A class action lawsuit has been filed against Washington State’s Long-Term Services and Supports Trust Act (the “Act”) that requires each worker in Washington to contribute $0.58 per $100 (0.58%) of wages to a trust set aside to pay long-term care benefits for its residents. The lawsuit challenges the Act and requests a declaratory judgment that the Act is unenforceable as it violates ERISA and federal and state laws governing employee benefit plans. See Pacific Bells LLC et al v. Inslee et al, No 2:21-cv-01515, (W. Dist. WA). Nov. 9, 2021.

Click here to read our Legal Update on the Washington Long Term Care Act.

The Internal Revenue Service (IRS) recently released 2022 cost-of-living adjustments applicable to dollar limitations for employer-sponsored health and welfare plans and retirement plans.

The changes in the 2022 cost-of-living adjustments for employer-sponsored health and welfare plans are summarized in the table below:

 

Health and Welfare Plan Limits (Rev. Proc. 2021-45 and Rev. Proc. 2021-25) 2022 2021 Change
Health Flexible Spending Account (Health FSA) Maximum Salary Reduction Limit $2,850 $2,750 + $100
Health FSA Carryover Limit $570 $550 + $20
Qualified Transportation Fringe Benefit and Qualified Parking (Monthly Limit) $280 $270 + $10
Maximum Amount Excluded from Employee’s Gross Income for the Adoption of a Child with Special Needs Through an Adoption Assistance Program (AAP) $14,890 $14,440 + $450
Maximum Amount Excluded from an Employee’s Gross Income for Amounts Paid by an Employer for Qualified Adoption Expenses Through an AAP* $14,890 $14,440 + $450
High Deductible Health Plan (HDHP) Maximum Annual Out-of-pocket Limit (Excluding Premiums) for Self-only Coverage $7,050 $7,000 + $50
HDHP Maximum Annual Out-of-pocket Limit (Excluding Premiums) for Family Coverage $14,100 $14,000 + $100
HDHP Minimum Annual Deductible for Self-only Coverage $1,400 $1,400 None
HDHP Minimum Annual Deductible for Family Coverage $2,800 $2,800 None
Health Savings Account (HSA) Annual Contribution Limit for Self-only Coverage $3,650 $3,600 + $50
HSA Annual Contribution Limit for Family Coverage $7,300 $7,200 + $100
HSA Catch-up Contribution Limit $1,000 $1,000 None
Dependent Care Flexible Spending Account (Dependent Care FSA)** Annual Contribution Limit for Employee’s Who Are Married and Filing a Joint Return or if the Employee Is a Single Parent $5,000 $10,500 – $5,500
Dependent Care FSA Annual Contribution Limit if Employee Is Married But Filing Separately $2,500 $5,250 – $2,750
Maximum Amount Made Newly Available for the Plan Year for an Excepted Benefit Health Reimbursement Arrangement (EBHRA) $1,800 $1,800 None

* The amount excludable from an employee’s gross income for amounts paid by an employer for qualified adoption expenses through an AAP begins to phase out in 2022 for taxpayers with modified adjusted gross income in excess of $223,410 and is completely phased out in 2022 for taxpayers with modified adjusted gross income of $263,410 or more.

**Dependent FSA limits are set by statute and do not adjust for inflation, but the Dependent FSA limits were temporarily increased for 2021 only by the American Rescue Plan Act of 2021 due to the COVID-19 pandemic.

The changes in the 2022 cost-of-living adjustments for employer-sponsored retirement plans are summarized in our previous article, Looking to Save More? You’re in Luck!

Employers who sponsor health and welfare plans and retirement plans should take advantage of the new increased limits by making adjustments to plan administrative/operational procedures.

Seyfarth Synopsis: The IRS just announced the 2022 annual limits that apply to tax-qualified plans. After minimal changes last year, there are several updates to the limits that employers should be aware of. Employers maintaining tax-qualified retirement plans will need to make sure their plans’ administrative procedures are adjusted accordingly.

In Notice 2021-61, the IRS announced the various limits that apply to tax-qualified retirement plans in 2022. The “regular” contribution limit for employees who participate in 401(k), 403(b) and most 457 plans will increase by $1,000 to $20,500 in 2022, up from $19,500 in 2021. The “catch-up” contribution limit will remain the same at $6,500. Thus, if you are or will be age 50 by the end of 2022, you may be eligible to contribute up to $27,000 to your 401(k) plan in 2022. These same limitations apply if you work for a governmental or tax-exempt employer and participate in a 403(b) plan.

The maximum amount that may be contributed to a defined contribution plan (the “415 Limit”) also is being increased for 2022 from $58,000 to $61,000. Additionally, the maximum annual compensation that may be taken into account under a plan is increasing from $290,000 to $305,000 for 2022. For individuals investing in individual retirement accounts (IRAs), the 2022 annual contribution limit remains unchanged at $6,000, or $7,000 for those 50 or older.

The Notice also includes several other notable retirement-related limitation changes for 2022, including the dollar limitation on the annual benefit under a defined benefit plan, which increases from $230,000 to $245,000; the dollar limit used to determine a highly compensated employee, which increases from $130,000 to $135,000; and the dollar limit used when defining a key employee in a top-heavy plan, which increases from $185,000 to $200,000.

Individuals should check their plan contribution elections and consult with their personal tax advisor before the end of 2021 to make sure that they take full advantage of the contribution limits in 2022. Given the numerous changes, employers who sponsor a tax-qualified retirement plan should consider any necessary adjustments to plan administrative procedures and update their participant notices to ensure proper administration of the plan in 2022.

Employers who sponsor defined benefit pension plans (e.g., cash balance plans) should review the new limits in the IRS Notice and make any necessary adjustments to plan administrative/operational procedures.

Seyfarth Synopsis: On June 25, 2021, the IRS released two information letters related to health savings accounts (“HSAs”) and high deductible health plans (“HDHPs”) addressing: (i) correction of excess employer contributions to an HSA, and (ii) how coupons, such as prescription drug coupons, apply toward the HDHP minimum annual deductible and what benefits can be provided before that deductible is met.

Below is a short summary and the key takeaways for each letter.

IRS Information Letter 2021-0008

The taxpayer requested assistance addressing an excess contribution to his HSA, obtaining a corrected Form 5948-SA (an information return reporting contributions to an HSA and other financial vehicles), and rectifying alleged mismanagement of his HSA by the custodian. The letter explains, in turn, that:

(i) employers inadvertently contributing more than the annual maximum may either (1) correct the error by asking the custodian to return the excess contribution to the employer or (2) if the excess is not returned, include the excess contribution as wages on the employee’s Form W-2;

(ii) the account holder should contact the custodian to obtain a corrected Form 5948-SA; and

(iii) HSAs may be governed by ERISA and if so, account holders should contact the Department of Labor for information about applicable fiduciary responsibilities.

Key takeaways:

(1) under some circumstances, employers are permitted to undo contribution errors despite the usual non-forfeitability of HSA contributions (this confirmed existing IRS guidance); and

(2) while most employers design their HSA programs to avoid ERISA, there are situations in which ERISA can apply. In those situations where ERISA does apply, questions about mismanagement of the HSA should be addressed under the ERISA fiduciary provisions.

IRS Information Letter 2021-0014

The taxpayer asked (i) how coupons and rebates affect an HDHP deductible, and (ii) whether medical services covered by the HDHP pursuant to a state mandate are exempt from the HDHP deductible. While the first issue has been the subject of debate, the IRS affirmed its previously-published position that, for HSA/HDHP purposes, only actual medical expenses count toward the HDHP deductible. For example, if an individual presents a coupon at the pharmacy reducing the price of a covered drug from $1,000 to $600, the amount credited toward the HDHP deductible is only $600 because that is the actual expense the individual incurred.

Second, the IRS averred that state insurance law mandates have no effect on HDHP rules. HDHP rules require the covered individual to satisfy the minimum HDHP deductible before the plan can cover any benefits other than preventive care. The relevant definition of “preventive care” is under Code Section 223. For example, assume a state requires insured plans to cover male contraception and sterilization services without cost sharing. Because these services would not be “preventive care” under Code Section 223, a plan that covers these services before an individual satisfies the minimum deductible for an HDHP would not constitute an HDHP, regardless of whether the coverage of such benefits is required by state law.

Key takeaways:

(1) HDHP/HSA participants can use drug coupons and discounts, provided that the value of the coupon or discount does not count towards the HDHP minimum deductible.

(2) While insured HDHPs must cover certain benefits under applicable state laws, those benefits may not be covered without cost-sharing that is otherwise applicable to non-preventive services before the deductible is met.

Important Note: IRS information letters do not contain an analysis of all of the potentially relevant facts and other applicable laws. For example, Letter 2021-0008 did not mention the 6% excise tax on excess contributions to HSAs if they are not timely distributed before the account holder’s federal income tax return filing deadline. Therefore, be sure to contact your Seyfarth Employee Benefits attorney to ensure you are compliant.

To stay up to date, be on the lookout for additional Beneficially Yours blog posts and Seyfarth Legal Updates.

 

Seyfarth Synopsis: The IRS recently sought to reassure employers that they will not jeopardize their retirement plan’s tax qualified status if they permit employees who have a bona fide separation from service to take a distribution from their retirement plan, even if they are rehired shortly thereafter by the same employer. The reassurance comes in the form of two FAQs that address COVID-related labor shortages and in-service distribution rules.

To maintain tax-qualification, retirement plans are required to limit a participant’s ability to take a distribution of their plan benefit while still working. However, and subject to controlled group rules that aggregate related employers, distributions are allowed once the participant leaves employment (separates from service) with the employer sponsoring the plan. In order to prevent “sham” separations (and commensurate benefit distributions), the IRS requires that the separation be “bona fide.”

Many employers have been and continue to be experiencing significant labor shortages as a consequence of the COVID-19 pandemic, and are looking to rehire employees who had previously separated from service and received or commenced to receive a distribution of their retirement benefits. The practice of rehiring former employees could be problematic based on existing IRS guidance if there were no bona fide retirement or separation at the time of initial employment termination. This could occur, for example, if an employer has agreed to rehire an employee at the time of the employee’s “retirement” or other separation from service.

In an effort to remind and reassure employers, the FAQs reiterate the IRS’s position that:

  • The determination of whether an individual’s retirement or separation from service is bona fide for retirement plan purposes is based on a facts and circumstances analysis (in the absence of plan terms specifying the conditions under which a retirement or other separation from service will be considered bona fide); and
  • A rehire due to unforeseen circumstances (such as COVID-related labor shortages) that do not reflect any prearrangement to rehire the individual will not cause the individual’s prior retirement or separation from service to no longer be considered “bona fide” under the plan.

The FAQs also remind employers that under the SECURE Act, defined benefit pension plans can be amended to allow in-service distributions to employees who have attained age 59 1/2. This change aligned the minimum age for in-service distributions under defined benefit pension plans with the existing age 59 1/2 in-service distribution rules for defined contribution plans (e.g., 401(k) and 403(b) plans).

While the new FAQs do not relax or otherwise modify existing IRS guidance relating to rehires and bona fide retirements/separations, they serve as a helpful reminder to sponsors of qualified retirement plans. Plan sponsors who wish to rehire a retired or previously separated employee to fill an unforeseen hiring need should first ascertain that the employee’s prior retirement/separation was bona fide and there was no previous agreement to rehire the employee.

This unforeseen need may arise as a result of the COVID-19 pandemic, or otherwise in the ordinary course of business. Also, plan sponsors should be mindful of plan terms that affect rehires and distributions. For example, plan sponsors should review any plan terms requiring that an individual who retires or otherwise separates from service and commences benefit distributions not be rehired within a specified period, any plan terms relating to the suspension of distributions upon rehire, and any other plan terms that may have an impact on the retirement benefit of a rehire.

If you have any questions or concerns about rehiring of a previously retired or separated employee, please contact your Seyfarth attorney.

 

 

Seyfarth Synopsis: For those of you following the saga of ERISA’s fiduciary duties and ESG investing, we are nearing a possible finish line. The latest turn in the saga came when the DOL issued a new set of proposed regulations this month. The approach taken by the DOL comes as no surprise. Looking at the broader ESG shifts in the regulatory environment, the DOL regulations create a symmetry with SEC activities under Gary Gensler’s helm as the SEC’s taken a very vocal approach on the role of ESG factors in an investor’s ability to assess the value of an investment. We further discuss the evolution of the market’s approach to ESG factors in our four-part series you can access here.

The Road to the Latest Swing

Avid subscribers to Beneficially Yours may recall where we started in June 2020 when the DOL issued proposed regulations addressing how ERISA fiduciaries should evaluate an investment or investment strategy based on environmental, social or governance (ESG) factors. Summarized here and here, that guidance indicated that ERISA fiduciaries should focus on pecuniary factors when evaluating an investment or investment strategy, and it cast doubt on whether ESG factors would meet that standard.

The DOL pushed that further in August 2020 with proposed rules described here on a fiduciary responsibility when exercising shareholder rights (including voting proxies) for the plan’s assets. When these rules were finalized and published in November and December 2020 (discussed here and here), they indicated that plan fiduciaries must evaluate investments and investment strategies based solely on pecuniary factors, made it clear that, in DOL’s eyes, ESG factors are not pecuniary in nature, and severely restricted fiduciaries’ ability to vote proxies for the plan’s assets. The new Administration sidelined those 2020 regulations (discussed here), and in March 2021, the DOL announced that it would not enforce those regulations.

The New Proposal’s Approach

Staying grounded in ERISA’s fiduciary duties of loyalty and prudence, the new proposed rules recognize the evolving importance of ESG factors when investing. While the DOL still emphasizes the importance of the risk-return analysis of a proposed investment, the proposal is clear that such an analysis may require evaluating the potential economic effects of climate change and other ESG factors on the proposed investment. This echoes the SEC’s views on ESG. The proposal also specifically permits ESG factors as a material consideration for plan fiduciaries. The DOL explains that “a fiduciary may consider any factor material to the risk-return analysis, including climate change and other ESG factors. … [M]aterial climate change and other ESG factors are no different than other ‘traditional’ material risk-return factors … .” Thus, under ERISA, if a fiduciary prudently concludes that a climate change or other ESG factor is material to an investment or investment course of action under consideration, the fiduciary can and should consider it and act accordingly, as would be the case with respect to any material risk-return factor.”

To demonstrate the potential economic materiality of these factors, the provision lays out examples in each of the E, S and G areas. On the environmental side, the DOL noted that climate change is already imposing significant economic consequences on businesses resulting from, for example, extreme weather damage to physical assets and disruption of business productivity and supply chains. The DOL also noted that proposed governmental regulations and policies (for example, to address green-house gas emissions, and to shift away from carbon intensive investments) could impact an entity’s value. Because pension plans have long term investment horizons, the expected effects of climate change is especially pertinent to the plans’ projected returns.

The DOL noted that governance factors involving board composition, executive compensation practices, corporate decision-making and compliance are also potential material considerations when evaluating an investment. Similarly, workforce diversity and inclusion, training and labor relations could be material factors. The proposed rule acknowledges that financial risk resulting from each of these areas can have a significant impact on reducing volatility and mitigating long term risks to plan assets and should be taken into consideration when selecting investments and investment strategy.

Key Changes

Tie-Break Standard Remains with a Clarification. The proposed rules do retain an element of the old tie-breaking standards, but clarify that a fiduciary is not prohibited from selecting an investment due to any collateral benefits other than investment returns — which was perceived under the 2020 regulations as targeting ESG factors. However, if collateral factors (for example, the ESG factors) tipped the scale in favor of including an investment option in the investment line-up of a participant-directed defined contribution plan, the fiduciaries must ensure that those collateral factors are prominently displayed in the disclosures provided to participants.

Record-keeping and Disclosure Requirements. The proposal also eliminates the special documentation requirement when the fiduciary has concluded pecuniary factors alone were insufficient to make a decision. The prosed rules recognized that such a requirement was not necessary given the existing fiduciary obligations, which are commonly understood to include documenting fiduciary decisions.

QDIAs are a Go. The proposed rules also eliminate the prohibition on ERISA fiduciaries designating investments that use ESG metrics as a plan’s QDIA, as long as those funds otherwise meet the standards.

Proxy Rules Have Give. The proposed rules also address the exercising of shareholder rights (including proxy voting) aspects of the 2020 regulations. The new proposed rules emphasize that the fiduciary duty to manage plan assets includes exercising the shareholder rights associated with those assets, and fiduciaries should conscientiously exercise those rights to protect the interests of the plan participants. As a result, fiduciaries should weigh the cost and effort of voting proxies against the significance of the issue to the plan, and apply the general fiduciary principles.

The proposal eliminates several provisions that were couched as “safe harbors” in the current rule based on the DOL’s concern that they were being construed as permission for fiduciaries to abstain from voting proxy without properly considering the plan’s interests as a shareholder. In addition, the proposed rule prohibits a fiduciary from following the recommendations of a proxy advisory firm or other service provider unless the fiduciary determines that its proxy voting guidelines are consistent with the guidance in the proposal.

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If you would like to discuss how these proposed rules could impact you, contact your Seyfarth Shaw employee benefits attorney. If you would like to comment on the proposal, your comments must be summited to the DOL by December 13, 2021.

On Tuesday, November 16, 2021, from 9:00 a.m. to 5:30 p.m. ET, Seyfarth attorneys Howard Pianko and Linda J. Haynes, along with a slate of other experienced ERISA practitioners in the area of plan investments, will share their insights a the Practicing Law Institute’s “Pension Plan Investments 2021: Advanced Perspectives.” Howard is a co-chair for the program and Linda will present the “Plan Administration” panel.

The ongoing evolution in ERISA statutory and regulatory issues ensures a full agenda for the panelists to explore and analyze. In this environment, it is important for practitioners to stay informed with respect to these regulatory, as well as case law, changes. In this program, experienced ERISA practitioners in the area of plan investments will provide their perspectives, and share their substantive knowledge, on recent structural and legal developments in this space. This conference also is an essential venue for learning about new plan investment products, market practices, regulatory litigation developments as well as considerations for financial institutions that transact with, or provide services or products to plan investors.

Find more information and register for this program here.

By: Mark Casciari and Michael Cederoth

Seyfarth Synopsis: If an ERISA plaintiff establishes a fiduciary breach, expect the computation of damages to be a complicated process that may enhance damages through judgment.  And a court judgment in complicated cases can take years to issue.  This is the lesson from a recent decision of the Court of Appeals for the Second Circuit.

Browe v. CTC Corporation, 2021 WL 4449878 (2d Cir. 9/29/21) is a complex ERISA case, both procedurally and substantively. This article focuses on the portion of the ruling that relates to the calculation of fiduciary breach damages. This is because the computation of ERISA fiduciary breach damages is central to successful discovery and settlement negotiations.

In Browe, former employees and officers of a defunct corporation asserted ERISA claims against the corporation and its former CEO for mismanagement of the firm’s deferred compensation plan. The controversy arose from a decision to terminate the Plan and use its funds to pay business operating expenses. The district court found in favor of plaintiffs and awarded damages based on the projected account balances as of Plan termination, after rejecting plaintiffs’ assertion that ERISA required restoration of Plan losses through judgment.

The Second Circuit overturned the restoration award.  It found that the Plan was improperly terminated — so it was not terminated at all. The Court then held that ERISA required that the award “return the participants to the position they would have occupied” but for this fiduciary breach. This included all losses, including unrealized gains, through the date of judgment. It remanded the case back to the district court for recalculation of award to capture losses through the date of judgment.

Citing to Donovan v. Bierwirth, 754 F.2d 1049 (2d Cir. 1985), the Court instructed that the award be based on the assumption that Plan funds were prudently invested, with the caveat that if several investment strategies were equally plausible, the district court should presume that the funds would have been invested in the most profitable of various options. The Court added that uncertainties in fixing damages must be resolved against the breaching fiduciary.

Damage Computation Takeaway – By computing damages for a fiduciary breach through judgment, the Court is advising fiduciary breach litigants that there will be a battle of the experts in determining what investment likely “would have happened.”  If a fiduciary breach case survives a motion to dismiss, expect complicated and expensive expert damage discovery that serve to inflate settlement demands.

By: Tom Horan, Ian Morrison, and Sam Schwartz-Fenwick

Seyfarth Synopsis: Recognizing that the Plan contained an unambiguous arbitration  provision, and that “ERISA claims are generally arbitrable,” the Seventh Circuit Court of Appeals nonetheless found that arbitration could not be compelled where the provision prospectively barred the plaintiff from pursuing certain statutory remedies.

In Smith v. Bd. of Dirs. of Triad Mfg., Inc., a Plan participant brought a putative class action suit asserting that the Plan’s fiduciaries breached their fiduciary duties and engaged in prohibited transactions in connection with the sale of all of the Plan sponsor’s stock to the Plan. Within two weeks of the transaction, the shares’ ostensible value dropped from $106 million to less than $4 million.

After the stock transaction—but before the suit was filed—the Plan sponsor amended the Plan to add an arbitration provision with a class action waiver. The provision prohibited an individual from bringing claims in anything other than an individual capacity, and further stated that an individual could not “seek or receive any remedy which has the purpose or effect of providing . . . relief to any [person] other than the Claimant.”

Based on this language, the Plan moved to compel individual arbitration of Plaintiff’s suit. The district court denied the motion. On appeal, the Seventh Circuit stated it was guided by the “liberal federal policy favoring arbitration agreements,” but nonetheless affirmed the decision of the district court, based on the “effective vindication” exception to the FAA. This exception invalidates arbitration agreements that operate as prospective waivers of a party’s right to pursue statutory remedies. Here, the plaintiff sought a variety of equitable remedies—including the potential removal of the Plan’s trustee—which would inescapably have had the effect of providing relief to individuals beyond the Plaintiff. As such, Plaintiff’s requested relief was impermissibly in conflict with the Plan’s arbitration provision.

The Seventh Circuit stated that its holding is limited to the language of the arbitration provision at issue, and that it was not deciding whether a claimant could be bound by an amendment enacted after his employment ended, or whether a plan sponsor can unilaterally amend a plan to require arbitration as to all participants. The Court was also quick to say that it did not view its decision as creating conflict with the Ninth Circuit’s holding in Dorman v. Charles Schwab Corp. (discussed here), in which that court held a that an ERISA plan’s mandatory arbitration and class action waiver provision was enforceable, and could require individualized arbitration of fiduciary breach claims. Still, the tension between the Seventh Circuit’s holding in Smith and the Ninth’s in Dorman—together with the Supreme Court’s repeated statements encouraging enforcement of arbitration provisions—has already lead to speculation that a petition for certiorari will be filed.

Thus, while the Seventh Circuit in Smith stated that ERISA claims are generally arbitrable, Smith leaves open many questions about the proper scope of such provisions and how those provisions (to the extent they are enforceable) will shape ensuing arbitration and litigation. Stay tuned as we continue to track this evolving area of the law.

Seyfarth Synopsis: As employers continue to struggle with strategies for safely re-opening their workplaces, we have previously discussed the possibility of mandating a vaccine or providing incentives for getting the vaccine. [Here] As employers shift their focus toward the cost of COVID hospitalizations (which studies show are a much greater risk for unvaccinated individuals), employers are increasingly considering imposing a premium differential between vaccinated and unvaccinated covered participants. Imposing such a premium differential is doable, but likely creates a group health plan wellness program, which implicates both HIPAA (under rules issued by HHS), and the ADA and GINA (governed by the EEOC) wellness program rules.

There are myriad intricacies to consider when setting up a wellness program. We will hit some of the highlights here:

HIPAA Wellness Programs

HIPAA’s rules divide the world of wellness programs into two main categories:

  1. Participation-only programs. These are programs that do not require any conditions for receiving a reward and have very few requirements associated with them, except that they must be available to all similarly-situated individuals.
  2. Health-contingent programs. These are programs that base rewards on satisfying a standard related to a health factor, which are further subdivided into

(i) activity-only, and

(ii) outcomes-based programs

While at first blush it may seem like getting a vaccine is participation-only as a person simply needs to get the shot, and does not need to remain free from COVID-19, there is some thought that it may actually be health-contingent because not everyone can get the vaccine due to underlying health conditions.

Most practitioners do not believe such a program is a health-contingent “outcomes-based” program, as the reward does not depend on staying COVID-19-free. However, at least one consultant has taken the position that this type of program could even be outcomes-based if having simply received the vaccine is considered a “health status.”

Although HHS has not provided any direct guidance here, we think it is more likely that such a program would be a health-contingent “activity-only” program. In general, a health-contingent activity-only wellness program must meet the following requirements:

  • Incentive Limit:
    • Limit the incentive to 30% of the cost of coverage (this limit is increased to 50% if the program includes a tobacco cessation component);
    • The limit is based on the overall cost of coverage — i.e., the COBRA rate — applicable to the value of coverage elected — i.e., self-only, family, etc.;
    •  This incentive would need to be combined with any other “health contingent” wellness program offered under the plan when determining whether the incentives exceed the limit (except that if any incentive is linked to smoker status, the limit is increased to 50%)
  • Reasonable Alternative
    •  A reasonable alternative must be offered to persons who cannot get vaccinated because it is medically inadvisable or, as a result of the overlay of Title VII, due to a sincerely held religious belief.
    • Participants must be notified of the availability of the reasonable alternative in all materials substantially describing the program.
  • Annual Opportunity to Qualify:
    • Provide an opportunity to qualify for the reward at least once per year
  •  Be uniformly available to all similarly situated individuals; and
  •  Not be a subterfuge for discrimination.

(Note: There are additional requirements for health contingent wellness programs that are outcomes-based programs.)

EEOC and the ADA

The EEOC has modified its wellness program rules a few different times in the last few months. Ultimately, we read the current loosening of the EEOC’s wellness program rules as the administration’s attempt to not discourage incentives.

If the wellness program is for a health-contingent activity-only program, the EEOC is okay if the plan meets the HIPAA/HHS standards. (The new EEOC wellness program rules will also allow an incentive for participatory programs that is not overly large (i.e., considered coercive).)

Similarly, recent EEOC guidance has indicated that vaccine status alone is not a “medical exam or disability-related inquiry” under the ADA. So, if an employer simply requests proof of vaccination status but does not require the employee to get the vaccine directly from the employer (or its contractor), the program is arguably outside of the scope of the EEOC’s wellness guidelines entirely.

Affordable Care Act

For ACA purposes, if the “incentive” is structured as an increased premium, the employer must treat all employees as if they failed to get vaccinated and were required to pay the increased amount for purposes of determining the affordability of coverage, regardless of whether that’s the case. However, there are ways for plan sponsors to mitigate this concern. For instance, the employer could design its “penalty” as a deductible increase rather than a premium increase, which would not impact affordability. (It would impact minimum value, but the employer likely has more flexibility there.) Similarly, because the ACA only requires that employers offer one affordable option, the employer could link the incentive only to its higher-cost benefit options (leaving untouched its lower-cost, “affordable” option.)

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While beyond the scope of this legal update, employers should also be cautious of how they structure the program considering collective bargaining obligations, HIPAA privacy concerns and Section 125 requirements (for mid-year implementations). We will continue to monitor trends in this space with an eye toward any agency indications as to whether they intend to regulate these types of programs.