Enacted in December 2022, the SECURE 2.0 Act contains over 90 provisions that impact qualified retirement plans. Notably, SECURE 2.0 mandates the adoption of auto-enrollment features for plans established after its enactment. Grab your cup of coffee and tune in to hear Richard and Sarah chat with Matthew Calloway from Mercer, about the effects that these requirements have on existing and new plans, as well as potential legislative developments, making this a must-listen for plan sponsors and HR professionals alike.
Seyfarth Synopsis: Fresh on the heels of the IRS Chief Counsel Memorandum on wellness and indemnity products, discussed in our prior post here, the agencies have weighed in with more formal and more expansive guidance throwing more cold water on the tax treatment of these types of products, that the Administration has dubbed “junk insurance”.
On July 7th, the Treasury Department, Department of Labor, and Health and Human Services (the “agencies”) issued proposed rules impacting “junk insurance”. The guidance proposes (i) changes to what qualifies as short-term, limited-duration insurance, (ii) amendments to the requirements for independent, non-coordinated coverage, and fixed indemnity insurance to be considered an “excepted benefit”, and (iii) clarifications of the tax treatment of fixed amount benefit payments under employment-based accident and health plans. The IRS also asks for comments on coverage limited to specified diseases or illnesses that qualifies as excepted benefits and on level-funded plan arrangements.Continue Reading My Insurance Doesn’t Cover That? Agency Guidance on “Junk Insurance”
Seyfarth Synopsis: Employer health plan sponsors, administrators, and insurers have been eagerly awaiting the U.S. Department of Labor’s upcoming guidance on mental health parity. According to recent reports, newly proposed MHPAEA regulations have been sent to the White House for review and their public release is imminent.
In 2020, Congress amended the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008, requiring employer group health plans to complete a “comparative analysis” reviewing whether plan non-quantitative treatment limitations (e.g., medically necessity criteria, prior authorization standards, network adequacy, etc.) apply more stringent standards to mental health and substance use disorder treatments than what is applied in other contexts, such as surgical care. Despite these new requirements, every plan the Employee Benefits Security Administration surveyed received a failing grade in its first report of the new requirements in January 2022.
In May 2023, the DOL’s Employee Benefits Security Administration Secretary Lisa M. Gomez said that the department was working to come out with more guidance on how to comply with federal mental health parity laws. Gomez added that the agency was working to produce proposed rules on parity and an annual report to Congress in the coming months.
The Office of Management and Budget reportedly received the DOL’s proposed regulations on Monday, July 10, and OMB confirmed Wednesday the rules were under review. Review by the OMB’s Office of Information and Regulatory Affairs is the final hurdle before regulations are publicly unveiled, which could be expected to be released in the near future.
Reports suggest the regulations could provide more guidance to plan sponsors on what is expected to be included in their comparative analysis. Some have speculated the regulations could include a “safe harbor” that would afford an easier path to compliance. This comes following the Biden-Harris Administration’s recent stated commitment to tackling the Nation’s mental health challenges.
Seyfarth is monitoring the progression of the regulations and will provide an update as soon as they are publicly available.
Seyfarth Synopsis: In light of the end of the COVID-19 National Emergency and Public Health Emergency (see our prior blog post here), the Internal Revenue Service (“IRS”) has announced the end of prior COVID-19-related special rules for health plan coverage.
On June 23, 2023, the IRS issued Notice 2023-37 to clarify the compatibility of high deductible health plans (“HDHPs”) with health savings accounts (“HSAs”) under Section 223 of the Internal Revenue Code (“Code”). The Notice provides that HDHPs that are compatible with HSAs may continue to provide coverage for COVID-19 testing and treatment before the deductible is met only for plan years ending on or before December 31, 2024. After that, COVID-19 testing may be covered before the deductible is met only if and to the extent recommended as preventive care, including with an “A” or “B” rating by the United States Preventive Services Task Force (“USPSTF”).
As a reminder, in order to be able to contribute to an HSA, among other requirements, an individual must be enrolled in an HDHP that meets certain requirements. An HDHP must have an annual minimum deductible (for calendar year 2024, not less than $1,600 for self-only coverage or $3,200 for family coverage) that generally must be met before benefits may be provided by the HDHP. The major exception to that rule is for preventive care as defined under Code § 223(c)(2)(C) (the “preventive care safe harbor”).
With the onset on the COVID-19 pandemic, individuals covered under HDHPs found themselves needing to purchase testing for a COVID-19 diagnosis on a not infrequent basis. Normally diagnostic testing would not meet the definition of preventive care. Relief was issued by the IRS very early in the COVID-19 pandemic. Notice 2020-15 provided that a HDHP would not fail to be a HDHP merely because the plan provides coverage for medical care services related to testing and treatment of COVID-19 prior to the satisfaction of the applicable minimum deductible.
In light of the end of the COVID-19 emergencies, Notice 2023-37 now provides and clarifies the following transition rules:
- The relief previously provided by Notice 2020-15 is no longer needed, and will end with plan years ending on or before December 31, 2024. That is, for plan years after that date (e.g., for calendar year plans beginning on or after January 1, 2025), HDHPs generally may not provide coverage for COVID-19 testing or treatment without satisfying the applicable deductible.
- Effective as of June 23, 2023, the Notice clarifies that the preventive care safe harbor no longer includes COVID-19 screening (testing).
- However, the guidance also provides that if COVID-19 testing were to be recommended with an “A” or “B” rating by the USPSTF, then such testing would be treated as falling within the preventive care safe harbor, and first dollar coverage of COVID-19 testing would be permitted without risking the plan’s status as an HDHP. (This is true for any USPSTF-recommended (with an “A” or “B” rating) items or services regardless of their treatment under the Affordable Care Act.)
Please reach out to your Seyfarth Employee Benefits attorney to discuss the impacts of this guidance for your plan or if you need additional information.
Seyfarth Synopsis: In light of a recent focus on price transparency, claims data, and hidden fees in the health plan world, employer-sponsored health plans have been bringing their fight to the courtroom in an effort to lower costs and demonstrate good fiduciary governance.
In the wake of the Consolidated Appropriations Act, as well as newly-issued transparency regulations, employers sponsoring group health plans now have access to (or should have access to) a bevy of data not previously available in the notoriously secretive space of health plan pricing. As predicted, this new era of information transparency has spurred a small but growing stream of lawsuits. Surprisingly though, the plaintiffs in these suits are plan sponsors (or their committees) in their role as plan administrator, as opposed to plan participants, and the defendants are health plan third-party administrators rather than the plans themselves. In light of these recent lawsuits, this post focuses on fiduciary considerations for health plans in this new era of fee and price transparency.
While each lawsuit filed to date has unique aspects, they all generally allege some combination of the following:
- Failure to adequately and fully disclose payment data as required by law;
- Imposition of hidden and unreasonable fees;
- Breach of fiduciary duty; and
- Claims mismanagement and overpayment.
On this episode of Coffee Talk With Benefits, Richard and Sarah venture out of the office as part of an Employee Benefits retreat and engage in brief discussions with their colleagues, Diane Dygert, Caroline Pieper, Alisha Sullivan, Ben Conley, Jen Kraft, Sam Schwartz-Fenwick, and Ada Dolph covering a range of interesting topics. Join us as we discuss what it means to be a “slob” in the ERISA world, the gag rule and what are NOT fiduciary best practices, among other things. Grab your cup of coffee and tune in for a lively episode.
By this point, most people in the employee benefits space have heard about the MOVEit and Retirement Clearing House (RCH) cyber incidents, which could directly impact employers’ benefit plans. The MOVEit file transfer application is used by a number of vendors, including those that locate missing plan participants or find information regarding deceased plan participants (e.g., PBI Research Services). RCH is often used by retirement plans to facilitate benefit transfers, including for IRA rollovers. Other plan vendors/subcontractors may also use the MOVEit software application or subcontract with RCH for their plan services. Actual and potential victims have included state and federal government agencies as well as companies across a variety of industries (and their benefit plans) who were using MOVEit or RCH, or who engaged with service providers who used these tools.
Initial public reports of the MOVEit and RCH cybersecurity incidents began in May and information about extent the incidents is still being uncovered. RCH has announced that Social Security Numbers, as well as account numbers at Matrix Trust, may have been compromised but the IRA accounts themselves were not actually accessed.
In order to satisfy ERISA fiduciary obligations to safeguard plan participants’ personal information, plan fiduciaries should attempt to understand what happened, whether or not the incident impacted plan participants, and what information was compromised. Since neither incident was a direct result of action taken by any plan, plan fiduciaries and administrators are currently in a “trust but verify” situation with their service providers, contractors and subcontractors. However, as of the date of this post, we have already seen a class action filed against PBI as a result of the MOVEit incident.
If a retirement plan has a business relationship with any service provider that uses, used or may have used the MOVEit software application or RCH services, the plan should determine what fields or categories of personal information were shared with the service provider(s), and by extension MOVEit or RCH, to determine the impact on the plan and its participants. Any service agreements with the applicable vendors should also be reviewed with respect to data breach notification, information reporting, and follow up obligations of the service provider(s). This includes any indemnification provisions for data incidents. Also, if the plan carries cyber-liability insurance (increasingly common), there may be a requirement to notify the cyber-liability carrier. If the plan is adversely impacted and does not receive satisfactory responses from its service provider, more direct action may be needed.
The plan’s responsibilities and potential avenues for relief depend on a number of factors. Any member of Seyfarth’s Global Privacy and Security team is able to assist you to obtain more information about your particular situation in order to evaluate next steps.
Seyfarth will continue to monitor the incident, and provide further information as we learn more.
Seyfarth Synopsis: The 5th Circuit Court of Appeals has stayed enforcement of a Texas federal district court ruling that that voided the ACA requirement for health plans to cover preventive care items and services (without cost sharing) recommended by the United States Preventive Services Task Force (“USPSTF”) effective as of March 23, 2010.
Just months after a Texas federal district court enjoined enforcement of the preventive care mandate for items and services with an “A” or “B” rating recommended by the USPSTF, the 5th Circuit Court of Appeals has issued a stay order which freezes the effect of the ruling. Until the appeal is resolved, health plans must continue to comply with the Affordable Care Act’s preventive care mandate as it applied prior to the district court decision. Plan sponsors should not make changes to their plans’ coverage for preventive care items and services with an “A” or “B” rating recommended by the USPSTF until the appeal has made its way through the courts and a final decision has been rendered by the 5th Circuit.
For more details on the original district court decision or subsequent FAQs issued by the Tri-Agencies, please see our prior blog posts here and here. We will continue to monitor the case and its impact on plans. Stay tuned!
Seyfarth Shaw’s Employee Benefits and Executive Compensation department has secured a notable position as one of the best in the country, according to the esteemed Legal 500 United States 2023 edition. This recognition reaffirms Seyfarth’s commitment to excellence in the field of employee benefits and executive compensation law.
Client feedback has played a pivotal role in determining this ranking, with Seyfarth partners Diane Dygert, Jennifer Kraft, Liz Deckman, Jonathan Karelitz, and Benjamin Conley being mentioned in the guide for their exceptional dedication to client service.
The Legal 500 United States guide emphasizes Seyfarth’s Employee Benefits and Executive Compensation department’s ability to efficiently communicate complex information in a practical, timely, and client-focused manner. Clients have complimented the team’s breadth of knowledge and experience in the rules and regulations surrounding employee benefits, including their expertise in the health and welfare space. Additionally, the guide highlights the group’s distinctive experience in retirement plan design and expertise in legislative compliance of plans.
Renowned as an independent guide offering comprehensive coverage of legal services, The Legal 500 United States is widely regarded for its authoritative assessment of law firm capabilities. It acknowledges and rewards exceptional in-house and private practice teams and individuals based on extensive research conducted over the past 12 months. The awards are bestowed upon elite legal practitioners, recognizing their outstanding contributions to the dynamic and ever-evolving US legal market.
Seyfarth Shaw’s Employee Benefits and Executive Compensation department’s inclusion in the Legal 500 rankings reinforces their position as a trusted and respected authority in employee benefits and executive compensation law. With their dedication to providing exceptional legal counsel, clear communication, and efficient service, Seyfarth continues to serve as a valuable partner for companies seeking comprehensive employee benefits and executive compensation advice and strategic guidance in today’s environment.
Seyfarth Synopsis: Just like a bad penny, schemes promising employers ways to reduce their FICA tax burden, and maybe their employees’ income tax burden at the same time, keep popping up with a slightly different burnish on the coin. The risks of such an approach have concerned tax practitioners and now the IRS has directly and definitively weighed in on the side of confirming there is no free lunch here.
In a recently released Chief Counsel Memorandum, the IRS weighed in on the tax treatment of a frequently marketed “insurance” product designed to reduce employer FICA taxes and employees’ taxable wages. In short, the IRS views payments under a wellness indemnity product as wages, subject to FICA taxes.
Over the last ten years or so, various vendors and insurance carriers have sought to take advantage of the admittedly arcane insurance and tax rules to design a mechanism to convert otherwise taxable income to tax-free benefits. While the products all vary slightly, they generally follow the same playbook:
- Employer enrolls employee in a wellness/fixed indemnity insurance product.
- Employee pays the product premium (let’s call it $1,200/month) on a pre-tax basis through the employer’s Section 125 cafeteria plan.
- On a monthly basis, the employee engages in a low-commitment “wellness” activity (e.g., call a nurse line, take blood pressure, fill out a health risk questionnaire).
- The “reward” or “reimbursement” for participating in the wellness activity is a tax-free “reimbursement” in an amount roughly equivalent to the amount the employee paid for the premium (less taxes) (e.g., $1,000). So, the employee nets roughly equal and the employer avoids paying FICA taxes. [Earlier versions of this product also promised to fully reimburse employee for the pre-tax premium, resulting in the amount of the premium payment itself being income tax free.]
- The product is usually also paired with a hospital indemnity/fixed indemnity insurance product that pays a set amount based on certain contingencies (e.g., hospitalization).
Over the years, the IRS has issued various memoranda (here, and here) opining that wellness payments are not tax-free simply because they are associated with a wellness plan (i.e., a cash reward is still taxable). While marketers of these products have attempted to circumvent this guidance by arguing this is a bona fide insurance product, recognized by state regulators, Seyfarth has continued to express concern that the payments under these types of products remained, at best, at risk of recharacterization as taxable income (and at worst, an abusive tax shelter).
In its recent guidance, the IRS focused on the FICA/FUTA tax exclusion relied upon by marketers of these products, which exempts “payments on account of sickness or accident disability”. The IRS indicated that even though wellness payments issued from the insurance product may relate to sickness or accident disability, they remain wages subject to FICA/FUTA withholding as they are not made to reimburse medical or hospitalization expenses. The same analysis applies to payments made from the hospital indemnity program.
Similarly, the IRS focused on the income tax exclusion for sick pay and medical benefits, and concluded that payments under these wellness insurance and indemnity programs do not qualify for the exclusion.
The IRS does not address the outcome if the reimbursements were to be applied toward the employee’s unreimbursed medical expenses, and whether they would be subject to FICA/FUTA or income tax withholding. But practically speaking, as proof of medical expenses are not required under this program an employer would have no meaningful way to ascertain how the funds would be applied, which appears to mean the IRS would almost always require the employer to pay (and withhold) FICA/FUTA and income taxes on reimbursements under these programs.
Nail in the Coffin?
While we have no doubt that some variation of this scheme will continue to live on in some form going forward, employers are cautioned to exercise extreme caution in implementing such a design, as the IRS continues to express an unfavorable opinion on the validity of these tax-avoidance arrangements.