New Cafeteria Plan Guidance Eases Transitions to Exchange Coverage

IRS Notice 2014-55, issued September 18, 2014, permits two new types of mid-year changes in cafeteria plan elections (other than health flexible spending account elections) that will enable employees to drop employer group coverage in favor of individual coverage offered on state and federally-facilitated health exchanges (collectively, “the Exchange.”)  Making that transition primarily will appeal to employees with household incomes in ranges that qualify them for financial assistance on the Exchange, in the form of premium tax credits and cost sharing.  Those ranges are between 100% and 400% of federal poverty level in states that have not expanded Medicaid, and between 138% and 400% of federal poverty level in states that have expanded Medicare.

Recap of Existing Change in Status Rules

Under existing cafeteria plan regulations, a participant may make a mid-year change in their plan elections only in the event of a “change in status,” and only to the extent that the election change is both “on account of” and “corresponds with” the change in status.  This latter requirement is referred to as the “consistency rule.”  An example of a change in election that satisfies the consistency rule is removing a spouse from coverage as a result of a change in status that is a legal separation or divorce.  By contrast, the participant dropping his or her own coverage in that situation would not satisfy the consistency rule.

Existing regulations set forth a finite list of changes in status that trigger the right to a mid-year cafeteria plan election.  The list does not currently include a change in employment status – such as a transition from full-time to part-time status – that is not accompanied by a loss of group health plan eligibility. In addition, under special enrollment rights that were introduced with HIPAA, employees may enroll in their employer’s plan in the event they lose other coverage (for instance, through exhausting COBRA coverage), may add to their coverage a dependent newly acquired through birth, marriage, or adoption, and may make mid-year cafeteria plan changes that are consistent with these events.  HIPAA’s special enrollment rights do not contain provisions that relate to availability of individual coverage on the Exchange.

Please note that references below to “changing cafeteria plan elections” may more accurately be described as revoking an election to make pre-tax salary deferral elections towards the purchase of group health premiums.

Notice 2014-55

Effective immediately, although at the option of employers, Notice 2014-55 permits mid-year cafeteria plan election changes in two different situations that are related to Exchange coverage.

The first situation applies when an employee who has been classified as full-time for ACA coverage purposes (averaging 30 or more hours of service per week) has a change in status which is reasonably expected to result in the employee averaging below full-time hours, without resulting in a loss of their group health coverage.  Under the look-back measurement method, as set forth in final employer shared responsibility regulations, an employee who averages full-time hours during an initial (following hire) or standard (ongoing) look-back measurement period generally will be offered coverage for the entire related initial or standard stability period (and associated administrative period) without regard to the actual hours worked during the stability period, such that a schedule reduction would not impact coverage.

Now, under Notice 2014-55, full-time employees whose average weekly hours are “reasonably expected” to remain below 30 – and whose reduced earnings may now qualify them for premium assistance on an Exchange, or increased assistance –  may revoke group coverage for themselves and covered dependents, provided it is for the purpose of enrolling in Exchange coverage or other “minimum essential coverage” that will take effect no later than the first day of the second month following the revocation.   (Minimum essential coverage is not limited to exchange coverage and may, for instance, include group health coverage offered by a spouse’s employer.)  Employers may rely on employee’ representations regarding the purpose of the election change.  Changes to health FSA elections are not permitted in this situation.

The second situation has two variations.  The first applies when an employee has special Exchange enrollment rights, including as a result of marriage, birth or adoption.  Similar to HIPAA special enrollment rights, these permit purchase of Exchange coverage outside of Exchange open enrollment. The second applies under a non-calendar year cafeteria plan when an employee wants to enroll in Exchange coverage during the Exchange open enrollment period, effective as of the first of the following calendar year.

In either instance an employee may prospectively revoke group health coverage for him or herself and family members, provided it is for the purpose of enrolling in Exchange coverage that will take effect no later than the day immediately following the last day of the original coverage that is revoked.  Employers may rely on employee’ representations regarding the purpose of the election change.  Changes to health FSA elections are not permitted in this situation.

Plan Amendments and Effective Dates

The IRS intends to amend cafeteria plan regulations to reflect the guidance in Notice 2014-55.  Employers may rely on the terms of the Notice until new regulations issue.

Employers who want to incorporate the new election changes into their cafeteria plans must amend their plan documents in order to do so.   Employers who put the changes into effect between now and the end of 2014 may amend their plan documents any time on or before the last day of their 2015 plan year (December 31, 2015 for a calendar year plan).  The amendment may be retroactive to the date the change went into effect, provided that participants are informed of the amendment and provided that, in the interim, the employer operates its plan in accordance with Notice 2014-55, or with subsequent issued guidance.

Employer Shared Responsibility Considerations

As mentioned, the first permitted change primarily relates to applicable large employers who use the look-back measurement period to identify full-time employees.  To minimize “pay or play” liability, these employers should continue to monitor, over subsequent measurement periods, the average hours worked by employees who migrate to Exchange coverage, and offer affordable, minimum value coverage over corresponding stability periods to those whose hours average 30 or more per week, or 130 or more per month.

Interestingly, this portion of Notice 2014-55 refers to individuals who were “reasonably expected” to average 30 or more hours of service prior to the change, but who are “reasonably expected” to average below that after the change.  This “reasonably expected” language  – which implies a measure of employer discretion – appears in the final shared responsibility regulations only in connection with assessment of an employee’s likely status (full-time, part-time, seasonable or variable hour) upon initial hire.   After an employee has remained employed throughout an entire standard stability period (which generally corresponds to the plan or policy year), he or she is an “ongoing employee” and his or her status as full-time or not full-time is determined solely based on average hours worked over the preceding look-back measurement method, or, under the “monthly” measurement period, over the preceding calendar month.  In other words, employer discretion is removed from the ongoing measurement process.  Now, it is reintroduced by Notice 2014-55 in the limited context of a schedule reduction during a stability period.

If the second permitted change is adopted by an applicable large employer, presumably that employer will continue to monitor employees who have migrated to the Exchange using the measurement method under which the employee previously qualified for an offer of group health coverage.

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Q: Where Can You Sue an ERISA Plan? A: Where the Plan Sponsor Says

So the Sixth Circuit, in Smith v. Aegonjust ruled in favor of the enforceability of forum selection clauses in ERISA governed plans. Combined with the Supreme Court’s approval in Heimeshoff of contractual limitations in ERISA plans on the time period for filing suit, the approach of Smith basically hands control of the basic procedural aspects of litigating ERISA cases – when and where – to plan sponsors. In Smith, the Sixth Circuit provides a legitimate rationale for doing so, which is that the law already provides extensive freedom to plan sponsors with regard to whether, and if so under what terms, to offer benefit plans. This principle, incidentally, flows naturally from the original grand bargain that gave rise to ERISA itself, which was the premise that employers would be granted much leeway and limited potential liability to encourage them to make benefit plans available to employees.

That said, however, the dissent in Smith makes an important point, which is that the venue provisions of ERISA have long been construed by federal courts in the manner that will best allow participants to protect their rights, and not in a manner that will make it more difficult for them to do so. The dissent’s point in this regard is well taken. ERISA expressly provides that a plan participant can sue in any federal district court where the plan is administered, the breach took place, the defendant resides or the defendant may be found. 29 U.S.C. § 1132(e)(2). Federal judges regularly find that this venue provision was intended by Congress to expand, rather than constrict, a participant’s choice of forum, so as to best protect plan participants. As one judge explained in a well-regarded opinion on the subject, Congress intended “to remove jurisdictional procedural obstacles which in the past appear to have hampered effective enforcement of fiduciary responsibilities under state law for recovery of benefits due to participants” and as a result, “ERISA venue provisions should be interpreted so as to give beneficiaries a wide choice of venue.” Cole v. Central States Southeast and Southwest Areas Health and Welfare Fund, 225 F.Supp.2d 96, 98 (D.Mass. 2002) (quoting H.R.Rep. No. 93–533, reprinted in 1974 U.S.C.C.A.N. at 4639, 4655; accord S.Rep. No. 93–127, reprinted in 1974 U.S.C.C.A.N. at 4838, 4871).

Decisions such as Smith run to the opposite of this thinking and essentially say that, while that may be the case, a plan sponsor can opt out of that system of protections in favor of selecting a forum in the first instance, and naming it in the plan.

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Plaintiff’s Attorney Fees Denied — Filing Of Lawsuit Was Not Reason Why Benefits Were Granted

You already know that in ERISA cases a court may, in its discretion, award attorney fees if a party achieved “some degree of success on the merits.”

Is the mere filing of a lawsuit,  before Plaintiff’s ERISA-governed disability benefit claim is granted, sufficient to win an award attorney fees?  NO.

Here’s the case of Koloff v. MetLife Ins. Co, 2014 WL 3420990 (E. D. Cal. July 14, 2014) [PDF].

FACTS: Koloff brought suit seeking disability benefits under an ERISA-governed plan. The Court dismissed the case (without prejudice) because Koloff had failed to exhaust administrative remedies. On December 5, 2013, MetLife informed Plaintiff’s counsel it was sending payment on benefits and asked for information to the net amounts, because of the offset for Social Security benefits. On December 17, 2013, Koloff brought a second lawsuit seeking disability benefits. On December 20, 2013, MetLife sent Koloff the letter approving her disability claim.

Koloff then moved for attorney fees, contending she achieved “some success on the merits.”

DISTRICT COURT HELD:  Plaintiff’s Motion for Attorney Fees Denied.

  1. The Plaintiff’s attorney’s time records strongly suggest that “he knew of MetLife’s intention to approve the claim prior to the filing of the complaint on December 17, 2013….”  The administrative record corroborates this, noting the December 5, 2013 conversation in which MetLife advised that it was “getting a check out.”  Op. at 7.
  2. “[T]he Court finds MetLife made the decision to approve plaintiff’s long term disability benefits by December 5, 2013 and, more importantly, made clear to plaintiff’s counsel that the only thing to do was determine the net amount to be paid which would occur once counsel provided MetLife the SSDI and EDD [offset] figures.”  Op. at 8.
  3. “Because there was no dispute as to the merits of the action before the complaint was filed, Plaintiff has shown no “injury in fact.”  Op. at 8-9.
  4. Under ERISA, “fees and costs may be awarded to any party ‘who has achieved some degree of success on the merits.’”  A claimant “does not satisfy that requirement by achieving ‘trivial success on the merits’ or a ‘purely procedural victory[.]’”  Op. at 10.
  5. Plaintiff’s counsel should not get attorney fees in her first lawsuit, which was dismissed without prejudice. “[W]hen an individual fails to exhaust administrative remedies, ‘the proper remedy is dismissal without prejudice.’” The dismissal here was not analogous to a remand.  Op. at 10.
  6. “[F]ees expended during administrative processes are not recoverable.”  Op. at 12, Fn. 13
  7. “T]he Ninth Circuit has not yet determined whether the catalyst theory [for seeking attorney fees] is viable in an ERISA action in light of Buckhannon[.]”  Op. at 12.
  8. [T]he facts do not demonstrate that the suit was [a catalyst] or linked to the decision to approve plaintiff’s benefits….Plaintiff’s counsel was informed that benefits would be paid before the litigation was initiated.”  Op. at 13-14.
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