Government audits, participant lawsuits and the dreaded play-or-pay rule could heap liability and risk on employer plans, all as a result of the reform law that was just affirmed by a majority of the U.S. Supreme Court.
Employers must take into account new liabilities when they move workers to part-time status or divert retirees into retiree-only plans, said attorney Stacey Barrow of Proskauer Rose LLP’s Boston office, in a July 9 webinar for Thompson Interactive.
Audits Expected to Increase
Enforcement of reform rules will trigger new reform compliance audits by the U.S. Departments of Labor, Health and Human Services and the IRS, Barrow said.
DOL, for one, added a section to its audit list to verify grandfather status. These audits are required under the law, and they started before the health reform ruling, Barrow explained. For the first few years, DOL’s goals are about increasing awareness rather than exacting penalties. If employers demonstrate they are apply a good faith interpretation of the rules, they should not see harsh penalties, he said.
Litigation May Await Employers
Significant legal risks come with health reform, because it creates tax, plan design and employee rights obligations, Barrow says. Participants will sue plans, plans will sue vendors and new fiduciaries will be created and scrutinized, all as a result of alleged failures to meet reform’s duties.
Importantly, efforts by small or mid-sized employers to rejigger workforces or move employees into a new plan, as a means of skirt substantial reform obligations could trigger lawsuits. Here’s a list of new liabilities he identifies.
- An increase in participant lawsuits is possible if employers seek to avoid play-or-pay penalties. Workforce realignment may trigger litigation. The employer mandate requires employers to provide health insurance to all full-time employees (defined as those working 30 or more hours a week). Employers may try to increase the number of part-time workers (defined as those working fewer than 30 hours), so they can avoid providing coverage and still not pay a penalty. Any such realignment inherently carries with it a risk under ERISA for interfering with someone’s rights. Workforce realignment could implicate other federal anti-discrimination statutes, including the Americans With Disabilities Act, Age Discrimination Employment Act and Title VII of the Civil Rights Act.
New litigation risks also relate to retiree plans and exit strategies from retiree coverage. Reform mandates generally don’t apply to (so-called retiree-only) plans with fewer than two active employees. Some employers have spun off retiree plans from plans that used to cover both actives and retirees, so they don’t have to provide enhanced benefits to retirees. An extensive body of retiree-rights litigation under ERISA and the Labor Management Relations Act holds that retirees cannot be deprived of vested benefits. So restructuring existing plans to create retiree-only plans will probably fall into the traditional ERISA and LMRA battlegrounds, Barrow said. - Disputes could arise over mandated benefits. Participants may bring lawsuits to enforce insurance mandates, including those regarding pre-existing conditions, annual and lifetime limits, coverage of dependents to age 26, etc. Participants may challenge the way the plan implemented a given coverage mandate; or they may challenge the manner the coverage was communicated.
- Independent review organizations may become plans’ enemies. The reform law requires that non-grandfathered plans must use IROs to make final decisions, and those decisions are binding. Therefore IROs can exercise discretionary authority after the plan, and could be subject to suit for breach of fiduciary duty. Plans may be sued over implementation of the IRO’s final determinations, and plans may sue IROs to dispute their final decisions.
- Interaction of employer plans with state-insurance exchanges. Employers may face litigation if they use insurance exchanges as part of their overall benefit strategies. For example, if an employer terminates its retiree health plan and uses the exchanges a soft-landing for affected retirees. “We can see litigation about details timing and implementation of these strategies,” he said.
- Play-or-pay problems in states that won’t expand Medicaid. Unlike the employer and individual mandates, the Supreme Court did strike down the law’s approach to Medicaid expansion in the states, but the stricken requirement that states expand Medicaid coverage could expose employers and plan sponsors to problems.
In states that opt out and don’t expand Medicaid, individuals who would have been eligible for Medicaid may now obtain coverage through a public exchange and get a federal subsidy to do so. And that could expose employers to additional costs and increased exposure under the play-or-pay mandates, something Barrow called an unforeseen consequence.