Commercial National Bank Building
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Telephone: 202-783-0010
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February 1999
This is one of a continuing series of updates on recent developments in the law affecting employee benefit plans.
IRS Issues COBRA Regulations
More COBRA Proposed Regulations
Electronic Documents Under ERISA
SOP 92-6-The Department of Labor Cries Uncle
Hearings Scheduled on Proposed Claims Regulations
Recent Noteworthy Decisions
Only fourteen years after Congress enacted the statutory self-pay requirements for health plans that came to be known as COBRA, and twelve years after the IRS issued its proposed regulations, the IRS has at last issued final regulations-nearly thirty pages of them. The regulations generally track the original proposed regulations, with a few important differences. Like those earlier proposed regulations, the final regulations are presented in question and answer format.
Effective Date-The new regulations apply for qualifying events that occur in plan years beginning on or after January 1, 2000. Until then, the IRS will consider a plan to be in compliance if it follows a good faith interpretation of the statute. By definition, compliance with the previously proposed regulations (to the extent they remain consistent with applicable court decisions) is good faith compliance.
Applicability of COBRA-The regulations clarify that COBRA requirements apply to any plan maintained by an employer or employee organization to provide health care to individuals who have an "employment-related connection to the employer or employee organization" or to a member of their families. This includes any such plan, whether provided through direct reimbursement, insurance, or even through on-site facilities. Moreover, with limited exceptions, this includes health plans provided through flexible benefit arrangements and cafeteria plans. Finally, it is not even necessary that the employer or employee organization contribute anything to the plan for COBRA to apply.
Health plans do not include programs that may promote good health, but that do not relate to the relief of medical problems, and that are generally used by employees without regard to their health. Thus, exercise or swimming facilities are not included. Similarly, employee discounts that apply to health care supplies are not included, provided they are available without regard to health. On the other hand, drug or alcohol abuse treatment facilities, or any other facility targeted at treating health problems, are covered. One specific exception to the rule that health care facilities provided on the employer's premises constitute a health plan is for first aid clinics that are only available to employees, without cost, and only during working hours.
Excluded from the definition of a health plan is a program providing only long-term care. Additionally, employer contributions to a medical savings account are not covered.
One general exception to the COBRA requirements is for "small employer plans." A small employer plan is a health plan maintained by an employer that normally employed fewer than 20 employees during the prior calendar year. In applying this test, the regulations require that all employees (including part-time employees) of each employer within the controlled group of employers be counted. In order for a multiemployer plan to fall within the small employer plan exception, each contributing employer must have normally employed fewer than 20 employees during the prior year.
An employer regularly employed fewer than 20 employees if it had fewer than 20 employees on at least 50% of its typical business days during the measurement year. Self-employed individuals and independent contractors are not counted. An employer that drops below the 20-employee threshold and becomes a small employer remains obligated to provide continuing COBRA coverage to eligible beneficiaries whose qualifying events occurred before it became subject to the exception.
Liability for Non-compliance-Besides substantive enforcement by participants (and the DOL) under ERISA, COBRA requirements are enforced by the IRS through the assessment of excise taxes. Generally, those taxes are imposed upon the employer. In the case of a multiemployer plan, however, the taxes are imposed on the plan itself. However, if a plan utilizes the services of a contract administrator or insurance company, and that administrator or insurance company has contractually assumed the obligation to perform the acts generally regulated by COBRA (including the obligation to enroll participants and beneficiaries and to pay claims), to the extent that administrator or insurance company fails to fulfil its contractual obligations in a manner that complies with COBRA and results in the imposition of the excise tax, then that administrator or insurance company is liable for those taxes.
Qualified Beneficiaries-A qualified beneficiary is anyone covered under a group health plan (prior to the qualifying event) by virtue of either being a covered employee or the dependent child of a covered employee. In addition, a child newly born or adopted (or placed for adoption with a qualified beneficiary) during a period of COBRA coverage is a qualified beneficiary. Otherwise, someone not covered by the plan prior to the qualifying event is generally not a qualified beneficiary. If the qualifying event is the bankruptcy of the employer, the term qualified beneficiary also includes retirees and dependents covered by the plan prior to the qualifying event. An individual who does not timely elect COBRA coverage ceases to be a qualified beneficiary.
The definition of qualified beneficiaries is not limited to common law employees and their dependents. Thus, independent contractors who are provided health coverage have the same COBRA rights as employees. However, an employee (or dependent) who is not covered under a health plan on the date of a qualifying event (other than a newly born, adopted, or placed child) is generally not a qualified beneficiary, and is not entitled to elect COBRA coverage, unless the failure to provide coverage to the employee or dependent was itself a violation of law.
Qualifying Events-Qualifying events include any of the following, if they would otherwise result in a loss of health coverage:
Coverage does not have to be lost immediately, as long as it is lost sometime within the COBRA continuation period. Although generally, for there to be a qualifying event, coverage must be in place prior to that event, there are several exceptions to this rule. First, if coverage is lost or reduced in anticipation of a qualifying event, there is still a qualifying event. Second, in the case of the bankruptcy of a retiree's former employer, the bankruptcy is still a qualifying event even if coverage was reduced or terminated as long as a year prior to the filing of the bankruptcy. Finally, as mentioned above, if an otherwise qualified beneficiary was denied coverage in violation of some other law prior to the event, it is still a qualifying event.
The termination of employment, or the reduction of hours, of a covered employee is a qualifying event regardless of the cause (unless it is for gross misconduct), including strikes and lockouts, and can be temporary (such as simple failure to work enough hours to maintain eligibility for benefits).
A COBRA qualifying event occurs even if there is no actual loss of coverage. If the event simply results in a reduction in coverage, or increased fees or expenses, there has been a qualifying event.
COBRA Coverage-Perhaps the biggest change from the earlier proposed regulations is the elimination of the concept of "core coverage." Based upon language included in a 1986 Congressional conference report (one year after COBRA was adopted), and never included in any statutory language, the IRS had imposed a requirement that qualified beneficiaries be permitted to elect core-only coverage. In these new regulations, the IRS has concluded that, in the absence of any statutory language supporting the requirement of a core-only option, it would eliminate that requirement.
In general, COBRA requires that, in the event of a qualifying event, a qualified beneficiary must be afforded the opportunity to self-pay for continued coverage under the same health plan that covers similarly situated non-COBRA beneficiaries. Similarly situated non-COBRA beneficiaries are employees, spouses and children receiving benefits other than through COBRA who, based on all the facts and circumstances, are most similarly situated to the position of the qualified beneficiary before the qualifying event.
Typically, this will be the same coverage the qualified beneficiary had prior to the qualifying event. Any reduction in coverage applicable to COBRA beneficiaries and not to similarly situated non-COBRA beneficiaries means that the plan does not comply with COBRA. Likewise, any change in coverage adopted in anticipation of a qualifying event is disregarded in determining the level of required COBRA coverage. For newborn, or newly placed or adopted, children, coverage must be offered on the same basis as for children born to, or adopted by or placed with, active employees.
A plan may not force a qualified beneficiary who elects COBRA to start over with any applicable deductibles. To the extent the qualified beneficiary had accumulated expenses to be applied toward any deductible, those expenses must still be considered toward the deductibles in the same manner as they would have had the beneficiary not had to make a COBRA election. For a plan that maintains family deductibles, if a family is divided (e.g., by a divorce), the family deducible is computed separately for each of the resulting family units. Each such resulting family unit is credited with the expenses accumulated by the members of that unit prior to the COBRA event. Limits (including out-of-pocket maximums and maximum benefits) are treated in the same way as deductibles.
In general, a qualified beneficiary need not be permitted to elect coverage that differs from what was provided prior to the qualifying event. Such elections need only be provided if they would also have been provided to similarly situated non-COBRA beneficiaries. A qualified beneficiary also must be afforded the same opportunity to add new family members that would be available to similarly situated non-COBRA beneficiaries.
Electing COBRA Coverage-The COBRA election period must begin no later than the date coverage would be lost. It must
end no earlier than 60 days after the later of:
A COBRA election is deemed made on the date it is sent to the plan administrator (not the date it is received).
Ordinarily, a qualified beneficiary has no duty to notify a plan administrator of a qualifying event. The only exceptions to this
rule is that a qualified beneficiary must notify the plan administrator of a divorce or legal separation or a dependent child
ceasing to qualify as a dependent child. If the beneficiary fails to provide such notice on a timely basis, the plan need not
offer COBRA coverage. Notice of such a qualifying event is considered timely if it is provided within 60 days of the later of:
In general, COBRA coverage must extend from the date coverage would have been lost. Thus, in the case of an indemnity plan, a qualified beneficiary who does not elect COBRA coverage until after benefits have already terminated must receive retroactive coverage and reimbursement back to the date of the termination. For an HMO or other medical clinic, the plan has two options. First, it may elect to make a reasonable charge for use of the facilities, subject to reimbursement if the beneficiary ultimately (and timely) elects COBRA coverage. Alternatively, the plan may choose to treat the use of the medical facilities as a constructive election to continue coverage. However, if a plan elects this latter course, the qualified beneficiary must be so informed.
If an individual has suffered a qualifying event, and a service provider asks the plan for the status of the individual's coverage, the plan must give a complete and accurate answer. Thus, for example, if coverage has already terminated as the result of the qualifying event, but the COBRA election period has not yet expired, the inquiring provider must be informed of this fact, and that a timely election of coverage will result in the retroactive payment of claims.
If a beneficiary waives COBRA coverage, that waiver may be revoked at any time within the original election period. However, if a qualified beneficiary does elect to revoke a waiver of COBRA coverage, the plan is not required to provide coverage for any period prior to the date of the revocation. Waivers and revocations are considered made on the date they are sent to the administrator (not the date they are actually received).
However, a plan is never required to permit beneficiaries to elect prospective-only coverage. Thus, a plan may always require that coverage be reinstated retroactive to the date coverage would otherwise have been lost but for COBRA.
An employer is prohibited from providing any incentive to a qualified beneficiary to waive COBRA coverage (or disincentive for electing such coverage). Each qualified beneficiary is permitted to make a separate COBRA election.
Termination of Coverage-In general, COBRA coverage can be terminated upon the first to occur of the following:
A plan is also permitted to terminate coverage for cause, on the same basis for which it would terminate coverage for similarly situated non-COBRA beneficiaries (e.g., for filing fraudulent claims).
With regard to coverage under another group plan, the IRS has incorporated the Supreme Court's recent decision in Geissal v. Moore Medical Corp., 524 U.S. 74 (1998), which held that a plan cannot deny COBRA coverage to an otherwise qualified beneficiary simply because he or she has preexisting coverage under another group health plan. In the case of subsequent coverage, the plan providing COBRA coverage can discontinue that coverage, even if the coverage under the other group health plan is not as good. However, if the other plan has preexisting illness exclusions, the plan providing COBRA coverage may not discontinue that coverage. (Note: Under federal law, preexisting illness exclusions are generally prohibited if a qualified beneficiary has been continuously covered under a medical plan.) Moreover, the qualified beneficiary must actually be covered by the other group health plan, and not simply eligible to obtain coverage, for COBRA coverage to be terminated.
The rules applicable to the termination of COBRA coverage as the result of coverage under another group health plan are also applicable to coverage under Medicare. Thus, in a change from the 1987 proposed regulations, a plan may not deny COBRA coverage to an otherwise qualified beneficiary merely because the beneficiary was covered by Medicare prior to the date of the COBRA election. Medicare coverage is treated as first occurring on the date either part A or part B Medicare coverage becomes effective, whichever is earlier.
In the event an employee is eligible for COBRA coverage as the result of a termination of employment or reduction of hours, and either the employee or any of his or her qualified beneficiaries becomes disabled during the first 60 days of COBRA coverage, the disabled qualified beneficiary is eligible for an extension of COBRA coverage for up to a total of 29 months from the original qualifying event. The right to this extension applies not only to the disabled qualified beneficiary, but to each qualified beneficiary in the family who is not disabled. The 60-day period during which the disability must occur in order for the extension to be required generally refers to the 60-day period beginning with the qualifying event. In the case of a newly born, adopted, or placed child, the 60 days runs from the date of birth, adoption or placement. However, the right to a disability extension is forfeited unless at least one of the affected qualified beneficiaries notifies the plan administrator of the Social Security disability determination within 60 days after the determination is issued, and before the initial 18-month COBRA continuation period expires.
If a qualified beneficiary is receiving COBRA coverage as the result of a termination of employment or reduction of hours, the maximum 18 month (or 29 month, in the case of a disability extension), COBRA period can be extended as the result of a second qualifying event occurring within the initial coverage period. Thus, if the spouse of a terminated employee gets a divorce, the spouse can extend COBRA coverage for up to a full 36 months from the original qualifying event. However, if COBRA coverage has already terminated prior to the second qualifying event, the qualified beneficiary does not have a right to resume COBRA coverage (except, as noted above, in the case where coverage was terminated in anticipation of the second qualifying event).
The coverage period under COBRA is normally measured from the qualifying event. The fact that a plan may, for other reasons, extend coverage beyond the date of the qualifying event does not extend the maximum COBRA coverage period.
If a plan provides alternative coverage to COBRA continuation coverage (e.g., a reduced premium continuation plan with reduced benefits), it must also permit qualified beneficiaries to elect COBRA coverage. If a qualified beneficiary elects not to take COBRA, but to take an alternative plan, and a subsequent qualifying event occurs (e.g., the death of a participant), the eligible qualified beneficiaries must be given a COBRA option to continue that alternative coverage. In an exception to the general rule that the maximum COBRA period is measured from the initial qualifying event, under these circumstances, the maximum COBRA continuation period is a full 36 months from the date of the subsequent qualifying event. This is a significant change from prior law.
If a plan offers a conversion option to similarly situated non-COBRA beneficiaries, at the conclusion of COBRA coverage, it must offer that same option to COBRA beneficiaries.
Payment of Premiums-The regulations restate the statutory requirement that a plan may charge up to 102% of the "applicable premium" for COBRA coverage. If the qualified beneficiaries are covered under the disability extension, the plan may charge up to 150% of the applicable premium, beginning in the 19th month. Interestingly, if a qualified beneficiary would have been entitled to a disability extension, but suffers a second qualifying event within the initial 18-month period, the plan may not increase the premium to the disability level. On the other hand, if the second qualifying event occurs after the premium has already been increased (after the conclusion of the initial 18 months), the plan may charge the increased premium for the balance of the 36 months, as long as the disabled individual continues to be covered.
The "applicable premium" must be determined on an annual basis, and must not be increased for a full year. The plan may use any 12 month period to determine its premium, as long as it does so on a consistent basis from year to year. Moreover, the same 12-month period must be used for any single benefit package (i.e., the plan may not use different 12-month periods to determine the cost of a particular benefit package for different participants). A plan can only increase the premium charged to beneficiaries under limited circumstances. First, an increase is permitted (as noted above) after the 18th month in the case of a disability extension of coverage. Second, the premium can be increased on an annual basis commensurate with an increase in the "applicable premium." Third, the premium can be increased to reflect the addition of new beneficiaries. Finally, if the original premium charged was less than the permitted maximum, the premium may be increased at any time to the permitted maximum level.
A plan must allow qualified beneficiaries to pay their premiums on a monthly basis. Payments for COBRA coverage are considered timely as long as they are made within 30 days of the first day of the period for which the payments are made. A plan must permit payment by an even later date if so required under the applicable provisions of the plan, or if employers are permitted to pay by such later date for similarly situated non-COBRA beneficiaries. Under no circumstance can a plan require payment for COBRA coverage any earlier than 45 days after the initial COBRA election is made.
Summary-The new regulations contain few surprises. Most notably is the elimination of the requirement that a plan offer core-only coverage. The requirement that a plan offer COBRA coverage to a qualified beneficiary who waived COBRA coverage in favor of an alternate plan (and for a full 36 months) is also new. We could applaud the IRS for finally imposing some certainty on the law, after all these years-at least we could if the IRS had not already proposed new regulations changing some of these requirements (see the next section below).
More COBRA Proposed Regulations
In addition to the final regulations described above, the IRS has released a substantial body of new proposed regulations. These proposed rules both supplement and modify the final regulations described above. Although these regulations are not final, the IRS has stated that it will consider a plan that follows them to be in compliance with its statutory obligations.
Withdrawal from a Multiemployer Plan-The proposed regulations include special provisions regarding the responsibilities under COBRA arising as the result of an employer's withdrawal from a multiemployer health plan. The proposed regulations begin by stating the fact that an employer's withdrawal from a multiemployer plan, in and of itself, is not a qualifying event, even if it results in the loss of health coverage. If, however, a qualified beneficiary had a qualifying event prior to the employer's withdrawal, the multiemployer plan generally retains responsibility for providing COBRA coverage to the employer's employees and their dependents, subject to one important exception. If the withdrawn employer establishes one or more group health plans (or starts to contribute to another multiemployer health plan) covering a significant number of the employer's employees formerly covered under the multiemployer plan, the plan established by the employer (or the other multiemployer plan) becomes obligated to provide COBRA coverage to any qualified beneficiary attributable to that employer who was receiving coverage under the multiemployer plan on the day before the employer ceased its contributions. This exception represents the IRS' attempt to overrule the Fifth Circuit's decision in In re Appletree Markets, Inc., 19 F.3d 969 (5th Cir. 1994).
Sale or Reorganization of Employer-Although the final regulations specify that a successor to the employer that maintained the plan may have COBRA responsibilities, those regulations did not explain what a successor is, or how various obligations may be allocated between the successor and the original employer. The proposed regulations specify that an employer is a successor if it results from a consolidation, merger, or similar restructuring of the employer or if it is a mere continuation of the employer. In the case of a stock sale, the buyer is defined as a successor to the seller employer. In the case of an asset sale, if the buyer continues the business operations associated with the assets it bought from the seller without interruption or substantial change, then the buyer is defined as a successor to the seller. In addition, if the buyer is a successor to the seller, then all members of the buyer's controlled group are also included as successors.
The proposed regulations introduce the new term "M&A qualified beneficiary," which is defined to include an employee (or
eligible dependent of an employee) whose qualifying event occurred prior to, or in connection with, a stock or asset sale.
(Although not defined in the regulations, presumably "M&A" refers to mergers and acquisitions.) In the case of a stock sale,
if the employee retains his or her employment, there has been no qualifying event. In an asset sale, however, there has been a
qualifying event unless one of the following conditions is met:
Thus, even if the employee becomes employed by the buyer sometime after the sale, the employee and his or her covered spouse and dependents are all M&A qualified beneficiaries in connection with the sale.
Generally, in the case of an asset or stock sale, the seller retains the obligation to provide COBRA coverage for M&A
qualified beneficiaries with respect to that sale, as long as the seller (including any member of its controlled group) maintains
a group health plan for any employees after the sale. In the case of a stock sale, if the seller ceases to maintain any group
health plans in connection with the sale, the successor employer (including all members of its controlled group) is then
responsible for providing COBRA coverage for the M&A qualified beneficiaries with respect to the sale. (The question
whether a seller's termination of its health plans is in connection with the sale is based upon the totality of the facts and
circumstances.) In such a case, the seller's obligation arises on the later of:
In the case of an asset sale, if the seller ceases to provide any group health plan for any employee in connection with the sale, and if the buyer is a successor to the seller, then the buyer becomes responsible for providing COBRA coverage for M&A qualified beneficiaries associated with the sale. The date the obligation arises is the same as for a stock sale.
In the case of a sale of stock or assets, the buyer and seller are permitted to allocate their respective COBRA obligations by contract. However, if the party who is contractually obligated to comply with COBRA fails to do so, then the party who would otherwise be responsible pursuant to the regulations bears the responsibility.
Small Employer Exception-The proposed regulations alter the way part-time employees are counted in determining whether an employer meets the small employer exception. Each part-timer is counted as a fraction of an employee, based upon the number of hours worked by the employee in a typical business day (or, at the employer's election, a typical pay period), compared to the number of hours needed for an employee to be considered full-time based upon the employer's employment practices (up to 8 hours in a day or 40 hours in a week).
With respect to a multiemployer plan, as stated in the final regulations (described above), the plan meets the small employer exception if each contributing employer normally employed fewer than 20 employees on a typical business day during the preceding calendar year. Under the proposed regulations, if a new employer who does not meet the small employer exception begins to contribute to the plan, the plan immediately ceases to meet the small employer exception. By contrast, if one of the existing employers ceases to meet the small employer exception because it has hired additional employees, the plan does not cease to qualify under the exception until the next January 1.
In determining whether a multiemployer plan meets the small employer exception, it is necessary to determine whether different benefit programs constitute separate plans. In general, the determination of whether multiple benefit programs constitute one or more plans is made by referring to the governing plan documents. If the documents are not clear, all plans maintained by a single employer (or by a single board of trustees) are considered a single plan. However, a single employer plan and a multiemployer plan are always considered separate plans. Additionally, if the principal purpose of establishing separate plans is to avoid or evade any requirement of law, then the separate plans will be considered a single plan as necessary to ensure compliance with the law.
Duration of Coverage-The proposed regulations clarify that a plan may elect to have its time limits measured from the date of termination of coverage, rather than from the date of the qualifying event. This is particularly important in the case of a multiemployer plan, where an employer's contributions and remittance forms may not be provided to the plan until well beyond the 30-day statutory deadline for notifying the plan of, for example, a termination of employment or reduction of hours. By electing to run the time from the date of termination of coverage, the plan can ensure that it remains in compliance. A plan that makes this election, however, must also measure its maximum COBRA continuation period from the date of termination of coverage, rather than from the date of the qualifying event. Additionally, the 60-day period during which an eligible beneficiary may become entitled to a disability extension must also be measured from the date coverage would have terminated.
The proposed regulations clarify that a plan can terminate the benefits of a qualified beneficiary continuing to receive benefits as the result of a disability extension 30 days after Social Security determines that the disabled beneficiary is no longer disabled.
Family and Medical Leave Act-The proposed regulations also attempt to deal with some issues arising from the interaction between the Family and Medical Leave Act (FMLA) and COBRA. Because the FMLA requires that an employer continue to provide health coverage to an employee who takes leave under the FMLA, the taking of such leave does not itself constitute a qualifying event. However, if the employee does not return to employment with the employer at the end of the leave period, and a qualified beneficiary would lose coverage before the end of the maximum coverage period, a qualifying event has occurred. Moreover, the qualifying event is considered to have occurred as of the last day of FMLA leave, rather than on the last day of actual employment.
Interestingly, if the employer terminates coverage for the class of employees to which the employee on leave belonged (while still employing those employees), there has been no qualifying event. If a qualifying event has occurred, the maximum coverage period is measured from the last day of FMLA leave (unless the plan has elected to measure the period from the date coverage would have been lost-see discussion above). However, any extensions to the FMLA period mandated by state law are ignored.
An employee on FMLA leave who has declined to pay any required premium during the leave period, and whose health coverage has lapsed as a result, is still considered to have had a qualifying event as of the last day of FMLA leave, and has rights under COBRA. Thus, a lapse of coverage under the plan is disregarded. Moreover, an employer is prohibited from conditioning the provision of COBRA coverage upon the employee's reimbursement of the employer for premiums owed for any coverage provided during the period of FMLA leave.
Comment Period-Because these are proposed regulations, the IRS is soliciting comments. The IRS has scheduled a public hearing for June 8, 1999. Anyone wishing to speak at the hearing, or who otherwise wishes to comment on the regulations, must submit written comments by May 14.
Electronic Documents Under ERISA
The Department of Labor has issued proposed regulations revising its earlier interim regulations regarding the use of electronic means for participant communications and records maintenance under ERISA. As usual, DOL has stated that a plan that complies with the requirements of these proposed regulations will be considered to be in compliance with its statutory obligations under ERISA.
Notices-The proposed regulations generally permit a plan to furnish certain documents (such as summary plan descriptions,
summaries of material modifications, and summary annual reports) required to be provided to a participant through
electronic means, as long as the following conditions are met:
Maintenance of Records-A plan is permitted to maintain records in electronic form, rather than in paper form, if the
following requirements are met:
Legibility means that all letters and numerals may be quickly and positively identified, and readability means that a reader must be able to recognize letters or numerals as complete words or numbers, respectively.
If an electronic recordkeeping system is implemented that meets the above requirements, a plan is generally permitted to dispose of the parallel paper records. Nevertheless, where paper records have particular legal significance or inherent value (such as notarized documents, stock certificates, insurance contracts and documents executed under seal), they must be retained.
The DOL has requested comments on the proposed regulations. Among the issues it specifically wants to consider is whether the regulations should be expanded to permit electronic delivery of other types of notices, such as COBRA notices; whether time-sensitive disclosures, including those that start time limits running, are appropriate for electronic disclosure; under what circumstances electronic communications are appropriate for communication outside the worksite, including whether participants who are not currently employed (such as retirees, spouses, and employees on leave), be permitted to elect electronic disclosure; and whether a plan may utilize electronic means to satisfy certain disclosure obligations (such as the obligation to provide access to plan documents). Although written comments are due no later than March 29, 1999, DOL suggests that they be submitted no later than February 27. Not surprisingly, comments may also be submitted by Email.
SOP 92-6-The Department of Labor Cries Uncle
We previously reported that, in 1992, the American Institute of Certified Public Accountants ("AICPA") adopted Statement of Position ("SOP") 92-6, requiring all welfare plans to report the present value of "post-retirement benefit obligations" in order to be considered in compliance with Generally Accepted Accounting Principles ("GAAP"). Among other things, compliance with this accounting standard would require a health plan to retain an actuary to perform a study of the future liabilities. Thus, a welfare plan that does not perform such an actuarial study and disclose its future retiree health benefit obligations as a liability on its financial statements cannot get a clean (i.e., an unqualified) audit. Instead, it will receive either a "qualified" or "adverse" audit. Although SOP 92-6 became effective for single employer plans at the end of 1992, it did not become effective for multiemployer plans until plan years beginning after December 15, 1995.
As we also reported, the Department of Labor had concluded that multiemployer welfare plans should not have to comply with SOP 92-6, reasoning that the value of the required disclosure was not worth the substantial expense required to perform the necessary actuarial study. DOL does not have the authority to establish accounting standards, however, so that it cannot simply repeal SOP 92-6. What DOL does have is the power to enforce the reporting and disclosure standards under ERISA, which generally require that a plan receive a clean audit. Consequently, DOL announced that, at least for plan years 1996 and 1997, plans that receive qualified or adverse audits solely for failure to comply with SOP 92-6 would be considered in compliance with ERISA standards. DOL further indicated that it would study the issue for subsequent years. Last year, DOL extended its permitted non-compliance period to include plan year 1998.
These actions by the DOL have not sat well with the accountants. They were very upset that the DOL, a public agency and instrumentality of the United States maintained pursuant to acts of a popularly-elected Congress, subject to ongoing public scrutiny and invested with regulatory power under ERISA, should have the temerity to presume to review the regulatory decisions of AICPA, a private trade organization, immune from public scrutiny and oversight, and accountable to no one. The accountants expressed their dismay both publicly and privately. Finally, last year, the AICPA raised the stakes. In a game of regulatory chicken, AICPA instructed the nation's accountants to refuse to issue any meaningful statement on a plan's financial records, but to simply issue an adverse opinion, if a plan had not complied with SOP 92-6. In effect, AICPA had made meaningful review of a plan's financial records impossible if it failed to comply with SOP 92-6.
Late last year, DOL finally threw in the towel. Although DOL again extended the period during which plans do not have to comply with SOP 92-6 to include plan year 1999, beginning with plan years commencing on or after January 1, 2000, plans must comply with SOP 92-6.
Hearings Scheduled on Proposed Claims Regulations
In our last Legal Report, we described the regulations recently proposed by the DOL that would substantially increase the burden on plans in responding to claims and appeals. The DOL has scheduled hearings on those proposals for February 17, 18 and, if necessary, 19.
Supreme Court Guidance on the Use of Surplus Plan Assets
In Hughes Aircraft Company v. Jacobson, 67 U.S.L.W. 4122, 1999 U.S. LEXIS 753 (1999), the Supreme Court addressed the issue of an employer's duty with regard to surplus pension plan assets. Hughes involved an employer (Hughes) that maintained a defined benefit pension plan. Established in 1955, the pension plan originally required participant contributions. By 1986, the plan had accrued a surplus (i.e., the amount by which the value of the plan's assets exceeded the value of all accrued benefits) of nearly $1 billion. Because of the surplus, Hughes stopped contributing in 1987 and has not contributed since. Employees, however, continued to be required to make contributions.
In 1989, Hughes implemented a special early retirement program in an effort to reduce its payroll costs. Effective January 1, 1991, Hughes again amended the plan to create a new, lower tier of benefits for new employees, who also would not be permitted or required to contribute to the plan. Existing participants could continue to contribute and receive the higher level of benefits, or to discontinue contributions and receive the reduced level of benefits. The cost of these changes was more than covered by the plan's funding surplus so that Hughes was still not required to make any contributions.
In response, a number of Hughes' retired employees sued, claiming that Hughes had violated ERISA when it amended the plan in 1989 and 1991. In sum, the retirees contended that Hughes had used the plan's surplus assets for its own benefit, rather than for the benefit of the participants and beneficiaries. The Supreme Court disagreed with the retirees. First, the Court held that plan participants in a defined-benefit plan are entitled only to the specified level of benefits set by the plan, and have no entitlement to share in a plan's surplus-even if the surplus was partially attributable to their own contributions. The Court rejected the retirees' contention that Hughes used plan assets to benefit itself, concluding that Hughes never acted to deprive the retirees of their accrued benefits, and had used plan assets for the sole purpose of providing pension benefits. Finally, citing Lockheed Corp. v. Spink, 517 U.S. 882 (1996), the Court rejected the retirees' breach of fiduciary duty claims, holding that ERISA's fiduciary provisions are generally inapplicable to plan amendments.
Participants May Sue Employee Benefit Plans for Interest on Delayed Benefit Payments
Fotta v. Trustees of the UMWA Health and Retirement Fund of 1974, 1998 U.S. App. LEXIS 31646, 22 E.B.C. 2169 (3rd Cir. 1998), involved a participant whose claim for a disability pension had been denied. Years later, the participant submitted additional information to the plan, and the benefit was granted retroactively. Not satisfied, the participant demanded interest, which the plan refused to pay. The participant sued. The Third Circuit held that a participant whose benefit had been wrongfully withheld for a substantial period has an independent cause of action for interest, even if the actual benefit has already been paid. The court concluded that ERISA Section 502(a)(3)(B), which authorizes a court to grant appropriate equitable relief to redress violations of ERISA and of a plan, empowered the courts to develop remedies to fill-in gaps where the statute is silent. Relying on the equitable doctrine of unjust enrichment, the court concluded that it was appropriate to award interest to compensate an injured participant for the lost time value of money, and to discourage plans from wrongfully delaying the payment of benefits. Ultimately, the court remanded the case to the district court for a determination of whether the payment of the benefit had in fact been wrongfully delayed.
This is the first case of its kind to address this issue. The matter is far from settled.
To discuss the implications of these decisions, please feel free to contact any of the employee benefit attorneys at Mooney, Green, Baker & Saindon.
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This Newsletter provides an update on current legal developments, and is not intended as legal advice. Copyright © 1999 Mooney, Green, Baker & Saindon, P.C.