Aiken & Aiken

Sheila Aiken July 23rd, 2008

Employers today are constantly searching for new and effective methods to decrease the amount spent for employee health care.  Consumer driven health plans, HSAs, HRAs, and wellness programs are a few of the strategies that are being used.  However, a number of employers are not adequately using a tool that their plan already contains in the fight against rising health care costs - reimbursement through subrogation.

Subrogation, in one form or another, has been around for a long time (some of the earliest recorded cases involving subrogation are from England in the 1700s).  YourDictionary.com (www.yourdictionary.com) defines subrogation as “the substitution of one creditor for another, along with a transference of the claims and rights of the old creditor”.  It goes on to describe the subrogation process as a legal procedure where an insurance company pays for a claimed loss, then attempts to recover the paid claims from another, legally responsible party (e.g., the person who caused the loss, another insurance company, etc.).  Subrogation was originally applicable almost exclusively to property insurance claims.  However, the concept has expanded over time, and now encompasses a large variety of insured areas, including health insurance.

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that governs most employee benefit plans, such as retirement plans and group health plans.  ERISA does not require employers to provide employee benefit plans, but if an employer chooses to offer benefits, the plans must comply with the rules and regulations contained in ERISA (and its amendments). 

ERISA allows employers the right of subrogation, so many group health plans contain what is commonly called “subrogation” provisions.  Generally, these provisions state that the plan is entitled to reimbursement from the participant of any medical expenses the plan previously paid that the participant later recovers from another party responsible for those expenses.  For example, if a plan participant is in an auto accident and sustains injuries, his/her health benefit plan would pay for the medical expenses (per the plan’s provisions).  However, if the participant that was injured in the auto accident has a claim against another party (such as the driver who was at fault, or an auto insurance company), and receives a settlement or judgment under the claim, the participant may be required to reimburse the health plan for the medical claims it paid related to the auto accident.  This requirement for reimbursement would be based upon the health plan’s subrogation provisions.

According to the U.S. Supreme Court (see Great-West Life v. Knudson), subrogation relief for employers under ERISA can only be determined by the characterization and mechanics of the plan’s subrogation provision.  Essentially, this means that the ability of an employer to recover benefits under a subrogation provision depends on how the provision is written and whether the action brought by the plan to recover is legal or equitable.  ERISA allows plans to bring suit for “appropriate equitable relief”.  However, monetary damages are considered legal rather than equitable relief, and therefore are not usually permitted under ERISA.  These restrictions mean that the subrogation language contained in the plan document as well as the operational procedures for subrogating claims becomes vital to an employer’s success in pursuing subrogation.

While a subrogation provision may be present in most health plan documents, employers frequently do not utilize their rights under the provision to the fullest.  Subrogation provisions should be reviewed to ensure that the provision’s language and operations are structured to provide the greatest benefit to the plan.  Provisions should include items such as: clearly identifying recoverable claims, providing for attachment of equitable liens, providing for attorney’s fees to be paid outside of recovery, and requiring segregation of recovered claim amounts before distribution to participants.  Plans should have procedures in place to routinely audit and investigate claims for potential subrogation rights. 

Actively investigating and pursuing subrogation on all appropriate claims can be a strong weapon in the fight to reduce health care costs.  Please contact our office for additional information.

• Benefits , ERISA , Health Care
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Sheila Aiken June 24th, 2008

On June 17, 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act.  This bill includes a number of changes that may impact certain employee benefits plans.  For more details on the Heart Act, see our blog posted on June 2, 2008.

• Benefits , Health Care , Pension , Retirement
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Sheila Aiken June 5th, 2008

On June 4, 2008, the IRS released Notices 2008-51 and 2008-52, which provide guidance for HSAs.  Generally, Notice 2008-51 applies to the treatment of qualified HSA funding distributions and Notice 2008-52 applies to contributions to HSAs.  Each Notice is discussed in further detail below.

Notice 2008-51

Notice 2008-51 provides guidance on a qualified HSA funding distribution from an IRA or Roth IRA to a HSA, effective for taxable years beginning after December 31, 2006.  The notice states that the qualified HSA funding distribution is a one-time transfer from an individual’s IRA or Roth IRA to that individual’s HSA.  Generally, it is excluded from gross income and not subject to the 10% additional tax for early distributions.  The IRA distribution is counted against the maximum annual HSA contribution for the taxable year of the distribution and is subject to the §408(d)(9)(D) testing period rules.  Distributions from both traditional IRAs and Roth IRAs are allowed, however, distributions from “ongoing” SEP or SIMPLE IRAs do not qualify.

The qualified HSA funding distribution must be less than or equal to the maximum annual HSA contribution, based on the individual’s age as of the end of the taxable year and the type of high deductible health plan (HDHP) coverage at the time of distribution.  Only one IRA distribution for contribution to a HSA is permitted during an individual’s lifetime, with one exception.  If the IRA distribution occurs when the individual has self-only HDHP coverage and later in the same taxable year the individual has family HDHP coverage, a second qualified distribution is allowed in that taxable year.  The normal HSA contribution rules do not apply to qualified funding distributions.  A qualified HSA funding distribution relates to the taxable year in which it is actually made, and it must be a direct transfer from an IRA to a HSA. 

The amount of the qualified HSA funding distribution is excluded from gross income and the 10% penalty tax does not apply provided the individual remains eligible during the entire testing period.  The testing period starts with the month the contribution is made to the HSA and ends on the last day of the 12^th month following the start month.  If an individual ceases to be eligible, the qualified distribution is included in gross income in the taxable year in which the individual first fails to be eligible, and the 10% additional tax applies unless the failure is due to death or disability. 

If a distribution from a HSA is not used for qualified medical expenses, that amount is included in income and subject to the 10% additional tax, regardless of whether the contribution includes the qualified HSA funding distribution.

Notice 2008-52

Notice 2008-52 provides guidance on the annual contribution limit to HSAs, effective for tax years beginning after December 31, 2006.  This notice provides that an individual who is an eligible individual on the first day of the last month of the taxable year (December 1 for calendar year) as having been an eligible individual for the entire year and therefore may make a full contribution for the year.  However, a testing period does apply to this full contribution rule.

The testing period starts with the month the contribution is made to the HSA and ends on the last day of the 12^th month following the start month.  If an individual ceases to be an eligible individual during the testing period, a portion of the contributions will be included in gross income and subject to the additional 10% tax.  This includable amount is the amount of the contributions attributable to months preceding the month in which the individual was not an eligible individual (which could have not have been made but for the provision).  It is includible for the taxable year of the first day of the testing period that the individual was not eligible.  However, an exception applies if the individual ceases to be eligible due to death or disability.

Those that wish to take advantage of these new rules, should ensure they have a thorough understanding of the requirements.  Both IRS Notices contain examples which illustrate the rules provided in the notices.  For additional information on how this new HSA guidance could impact your plans, please contact our office.

• Benefits , Health Care , Health Savings Accounts (HSAs)
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Sheila Aiken June 2nd, 2008

Late last month (May 20^th and May 22^nd), the House and the Senate, respectively, unanimously approved the Heros Earnings Assistance and Relief Tax Act of 2008 (H.R. 6081).  The bill is now pending President Bush’s signature to enact it as law.  President Bush is expected to sign it.

H.R. 6081, among its many provisions, includes changes to the Internal Revenue Code of 1986, as amended, that may impact certain employee benefits plans.  The provisions of H.R. 6081 are effective at differing dates and include provisions that:

• Amend existing rules governing cafeteria plans to allow Health Flexible Spending Accounts to distribute account balances to reservists who are called for active duty for indefinite periods or 180 days or more
• Require qualified retirement plans to provide additional benefits that would have been provided to the participant had he/she resumed employment prior to death to the survivors of plan participants who die during qualified military service
• Allow employers to make contributions to qualified retirement plans on behalf of participants who die or become disabled in combat
• Allow employers to treat the day prior to the day of the participant’s death or disability as the day the participant returned to work from military duty so as to provide the retroactive benefit accruals available under USERRA
• Require qualified plans to treat differential military pay as compensation for plan purposes and as wages subject to withholding
• Provide a tax credit under certain circumstances for small employers that provide differential military pay
• Authorize qualified plans to treat participants on active duty for greater than 30 days as terminated in order to access distribution from a qualified retirement plan
• Make the PPA waiver of the 10% penalty tax for early retirement distributions permanent

As mentioned above, it is expected that President Bush will sign the legislation and it will therefore become law.  Employers should make plans to begin reviewing their plans for areas that need amending to comply with the required provisions.  Additionally, employers should review the non-mandatory provisions to determine whether they wish to amend their plans to allow for these provisions. 

During the plan review, employers need to keep in mind the differing effective and/or application dates of the provisions.  Benefits counsel can assist employers with the review and amendment of plan documents to ensure that plans are updated appropriately.

• Benefits , Health Care , Pension , Retirement
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Michele Aiken May 29th, 2008

The Employee Retirement Income Security Act was enacted in 1974.  Since then, more than 75 laws have been passed that affect employee benefit plans and the protections afforded them by ERISA.  Many of these subsequent laws have mandated extensive changes to benefit plans.

The following are some of the major laws passed along with a very brief description of a few of the provisions contained within the statute:

• National Defense Authorization Act (NDAA) - amends the Family and Medical Leave Act (FMLA) to create 2 new FMLA leave entitlements and modifies some Department of Defense contracting requirements.
• Pension Protection Act of 2006 (PPA) -  makes several modifications to retirement plans including funding requirements for defined benefit plans, authorizing the use of cash balance and hybrid pension plans and requiring more disclosure to plan participants.
• American Jobs Creation Act of 2004 (AJCA) - provides significant new rules for non-qualified deferred compensation plans, including the enactment of Internal Revenue Code Section 409A.
• Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) - expands the Medicare program including prescription drug coverage for post-65 and disabled Medicare beneficiaries and provides for a Medicare subsidy, which is excludable from income, payable to employers who provide retiree health coverage that is at least actuarially equivalent to the Medicare drug benefit.
• Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) - provides significant changes to retirement plans including increasing the allowable participant elective deferrals, allowing “catch-up” contributions, increasing compensation limits for some pension plans and changing the definition of compensation for deduction purposes.
• Health Insurance Portability and Accountability Act of 1996 (HIPAA) -  limits restrictions that a health plan can place on benefits for preexisting conditions, defines numerous offenses relating to health care and sets civil and criminal penalties for them and establishes regulations for the use and disclosure of Protected Health Information (PHI).
• Older Workers Benefit Protection Act of 1990 (OWBPA) - allows retirement plans to continue to have minimum age for eligibility and to have subsidized early retirement benefits provided it is voluntary.
• Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) -  requires specified employers to offer continuation of group health plan coverage to beneficiaries who no longer qualify for coverage due to certain events.
• Pregnancy Discrimination Act of 1978 (PDA) - requires employers to cover costs of pregnancy, childbirth and related medical conditions under the same terms as other medical conditions.

The above information is just a small portion of what is required by these laws as applied to benefit plans.  Additionally, there are many more laws that impact employee benefits plans then those few described above.  For example, the PPA, in addition to the brief overview already provided, requires additional extensive compliance for retirement plans and makes some of the other changes under previous laws mandatory.

Benefit plans and operational policies and procedures that have not remained current with new requirements are at risk for being non-compliant and subject to fines and penalties.  All employers should review their ERISA plans, including retirement and heath and welfare plans, as well as their operational policies and procedures, to verify that their plans, policies and procedures have been updated and amended for all applicable changes in the law.

Once plans, policies and procedures are current, employers need to remain vigilant to ensure continued compliance with changing laws.  Employment and benefits counsel can assist employers in reviewing and updating their existing plans to ensure compliance with all applicable laws, as well as assisting employers to proactively update their policies, plans and procedures as required for future changes.

• Benefits , COBRA , ERISA , Health Care , Pension , Retirement
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