If you are an employer that is subject to COBRA, you are probably aware that there are significant penalties that the Department of Labor can assess if you fail to offer coverage or give proper COBRA notice to employees or beneficiaries who lose the health coverage that you provide. These penalties are up to $110 per day for each violation, and they can add up quickly. This alone causes most employers and vendors to take COBRA compliance seriously. What you may not know is that these same employees or beneficiaries can also sue you for common and inadvertent COBRA compliance issues.
COBRA Lawsuits
Unfortunately, there appears to be a new wave of class-action lawsuits targeting employers who may have used an outdated COBRA notice or maybe did not give clear instructions on where to mail COBRA premiums or really any number of other COBRA compliance violations.
One of the firms filing these lawsuits is ClassAction.com. Visiting their web site you will note a list of common mistakes employers make that can lead to litigation. These mistakes involve more than just missing deadlines in providing a COBRA election notice. The list includes contacting only the employee losing health coverage and forgetting to also contact the covered spouse and dependent children—remember each covered family member has an individual COBRA election right.
The ClassAction.com website also boasts about million dollar settlements recently won on behalf of individuals whose COBRA rights were either violated or not administered properly. This should be a wake-up call for employers to examine their COBRA procedures to ensure full compliance. Given the number of furloughs and lay-offs occurring throughout the U.S. due to COVID-19, this COBRA examination or audit becomes urgent.
Reviewing COBRA Practices
Findley stands ready to assist employers in reviewing their COBRA practices. This can even be in the context of a full ERISA audit. Since many employers outsource COBRA administration to a third party, Findley can also help employers review those administrative agreements and recommend changes to indemnification provisions to protect the employer from the administrator’s failures or omissions.
For more information about auditing COBRA administration and litigation risk, please contact Bruce Davis in the form below.
If you
have more than one pension plan you are administering, consider a pension plan
merger to potentially reduce plan administrative, Pension Benefit Guarantee
Corporation (PBGC), and future plan termination fees. Sound too good to be
true? Read on.
While the total number of pension plans may have dwindled over the past few decades, several companies still sponsor not only one, but multiple pension plans for participants within their organization. Most typically this is the result of a decision made years ago when the retirement plans were created or acquired – either to intentionally separate participants with different benefit formulas such as Hourly Plans for union employees earning a service related benefit, Salaried Plans for employees earning a pay related benefit, or as a result of an acquisition where the plans benefitting employees are not original employees of the parent company.
While there may have been reason to keep the plans separate in the past, it might be time to reevaluate and consider whether a pension plan merger might be beneficial.
“It might be time to reevaluate and consider whether a pension plan merger might be beneficial.”
What is a Pension Plan Merger?
A pension plan merger is the consolidation of one or more pension
plans into a single, previously existing pension plan.
Consider Company X who maintains 3 pension
plans:
Plan A benefits all Hourly, union employees
Plan B benefits all Salaried employees
Plan C benefits all participants acquired by
Company Y
A pension
plan merger is the transfer of all retirement plan assets and liabilities from
Plans A and/or Plan B into Plan C (or some other similar combination)
and as a result, Plan A and/or Plan B would cease to exist.
Going
forward, annual requirements remain only for the consolidated plan. Because the
merger cannot violate anti-cutback rules, there is no negative impact to the
retirement plan participants. Protected benefits such as accrued and early
retirement benefits, subsidies, and optional forms of benefits cannot be
reduced.
Why Should We Consider Merging Pension Plans?
Reason #1 : Reduced Administrative Fees
Each qualified pension plan has several annual requirements,
regardless of size. Combining plans can reduce total administrative fees by
minimizing the redundancy of the annual actuarial, audit, and trustee work:
Annual valuations: Funding, accounting, and
ASC 960
Government reporting: IRS Form 5500 and PBGC
filings
Participant notices: Annual funding notices
Annual audit: Plan audit for ASC 960 and
financial accounting audit
Trustee reports
Merging plans can streamline many processes, reducing fees for
these services compared to operating separately.
Reason #2 : Potential PBGC Savings
Plan sponsors with both an underfunded and overfunded plan can reduce
PBGC premiums by sharing the excess retirement plan assets of an overfunded
plan with one that is underfunded. Annual premiums are due to the PBGC (Pension
Benefit Guarantee Corporation) for protection of participant benefits in the
event the plan sponsor is unable to fulfill their pension promises. Plans that
are fully funded pay only a flat rate premium based on headcount. Underfunded
plans pay an additional variable rate premium (VRP) based on the total unfunded
liability for the plan (capped by participant). Merging an underfunded and
overfunded plan can create a combined fully funded plan, eliminating the
variable portion of the cost or premium due to the PBGC as shown:
Consider Company X who maintains 2 pension plans:
Plan A has 580 Hourly participants with a PBGC
shortfall of $10 million as of 1/1/2019
Plan B has 1,160 Hourly participants with a
PBGC excess of $10 million as of 1/1/2019
Plan A merges into Plan B with 1,740
participants and no shortfall as of 1/1/2019
By merging Plan A into Plan B, the shortfall is eliminated and
PBGC premiums due are dramatically reduced with considerable financial impact.
Reason #3 : Plan Termination on the Horizon
Similar to the administrative savings of merging two ongoing
pension plans, there will likely be reduced fees related to the process at termination.
The final step in distributing retirement plan assets will be the agreement
between the insurance company taking over the responsibility for all future
benefit payments of remaining participants. Merging plans will consolidate the
transaction and increase the number of participants affected, potentially resulting
in annuity purchase cost savings to offset the underfunded liability at final distribution. If plan termination is
on the horizon, especially for two small to mid-size pension plans, a plan
merger may prove to be a valuable first step with potential positive financial
impact.
We Want to Merge our Pension Plans…Now What?
In most scenarios, the process is fairly
straightforward. There will be a few adjustments required to the valuation
process in the first year, but going forward will operate as usual.
Participants will be notified of the change, but there will be no difference to
the way that their benefits are calculated or administered.
The plan sponsor will also be required to do the
following:
Execute a plan amendment describing the plan
merger
Modify the plan document to reflect the new
consolidated plan
File Form 5310-A with the IRS no later than 30
days prior to the merger
Regardless of the size of the plan, a plan merger may be
a step in the right direction toward simplifying the administration and cutting
costs for many organizations sponsoring more than one pension plan. Merging multiple pension plans is most often
one example in the pension world where less is more. Finally, there are instances
where a merger may result in increased costs (PBGC premiums) or may present
other challenges.
Each situation is unique so don’t make any assumptions
without consulting your actuary. And don’t overlook the importance of a
communications strategy to inform participants of any changes which take place.
Questions? For more information, contact the Findley
consultant you normally work with, or contact Debbie Sichko at debbie.sichko@findley.com,
216.875.1930.
Effective
January 1, 2020, employers can establish two new Health Reimbursement Accounts
(HRAs) — an Individual Coverage HRA (ICHRA) and an Excepted Benefit HRA (EBHRA).
This could be a significant development for employers sponsoring employee
health benefit plans — both insured and self-funded.
Questions Employers Should Ask
Employers should
consider the following questions regarding the impact of the new rules.
Will the
new HRA rules change how your organization delivers health benefits? If
so, how?
Do you
believe these new rules will facilitate more job mobility? If so, how will that
trend impact your ability to retain talent, or attract new associates?
How Did We Get to this Point?
You may recall that
in October 2018, proposed regulations were released by the Departments of
Health and Human Services, Labor, and Treasury to enable employers of all sizes
to use a Health Reimbursement Arrangement (HRA) to finance individually-purchased
health insurance on a tax-preferred basis.
Comments on the
proposed regulations were due by December 28, 2018. In June 2019, final
regulations were released and generally apply for plan years beginning on or
after January 1, 2020.
Individuals can
currently purchase health insurance from either the ACA Marketplace (i.e. the
public “exchange”) or directly from an insurer.
Employers with less than 50 full-time employees can currently reimburse an employee for individual health insurance premiums using a Qualified Small Employer HRA (QSEHRA). In 2019, the amounts an employer can contribute to a QSEHRA are limited to $5,150 for Single coverage or $10,450 for Family coverage.
What Changed?
Effective January 1,
2020, two new HRAs can be established.
Individual Coverage HRA (ICHRA)
As long as the individual purchases ACA-compliant health
coverage, the employer (of any size) can reimburse the employee for those
premiums subject to these rules:
The employer cannot also offer a traditional group health plan in addition to the ICHRA
Offering an ICHRA will satisfy the ACA employer mandate under Section 4980H so long as a) the affordability threshold is met; and b) the employer makes the ICHRA available to entire classes of employees, such as FTEs, or PTEs. However, there are minimum class sizes:
For those employers with less than 100 employees: minimum class of 10 employees
For employers with 100-200 employees: the minimum class is 10% of total employees
For employers with more than 200 employees: the minimum class is 20 employees
A notice of the availability of an ICHRA must be provided at least 90 days prior to the beginning of the plan year (a model notice accompanied the final regulations)
When an employee or their dependent gains access to an ICHRA, a Special Enrollment Period applies
The amounts contributed to the HRA must not favor highly compensated individuals—there are only two instances in which the employer’s HRA contributions can vary: a) older employees may receive higher amounts (but not to exceed a 3:1 age band); or b) employees with greater numbers of covered dependents may receive a higher amount
There is
no limit on the amount the employer can contribute to the ICHRA and
The
amount of the ICHRA reimbursement is not taxable to the employee
Excepted Benefit HRA (EBHRA)
Those employers
wishing to continue offering traditional health benefits (including PPOs, HMOs,
or qualified high deductible health plan/HSA plans) can offer an EBHRA to pay:
Out-of-pocket
medical expenses
Dental
benefits
Vision
benefits or
STLDI
premiums
Although these
reimbursements are also tax-exempt, the amount that can be contributed by the
employer is limited to $1,800 per year. This amount will be indexed for
inflation after 2020.
An employee could
opt-out of his/her employer-sponsored health plan and still be eligible for the
EBHRA. However, an employee cannot have both an ICHRA and
an EBHRA.
Now What?
A defined
contribution (DC) approach to employee health benefits is not new. A few
years ago, private health insurance exchanges were a hot topic. However,
they did not catch on for active employees, primarily because the insured
models were inefficient due to state premium taxes, ACA market share fees and
broker commissions. In addition, they had an unsatisfactory record in
providing long-term rate stability.
The ICHRA promises
to be more viable, assuming the individual health insurance market remains
healthy. Remember, the ACA still applies to the individual market in that
a person can’t be denied coverage due to pre-existing condition, or have his/her
premiums increased because of health status.
When HIPAA was
enacted in 1996, a key objective was to facilitate portability of health
insurance and end “job lock”. However, that goal was not fulfilled in an
employer-sponsored health benefits environment. But with individually-purchased
health insurance, portability is achieved. As a result, will employees be more
apt to change jobs and either look for employers with ICHRAs or negotiate
additional compensation to pay their health insurance premiums? If so, how
does this impact an employer’s employment value proposition, or their ability
to retain qualified talent?
Although the Trump
Administration believes these HRA rules will appeal mostly to small-to-medium
employers, it is likely larger employers looking for an effective DC approach
to health benefits will take a serious look at ICHRAs. Although health
care cost trends have moderated somewhat in recent years, they are still accelerating
at three times inflation. Any opportunity to budget health benefit
expenses on the same basis as wage and salary increases is very important to
all businesses.
Findley will
continue to follow HRA developments. To learn more about how these rules impact
your future health care strategy, appropriate employee communications, or
suitable HRA administrative arrangements, contact your Findley consultant or
Bruce Davis at bruce.davis@findley.com or 419. 327.4133.
