California benefits cannot be deemed to have
contractually waived those benefits, and an employer who is otherwise liable for California benefits cannot evade liability through contract.” In
this case, the court finds that the plaintiff ’s claim
does not come within the scope of the California workers’ compensation scheme. The court
notes that “California’s workers’ compensation
law covers an employee who suffers a discrete
injury in California, at least where the costs associated with the employee’s injury may impact
California’s medical system and other resources.”
The plaintiff asserts that he suffered cumulative
injuries in “various” locations between 1983 and
2001 that culminated in his need for workers’
compensation benefits. The court finds, however,
that the lack of connection between the plaintiff ’s
injuries and the state of California is fatal to his
claim. Because the plaintiff fails to make a prima
facie showing that his claim falls within the scope
of California’s workers’ compensation regime, the
court affirms the arbitrator’s decision ordering
the plaintiff to terminate his claim. The court also
finds that the arbitration award does not violate
federal labor policy as there is no evidence that
the award is depriving him of benefits to which
he is entitled. Finally, the court concludes that
the arbitration award does not violate the fullfaith-and-credit clause of the Constitution. The
Ninth Circuit affirms the judgment of the district
court. No. 11-55186 (9th Cir. Aug. 6, 2012).
Multiemployer Plans
Central States, Southeast and Southwest
Areas Pension Fund et al. v. E & L
Development Inc.
The defendant company was a participating
employer in the plaintiff multiemployer pension plan (the plan). The company permanently
ceased contributing to the plan in 2008 and was
assessed with a complete withdrawal. The plan
notified the company of its principal amount
of withdrawal liability and informed the company that it could make a lump-sum payment
or monthly payments to discharge its debt. The
company never made payments, and the plan initiated this action. The plan seeks $1,076,391.08
in withdrawal liability, prejudgment interest, an
amount equal to the greater of liquidated damages of 20% of the unpaid withdrawal liability or
interest on the unpaid withdrawal liability, and
attorney fees and costs. The company does not
contest the principal amount of withdrawal liability it owes. The company also does not contest the plan’s entitlement to interest, attorney
69
fees and costs. The company, however, contends
that the plan is entitled to liquidated damages
equaling 20% of the total of the unpaid interim
payments, not 20% of the unpaid interim payments. The Northern District of Illinois recognizes that the allowance for liquidated damages
to be assessed at 20% of unpaid contributions is
a statutory provision. However, the parties disagree as to what was due at the time of the filing.
Court Affirms Denial of Retiree Benefits
sions that reserved the right for the defendant
company to “amend, suspend or terminate the
plan . . . at any time and for any reason.”
The Second Circuit then considers the plaintiffs’ challenge of the district court’s dismissal of
their claims for breach of fiduciary duty under
ERISA Sections 502(a)(2) and 502(a)(3). The court
notes that the plaintiffs may bring a claim against
an ERISA plan fiduciary that has “participate[d]
knowingly or significantly in deceiving a plan’s
beneficiaries.” While the plaintiffs’ complaint
70
The plan contends that the entire withdrawal
liability was and is due, because it accelerated
the withdrawal liability when the defendant did
not make its interim payments. The company,
however, contends that the acceleration was
inappropriate and only interim payments were
due. The court finds that the plan met the “permissive” statutory requirements for accelerating
the total amount due. Accordingly, the court
finds that the plan is entitled to 20% of the total
(accelerated) withdrawal liability and assesses
liability against the company. No. 11 C 7626
(N.D.Ill. Aug. 15, 2012).
generally stated that the class members were assured lifetime health care benefits, the court finds
the plaintiffs’ claims unsupported by the record.
The plaintiffs conceded at oral argument that they
could not establish that any assurances from the
defendant company regarding lifetime health care
benefits accompanied or postdated the creation of
the plan under which such benefits are allegedly
provided. Accordingly, the Second Circuit finds
that the plaintiffs have not stated a plausible claim
for relief and affirms the district court’s dismissal
of the plaintiffs’ claims.
Coriale et al. v. Xerox Corporation et al., No. 11-1724cv (2nd Cir. Aug, 3, 2012).
foundation
news
One Program Leads to Another for New CEBS Grad
A
s she interviewed with a Denver, Colorado insurance agency in June 2010, Morgan Virgilio
thought she would be working in property and
casualty (P&C) insurance business development. That’s what she was doing in her first job
out of college for a small Chicago broker.
“I had a very limited benefits background, and I said during the interview that I thought benefits were confusing and
boring and that I would never want to work in that area,”
Virgilio recalled.
She was taken aback when Dave Uppinghouse, CEBS,
then a senior vice president at Van Gilder Insurance Corporation, told her that the job she was interviewing for was in
benefits.
“He said, ‘Give me a year to teach you and work with you
to learn the business. Then, if you still don’t like it, you can go
back to P&C.’ ” Four months later, Virgilio attended the Employee Benefits Producer Training Program at the International Foundation of Employee Benefit Plans in Brookfield,
Wisconsin. There, she was immersed in the fundamentals
of benefit offerings, as well as sales techniques taught by instructors from the National Alliance for Insurance Education & Research.
“I fell in love with benefits,” Virgilio said. “I find the subject absolutely fascinating. I like to read about it, study it,
read case studies. There are so many different facets to employee benefits—I get really excited about it.”
During Producer Training, she also heard more about the
Certified Employee Benefit Specialist (CEBS) designation.
Uppinghouse, a CEBS fellow who has since retired, encouraged her to pursue the designation. “He said it was something that would be good to strive for, for someone my age—
that it would show initiative and give me more credibility.”
Two years later—in September 2012—she successfully
completed her eighth course and now is Morgan Virgilio,
CEBS.
“For the most part, I found it extremely interesting. I especially loved the three Group Benefits Associate courses—they
gave me a grounding that I use in my job. I learned about
terms like self-funding and about the history of health insurance in the United States,” Virgilio said. “I like to study, and
I want to learn. Although I’m
happy to have earned the designation, I keep asking myself,
‘Now what am I going to do?’ ”
As she worked steadily
through her CEBS courses,
in April 2011 Virgilio also
earned a Certificate in Global
Benefits Management offered
through the Foundation.
There, she discovered another
passion—the cultural differences and issues of cost inefMorgan Virgilio, CEBS
ficiencies and administration
involved in offering benefits
globally.
Although she enjoyed working in sales, Virgilio switched
from sales to being an account associate in January 2012. She
thinks her CEBS education about different types of health
and other insurance plans helps her in her work with clients
and other team members on strategy, renewals and the marketing and analysis of plans. by | Chris Vogel, CEBS | [email protected]
71
plan
ahead
Administrators Masters
Program® (AMP®)
Certificate Series
What does it take to be a leader in the management of
multiemployer and public employee health and welfare and pension funds? What management skills are
essential for good working relationships? How do successful projects get off the ground? Those with at least
five years of professional experience administering
employee benefit plans will hone their skills during
two days of exercises, case studies and group activities.
Administrators will network with others; talk about
current issues, trends and best practices; and take
home written materials that will be ongoing resources.
www.ifebp.org/amp
Certificate in Global
Benefits Management
Three separate tracks—for new trustees, advanced trustees and administrators—provide an
educational focus specific to a person’s role with
a multiemployer trust fund. Active trustees, administrators and professional advisors develop
the content for these institutes. New trustees get
a grounding on trust fund basics, while advanced
trustees and administrators gain a deeper understanding of issues critical to their funds.
International employee benefits is an increasingly complex area, with regulations varying between countries and regions, and many cultural
differences. Instructors who are global industry
experts and international residents will provide
an understanding of the differences in benefits
offered around the world. This certificate course
is for professionals who already work in or recently assumed responsibility for global benefits,
who work internationally and want to know
more about benefits, or who work for organizations that provide benefit services to multinational employers.
March 4-8, 2013
Boston, Massachusetts
Trustees and Administrators
Institutes
www.ifebp.org/global
february
march
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Come for one two-day course, or stay for six days
of comprehensive education and earn a Certificate in Retirement Plans, Health Care Plans or
Benefit Plan Administration. Instructors provide
outstanding insight and valuable learning materials, and those attending the courses network with
peers as they gain an understanding of major issues and trends in employee benefits.
plan ahead
February 2013
May 2013
July 2013
16-17
6-9
16-17 Certificate Series
Administrators Masters
Program® (AMP®)
www.ifebp.org/amp
17
Institutes—Preconference
Portfolio Concepts
and Management (tentative)
Philadelphia, Pennsylvania
www.ifebp.org/wharton
20-21
Washington Legislative
Update
Washington, D.C.
www.ifebp.org/washington
18-20 Trustees and Administrators
Brookfield, Wisconsin
September 2013
8
Advanced Investments
Management—Refresher
Workshop (tentative)
Institutes
www.ifebp.org/
trusteesadministrators
18-23
9-12
Certificate Series
16-17 Construction Industry
Benefits Conference
March 2013
4-8
Certificate in Global Benefits
Management
www.ifebp.org/construction
June 2013
3-7
11-13 Health Care Management
Essentials of Multiemployer
Trust Fund Administration
Brookfield, Wisconsin
www.ifebp.org/essentialsme
Conference
Rancho Mirage, California
www.ifebp.org/healthcare
Certificate in Global Benefits
Management
Chicago, Illinois
23
Institutes—Preconference
San Francisco, California
24-26
April 2013
16-17 Benefits Conference
for Public Employees
Phoenix, Arizona
www.ifebp.org/investments
Institutes
16-18 Benefit Plan Professionals
Institute for Accountants
www.ifebp.org/accountants
18-19 Collection Procedures
Institute
www.ifebp.org/collections
22-25 32nd Annual ISCEBS
Employee Benefits
Symposium
www.ifebp.org/symposium
San Francisco, California
25-26
Sacramento, California
www.ifebp.org/peconference
22-24 Investments Institute
Advanced Investments
Management (tentative)
Certificate of
Achievement in Public Plan
Policy (CAPPPTM)—Pensions
and Health Part I
Chicago, Illinois
www.ifebp.org/cappp
27-28
Certificate of
Achievement in Public Plan
Policy (CAPPPTM)—Pensions
and Health Part II
Sept. 30-Oct. 5
Certificate Series
Seattle, Washington
Chicago, Illinois
www.ifebp.org/cappp
[ schedule subject to change ]
73
fringe
benefit
where can I get a
big return at no risk?
When it comes to retirement planning, be skeptical of the adage “there’s no such thing as
a stupid question.” Benefits Magazine asked financial education providers and retirement
planners for examples of interesting plan participant questions or statements.
Some of these show that clearly,
plan sponsors may need to bump up their participant
education—as well as efforts to make participants appreciate their benefits.
• If I must name my spouse as beneficiary, do I name my
common-law or my married one?
• I just don’t like this stuff and don’t want to deal with it.
Can you guys just do it for me?
• W
hy does my employer pay me to be in the plan? What’s in it
for them?
• I am just going to put it in the stable fund so I don’t lose
anything.
• W
hat’s the catch to the employer match? I know if I accept the
match, I will pay for it later.
• My company pays all the fees for me.
• A
question asked directly of the individual leading an education
session: Do you get a cut for holding this meeting for us?
• I’ve been losing money since (the educational provider’s firm)
took over this account. Do you have any funds that make
money?
• You guys are taking care of this account, right?
• E ven though I am no longer with the company, if I stay in the
plan I will eventually become vested.
• I won’t have to pay taxes on the money I take out because
I’m unemployed.
• If the only way to access these funds is to no longer be
employed . . . I will just quit.
• I was saving this money to pay for my daughter’s/son’s college.
Nancy Anderson, CFP, Think Tank director at Financial Finesse, Inc., provided these questions
or statements from recent retirement planning workshops—which, she says,
“is why we are so glad to help these folks.”
• Where can I invest and have no risk and get a big return?
• Won’t Medicare cover all my medical expenses?
• I want to take a distribution from my pension plan and buy
an annuity.
• S hould I take my pension payout as a lump sum and put it in
my savings account?
• Can I retire with $50,000 in savings?
• Won’t Social Security support me?
• W
ould it make sense for me to cash out the majority of my
401(k) at retirement and pay off the house so I can give it to my
23-year-old son for him to have a good head start in life?
• Can I get Medicare at 62?
• I’ve got 100% of my 401(k) in company stock. Is that ok?
One planner noted that back in 2008, “We heard a lot of participants ask
when we would put the money they lost back in their accounts.”
74
Wellness Programs and Value-Based Health Care
Third Edition
Survey & Sample Series
The Complete
Resource for
Any Workplace
Wellness Program
Seven out of every ten American employers
offer wellness initiatives. This detailed
survey report examines popular types of
wellness programs in the United States
and Canada—and provides more than
160 sample wellness documents!
Available in e-book (PDF) format only.
Order now at www.ifebp.org/
wellnessprograms.
Free to
Foundation Members
A Closer Look: Wellness ROI
This report examines wellness strategies
that have achieved a positive return on
investment. It explores how incentives affect
participation and the significant factors that
lead to a healthy return on investment.
www.ifebp.org/wellnessprograms
Are You Moving Up—
or Will You End Up Looking Back?
Not sure what the future holds for you? While there’s
so much that’s uncertain, one thing that’s clear is the
advantage the Certified Employee Benefit Specialist®
(CEBS®) Program can give you. If you’re looking for a
way to make your mark in the benefits world, take a
look at the CEBS program.
• CEBS designation, regarded as the highest mark of professional
achievement in the benefits industry
• Courses providing current, need-to-know information
• A curriculum that delivers a comprehensive perspective on the issues
facing your business
• A world-class cosponsor—the Wharton School of the
University of Pennsylvania
• The ability to earn specialty designations in group benefits, retirement
plans, and human resources and compensation
• A flexible way to fit learning into your schedule
It’s time to write your own story.
Let CEBS help you move your career forward.
For more information on the
Certified Employee Benefit
Specialist (CEBS) program:
Visit: www.cebs.org
Call: (800) 449-2327, option 3
E-mail: [email protected]
“
If you’re thinking about heading down the path toward earning
the CEBS designation, the knowledge you’ll gain is well worth it.
I consider the CEBS program an investment in my future in the
benefits arena.
”
Sonya Brown, M.A., CEBS, PHR
Benefits Manager
Northwestern University
Evanston, Illinois

benefits - Evolent Health

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