The Cadillac Tax is one of the least popular parts of the Affordable Care Act. In a nutshell, the law creates a 40 percent tax on the cost of health insurance premiums to the extent they exceed certain threshold amounts — currently $850 a month ($10,200/year) for individual coverage and $2,325 a month ($27,500/year) for all other coverage. Employer contributions to employees’ Health Savings Accounts are also subject to the tax.

The basic goal of the Cadillac Tax is to dissuade employers from providing health care coverage that is too generous. Otherwise, the theory goes, if consumers are too heavily shielded from the true costs of their care, they might obtain unnecessary services, driving up everyone’s costs.

Seemingly every politician expressing an opinion on the tax has called for its repeal, and multiple pieces of bipartisan legislation were introduced in 2015 attempting to repeal the tax. The tax survived, however, and legislators had to settle on simply delaying it. Originally set to go into effect on Jan. 1, 2018, it was pushed back to 2020. The delay will cost the government about $9 billion in foregone revenue.

Employers will need to watch closely for further developments on the Cadillac Tax. 

A recently decided Fifth U.S. Circuit Court of Appeals case provides employee stock ownership plan (ESOP) fiduciaries and others with an example of how not to undertake an ESOP transaction.

When an employee stock ownership plan purchases the stock of a closely held corporation, the duty of a fiduciary is to act solely in the interest of the participants and their beneficiaries. The case, Perez v. Bruister, details that duty and the consequences of failing to fulfill it.

The case arose out of the sale to an ESOP of 100 percent of the stock of a closely held business that installed and serviced satellite television equipment. The sale occurred over a period of three years in five separate transactions. The three plan trustees (one of which was the selling shareholder) established the purchase price based on valuations by a third-party appraiser. The trial court had found that although the owner-trustee abstained from voting on the transactions, he influenced the outcome of the valuations and the consideration given by the other trustees. In addition, while not voting on the sale transactions, he actively participated in meetings pertaining to the sale.

There are several lessons to be learned from this case, the most important of which is the danger of wearing multiple hats. In addition to being a trustee, the owner was a member of the company board of directors. The court determined that even though the owner abstained from voting on the transaction, he breached his fiduciary duty by his actions in firing ESOP counsel, firing the initial appraiser, influencing the valuation of the second appraiser by adjusting assumptions and financial information to obtain a higher appraisal, and participating in trustees’ meetings pertaining to the sale. The court stated that “the duty of loyalty was breached from start to finish,” focusing on the obvious conflict of interest.

Another lesson of the case is that trustees cannot blindly rely on the valuation provided by the third-party appraiser. In this case, the court noted that the trustees failed to conduct a sufficient investigation into the appraiser’s background and qualifications, failed to provide him with significant information that would affect the valuation and failed to significantly review the appraiser’s ultimate conclusions. Rather, the trustees’ acceptance of the appraiser’s conclusion of value without further inquiry was deemed to be a breach of their fiduciary duty of care.

The final lesson relates to the available remedy and the potential damages. The court determined that the measure of damages should be the difference between the fair market value of the stock at the time of the sale and the amount that the ESOP paid for the stock. In this case, the loss was $3.4 million. The court rejected a higher level of damages sought by the Department of Labor and a lower level argued by the owner’s attorneys.

The takeaways from this case are obvious. When structuring an ESOP acquisition of stock, it is best to avoid any potential conflict of interest by engaging an independent third-party (ideally, professional) trustee to act on behalf of the ESOP and ensuring that the trustee performs the necessary due diligence and hires a qualified valuation firm and ESOP counsel without ties to the selling shareholder.

On May 16, the U.S. Supreme Court declined to rule on a challenge to the Affordable Care Act’s contraceptive mandate as applied to nonprofit religious organizations.

In Zubik v. Burwell (2016 WL 2842449, U.S., No. 14-1418, 5/16/16), the court sent back to the lower courts seven decisions that held that the ACA’s accommodation for nonprofit religious organizations did not violate the Religious Freedom Restoration Act of 1993 (RFRA) or the First Amendment. 

The ACA requires health insurance providers — including nonprofit religious organizations that self-insure health plans — to cover contraceptives for women. Regulations were set forth to give nonprofit religious organizations the ability to opt out of paying for contraceptive coverage.

To benefit from this exemption, however, a nonprofit religious organization must submit a form to their insurer or the federal government stating that they object on religious grounds to providing contraceptive coverage. Nonprofit religious organizations challenged those regulations based upon the argument that the notice requirement substantially burdens the exercise of their religion, in violation of the Religious Freedom Restoration Act.

After oral arguments, the Supreme Court requested supplemental briefing on whether contraceptive coverage could be provided to the nonprofit religious organizations’ employees through the insurance companies without requiring notice from the organizations. The organizations stated in this briefing that their religious exercise is not infringed where they are only required to contract for a plan that does not include contraceptive coverage even if their employees receive cost-free contraceptive coverage from the same insurance company. The government confirmed that the challenged procedures could be modified to operate in the manner posited by the court’s order.

With the court’s remand, the parties now are to be given an opportunity to reach an agreement that accommodates the organizations’ religious exercise while ensuring that women “receive full and equal health coverage, including contraceptive coverage.”

In reaction to the U.S. Treasury Department’s recent rejection of its proposed pension rescue plan, the Central States pension plan’s sponsor is calling on Congress to find a solution to its pending insolvency.

The Treasury Department rejected the Central States, Southeast and Southwest Areas Pension Plan’s application on May 6, 2016, because the proposed suspension failed to satisfy the statutory criteria for approval of benefit suspensions.

The pension plan is projected to become insolvent within the next 10 years, and plan representatives worry that the Pension Benefit Guarantee Corporation will not have sufficient funds to provide benefits to its over 400,000 participants, who include truck drivers and warehouse workers. 

In 2014, in an effort to help struggling multi-employer plans, Congress passed the Multiemployer Pension Reform Act (MPRA), which allows multi-employer pension plans to reduce benefits in order to prevent insolvency. The plan made its application to Treasury under the terms of MPRA. Participants and interest groups such as the Pension Rights Center opposed the plan’s proposal.

At least four other plans have made similar applications, and many other plans covering union employees have similar financial difficulties. Because of the severe unfunded liabilities in many multi-employer plans, employers who would like to leave these plans face large withdrawal liabilities. As companies participating in the plans cease operations or withdraw, it leaves the remaining employers with even more liabilities.

Treasury, in consultation with the Department of Labor and Pension Benefit Guaranty Corporation, did not find that the Central States plan’s proposed suspensions were reasonably estimated to allow the plan to avoid insolvency. Treasury determined that certain age and interest rate assumptions were not reasonable and that the suspension of benefits was not equally distributed.

In response, the plan has urged participants to contact their congressional representatives to find a legislative solution to the plan’s underfunding. The plan claims that a government bailout is now the only solution.

Congress is considering legislation that would repeal MPRA or limit a plan’s ability to make pension cuts. SeeKeep Our Pension Promises Act (H.R. 2844, S. 1631); the  Pension Accountability Act (H.R. 4029, S. 2147); and the Pension Fund Integrity Act of 2016 (S. 2894).

On May 16, 2016 the EEOC issued final rules amending the regulations and interpretive guidance implementing Title I of the Americans with Disabilities Act (ADA) and Title II of the Genetic Information Nondiscrimination Act (GINA) with respect to employer wellness programs. These changes clarify that employers may use incentives to encourage participation in wellness programs that include disability-related inquiries and/or medical examinations as long as the programs are voluntary and the incentives do not exceed certain limits. Additionally, the rules confirm that employers may provide incentives when employees’ spouses — but not children — provide certain health information.

Which wellness programs qualify?

An employee health program must be reasonably designed to promote health or prevent disease. In other words, the program must have a reasonable chance of improving the health of, or preventing disease in, participating employees, and must not be overly burdensome, a pretense for violating the ADA, GINA or other applicable nondiscrimination laws, or highly suspect in the method chosen to promote health or prevent disease. For example, conducting biometric screenings for the purpose of alerting employees to health risks that they may be unaware of would qualify as an employee health program. However, collecting medical information from employees on a health questionnaire without providing follow-up advice or using the information to design a program to treat specific conditions would not qualify as an employee health program. A program will not qualify as an employee health program if it excessively burdens employees in terms of costs or time required for their participation or if the program exists mainly to shift costs from employers onto targeted employees based upon their health. Additionally, a program will not qualify if it imposes a penalty on an individual whose spouse’s manifestation of disease or disorder prevents the spouse from participating or from achieving a certain health outcome.

What makes an employee health program voluntary?

In order for an employee health program that includes disability-related inquiries and/or medical examinations to be considered voluntary, the program must meet all of the following requirements:

• Does not require employees to participate;
• Does not deny coverage or limit coverage for employees who do not participate (except to the extent of allowed incentives);
• Does not take any adverse employment action or retaliate against, interfere with, coerce, intimidate or threaten employees who choose not to participate in the employee health program or who fail to achieve certain health outcomes; and
• Provides employees with a notice that meets the notice requirements specified in the rule.

What incentives may employers offer for participation?

In general, the use of limited incentives (which include both financial and in-kind incentives, such as time-off awards, prizes or other things of value) in a wellness program will not render a wellness program involuntary. However, the total allowable incentive for a wellness program that involves asking disability-related questions and/or conducting medical examinations (such as having employees complete a health risk assessment) may not exceed 30 percent of the total cost of employee-only coverage. For example, if a group health plan under which an employee is enrolled has a total annual premium for employee-only coverage of $6,000 (which includes both the employer’s and employee’s contributions toward coverage), the maximum allowable incentive is $1,800.

Employers may offer an inducement, not to exceed 30 percent of the total cost of employee-only coverage in exchange for individuals who complete risk assessments that include questions about family medical history or other genetic information; the same inducement may be offered for employees’ spouses who provide information about the spouse’s manifestation of disease or disorder as part of a health assessment. Inducements may not be offered to employee spouses who provide their genetic information, including results of genetic tests, or to employee children who provide their health information.

Importantly, the 30 percent limit only applies to programs that ask participants to answer disability-related inquiries, take medical examinations, or provide information regarding family medical history or genetic information. Programs that do not include these requirements, such as attending smoking cessation, weight loss, or nutrition classes, have no limit on incentives available for participation or achievement of an outcome.

How are the ADA’s reasonable accommodation requirements impacted?

All employee health programs are prohibited from discriminating against employees with disabilities. Absent undue hardship, employers must provide reasonable accommodations to enable employees with disabilities to fully participate in employee health programs and earn any reward or avoid any penalty that is part of an employee health program. For example, an employer that offers a financial incentive for employees to attend a nutrition class would be required to provide a sign language interpreter so that an employee who is deaf could earn the incentive.

The final rules will go into effect beginning in 2017.