Feds Tighten the Belt on "Skinny Plans" and Other ACA Workarounds

This post was contributed by Eric N. Athey, an Attorney in McNees Wallace & Nurick LLC's Labor & Employment Practice Group in Lancaster, Pennsylvania.

On January 1, 2015, employers with 100 or more "full-time equivalents" will be subject to the "Pay or Play" regulations under the Affordable Care Act ("ACA"). Over the past few years, many consultants have sought to identify loopholes in the law and lower-cost strategies for complying. Unfortunately for employers who were banking on these "workarounds," the Internal Revenue Service and the U.S. Department of Labor both issued guidance this week dismissing several of the more aggressive strategies that have garnered attention in the press.

Skinny Plans Kaput? A 2013 article in the Wall Street Journal highlighted the possibility that employers might offer low-cost "skinny plans" to avoid some or all of the "pay or play" penalties under ACA. Skinny plans typically offer little or no hospitalization benefits or physician services and only minimal preventive services. The legitimacy of skinny plans under the ACA appeared to be secure when they were not expressly addressed in final regulations governing "minimum value." In addition, many skinny plans appeared to pass muster under the "minimum value calculator" that was developed by the feds for use by employers and carriers. However, on November 4, 2014, the IRS issued Notice 2014-69 indicating that they will promptly be issuing proposed regulations stating that plans which do not offer hospitalization and/or physician service benefits do not constitute "minimum value" coverage under the ACA. The forthcoming proposed regulations will not apply to skinny plans that were in existence before November 4, 2014; however, such plans will lose their exempt status at the end of the plan year beginning no later than March 31, 2015.

The recent IRS guidance further states that employers may not issue any notices to employees suggesting that their skinny plan is considered "minimum value" under ACA or will otherwise affect an employee's eligibility for a tax subsidy – and that any prior notices to this effect must be rescinded and clarified. The practical impact of this change is that employers who solely offer skinny plans that do not qualify as minimum value coverage may be subject to a penalty of $3000 for every full-time employee who qualifies for a tax subsidy to purchase coverage on the health insurance exchange. Notwithstanding this development, skinny plans will likely continue to qualify as "minimum essential coverage" and thereby prevent imposition of the "no coverage penalty" (i.e. $2000 for all but 30 full-time employees); however, it remains to be seen whether they will be adopted by many employers for this reason.

Reimbursing Employees For the Cost of Individual Plans. Some employers have considered dropping group coverage but reimbursing full-time employees for part or all of the premium for a policy purchased on the individual market. Doing so could constitute a valuable employee benefit and some believed it could minimize employer pay or play penalties under ACA. However, in guidance issued on November 6, 2014, the U.S. Department of Labor ("DOL") indicated that such arrangements constitute "part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees." This being true, the DOL found that these payment arrangements must comply with ACA's market reform provisions – including free preventive care requirements and no annual or lifetime limits. According to the DOL, payment arrangements of this nature cannot be "integrated" (i.e. combined) with individual market policies in order to comply with these requirements. Significantly, the DOL guidance applies to these arrangements regardless of whether the employee payments or reimbursements are handled on a pre-tax or after-tax basis.

What if an Employee is Reimbursed Via a Section 105 Plan Through a Broker or Agent? Some vendors have sought to avoid the status of "employer reimbursement plans" (discussed in the paragraph above) by setting up their own Section 105 plans through which client-employers can reimburse their employees for the cost of individual coverage. In their recent guidance, the DOL specifically pointed out that these arrangements are, in themselves, health plans and will disqualify participating employees from receiving tax subsidies on the exchange. In addition, as health plans, these arrangements will be subject to ACA requirements regarding free preventive care and annual and lifetime limits. This conclusion is consistent with prior guidance issued by the IRS. Employers that pursue such arrangements do so with substantial risk.

Paying Plan Participants with High Claims to Drop Coverage. ACA prohibits employers from discriminating against employees who qualify for a tax subsidy to purchase coverage on the exchange (which will often trigger an employer penalty). However, the Act says nothing about employers who offer cash incentives to employees to drop employer-provided coverage. Over the past year, a number of commentators argued that such employer "cash-outs" or "dumping" of high-risk or high-claim participants would save costs for employer group health plans and threaten the viability of exchange plans. Although the ACA is silent on this specific practice, the DOL's November 6, 2014 guidance indicates that offering cash to such participants would violate HIPAA's non-discrimination rules and may constitute a violation of Section 125 non-discrimination rules. Suffice it to say, the DOL's reasoning is somewhat strained and does not bear repeating here; however, the guidance makes it clear that such "cash out" programs targeted at high-risk or high-claim participants are likely to be challenged by the Department.

The ACA provides ample room for employers to be creative in their compliance strategies. However, many of the "silver bullet" strategies that have been touted by some consultants over the past 18 months always seemed too good to be true and, it turns out, they are. Employers that have been considering these strategies will need to redirect their efforts or proceed with knowledge that they are likely to face a challenge if audited. Only time will tell whether the positions taken by the IRS and DOL in the recent guidance will hold up in court. Employers who prefer to stay out of court are well-advised to steer clear of these workarounds.

Halbig v. Burwell: A Death Blow for the Affordable Care Act?

This post was contributed by Eric N. Athey, a Member in McNees Wallace & Nurick LLC's Labor & Employment Practice Group in Lancaster, Pennsylvania.

On July 22, 2014, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit ruled in Halbig v. Burwell that the Affordable Care Act (ACA) authorizes the issuance of tax credits to assist individuals to purchase health coverage only on state-run exchanges. On the same day, a panel of the U.S. Court of Appeals for the Fourth Circuit reached the opposite conclusion in King v. Burwell, holding that ACA tax credits were also available to participants in federally-run exchanges. These decisions raise many questions; however, all that is certain at this point is that these two decisions, both issued by three-judge panels of larger appellate courts, will not be the final word on the subject.

Legislative Intent vs. Plain Language of the Law. At the heart of the Halbig case is a single sentence in Section 36B of the ACA, which states that the amount of a premium tax credit is based on the cost of a health plan that an individual enrolls in "through an Exchange established by the State . . . [under the ACA]." Given the ACA's failure to reference federally-run exchanges in its discussion of tax credits, the Court found that these credits may only be issued for coverage obtained through state-run exchanges. However, the Fourth Circuit and the dissenting judge in Halbig reached the opposite conclusion, reasoning that if one reads the entire text of the ACA, it is clear Congress's intent was to allow credits to be issued to participants in federally-run exchanges as well. As the dissent in the Halbig case argued, it seems unlikely that Congress intended to plant a "poison pill" in Section 36B that could tear down the ACA.

What Happens if the Halbig Decision is Upheld? If the decision stands, this would mean that individuals seeking to purchase coverage through any of the 36 federally-run exchanges (including Pennsylvania's exchange) could not qualify for a tax credit to assist with the cost of the premium. The decision would also have significant ramifications for the ACA's individual mandate and employer mandate. By making exchange coverage unaffordable to many potential purchasers (i.e. costing over 8% of household income), the decision could have the effect of exempting them from the individual mandate penalty. In addition, since employer mandate penalties are triggered when an employee obtains a tax credit to obtain exchange coverage, the elimination of tax credits in 36 states could effectively exempt employers from penalties in those states (including Pennsylvania).

Will the Halbig Decision be Upheld? At this point, the U.S. Department of Health and Human Services (HHS) is likely to pursue one of two options: (1) request an en banc rehearing of the Halbig case by all active judges on the court; or (2) petition for the case to be heard by the U.S. Supreme Court. If HHS chooses to pursue an en banc rehearing, their chances of prevailing are probably good – 7 of the Court's 11 active judges were appointed by Presidents who were Democrats (4 of whom were appointed by President Obama).

If this case eventually winds up in the Supreme Court, it is impossible to predict the outcome. The Supreme Court's recent decision in the Hobby Lobby case demonstrates that the Court is willing to scale back aspects of the ACA. However, the Halbig case has far broader implications and the Court may be reluctant to (in the words of Judge Edwards) "gut" the ACA. If the D.C. Circuit reverses itself en banc, it is also conceivable that the Supreme Court may not agree to hear the case since the two appellate courts to have considered the issue would then be in agreement. However, opponents of the ACA undoubtedly see Supreme Court review as a tantalizing opportunity to upend the law and, regardless of the ultimate decision by the D.C. Circuit, it is a safe bet that one of the parties is going to be seeking review by the high court.

Key Questions Left in the Wake of the Supreme Court's Hobby Lobby Decision

This post was contributed by Eric N. Athey, a Member in McNees Wallace & Nurick LLC's Labor & Employment Practice Group in Lancaster, Pennsylvania.

On June 30, 2014, the U.S. Supreme Court held in Burwell v. Hobby Lobby Stores, Inc. et al., that the Affordable Care Act's "contraceptive mandate", as applied to "closely held corporations", violates the Religious Freedom Restoration Act (RFRA). Much has been written about the decision authored by Justice Alito and its impact on the rights of corporations. However, most employers are still seeking clarity in terms of how the decision impacts their group health plans.

May any company now choose not to provide free contraceptive coverage as part of their health plan? No. At this point, the contraceptive mandate remains in effect for all employer health plans, except those that are grandfathered or non-grandfathered plans offered by (a) religious employers (e.g. churches); (b) certain religious nonprofit organizations; or (c) in light of the Hobby Lobby decision, for-profit "closely held" corporations that object to the mandate on religious grounds. In his opinion, Justice Alito did not preclude the possibility that publicly traded corporations could also voice valid religious objections to the mandate; however, given the diverse interests among shareholders in public companies, he observed that such religious objections are unlikely.

What is a closely held corporation? A broadly used IRS definition of "closely held corporation" is one in which more than 50% of all outstanding shares are held directly or indirectly by five or fewer individuals. However, Justice Alito never references any particular definition of the term in his opinion. It is possible that he intended his decision to apply only to closely held corporations within the IRS definition; however, it is more likely that Justice Alito used the term in a broader sense to include corporations with more than five shareholders who are of like mind from a religious standpoint (e.g. family businesses in which more than five family members are shareholders). The agencies charged with enforcing the ACA will likely be tasked with discerning which companies are closely held as contemplated in the Hobby Lobby decision and which are not.

May a closely held corporation be exempted from providing any form of contraception in its health plan? The owners in the Hobby Lobby decision objected to only four of the twenty means of contraception that are covered under the mandate. The four drugs, known as abortifacients or "morning after pills", were objectionable to the employers because they may prevent an already fertilized egg from developing any further. Although the owners in Hobby Lobby limited their objections to abortifacients, Justice Alito's opinion clearly anticipates that other employers will have broader religious objections to contraception; his holding is directed at the "contraceptive mandate" in general and not limited to abortifacient drugs. For this reason, it is likely that some closely held corporations with sincere religious objections to contraceptives may be exempt from covering most or even all of the methods of contraception covered by the mandate.

How will the exemption for certain closely held corporations be administered? The ball is in HHS's court on this question. Justice Alito alluded to several ways that HHS might accommodate the religious beliefs of closely held corporations while maintaining access to free contraceptive coverage for affected employees. These include a government-paid benefit or an arrangement through which employees obtain the benefit directly through the employer's insurer (not through the employer's plan). It is likely that HHS will create a process through which closely held corporations will file an exemption application in which they disclose the basis and scope of their religious objection. Such processes already exist for certain employers with respect to other health care mandates such as mental health parity requirements.

Are there other liability risks associated with excluding contraceptive coverage? An often overlooked aspect of the debate over the contraception mandate is that the Equal Employment Opportunity Commission (EEOC) has, in the past, taken the position that an employer's exclusion of contraception from a group health plan may constitute unlawful discrimination under Title VII and the Pregnancy Discrimination Act. In a 2000 agency decision, the EEOC reasoned that any plan which covers preventive prescription drugs such as vaccinations and blood pressure medication must also cover the "full range of contraceptive choices" for women other than abortion. It will be interesting to see whether this analysis holds up in court in light of the Hobby Lobby decision. Until that question is resolved, employers who may be exempt from the contraception mandate under ACA may nevertheless face EEO challenges if they exclude coverage for contraception.

Federal Judge Strikes Down Pennsylvania Same-Sex Marriage Ban

Earlier today, Harrisburg-based Federal District Court Judge John E. Jones, III, struck down Pennsylvania's ban on same-sex marriage. In this landmark ruling, Jones concluded that "same-sex couples who seek to marry in Pennsylvania may do so, and already married same-sex couples will be recognized as such in the Commonwealth."

In 1996 Pennsylvania amended its Domestic Relations Code to limit marriage to opposite sex couples and prohibit the recognition of same-sex marriages. Today, that law was declared unconstitutional when Judge Jones held that "the fundamental right to marry as protected by the Due Process Clause of the Fourteenth Amendment to the United States Constitution encompasses the right to marry a person of one’s own sex" and that Pennsylvania's gay marriage ban infringes upon that right. 

Judge Jones wrote that "certain citizens of the Commonwealth of Pennsylvania are not guaranteed the right to marry the person they love. Nor does Pennsylvania recognize the marriages of other couples who have wed elsewhere. . . . We now join the twelve federal district courts across the country which, when confronted with these inequities in their own states, have concluded that all couples deserve equal dignity in the realm of civil marriage."

Judge Jones also noted that "in over half of states including Pennsylvania, gay and lesbian individuals lack statewide, statutory protections against discrimination in housing and public accommodation, as well as in firing, refusal to hire, and demotion in private-sector employment." While Judge Jones' ruling has no impact on state or federal employment discrimination laws, like last year's United States Supreme Court decision in United States v. Windsor, this decision will have implications for Pennsylvania employers and their employee benefit plans.

Stay tuned to this blog for future updates.

PPACA Update: Employer Shared Responsibility Mandate Delayed Again...For Some Employers, But Not All

This post was contributed by Kelley E. Kaufman, Esq., an Associate in McNees Wallace & Nurick LLC's Labor & Employment Practice Group in Harrisburg, Pennsylvania.

Yesterday, the Obama administration announced a partial delay in the effective date of one of the key requirements of the Patient Protection and Affordable Care Act (“PPACA”) – the employer “shared responsibility” requirements (a.k.a. “pay or play”). This marks the second delay of the effective date for these requirements, which was previously extended from January 1, 2014 to January 1, 2015. The shared responsibility requirements apply to "large employers" – i.e., those employers with 50 or more full-time equivalent employees, where "full-time" includes those employees working an average of 30 hours or more per week. Under the shared responsibility requirements, beginning January 1, 2015, large employers will be required to make a PPACA-compliant offer of health insurance coverage to all "full-time" employees and their dependents. Failure to comply with the shared responsibility requirements can result in significant penalties for employers.

Most notably, the final regulations, which will be formally published by the U.S. Department of the Treasury (the "Department") this week, grant an additional reprieve to certain mid-sized employers with 50 to 99 full-time equivalent employees. Those mid-sized employers will not be required to comply with the shared responsibility requirement until 2016, while employers with 100 full-time equivalent employees are generally required to comply by January 1, 2015. The final regulations contain many additional clarifications on the implementation of the shared responsibility rules, including transitional rules intended to help phase-in and assist employers with compliance, as well as clarifications on the application of the rules to various employee categories, such as volunteers, educational employees, adjunct faculty and seasonal employees. The Department's Fact Sheet, summarizing key points of the final regulations, can be found here.

Stay tuned to this blog for a more detailed summary of the final regulations.

Questions regarding the shared responsibility requirements or other specific PPACA compliance issues may be addressed to any member of McNees Wallace & Nurick’s Labor and Employment Law and Employee Benefits Practice Groups.

U.S. Supreme Court Upholds ERISA Plans' Modified Statute of Limitations

This post was contributed by Tony D. Dick, Esq., an attorney in McNees Wallace & Nurick LLC's Labor & Employment Practice Group in Columbus, Ohio.

The U.S. Supreme Court issued a rare unanimous decision earlier this week finding that employee benefit plans can set reasonable time limitations on when a plan participant may bring a lawsuit seeking plan benefits – even when the time limitation is shorter than what would otherwise be permitted under the Employee Retirement Income Security Act of 1974 (ERISA) and analogous state statutes.

In Heimeshoff v. Hartford Life & Accident Ins. Co., Case No. 12-729 (Dec. 16, 2013), Petitioner Julie Heimeshoff, a long-term Wal-Mart executive, began to suffer from a multitude of ailments caused by fibromyalgia. As a result, in August 2005, she filed a claim for disability benefits with the plan administrator for Wal-Mart’s disability plan - Hartford Life & Accident Insurance Co. On December 8, 2005, after considering the medical evidence offered by Ms. Heimeshoff, Hartford denied her claim for failure to provide sufficient proof of loss.

Ms. Heimeshoff subsequently filed an internal appeal of the denial of her claim with Hartford as she was required to do under the plan. On November 25, 2007, Hartford ultimately upheld its decision to deny disability benefits to Ms. Heimeshoff and informed her that she had exhausted her administrative remedies. On November 18, 2010, Ms. Heimeshoff filed suit in federal court seeking judicial review of the denial of her claim pursuant to ERISA Section 502(a)(1)(B). Hartford moved to dismiss the case arguing that, pursuant to the terms of the relevant disability plan, Ms. Heimeshoff was required to file suit within three years from the time proof of loss was due under the plan. In this case, that would have been no later than December 8, 2008. Ms. Heimeshoff argued in response that despite the plan language modifying the time to bring suit, the three-year limitations period should run from November 25, 2007 – the date on which the plan upheld its final denial of her claim for benefits.

The Court determined that although a statute of limitations typically begins to run when a claim actually accrues (usually after the final denial of benefits by the plan administrator in the ERISA context), parties are perfectly within their rights to modify the applicable statute of limitations so long as the modified time limitation is reasonable. Justice Thomas, writing for the Court, concluded that “in the absence of a controlling statute to the contrary, a provision in a contract may validly limit, between the parties, the time for bringing an action on such contract to a period less than that prescribed in the general statute of limitations, provided that the shorter period itself is a reasonable period.”

Obviously, the Supreme Court’s decision is a major victory for ERISA plans and their employer sponsors. In light of the decision, plan sponsors should give consideration to amending plan documents to include a statute of limitations provision similar to the one in Heimeshoff. Beyond the ERISA context, however, the Court’s decision may serve as a clear endorsement of suit limitation provisions in general and falls in line with similar decisions from various lower courts. For example, just last year, the Sixth Circuit Court of Appeals held in Oswald v. BAE Industries, Inc., 483 Fed.Appx. 30 (6th Cir. 2012) that private employers may enter into agreements with their employees to shorten the applicable statute of limitations for employment claims to as little as six months. If you have not done so already, now might be a good time to engage counsel to determine whether such suit limitation provisions make sense for your business.

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New Rule For Flexible Spending Arrangements: "Use It or Lose (Some of) It"

This post was contributed by Eric N. Athey, Esq., a Member in McNees Wallace & Nurick LLC's Labor and Employment Practice Group. 

Flexible spending arrangements, or FSAs, have gained popularity among employers over the past fifteen years.  Today, approximately 14 million families participate in these benefit plans.  An FSA enables employees to set aside a pre-determined portion of their compensation on a pre-tax basis to pay for medical expenses that are not otherwise covered by a group health plan (e.g. deductibles, co-pays, dental/vision expenses and other non-covered items).  Until recently, there was no limit on how much money an employee could set aside for this purpose; however, the Affordable Care Act imposed an annual cap of $2500 on employee contributions beginning in 2013.

Although FSAs are an easy way for employees to reduce their taxes, there is a catch.  In order to allow pre-tax reimbursements of medical expenses, an FSA must include a "use-it-or-lose-it" rule.  In other words, any balance remaining in an employee's FSA account at the end of the coverage period (typically a calendar year) is forfeited and no longer available to the employee.  In 2005, the IRS loosened this rule by permitting plans to offer a 2 ½ month grace period for participants to spend down their balance from the prior year.  Notwithstanding the permitted grace period, the use-it-or-lose-it feature of FSAs often deters employees from participating or from making sufficient contributions.

On October 31, 2013, the U.S. Treasury Department announced another exception to the "use-it-or-lose-it" rule.  In Notice 2013-71, the Treasury Department authorized FSA plans to adopt a provision allowing employees to "carry over" up to $500 of their FSA balance into the following plan year.  FSA plans are not required to permit a carry over and may limit permitted carryovers to less than $500.  The amount carried over does not count toward the $2500 annual cap on employee contributions.

Interestingly, the new carryover rule is not available for FSA plans that continue to allow a 2 ½ month grace period.  Plan administrators wishing to take advantage of one of the "use-it-or-lose-it" exceptions must choose which of them will be more appealing to participants.  Plans that adopt the $500 carryover will need to be amended to reflect this change and to eliminate any grace period.  Once that is accomplished, benefits professionals will need to turn their attention to educating employees on the advantages of the new "use-it-or-lose-some of-it" rule.

If you have any questions regarding this post or Notice 2013-71, please contact any member of MWN's Labor and Employment Practice Group.

Healthcare Reform Update: The Top Five Questions Employees Will Be Asking on October 1

This post was contributed by Eric N. Athey, Esq., a Member in McNees Wallace & Nurick LLC's Labor and Employment Practice Group.

As previously reported on this blog, employers are required to provide a notice to employees regarding coverage options under the new Health Insurance Marketplaces created by the Affordable Care Act that are scheduled to be up and running on October 1. The notice must be provided by October 1 to all employees, part-time and full-time, regardless of whether they have health coverage through their employer. New hires must receive the notice within 14 days of hire. 

Employers were understandably confused when, on September 11, the DOL posted an FAQ on its website advising that employers would not be fined under the Fair Labor Standards Act for failing to distribute the notice, yet some DOL officials were quick to point out that penalties and other adverse consequences for non-compliance could follow under ERISA and other statutes. In light of this uncertainty, employers are wise to comply and provide the notice by October 1.

The U.S. Department of Labor ("DOL") has published sample notices at http://www.dol.gov/ebsa/healthreform/. The specific language in the DOL notices need not be used, however, so long as certain key points are included. Given the complexity of the topic, the DOL sample notices are likely to raise more questions than they answer. Many employers are tailoring the notice in a manner that they feel will be more understandable to their employees. Other employers are preparing supplemental handouts and scheduling employee group meetings to address the many questions that will likely arise. Much is uncertain about how the roll out of the Health Insurance Marketplaces will go on October 1; however, one thing is for certain: employees are likely to have many questions and misunderstandings regarding their options under the Affordable Care Act. 

Based on questions and feedback we've been hearing from clients, here is our list of the "top five" questions you may hear from employees once the required notices are distributed (and suggested responses):

  1. "Why am I receiving this notice?" You have probably heard news reports about "Obamacare" (aka "Healthcare Reform" or the "Affordable Care Act"). Under the law, employers must notify all employees of their ability to purchase their own coverage under new "Health Insurance Marketplaces" that will be open on October 1, 2013. The new Marketplaces do not impact your eligibility for coverage under the Company's health plan.
  2. "Can I get coverage on the Health Insurance Marketplace if I find a plan there that's cheaper than my employer's plan?" Nearly anyone will be able to purchase coverage on the Marketplace; however, employees who are likely to find this advantageous are those who either do not have employer-provided coverage available to them or who pay a lot (more than 9.5% of income) for their coverage.
  3. "Will I qualify for a tax subsidy if I purchase coverage on the Health Insurance Marketplace?" Employees who have affordable, minimum value coverage available to them through their employer will not qualify for a tax subsidy. If you are not eligible for coverage from an employer (or you pay more than 9.5% of your income to purchase coverage through your employer) you may qualify for a subsidy and you should explore your coverage options on the Marketplace.
  4. "Is the health coverage I have through my employer 'affordable' and of 'minimum value'?" There are no short answers to these questions. However, as a rule of thumb, coverage through an employer is "affordable" if an employee does not pay more than 9.5% of his or her income for self-only coverage, and the coverage is "minimum value" if the plan's share of the total allowed benefit costs covered by the plan is no less than 60% of those costs.
  5. "Haven't the individual mandate penalties been delayed until 2015?" No. Certain "shared responsibility" penalties that apply to large employers have been delayed until 2015; however, the individual mandate is scheduled to take effect on January 1, 2014. Individuals who do not obtain coverage may be subject to an annual penalty equivalent to the greater of $95 or 1% of their household income. The penalty amount will increase in subsequent years.

Employers are likely to receive more questions from employees regarding health coverage than ever before in the months following October 1, 2013. Of course, employees can always be referred to the feds for additional information (www.HealthCare.gov or 1-800-318-2596).  If we can assist you with any questions you may have regarding compliance with the Affordable Care Act, please contact any member of our Labor and Employment Practice Group.

DOL Issues Clarification of FMLA Rights for Same-Sex Spouses

This post was contributed by Tony D. Dick, Esq., an attorney in McNees Wallace & Nurick LLC's Labor and Employment Practice Group in Columbus, Ohio.

In light of the Supreme Court’s recent decision in United States v. Windsor, the U.S. Department of Labor (DOL) has just issued updated guidance for employers concerning the rights of same-sex spouses under the Family and Medical Leave Act (FMLA). As you may recall from our earlier blog post on the legal implications of the Windsor case, in a 5-4 ruling, the Supreme Court struck down a key provision of the Defense of Marriage Act, which defined marriage under federal law as “a legal union only between one man and one woman as husband and wife.” 

The updated Fact Sheet #28F issued by the DOL Wage and Hour Division entitled “Qualifying Reasons for Leave under the Family and Medical Leave Act” now defines a “spouse” under the FMLA as “a husband or wife as defined or recognized under state law for purposes of marriage in the state where the employee resides, including ‘common law’ marriage and same-sex marriage.” As a result, an eligible employee in a same-sex marriage who was married and resides in a state that recognizes same-sex marriages is entitled to up to 12 weeks of leave in a 12-month period to care for a seriously ill spouse or for activities associated with a military spouse’s deployment, and up to 26 weeks of caregiver leave for military spouse who is seriously injured or ill. 

Conversely, there is no obligation to make FMLA spousal leave available to a same-sex spouse who resides in any state that has banned or otherwise does not recognize same-sex marriage, including both Pennsylvania and Ohio. Of course, private employers in states that do not recognize same-sex marriage are free to extend equivalent FMLA spousal leave benefits to same-sex spouses on their own if they wish.

DOL Secretary Thomas Perez has suggested further guidance in this area will be released in the coming months. We will certainly keep you updated on any new developments. In the meantime, if you are a covered employer operating in one of the 13 states that permits same-sex marriage, or the District of Columbia where same-sex marriage is recognized, now is the time to revise your policies, procedures and forms to conform with the DOL’s updated guidance.

Third Circuit Denies Pennsylvania Business's Challenge to Contraception Mandate

As readers of this blog are surely aware, the Patient Protection and Affordable Care Act (PPACA) imposes a number of new obligations on employers and private health insurance plans. Effective January 1, 2013, most private employers with 50 or more employees must provide health insurance coverage for women’s preventative services, including reproductive health screenings and contraception, without charging a co-pay, deductible, or co-insurance. Failure to provide such coverage can lead to financial penalties of up to one hundred dollars per day per employee who is not provided with the required coverage. A limited exception is available for religious institutions, giving such employers the option of whether to cover contraception services. Over 60 lawsuits are pending around the country by for-profit companies and non-profits alike, challenging the constitutionality of the contraception requirement on religious grounds and seeking to block its enforcement.

Late last week, the Third Circuit Court of Appeals issued a ruling on one such challenge brought by a private family-owned business in Pennsylvania. The court, ruling in the case of Conestoga Wood Specialties Corp. v. Health and Human Services (pdf), held that a private employer cannot challenge on religious grounds PPACA’s contraception mandate, even if the business is owned and operated by a religiously devout individual. Specifically, the court rejected the business’s claim that the contraception rule violated its rights to the free exercise of religion under the First Amendment. In doing so, the Third Circuit concluded that the free exercise right is a “personal rights” that exists only for the benefit of human beings and not secular, profit-making business entities. Moreover, the court held that, because a corporation is legally recognized as having its own independent identity, the owners of a corporation cannot use the corporation as a vehicle for imposing their own personal religious beliefs on others.

The Third Circuit’s decision is in direct conflict with a recent ruling by the Tenth Circuit Court of Appeals on the same issue. The conflicting decisions among the circuit courts increase the likelihood that the U.S. Supreme Court will consider the constitutionality of the contraception mandate. We will keep you apprised of developments on this issue through this blog. In the interim, employers subject to PPACA should continue to provide insurance coverage for contraception without cost-sharing.


PPACA Presentation - Countdown to 2014: PPACA Compliance Opportunities for Employers

As we discussed with attendees at our most recent health care reform compliance seminar in June, we wanted to make the presentation available to the readers of our blog.  You can access the PowerPoint, “Countdown to 2014: PPACA Compliance Priorities for Employers,” by clicking here

Readers of this blog will note that we recently reported on a one-year delay in the effective date for PPACA's employer shared responsibility requirements.  Please keep in mind that the PowerPoint presentation was created prior to the announcement of the change in effective date for the shared responsibility provisions; however, other information and other effective dates referenced in the presentation remain accurate.  For future PPACA developments, stay tuned to this blog at http://www.palaborandemploymentblog.com/tags/ppaca/.

Questions regarding specific PPACA compliance issues and our upcoming PPACA presentations may be addressed to any member of McNees Wallace & Nurick's Labor and Employment Law and Employee Benefits Practice Groups

PPACA Update: Employer Shared Responsibility Mandate Delayed Until 2015

Many employers received a welcome, though temporary, reprieve yesterday, when the U.S. Department of the Treasury (“Department”) announced a one-year delay in the effective date of one of the key requirements of the Patient Protection and Affordable Care Act (“PPACA”) – the employer “shared responsibility” requirements (a.k.a. “pay or play”).  PPACA’s shared responsibility requirements were scheduled to become effective January 1, 2014, which has left countless employers scrambling to navigate complex regulations to determine what steps are necessary to comply with the mandate and avoid penalties.  (Click here to read our previously-published Employer Alert detailing the shared responsibility provisions and regulations issued to date.) 

The announced delay was prompted by the Department’s recognition that new employer and insurer coverage reporting requirements under PPACA are complex and that businesses need additional time to implement these requirements effectively.  Specifically, PPACA will require information reporting by insurers, self-insuring employers, and other parties that provide health coverage, as well as by certain employers with respect to the health coverage offered to their full-time employees.  The delayed implementation of these requirements is intended to allow the Department time to review and (hopefully) simplify the new reporting requirements and to allow additional time to adapt health coverage and reporting systems while employers move towards compliance with the shared responsibility requirements.


The Department’s announcement effectively pushes the deadline for compliance with the shared responsibility rules to January 1, 2015 – including the assessment of shared responsibility payments or penalties.  Importantly, other key 2014 requirements under PPACA, including the implementation of Health Care Exchanges and the so-called individual mandate, as well as the Patient Centered Outcomes Research Institute (PCORI) and transitional reinsurance program fees, remain unchanged.  


The Department is expected to issue formal guidance within the next week regarding transitional matters relating to its announcement, as well as proposed rules later this summer implementing the reporting provisions under PPACA.  We will provide additional updates on our blog as they become available.  


For more information on the most recent developments under PPACA, click here to view McNees’ recent Healthcare Reform White Paper: Countdown to 2014.  Questions regarding this white paper and specific PPACA compliance issues may be addressed to any member of McNees Wallace & Nurick’s Labor and Employment Law and Employee Benefits Practice Groups.

Pennsylvania Employers Left Wondering How They Are Affected by the Supreme Court's Decision on DOMA

Last week, the Supreme Court of the United States struck down as unconstitutional a key provision of the Defense of Marriage Act (DOMA) that defined “marriage” for purposes of over 1,100 federal laws as a legal union between a man and a woman. With the Court’s decision, same-sex couples that are legally married under state law are now entitled to the same treatment under federal law as opposite-sex married couples. Chief among the benefits now available to same-sex married couples are equal treatment under the country’s immigration and tax laws and equal rights to participate in its federal health and welfare programs. The Court’s decision striking down DOMA also will have a significant impact on the rights of same-sex married couples under various federal laws relating to employment, extending to same-sex married couples in certain states rights to (1) family leave under the Family and Medical Leave Act (FMLA) to care for a same-sex spouse, (2) favorable tax treatment for spousal health benefits and expense reimbursements, (3) continuation healthcare coverage under COBRA, (4) and spousal rights under retirement plans.

It is important to note, however, that the Court’s decision does not legalize same-sex marriage, address whether same-sex couples have a constitutional right to marry, or consider the constitutionality of a state law banning same-sex marriage. Moreover, the provision of DOMA permitting states to refuse to recognize same-sex marriages performed under the laws of other states was not affected by the Court’s ruling. Accordingly, while the Supreme Court’s decision will have a significant impact on employers in states that recognize same-sex marriage, only 13 states and the District of Columbia presently do. Of the remaining states, 35 have either statutory or constitutional bans on same-sex marriage. Pennsylvania is one such state. The question for Pennsylvania employers, then, is: How does the Supreme Court’s decision affect us?

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Health Care Reform Update: Countdown to 2014

Although the Patient Protection and Affordable Care Act (“PPACA” or the “Act”) is now over three years old, the Act’s core requirements will not take effect until 2014. The last half of 2013 should be a “wild ride” as the federal agencies charged with implementing the Act scramble to prepare for 2014 and employers weigh their compliance options.

Recently, Eric N. Athey, Esq. and Kelley E. Kaufman, Esq., attorneys in McNees Wallace & Nurick LLC's Labor and Employment Law Group, prepared a white paper entitled: "Health Care Reform Update: Countdown to 2014.” The White Paper is part of our ongoing PPACA series that is intended to keep clients abreast of recent developments and things to watch for as we count down to 2014. This installment addresses:  

  • PCORI Fees: July 2013 Filing Deadline
  • Compliance Loopholes, Shortcuts and Silver Bullets
  • Update on Required Notice of Health Care Exchanges
  • Final Wellness Program Regulations

The entire white paper is available here  and a pdf version is available here.

DOL Audits of Employer-Sponsored Group Health Plans Now Include Healthcare Reform Compliance

This post was contributed by Stephen R. Kern, Esq., a Member in the Employee Benefits Practice Group.

The U.S. Department of Labor (the "DOL") has recently enhanced its enforcement activities with respect to group health plans by significantly increasing the number of audits it is conducting. In addition, the DOL's audit letters contain significant document requests that are directed specifically at compliance with the Patient Protection and Affordable Care Act ("PPACA" or "healthcare reform") compliance obligations. For example, the DOL's audit letters now include the following:

  • Age 26 mandate – Plans must provide a sample of the written notice describing the enrollment rights for dependent children up to the age of 26 that has been used by the plan since September 23, 2010. 
  • Prohibition on rescissions of coverage – If the plan has rescinded coverage, it must supply a list of all affected individuals and a copy of the written notice provided 30 days in advance of each rescission. The DOL will analyze whether the reason for the rescission complies with the healthcare reform standard of fraud or intentional misrepresentation of a material fact.
  • Monetary limits on essential health benefits – Plans that have imposed dollar limits since September 23, 2010 must provide documentation showing the limits that are applicable for each year. A plan must also provide a sample of the notice that it sent to participants stating that the plan's lifetime limits had been eliminated. 
  • Grandfathered plan status – Employers that are retaining grandfathered plan status must provide documentation to substantiate that status, as well as a copy of the notice that is part of the plan's documents and has been provided to participants and beneficiaries.
  • Choice of Provider Notice – Nongrandfathered plans must provide a copy of the notice informing participants of the right to designate their choice of certain providers as well as a list of participants who received the notice. 
  • Claims and external review – Nongrandfathered plans must provide samples of the claims and appeals forms that have been used since September 23, 2010 plus the contracts with any independent review organizations or third party administrators that are providing the required external reviews. 

In light of this recent DOL audit activity, employers should carefully document their files regarding these healthcare reform compliance issues. To assist employers in this regard, the DOL recently published a very useful checklist entitled "Self-Compliance Tool for Part 7 of ERISA: Affordable Care Act Provisions" on its website. The DOL compliance tool allows employers to engage in a step-by-step analysis of their level of compliance with the healthcare reform requirements that are currently effective. In addition to the compliance issues referenced above, the compliance tool also deals with summary of benefits and coverage, emergency care, and preventive services. 

The increased scope of the DOL's group health plan audits echoes the recent expansion of other DOL investigations and audits of employers (e.g., wage and hour audits, and other areas of labor and employment law compliance – see our recent blog article for more information).  If you have any questions regarding DOL audits or PPACA, please do not hesitate to contact any member of our Labor & Employment and Employee Benefits Practice Groups.

Pennsylvania Regulatory Review Panel Disapproves of L&I's New UC Active Work Search Requirements

In the past year there has been a flurry of activity in the courts and the General Assembly surrounding the availability of unemployment compensation benefit to employees within the state. To start off 2012, amendments to the Pennsylvania Unemployment Compensation Law (“Act 6” or “amendments”) took effect and imposed a requirement that claimants “mak[e] an active search for suitable employment” in order to be eligible for UC benefits. Prior to Act 6, Pennsylvania was the only state that did not require a UC claimant to search for work in order to qualify for benefits.

Act 6 directed the state’s Department of Labor and Industry (“L&I”) to establish the specific search efforts necessary for a claimant to satisfy the active search requirement. At a minimum, though, the amendments required claimants to (i) register for employment search services with the Pennsylvania CareerLink system, (ii) post a resume to the site, and (iii) apply for similar employment within a certain commuting distance.

Pursuant to the directive, L&I proposed specific additional steps claimants must take to make an active search for work. L&I's proposal established a two-tiered search scheme, tying the level of search efforts to the number of weeks for which a claim for UC was filed. Notably, L&I's regulations required claimants to apply for a specified number of positions each week, undertake certain work search activities other than applying directly for a position, and keep a record of such activities. The required efforts increased after a claimant filed for benefits for eight consecutive weeks. Legislative staff estimated L&I's proposed work search regulations would yield an estimated $24 million in annual savings to the state UC system.

Last week, officials with the Pennsylvania Independent Regulatory Review Commission (“IRRC”) voted to disapprove the work search rules. The IRRC, an independent state agency tasked with reviewing regulations before implementation, concluded that the L&I work search proposals were “not in the public interest.” In its comments on the regulations, the IRRC stated its opinion that the two-tiered system was inconsistent with the General Assembly’s intent in establishing the active search requirements, was unreasonable and overly burdensome on claimants, and exceeded L&I’s statutory authority.

Although IRRC disapproval does not permanently bar a regulation, it does delay its implementation. At this point L&I has three options: (i) withdraw the regulation; (ii) modify the regulation in light of the IRRC’s comments and resubmit for consideration by the IRRC and legislative standing committees; or (iii) resubmit the regulation without modification for consideration. L&I has yet to publicly address the vote of disapproval. While this development does not require employers to take any immediate action, we will keep you updated on any updates as they come to light.

Employee's History of Absenteeism Sufficient to Deny UC Benefits Even if Final Incident Justified

Historically, in determining whether an employee discharged for absenteeism and tardiness was eligible for unemployment compensation benefits, the court’s analysis had focused on the final incident that led to termination. Specifically, even where the employer could point to a pattern of excessive absenteeism as the cause for discharge, the employee was not disqualified from receiving benefits if the last absence was justified. Late last year, however, the Commonwealth Court of Pennsylvania issued a decision that undermines this "last in time" approach.

In Grand Sport Auto Body v. UCBR (pdf), the Court considered whether Andrew Terrell was eligible for benefits after being discharged for excessive absences. Mr. Terrell had a pattern of unexcused tardiness and absences, including 19 incidents in a period of less than six months, and was previously warned about his attendance issues. His employer even pushed back his start time to improve his attendance, but he continued to be tardy. Towards the end of his employment, Mr. Terrell requested and was approved for leave from March 14 through March 21, 2011 to get married in Mexico. On March 21, 2011, Mr. Terrell’s flight home from Mexico was overbooked, leaving him unable to return to work on March 22, 2011, as scheduled. When Mr. Terrell did return to work the following day, he was suspended and later discharged because of his “history of attendance and tardy arrivals.”

Following his termination, Mr. Terrell applied for unemployment compensation benefits. Relying on court precedent, the referee found Mr. Terrell to be eligible for benefits. Specifically, the referee concluded that because the last absence was justified due to a change in flight schedule it did not constitute willful misconduct sufficient to deny benefits. The Unemployment Compensation Board of Review (“Board”) agreed.

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Employers Required to Display New FMLA Poster by March 8, 2013

In 2009, the Family and Medical Leave Act (“FMLA” or “Act”) was amended to expand military leave entitlements available under the Act. Last week, the Department of Labor (“DOL”) issued new regulations implementing and clarifying these amendments. In addition, the regulations increase the scope of qualifying exigency leave to include parental care and extend military caregiver leave to include care for veterans with a serious injury or illness.

From a practical perspective, these regulations do not create any significant changes to the availability or administration of FMLA benefits. However, in conjunction with these new regulations, the DOL has made revisions to its mandatory poster—Employee Rights and Responsibilities under the FMLA. Employers must begin using the updated poster no later than March 8, 2013. The Department of Labor has noted, though, that employers may start using the poster immediately.

All employers covered by the Act—generally public and private employers with 50 or more employees—are required to display the FMLA poster in a conspicuous place accessible to employees and applicants. The poster must be displayed at all worksites, even if there are no FMLA-eligible employees. The updated poster is available for free here.

PPACA Update: Employers' Deadline to Provide Notice of Health Care Exchanges Postponed

Late last week, the Departments of Labor, Treasury, and Health and Human Services issued a new Frequently Asked Question (“FAQ”) page addressing implementation questions under the Patient Protection and Affordable Care Act (“PPACA”).  Of particular note in the latest FAQ is the Departments’ announcement is the delayed effective date for the written notice of Exchange requirements under PPACA. Originally, PPACA required employers to issue specific written notices regarding the existence of Exchanges to new and current employees effective March 1, 2013. This deadline has now been delayed until late summer or fall of 2013. Additional guidance, which may include model notice language, likely will be forthcoming. 

Stay tuned – and look for future PPACA updates on this blog. Additionally, if you have any questions regarding PPACA requirements, please do not hesitate to contact any member of our Labor & Employment Practice Group.

IRS Proposed Regulations On PPACA'S Shared Responsibility Provisions Full of New Year Surprises (Some Good For Employers - Some Not)

Recently, Eric N. Athey, Esq. and Kelley E. Kaufman, Esq., attorneys in McNees Wallace & Nurick LLC's Labor and Employment Law Group, prepared a White Paper entitled: "IRS Proposed Regulations On PPACA'S Shared Responsibility Provisions Full of New Year Surprises (Some Good For Employers - Some Not)". 

On December 28, 2012, the Internal Revenue Service (“IRS”) issued long-awaited proposed regulations regarding the “shared responsibility” penalty provisions of the Patient Protection and Affordable Care Act (“PPACA”). In addition to consolidating prior IRS guidance on the subject, the proposed regulations also contain some surprising interpretations of PPACA’s penalty provisions. Employers will likely be pleased by some of these interpretations and disappointed with others.

Click to view the entire white paper


Healthcare Reform Update: IRS Regulations Address Full-Time Status of Nine-Month Education Employees

This post was contributed by Eric N. Athey, Esq., a Member in McNees Wallace & Nurick LLC's Labor and Employment Practice Group.

The Patient Protection and Affordable Care Act ("PPACA") requires "large employers" (i.e., those regularly employing 50 or more full-time equivalents) to provide "affordable" health coverage of "minimum value" to "full-time employees" and their dependents. The term "full-time employee" is defined to include those who are employed "an average of at least 30 hours of service per week." Effective January 1, 2014, large employers who fail to provide such coverage to all of their full-time employees and dependents may be subject to "shared responsibility" monetary penalties. These penalties will be triggered whenever a full-time employee (or his or her dependent) of a large employer qualifies for and uses a tax subsidy or credit to purchase coverage on a health care exchange.

School districts, colleges and other educational organizations preparing to comply with PPACA should begin by analyzing whether all of their "full-time employees" (as defined in the law) are offered coverage that is affordable and of minimum value. A common question raised by schools and colleges is whether summer break periods may be counted when calculating whether a 9-month (or 10-month) employee is employed an average of 30 hours per week. Until recently, the answer appeared to be yes. However, proposed regulations issued by the Internal Revenue Service ("IRS") on December 28, 2012 state otherwise.

The new proposed regulations provide that employers may use "initial measurement periods" and "standard measurement periods" of up to 12 months in duration for purposes of calculating whether new and ongoing employees are employed for an average of at least 30 hours of service per week. However, the regulations further state that "educational organizations" may not account for "employment break periods" of at least four consecutive weeks in duration when making calculations as to average hours of service. 

The proposed regulations permit educational organizations to take either of two approaches with respect to employment break periods (e.g., summer break periods) when making determinations as to average hours of service: 1) the employment break period may be excluded when calculating average hours during the measurement period; or 2) the employee may be credited with hours of service during the employment break period at a rate equal to his or her average hours of service during non-break periods. When calculating average hours of service, no more than 501 hours of service during employment break periods are required to be excluded (or credited) by an educational organization per employee each calendar year.

Notably, shorter break periods of less than four consecutive weeks may be factored into average hour of service determinations. However, the proposed regulations make it clear that "hours of service" are not limited to hours actually worked.  The new regulations define an "hour of service" to include "each hour for which an employee is paid, or entitled to payment by the employer for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence…." For this reason, shorter breaks will be treated as "hours of service" to the extent they are paid.

The proposed regulations contain a number of other clarifications regarding PPACA's shared responsibility provisions; however, the "employment break period" requirements will surely be of greatest interest to educational organizations. Additional information regarding the new regulations will be posted on our blog at www.palaborandemploymentblog.com. Although the proposed regulations are not yet final, the IRS has indicated that employers may rely upon them until additional guidance is issued. The IRS has invited public comments to the new proposed regulations. Comments may be submitted in written or electronic form on or before March 18, 2013. 

Healthcare Reform Update: Recent Federal Guidance Focuses on 2014

This post was contributed by Eric N. Athey, Esq. and Kelley E. Kaufman, Esq., attorneys in McNees Wallace & Nurick LLC's Labor and Employment Practice Group.

With the re-election of President Obama in November, the Patient Protection and Affordable Care Act (a.k.a. "healthcare reform" or "Obamacare") survived its second major challenge in 2012. Many employers had been awaiting the outcome of the election before devoting substantial effort to long-term compliance planning. The period of "wait and see" is now over and employers are well-advised to start looking ahead to 2014, when the Act's most significant provisions take effect. Employers should expect a steady stream of PPACA guidance and regulations flowing out of Washington over the next twelve months. The first significant post-election installment of PPACA guidance was issued on November 20, 2012 when the Internal Revenue Service ("IRS"), U.S. Department of Labor ("DOL") and U.S. Department of Health and Human Services ("HHS") jointly issued two Proposed Rules and one Notice of Proposed Rulemaking. 

 Incentives for Nondiscriminatory Wellness Programs in Group Health Plans.  Let's start with the good news (and the easiest to explain). Since 2006, employers offering wellness programs that tie a financial incentive to the attainment of certain health outcomes have been governed by HIPAA nondiscrimination regulations. The 2006 regulations impose five basic compliance requirements for these “health-contingent” plans, including a general limit on the amount of financial incentives to 20% of the total cost of coverage under the plan. PPACA increased this limit to 30% (and  up to 50%) in 2014. A Notice of Proposed Rulemaking recently issued by the agencies addresses this increase. 

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Health Care Reform Update - Five Compliance Issues Employers Should Focus on Now

This post was contributed by Eric N. Athey, Esq., a Member in McNees Wallace & Nurick LLC's Labor and Employment Law Group. A version of this post appeared in an Employer Alert published by McNees Wallace & Nurick LLC's Labor and Employment Group in October 2012. The Employer Alert can be accessed here.

The Patient Protection and Affordable Care Act (“PPACA”), otherwise known as Health Care Reform, is now 2 ½ years old. It narrowly survived its first major legal challenge with the Supreme Court’s decision in July. PPACA survived its second big hurdle with the re-election of President Obama earlier this month. While many of PPACA’s biggest requirements do not take effect until 2014, employers and health plans must be mindful of the flurry of compliance requirements that will soon take effect under the Act. Here is a quick look at the PPACA compliance issues that employers and health plans should be focused on now:

Is Your Health Plan Ready to Disclose SBCs?

This new disclosure requirement takes effect for open enrollment periods beginning on or after September 23, 2012 (or plan years beginning on or after that date). In a nutshell, insurers must now provide four-page summaries of benefits and coverage (“SBCs”) to group health plans (“GHPs”) within 7 days after a plan applies for coverage with the insurer. GHPs must, in turn, SBCs to plan participants without charge as part of any written application materials that are distributed for enrollment. Individuals also have the right to request an SBC at any time and must receive it within 7 days of the request. A sample SBC is available on the U.S. Department of Labor’s (“DOL”) website at www.dol.gov/ebsa. Additionally, a 60-day advance notice requirement now applies to “material modifications” affecting the content of an SBC; however, special disclosure rules apply in plan renewal situations. Willful failures to comply with these disclosure requirements may trigger a fine of up to $1000 per violation; however, the DOL has indicated that the agency’s focus will be primarily on compliance assistance, not enforcement, as employers work to comply with this new requirement in the coming months.

Is Your Company Prepared for W-2 Reporting of Health Coverage?

W-2 forms for 2012 (to be issued in early 2013) must report the aggregate cost of applicable employer-sponsored group health plan coverage – this includes both employer and employee cost shares. Employers filing fewer than 250 W-2 forms for the preceding calendar year are currently exempt from this requirement. Ancillary benefits such as long-term care, HIPAA excepted benefits (i.e., certain dental and vision plans), disability and accident benefits, workers’ compensation, fixed indemnity insurance and coverage for a specific illness or disease are excluded from the value to be reported. Similarly, the IRS has issued guidance allowing employers to exclude reporting of contributions to consumer-directed health plans such as HRAs and FSAs in most instances. The value of coverage under an Employee Assistance Program (“EAP”) may also be excluded if the coverage does not qualify as a COBRA benefit. The IRS has issued guidance (Notice 2012-9) approving three methods for calculating the value of coverage: 1) the COBRA applicable premium method (COBRA premium less the 2% administrative charge); 2) the premium charged method (for insured plans); and 3) the modified COBRA method (when an employer subsidizes the COBRA premium).

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Federal Appeals Court Gives Wellness Program a Clean Bill of Health

This post was contributed by Eric N. Athey, Esq., a Member in McNees Wallace & Nurick LLC's Labor and Employment Law Group.

Employers and wellness advocates have long been confounded by the complex gauntlet of federal laws and regulations that must be considered when structuring wellness programs. HIPAA's non-discrimination requirements, the Genetic Information Nondiscrimination Act ("GINA") and, perhaps most daunting, the Americans with Disabilities Act ("ADA") are among the laws that come into play when an employer is considering its wellness plan options.

Perhaps the most closely watched legal issue concerning wellness programs is this: May an employer offer a health coverage premium discount to those employees who complete a "health risk assessment" ("HRA")? Or, put another way, may employees who choose not to complete an HRA be subject to a premium surcharge? HIPAA regulations clearly allow employers to offer "bona fide wellness programs" with limited premium discounts; however, tying a discount to completion of an HRA presents a potential rub under the ADA. 

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McNees to Offer Seminars on How the Supreme Court's Health Care Decision Affects Your Business

Earlier this morning, the United States Supreme Court issued its much-anticipated decision (pdf) on the constitutionality of the federal Patient Protection and Affordable Care Act (PPACA), the health care reform legislation signed into law by President Obama in 2010. The Supreme Court ruled that the PPACA, including the individual mandate requiring almost all Americans to buy health insurance, is constitutional.

While the Supreme Court’s decision eliminates one of the major sources of uncertainty facing employers around the country, employers must now take significant steps to comply with the PPACA’s many requirements, or face penalties. And while the individual mandate does not become effective until 2014, some of the PPACA’s requirements take effect as early as September 2012. For example, employers must be prepared to provide summaries of benefits and coverages to their employees during open enrollment. Employers will also be required to report the value of employer health coverage on IRS Form W-2 for 2012.

To help employers determine how the Supreme Court’s decision affects their businesses and benefits plans, the Employee Benefits Group of McNees Wallace & Nurick LLC will be offering two presentations in July 2012 entitled “What the Supreme Court’s Decision on Health Care Reform Means to Your Business.” These presentations will provide a practical guide to employers and other professionals who need to understand the decision and their obligations under the PPACA going forward.

Presentations will be held in Lancaster, PA, on July 13, 2012, and in Grantville, PA, on July 20, 2012. Information, including how to register, is available here (July 13, 2012) and here (July 20, 2012).

We will continue to keep you updated on any additional developments in this area.

Health Care Reform Updates: Final Regulations and Technical Release Issued

The past couple of weeks have been busy ones for the Department of Labor (“DOL”), the Department of Health and Human Services (“DHHS”) and the Department of Treasury (“DOT”) (collectively, the “Departments”). Since February 9, 2012, the Departments have issued two sets of final regulations and a Technical Release bulletin, providing some long-awaited guidance on a variety of requirements under the federal Patient Protection and Affordable Care Act (“PPACA”), the health care reform legislation signed into law under President Obama in early 2010. Links to the regulations, the Technical Release and additional materials can be found on the DOL’s PPACA Regulations and Guidance web page.

Technical Release Regarding Automatic Enrollment, Employer Shared Responsibility and Waiting Periods

On February 9, 2012, the Departments issued Technical Release 2012-01, which provides information regarding the PPACA provisions governing automatic enrollment, employer shared responsibility and the 90-day limitation on waiting periods. The Technical Release provides a Question and Answer discussion on each of these issues, including approaches that the Departments are considering for future regulations.

Importantly, the Departments also announced that the automatic enrollment guidance will not be ready to take effect by 2014. Until final regulations are issued and applicable, employers are not required to comply with this requirement. Keep an eye out for proposed regulations on each of these requirements under PPACA.

Final Regulations Regarding Summary of Benefits and Coverage and Uniform Glossary

On February 14, 2012, the Departments issued final regulations implementing the disclosure requirements under PPACA, which include the requirement to provide a Summary of Benefits and Coverage (“SBC”), notice of material modifications and a uniform glossary. This information is intended to help plan participants better understand their health coverage, as well as other coverage options. 

In part, the regulations set forth 12 required content elements for an SBC, as well as appearance requirements. The Departments also provided supplemental information, including an SBC template, instructions and other related materials, which can be found on the DOL’s PPACA Regulations and Guidance web page.

Review the regulations carefully for additional information on who must provide each required disclosure, when the disclosures are required, what content must be provided, what format disclosures must take, and acceptable methods of disclosure. These requirements become effective on the first day of the first open enrollment period beginning on or after September 23, 2012. Failure to provide the information required can result in a significant monetary penalty, including a fine of up to $1,000 per failure.

Final Regulations Regarding Coverage of Preventive Services

On February 15, 2012, the Departments issued final regulations addressing the exemption of group health plans and group health insurance coverage sponsored by certain religious employers from having to cover certain preventive health services under provisions of PPACA, such as approved contraceptive methods and sterilization procedures.

The final regulations grant the DHHS’ Health Resources and Services Administration the discretion to exempt group health plans established or maintained by certain religious employers from the requirement to cover contraceptive services. For purposes of this exemption, a “religious employer”: (1) has the inculcation of religious values as its purpose; (2) primarily employs persons who share its religious tenets; (3) primarily serves persons who share its religious tenets; and (4) is a non-profit organization described under the Internal Revenue Code. 

In addition, the regulations provide a temporary, one year enforcement “safe harbor” for employers who are non-exempted, non-profit organizations with religious objections to covering contraceptive services whose group health plans are not grandfathered health plans under PPACA. 

Responding to the most recent controversy regarding PPACA, the Departments are expected to issue additional regulations addressing the religious objections of non-profit religious organizations who do not qualify as a “religious employer” under the narrow exemption. These regulations are expected to require the insurers of such organizations to cover contraception if a religious organization chooses not to do so. In such cases, the insurers would be expected to offer contraception coverage to women directly and free of charge, with no role for their religious employers who oppose contraception.

If you have any questions regarding these recent guidance materials or any other aspect of PPACA, please consult our prior posts or contact any of the attorneys in our Labor and Employment Practice Group.

Curbing FMLA Abuse: Policies Restricting an Employee's Travel While on Paid Sick Leave

This post was contributed by Jodi Frankel, a new Associate in McNees Wallace & Nurick LLC's Labor and Employment Group.  Jodi graduated from the University of Virginia School of Law in May 2011 and sat for the Pennsylvania bar exam in July 2011

So your employee recently posted photos of herself lounging poolside with margarita in hand while out on FMLA leave. Can you do something more than just compliment her nice tan?

Earlier this year, in the case of Pellegrino v. Communications Workers of America (PDF), a Pennsylvania federal court answered yes. The court upheld the termination of an employee for violating a work rule that restricted employee travel outside the immediate vicinity while on FMLA leave.

Under a policy in its employee handbook, CWA provided sick pay to eligible employees on approved medical leave. Such wage replacement, however, was subject to certain restrictions. Specifically, employees were required to remain in the immediate vicinity of their homes while on sick leave unless they were seeking treatment or attending to ordinary and necessary personal or family needs. Employees also were permitted to leave the immediate vicinity if they received express permission from CWA.

Denise Pellegrino, a CWA employee, was out on approved FMLA leave following surgery. She also received sick leave pay under the CWA policy. While out on leave, Pellegrino took an unapproved week-long vacation to Cancun, Mexico. CWA learned of Pellegrino's travels and fired her; at the time of her termination, Pellegrino had yet to return from FMLA leave. Pellegrino sued claiming that CWA had unlawfully interfered with her right to take FMLA leave. CWA claimed that her termination was unrelated to her status under the FMLA, but rather because she violated its leave policies. CWA said it would have terminated Pellegrino regardless of whether or not she was on FMLA leave.

While the court agreed that Pellegrino was entitled to unpaid leave under the FMLA, it found no evidence that CWA's sick leave policy or its decision to terminate her employment while she was still out on leave improperly interfered with her rights under the FMLA. In fact, the court noted that to the extent the CWA policy provided a wage supplement, it might have actually encouraged employees to take advantage of their rights under the FMLA.

In its ruling, the court noted that "the FMLA does not shield an employee from termination if the employee was allegedly involved in misconduct related to the use of FMLA leave." Similarly, companies have the right to create and enforce leave polices, including policies designed to rein in FMLA abuse, so long as such policies do not abridge an employee's rights under the FMLA. Where a sick leave policy has been adopted, the employer has the discretion to enforce it through means such as termination. The court further noted that, even in the absence of an explicit policy limiting employee travel while out on FMLA leave, an employer might reasonably terminate an employee for taking a vacation while receiving sick leave pay.

Sick leave policies similar to CWA's were previously upheld by courts in Pennsylvania. Such policies have included requirements that employees absent on sick leave stay at home during working hours, that employees obtain medical authorization and employer permission to leave the home, and that employees be subject to calls or visits by their employer.

The Pellegrino case underscores the court's growing concern with FMLA abuse and provides precedent for restrictive sick leave policies. However, an employer who suspects that an employee is abusing FMLA should conduct a thorough investigation and allow the employee to explain his/her conduct before taking immediate employment action.

Taking an Active Role in Your Employee Benefit Plan Can Save You a Lot of Money

This post was contributed by Charles T. Young, Jr., Esq., Of Counsel and a member of the Litigation and Insurance Litigation and Counseling Practice Groups

The continuing rise in the cost of health care is increasing the level of scrutiny and risk associated with employer health plans. The financial stresses associated with skyrocketing costs have manifested themselves in a number of different ways. For instance, employers with "insured plans" may find that their insurers are now more likely to perform "coverage audits" to ensure that only eligible employees and dependents are participating in the plan. 

Common audit issues involve former employees and employees on extended leaves of absence who have been permitted to retain coverage beyond their last day of active employment. Employers are well-advised to consult with their carriers to ensure that there is no disagreement as to whether coverage may be extended in these situations, and for how long.

Another common audit issue involves the eligibility of dependents. Does the carrier's definition of the term "spouse" comport with the definition that the employer uses during open enrollment? Audits also commonly find dependent children who are inadvertently permitted to remain on a plan after surpassing the maximum age limit. Under the Patient Protection and Affordable Care Act ("PPACA"), otherwise known as healthcare reform, most dependents are now entitled to coverage until age 26. This recent statutory expansion of coverage will likely generate a surge in dependent-related coverage audit issues.

Self-insured employers may similarly find that major claims are subject to much greater scrutiny from reinsurers, or stop loss carriers. Common questions raised during claims reviews include: Was the employee properly covered under the plan at the time the claim was incurred? Do all covered spouses and dependents qualify for coverage under the definitions in the plan? Does the employer's Summary Plan Description accurately reflect all conditions or exclusions required? Has the employer or the employer's third party administrator failed to apply a plan exclusion to the claim? Self-insured employers should be mindful of these issues during day-to-day administration of their plans; otherwise, a reinsurer may decline coverage when it is needed most by a plan participant.

Disputes often arise when an employer extends coverage to an employee in an effort to avoid liability under employment laws. For example, employers covered by the Family and Medical Leave Act ("FMLA") must provide eligible employees with 12 weeks of leave per year (26 weeks in cases involving certain military exigencies). During this leave, benefits must be provided if the employee continues to pay his or her share of the premium. Once FMLA leave is exhausted, an employer may decide to provide additional leave, with benefits, as a reasonable accommodation under the Americans with Disabilities Act ("ADA"). An insurer or stop loss insurer, in contrast, may take the position that coverage should be terminated upon completion of the required FMLA leave and that any additional "supplemental" coverage should be treated as COBRA continuation coverage. This is yet another area where employers should have a clear understanding of their carrier's position. 

When an employer outsources its plan administration, another set of issues can arise. Many self-insured employers outsource the administration of their employee benefit plans to third party administrators ("TPA"). A TPA handles the paperwork associated with the plan, and administers the claims process, paying claims with company funds. As in any other industry, the performance and quality of TPAs varies. Some TPAs are excellent, and they timely communicate the information an employer needs to intelligently manage its claims. Unfortunately, some TPAs fail to communicate essential information to their client employers. They may fail to make wise decisions with respect to paying claims, fail to apply benefit exclusions or fail to comply with the sometimes burdensome requirements imposed by stop loss carriers providing coverage for catastrophic losses. With the rising costs of healthcare, a stop loss carrier may increasingly deny claims for reimbursement based on the conduct of an employer's TPA. At the same time, the employer may be increasingly reliant on the TPA because it lacks the personnel and/or commitment to actively monitor the claims made by its employees. 

Coverage disputes are expensive to defend and can quickly sour a relationship between an employer and employee. Under PPACA, claims appeals processes will be subject to external review and are likely to be more claimant-friendly. Limited proactive involvement by an employer in its benefit plan can go a long way toward preventing these costly and disruptive disputes. Employers are encouraged to conduct self-audits to identify potential issues and resolve them through discussion with their TPAs, insurers and reinsurers on a proactive basis. Plan documents should be reviewed by counsel to ensure clarity and compliance. In the realm of plan administration, the old adage "an ounce of prevention is worth a pound of cure" clearly applies.

Federal Agencies Ease Grandfathering Restrictions Under Health Care Reform Regulations

This post was contributed by Eric N. Athey, Esq., a Member in McNees Wallace & Nurick LLC's Labor and Employment Law Practice Group.

As 2011 approaches, perhaps the biggest compliance issue for employers under the Patient Protection and Affordable Care Act ("PPACA") is whether it is advisable to retain "grandfathered" status for their health plan.  Our June 17, 2010 blog article discusses the interim federal regulations governing grandfathered status and the "do's and don'ts" for plans that wish to maintain that status.  One of the more controversial provisions in those regulations is the "change of carrier" provision.  Under the interim regulations, a grandfathered health plan loses its grandfathered status if the sponsoring employer enters into a new policy, certificate, or contract of insurance after March 23, 2010.  In other words, for most plans, changing carriers after March 23, 2010, would defeat grandfathered status – even if the benefits available through the new carrier did not change.

The change of carrier provision made little sense for several reasons.  First, it presented an obstacle for employers who sought to obtain more competitive premium rates from other carriers to provide the same or better coverage.  Secondly, it arguably gave additional leverage to insurance carriers when negotiating rate increases, since the loss of grandfathered status was a disincentive for employers to switch plans.  Finally, the restriction did not seem to advance the regulatory goal of containing employee cost-sharing requirements.

Fortunately, the change in carrier provision is now a thing of the past.  On November 17, 2010, the regulating agencies jointly issued an "amendment" to the interim grandfather regulations which effectively removed the change of carrier provision from the regulations.  Importantly, the amendment does not apply retroactively, only prospectively for all such changes that are effective on or after November 15, 2010.  For any plan that enters into a new agreement with a carrier, it is the date on which the coverage becomes effective – not the date on which the plan entered into the new contract or policy – that applies for purposes of this rule.  Thus, this amendment will not apply to plans for which such changes became effective prior to November 15, 2010; those plans still lose their grandfather status under PPACA.

Prospectively, grandfathered group health plans may now change carriers without losing grandfathered status, provided the change does not involve a reduction of benefits or increase in cost-sharing that would defeat grandfathered status under the June 17 regulations.  However, the amendment only applies to group health plans; it does not apply to policies issued on the individual market.  Employers who are presently (or will soon be) considering a change in carriers for their group health plan may now do so without fear of losing grandfathered status by virtue of the change.

If you have any questions regarding the recent amendment to the grandfathering rules or any other aspect of PPACA, please consult our prior posts or contact any of the attorneys in our Labor and Employment Practice Group.

First Wave of Health Care Reform Requirements Take Effect For Plan Years Beginning on or After September 23, 2010

This post was contributed by Eric N. Athey, Esq., a Member in McNees Wallace & Nurick LLC's Labor and Employment Law Practice Group.

The Patient Protection and Affordable Care Act ("PPACA") (pdf), otherwise known as the Health Care Reform Law, is hundreds of pages long and contains dozens of requirements affecting employers, health care providers and group health plans. Implementation of these new requirements will be staggered over the next eight years, with many of the most sweeping changes taking effect in 2014. However, for some employers and plans, a very important implementation date is imminent.

When Must Your Plan Comply?  Group health plans and health insurance issuers are required to comply with a host of PPACA's requirements by the first "plan year" beginning on or after September 23, 2010. For plans that operate on a calendar plan year basis, this means a compliance deadline of January 1, 2011. Employers who are uncertain of the start date of their next plan year should find it in the "general information" section at the back of their plan booklet or consult their employee benefits professional.

Requirements Affecting All Plans.  There are two types of requirements that will take effect for the upcoming plan year – the first group applies to all group health plans and the second applies only to plans that are considered "non-grandfathered" under recently issued interim federal regulations (pdf). The requirements that apply to all plans are as follows:

  • Extension of dependent coverage to children up to age 26;
  • Elimination of lifetime dollar limits on essential benefits and gradual elimination of annual limits;
  • Elimination of pre-existing condition exclusions for children under age 19;
  • Elimination of retroactive rescissions of coverage (except for fraud, misrepresentation and non-payment);
  •  Elimination of reimbursement for most over-the-counter medications under HRAs, HSAs and FSAs and an increased excise tax for non-qualified distributions under these plans (effective January 1, 2011).

Additional Requirements for Non-Grandfathered Plans.  As noted above, non-grandfathered plans have several additional requirements to comply with for plan years beginning on or after September 23, 2010. A non-grandfathered plan is one that was either established after March 23, 2010 or which existed beforehand but lost grandfathered status by making a disqualifying change to benefits after that date. These additional requirements include:Additional Requirements for Non-Grandfathered Plans. As noted above, non-grandfathered plans have several additional requirements to comply with for plan years beginning on or after September 23, 2010. A non-grandfathered plan is one that was either established after March 23, 2010 or which existed beforehand but lost grandfathered status by making a disqualifying change to benefits after that date. These additional requirements include:

  • Implementation of certain non-cost preventive health services;
  • Implementation of new required appeals processes;
  • Compliance with rules prohibiting discrimination in favor of highly compensate individuals for fully insured plans; and
  • Protection of a participant's right to designate a primary care physician; and
  • Implementation of a participant's right to obtain emergency care and OB-GYN services without prior authorization

Although opponents of PPACA hope to repeal the law through the election process or block its enforcement via litigation , those efforts will likely take years to be resolved. The requirements listed above take effect in the near term and employers should work with their benefits professionals to ensure that their plans are up to date by the first plan year following September 23, 2010. For additional information regarding these requirements and the "grandfathering" regulations, consult our prior posts or contact any of the attorneys in our Labor and Employment Group.

Health Care Reform Update: The Regulations Keep Coming... External Review Processes and Preventive Health Services for Non-Grandfathered Plans

This post was contributed by Eric N. Athey, Esq., a Member in McNees Wallace & Nurick LLC's Labor and Employment Law Practice Group.

Our June 17, 2010 posting discussed the interim regulations on "grandfathered" health plan status under the Patient Protection and Affordable Care Act ("PPACA") and the benefits of maintaining that status.  Grandfathered plans are exempt from a host of statutory requirements that apply only to non-grandfathered plans.  Until recently, little was known about the additional statutory requirements that apply to non-grandfathered plans.  However, the Internal Revenue Service, the Department of Health and Human Services and the Department of Labor (referred to collectively as "the agencies") recently issued interim regulations which explain two of the most significant requirements: (1) the internal claim and appeal and external review processes; and (2) availability of certain preventive health services at no cost.  These new requirements will take effect for plan years beginning on or after September 23, 2010.

Internal Claims and Appeals and External Review Processes

On July 23, 2010, the agencies jointly published interim final regulations governing a plan's internal claims and appeals procedures and external review processes.  The interim regulations require that non-grandfathered group health plans and health insurance issuers offering such plans have an internal claim and appeal procedure which complies with existing Employee Retirement Income Security Act ("ERISA") regulations (29 C.F.R. §2560.503-1).  However, the interim regulations impose several additional requirements over and above existing ERISA regulations, including expedited notification of benefit determinations involving urgent care within 24 hours and additional notice requirements.

Non-grandfathered plans also are subject to external review of claims appeals.  Currently, 44 states have laws providing some level of external review.  Plans operating in states which already have laws that afford at least the same level of consumer protection as the Uniform Health Carrier External Review Model Act will satisfy the external review requirement.  The Model Act is a template statute published by the National Association of Insurance Commissioners ("NAIC").  Plans operating in states that have not adopted Model Act will be subject to either a state-run external review process that complies with the new interim regulations or a comparable federal review process.  Pennsylvania state law allows for review of claims only under managed care plans; this process will either be expanded by amendment of the state law or supplemented by the federal review process set forth in the new interim regulations.

Preventive Health Services 

PPACA requires that certain preventive health services be made available under non-grandfathered plans at no cost to participants.  On July 19, 2010, the agencies issued interim regulations regarding this requirement.  The new regulations prohibit plans from imposing any cost-sharing requirements (e.g. copay, co-insurance or deductible) on any of the following:

  1. Services that have a Grade A or B rating in the current recommendations of the United States Preventive Services Task Force with respect to the individual involved.  The current Grade A and B rating recommendations are included in the preface to the interim regulations and currently include 45 services, including screening for alcohol misuse, high blood pressure, breast cancer, cholesterol abnormalities, colorectal cancer, depression, diabetes, hepatitis B, obesity and sexually transmitted diseases.
  2. Certain immunizations recommended by the Centers for Disease Control ("CDC");
  3. Certain screenings recommended by the Health Resources and Services Administration.

Office visits to obtain free preventive services may be subject to cost-sharing only if the visit is billed (or tracked) separately from the preventive service provided or if the service was not the primary purpose of the visit.  Plans are not required to waive cost-sharing requirements for services rendered out-of-network.  Plans are permitted to use reasonable medical management techniques to determine the frequency, method, treatment or setting for a preventive service covered under the regulations.

These new interim regulations are the first of a series that explain the statutory requirements that apply solely to non-grandfathered plans.  We will keep you apprised as additional regulations are issued.  For additional information regarding health care reform, please click here to view the McNees Whitepaper regarding What Employers Need to Know about Health Care Reform.

Health Care Reform Update: Interim Regulations Issued for "Patient's Bill of Rights" Requirements

This post was contributed by Eric N. Athey, Esq., a Member in McNees Wallace & Nurick LLC's Labor and Employment Law Practice Group, and Stephen R. Kern, Esq., a Member in the Employee Benefits Practice Group.

Many of the requirements in the Patient Protection and Affordable Care Act ("PPACA") will have little meaning until federal agencies issue regulations that clarify the statutory language.  The Department of Health and Human Services, Department of Labor and Internal Revenue Service are all charged with issuing regulations to implement the Act.  Since May, these agencies have issued a steady stream of interim regulations regarding a number of the Act's requirements.  Most recently, on June 22, 2010, the agencies jointly issued interim regulations to implement what have been referred to as the "Patient's Bill of Rights" provisions of PPACA.  The following provisions will take effect in plan years beginning on or after September 23, 2010.

Preexisting Condition Exclusions 
PPACA prohibits a group health plan from imposing any preexisting condition exclusion ("PCE") on any individual under the age of 19. The age limit is eliminated for plan years beginning on or after January 1, 2014. In the interim, HIPAA's current PCE rules apply. The interim regulations accept the HIPAA definition of a preexisting condition as a health condition or illness that was present before an individual's effective date of coverage in the health plan, regardless of whether any medical advice was recommended or received before that date. A PCE is any limitation or exclusion of benefits (including a denial of coverage) that applies to an individual due to the individual's health status before the effective date of coverage under the health plan. A benefit limitation or exclusion is not a PCE, however, if it applies regardless of when the condition arose relative to the effective date of coverage. 

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Health Care Reform Update: Applications for Early Retirement Reinsurance Funds Now Being Accepted

This post was contributed by Eric N. Athey, Esq., a Member in McNees Wallace & Nurick LLC's Labor and Employment Law Practice Group.

As part of the Patient Protection and Affordable Care Act, Congress established a $5 billion pool to serve as a temporary reinsurance program for employer health plans (insured and self-funded) that provide coverage for eligible early retirees between the ages of 55 and 64.  The program is intended to reimburse plan sponsors for 80% of the cost of an eligible enrollee's benefits between $15,000 and $90,000. This program will cease upon the earlier of 2014 or depletion of the $5 billion reinsurance pool. Payments are on a first come, first served basis and some believe that the reinsurance pool could be depleted in a matter of days.

As discussed in our June 6, 2010 blog post, the Department of Health and Human Services ("HHS) issued interim final regulations (pdf) on May 5, 2010, which set forth the eligibility requirements a plan must meet in order to participate in the program.  However, those regulations did not include a final application that plans could use for purpose of applying for the funds. 

On June 29, 2010, HHS issued a final application for this purpose and announced that applications are now being accepted.  To view the application and related materials, including "Do's and Don'ts" for submitting the application, click here

Since funds are awarded to plans on a first come, first served basis, interested plans should complete and submit the application as soon as possible.

For additional information regarding health care reform, please click here to view the McNees Whitepaper regarding What Employers Need to Know about Health Care Reform. In addition, we will post additional articles on this blog as other regulations are issued.

The Advantages of Having "Grandfathered" Health Plan Status Under PPACA (And How to Lose That Status)

This post was contributed by Eric N. Athey, Esq., a Member in McNees Wallace & Nurick LLC's Labor and Employment Law Practice Group.

The Patient Protection and Affordable Care Act ("PPACA" or the "Act") is by far the most wide-reaching new law governing employee benefits since the Employee Retirement Income Security Act ("ERISA") was passed in 1974. During the legislative process that led to passage of the sweeping health care reform legislation, it was proposed that plans already in existence on the date of passage be "grandfathered," or exempted, from the Act's requirements. The concept of "grandfathering" is included in the Act; however, grandfathered plans are only exempt from some of the Act's requirements. This article briefly discusses the meaning and advantages of grandfathered status and the recent interim federal regulations governing the maintenance of grandfathered status.

What is a grandfathered plan under PPACA?
A grandfathered plan is a health plan that was in existence on the date PPACA was passed – March 23, 2010. Under recently issued interim federal regulations, a plan must have "continuously covered someone since March 23, 2010" in order to be grandfathered.

What are the benefits to an employer of having a grandfathered health plan?

  1. Grandfathered plans are exempt from some, but not all, of PPACA's requirements. For example, grandfathered plans are exempt from:  the Act's mandate for plans to offer certain free preventive health services;
  2. The extension of rules prohibiting discrimination in favor of highly compensated employees to insured plans;
  3. The establishment of an external review process for benefit claim appeals;
  4. The prohibition against pre-authorization requirements for OB/GYN and emergency services;
  5. New Department of Health and Human Services ("HHS") reporting requirements regarding plan efforts to improve participant health, safety and wellness;
  6. New HHS reporting requirements regarding claim payment policies, enrollment/disenrollment, claim denials and cost sharing; and
  7. Certain cost-sharing restrictions. In addition, grandfathered plans have delayed compliance deadlines for several of the Act's requirements (e.g., restrictions on annual benefit limits). 

Is it possible to lose grandfathered plan status?

Although a health plan can avoid having to comply with a number of PPACA requirements by maintaining grandfathered status, that status can be lost.  On June 11, 2010, the Internal Revenue Service, HHS and the Department of Labor jointly issued "interim final rules" outlining the ways in which a grandfathered plan can lose its status.  These regulations are extremely restrictive and are likely to trigger significant "pushback" from the employer community.  It is entirely possible that the interim rules will be overhauled before being issued in final form.  However, for present purposes, the interim rules are the only formal guidance available on this point.

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Federal Agencies Issue First Wave of Health Care Reform Regulations

This post was contributed by Eric N. Athey, Esq., a Member in McNees Wallace & Nurick LLC's Labor and Employment Law Practice Group.

The Patient Protection and Affordable Care Act ("PPACA" or the "Act") (pdf), commonly referred to as the "health care reform law," is nearly 900 pages long and imposes a multitude of new requirements on employers and their group health plans. Yet, despite its length, the Act leaves many basic questions regarding its requirements unanswered. For example, employers that seek to comply with the Act's requirement regarding the provision of unpaid breaks for mothers to express breast milk for children up to one year of age do not yet know how many breaks must be provided per day or how long the breaks must be. Similarly, group health plans that are "grandfathered," and therefore exempt from certain of the Act's requirements, do not yet know what types of plan amendments jeopardize grandfathered status. Important questions like these will likely be addressed over the course of the next several months, and years, in federal regulations. In May 2010, federal agencies issued the first wave of "interim" regulations under the Act.

Interim Final Rules Relating to Dependent Coverage of Children to Age 26 The Act requires all group health plans, regardless of grandfathered status, to extend dependent coverage to children until they reach age 26. This requirement goes into effect for plan years beginning on or after September 23, 2010 (i.e. January 1, 2011 for calendar year plans). Grandfathered plans may exclude an employee's child who is over the age of 19 if he has other employer-provided coverage available - other than through one of the child's parents. However, this limited exclusion does not apply to non-grandfathered plans and the exclusion will be eliminated altogether in 2014.

On May 10, 2010, the Internal Revenue Service, Department of Labor and Department of Health and Human Services jointly issued "interim final regulations (pdf)" governing the extension of dependent coverage. The regulations expressly prohibit group health plans from denying or restricting coverage to dependents under the age of 26 on the basis of residency, student status, employment status or financial dependency. The regulations also clarify that the extension of coverage does not apply to the grandchild of an employee.

Although plans may charge an employee more for coverage as the number of his or her covered dependents increase, the regulations prohibits plans from varying the terms of dependent coverage based on age (unless the dependent is 26 or older). In other words, a plan may not charge more to cover a 25-year old dependent than it does a 5-year old. Similarly, older dependents cannot be offered fewer plan options than younger dependents.

Under the regulations, dependents under the age of 26 who previously lost coverage or who were denied coverage due to their age must be given an opportunity to enroll in the plan. The enrollment opportunity must begin no later that the plan's first plan year beginning on or after September 23, 2010 and must last at least thirty days. In addition, a written notice of this opportunity must be provided to the dependent or to the employee-parent. It may be included as part of other enrollment materials; however, the notice must be prominent.

Interim Final Rules Relating to PPACA's Early Retirement Reinsurance Program The Act also created a temporary reinsurance program for employer health plans (insured and self-funded) that provide coverage for eligible early retirees between the ages of 55 and 64.

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On March 30, 2010, President Obama signed the Health Care and Education Reconciliation Act of 2010 (H.R. 4872) (pdf) into law, supplementing the Patient Protection and Affordable Care Act (H.R. 3590) (pdf). McNees attorneys have written a whitepaper on the areas of these Acts that apply directly to employers, summarizing each provision and grouped by their effective date. To read the full whitepaper, click here.

The core goal of health care reform was to provide health insurance coverage to 32 million Americans who are currently uninsured. The legislation attempts to achieve this goal through a variety of approaches, including tax credits, penalizing employers that don’t offer affordable coverage and individuals who fail to obtain coverage, creation of “health insurance exchanges,” expansion of Medicare Part D coverage and taxing high cost insurance plans.

The most sweeping changes brought by the Act do not take effect until 2014 and 2018, and existing health plans may be “grandfathered” or exempt from certain requirements. However, a number of important provisions take effect in 2010 and 2011 for all health plans.

The reform package is extremely broad in scope, and it will take time for employers to develop appropriate plans for compliance. As an initial step, employers should work with their insurance providers and brokers, third-party administrators, counsel and accountants to determine which of the 2010 requirements apply to them and the appropriate compliance steps.

It is also important to note that many provisions in the new law do not apply to plans maintained through a collective bargaining agreement until the agreement expires. Employers that are currently negotiating a collective bargaining agreement, or that will be doing so in the near future, must be clear regarding the impact of health care reform on their current and future agreements.

Although the Act is rife with new taxes and administrative burdens on plans, there are also a few “sweeteners” that employers should consider taking advantage of (e.g. Small Employer Tax Credit, Simplified Cafeteria Plan, Retiree Reinsurance, etc.). For a more detailed summary of these provisions including effective dates, click here. Additional guidance will be coming from Washington as compliance deadlines approach and we will continue to keep you informed.

If you have any specific questions regarding the Act’s impact on your health plans, contact any of the attorneys in the McNees Wallace and Nurick LLC Labor and Employment Group or Employee Benefits Group for assistance.   In addition, McNess attorneys will be presenting a breakout session entitled "Whats New in Employee Benefits?  Healthcare Reform is Just the Beginning..." at the McNess Wallace and Nurick LLC 20th Annual Labor and Employment Law Seminar on May 21, 2010.  To download a PDF of the Seminar invitation click here

COBRA Subsidy Extended...Again...And Again?

On March 3, 2010, President Obama signed the Temporary Extension Act of 2010 (.pdf) into law. The Act provides for the continuation of the extended unemployment compensation benefit program and the availability of the COBRA premium subsidy, which expired February 28, 2010. The COBRA premium assistance program was extended to allow those involuntarily terminated through March 31, 2010 to receive the 65 percent premium subsidy. More information regarding the COBRA premium subsidy was posted on our blog on January 6, 2010.

The Act also clarifies that if an individual has a COBRA qualifying event due to a reduction in hours, and is later involuntarily terminated, then the involuntary termination must be treated as a qualifying event and the employee must receive a new, appropriate COBRA notification.

Finally, the Act clarifies certain interpretative guidance, and indicates that certain portions of the Act are retroactive.

Employers and Plan Administrators should be sure to incorporate these changes into their COBRA notification procedures and COBRA notices.  

Congress is also said to be considering a bill that would extend the COBRA premium subsidy program further. 


On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA), which expanded health care insurance benefits under the Consolidated Omnibus Budget Reconciliation Act (COBRA). The ARRA granted individuals involuntarily terminated from employment between September 1, 2008 and December 31, 2009, a subsidy to cover 65 percent of their monthly COBRA premiums for up to nine months. The subsidy is available for individuals with an annual income of less than $125,000 (single) or $250,000 (joint filers). Individuals earning between $125,000 ($250,000 joint) and $145,000 ($290,000 joint) are eligible for "phased-in" assistance.

Under the ARRA, plan administrators are not only responsible for providing notice of the subsidy to eligible individuals, they must also pay the cost of the subsidy up front. The plan administrator may then file IRS Form 941 to claim a payroll tax credit in the amount of subsidies paid. In other words, employers must front 65 percent of eligible individuals' COBRA premiums in exchange for a credit against their payroll taxes.

UPDATE! On December 19, 2009, President Obama signed the 2010 Department of Defense Appropriations Act (Act), which extends the COBRA premium subsidy provisions and places additional notification requirements on plan administrators. The Act provides eligible individuals with an additional six months of subsidized coverage, extending the availability of the COBRA premium subsidy from nine to 15 months. The Act also allows individuals involuntarily terminated on or before February 28, 2010 to receive the subsidy, extending the original eligibility deadline of December 31, 2009, by two months. Employees involuntarily terminated in January and February 2010 will now be eligible for the subsidy.

Furthermore, if an individual was eligible for the COBRA premium assistance under the original ARRA, and that eligibility already expired, then that individual may receive the continued premium subsidy retroactively. In order to take advantage of the retroactive coverage, the individual must pay 35 percent of the premium by February 17, 2010, or within 30 days of receipt of the extension notice described below, whichever is later. If eligible individuals already have paid the full COBRA premium, then the plan administrator must either refund the over payments or credit future premium payments.

The Act also contains additional notification requirements that require plan administrators to provide eligible individuals with information regarding the extended subsidy.

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PA Department of Insurance Provides Mini-COBRA Guidance

Pennsylvania's Mini-COBRA law became effective July 10, 2009. The law provides COBRA-like medical insurance continuation to employees who work for smaller business not covered by the federal law. The Department of Insurance clarified some of the coverage issues and provided a model notice for covered businesses to provide to employees. Employees who elect Mini-COBRA may also be eligible for a 65% premium assistance provided by the federal stimulus legislations. Fortunately, small business will not need to "front" the premium assistance payment because Pennsylvania's Mini-COBRA law places the obligation on the insurer.

Pennsylvania Enacts "Mini-COBRA" requiring Insurers to offer Continuation of Health Coverage Options for Employees of Small Businesses

Effective July 10, 2009, medical insurers covering small employers in Pennsylvania will be required to offer COBRA-like continuation coverage to qualified employees and their eligible dependents. The new law covers small employers who have between two and 19 employees on a typical business day during the preceding calendar year. 

The so-called mini-COBRA coverage expands on the federal COBRA law that covers employers with at least 20 employees and allows employees who are involuntarily terminated to qualify under a federal economic stimulus law for a 65% federal subsidy of both COBRA and mini-COBRA premiums.

Like the federal law, qualifying events for coverage under the new Pennsylvania mini-COBRA are loss of group coverage due to termination of employment, death, divorce or marital separation. However, there are some key differences between the federal COBRA  and Pennsylvania’s mini-COBRA law, some of which are as follows:

  • Under the Pennsylvania law, an employee or dependent must have been continuously covered by medical insurance for three months prior to termination of coverage and may not be covered or eligible for coverage under another medical plan or Medicare.
  • Under the Pennsylvania law, continuation coverage must be extended for nine months; under federal COBRA law, coverage is available up to 18 months when employment is terminated and 36 months in situations involving death, divorce or legal separation.
  • Under the Pennsylvania mini-COBRA law, beneficiaries can be charged a premium up to 105% of the group rate; federal COBRA beneficiaries can be charged a premium of up to 102% of the group rate.
  • Pennsylvania mini-COBRA obligations apply to insurers; federal COBRA applies to employers that provide medical coverage through self-insurance or insurance products.

Employers and insurers will need to provide notices to employees and dependents of the provisions of the new law as well as their rights to elect continuation coverage upon the occurrence of a qualifying event.

Employment Law implications of Obesity and BMI after the ADA Amendments Act

The ADA Amendments Act re-wrote the definition of disability so that it will likely include obesity-related health conditions and perhaps obesity itself as a protected disability. Before the ADA Amendments, being overweight and even obese was not generally considered a "disability". For example in EEOC v. Watkins Motor Lines, Inc., a court determined that non-physiological morbid obesity was not a protected disability.

The EEOC is considering regulations regarding the equal employment provisions of the ADAAA.  In December 2008, the EEOC commissioners deadlocked along party lines on whether to approve former Chair Naomi Earp’s proposed regulations. According to the EEOC’s agenda, a notice of proposed rulemaking will be issued by August of this year.  I predict that obesity will become a protected disability requiring employers to reasonably accommodate the condition.  I also expect that the correlation between BMI and obesity will be challenged by agruing that disqualifying an employee based on a high BMI consistitutes "regarded as" disability discrimination.

The ADA changes have important implications for businesses including employment discrimination claims, health plan design, and wellness program administration. There are several issues that merit discussion when examining obesity such as following. 

What is Body Mass Index (BMI)? BMI has become the unofficial scientific measure for assessing obesity. BMI is a function of height and weight (BMI calculator). The Center for Disease Control classifies a person who has a BMI of less than 18.5 as underweight; normal is 18.5-24.9; overweight is 25-29.9; obese is over 30; and extremely obese is over 40.

What is the BMI analysis telling us about our weight? A Report by the Trust for America's Health recently disclosed statistics about obesity trends. In the Report, Pennsylvania had the 24th highest rate of adult obesity with 25.7 percent of its population having a BMI over 30. The Report correlated obesity figures with other factors like Diabetes and Hypertension rates. It also noted levels of admitted physical activity (or inactivity). Twenty-Four percent of Pennsylvanians admit no physical activity.

How good is BMI as a measure of obesity? Martica Heaner points out the limitations of BMI in her posts BMI Blues and Is Body Mass Index a Bad Measure?:

The BMI works well for research purposes, but doesn’t necessarily translate precisely to the individual. Unfortunately, it tends to convey that people that exercise regularly, for example, are overweight, when they are not actually overfat. A fit person tends to have more muscle, so their body weight is a reflection of body fat as well as muscle and other lean tissue.

Since the problem with being overfat is that health risks are increased, a BMI in the overweight range is probably not a negative indicator for a fit person. Regular exercise, low body fat and increased muscle mass are all factors that tend to outweigh any health risks suggested by a higher BMI.

Is there correlation between high BMI and bad health? According to the CDC, the BMI ranges were established based on the health consequences associated with obesity as determined by different BMIs. Some, like Paul Campos in his book, The Obesity Myth, challenge this conclusion. However, the correlation between high BMI and bad health is quickly becoming an assumption.

Other than being incorrectly labeled "overweight" or "obese", why should we care whether BMI is a accurate health status predictor? BMI is fast becoming the legal standard for determining whether someone is "obese" and therefore a "health risk". Those with high BMIs can face increase cost and eligibility barriers for certain employee benefits.

Individual insurance policies for life, disability and medical insurance almost universally use underwriting procedures that take into account BMI as a basis for determining insurability and premium. A survey by the Texas Office of Public Insurance Counsel found that insurance company individual health plan underwriting guidelines used BMI as a basis to deny coverage, charge a higher premium, and offer less coverage. The California Insurance Commission has made comments alerting consumers about BMI as a basis for insurance denial.

Some group health plans are community rated and not subject to medical underwriting. These plans calculate premium based on the expected claims of the community not the individual employer group. Other group health insurance programs can be subject to medical underwriting in which BMI analysis and other factors will be used to price the coverage for the group. An employer with a compliment of employees with potential for high claims (including high BMI) will face higher premiums or denial. Likewise, self-insured medical plans that utilize stop loss coverage may undergo medical underwriting where BMI will be factored into the rate for reinsurance.

Group health plan wellness program incentives may be keyed to BMI targets for premium discounts and other incentives. The availability of incentives to those with high BMI is subject to limitations including situations when it is "unreasonably difficult" or "medically inadvisable" for a participant to attempt to achieve the BMI standard.

Healthy Families Act: Proposed Legislation Mandates Seven Days of Paid Time Off

Representative DeLauro introduced the Healthy Families Act (H.R. 2460) which would require businesses with 15 or more employees to provide up to seven days of annual paid sick leave.  The paid leave could be taken to attend to an employee's own or a family member’s illness, or used for preventative care such as doctor’s appointments. In addition, the bill provides leave for employees who are the victims of domestic violence, stalking or sexual assault.  Sick time requests may be oral or in written at least seven days prior to foreseeable absence or otherwise as soon as practicable. The employee must provide notice of the expected duration of the absence. Medical certification is required if more than three consecutive days are taken off.

Employees would earn one hour of paid sick time for every 30 hours worked up to a maximum of 56 hours (seven days) annually. Leave begins accruing from the first day of employment, but may not be taken until an employee works for 60 days. Up to 56 hours of paid sick leave would carry over from year to year, but an employer may permit additional accrual beyond the 56 hour minimum. Employers are not required to pay terminated employees for unused paid time off. If a separated employee is rehired within 12 months, that employee is entitled to the accrued leave already earned, and would be entitled to take sick leave immediately.

A business's existing paid time off policy would not need to modified if it met or exceeded the minimum time periods and allow employees to take such leave for illness and other circumstances outlined in the Health Families Act. Employers must post a notice of the substantive and remedial provisions of the Act.

Aggrieved employees may bring civil claims to recoup unpaid time off benefits and to enforce the Act's discrimination and retaliation protections.  The Secretary of Labor also has investigative and enforcement powers. The Bill, if enacted, is effective six months after the Department of Labor issues required regulations.

Tax Treatment of Differential Wage Payments to Employees in Military Service

In recognition of the importance and sacrifices associated with military service, many employers provide a supplemental payment for their employees called to active military service which covers the difference between their military pay and their regular compensation. Pay differentials are provided for varying lengths of time.

Revenue Ruling 2009-11 provides that a differential wage payment made by employers to their employees that leave their job to go on active military duty is not subject to FICA or FUTA taxes. However, the pay differential is subject to income tax withholding under new Code section 3401(h). The IRS ruling provides that employers may use the aggregate procedure or optional flat rate withholding to calculate the amount of income taxes required to be withheld on these payments, and that these payments must be reported on Form W-2.

Section 3401(h) was added to the Code by section 105(a) of the Heroes Earnings Assistance and Relief Tax Act of 2008.  New subsection 3401(h) provides that, for purposes of income tax withholding, any differential wage payment is to be treated as a payment of wages by the employer to the employee. Section 3401(h) applies to differential wage payments paid after December 31, 2008. The enactment of section 3401(h) modifies the holding in Revenue Ruling 69-136 that differential wage payments are not subject to income tax withholding. The term “differential wage payment” means any payment which (A) is made by an employer to an individual with respect to any period during which the individual is performing service in the uniformed services (as defined in chapter 43 of title 38, United States Code) while on active duty for a period of more than 30 days, and (B) represents all or a portion of the wages the individual would have received from the employer if the individual were performing service for the employer.

We have previously summarized the provisions of HEART in our post Making Sure Your "HEART" Is In The Right Place When It Comes To Soldier-Employee's Benefits

Important IRS clarification of COBRA Subsidy Provisions

On March 31, 2009, the IRS issued a notice relating to premium assistance for COBRA continuation coverage under the American Recovery and Reinvestment Act of 2009 (ARRA). Notice 2009-27 contains many helpful clarifications on the following topics:


The Q&A section answers many nagging questions particularly on "involuntary termination" eligibility including the following as meeting the definition:

  • An involuntary termination means any severance from employment due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services (this leaves in question where employees accepting a "voluntary layoff" may qualify).
  • Any temporary layoff with recall rights qualifies as a termination, but a reduction in hours does not qualify. However, an employee’s voluntary termination in response to an employer-imposed reduction in hours may be an involuntary termination if the reduction in hours is a material negative change in the employment relationship for the employee.
  • Any termination elected by the employee in return for a severance package.
  • Any employee-initiated termination from employment constitutes an involuntary termination from employment for purposes of the premium reduction if the termination from employment constitutes a termination for good reason due to employer action that causes a material negative change in the employment relationship for the employee.

Employers should be complying with the Notice requirement of the ARRA before April 18, 2009.


New COBRA Model Notice for ARRA Compliance Published by DOL

The Department of Labor Published Model Cobra Notices implementing the provisions of the American Recovery and Reinvestment Act of 2009. 

Individuals eligible for the special COBRA election period described above also must receive a notice informing them of this opportunity. This notice must be provided within 60 days following February 17, 2009. Plan administrators must provide notice about the premium reduction to individuals who have a COBRA qualifying event during the period from September 1, 2008 through December 31, 2009. Plan administrators may provide notices separately or along with notices they provide following a COBRA qualifying event. This notice must go to all individuals, whether they have COBRA coverage or not, who had a qualifying event from September 1, 2008 through December 31, 2009.

Individuals involuntarily terminated from September 1, 2008 through February 16, 2009 who did not elect COBRA when it was first offered OR who did elect COBRA, but are no longer enrolled (for example because they were unable to continue paying the premium) have a new election opportunity. This election period begins on February 17, 2009 and ends 60 days after the plan provides the required notice. This special election period does not extend the period of COBRA continuation coverage beyond the original maximum period (generally 18 months from the employee's involuntary termination). COBRA coverage elected in this special election period begins with the first period of coverage beginning on or after February 17, 2009. This special election period opportunity does not apply to coverage sponsored by employers with less than 20 employees that is subject to State law.

UPDATE:  IRS Notice 2009-27 clarifies many issues related to implementation of the COBRA subsidy.

Employers limited in use of Genetic Information

The Genetic Information Nondiscrimination Act of 2008 (GINA) was enacted to curtail the use of genetic history in employment-related areas. GINA includes two titles. Title I, which amends portions of the Employee Retirement Income Security Act (ERISA), the Public Health Service Act, and the Internal Revenue Code, addresses the use of genetic information in health insurance. Title II prohibits the use of genetic information in employment, prohibits the intentional acquisition of genetic information about applicants and employees, and imposes strict confidentiality requirements.

The law is effective November 21, 2009. The EEOC has begun its regulatory and information process with the issuance of EEOC's Questions & Answers on GINA and Proposed Regulations.

IRS Releases Information for Employers to Claim COBRA Assistance Credit on Payroll Tax Form

On February 26, 2009, the Internal Revenue Service released detailed information that will help employers claim credit for the COBRA medical premiums they pay for their former employees.

Under the new law, eligible former employees, enrolled in their employer’s health plan at the time they lost their jobs, are required to pay only 35 percent of the cost of COBRA coverage.  Employers must treat the 35 percent payment by eligible former employees as full payment, but the employers are entitled to a credit for the other 65 percent of the COBRA cost on their payroll tax return.

  • Employers must maintain supporting documentation for the credit claimed. This includes:
  • Documentation of receipt of the employee’s 35 percent share of the premium.
  • In the case of insured plans: A copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier.
  • Declaration of the former employee’s involuntary termination.

The informational Release is IR-2009-15, includes an amended Form 941 and the Instructions,  together with a Q&A for Employers.  The Q&A makes the following notes on implementing and claiming the subsidy:

  • The Employer may provide the subsidy (65%) and take the take the credit on its employment tax return only after it has received the 35% premium payment from then intdividual.
  • The law became effective on the date of enactment, Feb. 17, 2009. However, under a transition rule, the regular premium amount may continue to be paid for up to two months after enactment (e.g., for March and April), and the subsidy can be provided retroactively.
  • An employer can reduce its tax deposits or claim the credit on its quarterly return.
  • An assistance-eligible individual can be any COBRA qualified beneficiary associated with the related covered employee, such as a dependent child of an employee, who is covered immediately prior to the qualifying event. The qualifying event for purposes of eligibility for the subsidy is involuntary termination of the covered employee’s employment that occurs during the period beginning Sept. 1, 2008, and ending Dec. 31, 2009. The individual must also be eligible for COBRA coverage, or similar state coverage, during this period.
  • Model notices implementing the law will be issued shortly apparently by the Department of Labor.


Premium Assistance for COBRA Benefits a part of Stimulus Legislation

The American Recovery and Reinvestment Act has passed both the House and Senate and awaits the President's signature. The substance of the Act as it relates to COBRA continuation subsidies is as follows:

COBRA Subsidy: Eligible Employees who are involuntarily separated from employment can receive a 65% subsidy toward COBRA premiums for up to 9 months. The Eligible Employee or a third party must pay the remaining 35% of the COBRA premium. Employers cannot pay this amount. Severance agreements that offer employer-paid health continuation should be drafted to take advantage of the subsidy.

Employee Eligibility: Individuals who have been involuntarily terminated between September 1, 2008 and December 31, 2009 with annual incomes less than $125,000 (individual) or $250,000 (joint) are eligible for the COBRA premium assistance. The amount of the subsidy covers both employee and family coverage. The premium assistance is not considered income to the Eligible Employee. 

Employer/Health Plan Payroll Tax Credit: Employers or health plans (if they administer COBRA benefits) must front the COBRA subsidy amount and in exchange receive a credit against payroll taxes for the cost of the subsidy. 

Duration of Subsidy: The subsidy terminates upon offer of any new employer-sponsored health care coverage or Medicare eligibility.

Special Elections and Alternate Enrollment Options: Qualified individuals, who initially decline COBRA coverage, have an additional 60 days after they receive notice of the special election period to elect to receive the subsidy. The election period begins on the date of enactment. Group health plans may provide a special enrollment right for eligible individuals to elect different coverage under the plan in conjunction with a COBRA continuation coverage election. The alternate coverage must meet certain requirements and may not be more expensive than the original coverage.

 Notice Requirements: COBRA notices must include information on the availability of the premium assistance. Model notices from the Department of Labor will be published 30 days after enactment.

Effective Date:  The law is effective for premiums as of the first calendar month following the date of enactment.

UPDATE:  IRS Releases Information for Employers to Claim COBRA Assistance Credit on Payroll Tax Form

Supreme Court Clarifies Pension Distributions to Former Spouse

On June 26, 2008, the U.S. Supreme Court issued a unanimous decision in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan. The case had attracted significant attention because it dealt with the common situation that plan administrators face in having to deal with conflicting documents relating to a pension distribution to a divorced spouse. The Court held that plan administrators have a duty under ERISA to follow the language in the plan in distributing benefits and that a divorce decree can not supersede the plan's terms.

William Kennedy had designated his wife, Liv, as the beneficiary of his interest in his employer's pension and savings plans. When they divorced, Kennedy executed a new beneficiary form with respect to the pension plan (naming his daughter as the beneficiary), but he did not execute a new form for the savings plan. In their divorce decree, Liv waived her interest in the savings plan benefits. Upon William's death, the savings plan administrator, relying on William's unrevoked beneficiary designation, paid the savings plan benefits to Liv rather than to William's estate.

The estate sued, alleging that the distribution to Liv violated ERISA. The District Court granted summary judgment for the estate. On appeal, the U.S. Court of Appeals for the 5th Circuit reversed the decision, holding that Liv's waiver was an improper assignment or alienation of her benefits under ERISA and, therefore, could not be honored. The 5th Circuit stated that the divorce decree did not satisfy the requirements for a QDRO, which is the only exception to the anti-alienation rule.

With respect to the anti-alienation issue, the Supreme Court reversed and held that the divorce decree simply waiver Liv's rights, but did not constitute an impermissable assignment or alienation. The Court went to hold, however, that the plan administrator is required under ERISA to follow the terms of the plan, not the divorce decree, with respect to the distribution of benefits. Because the DuPont plan included a specific procedure for changing a beneficiary, which William did not follow, the plan administrator properly distributed the benefit to Liv. The Court left open the question, however, of whether the benefit had to be returned in light of Liv's valid waiver as to that benefit.

The result of this Supreme Court decision is that plan administrators should review the terms of their plans, SPDs and other communications to ensure that benefit distribution and beneficiary designation provisions are clear and unambiguous. Consideration should also be given to including language in SPDs and other communications that specifically states that divorce decrees that are not QDROs will not determine the disposition of benefits under the plan. This decision provides plan sponsors and plan administrators with a long awaited directive that they are not required to investigate the existence of other documents or other events in determining the manner in which benefits are to be distributed if the terms of the plan are clear and unambiguous.

Record Retention Nightmare Created by Ledbetter Fair Pay Act

Ledbetter Fair Pay Act (H.R. 2831/ S. 1843) is on the fast track with full support of the Obama Administration. LFPA overturns the Supreme Court’s decision in Ledbetter v. Goodyear Tire and Rubber Co. effectively eliminating the 180 or 300-day statute of limitations for filing a wage-related discrimination claim. The Bill allows family members and others affected by discrimination to file claims and reinstitutes the Paycheck Accrual Rule for determining when a claim arises. It also allows claims based on paychecks and annuity payments which would permit retirees to bring claims.

Ms. Leddbetter's discriminatory pay claims originated from pay raises allegedly denied her based on supervisor's discriminatory evaluations of her performance conducted over a period between 1979 and 1998. The U.S. Supreme Court held that the pay setting was a discrete act triggering the180 day limitations period for filing a discrimination claim, therefore a timely discrimination claim must be based on acts of discrimination occurring within the 180 day period. Leddbetter argued that“[E]ach paycheck that offers a woman less pay than a similarly situated man because of her sex is a separate violation of Title VII with its own limitations period, regardless of whether the paycheck simply implements a prior discriminatory decision made outside the limitations period”.

The effect of the argument is to call into question decisions of supervisors made almost 20 years before the employer received notice of the alleged discrimination. Leddbetter counters that she had no way of knowing about her discriminatory treatment because of the confidentiality of the performance reviews and salary adjustments

In its Ledbetter decision, the Supreme Court enunciated a classic application of the statute of limitations governing the time period for bringing legal claims:

Statutes of limitations, which "are found and approved in all systems of enlightened jurisprudence, represent a pervasive legislative judgment that it is unjust to fail to put the adversary on notice to defend within a specified period of time, and that "the right to be free of stale claims in time comes to prevail over the right to prosecute them. These enactments are statutes of repose; and although affording plaintiffs what the legislature deems a reasonable time to present their claims, they protect defendants and the courts from having to deal with cases in which the search for truth may be seriously impaired by the loss of evidence, whether by death or disappearance of witnesses, fading memories, disappearance of documents, or otherwise. (emphasis added). 

The implication's are huge for employers in terms of faulty memories, missing witnesses, and mountains of documents. Defense of decades old discrimination claims will necessitate the retention of more documents for longer time periods. The expense associated with storage and production of documents (whether paper or electronic) may be staggering. Imagine a Request for Production of Documents or subpoena that demands access to 20 or 30 years of employer records associated with the evaluations and salary adjustments for an employee (or retiree) claiming pay discrimination. Add in all of the employee's peer comparators who were similarly situated over the same time period for a truly nightmarish perspective. Now the rationale for the statute of limitations becomes clearer.

Human Resources Legal Compliance Checklist for 2009

Human Resource Professionals face a demanding legal compliance year in 2009. The following five items should be added to your "To Do" list for the first quarter of '09:

ADA Amendments Act Compliance (effective 1/1/2009):  The amendments greatly expand the definition of disability refocusing compliance on determining whether the employee is "qualified" and evaluating reasonable accommodations. Employers should consider the following:

  • Revising job descriptions to define essential job functions and minimum qualifications.
  • Formalizing the interactive process for assessing disability issues.
  • Educating supervisors on the expanded ADA coverage.

E-Verify Registration and Immigration Compliance (effective 1/15/2009):  Government contractors and subcontracts may need to register for and use the E-Verify System for new and existing government contracts. Employers who may be covered should inventory their existing contracts and review prospective contracts and subcontracts to determine whether they are covered by the regulations.

U.S. Citizenship and Immigration Services (USCIS) has amended regulations governing the types of acceptable identity and employment authorization documents that employees may present to their employers for completion of the Form I-9, Employment Eligibility Verification. Under the interim rule, employers will no longer be able to accept expired documents to verify employment authorization on the Form I-9. There are other changes to the types of acceptable documents. Employers must use the revised Form I-9 (not yet issued) for all new hires and to re-verify any employee with expiring employment authorization beginning January 31, 2009. The current version of the Form I-9 will no longer be valid as of February 2, 2009.


FMLA Regulations Implementation (effective 1/16/2009):  Amendments to the FMLA's regulations require action by employers in the following areas:

EFCA and RESPECT Act Planning:  This pending legislation has enormous potential consequences for employers. Developing an action plan should include the following items:

Wage & Hour Self-Audit:  As evidenced by Wal-Marts recent record settlement, wage and hour lawsuits will play prominently in 2009. A self-audit of compliance practices can mitigate these claims particularly in the following areas;

  • Employee classification (exempt vs. non-exempt)
  • Off the clock work (starting times, breaks and meal periods)
  • Donning and Doffing
  • Child labor

Department of Labor Issues FMLA posters and Forms

The DOL issued a revised Family and Medical Leave Act (FMLA) poster, reflecting the recently published final rule which is now available for viewing and downloading. Every employer covered by the FMLA is required to post and keep posted on its premises, in conspicuous places where employees are employed, a notice explaining the Act’s provisions.  

The Department provides optional forms for use by employers and employees during the FMLA process.  The Department has revised its Certification of Health Care Provider form (WH-380), and divided it into two separate forms for an Employee’s Serious Health Condition (WH-380E) and a Family Member’s Serious Health Condition (WH-380F).  The Department has also revised its Notice of Eligibility and Rights and Responsibilities form (WH-381).  In addition, the Department has added new forms for Designation Notice to Employee of FMLA Leave (WH-382), Certification of Qualifying Exigency for Military Family Leave (WH-384), and Certification for Serious Injury or Illness of Covered Servicemember for Military Family Leave (WH-385).

The poster and forms become effective on January 16, 2009.  Additional compliance assistance materials are also available on our FMLA Final Rule Web site at http://www.dol.gov/esa/whd/fmla/finalrule.htm. Employers must also amend handbook provisions to reflect the new regulations.

Avoid Wage & Hour Problems from Year End Bonus Payments to Hourly Employees

Many employers traditionally provide year end bonuses and holiday gifts for their employees. Bonuses may be included in a nonexempt employee’s regular rate depending upon the manner in which the bonus is calculated and the company’s prior communication. Inclusion in the regular rate impacts overtime calculations and payments.

Bonuses paid to nonexempt employees are included in the determination of the employees’ regular rate under section 778.208 unless the bonus falls into one of several exceptions. The bonuses are allocated to the pay period and added to other wages paid to nonexempt employees and then divided by the hours worked for the same period to determine the new regular rate under the methodology described in section 778.209. For bonuses earned over more than one work week, the bonus must be allocated to pay periods to which the bonus applies and the regular rate recalculated. If overtime was worked during this period, the overtime rate must be revised to be time and a half the recalculated regular rate that includes the bonus payment. This is a nightmare.


Department of Labor regulations provide for several exclusions. Among these excludable bonus payments are discretionary bonuses, gifts and payments in the nature of gifts on special occasions, contributions by the employer to certain welfare plans and payments made by the employer pursuant to certain profit-sharing, thrift and savings plans. These exemptions are discussed in Section 778.211 Discretionary Bonuses, Section 778.212 Gifts and Holiday Bonuses, Section 778.213 Qualified Profit Sharing and Savings Plans, and Section  778.214 Other Qualified Plans.  Bonuses which do not qualify for exclusion from the regular rate as one of these types must be totaled in with other earnings to determine the regular rate on which overtime pay must be based.


Typically any bonus announced in advance and tied to work performance, hours or other productivity will not qualify for an exemption.  There three ways to manage the recalculation problem, other than utilizing qualified plans:


1.  Holiday Bonuses: The Holiday Gift and Bonus exemption under section 778.212 allows for the exclusion from calculation of an employees “regular rate” of pay “sums paid as gifts; payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent upon hours worked, production, or efficiency…”   The following sets forth some of the parameters of the exclusion:

If the bonus paid at Christmas or on other special occasion is a gift or in the nature of a gift, it may be excluded from the regular rate under section 7(e)(1) even though it is paid with regularity so that the employees are led to expect it and even though the amounts paid to different employees or groups of employees vary with the amount of the salary or regular hourly rate of such employees or according to their length of service with the firm so long as the amounts are not measured  by or directly dependent upon hours worked, production, or efficiency. A Christmas bonus paid (not pursuant to contract) in the amount of two weeks' salary to all employees and an equal additional amount for each 5 years of service with the firm, for example, would be excludable from the regular rate under this category.


2.  Discretionary Bonuses: This is an area of DOL audit scrutiny and should not be used on a regular or aggressive basis. Truly discretionary bonuses are not included in the regular rate of pay under section 778.211, if both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly. The following sets forth some of the parameters of the exclusion:

For example, any bonus which is promised to employees upon hiring or which is the result of collective bargaining would not be excluded from the regular rate under this provision of the Act. Bonuses which are announced to employees to induce them to work more steadily or more rapidly or more efficiently or to remain with the firm are regarded as part of the regular rate of pay. Attendance bonuses, individual or group production bonuses, bonuses for quality and accuracy of work, bonuses contingent upon the employee's continuing in employment until the time the payment is to be made and the like are in this category. They must be included in the regular rate of pay.


3.  Percentage Total Earnings Bonus: Bonuses based on a percentage of the nonexempt employee’s total earnings under section 778.210 do not result in a recalculation of the regular rate because overtime is already been accounted for in the calculation.   Under this method, the bonus is described as a percentage of the nonexempt employee’s total (W-2) earnings, thereby including both regular and overtime payments and obviating the need for recalculation of the regular rate.


The Ohio Employer's Law Blog is also a great resource on this topic.

ADA Amendments may Open the Door for Nicotine Addiction Claims

Today’s smokers [are] more addicted to nicotine according to a new study, which notes that 73% of those trying to quit are “highly dependent”. The Center for Disease Control and Prevention estimates that 20.2% of Americans are smokers. Pennsylvania has a slightly higher rate of smoking at 21.5 % with 51.9% attempting to quit. Many of these smokers are also employees.

Smokers are feeling the heat in the workplace through smoke-free workplace policies. Jon Hyman at the Ohio Employer’s Law Blog has a post asking Are there legal risks with smoking bans?  He notes that pushing back on these employer initiatives are  29 states which have enacted laws protecting employees who smoke from discrimination.

Pennsylvania has no law protecting smokers from discrimination. To the contrary, Pennsylvania’s new Clean Indoor Air Act mandates smoke-free workplaces and precludes employees from smoking indoors. However, the law allows employers to prohibit smoking anywhere on company property; it does not prevent the continuation of outdoor smoking areas. Employers are left with the sometimes delicate task of crafting a policy concerning outdoor smoking and monitoring the break schedules of employees who wish to smoke. In addition, many wellness programs have targeted smoking with cessation programs coupled with both financial incentives and penalties.

The Americans with Disabilities Act was recently amended to expand the definition of “disability” to the point that it may encompass nicotine addiction. The few ADA cases on “smoking” as a disability have not recognized a claim based on the pre-amendment definition of disability. However, the rationale for denying disability status to “smoking” or “nicotine addiction” is squarely predicated on the remedial nature of the condition exempting it from coverage of the ADA as expounded in Sutton v. United Airlines, Inc. The ADA Amendments expressly abrogated Sutton.  In the only published case of which I am aware, the court in Brashear v. Simms set forth the following rationale in dismissing a smoker’s ADA claim:

…[E]ven assuming that the ADA fully applies in this case, common sense compels the conclusion that smoking, whether denominated as “nicotine addiction” or not, is not a “disability” within the meaning of the ADA. Congress could not possibly have intended the absurd result of including smoking within the definition of “disability,” which would render somewhere between 25% and 30% of the American public disabled under federal law because they smoke. In any event, both smoking and “nicotine addiction” are readily remediable, either by quitting smoking outright through an act of willpower (albeit easier for some than others), or by the use of such items as nicotine patches or nicotine chewing gum. If the smokers' nicotine addiction is thus remediable, neither such addiction nor smoking itself qualifies as a disability within the coverage of the ADA, under well-settled Supreme Court precedent.

Pennsylvania employers can and must adopt policies prohibiting smoking in the workplace. However, employers may well be required to reasonably accommodate nicotine-addicted employees much as they would need to do so with other addictions, like drugs and alcohol. The scope of such accommodations must be explored. Section G of the EEOC’s Guidance on Applying Performance Standards to Employees with Disabilities may prove helpful.


UPDATE:  How will this new wrinkle weigh in the mix: Under Obama will smoking become  "cool" again?

Employer's Guide to the Election

The election rhetoric has been relatively quiet on employment-related topics, except for the brief mention in the last debate. Candidate Obama has a clear agenda employment legislation based on his co-sponsorship of various bills and other media comments. Candidate McCain’s position is less clear. Detailed below is a summary of the key legislative initiatives considered by Congress in 2008, all of which have passed the House of Representatives except the RESPECT Act.

Employee Free Choice Act (H.R. 800 and S. 1041)

Summary:  The EFCA amends the NLRA to change the procedures for union certification and first contract negotiation. The primary components of the act are as follows:

  • Allows NLRB certification of a relevant bargaining unit upon authorization card showing from 50% plus one of employees bypassing secret ballot election.
  • Mandates initial collective bargaining contract be negotiated within 120 days or first contract is produced by an arbitrator covering employees for 2 years.
  • Provides new fines for employer unfair labor practices.

Impact:   EFCA is a monumental change to the NLRA. Much has been made of the abrogation of the secret ballot election, but equally dramatic are the limitations placed on collective bargaining and contract determination by an arbitrator if no agreement is reached in 120 days of negotiations.   If enacted, EFCA will result in unprecedented organizing activity with employers losing their ability to demand an election and engage in hard bargaining over a first contract.

Candidate Positions:  H.R. 800 passed the House but did not receive enough votes for consideration by the Senate. Candidate Obama is a co-sponsor of the Senate Bill and supports its passage. Candidate McCain opposes the Senate Bill.

Prior Posts:  NOW is the Time for Employers to Gear up for the Employee Free Choice Act (Unions Are)


Employment Non-Discrimination Act (H.R. 3685/ no Senate Bill)

Summary:  ENDA adds sexual orientation to the protected classes under Title VII for all employers except religious organizations. It allows reasonable access to adequate facilities that are not inconsistent with the employee’s identified gender, but does not require domestic partner benefits or protect “gender identity”.

Impact:  ENDA adds a protected class to employment discrimination protections allowing compensatory and punitive damage claims against employers.     

Candidate Positions:  H.R. 3685 passed the House but did not receive enough votes for consideration by the Senate.  No legislative position by either candidate.   Candidate Obama’s website expresses support for the legislation.


Ledbetter Fair Pay Act (H.R. 2831/ S. 1843)

Summary:  FPA overturns the Supreme Court’s decision in Ledbetter v. Goodyear Tire and Rubber Co. effectively eliminating the 180 or 300-day statute of limitations for filing a wage-related discrimination claim. The bill allows family members and others affected by discrimination to file claims and reinstitutes the Paycheck Rule for determining when a claim accrues. It also allows claims based on paychecks and annuity payments which would allow retirees to bring claims.

Impact:  FPA virtually eliminates the statute of limitations for wage-related claims.

Candidate Positions:  H.R. 2831 passed the House but did not receive enough votes for consideration by the Senate.  Candidate Obama is a cosponsor of the Bill. Candidate McCain has expressed no opinion on the Bill.


Paycheck Fairness Act (H.R. 1338/ S. 766)

Summary:  PFA changes the burden of proof in gender based pay claims requiring the employer to affirmatively demonstrate that any pay differential is not based on sex. Employers who cannot meet this burden face unlimited compensatory and punitive damages. The EEOC would be required to collect employer payroll information based on sex, race, and national origin thereby targeting its enforcement activities. The Bill also changed rules on class actions automatically including employees in such claims unless they specifically opt out.

Impact:  PFA subjects employers to wage related class actions with unlimited damages and makes it easier for employees to prove such claims.

Candidate Positions:  H.R. 1338 passed the House but did not receive enough votes for consideration by the Senate.  Candidate Obama is a cosponsor of the Bill. Candidate McCain has not taken any position on the Bill.


RESPECT ACT (H.R. 1644/ S. 969)

Summary:  The so-called Re-Empowerment of Skilled and Professional Employees and Construction Tradesworkers (RESPECT) Act would change the NLRA definition of “supervisor” to exclude “working supervisors” who do not spend a majority of their worktime in strictly managerial duties excluding the tradition duties of assigning work and directing the activities of others.

Impact:  Respect would allow many working or front line supervisors to join a union dividing their loyalties to the company, as they would be permitted to assist in the unionization of the company.

Candidate Positions:  Candidate Obama is a cosponsor of the bill and Candidate McCain has taken no position on the Bill.

Prior Posts: Bosses do not Deserve RESPECT


If there is a Democratically-controlled House, Senate, and President, it is likely that some or all of the above legislation will be enacted in 2009. Others have commented on the HR landscape following the election:

What The Future of HR Looks Like in 2009

Small business owner’s guide to the election

HR GENERALIST RESOURCES: Payroll Tax Withholding from Severance Pay and Other Supplemental Wage Payments

Employers offering severance payment to employees are typically uncertain about the payroll taxes that may apply to these additional payments. Severance pay is treated as “supplemental wages” because it is not a payment for services in the current payroll period but a payment made upon or after termination of employment for an employment relationship that has terminated. As supplemental wages, special payroll tax withholding rules apply. The Internal Revenue Service recently clarified its position on withholding for supplemental wages, including severance pay.  Employers should also make sure that severance payments offered in conjuntion with a waiver and release comply with the ADEA and WARN requirments.

Revenue Ruling 2008-29 addresses nine different situations where supplemental payments are made to employees that require additional payroll tax withholding as follows:

  1. commissions paid at fixed intervals with no regular wages paid to the employee;
  2. commissions paid at fixed intervals in addition to regular wages paid at different intervals;
  3. draws paid in connection with commissions;
  4. commissions paid to the employee only when the accumulated commission credit of the employee reaches a specific numerical threshold;
  5. a signing bonus paid prior to the commencement of employment;
  6. severance pay paid after the termination of employment;
  7. lump sum payments of accumulated annual leave;
  8. annual payments of vacation and sick leave; and
  9. sick pay paid at a different rate than regular pay.

For the supplemental wage payments identified above that do not exceed $1 millon, the amount of income tax withholding is determined under the rules provided in § 31.3402(g)-1(a)(6) and (7). These paragraphs describe two procedures for withholding on supplemental wages: the aggregate procedure and optional flat rate withholding. The Revenue Ruling explains the application of the two procedures to each of the nine payment types. A Supplemental to Circular E also provides guidance on withholding in Publication 15 and Publication15A.

Managing a Business and its Employees in Financial Crisis Requires Communication from HR

The specter of business failure and personal financial setbacks wreak havoc on employee morale challenging Human Resources with dual management problems. First, HR needs to formulate a communication strategy to address the concerns of employees surrounding job security and compensation. Employee jitters surround the viability of their employer and the security of their jobs. Retirement savings evaporate as the stock market plummets leading some to forego matching 401k contributions. Compensation packages and incentives tied to stock continue their downward spiral. Wordsmith the message that the CFO might send out: “They are lucky to have a job.”

Second, HR must manage the collateral effects of an employee’s personal financial problems, which can lead to bankruptcy, foreclosure and even divorce, any of which may influence his or her job and job performance. Businesses must be prepared to respond to employee performance issues created by financial problems. Employers should be aware of legal limitations placed on their actions with regard to an employee’s financial problems. In addition, human resource professionals should appreciate the relationship between their performance management program and other resources to address employee issues created by financial distress.


Pennsylvania and federal laws limit actions employers may take against employees that file for bankruptcy or are subject to wage attachments. Many employers, particularly those in the financial sector, face customer relation problems when one of their employees does not pay his or her bills or files for bankruptcy. Legal limitations on employer responses are as follows:

  • Garnishment/Attachment of Wages. Pennsylvania prohibits garnishment/attachment of wages for the repayment of personal debts, except in limited circumstances for child support, alimony or student loans.   Employees may not be disciplined, discriminated against or discharged because of wage garnishments.
  • Employee BankruptcySection 575 of the Bankruptcy Act protects employees and applicants from discrimination if an individual:(1) is or has been a debtor under this title or a debtor or bankrupt under the Act; (2) has been insolvent before the commencement of a case under the Act or during the case but before the grant or denial of a discharge; or (3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Act. Courts have limited the reach of this provision by requiring that the discrimination be "solely because" of the individual's bankruptcy participation.
  • Worries about Temptation for Theft. Businesses may become concerned that an employee in financial distress may be more likely to embezzle and react by trying to find out the scope of an employee’s credit problems. The Fair Credit Reporting Act limits an employer’s use of employee credit information. A business’ usual financial controls should be uniformly applied, but, if inadequate, should be revised for all employees.

Employees experience financial distress are subject to performance problems including declining productivity, absenteeism and depression.  The usual performance management tools can be used: however, special attention should be paid to other resources like the EAP and Debt/Credit counseling.


Pennsylvania Workplaces Must be Smoke-free by September 11, 2008

The effective date of Pennsylvania’s Clean Indoor Air Act is fast approaching leaving many employers with questions about what they should be doing to comply with the new law. Here are some steps that employers may wish to consider in fostering good employee relations and avoiding the civil and criminal penalties associated with violations of the CIAA:

Get Familiar with the Requirements of the Law. An Employer Toolkit is available from the Department of Health setting out the basic requirements of the law. We have posted on the CIAA as follows:

Pennsylvania enacts Clean Indoor Air Act Prohibiting Smoking in most Public Places including Workplaces

Department of Health Issues Guidance for Employer Compliance with the Pennsylvania Clean Indoor Air Act


Post Required Signage Designating Nonsmoking Areas. Employers must post signs prohibiting smoking in the workplace and designating outdoor smoking areas that are not too close to entrances or exits. Downloadable signs for both “No Smoking” and “Smoking Permitted” in English and Spanish are available from DOH.


Adopt a Policy on Workplace Smoking for Employees and Customers. Adopting a policy is not an express requirement of the law but makes good sense for effective employee communications and to establish the employer’s good faith defense to civil and criminal penalties under the law. The DOH (through its partner PACT) has a sample policy, which I do not recommend. At a minimum, a policy should designate the all indoor workplace areas as nonsmoking and, if elected, those outdoor areas where smoking is permitted. Other restrictions on smoking such as time and frequency of breaks should be addressed. The consequences of violating the policy should be set forth along with acknowledgment of the CIAA anti-retaliation provisions for employees who complain about violations.


Conduct Training for Supervisors and Employees. Employers should notify employees of the new law and its restrictions either in conjunction with introduction of the policy or otherwise. Avoid pitting the smokers against the nonsmokers. This is a state law, you don’t have a choice. Mention of the criminal fines and consequences of violation of the law is appropriate.


Consider a Smoking Cessation Program to help Smokers Adapt to the New Law. As mentioned previously, the CIAA may be a chance to offer a wellness program including a smoking cessation component.

Tobacco Free Workplace Policies may be integrated with Wellness Programs


Apply for Necessary Exemptions.  Drinking Establishments, Cigar Bars, and Tobacco Shops should apply for an exemption if they intend to allow smoking under the exemptions provided in the CIAA. 

Making Sure Your "HEART" Is In The Right Place When It Comes To Soldier-Employee's Benefits

On June 17, 2008, President Bush signed into law the Heroes Earnings Assistance and Relief Tax Act of 2008 (the "HEART Act"). The HEART Act extends or modifies several tax and retirement benefits for active-duty and former military service members, and employers and plan administrators should be familiar with its provisions.

Retirement Plans

            Currently, for purposes of retirement plan vesting or accruals, an individual's period of qualified military service is treated as a period of employment, which is credited when the soldier-employee returns to work. As such, if the individual dies during military service, his or her survivors do not receive accelerated vesting, ancillary life or other benefits they may have received if the employee died while actively performing his civilian employment. Under the HEART Act, retirement plans must pay the survivors of a soldier-employee who dies during qualified military service any benefits (other than those that accrued during military service) that the plan would have paid had the employee died during active employment. If a plan fails to follow this provision, it will be disqualified. Of note, this provision is effective for military service related deaths and disabilities occurring on or after January 1, 2007, so some plan sponsors may have to provide this benefit retroactively or risk disqualification.

            In addition to this mandatory provision, the HEART Act provides that retirement plans may elect to provide optional benefits to soldier-employees and their families. Notably, under one of the optional benefits, a plan may treat someone who dies or becomes disabled during qualified military service as if he or she resumed employment the day before the death or disability occurred and then terminated employment because of the death or disability. This optional benefit allows the plan to pay out benefits that would have accrued during the soldier-employee's military service presuming he or she was reemployed. Plan sponsors that elect to make this benefit available must do so for all employees performing qualified military service on a reasonably equivalent basis.

Differential Wage Payments

            The voluntary payments made by some employers to service members during a qualified military leave to account for the difference between what the soldier-employee makes in the military and what his or her average compensation was while actively employed are commonly referred to as "differential wage payments." Under prior law, the Income Revenue Service (IRS) took the position that these payments were not subject to tax withholding and were not required to be treated as compensation for retirement plan purposes. Under the HEART Act, however, as of January 1, 2009, differential wage payments will be deemed wages subject to income tax withholding and must be treated as compensation of the employee for retirement plan purposes. In the HEART Act, "differential wages" is a term of art that includes: "compensation paid by an employer to an individual who is on active duty in the uniformed services for a period of more than 30 days, that represent all or a portion of the wages the individual would have received from the employer if the individual had remained in active employment with the employer." Any plan amendments relating to differential wages must be made on or before the last day of the first plan year beginning on or after January 1, 2010. 

Flexible Spending Arrangements

            The HEART Act permits health flexible spending arrangements ("FSA") to provide "qualified reservist distributions." A soldier-employee may be eligible for a "qualified reservist distribution" if he or she is called to active military duty for at least 180 days (or for an indefinite period), and the distributions are made during the period beginning with the active-duty call and ending on the last day of the FSA's coverage period that includes the date of the active-duty call. Although this provision will help employees avoid the FSA use-it-or-lose-it rule, a number of important issues remain open for clarification. Specifically, the permissible amount of the distribution, timing of the distribution, and taxation of the distribution are not squarely addressed under the HEART Act. Accordingly, employers may amend their FSAs to include qualified reservist distributions as of June 17, 2008, it is advisable for employers to wait to offer these distributions until after the IRS clarifies some of the foregoing issues.

Tobacco Free Workplace Policies may be integrated with Wellness Programs

As the effective date of Pennsylvania’s Clean Indoor Air Act approaches, businesses may wish to seize the opportunity to create a comprehensive tobacco-free workplace program including wellness initiatives. The no smoking law applies to all indoor work areas and permits an employer to completely prohibit smoking on its property. However, legal and employee relations considerations suggest an integrated approach to workplace smoking.

Smoking-related business cost are well documented. The Center for Disease Control has the following statistics on smoking:

  • For 1997–2001, cigarette smoking was estimated to be responsible for $167 billion in annual health-related economic losses in the United States ($75 billion in direct medical costs, and $92 billion in lost productivity), or about $3,561 per adult smoker.
  • An estimated, 20.8% of all adults (45.3 million people) smoke cigarettes in the United States.
  • Among current U.S. adult smokers, 70% report that they want to quit completely. In 2006, an estimated 19.2 million (44.2%) adult smokers had stopped smoking for at least 1 day during the preceding 12 months because they were trying to quit.

Design of an effective wellness program to address smoking can take many forms and requires collaboration between insurance brokers, benefit providers and legal advisors in light of limitations placed on certain aspects of their design including HIPAA's Nondiscrimination Requirements.    HIPAA regulations affect the design of wellness programs that take into account "health factors" when providing incentives under the program. Programs such as the following that do not take into account a participant's health factors when a reward is given or withheld for participation by an employee or beneficiary:

  • Health Assessments
  • Diagnostic testing that does not take into account test results
  • Preventive care encouragement incentives such as waivers of co-pays or deductibles
  • Smoking cessation programs so long as the benefit is received regardless of whether the employee quits smoking
  • Health education seminars
  • Gym membership reimbursement

Wellness programs that give rewards for healthy conduct or that penalize unhealthy activities (like smoking) must meet all of the five following standards:

  • Limited Reward:       All rewards offered under the program must not exceed 20% of the cost of coverage (total amount of employee and employer contribution). The reward can be in the form of a discount or rebate of premium or contribution; waiver of deductible, copayment or coinsurance; or the value of a benefit provided under the plan.
  • Reasonably Designed to Promote Health or Prevent Disease:    The plan must have a reasonable chance of improving health or preventing disease in a way that is not overly burdensome.
  • No More that Annual Qualification for Award:    Individuals eligible to participate must be given the opportunity to qualify at least once a year.
  • Uniform Reward Availability for "Similarly Situated" Individuals: The reward must be available to all similarly situated individuals and there must be a reasonable alternative for receiving the reward for any individual for whom it is unreasonably difficult due to a medical condition or for whom it is medically inadvisable to attempt to obtain the applicable standard. Physician verification may be required.
  • Plan Material must Describe all Terms:     The plan must describe all terms of the program and the availability of a reasonable alternative. The following language may be used to satisfy the alternative:

"If it is unreasonably difficult due to a medical condition for you to achieve the standards for the reward under this program, or if it is medically inadvisable for you to attempt to achieve the standards for the reward under this program, call us at            and we will work with you to develop another way to qualify for the reward."

Business initiatives to regulate off duty conduct have some legal risk. However, courts have so far rejected smoker’s claims of disability based upon nicotine addiction.

Switching to a Paid Time Off Program (PTO) has Practical and Legal Implications

Traditional leave programs segregate time off into categories like vacation, sick time and personal time requiring HR professionals to track both the time off and the reason it is being taken. Sick time abuses are addressed by tightly monitoring the reasons for sickness-related absences and disciplining employees for excessive absenteeism. Many employers have decided to get away from policing the circumstances of an employee's absence by just creating a bank of paid time off that can be used for any reason. Once PTO is exhausted, time off is unpaid and subject to the attendance discipline policy. This certainly sounds like a great idea, but here are some practical and legal considerations in converting from a traditional sick pay program to a PTO plan:

Timing the Change Over to PTO:

Changes in leave policies should be coordinated with either the end of the leave year period or some other workplace change like moving to a four-day workweek. The obvious choice is converting to PTO bank at the end of the year, since most employers administer their time off programs on a calendar/fiscal year. For employers using anniversary date leave years, it is too difficult administratively to run dual programs, so they should pick a date and change over for everyone.

Effect on Four-Day Workweeks

Employers need to remember that a change in workweek from five eight days to four day ten hour days also affects time off policies. A handbook or CBA may describe time off (PTO, vacation, holidays, personal and sick time) in terms of “days”. However,

a workday, which used to be an 8-hour day, is now a 10-hour day. The 8-hour day was 20% or the workweek, but the 10-hour-workday is 25% of the workweek. If a day expands to 10 hours, employees are getting more time off and, as a result, the company is losing 5% productivity. If a day stays at 8 hours then employees can’t cover the whole day off. Converting the whole PTO bank to hours can address this situation. (see Energy Expenses And Gas Prices Motivate Employers To Move To Four Day Workweek: What Are The Legal Issues?)

Addressing the Perception of a "Take Away":

Converting to PTO means combining vacation, sick days, personal days, and other time off into one bank. Employers almost never credit the entire amount of sick time to PTO banks. Therefore, employers need to address the perception that employees are losing sick time. I have found that referring to the statistic mentioned in the prior posting (average 8 sick days, use 5) makes some sense. Based on this ratio, I convert 60% of sick days to PTO and couple it with an explanation about trade offs.

Dealing with Accumulated Sick Time:

Some employers allow the accumulation of unused sick time as an incentive not to use it. (This practice drives accountants crazy). The accumulated time may be used in some of the following ways: to satisfy a waiting period for STD/LTD; as a pay out upon separation, typically at a reduced percentage (50%); or it is simply forfeited. Employers may seize the opportunity to clean up their balance sheet and pay out a portion of the accumulated time or convert it to PTO. This approach softens the blow of the perceived take away mentioned above. However, an employer's flexibility in dealing with accumulated sick time depends on its written policy and practice with regard to payouts. Be careful not to create a claim for unpaid fringe benefits under the Pennsylvania Wage Payment and Collection Law.

Exhausting PTO:

Employees who use all of their PTO are unpaid for additional absences and are subject to discipline under the attendance policy. Some traps for the unwary include: the prohibition on salary docking for exempt employees; additional unpaid leave as an accommodation under the ADA, and discrimination claims under the ADA.

Administering FMLA:

FMLA administration becomes more challenging in a PTO program since the employer is not necessarily aware of the reason for an absence. A serious health condition under the FMLA triggers an obligation to notify an employee of his or her FMLA rights and starts the counting of the time against the 12 weeks of leave. Employers must also address the concurrent use of PTO and FMLA leave in their policies.

Integrating STD and other Leave Programs:

Some sick leave policies were designed to integrate with the waiting period for STD benefits. A move to PTO creates a disconnect. The disconnect can be mitigated by allowing an employee with accumulated sick time to use it to satisfy the waiting period if he or she becomes eligible for STD benefits. Otherwise, PTO or unpaid time is used during the waiting period. Employers might address hardships by creating a PTO donation program where employees may donate unused PTO to a fellow worker who needs additional time.

Contesting Unemployment Claims:

 An employer's proof of willful misconduct to deny unemployment benefits will generally look at the incident that gave rise to the discharge. If the reason is a violation of employer's attendance policy, the employee can show that the violation was not his or her fault. An employee who is fired for excessive absences after "squandering" PTO, may still be eligible for unemployment if the absence that gave rise to termination was for a legitimate illness.

Drafting a Policy:

A written policy on PTO is strongly suggested and it should address at least the following areas:

  • Accrual Basis or Award Basis
  • Notice of Absence
  • Unused PTO carryover or forfeiture
  • Concurrent use of FMLA and PTO
  • Consequences of Exhausting PTO
  • Discipline/Discharge

U.S. Supreme Court Decides Several Employment-Related Cases

On June 19, 2008, the United States Supreme Court issued four employment-related decisions that are briefly summarized as follows:

Meacham v. Knolls Atomic Power Laboratory:  The government ordered its contractor to reduce its workforce. The contractor had its managers select employees for layoff based on factors including performance, flexibility, critical skills and seniority. The resulting reduction in force netted 31 employees, 30 of which were over 40. Several laid off employees sued claiming the neutral factors used for layoff had a disparate impact on older workers.

The Court noted that the employees in a disparate impact case must isolate and identify specific employment practices that are allegedly responsible for the statistical disparity disfavoring older workers. The employer must prove that the neutral factors constitute “reasonable factors other than age”. Reasonableness differs from business necessity.

Chamber of Commerce v. Brown:  The Court struck down a California law that prohibited employers who receive state funding from using those funds to “assist, promote, or deter union organizing.” The Court held that the NLRA preempts state laws that attempt to regulate areas that the NLRA protects or prohibits.

Kentucky Retirement System v. EEOC:  Kentucky’s pension program imputed additional years of service for workers in “hazardous positions” who became disabled so as to credit them with service to reach “normal retirement” under the plan. An employee who worked past normal retirement age and then became disabled challenged the plan on the basis of age discrimination. He argued that the disability pension calculation disadvantaged older workers based on their aged.

The Court noted the distinction between “age” and “pension status”. When an employer adopts a pension plan that includes age as a factor, and that employer treats employees differently based on pension status, a plaintiff must prove that the differential treatment was “actually motivated” by age and not pension status to prevail under the ADEA.

Metropolitan Life Insurance Co. v. Green:   A life insurance company was the administrator of an employer’s long-term disability plan so it decided an employee’s eligibility for benefits and paid the claim out of its pocket. The insurer determined that an employee was not eligible for benefits and the employee appealed.

The Court analyzed the standard of review of a plan administrator’s denial of benefits under ERISA when the administrator is both the decision maker and the payer of benefits. In such a situation, the administrator has a conflict of interest, which a court may consider as a factor in accessing whether the decision is an abuse of its discretion under the plan. The administrator’s decision is entitled to “deference” and the court may not substitute its judgment for that of the administrator; however, it may consider the conflict as part of its assessment.

Hat tip to Connecticut for being faster by a nose.

Sue your Employee?: Self-Insured Health Plans Reimbursement Actions have Public Relations and Legal Concerns

Self-insured medical plans typically contain “subrogation clauses” that allow the plan to claim reimbursement from a personal injury recovery of a participant. The self-insured plan’s reimbursement right exists even if state laws prohibit such attachment as ERISA pre-empts the state limitation. For example, the Supreme Court ruled that ERISA trumped Pennsylvania’s anti-subrogation law allowing a self-insured plan to recoup payments it made for medical expenses from an injured participant’s tort recovery.

Recently in its decision in Sereboff v. Mid Atlantic Medical Services, Inc., the U.S. Supreme Court unanimously affirmed a self-insured health plan’s legal right of reimbursement from a participant’s personal injury recovery. Enforcement of this right requires that the plan sponsor include reimbursement language in both its plan document and summary plan description. Specifically, well-drafted documents should address the following:

  • Identifying the individuals covered by the reimbursement right in addition to the participant (e.g., dependents, heirs, etc.). 
  • Specifically reference the right of subrogation and reimbursement.
  • Specifically reject common law doctrines such as the "make whole" and "common fund" doctrines.
  • State that the plan has a first priority equitable lien with respect to any proceeds (from any source) that will be held in a "constructive trust" for the benefit of the plan and that the participant consents to both the lien and the constructive trust.
  • Require participant cooperation with respect to the plan's ability to enforce its rights, including requiring participants to execute subrogation and reimbursement agreements as a condition to receiving benefits.
  • Specifically reference the plan's right to offset future benefits to the participant.

Properly drafted (and consistent) language in plan documents and summary plan descriptions will serve to thwart any efforts to block the enforcement of a self-insured plan's reimbursement rights. However, a medical plan’s action in seeking reimbursement from an employee or dependent may not be without other repercussions.

Substantial adverse publicity and damage to employee relations could result when medical plans seek to recoup payments from accident victims. Consider the media firestorm that rained down on Wal-Mart after it tried to recoup $470,000 in medical reimbursements from a $1 million tort recovery of an injured employee. Wal-Mart’s was tarred with the title of “Worst Person in the World” from one media pundit. Ultimately, the Wal-Mart plan relented allowing a brain-damaged former employee to keep the money, even though Wal-Mart probably had a clear legal right to reimbursement.

Carnival of HR # 34

The Carnival of HR has its usual compliment of excellent postings on interesting topics.

Leading off is a discussion of the two sides of generational differences in the workforce. Dr. Ira Wolfe from the Perfect Labor Storm 2.0 posts on Gray ceiling disrupts succession plans for Gen Xers which discusses the recruiting challenges created by older workers remaining in the workforce and impeding the career advancement of younger employees. On the other side, Jon Agno of So Baby Boomer: Life Tips posts on Boomer Executive Challenges in which he fears that decades of institutional memory may be wiped out leaving organizations without many of the skills and insider knowledge businesses had taken for granted. 

Blogging is the subject of several of the Carnival submissions. Lisa Rosendahl at HR Thoughts asks the question “Why do you blog?” and answers it by stating that  “In doing so, you may very well be creating your legacy”. Her post is called "Moving Forward While Capturing the Past." Perhaps there is another answer to that question found in a post by Totally Consumed in which he comments On Personal Branding and Anonymous Blogging. The queen of anonymous blogging, The Evil HR Lady, chimes in recognizing that “I Haven’t Complained About Recruiters Lately.”

Legal risks sometimes cross the minds of HR pros.  Jon Ingham’s Strategic Capital Management (HCM) Blog assesses risk in his contribution Human Capital Risk and Reporting which argues that risk is an important area for all HR professionals. Dan Schwartz of the Connecticut Employment Law Blog kicks off our summer with some legal thoughts in his post called Start of the Summer Season: HR Topics to Ponder Now Before They AriseJon Hyman of the Ohio Employer’s Law Blog comes up with another compelling title for his post called Cat fight on aisle 6: court leaves open the possibility that a handbook can create a contract.  Most importantly, we should all keep in mind of Marcy McCullough’s post evaluating whether we can be dooced for On-Line Postings And Your Corporate Image: Can You Terminate Employees For Personal Postings?!?

Speaking of minds, Alvaro Fernandez at SharperBrains offers a superb introduction to what working memory is and why it is critical for our productivity, complemented with daily tips on Try Thinking and Learning Without Working Memory. Nina Simosko’s post describes "Comfortable Misery", a state of mind wherein you are miserable, but you have gotten used to it.  She states that far too many people live in "comfortable misery". A subsequent post offers a survey on the topic. If you are looking for a coping mechanism, the Career Encouragement Blog notes that it's okay to acknowledge that sometimes you are irrelevant on a particular project or even in a whole job. That’s Job Search Rule # 30 for those who are counting. I wonder if comfortable misery is one of the “10 Things I Learned About Working in HR” as recounted by Dan McCarthy at Great Leadership when he makes observations about his 18 month develop assignment as an HR generalist.

Employee benefits and compensation are the subjects of several posts. Michael D. Haberman at HR Observations advocates helping employees at the gas pump as an employee benefit in his post Pumping Up Your Employees: No Rah-Rah, Just Help With Gas.   Ann Bares at Compensation Force posits that merit pay systems create a dilemma that occurs when the short-term interests of individuals are at odds with the long-term interests of the grouping her post  “The Tragedy of the Commons and Merit Pay”.  Wayne Turmel who is the host of The Cranky Middle Manager Show submits a post called Lousy Quality and Small Portions in which he confronts the paradoxes of middle managers. Greg Pernula at i4cp writes about a recent survey that found a majority of companies lack various support, training or education when it comes to workplace diversity matters.

There are lots of insights on Talent Management and Employee Empowerment. Wally Block’s Three Star Leadership Blog observes that The best and the brightest are not always the best fit because setting out to hire "the best and the brightest" without attention to ethics, work habits, or organizational fit is just asking for trouble and minimizing your chances for success. Steve Roesler at All Things Workplace writes in his post titled “Making Change? Pay Attention to High Achievers” that, when it comes to making change, the talented people you think will be most helpful just might be the least. Chris Young of Maximizing Possibilities thinks that Talent Management is an increasingly important strategic issue for most organizations.  Given the value placed on effective talent management practices the question must be asked: “Is talent management too important to be left to HR?”   Alice Snell’s at Taleo’s Talent Drives Performance Blog  has a post called “Strategic Is As Strategic Does” that explains how embedding talent management into the business process—facilitated by HR and owned by line managers and employees—puts strategy into action. Susan Heathfield at About.com Guide to Human Resources discusses Employee Empowerment as the goal of forward thinking HR processes and practices in her post Want Empowerment? You Get What You Request and Reward.

To add to our international flair, Frank Mulligan at Talent in China tries to explain the skills shortage for both professionals and workers in a land of 1.3 billion people, with the added contradiction of a shortage of jobs for Chinese graduates in his post "The Ups & Downs of China's Labor Shortage".  Somewhere in Ireland, Rowan Manahan of Fortify Your Oasis conducted a radio interview on job equality somewhat irreverently titled and unlikely to pass prudish US internet filters.

All good stuff for us to consider as we address today’s challenges. Thanks for all those who contributed to this Carnival. Jon Ingham’s Strategic Capital Management (HCM) Blog will host the June 11th Carnival of HR.

Sex may Sell, but Gender-based Employment Decisions are Unlawful Discrimination

The EEOC announced a $1 million settlement for sex discrimination against men arising from a restaurant’s preference for hiring and promoting only women into bartending positions. The lawsuit highlights the tension between a business’s marketing efforts and legal compliance. What marketers may pander to in the name of “customer preference,” employment laws prohibit as discrimination.

Businesses spend millions of dollars to find out what motivates customers to buy by evaluating their preferences. Demographics play an important role in tying the right product to the right market. Also critical is having the “right” salesperson to make the pitch.

A business’s natural, but unlawful reaction may be to make staffing decisions based upon appealing to a target demographic group.  The “customer preferences” for the right salesperson cannot create employer hiring or promotion criteria for someone of a particular gender, religion, age, etc. Courts have universally rejected this form of customer preference, except in the narrow case where it is a Bona Fide Occupational Qualification (BFOQ). A BFOQ may exist where it is necessary for the purpose of authenticity or genuineness, such as, a model for gender specific clothing. 

In its lawsuit, the EEOC said that Razzoo's, a Cajun food restaurant chain, refused to hire or promote men to the position of bartender. The EEOC had evidence that the restaurant's management set up and communicated to managers by e-mail, a plan for an 80-20 ratio of women to men behind the bar. Male applicants and servers were told that management wanted mostly “girls” behind the bar. Men who worked as servers at the restaurant were generally denied promotion to bartender because of their gender. The few men who were promoted to bartender were not allowed to work lucrative “girls-only” bar­tend­ing events.

The EEOC’s settlement with Razzoo shows a developing trend in the agency of making an employer improve its approach to human resources. In addition to paying $775,000 to be divided among a class of male applicants, male servers, and male bartenders who were discriminated against, Razzoo's was also required to retain the services of a human resources consultant or to develop an in-house human resources department spending no less than $225,000 for these human resources services.   Razzoo's agreed to injunctive relief requiring training on equal employment opportunity for all its employees, the posting of an anti-discrimination notice, and EEOC monitoring of employee complaints of discrimination.

Suzanne M. Anderson, EEOC supervisory trial attorney and lead counsel on the lawsuit, summed up the EEOC’s position by saying that, "Some may think that sex sells drinks, but gender ratios are illegal… Razzoo's decision to hire and promote by gender is a clear violation of federal law. A hiring ratio is illegal whether it is 80-20 whites to blacks or 80-20 women to men."   It will be interesting to see how far the law will go in policing an employer’s efforts to appease a customer preference. For example, would an OBGYN practice be subject to an EEOC lawsuit if it specifically hired a female doctor based on the preference of its patients?