Illinois passed the Consumer Coverage Disclosure Act (CCDA) in 2021. In a nutshell, the CCDA requires all employers to send employees a notice comparing their health benefits to a list of the state of Illinois’ Essential Health Benefits (EHBs). Depending on the size of the employer and how the law is interpreted, the civil penalties for non-compliance could run anywhere from a nuisance fee to astronomically high.

Even more problematic, the CCDA may not be enforceable at all against most private employers, as the law may be preempted by the Employee Retirement Income Security Act of 1974 (ERISA). But no court has ruled on this issue … at least not yet.

This blog answers basic questions about what the CCDA does and the options employers have, considering the law’s unsettled status.

Q: What does the CCDA require?

A: The CCDA requires employers (any person or entity that “gainfully” employs someone in Illinois) with “group health insurance” to provide a disclosure to all its eligible employees showing which of the state’s EHBs are covered benefits in the employer’s health plan.

To create a compliant employee disclosure, employers will have to look up the scope of each EHB, compare it to the coverage provided in the employer’s plan, and indicate either “No” (meaning the EHB is not a covered benefit), “Yes” (it is), or “Yes, partially” (explaining how the benefit is partly covered). Creating a compliant form will require some expertise in reading and interpreting health benefits and health plans, and it may be somewhat time-consuming.

Q: What are the EHBs?

A: The Illinois Department of Labor (IDOL) recently released a sample compliance form identifying all the EHBs that must be compared. There are 42 separate benefits in 10 different categories. The EHBs are not necessarily required to be covered by a health plan. Whether they are depends on a plan’s insured status (fully insured v. self-funded) and the size of the employer. IDOL simply tells employers to consult an attorney if they want to know what EHBs are actually required.

The disclosure may lead to considerable confusion when received by employees. For each “No” or “Yes, partially” response, employees may believe their employers are breaking the law or providing substandard coverage. But there may be absolutely nothing requiring the employer to provide the benefit in the first place, and the employer’s plan may provide superior benefits in other categories not included in the state’s EHBs.  

Q: When and how does the disclosure have to be provided?

A: The disclosure must be made to an employee when hired, annually, and upon request. The law does not specify a timeframe following each event in which the disclosure must be made (e.g., 30 days following date of hire). This makes it unclear at what point the failure to disclose actually becomes a violation of the CCDA. Fortunately, in addition to in person or via email, the disclosure may be provided to employees by simply posting it on a website they can access. That will easily take care of most disclosures.

Q: If an employer has more than one coverage option, how many forms have to be completed?

A: It is not clear. Employers often have multiple coverage options available to employees. Each option may cover different benefits or at different levels. If the different options can be adequately represented on a single form—e.g., the options provide almost the same coverage, with minor differences that can be adequately explained—then a single form is likely sufficient. But the differences among the options may become so significant that, at some point, it would be impracticable to try to represent that information in a single form, and separate forms will need to be created.

Q: Will health insurance companies complete the form for employers?

A: The CCDA is directed at employers. It does not apply to health insurers, and insurers are not required to help in any way. While insurance companies, brokers, third-party administrators, or other service providers may help an employer comply with the law (particularly a larger employer with leverage), many employers (especially smaller employers) may find that their insurers and service providers are not willing to help them, making compliance even more challenging. The employer will have to create it in-house or hire a third party (such as an attorney) to draft the disclosure, which could be expensive.

Q: What are the penalties for non-compliance?

A: IDOL may assess civil penalties against an employer as follows:

  • Employers with three or fewer employees: up to $500 for a first “offense,” $1,000 for a second, and $3,000 for a third.
  • Employers with four or more employees: up to $1,000 for a first offense, $3,000 for a second, and $5,000 for a third.

The CCDA states that the civil penalty shall take into account “the size of the employer, the good faith efforts made by the employer to comply, and the gravity of the violation.”

Q: That doesn’t sound too bad … right?

A: Well, it could be bad. The law is vague enough that IDOL could assert that a separate penalty may be assessed for each employee who fails to receive a notice when required, as well as for each separate coverage option the employee is eligible for, which could lead to enormous potential penalties.

For example, suppose an employer with no prior “offenses” has 100 eligible employees with three coverage options, and the employer fails to provide any required disclosures. How many “offenses” is that? It could be treated as a single, combined offense leading to a small civil penalty of $1,000. Alternatively, it could be viewed as 100 or even 300 separate offenses, leading to a potential maximum penalty of $1,494,000 (i.e., $1,000 for a first offense + $3,000 for a second offense + $1,490,000 for 298 additional offenses at $5,000 each).

It appears IDOL has privately expressed its opinion that it would view all violations in a single year as one “offense,” but no official guidance or actions consistent with that position have been made. Hopefully, IDOL will soon publicly clarify how penalties will be calculated under the CCDA so employers can better understand the risks of non-compliance.

Q: How are violations and penalties determined?

A: IDOL has the right to conduct investigations of violations. IDOL will first notify an employer and ask it to demonstrate compliance with the CCDA. If the employer fails to do so, IDOL will issue a notice to show cause “giving the employer 30 days to comply.” In other words, an employer gets 30 days to fix the alleged violations. Which is good!

If the employer does not comply within 30 days, IDOL can impose a penalty after conducting a hearing on the matter. The employer has the option of appealing IDOL’s imposed penalty, while IDOL has the option of filing a lawsuit to collect the penalty. And, of course, given the likelihood of ERISA preemption, an employer could file a lawsuit in federal court seeking to enjoin the state from enforcing the law against sponsors of ERISA plans.

Q: What is ERISA preemption?

A: ERISA is a federal law that governs employee benefits, from retirement plans to health plans, and almost everything in between. Section 514 of ERISA (29 U.S.C. § 1144) contains a special “preemption” provision. It states that the provisions of ERISA “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” This means states cannot pass or enforce laws that “relate to” employee benefits governed by ERISA.

ERISA preemption typically plays out in federal court (including the U.S. Supreme Court on numerous occasions), where federal judges determine the boundaries of what states can and cannot do. There is a rich history of opinions delineating those boundaries.

Q: Are there limits to preemption?

A: For one, ERISA contains a “Savings Clause,” pursuant to which states can still regulate insurance. Many employers use insured plans for health, disability, and similar benefits, and those insurance policies may still be regulated by the states. However, ERISA also contains a “Deemer Clause,” pursuant to which uninsured plans (i.e., self-funded plans) cannot be regulated as insurance by states.

In addition, ERISA preemption does nothing to save plans that are not subject to ERISA. These plans include church plans and governmental plans, which are fully subject to state regulation.

Q: Is the CCDA preempted with respect to ERISA health plans?

A: IDOL has taken the position that the CCDA is not preempted, stating in its FAQs:

Because the Consumer Coverage Disclosure Act creates a benefits notification requirement for all Illinois employers, regardless of the type of insurance they provide, and does not mandate insurance provisions or otherwise have any direct impact on employer-provided group health insurance coverage, employers who provide self-insured plans and/or ERISA plans are subject to the provisions of the Act.

This is probably not a winning argument.

ERISA already extensively governs disclosures that are required to be given to participants in health plans. For example, certain documents must be furnished to participants that thoroughly explain their benefits and coverage, such as Summary Plan Descriptions and Summaries of Benefits & Coverage. Other types of formal plan documents must be furnished to participants upon request. ERISA governs what must be provided and when it must be provided.

The CCDA interferes in ERISA’s extensive regulation of plan disclosures. The Supreme Court’s words in a 2016 case—concerning a Vermont law that required plans to disclose certain data to state authorities—seem to apply equally well to the CCDA:

The State’s law and regulation govern plan reporting, disclosure, and—by necessary implication—recordkeeping. These matters are fundamental components of ERISA’s regulation of plan administration. Differing, or even parallel, regulations from multiple jurisdictions could create wasteful administrative costs and threaten to subject plans to wide-ranging liability. … Pre-emption is necessary to prevent the States from imposing novel, inconsistent, and burdensome reporting requirements on plans.

The Secretary of Labor, not the States, is authorized to administer the reporting requirements of plans governed by ERISA. He may exempt plans from ERISA reporting requirements altogether. … And, he may be authorized to require ERISA plans to report data similar to that which Vermont seeks, though that question is not presented here. Either way, the uniform rule design of ERISA makes it clear that these decisions are for federal authorities, not for the separate States.

Gobeille v. Liberty Mut. Ins. Co., 577 U.S. 312, 323–24 (2016).

Q: What about the Savings Clause?

A: The Savings Clause allows states to regulate the business of insurance. The CCDA does not look or act like an insurance law. It is not placed among insurance laws, it is not enforced by the Illinois Department of Insurance, and, most importantly, it is not directed at insurance companies or insurance policies. It is best described as a labor law directed at employers, not a bona fide insurance regulation. And, even if it were an insurance regulation, the CCDA would still not apply to self-funded health plans.

But again, no court has yet ruled on the preemption issue. It is possible that a federal court would uphold the law and find that it is not preempted.

Q: So, what should employers do?

A: There are two basic options: (1) comply now; or (2) wait and see.

Complying now is the least risky option, but it may be a little expensive and burdensome to create a compliant form, particularly for an employer that is not getting help from its insurer or other service provider.

The wait-and-see approach has some advantages. Even if IDOL notifies an employer of a violation, the employer would have 30 days to try to comply (in which case no penalty would be imposed), and/or decide to fight it. It is also possible that, in the meantime, a court may rule that the law is preempted (or that it is not). This option is not without risk, however, as it may be difficult complying with the law under a tight timeframe, and the potential penalties could be high, depending on IDOL’s interpretation.

But a wait-and-see approach is not unreasonable, given the likelihood that the law is preempted, the ability to comply within 30 days if notified of a violation, IDOL’s private statement that it will view all violations in a year as a single “offense,” and the time and expense of complying.

Of course, for an employer that sponsors a health plan that is not governed by ERISA, such as a church plan or governmental plan, the analysis is simpler, because there is no preemption argument. For these plans, it is advisable to comply with the CCDA now.

There are both single-employer pension plans and multiple employer plans (MEPs). In a single-employer plan, only employees within the same “controlled group” of businesses are allowed to participate. Put very simply (because the rules are complicated), the controlled group consists of different entities that share enough common ownership that they are treated as a single employer for employee benefits purposes. And all of those employers’ employees are able to participate in one plan.

In contrast, in an MEP, the employees of unrelated employers — i.e., those falling in two or more controlled groups — may participate in a single plan. The entities may share some ownership or control, but not enough to be treated as a single employer.

There are often good business reasons for allowing non-controlled group members to participate in a single pension plan. But circumstances change, and the time may come when it’s appropriate for an unrelated employer to leave. It often makes the most sense for the MEP to distribute benefits to those employees, allowing the plan to cut ties with the unrelated employer, and avoid having to keep track of the employment status of all those unrelated employees.

Assuming there is no other distributable event, there are three options to consider:

  1. Complete plan termination
  2. Partial plan termination
  3. Spinoff termination

Complete Plan Termination

A plan termination is a distributable event. Generally, an employer leaving an MEP does not constitute a plan termination, because there’s just one plan and it will still be around even after the unrelated employer leaves. However, it is possible under the Tax Code and the Employee Retirement Income Security Act of 1974 (ERISA) for an MEP to technically consist of a collection of separate plans, as opposed to a single plan. In such a case, the withdrawing employer could be treated as having its own individual plan, and that plan could be terminated and the assets distributed, provided such actions are consistent with the plan and trust documents.

Separate plans will exist under the Tax Code if the plan’s assets are not available to satisfy the benefits of all participants and beneficiaries. In other words, the assets must be segregated in some way, such that some assets are designated and may only be used to pay the benefits of the employees of the unrelated employer. This is not typically the case, however.

ERISA applies to most plans sponsored by private employers (but not to governmental plans and certain church plans). Under ERISA, if an MEP is a defined benefit plan, then separate plans may exist if either: (1) the assets are segregated and not available to pay the benefits of all participants and beneficiaries, just as with the Tax Code; or (2) the participating employers do not share common ownership, i.e., an “employment-based common nexus or other genuine organizational relationship that is unrelated to the provision of benefits.” With respect to defined contribution plans, the U.S. Department of Labor modified its regulations in late 2019 to make it easier for some otherwise unrelated businesses to form an MEP known as a “association retirement plan.” Generally, to be treated as a single plan, these employers need only form a bona fide organization that has a substantial business purpose and either the employers operate in the same trade, industry, or profession, or they have a principal place of business in the same geographic region. See 29 C.F.R. § 2510.3-55. If these loose restrictions are not met, separate plans will still exist.

Keep in mind, there may be numerous other issues to consider. For example, if the MEP should have been treated as a collection of separate plans under ERISA but has not been, then the participating employers could have potential liability for failing to comply with their reporting obligations, such as the filing an Annual Report (Form 5500). Also, notice to the Pension Benefit Guaranty Corporation (PBGC) may be required under Section 4043 of ERISA (29 U.S.C. § 1343), and it could result in an assessment of liability against the leaving employer under Section 4063 of ERISA (29 U.S.C. § 1363).

Partial Plan Termination

Assuming — in all likelihood — that an MEP constitutes a single plan, a partial termination could occur when an employer ceases participating in the plan. This is determined based on all the facts and circumstances. While there is no bright-line test, if 20 percent or more of the participants are excluded from further plan participation, a partial termination is likely to have occurred, although there may be disputes as to the most appropriate method of calculating the turnover percentage, or as to other relevant facts. While this 20-percent rule of thumb technically only applies to ERISA plans, it nonetheless provides a good framework for non-ERISA plans as well.

If it’s unclear whether a partial termination has occurred, the plan sponsor of the MEP could ask for the IRS’ opinion. This is accomplished by filing Form 5300 (Application for Determination for Employee Benefit Plan) with the IRS. The plan sponsor would provide the basic facts and a description of why it believes a partial termination has occurred (or might occur in the future).

If a partial termination occurs, then benefits for the affected employees must become nonforfeitable (to the extend funded), and any previously unallocated funds must be “allocated” to the affected employees. This allocation “may be in cash or in the form of other benefits provided under the plan.” See Treasury Regulations 1.401-6(b)(2)(ii), 1.411(d)-2(b)(2)(ii). Thus, the rules permit, but do not require, a distribution of benefits to affected participants upon a partial termination, so long as that distribution is consistent with the plan document. If the MEP does not provide for benefit distributions, it could likely be amended to so provide.

Just as with a complete termination, other issues may arise under the Tax Code and ERISA, such as notice to the PBGC (Form 10) and liability for the withdrawal of a “substantial employer.”

Spinoff Termination

If there is neither a complete termination nor a partial termination (and again, assuming there is no other distributable event), the only option is to spin off the withdrawing employer’s participants into a new plan (sponsored by the unrelated employer or another entity in its separate controlled group), which can then be terminated and assets distributed. This would likely be the most expensive option, as it would first require the creation and establishment of an entirely new plan, as well as additional coordination between the MEP and the unrelated employer leaving the plan. But it may be the only option.

Records AuditAt the beginning of this year, we wrote about changing standards applicable to audits of financial statements of employee benefit plans subject to ERISA. Specifically, we explained that the Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) issued new standards for what are currently known as “limited-scope audits.” Initially, the changed audit standards were effective for plan years ending on or after December 15, 2020, but due to the COVID-19 pandemic the AICPA delayed the implementation of the standards to audits of plan years ending on or after December 15, 2021. We want to remind plan sponsors of employee benefit plans required to include an auditor’s report as part an annual Form 5500 filing that the changed audit standards create new responsibilities for plan sponsors in 2022.

In general, a report of an independent qualified public accountant must be filed with Form 5500 for employee benefit plans with 100 or more participants. U.S. Department of Labor (DOL) regulations require the report to include the opinion of the accountant as to the financial statements and schedules included in the report and the accounting principles and practices expressed in the report. However, there is an exception in the regulations for “limited-scope audits.” Under a limited-scope audit, plan management may choose to exclude any statement or information prepared and certified by an institution such as a bank, similar institution, or insurance carrier, with respect to the plan assets held by such institution. Due to the exception, it has been a generally accepted accounting industry practice for an auditor to disclaim an opinion on a limited-scope audit.  

After the DOL recommended that the limited-scope audit exception be repealed due to a large number of audit deficiencies, the AICPA issued new standards applicable to audits of employee benefit plan financial statements in the AICPA’s Statement on Auditing Standards (“SAS”) No. 136. As explained in our previous blog post, SAS No. 136 refers to limited-scope audits as “ERISA Section 103(a)(3)(C) audits.” Unlike limited-scope audits, ERISA Section 103(a)(3)(C) audits impose more obligations on auditors and do not permit an auditor to disclaim an opinion on an entire audit. In addition, ERISA Section 103(a)(3)(C) audits create new responsibilities for plan sponsors.

SAS No. 136 provides a description of a plan sponsor’s additional responsibilities with respect to an ERISA Section 103(a)(3)(C) audit, which include:

  • Acknowledging plan management’s responsibility for:
    • maintaining a current plan document,
    • administering the plan, and
    • determining that the plan’s transactions presented and disclosed in the plan financial statements comply with the plan.
  • Providing an auditor with written acknowledgement that:
    • an ERISA Section 103(a)(3)(C) audit is permissible with respect to the plan,
    • the investment information is prepared and certified by a bank, similar institution, or insurance carrier described in DOL regulations,
    • the certification meets DOL regulatory requirements, and
    • the certified investment information is appropriately measured, presented, and disclosed in accordance with the applicable financial reporting framework.
  • Substantially completing a draft Form 5500 before engaging an auditor, including any related forms and schedules that could have a material effect on the audit.

Plan sponsors that elect an ERISA Section 103(a)(3)(C) audit beginning in 2022 need to carefully consider all legal and regulatory requirements applicable to auditors’ reports and other Form 5500 requirements and should consult legal counsel.

As the number of people receiving a COVID-19 vaccine has decreased, employers have tried to find ways to incentivize their employees to get vaccinated. While some employers have imposed COVID-19 vaccine requirements, others have searched for alternative methods to motivate employees to receive the vaccines. One method some employers have considered is imposing a surcharge on health insurance premiums for employees and their dependents who are unvaccinated. The Department of Health and Human Services, the Department of Labor, and the Department of the Treasury issued guidance this week that addresses COVID-19 vaccine premium surcharges.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) prohibits group health plans and insurers from discriminating against individuals based on a health factor. In general, these “non-discrimination” rules under HIPAA do not permit group health plans and insurers to vary benefits or charge higher premiums based on health factors such as vaccination status. However, there is an exception to the HIPAA non-discrimination rules for wellness programs.

Wellness programs that meet various legal and regulatory requirements may vary benefits and premium costs based on whether an individual has met a certain standard, even if the standard is related to a health factor. Wellness programs that require individuals to meet a standard related to a health factor in order to obtain a reward (including avoiding a premium surcharge) are health-contingent wellness programs. Health-contingent wellness programs must meet several requirements to be excepted from the HIPAA non-discrimination rules, which in summary include (1) a once-per-year eligibility requirement, (2) a limit on the size of a reward, (3) a requirement to be reasonably designed to promote health or prevent disease, (4) a requirement to have reasonable alternative standards or waivers, and (5) a disclosure requirement.

Health-contingent wellness programs are either activity-only or outcome-based programs. Activity-only programs require an individual to perform or to complete an activity related to a health factor to obtain a reward, but they do not require the individual to attain or maintain a specific health outcome. Conversely, outcome-based programs require an individual to attain or maintain a specific health outcome. Examples of activity-only programs include walking, dieting or exercising programs, while examples of outcome-based programs include programs that require individuals to achieve specific standards on biometric screenings.

Until this week, there was some uncertainty as to whether COVID-19 vaccine premium surcharges are activity-only or outcome-based programs. The distinction is important because activity-only and outcome-based programs are required to waive a surcharge or provide a reasonable alternative standard for avoiding the surcharge for different groups of employees. For instance, if a COVID-19 vaccine premium surcharge is an activity-only wellness program, it must either waive the surcharge or provide a reasonable alternative standard to qualify for avoiding the surcharge only for individuals for whom receiving a COVID-19 vaccine is medically inadvisable or unreasonable due to a medical condition.

However, if a COVID-19 vaccine premium surcharge is an outcome-based program, it must either waive the surcharge or provide a reasonable alternative standard to qualify for avoiding the surcharge for any individual who does not meet the initial standard. Therefore, if a COVID-19 vaccine premium surcharge program is an outcome-based program, its ability to increase employee vaccination rates will be limited as the program must offer a waiver or a reasonable alternative standard to any individual who does not receive a COVID-19 vaccine.

This week, the Department of Health and Human Services, the Department of Labor, and the Department of the Treasury, which are the agencies that enforce wellness program regulations, issued guidance indicating that they consider wellness programs with a COVID-19 vaccine premium surcharge to be activity-only programs. While the agencies did not provide an explanation as to the reasons a COVID-19 vaccine premium surcharge program is activity-only and not outcome-based, it is possible that the agencies determined such programs are activity-only because they require individuals to engage in the health-related activity of receiving a vaccination but do not require individuals to attain or maintain a specific health outcome as a result of the activity, such as not contracting or transmitting the virus.

Based on the agencies’ guidance, wellness programs with a COVID-19 vaccine premium surcharge that comply with applicable regulations are activity-only programs and thus must provide a waiver or a reasonable alternative standard only to individuals for whom it is medically inadvisable or unreasonably difficult to receive a COVID-19 vaccine.

An employer that wishes to implement a COVID-19 vaccine premium surcharge through its wellness program must carefully consider other stringent legal and regulatory requirements that govern wellness programs and should consult legal counsel before implementing the program.

In 2018, the Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) changed the audit standards applicable to audits of financial statements of employee benefit plans subject to ERISA. These standards impact what is currently known as “limited-scope audits.” Initially, the new standards were to apply to audits of plan years ending on or after December 15, 2020, which means they would apply to 2020 plan year audits performed in 2021. However, due to the COVID-19 pandemic, the AICPA changed the effective date of the standards to plan years ending after December 15, 2021, extending the implementation of the standards for one year. Plan sponsors of plans subject to ERISA should be aware of the new responsibilities the standards impose on auditors, as these changes also indirectly create new responsibilities for plan sponsors.

In general, U.S. Department of Labor regulations require that a report of an independent qualified public accountant be filed as part of an employee benefit plan’s annual reporting obligations, which also include filing a Form 5500. The audit report must include the opinion of the accountant as to the financial statements and schedules included in the report and the accounting principles and practices expressed in the report. However, the regulations do not require an auditor’s report to cover any statement or information prepared and certified by a bank, similar institution, or insurance carrier with respect to the plan assets that are held by such bank, similar institution, or insurance carrier. Audit reports that fall under this exception are known as “limited-scope audits.”

With limited-scope audits, an auditor may disclaim the opinion on plan financial statements prepared and certified by a bank, similar institution, or insurance carrier when a plan sponsor instructs the auditor not to perform an audit of such statements. Until recently, disclaiming an opinion complied with generally accepted accounting industry standards as set forth by the AICPA.

The ASB of the AICPA in 2018 voted to issue new audit standards for audits of financial statements of employee benefit plans subject to ERISA. These new standards follow an assessment by the U.S. Department of Labor reporting that a large number of audits of employee benefit plans contain major deficiencies with respect to generally accepted auditing standards and recommending that the limited-scope audit exception be repealed.

The new standards are set forth in Statement on Auditing Standards (SAS) No. 136, refer to limited-scope audits as “ERISA Section 103(a)(3)(C) audits,” and include a new audit report format. Instead of disclaiming an opinion, in an ERISA Section 103(a)(3)(C) audit an auditor must provide an opinion on audit areas that are not certified and perform limited procedures on investments. For instance, the new standards will require ERISA Section 103(a)(3)(C) audit reports to comply with more extensive content requirements and include sections that address the auditor’s opinion, the basis for her opinion, the responsibilities of plan sponsors for financial statements, and the responsibilities of the auditor for the audit of financial statements.

Plan sponsors that elect an ERISA Section 103(a)(3)(C) audit will likely have more responsibilities than plan sponsors have with respect to limited-scope audits. For example, before performing an ERISA Section 103(a)(3)(C) audit, an auditor must obtain acknowledgement from a plan sponsor that an ERISA Section 103(a)(3)(C) audit is permissible, that the investment information is prepared and certified by a bank, similar institution, or insurance carrier qualified under the regulations, that the certification meets regulatory requirements, and that the certified investment information is appropriately measured, presented, and disclosed in accordance with the applicable financial reporting framework.

Plan sponsors must also substantially complete a draft Form 5500 before an auditor may accept engagement to perform an ERISA Section 103(a)(3)(C) audit. A substantially complete Form 5500 means the forms and schedules that could have a material effect on the audit are completed.

On November 10, 2020, the U.S. Supreme Court held oral arguments in California, et. al. v. Texas, et. al., the most recent challenge to the Patient Protection and Affordable Care Act (ACA).

By way of brief background, the Supreme Court addressed the constitutionality of the ACA in 2012 in National Federation of Independent Business v. Sebelius. In the Sebelius case, the ACA provision that required most Americans to maintain “minimum essential coverage” (i.e., the individual mandate) was at issue. The Court held in Sebelius that the individual mandate was constitutional under Congress’s authority to lay and collect taxes.[1] In 2017, Congress amended the ACA through the Tax Cuts and Jobs Act, which as of January 1, 2019, reduced to zero an individual’s tax penalty for failing to maintain minimum essential coverage. Once the tax penalty was removed, litigation arose regarding whether the ACA was still constitutional.

In 2018 in Texas v. United States, the U.S. District Court for the Northern District of Texas declared the individual mandate unconstitutional. The court also held that the remaining provisions of the ACA were invalid because they were inseverable from the individual mandate. The U.S. Court of Appeals for the Fifth Circuit affirmed the district court’s decision regarding the individual mandate, but it remanded on the issue of severability. The Supreme Court granted certiorari to the case, consolidated as California v. Texas, and heard oral arguments on November 10, 2020.

More than half of the oral arguments related to a legal theory called standing. In layman’s terms, a person or legal entity must have an actual injury from a law to contest the law, and this is typically called standing. All nine justices asked at least one question regarding the states’ standing and the individual citizens’ standing, as there is no longer a tax penalty under the individual mandate for failing to purchase minimum essential coverage. The states had seven grounds to argue states were injured, but the clear focus at the hearing was injury to a state’s pocketbook due to numerous obligations under the ACA that cost states money. The individual citizens had several arguments, but the primary argument was the mandate to purchase insurance they did not desire to purchase.

Justices Breyer, Sotomayor, and Kagan made clear that they do not believe the petitioners have standing. Once the individual mandate was removed, no individual has been forced to purchase anything. Justice Breyer in particular argued the individual mandate is now really just a suggestion. Further, the states are required to meet obligations under the ACA that the states claimed caused injury, including paperwork, by provisions other than the individual mandate. Thus, the states are not injured by the individual mandate. The newest member of the court, Justice Amy Coney Barrett, gave indications that she agreed, at least partially, with the more liberal justices on standing. She had difficulty understanding how the individual mandate required any paperwork from the states. She used the word “traceable” and argued that the injury alleged by the states was not related to the individual mandate. Moreover, based on the questioning from Chief Justice Roberts and Justice Alito, it can be suggested that Justices Roberts and Alito may agree with Justice Barrett.

If five justices find that the parties have standing, then the court must address whether the individual mandate is unconstitutional, and, if the court holds it to be unconstitutional, whether it may be severed from the ACA. It seemed rather apparent that at least five justices believe the individual mandate is severable. Of course, oral arguments can be misleading. However, at face value, Justices Roberts, Breyer, Sotomayor, Kagan, and Kavanaugh indicated they are leaning toward finding the individual mandate severable from the rest of the ACA. Chief Justice Roberts went so far as to say it is not the court’s job to do that which Congress did not. He raised the fact that Congress had the chance to repeal the law, and it did not do so. Instead, Congress reduced the tax penalty related to the individual mandate to zero, with many members of Congress openly stating that they repealed the individual mandate. Justice Kavanaugh asked the attorney representing the respondents, “Isn’t it clear that the proper remedy is to sever the mandate?”

Justice Thomas indicated that he might not want to reach the question of severability at this time. The opinions of Justices Gorsuch, Alito, and Barrett on the severability question were difficult to interpret. The attorney for Texas and the other respondents and the attorney for the petitioners focused heavily on a clause or clauses in the original ACA, which they argued indicated the individual mandate could not be severed. There was tremendous discussion between the justices and the attorneys for the parties on whether Congress actually drafted a severability clause in the original ACA. Even if Congress did, some of the justices argued it was no longer relevant after the ACA was amended in 2017.

Finally, it must be noted, the last question asked at oral argument was whether the 2012 Sebelius case definitively resolved the issue of whether Congress had authority to enact the individual mandate under the Commerce Clause. This is important because there are three new justices to the Court since Sebelius was decided. Justices Breyer, Sotomayor, and Kagan clearly stated in Sebelius that they believed the individual mandate was a valid exercise of the Commerce Clause. If Justice Barrett and either Justice Gorsuch or Justice Kavanaugh agree, then the Commerce Clause may be an entirely new basis for upholding the individual mandate and the ACA.

[1] Four justices found the ACA to be constitutional under the Commerce Clause, but five disagreed.

When the CARES Act was enacted, we wrote about its provisions that impact retirement plans and provide relief to plan sponsors and plan participants. Recently, pursuant to Section 2202 of the CARES Act, the Internal Revenue Service issued Notice 2020-50 on coronavirus-related distributions and plan loans from eligible retirement plans. Notice 2020-50 provides guidance to employers on several subjects associated with coronavirus-related distributions and plan loans, including the following:

Additional categories of “qualified individuals” for the purposes of coronavirus-related distributions and plan loans

“Qualified individuals” are individuals eligible under the CARES Act to elect coronavirus-related distributions and plan loans. Notice 2020-50 expands the definition of “qualified individuals” to those who experience adverse financial consequences as a result of:

  • the individual having a reduction in pay (or self-employment income), a rescinded job offer, or a delayed job starting date due to COVID-19;
  • the individual’s spouse or member of the individual’s household being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or a job starting date delayed due to COVID-19; or
  • closing or reducing hours of a business owned or operated by the individual’s spouse.

A member of an individual’s household is someone who shares the individual’s principal residence.

A plan administrator’s reliance on certifications and a sample certification

A plan administrator may rely on an individual’s certification that he or she satisfies the conditions of a qualified individual, unless the administrator has actual knowledge to the contrary. The “actual knowledge” requirement does not require the administrator to inquire into whether the individual meets the qualified individual requirements. Instead, the “actual knowledge” requirement is limited to circumstances in which the administrator already possesses accurate information to determine the reliability of a certification.

Notice 2020-50 provides a sample notification that may be signed by an individual who claims to meet the requirements of a qualified individual.

Employer safe harbor for plan loans

The CARES Act provides for a one-year delay in the due date for a qualified individual’s repayment of a plan loan if the loan payment is due between March 27, 2020, and December 31, 2020. Notice 2020-50 provides a safe harbor for qualified employers who suspend a qualified individual’s loan due date. An employer will be treated as satisfying Code § 72 requirements if:

  • The qualified individual’s obligation to repay an outstanding loan is suspended for any period not beginning earlier than March 27, 2020, and not later than December 31, 2020 (the “suspension period”).
  • The loan repayment must resume after the end of the suspension period, and the term of the loan may be extended by up to one year from the date the loan was originally due.
  • Interest accruing during the suspension period must be added to the remaining principal of the loan. This requirement is satisfied if the loan is reamortized and repaid in substantially level installments over the remaining loan period (for example, five years from the date of the loan, plus up to one year).
  • If a qualified employer plan suspends loan repayments during the suspension period, the suspension will not cause the loan to be deemed distributed even if, due solely to the suspension, the term of the loan is extended beyond five years.

Qualified individuals may designate a distribution as a coronavirus-related distribution

Notice 2020-50 explains that a qualified individual is permitted to designate a distribution from an eligible retirement plan that does not exceed $100,000 and that is made on or after January 1, 2020, and before December 31, 2020 as a coronavirus-related distribution on his or her tax return without regard as to whether the plan treated the distribution as a coronavirus-related distribution. Similarly, a qualified individual may designate an eligible distribution as a coronavirus-related distribution even if the plan is not amended to provide for coronavirus-related distributions.

Employers’ decisions to amend plans to provide for coronavirus-related distributions and plan loans

An employer may choose whether to amend its plan to provide for coronavirus-related distributions and plan loans. Notice 2020-50 explains that, for instance, an employer may choose to provide for coronavirus-related distributions but also choose not to modify its plan’s loan provisions or loan repayment schedules. However, if a plan chooses to provide for coronavirus-related distributions, it must be consistent in its treatment of similar distributions.

An employer may choose whether to treat a plan distribution to a qualified individual as a coronavirus-related distribution. Nevertheless, as explained above, a qualified individual could designate a distribution that meets applicable requirements as a coronavirus-related distribution on his or her own tax return even if a plan is not amended to provide for coronavirus-related distributions.

Distribution limits on coronavirus-related distributions

The total amount of distributions to a qualified individual that are treated by an employer as coronavirus-related distributions under all of its retirement plans may not exceed $100,000. For purposes of this rule, “employer” means the employer maintaining the plan and those employers required to be aggregated with the employer. However, a plan will not fail to satisfy this requirement if a qualified individual’s total coronavirus-related distributions exceed $100,000 taking into account distributions from IRAs or other retirement plans maintained by unrelated employers.

Greensfelder Officer Amy Blaisdell recently co-authored an article in For the Defense, a publication of the Defense Research Institute (DRI), about lessons employers should keep in mind when defending against disability benefits claims that lack objective medical evidence. The article, titled “Objective Versus Subjective Evidence in the ERISA Claims-Handling Process,” was published in the August 2020 edition.

As noted in the article, disability claimants regularly take the position that certain difficult-to-diagnose conditions cannot be proven through objective medical evidence. As such, they argue that it is unreasonable or arbitrary for an administrator of a disability plan governed by ERISA to require objective evidence of these disabling conditions.

The notion that subjective symptoms must be given at least some level of consideration has gained traction in the federal courts recently. However, there are ways to organize a defense to increase the likelihood of success on the merits. These include:

  • focusing on the language in the plan;
  • highlighting evidence in the record that demonstrates that subjective evidence was considered, even if was ultimately found to be insufficient;
  • focusing on the lack of impairment evidence, rather than the diagnosis; and
  • carefully considering the role of credibility in your arguments.

Read the full article by Amy Blaisdell and former Greensfelder associate Dan Ritter in For the Defense.

The COVID-19 pandemic has caused significant burdens for employers and employees alike. While some businesses struggle to survive, others are fortunate enough to be in a position to help employees as they face hardships created by the crisis. Many employers in the latter category are looking for ways to best help employees who are facing financial difficulties as a result of the pandemic.

One possible approach for these employers is a disaster relief fund under Section 139 of the Internal Revenue Code. Section 139 disaster relief funds allow employers to make qualified disaster relief payments to employees to help with certain expenses they incur as a result of a qualified disaster.

Tax status of COVID-19 disaster relief funds

On March 13, 2020, President Trump declared the COVID-19 pandemic to be an emergency under Section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Although this declaration does not strictly fall within the definitions of “disaster” and “qualified disaster” in applicable Internal Revenue Code sections, the IRS has taken the position that a disaster includes an event declared a major disaster or an emergency.[1] Therefore, if a disaster relief fund is properly structured, payments under such a fund are likely excludable from recipient employees’ taxable income for federal tax purposes. The payment also will be excluded from taxable income in most states and will not be subject to employment taxes.

Scope of qualified disaster relief payments

Code § 139 defines “qualified disaster relief payments” to include payments for several possible types of expenses incurred as a result of a qualified disaster. In the context of the COVID-19 emergency, qualified disaster relief payments would include amounts paid by an employer to an employee for the employee’s reasonable and necessary personal, family, living or funeral expenses incurred as a result of the COVID-19 emergency. Payments to replace lost salary or wages will not qualify for favorable tax treatment under Code § 139.

Although Code § 139 does not set forth specific expenses that will qualify (other than funeral expenses), the following likely fall within the scope of qualified expenses:

  • Expenses incurred in working from home as a result of the pandemic
  • Additional or unexpected dependent care expenses incurred as a result of the pandemic
  • Increased commuting costs resulting from a lack of access to public transportation
  • Unreimbursed medical expenses incurred for treatment of COVID-19 or its symptoms
  • Other extraordinary expenses resulting from an employee’s exposure to COVID-19, such as expenses for products to sanitize the employee’s home

Disaster relief fund requirements

There is little formal guidance on how disaster relief funds must be structured and what requirements such funds must meet. Although it is not strictly required, it is prudent to set forth the terms of a disaster relief fund in a written document or policy. Among other things, the document or policy should describe the scope of the policy, the duration of the disaster relief fund, eligibility requirements for receipt of disaster relief payments, procedures to apply for payments, the timing and method of making payments, and limits on the amount of payments, if any.

In order to receive favorable tax treatment under Code § 139 for payments they receive under a disaster relief fund, employees need not be required to provide proof of actual expenses. However, the employer providing the payments should take steps to ensure that the payments are reasonably expected to be commensurate with the amount of unreimbursed reasonable and necessary qualifying expenses. To meet this standard, the employer should, at a minimum, require employees to certify that they have incurred or will incur qualifying expenses and that the amount of payments that they will receive under the fund are reasonably expected to be commensurate with the amount of their qualifying expenses. In addition, employees should certify that the expenses are not reimbursable under any other plan, program or insurance policy.

Other considerations

A properly structured disaster relief fund will not be subject to ERISA. Therefore, it need not contain formal claim and claim review procedures. However, employers should consider adopting some basic administrative procedures to ensure that requests for payments from the fund are proper. In addition, employers should consider whether employees will have the ability to appeal denied payments. Appeals will add to the complexity of administering a disaster relief fund, which may not be desirable in a time of crisis. However, it can provide an added measure of protection in the event that payment requests are denied.

Link to COVID-19 Resources page

[1] The recent delay of the April 15 tax filing deadline is one example of this position.

Retirement benefits on cellphone screenOn March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. The CARES Act includes the following provisions that impact retirement plans and provide relief to plan sponsors and plan participants.

Coronavirus-related distributions

  • Participants may take “coronavirus-related distributions” from qualified retirement plans.
  • A coronavirus-related distribution is exempt from the 10 percent penalty that otherwise applies to early distributions from qualified retirement plans.
  • A “coronavirus-related distribution” is defined as a distribution taken by a participant:
    • Who is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDC),
    • Whose spouse or dependent is diagnosed with COVID-19 by a CDC-approved test, or
    • Who experiences adverse financial consequences as a result of:
      • Being quarantined,
      • Being furloughed or laid off or having reduced work hours due to COVID-19,
      • Being unable to work due to lack of child care because of COVID-19,
      • Closing or reducing hours of a business owned or operated by the participant due to COVID-19, or
      • Experiencing other factors determined by the Secretary of the Treasury.
  • Plan administrators may rely on a participant’s certification that he or she satisfies the conditions of a coronavirus-related distribution.
  • A coronavirus-related distribution must be taken during the 2020 calendar year, cannot exceed $100,000 per participant, and may be repaid within three years after the date of the distribution. If the distribution is not repaid within three years, taxes on the unpaid amount of the distribution may be paid over a three-year period.

Plan loan relief for “qualified individuals”

  • The $50,000 limit on a plan loan is increased to $100,000 for a “qualified individual” during the 180-day period following the enactment of the CARES Act.
  • A “qualified individual” is a plan participant who meets the definition of a “coronavirus-related distribution,” which is described above.
  • If the due date of a loan to a “qualified individual” occurs between the enactment of the CARES Act and Dec. 31, 2020, the due date is delayed for one year and repayments of the loan are adjusted to reflect the delayed due date and any interest accrued during the delay. The delay in the due date is disregarded for determining the five-year time limitation for plan loans.

Waiver of required minimum distribution rules

  • The CARES Act waives required minimum distributions that are required to be made during the 2020 calendar year from defined contribution 401(a), 403(a), and 403(b) plans, governmental 457(b) plans, and IRAs.

Delayed funding requirements for defined benefit plans

  • Minimum required contributions to single-employer defined benefit plans that are due in 2020 may be delayed until Jan. 1, 2021.
  • The amount of any delayed minimum required contribution will be increased by the interest that accrued during the period the contribution was delayed.

Plan amendments to implement CARES Act changes

  • Plans are not required to adopt plan amendments that implement CARES Act provisions until the last day of the first plan year that begins on or after Jan. 1, 2022.
  • Governmental plans are not required to adopt plan amendments until the last day of the first plan year that begins on or after Jan. 1, 2024.

Please contact your primary Greensfelder contact or any of the attorneys in the Employee Benefits group with any questions you may have.

For additional coverage of implications of the CARES Act on businesses and employers, please see:

Link to COVID-19 Resources page