Archive for April, 2008

Who Is Required to Provide COBRA Notice – the Employer, the Insurer or the Third-Party Administrator?

April 29th, 2008

The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1986 provides rights for continuation of health coverage to workers and their qualified beneficiaries for specified periods of time when they lose health coverage under certain defined circumstances.  Administration of this far reaching legislation can be fraught with pitfalls for the unwary employer. 

One of the ways that employers try to manage the administrative burdens which COBRA imposes is to outsource administration to insurers or Third-Party Administrators (TPA).  Sometimes the division of duties between the parties is not always clear – to the parties themselves as well as to the employees.

Some of the notice requirements that must be met are:

  • A General Notice of Continuation Coverage – Under this requirement, among other things, notice is required to be provided to every new employee and his or her spouse. Notice must be given within 90 days after the date the individual first becomes eligible for coverage.
  • A Notice of Right to Elect Continuation of Coverage to Qualified Beneficiaries – This notice must be provided to a covered employee or qualified beneficiary within 14 days of notice of a qualifying event as defined under COBRA.
  • A Notice of Unavailability of Continuation Coverage – Under this requirement, notice must be provided within 14 days of notice of a qualifying event or a second qualifying event where a determination is made that the individual affected by the event is not eligible for the continuation requested. 
  • A Notice of Early Termination of Continuation Coverage – This notice must be provided as soon as practicable if the continuation coverage will terminate earlier than the period available under COBRA. The notice must specify the reason for the termination, the date the coverage will end and the rights the individual may have to elect other coverage.

Some states have additional requirements that must be met.  In general, the employer has the duty to provide the notice, but the regulations allow the responsibility to be outsourced.  When an employer does outsource administrative responsibilities, the employer then has a requirement to provide notice to the administrator within 30 days of qualifying events such as:

  • Termination of an employee,
  • A reduction in the work hours of an employee,
  • Death of an employee,
  • An employee becoming entitled to Medicare, or
  • Bankruptcy of the employer (to retired employees)

In a recent Nevada case, one of the issues the court considered was whether the TPA could escape liability for not notifying an insurer to continue an individual’s benefits after the individual made a timely notification under COBRA.  In Hecht v. Summerlin Life and Health Ins. Co., the TPA argued that they did not have a duty to notify the Insurer “because only employees, employers, beneficiaries, group health plans, administrators, and sponsors have notification responsibilities” under COBRA. 

The TPA argued that due they should therefore be dismissed from the case.  However, the court did not allow the dismissal, finding that there were sufficient allegations by the insurer that the TPA was an agent of the employer and could have had an obligation to provide the notice to the insurer.

While there is no final resolution of this case yet, employers, insurers and TPAs should continue to watch how this and other decisions evolve.  COBRA administration can be very labor-intensive for employers, so outsourcing the process can be very appealing.  If an employer chooses to outsource the administration of the COBRA process, the responsibilities of both the employer and the TPA/insurer need to be clearly defined. 

Generally, liability for COBRA compliance will fall on the employer as the plan sponsor, so the service contract should specifically address each party’s responsibilities for notification of continuation rights.  Additionally, employers should ensure that anyone to whom they delegate authority has appropriate procedures in place and that there are safeguards in place so that proper notice is provided.  Benefits counsel can assist employers in making certain that their contracts with benefits service providers clearly divide and define responsibilities for the employer’s maximum protection.

When Does an Employer Have an ERISA Plan?

April 24th, 2008

Many employers might assume that an ERISA plan is not created until they actually set up a plan, write a plan document and take formalized steps to create a plan.  However, this is not necessarily the case. 

Employers need to be cautious when establishing an employee benefits program as they can inadvertently create an ERISA plan or find themselves in a situation where a common “ongoing administrative scheme” can be construed to be an ERISA-governed benefits plan.  If this happens, the employer will then find itself with an ERISA plan that is not in compliance with ERISA requirements, one of which is a written plan document.

Currently, courts use a 3-part test to determine whether an ERISA plan exists.  The factors the court will consider are: (1) whether a plan exists; (2) whether the plan falls within the Department of Labor’s (DOL) safe-harbor provision; and (3) whether the plan was established or maintained by employer with the intent to benefit employees.  

This is a facts and circumstances inquiry analyzing the specific facts and circumstances surrounding the questioned plan.  On of the key areas considered is a determination of whether there is an “ongoing administrative scheme” as opposed to a “one-time, lump sum payment triggered by a single event” that does not require an administrative scheme. 

Additionally, courts will look at facts surrounding:

  • Representations made by employers in internal documents,
  • Representations made orally by the employer,
  • The employer’s intent,
  • Whether a fund has been established to pay benefits,
  • How any benefits are paid, and
  • The employee’s reasonable understanding of the program.

For example, in Moorman v. Unum Provident Corp., the court found that an employer had unintentionally created a Long-Term Disability (LTD) Plan that was governed by ERISA.  In reviewing the surrounding facts and circumstances of the program’s administration, the court concluded that a reasonable employee could conclude that it was an employer-sponsored plan; therefore, despite the employer’s intent, the LTD program met the requirements that establish an ERISA benefit plan.

However, there is a safe harbor exemption from ERISA for certain types of voluntary benefits plans.  In order to qualify for this exemption there must be no employer contributions, participation by employees is voluntary, the employer’s role in the plan is limited to collecting premiums through payroll deductions and remitting them to an insurer and the employer does not receive any compensation for its services other reasonable compensation for administrative services.

Unfortunately, employers can inadvertently trigger significant problems by trying to provide better benefits for their employees.  Before establishing any new benefits program or changing an existing program that provides benefits to employees, employers should consult with their benefits lawyer to ensure that their attempt at providing for their employees does not have unintended consequences.  Additionally, employers should periodically audit their practices to ensure that ERISA-governed plans are not inadvertently created.

Surviving a DOL Audit

April 17th, 2008

The Employee Benefits Security Administration (EBSA) is a division of the U.S. Department of Labor (DOL) which is responsible for “ensuring the integrity of the private employee benefit plan system” in the U.S by enforcing ERISA and Title 18 provisions applicable to benefit plans.  One method that EBSA uses to identify and correct violations is through a DOL audit.  The audits are geared towards voluntary compliance on the part of the employer/plan sponsor, but can result in civil and/or criminal litigation if the efforts at voluntary compliance fail.

The EBSA conducts thousands of employee benefit plan audit each year, with approximately 75% of the audits resulting in at least one violation.  Although the majority of audits focus on civil violations, EBSA can also review plans for criminal violations, and recommend that criminal charges be brought against plan sponsors and/or plan fiduciaries.  Some plan sponsor audits are selected through a random selection process, but more frequently due to other avenues such as information received from another agency or through a participant complaint received by the EBSA Benefit Advisors.

If your plan is chosen for an audit by the DOL, generally the investigator will contact you via a letter advising you of the audit and requesting applicable plan documents.  Additionally, there will usually be an “on-site” review by the investigator that might require interviews with key employees and/or plan fiduciaries.  During the “on-site” review, employers should follow certain procedures:

  • Be courteous and professional with the investigator;
  • Designate 1 or 2 senior employees or an attorney who will be responsible for all contact and communication between the employer and the investigator;
  • Assign the investigator a “work area” during the audit and request the interviewer to refrain from indiscriminately questioning employees;
  • Have counsel prepare any employee or fiduciary prior to a DOL-requested interview and have counsel attend such interview;

After the audit completion, the investigator normally sends a letter to the employer/plan sponsor which summarizes the audit findings and identifies any facts that lead to a conclusion by the EBSA that a violation has occurred.  The letter will also require the employer/plan sponsor to correct the violations, reimburse plan losses plus interest, and advise of any penalties that will be assessed to the employer/plan sponsor for the violation(s).  Employer/plan sponsors have 10 days to respond to the audit findings communication.  This response is where employers/plan sponsors can refute the investigator’s findings, understanding of the facts and/or statutory interpretation.

The best way to survive a DOL audit is to proactively review all your benefit plans with legal counsel at least annually, and more often if any plan was amended during the year, or if the company experienced a significant change in demographics.  However, the second best way to survive a DOL audit relatively unscathed is to contact your benefits attorney as soon as you receive communication from the DOL regarding an audit of your plan(s).  The sooner you involve your attorney in the process, the more time he or she will have to review all documentation and prepare any witnesses.  The more information that is available to your attorney will make it easier for him or her to work with the investigator during the audit as well as providing him or her with the necessary information to refute the investigator’s findings of violations.

Bona Fide Occupational Qualification (BFOQ) Discrimination

April 14th, 2008

Title VII of the Civil Rights Act of 1964 prohibits employers (with 15 or more employees) from discriminating against any individual with respect to the individual’s compensation, terms, conditions, or privileges of employment due to the individual’s race, color, religion, sex, or national origin.  However, Title VII also includes a defense to discrimination known as the “bona fide occupational qualification” defense, or “BFOQ” defense.   

Title VII allows for employers to discriminate on the basis of religion, sex, or national origin in their hiring and employment practices in instances where religion, sex, or national origin is a “bona fide occupational qualification reasonably necessary to the normal operation of that particular business or enterprise …”.  Courts have determined that discrimination on the basis of religion, sex, or national origin is permissible if the discriminatory action is required due to the “essence of the business”.  Note that “race” and “color” are conspicuously absent from the allowed BFOQ defense.  Under Title VII, there cannot be any reason that would justify discrimination on the basis of race or color.

In order to show that a discriminatory action was allowable as a BFOQ, an employer must prove:

  1. There is a direct relationship between the protected characteristic and the ability to perform the job duties;
  2. The bona fide occupational qualification directly relates to the “essence” or to the “central mission of the employer’s business”; and
  3. There is no less-restrictive, reasonable alternative available to the employer

Employers who attempt to use the BFOQ “defense” to discrimination need to be aware that courts have interpreted the statute very narrowly and will only infrequently find that a permissible BFOQ exists.  One of the seminal cases on BFOQ exceptions is International Union, United Automobile, Aerospace & Agricultural Implement Workers of America, UAW, et. al. v. Johnson Controls, Inc.  In that case, the employer established a policy excluding fertile women from working in a position that required exposure to high doses of lead, in order to protect the possible unborn fetuses from damage due to the lead exposure. 

In that case, the U.S. Supreme Court found that the BFOQ defense was not available to the employer.  The Court specifically stated that the BFOQ exception must be interpreted narrowly, and advised that “[n]o one can disregard the possibility of injury to future children; the BFOQ, however, is not so broad that it transforms this deep social concern into an essential aspect of battery-making.”

When considering whether to adopt a discriminatory business practice due to a BFOQ, employers should seek advice from legal counsel before taking any action.  Because of the restrictive language of the statute itself, and the extremely narrow interpretation of the statute by the judiciary, advice from an attorney on whether a specific situation would rise to the level of an allowable BFOQ would be invaluable in preventing liability for discrimination claims down the road. 

ADA “Association Discrimination” Claims

April 10th, 2008

Most employers are familiar with the “usual” ADA discrimination prohibitions – namely that any employer with 15 or more employees may not discriminate against an employee who: has a physical or mental impairment which limits one or more major life activities; has a history of such impairment; or is regarded as having such impairment. However, there is another, lesser known, discriminatory prohibition covered under the ADA which is becoming more prevalent – that of association discrimination.

In addition to the three prohibitions listed above, the ADA also forbids an employer from discriminating against an employee who has a relationship or association with an individual who has a physical or mental impairment which limits one or more major life activities. According to the EEOC, the purpose of this provision is to prevent employers from taking adverse employment actions based on unfounded stereotypes and assumptions about individuals who associate with people who have disabilities.

A familial relationship is not required to support a claim of discrimination by association. The association may be with a family member or anyone else with whom the employee has an association. For example, an employer would violate this provision of the ADA if it took adverse employment action against an employee who volunteers at a homeless shelter which has a high population of HIV/AIDS individuals, if the employer’s decision was based on concerns about the disabilities of the individuals that the employee works with at the shelter.

The association provision does not require an employer to provide a reasonable accommodation to a person without a disability on the basis of that person’s association with a disabled individual. However, an employer must avoid treating an employee in a different manner than other employees based on the employee’s relationship or association with a disabled person. For example, an employer would not be required to modify its leave policy for an employee who needs time off to care for a disabled child as a “reasonable accommodation” under the ADA.

According to the EEOC, types of employer conduct that would be prohibited under the association provision include:

  • Terminating or refusing to hire an individual due to his/her known association with a disabled individual
  • Denying an employee promotion or advancement opportunities due to the employee’s association with a disabled individual
  • Denying an employee health care coverage that is available to other employees because of the disability of someone with whom the employee has an association

In February 2008, the Seventh Circuit handed down a decision in an ADA association discrimination case – Dewitt v. Proctor. In that case, a nurse was fired by the hospital due to the excessive health care costs incurred by her husband during his treatment for prostate cancer. In its decision, the Court held that an individual may establish a case for association discrimination under the ADA by showing that:

1) The individual was qualified for the job at the time of the adverse employment action;

2) The individual was subjected to an adverse employment action;

3) The individual was known by the employer to have a relative or associate with a disability; and

4) The individual’s case falls within one of three categories: the employer believes the individual will be: costly to the employer, distracted from work, or a possible threat in spreading the disabling condition.

If the individual is successful in establishing these requirements, the burden then shifts to the employer to prove a non-discriminatory reason for the adverse employment action in question.

With the increased litigation being brought under the association provision, the EEOC is increasing its scrutiny of allegations of association discrimination made by employees. Employers would be well-served to review their own policies and procedures with counsel to ensure that they don’t run afoul of the ADA’s prohibition against association discrimination.

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